-----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, J31yluwFheGuv709pJsVNJwgqcllN62JdcOiFN+crVYACd6mESM2I+zDIBD5I5J1 /XI5MfewqDTCLQkVjUNDKA== 0000950129-96-000538.txt : 19960402 0000950129-96-000538.hdr.sgml : 19960402 ACCESSION NUMBER: 0000950129-96-000538 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 16 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960401 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SERV TECH INC /TX/ CENTRAL INDEX KEY: 0000852485 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISCELLANEOUS REPAIR SERVICES [7600] IRS NUMBER: 741398757 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-11575 FILM NUMBER: 96543459 BUSINESS ADDRESS: STREET 1: 5200 CEDAR CREST BLVD CITY: HOUSTON STATE: TX ZIP: 77087 BUSINESS PHONE: 7136449974 MAIL ADDRESS: STREET 1: P O BOX 4334 CITY: HOUSTON STATE: TX ZIP: 77210 10-K 1 SERV-TECH, INC. - FORM 10-K - 12/31/95 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (mark one) [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended December 31, 1995 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from ____ to ____ Commission file No. 0-17888 SERV-TECH, INC. (Exact name of registrant as specified in its charter) TEXAS 74-1398757 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5200 CEDAR CREST BOULEVARD HOUSTON, TEXAS 77087 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (713) 644-9974 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.50 per share Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the 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. [ ] As of March 15, 1996, the registrant had 6,656,238 outstanding shares of Common Stock, par value $.50 per share, and at such date, the aggregate market value of the shares of Common Stock held by nonaffiliates of the registrant was approximately $36.1 million. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Annual Report to Shareholders for the fiscal year ended December 31, 1995, are incorporated by reference into Part II. Portions of the Registrant's Proxy Statement in connection with its 1995 Annual Meeting of Shareholders are incorporated by reference into Part III. 2 SERV-TECH, INC. AND SUBSIDIARIES TABLE OF CONTENTS
Page ---- PART I Item 1. Business....................................................................................... 3 Item 2. Properties..................................................................................... 11 Item 3. Legal Proceedings.............................................................................. 11 Item 4. Submission of Matters to a Vote of Security Holders............................................ 11 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters......................................................................... 12 Item 6. Selected Financial Data........................................................................ 12 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................... 12 Item 8. Financial Statements and Supplementary Data.................................................... 12 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...................................................... 12 PART III Item 10. Directors and Executive Officers of the Registrant............................................. 13 Item 11. Executive Compensation......................................................................... 13 Item 12. Security Ownership of Certain Beneficial Owners and Management....................................................................... 13 Item 13. Certain Relationships and Related Transactions................................................. 13 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................................................................. 14
-2- 3 PART I ITEM 1. BUSINESS GENERAL Serv-Tech, Inc. (the "Company") is an integrated provider of specialty services and products to process industries worldwide. Serv-Tech has three primary operating segments, (i) Serv-Tech Specialty Services ("Specialty Services"), (ii) Serv-Tech EPC ("EPC"), and (iii) Environmental Services and Performance Chemicals ("Environmental"). Specialty Services provides total turnaround project management services including heat exchanger extraction and cleaning, fabrication, specialty welding, refractory and other specialized services primarily to the refining, petrochemical, paper, power and cement industries. EPC provides a full range of engineering, procurement and construction services primarily to the hydrocarbon processing, petrochemical, power, pulp and paper, and food processing industries. Additionally, EPC installs electrical and instrumentation systems for offshore production platforms, refineries, petrochemical processing plants, food processing plants and riverboat casinos through SECO Industries, Inc. ("SECO"). The Environmental business formulates specialty chemicals to meet specific customer needs primarily in the hydrocarbon processing, pulp and paper, and waste water industries. The Company was organized in Texas in 1978 to provide conventional hydroblasting and chemical cleaning services to the refining, petrochemical and paper processing industries in Texas and Louisiana. In 1985, the Company introduced its new heat exchanger extraction and cleaning technologies and sold its conventional businesses. In 1987, the Company introduced its tower and vessel maintenance services to complement its heat exchanger services. In 1988, the Company introduced its turnaround management services and its proprietary tank cleaning services. Specialty pipe welding services were added in late 1990. Electrical and instrumentation services were added in September, 1991, with the acquisition of SECO. The Company began offering engineering and design services in May, 1992, with the acquisition of Talbert & Associates, Inc ("TAI"). In 1994, the engineering capabilities of TAI were incorporated into the newly formed Serv-Tech EPC group, to offer its customers turnkey, single source responsibilities for engineering, procurement and construction services. In 1994, the Company introduced refractory services through the acquisition of Hartney Industrial Services Corporation ("Hartney"). In September, 1991, the Company acquired all of the outstanding common stock of SECO, a Metairie, Louisiana, based specialty contracting company. SECO is engaged primarily in electrical and instrumentation projects for offshore production platforms, petroleum refineries, petrochemical processing plants, food processing, gaming and other industrial facilities. During 1991, the Company acquired a 50% interest in Chemisolv Holdings, Inc. ("Chemisolv"). In November, 1994, the Company acquired the remaining 50% interest. Chemisolv is an environmental services and specialty chemical treatment company with operations in the United Kingdom and the United States. In the fourth quarter of 1991, the Company acquired the assets and business operations of Terminal Technologies, Inc. ("TTI"), whose business is cleaning petrochemical product storage tanks using specialized proprietary equipment. In May, 1992, the Company acquired all of the outstanding common stock of TAI, a New Orleans, Louisiana, based engineering firm. TAI provides a full range of specialized engineering and design services to the petroleum refining and chemical industries. In September, 1992, the Company acquired all the outstanding common stock of Delta Maintenance, Inc., a union contractor providing refinery maintenance services in Louisiana. In early 1993, a branch of Delta Maintenance was established in the St. Louis, Missouri, area to provide union based maintenance services to refineries in the midwestern and eastern United States. -3- 4 In June, 1994, the Company acquired all the outstanding common stock of Hartney, a Houston, Texas, based company. Hartney is a specialty contractor which provides refractory, acid proofing and other corrosion prevention services to the petroleum refining, petrochemical, cement, power generation and waste incineration industries. In November, 1994, the Company acquired all of the outstanding common stock of F. C. Schaffer & Associates, Inc. ("Schaffer"). Headquartered in Baton Rouge, Louisiana, Schaffer is a provider of engineering, consulting and project management services primarily to sugar refinery, cogeneration and alcohol production industries. SERV-TECH SPECIALTY SERVICES Specialty Service's principal market has been the petroleum industry in the United States. Its customers include all of the ten largest integrated oil companies in the United States. To ensure the operability, environmental compliance, efficiency and safety of their refineries, these companies must periodically maintain, repair or replace process equipment, operating machinery and piping systems. Since 1986, increased demand for petroleum products and a stabilization in refining capacity has led to a substantial increase in refinery utilization, providing refineries with an incentive to minimize the duration of maintenance turnarounds. As a consequence, refineries have increased their reliance on outside contractors who can perform specialized turnaround services within strict time constraints. PLANNING AND MANAGEMENT SERVICES. As demand for the Company's specialized heat exchanger and tower and vessel maintenance services increased, the Company developed the planning capabilities, operations skills and field supervision necessary to manage all aspects of a turnaround. When managing a turnaround, the Company is responsible for scheduling and coordinating the entire project. Certain aspects of a turnaround, such as heat exchanger and tower and vessel maintenance, refractory installation, piping repair and fabrication, inspection and repair of furnaces and heaters, and certain specialized types of welding typically are provided directly by the Company. The Company intends to continue to enhance its capabilities in turnaround management by improving its planning and estimating capabilities, adding additional services as necessary and hiring experienced, qualified project management. HEAT EXCHANGER SERVICES. Heat exchangers are essential components in petroleum refining and petrochemical processing. Crude oil and other feedstocks must be heated before they are processed. Once processed, finished or semi-finished products must be cooled before storage. Refineries and petrochemical plants use heat exchangers to allow hot products, which need cooling, to give up their heat to crude oil or feedstocks, which need heating. This results in conservation of energy and reduced operating cost. Heat exchangers require periodic maintenance and cleaning. Heat exchangers are usually cleaned in conjunction with a scheduled turnaround, which may involve the removal and cleaning of up to 300 heat exchangers during a one- to four-week period. During the turnaround, the heat exchangers are disassembled and tube bundles are extracted, cleaned and inspected. The tube bundles are then reinserted and the heat exchangers are reassembled and pressure tested. The Company extracts and reinserts heat exchanger bundles using its patented Fast Draw(R) mobile heat exchanger bundle extractor. The Fast Draw(R) unit uses a rotating carriage frame, which is aligned with the heat exchanger centerline and attached to the exchanger shell. A pulling sled, situated on the carriage frame, is attached to the bundle tubesheet. The pulling sled is then activated and exerts a pulling force of up to 100 tons to extract the bundle from the exchanger shell in one continuous, controlled pull. The carriage can be adjusted to balance the bundle as it is extracted. Once the heat exchanger bundle is fully extracted, it is lowered to a Company designed and owned trailer for transportation to an approved cleaning site at the refinery. After cleaning and inspection, the process is reversed to reinsert the tube bundle. The Company has received four United States patents regarding its Fast Draw(R) technology. See "--Patents, Licenses and Permits." -4- 5 In 1985, the Company introduced its Fast Clean(R) system, a mobile, self-contained, remotely controlled, high-pressure hydroblasting unit. By cleaning multiple tubes at one time and eliminating hand-held hydroblasting equipment, the Fast Clean(R) system has demonstrated significant improvements from traditional methods in cleaning time, personnel safety and manpower requirements. The Fast Clean(R) unit enhances operator safety by distancing personnel from high pressure streams and replacing flexible hoses with rigid piping. The units mobility allows the Company to perform jobs at widely separate locations with a minimum of moving costs. The Company has received three United States patents regarding its Fast Clean(R) technology. See "--Patents, Licenses and Permits." The Company also provides the manpower and tools to disassemble and reassemble heat exchanger components and shells. The Company has several fully equipped tool trucks which are used in conjunction with Fast Draw(R) and Fast Clean(R) equipment. By combining the disassembly, extraction, cleaning, reassembly and testing of the heat exchanger, the Company is able to control all phases of heat exchanger maintenance and provide the customer with shorter turnaround cycles. TOWER AND VESSEL MAINTENANCE. In 1987, Specialty Services expanded its turnaround maintenance capabilities by offering tower and vessel maintenance services. An integral part of all refining units, towers are used to separate the components of crude oil or other hydrocarbons through distillation. The distillation process utilizes a series of disc-shaped perforated horizontal plates called trays, spaced about every two feet inside the tower. Since these trays are exposed to high temperature and corrosive conditions during the distillation process, and because these trays are critical to meeting product specifications, towers are always inspected and repaired during maintenance turnarounds. Frequently, tower maintenance is critical to completing the turnaround and returning the unit to operation. Inspection, repair, modification and replacement of the tower trays require an experienced work force to complete the work within the strict time limits imposed by the customer. During the turnaround, other towers, drums and vessels which are ancillary parts of the refining process are opened, inspected and repaired if necessary. The Company has assembled the necessary management, planning skills and labor force to offer its customers a cost effective tower and vessel maintenance service. SPECIALTY PIPE WELDING. In late 1990, Specialty Services began offering, through a newly formed subsidiary, ST Piping, Inc., specialized welding services to refineries and petrochemical plants. The piping, vessels and heat exchangers in these plants must be designed to withstand extremes of high temperature, pressure and corrosive conditions. Many of the newer process designs utilize high alloy steels and exotic metals. ST Piping has the equipment and highly skilled personnel necessary to provide the specialized welds needed for these design conditions. All of ST Piping's work conforms to the American Society of Mechanical Engineers Boiler and Pressure Vessel Code, the highest standards in the industry. REFRACTORY, ACID PROOF AND FIREPROOF CONSTRUCTION. In 1994 Specialty Services began offering refractory installation and maintenance services through Hartney which was acquired in June, 1994. Hartney is a leading provider of refractory services for turnarounds, outages, revamps and expansions of critical processing units primarily for the petroleum refining, chemical processing and power industries. Refractory services include the construction of high temperature, corrosion resistant and fireproof lining systems for virtually every type of industrial application, in-plant structural and vessel fireproofing and major refractory installations on Fluid Catalytic Cracking Units. ENGINEERING PROCUREMENT AND CONSTRUCTION SERVICES The Company introduced engineering services in May, 1992, with the acquisition of TAI, an engineering and design firm primarily serving the petroleum refining and chemical industries. TAI provides a full range of engineering, design, project management, drafting and estimating services. Since the physical plants utilized by the Company's customers are large and complex, they require specialized engineering services in order to undertake refurbishment, expansion or new construction projects. TAI is able to perform such jobs, beginning with field inspection activity, through total project management which includes mechanical, civil, structural, electrical, process and instrumentation engineering. -5- 6 In 1994, the engineering capabilities of TAI were incorporated into the newly formed Serv-Tech EPC group, to offer its customers turnkey, single source responsibility for engineering, procurement and construction services. In November, 1994, EPC was awarded an estimated $20.7 million contract to design, procure and construct a tank farm for Conoco in Westlake, Louisiana. This fixed price contract has an estimated completion date of mid-1996. During the last part of 1994, the Company acquired all of the outstanding common stock of Schaffer of Baton Rouge, Louisiana. Schaffer is one of the leading experts on sugar mill design, engineering and construction management. In February, 1995, Schaffer secured an $83.0 million contract to design, procure and construct a 4,000 metric ton cane-per-day sugar factory and 45,000 liter-per-day ethanol plant in Finchaa, Ethiopia. The project, which is financed by the African Development Bank, is expected to be completed in the latter part of 1997 followed by a twelve month training and warranty period. During 1995, the electrical and instrumentation contracting subsidiary, SECO, was combined with the operations of EPC to further enhance the services available to the Company's clients. SECO's clients are petroleum, petrochemical, paper, food processing, mining, marine, gaming and utility companies, as well as major engineering firms and general contractors. SECO was formed in 1961 as an electrical contractor in southern Louisiana. SECO's initial growth was in the oil field and commercial markets, and was characterized by progressively larger projects and wider geographical scope. At present, a major portion of SECO's projects involve electrical and instrumentation systems installation for large offshore petroleum production facilities. SECO provides its services throughout the world, and has worked in 21 countries. Offshore production platforms, petroleum refineries and petrochemical processing plants, mining facilities and other industrial installations have complex requirements for electrical, instrumentation, power distribution and process control systems. Installations of these systems involve large construction projects often characterized by multiple fabrication sites, wide diversity of components and processes, and application of advanced technology. The electrical and instrumentation contractor must excel in every phase of the project from design assistance to final hookup. Engineering, procurement and construction projects are typically of longer duration, with more stable manpower levels than the Company's Specialty Services work. Gross profit margins on construction contracts, however, are lower than Specialty Services due to better defined design and scope of work, and less critical nature of completion schedules compared to Specialty Services projects. ENVIRONMENTAL SERVICES AND PERFORMANCE CHEMICALS In 1988, Serv-Tech introduced petroleum storage tank sludge cleaning services, which significantly enhance personnel safety and reduce the environmental risks of cleaning petroleum storage tanks. Sludge is a mixture of hydrocarbons (paraffins and asphaltines), sediment and corrosive elements which, together with water, form an emulsion of oil, water and solids. Generally, more than 90% of the sludge constitutes valuable hydrocarbons. Sludge is generally heavier and more viscous than oil and settles to the bottom of the tank, thereby reducing the effective capacity of the tank and increasing the likelihood of corrosion of the tank bottom which can lead to leakage into the environment. The Company's petroleum tank cleaning services utilize the HP2000 system, a high-pressure rotating, controllable submerged jet which is inserted into a tank while the tank remains in service. The twin nozzle, high-shear unit is positioned at the center of the tank and directs single or opposed jets of crude oil horizontally across the tank bottom. The high-pressure sweeping action resuspends the hydrocarbon components of the sludge by breaking the bonding within the emulsion. Once suspended, the -6- 7 sludges and crude oil are filtered through fine mesh screens on Company owned filter trucks to further homogenize the crude oil and remove any sediment and rust scale. A refinery can then process the resuspended hydrocarbon in the normal manner. Inorganic sediments, scale and water remaining in the tank will have to be removed using traditional methods. However, because the volume of the sludge has been reduced, the time between such cleanups is significantly increased. The primary benefits of the Company's petroleum tank cleaning services are the recovery of hydrocarbons from the resuspended sludge, the minimizing of vapor emissions associated with the removal of the residual sludge from the tank, enhancement of worker safety by reduced exposure to hazardous conditions, and reduction in the volume of sludge and other waste which requires reprocessing, disposal in landfills or incineration. In December, 1991, the Company acquired the business operations of TTI, a provider of tank cleaning services for product storage tanks in petroleum products distribution terminals. TTI's tank cleaning process uses that company's patented Hydrocarbon Reclaimer System. The Hydrocarbon Reclaimer System filters the contaminated tank bottoms, recovering all of the reusable product. The waste material collected in the filtering process is dried and stored in containers supplied by TTI. All waste generated in the tank cleaning process leaves the product distribution terminal as a dried solid. A unique advantage of the process is that the waste solids are non-hazardous, and can be transported and disposed by the customer, with a minimum of permitting. During the first quarter of 1991, the Company acquired a 50% interest in Chemisolv and acquired the remaining 50% interest in the fourth quarter of 1994. Chemisolv is an environmental services and specialty chemical treatment company with operations in the United Kingdom and the United States. Management of this company has significant experience in providing waste stream treatment and chemical treating solutions to a wide range of industries including food, hydrocarbon processing, textiles, metal finishing, and pulp and paper. In 1992, the Company and Chemisolv jointly developed a proprietary chemical decontamination process for removing benzene and other hydrocarbons from process equipment in refineries and petrochemical plants. The Life Guard(R) system utilizes chemical formulations developed by the Company and Chemisolv to emulsify and extract hydrocarbons remaining in heat exchangers and towers and vessels after those units have been removed from service in preparation for turnaround maintenance. The emulsified solution containing the entrapped benzene and hydrocarbons is then separated to allow disposal of the contaminants through the plant's waste treatment facilities. The Life Guard(R) chemicals are non-toxic and biodegradable. The benefits of the Life Guard(R) system are twofold: it improves worker safety by removing harmful, carcinogenic benzene and other hydrocarbon compounds from vessels in which maintenance is performed; and, it reduces the time necessary to remove oil, sludges and hydrocarbons from process equipment. This reduces turnaround time by permitting quicker entry to vessels, eliminating the need for fresh air respiratory equipment, and providing cleaner work areas. On turnarounds in which the Life Guard(R) system has been used, the Company has experienced significant savings in time and manpower requirements. Turnaround times have been reduced by one to three days and manpower has been reduced up to 25%. The Company manufactures pumping systems which circulate the Life Guard(R) chemical solutions. The Company has received one United States patent and two United States patents are pending regarding its Life Guard(R) Decontamination System. See "--Patents, Licenses and Permits." -7- 8 CUSTOMERS AND MARKETING Prior to 1995, the Company derived most of its revenues from the refining and oil and gas production industries in the United States. Services have also been provided to companies in the petrochemical, chemical, gas processing, pipeline and liquid terminal industries. The Company's customers operate through various subsidiaries and at multiple plant locations principally throughout the United States. In general, decisions to award work are made at each operating facility of the customer. While the Company derived a significant portion of revenue from its historical customer base in 1995, the Company's major customer was the Finchaa Sugar Factory. This is consistent with the Company's continued diversification of its revenue base beyond traditional markets. In each of Serv-Tech's service lines, work is typically bid on a job-by-job basis. Performance of services by the Company at any single plant or project location does not assure the Company subsequent work at that facility or other facilities of that customer. Conversely, the loss of a bid for any one project does not affect the Company's ability to obtain additional work from that customer. One customer accounted for 12% of the Company's revenues in 1995 and 27% in 1994, and three customers accounted for 42% of the Company's revenues in 1993. The following table sets forth the Company's ten largest customers, based upon revenues, for each of 1995, 1994 and 1993:
1995 1994 1993 - --------------------------- -------------------------- ----------------------- Finchaa Sugar Factory Mobil Oil Corporation Mobil Oil Corporation Chevron USA, Inc. Chevron USA, Inc. McDermott, Inc. Conoco, Inc. Conoco, Inc. Conoco, Inc. Mobil Oil Corporation Texaco, Inc. Texaco, Inc. Atlas Producing Company Exxon USA, Inc. Chevron U.S.A., Inc. E. I. Dupont Atlantic-Richfield Company Exxon U.S.A., Inc. Unocal Uno-Ven, Inc. Gulf Marine Fabricators Coastal Refining McDermott, Inc. Atlantic Richfield Phibro Energy, U.S.A., Inc. B. P. Oil Company Lea Refining, Inc. Vista Chemical Star Enterprise Southwestern Refining
The Company maintains close contact with its customers in order to determine upcoming projects for which its services may be required. The Company generally is required to bid competitively for work on a project-by-project basis for each of the services it provides. Depending on the size and complexity of the work to be awarded, bid lead times range from two weeks to four months. Much of the work involved in preparing a bid consists of planning the schedule for the project. As a result, costs associated with the planning, as well as anticipated costs for management of the project, are included in the Company's bid. Bids are generally awarded based on price considerations, although scheduling, efficiency, quality and safety are also considered by the customer in awarding contracts. The Company's fee arrangements for its services are either fixed price or based on detailed time and material billing schedules. The Company has encouraged its customers to seek firm bid turnkey proposals for its Specialty Services and EPC contracts. Management believes that firm bid contracts permit its customers to realize the benefits of the Company's services and offer the Company an opportunity to realize higher profit margins. Time and material billing arrangements provide for cost plus billing schedules for labor and equipment used on the job and offer the Company an assured level of project profitability. The accumulated man-hours and equipment utilized are billed on a weekly or monthly basis. In 1995, approximately 35 percent of the Company's revenues were derived from fixed price contracts. The Company maintains estimators and planners who review the scope of work to be performed, analyze labor and material requirements, and prepare bids to be submitted to potential customers. Final bid prices on major proposals are coordinated between the estimator/planners, regional managers and senior management. -8- 9 The Company markets its turnaround services through five regional offices and its corporate headquarters in Houston, Texas, with its regional managers primarily responsible for their sales effort. EPC services are marketed through offices in Metairie, Louisiana, and seven regional offices. The Company markets its environmental services and performance chemicals from its Houston, Texas, Atlanta, Georgia, and Manchester, England, offices. PATENTS, LICENSES AND PERMITS The Company is the holder of 18 United States patents covering its Fast Draw(R), Fast Clean(R), Life Guard(R) Decontamination System and tank cleaning equipment and technology. The Company is actively developing technology related to its businesses and has filed several patent applications with the United States Patent Office. Management believes that the development of proprietary technology has been an important factor in the Company's growth and the Company intends to seek additional patent protection where appropriate. However, there can be no assurance that additional patents will be granted, or as to the validity or value of such patents. In addition, it is conceivable that competitors could modify the essential technology represented by the Company's patents in such a way that it would not result in patent infringement. The Company's patents expire at various dates between November 18, 2003 and June 17, 2014. The Company is certified by the American Society of Mechanical Engineers ("ASME") Boiler and Pressure Vessel Code to hold "A", "U", "S", and "PP" stamps, as well as the National Board "R" stamp. These stamps permit the Company to perform specialized major weld repairs, nozzle replacements and additions in compliance with ASME requirements. BACKLOG The Company's backlog includes contracts which have been awarded and the unearned portion of contracts for work in progress. The Company's backlog was approximately $96.1 million at December 31, 1995 and $88.1 million at December 31, 1994. COMPETITION The market for the Company's specialty services, engineering, procurement and construction, and environmental services is highly competitive. Many of the Company's competitors have greater financial and other resources than the Company. Additionally, the Company competes with numerous small, independent contractors which collectively have a significant share of the market for these services. Competitive factors for these services include price considerations, performance record, quality and safety. GOVERNMENT REGULATION The Company's services involve contact with crude oil and refined petroleum products. These substances have been classified as hazardous waste. Under various federal laws, hazardous waste is regulated from the point of generation until disposal. In addition, the United States Environmental Protection Agency has issued regulations for hazardous waste generators, transporters and owners and operators of treatment, storage and disposal facilities. The Company's services are structured to avoid any involvement in the disposal of hazardous wastes and the Company does not consider itself to be a generator or transporter of hazardous waste. Typically, all hazardous materials handled by the Company are disposed of by the customer using the customer's waste disposal facilities. The cleaning of heat exchangers is usually performed on cleaning slabs, with the water and debris collected and treated by the customer's waste water facilities. The Company has designed and installed for several of its customers a closed-loop system to circulate and filter -9- 10 water used in its Fast Clean(R) system. This minimizes water usage and reduces the volume of waste water processed by the customer. The Company's petroleum tank cleaning and sludge control systems resuspend sludge within the petroleum storage tank, permitting the refinery to reclaim processible hydrocarbons, rather than removing the sludge for reprocessing or disposal. The Company's tank cleaning services for petrochemical product storage tanks employ the patented Hydrocarbon Reclaimer System which recovers all of the reusable product. All waste generated by this process is in the form of non-hazardous dried solids, which can be conveniently transported and disposed by the customer. All of the Company's operations are subject to regulations issued by the Department of Labor under OSHA. These regulations have strict requirements for protecting personnel involved with any materials that are classified as hazardous, which includes certain materials found in heat exchangers, towers, vessels and petroleum storage tanks. Violations of these rules can result in fines and suspension of licenses. INSURANCE The Company maintains statutory worker's compensation insurance in accordance with various states requirements and liability insurance with an occurrence annual aggregate coverage limit of $61 million. The Company maintains professional liability insurance for its EPC subsidiaries. The Company's general liability insurance provides only limited coverage for pollution related claims and excludes fines and penalties levied against the Company as a result of any violations by the Company of the regulations issued by the Department of Labor under OSHA. To date, the Company has not incurred significant fines, or penalties or any liability for pollution, environmental damage, toxic torts or personal injury from exposure to hazardous wastes. However, a successful liability claim for which the Company is only partially insured or completely uninsured could have a material adverse effect on the Company. In addition, if the Company experiences a significant amount of such claims, increases in the Company's insurance premiums could materially and adversely affect the Company. Any difficulty in obtaining insurance coverage consistent with industry practice may also impair the Company's ability to obtain future contracts which in most cases are conditioned upon the availability of specified insurance coverage. WORKING CAPITAL The Company's customers typically compensate the Company for services performed upon completion of a given project or on an agreed upon progress payment schedule for larger projects. Therefore, the Company must have sufficient working capital to permit it to undertake its services throughout the duration of a project. The Company believes that its present working capital position, combined with forecasted cash flows and borrowing capacity, will be sufficient to meet the Company's working capital requirements. The continued expected growth of the Company will require additional working capital needs, especially those related to the seasonality of the business. During 1995 in order to support the growing operations, the Company increased its working capital line of credit from $20.0 million to $35.0 million. QUARTERLY FLUCTUATIONS The Company's revenues and operating income have historically been subject to significant, quarterly fluctuations with respect to Specialty Services. This is due primarily to the timing of shutdowns at plant facilities. Accordingly, it is anticipated that the Company's quarterly results will fluctuate and the results of one quarter should not be deemed to be representative of the results of any other quarter or for the year. The quarterly fluctuations are expected to be lessened as the Company increases the volume of revenue from other business segments. -10- 11 EMPLOYEES At December 31, 1995, the Company had 1,502 full-time employees, of which 444 were salaried and 1,058 were hourly. In addition, the Company employs hourly workers on an as-required basis to perform labor on a job-by-job basis. Total employment levels have ranged from 1,443 to 3,200 per week during 1995, averaging 2,243 employees on a weekly basis. The number of employees fluctuates significantly due to changing demand during the peak turnaround periods and the level of EPC work performed. The Company has been able to staff its projects through maintenance of a computerized listing of qualified workers and the personal contacts of its superintendents and foremen. Certain of the Company's subsidiaries maintain collective bargaining agreements with several construction trade unions. Management believes its relations with its employees to be good. ITEM 2. PROPERTIES The Company's corporate offices are located at 5200 Cedar Crest Boulevard in Houston, Texas, at a Company owned combination office and operations facility. This location contains 15,000 square feet of office space and 72,500 square feet of shop facilities. EPC occupies 45,200 square feet of leased property located in Metairie, Louisiana. The Company leases an aggregate of approximately 142,000 square feet of office, shop and storage space in Lake Charles, Baton Rouge and Lafayette, Louisiana; Beaumont and Houston, Texas; Atlanta, Georgia; and Los Angeles, California. The Company does not anticipate any difficulty in renewing those leases that require renewal within the next five years. The Company owns land and buildings containing an aggregate of approximately 50,000 square feet of office and shop space in Houston, Texas, and Westlake and Belle Chasse, Louisiana. The Company believes that its existing facilities are adequate to meet the requirements of current operations and that suitable additional space will be available as required to accommodate any expansion of operations. The Company designs, engineers and assembles the Fast Draw(R), Fast Clean(R), Tank Cleaning, and Chemical Decontamination equipment at its Westlake, Louisiana facility. The Company assembles this equipment from components that it purchases from outside suppliers or which it fabricates. The Company has several sources for these components and does not rely upon any single supplier. ITEM 3. LEGAL PROCEEDINGS On January 26, 1990, the Company filed a petition in the 125th Judicial District Court of Harris County, Texas, seeking injunctive and monetary relief against three defendants. The Company alleged various claims, including, the breach of a secrecy agreement, civil conspiracy, tortious interference with the Company's business relationships and misappropriation of confidential and/or trade secret information by all defendants. On June 11, 1992, the jury found in favor of the Company, awarding $17.5 million in actual damages and legal fees. In December, 1992, the Company received a partial settlement from two of the defendants of approximately $2.7 million, net of $1.5 million in legal fees and other expenses. In April, 1994, the 14th Court of Appeals of the State of Texas reversed the judgment against the three defendants. The reversal by the Appeals Court does not affect the partial settlement received in December, 1992. The Supreme Court of Texas has affirmed the Court of Appeals decision and has remanded the case to trial court. The Company is involved in various claims and disputes incidental to its business. The Company believes that the disposition of all such claims and disputes, individually or in the aggregate, should not have a material adverse effect upon the Company's financial position, results of operations or cash flows. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable. -11- 12 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock is traded in the over-the-counter market and is quoted on the National Association of Securities Dealers' Automated Quotations System ("NASDAQ") National Market System under the symbol "STEC". The following table sets forth the quarterly high and low bid quotations of the common stock, as quoted by NASDAQ, for the calendar quarters indicated.
Calendar Period High Low --------------- ---- --- 1995: First Quarter............................................................... 8 3/4 6 Second Quarter.............................................................. 9 1/4 6 5/8 Third Quarter............................................................... 9 6 1/2 Fourth Quarter.............................................................. 8 1/2 5 1/8 1994: First Quarter............................................................... 12 3/4 8 3/4 Second Quarter.............................................................. 10 3/4 7 1/2 Third Quarter............................................................... 10 1/4 7 1/4 Fourth Quarter.............................................................. 10 1/2 5 7/8
At March 15, 1996, there were approximately 2,200 shareholders of the common stock. The average of the high and low bid quotations on such date was $5.5625. The Company has not paid dividends on its common stock, and the Board of Directors of the Company presently intends to continue a policy of retaining earnings for use in the Company's operations and to fund the Company's expansion program. ITEM 6. SELECTED FINANCIAL DATA Information required by this item is included on page 3 of the Serv-Tech, Inc. Annual Report under the caption "Financial Highlights", and is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Information required by this item is included on pages 27-31 of the 1995 Serv-Tech, Inc. Annual Report under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations", and is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Information required by this item is included on pages 31-47 of the 1995 Serv-Tech, Inc. Annual Report under the captions "Independent Auditors' Report", "Consolidated Balance Sheets", "Consolidated Statements of Operations", "Consolidated Statements of Changes in Stockholders' Equity", "Consolidated Statements of Cash Flows", and "Notes to Consolidated Financial Statements", and is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. -12- 13 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ITEM 11. EXECUTIVE COMPENSATION ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information called for by PART III (Items 10, 11, 12 and 13) has been omitted as the Company intends to file with the Securities and Exchange Commission not later than 120 days after the close of the fiscal year a definitive Proxy Statement pursuant to Regulation 14A. Such information is set forth in such Proxy Statement (i) with respect to Item 10, under the captions "Election of Directors" and "Other Matters - Compliance with Section 16(a) of the Exchange Act"; (ii) with respect to Item 11, under the caption "Executive Compensation"; (iii) with respect to Item 12, under the captions "Security Ownership of Management and Principal Holders of Securities" and "Election of Directors"; and (iv) with respect to Item 13, under the caption "Compensation Committee Interlocks and Insider Participation." -13- 14 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Financial Statements and Schedules: (1) Consolidated Financial Statements: The Consolidated Financial statements of Serv-Tech, Inc. and Subsidiaries listed below are incorporated herein by reference to the following pages of the Serv-Tech, Inc. Annual Report: Page --- Independent Auditors' Report.......................................... 31 Consolidated Balance Sheets as of December 31, 1995 and 1994.......... 32 Consolidated Statements of Operations for Each of the Three Years in the Period Ended December 31, 1995........................ 33 Consolidated Statements of Changes in Stockholders' Equity for Each of the Three Years in the Period ended December 31, 1995............................................................... 34 Consolidated Statements of Cash Flows for Each of the Three Years in the Period Ended December 31, 1995........................ 35 (2) Consolidated Financial Statement Schedules: II. Valuation and Qualifying Accounts............................ S-1 Independent Auditors' Report................................. S-2 The Financial Statements Schedules of Serv-Tech, Inc. and Subsidiaries are included in Part IV of this report on the pages indicated. (3) Exhibits: The exhibits listed on the accompanying Exhibit Index are filed as part of this report. (b) Reports on Form 8-K: None. The Financial Statements and Schedules listed in the accompanying Index to Financial Statements are filed herein as part of this report. -14- 15 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. SERV-TECH, INC. By RICHARD L. DAERR ---------------------------------------- Richard L. Daerr, Chief Executive Officer Signature Title Date ROBERT J. CRESCI Chairman of the Board March 29, 1996 - ------------------------ and Director (Robert J. Cresci) RICHARD L. DAERR President, Chief Executive March 29, 1996 - ------------------------ Officer and Director (Richard L. Daerr) DAVID P. TUSA Senior Vice-President, March 29, 1996 - ------------------------ Finance and Administration (David P. Tusa) MIKE M. MUSTAFOGLU Director March 29, 1996 - ------------------------ (Mike M. Mustafoglu) CHARLES M. BALCH, M.D. Director March 29, 1996 - ------------------------ (Charles M. Balch, M.D.) MICHAEL T. WILLIS Director March 29, 1996 - ------------------------ (Michael T. Willis) JOHN B. O'BRIEN Director March 29, 1996 - ------------------------ (John B. O'Brien) D. D. (DEL) HOCK Director March 29, 1996 - ------------------------ (D. D. (Del) Hock) JAMES M. PIETTE Director March 29, 1996 - ------------------------ (James M. Piette) DALE W. WILHELM Corporate Controller March 29, 1996 - ------------------------ (Dale W. Wilhelm) -15- 16 SCHEDULE II SERV-TECH, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS FOR THE THREE YEARS ENDED DECEMBER 31, 1995
- ---------------------------------------------------------------------------------------------------------------------------------- Col. A. Col. B Col. C - Additions Col. D Col. F - ---------------------------------------------------------------------------------------------------------------------------------- (2) Balance at (1) Charged to Balance Beginning Charged to Costs Other Accounts- Deductions- at End Description of Period and Expenses Describe Describe of Period - ---------------------------------------------------------------------------------------------------------------------------------- December 31, 1995: Allowance for doubtful accounts .............. $1,739,431 $1,245,072 $ 74,043(B) $1,115,462(A) $1,943,084 December 31, 1994: Allowance for doubtful accounts .............. 298,281 981,536 835,285(B) 375,671(A) 1,739,431 December 31, 1993: Allowance for doubtful accounts .............. 395,649 399,042 - 496,410(A) 298,281
- ----------------- (A) Represents recoveries and uncollectible accounts written off. (B) Represents allowance for doubtful accounts of companies acquired at date of acquisition. S-1 17 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Serv-Tech, Inc: Under date of February 16, 1996, we reported on the consolidated balance sheet of Serv-Tech, Inc. and Subsidiaries as of December 31, 1995, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the year then ended, as contained in the 1995 annual report to shareholders. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for the fiscal year ended December 31, 1995. In connection with our audit of the aforementioned consolidated financial statements, we also have audited the related financial statement schedule as listed in the accompanying Index to Financial Statements and Schedules. 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 audit. 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. KPMG PEAT MARWICK LLP Houston, Texas February 16, 1996 S-2 18 EXHIBIT INDEX (3) 2.1 - Stock purchase Agreement dated September 20, 1991, between Serv-Tech, Inc., on the one hand, and L. N. Bubrig, K. T. Bubrig, F. L. Calandro, K. T. Bubrig, Jr., and the Byron Keith Bubrig Interviros Trust, and the SECO Industries, Inc. E.S.O.P. Trusts, on the other hand. (5) 2.2 - Joint Venture Agreement dated February 4, 1992, between Serv-Tech, Inc., Westdeutsche Industrieinstandhaelungs Verwaltungsgesellschaft GmbH and Alan Kidd. (7) 2.3 - Agreement and Plan of Merger dated June 14, 1994, among Serv-Tech, Inc., Hartney Acquisition Corporation and Hartney Industrial Services Corporation. (1) 3.1 - Restated Articles of Incorporation of Serv-Tech, Inc. (1) 3.2 - Bylaws, as amended, of Serv-Tech, Inc. (1) 4.1 - Specimen stock certificate evidencing Common Stock of Serv-Tech, Inc. (1) 10.1 - Loan Agreement dated November 1, 1988 by and between Serv-Tech, Inc. and Texas Commerce Bank National Association. (Superseded by the Loan Agreement filed as Exhibit 10.2). (4) 10.2 - Loan Agreement dated March 26, 1992, by and between Serv-Tech, Inc. and Texas Commerce Bank National Association. (Superseded by the Credit Agreement filed as Exhibit 10.36.) (1) 10.3 - United States Patent Number 4,817,653 (Tank Cleaning, Water Washing Robot), dated April 4, 1989. (1) 10.4 - United States Patent Number 4,805,653 (Mobile Articulatable Tube Bundle Cleaner), dated February 21, 1989. (1) 10.5 - United States Patent Number 4,666,365 (Tube Bundle Pulling Apparatus), dated May 19, 1987. (1) 10.6 - United States Patent Number 4,575,305 (Truck-Mounted Tube Bundle Pulling Apparatus), dated March 11, 1986. (2) 10.7 - United States Patent No. 4,856,545 (Multi-Lance Tube Bundle Cleaner), dated August 15, 1989. (2) 10.8 - United States Patent No. 4,869,638 (Aerial Bundle Puller), dated September 26, 1989. (4) 10.9 - United States Patent No. 4,954,267 (Hydrocarbon Reclaimer System), dated September 4, 1990. (4) 10.10 - United States Patent No. 4,945,933 (Liquid Circulator Useful for Dispersing Sediment Contained in a Storage Tank), dated August 7, 1990. (4) 10.11 - United States Patent No. 5,032,054 (Aerial Bundle Puller), dated July 16, 1991. E-1 19 (4) 10.12 - United States Patent No. 5,091,016 (Method for Dispersing Sediment Contained in a Storage Tank), dated February 25, 1992. (8) 10.13 - United States Patent No. 5,356,482 (Process for Vessel Decontamination), dated October 18, 1994. (8) 10.14 - United States Patent No. 5,261,600 (Vertical Tube Bundle Cleaner), dated November 16, 1993. (8) 10.15 - United States Patent No. 5,173,007 (Method and Apparatus for In-Line Blending of Aqueous Emulsions), dated December 22, 1992. (8) 10.16 - United States Patent No. 5,389,156 (Decontamination of Hydrocarbon Process Equipment), dated February 14, 1995. (4) 10.17 - Amended and Restated 1986 Incentive Stock Option Plan of Serv-Tech, Inc. (4) 10.18 - Amended and Restated 1989 Incentive Stock Option Plan of Serv-Tech, Inc. (4) 10.19 - Amended and Restated 1989 Director Stock Option Plan of Serv-Tech, Inc. (4) 10.20 - Senior Subordinated Loan Agreement dated January 31, 1992, between Hartney Corporation and Serv-Tech, Inc. (6) 10.21 - Note Purchase Agreement dated June 1, 1993, by and between Serv-Tech, Inc., and Berkshire Life Insurance Company; Serv-Tech, Inc. and The Security Mutual Life Insurance Company; Serv-Tech, Inc., and TMG Life Insurance Company; Serv-Tech, Inc., and Principal Mutual Life Insurance Company. (6) 10.22 - Employment Agreement, dated September 20, 1991, between the Company and Frank L. Calandro. (6) 10.23 - Registration Rights Agreement, dated September 20, 1991, among Serv-Tech, Inc. and L.N. Bubrig, K. T. Bubrig, Frank L. Calandro, K. T. Bubrig, Jr., Byron Keith Bubrig Inter Vivos Trust. (6) 10.24 - Non-Competition and Confidentiality Agreement, dated September 20, 1991, between Serv-Tech, Inc. and Frank L. Calandro. (6) 10.25 - Employment Agreement, dated May 11, 1992, between the Company and Larry A. Talbert. (6) 10.26 - Registration Rights Agreement, dated May 11, 1992, between Serv-Tech, Inc. and Larry A. Talbert. (6) 10.27 - Earnout Agreement, dated May 11, 1992, between Serv-Tech, Inc. and Larry A. Talbert. (8) 10.28 - Employment Agreement, dated August 9, 1994, between Serv-Tech, Inc., and Richard L. Daerr. (8) 10.29 - Employment Agreement, dated August 29, 1994, between Serv-Tech, Inc., and David P. Tusa. E-2 20 (8) 10.30 - Employment Agreement, dated November 10, 1994, between Serv-Tech, Inc., and Frank A. Perrone. 10.31 - United States Patent No. 5,403,145 (Street Legal, Mobil, Truck Mounted Tube Bundle Pulling Apparatus), dated April 4, 1995. 10.32 - United States Patent No. 5,425,814 (Method for Quick Turnaround of Hydrocarbon Processing Units), dated June 20, 1995. 10.33 - United States Patent No. 5,460,331 (Apparatus for Dispersion of Sludge in a Crude Oil Storage Tank), dated October 24, 1995. 10.34 - United States Patent No. 5,485,966 (Remotely Controlled Chopping Machine for Tank Cleaning), dated January 23, 1996. 10.35 - Contract No. FP-03 for Design, Supply, Construction and Commissioning of Finchaa Sugar Factory and Ethanol Plant between Finchaa Sugar Factory of the Transitional Government of Ethiopia and F. C. Schaffer & Associates, Inc. 10.36 - Credit Agreement dated May 15, 1995, by and between Serv-Tech, Inc. and Texas Commerce Bank National Association, and Bank One Texas, N.A. 10.37 - Agreement for Serv-Tech Turnaround Services Management Group. 10.38 - Agreement Relating to Employment Performance Bonuses by and between Chemisolv, Limited and Chemisolv Holdings, Inc. and Serv-Tech, Inc. and the Chemisolv Management Group. 10.39 - Option Assignment Agreement by and between Chemisolv Holdings, Inc. and Chemisolv, Limited and Serv-Tech, Inc. and the Chemisolv Option Holders and Laserdisk, Limited. 10.40 - Guaranteed Unsecured Loan Notes by and between Chemisolv Holdings, Inc. and Serv-Tech, Inc. and the Chemisolv Management Group. 13.1 - Portions of the 1995 Annual Report to Shareholders of Serv-Tech, Inc. Portions of the 1995 Annual Report to Shareholders of Serv-Tech, Inc. are not deemed to be "filed" under the Securities Exchange Act of 1934. 21.1 - Subsidiaries of Serv-Tech, Inc. 23.1 - Consent of KPMG Peat Marwick LLP. 27.1 - Financial Data Schedule 99.1 - Opinion of Coopers & Lybrand for the consolidated balance sheet as of December 31, 1994, and the consolidated statements of operations, changes in stockholders' equity and cash flow for the two years in the period ended December 31, 1994. (1) Incorporated by reference from the registrant's Registration Statement No. 33-29594 on Form S-1. (2) Incorporated by reference from the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1990. E-3 21 (3) Incorporated by reference from the registrant's Report on Form 8-K dated September 20, 1991. (4) Incorporated by reference from the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1991. (5) Incorporated by reference from the registrants Annual Report on Form 10-K for the fiscal year ended December 31, 1992. (6) Incorporated by reference from the registrants Annual Report on Form 10-K for the fiscal year ended December 31, 1993. (7) Incorporated by reference from the registrants Report on Form 8-K, dated June 14, 1994. (8) Incorporated by reference from the registrants Annual Report on Form 10-K for the fiscal year December 31, 1994. E-4 EX-10.31 2 U.S. PATENT NO. 5,403,145-STREET LEGAL MOBIL TRUCK 1 EXHIBIT 10.31 US005403145A United States Patent [19] [11] Patent Number: 5,403,145 Cradeur et al. [45] Date of Patent: Apr. 4, 1995 - ------------------------------------------------------------------------------- [54] STREET LEGAL, MOBILE, TRUCK MOUNTED TUBE BUNDLE PULLING APPARATUS [75] Inventors: Robert R. Cradeur, Sulpher, La.; Richard W. Krajicek, Houston, Tex. [73] Assignee: Serv-Tech, Inc., Houston, Tex. [21] Appl. No.: 221,920 [22] Filed: Apr. 1, 1994 RELATED U.S. APPLICATION DATA [63] Continuation of Ser. No. 739,466, Aug. 2, 1991, aban- doned. [51] Int. CL(6) ................................B66F 11/00 [52] U.S. CL ........................414/745.3; 180/24.01; 414/541; 414/544; 414/547 [58] Field of Search ..............414/495, 501, 540, 541, 414/542, 543, 544, 547, 555, 633, 745.3; 180/24.01 [56] REFERENCES CITED U.S. PATENT DOCUMENTS 2,857,062 10/1958 Anderson .................414/543 3,064,834 11/1962 Dempster et al. 3,121,499 2/1964 LaBarre, Jr. 3,452,887 7/1969 Larson et al. 3,501,031 3/1970 Whitfield.................414/543 3,734,223 5/1973 Anderson 3,937,340 2/1976 Grove 4,306,832 12/1981 Schmiesing 4,392,524 7/1983 Banch 4,575,305 3/1986 Krajicek et al. 4,666,365 5/1987 Cradeur 4,943,118 7/1990 Davis .....................298/12 4,943,203 7/1990 Bohata 4,986,719 1/1991 Galbreath 5,088,570 2/1992 Loeber .................180/24.01 5,169,281 12/1992 Boisture ...............414/745.3 5,305,844 4/1994 Ducote .................180/24.01 Primary Examiner--Michael S. Huppert Assistant Examiner--Janice L. Krizek Attorney, Agent, or Firm--John R. Kirk, Jr. [57] ABSTRACT The invention relates to a street legal mobile mounted tube bundle pulling apparatus which is moveable from a lifting position to a traveling position. A longitudinal track is attached to the bed of the vehicle. A sled which is contiguous with said track supports a turntable. A vertical telescoping column is mounted on the turntable. A bundle pulling apparatus is attached to the vertical telescoping column. Hydraulic cylinders are used for actuating both the turntable and the sled. By actuating the sled the telescoping column and bundle pulling apparatus which is a majority of the mass can be dragged to and between a rearward lifting position and a forward travelling position. 6 CLAIMS, 8 DRAWING SHEETS [FIGURE] 2 U.S. Patent Apr. 4, 1995 Sheet 1 of 8 5,403,145 [FIG. 1] 3 U.S. Patent Apr. 4, 1995 Sheet 2 of 8 5,403,145 [FIG. 2] [FIG. 15] 4 U.S. Patent Apr. 4, 1995 Sheet 3 of 8 5,403,145 [FIG. 3] [FIG. 4] 5 U.S. Patent Apr. 4, 1995 Sheet 4 of 8 5,403,145 [FIG. 4A] [FIG. 5] 6 U.S. Patent Apr. 4, 1995 Sheet 5 of 8 5,403,145 [FIG. 6] 7 U.S. Patent Apr. 4, 1995 Sheet 6 of 8 5,403,145 [FIG. 7] [FIG. 8] 8 U.S. Patent Apr. 4, 1995 Sheet 7 of 8 5,403,145 [FIG. 9] [FIG. 10] [FIG. 12] [FIG. 11] 9 U.S. Patent Apr. 4, 1995 Sheet 8 of 8 5,403,145 [FIG. 13] [FIG. 14] 10 5,403,145 STREET LEGAL, MOBILE, TRUCK MOUNTED TUBE BUNDLE PULLING APPARATUS This is a continuation of application Ser. No. 07/739,466, filed on Aug. 2, 1991, now abandoned. The present invention generally relates to a truck mounted tube bundle puller and more specifically relates to a bundle puller which is interchangeable from a rearward lifting position to a forward travelling position making the mobile bundle puller highway legal. BACKGROUND OF INVENTION U.S. Pat. No. 4,575,305 to Krajicek, et al. relates to a truck mounted tube bundle pulling apparatus. In this invention the tube bundle pulling apparatus is attached to a telescoping column. The telescoping column is rotatably mounted to the rear of the bed. Although this invention is commercially successful it has one primary disadvantage. The apparatus exceeds the legal highway weight limits and therefore requires permitting for street travel. The highway legal limits are 34,000 lbs. on the dual drive axles, and 12,000 lbs. per steering axle. The invention disclosed in the '305 patent resulted in a weight of approximately 42,000 lbs. on the rear axles and 10,000 lbs. on the steer axle. This distribution could not be remedied due to the fixed location of the mass on the bed of the truck. For the past several years, Serv-Tech has spent many thousands of dollars in highway permits for transporting what has been classified as an overweight vehicle. Serv-Tech has also spent many thousands of dollars in unseen costs on equipment and manpower waiting for permits, waiting on weather conditions since many states will not permit movement during bad weather and storing and housing equipment and manpower since many states will not permit movement of overweight vehicles during nights, weekends and holidays. Several unsuccessful attempts were made to resolve this problem. For example, an attempt was made to redistribute the weight by adding a third rear axle. This did not work and only exacerbated the steering problems. At the time application for the '305 patent was made the weight distribution or highway legal problem was not recognized and therefore, at the time, there could not have been any motivation to solve the problem. Once the problem was recognized it took several unsuccessful attempts to resolve the problem before Applicant conceived of shifting the mass between two positions to resolve the problem. SUMMARY OF THE INVENTION The present invention resolves the highway legal problem by mounting the bearing and structures on a slide plate. By dragging the slide plate the weight can be redistributed by moving the center of gravity forward of the rear axle centers. Dual front steer axles are also added allowing 12,000 lbs. to be placed on each front axle. As a result of moving these structures forward, the truck becomes highway weight legal in all states and in most of Europe. Thus the requirement for obtaining moving permits is removed. The unit can be driven to and from job sites at any time as a conventional truck. The invention relates to a street legal, mobile, truck mounted bundle pulling apparatus which is interchangeable from a lifting position to a travelling position. A longitudinal track is attached to the bed of the vehicle. A sled which is contiguous with said track supports a turntable. A vertical telescoping column is mounted on the turntable. A bundle pulling apparatus is attached to the vertical telescoping column. Hydraulic cylinders are used for actuating both the turntable and the sled. By actuating the sled the telescoping column and bundle pulling apparatus which is a majority of the mass can be drug between rearward lifting position and a forward travelling position. BRIEF DESCRIPTION OF THE DRAWINGS FIG. 1 is a side view of the invention shown in the lifting position. FIG. 2 is a back view of the invention (without the carriage frame) shown in FIG. 1. FIG. 3 is a plan view of the invention (without the truck) shown in the travel position. FIG. 4 is a side view of the invention shown in FIG. 3. FIG. 4A is a front view of the invention shown in FIG. 3. FIG. 5 is a back view of the invention shown in FIG. 3 showing the loading arm mounted thereon. FIG. 6 is another rearward view of the invention showing the sled, rails, turntable and telescoping column in crossection. FIG. 7 is a rear view of the bed and outrigger assembly. FIG. 8 is a crossectional view of the bed taken along line 8-8 of FIG. 3. FIG. 9 is a top view of the sled. FIG. 10 is a rear side view of the sled. FIG. 11 is a plan view of the framing assembly. FIG. 12 is a crossectional view taken along a line 12-12 of FIG. 11. FIG. 13 is a plan view of the main features of the invention. FIG. 14 is an exploded view of the fork shift assembly. FIG. 15 is an exploded view of the telescoping loading arm. DETAILED DESCRIPTION OF THE INVENTION By way of definition, it is to be understood that references to hydraulic cylinders encompass the pistons included therein including all necessary controls and connecting lines required to make such cylinders operational. The hydraulic cylinders and the controls as used in this invention are of a type well known in the art. U.S. Pat. No. 4,575,305 is incorporated by reference for information relating to the truck mounted tube bundle pulling art. Referring to FIGS. 1 and 2, the highway legal bundle pulling apparatus 10 generally includes a vehicle or truck 20 having a bed 30. A track 40 is attached to the bed 30. A sled 50 is mounted contiguous with said track 40 and a turntable 60 is mounted on the sled 50. Hydraulic cylinders 70 and 75 are used to actuate, respectively, sled 50 and turntable 60. A telescoping column 80 is mounted on turntable 60. A bundle pulling apparatus 90 is attached to the upper end of telescoping column 80. Truck 20 preferably includes two front steering axles 21a and 21b although three front steering axles could be used as well. The design of dual and triple front steering axles 21 is of a type well known in the art. A bogie 22 is attached to the rear of the vehicle 20. The design of a 11 5,403,145 bogie 22 is also well known in the art. The front axles and bogie are attached to truck frame 24 which supports outrigger assembly 26 (best seen in FIGS. 3-5). Four longitudinally running beams 28a, 28b, 28c, and 28d are welded to the outrigger assembly 26. The rear portion of outrigger assembly 26 (FIGS. 5 and 11) supports jacks 26a and 26c and rear stabilizer leg 26b. Track 40 is welded to beams 28b and 28d. The track 40 is preferably made from two inverted L-shaped rails 42a and 42b. These rails 42 are fixed, preferably by welding, to beams 28b and 28d. The rails project inwardly for retaining or interposing the sled 50. Impact plates 34a and 34b are attached to outrigger assembly 26 and to rails 42a and 42b. Cross support members 29 support beams 28 (FIGS. 1 and 11). Sled 50 is contiguous with track 40 and in the particular embodiment shown is interposed between inverted L-shaped rails 42a and 42b. Referring to FIGS. 6, 9 and 10 sled 50 includes bearing plate 52 and three longitudinal runners 54a, 54b and 54c which are fixed, preferably by welding, to bearing plate 52. A lubricant can be placed between runners 54 and bed 30. Left and right locking pin attachments 56a and 56b are attached to bearing plate 52 and are used for locking the sled 50 in either the lifting position or the travelling position. A crane bearing mounting plate 58 is attached to bearing plate 52 for mounting of crane bearing 62. Rotate cylinder mount bracket 59 is also attached to bearing plate 52 for the mounting of hydraulic cylinder 75. Hydraulic cylinder 75 travels with sled 50. Nest 76 (FIG. 4) attached by tube 78 to mount bracket 59 also travels with sled 50 and nests hydraulic lines (not shown). It is to be understood that the hydraulic cylinders described herein could be replaced by other known actuation means such as a chain, a rack and pinion, a cable, etc. Turntable 60 is mounted on bearing plate 52. The mounting is accomplished through a crane bearing 62. Crane bearing 62 includes inner race 64a, outer race 64b and ball bearings (depicted by 65). Turntable plate 61 is fixed to inner race 64a by bolts 66 (shown in FIG. 6). Outer race 64b is fixed to crane bearing mounting plate 58 and bearing plate 52 by bolts 67. Inner race 64a is rotatable with respect to outer race 64b yet is trapped by outer race 64a and the ball bearings. A clearance exists between bolts 66 and bearing plate 52 and between bolts 67 and outrigger assembly 26 or bed 30. Telescoping column 80 is mounted on top of turntable 60. Telescoping column 80 preferably includes base section 81a, intermediate section 81b and upper section 81c. Base section 81a is fixed to turntable 60, preferably by welding with gussets 82 between turntable plate 61 and base section 81a. The operation of the invention can be described as follows: After work has been completed at the worksite, hydraulic cylinder 70 is actuated to drag sled 50 forward to a forward travelling position. Once in the travelling position, pins (not shown) are used to lock the sled 50 in place. The vehicle 20 is now highway legal. Once the vehicle 20 arrives at a new worksite and is positioned for operation, hydraulic cylinder 70 can be actuated to drag (by pushing) the sled 50 to the rearward lifting position. Once in the lifting position, the sled 50 is pinned in place. Referring to FIG. 1, the overall length from the front end of the truck 20 to the end of the outrigger assembly 26 is preferably thirty feet (30'). The distance from the front end of the truck to the center of the front axle 21a is 62 inches and 63.6 inches separate the steering axles 21a and 21b. The rear steering axle is 108 inches from the front axle of the bogie 22. The axles of bogie 22 are separated by 56 inches with the center line of the bogie being half the distance between the axles of the bogie. The center of gravity of the rearward lifting position is located 45 inches from the center line of the rear bogie. The sled travels approximately 7 1/2 feet from the rearward lifting position until it reaches the forward travel position (FIGS. 3 and 4). This results in a weight distribution as follows: 33,000 pounds bears upon the center line of the rear bogie, and 12,000 pounds bears upon each of the steering axles, resulting in an overall bearing weight of 57,000 pounds. Referring to FIG. 13 hydraulic cylinder 70 is attached at one end to sled 50 and is attached at the other end to a clevis mount 57. Hydraulic cylinder 70 is preferably centered on the passenger side of truck 20 and attaches to sled 50 along a line through the center of gravity of sled 50. Referring back to FIGS. 1-5, vertical telescoping column 80 has base section 81a mounted on top of turntable 60. Intermediate telescoping section 81b telescopes over base section 81a. It is understood that the preferred embodiment shows one intermediate telescoping section however, a design employing a plurality of intermediate telescoping sections is within the spirit of the invention. Top telescoping section 81c is adapted to telescope over the outside of intermediate telescoping section 81b. It is understood that the top telescoping section 81c and the intermediate telescoping section 81b are telescoped relative to base section 81a via a raising mechanism (not shown) located within vertical telescoping column 80 which is of a type well known in the art. Top telescoping section 81c has a frame 80d with structural members 80e and 80f connected thereto. Structural members 80e and 80f have a vertical, longitudinal axis which is parallel to the axis of vertical telescoping column 80. Structural members 80e and 80f are connected to arms 80g, 80h and 80i which are connected to top telescoping section 81c. Structural member 80e includes flange 80j (FIG. 3). Structural member 80f includes flange 80k is parallel to flange 80j. Bundle support member vertical adjustment section 801 (FIG. 1) is disposed to move vertically over guide flanges 80j; and 80k. Bundle support member vertical adjustment section 801 contains four mounting lugs 80m attached to its upper end 80n (shown in FIG. 3), and disposed to accept support member telescoping shafts 80o and 80p (shown in FIGS. 2 and 14). Support member telescoping shafts 80o and 80p are each connected to mounting plate 80q. Therefore, on actuation of support member telescoping shafts 80o and 80p bundle support member vertical adjustment section 801 can be moved vertically independent of the telescoping action of top telescoping section 81c and intermediate telescoping section 81b over base section 81a. It is understood that although the preferred embodiment is disclosed as including a pair of telescoping shafts 80o and 80p for vertical movement of bundle support member vertical adjustment section 801 relative to top telescoping section 81c, other devices well known in the art such as hydraulic cylinders or rack and pinions may also be used without departing from the spirit of the invention. Cradle forks 80r and 80s are connected to front wall 80z and extend horizontally therefrom. Cradle fork shift housing 80u defines grooves 80v and 80w for sliding over cradle forks 80r and 80s as actuated by cradle fork 12 5,403,145 shift housing cylinder 80x. Retainer plates 80y define guide grooves which guide the horizontal movement of bundle support member 91 along the top of cradle fork shift housing 80u. The structure and operation of bundle support member 91 is incorporated herein as discussed in U.S. Pat. No. 4,575,305 at columns 6 to 9. Cradle fork shift housing 80u is extendable and retractable for fine tune adjustments required for alignment with heat exchangers, bundle dollies, etc. after truck 20 has been parked. Since vertical telescoping column 80 is mounted on turntable 60 which is in turn moveable to the rear of bed 30, it is clear that when the longitudinal axis of bundle support member 91 is oriented at ninety degrees to the longitudinal horizontal axis of bed 30, bundle support member 91 may be lowered below the elevation of the bed 30. In order to lower bundle support member 91 below the elevation of bed 30 vertical telescoping column 80 must be in a fully contracted position wherein top telescoping section 81c and intermediate telescoping section 81b are fully lowered over base section 81a. Furthermore, support member telescoping shafts 80o and 80p must also be in their fully retracted position thereby lowering bundle support member vertical adjustment section 801 relative to top telescoping section 81c. As best understood by reference to FIG. 1, bundle support member vertical adjustment section 801 is disposed to move downwardly behind bed 30 and adjacent to mounting housing 26d which houses rear stabilizer leg 26b with wheel 26e. Bundle support member vertical adjustment section 801 may thus move downwardly to a level of eighteen inches above the ground. After withdrawing a tube bundle from an exchanger shell, the tube bundle is raised or lowered, as needed, through the action of support member telescoping shafts 80o and 80p which can raise or lower bundle support member 91. Turntable hydraulic cylinder 75 is then used to align the longitudinal axis of bundle support member 91 with the longitudinal axis of bed 30. Vertical telescoping column 80 is placed in a fully retracted position by telescoping intermediate telescoping section 81b and top telescoping section 81c downwardly toward base section 81a. At that point, the bundle support member 91 can be lowered until cradle forks 80r and 80s come in contact with carriage frame fork structure support 94 (FIG. 4). It is understood that the previously described lowering functions and maneuvering functions can occur in any order the operator so chooses by using a remote control (not shown) or the control console (not shown). It is also understood that depending upon the position of a bundle dolly (not shown) relative to truck bed 30 that the offloading assembly 100 may be used to load or unload a tube bundle from the bundle support member 91 when the bundle support member 91 is positioned transversely to the longitudinal axis of the over the road truck 20 and disposed below the elevation of bed 30. Having fully lowered the bundle support member 91 with a tube bundle supported therefrom, off-loading mechanism 100 of this invention is used to transfer a tube bundle from bundle support member 91 to a bundle dolly. Referring to FIGS. 5 and 15, the off-loading mechanism 100 contains a first telescoping loading arm 102 and an opposite second telescoping loading arm (not shown). First telescoping loading arm 102 is identical in function to the second telescoping loading arm. Therefore, the foregoing discussion, while directed at first telescoping loading arm 102, is intended to apply to the second telescoping loading arm as well. First telescoping arm 102 contains a base 104 and an upper section 106. Upper section 106 telescopes from within base 104. Base 104 is pivotally connected to mounting bracket 108 (see FIGS. 1 and 2). First telescoping arm 102 can be raised by using loading arm scope cylinder 110. Arm scope cylinder 110 is connected to base 104 at brackets 105 and to upper section 106 at brackets 107. Therefore, actuation of arm scope cylinder 110 raises upper section 106 relative to base 104. Cable actuating cylinder 112 is mounted at a lower end on upper section 106 and at an upper end is attached to cable 114 which is supported by pulley 116. Cable actuating cylinder 112 travels with upper section 106 within base 104. Actuation of cylinder 112 extends or retracts cable 114. Hook 118 is attached to the other end of cable 114 and is normally used for retaining a sling (FIG. 15 only) for movement of tube bundles. The first telescoping loading arm 102 is pivoted about mounting bracket 108 via a loading arm tilt cylinder 120. The loading arm tilt cylinder 120 is pivotally mounted between mounting bracket 122 mounted on arm 80g and bracket 109 on base 104. Actuation of loading arm tilt cylinder 120 pivots first telescoping loading arm 102 for setting the tube bundle onto the bundle dolly. It should be noted that arm scope cylinder 110, cable actuating cylinder 112 and loading arm tilt cylinder 120 can be operated in any order chosen by the operator either simultaneously or serially by manipulation of remote controls (not shown) or by using a control console (not shown). As can be readily appreciated by one skilled in the art, first telescoping mast loading arm 102 is adapted to raise the tube bundle vertically using loading arm scope cylinder 110. The tube bundle can be further raised vertically using cable actuating cylinder 112 to retract cable 114. As stated hereinabove, off-loading assembly 100 contains a first telescoping loading arm 102 and a second telescoping loading arm. A spreader bar 124 (FIG. 15) attaches to upper section 106 of first telescoping arm 102, as well as to upper section of the second telescoping arm. Therefore, spreader bar 124 serves a stabilizing function for off-loading assembly 100. The bundle pulling apparatus 90 of the present invention is placed into service by driving the over-the-road truck 20 to a suitable location adjacent the heat exchanger whose bundle is to be removed or inserted. Lateral outrigger beam 26f and jack 26c as well as stabilizer leg 26b are actuated to shift the weight of the apparatus off of the wheels of truck 20. Actuation of hydraulic cylinder 70 drags (pushes) sled 50 to the lifting position. Hydraulic cylinder 75 via arm 78 rotates turntable 60 to a desired position. Turntable 60 is rotatable through approximately 105 degrees. Vertical telescoping column 80 is extended and rotated until the longitudinal axis of bundle support member 91 is aligned with the longitudinal axis of the heat exchanger. Refer to U.S. Pat. No. 4,575,305, column 11, lines 30-60 for a description of tube bundle removing procedures. Having fully withdrawn the tube bundle from the heat exchanger shell, vertical telescoping column 80 is rotated and retracted thereby aligning the longitudinal axis of the bundle support member 91 with the longitudinal axis of the bed 30 and allowing the bundle support member 91 to be lowered toward bed 30 while dragging sled 50 toward the travel position until forks 80r and 80s 13 5,403,145 come in contact with support 94. Vertical telescoping column 80 can also be rotated to position the longitudinal axis of bundle support member 91 transversely to the longitudinal axis of bed 30. Support member telescoping shafts 80o and 80p can be used to lower bundle support member 91 behind the bed 30 of truck 20 and to an elevation below the bed 30. From either position described above, the offloading mechanism 100 may be used to transfer the tube bundle from bundle support member 91 to a waiting bundle dolly. It should be noted that the bundle pulling apparatus 90 is suitable for removing tube bundles from heat exchangers having a ground clearance of as little as eighteen inches. In situations where tube bundles are inaccessible from the position shown in FIGS. 1 and 2, truck 20 can be backed in and the bundle extracted with bundle pulling support member 91 parallel to the longitudinal axis of bed 30. Other configurations are possible. The preferred embodiment of the invention is shown and described. The disclosure and description of the invention are illustrative and explanatory thereof, and various changes in the size, shape, and materials, as well as in the details of the illustrated construction may be made without departing from the spirit of the invention. What is claimed is: 1. A street legal, mobile tube bundle pulling apparatus mounted on a truck and movable from a lifting position to a traveling position, said truck having a bed disposed along a longitudinal axis and having a forward end and a rearward end, said bed being supported by at least two pairs of steerable wheels arranged in tandem relationship with one of said pairs of steerable wheels being disposed adjacent said forward end and the other pair being spaced rearwardly from said one pair, and by a plurality of nonsteerable wheels mounted on at least two axles arranged in tandem relationship with one of said axles being disposed adjacent said rearward end of the bed and the other one of said axles being spaced forwardly of the one axle, said apparatus comprising: a track attached to said bed and running in a longitudinal direction with respect to said bed; an outrigger assembly extendably mounted on said bed; a sled slidably mounted on said track at a position elevationally above said bed; a turntable mounted on said sled; a vertical telescoping columnmounted on said turntable; a bundle pulling apparatus attached to said column; a hydraulic means for rotating said turntable; and a hydraulic means for dragging said sled on said track between said lifting position and said traveling position at which the weight of said sled, said turntable, said vertical telescoping column and said tube bundle pulling apparatus is adjustably positioned with respect to said longitudinal axis to controllably distribute said weight between said steerable wheels and said nonsteerable wheels. 2. The apparatus according to claim 1 wherein said steerable wheels have a centerpoint longitudinally equi-distantly positioned between said steerable wheels that is separated from a longitudinal centerpoint of said axles by fourteen feet, and the traveling position is seven and one-half feet forward of the lifting position. 3. The apparatus according to claim 1 wherein said turntable comprises a crane bearing fixed to said sled and to said column. 4. The apparatus according to claim 1 wherein said sled comprises a bearing plate attached to at least two runners. 5. The apparatus according to claim 1 wherein said track comprises two rails each having an inward projection, wherein said rails are fixed to said bed such that said inward projections retain said sled. 6. In a tube bundle pulling apparatus mounted on a truck, said truck having a bed disposed along a longitudinal axis and a forward end and a rearward end, said bed being supported at the forward end by at least two pairs of steerable wheels and at the rearward end by a plurality of non-steerable wheels mounted on at least two axles, and said apparatus having a vertical telescoping column mounted to a turntable, and a tube bundle pulling apparatus mounted to the column, wherein the improvement comprises: mounting the turntable to a sled, said sled being carried by a track mounted longitudinally on the bed to enable the sled to travel between a forward traveling position at which the weight of said sled, said turntable, said vertical telescoping column and said tube bundle pulling apparatus is adjustably positioned with respect to said longitudinal axis to controllably distribute said weight between said steerable wheels and said nonsteerable wheels and a rearward lifting position adjacent the rearward end of said bed. * * * * * EX-10.32 3 U.S. PATENT NO. 5,425,814 - METHOD FOR TURNAROUND 1 EXHIBIT 10.32 UNITED STATES PATENT [19] [11] PATENT NUMBER: 5,425,814 KRAJICEK ET AL. [45] DATE OF PATENT: JUN. 20, 1995 - ------------------------------------------------------------------------------- [54] METHOD FOR QUICK TURNAROUND OF HYDROCARBON PROCESSING UNITS [75] Inventors: Richard W. Krajicek; Nismanath Mehta, both of Houston, Tex.; James R. Duffy, Chesterfield, Mo. [73] Assignee: Serv-Tech, Inc., Houston, Tex. [21] Appl. No.: 261,423 [22] Filed: Jan. 17, 1994 RELATED U.S. APPLICATION DATA [63] Continuation-in-part of Ser. No. 61,187, May 13, 1993, Pat. No. 5,389,156, and a continuation-in-part of Ser. No. 998,556, Dec. 30, 1992, Pat. No. 5,356,482, which is a continuation-in-part of Ser. No. 805,367, Dec. 10, 1991, abandoned. [51] Int. CL6 . . . . . . . . . . . . . . . B08B 3/00; B08B 9/00 [52] U.S. CL . . . . . . . . . . . . . . . 134/22.1; 134/22.14; 134/22.19; 134/22.15; 134/30; 134/31; 134/34; 134/11; 134/10; 134/39; 134/26; 134/19 [58] FIELD OF SEARCH . . . . . . . . . . 134/22.1, 22.14, 22.19, 134/22.15, 30, 31, 34, 11, 10, 39, 26, 19 [56] REFERENCES CITED U.S. PATENT DOCUMENTS 1,722,211 7/1929 Guardino . . . . . . . . . . . . 134/22.15 1,891,592 12/1932 Fitzgerald . . . . . . . . . . . . 134/31 2,023,496 12/1935 Todd . . . . . . . . . . . . . 134/22.15 2,715,594 8/1955 Garrison . . . . . . . . . . . . 134/22.15 3,084,076 4/1963 Loucks et al. . . . . . . . . . 134/22.15 4,446,044 5/1984 Rutkiewic et al. . . . . . . . . . 252/170 BI4,511,488 9/1990 Matta . . . . . . . . . . . . . . 252/162 4,790,951 12/1988 Frieser et al. . . . . . . . . . 252/162 5,271,773 12/1993 Hamilton et al. . . . . . . . . . . 134/10 OTHER PUBLICATIONS Aksoy, M. ""Benzene Carcinogenicity'', CRC Press, Inc., Boca Raton, Florida (pp. 34-39, 50-53) No date. ""Toxicological Profile for Benzene'', Oak Ridge National Laboratory, May 1989 (pp. 3-5, 7-12, 32-34, 39-41, 44, 68). Primary Examiner -- David A. Simmons Assisment Examiner -- Zeinab El-Arini Attorney, Agent, or Firm -- John R. Kirk, Jr.; Jenkens & Gilchrist [57] ABSTRACT A quick cleaning method for hydrocarbon processing is described which avoids using the time honored steam-out as a cleaning step by isolating the equipment to be cleaned from the rest of the hydrocarbon processing units, establishing a circulation loop and by pumping through the equipment an aqueous solution at an elevated temperature, of an extractant, such as a terpene, and a surfactant mixture which extracts and traps contaminants in an emulsion which is normally subjected to a high shearing step before recirculation to the equipment. 29 CLAIMS, NO DRAWINGS 2 5,425,814 METHOD FOR QUICK TURNAROUND OF HYDROCARBON PROCESSING UNITS RELATED APPLICATION This application is a continuation-in-part of applications Ser. No. 08/061,187, filed May 13, 1993, now U.S. Pat. No. 5,389,156, and a continuation-in-part of Ser. No. 07/998,556, filed Dec. 30, 1992, now U.S. Pat. No. 5,356,482 which was a continuation-in-part of application Ser. No. 07/805,367, filed Dec. 10, 1991, now abandoned. FIELD OF THE INVENTION This invention relates to the decontamination of hydrocarbon process equipment and vessels to remove contaminants, particularly benzene, to clean the equipment during turnaround periods of short duration or to restore efficiency to pieces of equipment which experience premature fouling. Specifically, it involves a unitary cleaning of all, or part, of the process equipment in a hydrocarbon flow-path which allows an extractant-based decontamination solution to be introduced into the processing system or equipment at a desired location in the process stream being cleaned and to recover in at almost any arbitrary location for disposal or reuse. BACKGROUND OF THE INVENTION In the chemical process and petroleum refining industries, maintenance and capital improvements of process plants normally occur at planned intervals, often three to seven years apart in the case of large petroleum refineries. Even if scheduled annually or biannually, cleaning is attempted when the operating unit is completely shut down and every aspect of its operation inspected and maintained. Operating units in hydrocarbon processing plants are made up of various types of vessels; i.e., tanks, heat exchanges, distillation columns, heaters, reactors and the like in fluid communication with each other. Characteristically, in refining and petrochemical operations, a feed, such as crude oil, is introduced to one end of the plant, with hydrocarbon product streams being removed at the other end, either to storage or to facilities for transportation to market. Of course, any similar process flow-stream equipment is also cleaned. This massive maintenance effort on each unit is called a turnaround and maximum speed in returning the unit to operation is essential to the plant economics, since the overriding cost of such an operation, even though itself expensive, is the time during which this operating unit is not producing refined product which can be sold. The speed at which the jobs are done are, of course, tempered with the necessity that safety of the workers be maintained throughout the operation. Hydrocarbon processing equipment is designed for operation with various hydrocarbon feedstreams for a certain period of time to normally concur with the time lapse between scheduled turnarounds. For instance, a heat exchanger may be over designed so that, as its efficiency falls off due to fouling and contamination from operation, it passes through an optimum level of heat transfer efficiency to a level of toleration which diminishes as the time for the turnaround procedure approaches. It is not uncommon that, during operation of hydrocarbon processing plants, particularly crude oil heaters in refineries which operate in parallel with each other, some particular units will become less efficient at a much faster rate than others. For example, the efficiency of a single crude oil heater in a process stream can cause an overall decrease in the operational capacity of the entire refinery, thus causing a considerable depression of the economics of the refinery. The choice becomes whether to keep operating until a scheduled turnaround or to shut down the entire refinery for a long period of time in order to bring the overall efficiency back to a satisfactory level. Such a work stoppage would result in premature expense to maintain some of the equipment merely to bring one or two pieces off equipment up to par. Normally, a turnaround operation for a large hydrocarbon processing plant may take three weeks to greater than a month of intensive round-the-clock operations. While the copending applications describe some of the advantages in time-saving through the practice of certain related inventions, the only alternative heretofore practiced in connection with the cleaning of these particular units has been to shut them down and then attempt to remove fouling through the injection of steam into the process equipment or unit. Initial injection of steam serves to remove hydrocarbons and volatile materials from the interior of the equipment. However, continued injection of high temperature steam often serves only to bake a scab of hard coke or scale on the walls of hydrocarbon processing units. Once this occurs, the only alternative is to disassemble the equipment and to proceed with cleaning of the parts in more conventional ways such as through hydroblasting with a high-pressure stream of water. A build up of carbon on heat exchanger tubing can cause hot spots to develop in the equipment resulting in erratic operation of the processing unit. The present cleaning practice, depending upon the equipment, uses a light hydrocarbon solvent to initially remove heavy oils and tars, followed by injection of steam for a period of time until monitoring devices indicate that no dangerous gases remain which present an explosive hazard to workers who must work in this environment. This period of preliminary steam cleaning is called a "steamout" and has been known to last for days, even weeks on occasion. Process equipment was also washed with water to remove contaminants where applicable, and often, both steaming and water washing is involved in the degassing of a vessel to make it possible for humans to safety enter to inspect and repair. Frequently, acids or detergents were also used to remove stubborn deposits. These steps often take many hours, even days, to accomplish -- days of lost production. Of particular importance to worker safety is, in addition to elimination of explosive gases, the removal of benzene and other volatile organic carbon components, many of which are known carcinogens, from the process vessels prior to worker entry, if required. It has been long recognized that chronic exposure by humans to benzene at high levels in the chemical and petro-chemical work place leads to bone marrow depression, aplastic anemia, and leukemia. Although absorption of benzene across the skin as a vapor or in aqueous media can occur, benzene toxicity in process systems is most frequently caused by inhalation of benzene that has managed to escape removal. Present government safety standards for eight hour work days are set at 1.0 ppm (average) benzene. The National Institute For Occupational Safety And Health (NIOSH) has recommended (1989) an occupational long term exposure limit in air of 3 5,425,814 0.1 ppm benzene. That is not good enough, since workmen employed by turnaround service companies are continually exposed to the interior of process vessels. Worker safety regulations now limit such exposure. One major goal of the present invention, therefore, is to provide a process for process equipment decontamination which exceeds this standard--in fact, which approaches, if not meets, 0 ppm of benzene. Benzene is often found collecting in head space of a vessel or trapped beneath scale or other contaminants anywhere along the process flow stream--in piping, in valves, and in pumps, as well as towers, reactors, tanks and heat exchanges--only to seep out from the interstices of contamination deposits at a later time when cleaning had been thought to be completed. In this era of quality management, when a particular piece of process equipment has lost its efficiency and requires cleaning in order to return the entire operating unit to useful efficiency, a procedure is needed for quickly accomplishing such cleaning and return to service through the removal of scales, absorbed hydrocarbons, cokes and other contamination from equipment and heat exchange surfaces without disturbing the entire unit when possible and certainly without requiring a prolonged shut down. Previously, such shut downs could last for weeks while extensive steaming and contamination removal continued during a steamout operation. The procedures required for such a cleaning, until now, are substantially described above. Where a single piece of process equipment rather than the entire unit is involved, it is necessary to unbolt flanges and install blinds to isolate the equipment while steam is introduced. Previously, when steam was used, venting to the atmosphere was allowed. Venting is no longer permissible under responsible environmental management, yet the steamout is strongly extended technology. Even though there are many conflicting problems which converge on cleaning process equipment, the overriding requirements are still speed with safety, and the practice of this invention accomplishes these while providing avenues for a more effective protection of the environment. This invention allows almost pristine cleaning of process equipment--from the crude oil feed pump to product storage tank and any step along the way--without time-honored steamout in terms of hours, rather than days or weeks. SUMMARY OF THE INVENTION This invention involves an improvement over old methods of cleaning and decontaminating process equipment where a steamout step was used. In the present invention the process equipment is cleaned by introducing, at any convenient, arbitrary location of the equipment an aqueous solution of an extractant having an affinity for the contaminant and an emulsifying surfactant such that the aqueous solution proceeds through the equipment being cleaned including piping, pumps and process equipment (except for those selected by plant personnel which may be harmed by the introduction of non-process substances). The aqueous solution can be discarded in an environmentally benign way or reused. The process of this invention uses materials which are nonhazardous, which do not create additional waste, and which can be disposed of by merely introducing them into the plant's waste water system where they can be handled by the biosystem on a routine basis. Initially, the processing system equipment may be drained while hot and flushed with a light hydrocarbon solvent to make an initial cleansing, although not absolutely necessary in the practice of the invention. Where desired or necessary, flanges are released and blinds are set in place in order to isolate the equipment to be cleaned from the rest of the unit. A line which leads from a circulation pump is attached to an intake flange of the equipment to be cleaned. The intake side of the pump is connected to a reservoir of cleaning liquid, initially water, and is downstream from a high shear device which is preferably a filter having an opening of from about 5 to about 100 microns. The 40 micron filter is best. The filters have been found to enhance the stability of the emulsion formed during the decontamination process. The contaminants removed from the system are trapped in the dispersed or discontinuous oil phase of the emulsion. Under certain conditions, the high shear operation of the filter is important to the success of the practice of this specialized cleaning operation. The act of pumping the solution or emulsion itself causes some shearing force to be applied. In some instances, this is enough. A sufficient amount of water would be introduced into the process flow equipment to provide a head for pumps, preferably the process pumps where possible, to be used to circulate it through the process flow equipment to be cleaned. The amount of water would be from about 5 to about 25% of the volume of the system. If a heat exchanger alone is to be cleaned then it would be necessary to assure that it would be substantially filled during circulation either through back pressure created in the system or by simply adding more water. Steam or another means would be used to heat the water, now circulating, and process equipment from the injection inlet to the exit to a temperature of from about 100 degrees F. to about 220 degrees F. or higher if the system is operating under pressure. The cleaning injection is continued by incorporating into the circulating hot water an extractant, having a high vapor pressure at the temperature involved, such that the vapors will condense on equipment surfaces to invade deposited scale and trap the contamination connected with the scale. It is preferred that a surfactant which boils at, or has a high vapor pressure within, the same temperature parameters also be included with the aqueous solution being circulated to enhance the invasion of the interstices of deposits containing contaminants and wash down of the internal surfaces of the process equipment with both condensed water and extractant. The circulating water heated by the steam, or some other means, also contains extractant and surfactant, if present, and in addition to sweeping contaminants from the system, serves to perform the cleaning function upon the surfaces contracted by it. The high shear device (40u filter) enhances the stability of emulsion which contains the contaminant extracted from the process equipment. A terpene extractant material is preferred because it is known to be environmentally safe, does not harm the ozone layer and its boiling point and vapor pressure and the solubility of hydrocarbon contaminants in the extractant. Even if the surfactant and extractant do not boil in the temperature range of the treatment, if the partial pressure of these two components is sufficiently high at cleaning conditions, vapors will be dispersed throughout the process equipment loop being cleaned and will condense to invade the interstices of the con- 4 5,425,814 taminant material and matrix of hydrocarbon scale to assure extraction and removal of the contaminants. It has been discovered that this process is particularly effective in thoroughly removing benzene from the equipment and causing a disintegration of the hydrocarbon scale to leave the equipment almost pristine in a very short period of time. The solids break down so completely that they, in fact, are transported through the micron sized filter, particularly the preferred 40 micron six filter in the shearing operation of the practice of this invention. This shearing step assists the captivity of normally volatile carcinogenic aromatic hydrocarbons like benzene. If a knock-out zone or drum, preferably upstream of the filter, is used in the circulation loop, then larger sized solids can be collected. The chemical formulations useful in the invention are capable of emulsifying and dissolving a wide range of typical hydrocarbon process industry contaminants such as tars, resins, and asphaltenes that might normally have been removed using aromatic or aliphatic solvents (some of which may be carcinogenic or teratogenic) and strong alkaline-based detergents. The decontamination solutions of this invention are not aggressive; they are non-reactive, and safe for use with the metallurgy normally found within hydrocarbon processing units. This characteristic allows the circulation of the decontamination solution using the standard process pumps already in place, thus allowing full and maximum use of system pressure and design fluid flow ratings without the damage to pump seals and packing which had been experienced during cleaning using reactive chemicals. In fact, the flow of the present chemical formulations may be controlled and monitored from the chemical plant's own control room. Surprisingly, observation of the interior of the equipment after cleaning approximates the appearance of new equipment. The surfaces are so clean that, in the case of mild steel, a patina of oxidation quickly forms upon exposure to air. Even more surprising is the ability to complete cleaning for disassembly and inspection is from about 10 to about 36 hours on jobs previously requiring from five to ten times as long; i.e., cleaning is accomplished in from about 10% to about 20% of the time. DETAILED DESCRIPTION OF THE INVENTION The method of this invention allows the owner of hydrocarbon processing units to clean process equipment or looped collections of equipment in a very short period of time without the necessity to resorting of the use of steam as the cleaning agent for equipment to remove contamination and scales and other deposits from hydrocarbon processing equipment as was previously required, i.e. without a steamout step. The steamout requires long periods of time and often exacerbated the problem of cleaning out tars and cokes. The cleaning method taught by this application is quick, amounting only to a matter of hours before the equipment could be opened for inspection as opposed to days previously when a steamout was required for safety. This allows reduced down time and in the case of badly fouled equipment reducing efficiency of the hydrocarbon processing unit can bring it back to full capacity without complete turnaround. Once the equipment being cleaned is shut down and drained, it is isolated through blinds, or blanks, most likely inserted at the flanges, and separated from the balance of the hydrocarbon processing unit, lines are installed to create a circulation loop through the isolated equipment. If necessary, pumps and a shearing unit are inserted in the loop. The practice of the method of this invention avoids the problem with the baking coke deposits into the units where a steamout step was previously used. Further, it takes advantage of the use of extractants which meet the Montreal protocol concerning the release of hydrocarbon to the atmosphere just in case an emission does occur. The practice of this invention even allows the removal of hydrocarbon fouling in a packed tower in a period of from 5 to 6 days without the physical removal of the packing from the tower. In the practice of the method of this invention which eliminates the "steamout" step universally followed in the cleaning of the hydrocarbon units, the equipment, or entire hydrocarbon processing unit, may be shut down and drained as completely as possible. It would then normally be flushed by circulating a light solvent through it such as a sweet crude or naphtha, kerosene or diesel cut. If it is a single piece of equipment or several pieces of equipment in fluid communication with each other, appropriate blanks are inserted into the flanges between this equipment and equipment which is not to be cleaned in this step. After the equipment is isolated a fluid circulation loop is established through the equipment to a shearing means, like a filter, through a pump which can be upstream or downstream from the shearing means and back to the equipment. The equipment to be cleaned is filled with water up to about 5% to about 25% of the volume of the system, as long as the amount of water is sufficient to cover the pump intakes while circulating the cleaning fluid; provided, however, the amount of water must be sufficient that heat exchanges are filled either by the rate of circulation or through addition of more water. Process pumps or extraneous pumps may be brought to bear on the operation, but a conduit for the solution is attached to the equipment where entry of the cleaning material is desired with a second conduit for the fluid attached at the exit. In the loop through which the fluid will be circulated includes a shearing means which can either be a static in-line mixture or a filter having a filter size of from about 1 to about 100 microns, preferably from about 20 to about 60 microns, and most preferably 40 microns plus or minus 15%, to provide shear to stabilize the emulsion created by the extractant, surfactant and the contaminants and solids removed from the equipment. A stable oil-in-water emulsion to be formed with extremely small particle size is caused by the combination of the shearing action and the ability of the extractant to break down the agglomerated scale or deposits on the equipment surfaces. The water in the equipment is circulated and heated to bring it to a temperature of from about 100 degrees F. to about 220 degrees F. The preferred method of heating is to inject steam into the water to raise its temperature and add the extractant and emulsifying agent to the heated water to form the cleaning solution. The extraction strength and emulsion forming capability of the circulating solution can be balanced by simple sampling and testing well-known in the art and adjusted as necessary during the cleaning process. The sampling and testing accomplishes a second purpose in that once the removal capacity of the extractant and surfactant has been exceeded there would be a tendency for the emulsion to invert where the water would become the discontinuous phase and the oil the continuous phase. At such time, it would be necessary to add more extractant and 5 surfactant to reverse the invert phenomenon. The circulation is continued until the foulding content of the cleaning solutions stabilizes, indicating that the removal of additional contamination is probably not to occur. This normally occurs within 6 to 12 hours. The material is then drained, the equipment flushed with water and opened for inspection to assure the restoration of the equipment to full operational capacity. For equipment like process vessels, towers, reactors and heat exchanges this occurs some 20 to 30 hours after the unit is shut down as opposed to days or even weeks with the old steamout cleaning method. Even with days of steamout questions remained about whether cleaning was complete remained. The cleaning process of this invention is applicable to almost any, if not all, hydrocarbon processing equipment as long as it can be isolated from adjacent equipment. For example, the method may be used to clean any equipment within the normal refining and hydrocarbon processing industry. For example, the units would include, but not be limited to, crude oil units, vis-breaker systems, hydrocrackers, hydrotreaters (including the reactor), fluid cat cracking systems (except for the craking unit itself), delayed coking units, ethylene thermal crackers, amine units and other associated vessels. For example, each of the units would have heat exchanges associated with them and some involve direct heating furnaces, such as, for example, the crude unit train. When high temperature hydrocarbon processing equipment is used, the prospect of coking occurs and it has surprisingly been found that the method of this invention has a salutary effect on the decoking of heaters and equipment while avoiding the troublesome steamout step. One of the great advantages of the cleaning method of this invention is its flexibility with respect to the ability to clean the entire process equipment or any parts thereof. Simply stated, the steps of the invention involves the shutdown and draining of the entire process plant, whether a petroleum refinery, a petrochemical plant, or the like. Normally, this draining will occur while the plant equipment is still hot, followed by an optional flush, usually with a light solvent, to remove soluble hydrocarbons. Flanges would be opened with blinds inserted to isolate the equipment to be cleaned. Of course, where there are valves in the system, they can be closed making insertion of blinds unnecessary unless these are plans to perform maintenance on the valves. A circulation loop and pumps, if needed, and shearing filter, if needed are installed. A sufficient amount of water would be introduced into the process flow equipment to provide a head for pumps, preferably the process pumps, to be used to circulate it through the process flow equipment to be cleaned. Circulation through the system would preferably be at a rate to generate at least about turbulent flow. Normally, this flow rate would be from 500 to about 5,000 gallons per minute depending upon the size of the plant equipment and pumps used to accomplish the circulation. The preferable flow rates would run from about 800 to about 1,400 gallons per minute. The stabilizing influence of the turbulent flow of the material circulating through the equipment is enhanced by insertion in the loop of a shearing means which additionally enhances the stabilization of the emulsion and, hence the removal capacity of the fluid greatly contributing to the reduced time form completion of the cleaning process. The action of shearing the emulsion containing contaminants, especially suspended solids, causes most smaller sizes to result thus making it more easily held in the emulsion to prevent it from settling out in the equipment. This shearing means can be in the form of an inline static mixer such as a "Keenix" brand mixer or a filter or even an ultra filter having pore sizes of from 1 to about 100 microns or, preferably, about 40 microns plus or minus about 15%. The amount of water introduced into the equipment being cleaned would be normally enough such that when the pumps are running at the desired flow rate, no cavitation would occur through lack of fluid in the intake of the pump and heat exchangers in the loop are filled. Normally, the amount of water introduced would be about 5% to about 25% of the internal volume of the process flow stream being cleaned. Preferably, the amount would be from about 10% to about 18% of the internal volume. Back pressure may be created by installing orifice plates in flow lines during circulation to keep exchangers full to assure contact with all fouled surfaces. If not, more water can be added. This would be followed by a circulation of water and then a heating of the equipment, preferably by the injection of steam into the water. Of course any residual heat in the units would aid in heating. Heating continues until the equipment and solution reaches a temperature of from about 100 degrees Fahrenheit to about 220 degrees Fahrenheit, preferably from 120 degrees Fahrenheit to about 180 degrees Fahrenheit. In the case where the equipment is maintained under pressure the water could be heated to its boiling point for the existing conditions. The steam temperature could be up to about 375 degrees Fahrenheit to perform the heating step. This steam would probably be from the same source as previously used for the now unnecessary "steamout" step. Then an extractant and surfactant as defined herein are added to the circulating heated water. The high vapor pressure will cause it to be vaporized throughout the system which is not flooded with liquid ultimately condensing on inner surfaces and mixing with the heated water being circulated through the equipment, preferably using process pumps. The circulation continues for a sufficient period of time, preferably for about 8 hours to about 12 hours or until contamination is removed. It has been found that after about a circulation time of from about 10 to 20 hours is normally sufficient for opening the equipment for inspection. Event though experience with the practice of the invention has shown that the cleaning is sufficient to put the equipment back on line with greatly improved results, it is only prudent to inspect the equipment to assure that some dangerous fault has not occurred and to install new gaskets for continued operation. The solution may be tested during circulation, using known procedures for the emulsifier activity remaining in the solution. If activity has diminished, or been exhausted, the solution could either be reconstituted by adding extractant and/or surfactant or it can be replaced entirely with virgin, heated aqueous solution. By adding a known amount of surfactant when the emulsifier activity is tested, the reduction in activity can indicate the level of cleaning. Once thorough cleaning is indicated, the equipment being cleaned is drained and rinsed with water. If the circulating chemicals are not spent, the cleaning liquid could be used as circulation fluid in another piece of equipment to be cleaned. The contamination removed is held in an aqueous emulsion such that an emulsion breaker can be used, employing known techniques, to separate the water from hydrocarbon and from solids. As stated before, the 6 5,425,814 stability of the emulsion is enhanced by the shearing forces placed upon the cleaning emulsion by the circulation rate, the pumps themselves, and the shearing means, particularly a filter having a small pore size. The hydrocarbon removed can be sent to a normal slop tank at the refinery and the recovered water to a biopond for biological remediation treatment. In the preferred embodiment of the invention the shearing means is best provided by using a truck-mounted tank having two chambers connected by a passageway including a filter of the desired size. The truck may include a circulation pump in case the process pumps are not available. Using the steps of the present invention as described above results in almost pristine cleaning of the process equipment in much shorter periods of time as compared to prior art methods using steamout procedures, while also maintaining strict safety standards for personnel. The time savings are evident when cleaning a single piece of hydrocarbon processing equipment isolated from the entire unit by blind flanges. It is not uncommon that the equipment in a plant is contaminated with residual amounts of carcinogens such as benzene, xylene, tolnene, and other hydrocarbons, both aromatic and aliphatic. The presence of these chemicals is detected with various devices and limitations have been set by health and environmental standards which can be safely contacted by humans or what amounts can be released to the environment, respectively. Thus, these materials must be removed before work and maintenance crews can safely enter a vessel for inspection or repair. Steamout and other cleaning methods and attempts, even using surfactants, fail to remedy the problem created by the volatile organics. The extractant may preferably be introduced into the circulating water while injecting steam to heat the circulating water to a temperature of from about 160 degrees Fahrenheit to about 270 degrees Fahrenheit, preferably from about 185 degrees Fahrenheit to about 210 degrees Fahrenheit, and then adding the extractant to the circulating water to obtain a concentration of from about 0.1% to about 7% by volume, preferably, from about 1 1/2% to about 5%. The extractant is chosen from those having an affinity for the contaminant being removed. The criteria for selection are the solubility of the material being removed in the extractant and the vapor pressure of the extractant such that a significant amount in the vapor phase at the temperature of the circulating heated water to condense on the surfaces of the metal in the interstices in the metal. While some hazardous solvents may be used for a portion of the method of this invention, the extractant material should preferably be non-toxic and nonhazardous and selected such that it has a high vapor pressure. Thus, the partial pressure of the extractant will be significant at cleaning conditions. Preferred extractants having affinity for the scales and contaminants normally found in a hydrocarbon processing unit include materials such as the various terpenes; including, for example, dipentenes, cinenes, cajeputenes, diamylenes, the oils of bergamot, geranium, citronella, dill, and caraway, and the like and related terpenes such as hermiterpenes (isoprenes), sesquiterpenes (caryophyllenes), diterpenes, and polyterpenes. The especially preferred extractant is limonene, particularly, d-limonene. Mixtures of several extractants may be used satisfactorily with the same criteria as set forth above. Consultation with well-known tables having vapor pressure information and simple experimentation to determine the affinity of the extractant for the contaminating material is all that is necessary to select the mixture and determine relative proportions. The matter of selecting the satisfactory surfactant is also within ordinary skill in the art. The boiling point and vapor pressure criteria remain the same as for the extractant such that the surfactant will also condense at substantially the same time as water vapor and the extractant material condenses. This allows the cracks and crevices of the metal and internals of the entire process system, including interstices of the matrix of scaly contamination, to all be invaded by the components of this cleaning system to break down the scale and trap the contaminants into the solution (microemulsion) and remove the troublesome contaminants, especially volatile organics such as benzene. The selected surfactants may be anionic, cationic, amphoteric or non-ionic, or mixture from several classes, but the selection specifically is within the experience of the skilled chemist, based upon the material being removed as the contaminant, the extractant being used and the relative amounts which are expected to be taken into the wash solution from the condensing steam or the circulating water wash. The HLB (Hydrophile/-Lyophile Balance) of the surfactants selected preferably should be between 6 and 18 and preferably, between about 7.5 and 12 for the optimum results in the practice of this invention. The characteristics of the members of these classes of surfactants are well known as are the many compounds within these classes. Many surfactants and/or emulsifiers may be selected for use in the practice of the invention depending upon the many and varied process streams which can be cleaned using this invention. Preferred surfactants are selected from ethoxylated alkyl phenols having an average of from about 6 to about 12 moles of ethylene oxide per mole of alkyl-phenol, where the alkyl group contains from 8 to 10 carbon atoms. Another preferred component in a surfactant mix is a block copolymer of ethylene oxide and propylene oxide having a molecular weight of from about 1,500 to about 2,500. As a third component in the especially preferred embodiment is a fatty acid alkanolamide which may be and often is, available in commercial solutions as 50/50 mixture with a linear alkylbenzene sulfonic acid. Many variations on this theme are well within the scope of the practice of this invention and the components may be varied, as well as their constituents, without departing from the practice of this invention. Combinations of the foregoing materials are especially useful in creating a stable microemulsion with the preferred extractants; i.e., terpenes, and particularly d-limonene. A mixture as described above has a high range of volatility and is found to be useful in contacting and removing many different types of contamination found in hydrocarbon processing units. Mixtures of surfactants in several of the classes and mentioned above may be used successfully, especially in the situation where a premix of extractant and surfactant is used. This premix would normally be in the form of a microemulsion of several extractants and surfactants. Often, several surfactants would be necessary in order to enhance the shelf life as a homogenous fluid, usually as a microemulsion with water acting as the discontinuous phase in the continuous phase terpene. Of course, the emulsion inverts in the presence of large amounts of water. The amount of the mixture added to circulating liquid would result in an effective amount of the extractant 7 5,425,814 and surfactant being present, usually at a concentration from about 0.1% to about 7%, preferably from 1 1/2% to about 5%, and more preferably from about 2% to about 4%, the emulsification of contaminants is important to the successful position of this invention and those skilled in the art given knowledge of the contaminants and the description herein will be able, with slight experimentation, to select a useful mixture. The shearing step of the method of this invention also contributes to the successful stabilizing of the emulsion. The practice of this invention substantially reduces the time and enhances the results of the cleaning, allowing the process equipment to be put back on stream sooner than previously when steamout was used either alone or even in connection with an improved process such as one similar to that described and claimed herein. As a particular advantage, the process equipment is free from volatile organic compounds (VOCs), especially benzene which is a known carcinogen. Prior attempts at decontamination left residual benzene contamination endangering workers who must enter the equipment. For example, a preferred mixture of extractants and surfactants for cleaning a reaction vessel was prepared using the following components: TABLE I - ------------------------------------------------------------------------------ (Mixture A) ----------- Weight Percent - ------------------------------------------------------------------------------ d-Limonene 57% Nonionic copolymer(1) 09% Monemalse 653-C(2) 17% Butyl Cellusolve 03% Nonionic surfactant(3) 05% Water 09% ------ 100% - ------------------------------------------------------------------------------ (1) Block copolymer of ethelyne oxide and propylene oxide having a molecular weight of 1950 and MLB of 12 to 18. (2) 90% active ingredients of a 50/50 mixture of an ethmolomide of a C12 fatty acid and a linear alky/benzene sulfuric acid in 10% isopropanol b.p. 205 degrees F. (3) 10 mole ethylene oxide acids adduct of a nonlyphenol. In another embodiment (Mixture B), the 8% represented by the butyl cellusolve and the nonionic surfactant in the mixture is replaced by a 6 mole ethylene oxide adduct of nonylphenol with an HLB of 10.8. The above-identified components, when mixed together, form a stable microemulsion of water in the terpene having a long shelf life and exhibiting good solvency for oils or greases, including the lighter materials such as benzene, toluene, and xylene which are trapped and held in the emulsion until removed from the process flow equipment in spite of the elevated temperatures at which the cleaning is performed. The effluent from the decontamination process will be resolvable into hydrocarbons, solids, and water phases such that the hydrocarbons may be recovered and the water containing soluble light hydrocarbons (especially benzene) can be scrubbed or stripped using a suitable conventional gas stripping operation for environmentally safe disposal. The solids can be removed for incineration and disposal to a land fill. Of course, the selection of the equipment which goes into the circulating loop will vary with respect to the hydrocarbon processing unit being cleaned and are selected using the parameters of the necessity for cleaning and the fluid communication through existing processing pipes. Of course, any equipment through which circulation is not desired then is isolated by the installation of blanks in the flow lines. A convenient place for introducing the fluid and removing the fluid is selected and the loop established. The following example is a description of one such loop created in a hydrocarbon processing refinery to illustrate the operation of the above-described invention. It is offered for purposes of instruction to those skilled in the art and should not be considered as a limitation on the scope of the described invention as claimed. EXAMPLE A hydrogenation unit of a refinery was shut down and drained. Blanks were inserted to isolate the hydrogenation reactor to protect the catalyst from the cleaning solution. Blanks were also inserted to close off the feed line from the crude unit. The volume of the vessels to be cleaned which included a fractionation tower and several drum-type vessels, a fin fanned heat exchanger, as well as three shell and tube heat exchangers, was selected for cleaning. A truck mounted pump and shearing device having a 40 micron filter was used to complete the circulation loop by attaching temporary piping to draw fluid off the bottom of the tower and pumping to both of the drum vessels was set up. This allowed the cleaning solution to circulate throughout the system by varying the valving. The volume of the well water used as fill was 30,000 gallons which was introduced through one of the drum vessels and allowed to fill the system. Circulation was begun and steam introduced to heat the water to about 190 degrees F. During circulation steam was periodically introduced to maintain the water temperature between a minimum of 180 degrees F. and a maximum of 200 degrees F. Mixture B (3,800 pounds) was introduced into the circulating water to result in approximately 1.5% of volume of the extractant/surfactant material circulating through the system. Circulation was continued for about 10 hours with periodic testing to determine the degree of contamination removal. When testing showed no changes in concentration, circulation was stopped (after about 10 hours), the circulating cleaning solution was pumped out of the hydrogenation unit to be used to assist cleaning the crude processing unit. Therefore, the crude line was reopened for the draining of the hydrogenation unit. Afterwards wash water circulated through the system, drained and the hydrogenation unit was opened for inspection. Examination of the unit showed that it was cleaner that previously experienced after conventional methods involving a steamout step and was accomplished in less than one fourth the time. Similarly, other units of the refinery were shut down, drained with loops established and cleaning occurred by pumping at conditions as set forth in the hydrogenation unit with similar, if not identical, results. The equipment cleaned throughout the refinery was, when inspected, found to be cleaner than previously and this stage of the process, i.e. the removal of fouling from the surfaces of equipment, was accomplished much more quickly than previously when the steamout step was used. During prior similar operations a steamout was done as a matter of course. Having described this invention and given exemplars thereof one of ordinary skill in the art having this description before them would be able to make many modifications and adjustments to the process without departing from the scope of the invention as claimed herein. What is claimed is: 8 5,425,814 1. A method for cleaning and decontaminating hydrocarbon processing plant equipment to remove scales and chemical deposits without a steamout step comprising the steps of: isolating the equipment to be cleaned from other process equipment; establishing a fluid loop of the equipment to be cleaned, including a pump for causing fluid to circulate within the loop; filling the equipment with sufficient water to cause any heat exchangers in the loop to be substantially full during circulation; circulating the water through the loop; heating the water to a temperature of from about 100 degrees F. to about the boiling point of water; adding a sufficient amount of an extractant chemical with an affinity for contaminants present in the equipment and a surfactant having emulsifying activity for said contaminant and extractant to said water to form a heated emulsion to clean the surface of the equipment; contacting surfaces of the equipment to be cleaned with the heated emulsion; circulating said heated emulsion at the temperature through the loop for a period of time sufficient to clean the contacted surfaces; and removing the circulating emulsion from the loop. 2. The method of claim 1 wherein the water fills from about 5% to about 25% of the volume of the equipment. 3. The method of claim 1 wherein the temperature of the circulating emulsion is from about 120 degrees F. to about 180 degrees F. 4. The method of claim 1 which includes circulating such emulsion through shearing means in the loop to stabilize such emulsion. 5. The method of claim 4 wherein the circulation through the equipment and shearing means is at a rate of from about 800 to about 1,400 gallons per minute. 6. The method of claim 4 wherein the shearing means is a filter having a pore size of from 1 to about 100 microns. 7. The method of claim 6 wherein the filter has a pore size of about 40 microns, plus or minus about 15%. 8. The method of claim 1 wherein the extractant is a terpene and the surfactant has a HLB of from about 6 to about 18. 9. The method of claim 8 wherein the terpene is d-Limonene and the surfactant comprises a 6 to 12 mole ethylene oxide adduct of an alkyl phenol wherein the alkyl group contains 8 to 10 carbon atoms, a block copolymer of ethylene oxide and propylene oxide having a molecular weight of from about 1,500 to about 2,500 and fatty acid alkanol amid. 10. The method of claim 9 wherein the terpene and surfactant mixture is from about 0.1% to about 7% by volume of the emulsion. 11. The method of claim 1 wherein the heating step occurs during circulation of water through the loop. 12. The method of claim 1 wherein the extractant chemical and surfactant are added to the water during one or more of the filling, circulation or heating steps. 13. The method of claim 1 wherein the extractant chemical and surfactant are added to the heated water. 14. A method for restoring efficiency in a hydrocarbon processing plant of processing equipment to remove scales and chemical deposits and without a steamout step comprising the steps of: draining the hydrocarbon process equipment of process fluids; isolating the equipment to be cleaned from other process equipment; flushing the hydrocarbon process equipment with a light solvent and filling the equipment with sufficient water to establish a head pressure for process pumps and fill heat exchangers during circulation; circulating said water to a temperature of from about 100 degrees F. to about 220 degrees F.; adding an extractant chemical with affinity for contaminants present in the equipment and a surfactant having emulsifying activity for said contaminants into said heated water to form a heated emulsion; circulating said heated emulsion at a temperature from about 100 degrees F. to about 220 degrees F. for a period of up to about 12 hours; removing the circulating solution containing emulsified contaminants; and rinsing the hydrocarbond process equipment with water before returning the equipment to operational status. 15. The method of claim 14 which includes circulating such emulsion through a shearing means in the loop to stabilize such emulsion. 16. The method of claim 15 wherein the shearing means is a filter having a pore size from 1 to about 100 microns. 17. The method of claim 16 wherein the filter has a pore size of about 40 microns, plus or minus about 15%. 18. The method of claim 14 wherein the extractant is a terpene and the surfactant has an HLB of from about 6 to about 18. 19. The method of claim 18 wherein the terpene is d-Limonene and the surfactant comprises a 6 to 12 mole ethylene oxide adduct of an alkyl phenol wherein the alkyl group contains 8 to 10 carbon atoms, a block copolymer of ethylene oxide and propylene oxide having a molecular weight of from about 1,500 to 2,500 and fatty acid alkanol amid. 20. A method for cleaning and decontaminating hydrocarbon processing plant equipment to remove scales and chemical deposits on internal equipment surfaces without a steamout step comprising the steps of: isolating the equipment to be cleaned from other processing equipment; contacting surfaces of the equipment with an aqueous solution heated to a temperature of from about 100 degrees F. to the boiling point of water, the solution containing an amount, sufficient to clean the surfaces of an extractant chemical with an affinity for contaminants present in the equipment and a surfactant having emulsifying activity for said contaminants and extractant, for a time sufficient to clean the contacted surfaces and form an emulsion; and removing the emulsion from the equipment. 21. The method of claim 20 which includes the step of replacing the removed emulsion with additional heated solution to repeat the contacting step. 22. The method of claim 20 which includes the steps of establishing a fluid loop of the equipment to be cleaned, including a pump for causing the fluid to circulate; and circulating the emulsion through the loop. 23. The method of claim 22 which includes circulating the emulsion through a shearing means within the loop to stabilize the emulsion. 9 5,425,814 24. The method of claim 23 wherein the shearing means is a filter having a pore size of from 1 to about 100 microns. 25. The method of claim 24 wherein the filter has a pore size of about 40 microns, plus or minus about 15%. 26. The method of claim 22 wherein the circulation at a rate of is from about 800 to about 1,400 gallons per minute. 27. The method of claim 20 wherein the extractant is a terpene and the surfactant has an HLB of from about 6 to about 18. 28. The method of claim 27 wherein the terpene is d-Limonene and the surfactant comprises a 6 to 12 mole ethylene oxide adduct of an alkyl phenol wherein the alkyl group contains 8 to 10 carbon atoms, a block copolymer of ethylene oxide and propylene oxide having a molecular weight of from about 1,500 to about 2,500 and a fatty acid alkanol amid. 29. The method of claim 28 wherein the terpene and surfactant is from about 0.1% to about 7% by volume of the emulsion. * * * * * EX-10.33 4 U.S. PATENT NO. 5,460,331-APPARATUS FOR DISPERSION 1 EXHIBIT 10.33 UNITED STATES PATENT [19] [11] PATENT NUMBER: 5,460,331 KRAJICEK ET AL. [45] DATE OF PATENT: OCT. 24, 1995 - ------------------------------------------------------------------------------- [54] APPARATUS FOR DISPERSION OF SLUDGE IN A CRUDE OIL STORAGE TANK [75] Inventors: RICHARD W. KRAJICEK, Houston, Tex.; ROBERT R. CRADEUR, Sulphur, La. [73] Assignee: SERV-TECH, INC., Houston, Tex. [21] Appl. No.: 261,438 [22] Filed: JUN. 17, 1994 [51] INT. CL.(R)...................BO5B 3/02; BO8B 9/093 [52] U.S. CL. .....................239/263.3; 239/263.1; 239,264; 134/167 R [58] FIELD OF SEARCH.................. 239/263.1, 263.3, 239/264, 142; 134/167 R, 168 R [56] REFERENCES CITED U.S. PATENT DOCUMENTS 1,978,015 10/1934 Erdman, 2,116,935 5/1938 Richard et al. 3,420,444 7/1969 Ajuefors..................... 239/264 3,460,988 8/1969 Kennedy, Jr. et al ........ 134/168 R 3,472,451 10/1969 Orem et al. ............... 134/167 R 3,586,294 6/1971 Strong. 3,834,625 9/1974 Barthod-Malat................ 239/264 3,878,857 4/1975 Heibo ..................... 134/167 R 3,953,226 4/1976 Emond et al. ................ 134/104 4,407,678 10/1983 Furness et al. ............ 134/167 R 4,685,974 8/1987 Furness et al. ............ 134/22.18 4,945,933 8/1990 Krajicek et al. ........... 134/167 R 5,091,016 2/1992 Krajicek et al. ............ 134/22.1 5,351,885 10/1994 Manabe .................... 239/263.1 FOREIGN PATENT DOCUMENTS 349510 1/1990 European Pat. Off. ........ 239/263.1 Primary Examiner--Karen B. Merritt Attorney, Agent, or Firm--John R. Kirk, Jr.; Jenkins & Gilchrist [57] ABSTRACT An apparatus for cleaning the interior of storage tanks of the type used for storing large volumes of crude oil wherein hydrocarbon sludge accumulates with the passage of time. The apparatus comprises a crude oil circulator having rotatable nozzles positioned within the tank, a gear member externally disposed on an outer surface of a hollow rotor, and a worm gear operatively connected to the gear member. A drive shaft is connected, through a valve opening in the tank wall, to a motor unit. Upon failure of the worm gear, the worm gear is removed from the tank through the valve opening, replaced or repaired, and reintroduced into the tank through the valve opening. 6 Claims, 5 Drawing Sheets [GRAPHIC] 2 U.S. Patent Oct. 24, 1995 Sheet 1 of 5 5,460,331 [FIG. 1] 3 U.S. Patent Oct. 24, 1995 Sheet 2 of 5 5,460,331 [FIG. 2] 4 U.S. Patent Oct. 24, 1995 Sheet 3 of 5 5,460,331 [FIG. 3] 5 U.S. Patent Oct. 24, 1995 Sheet 4 of 5 5,460,331 [FIG. 4] [FIG. 5] [FIG. 6] [FIG. 7] 6 U.S. Patent Oct. 24, 1995 Sheet 5 of 5 5,460,331 [FIG. 8] [FIG. 9] 7 5,460,331 APPARATUS FOR DISPERSION OF SLUDGE IN A CRUDE OIL STORAGE TANK BACKGROUND OF THE INVENTION 1. Field of the Invention The present invention relaxes generally to an apparatus for dispersing sediment, such as hydrocarbon sludge, in a storage tank, and more particularly to such an apparatus that is repairable without emptying the storage tank. 2. Description of the Related Art. It is a common commercial practice to store liquid materials in storage tanks. Typically, for many industrial applications, storage tanks will have a diameter from 100 to 300 feet and heights of 20 to 50 feet or more. The liquids stored in such storage tanks are diverse. For example, water or aqueous solutions of organic or inorganic chemicals may be stored in this manner, derivatives of agricultural products such as vegetable oils which are water soluble are likewise stored in this manner. More commonly, however, large volume storage tanks of this nature are used in the production, collection and refining of crude oils and derivatives thereof such as crude oils containing naphthenic and aromatic components, and refinery products such as gasolines, diesel fuels, jet fuels, fuel oils, kerosene, gas oil, etc., and petrochemical derivatives thereof such as benzene, xylene, toluene, etc. With the passage of time, solid materials, usually in finely divided form, will accumulate in the storage tank and settle at the bottom thereof. When the accumulation becomes excessive, it must be removed from the storage tank. One manner in which this can be accomplished is to drain the tank and then have workmen enter the tank and manually remove the sediments that are deposited therein. However, such a procedure is costly and time-consuming and can cause the workmen involved therein to be exposed to toxic or potentially toxic materials. The problem of sediment accumulation is particularly accentuated insofar as the storage of crude oil and, in particular, aromatic and napthenic crude oils is concerned. Such crude oils, as introduced into the storage tank, will normally contain aromatic, napthenic and asphaltic components which are believed to be potentially reactive and/or condensible with each other. Moreover, a minor amount of water will normally be present in the crude oil (e.g., about 0.1 to 5 wt. %). Usually, the water will not be present as a separate phase, but rather as small droplets of water emulsified by ionizable components of the crude oil, such as asphaltenes. It is believed that molecular charge transfer forces, such as vander waals forces, cause many of the molecular aromatic, napthenic and asphaltic components of the crude oil to agglomerate and weakly bond to each other to form aggregates having a size sufficient to cause them to precipitate from the crude oil and to settle at the bottom of a crude oil storage tank together with the emulsified water droplets so that the resultant "hydrocarbon sludge" will normally comprise highly aromatic components such as polyaromatic components in which a significant portion of the water (in the form of emulsified droplets) will be occluded. Also, when phyrins are present, the porphyrin molecules are believed to be attracted to each other so as to form agglomerates that will settle from the crude oil stored in the crude oil storage tank. It is for reasons such as these that the sediment in the bottom of a crude oil storage tank is sometimes colloquially referred to as "black sediment and water" or "hydrocarbon sludge" or just plain "sludge". The hydrocarbon sludge that accumulates, as such, is of marginal economic value and, if manually removed, usually represents a disposal problem. Various prior art methods have been suggested for removing such materials from storage tanks. For example, U.S. Pat. No. 1,978,615 to Erdman is directed to method and apparatus for cleaning sediment from a tank containing a fluid comprising a central manifold from which a plurality of discharge pipes radiate, each discharge pipe being provided with a plurality of discharge nozzles so that liquid may be pumped through the central manifold and out through the nozzles to roil the sediment or other foreign materials at the bottom of the tank and suspend it for withdrawal through a side withdrawal pipe located above the apparatus. U.S. Pat. No. 2,116,935 issued to Richard et al. is directed to a method and apparatus for cleaning tanks such as railroad tank cars and comprises a pipe which is suspended vertically in the tank for rotation about a horizontal axis and which contains, at a lower end thereof, a reaction nozzle mounted for rotation about a horizontal axis and includes a reaction nozzle member mounted on vertical conduit for rotation about a horizontal axis so that liquid pumped down the conduit is forced out the vertically disposed jets of the reaction nozzle. The device also includes appropriate means for slowly rotating the reaction nozzle about the vertical axis of the suspending pipe. U.S. Pat. No. 3,586,294 to Strong is directed to a method and apparatus for creating a suspension of fine particles in a liquid in a tank using a plurality of spargers suspended above the bottom of the tank on a nonrotating lattice of feed pipes through which a liquid is pumped for emission through the sparging nozzles to suspend fine particles of sediment in the liquid for discharge from the tank or removal of the suspension. U.S. Pat. No. 3,878,857 to Heibo is directed to a device 120 for cleaning the side walls of a storage tank such as a tank located on a ship carrying crude oil. The apparatus comprises an L-shaped inlet pipe suspended from the top of the tank. A pair of diametrically opposed jets are mounted on the end of the "L" so that liquid pumped through the L-shaped inlet pipe will be forced to flow out of the pipe through one of the jets at a time. Means are provided for rotating the jetting means a fraction of a turn about a horizontal axis for each complete revolution about the vertical axis. The mechanism for accomplishing this is a worm gear which operates in conjunction with a cog wheel and a blocking wheel. U.S. Pat. No. 3,953,226 to Edmond et al. is directed to a device for cleaning sediment from a tank and includes pipe means oscillatably suspended from the top of the tank. The oscillatable pipe means is provided, at a discharge point near the bottom of the tank, with one or more spray jets through which hot water may be sprayed to sweep suspended matter to a sump located on the opposite side of the storage tank for removal. U.S. Pat. No. 4,407,678, issued to Furness et al., discloses a sludge removal machine for removing sludge from the bottom of a storage tank which comprises a hollow body, and laterally rotatable nozzles. The sludge removal machine is suspended in a storage tank from a pipe through which a cleaning liquid may be pumped. The sludge removal machine is also provided with a "turbine" or impeller for rotating the nozzles in order to disperse sludge. The rotational speed of the turbine, and thus the rotation rate of the 8 5,460,331 nozzles, is determined by the viscosity, pressure, and flow rate of the liquid pumped through the machine. Therefore, if it is desired to increase or decrease the fairly critical speed of rotation of the nozzles, one of these parameters, e.g., flow rate must be adjusted accordingly. U.S. Pat. No. 4,685,974, also to Furness et al., is directed to a method for removing settled sludge from the bottom of a storage tank which uses apparatus of the type disclosed and claimed in Furness et al. A liquid such as crude oil is pumped into a machine suspended in a storage tank adjacent a side wall thereof and which is provided with diametrically opposed lateral nozzles which are rotated in a manner such that each nozzle emits liquid during 180 degrees of its rotation to avoid impingement of liquid on the side of the tank wall to thereby suspend the sludge in liquid in the tank, after which the liquid having sludge suspended therein is pumped from the tank. In an improvement over the prior art, U.S. Pat. No. 4,945,933 and U.S. Pat. No. 5,019,016 disclose an apparatus useful for dispersing sediment contained in a crude oil storage tank. The apparatus generally comprises an oil circulator having a plurality of rotatably mounted nozzled outlet jets. Crude oil is continuously forced through the jets, whose rotation is controlled by an independently controllable indexing power means, to disperse the sediment. While the prior art practices do provide methods and apparatus for dispersing sludge in a crude oil storage tank, these devices are difficult to service or repair, requiring removal of the entire circulation apparatus from the tank which typically necessitates emptying of the tank before such removal can be accomplished. Therefore, there is a need for a sludge dispersing apparatus having a rotation speed that is independently controllable of the fluid flow rate through the apparatus, and that can be easily removed for service or repair. SUMMARY OF THE INVENTION Accordingly, the present invention is directed to a new and improved method and apparatus useful for the removal of sediment, such as hydrocarbon sludge from a storage tank containing a liquid such as crude oil. According to one embodiment of the present invention an apparatus useful for dispersing sediment in a storage tank includes a liquid circulator that has a housing, a hollow rotor rotatably mounted in the housing and having an internal bore disposed therein, and one or more nozzles in fluid communication with the internal bore of the rotor. A gear member is disposed around the periphery of the hollow rotor, and when driven by a mating worm gear, will rotate the hollow rotor and the nozzles. The apparatus further includes an elongated tubular casing that extends from the housing, through a wall of the tank, to a position external of the tank. A driven shaft, rotatably mounted in the tubular casting operatively connects the worm gear with a motor. The worm gear and the driven shaft are insertable into the tubular casing through the end of the casing disposed externally of the tank. An end of the driven shaft adjacent the worm gear abuts a thrust cap disposed at an opposite end of the tubular casing. Operation of the motor results in a corresponding rotation of the worm gear, the gear member, the hollow rotor and, most importantly the nozzles, at a rate that is independent of the pressure and rate of flow of liquid through the nozzles. According to still yet another embodiment of the present invention there is provided a method for redispersing hydrocarbon sludge deposited in a crude oil storage tank having a opening in the side thereof and covered by a gate valve. Liquid, such as crude oil which is either stored or is to be stored in the tank, is delivered under high pressure to the interior of the tank through a liquid circulator disposed within the tank. The circulator has one or more nozzles that are rotated by a shaft driven worm gear that is positioned within a tubular casing extending through the tank wall opening. The worm gear engages a gear member disposed around the periphery of a hollow rotor which carries a nozzle support and the nozzles attached to the nozzle support. The high pressure delivery and rotation of the nozzles are continued until the shaft driven worm gear fails either due to stripping of the worm gear or shearing of a key which secures the worm gear to the driven shaft. At this point, the worm gear is disengaged from the gear member and pulled from the tubular casing to a point just past the gate valve. The gate valve is then closed, and the worm gear is completely withdrawn from the tubular casing and repaired and/or replaced. After repair or replacement, an operable shaft driven worm gear is inserted into the tubular casing to a position adjacent the gate valve. The gate valve is opened to allow passage of the shaft and worm gear which are then further inserted into the casing until the worm gear engages the gear member attached to the hollow rotor and is seated in an end cap thrust seat. The circulator and rotation steps above are then repeated. BRIEF DESCRIPTION OF THE DRAWINGS FIG. 1 is a side view of an apparatus embodying the present invention showing a liquid circulator driven by a worm gear having an attached drive shaft powered by a motor unit. FIG. 2 is a sectional view the liquid circulator and worm gear assembly taken along the line 2 -- 2 of FIG. 8 with the nozzles removed in the interest of greater clarity. FIG. 3 is an enlarged view from FIG. 1 of a gate valve assembly and the drive shaft. FIG. 4 is an enlarged detail view of the worm gear assembly shown in FIG. 1. FIG. 5 is a cross-sectional view of the worm gear assembly taken along the line 5 -- 5 in FIG. 4. FIG. 6 is a cross-sectional view of the worm gear assembly taken along the line 6 -- 6 in FIG. 4. FIG. 7 is an end view of the worm gear assembly. FIG. 8 is a top view of the crude oil circulator and the worm gear assembly, with the crude oil circulator rotated 90 degrees from the position shown in FIG. 1. FIG. 9 is a view of the drive shaft removed from the worm gear assembly, showing various elements of the drive shaft. DETAILED DESCRIPTION OF THE INVENTION In accordance with the present invention, a liquid circulator 300 is provided which, when in operation, is positioned inside a liquid storage tank, particularly a crude oil or petrochemical storage tank. The liquid circulator 300 generally comprises a rotatable nozzle support member 346 with one or more nozzles 360 attached to the support member. The liquid circulator further comprises a hollow rotor 314 through which a liquid, such as crude oil, will flow under pressure from an intake conduit 101 to the nozzle support member 346, and discharged through the nozzles 9 5,460,331 360 into interior of the tank, to cause sludge to be broken into smaller particles. The crude oil circulator 300 of the present invention also comprises appropriate means for rotating the nozzles 360. The rotation means generally includes a flat spur gear 330 attached to the hollow rotor 314. When engaged by a driven worm gear 402, the spur gear 330 will rotate the hollow rotor 314, the nozzle support member 346 mounted on the rotor, and the nozzles 360 about a vertical axis 150. Also in accordance with the present invention, an elongate tubular casing 200 extends from a housing 310, in which the rotor 314 is rotatably supported, and has an outer diameter substantially equivalent to that of an opening 106 in the wall 102 of the storage tank. The tybular casing 200 is provided with flanges so that it can be secured to a gate valve 110 disposed externally of the tank. Also in accordance with the present invention, a retrievable drive housing 209 is constructed so that it can be slidably inserted into, and withdrawn from, the elongate tubular casing 200. The drive housing 209 is adapted to rotatably support a worm gear assembly 400, a worm gear assembly drive shaft 406, and an attached drive shaft 405 through an open end of the housing. In association with the present invention, the liquid circulator 300 is typically connected to a circulation system having a filter system, pumping means and piping or tubing means for providing for circulation of a liquid such as crude oil from the storage tank through a discharge line, through the filter system to the pump, and then discharged through the liquid circulator 300 back into the tank. More specifically, in this mode of operation, the stored liquid is continuously recirculated as a result of withdrawal of liquid from the tank and then returning the withdrawn fluid, under pressure, by way of an intake conduit 101, the hollow rotor 314 and the nozzle support member 346, and then through the nozzles 360 to the interior of the tank. Alternatively, the source of the pressurized liquid delivered to the tank may be a side stream, or a portion, of the liquid added to the tank during filling. The pump mentioned above is generally a high pressure pump capable of delivering up to about 5,000 gallons per minute of liquid at a pressure of up to about 150 pounds per square inch, and is generally provided with appropriate filter means, such as a pair of filters, mounted in parallel in filter tanks adjacent the storage tank. The filter means is fluidly interconnected with the din charge line of the tank by appropriate conduit means, and the discharge end of the filter means is interconnected with the suction side of the high pressure pump by a conduit. The discharge side of the high pressure pump is connected with the crude oil circulator 300 by the intake conduit 101. Therefore, in the normal operational mode, the high pressure pump will withdraw fluid, such as crude oil, from the storage tank, through the filter, and then to the high pressure pump. The pump preferably pressures the crude oil to a pressure of about 100 to about 150 psig at a flow rate of from about 4,000 to about 5,000 gallons per minute of crude oil through the nozzles 360 of the circulator 300. The initial velocity of the crude oil ejected from the liquid circulator nozzles 360 is preferably from about 75 to about 120 feet per second, thereby assuring that the velocity of the crude oil will have a velocity of about 0.5 to 2 feet per second adjacent the periphery of the crude oil storage tank. With this construction, and the above described parameters, crude oil ejected from the nozzles 360 will form an expanding cone of turbulent crude oil. Because of its high velocity, the ejected crude oil will impact with hydrocarbon sludge in the storage tank and cause the sludge to be progressively broken into smaller particles, both physically and as a result of disrupting the molecular charge transfer forces interconnecting the asphaltic, naphthenic, polyaromatic, etc., molecular components of the sludge. As a consequence, the sludge will be progressively dispersed in the crude oil and will be of a size that will normally pass through the filters of the filter means. At the end of the dispersing operation, the aromatic, asphaltenic, naphthenic and/or porphyritic components of the sludge will be molecularly redispersed in the crude oil and comprise a part of the crude oil withdrawn from the storage tank for processing in a refinery normally within which the crude oil storage tank is located. In the operation of the system as described above, sooner or later the teeth of the worm gear 402 will become stripped, either through normal wear and tear or through the impingement of the nozzles 360 against a physical barrier. At that point, the drive shaft 406, the worm gear assembly 400 and the drive housing 209 are easily withdrawn from the tank. As these components clear the gate valve 110, the gate valve 110, the gate valve is closed to prevent any accidental leakage of crude oil from the tank through the elongate tubular casing 200. The worm gear 402, or the entire worm gear assembly 400, may be either repaired or replaced. The replacement worm gear or assembly is then reinserted into the elongate tubular casing 200 and into the storage tank by opening the gate valve 110. Referring now to FIGS. 1, 2, 3 and 8, the crude oil circulator, designaged generally by the number 300, is positioned generally at the bottom and center of a crude oil tank of which the tank sall 102 represents one portion of the peripheral wall of the tank. In the preferred embodiment of the present invention, the crude oil circulator 300 includes a housing 310 having a flanged base 312 that mates with a flange 105 attached to the intake conduit 101. The housing 310 is removably connected with the intake conduit 101 by a plurality of bolts extending through aligned holes provided in both of the flanges 105,312. The circulator 300 also includes the hollow cylindrical rotor 314 that is rotatably supported by the housing 310. A pair of L-shaped bearing pads 316, 318, interposed the rotor 314 and an interanl bore 320 of the housing 310 provide, after assembly as described below in more detail, both radial and axial support for the rotor 314. The rotor 314 is further supported at its upper end by a centrally disposed internal bore 324 of a guide flange 322. The guide flange 322 is removably attached tot he housing 310 by a plurality of cap screws 326. A plurality of radial seals 328 are disposed in the respective internal bores 320,324 of the housing 310 and the guide flange 322 to provide a fluid seal around the outer circumferential surface of the cylindrical rotor 314. The seals 328 prevent leakage of oil, or other fluid stored in the storage tank, into the interal cavity 332 and the interconnected interior of the casing 200. The spur gear 330 is fixed, preferably by welding, to the outer circumferential surface of the hollow rotor 314 in concentric relationship with the rotor and the axis of rotation 150. The spur gear 330 extends radially outwardly from the rotor 314 into an internal cavity 332 defined by the upper wall surfaces of the housing 310 and the lower wall surfaces of the guide flange 322. A ring-shaped rotor support plate 334 is attached to the lower end of the housing 310 by a plurality of cap screws, and has a central opening radially aligned with the internal bore surface of the hollow cylindrical rotor 314. The rotor 10 5,460,331 support plate 334 cooperates with a lower planer surface of the spur gear 330, and the radially outwardly extending portions of the bearing pads 316,318 that are respectively interposed the housing 310 and adjacent surfaces of the support plate and gear, to maintain the rotor 314 and attached spur gear 330 in a predetermined axially aligned relationship with respect to the housing 310. The circulator 300 also includes a hollow nozzle support member 346 that is removably attached to the upper end of the hollow cylindrical rotor 314 by a plurality of cap screws. The hollow nozzle support has internal wall surfaces 348 defining an internal cavity that, at its lower end, is radially aligned with respect to the internal bore 332 of the hollow rotor 314. The internal wall surfaces 348 of the nozzle support member 346 also extend radially outwardly in the upper portion of the support member and define one or more radial openings 350 in the nozzle support member 346. An externally threaded nozzle mount 352 is formed on an outer surface of the support member 346 in concentrically with each of the radial openings 350. In the preferred embodiment, the nozzle support member 346 has two threaded nozzle mounts 352 that are spaced apart by a radial arc of 180 degrees. However, if desired, the nozzle support member 346 may be configured to have a single or, alternatively, more than two nozzle mounts 352. A nozzle 360, having internal threads provided at an inlet end of the nozzle is threadably mounted on each of the nozzle mounts 352. Each of the nozzles 360 has a discharge orifice 362 disposed at the outlet end of the nozzle that is preferably lined with a suitable erosion material, such as tungsten carbide. Depending on the application and the desires and specifications of the user, various sizes and shapes of crude oil circulator nozzles 360 may be utilized. While not shown, it is understood that a unitary nozzle support with one or more integrally formed nozzles may also be utilized. The rotatably mounted rotor 314, the nozzle support member 346 and the nozzles 360, are rotated through 360 degrees around the centerline 150 in response to rotation of the spur gear 330. This complete rotation provides continuous spraying around and throughout the tank to be cleaned. The spur gear 330 is driven by a worm gear drive assembly shown generally at 400. More specifically, the drive assembly 400 includes the worm drive gear 402 which mates with a plurality of teeth 336 formed on the periphery of the spur gear 330. As described above, the worm gear 402 is driven by the drive shaft 406. The worm gear assembly 400 is partially enclosed, and removably supported, by a worm gear assembly housing 410 provided at one side of the circulator housing 310. In the preferred embodiment of the present invention, the worm gear assembly housing 410 is integrally formed, i.e., comprises a single cast member, with the circulator housing 310. Alternatively, the assembly housing 410 may be a separate fabricated part that is permanently affixed to the circulator housing 310 by a weldment to form a sealed joint between the two components. The worm gear assembly housing 410 and the casing 200 are joined to each other by a housing flange 455 and a casing flange 255 that are interconnected by a pair of nuts 456,256 and a threaded bolt 257. Referring now to FIGS. 2 and 4-9, the worm gear assembly 400 includes the aforementioned retrievable drive housing 209 which has an elongated slot 403 formed through a portion of the side wall at the forward end of the side wall at the forward end of the housing, and the worm gear drive shaft 406 rotatably supported in the drive housing 209 by a pair of bearing assemblies 430,431. Preferably, the retrievable drive housing 209 is formed of multiple sections that are screwed together to form a desired overall length of housing, and for ease of assembly and disassembly. Also, the sectioned construction enables the forward end of the housing to be machined as a separate component, thereby enabling the drive housing 209 to be more easily manufactured. The worm gear assembly drive shaft 406, best shown in FIG. 9, has a pair of bearing journals 413,418, a pair of bearing abutment shoulders 416,415 respectively associated with the journals 413,418, a centrally disposed worm gear journal 402a with a keyway 402b provided therein an and associated worm gear abutment shoulder 401, and a plurality of threads 406a,406b,406c,406d positioned at axially spaced predetermined positions on the drive shaft 406. As shown assembled in FIG. 4, a pair of retaining nuts 433 on the threads 406b cooperate with the forward bearing abutment shoulder 415 to retain the bearing assembly 430 on the forward bearing journal 413. Likewise, a second pair of retaining nuts 438 on the threads 406a cooperate with the rearward bearing abutment shoulder 415 to retain the rear bearing assembly 431 on the rear bearing journal 418. In similar fashion, the worm gear 402 is retained in a fixed axial relationship with the shaft 406 by a pair of retaining nuts 435 on the threads 406c which cooperate with the worm gear abutment shoulder 401 to prevent axial movement of the worm gear on the shaft. The forwardly disposed bearing assembly 430 is maintained at a fixed axial position with respect to the drive housing 209 by a snap ring 429 that engages a groove in the wall of the housing 209 to prevent forward movement of the bearing assembly 430 and by a radially inwardly extending shoulder 427 in the wall of the housing which prevents rearward movement of the bearing assembly 430 with respect to the housing 209. The rear bearing assembly 431 is restrained from forward movement with respect to the drive housing 209 by a second inwardly extending shoulder 428 formed in the wall of the housing 209. Thus it can be seen that, after assembly, the worm gear 402 is maintained in a fixed predetermined relationship with respect to both the drive housing 209 and the worm gear assembly drive shaft 406. The threads 406d disposed at the rearward end of the worm gear assembly drive shaft 406 couple the worm gear assembly drive shaft 406 to a drive shaft 405 through employment of a threaded shaft coupling 222. Similar couplings are also used to advantageously connect shaft segments together and provide a desired overall length for the drive shaft 405. The worm gear 402 is maintained in a fixed rotational relationship with the drive shaft 406 by a worm gear key inserted into the keyway 402b. Preferably the apparatus of the present invention is designed to fail at the worm gear key or by stripping the teeth of the worm gear 402. As described below in additional detail, the worm gear assembly 400 may be removed and serviced much easier than could the circulator 300. Therefore, the worm gear 402 is intentionally formed from a material that is softer than the material of the teeth 336 on the spur gear 330. Preferably, the worm gear 402 is formed of a soft metal such as brass or the like. As best shown in FIGS. 2 and 5-7, the elongated groove or slot 403 provided in the wall of the forward end of the drive housing 209 allows engagement of the worm gear 402 with the spur gear 330. A worm gear assembly positioning member 420 is attached to the forward end of the retrievable drive housing 209 by a plurality of bolts 421. As best shown 11 5,460,331 in FIG. 1, the worm gear assembly 400 is maintained at a predetermined fixed position with respect to the spur gear 330 by engagement of the worm gear positioning member 420 in a worm gear assembly docking station 450 that is provided in the worm gear assembly housing 410. The docking station, or end cap, 450 has a seat that is contoured to receive a mating end portion of the member 420. The worm gear assembly 400 is held against the docking station 450 by the drive housing 209 which, when coupled with a restraining flange to be described later, maintains the worm gear 402 in engaging alignment with the spur gear 330. The worm gear assembly 400 is easily removed, by simply pulling the retrievable drive housing 209, containing the shaft 405, the attached shaft 406 and the worm gear assembly 400, from the protective tubular casing 200. As the worm gear assembly clears the gate valve 110, a valve plate 116 is desirably lowered by rotation of a turning bar 118 to preclude accidental or inadvertent leakage of fluid past the seals 328 and then subsequently through the casing 200. As best shown in FIG. 3, the gate valve 110 is connected, at one side of the valve, to a flange 108 mounted on an end of the tubular casing 200 that extends externally of the tank wall 102, and at the other side to a flange 201 attached to one end of a first packing box 205. The packing box 205 contains a packing element 168 interposed an internal wall of the box and the external wall of the retrievable drive housing 209 to provide a seal between the two surfaces. The tubular casing 200 extends from the gate valve 110 externally of the tank opening 106 to the worm gear assembly 400. The casing 200 serves as a guide and means through which the retrievable drive housing 209 containing the worm gear assembly 400 is moved from an operational position, to servicing and back. The retrievable drive housing 209, is adjustably maintained at a predetermined fixed position with respect to the tubular casing 200, and also with respect to the worm gear assembly housing 410 to which the casing 200 is connected, by adjustment of a drive housing restraining flange 175 attached to the outer end of the drive housing 209. The drive housing restraining flange 175 is adjustably connected to the first packing section 160 by a plurality of nuts 175a threadably mounted on the bolts 175b that extend through both the drive housing restraining flange 175 and the flange 162 attached to the rearward portion of the first packing section 160. A plurality of shaft guides 221 keep the drive shaft 405 correctly centered within the drive housing 209. As shown in FIG. 1, a drain pipe 224 communicating with the interior of the tubular casing 200 has a valve 225 therewith for the drainage of any liquid that may inadvertently find its way into the casing 200. In addition to the first packing box 20S, a packing section shown generally at 160 includes a first packing pusher 165 that has a radial flange attached to a circular collar adapted to slidably fit between an internal wall surface of the backing box 205 and the external wall surface of the drive housing 209. The first packing pusher 165 is adjustably interconnected to the packing box 205 at the flange 162 by a plurality of interconnecting nuts 165a and bolts 175b. As can be seen from a study of FIG. 3, the packing 168 is axially compressed when the first pusher 165 is moved, by appropriate adjustment of the adjusting nuts disposed on the bolt 175b, towards the flange 162. The packing section 160 also includes a second packing box 178 having internally disposed rope packing 169 to provide a seal around the drive shaft 405. The second packing box 178 is fixedly attached at its forward end to the drive housing restraining flange 175 and has a radial flange 177 attached at its rearward end. Finally, a second packing pusher 181 having a radial flange at the rear thereof, is adjustably connected to the second packing box 178 by a plurality of nuts 177a, 181a threadably mounted on a plurality of bolts 177b extending through the rearwardly disposed flange 177 of the packing box 178 and the pusher flange. The gate valve 110 may be of any desired construction and may comprise, for example, a bonnet 112 and the valve plate which may be raised and lowered by appropriate turning means such as the aforementioned turning bar 118. The motor unit 500 provides the source of rotational motion needed to rotate the nozzles 360 around the centerline 150. A motor output shaft 505 of the motor unit 500 is linked to the drive shaft 405 by a coupling 502. As the motor unit 505 drives the output shaft 505, the worm gear 402 is also rotated, thereby rotating the spur gear 330, which in turn rotates the cylindrical rotor 314, the nozzle support member 346 and, consequently, the nozzles 360 about the centerline 150. The speed of the motor unit 500 is controlled such that the outlet nozzles 360 are rotated at a rate of about 0.5 to about 4 revolutions per hour. Thus, the rotational speed of the outlet nozzles 360 is determined by the rotational drive speed of the output shaft 505, the gear ratio of the worm gear 402, and the diameter and tooth pitch of the spur gear 330. Preferably, the motor unit 500 has a controllably variable speed and, desirably, also includes suitable gear box means to provide a reduced motor output shaft speed. OPERATION When a crude oil storage tank containing crude oil has a significant quantity of accumulated hydrocarbon sludge in the bottom, and has a crude oil circulator 300 embodying the present invention positioned in the tank, requires removal of the sludge, a high pressure pump is activated to withdraw crude oil from the tank. The withdrawn crude oil passes through a conduit to the filter system to remove solid particles, through another conduit to the intake of a high pressure pump, and is then discharged from the pump through the conduit 101 to the circulator 300 where it is discharged back into the tank through the nozzles 360. Alternatively, crude oil may be provided externally of the tank, such as during initial filling of the tank. In this operational mode, the crude oil directed to the tank through the circulator 300 is diverted, as a side stream, from the primary flow of oil into the tank. At the same time as the crude oil is being circulated, the motor unit 500 independently drives the worm gear 402 through the drive shaft 405. Rotation of the worm gear 402 causes corresponding rotation of the hollow rotor 314 and, consequently, rotation of the nozzles 360, thus distributing a high velocity jet of crude oil around a 360 degree path in the storage tank. As discussed above, the gear ratios in a gear box at the motor unit 500 are selected such that the nozzle support 346 completes about 0.5 to 4 revolutions per hour. As mentioned earlier, the hydrocarbon sludge or "black sediment and water" that accumulates with time in a crude oil storage tank is formed by the reversible interaction of asphaltenes, porphyrins, condensed ring aromatics, etc., in the crude oil. Thus, the charge transfer forces at the molecular level causes a reversible coupling of these molecular components to form molecules of such a size that they become solid particles big enough to settle as sludge in the 12 5,460,331 storage tank. However, when the hydrocarbon sludge is impacted with the high velocity jet of crude oil emanating from the nozzles 360, the energy of the ejected crude oil is sufficient to disrupt the charge transfer forces and refragment the hydrocarbon sludge molecules into smaller components that are small enough to be colloidally suspended in or dissolved in the crude oil. Agglomerations of water in the hydrocarbon sludge likewise tend to be atomized and colloidally suspended in a like manner. The slow rotation of the nozzled outlet jets 360 provides adequate time for the disruption of the charge transfer forces so that the slow rate of rotation actually enhances, rather than impedes the rate at which the hydrocarbon sludge is fragmentized and resuspended in the crude oil. Normally, with the apparatus of the present invention, a crude oil storage tank can be cleaned in a short time such as a matter of 0.5 to 5 days. Importantly, the worm gear 402 is designed such that failure of the system, as for example the result of accidental impingement of rotating elements of the circulator 300 against a fixed barrier, will cause failure at the worm gear 402, either by stripping of the teeth on the worm gear 402, or by breaking the key that secures the worm gear 402 in place on the shaft 406. Once failure occurs, repairs to the system can be made very easily. The motor unit 500 and the drive shaft 405 are uncoupled at the coupling 502. The worm gear drive housing 209 can be withdrawn by removing the nuts 175a from the bolts 175b, connecting the drive housing restraining flange 175 to the packing box 205, and then pulling the drive housing 209 from the casing 200. After the forward end of the drive housing 209 clears the gate valve 110, the valve is preferably closed during the following service procedure to prevent any accidental leakage of fluid past the seals 328 and subsequently through the casing 200. After withdrawal of the drive housing 209 from the casing 200, the worm gear assembly 400 is serviced to repair or replace the sheared key or stripped gears. The worm gear assembly 400 is disassembled by first removing the bolts 421 and separating the worm gear positioning member 420 from the forward end of the drive housing 209. After removal of the worm gear positioning member 420, the forward retaining nuts 433 are unscrewed from the end of the worm gear assembly drive shaft 406 and the shaft 406, along with the remaining shaft-mounted elements of the worm gear assembly 400, is withdrawn from the drive housing 209. After removal of the worm gear retaining nuts 435, the worm gear 402 may be separated from drive shaft 406. If required, the bearing assembly 430 may also be removed for cleaning or replacement at this time by removal of the snap ring 429. After replacement of the worm gear 402, or the key between the worm gear 402 and the shaft 406, or both, the worm gear is reinstalled on the shaft journal 402a and secured thereon by the retaining nuts 435. The forward and retaining nuts 433 are then installed to axially retain the worm gear drive shaft 406 in the desired position with respect to the drive housing 209. The reassembly of the worm gear assembly 400 is then completed by reattaching the worm gear positioning member 420 to the end of the drive housing 209. After reassembly, the worm gear assembly 400 is then placed into operable engagement with the circulator 300 by insertion through the casing 200. As the forward end of the worm gear drive shaft 209 approaches gate valve 110, the valve plate 116 is raised to allow passage of the shaft into the tank. To provide passage of the forward end of the drive housing 209 past the spur gear 330, the elongated slot 403 at the forward end of the drive housing 209 must be radially aligned with the spur gear 330. The shaft 405, with the worm gear drive shaft 406 with the worm gear 402 mounted thereon, is then rotated simultaneously with moving the drive housing 209 forwardly. This will insure proper engagement of the worm gear 402 with the mating teeth of the spur gear 330 without risking possible stripping or damage to the teeth upon initial contact. Insertion of the drive housing 209 is continued until the positioning member 420 abuts and properly engages the seat provided in the docking station 450. The positioning member 420 is maintained in biased contact with the docking station 450 adjustment of the nuts 175a to controllably position the drive housing restraining flange 175. Other aspects, features and advantages of the present invention can be obtained from a study of this disclosure together with the appended claims. What is claimed is: 1. An apparatus useful for dispersing sediment in a storage tank containing liquid and sediment, the apparatus comprising: a liquid circulator comprising a housing having a liquid inlet port, a hollow rotor rotatably mounted in the housing and having an internal bore in fluid communication with the liquid inlet port, a gear member positioned around the periphery of the hollow rotor in rotationally fixed relationship therewith, and at least one nozzle rotatably mounted in said housing and in fluid communication with the internal bore of said rotor; a tubular casing disposed externally of the internal bore of said hollow rotor and having a first end connected to the housing of said circulator and a second end adapted to be spaced externally of said storage tank; a rotational drive unit removably disposed in said tubular casing and comprising a housing, a shaft rotatably mounted in said drive unit housing and having a worm gear mounted thereon and disposed in operative engagement with said circulator gear member, said rotational drive unit being removable from said tubular casing in response to withdrawing said shaft from said second end of the tubular casing; a liquid inlet conduit connected to said liquid circulator housing in fluid communication with the inlet port of said circulator housing; and, a power means comprising a motor having an output shaft operatively connected to the rotational drive unit, said output shaft and said shaft having a worm gear mounted thereon being coupled together by a drive shaft disposed inside said tubular casing, said rotor and said at least one nozzle being rotatable at a preselected rate in response to the operation of said motor, said preselected rate being independent of the pressure and rate of flow of liquid through said at least one nozzle. 2. The apparatus of claim 1 wherein said at least one nozzle comprises two nozzles. 3. The apparatus of claim 2 wherein said circulator gear member is a spur gear. 4. An apparatus useful for dispersing sediment in a storage tank containing liquid and sediment, the apparatus comprising: a liquid circulator comprising a housing having a liquid inlet port, a hollow rotor rotatably mounted in the 13 5,460,331 housing and having an internal bore in fluid communication with the liquid inlet port, a gear member positioned around the periphery of the hollow rotor in rotationally fixed relationship therewith, and at least one nozzle rotatably mounted in said housing and in fluid communication with the internal bore of said rotor; a tubular housing removably attached to the liquid circulater and disposed externally of the internal bore of said hollow rotor, said tubular housing having an opening in a wall of the housing adjacent said circulater gear member, and an end adapted to be spaced externally of said storage tank; a rotational drive unit disposed within the tubular housing and comprising a worm gear drive shaft with a worm gear affixed thereto, said worm gear being disposed at the tubular housing wall opening and in operative engagement with the circulater gear member, said rotational drive unit being removable from said tubular casing in response to withdrawing said shaft from said tubular casing end adapted to be spaced externally of the storage tank; a liquid inlet conduit connected to said liquid circulater housing and in fluid communication with the inlet port of said circulater housing; and a power means comprising a motor having an output shaft, said power means being operatively connected with the rotational drive unit by coupling the output shaft and the worm gear shaft, said at least one nozzle being rotatable at a predetermined rate in response to rotation of the output shaft by said power means, said predetermined rate being independent of the pressure and rate of flow of liquid through said at least one nozzle. 5. The apparatus of claim 4 wherein said at least one nozzle comprises two nozzles. 6. The apparatus of claim 4 wherein said gear member comprises a spur gear. * * * * * EX-10.34 5 U.S. PATENT NO. 5,485,966 - CHOPPING MACHINE 1 EXHIBIT 10.34 United States Patent [19] [11] Patent Number: 5,485,966 Cradeur [45] Date of Patent: Jan. 23, 1996 - ------------------------------------------------------------------------------- [54] REMOTELY CONTROLLED CHOPPING MACHINE TANK CLEANING [75] Inventor: Robert R. Cradeur, Sulphur, La. [73] Assignee: Serv-Tech, Inc., Houston, Tex. [21] App. No.: 237,455 [22] Filed: May 3, 1994 [51] Int. Cl.6 .................................... B02C 13/02; B02C 25/00 [52] U.S. Cl. ............................. 241/39; 241/101.72; 241/101.74; 241/189.1 [58] Field of Search....................................... 134/168 R, 181; 180/6.2; 239/227, 722; 241/38, 39, 101.72, 101.74, 189.1, 282.1, 282.2, 277; 299/1.5, 30, 25, 39, 89, 91; 901/1 [56] Reference Cited U.S. PATENT DOCUMENTS 2,197,549 4/1940 Hargrave et al. ..................... 2411/101.7 X 2,336,478 12/1943 Lewis et al. .............................. 299/39 2,341,486 2/1944 Swenfeger ............................ 241/101.7 X 3,560,050 2/1971 Lockwood .................................. 299/39 3,907,366 9/1975 Pender .................................. 299/30 X 3,937,261 2/1976 Blum ................................... 241/277 X 4,023,862 5/1977 Gold .................................... 299/30 X 4,192,551 3/1980 Weimer et al. .......................... 299/30 X 4,376,515 3/1983 Scc .................................... 241/277 X 4,753,484 6/1988 Stolarzyk et al. ....................... 299/30 X 4,817,653 4/1989 Krajicek et al. ........................ 239/722 X Primary Examiner -- Timothy V. Eley Attorney, Agent, or Firm -- John R. Kirk, Jr.; Jenkins & Gilchrist [57] ABSTRACT A chopping machine comprises a frame and a plurality of detachable components which may be individually insertable through an entryway into a storage tank to be cleaned. The detachable components include traction drive belts and a chopping assembly. Hydraulic power means are provided exteriorly of the tank, and are connected by lines extending through the entryway to the frame mounted operating components inside the tanks. The chopping assembly comprises a plurality of replacement blades radically disposed about a rotable tubular member. 15. Claims, 2 Drawing Sheets [ F I G U R E ] 2 U.S. Patent Jan. 23, 1996 Sheet 1 of 2 5,485,966 [FIG. 1] 3 U.S. Patent Jan. 23, 1996 Sheet 2 of 2 5,485,966 [FIG. 2] [FIG. 3] 4 5,485,966 1 REMOTELY CONTROLLED CHOPPING MACHINE FOR TANK CLEANING BACKGROUND OF THE INVENTION 1. Field of the Invention This invention relates to a mobile cleaning device. More particularly, this invention relates to a remote controlled chopping machine for cutting and chopping solids buildup on the interior floor of hydrocarbon storage tanks of the type used in petroleum refineries and chemical plants. 2. Brief Description of the Related Art Petroleum refineries, chemical plants, petroleum and chemical stock farms, and similar plants, are normally provided with large cylindrical storage tanks having diameters of from about 20 to about 300 feet and heights of from about 50 to about 100 feet and closed to the atmosphere by floating or fixed roofs. With the passage of time, and particularly when the tanks are used to store crude oil, sedimentation and fouling of the tank surfaces will occur. Conventionally, a gang of workmen enter the tank through an entryway adjacent the bottom of the tank and manually operate high pressure hoses, similar to the hoses used in fighting fires, in order to wash down the inside of the tank. Suction lines disposed on the bottom of the tank are used to remove the wash water and sediments collected by the water. It is generally necessary for the workmen to use respirators and wear protective garments. As a consequence, a workman can work inside the tank for only a very limited time because of the debilitating working conditions, and must then leave the tank to rest. U.S. Pat. No. 4,817,653, issued Apr. 4, 1989 to Richard W. Krajicek et al., and assigned to the assignee of the present invention, is directed to solving the problems associated with washing down the inside of the above described tanks. The '653 patent describes an essentially self-contained mobile water washing robot which is remotely operable, thereby negating the need for operating personnel to be in close proximity of the cleaning nozzles and other high pressure lines during water wash cleaning operations. U.S. Pat. No. 4,817,653 is incorporated herein by reference for all respects and purposes. However, even with the improvements in tank cleaning disclosed in the '653 patent, the problem of solids buildup on the floor of the storage tank still exists. This is a particular problem when solids such as coke, sludge, or granite accumulate and harden over a period of time. In general, these sludge-like materials form mounds or large cakes on the bottom surface of the tank, especially in areas where there is little or no turbulence, and must be broken into smaller pieces for disposal. Heretofore, these materials were cut by laborers into fragments by repeated strokes with a pickax, and then shoveled or otherwise "mucked out". Thus, while the disclosure of '653 patent eliminated much of the dangerous, undesirable in-tank labor, improvements still need to be made. It is an object of the present invention to provide a hydraulically powered, remotely controlled, movable chopping device for breaking up the high-solids material deposits on the bottom of the above described types of hydrocarbon storage tanks. Accordingly, the present invention is directed to an apparatus for chopping waste, such as sludge formed on the bottom of the interior of oil storage tanks, and comprises modular components that can be separately moved inside a storage tank and then conveniently assembled inside the tank to form a workable apparatus. SUMMARY OF THE INVENTION According to one embodiment of the present invention, an apparatus for chopping waste has a frame, a traction drive means detachably mounted on the frame, and a chopping assembly also detachably mounted on the frame. The apparatus also includes hydraulic power means for independently powering the traction means and the chopping assembly, and control means for regulating the operation of the power means. Optionally, the apparatus also includes a hydraulically powered fluid wash means that is detachably mounted on the frame of the apparatus. BRIEF DESCRIPTION OF THE DRAWINGS FIG. 1 is a side view of an apparatus for chopping waste having a chopping assembly detachably mounted on a forward end of the apparatus, and embodying the present invention. FIG. 2 is a front view of the chopping assembly component of the apparatus embodying the present invention. FIG. 3 is a cross sectional view of a portion of the chopping assembly, taken along the line 3--3 in FIG. 2, showing a cutting blade mounting arrangement for the apparatus embodying the present invention. DETAILED DESCRIPTION OF THE INVENTION In accordance with the present invention, a mobile, remotely controlled, hydraulically powered chopping machine 10 for chopping waste is provided which can be disassembled, moved into or positioned in a storage tank to be cleaned through an entryway adjacent the bottom of the tank, and then reassembled inside the tank. The principal components of the chopping machine 10 include a frame 12, preferably having an open bottom configuration, to which a hydraulically powered and controlled traction drive means 20 for moving the apparatus is detachably mounted. A hydraulically powered and controlled chopping assembly 30 is also detachably mounted on the frame 12. A hydraulic power means 50 for independently powering the traction drive means 20 and the chopping assembly 30 and a hydraulic control means 60 for regulating the operation of the hydraulic power means 50 are remotely positioned from the frame 12, preferably outside of the tank in which the main structure of the chopping machine 10 is operating. When remotely disposed in this manner, the hydraulic power means 50 is hydraulically connected through an entryway into the tank with a first hydraulic motor means 25 driving the traction drive means 20, and a second hydraulic motor means 40 driving the chopping assembly 30. The frame 12, the traction drive means 20, the hydraulic power means 50 and hydraulic control means 60, are described in detail in the U.S. Pat. No. 4,817,653 which, as noted above, is incorporated herein for all purposes. More specifically, for the sake of brevity and avoidance of unnecessary repetition, a detailed discussion of the above identified common elements is not repeated in the description of the present invention. The traction drive means 20 of the chopping machine 10 is identified in the '653 patent as "robot articulation means 700". The remaining common elements are generally identified by the same descriptive terminology in both specifications. 5 5,485,966 Briefly, the traction drive means 20 includes a pair of detachably mounted endless belts 22,24, such as a rubber belt or a plurality of track links connected together to form an endless chain. The endless belts 22,24 are driven by the first hydraulic motor means 25 which includes a pair of hydraulic motors 26,28, one motor of the pair being operatively connected to a respective one of the endless belts 22,24. In the preferred embodiment of the present invention, the chopping assembly 30 comprises a plurality of chopping blades 32 mounted through slots provided in a long square tube 34. Stub rotor shafts 36,38 are attached, respectively, to the left and right hand ends of the square tube 34, as viewed in FIG. 2, and are rotatably supported by a pair of bearing assemblies 42,44. The right hand stub rotor shaft 38 extends through its supporting bearing assembly 44 and engages the second hydraulic motor means 40. The second hydraulic motor means includes a hydraulic motor 46 and, preferably, is operatively connected with the rotor shaft 38 through a reduction gear box 48. Alternatively, the square tube 34 carrying the chopping blades 32 could be a cylindrical pipe having a plurality of chopping blades or cutting plates emanating from different surface portions of the pipe and arranged to cut or chop the solids buildup on the bottom of the tank. The rotational speed of the square tube 34 carrying the chopping blades 32 must be in a range suitable for effectively processing the waste material. Furthermore, it is desirable that the waste material be subjected to at least one of chopping, mixing, scraping, stirring, cutting, pulverizing, agitating, disintegrating, digging, pounding or other similar actions. In the preferred embodiment of the present invention, the second hydraulic motor means 40 is capable of varying the rotational speed of the square tube 34 from 0 up to about 200 rpm, preferably about 120 rpm, and is designed to rotate in a clockwise direction as viewed from the right hand end of the square tube 34 in FIG. 2. Preferably, as best shown in FIG. 3, the chopping blades 32 are mounted in a protective sleeve 33 to protect blades from becoming bent or distorted. Also, it is desirable that the chopping blades 32 be formed of a non-ferritic material such as brass, bronze, or aluminum to decrease the risk of generating sparks that could ignite volatile hydrocarbon fumes that may be present in the tank being cleaned. As shown in FIGS. 2 and 3, the chopping blades are proportionally spaced, in a radially staggered relationship at right angles to an adjacent blade, along the square tube 34 which in the illustrated embodiment supports twenty-one chopping blades 32. In this arrangement, ten of the chopping blades 32 extend through aligned openings provided in two parallel sides of the square tube 34 and eleven of the chopping blades 32 extend through aligned openings in the remaining parallel sides of the square tube 34. The sleeves 33 are welded to the square tube 34, and centered over the openings so that the chopping blades 32 can be inserted through the openings and retained in place by bolts 35 extending through each of the sleeve 33 and an associated chopping blade 32 positioned in the sleeve. Thus, two pairs of bolts and nuts hold each chopping blades 32 within sleeve 33 on both sides of the square tube 34. By this arrangement, the chopping blades 32 are easily removed when they become worn from repeated use. Moreover, chopping blades 32 of different lengths can be easily interchanged to vary the distance from the tip of the blade to the deck of the storage tank. In the preferred embodiment, the chopping blades 32 are fourteen inches in length 1/2 inch thick, and two inches wide. If desired, the chopping blades 32 could have a different configuration or shape, or be adorned with a variety of notches or cutting aids to facilitate the chopping process. The chopping assembly 30 is supported, in a fixed relationship with the frame 12, by a support assembly 70 detachably mounted on the forward end of the frame. The support assembly 70 comprises a pair of upper and lower reinforced arms 72,74 that are connected together at one end by a plate member 76 extending between the upper and lower arms, and at the other end to the frame 12. A square tubular cross member 78 is rigidly attached to the plate member 76, by a pair of connecting plate member 80, in a perpendicular relationship with the front panel 18 and side panels 14,16 of the frame 12. The tubular cross member 78 has a length substantially equal to the distance between the left and right hand bearing assemblies 42,44. A pair of flange mounting plates 82,84 are fixedly attached, such as by welding, to each end of the connecting plate member 80. Each of the flange mounting plates 82,84 contains holes therethrough for receiving bolts for attachment of the plates to the flange of a respective one of the bearing assemblies 42,44. As shown in FIG. 2, the second hydraulic motor means 40 for operating the chopper assembly 30, is also supported by the flange mounting plate 84, by way of attachment through the housing of the right bearing assembly 44. A protective cover, or shroud, 96 is also mounted, preferably with removable bolts, to a forwardly disposed surface of the cross member 78. Preferably, the shroud 96 extends along the length of the square tube 34 on which the chopping blades 32 are mounted from an area directly above the square tube 34 to an area directly to the rear of the chopping blades 32, i.e., between the chopping assembly 30 and the frame 12. In an alternative embodiment of the present invention, an articulatable water jet washer 90, indicated by broken lines in FIG. 1 and described in detail in the previously incorporated U.S. Pat. No. 4,817,653, may be mounted on the frame 12. For this purpose, a threaded coupling 92 and a water supply pipe 94 are provided, respectively, on the top and sides of the frame 12. When connected with a high pressure water pump and hose as taught in the patent, an operator is able to remotely operate the water jet washer and progressively wash down the sides of the tank with high pressure water. Thus, when combined with the chopper assembly described above, an operator has the ability to chop solid waste material from the floor of the tank to be cleaned and wash down the interior walls of the tank with a single apparatus, either simultaneously or sequentially. When a storage tank is to be cleaned, the portable hydraulic power means 50 is moved to a location adjacent the tank and individual components, i.e., the traction drive means 20, the chopping assembly 30, the second hydraulic motor means 40, and the support assembly 70 either as a unit or as two or more subassemblies, are then moved into the tank through an entryway. Also, if desired, the water jet washer 90 can also be separately moved into the tank. Next, the scaffolding and the slide rail and winch assemblies, described in the incorporated U.S. Pat. No. 4,817,653, are put in place and used to lift, move and lower the frame 12 onto the floor of the storage tank for assembly with the aforementioned individual components. After assembly, hydraulic lines between the hydraulic power means 50 and the hydraulic motors 26,28, and between the hydraulic power means 50 and the hydraulic motor 46 driving the chopping assembly 30, are then connected. Also, appropriate control lines between the hydraulic control means 60 and the 6 5,485,966 respective motors are also connected. The hydraulic control means may be either positioned inside or outside the tank to be cleaned. Preferably, an operator is able to operate the appropriate control switches on the control panel from the entryway, with both the operator and control panel being positioned outside the tank. If this is not possible, the control means may be placed inside the tank and the operator fitted with protective garments and possibly, auxiliary breathing apparatus. The remotely controlled chopping machine 10 embodying the present invention can be moved from place to place about the tank by actuation of the hydraulic motors 26,28. Both endless belts 22,24 can be driven in the same direction in order to move the frame 12 in a forward or reverse direction. The chopping machine 10 can be turned to the right or to the left in essentially a zero radius by operating one of the belts, e.g., 22, in a forward direction and the other belt, e.g., 24, in a rearward direction. When the tank cleaning operation is complete, the hydraulic and water supply lines are disconnected and withdrawn through the entryway, the chopping machine 10 is disassembled into its component parts, and the component parts are removed from the tank by way of the entryway. The above embodiments are given by way of example of the present invention and are not intended as limitations as further embodiments and advances will occur to those of skill in the art who practice the present invention. What is claimed is: 1. An apparatus useful for chopping waste on the interior bottom of a storage tank having an entryway adjacent said bottom, comprising: a frame; a traction drive means for moving said apparatus, said traction drive means being detachably mounted on said frame; a support assembly detachably mounted to a forward end of said frame and having a pair of upper and lower arms detachably connected to said frame at a first end of said arms, a plate member fixedly connected to a second end of said arms, and a pair of spaced apart flange mounting plates each fixedly attached to said plate member; a chopping assembly rotatably mounted in a pair of bearing assemblies, said bearing assemblies being detachably connectable to a respective one of said flange mounting plates of the support assembly, and said chopping assembly being separately insertable through said entryway; a hydraulic power means for independently powering said traction drive means and said chopping assembly; and, a hydraulic power means for regulating the operation of said hydraulic power means. 2. The apparatus as set forth in claim 1 wherein said chopping assembly comprises a plurality of chopping blades, said blades extending radially outwardly from a shaft member that is rotatable about a horizontal axis. 3. The apparatus, as set forth in claim 2 wherein said chopping assembly includes a mounting means attached to said frame, said shaft member being rotatably mounted on said mounting means, and said shaft member has a plurality of sleeves radially attached to said shaft member, each of said chopping blades being mounted on a respective one of said sleeves and extending radially outwardly from said sleeve. 4. The apparatus, as set forth in claim 3 wherein said sleeves are mounted along four rows equiangularly spaced around said shaft member. 5. The apparatus, as set forth in claim 4 wherein adjacent rows of said sleeves are staggered. 6. The apparatus as set forth in claim 3 wherein said apparatus includes a shroud mounted on said mounting means, said shroud being disposed about a portion of said chopping assembly extending from a first area vertically above said chopping assembly to a second area between said chopping assembly and said frame. 7. The apparatus as set forth in claim 1 wherein said frame includes a pair of spaced side members and said traction drive means includes a pair of endless belts, one of said endless belts being detachably mounted to a respective one of said side members. 8. The apparatus as set forth in claim 1 wherein said apparatus includes a fluid washing means for controllably delivering a pressurized jet of fluid. 9. An apparatus for chopping waste on the interior bottom of a storage tank having an entryway adjacent said bottom, comprising: a frame; a traction drive means for moving said apparatus, said traction drive mean being detachable mounted on said frame; a support assembly detachably mounted to a forward end of said frame and having a pair of upper and lower arms detachably connected to said frame at a first end of said arms, a plate member fixedly connected to a second end of said arms, and a pair of spaced apart flange mounting plates each fixedly attached to said plate member; a chopping assembly rotatably mounted in a pair of bearing assemblies, said bearing assemblies being detachably connectable to a respective one of said flange mounting plates of the support assembly, and said chopping assembly being separately insertable through said entryway; a first hydraulic motor mounted on said frame and operatively connected with said traction drive means; a first hydraulic motor control means, connected with said first hydraulic motor, for remotely regulating operation of said traction drive means; a second hydraulic motor mounted on said chopping assembly and operatively connected with said chopping assembly; a second hydraulic motor control means, connected with said second hydraulic motor, for remotely regulating operation of said chopping assembly; and, a hydraulic power means for delivering a flow of hydraulic fluid under pressure to said first and said second hydraulic motors, said hydraulic power means being disposed at a position remote from said frame. 10. The apparatus as set forth in claim 9 wherein said frame includes a pair of spaced side members and said traction drive means includes a pair of endless belts, one of said endless belts being detachably mounted to a respective one of said side members. 11. The apparatus as set forth in claim 9 wherein said apparatus includes a fluid washing means for controllably delivering a pressurized jet of fluid. 12. An externally powered and remotely controllable chopping apparatus for chopping sludge on the interior bottom of an oil storage tank, said storage tank having an entryway adjacent the bottom thereof, said chopping apparatus comprising: a frame that is movable through said entryway; a traction drive means for moving said apparatus about the interior bottom of said tank, said traction drive means being detachably mountable on said frame; 7 5,485,966 a support assembly detachably mounted to a forward end of said frame and having a pair of upper and lower arms detachably connected to said frame at a first end of said arms, a plate member fixedly connected to a second end of said arms, and a pair of spaced apart flange mounting plates each fixedly attached to said plate member; a support assembly detachably mounted to a forward end of said frame and having a pair of upper and lower arms fixedly connected together at one end by a plate member and detachably connected to said frame at the other end, and a pair of spaced apart flange mounting plates each fixedly attached to said plate member; a chopping assembly rotatably mounted in a pair of bearing assemblies, said bearing assemblies being detachably connectable to a respective one of said flange mounting plates of the support assembly, and said chopping assembly being separately insertable through said entryway; a first hydraulic motor mounted on said frame and operatively connected with said traction drive means; a first hydraulic motor control means, connected with said first hydraulic motor, for remotely regulating operation of said traction drive means; a second hydraulic motor mounted on and operatively connected with said chopper assembly; a second hydraulic motor control means, connected with said second hydraulic motor, for remotely regulating operation of said chopper assembly; and a hydraulic power means for delivering a flow of hydraulic fluid under pressure to said first and said second hydraulic motors, said hydraulic power means being disposed at a position remote from said frame. 13. The apparatus as set forth in claim 12 wherein said chopping apparatus includes a fluid washing means for controllably delivering a pressurized jet of fluid, said fluid washing means being detachably mounted on said frame. 14. The apparatus as set forth in claim 12 wherein said frame includes a pair of spaced side members and said traction drive means includes a pair of endless belts, one of said endless belts being detachably mounted to a respective one of said side members. 15. An externally powered and remotely controllable chopping apparatus for chopping sludge on the interior bottom of an oil storage tank, said storage tank having an entryway adjacent the bottom thereof, said chopping apparatus comprising: an open-bottomed frame having opposed side panels and a top panel interconnecting said side panels, said frame having a height and width such that the frame can be moved into the storage tank through said entryway; a pair of endless belts each being detachably mountable on one of said opposed side panels of the frame and separately insertable through said entryway; a support assembly detachably mounted to a forward end of said frame and having a pair of upper and lower arms fixedly connected together at one end by a late member and detachably connected to said frame at the other end, and a pair of spaced apart flange mounting plates each fixedly attached to said plate member; a chopping assembly rotatably mounted in a pair of bearing assemblies, said bearing assemblies being detachably connectable to a respective one of said flange mounting plates of the support assembly, and said chopping assembly being separately insertable through said entryway; a first hydraulic motor mounted on said frame and operatively connected with said pair of endless belts; a first hydraulic motor control means, connected with said first hydraulic motor, for remotely regulating operation of said pair of endless belts; a second hydraulic motor mounted on and operatively connected with said chopper assembly; a second hydraulic motor control means, connected with said second hydraulic motor, for remotely regulating operation of said chopper assembly; and a hydraulic power means for delivering a flow of hydraulic fluid under pressure to said first and said second hydraulic motors, said hydraulic power means being disposed at a position outside of said tank and hydraulically connected through the entryway with said first and second hydraulic motors. * * * * * EX-10.35 6 CONTRACT NO. FP-03 FOR DESIGN, SUPPLY,CONSTRUCTION 1 EXHIBIT 10.35 CONTRACT NO. FP - 03 FOR DESIGN, SUPPLY, CONSTRUCTION AND COMMISSIONING OF FINCHAA SUGAR FACTORY AND ETHANOL PLANT BETWEEN FINCHAA SUGAR FACTORY OF THE TRANSITIONAL GOVERNMENT OF ETHIOPIA AND F.C. SCHAFFER & ASSOCIATES INC., LOUISIANA, U.S.A. VOLUME 1 CONTRACT AGREEMENT AND CONDITIONS OF CONTRACT 2 CONTRACT AGREEMENT FOR DESIGN, SUPPLY, CONSTRUCTION AND COMMISSIONING OF FINCHAA SUGAR FACTORY AND ETHANOL PLANT THIS AGREEMENT IS MADE THE day of 1994 between 1) THE FINCHAA SUGAR FACTORY OF THE TRANSITIONAL GOVERNMENT OF ETHIOPIA (hereinafter called 'the Employer') and 2) F.C. SCHAFFER & ASSOCIATES INC. REGISTERED UNDER THE LAWS OF LOUISIANA, U.S.A. (hereinafter called 'the Contractor') WHEREAS the Employer is desirous that in connection with the Finchaa Sugar Project the above-named works should be executed and has accepted a tender by the Contractor for the execution, completion and maintenance of such works. NOW IT IS AGREED AS FOLLOWS: 1. In this Agreement words and expressions shall have the same meanings as are respectively assigned to them in the Conditions of Contract hereinafter referred to. 2. The following documents shall be deemed to form and be read and construed as 'the Contract': a) the Contract Agreement b) The Conditions of Contract c) the Specification d) the Schedule of Prices 3. The Contract Price is USD 70,016,819.- (Seventy Million, Sixteen Thousand, Eight Hundred and Nineteen). and Birr 75,404,068.- (Seventy Five Million, Four Hundred Four Thousand and Sixty Eight). 4. In consideration of the payment of the Contract Price by the Employer to the Contractor, the Contractor hereby undertakes to execute, complete and maintain the Works in conformity in all respects with the terms and Conditions of the Contract. 5. The Employer hereby undertakes to pay the Contractor in consideration of the due execution, completion and maintenance of the Works the Contract Price at the times and in the manner prescribed under the Contract. 3 IN WITNESS WHEREOF the duly authorised representatives to the parties hereto have in accordance with the laws of Ethiopia hereunto set their respective hands the day and year first above written. Signed by ......................... Signed by ......................... on behalf of the Employer on behalf of the Contractor ......................... ......................... in the presence of....... in the presence of....... ......................... ......................... ......................... ......................... 4 CONDITIONS OF CONTRACT 5 TABLE OF CONTENTS 1. DEFINITIONS AND INTERPRETATIONS 1.1 Definitions 1-1 1.2 Headings and Titles 1-5 1.3 Interpretation 1-5 1.4 Written Communications 1-5 1.5 Notices, Consents and Approvals 1-5 1.6 Costs, Overhead Charges and Profit 1-5 1.7 Periods 1-6 1.8 References 1-6 2. ENGINEER AND ENGINEER'S REPRESENTATIVE 2.1 Engineer's Duties and Authority 1-6 2.2 Engineer's Decisions and Interpretations 1-7 2.3 Engineer's Representative 1-7 2.4 Engineer's Power to Delegate 1-7 2.5 Confirmation in Writing 1-8 2.6 Replacement of Engineer 1-8 3. ASSIGNMENT, SUB-CONTRACTING AND VENDORS 3.1 Assignment of Contract 1-8 3.2 Subcontracting 1-8 3.3 Vendors 1-9 4. CONTRACT DOCUMENTS 4.1 Language 1-9 4.2 Priority of Contract Documents 1-9 4.3 Documents Mutually Explanatory 1-9 4.4 Contractor's Drawings 1-10 4.5 Consequences of Disapproval of Contractor's Drawings 1-10 4.6 Approved Contractor's Drawings 1-11 4.7 Inspection of Contractor's Drawings 1-11 4.8 Erection Information 1-11 4.9 Operation and Maintenance Manuals 1-11 4.10 Employer's use of Contractor's Drawings 1-11 4.11 Contractor's use of Employer's Drawings 1-12 4.12 Manufacturer's Drawings 1-12 4.13 Errors in Contractor's Drawings 1-12 4.14 Errors by the Employer or Engineer 1-12 4.15 Disruption of Progress 1-13 4.16 Delays and Cost of Delays of Drawings 1-13 4.17 Failure by Contractor to Submit Drawings 1-13 6 7. LABOUR 7.1 Engagement of Labour 1-27 7.2 Employment of Local Population 1-27 7.3 Importation of Labour 1-27 7.4 Use of Alcohol and Drugs 1-28 7.5 Prohibition of Firearms 1-28 7.6 Preservation of Peace 1-28 7.7 Working Hours 1-28 7.8 Outbreak of Illness 1-29 7.9 Prevention of Disease 1-29 7.10 Responsibilities for Safety 1-29 7.11 Removal of Temporary Facilities 1-29 7.12 First Aid Facilities 1-30 7.13 Responsibilities for Costs 1-30 7.14 Responsibilities of Subcontractors 1-30 7.15 Reporting Requirements 1-30 7.16 Availability of Facilities to Other Contractors 1-30 7.17 Provision of Information on Labour Laws 1-31 8. MATERIALS, PLANT AND WORKMANSHIP 8.1 Quality of Plant 1-31 8.2 Certificate of Testing 1-32 8.3 Inspection of Operation 1-32 8.4 Inspection and Testing 1-32 8.5 Dates for Inspection and Testing 1-32 8.6 Rejection 1-33 8.7 Removal of Improper Plant 1-33 8.8 Default of Contractor in Compliance 1-33 8.9 Examination of Work Before Covering Up 1-34 8.10 Uncovering and making Openings 1-34 8.11 Plant - Free Issue 1-34 8.12 Permission to Deliver 1-35 8.13 Warranty 1-35 9. SUSPENSION OF WORKS, DELIVERY OR ERECTION 9.1 Order to Suspend 1-36 9.2 Cost of Suspension 1-36 9.3 Payment in Event of Suspension 1-36 9.4 Prolonged Suspension 1-37 9.5 Resumption of Work 1-37 10. COMMENCEMENT AND COMPLETION OF WORKS 10.1 Commencement of Works 1-38 10.2 Time for Completion 1-38 10.3 Extension of Time for Completion 1-38 10.4 Rate of Progress 1-39 10.5 Delay in Completion and Liquidated Damages 1-40 10.6 Bonus for Early Completion 1-41 10.7 Prolonged Delay 1-41 7 5. OBLIGATIONS OF THE CONTRACTOR 5.1 General Obligations 1-13 5.2 Obligation to Provide Items and to Execute Works 1-14 5.3 Availability of Spare Parts 1-14 5.4 Performance Security 1-14 5.5 Period of Validity 1-14 5.6 Claims Under Performance Security 1-14 5.7 Site Data 1-15 5.8 Other Local Conditions 1-16 5.9 Physical Obstructions and Conditions 1-16 5.10 Work to be in Accordance with contract 1-16 5.11 Master Schedule to be Furnished 1-17 5.12 Cash flow Estimate and Contract Administration Procedure to be Furnished 1-18 5.13 Contractor's Superintendence 1-18 5.14 Contractor's Employees 1-18 5.15 Objection to Contractor's Employees 1-19 5.16 Setting Out 1-19 5.17 Contractor's Equipment 1-20 5.18 Safety, Security and Protection of Environment 1-20 5.19 Clearance of Site 1-21 5.20 Opportunities for Other Persons and 1-21 Contractors 5.21 Authority for Access 1-22 5.22 Information for Import Permits and 1-22 Licenses 5.23 Compliance with Laws 1-22 5.24 Patent Rights 1-22 5.25 Claims in Respect of Patent Rights 1-23 5.26 Employer's Warranty for Patent Rights 1-23 5.27 Royalties 1-23 5.28 Antiquities 1-23 5.29 Traffic and Special Loads 1-24 6. OBLIGATIONS OF THE EMPLOYER 6.1 Possession of Site 1-25 6.2 Civil Works on Site 1-26 6.3 Permits and Approvals 1-26 6.4 Information Regarding Laws 1-26 6.5 Clearance Through Customs 1-26 6.6 Permits for Re-Export 1-26 6.7 Letter of Guarantee of Payment 1-26 for Arbitration Awards 6.8 Letter of Credit 1-27 8 11. TESTS ON COMPLETION 11.1 Notice of Tests 1-41 11.2 Time for Tests 1-41 11.3 Delayed Tests 1-42 11.4 Facilities for Tests on Completion 1-42 11.5 Notice of Test Results 1-42 11.6 Retesting 1-42 11.7 Disagreement as to Result of Test 1-43 11.8 Consequences of Failure to Pass Tests 1-43 on Completion 11.9 Test Certificate 1-43 11.10 Test by Employer's Operators 1-44 12. TAKING OVER 12.1 Taking-Over 1-44 12.2 Taking-Over Certificate 1-44 12.3 Use Before Taking-Over 1-45 12.4 Interference with Tests on Completion 1-45 13. PERFORMANCE TESTS 13.1 Carrying Out Tests 1-46 13.2 Notice 1-46 13.3 Facilities for Performance Tests 1-46 13.4 Procedure for Performance Tests 1-46 13.5 Cessation of Performance Tests 1-46 13.6 Adjustments and Modifications 1-46 13.7 Costs of Performance Tests 1-47 13.8 Evaluation of Performance Tests 1-47 13.9 Failure to Pass Performance Tests 1-47 13.10 Postponement and Adjustments of 1-48 Modifications 14. ACCEPTANCE 14.1 Issue of Acceptance Certificate 1-49 14.2 Provisional Acceptance Certificate 1-49 14.3 Uncompleted Performance Tests and Work 1-49 14.4 Revoking of Provisional Acceptance Certificate 1-50 14.5 Defects Liability 1-50 15. DEFECTS LIABILITY 15.1 Defects Liability Period 1-50 15.2 Making Good Defects 1-50 15.3 Notice of Defects 1-51 15.4 Extension of Defects Liability Period 1-51 15.5 Failure to Remedy Defects 1-51 15.6 Removal of Defective work 1-52 15.7 Further Tests/Performance Tests 1-52 9 15.8 Right of Access 1-52 15.9 Contractor to Search 1-52 15.10 Defects Liability Certificate 1-53 15.11 Defects in Free Issue Equipment 1-53 15.12 Exclusive Remedies 1-53 16. VARIATION 16.1 Engineer's Right to Vary 1-53 16.2 Variation in Excess of 5% 1-54 16.3 Variation Order Procedure 1-54 16.4 Disagreement on Adjustment of Contract Price 1-55 16.5 Variation on Manufacture and Drawings 1-55 16.6 Contractor to Proceed 1-56 16.7 Records of Costs 1-56 16.8 Monthly Variations Statement 1-56 17. OWNERSHIP OF PLANT 1-57 18. CERTIFICATE AND PAYMENT 18.1 Methods of Application 1-57 18.2 Issue of Certificate of payment 1-57 18.3 Corrections to Certificates of Payment 1-58 18.4 Payment 1-58 18.5 Delayed Payment 1-58 18.6 Remedies on Failure to Certify or Make Payment 1-58 18.7 Application for Final Certificate of Payment 1-59 18.8 Issue of final Certificate of Payment 1-59 18.9 Final Certificate of Payment conclusive 1-60 18.10 Advance Payment 1-60 18.11 Advance Payment Guarantee 1-60 18.12 Terms of Payment 1-60 18.13 Retention 1-61 19. CLAIMS 19.1 Procedure 1-61 19.2 Assessment 1-62 20. CURRENCY OF PAYMENT 1-62 21. RISK AND RESPONSIBILITY 21.1 Allocation of Risk and Responsibility 1-62 21.2 Employer's Risks 1-62 21.3 Contractor's Risks 1-63 10 22. FORCE MAJEURE 22.1 Definition of Force Majeure 1-64 22.2 Effect of Force Majeure 1-64 22.3 Notice of Occurrence 1-64 22.4 Performance to Continue 1-65 22.5 Additional Cost Caused by Force Majeure 1-65 22.6 Damage Caused by Force Majeure 1-65 22.7 Termination in Consequence of Force Majeure 1-65 22.8 Payment on Termination for Force 1-65 Majeure 22.9 Release from Performance 1-66 22.10 Force Majeure Affecting Engineer's 1-66 Duties 23. CARE OF THE WORKS AND PASSING OF RISK 23.1 Contractor's Responsibility for the 1-67 Care of the works 23.2 Risk Transfer Date 1-67 23.3 Loss or Damage Before Risk Transfer 1-67 Date 24. DAMAGE TO PROPERTY AND INJURY TO PERSONS 24.1 Contractor's Liability 1-68 24.2 Employer's Liability 1-68 24.3 Accidents 1-68 25. LIMITATION OF LIABILITY 25.1 Liability for Indirect or Consequential 1-68 Damage 25.2 Maximum Liability 1-69 25.3 Liability after Expiration of Defects 1-69 Liability Period 25.4 Exclusive Remedies 1-69 25.5 Mitigation of Loss or Damage 1-69 25.6 Foreseen Damages 1-70 26. INSURANCE 26.1 The Works 1-70 26.2 Contractor's Equipment 1-70 26.3 Third party Liability 1-70 26.4 Employees Insurance 1-71 26.5 General Requirements of Insurance 1-71 Policies 26.6 Remedies on the Contractor's Failure 1-71 to Insure 26.7 Amounts not Recovered 1-71 11 27. DEFAULT 27.1 Notice of Default 1-71 27.2 Contractor's Default 1-72 27.3 Valuation at Date of Termination 1-72 27.4 Payment After Termination 1-72 27.5 Effect on Liability for Delay 1-72 27.6 Employer's Default 1-73 27.7 Removal of Contractor's Equipment 1-73 27.8 Payment on Termination for Employer's Default 1-73 28. URGENT REMOVAL WORK 1-73 29. CHANGES IN COST AND LEGISLATION 29.1 Local Currency Component of Contract Price 1-74 29.2 Foreign Currency Component of Contract 1-74 Price 1-73 30. CUSTOMS AND TAXES 30.1 Customs, Import Duties and Taxes 1-74 30.2 Clearance Through Customs 1-75 30.3 Taxation 1-75 30.4 Customs and Taxes on Contractor's Equipment 1-75 31. EXPLOSIVES 1-75 32. PUBLICITY 1-76 33. NOTICES 33.1 Notices to Contractor 1-76 33.2 Notices to Employer and Engineer 1-76 33.3 Minutes of Meetings 1-77 34. SETTLEMENTS OF DISPUTES 1-77 35. APPLICABLE LAW 1-78 12 1. DEFINITIONS AND INTERPRETATIONS 1.1 Definitions In the Contract (as hereinafter defined), the following words and expressions shall have the meanings hereby assigned to them: 1.1.1 "Commencement Date" means the date on which work commences which shall be the Effective Date. 1.1.2 "Conditions" means these Conditions of Contract. 1.1.3 "Contract" means these conditions, the Specification, the Employer's Drawings and the Contractor's Drawings, Annexes, the Contract Agreement, Schedule of Prices, and such further documents as may be expressly incorporated in the Contract Agreement. 1.1.4 "Contract Agreement" means the document recording the terms of the Contract between the Employer and the Contractor and referred to as such in this Contract. 1.1.5 "Contract Price" means the sum stated in the Contract Agreement payable to the Contractor for the execution of the Works. 1.1.6 "Contractor" means F.C. Schaffer & Associates Inc. a Company registered under the Law of LOUISIANA, USA and its legal successors in title but not (except with the consent of the Employer) any assignee of the Contractor. 1.1.7 "Contractor's Drawings" means all drawings, samples, patterns, models and operation and maintenance manuals to be submitted by the Contractor in accordance with Clause 4. 1.1.8 "Contractor's Equipment" means all appliances or things of whatsoever nature required for the purposes of the Works but does not include Plant. 1.1.9 "Contractor's Risks" means the risks defined in Sub-Clause 21.2. 1-1 13 1.1.10 "Defects Liability Certificate" means the certificate to be issued by the Engineer to the Contractor in accordance with Sub-Clause 15.10 1.1.11 "Defects Liability Period" means one year following taking over, during which the Contractor is responsible for making good defects and damage in accordance with Clause 15. 1.1.12 "Effective Date" means the date when each of the following conditions has been satisfied: a) The Employer has obtained any necessary approval of the Contract by the relevant authorities in Ethiopia; b) The Employer has obtained the approval by the African Development Bank of the award of the Contract to the Contractor. c) The Contractor has provided the performance security and the advance payment guarantee required to be obtained under the Contract; and d) The Contractor has received the advance payment and, e) The Employer has provided the Letter of Guarantee required under Sub-Clause 6.7. 1.1.13 "Employer" means the Finchaa Sugar Factory of the Government of Ethiopia and its legal successors in title, but not (except with the consent of the Contractor) any assignee of the Employer. 1.1.14 "Employer's Drawings" means all the drawings and information provided by the Employer or the Engineer to the Contractor under the Contract. 1.1.15 "Employer's Risks" means those risks defined in Sub-Clause 21.2 1-2 14 1.1.16 "Engineer" means Tate and Lyle Technical Services a Division of BOOKER TATE, Limited United Kingdom, to act as Engineer for the purposes of the Contract or such other person as may be appointed by the Employer to act as the Engineer for the purpose of the Contract. 1.1.17 "Engineer's Representative" means any representative of the Engineer appointed from time to time by the Engineer under Sub-Clause 2.3 1.1.18 "Financial Certificate of Payment", means the certificate to be issued by the Engineer to the Employer in accordance with Sub- Clause 18.8 1.1.19 "Force Majeure" has the meaning assigned to it under Sub-Clause 22.1 1.1.20 "Foreign Currency" means any currency other than the Ethiopian Birr. 1.1.21 "Gross Misconduct" means any act or omission of the Contractor in violation of the most elementary rules of dilignece which a conscientious contractor in the same position and under the same circumstances would have followed. 1.1.22 "Master Schedule" means the schedule for completion of the Works set forth in Annex 19 of the Specification. 1.1.23 "Performance Security" means the security to be provided by the Contractor in accordance with Sub-Clause 5.4 for the due performance of the Contract. 1.1.24 "Plant" means machinery, apparatus, materials and all things to be provided under the Contract for incorporation in the Works. 1.1.25 "Risk Transfer Date" means the date when the risk of loss of or damage to the Works passes from the Contractor to the Employer in accordance with Sub-Clause 23.2. 1-3 15 1.1.26 "Schedule of Prices" means the completed and priced Schedule of Prices, or any part or individual schedule thereof, forming a part of the Contract documents. 1.1.27 "Section" means a part of the Works specifically identified as such in the Contract. 1.1.28 "Site" means the place or places provided or made available by the Employer where work is to be done by the Contractor or to which Plant is to be delivered, together with so much of the area surrounding the same as the Contractor shall with the consent of the Employer use in connection with the Works otherwise than merely for the purposes of access. 1.1.29 "Specification" means the specification of the Works included in the Contract as Annexes 1-20 and any modification thereof made under Clause 16 or submitted by the Contractor and approved by the Engineer. 1.1.30 "Subcontractor" means any person (other than the Contractor) named in the Contract for any part of the Works, or any person to whom any part of the Contract has been subcontracted and the Subcontractor's legal successors in title but not any assignee of the Subcontractor. 1.1.31 "Taking-Over Certificate" means the certificate to be given by the Engineer to the Contractor in accordance with Clause 12. 1.1.32 "Tests on Completion" means the tests specified in Annex 11 of the Contract, or otherwise agreed by the Engineer and the Contractor to be performed before the Works or any Section or part thereof are taken over by the Employer. 1-4 16 1.1.33 "Time for Completion" means the time stated in the Contract for completing the Works or any Section thereof and passing the Tests on Completion calculated from the Commencement Date unless extended in accordance with Clause 10. 1.1.34 "Variation Order" means any written order, identified as such, issued to the Contractor by the Engineer under Sub-Clause 16.1. 1.1.35 "Works" means all Plant to be provided and work to be done by the Contractor under the Contract. 1.2 Headings and Titles The headings and titles in these Conditions shall not be deemed part thereof or be taken into consideration in the interpretation or construction of the Contract. 1.3 Interpretation Words importing persons or parties shall include firms and corporations and any organization having legal capacity. Words importing the singular only also include the plural and vice versa where the context requires. 1.4 Written Communications Wherever in the Contract provision is made for a communication to be "written" or "in writing" this means any hand-written, type-written or printed communication, including telex, cable and facsimile transmission. 1.5 Notices, Consents and Approvals Wherever in the Contract provision is made for the giving of notice, consent, certificate, determination or approval by any person, such consent or approval shall not be unreasonably withheld or delayed. Unless otherwise specified, such notice, consent or approval shall be in writing and the word "notify" shall be construed accordingly. 1-5 17 1.6 Costs, Overhead Charges and Profit Whenever by these Conditions the Contractor is entitled to be paid cost, such cost shall be properly incurred and shall include any overhead charges properly allocable thereto but not profit unless so stated. Any profit entitlement shall be added to cost as provided for in the Contract. 1.7 Periods In these Conditions "day" means calendar day, "month" means calendar month, and "year" means 365 days, all pursuant to the Gregorian Calendar. 1.8 References References to clauses are references to the specified Clause or Sub-Clause of these Conditions of Contract. 2. ENGINEER AND ENGINEER'S REPRESENTATIVE 2.1 Engineer's Duties and Authority (a) The Engineer shall carry out the duties specified in the Contract (b) The Engineer may exercise the authority specified in or necessarily to be implied from the Contract. However he is required to obtain the specific approval of the Employer before exercising the authority as indicated below: 1. Approval of subletting any part of the works under Sub-Clause 3.1. 2. Certification of additional cost under Sub-Clause 5.9. 3. Determination of extension of time under Sub-Clause 10.3. 4. Issuing a variation order under Clause 16. except: i) in an emergency situation as reasonably determined by the Engineer. ii) where the variation order does not exceed US$30,000 or its Birr Equivalent at prevailing rate at the National Bank of Ethiopia. 1-6 18 5. Fixing rates or prices under Sub-Clause 16.4. 6. Certifying additional payment under Sub-Clause 23.5. 7. Issuing of Taking-Over Certificate under Clause 12. The Employer will deliver to the Contractor a copy of any approval or other communication issued to the Engineer pursuant to this Sub-Clause 2.1 simultaneously with its delivery of such approval or communication to the Engineer. 2.2 Engineer's Decisions and Instructions The Contractor shall proceed with decisions and instructions given by the Engineer in writing in accordance with these Conditions. The Engineer shall have no authority to relieve the Contractor of any of his obligations under the Contract. 2.3 Engineer's Representative The Engineer's Representative shall be appointed by and be responsible to the Engineer and shall carry out such duties and exercise such authority as may be delegated to him by the Engineer in Sub Clause 2.4. 2.4 Engineer's Power to Delegate The Engineer may from time to time delegate to the Engineer's Representative any of the duties vested in the Engineer and may at any time revoke such delegation. Any such delegation or revocation shall be in writing and shall not take effect until a copy thereof has been delivered to the Contractor and the Employer. Any decision, instruction or approval given by the Engineer's Representative to the Contractor in accordance with such delegation shall have the same effect as though it had been given by the Engineer. However: (a) any failure of the Engineer's Representative to disapprove any work, plant or workmanships shall not prejudice the right of the Engineer thereafter to disapprove such work plant or workmanships and to give instruction for rectification thereof; (b) if the Contractor questions any decision of the Engineer's Representative, he may refer the matter to the Engineer, who shall thereupon confirm, reverse or vary such decision. 1-7 19 2.5 Confirmation in Writing The Contractor may require the Engineer to confirm in writing any decision or instruction of the Engineer. The Contractor shall notify the Engineer of such requirements without delay. Such a decision or instruction shall not be effective until written confirmation thereof has been received by the Contractor. 2.6 Replacement of Engineer The Employer shall have the right to replace the Engineer and appoint a person to act in replacement who is independent and impartial. Furthermore, the Employer shall give the Contractor thirty (30) days/notice of any replacement of the Engineer, to allow the Contractor to work towards an orderly transition between the then-current Engineer and the replacement Engineer. Any delay in the construction of the Works which is caused by the replacement of the Engineer shall entitle the Contractor to an extension of the Time for Completion, as provided in Sub-Clause 10.3e. 3. ASSIGNMENT, SUB-CONTRACTING AND VENDORS 3.1 Assignment of Contract The Contractor shall not, without the prior consent of the Employer (which consent, notwithstanding the provisions of Sub-Clause 1.5, shall be at the sole discretion of the Employer), assign the Contract or any part thereof, or any benefit or interest therein or there under, otherwise than by: (a) a charge in favor of the Contractor's bankers or financial sources for any commitments due or to become due under the Contract, or (b) assignment to the Contractor's insurers (in cases where the insurers have discharged the Contractor's loss or liability) of the Contractor's right to obtain relief against any other party liable. 3.2 Subcontracting The Contractor shall not subcontract the whole of the Works. Except where otherwise provided by the Contract the Contractor shall not subcontract any part of the Works without the prior consent of the Employer. 1-8 20 Provided that the Contractor shall not be required to obtain such consent for: (a) the provision of local labor and personnel, (b) the purchase of materials which are in accordance with the standards specified in the Contract, or (c) the sub-contracting of the Civil Works to the Blue Nile Construction Enterprize and the Erection Works to DEMECH. The Contractor shall be responsible for the acts, defaults and neglects of any Subcontractor, his agents or employees as fully as if they were the acts, defaults or neglects of the Contractor, his agents or employees. 3.3 Vendors The Contractor shall not deviate from the Vendor List annexed to the Contract for purchasing the plant. 4. CONTRACT DOCUMENTS 4.1 Language The language in which the Contract documents and all documents issued pursuant thereto shall be drawn up is English. The day to day communication during the execution of the Contract shall be in English. 4.2 Priority of Contract Documents. Unless otherwise provided in the Contract the priorith of the Contract documents shall be as follows: 1. Contract Agreement 2. The Conditions of Contract 3. The Specification Annexes 1-20 4. Annexes A-E associated with the Contract Agreement 5. The Schedules of Prices 6. Any other documents forming part of the Contract 4.3 Documents Mutually Explanatory Subject to Sub-Clause 4.2, the Contract Documents shall be taken as mutually explanatory. Any ambiguities or discrepancies shall be resolved by the Engineer, who shall then instruct the Contractor thereon. 1-9 21 1. DEFINITIONS AND INTERPRETATIONS 1.1 Definitions In the Contract (as hereinafter defined), the following words and expressions shall have the meanings hereby assigned to them: 1.1.1 "Commencement Date" means the date on which work commences which shall be the Effective Date. 1.1.2 "Conditions" means these Conditions of Contract. 1.1.3 "Contract" means these conditions, the Specification, the Employer's Drawings and the Contractor's Drawings, Annexes, the Contract Agreement, Schedule of Prices, and such further documents as may be expressly incorporated in the Contract Agreement. 1.1.4 "Contract Agreement" means the document recording the terms of the Contract between the Employer and the Contractor and referred to as such in this Contract. 1.1.5 "Contract Price" means the sum stated in the Contract Agreement payable to the Contractor for the execution of the Works. 1.1.6 "Contractor" means F.C. Schaffer & Associates, Inc. a company registered under the Law of LOUISIANA, USA and its legal successors in title but not (except with the consent of the Employer) any assignee of the Contractor. 1.1.7 "Contractor's Drawings" means all drawings, samples, patterns, models and operation and maintenance manuals to be submitted by the Contractor in accordance with Clause 4. 1.1.8 "Contractor's Equipment" means all appliances or things of whatsoever nature required for the purposes of the Works but does not include Plant. 1.1.9 "Contractor's Risks" means the risks defined in Sub-Clause 21.2. 1-1 22 1.1.10 "Defects Liability Certificate" means the certificate to be issued by the Engineer to the Contractor in accordance with Sub-Clause 15.10. 1.1.11 "Defects Liability Period" means one year following taking over, during which the Contractor is responsible for making good defects and damage in accordance with Clause 15. 1.1.12 "Effective Date" means the date when each of the following conditions has been satisfied: a) The Employer has obtained any necessary approval of the Contract by the relevant authorities in Ethiopia; b) The Employer has obtained the approval by the African Development Bank of the award of the Contract to the Contractor; c) The Contractor has provided the performance security and the advance payment guarantee required to be obtained under the Contract; and d) The Contractor has received the advance payment; and e) The Employer has provided the Letter of Guarantee required under Sub-Clause 6.7. 1.1.13 "Employer" means the Finchaa Sugar Factory of the Government of Ethiopia and its legal successors in title, but not (except with the consent of the Contractor) any assignee of the Employer. 1.1.14 "Employer's Drawings" means all the drawings and information provided by the Employer or the Engineer to the Contractor under the Contract. 1.1.15 "Employer's Risks" means those risks defined in Sub-Clause 21.2. 1-2 23 1.1.16 "Engineer" means Tate and Lyle Technical Services, a Division of BOOKER TATE, Limited United Kingdom, to act as Engineer for the purposes of the Contract or such other person as may be appointed by the Employer to act as the Engineer for the purpose of the Contract. 1.1.17 "Engineer's Representative" means any representative of the Engineer appointed from time to time by the Engineer under Sub-Clause 2.3. 1.1.18 "Final Certificate of Payment", means the certificate to be issued by the Engineer to the Employer in accordance with Sub-Clause 18.8. 1.1.19 "Force Majeure" has the meaning assigned to it under Sub-Clause 22.1. 1.1.20 "Foreign Currency" means any currency other than the Ethiopian Birr. 1.1.21 "Gross Misconduct" means any act or omission of the Contractor in violation of the most elementary rules of diligence which a conscientious contractor in the same position and under the same circumstances would have followed. 1.1.22 "Master Schedule" means the schedule for completion of the Works set forth in Annex 19 of the Specification. 1.1.23 "Performance Security" means the security to be provided by the Contractor in accordance with Sub-Clause 5.4 for the due performance of the Contract. 1.1.24 "Plant" means machinery, apparatus, materials and all things to be provided under the Contract for incorporation in the Works. 1.1.25 "Risk Transfer Date" means the date when the risk of loss of or damage to the Works passes from the Contractor to the Employer in accordance with Sub-Clause 23.2. 1-3 24 1.1.26 Schedule of Prices" means the completed and priced Schedule of Prices, or any part or individual schedule thereof, forming a part of the Contract documents. 1.1.27 "Section" means a part of the Works specifically identified as such in the Contract. 1.1.28 "Site" means the place or places, provided or made available by the Employer where work is to be done by the Contractor or to which Plant is to be delivered, together with so much of the area surrounding the same as the Contractor shall with the consent of the Employer use in connection with the Works otherwise than merely for the purposes of access. 1.1.29 "Specification" means that specification of the Works included in the Contract as Annexes 1-20 and any modification thereof made under Clause 16 or submitted by the Contractor and approved by the Engineer. 1.1.30 "Subcontractor" means any person (other than the Contractor) named in the Contract for any part of the Works, or any person to whom any part of the Contract has been subcontracted and the Subcontractor's legal successors in title but not any assignee of the Subcontractor. 1.1.31 "Taking-Over Certificate" means the certificate to be given by the Engineer to the Contractor in accordance with Clause 12. 1.1.32 "Tests on Completion" means the tests specified in Annex 11 of the Contract, or otherwise agreed by the Engineer and the Contractor to be performed before the Works or any Section or part thereof are taken over by the Employer. 1-4 25 1.1.33 "Time for Completion" means the time stated in the Contract for completing the Works or any Section thereof and passing the Tests on Completion calculated from the Commencement Date unless extended in accordance with Clause 10. 1.1.34 "Variation Order" means any written order, identified as such, issued to the Contractor by the Engineer under Sub-Clause 16.1. 1.1.35 "Works" means all Plant to be provided and work to be done by the Contractor under the Contract. 1.2 Headings and Titles The headings and titles in these Conditions shall not be deemed part thereof or be taken into consideration in the interpretation or construction of the Contract. 1.3 Interpretation Words importing persons or parties shall include firms and corporations and any organization having legal capacity. Words importing the singular only also include the plural and vice versa where the context requires. 1.4 Written Communications Wherever in the Contract provision is made for a communication to be "written" or "in writing" this means any hand-written, type-written or printed communication, including telex, cable and facsimile transmission. 1.5 Notices, Consents and Approvals Wherever in the Contract provision is made for the giving of notice, consent, certificate, determination or approval by any person, such consent or approval shall not be unreasonably withheld or delayed. Unless otherwise specified, such notice, consent or approval shall be in writing and the work "notify" shall be construed accordingly. 1-5 26 1.6 Costs, Overhead Charges and Profits Whenever by these Conditions the Contractor is entitled to be paid cost, such cost shall be properly incurred and shall include any overhead charges properly allocable thereto but not profit unless so stated. Any profit entitlement shall be added to cost as provided for in the Contract. 1.7 Periods In these Conditions "day" means calendar day, "month" means calendar month, and "year" means 365 days, all pursuant to the Gregorian Calendar. 1.8 References References to clauses are references to the specified Clause or Sub-Clause of these Conditions of Contract. 2. ENGINEER AND ENGINEER'S REPRESENTATIVE 2.1 Engineer's Duties and Authority (a) The Engineer shall carry out the duties specified in the Contract. (b) The Engineer may exercise the authority specified in or necessarily to be implied from the Contract. However he is required to obtain the specific approval of the Employer before exercising the authority as indicated below: 1. Approval of subletting any part of the works under Sub-Clause 3.1. 2. Certification of additional cost under Sub-Clause 5.9. 3. Determination of extension of time under Sub-Clause 10.3. 4. Issuing a variation order under Clause 16. except: i) in an emergency situation as reasonably determined by the Engineer. ii) where the variation order does not exceed US$30,000 or its Birr Equivalent at prevailing rate at the National Bank of Ethiopia. 1-6 27 5. Fixing rates or prices under Sub-Clause 16.4. 6. Certifying additional payment under Sub-Clause 23.5. 7. Issuing of Taking-Over Certificate under Clause 12. The Employer will deliver to the Contractor a copy of any approval or other communication issued to the Engineer pursuant to this Sub-Clause 2.1 simultaneously with its delivery of such approval or communication to the Engineer. 2.2 Engineer's Decisions and Instructions The Contractor shall proceed with decisions and instructions given by the Engineer in writing in accordance with these Conditions. The Engineer shall have no authority to relieve the Contractor of any of his obligations under the Contract. 2.3 Engineer's Representative The Engineer's Representative shall be appointed by and be responsible to the Engineer and shall carry out such duties and exercise such authority as may be delegated to him by the Engineer in Sub-Clause 2.4. 2.4 Engineer's Power to Delegate The Engineer may from time to time delegate to the Engineer's Representative any of the duties vested in the Engineer and may at any time revoke such delegation. Any such delegation or revocation shall be in writing and shall not take effect until a copy thereof has been delivered to the Contractor and the Employer. Any decision, instruction or approval given by the Engineer's Representative to the Contractor in accordance with such delegation shall have the same effect as though it had been given by the Engineer. However: (a) any failure of the Engineer's Representative to disapprove any work, plant or workmanships shall not prejudice the right of the Engineer thereafter to disapprove such work plant or workmanships and to give instruction for rectification thereof; (b) if the Contractor questions any decision of the Engineer's Representative, he may refer the matter to the Engineer, who shall thereupon confirm, reverse or vary such decision. 1-7 28 2.5 Confirmation in Writing The Contractor may require the Engineer to confirm in writing any decision or instruction of the Engineer. The Contractor shall notify the Engineer of such requirements without delay. Such a decision or instruction shall be effective until written confirmation thereof has been received by the Contractor. 2.6 Replacement of Engineer The Employer shall have the right to replace the Engineer and appoint a person to act in replacement who is independent and impartial. Furthermore, the Employer shall give the Contractor thirty (30) days/ notice of any replacement of the Engineer, to allow the Contractor to work towards an orderly transition between the then-current Engineer and the replacement Engineer. Any delay in the construction of the Works which is caused by the replacement of the Engineer shall entitle the Contractor to an extension of the Time for Completion, as provided in Sub-Clause 10.3e. 3. ASSIGNMENT, SUB-CONTRACTING AND VENDORS 3.1 Assignment of Contract The Contractor shall not, without the prior consent of the Employer (which consent, notwithstanding the provisions of Sub-Clause 1.5, shall be at the sole discretion of the Employer), assign the Contract or any part thereof, or any benefit or interest therein or there under, otherwise than by: (a) a charge in favor of the Contractor's bankers or financial sources for any commitments due or to become due under the Contract, or (b) assignment to the Contractor's insurers (in cases where the insurers have discharged the Contractor's loss or liability) of the Contractor's right to obtain relief against any other party liable. 3.2 Subcontracting The Contractor shall not subcontract the whole of the Works. Except where otherwise provided by the Contract, the Contractor shall not subcontract any part of the Works without the prior consent of the Employer. 1-8 29 Provided that the Contractor shall not be required to obtain such consent for: (a) the provision of local labor and personnel, (b) the purchase of materials which are in accordance with the standards specified in the Contract, or (c) the sub-contracting of the Civil Works to the Blue Nile Construction Enterprise and the Erection Works to DEMECH. The Contractor shall be responsible for the acts, defaults and neglects of any Subcontractor, his agents or employees as fully as if they were the acts, defaults or neglects of the Contractor, his agents or employees. 3.3 Vendors. The Contractor shall not deviate from the Vendor List annexed to the Contract for purchasing the plant. 4. CONTRACT DOCUMENTS 4.1 Language The language in which the Contract documents and all documents issued pursuant thereto shall be drawn up is English. The day to day communication during the execution of the Contract shall be in English. 4.2 Priority of Contract Documents. Unless otherwise provided in the Contract the priority of the Contract documents shall be as follows: 1. Contact Agreement 2. The Conditions of Contract 3. The Specification Annexes 1-20 4. Annexes A-E associated with the Contract Agreement 5. The Schedules of Prices 6. Any other documents forming part of the Contract 4.3 Documents Mutually Explanatory. Subject to Sub-Clause 4.2, the Contract documents shall be taken as mutually explanatory. Any ambiguities or discrepancies shall be resolved by the Engineer, who shall then instruct the Contractor thereon. 1-9 30 If the Contractor considers that compliance with such instructions will result in any cost which the Contractor could not reasonably have anticipated, he shall forthwith inform the Engineer with full supporting details. The Engineer shall then, if he approves, certify such costs as may be reasonable, together with profit where appropriate, which shall be added to the Contract Price. If on the other hand compliance with such instructions results in lower costs for the Contractor than he had reason to anticipate, the Engineer shall certify a deduction from the Contract Price allowing for profit where appropriate. 4.4 Contractor's Drawings The Contractor shall submit to the Engineer for his approval, (a) within the time given in the Contract such drawings, samples, models or information as may be called for therein, and in the numbers therein required, and (b) during the progress of the Works, such drawings of the general arrangement and details of the Works as specified in the Contract or as the Engineer may require. The Engineer shall signify his approval or disapproval thereof. If he fails to do so within the time given in the Contract or if no time limit is specified, within 28 days of receipt, they shall be deemed to be approved. Approved drawings, samples and models shall be signed or otherwise identified by the Engineer. The Contractor shall supply additional copies of approved drawings as reasonably required by the Engineer. The Contractor shall obtain the approval of the appropriate Ethiopian Government Authorities for all Drawings as stated in Annex 13. 4.5 Consequences of Disapproval of Contractor's Drawings Any Contractor's Drawings which the Engineer disapproves, shall be forthwith modified to meet the requirements of the Engineer and shall be resubmitted. 1-10 31 4.6 Approved Contractor's Drawings Approved Contractor's Drawings shall not be departed from except in accordance with the Engineer's written instructions. 4.7 Inspection of Contractor's Drawings The Engineer shall have the right at all reasonable times to inspect, at the Contractor's or Sub-contractor's premises, all Contractor's Drawings of any part of the Works. 4.8 Erection Information The Contractor shall provide, within the times stated in the Contract or in the Master Schedule, drawings showing how the Plant is to be affixed and any other information required for: (a) preparing suitable foundations or other means of support, and (b) providing suitable access on the Site for the Plant and any necessary equipment to the place where the Plant is to be erected, and (c) making necessary connections to the Plant. 4.9 Operation and Maintenance Manuals Before the Works are taken over in accordance with Sub-Clause 12.1 the Contractor shall supply operation and maintenance manuals together with drawings of the Works as built. These shall be in such detail as will enable the Employer to operate, maintain, adjust and repair all parts of the Works. The manuals and drawings shall be in the English language, and in such form and numbers as reasonably required by the Engineer. Unless otherwise agreed, the Works shall not be considered to be completed for the purposes of Taking Over until such manuals and drawings have been supplied to the Employer. 4.10 Employer's Use of Contractor's Drawings The Contractor's Drawings may be used by the Employer for no other purpose than completing, operating, maintaining, adjusting and repairing the Works. 1-11 32 4.11 Contractor's Use of Employer's Drawings The Employer's Drawings, Specification and other information submitted by the Employer or the Engineer to the Contractor shall remain the property of the Employer. They shall not, without the consent of the Employer, be used, copied or communicated to a third party by the Contractor unless necessary for the purposes of the Contract. 4.12 Manufacturer's Drawings Unless otherwise specified within the Contract, the Contractor shall not be required to disclose to the Employer or the Engineer the Contractor's confidential manufacturing drawings, designs, know-how or manufacturing practices, processes or operations. 4.13 Errors in Contractor's Drawings The Contractor shall be responsible for any errors or omissions in the Contractor's Drawings unless they are due to incorrect Employer's Drawings or other written information supplied by the Employer or the Engineer. Approval by the Engineer of the Contractor's Drawings shall not relieve the Contractor from any responsibility under this Sub-Clause. The Contractor shall bear any costs he may incur as a result of delay in providing Contractor's Drawings and other information or as a result of errors or omissions therein, for which the Contractor is responsible. The Contractor shall at his own cost carry out any alterations or remedial work necessitated by such errors or omissions for which he is responsible and modify the Contractor's Drawings and such other information accordingly. The performance of his obligations under this Clause shall be in full satisfaction of the Contractor's liability under this Clause but shall not relieve him of his liability under Sub-Clause 25.1. 4.14 Errors by the Employer or Engineer The Employer shall be responsible for the Employer's Drawings and for other written information supplied by the Employer or the Engineer and for the details of special work specified by either of them provided, however, that the Contractor shall be responsible for his interpretation of such matters. If such Employer's 1-12 33 Drawings, information or details are incorrect and necessitate alterations of the work, the Employer shall pay the Contractor the cost of the alterations together with profit as certified by the Engineer. 4.15 Disruption of Progress The Contractor shall give notice to the Engineer, with a copy to the Employer, whenever planning or execution of the works is likely to be delayed or disrupted unless any further drawing or instruction is issued by the Engineer within a reasonable time. The notice shall include details of the drawing or instruction required and of why and by when it is required and of any delay or disruption likely to be suffered if it is late. 4.16 Delays and Cost of Delays of Drawings If, by reason of any failure or inability of the Engineer to issue, within a time reasonable in all the circumstances, any drawings or instruction for which notice has been given by the Contractor in accordance with Sub-clause 4.15, and the Contractor suffers delay and/or incurs cost then the Engineer shall, after due consultation with the Employer and the Contractor, determine: (a) any extension of time to which the Contractor is entitled under Clause 10.3 and (b) the amount of such cost shall be added to the contract price, and the Engineer shall notify the Contractor accordingly, with a copy to the Employer. 4.17 Failure by Contractor to Submit Drawings If the failure or inability of the Engineer to issue any drawings or instructions is caused in whole or in part by the failure of the Contractor to submit Drawings or other documents which he is required to submit under the Contract, the Engineer shall take such failure by the Contractor into account when making his determination pursuant to Sub-Clause 4.16. 5. OBLIGATIONS OF THE CONTRACTOR 5.1 General Obligations The Contractor shall in accordance with the Contract, with due care and diligence, design, manufacture, deliver to Site, construct, maintain, erect, test and commission the Plant and carry out 1-13 34 the Works within the Time for Completion. The Contractor shall also provide all necessary Contractor's Equipment, superintendence, labor, training for the employees of the Employer, materials and all necessary facilities therefor. 5.2 Obligation to Provide Items and to Execute Works Except as otherwise provided in the Contract, the Contractor shall take full responsibility, at no additional cost to the Employer to provide all items and execute all tasks which are not specifically mentioned in the Contract, but which are necessary for the proper normal, efficient, safe and stable operation of the Plant. 5.3 Availability of Spare Parts The Contractor shall provide necessary spare parts for at least 15 years from the date of issue of provisional certificate of acceptance subject to conditions to be agreed at the completion of the Contract, and after the lapse of this period, the necessary manufacturing drawings shall be provided to the Employer free of charge. 5.4 Performance Security The Contractor shall provide a Performance Security by a First Class International Bank confirmed by the Commercial Bank of Ethiopia, in favor of the Employer to the amount of 10% (Ten) percent of the Contract Price, within 28 days after the signature of the Contract. Such security shall be in the form annexed to these Conditions, (Annex A). The cost of complying with the requirements of this Clause shall be borne by the Contractor. 5.5 Period of Validity The Performance Security shall be valid until the Contractor has executed, completed and remedied defects in the Works in accordance with the Contract. No claim shall be made against the Performance Security after the issue of the Defects Liability Certificate and the Performance Security shall be returned to the Contractor within 14 days of the issue of the Defects Liability Certificate. 5.6 Claims under Performance Security The Employer shall not make a claim under the Performance Security unless one of the following conditions is satisfied: a) the Contractor is in breach of the Contract and fails to remedy the breach within 30 days after receiving written notice from the 1-14 35 Employer requiring him so to do. The notice shall state the intention to claim under the Performance Security, the amount claimed and the breach relied upon, or b) the Employer and the Contractor have agreed in writing that the amount demanded is payable to the Employer, and the amount has not been paid within 30 days thereafter, or c) the Employer has obtained an award in arbitration under the Contract and the amount awarded has not been paid within 30 days after the award, or d) the Contractor has gone into liquidation or is bankrupt. In every case the Employer shall, when making the claim, send a copy to the Contractor. 5.7 Site Data The Employer shall have made available to the Contractor, before the submission by the Contractor of the Tender, such data on hydrological meteorological and sub-surface conditions as have been obtained by or on behalf of the Employer from investigations undertaken relevant to the Works but the Contractor shall be responsible for his own interpretation thereof. The Contractor shall be deemed to have inspected and examined the Site and its surroundings and information available in connection therewith and to have satisfied himself (so far as is practicable, having regard to considerations of cost and time) before submitting his Tender, as to: a) the form and nature thereof, including the sub-surface conditions, b) the hydrological and climatic conditions, c) the extent and nature of work and materials necessary for the execution and completion of the Works and the remedying of any defects therein, d) the facilities available at the ports for unloading cargo and the time taken for such operation. e) the means of access to the Site and the accommodation he may require and, in general, shall be deemed to have obtained all necessary information, subject as above mentioned, as to 1-15 36 risks, contingencies and all other circumstances which may influence or affect his Tender. The Contractor shall be deemed to have based his Tender on the data made available by the Employer and on his own inspection and examination, all as aforementioned. 5.8 Other Local Conditions The Contractor shall be deemed to have satisfied himself on and taken account of: a) all the conditions and circumstances affecting the Contract Price, b) the possibility of carrying out the Works as described in the Contract, c) the general circumstances at the Site, and d) the general labor position at the Site. The Contractor shall not be responsible for the accuracy of information given in writing by the Employer or the Engineer but shall be responsible for his interpretation of information received from whatever source. 5.9 Physical Obstructions and Conditions If during the execution of the Works on site the Contractor encounters physical obstructions or conditions of the kind stipulated in sub-clause 10.3C which could not reasonably have been foreseen he shall be entitled to recover the additional cost incurred in consequence provided that the Contractor gives written notice to the Engineer. The Engineer shall certify and there shall be added to the Contract Price the additional cost of: a) complying with any instruction which the Engineer, after due consultation with the Employer and the Contractor, issues to the Contractor in connection therewith, and b) any necessary measures which the Contractor may take in the absence of specific instructions from the Engineer. 5.10 Work to be in Accordance with Contract Unless it is legally or physically impossible, the Contractor shall execute and complete the Works and remedy any defects therein in strict accordance with the Contract to the satisfaction of the Engineer. The Contractor shall comply with and 1-16 37 adhere to the Engineer's instructions on any matter, whether mentioned in the Contract or not, touching or concerning the Works. The Contractor shall take instructions only from the Engineer or, subject to the provisions of Clause 2, from the Engineer's Representative. 5.11 Master Schedule to be Furnished a) The Contractor shall within 30 days from the Effective Date submit a Master Schedule for the approval of the Engineer. The Master Schedule shall contain the following: 1) the order in which the Contractor proposes to carry out the Works (including design, manufacture, delivery to Site, erection, testing and commissioning), 2) the times when submission and approval of the Contractor's Drawings are required. 3) the times by which the Contractor requires the Employer or Engineer: (i) to furnish any Employer's Drawings, ii) to provide access to the Site, and iii) to have obtained any import licenses, consents, wayleaves and approvals necessary for the purpose of the Works. Such Master Schedule shall be based on the provisional Master Schedule issued by the Contractor and incorporated in the Contract as Annex 19. b) The Engineer shall approve the Master Schedule within 30 days of receipt. c) Approval of the Master Schedule (or any modification thereof with the Engineer's consent) shall not relieve the Contractor of any of his obligations under the Contract. d) After approval of the Master Schedule the Contractor shall adhere to the order of the procedure stated therein unless he obtains the written permission of the Engineer to vary such order. The Contractor shall whenever 1-17 38 required by the Engineer also provide in writing a general description of the arrangements and methods which the Contractor proposes to adopt for the execution of the Works. e) No alteration of the Master Schedule shall be made without the approval of the Engineer. f) If at any time it should appear to the Engineer that the actual progress of the Works does not conform to the Master Schedule, the Contractor shall produce, at the request of the Engineer, a revised Master Schedule showing the modifications to the agreed Master Schedule necessary to ensure completion of the Works within the Time for Completion. 5.12 Cash Flow Estimate and Contract Administration Procedures Within 30 days of the Effective Date, the Contractor shall provide to the Engineer: a) a detailed cash flow estimate in quarterly periods, of all payments to which the Contractor will be entitled under the Contract and the Contractor shall subsequently supply revised cash flow estimates at quarterly intervals. b) the Contract Administration Procedures Manual as specified in Annex 20. 5.13 Contractor's Superintendence The Contractor shall provide all necessary superintendence during the execution of the Works and as long thereafter as necessary for the proper fulfilling of the Contractor's obligations under the Contract. The Contractor, or his competent and authorized representatives, shall be fluent in the English language, and their names shall be communicated to the Engineer within 30 days after the Effective Date. Such authorized representative shall receive, on behalf of the Contractor, instructions from the Engineer or, subject to the provisions of Clause 2, the Engineer's Representative. 5.14 Contractor's Employees The Contractor shall provide on the Site in connection with the execution and completion of the Works and the remedying of any defects therein: 1-18 39 a) only such technical assistants as are skilled and experienced in their respective callings and such foremen and leading hands as are competent to give proper superintendence of the Works, and b) such skilled, semi-skilled and unskilled labor as is necessary for the proper and timely fulfilling of the Contractor's obligations under the Contract. 5.15 Objection to Contractor's Employees The Engineer shall be at liberty to object to and require the Contractor to remove forthwith from the Works any person provided by the Contractor who, in the opinion of the Engineer, misconducts himself, or is incompetent or negligent in the proper performance of his duties, and such person shall not be again allowed upon the Works without the consent of the Engineer. Any person so removed from the Works shall be replaced as soon as possible. 5.16 Setting Out The Contractor shall be responsible for: a) the accurate setting-out of the Works in relation to the original points, lines and levels of reference given by the Engineer in writing, b) the correctness, subject as above mentioned, of the position, levels, dimensions and alignment of all parts of the Works, and c) the provision of all necessary instruments, appliances and labor in connection with the foregoing responsibilities. If, at any time during the execution of the Works, any error appears in the position, levels, dimensions or alignment of any part of the Works, the Contractor, on being required so to do by the Engineer, shall, at his own cost, rectify such error to the satisfaction of the Engineer, unless such error is based on incorrect data supplied in writing by the Engineer, in which case the Engineer shall determine an addition to the Contract Price per Sub-clause 4.14, and shall notify the Contractor accordingly, with a copy to the Employer. 1-19 40 The checking of any setting-out of any line or level by the Engineer shall not in any way relieve the Contractor of his responsibility for the accuracy thereof and the Contractor shall carefully protect and preserve all bench-marks, sight-rails, pegs and other things used in setting-out the Works. 5.17 Contractor's Equipment a) All Contractor's equipment imported under the Contract shall forthwith be sent to the Site and shall not be used except for the execution of the Works. b) All Contractor's Equipment provided by the Contractor shall, when brought on to the Site, be deemed to be exclusively intended for the execution of the Works and the Contractor shall not remove the same or any part thereof, except for the purpose of moving it from one part of the Site to another or upon completion of the Works, without the consent in writing of the Engineer. c) The Contractor shall be liable for loss of or damage to any of the Contractor's Equipment which may happen otherwise than through the default of the Employer. 5.18 Safety, Security and Protection of the Environment The Contractor shall, throughout the execution and completion of the Works and the remedying of any defects therein: a) have full regard for the safety of all persons entitled to be upon the Site and keep the Site (so far as the same is under his control) and the Works (so far as the same are not completed or occupied by the Employer) in an orderly state appropriate to the avoidance of danger to such persons, and b) provide and maintain at his own cost all lights, guards, fencing, warning signs and watching, when and where necessary or required by the Engineer or by any duly constituted authority, for the protection of the Works or for the safety and convenience of the public or others, and 1-20 41 c) take all reasonable steps to protect the environment on and off the Site and to avoid damage or nuisance to persons or to property of the public or others resulting from pollution, noise or other causes arising as a consequence of his methods of operation. 5.19 Clearance of Site The Contractor shall from time to time during the progress of the Works clear away and remove all surplus materials and rubbish. On completion of the works the Contractor shall remove all Contractor's Equipment and leave the whole of the Site and the Works clean and in a workmanlike condition, to the satisfaction of the Engineer. Provided that the Contractor shall be entitled to retain on Site, until the end of the Defects Liability Period, such material, Contractor's Equipment and Temporary Works as are required by him and consented to by the Engineer for the purpose of fulfilling his obligations during the Defects Liability Period. 5.20 Opportunities for Other Persons and Contractors a) The Contractor shall, in accordance with the requirements of the Engineer, afford all reasonable opportunities to persons for carrying out their work, to any other contractors employed by the Employer and to the workmen of the employer and of any other persons who may be employed in the execution on or near the Site of any work not included in the Contract or of any contract which the Employer may enter into in connection with or ancillary to the Works. If, however, the Contractor shall, on the written request of the Engineer or the Engineer's Representative, make available to any such other person, any road or ways for the maintenance of which the Contractor is responsible, or permit the use by any such of the Contractor's Equipment on the Site, or provide any other service of whatsoever nature, the Employer shall pay to the Contractor accordingly. The amount to be paid shall be certified by the Engineer and added to the Contract Price. b) In so far as the execution of the Works requires the Contractor to work in conjunction with any other contractor employed by the Employer, such work shall be carried out as described in the Specification or in such manner and at such times as the Engineer shall reasonably instruct in the interests of the timely completion of all works by all 1-21 42 contractors on the Site provided the same shall not obstruct or disturb the progress of the Works. 5.21 Authority for Access No persons other than the employees of the Contractor and his Subcontractors shall be allowed on the Site except with the consent of the Engineer. 5.22 Information for Import Permits and Licenses The Contractor shall submit to the Employer in good time such details of all Plant and Contractor's Equipment as will enable the Employer to obtain all necessary import permits or licenses. 5.23 Compliance with Laws The Contractor shall, in all matters arising in the performance of the Contract, conform in all respects with the provisions of any law or regulation of any duly constituted authority that shall be applicable to the Works, and shall keep the Employer indemnified against all penalties and liability of every kind for breach of any such law or regulation. 5.24 Patent Rights The Contractor shall indemnify the Employer against all claims of infringement of any patent, registered design, copyright, trade mark or trade name or other intellectual property right provided that all of the following conditions are satisfied: (a) The Claim or proceeding arise out of the design, construction, manufacture or use of the Works or any Plant supplied by the Contractor. (b) The right was protected at the date of the Contract in the Contractor's country or the country in which the Plant is to be manufactured or erected. (c) The infringement or allegation of infringement was not caused by any use of the Works otherwise than for the purpose indicated by or reasonably to be inferred from the Specification. (d) The infringement or allegation of infringement was not caused by the use of any Plant in association or combination with any plant not supplied by the Contractor, unless such association or combination was disclosed to the Contractor prior to the date of the Tender. 1-22 43 (e) The infringement or allegation of infringement was not caused by the Contractor following the design or instructions of the Employer or the Engineer. 5.25 Claims in respect of Patent Rights The Contractor shall be promptly notified of any claim under this Clause made against the Employer. The Contractor may at his own cost conduct negotiations for the settlement of such claim, and any litigation that may arise therefrom. The Employer shall not make any admission which might be prejudicial to the Contractor unless the Contractor has failed to take over the conduct of the negotiations or litigation within a reasonable time after having been so requested. The Contractor may not, however, conduct such negotiations or litigation before he has given the Employer such reasonable security as the Employer may require. The security shall be for an amount which is an assessment of the compensation, damages, expenses and costs for which the Employer may become liable and which are the subject of the indemnity under Sub-Clause 5.24. The Employer shall, at the request of the Contractor, provide all available assistance for the purpose of contesting any such claim or action, and shall be repaid all reasonable costs incurred in doing so. 5.26 Employer's Warranty for Patent Rights If any matter for which the Contractor is not liable to indemnify the Employer under Sub-Clause 5.24 causes the infringement or allegation of infringement by the Contractor of any patent, registered design, trade mark, copyright or other intellectual property right, the Employer shall indemnify the Contractor against all claims, damages, expenses and costs which the Contractor may incur in relation thereto. The provisions of Sub-Clause 5.24 shall apply mutatis mutandis. 5.27 Royalties The Contractor shall pay all tonnage and other royalties, rent and other payments or compensation, if any, for obtaining stone, sand, gravel, clay or other materials required for the Works. 5.28 Antiquities All fossils, coins, articles of value or antiquity and structures and other remains or things of geological or archaeological interest discovered on the Site of the Works shall as between the Employer 1-23 44 and the Contractor be deemed to be the absolute property of the Employer. The Contractor shall take reasonable precautions to prevent his workmen or any other persons from removing or damaging any such article or thing and shall immediately upon discovery thereof and, before removal, acquaint the Engineer's Representative of such discovery and carry out, at the expense of the Employer, the Engineer's Representative's orders as to the disposal of the same. If, by reason of such instructions, the Contractor suffers delay and/or incurs cost, then the Engineer shall, after due consultation with the Employer and the Contractor determine: a) any extension of time to which the Contractor is entitled under Clause 10 hereof, and b) the amount of such costs, which shall be added to the Contract Price. 5.29 Traffic and Special Loads a) All operations necessary for the execution of the Works shall, so far as compliance with the requirements of the Contract permits, be carried on so as not to interfere unnecessarily or improperly with the convenience of the public, or the access to, use and occupation of public or private roads and footpaths to or of properties whether in the possession of the Employer or of any other person. The Contractor shall save harmless and indemnify the Employer in respect of all claims, proceedings, damages, costs, charges and expenses whatsoever arising out of, or in relation to, any such matters in so far as the Contractor is responsible therefor. b) The Contractor shall use every reasonable means to prevent any of the roads or bridges communicating with or on the routes to the Site from being damaged or injured by any traffic of the Contractor or any Sub-Contractor and, in particular, shall select routes, choose and use vehicles and restrict and distribute loads so that any such extraordinary traffic as will inevitably arise from the moving of Plant and Contractor's Equipment from and to the Site shall be limited, as far as reasonably possible, and so that no unnecessary damage or injury may be occasioned to such highways and bridges. 1-24 45 c) Should it be found necessary for the Contractor to move one or more loads of Plant or Contractor's Equipment over part of a highway or a bridge, the moving whereof is likely to damage any such highway or bridge unless special protection or strengthening is carried out, then the Contractor shall before moving the load on to such highway or bridge give notice to the Engineer or Engineer's Representative of the weight and other particulars of the load to be moved and his proposals for protecting or strengthening the said highway or bridge. Unless within 14 days of the receipt of such notice the Engineer shall by counter-notice direct that such protection or strengthening is unnecessary, then the Contractor shall carry out such proposals or any modification thereof that the Engineer shall require and the costs thereof shall be paid by the Employer to the Contractor only if the Contractor could not reasonably have foreseen the same. 6. OBLIGATIONS OF THE EMPLOYER 6.1 Possession of Site a) The Employer shall, promptly provide the Contractor possession and access of so much of the Site as may be required to enable the Contractor to commence and proceed with the execution of the Works in accordance with the Master Schedule and otherwise in accordance with such reasonable proposals of the Contractor as he shall, by written notice to the Engineer, make and the Employer shall, from time to time as the Works proceed, give to the Contractor, possession of such further portions of the Site as may be required to enable the Contractor to proceed with the execution of the Works in accordance with the Master Schedule or with such proposals, as the case may be. b) If the Contractor suffers delay or incurs costs from any failure on the part of the Employer to give possession or access in accordance with the terms of this Clause, the Engineer shall grant an extension of time for the completion of the Works and certify such sum as, in his opinion, shall be fair to cover the cost incurred, which sum shall be paid by the Employer. 1-25 46 6.2 Civil Works on Site Any building, structure, foundation or means of access on the Site to be provided by the Employer shall be in a condition suitable for the reception, movement, installation and maintenance of the Works within the time or times indicated in the Master Schedule. 6.3 Permits and Approvals The Employer shall per the Master Schedule use its best efforts to assist the Contractor to obtain all consents including permits-to-work, wayleaves, and approvals at the expense of the Contractor. The Employer shall assist the Contractor to obtain all import permits or licenses whenever required for any part of the Plant or Works in reasonable time having regard to the time for delivery of the Plant and completion of the Works. 6.4 Information regarding Laws. The Employer shall assist the Contractor in ascertaining the nature and extent of any laws, regulations, orders or by-laws, and customs in the country where the Plant is to be erected, which may affect the Contractor in the performance of his obligations under the Contract. 6.5 Clearance through Customs The Employer shall use its best efforts in assisting the Contractor in obtaining clearance through customs for Contractor's Equipment, materials and other things required for the Works. 6.6 Permits for Re-Export The Employer shall use its best efforts to assist the Contractor in procuring any necessary government consent to the re-export of the Contractor's Equipment by the Contractor upon the removal thereof pursuant to the terms of the Contract. 6.7 Letter of Guarantee of Payment for Arbitration Awards Prior to the Effective Date the Employer shall provide to the Contractor a letter of guarantee issued by a competent authority of the Ethiopian Government which requires the Government to authorize payment of the amount awarded by arbitration in favour of the Contractor against the Employer subject to the award stating that the Employer has improperly drawn upon the Performance 1-26 47 Security, in the event that the Employer does not pay such award within forty five (45) days of the awarding thereof. 6.8 Letter of Credit Within a reasonable time after the Effective Date of the Contract, the Employer shall establish a Letter of Credit in favour of the Contractor. The Letter of Credit shall be irrevocable, divisible and revolving and shall be issued by a US Bank acceptable to the Contractor. The Letter of Credit shall be guaranteed by the African Development Bank's Procedure under its reimbursement guarantee format (ADB II-B). The face value of the Letter of Credit for the first year of its issuance shall be US$ 25,000,000 and thereafter shall reduce to US$ 12,500,000. All costs associated with the Letter of Credit shall be borne by the Contractor. 7. LABOUR 7.1 Engagement of Labour The Contractor shall make his own arrangements for the engagement of all labor and for the transport, housing, feeding and payment thereof. 7.2 Employment of Local Labour The Contractor shall make every effort to and shall employ the maximum number of qualified Ethiopian citizens to carry out the Works. Suitably skilled tradesmen and unskilled labor shall be drawn from the local population where available. 7.3 Importation of Labour If the Contractor shall import qualified staff or artisans the importation and repatriation thereof together with the importation and repatriation of other labor and personnel shall be subject to the relevant laws and regulations in force from time to time and no labor or personnel shall be imported by the Contractor without first obtaining the necessary authorizations from the appropriate authorities. The Contractor shall in his planning take due account of the time required to complete all formalities and to obtain necessary documents. 1-27 48 The Employer shall assist the Contractor in the obtaining of visas, work permits and other authorizations for the Contractor's essential labor and personnel. 7.4 Use of Alcohol and Drugs The Contractor shall not, otherwise than in accordance with the laws and regulations for the time being in force, import, sell, give, barter or otherwise dispose of any alcoholic liquor, or drugs or permit or allow any such importation, sale, gift, barter or disposal by his Sub-Contractors, agents or employees. 7.5 Prohibition of Firearms The Contractor shall not import, buy locally, give, barter or otherwise dispose of to any person any arms or ammunition of any kind or permit or allow the same as aforesaid, except as authorized by appropriate Ethiopian government authorities. 7.6 Preservation of Peace The Contractor shall at all times take all reasonable precautions to prevent any unlawful, riotous or disorderly conduct by or amongst his employees and for the preservation of peace and protection of persons and property in the neighborhood of the Works against the same. 7.7 Working Hours The Contractor shall, in all dealing with labor in his employment have due regard to the hours and conditions of work prescribed by law and to all recognized festivals, days of rest and religious or other customs. No work shall be carried out on the Site outside normal working hours or on the locally recognized days of rest, unless: a) the Contract so provides, or b) the work is unavoidable or necessary for the saving of life or property or for the safety of the Works, in which case the Contractor shall immediately advise the Engineer, or c) the Engineer gives his consent. 1-28 49 7.8 Outbreak of Illness In the event of any outbreak of illness of an epidemic nature, the Contractor shall comply with and carry out such regulations and orders as may be made by the Government, or the local medical or other authorities for the purpose of dealing with and overcoming the same. The costs associated with the outbreak of such illness shall be the responsibility of the Employer. 7.9 Prevention of Disease The Contractor shall take such precautions as necessary to reduce the danger to health and general nuisance occasioned by mosquitos and other animal pests. At the Site, as requisite, the Contractor shall provide his employees with suitable prophylactics for the prevention of disease and take steps to prevent the formation of stagnant pools of water. He shall comply with all regulations of the medical authorities in these respects and shall in particular arrange to spray thoroughly with approved insecticide all buildings, sheds and temporary structures erected on the Site. He shall warn his employees of the existence and danger of health hazards whenever applicable. 7.10 Responsibility for Safety The Contractor shall appoint some person to deal with the safety and protection against accidents of his labor and personnel at the Site. Such person shall be qualified for this work and shall have authority to issue instructions and to institute protective measures to prevent accidents to the satisfaction of the Engineer. The Contractor shall within twenty-four hours of the occurrence of any accident, at the Site or in connection with the execution of the Works, report such accident to the Engineer's Representative. The Contractor shall also report such accident to the competent authority whenever such report is required by law. 7.11 Removal of Temporary Facilities The Contractor shall at his own cost provide, maintain and remove on completion of the Contract, all camps and housing necessary to properly accommodate his personnel and labor, together with all associated services including all necessary water supplies and installations for drinking and other purposes, sanitation, drainage, refuse disposal, fencing and fire-fighting equipment. All buildings and all sheds and temporary structures which the Contractor may erect for his own purposes 1-29 50 shall be erected only on land placed at the Contractor's disposal by the Employer. Such facilities shall in respect of design, situation, layout, water supply, washing and cooking facilities, lighting, sanitary and health arrangements and welfare be appropriate in all respects for their purpose, shall comply with all relevant laws and regulations and be subject to the approval of the Engineer. 7.12 First Aid Facilities The Contractor shall provide, equip and maintain throughout the construction period and so far as may be necessary during the Period of Maintenance, in a position on the Site and approved by the Engineer suitable and sufficient first-aid facilities for the general use of his and Sub-Contractor's personnel and labor. 7.13 Responsibility for Costs Unless specifically provided herein, all costs that may be incurred by the Contractor in giving effect to the provisions of this Clause, shall be deemed to be included in the Contract Price. 7.14 Responsibilities of Sub-Contractors The Contractor shall be responsible for the observance by his Sub-Contractors of the provisions of this Clause. 7.15 Reporting Requirements The Contractor shall, if required by the Engineer, deliver to the Engineer's Representative or at his office a record in detail, in such form and at such intervals as the Engineer may prescribe, showing the supervisory staff and the numbers of the several classes of labor from time to time employed by the Contractor on the Site and such information respecting Contractor's Equipment as the Engineer may require. 7.16 Availability of Facilities to Other Contractors The Contractor shall make available, without charge, to the personnel (designated by the Engineer and not exceeding three in number at any one time) of another contractor employed by the Employer to supervise the erection of mills and caneyard equipment, all such facilities as are to be provided for under this Clause. 1-30 51 7.17 Provision of Information-Labour Laws The Employer shall assist the Contractor in provision of information regarding applicable labor laws as necessary to allow the Contractor to comply with the provisions of Clause 7, including without limitation, the requirements regarding permissible working hours, the dispensation of alcoholic liquor and drugs, prompt handling of the importation and repatriation of foreign labor, and the applicable laws and regulations regarding the construction of accommodations for personnel and labor. 8. MATERIALS, PLANT AND WORKMANSHIP 8.1 Quality of Plant All Plant shall be: a) of the respective kinds described in the Contract and in accordance with the Engineer's instructions, and b) subjected from time to time to such tests as the Engineer may reasonably require at the place of manufacture, fabrication or preparation, or on the Site or at such other place or places as may be specified in the Contract, or at all or any of such places. The Contractor shall use his best endeavors to use materials and products originating in Ethiopia. The Contract shall provide such assistance, labor, electricity, fuels, stores, apparatus and instruments as are normally required for examining, measuring and testing any materials or Plant and shall supply samples of materials, before incorporation in the Works, for testing as may be selected and required by the Engineer. Where the manner of manufacture and execution is not set out in the Contract, the work shall be executed in a proper and workmanlike manner in accordance with recognized good practice. The cost of making any test shall be borne by the Contractor only if such test is clearly intended by or provided for in the Contract 1-31 52 8.2 Certificate of Testing When Plant has passed the tests referred to in this Clause, the Engineer shall furnish to the Contractor a certificate or endorse the Contractor's test certificate to that effect. 8.3 Inspection of Operation The Engineer, and any person authorized by him in writing, shall at all reasonable times have access to the Site and to all workshops and places where materials or Plant are being manufactured, fabricated or prepared for the Works and the Contractor shall afford every facility for and every assistance in obtaining the right to such access. 8.4 Inspection and Testing The Engineer shall be entitled, during manufacture, fabrication or preparation to inspect and test the materials and plant to be supplied under the Contract. If materials or Plant are being manufactured, fabricated or prepared in workshops or places other than those of the Contractor, the Contractor shall obtain permission for the Engineer to carry out such inspection and testing in those workshops or places. Such inspection or testing shall not release the Contractor from any obligation under the Contract. 8.5 Dates for Inspection and Testing The Contractor shall agree with the Engineer on the time and place for the inspection or testing of any materials or plant as provided in the Contract. The Engineer shall give the Contractor not less than 24 hours notice of his intention to carry out the inspection or to attend the tests. If the Engineer, or his duly authorized representative, does not attend on the date agreed, the Contractor may, unless otherwise instructed by the Engineer, proceed with the tests, which shall be deemed to have been made in the presence of the Engineer. The Contractor shall forthwith forward to the Engineer duly certified copies of the test readings. If the Engineer has not attended the tests, he shall accept the said readings as accurate. 1-32 53 8.6 Rejection If, as a result of the inspection, examination or testing referred to in Clause 8, the Engineer decides that any Plant is defective or otherwise not in accordance with the Contract, he may reject such Plant and shall notify the Contractor in writing thereof immediately. The notice shall state the Engineer's objections with reasons. The Engineer shall not reject any Plant for minor defects which do not affect the commercial operation of the Plant. The Contractor shall within reasonable time make good the defect or ensure that any rejected Plant complies with the Contract. If the Engineer requires such Plant to be retested, the tests shall be repeated under the same terms and conditions. All costs incurred by the Employer and certified by the Engineer as the result of the repetition of the tests shall be deducted from the Contract Price. 8.7 Removal of Improper Plant The Engineer shall have authority to issue instructions from time to time, for: a) the removal from the Site, within such time or times as may be specified in the instruction, of any materials or Plant which, in the opinion of the Engineer, are not in accordance with the Contract, b) the substitution of proper and suitable materials or Plant, and c) the removal and proper re-execution, notwithstanding any previous test thereof or interim payment therefor, of any work which, in respect of: (i) materials, Plant or workmanship, or (ii) design by the Contractor or for which he is responsible, is not, in the opinion of the Engineer, in accordance with the Contract. 8.8 Default of Contractor in Compliance In case of default on the part of the Contractor in carrying out such instruction within the time specified therein or, if none, within a reasonable time, the Employer shall be entitled to employ and 1-33 54 pay other persons to carry out the same and all costs consequent thereon or incidental thereto shall, after due consultation with the Employer and the Contractor, be determined by the Engineer and shall be recoverable from the Contractor by the Employer, and may be deducted by the Employer from any moneys due or become due to the Contractor and the Engineer shall notify the Contractor accordingly, with a copy to the Employer. 8.9 Examination of Work Before Covering Up No part of the Works shall be covered up or put out of view without the approval of the Engineer and the Contractor shall afford full opportunity for the Engineer to examine and measure any such part of the Works which is about to be covered up or put out of view and to examine foundations before any part of the Works is placed thereon. The Contractor shall give due notice to the Engineer whenever any such assembly, work or foundation is or are ready or about to be ready for examination and the Engineer shall, without unreasonable delay, unless he considers it unnecessary and advises the Contractor accordingly, attend for the purpose of examining and measuring such assembly or work or of examining such foundations. 8.10 Uncovering & Making Openings The Contractor shall uncover any part of the Works or make openings in or through the same as the Engineer may from time to time direct and shall reinstate and make good such part to the satisfaction of the Engineer. If any such part has been covered up or put out of view after compliance with the requirement of the preceding Sub-Clause and is found to be executed in accordance with the Contract, the Engineer shall, after due consultation with the Employer and the Contractor, determine the amount of the Contractor's costs in respect of such of uncovering, making openings in or through, reinstating and making good the same, which shall be added to the Contract Price, and shall notify the Contractor accordingly, with a copy to the Employer. In any other case all costs shall be borne by the Contractor. 8.11 Plant - Free Issue Where the Employer is providing without charge to the Contractor (Free Issue) Plant for incorporation in the Works, such Plant shall remain the property of the Employer. The Contractor shall maintain such plant in good order and condition and shall 1-34 55 take full responsibility for the care thereof. Waste or loss of such Plant arising from bad workmanship or from the neglect of the Contractor shall be made good at the expense of the Contractor. 8.12 Permission to Deliver The Contractor shall apply in writing to the Engineer for permission to deliver any Plant or Contractor's Equipment to the Site. No Plant or Contractor's Equipment may be delivered to the Site without the Engineer's written permission. Authorization for shipment under Annex C is deemed as permission to deliver such Plant and Equipment. The Contractor shall be responsible for the reception on Site of the Plant and Contractor's Equipment. 8.13 Warranty a) The Contractor warrants that the Plant supplied under the Contract are in accordance with the specification, new, unused, of the most recent or current models and incorporate all recent improvements in design and materials. The Contractor further warrants that all Plant supplied under this Contract shall have no defect arising from design, materials or workmanship or from any act or omission of the Contractor that may develop under normal use of the supplied Plant in the conditions prevailing at the site of Finchaa Sugar Factor. b) This Warranty shall remain valid for 12 months after Taking-over Certificate is issued for the Plant or, any portion thereof as the case may be. c) The Employer shall promptly notify the Contractor in writing of any claims arising under this Warranty. d) Upon receipt of such notice the Contractor shall, with all reasonable speed, repair or replace the defective plant or parts thereof, without costs to the Employer. 1-35 56 e) If the Contractor, having been notified, fails to remedy the defect(s) within a reasonable period, the Employer may proceed to take such remedial action as may be necessary, at the Contractor's risk and expense and without prejudice to any other rights which the Employer may have against the Contractor under the Contract. 9. SUSPENSION OF WORKS, DELIVERY OR ERECTION 9.1 Order to Suspend The Engineer may at any time instruct the Contractor to: a) suspend progress of the Works, or b) suspend delivery of Plant or Contractor's Equipment which is ready for delivery to the Site at the time for delivery specified in the Master Schedule, or if no time is specified, at the time appropriate for it to be delivered, or c) suspend the erection of Plant which has been delivered to the Site. When the Contractor is prevented from delivering or erecting Plant in accordance the Master Schedule the Engineer shall be deemed to have instructed a suspension except when such prevention is caused by the Contractor's default. The Contractor shall during suspension protect and secure the Works or Plant affected at the Contractor's works or elsewhere or at the Site, as the case may be, against any deterioration, loss or damage. 9.2 Cost of Suspension The additional cost incurred by the Contractor in protecting, securing and insuring the Works or Plant and in following the Engineer's instructions under Sub-Clause 9.1 and in resumption of the work, shall be added to the Contract Price. 9.3 Payment in Event of Suspension The Contractor shall be entitled to payment for Plant which has not been delivered to Site if the work on Plant or delivery of Plant has been suspended for more than 30 days. After 30 days of 1-36 57 suspension, the Contractor shall be entitled to payment of the value of such Plant as at the date of suspension. A certificate of payment shall be issued on condition that: a) the Contractor has marked the Plant as the Employer's property in accordance with the Engineer's instructions, and b) the suspension is not due to the Contractor's default. 9.4 Prolonged Suspension If suspension of the Works under Sub-Clause 9.1 has continued for more than 90 days, and the suspension is not due to the Contractor's default, the Contractor may by notice to the Engineer require permission to proceed within 30 days. If permission is not granted within that time, the Contractor may treat the suspension as an omission under Clause 16 of the Section it affects, or if the suspension affects the whole of the Works, terminate the Contract and the provisions of Clause 27 shall apply. 9.5 Resumption of Work If the Contractor chooses not to treat prolonged suspension as an omission or termination under Sub-Clause 9.4, the Employer shall upon the request of the Contractor, take over the responsibility for protection, storage, security and insurance of the suspended Works and the risk of loss or damage thereto shall thereupon pass to the Employer. After receipt of permission or an order to proceed, the Contractor shall, after due notice to the Engineer, examine the Works and the Plant affected by the suspension. The Contractor shall make good any deterioration or defect in or loss of the Works or Plant that may have occurred during the suspension. The cost properly incurred by the Contractor which would not have been incurred but for the suspension shall be added to the Contract Price. 1-37 58 The Contractor shall not be entitled to payment for costs incurred in making good any deterioration, defect or loss caused by faulty workmanship or materials or by the Contractor's failure to take the measures specified in Sub-Clause 9.1. If the Employer has taken over risk and responsibility for the suspended Works under this Sub-Clause, risk and responsibility shall revert to the Contractor 14 days after receipt of the permission or order to proceed. 10. COMMENCEMENT AND COMPLETION OF WORKS 10.1 Commencement of Works The Contractor shall commence the Works on the Effective Date. Thereafter, the Contractor shall proceed with the Works with due expedition and without delay. 10.2 Time for Completion The Works shall be completed and shall have passed the Tests on Completion within 28 months from the Commencement Date as extended, to the extent necessary, pursuant to Sub-Clause 10.3. 10.3 Extension of Time for Completion The Contractor may claim an extension of the Time for Completion if he is or will be delayed in completing the Works by any of the following causes: a) extra or additional work ordered in writing under Clause 16, b) exceptional adverse weather conditions, c) physical obstructions or conditions which could not reasonably have been foreseen by the Contractor, d) Employer's or Engineer's instructions, otherwise than by reason of the Contractor's default, e) the failure of the Employer to fulfill any of his obligations under the Contract, f) delay by any other contractor engaged by the Employer, g) any suspension of the Works under Clause 9, except when due to the Contractor's default, h) any industrial dispute, i) the Employer's Risks, j) Force Majeure, 1-38 59 k) any impediment or prevention by the Employer not already mentioned in Sub-Clause 10.3, l) Any delay resulting from loss, destruction or theft of plant/equipment and/or Contractor's plant/equipment, from time of shipment to time of arrival at Site and while stored at site, such theft or pilferage being the subject of an insurance claim. The Contractor shall give to the Engineer notice of this intention to make a claim for an extension of time within 14 days of the circumstances for such a claim becoming known to the Contractor. The notice shall be followed as soon as possible by the claim with full supporting details. The Engineer shall, after due consultation with the Employer and the Contractor, grant the Contractor from time to time, either prospectively or retrospectively, such extension of Time for Completion as may be justified. The Engineer shall notify the Employer and the Contractor accordingly. The Contractor shall be entitled to such extension whether the delay occurs before or after the Time for Completion. Where an extension of time has been granted under Sub-Clause 10.3, the additional cost of maintaining the Performance Security in place must be borne by the Employer, and the period and value of Performance Security for such extended time must be subject to mutual agreement between the Employer and Contractor. 10.4 Rate of Progress If for any reason, which does not entitle the Contractor to an extension of time, the rate of progress of the Works or any Section is at any time, in the opinion of the Engineer, too slow to comply with the Time for Completion, the Engineer shall so notify the Contractor who shall thereupon take such steps as are necessary, subject to the consent of the Engineer, to expedite progress so as to comply with the Time for Completion. The Contractor shall not be entitled to any additional payment for taking such steps. If, as a result of any notice given by the Engineer under this Clause, 1-39 60 the Contractor considers that it is necessary to do any work at night or on locally recognized holiday or days of rest, he shall be entitled to seek the consent of the Engineer (of which consent cannot be unreasonably refused) so to do. Provided that if any steps, taken by the Contractor in meeting his obligations under this Clause, involve the Employer in additional supervision costs, such costs shall, after due consultation with the Employer and the Contractor, be determined by the Engineer and shall be recoverable from the Contractor by the Employer, and may be deducted by the Employer from any monies due or to become due to the Contractor and the Engineer shall notify the Contractor accordingly, with a copy to the Employer. 10.5 Delay in Completion and Liquidated Damages If the Contractor fails to complete the Works within the Time for Completion, the Employer shall be entitled to a reduction in the Contract Price as Liquidated Damages. The reduction shall be 0.07% (seven hundredths of one percent) per day of the Contract Price which is attributable to such part of the works as cannot in consequence of the failure be put to the intended use. The reduction shall be computed for each day between the Time for Completion and the actual date of completion. If, before the completion of the whole of the works any part or section of the Works has been certified by the Engineer as completed and occupied or used by the Employer, the liquidated damages for delay shall, for any period of delay after such certificate and in the absence of alternative provisions in the Contract be reduced in the proportion which the value of the part or section so certified bears to the value of the whole of the works. The reduction shall in no case exceed five (5) percent of the Contract Price. Except as provided in Sub-Clause 10.7, such reduction shall be to the exclusion of any other remedy of the Employer in respect of the Contractor's failure to complete within the Time for Completion. 1-40 61 10.6 Bonus for Early Completion If the Contractor completes the Works in less time than that established in the Time for Completion, the Contractor shall be entitled to a bonus as specified in Annex E. 10.7 Prolonged Delay If the Employer has become entitled to the maximum reduction under Sub-Clause 10.5 for any part of the Works, he may by notice require the Contractor to complete. Such notice shall fix a final time for completion which shall be reasonable. If the Contractor fails to complete within such time, and this is not due to a cause for which the Employer or some other contractor employed by the Employer is responsible, the Employer may by further notice to the Contractor either: a) require the Contractor to complete, or b) may himself complete at the Contractor's cost provided that he does so in a reasonable manner, or c) terminate the Contract. If the Employer terminates the Contract, he shall be entitled to recover from the Contractor any loss he has suffered up to the maximum amount stated in the Contract. If no maximum amount is stated, the Employer shall not be entitled to recover more than that part of the Contract Price which is attributable to that part of the Works which cannot by reason of the Contractor's failure be put to the intended use. The Employer shall give credit for the value of any part of the Works which he retains. 11. TESTS ON COMPLETION 11.1 Notice of Tests The Contractor shall give to the Engineer 21 days' notice of the date after which he will be ready to make the Tests on Completion. Unless otherwise agreed, the Tests shall take place within 10 days after the said date on such day or days as the Engineer shall notify the Contractor. 11.2 Time for Tests If the Engineer fails to appoint a time within 21 days after having been asked to do so, or does not attend at the time and place appointed, the 1-41 62 Contractor shall be entitled to proceed with the Tests in his absence. The Tests shall then be deemed to have been made in the presence of the Engineer and the results of the Tests shall be accepted as accurate. 11.3 Delayed Tests If the Tests are being unduly delayed by the Contractor the Engineer may by notice require the Contractor to make the Tests within 10 days after the receipt of such notice. The Contractor shall make the Tests on such days within that period as the Contractor may fix and of which he shall give notice to the Engineer. If the Contractor fails to make the Tests within 10 days the Engineer may himself proceed with the Tests. All Tests so made by the Engineer shall be at the risk and cost of the Contractor and the cost thereof shall be deducted from the Contract Price. The Tests shall then be deemed to have been made in the presence of the Contractor and the results of the Tests shall be accepted as accurate. 11.4 Facilities for Tests on Completion The Employer shall provide free of charge such labor, materials, electricity, fuel, water, stores, apparatus and other things as may be reasonably required by the Contractor to carry out the Tests. 11.5 Notice of Test Results The Engineer must give the Contractor written notice of the Engineer's interpretation of the results of each Test within 15 days of the test date. If the Employer fails to provide such written notice to the Contractor within the time specified, the Plant should be deemed to have passed the Test. 11.6 Retesting If the Work or any Section fails to pass the Tests, the Engineer or the Contractor may require such Tests to be repeated within a reasonable time on the same terms and conditions. All costs to which the Employer may be put by the repetition of the Tests under this Sub-Clause shall be deducted from the Contract Price. 1-42 63 11.7 Disagreement as to Result of Tests If the Engineer and the Contractor disagree on the interpretation of the Test results, each shall give a statement of his views to the other within 14 days after such disagreement arises. The statement shall be accompanied by all relevant evidence. 11.8 Consequences of Failure to Pass Tests on Completion If the works or any Section fails to pass the Tests on the repetition thereof under Sub-Clause 11.6, the Engineer, after due consultation with the Employer and the Contractor, shall allow the Contractor if he desires to conduct a third test within seven days after the Contractor has received notice that such plant failed the second test and if the plant then fails Test or Contractor elects not to re-test for the third time, the Engineer shall: a) Reject the Works or Section in which event the Employer shall have the same remedies against the Contractor as are provided under Sub-Clause 15.5(a) or b) Issue a Taking-Over Certificate, if the Employer so wishes, notwithstanding that the Works are not complete. The Contract Price shall then be reduced by such amount as may be agreed by the Employer and the Contractor or, failing agreement, as may be determined by arbitration. 11.9 Test Certificate As soon as the Works or any Section thereof has passed the Tests, the Engineer shall issue a Certificate to the Contractor and the Employer to that effect. 1-43 64 11.10 Test by Employer's Operators Before issuing of the Taking-Over Certificate, the Employer's operators shall run the Plant with materials under the direction and supervision of the Contractor. 12. TAKING OVER 12.1 Taking Over The Works or any Section thereof specified under Annex 11.7(c) shall be taken over by the Employer when they have been substantially completed in accordance with the Contract, except in minor respects that do not affect the use of the works for their intended purpose, have passed the Tests on Completion prescribed by the Contract and a Taking-Over Certificate has been issued or deemed to have been issued in accordance with Sub-Clause 12.2. 12.2 Taking-Over Certificate The Contractor may apply by notice to the Engineer for a Taking-Over Certificate not earlier than 14 days before the Works will in the Contractor's opinion be complete and ready for taking over under Sub-Clause 12.1. The Engineer shall within 21 days after the receipt of the Contractor's application either: a) issue the Taking-Over Certificate to the Contractor, with a copy to the Employer, stating the date on which the Works were substantially complete and ready for taking over, or b) reject the application giving his reasons and specifying the work required to be done by the Contractor to enable the Taking-Over Certificate to be issued. If the Engineer fails either to issue the Taking-Over Certificate or to reject the Contractor's application within the period of 21 days, he shall be deemed to have issued the Taking-Over Certificate on the last day of that period. The Contractor shall be entitled to apply for separate Taking-Over Certificates for each such section. 1-44 65 12.3 Use Before Taking Over The Employer and/or the Engineer shall not use any part of the Works unless a Taking-Over Certificate has been issued by the Engineer in respect thereof. If nevertheless, the Employer and/or Engineer uses any Section of the Works, that Section which is used shall be deemed to have been Taken Over at the date of such use. The Engineer shall on request of the Contractor issue a Taking-Over Certificate accordingly. If the Employer and/or Engineer uses the Works before taking over, the Contractor shall be given the earliest opportunity to take such steps as may be necessary to carry out the Tests on Completion. The provisions of Sub-Clause 10.5 shall not apply to any Section of the Works while being so used by the Employer. Clause 15 shall apply as if the Section had been taken over on the date it was used by the Employer. 12.4 Interference with Tests on Completion If the Contractor is prevented from carrying out the Tests on Completion by a cause for which the Employer or the Engineer, or other contractors employed by the Employer are responsible, the Employer shall be deemed to have taken over the Works on the date when the Tests on Completion would have been completed but, for such prevention. The Engineer shall issue a Taking-Over Certificate accordingly. The Works shall not be deemed to have been taken over if they are not substantially in accordance with the Contract. If the Works are taken over under this Clause, the Contractor shall nevertheless carry out the Tests on Completion during the Defects Liability Period. The Engineer shall require the Tests on Completion to be carried out by 14 days notice and in accordance with the relevant provisions of Clause 11. Any additional costs to which the Contractor may be put in making the Tests on Completion during the Defects Liability Period, shall be added to the Contract Price. 1-45 66 13. PERFORMANCE TESTS 13.1 Carrying Out Tests The Performance Tests prescribed under the Contract shall be carried out after the Works have been taken over by the Employer. The Performance Tests shall demonstrate that the plant is capable of performing as designed and specified in the Contract. 13.2 Notice The Employer has to give to the Contractor, with a copy to the Engineer, 21 days notice in writing of the date after which the Employer will be ready to make the initial Performance Tests. Unless otherwise agreed in writing the tests shall take place within 10 days after the said date on such day or days as the Contractor shall notify the Employer in writing. 13.3 Facilities for Performance Tests The Employer shall provide free of charge such labour, materials, electricity, fuel, water, stores apparatus and all things as may be requisite and reasonably demanded to carry out such tests efficiently. 13.4 Procedure for Performance Tests Performance Tests shall be carried out by the Employer and the Engineer under the supervision of the Contractor pursuant to such instructions as the Contractor may give in the course of carrying out such Tests. The Performance Tests shall be carried out as far as practicable under the conditions detailed in the Specification. 13.5 Cessation of Performance Tests Every Performance Test shall be carried out to completion unless either the Employer, or the Engineer on his behalf or the Contractor shall order it to be stopped because its continuance would endanger life or cause damage to the Plant. Cessation of a Performance Test does not constitute a Test. 13.6 Adjustments and Modifications If the Works or any portion thereof fails to pass any Performance Test or repeat Performance Test or if any Performance Test or repeat Performance Test is stopped before its completion, such test shall 1-46 67 be repeated as soon as practicable thereafter. In agreement with the Engineer the Employer shall permit the Contractor to make adjustments and modifications to any part of the Works before the repetition of any Performance Test and shall, if necessary, shut down any part of the Works for such purpose and re-start it after any adjustments or modifications have been made. All such adjustments and modifications shall be made by the Contractor as soon as practicable in agreement with the Engineer at his own expense. The Contractor shall if so required by the Engineer submit details of the adjustments or modifications which he proposes to make to the Engineer for his approval. 13.7 Costs of Performance Tests All reasonable expenses to which the Employer may be put by the repetition of Performance Tests shall be deducted from the Contract Price unless the repetition of the Performance Tests are necessitated by lack of suitable cane, failure or problems with the cane yard or mill room equipment or other cause out of the control of Contractor. 13.8 Evaluation of Performance Tests The results of Performance Tests shall be compiled and evaluated jointly by the Employer, the Engineer and the Contractor on consequences of failure to pass the Performance Tests. Subject to all other conditions of the Contract the Contractor shall not be responsible for any failure to pass Performance Tests caused by deficiencies in equipment supplied to the Contractor by Employer. Provided the Contractor has met all other performance related conditions of the Contract the Contractor shall not be held responsible for any failure to meet performance guarantees if the mill crushing rate during the 72 hour test period shall vary from 4000 metric tones per day by more than 10% or if the rate exceeds 4400 metric tones per 24 grinding hours or if the crushing is not at a reasonable uniform rate over each of the 72 elapsed hours of the test. 13.9 Failure to Pass the Performance Tests If the Works or any part there of shall fail to pass any Performance Tests on the repetition thereof, the Employer shall be entitled; 1-47 68 a) to order a repetition of the Performance Tests at the expense of the Contractor, or b) to issue an acceptance certificate pursuant to the provisions of Clause 14 if the Employer so wishes, and recover from the Contractor any loss suffered by the Employer by reason of the Works failing to achieve any guaranteed performance, or c) to reject the Works or any part thereof where the Contractor shall with all speed and at this own expense make good the deficiency. In case the Contractor shall fail so to do the Employer may, provided he does so without undue delay, take such steps, at the expense of the Contractor, as may in all the circumstances be reasonable to make good such deficiency. Any Plant provided by the Employer to replace defective Plant shall comply with the Contract and shall be obtained at reasonable prices. The Contractor shall be entitled to remove and retain all Plant that the Employer may have replaced at the Contractor's expense. 13.10 Postponement and Adjustments of Modifications If the Works fail to pass any Performance Test and the Contractor in consequence proposes to make an adjustment or modification thereto, the Employer may notify the Contractor that he does not wish such adjustment or modification to be made until a time that is convenient to him. In such event the Contractor shall become entitled to the issue of an acceptance certificate as if the Works has passed the Performance Test in question, but the Contractor shall remain liable to carry out the adjustment or modification and to satisfy the Performance test within a reasonable time of being notified to do so by the Employer. If however the Employer fails to give any such notice within twelve months of the acceptance of the Works, the Contractor shall be relieved of any such obligation and the Works shall be deemed to have passed such Performance Test. 1-48 69 14. ACCEPTANCE 14.1 Issue of Acceptance Certificate Subject to the provisions of Clause 13, the Employer shall issue to the Contractor a certificate (herein called an "acceptance certificate") stating that the Works are accepted by the Employer as from the date thereof as soon as: a) the Works have been taken over by the Employer, b) the Works have passed all the Performance Tests, and c) the Works are currently free from any defects which the Contractor is bound to make good. In the event the Employer fails to issue to the Contractor an Acceptance Certificate within 14 days of the earliest date after which all Sections of the Works have satisfied all Performance Tests, the Acceptance Certificate shall be deemed to have been issued by the Employer for purpose of this Sub- Clause. 14.2 Provisional Acceptance Certificate If the Contractor is prevented from satisfying either paragraph (a) or paragraph (b) of the preceding Sub-Clause within three months of the taking-over of the Works by any matter which is wholly beyond the Contractor's control he may apply to the Employer for the issue of a provisional acceptance certificate in respect of the Works. The Employer shall thereupon issue such certificate to the Contractor if the Employer is of the opinion that but for the matter of prevention the Contractor would have become entitled to an acceptance certificate under the preceding Sub-Clause. 14.3 Uncompleted Performance Tests and Work The issue of an provisional acceptance certificate shall constitute a provisional acceptance by the Employer of the Works. All uncompleted work and all unsatisfied or uncompleted Performance Tests shall be carried out as soon as practicable. If matters wholly beyond the Contractor's control continue to prevent the carrying out of all the uncompleted work throughout the remainder of the relevant Defects Liability Period then at the expiry of such period uncompleted work shall be treated as having been omitted pursuant to a 1-49 70 variation order of the Engineer and shall be valued accordingly. If matters wholly beyond the Contractor's control continue to prevent the Carrying out of the Performance Tests throughout the remainder of the relevant Defects Liability Period then unless it is otherwise established that the Works were throughout the said Defects Liability Period incapable of passing any or all of such Performance Tests by reason of some default of the Contractor, such tests shall at the end of the Defects Liability Period be deemed to have been satisfied. 14.4 Revoking of Provisional Acceptance Certificate If the Works shall fail to pass any of the Performance Tests when carried out in pursuance of the preceding Sub-Clause, the Employer may by further certificate (herein called a "revocation certificate") issued to the Contractor revoke the provisional acceptance certificate. 14.5 Defects Liability Upon acceptance of the Works by the Employer under this Clause the only remaining obligations of the Contractor in respect thereof shall be his obligation to make good any defects during the Defects Liability Period unless such acceptance is by virtue of a provisional acceptance certificate. 15. DEFECTS LIABILITY 15.1 Defects Liability Period When any Section of the Work is taken over separately from the Works the Defects Liability Period for the Section shall commence on the date it was taken over. 15.2 Making Good Defects The Contractor shall subject to Sub-Clause 15.1, be responsible for making good any defect in or damage to any part of the Works which may appear or occur during the Defects Liability Period and which arises from, either: a) Any defective materials, workmanship or design, or b) Any act or omission of the Contractor during the Defects Liability Period. The Contractor shall make good the defect or damage as soon as practicable and at his own cost. 1-50 71 15.3 Notice of Defects If any such defect appears or damage occurs, the Employer or the Engineer shall forthwith notify the Contractor thereof. If the Employer and the Engineer fail to notify the Contractor as soon as practical of any defect, and the Employer continues to use the Works prior to notice to the Contractor such that the works are further damaged by the Employer's use, then the Contractor will not be liable for repairing any additional damages caused by the Employer's delay in notifying the Contractor of the defect. 15.4 Extension of Defects Liability Period The provisions of this Clause shall apply to all replacements or renewals carried out by the Contractor as if the replacements and renewals had been taken over on the date they were completed. The Defects Liability Period for the Works shall be extended by a period equal to the period during which the Works cannot be used by reason of a defect or damage. If only part of the Works is affected the Defects Liability Period shall be extended only for that part. In neither case shall the Defects Liability Period be extended by more than one year. When erection or delivery of Plant has been suspended under Sub-Clause 9.1, the Contractor's obligation under this Sub-Clause 15.4 shall not apply to any defects occurring more than three years after it would have been delivered but for the suspension. 15.5 Failure to Remedy Defects If the Contractor fails to remedy a defect or damage within a reasonable time as approved by the Engineer, the Employer may fix a final time for remedying the defect or damage. If the Contractor fails to do so, the Employer may: a) Carry out the work himself or by others at the Contractor's risk and cost, provided that he does so in a reasonable manner. The costs properly incurred by the Employer in remedying the defect or damage shall be deducted from the Contract Price, but the Contractor shall have no responsibility for such work, or 1-51 72 b) Require the Contractor to grant the Employer a reasonable reduction in the Contract Price to be agreed or fixed by arbitration under Sub-Clause 34. 15.6 Removal of Defective Work If the defect or damage is such that repairs cannot be expeditiously carried out on the Site, the Contractor may with the consent of the Engineer or the Employer remove from the Site for the purposes of repair any part of the Works which is defective or damaged. 15.7 Further Tests/Performance Tests If the replacements or renewals are such that they may affect the performance of the Works, the Employer may request that Performance Tests be repeated to the extent necessary. The request shall be made by notice within 28 days after the replacement or renewal. The Tests shall be carried out in accordance with Clause 13. If the Employer fails to request the repetition of Tests within the 28 day time period specified in this Sub-Clause the Employer's right to require such Tests shall be terminated. 15.8 Right of Access Until the Final Certificate of Payment has been issued, the Contractor shall have the right of access to all parts of the Works and to records of the working and performance of the Works. Such right of access shall be during the Employer's normal working hours at the Contractor's risk and cost. Access shall also be granted to any duly authorized representative of the Contractor whose name has been communicated in writing to the Engineer. Subject to the Engineer's approval which will not be unreasonably withheld, the Contractor may also at his own risk and cost make any tests which he considers desirable. 15.9 Contractor to Search The Contractor shall, if required by the Engineer in writing, search for the cause of any defect, under the direction of the Engineer. Unless the defect is one for which the Contractor is liable under this Clause, the cost of the work carried out by the Contractor in searching for the cause of the defect shall be added to the Contract Price. 1-52 73 15.10 Defects Liability Certificate When the Defects Liability Period for the Works or any Section thereof has expired and the Contractor has fulfilled all his obligations under the Contract for defects in the Works or that Section, the Engineer shall issue within 28 days to the Employer and the Contractor a Defects Liability Certificate to that effect. If the Engineer fails to issue the Defects Liability Certificate within 28 days of the Contractor's fulfillment of his obligations under the Contract such Defects Liability Certificate shall be deemed issued without further action of the Engineer or Employer. 15.11 Defects in Free Issue Equipment The Contractor shall not be liable for any defects resulting from Free-Issue equipment specified and furnished by the Employer or the Engineer subject the Condition of the Contract. 15.12 Exclusive Remedies Except in the case of Gross Misconduct, the Employer's remedies under this Clause shall be in place of and to the exclusion of any remedy in relation to defects whatsoever. 16. VARIATIONS 16.1 Engineer's Right to Vary The Engineer may by Variation Order to which the Contractor shall comply at any time before the Works are taken over, instruct the Contractor to alter, amend, omit, add to or otherwise vary any part of the Works. The Contractor may, however, at any time propose variations of the Works to the Engineer. The Contractor shall carry out such variations and be bound by the same conditions, so far as applicable, as though the said variations were stated in the Specification. Provided that no such variation shall, except with the consent in writing of the Contractor and the Employer, be such as will, with any variations already directed to be made, involve a net addition to or deduction from the Contract Price of more than 5 percent thereof. In any case in which the Contractor has received any such direction from the Engineer which either then or later will, in the opinion of the Contractor, involve an increase or decrease in the 1-53 74 Contract Price, the Contractor shall as soon as reasonably possible and before proceeding therewith advise the Engineer in writing to that effect. The amount to be added to or deducted from the Contract Price shall be ascertained and determined in accordance with the rates stated in the schedule of prices so far as the same may be applicable, and where rates are not stated or are not applicable such amount shall be such sum as is determined by the Engineer to be reasonable in the circumstances. 16.2 Variations in Excess of 5% If, with the consent in writing of the Contractor and the Employer, the total value of all variations ordered under the provisions of this Clause exceeds 5 percent of the Contract Price, the Contract Price shall be amended by such sum as shall be agreed upon between the Employer and the Contractor. 16.3 Variation Order Procedure Prior to any Variation Order under Sub-Clause 16.1 the Engineer shall notify the Contractor of the nature and form of such variation. As soon as possible after having received such notice, the Contractor shall submit to the Engineer: a) a description of work, if any, to be performed and a program for its execution, b) the Contractor's proposal for any necessary modifications to the Master Schedule according to Sub-Clause 10.3 or to any of the Contractor's obligations under the Contract, and c) the Contractor's proposals for adjustment to the Contract Price. Following the receipt of the Contractor's submission the Engineer shall, after due consultation with the Employer and the Contractor, decide as soon as possible whether or not the variation shall be carried out. If the Engineer decides that the variation shall be carried out, he shall issue a Variation Order clearly identified as such in accordance with the Contractor's submission or as modified by agreement. If the Engineer and the Contractor are unable to agree the adjustment of the Contract Price, the provisions of Sub-Clause 16.4 shall apply. 1-54 75 16.4 Disagreement on Adjustment of the Contract Price If the Contractor and the Engineer are unable to agree on the adjustment of the Contract Price, the adjustment shall be determined in accordance with the rates specified in the Schedule of Prices. If the rates contained in the Schedule of Prices are not directly applicable to the specific work in question, suitable rates shall be established by the Engineer reflecting the level of pricing in the Schedule of Prices. Where rates are not contained in the said Schedule, the amount shall be such as is in all the circumstances reasonable. Due account shall be taken of any over-or under-recovery of overheads by the Contractor in consequence of the variation. The Contractor shall also be entitled to be paid: a) the cost any partial execution of the Works rendered useless by any such variation, b) the cost of making necessary alterations to Plant already manufactured or in the course of manufacture or of any work done that has to be altered in consequence of such a variation, c) any additional costs incurred by the Contractor by the disruption of the progress of the Works as detailed in the Program, and d) the net effect of the Contractor's finance costs, including interest, caused by the variation. The Engineer shall on this basis determine the rates or prices to enable on-account payment to be included in certificates of payment. 16.5 Variations on Manufacture and Drawings If the Engineer shall make any variation in any part of the Works such reasonable notice in writing shall be given to the Contractor as will enable him to make his arrangements accordingly. In cases where Plant is already manufactured or in the course of manufacture, or any work done or Drawings made require to be altered, a reasonable sum in respect thereof shall be allowed by the Engineer. If, in the opinion of the Contractor, any such variation is likely to prevent or prejudice the Contractor from or in fulfilling any of his obligations under the Contract, he shall notify the Engineer thereof in writing and the Engineer shall decide forthwith whether or not the same shall be 1-55 76 carried out. If the Engineer confirms his instructions in writing the said obligations shall be modified to such an extent as may be justified. Until the Engineer so confirms his instructions they shall be deemed not to have been given. 16.6 Contractor to Proceed On receipt of a Variation Order, the Contractor shall forthwith proceed to carry out the variation and be bound to these Conditions in so doing as if such variation was stated in the Contract. The work shall not be delayed pending the granting of an extension of the Time for Completion or an adjustment to the Contract Price under Sub-Clause 16.4. 16.7 Records of Cost In any case where the Contractor is instructed to proceed with a variation prior to the determination of the adjustment to the Contract Price in respect thereof the Contractor shall keep records of the cost of undertaking the variation and of time expended thereon. Such records shall be open to inspection by the Engineer at all reasonable times. 16.8 Monthly Variations Statement The Contractor shall send to the Engineer, once in every month, an account giving particulars, as full and detailed as possible, of all claims for any additional payment to which the Contractor may consider himself entitled and of all extra or additional work ordered by the Engineer which he has executed during the preceding month. No claim for payment will be considered unless included in such account. Provided always that the Engineer shall be entitled to authorize payment to be made notwithstanding the Contractor's failure to comply with this condition, if the Contractor has at the earliest practicable opportunity, not exceeding 15 days notified the Engineer that he intends to make a claim. When the engineer has received a Contractor's claim for additional payment as mentioned above he shall after due consultation with the Employer and the Contractor determine whether the Contractor is entitled to additional payment and notify the parties accordingly. 1-56 77 17. OWNERSHIP OF PLANT Plant supplied pursuant to the Contract shall become the property of the Employer at whichever is the earlier of the following times, namely: a) When the Plant is delivered to the Site pursuant to the Contract, and b) When the Contractor has become entitled to require that the Contract Value of the Plant be included in an interim certificate and has received payment thereof. 18. CERTIFICATES AND PAYMENT 18.1 Methods of Application Applications by the Contractor for payment shall be made and in accordance with Annex C of the Contract to the Engineer as follows: (a) in respect of the progress of the Works accompanied by such evidence of the value of the work done as the Engineer may require, (b) in respect of Plant to be shipped, identifying the Plant concerned and accompanied by such evidence of shipment and of payment of freight and insurance and by such other documents as the Engineer may require, and (c) for additional payment in accordance with Clause 19. Any other applications for payment shall state the amounts claimed and the detailed particulars in respect of which the application is made. 18.2 Issue of Certificate of Payment Within 30 days after receiving an application for payment which the Contractor was entitled to make the Engineer shall issue a Certificate of Payment to the Employer showing the amount due, with a copy to the Contractor. A certificate of payment, other than the Final Certificate of Payment, shall not be withheld on account of: (a) defects of a minor character which are not such as to affect the use of the Works, or 1-57 78 (b) any part of the payment applied for being disputed. In such case a certificate of payment for the undisputed amount shall be issued. Provided always that no interim certificate shall be issued at any one time for a sum less than the equivalent of US$ Two Hundred & Fifty Thousand. 18.3 Corrections to Certificates of Payment The Engineer may in any certificate of payment make any correction or modification that should properly be made in respect of any previous certificate. 18.4 Payment The Employer shall pay the amount certified within 45 days from the date of issue of each certificate of payment to the Contractor. 18.5 Delayed Payment If payment of any sum payable under Sub-Clause 18.4 is delayed, the Contractor shall be entitled to receive interest on the amount unpaid during the period of delay. The interest shall be at the rate of 7.46% per annum on the US Dollar component and at the prevailing bank interest rate on the Ethiopian Birr component of the invoice. The Contractor shall be entitled to such payment without formal notice and without prejudice to any other right or remedy. 18.6 Remedies on Failure to Certify or Make Payment The Contractor shall be entitled to stop the Works by giving 14 days notice to the Engineer and the Employer, if either: a) the Engineer fails to issue a certificate of payment upon proper application by the Contractor, or b) the Employer fails to make any payment as provided in this Clause. The cost to the Contractor occasioned by the stoppage and the subsequent resumption of work, shall be added to the Contract Price. The Contractor shall also be entitled to terminate the Contract by giving 28 days notice to the Engineer and the Employer in any case where the Engineer has failed to issue a certificate of 1-58 79 18.7 Application for Final Certificate of Payment The Contractor shall make application to the Engineer for the Final Certificate of Payment within 28 days after the issue of Defects Liability Certificate or if more than one, the last Defects Liability Certificate. The application for the Final Certificate of Payment shall be accompanied by a final account prepared by the Contractor. The final account shall give full details of the value of all Plant supplied and work done under the Contract together with: a) such additions to or deductions from the Contract Price as have been agreed, and b) all claims for additional payment to which the Contractor may consider himself entitled. Where the Contractor has been required to carry out replacements or renewals to the Works, the obligations of the Contractor under Clause 15 shall continue as provided therein, but the right of the Contractor to apply for a Final Certificate of Payment in respect of the works or a portion thereof other than the portions affected by such replacements or renewals shall not be affected by that fact, and after the Contractor has ceased to be under any obligation under Clause 15 in respect of the portions affected by replacements or renewals he may apply for a Final Certificate of Payment in respect thereof. 18.8 Issue of Final Certificate of Payment The Engineer shall issue to the Employer with a copy to the Contractor, the Final Certificate of Payment within 28 days after receiving an application in accordance with Sub-Clause 18.7. If the Contractor has not applied for a Final Certificate of Payment within the time specified in Sub-Clause 18.7 the Engineer shall request the Contractor to do so within a further period of 28 days. If the Contractor fails to make such an application, the Engineer shall issue the Final Certificate of Payment for such amount as he deems correct. 1-59 80 18.9 Final Certificate of Payment Conclusive A Final Certificate of Payment shall be conclusive evidence of the value of the Works, that the Works are in accordance with the Contract and that the Contractor has performed all his obligations under the Contract. Payment of the amount certified in the Final Certificate of Payment shall be conclusive evidence that the Employer has performed all his obligations under the Contract. A Final Certificate of Payment or payment shall not be conclusive: (a) to the extent that fraud or dishonesty relates to or affects any matter dealt with in the certificate, or (b) if any arbitration or court proceedings under the Contract have been commenced by either party before the expiry of 84 days after the issue of the Final Certificate of Payment. 18.10 Advance Payment After the advance payment guarantee referred to in the Sub-Clause 18.11 and the Performance Security referred to in Sub-Clause 5.4 have been received by the Employer, an advance payment in the amount of twenty percent of the Contract Price shall be made to the Contractor by the Employer and shall be recovered by deducting from subsequent payments due to the Contractor twenty percent (20%) of each such payment. If the full value of the advance payment has not been recovered by the Employer at the date upon which the Engineer shall have issued the Taking-Over Certificate any amount of the advance payment not so recovered shall be deducted from the amount of the last Interim Certificate which is released to the Contractor. 18.11 Advance Payment Guarantee The Contractor shall provide an advance payment guarantee for 20% twenty percent of the Contract Price from a first class international bank to be confirmed by the Commercial Bank of Ethiopia. 18.12 Terms of Payment The Employer shall pay the Contract Price to the Contractor in the manner provided for in Annex C to the Contract. 1-60 81 If any Section or portion of the Works shall be taken over separately from the remaining Works, the payments herein provided for on or after the issuance of the Taking-Over Certificate for such Works shall be made in respect of the Section or portion taken over, and references to the Contract Price shall mean such part of the Contract Price as shall be in the absence of agreement be apportioned thereto by the Engineer. In determining the amount of any payment under this Clause in respect of any Section of the Works due account shall be taken of all payments previously made in respect of the same portion. 18.13 Retention The Employer shall be entitled to retain 5 (five) percent of the Dollar component and the Birr component of the value of the Local Works as indicated in the Schedule of Prices excluding General Items, until the Employer has issued to the Contractor the Final Certificate of Payment as referenced in Sub-Clause 18.8. There will be no retention of money on any other parts of the Works except for that indicated herein. 19. CLAIMS 19.1 Procedure In any case where under these Conditions there are circumstances which the Contractor considers entitle him to claim additional payment, the Contractor shall: a) If he intends to make any claim for additional payment give to the Engineer notice of his intention to make such claim within 28 days after the said circumstances became known to the Contractor stating the reasons for his claim, and b) As soon as reasonably practical after the date of such notice submit to the Engineer full and detailed particulars of his claim but not later than 182 days after such notice unless otherwise agreed by the Engineer. In any event such particulars shall be submitted no later than the application for the Final Certificate of Payment. The Contractor shall 1-61 82 thereafter promptly submit such further particulars as the Engineer may reasonably require to assess the validity of the claim. 19.2 Assessment When the Engineer has received full and detailed particulars of the Contractor's claim in accordance with Sub-Clause 19.1 and such further particulars as he may reasonably have required he shall after due consultation with the Employer and the Contractor determine whether the Contractor is entitled to additional payment and notify the parties accordingly. The Engineer may reject any claim for additional payment which does not comply with the requirements of Sub-Clause 19.1. 20. CURRENCY OF PAYMENT The local component of the Contract Price shall be paid in Ethiopian Birr and the foreign component shall be paid in US Dollars. Any payment in respect of variations or additions to the Contract Price shall be in the currency in which the related cost is incurred by the Contractor. 21. RISK AND RESPONSIBILITY 21.1 Allocation of Risk and Responsibility The Risks of loss of or damage to physical property and of death and personal injury which arise in consequence of the performance of the Contract shall be allocated between the Employer and the Contractor as follows: a) the Employer's Risks as specified in Sub-Clause 21.2 b) the Contractor's Risks as specified in Sub-Clause 21.3 21.2 Employer's Risks The Employer's Risks are: a) use or occupation of the Works or any part thereof by the Employer; b) use or occupation of the site by the Works or any part thereof, of for the purposes of the Contract; or interference, whether temporary or permanent with any right of way, light, air or water or with any easement, wayleaves or 1-62 83 right of a similar nature which is the inevitable result of the construction of the Works in accordance with the Contract; c) the right of the Employer to construct the Works or any part thereof on, over, under, in or through any land; d) damage (other than that resulting from the Contractor's method of construction) which is the inevitable or unavoidable result of the construction of the Works in accordance with the Contract; e) the act, neglect or omission or breach of contract or of statutory duty of the Engineer, the Employer or other contractors engaged by the Employer or of their respective employees or agents; f) rebellion, revolution, insurrection, military or usurped power or civil war; g) riot, commotion or disorder, unless solely restricted to the employees or the Contractor or his Sub-Contractor and arising from the Conduct of the Works; and h) any operation of the forces of nature against which an experienced contractor could not reasonably have been expected to take precautions. The Employer shall be liable for all the risks under this Sub-Clause and all risks which an experienced Contractor could not have foreseen, or if foreseeable, against which measures to prevent loss, damage or injury from occurring could not reasonably have been taken by such Contractor. 21.3 Contractor's Risks The Contractor's Risks are all risks other than those identified as the Employer's Risks. The Contractor shall be liable for all his risks. 1-63 84 22. FORCE MAJEURE 22.1 Definition of Force Majeure Force Majeure means any circumstances beyond the control of the parties, including but not limited to: a) war and other hostilities, (whether war be declared or not), invasion, act of foreign enemies, mobilization, requisition or embargo; b) ionizing radiation or contamination by radio-activity from any nuclear fuel or from any nuclear waste from the combustion of nuclear fuel, radio-active toxic explosives, or other hazardous properties of any explosives, or other hazardous properties of any explosive nuclear assembly or nuclear components thereof; c) rebellion, revolution, insurrection, military or usurped power and civil war; d) riot, commotion or disorder, except where solely restricted to employees of the Contractor. e) Pressure waves caused by aircraft or other aerial devices travelling at sonic or super-sonic speeds. 22.2 Effect of Force Majeure Neither party shall be considered to be in default or in breach of his obligations under the Contract to the extent that performance of such obligations is prevented by any circumstances of Force Majeure which arise after the date when the Contract becomes effective. The Employer shall indemnify and save harmless the Contractor from any destruction of or damage to the Works or the Contractor's Equipment arising from Force Majeure and against and from all claims, proceedings, damages, costs, charges and expenses whatsoever arising therefrom or in connection therewith. 22.3 Notice of Occurrence If either party considers that any circumstances of Force Majeure have occurred which may affect performance of his obligations he shall promptly notify the other party and the Engineer thereof. 1-64 85 22.4 Performance to Continue Upon the occurrence of any circumstances of Force Majeure the Contractor shall endeavor to continue to perform his obligations under the Contract so far as reasonably practicable. The Contractor shall notify the Engineer of the steps he proposes to take including any reasonable alternative means for performance which is not prevented by Force Majeure. The Contractor shall not take any such steps unless directed so to do by the Engineer. 22.5 Additional Costs caused by Force Majeure If the Contractor incurs additional costs in complying with the Engineer's directions under Sub-Clause 22.4, the amount thereof shall be certified by the Engineer and added to the Contract Price. 22.6 Damage Caused by Force Majeure If in consequence of Force Majeure the Works or Contractor's Equipment shall suffer loss or damage the Contractor shall be entitled to have the value of the work done without regard to the loss or damage that has occurred, included in a Certificate of Payment. 22.7 Termination in Consequence of Force Majeure If circumstances of Force Majeure have occurred and shall continue for a period of 182 days then, notwithstanding that the Contractor may by reason thereof have been granted an extension of Time for Completion of the Works, either party shall be entitled to serve upon the other 28 days' notice to terminate the Contract. If at the expiry of the period of 28 days Force Majeure shall still continue the Contract shall terminate. 22.8 Payment on Termination for Force Majeure If the Contract is terminated under Sub-Clause 22.7 the contractor shall be paid the value of the work done. The Contractor shall also be entitled to receive: a) the amounts payable in respect of any preliminary items so far as the work or service comprised therein has been carried out and a proper proportion of any such item in which the work or service comprised has only been partially carried out, 1-65 86 b) the cost of materials or goods ordered for the Works or for use in connection with the Works which have been delivered to the Contractor or of which the Contractor is legally liable to accept delivery. Such materials or goods shall become the property of and be at the risk of the Employer when paid for by the Employer and the Contractor shall place the same at the Employer's disposal, c) the amount of any other expenditure which in the circumstances was reasonably incurred by the Contractor in the expectation of completing the whole of the Works, d) the reasonable cost of removal of Contractor's Equipment from the Site and the return thereof to the Contractor's works in his country or to any other destination at no greater cost, and e) the reasonable cost of repatriation of the Contractor's staff and workmen employed wholly in connection with the Works at the date of such termination. 22.9 Release from Performance If circumstances of Force Majeure including without limitation an outbreak of war, whether declared or not, in any part of the world which materially affects the execution of the Works, occur and in consequence thereof under the law governing the Contract the parties are released from further performance of the Contract, the sum payable by the Employer to the Contractor shall be the same as that which would have been payable under Sub-Clause 22.8 if the Contract had been terminated under Sub-Clause 22.7. 22.10 Force Majeure Affecting Engineer's Duties The provisions of Clause 22 shall also apply in circumstances where the Engineer is prevented from performing any of his duties under the Contract by reason of Force Majeure. 1-66 87 23. CARE OF THE WORKS AND PASSING OF RISK 23.1 Contractor's Responsibility for the Care of the Works The Contractor shall be responsible for the care of the Works or any Section thereof from the Commencement Date until the Risk Transfer Date applicable thereto under Sub-Clause 23.2. The Contractor shall also be responsible for the care of any part of the Works upon which any outstanding work is being performed by the Contractor during the Defects Liability Period until completion of such outstanding work. 23.2 Risk Transfer Date The Risk Transfer Date in relation to the Works or a Section thereof is the earliest of either: a) the date of issue of the Taking-Over Certificate, or b) the date when the Engineer is deemed to have issued the Taking-Over Certificate or the Works are deemed to have been taken over in accordance with Clause 12, or c) the date of expiry of the notice of termination when the Contract is terminated by the Employer or the Contractor in accordance with these Conditions. The risk of Loss of or damage to the Works or any Section thereof shall pass from the Contractor to the Employer on the Risk Transfer Date applicable thereto. 23.2 Loss or Damage Before Risk Transfer Date Loss of or damage to the Works or any Section thereof occurring before the Risk Transfer Date shall: a) to the extent caused by any of the Contractor's Risks, be made good forthwith by the Contractor at his own cost, and b) to the extent caused by any of the Employer's Risks, be made good by the Contractor at the Employer's expense if so required by the Engineer within 28 days after the occurrence of the loss or damage. The price for making 1-67 88 good such loss and damage shall be in all circumstances reasonable and shall be agreed by the Employer and the Contractor, or in the absence of agreement, shall be fixed by arbitration under Clause 34. 24. DAMAGE TO PROPERTY AND INJURY TO PERSONS 24.1 Contractor's Liability Except as provided under Sub-Clause 24.3, the Contractor shall be liable for and shall indemnify the Employer against all losses, expenses and claims in respect of any loss of or damage to physical property (other than the Works), death or personal injury occurring before the issue of the last Defects Liability Certificate to the extent caused by: a) defective design, material or workmanship of the Contractor, or b) negligence or breach of statutory duty of the Contractor, his Subcontractors or their respective employees and agents. 24.2 Employer's Liability The Employer shall be liable for and shall indemnify the Contractor against all losses, expenses or claims in respect of loss of or damage to any physical property or of death or personal injury whenever occurring, to the extent caused by any of the Employer's Risks. 24.3 Accidents In the case of any acts or defaults of the Engineer, the Employer or other contractors engaged by the Employer or by their respective employees or agents, the Employer shall be liable for and shall indemnify the Contractor and his Sub-Contractors against all losses, expenses and claims arising in connection therewith. 25. LIMITATION OF LIABILITY 25.1 Liability for Indirect or Consequential Damage Neither party shall be liable to the other for any loss of profit, loss of use, loss of production, loss of contracts or for any other indirect or consequential damage that may be suffered by the other, except: 1-68 89 a) as expressly provided in Clause 10.5 and 10.7, and b) those provisions of these Conditions whereby the Contractor is expressly entitled to receive profit. 25.2 Maximum Liability The liability of the Contractor to the Employer under these Conditions shall in no case exceed the Contract Price. 25.3 Liability after Expiration of Defects Liability Period The Contractor shall have no liability to the Employer for any loss of or damage to the Employer's physical property which occurs after the expiration of the Defects Liability Period unless caused by Gross Misconduct of the Contractor. 25.4 Exclusive Remedies The Employer and the Contractor intend that their respective rights, obligations and liabilities as provided for in these Conditions shall alone govern their rights under the Contract and in relation to the Works. Accordingly, the remedies provided under the Contract in respect of or in consequence of: (a) any breach of contract, or (b) any negligent act or omission, or (c) death or personal injury, or (d) loss or damage to any property are, save in the case of Gross Misconduct, to be to the exclusion of any and other remedy that either may have against the other under the law governing the Contract or otherwise. 25.5 Mitigation of Loss or Damage In all cases the party claiming a breach of Contract or a right to be indemnified in accordance with the Contract shall be obliged to take all reasonable measures to mitigate the loss or damage which has occurred or may occur. 1-69 90 25.6 Foreseen Damages Where either the Employer or the Contractor is liable in damages to the other these shall not exceed the damage which the party in default could reasonably have foreseen at the date of the Contract. 26. INSURANCE 26.1 The Works The Contractor shall insure the Works in the joint names of the Contractor and the Employer to their full replacement value: a) From the Effective Date until the Risk Transfer Date against any loss or damage caused by any of the Contractor's Risks and customarily insurable. b) During the Defects Liability period against any loss or damage which is caused either: i) by the Contractor in completing any outstanding work or complying with his obligations under Clause 15 or ii) by any of the Contractor's Risks which occurred prior to the Risk Transfer Date. 26.2 Contractor's Equipment The Contractor shall insure Contractor's Equipment and motor vehicles for its full replacement value whilst in transit to the Site, from commencement of loading until completion of unloading at the Site and while on the Site against all loss or damage caused by any of the Contractor's Risks. 26.3 Third Party Liability The Contractor shall insure against liability to third parties for any death or personal injury and loss of or damage to any physical property arising out of the performance of the Contract and occurring before the issue of the last Defects Liability Certificate. Such insurance shall be effected before the Contractor begins any work on the Site. The insurance shall be for not less than two million US Dollars. 1-70 91 26.4 Employees The contractor shall insure and maintain insurance against his liability under Sub-Clause 24.3. 26.5 General Requirements of Insurance Policies The Contractor shall: a) produce the policies or certificates of any insurance which he is required to effect under the Contract together with receipts for the premiums, b) effect all insurance for which he is responsible with an insurer and in terms approved by the Employer, and c) make no material alterations to the terms of any insurance without the Employer's approval. If an insurer makes any material alteration to the terms the Contractor shall forthwith notify the Employer, and d) in all respects comply with any conditions stipulated in the insurance policies which he is required to place under the Contract. 26.6 Remedies on the Contractor's Failure to Insure If the Contractor fails to produce evidence of insurance coverage as stated in Sub-Clause 26.5(a) then the Employer may effect and keep in force such insurance. Premiums paid by the Employer for this purpose shall be deducted from the Contract Price. 26.7 Amounts not Recovered Any amounts not recovered from the insurers shall be borne by the Employer or Contractor in accordance with their responsibilities under Clause 21. 27. DEFAULT 27.1 Notice of Default If the Contractor is not executing the Works in accordance with the Contract or is neglecting to perform his obligations thereunder so as seriously to affect the carrying out of the Works, the Engineer may give notice to the Contractor requiring him to make good such failure or neglect. 1-71 92 27.2 Contractor's Default If the Contractor: a) has failed to comply within a reasonable time with a notice under Sub-Clause 27.1 or, b) assigns the Contract or subcontracts the whole of the Works without the Employer's written consent, or c) becomes bankrupt or insolvent, has a receiving order made against him or compounds with his creditors, or carries on business under a receiver, trustee or manager for the benefit of his creditors or goes into liquidation, The Employer may, after having given 14 days notice to the Contractor, terminate the Contract and expel the Contractor from this Site. Any such expulsion and termination shall be without prejudice to any other rights or powers of the Employer, the Engineer or the Contractor under the Contract. The Employer may upon such termination complete the Works himself or by any other contractor. 27.3 Valuation at Date of Termination The Engineer shall, as soon as possible after such termination, certify the value of the Works and all sums then due to the Contractor as at the date of termination in accordance with Clause 18. 27.4 Payment After Termination The Employer shall not be liable to make any further payments to the Contractor until the Works have been completed. When the Works are so complete, the Employers shall be entitled to recover from the Contractor the extra costs, if any, of completing the Works after allowing for any sum due to the Contractor under Sub-Clause 27.3. If there is no such extra cost the Employer shall pay any balance due to the Contractor. 27.5 Effect on Liability for Delay The Contractor's liability under Sub-Clause 10.5 and 10.7 shall immediately cease when the Employer expels him from the Site without prejudice to any liability thereunder that may have already occurred. 1-72 93 27.6 Employer's Default The Contractor may, by giving 14 days notice to the Employer and the Engineer, terminate the Contract if the Employer: a) fails to pay the Contractor the amount due under any certificate of the Engineer within 45 days after the amount became payable, or b) interferes with or obstructs the issue of any certificate of the Engineer, or c) becomes bankrupt or insolvent, has a receiving order made against him, compounds with his creditors, or carries on business under a receiver, trustee or manager for the benefit of his creditors or goes into liquidation, or d) consistently fails to meet his contractual obligations, or e) appoints a person to act with or in replacement of the Engineer without written notice to the Contractor. Any such termination shall be without prejudice to any other rights of the Contractor under the Contract. 27.7 Removal of Contractor's Equipment On such termination, the Contractor shall be entitled to remove immediately all Contractor's Equipment which is on the Site. 27.8 Payment on Termination for Employer's Default In the event of such termination the Employer shall pay the Contractor an amount calculated in accordance with Sub-Clause 22.8. The Employer shall pay in addition the amount of any loss or damage, including loss of profit which the Contractor may have suffered in consequence of termination. 28. URGENT REMEDIAL WORK If, by reason of any accident, or failure, or other event occurring to, in, or in connection with the Works, or any part thereof, either during the execution of the Works, or during the Defects Liability Period, any remedial or other work is, in the opinion of the Engineer urgently necessary, for the safety of the Works and the 1-73 94 Contractor, after appropriate notice given the circumstances, is unable or unwilling at once to do such work, the Employer shall be entitled to employ and pay other persons to carry out such work as the Engineer may consider necessary. If the work or repair so done by the Employer is work which, in the opinion of the Engineer, the Contractor was liable to do at this own cost under the Contract, then all reasonable costs consequent thereon or incidental thereto shall, after due consultation with the employer and the Contractor, be determined by the Engineer and shall be recoverable from the Contractor by the Employer, and may be deducted by the Employer from any monies due or to become due to the contractor and the Engineer shall notify the Contractor accordingly, with a copy to the Employer. Provided that the Engineer shall, as soon after the occurrence of any such emergency as may be reasonably practicable, notify the Contractor thereof in writing. 29. ESCALATION 29.1 Local Currency Component of the Contract Price The Contract Price shall be adjusted to take account of any increase or decrease in costs of labour, materials, transport or other costs of execution of the Works, resulting from changes in legislation or in its generally accepted interpretation of the Country where the Site is located, and/or other price changes as specified in Annex D of the Contract. Legislation means any law, order, regulation or by-law having the force of law, which affects the Contractor in the performance of his obligations under the Contract from the date of Contract signature. 29.2 Foreign Currency Component of the Contract Price There shall be no price adjustment in the foreign currency component of the Contract Price except as elsewhere provided for in the Contract. 30. CUSTOMS AND TAXES 30.1 Customs, Import Duties and Taxes The Employer shall pay or secure exemption from payment all customs, import duties and taxes in consequence of the importation of Plant. If the Contractor is required to pay such customs, import duties and taxes, the Employer shall reimburse the amount thereof. 1-74 95 30.2 Clearance through Customs The Employer shall assist the Contractor in obtaining clearance through the customs of all Plant and Contractor's Equipment and in procuring any necessary government consent to the re-export of Contractor's Equipment when it is removed from the Site. 30.3 Taxation The Employer undertakes to pay and settle promptly on behalf of the Contractor and his foreign national employees any Company and Personal Income Taxes imposed under any law, decree or regulation of the Government of Ethiopia or any subordinate authority. The Contractor shall only pay sales taxes on locally bought goods and services and personal income taxes for his Ethiopian national personnel. 30.4 Customs and Taxes on Contractor's Equipment The Contractor may, in accordance with Ethiopian customs regulations import the Contractor's Equipment specified in Annex 18 for the execution and maintenance of the Works and export same on completion of the Works or Section thereof. The Employer shall pay all duty or tax, if any, which may be imposed by the Government of Ethiopia in connection with the Contractor's importation and export of such Contractor's Equipment. The Contractor may however with the prior consent of the Employer and upon payment of the required customs duty and tax in accordance with customs regulations and tax laws, elect to sell within Ethiopia such Contractor's Equipment on completion of the Works or Section thereof. 31. EXPLOSIVES The importation into Ethiopia, transportation, storage and use of explosives shall be strictly in accordance with all applicable regulations. The Employer is to provide the Contractor with all applicable regulations. The use of explosives shall be kept to a minimum and shall only be in a manner approved by the Engineer. No approval of the Engineer shall relieve the Contractor of any of his responsibilities under the Contract. The Contractor shall notify the Engineer of personnel on his staff who are qualified and competent to use explosives and only those persons shall be permitted to use explosives. 1-75 96 The Contractor shall provide and operate an efficient system to warn all persons likely to be endangered by the use of explosives. The system shall include procedures to indicate clearly the beginning and end of any period of danger. 32. PUBLICITY Unless the Contractor shall first have obtained the permission in writing of the Engineer, the Contractor shall not at any time take any photographs of the Site or of the Works or of any part thereof and shall take all steps to ensure that no such photograph shall at any time be taken or published or otherwise circulated by any person employed by the Contractor or any Sub-Contractor. The Contractor shall be allowed to take photographs of the plant on periodic basis to document and monitor construction progress. All requests for information concerning the Works by the news media or any individual shall be referred to the Employer. All plans for publicity by the Contractor, any Sub-Contractor or supplier shall be submitted to the Employer for prior approval. Nothing contained herein shall restrict or prohibit the Contractor from disclosing any information which the Contractor believes in good faith is needed to comply with any laws or regulations of the United States of America. 33. NOTICES 33.1 Notices to Contractor All certificates, notices or written orders to be given to the Contractor by the Employer or the Engineer under the Contract shall be sent by airmail post, cable, telex or facsimile transmission to or left at the Contractor's principal place of business or such other address as the Contractor shall nominate in writing for that purpose, or may be handed over to the Contractor's representative. 33.2 Notices to Employer and Engineer Any notice to be given to the Employer or to the Engineer under the Contract shall be sent by airmail post, cable, telex or facsimile transmission to or left at the respective addresses nominated by the Employer in writing for that purpose or handed over to the Engineer's or the Employer's representative authorized to receive it. 1-76 97 33.3 Minutes of Meetings Instructions or notices to the Contractor and notices from the Contractor to the Engineer or the Employer recorded in a minute or protocol signed by the authorized representatives of the giver and recipient of such notice or instruction shall be valid notice or instruction for the purpose of the Contract. 34. SETTLEMENT OF DISPUTE If any dispute or difference of any kind whatsoever shall arise between the Employer and the Contractor or the Engineer and the Contractor in connection with, or arising out of the contract, or the execution of the Works, whether during the progress of the Works or after the termination, abandonment or breach of the contract, it shall in the first place, be referred to and settled by the Engineer who shall, within a period of 90 days after being requested by either party to do so, give written notice of his decision to the Employer and the Contractor. Formal notice of arbitration must be given to the other party, and where required, to the appropriate arbitration body, no later than 84 days after the issue of the Final Certificate of Payment. Subject to arbitration, as hereinafter provided, such decision in respect of every matter so referred shall be final and binding upon the Employer and the Contractor and shall forthwith be given effect to by the Employer and by the Contractor, who shall proceed with the execution of the Works with all due diligence whether he or the Employer requires arbitration, as hereinafter provided, or not. If the Engineer has given written notice of his decision to the Employer and the Contractor and no claim to arbitration has been communicated to him by either the Employer or the Contractor within a period of 90 days from receipt of such notice, the said decision shall remain final and binding upon the Employer and the Contractor. If the Engineer shall fail to give notice of his decision, as aforesaid within a period of 90 days after being requested aforesaid; or if either the Employer or the Contractor be dissatisfied with any such decision, then and in any such case either the Employer or the Contractor may within 90 days after receiving notice of such decision, or within 90 days after the expiration of the first-named period of 90 days, as the case may be, require that the matter or matters in dispute be referred to arbitration as hereinafter provided. All disputes or differences in respect of which the decision, if any, of the Engineer has not become final and binding as aforesaid shall be finally settled by arbitration by three arbitrators in accordance 1-77 98 with the UNCITRAL Arbitration Rules for the time being in force. The said arbitrator shall have full power to open up, revise and review any decision, opinion, direction, certificate or valuation of the Engineer. Neither party shall be limited in the proceedings before such arbitrator to the evidence or arguments put before the Engineer for the purpose of obtaining his said decision. No decision given by the Engineer in accordance with the foregoing provisions shall disqualify him from being called as a witness and giving evidence before the arbitrator on any matter whatsoever relevant to the dispute or difference referred to the arbitrator as aforesaid. The reference to arbitration may proceed notwithstanding that the Works shall not then be or be alleged to be complete, provided always that the obligations of the Employer, the Engineer and Contractor shall not be altered by reason of the arbitration being conducted during the progress of the Works. The arbitration award shall be binding upon the parties. The arbitration proceedings shall take place in London, England. The language of the arbitral proceedings shall be English. 35. APPLICABLE LAW The law which is to apply to the Contract and according to which the Contract shall be construed is the Law of Ethiopia. 1-78 99 ANNEX A FORM OF PERFORMANCE SECURITY To be issued by a first class international bank and confirmed by the Commercial Bank of Ethiopia. The General Manager Finchaa Sugar Factory P.O. Box 5734 Addis Ababa Ethiopia Finchaa Sugar Factory Contract FP3: Design, Supply, Construction and Commissioning of Sugar Factory and Ethanol Plant Whereas it is a condition of the Contract awarded by you to [name of Contractor] ('the Contractor') for the execution of the above-named works that the Contractor shall furnish you with a performance security. Whereas [name and address of Contractor's bank requested us to issue such a performance security in your favour for an aggregate sum of [equivalent of 10% of the Contract Price.] Now, therefore, in fulfilment of the obligations of the Contractor under the Contract, we hereby undertake irrevocably, unconditionally and without reserve, regardless of any objections or protests by the Contractor or third parties and expressly refusing any profit in or becoming party to any dispute or termination of the Contract, to pay to you at your first demand against receipt of your written statement that the Contractor has not fulfilled his contractual obligations, a sum not exceeding [equivalent of 10% of the Contract Price]. Your claim if any, must be delivered to and duly received by us on or before the expiry date of this guarantee, after which date this guarantee will automatically become null and void whether returned to us or not. This performance security shall come into force on the date of its issuance and shall remain in full force and effect until issuance by you of a certificate that the Contractor has completed all his obligations under the Contract. 100 ANNEX B FORM OF ADVANCE PAYMENT GUARANTEE To be issued by a first class international bank and confirmed by the Commercial Bank of Ethiopia. The General Manager Finchaa Sugar Factory P.O. Box 5734 Addis Ababa Ethiopia Finchaa Sugar Project Contract FP3: Design, Supply, Construction and Commissioning of Sugar Factory and Ethanol Plant Whereas according to the terms of the above-named contract it has been stipulated that twenty percent of the Contract Price amounting to 20% [twenty percent] shall be paid by you to the Contractor on the condition that a bank guarantee in an equal amount has been obtained to secure such advance payment; Whereas [name and address of bank or insurance company] has requested us to give the said bank guarantee on its behalf in your favour for the above-mentioned sum; Now, therefore, in consideration of the foregoing we hereby undertake and guarantee to pay to you unconditionally and irrevocably any sum up to a maximum amount of [equivalent of twenty percent of Contract Price] at your first demand against receipt of your written statement that the Contractor is in substantial default under the terms of the Contract and of a bank certificate substantiating that the amount of the advance payment has been transferred to the account of the Contractor, without requiring any further justification or issuance of a notice or action through administrative, legal, judicial or any other authorities. Our liability under this guarantee shall reduce pro rata to your recovery of the advance payment from subsequent payments due to the Contractor until the date when our liability is reduced to nil and demand for payment must be received by us on or before such date, after which this guarantee will automatically become null and void whether returned to us or not. [Dated, signed and sealed by the relevant bank]. 101 ANNEX C METHOD OF PREPARATION OF CONTRACTOR'S PAYMENT APPLICATIONS AND CERTIFICATES FOR PAYMENT 1. This Annex describes the method of preparation of Payment Applications and Certificates of Payment in accordance with Clause 18 of the Conditions of Contract. 2. General Items The method of payment of general items will be as follows: a) The value of the General Items in Section 1 of the Schedule of Prices, shall be calculated as the same percentage of the sum of the certified value of the local works undertaken and the certified value of plant shipped, as a percentage of the Contract Value of those sections, on a monthly basis. A deduction of 20% will be made from every certificate to recover the Advance Payment. b) Payment will be made for the US Dollar component through the Letter of Credit method as indicated in Sub-clause 6.8 and payment for the Ethiopian Birr component shall be paid directly from the Employer. 3. Delivery of Plant (C.I.F. Assab) The method of Payment of the Delivery of Plant C.I.F. Assab will be as follows: a) After factory mechanical and electrical design work is complete the Contractor will prepare a detailed Plant list. b) The Contractor and the Engineer will estimate values for all items on the Plant list to the total Contract Value. c) In the Contractor's application for permission to deliver, the Contractor will estimate the Contract Value to be shipped in relation to the agreed Plant list. The Engineer will grant the permission to deliver. The value of that payment certificate will be paid to the Contractor as 100% of the Value of the Plant shipped minus a deduction of 20% for recovery of the Advance Payment. d) The Contractor will be paid by presentation of the following documents to the US Bank issuing the Letter of Credit and shall also supply sufficient copies as shall be specified in the Contract Administration Procedures Manual in Annex 20 to the Employer. 102 No. of Copies 1. Copy of Original Bill of Lading 2 2. Chamberized Commercial Invoice 2 3. Packing List including List of 2 Measurements or Weights 4. Certificate of Origin 2 5. Insurance Certificate 2 6. Inspection Certificate 2 7. Engineer's Permission to Deliver 2 e) Payment will be made through the Letter of Credit Method as indicated in Sub-clause 6.8. 4. Transport from Assab to Finchaa Project site The method of payment for the transport of the Plant from the port of Assab to Finchaa Sugar Project Site shall be as follows: a) The Contractor shall prepare a detailed schedule of estimated tonnages for shipment of plant. This schedule will be approved by the Engineer. b) The Contractor shall be paid on a monthly basis on a direct proportion of tonnage arrived at Assab Port against the total estimated tonnage in relation to the Total Item for C.I.F. (Birr) cost in the Schedule of Prices. A deduction of 20% will be made for recovery of Advance payment. c) The Contractor shall be paid directly by the Employer. 5. Civil/Structural Works (Local Works) The method of payment for Civil/Structural Works shall be as follows: a) After the Civil/Structural Design has been completed, the Contractor shall prepare detailed estimated percentage based on bills of quantities on each section of the Works. This estimate will be approved by the Engineer. b) The Contractor shall prepare an application for payment based on the work done from estimated percentage based on a monthly period. This will be approved by the Engineer who will issue a certificate for payment. 103 This certificate shall have deductions for 5% of its value in the respective currencies for Retention (Sub-clause 18.13) and 20% for recovery of Advance Payment. c) Payment will be made for the US Dollar component through the Letter of Credit method as indicated in Sub-Clause 6.8 and Payment in Ethiopian Birr will be paid directly by the Employer by cheque. 6. Erection Works (Local Works) The method of payment for the Erection Works shall be as follows: a) After the Erection works have been designed the Contractor shall prepare a detailed estimated percentage based on the bills of quantities of each Section of the Erection works. b) The Contractor shall prepare an application for payment based on the work done from estimated percentage based on a monthly period. This will be approved by the Engineer who will issue a certificate for payment. This certificate shall have deductions for 5% of its value for Retention (Sub-clause 18.13) and 20% for recovery of Advance Payment. c) Payment will be made for the US Dollar component through the Letter of Credit method as indicated in Sub-Clause 6.8 and Payment in Ethiopian Birr will be paid directly by the Employer. 104 ANNEX D ESCALATION - METHOD OF PAYMENT 1. In accordance with Sub-clause 29.1, the Contract Price shall be adjusted for changes in costs in the local currency element of the Contract (Ethiopian Birr). 2. The method of determining the Escalation is as follows: a) General Items The value of the General Items for each monthly application for payment by the Contractor shall be adjusted for the increase or decrease in the exchange rate at the government auction on the nearest date to the application for payment as follows: Escalation General = Monthly Value of X (Auction Rate - 6.29) --------------------- Items General Items 6.29 The current auction exchange rate is 6.29 Ethiopian Birr to 1 US Dollar. b) Listed Items Escalation on the local currency element of the Works will be paid only on the following items. Item Current Unit Price Remark ---- ------------------ ------ 1. Cement 310.00 Birr/Tonne EX-Mugher 2. Mild Steel Reinforcement 4.10 Birr/Kg. Govt. Shop A.A 3. Fuel - Diesel 1.50 Birr/litre EX-Retail A.A - Petrol 2.00 Birr/litre EX-Retail A.A 4. Timber 1294.47 Birr/Cu.m EX-SIDAMO (Govt) 5. Oil 30/40 8.33 Birr/litre EX-Shell A.A 90/140 8.80 Birr/litre EX-Shell A.A. 6. Grease 12.07 Birr/Kg. EX-Shell A.A 7. Transport (Assab-Addis) 0.36 Birr/Tonne Km. 8. Port Charges Only if changed by legislation 9. Labour Only if changed by legislation
These prices will be referred to as Base Prices at the date of Contract Signature. When there is change in price for any of the above items, the Contractor shall submit the invoices for the purchases of the items for that month. The adjustment will be made for escalation calculated as follows: Escalation Listed = Quantity of Items X [Current - Base] Items Purchased X [Unit Price - Unit Price] 105 c) The Escalation for both General and Listed Items will be included in the Monthly payment Applications and Certificates. d) In the event that the listed items, with the exception of Transport, cannot be purchased through the Government system and that the Contractor has to purchase through the free market system, any adjustment in price will be subject to the approval of the Engineer. In this event the Escalation will be calculated upon the difference between the base price and the free market price. The Contractor is free to use the "Free Market" for Inland Transport, but will only be reimbursed Escalation against the Base price shown, with the approval of the Engineer. e) There shall be no escalation for the Contractor's Profit. 106 ANNEX E BONUS FOR EARLY COMPLETION Under Article 10.6 of the Contact, the Contractor is entitled to be paid a Bonus should he complete the Works in less Time than that established under Article 10.2, Time for Completion. Any Bonus earned under Clause 10.6 will be due and payable to the Contractor within 30 days of the issuance of the Certificate specified in Article 12.2. The Bonus will be a fixed amount and will be paid in Ethiopian Birr, for each day or part thereof of advance Completion at the rate of BIRR 32,400 (thirty two thousand four hundred Birr) per day. The maximum total amount of Bonus payable to the Contractor shall not exceed Birr 2,000,000 (two million Birr). EX-10.36 7 CREDIT AGREEMENT DATED 5/15/95 - TX. COMMERCE BANK 1 EXHIBIT 10.36 CREDIT AGREEMENT $35,000,000.00 REVOLVING CREDIT LOAN DATED AS OF MAY 15, 1995 BETWEEN SERV-TECH, INC., AS THE COMPANY, THE SUBSIDIARIES OF THE COMPANY LISTED AS GUARANTORS HEREIN AND TEXAS COMMERCE BANK NATIONAL ASSOCIATION, AS THE AGENT AND THE BANKS NAMED HEREIN 2 TABLE OF CONTENTS ARTICLE I DEFINITIONS; ACCOUNTING TERMS; INTERPRETATION . . . . . . . . . . . . . . . . . . . . . . . 1 Section 1.01 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Section 1.02 Types of Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Section 1.03 Accounting Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 ARTICLE II THE LOANS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Section 2.01 The Term Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Section 2.02 The Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Section 2.03 Advances Under the Revolving Credit Loan . . . . . . . . . . . . . . . . . . . . . . . . 15 Section 2.04 Disbursement of Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Section 2.05 Conversions and Continuances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Section 2.06 Voluntary Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Section 2.07 Mandatory Repayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Section 2.08 Method and Place of Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Section 2.09 Pro Rata Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Section 2.10 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Section 2.11 Interest Periods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Section 2.12 Interest Rate Not Ascertainable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Section 2.13 Change in Legality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Section 2.14 Increased Costs, Taxes or Capital Adequacy Requirements . . . . . . . . . . . . . . . . . 20 Section 2.15 Eurodollar Advance Prepayment and Default Penalties . . . . . . . . . . . . . . . . . . . 21 Section 2.16 Voluntary Reduction of Commitment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Section 2.17 Tax Forms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 ARTICLE III LETTERS OF CREDIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Section 3.01 Letters of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Section 3.02 Letter of Credit Requests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Section 3.03 Letter of Credit Participations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Section 3.04 Increased Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Section 3.05 Conflict Between Applications and Agreement . . . . . . . . . . . . . . . . . . . . . . . 27 ARTICLE IV FEES; COMMITMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Section 4.01 Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
3 ARTICLE V CONDITIONS PRECEDENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Section 5.01 Conditions Precedent to the Initial Advance . . . . . . . . . . . . . . . . . . . . . . . 27 Section 5.02 Conditions Precedent to All Credit Events . . . . . . . . . . . . . . . . . . . . . . . . 29 Section 5.03 Delivery of Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 ARTICLE VI REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Section 6.01 Organization and Qualification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Section 6.02 Authorization and Validity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Section 6.03 Governmental Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Section 6.04 Conflicting or Adverse Agreements or Restrictions . . . . . . . . . . . . . . . . . . . . 31 Section 6.05 Title to Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Section 6.06 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Section 6.07 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Section 6.08 Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Section 6.09 Investment Company Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Section 6.10 Public Utility Holding Company Act . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Section 6.11 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Section 6.12 Tax Returns and Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Section 6.13 Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Section 6.14 Purpose of Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Section 6.15 Franchises and Other Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Section 6.16 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Section 6.17 Solvency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 ARTICLE VII AFFIRMATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Section 7.01 Information Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Section 7.02 Books, Records and Inspections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Section 7.03 Insurance and Maintenance of Properties . . . . . . . . . . . . . . . . . . . . . . . . . 36 Section 7.04 Payment of Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Section 7.05 Corporate Existence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Section 7.06 Compliance with Statutes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Section 7.07 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Section 7.08 Additional Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
-ii- 4 ARTICLE VIII NEGATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Section 8.01 Change in Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Section 8.02 Consolidation, Merger or Sale of Assets . . . . . . . . . . . . . . . . . . . . . . . . . 38 Section 8.03 Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Section 8.04 Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Section 8.05 Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Section 8.06 Restricted Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Section 8.07 Change in Accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Section 8.08 Change of Certain Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Section 8.09 FINCHAA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Section 8.10 Transactions with Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Section 8.11 Minimum Consolidated Tangible Net Worth . . . . . . . . . . . . . . . . . . . . . . . . . 41 Section 8.12 Consolidated Net Worth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Section 8.13 Funded Debt Coverage Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Section 8.14 Capital Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Section 8.15 Fixed Charge Coverage Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 ARTICLE IX GUARANTY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 Section 9.01 Guaranty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 Section 9.02 Continuing Guaranty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Section 9.03 Effect of Debtor Relief Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 Section 9.04 Complete Waiver of Subrogation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 Section 9.05 Subordination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 Section 9.06 Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 Section 9.07 Full Force and Effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 ARTICLE X EVENTS OF DEFAULT AND REMEDIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 Section 10.01 Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 Section 10.02 Primary Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 Section 10.03 Other Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 ARTICLE XI THE AGENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 Section 11.01 Authorization and Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 Section 11.02 Agent's Reliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Section 11.03 Agent and Affiliates; TCB and Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Section 11.04 Bank Credit Decision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
-iii- 5 Section 11.05 Agent's Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Section 11.06 Successor Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Section 11.07 Notice of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 ARTICLE XII MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 Section 12.01 Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 Section 12.02 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 Section 12.03 No Waiver; Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Section 12.04 Costs, Expenses and Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 Section 12.05 Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 Section 12.06 Right of Setoff . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 Section 12.07 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 Section 12.08 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 Section 12.09 Survival of Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . 56 Section 12.10 Successors and Assigns; Participations . . . . . . . . . . . . . . . . . . . . . . . . . 56 Section 12.11 Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 Section 12.12 Pro Rata Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 Section 12.13 Separability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 Section 12.14 Execution in Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 Section 12.15 Interpretation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 Section 12.16 Submission to Jurisdiction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 Section 12.17 Waiver of Jury Trial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 Section 12.18 Final Agreement of the Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
-iv- 6 CREDIT AGREEMENT THIS CREDIT AGREEMENT dated as of May 15, 1995 (this "Agreement") is between SERV-TECH, INC., a Texas corporation (the "Company"), the Subsidiaries of the Company listed on the signature pages hereto as Guarantors (together with each other person who subsequently becomes a Guarantor, collectively the "Guarantors"), the banks and other financial institutions listed on the signature pages hereto under the caption "Banks" (together with each other person who becomes a Bank, collectively the "Banks") and TEXAS COMMERCE BANK NATIONAL ASSOCIATION, individually as a Bank ("TCB") and as agent for the other Banks (in such capacity together with any other Person who becomes the agent the "Agent"). The Company has requested that the Banks provide the Company with a credit facility, pursuant to which the Banks will commit to make a revolving credit loan of up to $35,000,000.00 to the Company to refinance the Prior Indebtedness, to finance capital expenditures, to provide for the issuance of Letters of Credit by TCB, and for use as working capital. In connection therewith, the Agent has agreed to serve as Agent for the Banks and the Agent and the Company hereby agree that, upon the fulfillment of the conditions contained in Section 5.01 and the repayment of the Prior Indebtedness, all documentation evidencing, securing or describing said Prior Indebtedness shall automatically terminate. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants set forth herein, the Company, the Agent and the Banks agree as follows: ARTICLE I DEFINITIONS; ACCOUNTING TERMS; INTERPRETATION SECTION 1.01. Definitions. As used in this Agreement, the following terms shall have the following meanings: "Accounts" means all accounts, accounts receivable or other indebtedness owing to the Company or to a Subsidiary of the Company which is a Guarantor as consideration for goods sold, services rendered or results from a billing based upon costs incurred on a project in excess of all prior billings (net of any billings in excess of such costs), if billed during the immediately succeeding billing cycle and, in any event, not later than the end of the month following the month in which same were incurred. 7 "Advance" means an advance pursuant to a Notice of Advance, comprised of a single Type of Loan from all the Banks (or resulting from a conversion or conversions on the same date having, in the case of Eurodollar Rate Advances, the same Interest Period (except as otherwise provided in this Agreement)), made by all of the Banks concurrently to the Company. "Advance Date" means, with respect to each Advance, the Business Day upon which the proceeds of such Advance are to be made available to the Company. "Affiliate" means, with respect to any Person, any other Person directly or indirectly controlling (including all directors and officers of such Person), controlled by, or under direct or indirect common control with such Person, and any other Person in which such Person's direct or indirect equity interest is 10% or more of the total outstanding equity interests of such Person. "Agent" has the meaning specified in the introduction to this Agreement. "Agent's Fee" has the meaning specified in Section 4.01(c). "Agreement" has the meaning specified in the introduction to this Agreement. "Alternate Base Rate" means, for any date, a rate per annum (rounded upwards, if necessary, to the next 1/16 of 1%) equal to the greater of (a) the Prime Rate in effect on such day and (b) the Federal Funds Effective Rate in effect on such day plus 1/2 of 1%. For purposes hereof, the term "Prime Rate" means, as of a particular date, the prime rate most recently determined by the Agent and thereafter entered in the minutes of its Loan and Discount Committee, automatically fluctuating upward and downward with and at the time of such determination without notice to the Company or any other Person, which prime rate may not necessarily represent the lowest or best rate actually charged to a customer. "Federal Funds Effective Rate" means, for any day, the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by the Agent from three federal funds brokers of recognized standing selected by it. If, for any reason, the Agent shall have determined (which determination shall be conclusive absent manifest error) that it is unable to ascertain the Federal Funds Effective Rate, including the inability or failure of the Agent to obtain sufficient quotations in accordance with the terms hereof, the Alternate Base Rate shall be determined without regard to clause (b) of the first sentence of this definition until the circumstances giving rise to such inability no -2- 8 longer exist. Any change in the Alternate Base Rate due to a change in the Prime Rate or the Federal Funds Effective Rate shall be effective on the effective date of such change in the Prime Rate or the Federal Funds Effective Rate, respectively. "Alternate Base Rate Advance" means any Advance bearing interest at a rate determined by reference to the Alternate Base Rate in accordance with the provisions of Article II. "Applicable Lending Office" means, with respect to each Bank, such Bank's Domestic Lending Office in the case of an Alternate Base Rate Advance and such Bank's Eurodollar Lending Office in the case of a Eurodollar Rate Advance. "Application for Letter of Credit" means an application by the Company to the Issuing Bank requesting it to issue a Letter of Credit, substantially in the form of Exhibit 1.01B hereto. "Assignment and Acceptance" has the meaning specified in Section 12.10 (c). "Bank" has the meaning provided in the introduction to this Agreement. "Bankruptcy Code" has the meaning specified in Section 10.01(e). "Board" means the Board of Governors of the Federal Reserve System of the United States (or any successor). "Borrowing Base" means an amount equal to 80% of the Eligible Accounts. "Borrowing Base Certificate" means a certificate calculating the Borrowing Base, substantially in the form of Exhibit 1.01. "Business Day" means any day (other than a day which is a Saturday, Sunday or legal holiday in the State of Texas) on which banks are open for business in Houston, Texas. "Capitalized Lease Obligations" means all lease or rental obligations which, pursuant to GAAP, are capitalized for balance sheet purposes. "Change of Control" means any of (i) the acquisition by any Person or two or more Persons acting in concert, of beneficial ownership of 50% or more of the outstanding shares of voting stock of the Company, (ii) a majority of the members of the Board of Directors of the Company on any date shall not have been members of the -3- 9 Board of Directors of the Company on the date 12 months prior to such date, (iii) all or substantially all of the assets of the Company are sold in a single transaction or series of related transactions to any Persons or (iv) the Company merges or consolidates with or into any other Person. "Code" means Internal Revenue Code of 1986 and the regulations promulgated thereunder. "Commercial Letter of Credit" means a letter of credit issued to finance the purchase or shipment of goods and payable upon presentation of appropriate documents of title and receipt in regard to said goods. "Commitment" and "Commitments" means the obligation of the Banks to enter into and perform this Agreement, to make available the Loans and to issue the Letters of Credit to the Company in the amounts shown on the signature page of each Bank hereto and all other duties and obligations of the Banks hereunder. "Commitment Fee" has the meaning specified in Section 4.01(b). "Company" has the meaning specified in the introduction to this Agreement. "Consolidated Net Income" means, for any period, the net income (or loss) of the Company and its Subsidiaries for such period determined on a consolidated basis without giving effect to any nonrecurring items, extraordinary gains or gains from sales of assets or write downs in the value of assets owned by the Company and its Subsidiaries. "Consolidated Net Worth" means total assets minus total liabilities. "Consolidated Tangible Net Worth" means: (a) total assets minus (b) the sum of (i) all liabilities and (ii) all intangible assets, including, without limitation, goodwill, patents, trademarks and similar items. "Coverage Ratio" means the ratio of Funded Debt to EBITDA. "Credit Event" means the making of any Advance, the conversion or continuation of any Advance as a Eurodollar Rate Advance or the issuance of any Letter of Credit. "Default" means the occurrence of any event which with the giving of notice or the passage of time or both could become an Event of Default. -4- 10 "Default Rate" means the lesser of (i) the Highest Lawful Rate and (ii) the Alternate Base Rate plus two percent (2%). "Designated Payment Date" means January 1, April 1, July 1 and October 1, in any calendar year; provided, however, if in any such year a Designated Payment Date shall be a day which is not a Business Day, such Designated Payment Date shall be the next succeeding Business Day, and such extension of time shall be included in determining the amount to be paid on such date. "Domestic Lending Office" means, with respect to any Bank, the office of such Bank designated from time to time as its "Domestic Lending Office" hereunder. "EBITDA" means, for any period, the Consolidated Net Income for such period, plus the aggregate amount which was deducted for such period in determining consolidated net income in respect of interest expense (including amortization of debt discount, imputed interest and capitalized interest), plus depreciation, amortization and provision for taxes, plus income attributable to any minority interest in any Person, for so long as said Person remains a Guarantor, but specifically excluding the special charges taken by the Company on September 30, 1994. "Effective Date" means the date on which all conditions to make an Advance set forth in Section 5.01(a) are first met or waived in accordance with Section 12.01 hereof. "Eligible Accounts" means all Accounts, each of which meets all of the following criteria on the date of determination: (a) is owned by the Company or a Subsidiary of the Company which is a Guarantor, free and clear of any claim, arising in the ordinary course of business; (b) is not more than ninety (90) days old from the original invoice date (120 days in the case of Accounts listed on Schedule 1.01 hereof, which schedule is subject to change by the Agent in its sole and absolute discretion); (c) except as allowed under (a) above, does not include any amount that is either for goods not yet delivered or services not yet performed or any amount that will be held back by any party as retainage or assurance of the future performance of the Company until the Company is entitled to and does bill for such retainage; -5- 11 (d) has not been challenged by the obligor thereon for any bonafide reason; (e) in respect of which no notice of the bankruptcy, insolvency or dissolution of the obligor thereon is known to the Company; (f) is not owed by (i) a foreign Person unless supported by a letter of credit or other insurance satisfactory to the Agent or (ii) the United States government; and (g) is not from an obligor that has 30% or more of its Accounts to the Company more than 120 days old.; "Eligible Assignee" means (a) any Bank; (b) a commercial bank organized under the laws of the United States, or any state thereof, and having total assets in excess of $1,000,000,000; (c) a commercial bank organized under the laws of any other country which is a member of the Organization for Economic Cooperation and Development or any successor organization, or a political subdivision of any such country, and having total assets in excess of $1,000,000,000; provided that such bank is acting through a branch or agency located in the country in which it is organized or another country which is also a member of the Organization for Economic Cooperation and Development or any successor organization; (d) the central bank of any country which is a member of the Organization for Economic Cooperation and Development or any successor organization; and (e) any other bank or similar financial institution approved by the Agent and the Majority Banks. "Environmental Laws" means federal, state or local laws, rules or regulations, and any judicial, arbitral or administrative interpretations thereof, including any judicial, arbitral or administrative order, judgment, permit, approval, decision or determination pertaining to conservation or protection of the environment in effect at the time in question, including the Clean Air Act, the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), the Federal Water Pollution Control Act, the Occupational Safety and Health Act, the Resource Conservation and Recovery Act, the Safe Drinking Water Act, the Toxic Substances Control Act, the Superfund Amendment and Reauthorization Act of 1986, the Hazardous Materials Transportation Act, and comparable state and local laws, and other environmental conservation and protection laws. "ERISA" means the Employee Retirement Income Security Act of 1974 and the regulations promulgated thereunder. -6- 12 "ERISA Affiliate" means (a) any trade or business (whether or not incorporated) which is either a member of the same "controlled group" or under "common control," within the meaning of Section 414 of the Code and the regulations thereunder, with the Company and (b) any Subsidiary of the Company. "Eurocurrency Liabilities" has the meaning specified in Regulation D as in effect from time to time. "Eurodollar Lending Office" means, with respect to each Bank, the branches or affiliates of such Bank designated as its "Eurodollar Lending Office" from time to time hereunder. "Eurodollar Rate" means, with respect to any Eurodollar Rate Advance, the rate (rounded to 1/16 of 1%) at which dollar deposits approximately equal in principal amount to the entire portion of such Advance and for a maturity equal to the applicable Interest Period are offered in immediately available funds to the Agent by prime banks in whatever Eurodollar interbank market may be selected by the Agent in its sole and absolute discretion at the time of determination and in accordance with the then usual practice in such market at approximately 10:00 a.m. (Houston, Texas time) two Business Days prior to the commencement of such Interest Period. "Eurodollar Rate Advance" means any Advance bearing interest at a rate determined by reference to the Eurodollar Rate in accordance with the provisions of Article II. "Events of Default" has the meaning specified in Section 10.01. "Execution Date" means the date upon which this Agreement shall have been executed by the Company and the Banks. "Existing Letters of Credit" means all letters of credit issued by TCB, outstanding on the Execution Date and described on Exhibit 3.01(a). "Federal Funds Effective Rate" has the meaning specified in the definition of the term "Alternate Base Rate." "Fees" means all amounts payable pursuant to Section 4.01. "Financials" has the meaning specified in Section 6.07. -7- 13 "FINCHAA Project" means the construction and operation of that certain FP-3 sugar refinery and ethanol plant, in the Republic of Ethiopia by F. C. Schaffer, a Subsidiary of the Company. "Funded Debt" means all indebtedness for borrowed money evidenced by a written document and subject to periodic, required payments of interest and/or principal. "GAAP" means generally accepted accounting principles as in effect from time to time as set forth in the opinions, statements and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants, the Financial Accounting Standards Board and such other Persons who shall be approved by a significant segment of the accounting profession and concurred in by the independent certified public accountants certifying any audited financial statements of the Company. "Guaranteed Obligations" has the meaning specified in Section 9.01. "Guarantors" means all of the Subsidiaries of the Company. "Guaranty" means the document described in Section 5.01(c), in the form of Article IX hereof. "Hazardous Materials" means (a) hazardous waste as defined in the Resource Conservation and Recovery Act of 1976, or in any applicable federal, state or local law or regulation, (b) hazardous substances, as defined in CERCLA, or in any applicable state or local law or regulation, (c) gasoline, or any other petroleum product or by-product, (d) toxic substances, as defined in the Toxic Substances Control Act of 1976, or in any applicable federal, state or local law or regulation or (e) insecticides, fungicides, or rodenticides, as defined in the Federal Insecticide, Fungicide, and Rodenticide Act of 1975, or in any applicable federal, state or local law or regulation, as each such Act, statute or regulation may be amended from time to time. "Highest Lawful Rate" means, as to any Bank, the maximum nonusurious rate of interest that, under applicable law, may be contracted for, taken, reserved, charged or received by such Bank on the Loans or under the Loan Documents at any time or from time to time. If the maximum rate of interest which, under applicable law, any of the Banks are permitted to charge the Company on the Loans shall change after the date hereof, to the extent permitted by applicable law, the Highest Lawful Rate shall be automatically increased or decreased, as the case may be, as of the effective time of such change without notice to the Company or any other Person. -8- 14 "Indebtedness" means (a) all indebtedness for borrowed money (whether by loan or the issuance and sale of debt securities) or for the deferred purchase price of property or services, (b) all indebtedness created or arising under any conditional sale or other title retention agreement with respect to property, (c) all Capitalized Lease Obligations, (d) all guaranties or other contingent liabilities of any kind (including letter of credit reimbursement obligations) and (e) all indebtedness, to the extent it would constitute a liability on a balance sheet prepared in accordance with GAAP or would be disclosed as a contingent liability in a footnote to financial statements of such Person prepared in accordance with GAAP. "Interest Period" has the meaning specified in Section 2.11. "Interest Rate Agreement" means an interest rate swap agreement, interest rate cap agreement or similar arrangement entered into by the Company and the Banks in connection with the Indebtedness evidenced by this Agreement and the other Loan Documents. "Investment" means, as applied to any Person, any direct or indirect purchase or other acquisition by such Person of the assets, stock or other securities of any other Person, or any direct or indirect loan, advance or capital contribution by such Person to any other Person, and any other item which would be classified as an "investment" on a balance sheet of such Person, including any direct or indirect contribution by such Person of property or assets to a joint venture, partnership or other business entity in which such Person retains an interest. "Issuing Bank" means TCB, in its capacity as a Bank. "Letter of Credit Fee" has the meaning specified in Section 4.01(e). "Letter of Credit Request" has the meaning specified in Section 3.02(a). "Letters of Credit" has the meaning specified in Section 3.01(a). "Lien" means, when used with respect to any Person, any mortgage, lien, charge, pledge, security interest or encumbrance of any kind (whether voluntary or involuntary and whether imposed or created by operation of law or otherwise) upon, or pledge of, any of its property or assets, whether now owned or hereafter acquired, or any lease intended as security, any capital lease in the nature of the foregoing, any conditional sale agreement or other title retention agreement, in each case, for the purpose, or having the effect, of protecting a creditor against loss of securing the payment or performance of an obligation. "Loan" and "Loans" have the meaning specified in Section 2.01. -9- 15 "Loan Documents" means this Agreement and the other documents described in Article V hereof. "Majority Banks" means Banks holding at least 66 2/3% of the Advances outstanding under the Loan, or, if no Advances are outstanding, Banks holding such percentage of the Commitment. "Margin" means, with respect to any Eurodollar Rate Advance for any Margin Period, the rate of interest per annum determined as set forth below as a function of the Coverage Ratio: (a) for any Margin Period which commences on a date when the Coverage Ratio is less than 1 to 1, the Margin shall be 1%; (b) for any Margin Period which commences on a date when the Coverage Ratio is equal to or greater than 1 to 1 but less than 1.5 to 1, the Margin shall be 1.25%; (c) for any Margin Period which commences on a date when the Coverage Ratio is equal to or greater than 1.5 to 1, but less than 2 to 1, the Margin shall be 1.5%; (d) for any Margin Period which commences on a date when the Coverage Ratio is equal to or greater than 2 to 1, but less than 2.5 to 1, the Margin shall be 1.75%; (e) for any Margin Period which commences on a date when the Coverage Ratio is equal to or greater than 2.5 to 1, the Margin shall be 2%; (f) as of the Execution Date, the Margin is 1.5%; and (g) if the Margin cannot be reasonably determined for any applicable period by the Agent, the Margin shall be 2%. "Margin Period" means a period commencing on the date on which the quarterly or annual financial statements of the Company are delivered pursuant to Section 7.01(a) or Section 7.01(b), as the case may be, and ending on the next date a financial statement is delivered. "Material Adverse Effect" means, relative to any occurrence of whatever nature (including any adverse determination in any litigation, arbitration or governmental investigation or proceeding) (a) a material adverse effect on the financial condition, -10- 16 business or operations of the Company and its Subsidiaries taken as a whole or (b) a material impairment of the collective ability of the Company to make payment hereunder or under any Note or the right of any Bank to enforce any of its remedies to collect any amounts owing under the Loan Documents. "Maturity Date" means May 31, 1997, unless accelerated pursuant to Section 10.02. "Maximum Guaranteed Amount" means for each Guarantor the greater of (a) 95% of the Adjusted Net Worth of such Guarantor as of the Execution Date and (b) 95% of the Adjusted Net Worth of such Guarantor at the earlier of (i) the date of commencement of a case under Title 11 of the Bankruptcy Code in which such Guarantor is a debtor and (ii) the date enforcement of the Guaranty is sought. For purposes hereof, "Adjusted Net Worth" of such Guarantor shall mean, as of the date of determination, (a) the amount of the present fair saleable value of the assets of such Guarantor as of the date of such determination, over (b) the amount of all liabilities of such Guarantor, contingent or otherwise, as of the date of such determination, as such terms are defined in accordance with applicable federal and state laws governing determinations of insolvency of debtors. "Multiemployer Plan" means any plan which is a "multiemployer plan" (as such term is defined in Section 4001(a)(3) of ERISA). "Note" and "Notes" have the meaning specified in Section 2.02. "Notice of Advance" has the meaning provided in Section 2.03(a). "Notice of Conversion" has the meaning provided in Section 2.05. "Notice of Default" has the meaning specified in Section 10.02. "Obligations" means all the obligations of the Company now or hereafter existing under the Loan Documents, whether for principal, interest, Fees, expenses, indemnification or otherwise. "Other Activities" has the meaning specified in Section 11.03. "Other Financings" has the meaning specified in Section 11.03. "Payment Office" means the office of the Agent located at 1111 Fannin Street, Houston, Texas 77002, or such other office as the Agent may hereafter designate in writing as such to the other parties hereto. -11- 17 "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to all or any of its functions under ERISA. "Permitted Investments" means, as to any Person: (a) securities issued or directly and fully guaranteed or insured by the United States or any agency or instrumentality thereof (provided that the full faith and credit of the United States is pledged in support thereof) having maturities of not more than twelve months from the date of acquisition thereof, (b) time deposits and certificates of deposit with maturities of not more than twelve months from the date of acquisition by such Person which deposits or certificates are either: (a) fully insured by the Federal Deposit Insurance Corporation or (b) in any Bank or other commercial bank incorporated in the United States or any U.S. branch of any other commercial bank, in each case having capital, surplus and undivided profits aggregating $100,000,000 or more with a long-term unsecured debt rating of at least A- from Standard & Poor's Ratings Group or A3 from Moody's Investors Service, (c) commercial paper issued by any Person incorporated in the United States rated at least A2 or the equivalent thereof by Standard & Poor's Ratings Group or at least P2 or the equivalent thereof by Moody's Investors Service and, in each case, maturing not more than 270 days after the date of issuance, (d) investments in money market mutual funds having assets in excess of $2,000,000,000 substantially all of whose assets are comprised of securities of the types described in clauses (a) through (c) above, and (e) repurchase or reverse purchase agreements respecting obligations with a term of not more than seven days for underlying securities of the types described in clause (a) above entered into with any bank listed in or meeting the qualifications specified in clause (b) above. "Person" means an individual, partnership, corporation (including a business trust), limited liability company, joint stock company, trust, unincorporated association, joint venture or other entity, or a foreign or domestic state or political subdivision thereof or any agency of such state or subdivision. "Plan" means any employee pension benefit plan (as defined in Section 3(2) of ERISA), subject to Title IV of ERISA or Section 412 of the Code, other than a Multiemployer Plan, with respect to which the Company or an ERISA Affiliate -12- 18 contributes or has an obligation or liability to contribute, including any such plan that may have been terminated. "Prior Indebtedness" means all indebtedness and obligations of any party under that one certain Credit Agreement dated March 26, 1992 between the Company as the borrower and Texas Commerce Bank National Association as the lender. "Regulation A" means Regulation A of the Board (respecting loans to depository institutions), as the same is from time to time in effect, and all official rulings and interpretations thereunder or thereof. "Regulation D" means Regulation D of the Board (respecting reserve requirements), as the same is from time to time in effect, and all official rulings and interpretations thereunder or thereof. "Regulation U" means Regulation U of the Board (respecting margin credit extended by banks), as the same is from time to time in effect, and all official rulings and interpretations thereunder or thereof. "Regulation X" means Regulation X of the Board (respecting borrowers who obtain margin credit), as the same is from time to time in effect, and all official rulings and interpretations thereunder or thereof. "Release" means any spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping or disposing into the environment (including the abandonment or discarding of barrels, containers and other closed receptacles). "Rents" means all payments in respect of operating leases, rental agreements and similar agreements in regard to the lease or rental of real or personal property. "Reportable Event" means an event described in Section 4043(b) of ERISA with respect to a Plan as to which the 30-day notice requirement has not been waived by the PBGC. "Requirements of Environmental Laws" means, as to any Person, the requirements of any applicable Environmental Law relating to or affecting such Person or the condition or operation of such Person's business or its properties, both real and personal. "Reserve Percentage" means, for any Interest Period, the reserve percentage applicable during such Interest Period under regulations issued from time to time by the -13- 19 Board (or if more than one such percentage is so applicable, the daily average for such percentages for those days in such Interest Period during which any such percentage shall be so applicable) for determining the maximum reserve requirement (including any marginal, supplemental or emergency reserves) for such Bank in respect of liabilities or assets consisting of or including Eurocurrency Liabilities. "Responsible Officer" means, with respect to the Company, the chairman of the board of directors, president, any vice president, chief executive officer, chief operating officer, treasurer or chief financial officer of the company. "Standby Letter of Credit" means a letter of credit that is issued to secure the payment or performance of an obligation and payable upon notice of a failure or default in regard thereto and that is not a Commercial Letter of Credit. "Subsidiary" means and includes, with respect to any Person, (a) any corporation more than 50% of whose stock of any class or classes having by the terms thereof ordinary voting power to elect a majority of the directors of such corporation (irrespective of whether or not at the time stock of any class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time owned by such Person, directly or indirectly and (b) any partnership, association, joint venture or other entity in which such Person, directly or indirectly, has greater than 50% of (i) the directors (or Persons performing similar functions) thereof or (ii) the equity interest. "Unfunded Current Liability" means, with respect to any Plan, the amount, if any, by which the present value of the accrued benefits under the Plan as of the close of its most recent Plan year exceeds the fair market value of the assets allocable thereto, determined in accordance with Section 412 of the Code. "Unutilized Commitment" at any time, means the Commitment less the outstanding Advances (including fundings under any Letters of Credit). SECTION 1.02. Types of Advances. Advances hereunder are distinguished by "Type". The Type of an Advance refers to the determination whether such Advance is a Eurodollar Rate Advance or an Alternate Base Rate Advance. SECTION 1.03. Accounting Terms. All accounting terms not defined herein shall be construed in accordance with GAAP, as applicable, and all calculations required to be made hereunder and all financial information required to be provided hereunder shall be done or prepared in accordance with GAAP. -14- 20 ARTICLE II THE LOANS SECTION 2.01. The Loan. (a) Subject to the terms and conditions hereof, each Bank severally agrees at any time and from time to time on and after the Execution Date and prior to the Maturity Date, to make and maintain a revolving credit loan or loans (each a "Loan" and collectively, the "Loans") to the Company, which Loans (i) shall, at the option of the Company, be made and maintained pursuant to one or more Advances comprised of Alternate Base Rate Advances or Eurodollar Rate Advances; provided that, except as otherwise specifically provided herein, all Loans comprising all or a portion of the same Advance shall at all times be of the same Type, (ii) shall be made in the minimum amount of $500,000.00 and integral multiples thereof, (iii) so long as no Default or Event of Default exists hereunder, may be repaid and reborrowed, at the option of the Company in accordance with the provisions hereof and (iv) shall, in the aggregate, not exceed the lesser of the Borrowing Base or the maximum total amount of the Commitment. There shall be no further Advances after the Maturity Date. (b) The Loans shall be used to provide working capital and for general corporate purposes, provided none of the proceeds of the Loans shall be used in any way in connection with the FINCHAA Project except as specifically herein provided. SECTION 2.02. The Notes. The Loans shall be evidenced by Notes in favor of each Bank (individually a "Note" and collectively, the "Notes"), substantially in the form of Exhibit 2.02 hereto. SECTION 2.03. Notice of Advance. (a) Whenever the Company requires an Advance, it shall give written notice thereof (a "Notice of Advance") (or telephonic notice promptly confirmed in writing) to the Agent (i) in the case of an Alternate Base Rate Advance, not later than 10:00 a.m. (Houston, Texas time) on the date of such Advance and (ii) in the case of a Eurodollar Rate Advance, not later than 11:00 a.m. (Houston, Texas time) three Business Days prior to the date of such Advance. Each Notice of Advance shall be irrevocable and shall be in the form of Exhibit 2.03 hereto, specifying (i) the aggregate principal amount of the Advance to be made, (ii) the date of such Advance (which shall be a Business Day), (iii) whether it is to be an Alternate Base Rate Advance or a Eurodollar Rate Advance and (iv) if the proposed Advance is to be a Eurodollar Rate Advance, the initial Interest Period to be applicable thereto. (b) The Agent shall promptly give the Banks written notice or telephonic notice (promptly confirmed in writing) of each proposed Advance, of each Bank's proportionate share thereof and of the other matters covered by each Notice of Advance. -15- 21 SECTION 2.04. Disbursement of Funds. (a) No later than 1:00 p.m. (Houston, Texas time) on the Advance Date, each Bank shall make available its pro rata portion of the amount of such Advance in U.S. dollars and in immediately available funds at the Payment Office. The Agent shall credit the amounts so received to the general deposit account of the Company maintained with the Agent. (b) Unless the Agent shall have been notified by any Bank prior to disbursement of the Advance by the Agent that such Bank does not intend to make available to the Agent such Bank's portion of the Advance to be made on such date, the Agent may assume that such Bank has made such amount available to the Agent on such Advance Date and the Agent may, in reliance upon such assumption, make available to the Company a corresponding amount. If such corresponding amount is not in fact made available to the Agent by such Bank and the Agent has made available same to the Company, the Agent shall be entitled to recover such corresponding amount on demand from such Bank. If such Bank does not pay such corresponding amount forthwith upon the Agent's demand therefor, the Agent shall promptly notify the Company, and the Company shall pay such corresponding amount to the Agent within two (2) Business Days after demand therefor. The Agent shall also be entitled to recover from such Bank or the Company, as the case may be, interest on such corresponding amount from the date such corresponding amount was made available by the Agent to the Company to the date such corresponding amount is recovered by the Agent, at a rate per annum equal to the Alternate Base Rate or the Eurodollar Rate plus the applicable Margin, as appropriate. Nothing herein shall be deemed to relieve any Bank from its obligation to fulfill its commitments hereunder or to prejudice any rights which the Company may have against any Bank as a result of any default by such Bank hereunder. SECTION 2.05. Conversions and Continuances. The Company shall have the option to convert on any Business Day all or a portion of the outstanding principal amount of one Type of Advance into another Type of Advance, provided, no Advances may be converted into or continued as Eurodollar Rate Advances if a Default or Event of Default is in existence on the date of the conversion. Each such conversion shall be effected by the Company giving the Agent written notice (each a "Notice of Conversion") prior to 11:00 a.m. (Houston, Texas time) at least (a) three (3) Business Days prior to the date of such conversion in the case of conversion into or continuance as Eurodollar Rate Advances and (b) prior to 10:00 a.m. (Houston, Texas time) one Business Day in the case of a conversion into Alternate Base Rate Advances, specifying each Advance (or portions thereof) to be so converted and, if to be converted into or continued as Eurodollar Rate Advances, the Interest Period to be initially applicable thereto. The Agent shall thereafter promptly notify each Bank of such Notice. SECTION 2.06. Voluntary Prepayments. The Company shall have the right to voluntarily prepay Advances in whole or in part at any time on the following terms and conditions: (a) no Eurodollar Rate Advance may be prepaid prior to the last day of its Interest -16- 22 Period unless, simultaneously therewith, the Company pays to the Agent for the benefit of the Banks, all sums necessary to compensate the Banks for all costs and expenses resulting from such prepayment, as reasonably determined by the Banks, including but not limited to those costs described in Sections 2.10(f), 2.14, and 2.15 hereof; (b) each partial prepayment shall be in an initial aggregate principal amount of $500,000.00 and integral multiples thereof; and (c) each prepayment pursuant to this Section shall be applied first, to the payment of accrued and unpaid interest, and then, to the outstanding principal of such Advances in the inverse order of maturity thereof. SECTION 2.07. Mandatory Repayments. (a) The aggregate amount of all Advances under the Notes (and all accrued, unpaid interest) shall be due and payable on the Maturity Date. (b) The Company shall repay advances on any day on which the aggregate outstanding principal amount of the Loans exceeds the lesser of (i) the Commitments and (ii) the then current Borrowing Base, in the amount of such excess, provided, the Company shall have three (3) days to make such payment if it is required only by subsection (ii) hereof. SECTION 2.08. Method and Place of Payment. Except as otherwise specifically provided herein, all payments under this Agreement due from the Company shall be made to the Agent for the benefit of the Banks not later than 11:00 a.m. (Houston, Texas time) on the date when due and shall be made in lawful money of the United States in immediately available funds at the Payment Office. SECTION 2.09. Pro Rata Advances. All Advances under this Agreement shall be incurred from the Banks pro rata, on the basis of their respective Commitments. It is understood that no Bank shall be responsible for any default by any other Bank in its obligation to make Loans hereunder and that each Bank shall be obligated to make the Loans provided to be made by it hereunder, regardless of the failure of any other Bank to fulfill its commitments hereunder. SECTION 2.10. Interest. (a) Subject to Section 12.08, the Company agrees to pay interest on the total outstanding principal balance of all Alternate Base Rate Advances from the date of each respective Advance to maturity (whether by acceleration or otherwise) at a rate per annum which shall at all times be equal to the lesser of (i) the Highest Lawful Rate and (ii) the Alternate Base Rate in effect from time to time. If the Alternate Base Rate is based on the Prime Rate, interest shall be computed on the basis of the actual number of days elapsed over a year of 365 or 366 days, as the case may be. If the Alternate Base Rate is based on the Federal Funds Effective Rate, interest shall be computed on the basis of the actual number of days elapsed over a year of 360 days. -17- 23 (b) Subject to Section 12.08, the Company agrees to pay interest on the total outstanding principal balance of all Eurodollar Rate Advances from the date of each respective Advance to maturity (whether by acceleration or otherwise) at a rate per annum (computed on the basis of the actual number of days elapsed over a year of 360 days) which shall, during each Interest Period applicable thereto, be equal to the lesser of (i) the Highest Lawful Rate and (ii) the applicable Eurodollar Rate for such Interest Period plus the applicable Margin. The applicable Eurodollar Rate shall be fixed for each Interest Period and shall not change during said Interest Period but the applicable Margin, which is added to said Eurodollar Rate to determine the total interest payable to the Banks, shall be adjusted, effective on the first day of each Margin Period, whether or not said adjustment occurs at a time other than the beginning of an Interest Period. (c) Subject to Section 12.08, overdue principal and, to the extent permitted by law, overdue interest in respect of any Advance and all other overdue amounts owing hereunder shall bear interest for each day that such amounts are overdue at a rate per annum equal to the Default Rate. (d) Interest on each Advance shall accrue from and including the date of such Advance to but excluding the date of any repayment thereof and shall be payable (i) in respect of Eurodollar Rate Advances (A) on the last day of the Interest Period (as defined below) applicable thereto and, in the case of any Interest Period in excess of three months, on each Designated Payment Date during said Interest Period and on the last day of the Interest Period and (B) on the date of any voluntary or mandatory repayment or any conversion or continuance, (ii) in respect of Alternate Base Rate Advances (A) on each Designated Payment Date commencing February 1, 1995 and (B) on the date of any voluntary or mandatory repayment and (iii) in respect of each Advance, at maturity (whether by acceleration or otherwise) and, after maturity, on demand. (e) The Agent, upon determining the Eurodollar Rate for any Interest Period, shall notify the Company thereof. Each such determination shall, absent manifest error, be final and conclusive and binding on all parties hereto. In addition, prior to the due date for the payment of interest on any Advances set forth in the immediately preceding paragraph, the Agent shall notify the Company of the amount of interest due by the Company on all outstanding Advances on the applicable due date, but any failure of the Agent to so notify the Company shall not reduce the Company's liability for the amount owed. (f) The Company shall pay to the Agent for the Account of each Bank, so long as the Banks shall be required under regulations of the Board to maintain reserves with respect to liabilities or assets consisting of or including Eurocurrency Liabilities, additional interest on the unpaid principal amount of each such Eurodollar Rate Advance, from the date of such Advance until such principal amount is paid in full, at an interest rate per annum equal at all -18- 24 times during the Interest Period for such Advance to the lesser of (i) the Highest Lawful Rate and (ii) the remainder obtained by subtracting (A) the Eurodollar Rate for such Interest Period from (B) the rate obtained by dividing such Eurodollar Rate referred to in clause (A) above by that percentage equal to 100% minus the Reserve Percentage of such Bank for such Interest Period. Such additional interest shall be determined by such Bank as incurred and shall be payable upon demand therefor by the Bank to the Company. Each determination by such Bank of additional interest due under this Section shall be conclusive and binding for all purposes in the absence of manifest error. SECTION 2.11. Interest Periods. (a) At the time the Company gives any Notice of Advance or Notice of Conversion in respect of the making of, or conversion into, a Eurodollar Rate Advance, the Company shall have the right to elect, by giving the Agent on the dates and at the times specified in Section 2.03 or Section 2.05, as the case may be, notice of the interest period (each an "Interest Period") applicable to such Eurodollar Rate Advance, which Interest Period shall be either a one, two, three or six month period; provided, that: (i) the initial Interest Period for any Eurodollar Rate Advance shall commence on the date of such Eurodollar Rate Advance (including the date of any conversion thereto or continuance thereof pursuant to Section 2.05); each Interest Period occurring thereafter in respect of such Eurodollar Rate Advance shall commence on the expiration date of the immediately preceding Interest Period; (ii) if any Interest Period relating to a Eurodollar Rate Advance begins on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period, such Interest Period shall end on the last Business Day of such calendar month; (iii) if any Interest Period would otherwise expire on a day which is not a Business Day, such Interest Period shall expire on the next succeeding Business Day, provided, that if there are no more Business Days in that month, the Interest Period shall expire on the preceding day; and (iv) no Interest Period for Advances shall extend beyond the Maturity Date. (b) If, upon the expiration of any Interest Period applicable to a Eurodollar Rate Advance, the Company has failed to elect a new Interest Period to be applicable to such Advance as provided above, the Company shall be deemed to have elected to convert such Advance into an Alternate Base Rate Advance effective as of the expiration date of such current Interest Period. SECTION 2.12. Interest Rate Not Ascertainable. In the event that the Agent shall determine (which determination shall, absent manifest error, be final, conclusive and binding upon -19- 25 all parties) that on any date for determining the Eurodollar Rate for any Interest Period, by reason of any changes arising after the date of this Agreement affecting the Eurodollar interbank market or any Bank's position in such market, adequate and fair means do not exist for ascertaining the applicable interest rate on the basis provided for in the definition of Eurodollar Rate, then, and in any such event, the Agent shall forthwith give notice to the Company and to the Banks of such determination. Until the Agent notifies the Company that the circumstances giving rise to the suspension described herein no longer exist, the obligations of the Banks to make Eurodollar Rate Advances shall be suspended. SECTION 2.13. Change in Legality. (a) Notwithstanding anything to the contrary herein contained, if any change in any law or regulation or in the interpretation thereof by any governmental authority charged with the administration or interpretation thereof shall make it unlawful for any Bank or its Eurodollar Lending Office to make or maintain any Eurodollar Rate Advance or to give effect to its obligations as contemplated hereby, then, by prompt written notice to the Company, the Bank may: (i) declare that Eurodollar Rate Advances will not thereafter be made by such Bank hereunder, whereupon the Company shall be prohibited from requesting Eurodollar Rate Advances from such Bank hereunder unless such declaration is subsequently withdrawn; and (ii) require that all outstanding Eurodollar Rate Advances made by such Bank be converted to Alternate Base Rate Advances, in which event (A) all such Eurodollar Rate Advances shall be automatically converted to Alternate Base Rate Advances as of the effective date of such notice as provided in paragraph (b) below and (B) all payments and prepayments of principal which would otherwise have been applied to repay the converted Eurodollar Rate Advances shall instead be applied to repay the Alternate Base Rate Advances resulting from the conversion of such Eurodollar Rate Advances. (b) For purposes of this Section, a notice to the Company by the Agent pursuant to paragraph (a) above shall be effective on the date of receipt thereof by the Company. SECTION 2.14. Increased Costs, Taxes or Capital Adequacy Requirements. (a) If the application or effectiveness of any applicable law or regulation or compliance by any Bank with any applicable guideline or request from any central bank or governmental authority (whether or not having the force of law) (i) shall change the basis of taxation of payments to such Bank of the principal of or interest on any Eurodollar Rate Advance made by such Bank or any other fees or amounts payable hereunder (other than taxes imposed on the overall net income of such Bank or its Applicable Lending Office or franchise taxes imposed upon it by the jurisdiction in which such Bank or its Applicable Lending Office has an office, (ii) shall impose, modify or deem applicable any reserve, special deposit or similar requirement against assets of, deposits with or -20- 26 for the account of, or credit extended by, such Bank (without duplication of any amounts paid pursuant to Section 2.10(f)) or (iii) shall impose on such Bank any other condition affecting this Agreement or any Eurodollar Rate Advance made by such Bank, and the result of any of the foregoing shall be to increase the cost to such Bank of maintaining its Commitment or of making or maintaining any Eurodollar Rate Advance or to reduce the amount of any sum received or receivable by such Bank hereunder (whether of principal, interest or otherwise) in respect thereof by an amount deemed in good faith by such Bank to be material, then the Company shall pay to such Bank such additional amount as will compensate it for such increase or reduction upon demand. (b) If any Bank shall have determined in good faith that any law, rule, regulation or guideline regarding capital adequacy, or any change therein, or any change in the interpretation or administration thereof or compliance with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency has or would have the effect of reducing the rate of return on the capital of such Bank as a consequence of, or with reference to, such Bank's obligations hereunder to a level below that which it could have achieved but for such adoption, change or compliance by an amount deemed by such Bank to be material, then, from time to time, the Company shall pay to the Agent for the benefit of such Bank such additional amount as will reasonably compensate it for such reduction upon demand. (c) Each Bank will notify the Company through the Agent of any event occurring after the date of this Agreement which will entitle it to compensation pursuant to this Section, as promptly as practicable after it becomes aware thereof and determines to request compensation. A certificate setting forth in reasonable detail the amount necessary to compensate the Bank in question as specified in paragraph (a) or (b) above, as the case may be and the calculation of such amount under clause (a)(i), shall be delivered to the Company and shall be conclusive absent manifest error. The Company shall pay to the Agent for the account of such Bank the amount shown as due on any such certificate within ten (10) days after its receipt of the same. The failure on the part of any Bank to demand increased compensation with respect to any Interest Period shall not constitute a waiver of the right to demand compensation thereafter. SECTION 2.15. Eurodollar Advance Prepayment and Default Penalties. Subject to Section 12.08, the Company shall indemnify each Bank against any loss or expense which it may sustain or incur as a consequence of (a) an Advance of, or a conversion from or into, Eurodollar Rate Advances that does not occur on the date specified therefor in a Notice of Advance or Notice of Conversion, (b) any payment, prepayment or conversion of a Eurodollar Rate Advance required by any other provision of this Agreement or otherwise made on a date other than the last day of the applicable Interest Period or (c) any default in the payment or prepayment of the principal amount of any Eurodollar Advance or any part thereof or interest accrued thereon, as and when due and payable (at the due date thereof, by notice of prepayment or otherwise). Such -21- 27 loss or expense shall include an amount equal to the excess determined by each Bank of (i) its cost of obtaining the funds for the Advance being paid, prepaid or converted or not borrowed (based on the Eurodollar Rate) for the period from the date of such payment, prepayment or conversion or failure to borrow to the last day of the Interest Period for such Advance (or, in the case of a failure to borrow, the Interest Period for the Advance which would have commenced on the date of such failure to borrow) over (ii) the amount of interest (as determined by each Bank) that would be realized in reemploying the funds so paid, prepaid or converted or not borrowed for such period or Interest Period, as the case may be. The Agent, on behalf of the Banks, will notify the Company of any loss or expense which will entitle the Banks to compensation pursuant to this Section, as promptly as possible after it becomes aware thereof, but failure to so notify shall not affect the Company's liability therefor. A certificate of any Bank setting forth any amount which it is entitled to receive pursuant to this Section shall be delivered to the Company and shall be conclusive absent manifest error. The Company shall pay to the Agent for the account of the Banks the amount shown as due on any certificate within ten (10) days after its receipt of the same. Without prejudice to the survival of any other obligations of the Company hereunder, the obligations of the Company under this Section shall survive the termination of this Agreement and the assignment of any of the Notes. SECTION 2.16. Voluntary Reduction of Commitment. Upon at least three (3) Business Days' prior written notice, the Company shall have the right, without premium or penalty, to reduce or terminate the Commitment in part or in whole, provided, that any reduction shall be in the amount of $500,000.00 or integral multiples thereof. SECTION 2.17. Tax Forms. With respect to each Bank which is organized under the laws of a jurisdiction outside the United States, on the date of the initial Advance hereunder, and from time to time thereafter if requested by the Company or the Agent, each such Bank shall provide the Agent and the Company with the forms prescribed by the Internal Revenue Service of the United States certifying as to such Bank's status for purposes of determining exemption from United States withholding taxes with respect to all payments to be made to such Bank hereunder or other documents satisfactory to the Company and the Agent indicating that all payments to be made to such Bank hereunder are subject to such tax at a rate reduced by an applicable tax treaty. Unless the Company and the Agent have received such forms or such documents indicating that payments hereunder are not subject to United States withholding tax or are subject to such tax at a rate reduced by an applicable tax treaty, the Company or the Agent shall withhold taxes from such payments at the applicable statutory rate in the case of payments to or for any Bank organized under the laws of a jurisdiction outside the United States. -22- 28 ARTICLE III LETTERS OF CREDIT SECTION 3.01. Letters of Credit. (a) Subject to and upon the terms and conditions herein set forth, the Issuing Bank agrees that it will, at any time and from time to time on or after the Execution Date and prior to the Maturity Date, following its receipt of a Letter of Credit Request and Application for Letter of Credit, issue for the account of the Company or any of the Guarantors and in support of the obligations of the Company or any of the Guarantors, one or more irrevocable letters of credit (all such letters of credit together with the Existing Letters of Credit collectively, the "Letters of Credit"), up to a maximum amount outstanding at any one time for all Letters of Credit and Existing Letters of Credit of $20,000,000.00, provided that the Issuing Bank shall not issue any Letter of Credit if at the time of such issuance: (i) the stated amount of such Letter of Credit shall be greater than an amount which, when added to all other Letters of Credit outstandings and all other Advances under the Notes then outstanding, would exceed the lesser of the Borrowing Base or the Commitments; or (ii) the expiry date or, in the case of any Letter of Credit containing an expiry date that is extendible at the option of the Issuing Bank, the initial expiry date of such Letter of Credit is a date that is later than the Maturity Date, unless such Letter of Credit is secured by cash. (b) The Issuing Bank shall neither renew nor permit the renewal of any Letter of Credit if any of the conditions precedent to such renewal set forth in Section 5.02 are not satisfied or, after giving effect to such renewal, the expiry date of such Letter of Credit would be a date that is later than the twelve months after the Maturity Date. (c) The Company, the Agent and the Banks acknowledge that TCB, pursuant to the terms of the Prior Indebtedness, has issued for the account of the Company, the Existing Letters of Credit. Upon the Execution Date, (i) the Letters of Credit outstanding shall be that amount equal to the aggregate stated amount of the Existing Letters of Credit, (ii) the amount available for Loans and Letters of Credit under the Commitments shall be reduced by such amount and (iii) the amount available under each Bank's Commitment shall be reduced by such Bank's percentage participation of such amount. If the Company or any of the Guarantors desires to extend the existing expiry date of any Existing Letter of Credit, or request a substitute letter of credit be issued for any reason in respect of any Existing Letter of Credit, the Company or any of the Guarantors shall submit to the Issuing Bank a Letter of Credit Request as provided in Section 3.02(a). (d) Notwithstanding anything else herein contained, the Issuing Bank shall not be obligated to issue any Letter of Credit for, or in support of, the FINCHAA project in any way, directly or indirectly, and any Letter of Credit issued to or for the account of F. C. Schaffer shall -23- 29 be issued only on the condition that it is not in support of, or in any way connected with, the FINCHAA Project. SECTION 3.02. Letter of Credit Requests. (a) Whenever the Company desires that a Letter of Credit be issued for its account or that the existing expiry date shall be extended, it shall give the Issuing Bank (with copies to be sent to the Agent and each other Bank) (i) in the case of a Letter of Credit to be issued, at least five Business Days' prior written request therefor and (ii) in the case of the extension of the existing expiry date of any Letter of Credit, at least five days prior to the date on which the Issuing Bank must notify the beneficiary thereof that the Issuing Bank does not intend to extend such existing expiry date. Each such request shall be executed by the Company and shall be in the form of Exhibit 3.02 attached hereto (each a "Letter of Credit Request") and shall be accompanied by an application for Letter of Credit therefor, completed to the satisfaction of the Issuing Bank, and such other certificates, documents and other papers and information as the Issuing Bank or any Bank (through the Agent) may reasonably request. Each Letter of Credit shall be denominated in U.S. dollars, shall expire no later than the date specified in Section 3.01, shall not be in an amount greater than is permitted under clauses (i) or (ii) of Section 3.01(a) and shall be in such form as may be reasonably approved from time to time by the Issuing Bank and the Company. (b) The making of each Letter of Credit Request shall be deemed to be a representation and warranty by the Company that such Letter of Credit may be issued in accordance with, and will not violate the requirements of this Agreement. Unless the Issuing Bank has received notice from any Bank before it issues the respective Letter of Credit or extends the existing expiry date of a Letter of Credit that one or more of the conditions specified in Article V are not then satisfied, or that the issuance of such Letter of Credit would violate this Agreement, then the Issuing Bank may issue the requested Letter of Credit for the account of the Company in accordance with the Issuing Bank's usual and customary practices. Upon its issuance of any Letter of Credit or the extension of the existing expiry date of any Letter of Credit, as the case may be, the Issuing Bank shall promptly notify the Company, the Agent and each Bank of such issuance or extension, which notice shall be accompanied by a copy of the Letter of Credit actually issued or a copy of any amendment extending the existing expiry date of any Letter of Credit, as the case may be. SECTION 3.03. Letter of Credit Participations. (a) All Existing Letters of Credit and all Letters of Credit issued subsequent hereto shall be deemed to have been sold and transferred by the Issuing Bank to each Bank, and each Bank shall be deemed irrevocably and unconditionally to have purchased and received from the Issuing Bank, without recourse or warranty, an undivided interest and participation, (to the extent of such Bank's percentage participation in the Commitments) in each such Letter of Credit (including extensions of the expiry date thereof), each substitute letter of credit, each drawing made thereunder and the -24- 30 obligations of the Company under this Agreement and the other Loan Documents with respect thereto, and any security therefor or guaranty pertaining thereto including the Guaranty. (b) In determining whether to pay under any Letter of Credit, the Issuing Bank shall have no obligation relative to the Banks other than to confirm that any documents required to be delivered under such Letter of Credit appear to have been delivered and that they appear to comply on their face with the requirements of such Letter of Credit. (c) In the event that the Issuing Bank makes any payment under any Letter of Credit, the same shall be considered an Alternate Base Rate Advance without further action by any Person. The Issuing Bank shall promptly notify the Agent, which shall promptly notify each Bank thereof. Each Bank shall immediately pay to the Agent for the account of the Issuing Bank the amount of such Bank's percentage participation of such Advance. If any Bank shall not have so made its percentage participation available to the Agent, such Bank agrees to pay interest thereon, for each day from such date until the date such amount is paid at the lesser of (i) the Federal Funds Effective Rate and (ii) the Highest Lawful Rate. (d) The Issuing Bank shall not be liable for, and the obligations of the Company and the Banks to make payments to the Agent for the account of the Issuing Bank with respect to Letters of Credit shall not be subject to, any qualification or exception whatsoever, including any of the following circumstances: (i) any lack of validity or enforceability of this Agreement or any of the other Loan Documents; (ii) the existence of any claim, setoff, defense or other right which the Company may have at any time against a beneficiary named in a Letter of Credit, any transferee of any Letter of Credit, the Agent, any Issuing Bank, any Bank, or any other Person, whether in connection with this Agreement, any Letter of Credit, the transactions contemplated herein or any unrelated transactions (including any underlying transaction between the Company and the beneficiary named in any such letter of credit); (iii) any draft, certificate or any other document presented under the Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; (iv) the surrender or impairment of any security for the performance or observance of any of the terms of any of the Loan Documents; or (v) the occurrence of any Default or Event of Default. -25- 31 1. (e) The Issuing Bank shall not be liable for any error, omission, interruption or delay in transmission, dispatch or delivery of any message or advice, however transmitted, in connection with any Letter of Credit, except for errors or omissions caused by such Issuing Bank's gross negligence or willful misconduct. IT IS THE EXPRESS INTENTION OF THE PARTIES HERETO THAT EACH ISSUING BANK, ITS OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS SHALL BE INDEMNIFIED AND HELD HARMLESS FROM ANY ACTION TAKEN OR OMITTED BY SUCH PERSON UNDER OR IN CONNECTION WITH ANY LETTER OF CREDIT OR ANY RELATED DRAFT OR DOCUMENT ARISING OUT OF OR RESULTING FROM SUCH PERSON'S SALE OR CONTRIBUTORY NEGLIGENCE. The Company agrees that any action taken or omitted by an Issuing Bank under or in connection with any Letter of Credit or the related drafts or documents, if done in accordance with the standards of care specified in the Uniform Customs and Practice for Documentary Credits (1993 Revision), International Chamber of Commerce, Publication No. 500 (and any subsequent revisions thereof approved by a Congress of the International Chamber of Commerce and adhered to by the Issuing Banks) and, to the extent not inconsistent therewith, the Uniform Commercial Code of the State of Texas, shall not result in any liability of the Issuing Bank to the Company. SECTION 3.04. Increased Costs. (a) Notwithstanding any other provision herein, but subject to Section 12.08, if any Bank shall have determined in good faith that any law, rule, regulation or guideline or the application or effectiveness of any applicable law or regulation or any change in applicable law or regulation or any change after the Execution Date in the interpretation or administration thereof, or compliance by any Bank (or any lending office of such Bank) with any applicable guideline or request from any central bank or governmental authority (whether or not having the force of law) either (i) shall impose, modify or make applicable any reserve, deposit, capital adequacy or similar requirement against letters of credit issued, or participated in, by any Bank or (ii) shall impose on any Bank any other conditions affecting this Agreement or any Letter of Credit; and the result of any of the foregoing is to increase the cost to any Bank of issuing, maintaining or participating in any Letter of Credit, or reduce the amount received or receivable by any Bank hereunder with respect to Letters of Credit, by an amount deemed by such Bank to be material, then, from time to time, the Company shall pay to the Agent for the account of such Bank such additional amount or amounts as will reasonably compensate such Bank for such increased cost or reduction by such Bank. (b) Each Bank will notify the Company through the Agent of any event occurring after the date of this Agreement which will entitle such Bank to compensation pursuant to subsection (a) above, as promptly as practicable. A certificate of a Bank setting forth in reasonable detail such amount or amounts as shall be necessary to compensate such Bank as specified in subsection (a) above may be delivered to the Company (with a copy to the Agent) and shall be conclusive absent manifest error. The Company shall pay to the Agent for the -26- 32 account of such Bank the amount shown as due on any such certificate within 30 days after its receipt of the same. SECTION 3.05. Conflict between Applications and Agreement. To the extent that any provision of any Application related to any Letter of Credit is inconsistent with the provisions of this Agreement, the provisions of this Agreement shall control. ARTICLE IV FEES SECTION 4.01. Fees. (a) The Company agrees to pay to the Agent on the Execution Date for the account of each Bank a fee (the "Facility Fee") equal to .1% of the Commitment of all of the Banks in excess of $20,000,000.00. (b) The Company agrees to pay to the Agent for the account of each Bank a commitment fee (the "Commitment Fee") for the period from and including the Execution Date to the Maturity Date, computed at a rate equal to .25% per annum and calculated on the basis of a 360 day-year on the daily average Unutilized Commitment of each Bank. Commitment Fees shall be due and payable in arrears on each Designated Payment Date commencing on the first such date following the Execution Date and on the Maturity Date. (c) The Company agrees to pay to the Agent for its own account a fee (the "Agent's Fee") of $15,000.00 per annum during the term hereof. (d) The Company agrees to pay to the Agent for the benefit of the Banks a fee (the "Letter of Credit Fee") in respect of all Letters of Credit issued hereunder equal to 1% of the face amount of such Letters of Credit which shall be divided 1/8th to the Issuing Bank and 7/8ths to the Banks, pro rata. Each such payment shall be made quarterly, in advance on each Designated Payment Date, in respect of all Letters of Credit then outstanding and shall be considered earned when paid and are non-refundable. ARTICLE V CONDITIONS PRECEDENT SECTION 5.01. Conditions Precedent to the Initial Advance. The obligation of each Bank to make its initial Advance to the Company is subject to the condition that the Agent shall have received the following: -27- 33 (a) this Agreement executed by the Company; (b) one Note for each Bank, each executed by the Company and payable to the order of said Bank in the amount of its Commitment; (c) a Guaranty, consisting of Article IX hereto, executed by each of the Subsidiaries of the Company, as Guarantors, for the benefit of the Banks; (d) a Notice of Advance with respect to the initial Advance meeting the requirements of Section 2.03(a), which Advance may be utilized for the sole purpose of repaying all outstanding obligations under and terminating the Prior Indebtedness; (e) a certificate of an officer and of the secretary or an assistant secretary of the Company certifying, inter alia, (i) true and complete copies of each of the articles or certificate of incorporation, as amended and in effect of the Company and each of its Subsidiaries, the bylaws, as amended and in effect, of the Company and each of its Subsidiaries and the resolutions adopted by the Board of Directors of the Company and each of its Subsidiaries (A) authorizing the execution, delivery and performance by the Company and each of its Subsidiaries of this Agreement and the other Loan Documents to which it is or will be a party and the Advances to be made hereunder, (B) approving the forms of the Loan Documents to which it is or will be a party and which will be delivered at or prior to the date of the initial Advance and (C) authorizing officers of the Company and each of its Subsidiaries to execute and deliver the Loan Documents to which it is or will be a party and any related documents, including, any agreement contemplated by this Agreement, (ii) the incumbency and specimen signatures of the officers of the Company and each of its Subsidiaries executing any documents on its behalf and (iii) that there has been no change in the businesses or financial condition of the Company which could have a Material Adverse Effect; (f) favorable, signed opinions addressed to the Agent and the Banks from Norton, Jacobs & Kuhn, L.L.P., counsel to the Company and the Guarantors, in form and substance satisfactory to the Agent and the Banks and their counsel; (g) the most current, revised budget for the FINCHAA Project; (h) the payment to the Agent and the Banks of all reasonable fees and expenses (including the reasonable fees and disbursements of Andrews & Kurth L.L.P.) agreed upon by such parties to be paid on the Execution Date; (i) certificates of appropriate public officials as to the existence, good standing and qualification to do business as a foreign corporation, as applicable, of the Company and its Subsidiaries in each jurisdiction in which the ownership of its properties or the conduct of its -28- 34 business requires such qualifications and where the failure to so qualify would have a Material Adverse Effect; and (j) evidence satisfactory to the Agent of the repayment of the Prior Indebtedness and termination of all parties' rights and obligations in regard thereto. The acceptance of the benefits of the initial Credit Event shall constitute a representation and warranty by the Company to the Agent and each of the Banks that all of the conditions specified in this Section above shall have been satisfied or waived as of that time. SECTION 5.02. Conditions Precedent to All Credit Events. The obligation of the Banks to make any Advance is subject to the further conditions precedent that on the date of such Credit Event: (a) The conditions precedent set forth in Section 5.01 shall have theretofore been satisfied or waived. (b) The representations and warranties set forth in Article VI shall be true and correct in all material respects as of, and as if such representations and warranties were made on, the date of the proposed Advance (unless such representation and warranty expressly relates to an earlier date or is no longer true and correct solely as a result of transactions permitted by the Loan Documents), and the Company shall be deemed to have certified to the Agent and the Banks that such representations and warranties are true and correct in all material respects by submitting a Notice of Advance. (c) The Company shall have complied with the provisions of Section 2.03 hereof. (d) No Default or Event of Default shall have occurred and be continuing or would result from such Credit Event. (e) No Material Adverse Effect shall have occurred since the delivery of the most recent financials. (f) All Persons that have become Subsidiaries subsequent to the Execution Date shall have executed a Guaranty. (g) The Agent shall have received such other approvals, opinions or documents as the Agent or the Banks may reasonably request. -29- 35 The acceptance of the benefits of each such Credit Event shall constitute a representation and warranty by the Company to the Agent and each of the Banks that all of the conditions specified in this Section above exist as of that time. SECTION 5.03. Delivery of Documents. All of the Notes, certificates, legal opinions and other documents and papers referred to in this Article V, unless otherwise specified, shall be delivered to the Agent for the account of each of the Banks and, except for the Notes, in sufficient counterparts for each of the Banks and shall be reasonably satisfactory in form and substance to the Banks. ARTICLE VI REPRESENTATIONS AND WARRANTIES In order to induce the Banks to enter into this Agreement and to make the Advances provided for herein, the Company, as to itself and each of its Subsidiaries, makes, on or as of the occurrence of each Credit Event (except to the extent such representations or warranties relate to an earlier date or are no longer true and correct in all material respects solely as a result of transactions permitted by the Loan Documents), the following representations and warranties to the Agent and the Banks: SECTION 6.01. Organization and Qualification. Each of the Company and its Subsidiaries (a) is a corporation duly organized, validly existing and in good standing under the laws of the state of its incorporation or organization, (b) has the corporate power to own its property and to carry on its business as now conducted and (c) is duly qualified as a foreign corporation to do business and is in good standing in every jurisdiction in which the failure to be so qualified would have a Material Adverse Effect. SECTION 6.02. Authorization and Validity. Each of the Company and its Subsidiaries has the corporate power and authority to execute, deliver and perform its obligations hereunder and under the other Loan Documents to which it is a party and all such action has been duly authorized by all necessary corporate proceedings on its part. The Loan Documents to which each of the Company and its Subsidiaries is a party have been duly and validly executed and delivered by such Person and constitute a valid and legally binding agreement of such Person enforceable in accordance with the respective terms thereof, except, in each case, as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer or other similar laws relating to or affecting the enforcement of creditors' rights generally, and by general principles of equity regardless of whether such enforceability is a proceeding in equity or at law. -30- 36 SECTION 6.03. Governmental Consents. No authorization, consent, approval, license or exemption of or filing or registration with any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, is necessary for the valid execution, delivery or performance by the Company or any Subsidiary of any Loan Document. SECTION 6.04. Conflicting or Adverse Agreements or Restrictions. Neither the Company nor any Subsidiary is a party to any contract or agreement or subject to any restriction which would reasonably be expected to have a Material Adverse Effect. All agreements of the Company relating to the lending of money or the issuance of letters of credit by any party are described hereto on Schedule 6.04. Neither the execution nor delivery of the Loan Documents nor compliance with the terms and provisions hereof or thereof will be contrary to the provisions of, or constitute a default under (a) the charter or bylaws of the Company or any of its Subsidiaries or (b) any applicable law or any applicable regulation, order, writ, injunction or decree of any court or governmental instrumentality or (c) any material agreement to which the Company or any of its Subsidiaries is a party or by which it is bound or to which it is subject. SECTION 6.05. Title to Assets. Each of the Company and its Subsidiaries has good title to all material personalty and good and indefeasible title to all material realty as reflected on the Company's and the Subsidiaries' books and records as being owned by them, except for properties disposed of in the ordinary course of business, subject to no Liens, except those permitted hereunder. All of such assets have been and are being maintained by the appropriate Person in good working condition in accordance with industry standards. SECTION 6.06. Litigation. No proceedings against or affecting the Company or any Subsidiary are pending or, to the knowledge of the Company, threatened before any court or governmental agency or department which involve a reasonable material risk of having a Material Adverse Effect except those listed on Schedule 6.06 hereof. SECTION 6.07. Financial Statements. Prior to the Execution Date, the Company has furnished to the Banks the audited consolidated balance sheet, income statement and statement of cash flow for itself as of December 31, 1994 (such audited financials, the "Financials"). The Financials have been prepared in conformity with GAAP consistently applied (except as otherwise disclosed in such financial statements) throughout the periods involved and present fairly, in all material respects, the consolidated financial condition of the Company and its consolidated Subsidiaries as of the dates thereof and the results of their operations for the periods then ended. As of the Execution Date, no Material Adverse Effect has occurred in the consolidated financial condition of the Company and its consolidated Subsidiaries since December 31, 1994. -31- 37 SECTION 6.08. Default. Neither the Company nor any Subsidiary is in default under any material provisions of any instrument evidencing any Indebtedness or of any agreement relating thereto, or in default in any respect under any order, writ, injunction or decree of any court, or in default in any respect under or in violation of any order, injunction or decree of any governmental instrumentality, in such manner as to cause a Material Adverse Effect. SECTION 6.09. Investment Company Act. Neither the Company nor any Subsidiary is, or is directly or indirectly controlled by or acting on behalf of any Person which is, an "investment company," as such term is defined in the Investment Company Act of 1940, as amended. SECTION 6.10. Public Utility Holding Company Act. Neither the Company nor any Subsidiary is a non-exempt "holding company," or subject to regulation as such, or, to the knowledge of the Company's or such Subsidiary's officers, an "affiliate" of a "holding company" or a "subsidiary company" of a "holding company," within the meaning of the Public Utility Holding Company Act of 1935, as amended. SECTION 6.11. ERISA. No accumulated funding deficiency (as defined in Section 412 of the Code or Section 302 of ERISA), whether or not waived, exists or is expected to be incurred with respect to any Plan. No liability to the PBGC (other than required premium payments) has been or is expected by the Company to be incurred with respect to any Plan by the Company or any ERISA Affiliate. Neither the Company nor any ERISA Affiliate has incurred any withdrawal liability under Title IV of ERISA with respect to any Multi-Employer Plans. SECTION 6.12. Tax Returns and Payments. Each of the Company and its Subsidiaries has filed all federal income tax returns and other tax returns, statements and reports (or obtained extensions with respect thereto) which are required to be filed and has paid or deposited or made adequate provision in accordance with GAAP for the payment of all taxes (including estimated taxes shown on such returns, statements and reports) which are shown to be due pursuant to such returns, except for such taxes as are being contested in good faith and by appropriate proceedings. SECTION 6.13. Environmental Matters. Each of the Company and its Subsidiaries (a) possesses all environmental, health and safety licenses, permits, authorizations, registrations, approvals and similar rights necessary under law or otherwise for the Company or such Subsidiary to conduct its operations as now being conducted (other than those with respect to which the failure to possess or maintain would not, individually or in the aggregate for the Company and such Subsidiaries, have a Material Adverse Effect) and (b) each of such licenses, permits, authorizations, registrations, approvals and similar rights is valid and subsisting, in full force and effect and enforceable by the Company or such Subsidiary, and each of the Company -32- 38 and its Subsidiaries is in compliance with all terms, conditions or other provisions of such permits, authorizations, registrations, approvals and similar rights except for such failure or noncompliance that, individually or in the aggregate for the Company and such Subsidiaries, would not have a Material Adverse Effect. Except as disclosed on Schedule 6.13, neither the Company nor any of its Subsidiaries has received any notices of any violation of, noncompliance with, or remedial obligation under, Requirements of Environmental Laws (which violation or non-compliance has not been cured, and there are no writs, injunctions, decrees, orders or judgments outstanding, or lawsuits, claims, proceedings, investigations or inquiries pending or, to the knowledge of the Company or any Subsidiary, threatened, relating to the ownership, use, condition, maintenance or operation of, or conduct of business related to, any property owned, leased or operated by the Company or such Subsidiary or other assets of the Company or such Subsidiary, other than those violations, instances of noncompliance, obligations, writs, injunctions, decrees, orders, judgments, lawsuits, claims, proceedings, investigations or inquiries that, individually or in the aggregate for the Company and such Subsidiaries, would not have a Material Adverse Effect. Except as disclosed on Schedule 6.13, there are no material obligations, undertakings or liabilities arising out of or relating to Environmental Laws to which the Company or any of its Subsidiaries has agreed, assumed or retained, or by which the Company or any of its Subsidiaries is adversely affected, by contract or otherwise. Except as disclosed on Schedule 6.13, neither the Company nor any of its Subsidiaries has received a written notice or claim to the effect that such Person is or may be liable to any other Person as the result of a Release or threatened Release of a Hazardous Material. SECTION 6.14. Purpose of Loans. (a) The proceeds of the Advances will be used to refinance existing indebtedness, to repay funding of Letters of Credit and for working capital purposes. (b) None of the proceeds of any Advance will be used directly or indirectly for the purpose of purchasing or carrying any "margin stock" within the meaning of Regulation U (herein called "margin stock") or for the purpose of reducing or retiring any indebtedness which was originally incurred to purchase or carry a margin stock. SECTION 6.15. Franchises and Other Rights. The Company and each of its Subsidiaries have all franchises, permits, licenses and other authority as are necessary to enable them to carry on their respective businesses as now being conducted where the absence of such would have a Material Adverse Effect. To the best of its knowledge, the Company is not in default in respect of any of such operating rights. SECTION 6.16. Subsidiaries. The Subsidiaries listed on Schedule 6.16 are all of the Subsidiaries of the Company as of the Execution Date. -33- 39 SECTION 6.17. Solvency. After giving effect to the initial Advance hereunder and all other Indebtedness of the Company, the Company and its Subsidiaries, viewed as a consolidated entity have (a) capital sufficient to carry on their businesses and transactions, (b) assets, the fair market value of which exceeds their consolidated liabilities (as reflected on the Financials or on the financial statements most recently delivered to the Banks), and (c) sufficient cash flow to pay their existing debts as they mature. ARTICLE VII AFFIRMATIVE COVENANTS The Company, as to itself and each of its Subsidiaries, covenants and agrees that on and after the date hereof and for so long as this Agreement is in effect and until the Commitments have terminated: SECTION 7.01. Information Covenants. The Company will furnish to each Bank: (a) As soon as available, and in any event within 45 days after the close of each of the first three quarters in each fiscal year of the Company, the consolidated and consolidating balance sheet of the Company and its Subsidiaries as of the end of such quarterly period and the related consolidated and consolidating statements of income and cash flows for such quarterly period and for the portion of the fiscal year ended at the end of such quarter, setting forth, in each case, comparative consolidated figures for the related periods in the prior fiscal year, all of which shall be certified by the chief financial officer or chief executive officer of the Company as fairly presenting in all material respects, the financial position of the Company and its Subsidiaries as of the end of such period and the results of their operations for the period then ended in accordance with GAAP, subject to changes resulting from normal year-end audit adjustments. (b) As soon as available, and in any event within 120 days after the close of each fiscal year of the Company, the audited consolidated and the unaudited consolidating balance sheets of the Company and its Subsidiaries as at the end of such fiscal year and the related consolidated and consolidating statements of income, stockholders equity and cash flows for such fiscal year, setting forth, in each case, comparative figures for the preceding fiscal year and certified by KPMG Peat Marwick or other independent certified public accountants of recognized national standing, whose report shall be without limitation as to the scope of the audit and reasonably satisfactory in substance to the Banks. -34- 40 (c) Immediately after any Responsible Officer of the Company obtains knowledge thereof, notice of: (i) any material violation of, noncompliance with, or remedial obligations under, Requirements of Environmental Laws, (ii) any material Release or threatened material Release of Hazardous Materials affecting any property owned, leased or operated by the Company or any of its Subsidiaries, (iii) any event or condition which constitutes a Default or an Event of Default, (iv) any condition or event which, in the opinion of management of the Company, would reasonably be expected to have a Material Adverse Effect, (v) any Person having given any written notice to the Company or taken any other action with respect to a claimed material default or event under any material instrument or material agreement, and (vi) the institution of any litigation which might reasonably be expected in the good faith judgment of the Company either to have a Material Adverse Effect or result in a final, non-appealable judgment or award in excess of $500,000.00 with respect to any single cause of action, or the institution of any litigation of any kind by any party with whom the Company has entered into a franchise agreement; then, a notice of such event or condition will be delivered to each Bank specifying the nature and period of existence thereof and specifying the notice given or action taken by such Person and the nature of any such claimed default, event or condition and, in the case of an Event of Default or Default, what action has been taken, is being taken or is proposed to be taken with respect thereto. (d) At the time of the delivery of the financial statement provided for in Sections 7.01(a) and 7.01(b), a certificate of a Responsible Officer to the effect that no Default or Event of Default exists or, if any Default or Event of Default does exist, specifying the nature and extent thereof and the action that is being taken or that is proposed to be taken with respect thereto, which certificate shall set forth the calculations required to establish whether the Company was in compliance with the provisions of Sections 8.11 through 8.15 as at the end of such fiscal period or year, as the case may be. (e) Monthly, as soon as available, and in any event within 45 days after the end of each month, (i) a Borrowing Base Certificate, (ii) a summary report of all Accounts of the -35- 41 Company and its Subsidiaries, (iii) a statement of income and a balance sheet for F.C. Schaffer, and (iv) a schedule of cash flows and the then currently available monthly project budget for the FINCHAA Project as an entity, all in form and substance reasonably satisfactory to the Agent. (f) Upon request by the Agent such environmental reports, studies and audits of the Company's procedures and policies, assets and operations in respect of Environmental Laws as the Agent may reasonably request. (g) Promptly upon receipt thereof, a copy of any report or letter submitted to the Company by its independent accountants in connection with any regular or special audit of the Company's records. (h) From time to time and with reasonable promptness, such other information or documents as the Agent or any Bank through the Agent may reasonably request. SECTION 7.02. Books, Records and Inspections. The Company and its Subsidiaries will maintain, and will permit, or cause to be permitted, any Person designated by any Bank or the Banks to visit and inspect any of the properties of the Company and its Subsidiaries, to examine the corporate books and financial records of the the Company and its Subsidiaries and make copies thereof or extracts therefrom and to discuss the affairs, finances and accounts of any such corporations with the officers, employees and agents of the Company and its Subsidiaries and with their independent public accountants, all at such reasonable times and as often as the Agent or such Bank may request. Such inspections shall be made not less often than annually and shall be at the expense of the Company. SECTION 7.03. Insurance and Maintenance of Properties. (a) Each of the Company and its Subsidiaries will keep reasonably adequately insured by financially sound and reputable insurers all of its material property, which is of a character, and in amounts and against such risks, usually and reasonably insured by similar Persons engaged in the same or similar businesses, including, without limitation, insurance against fire, casualty and any other hazards normally insured against. Each of the Company and its Subsidiaries will at all times maintain insurance against its liability for injury to Persons or property, which insurance shall be by financially sound and reputable insurers and in such amounts and form as are customary for corporations of established reputation engaged in the same or a similar business and owning and operating similar properties, and shall annually provide the Agent a listing of all such insurance and such other certificates and other evidence thereof, as the Agent shall reasonably request. A listing of all presently existing policies of the Company and its Subsidiaries is attached hereto as Schedule 7.03. (b) Each of the Company and its Subsidiaries will cause all of its material properties used or useful in the conduct of its business to be maintained and kept in good -36- 42 condition, repair and working order and supplied with all necessary equipment and will cause to be made all reasonably necessary repairs, renewals and replacements thereof, all as in the reasonable judgment of such Person may be reasonably necessary so that the business carried on in connection therewith may be properly conducted at all times. SECTION 7.04. Payment of Taxes. Each of the Company and its Subsidiaries will pay and discharge all taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits, or upon any properties belonging to it, prior to the date on which penalties attach thereto, except for such amounts that are being contested in good faith and by appropriate proceedings. SECTION 7.05. Corporate Existence. Each of the Company and its Subsidiaries will do all things necessary to preserve and keep in full force and effect (a) the corporate existence of such Person, and (b) unless the failure to do so would not have a Material Adverse Effect, the rights and franchises of each of the Company and its Subsidiaries. SECTION 7.06. Compliance with Statutes. Each of the Company and its Subsidiaries will comply with all applicable statutes, regulations and orders of, and all applicable restrictions imposed by, all governmental bodies, domestic or foreign, in respect of the conduct of its business and the ownership of its property, except to the extent the failure to do so would not reasonably be expected to have a Material Adverse Effect. SECTION 7.07. ERISA. Immediately after any Responsible Officer of the Company or any of its Subsidiaries knows or has reason to know any of the following items are true the Company will deliver or cause to be delivered to the Banks a certificate of the chief financial officer of the Company setting forth details as to such occurrence and such action, if any, the Company or its ERISA Affiliate is required or proposes to take, together with any notices required or proposed to be given to or filed with or by the Company or its ERISA Affiliate with respect thereto; that a Reportable Event has occurred or that an application may be or has been made to the Secretary of the Treasury for a waiver or modification of the minimum funding standard; that a Multiemployer Plan has been or may be terminated, reorganized, partitioned or declared insolvent under Title IV of ERISA; that any required contribution to a Plan or Multiemployer Plan has not been or may not be timely made; that proceedings may be or have been instituted under Section 4069(a) of ERISA to impose liability on the Company or an ERISA Affiliate or under Section 4042 of ERISA to terminate a Plan or appoint a trustee to administer a Plan; that the Company or any ERISA Affiliate has incurred or may incur any liability (including any contingent or secondary liability) on account of the termination of or withdrawal from a Plan or a Multiemployer Plan; and that the Company or an ERISA Affiliate may be required to provide security to a Plan under Section 401(a)(29) of the Code; or any other condition exists or may occur with respect to one or more Plans and/or Multiemployer Plans. -37- 43 SECTION 7.08. Additional Subsidiaries. The Company will immediately cause any Person which becomes a Subsidiary subsequent to the Execution Date to execute a Guaranty and deliver same to the Agent. ARTICLE VIII NEGATIVE COVENANTS The Company covenants and agrees, as to itself and each of its Subsidiaries, that on and after the date hereof and for so long as this Agreement is in effect and until the Commitments have terminated: SECTION 8.01. Change in Business. The Company will not, and will not engage in any businesses not of the same general type as those conducted by the Company on the Execution Date. SECTION 8.02. Consolidation, Merger or Sale of Assets. The Company will not, and will not permit any of its Subsidiaries to, wind up, liquidate or dissolve their affairs, or enter into any transaction of merger or consolidation, or sell or otherwise dispose of all or any part of their property or assets (other than sales of inventory and surplus or obsolete assets in the ordinary course of business provided that any disposal does not prejudice the Banks in any way), including the capital stock of any Subsidiary, or purchase, lease or otherwise acquire (in one or a series of related transactions) all or any part of the property or assets of any Person or all of the capital stock of any Person, provided the Company may acquire the assets or stock of companies in businesses related to the Company's business up to a maximum of $7,500,000.00 in any one transaction, and $10,000,000.00 in the aggregate for any four-quarter period, computed on a rolling four-quarter basis. SECTION 8.03. Indebtedness. Neither the Company nor any Subsidiary will create, incur, assume or permit to exist any Indebtedness except: (a) Indebtedness existing hereunder; (b) Indebtedness existing on the Execution Date and described in the Financials or, if not shown, listed on Schedule 8.03(b); (c) current accounts payable incurred in the ordinary course of business and commercial (but not standby) letters of credit obtained for the purpose of providing credit support for such payables; -38- 44 (d) Indebtedness arising as a result of the endorsement in the ordinary course of business of negotiable instruments in the course of collection; (e) Indebtedness of F. C. Schaffer, a Subsidiary, up to a maximum of $26,000,000.00, which Indebtedness may be guaranteed by the Company for the sole purpose of causing third party financial institutions to issue Standby Letters of Credit in support of the FINCHAA Project (which Indebtedness may be guaranteed by the Company); (f) Indebtedness of F. C. Schaffer only, up to a maximum of $10,000,000.00 for the sole purpose of causing third party financial institutions to issue Commercial Letters of Credit in connection with the FINCHAA Project; (g) guaranties of any Indebtedness of any Person not to exceed in the aggregate $2,000,000.00, provided that such limitation shall not apply to a guaranty of any Indebtedness of F. C. Schaffer, the FINCHAA Project or any Indebtedness related thereto; (h) purchase money indebtedness by or for the Company or any Subsidiary, except by F. C. Schaffer, incurred in connection with the acquisition of tangible assets from any third party not to exceed $5,000,000.00 in the aggregate during the term hereof; and (i) renewals and extensions (in the same or lesser principal amount on similar terms and conditions) of any Indebtedness listed in subparagraphs (b), (e), (f) and (g) above. SECTION 8.04. Liens. Neither the Company nor any Subsidiary will create, incur, assume or suffer to exist any Lien upon or with respect to any of its property or assets of any kind whether now owned or hereafter acquired (nor will they covenant with any other Person not to grant such a lien to the Agent), except (a) Liens existing on the Execution Date and listed on Schedule 8.04(a); (b) Liens for taxes or assessments or other governmental charges or levies, either not yet due and payable or being contested in good faith and by appropriate proceedings for which adequate reserves have been established; (c) Liens securing Indebtedness permitted under Section 8.03(h) above; and (d) any renewal, extension or replacement of any Lien referred to in subparagraph (a) above; provided, that no Lien arising or existing as a result of such extension, renewal or replacement shall be extended to cover any property not theretofore subject to the Lien being extended, renewed or replaced and provided further that the principal amount of the -39- 45 Indebtedness secured thereby shall not exceed the principal amount of the Indebtedness so secured at the time of such extension, renewal or replacement. SECTION 8.05. Investments. Except as provided in Sections 8.02 and 8.09, neither the Company nor any Subsidiary will, directly or indirectly, make or own any Investment in any Person, except: (a) The Company and its Subsidiaries may make and own Permitted Investments; (b) The Company and its Subsidiaries may continue to own Investments owned by them on the Execution Date as set forth on Schedule 8.05(b); (c) The Company and its Subsidiaries may make and own Investments arising out of loans and advances for expenses, travel per diem and similar items in the ordinary course of business to officers, directors and employees; and (d) The Subsidiaries may make Investments permitted under Section 8.09(b) below. SECTION 8.06. Restricted Payments. (a) The Company will not pay any dividends or redeem, retire, purchase or make any other acquisition, direct or indirect, of any shares of any class of stock of the Company, or of any warrants, rights or options to acquire any such shares, now or hereafter outstanding, in excess of $2,000,000.00 during the term hereof, except to the extent that the consideration therefor consists solely of shares of stock (including warrants, rights or options relating thereto) of the Company. (b) Except in the ordinary course of business, the Subsidiaries will not declare any dividends, make any loans or advances to, or otherwise transfer any money or other assets to the Company during the term hereof, except for dividends, loans or transfers which are simultaneously transferred to the Banks in repayment of the Obligations. SECTION 8.07. Change in Accounting. The Company will not and will not permit any Subsidiary to, change its method of accounting except for (a) immaterial changes permitted by GAAP in which the Company's auditors concur or (b) changes required by GAAP. The Company shall advise the Agent in writing promptly upon making any material change to the extent same is not disclosed in the financial statements required under Section 7.01 hereof. SECTION 8.08. Change of Certain Indebtedness. The Company will not, and will not permit any of its Subsidiaries after the occurrence and during the continuance of any -40- 46 Event of Default to make any voluntary prepayments of principal or interest on any other of the Company's Indebtedness. SECTION 8.09. FINCHAA Project. Except as otherwise allowed under Section 8.03(e) and (f) hereof, neither the Company nor any Subsidiary will invest in, lend to, guaranty Indebtedness of, transfer assets to, obtain letters of credit for or otherwise become financially involved with the FINCHAA Project in any manner, directly or indirectly, through F. C. Schaffer or otherwise in excess of a loan or capital investment to such project of a maximum of $5,000,000.00 for all such Persons collectively, provided, the Company may, in addition, lend to, invest in or transfer funds to F. C. Schaffer up to an additional $1,000,000.00, provided said funds are not utilized in the FINCHAA project in any way. SECTION 8.10. Transactions with Affiliates. The Company will not, directly or indirectly, engage in any transaction with any Affiliate, including the purchase, sale or exchange of assets or the rendering of any service, except in the ordinary course of business or pursuant to the reasonable requirements of its business and, in each case, upon terms that are no less favorable than those which might be obtained in an arm's-length transaction at the time from non-Affiliates. SECTION 8.11. Minimum Consolidated Tangible Net Worth. The Company will not permit its Consolidated Tangible Net Worth during the term hereof to be less than $30,000,000.00, plus (a) 50% of Consolidated Net Income for each fiscal quarter commencing with the quarter starting on January 1, 1995, and thereafter during the term hereof to the date of determination, plus (b) 100% of the value of any consideration received in connection with the issuance of any capital stock by the Company or any Subsidiary subsequent to the Execution Date and during the term hereof. SECTION 8.12. Consolidated Net Worth. The Company will not permit its Consolidated Net Worth to be less than $49,000,000.00, plus (a) 50% of Consolidated Net Income for each fiscal quarter commencing with the quarter starting on January 1, 1995, and thereafter during the term hereof to the date of determination, plus (b) 100% of the value of any consideration received in connection with the issuance of any capital stock by the Company or any Subsidiary subsequent to the Execution Date at any time during the term hereof. SECTION 8.13. Funded Debt Coverage Ratio. The Company will not permit the ratio of (a) its total Funded Debt (exclusive of guaranties and other contingent obligations) to (b) consolidated EBITDA, computed quarterly on a rolling four quarters basis, to be greater than 2.75 to 1.0 at any time during the term hereof. SECTION 8.14. Capital Expenditures. The Company will not permit total consolidated capital expenditures (including Capitalized Lease Obligations) computed quarterly -41- 47 on a rolling four quarters basis to be greater than $7,500,000.00 at any time during the term hereof. SECTION 8.15. Fixed Charge Coverage Ratio. The Company will not permit the ratio of (a) EBITDA minus provisions for taxes to (b) the sum of: required principal repayments on all Funded Debt, plus required interest payments, plus actual cash expended and not financed from third party sources in respect of capital expenditures (including Capitalized Lease Obligations), plus stock repurchases, plus declared dividends, all calculated for the preceding four (4) quarters on a consolidated basis, to be less than (i) 1.0 to 1.0 on a rolling four quarter basis for each fiscal quarter, until the fiscal quarter ending September 30, 1995 and (ii) 1.1 to 1.0 for each fiscal quarter thereafter. ARTICLE IX GUARANTY SECTION 9.01. Guaranty. In consideration of, and in order to induce the Banks to make the Loans and the Issuing Bank to issue Letters of Credit hereunder, the Guarantors hereby absolutely, unconditionally and irrevocably, jointly and severally guarantee the punctual payment and performance when due, whether at stated maturity, by acceleration or otherwise, of the Obligations, and all other obligations and covenants of the Company now or hereafter existing under this Agreement, the Notes and the other Loan Documents whether for principal, interest (including interest accruing or becoming owing both prior to and subsequent to the commencement of any proceeding against or with respect to the Company under any chapter of the Bankruptcy Code), Fees, commissions, expenses (including reasonable attorneys' fees and expenses) or otherwise, and all reasonable costs and expenses, if any, incurred by the Agent or any Bank in connection with enforcing any rights under this Guaranty (all such obligations being the "Guaranteed Obligations"), and agree to pay any and all reasonable expenses incurred by each Bank and the Agent in enforcing this Guaranty; provided, that, anything herein or in any other Loan Document to the contrary notwithstanding, the maximum liability of each Guarantor hereunder and under the other Loan Documents shall in no event exceed such Guarantor's Maximum Guaranteed Amount as determined at the earlier of the date of the commencement of a case under Title 11 of the United States Code in which said Guarantor is a debtor and the date enforcement hereunder is sought. This Guaranty is an absolute, unconditional, present and continuing guaranty of payment and not of collectibility and is in no way conditioned upon any attempt to collect from the Company or any other action, occurrence or circumstance whatsoever. Each Guarantor agrees that the Guaranteed Obligations may at any time and from time to time exceed the Maximum Guaranteed Amount of such Guarantor without impairing this Guaranty or affecting the rights and remedies of the Banks hereunder. -42- 48 SECTION 9.02. Continuing Guaranty. Each Guarantor guarantees that the Guaranteed Obligations will be paid strictly in accordance with the terms of this Agreement, the Notes and the other Loan Documents. Each Guarantor agrees that the Guaranteed Obligations and Loan Documents may be extended or renewed, and Loans repaid and reborrowed in whole or in part, without notice to or assent by such Guarantor, and that it will remain bound upon this Guaranty notwithstanding any extension, renewal or other alteration of any Guaranteed Obligations or Loan Documents, or any repayment and reborrowing of Loans. To the maximum extent permitted by applicable law, the obligations of each Guarantor under this Guaranty shall be absolute, unconditional and irrevocable, and shall be performed strictly in accordance with the terms hereof under any circumstances whatsoever, including: (a) any extension, renewal, modification, settlement, compromise, waiver or release in respect of any Guaranteed Obligations; (b) any extension, renewal, amendment, modification, rescission, waiver or release in respect of any Loan Documents; (c) any release, exchange, substitution, non-perfection or invalidity of, or failure to exercise rights or remedies with respect to, any direct or indirect security for any Guaranteed Obligations, including the release of any Guarantor or other Person liable on any Guaranteed Obligations; (d) any change in the corporate existence, structure or ownership of the Company, any Guarantor, or any insolvency, bankruptcy, reorganization or other similar proceeding affecting the Company, such Guarantor, any other Guarantor or any of their respective assets; (e) the existence of any claim, defense, set-off or other rights or remedies which such Guarantor at any time may have against the Company, or the Company or such Guarantor may have at any time against the Agent, any Bank, any other Guarantor or any other Person, whether in connection with this Guaranty, the Loan Documents, the transactions contemplated thereby or any other transaction other than by the payment in full by the Company of the Guaranteed Obligations after the termination of the Commitments of the Banks and the expiration or termination of all Letters of Credit; (f) any invalidity or unenforceability for any reason of this Agreement or other Loan Documents, or any provision of law purporting to prohibit the payment or performance by the Company, such Guarantor or any other Guarantor of the Guaranteed Obligations or Loan Documents, or of any other obligation to the Agent or any Bank; or -43- 49 (g) any other circumstances or happening whatsoever, whether or not similar to any of the foregoing. SECTION 9.03. Effect of Debtor Relief Laws. If after receipt of any payment of, or proceeds of any security applied (or intended to be applied) to the payment of all or any part of the Guaranteed Obligations, the Agent or any Bank is for any reason compelled to surrender or voluntarily surrenders, such payment or proceeds to any Person (a) because such payment or application of proceeds is or may be avoided, invalidated, declared fraudulent, set aside, determined to be void or voidable as a preference, fraudulent conveyance, fraudulent transfer, impermissible set-off or a diversion of trust funds or (b) for any other reason, including (i) any judgment, decree or order of any court or administrative body having jurisdiction over the Agent, any Bank or any of their respective properties or (ii) any settlement or compromise of any such claim effected by the Agent or any Bank with any such claimant (including the Company), then the Guaranteed Obligations or part thereof intended to be satisfied shall be reinstated and continue, and this Guaranty shall continue in full force as if such payment or proceeds have not been received, notwithstanding any revocation thereof or the cancellation of any Note or any other instrument evidencing any Guaranteed Obligations or otherwise; and the Guarantors, jointly and severally, shall be liable to pay the Agent and the Banks, and hereby do indemnify the Agent and the Banks and hold them harmless for the amount of such payment or proceeds so surrendered and all expenses (including reasonable attorneys' fees, court costs and expenses attributable thereto) incurred by the Agent or any Bank in the defense of any claim made against it that any payment or proceeds received by the Agent or any Bank in respect of all or part of the Guaranteed Obligations must be surrendered. The provisions of this paragraph shall survive the termination of this Guaranty, and any satisfaction and discharge of the Company by virtue of any payment, court order or any federal or state law. SECTION 9.04. Complete Waiver of Subrogation. Notwithstanding any payment or payments made by any Guarantor hereunder, or any set-off or application by the Agent or any Bank of any security or of any credits or claims, no Guarantor will assert or exercise any rights of the Agent or any Bank or of such Guarantor against the Company to recover the amount of any payment made by such Guarantor to the Agent or any Bank hereunder by way of any claim, remedy or subrogation, reimbursement, exoneration, contribution, indemnity, participation or otherwise arising by contract, by statute, under common law or otherwise, and such Guarantor shall not have any right of recourse to or any claim against assets or property of the Company, whether or not the obligations of the Company guaranteed hereby have been satisfied. Each Guarantor hereby expressly waives any right to exercise any claim, right or remedy which such Guarantor may now have or hereafter acquire against the Company or any other Guarantor that arises under this Agreement or any other Loan Document or from the performance by any Guarantor of the Guaranty hereunder including any claim, remedy or right of subrogation, reimbursement, exoneration, contribution, indemnification or participation in any claim, right or remedy of the Agent or any Bank against the Company or any Guarantor, -44- 50 or any security that the Agent or any Bank now has or hereafter acquires, whether or not such claim, right or remedy arises in equity, under contract, by statute, under common law or otherwise. Each Guarantor agrees not to seek contribution or indemnity or other recourse from any other Guarantor or other Person. If any amount shall nevertheless be paid to a Guarantor by the Company or another Guarantor prior to payment in full of the Guaranteed Obligations, such amount shall be held in trust for the benefit of the Agent and the Banks and shall forthwith be paid to the Agent to be credited and applied to the Guaranteed Obligations, whether matured or unmatured. The provisions of this paragraph shall survive the termination of this Guaranty, and any satisfaction and discharge of the Company by virtue of any payment, court order or any federal or state law. SECTION 9.05. Subordination. If any Guarantor becomes the holder of any indebtedness payable by the Company or another Guarantor, each Guarantor hereby subordinates all indebtedness owing to it from the Company to all indebtedness of the Company to the Agent and the Banks, and agrees that during the continuance of any Default or Event of Default it shall not accept any payment on the same until payment in full of the Obligations of the Company under this Agreement and the other Loan Documents after the termination of the Commitments of the Banks and the termination or expiration of the Letters of Credit, the Notes and all other Loan Documents, and shall in no circumstance whatsoever attempt to set-off or reduce any obligations hereunder because of such indebtedness. If any amount shall nevertheless be paid to a Guarantor by the Company or another Guarantor prior to payment in full of the Guaranteed Obligations, such amount shall be held in trust for the benefit of the Agent and the Banks and shall forthwith be paid to the Agent to be credited and applied to the Guaranteed Obligations, whether matured or unmatured. SECTION 9.06. Waiver. Each Guarantor hereby waives promptness, diligence, notice of acceptance and any other notice with respect to any of the Guaranteed Obligations and this Guaranty and waives presentment, demand of payment, notice of intent to accelerate, notice of dishonor or nonpayment and any requirement that the Agent or any Bank institute suit, collection proceedings or take any other action to collect the Guaranteed Obligations, including any requirement that the Agent or any Bank protect, secure, perfect or insure any Lien against any property subject thereto or exhaust any right or take any action against the Company or any other Person or any collateral (it being the intention of the Agent, the Banks and each Guarantor that this Guaranty is to be a guaranty of payment and not of collection). It shall not be necessary for the Agent or any Bank, in order to enforce any payment by any Guarantor hereunder, to institute suit or exhaust its rights and remedies against the Company, any other Guarantor or any other Person, including others liable to pay any Guaranteed Obligations, or to enforce its rights against any security ever given to secure payment thereof. Each Guarantor hereby expressly waives to the maximum extent permitted by applicable law each and every right to which it may be entitled by virtue of the suretyship laws of the State of Texas, including any and all rights it may have pursuant to Rule 31, Texas Rules of Civil Procedure, Section 17.001 of the Texas Civil -45- 51 Practice and Remedies Code and Chapter 34 of the Texas Business and Commerce Code. Each Guarantor hereby waives marshaling of assets and liabilities, notice by the Agent or any Bank of any indebtedness or liability to which such Bank applies or may apply any amounts received by such Bank, and of the creation, advancement, increase, existence, extension, renewal, rearrangement or modification of the Guaranteed Obligations. Each Guarantor expressly waives, to the extent permitted by applicable law, the benefit of any and all laws providing for exemption of property from execution or for valuation and appraisal upon foreclosure. SECTION 9.07. Full Force and Effect. This Guaranty is a continuing guaranty and shall remain in full force and effect until all of the Obligations of the Company under this Agreement and the other Loan Documents and all other amounts payable under this Guaranty have been paid in full (after the termination of the Commitments of the Banks and the termination or expiration of the Letters of Credit). All rights, remedies and powers provided in this Guaranty may be exercised, and all waivers contained in this Guaranty may be enforced, only to the extent that the exercise or enforcement thereof does not violate any provisions of applicable law which may not be waived. ARTICLE X EVENTS OF DEFAULT AND REMEDIES SECTION 10.01. Events of Default. The following events shall constitute Events of Default ("Events of Default") hereunder: (a) any installment of principal or payment of interest on any Note or any payment of any Fee shall not be paid on the date on which such payment is due and such failure is not remedied within three (3) days; or (b) any representation or warranty made or, for purposes of Article VI, deemed made by the Company or any Subsidiary herein or in any of the Loan Documents or other document, certificate or financial statement delivered in connection with this Agreement or any other Loan Document shall prove to have been incorrect in any material respect when made or deemed made or reaffirmed, as the case may be; or (c) the Company shall fail to perform or observe or cause any Subsidiary to fail to perform or observe any duty or covenant contained in this Agreement or in any of the Loan Documents and such failure is not remedied with thirty (30) days if it relates to a covenant contained in Article VII hereof or ten (10) days if it relates to a covenant contained in Article VIII hereof; or -46- 52 (d) the Company or any Subsidiary shall (i) fail to make (whether as primary obligor or as guarantor or other surety) any principal payment of or interest or premium, if any, on any instrument of Indebtedness allowed hereunder (other than the Notes) outstanding beyond any period of grace provided with respect thereto or (ii) shall fail to duly observe, perform or comply with any agreement with any Person or any term or condition of any instrument of Indebtedness in excess of $500,000.00, if such failure is to cause, or to permit the holder or holders to cause, such obligations to become due prior to any stated maturity; or (e) an involuntary proceeding shall be commenced or an involuntary petition shall be filed in a court of competent jurisdiction seeking (i) relief in respect of the Company or any Subsidiary, or of a substantial part of the property or assets of the Company or any Subsidiary, under Title 11 of the United States Code, as now or hereafter in effect, or any successor thereto (the "Bankruptcy Code"), or any other federal or state bankruptcy, insolvency, receivership or similar law, (ii) the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for the Company or any Subsidiary or for a substantial part of the property or assets of the Company or any Subsidiary or (iii) the winding-up or liquidation of the Company or any Subsidiary; and such proceeding or petition shall continue undismissed for 60 days or an order or decree approving or ordering any of the foregoing shall be entered; or (f) the Company or any Subsidiary shall (i) voluntarily commence any proceeding or file any petition seeking relief under the Bankruptcy Code or any other federal or state bankruptcy, insolvency, receivership or similar law, (ii) consent to the institution of, or fail to contest in a timely and appropriate manner, any proceeding or the filing of any petition described in clause (e) above, (iii) apply for or consent to the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for the Company or any Subsidiary or for a substantial part of the property or assets of the Company or any Subsidiary, (iv) file an answer admitting the material allegations of a petition filed against it in any such proceeding, (v) make a general assignment for the benefit of creditors, (vi) become unable, admit in writing its inability or fail generally to pay its debts as they become due or (vii) take any action for the purpose of effecting any of the foregoing; or (g) a judgment or order, which with other outstanding judgments and orders against the Company and its Subsidiaries equal or exceed $500,000.00 in the aggregate (to the extent not covered by insurance as to which the respective insurer has acknowledged coverage), shall be entered against the Company or any Subsidiary and (i) within 30 days after entry thereof such judgment shall not have been paid or discharged or execution thereof stayed pending appeal or, within 30 days after the expiration of any such stay, such judgment shall not have been paid or discharged or (ii) any enforcement proceeding shall have been commenced (and not stayed) by any creditor or upon such judgment; or (h) a Change of Control shall occur. -47- 53 SECTION 10.02. Primary Remedies. In any such event, and at any time after the occurrence of any of the above described events, the Agent may, by written notice to the Company (a "Notice of Default") take any or all of the following actions (without prejudice to the rights of any Bank to enforce any other rights it may have against the Company, provided that, if an Event of Default specified in Section 10.01(e) or Section 10.01(f) shall occur, the following shall occur automatically without the giving of any Notice of Default): (a) declare the Commitments terminated, whereupon the Commitments shall forthwith terminate immediately and any Commitment Fee shall forthwith become due and payable without any other notice of any kind; (b) declare the principal of and any accrued and unpaid interest in respect of all Advances, and all obligations owing hereunder, to be, whereupon the same shall become, forthwith due and payable without presentment, demand, notice of demand or of dishonor and non-payment, protest, notice of protest, notice of intent to accelerate, declaration or notice of acceleration or any other notice of any kind, all of which are hereby waived by the Company; and (c) exercise any rights or remedies under any document securing any of the Loan Documents. In the event that no Default has occurred solely because of any grace period referred to herein or in Section 2.07(b), the Company shall, nonetheless, not be entitled to any Advances during said period. SECTION 10.03. Other Remedies. Upon the occurrence and during the continuance of any Event of Default, the Agent may proceed to protect and enforce its and the Banks' rights, either by suit in equity or by action at law or both, whether for the specific performance of any covenant or agreement contained in this Agreement or in any other Loan Document or in aid of the exercise of any power granted in this Agreement or in any other Loan Document; or may proceed to enforce the payment of all amounts owing to the Banks under the Loan Documents and any accrued and unpaid interest thereon in the manner set forth herein or therein; it being intended that no remedy conferred herein or in any of the other Loan Documents is to be exclusive of any other remedy, and each and every remedy contained herein or in any other Loan Document shall be cumulative and shall be in addition to every other remedy given hereunder and under the other Loan Documents or now or hereafter existing at law or in equity or by statute or otherwise. ARTICLE XI THE AGENT SECTION 11.01. Authorization and Action. Each Bank hereby irrevocably appoints and authorizes the Agent to act on its behalf and to exercise such powers under this Agreement and the other Loan Documents as are specifically delegated to or required of the Agent by the terms hereof, together with such powers as are reasonably incidental thereto. The Agent may perform any of its duties hereunder by or through its agents and employees. The duties of the Agent shall be mechanical and administrative in nature; the Agent shall not have -48- 54 by reason of this Agreement or any other Loan Documents a fiduciary relationship in respect of any Bank; and nothing in this Agreement or any other Loan Document, expressed or implied, is intended to, or shall be so construed as to, impose upon the Agent any obligations in respect of this Agreement or any other Loan Document except as expressly set forth herein or therein. As to any matters not expressly provided for by this Agreement, the Notes or the other Loan Documents (including enforcement or collection of the Notes), the Agent shall not be required to exercise any discretion or take any action, but shall be required to act or to refrain from acting (and shall be fully protected in so acting or refraining from acting) upon the instructions of the Majority Banks, and such instructions shall be binding upon the Banks and all holders of Notes and the Obligations; provided, that the Agent shall not be required to take any action which exposes the Agent to personal liability or which is contrary to this Agreement or applicable law. SECTION 11.02. Agent's Reliance. (a) Neither the Agent nor any of its directors, officers, agents or employees shall be liable for any action taken or omitted to be taken by it or them under or in connection with this Agreement, the Notes or any of the other Loan Documents (i) with the consent or at the request of the Majority Banks or (ii) in the absence of its or their own gross negligence or willful misconduct (IT BEING THE EXPRESS INTENTION OF THE PARTIES HERETO THAT THE AGENT AND ITS DIRECTORS, OFFICERS, AGENTS AND EMPLOYEES SHALL HAVE NO LIABILITY FOR ACTIONS AND OMISSIONS UNDER THIS SECTION RESULTING FROM THEIR SOLE ORDINARY OR CONTRIBUTORY NEGLIGENCE). (b) Without limitation of the generality of the foregoing, the Agent: (i) may treat the payee of each Note and the Obligations as the holder thereof until the Agent receives written notice of the assignment or transfer thereof signed by such payee and in form satisfactory to the Agent; (ii) may consult with legal counsel (including counsel for the Company), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts; (iii) makes no warranty or representation to any Bank and shall not be responsible to any Bank for any statements, warranties or representations made in or in connection with this Agreement, any Note or any other Loan Document; (iv) except as otherwise expressly provided herein, shall not have any duty to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions of this Agreement, any Note or any other Loan Document or to inspect the property (including the books and records) of the Company; (v) shall not be responsible to any Bank for the due execution, legality, validity, enforceability, collectibility, genuineness, sufficiency or value of this Agreement, any Note, any other Loan Document or any other instrument or document furnished pursuant hereto or thereto; (vi) shall not be responsible to any Bank for the perfection or priority of any Lien securing the Obligations; and (vii) shall incur no liability under or in respect of this Agreement, any Note or any other Loan Document by acting upon any notice, consent, certificate or other instrument or writing (which may be by telegram, telecopier, cable or telex) reasonably believed by it to be genuine and signed or sent by the proper party or parties. -49- 55 SECTION 11.03. Agent and Affiliates; TCB and Affiliates. Without limiting the right of any other Bank to engage in any business transactions with the Company or any of its Affiliates, with respect to their commitments, the Loans made by them and the Notes issued to them, TCB and each other Bank who may become the Agent shall have the same rights and powers under this Agreement and its Notes as any other Bank and may exercise the same as though it was not the Agent; and the term "Bank" or "Banks" shall, unless otherwise expressly indicated, include TCB and any such other Bank, in their individual capacities. TCB, each other Person who becomes the Agent and their respective Affiliates may be engaged in, or may hereafter engage in, one or more loan, letter of credit, leasing or other financing activity not the subject of this Agreement (collectively, the "Other Financings") with the Company, any Subsidiary or any of its Affiliates, or may act as trustee on behalf of, or depositary for, or otherwise engage in other business transactions with the Company, any Subsidiary or any of its Affiliates (all Other Financings and other such business transactions being collectively, the "Other Activities") with no responsibility to account therefor to the Banks. Without limiting the rights and remedies of the Banks specifically set forth herein, no other Bank by virtue of being a Bank hereunder shall have any interest in (a) any Other Activities, (b) any present or future guaranty by or for the account of the Company not contemplated or included herein, (c) any present or future offset exercised by the Agent in respect of any such Other Activities, (d) any present or future property taken as security for any such Other Activities or (e) any property now or hereafter in the possession or control of the Agent which may be or become security for the obligations of the Company hereunder and under the Notes by reason of the general description of indebtedness secured, or of property contained in any other agreements, documents or instruments related to such Other Activities; provided, however, that if any payment in respect of such guaranties or such property or the proceeds thereof shall be applied to reduction of the obligations evidenced hereunder and by the Notes, then each Bank shall be entitled to share in such application according to its pro rata portion of such obligations. SECTION 11.04. Bank Credit Decision. Each Bank acknowledges and agrees that it has, independently and without reliance upon the Agent or any other Bank and based on the financial statements referred to in Section 7.01 and such other documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Bank also acknowledges and agrees that it will, independently and without reliance upon the Agent or any other Bank and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement and the other Loan Documents. SECTION 11.05. Agent's Indemnity. (a) The Agent shall not be required to take any action hereunder or to prosecute or defend any suit in respect of this Agreement, the Notes or any other Loan Document unless indemnified to the Agent's satisfaction by the Banks against loss, cost, liability and expense. If any indemnity furnished to the Agent shall become impaired, it may call for additional indemnity and cease to do the acts indemnified against until -50- 56 such additional indemnity is given. In addition, the Banks agree to indemnify the Agent (to the extent not reimbursed by the Company), ratably according to the respective aggregate principal amounts of the Notes then held by each of them (or if no Notes are at the time outstanding, ratably according to the respective amounts of the Commitments), from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may be imposed on, incurred by, or asserted against the Agent in any way relating to or arising out of this Agreement or any action taken or omitted by the Agent under this Agreement, the Notes and the other Loan Documents. Without limitation of the foregoing, each Bank agrees to reimburse the Agent promptly upon demand for its ratable share of any out-of-pocket expenses (including reasonable counsel fees) incurred by the Agent in connection with the preparation, execution, administration, or enforcement of, or legal advice in respect of rights or responsibilities under, this Agreement, the Notes and the other Loan Documents to the extent that the Agent is not reimbursed for such expenses by the Company. The provisions of this Section shall survive the termination of this Agreement, the payment of the Obligations and/or the assignment of any of the Notes. (b) Notwithstanding the foregoing, no Bank shall be liable under this Section to the Agent for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements due to the Agent resulting from the Agent's gross negligence or willful misconduct. EACH BANK AGREES, HOWEVER, THAT IT EXPRESSLY INTENDS, UNDER THIS SECTION, TO INDEMNIFY THE AGENT RATABLY AS AFORESAID FOR ALL SUCH LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS, EXPENSES AND DISBURSEMENTS ARISING OUT OF OR RESULTING FROM THE AGENT'S SOLE ORDINARY OR CONTRIBUTORY NEGLIGENCE. SECTION 11.06. Successor Agent. The Agent may resign at any time by giving written notice thereof to the Banks and the Company and may be removed as Agent under this Agreement, the Notes and the other Loan Documents at any time with or without cause by the Majority Banks. Upon any such resignation or removal, the Majority Banks shall have the right to appoint a successor Agent. If no successor Agent shall have been so appointed by the Majority Banks, and shall have accepted such appointment, within 30 calendar days after the retiring Agent's giving of notice of resignation or the Majority Banks' removal of the retiring Agent, then the retiring Agent may, on behalf of the Banks, appoint a successor Agent, which shall be a commercial bank organized under the laws of the United States of America or of any state thereof and having a combined capital and surplus of at least $50,000,000. Upon the acceptance of any appointment as Agent hereunder and under the Notes and the other Loan Documents by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations under this Agreement, the Notes and the other Loan Documents. After any retiring Agent's resignation or removal as Agent hereunder and under the Notes and the other Loan Documents, the provisions of this Article XI shall inure to its benefit -51- 57 as to any actions taken or omitted to be taken by it while it was Agent under this Agreement, the Notes and the other Loan Documents. SECTION 11.07. Notice of Default. The Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default hereunder unless the Agent shall have received notice from a Bank or the Company referring to this Agreement, describing such Default or Event of Default and stating that such notice is a "notice of default." If the Agent receives such notice, the Agent shall give notice thereof to the Banks; provided, however, if such notice is received from a Bank, the Agent also shall give notice thereof to the Company. The Agent shall be entitled to take action or refrain from taking action with respect to such Default or Event of Default as provided in Section 11.01 and Section 11.02. ARTICLE XII MISCELLANEOUS SECTION 12.01. Amendments. No amendment or waiver of any provision of this Agreement, any Note or any other Loan Document, nor consent to any departure by the Company herefrom or therefrom, shall in any event be effective unless the same shall be in writing and signed by the Company, as to amendments, and by the Majority Banks in all cases, and then, in any case, such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given provided, no such amendment shall be effective unless signed by all of the Banks if it attempts to: (a) change the definition of "Accounts", "Borrowing Base", "Commitment", "Designated Payment Date", "Eligible Accounts" "Majority Banks", "Margin" or "Maturity Date"; (b) modify this Section or Sections 4.01(a), (b) or (d); (c) release any Guarantor; (d) to waive any Default under Section 10.01(a) or (e) in any other manner change the repayment terms of the Loans, including required principal payments or amount or time of interest payments. SECTION 12.02. Notices. Except with respect to telephone notifications specifically permitted pursuant to Article II, all notices, consents, requests, approvals, demands and other communications provided for herein shall be in writing (including telecopy communications) and mailed, telecopied, sent by overnight courier or delivered: (a) If to the Company: Serv-Tech, Inc. 5200 Cedar Crest Blvd. Houston, Texas 77087 Telecopy No: (713) 644-2455 -52- 58 Attention: Mr. David P. Tusa (b) If to the Agent: 712 Main Street, Houston, Texas 77002 Telecopy No: (713) 216-6004 Attention: Mr. Curtis D. Karges, Senior Vice President with copies to: Loan Syndication Services 1111 Fannin 9th Floor - M.S. 46 Houston, Texas 77002 Attention: Mr. Gale Manning and to: Andrews & Kurth L.L.P. 4200 Texas Commerce Tower Houston, Texas 77002 Telecopy No. (713) 220-4295 Attention: Mr. Thomas J. Perich or, in the case of any party hereto, such other address or telecopy number as such party may hereafter specify for such purpose by notice to the other parties. (c) If to any Bank, to the address specified by such Bank (or the Agent on behalf of any Bank) to the Company. All communications shall, when mailed, telecopied or delivered, be effective when mailed by certified mail, return receipt requested to any party at its address specified above, or telecopied to any party to the telecopy number set forth above, or delivered personally to any party at its address specified above; provided, that communications to the Agent pursuant to Article II shall not be effective until actually received by the Agent. SECTION 12.03. No Waiver; Remedies. No failure on the part of any Bank or the Agent to exercise, and no delay in exercising, any right hereunder, under any Note or under any other Loan Document shall operate as a waiver thereof; nor shall any single or partial exercise of any such right, or any abandonment or discontinuance of any steps to enforce such -53- 59 right, preclude any other or further exercise thereof or the exercise of any other right. No notice to or demand on the Company in any case shall entitle the Company to any other or further notice or demand in similar or other circumstances. The remedies herein are cumulative and not exclusive of any other remedies provided by law, at equity or in any other agreement. SECTION 12.04. Costs, Expenses and Taxes. The Company agrees to pay on demand: (a) all reasonable out-of-pocket costs and expenses of the Agent in connection with the preparation, execution and delivery of this Agreement, the Notes, the other Loan Documents and the other documents to be delivered hereunder, including the reasonable fees and out-of-pocket expenses of counsel for the Agent with respect thereto and with respect to advising the Agent as to its rights and responsibilities under this Agreement, the Notes and the other Loan Documents, and any modification, supplement or waiver of any of the terms of this Agreement or any other Loan Document, (b) all reasonable costs and expenses of any Bank and any other holder of an interest in the Notes, and the Obligations of the Company hereunder and under the Loan Documents, including reasonable legal fees and expenses, in connection with a default or the enforcement of this Agreement, the Notes and the other Loan Documents and (c) reasonable costs and expenses incurred in connection with third party professional services required by the Agent such as appraisers, environmental consultants, accountants or similar Persons, provided that, prior to any Event of Default hereunder, the Agent will first obtain the consent of the Company to such expense, which consent shall not be unreasonably withheld. Without prejudice to the survival of any other obligations of the Company hereunder and under the Notes, the obligations of the Company under this Section shall survive the termination of this Agreement or the replacement of the Agent and each assignment of the Notes. SECTION 12.05. Indemnity. (a) The Company shall indemnify the Agent and each Bank and each Affiliate thereof and their respective directors, officers, employees and agents from, and hold each of them harmless against, any and all losses, liabilities, claims or damages (including reasonable legal fees and expenses) to which any of them may become subject, insofar as such losses, liabilities, claims or damages arise out of or result from any actual or proposed use by the Company of the proceeds of any extension of credit hereunder or any investigation, litigation or other proceeding (including any threatened investigation or proceeding) relating to the foregoing or any of the other Loan Documents, and the Company shall reimburse each Bank and each Affiliate thereof and their respective directors, officers, employees and agents, upon demand for any expenses (including legal fees) reasonably incurred in connection with any such investigation or proceeding; but excluding any such losses, liabilities, claims, damages or expenses incurred by reason of the gross negligence or willful misconduct of the Person to be indemnified. (b) WITHOUT LIMITING ANY PROVISION OF THIS AGREEMENT, IT IS THE EXPRESS INTENTION OF THE PARTIES HERETO THAT EACH PERSON TO BE INDEMNIFIED HEREUNDER OR THEREUNDER SHALL BE INDEMNIFIED AND HELD HARMLESS AGAINST ANY AND ALL LOSSES, LIABILITIES, CLAIMS OR -54- 60 DAMAGES: (i) ARISING OUT OF OR RESULTING FROM THE ORDINARY SOLE OR CONTRIBUTORY NEGLIGENCE OF SUCH PERSON OR (ii) IMPOSED UPON SAID PARTY UNDER ANY THEORY OR STRICT LIABILITY. Without prejudice to the survival of any other obligations of the Company hereunder and under the other Loan Documents, the obligations of the Company under this Section shall survive the termination of this Agreement and the other Loan Documents and the payment of the Obligations or the assignment of the Notes. SECTION 12.06. Right of Setoff. If any Event of Default shall have occurred and be continuing, each 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 held and other indebtedness owing by such Bank, or any branch, subsidiary or Affiliate, to or for the credit or the account of the Company against any and all the Obligations of the Company now or hereafter existing under this Agreement and the other Loan Documents and other obligations of the Company held by such Bank, irrespective of whether or not such Bank shall have made any demand under this Agreement, its Note or the Obligations and although the Obligations may be unmatured. The rights of each Bank under this Section are in addition to other rights and remedies (including other rights of setoff) which such Bank may have. SECTION 12.07. Governing Law. This Agreement, all Notes, the other Loan Documents and all other documents executed in connection herewith shall be deemed to be contracts and agreements executed by the Company and each Bank under the laws of the State of Texas and of the United States of America and for all purposes shall be construed in accordance with, and governed by, the laws of said state and of the United States of America. Without limitation of the foregoing, nothing in this Agreement, or in the Notes or in any other Loan Document shall be deemed to constitute a waiver of any rights which any Bank may have under applicable federal legislation relating to the amount of interest which such Bank may contract for, take, receive or charge in respect of the Loan and the Loan Documents, including any right to take, receive, reserve and charge interest at the rate allowed by the law of the state where any Bank is located. The Agent, each Bank and the Company further agree that insofar as the provisions of Article 5069- 1.04, of the Revised Civil Statutes of Texas, as amended, are applicable to the determination of the Highest Lawful Rate with respect to the Notes and the obligations hereunder and under the other Loan Documents, the indicated rate ceiling of such Article shall be applicable; provided, however, that to the extent permitted by such Article, the Agent may from time to time by notice to the Company revise the election of such interest rate ceiling as such ceiling affects the then current or future balances of the Loans. The provisions of Article 5069-15.01 et. seq. do not apply to this Agreement, any Note issued hereunder or the other Loan Documents. SECTION 12.08. Interest. Each provision in this Agreement and each other Loan Document is expressly limited so that in no event whatsoever shall the amount paid, or otherwise agreed to be paid, to the Agent or any Bank, or charged, contracted for, reserved, taken -55- 61 or received by the Agent or any Bank, for the use, forbearance or detention of the money to be loaned under this Agreement or any Loan Document or otherwise (including any sums paid as required by any covenant or obligation contained herein or in any other Loan Document which is for the use, forbearance or detention of such money), exceed that amount of money which would cause the effective rate of interest to exceed the Highest Lawful Rate, and all amounts owed under this Agreement and each other Loan Document shall be held to be subject to reduction to the effect that such amounts so paid or agreed to be paid, charged, contracted for, reserved, taken or received which are for the use, forbearance or detention of money under this Agreement or such Loan Document shall in no event exceed that amount of money which would cause the effective rate of interest to exceed the Highest Lawful Rate. Anything in any Note or any other Loan Document to the contrary notwithstanding, the Company shall not be required to pay unearned interest on any Note and the Company shall not be required to pay interest on the Obligations at a rate in excess of the Highest Lawful Rate, and if the effective rate of interest which would otherwise be payable under such Note and such Loan Documents would exceed the Highest Lawful Rate, or if the holder of such Note shall receive any unearned interest or shall receive monies that are deemed to constitute interest which would increase the effective rate of interest payable by the Company under such Note and the other Loan Documents to a rate in excess of the Highest Lawful Rate, then (a) the amount of interest which would otherwise be payable by the Company shall be reduced to the amount allowed under applicable law and (b) any unearned interest paid by the Company or any interest paid by the Company in excess of the Highest Lawful Rate shall in the first instance be credited on the principal of the obligations of the Company (or if all such obligations shall have been paid in full, refunded to the Company). It is further agreed that, without limitation of the foregoing, all calculations of the rate of interest contracted for, reserved, taken, charged or received by any Bank under the Notes and the Obligations and under the other Loan Documents are made for the purpose of determining whether such rate exceeds the Highest Lawful Rate, and shall be made, to the extent permitted by usury laws applicable to such Bank, by amortizing, prorating and spreading in equal parts during the period of the full stated term of the Notes and this Agreement and all interest at any time contracted for, charged or received by such Bank in connection therewith. SECTION 12.09. Survival of Representations and Warranties. All representations, warranties and covenants contained herein or made in writing by the Company in connection herewith and the other Loan Documents shall survive the execution and delivery of this Agreement, the Notes and the other Loan Documents, the termination of the Commitments of the Banks and will bind and inure to the benefit of the respective successors and assigns of the parties hereto, whether so expressed or not, provided, that the Commitments of the Banks shall not inure to the benefit of any successor or assign of the Company. SECTION 12.10. Successors and Assigns; Participations. (a) All covenants, promises and agreements by or on behalf of the Company or the Banks that are contained in this -56- 62 Agreement shall bind and inure to the benefit of their respective permitted successors and assigns. The Company may not assign or transfer any of its rights or obligations hereunder. (b) Any of the Banks may assign to or sell participations to one or more banks of all or a portion of its rights and obligations under this Agreement and the other Loan Documents (including all or a portion of its Commitment, the Advances and the Obligations of the Company owing to it and the Notes); provided, that the participating banks or other entities shall be entitled to the cost protection provisions contained in Article II and Section 12.04 and the Company shall continue to deal solely and directly with the Agent in connection with its rights and obligations under this Agreement and the other Loan Documents. Except with respect to cost protections provided to a participant pursuant to this paragraph and the items listed in Section 12.01 hereof, no participant shall be a third party beneficiary of this Agreement nor shall it be entitled to enforce any rights provided to the Banks against the Company under this Agreement. (c) A Bank may assign to any other Bank or Banks or to any Affiliate of a Bank and, with the prior written consent of the Company and the Agent (which consent shall not be unreasonably withheld), a Bank may assign to one or more other Eligible Assignees all or a portion of its interests, rights, and obligations under this Agreement and the other Loan Documents (including all or a portion of its Commitment and the same portion of the Loans and other Obligations of the Company at the time owing to it and the Note held by it); provided, however, that (i) each such assignment shall be in a minimum principal amount of not less than $5,000,000.00 (unless such assignment shall be to another Bank) and shall be of a constant, and not a varying, percentage of all the assigning Bank's Commitment, rights and obligations under this Agreement, (ii) the parties to each such assignment shall execute and deliver to the Agent, for its acceptance, an Assignment and Acceptance in form and substance satisfactory to the Agent (an "Assignment and Acceptance") and any Note subject to such assignment and (iii) no assignment shall be effective until receipt by the Agent of a reasonable service fee in respect of said assignment equal to $2,000.00. Upon such execution, delivery, acceptance and recording, from and after the effective date specified in each Assignment and Acceptance, which effective date shall be at least five Business Days after the execution thereof unless otherwise agreed to by the assigning Bank, the Eligible Assignee thereunder and the Agent (x) the Eligible Assignee thereunder shall be a party hereto and to the other Loan Documents and, to the extent provided in such Assignment and Acceptance, have the rights and obligations of a Bank hereunder and under the other Loan Documents and (y) the assignor Bank thereunder shall, to the extent provided in such Assignment and Acceptance, be released from its obligations under this Agreement and the other Loan Documents (and, in the case of an Assignment and Acceptance covering all of the remaining portion of an assigning Bank's rights and obligations under this Agreement and the other Loan Documents, such Bank shall cease to be a party hereto). -57- 63 (d) Notwithstanding any other provision herein, any Bank may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section disclose to the assignee or participant or proposed assignee or participant, any information relating to the Company furnished to such Bank by or on behalf of the Company. SECTION 12.11. Confidentiality. Each Bank agrees to exercise its best efforts to keep any information delivered or made available by the Company to it which is clearly indicated to be confidential information, confidential from anyone other than Persons employed or retained by such Bank who are or are expected to become engaged in evaluating, approving, structuring or administering the Loans; provided that nothing herein shall prevent any Bank from disclosing such information (a) to any other Bank, (b) pursuant to subpoena or upon the order of any court or administrative agency, (c) upon the request or demand of any regulatory agency or authority having jurisdiction over such Bank, (d) which has been publicly disclosed, (e) to the extent reasonably required in connection with any litigation to which the Agent, any Bank, the Company or its respective Affiliates may be a party, (f) to the extent reasonably required in connection with the exercise of any remedy hereunder, (g) to such Bank's legal counsel and independent auditors and (h) to any actual or proposed participant or assignee of all or part of its rights hereunder which has agreed in writing to be bound by the provisions of this Section. Each Bank will promptly notify the Company of any information that it is required or requested to deliver pursuant to clause (b) or (c) of this Section and, if the Company is a party to any such litigation, clause (e) of this Section . SECTION 12.12. Pro Rata Treatment. (a) Except as otherwise specifically permitted hereunder, each payment or prepayment of principal, if permitted under this Agreement, and each payment of interest with respect to an Advance shall be made pro rata among the Banks. (b) Each Bank agrees that if, through the exercise of a right of banker's lien, setoff or claim of any kind against the Company as a result of which the unpaid principal portion of the Notes and the Obligations held by it shall be proportionately less than the unpaid principal portion of the Notes and Obligations held by any other Bank, it shall be deemed to have simultaneously purchased from such other Bank a participation in the Notes and Obligations held by such other Bank, in the amount required to render such amounts proportional; provided, however, that if any such purchase or purchases or adjustments shall be made pursuant to this Section and the payment giving rise thereto shall thereafter be recovered, such purchase or purchases or adjustments shall be rescinded to the extent of such recovery and the purchase price or prices or adjustments restored without interest. SECTION 12.13. Separability. Should any clause, sentence, paragraph or Section of this Agreement be judicially declared to be invalid, unenforceable or void, such decision will not have the effect of invalidating or voiding the remainder of this Agreement, and -58- 64 the parties hereto agree that the part or parts of this Agreement so held to be invalid, unenforceable or void will be deemed to have been stricken herefrom and the remainder will have the same force and effectiveness as if such part or parts had never been included herein. SECTION 12.14. Execution in Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. SECTION 12.15. Interpretation. (a) In this Agreement, unless a clear contrary intention appears: (i) the singular number includes the plural number and vice versa; (ii) reference to any gender includes each other gender; (iii) the words "herein," "hereof" and "hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular Article, Section or other subdivision; (iv) reference to any Person includes such Person's successors and assigns but, if applicable, only if such successors and assigns are permitted by this Agreement, and reference to a Person in a particular capacity excludes such Person in any other capacity or individually, provided that nothing in this clause is intended to authorize any assignment not otherwise permitted by this Agreement; (v) except as expressly provided to the contrary herein, reference to any agreement, document or instrument (including this Agreement) means such agreement, document or instrument as amended, supplemented or modified and in effect from time to time in accordance with the terms thereof and, if applicable, the terms hereof, and reference to any Note or other note includes any Note issued pursuant hereto in extension or renewal thereof and in substitution or replacement therefor; (vi) unless the context indicates otherwise, reference to any Article, Section, Schedule or Exhibit means such Article or Section hereof or such Schedule or Exhibit hereto; (vii) the words "including" (and with correlative meaning "include") means including, without limiting the generality of any description preceding such term; -59- 65 (viii) with respect to the determination of any period of time, except as expressly provided to the contrary, the word "from" means "from and including" and the word "to" means "to but excluding"; and (ix) reference to any law, rule or regulation means such as amended, modified, codified or reenacted, in whole or in part, and in effect from time to time. (b) The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. (c) No provision of this Agreement shall be interpreted or construed against any Person solely because that Person or its legal representative drafted such provision. Section 12.16. Submission To Jurisdiction. (a) Any legal action or proceeding with respect to this Agreement and the other Loan Documents may be brought in the courts of the State of Texas, in Harris county or elsewhere or of the United States for the Southern District of Texas and, by execution and delivery of this Agreement, each of the Company and each Guarantor hereby irrevocably accepts for itself and in respect of its property, unconditionally, the jurisdiction of the aforesaid courts with respect to any such action or proceeding. The Company and each Guarantor further irrevocably consent to the service of process out of any of the aforementioned courts in any such action or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to it at its address provided in Section 12.02 and with respect to any guarantor, at the address provided on Schedule 6.16 hereto, such service to become effective thirty (30) days after such mailing. Nothing herein shall affect the right of the agent or any bank to serve process in any other manner permitted by law or to commence legal proceedings or otherwise proceed against the company in any other jurisdiction. (b) Each of the Company and the Guarantors hereby irrevocably waives any objection which it may now or hereafter have to the laying of venue of any of the aforesaid actions or proceedings arising out of or in connection with this Agreement brought in the courts referred to in clause (a) above and hereby further irrevocably waives and agrees not to plead or claim in -60- 66 any such court that any such action or proceeding brought in any such court has been brought in an inconvenient forum. Section 12.17. Waiver of Jury Trial. Each of the Company and each Guarantor hereby waives, to the extent permitted by applicable law, any right to a trial by jury in any action or proceeding to enforce or defend any rights under this Agreement or under any amendment, instrument, document or agreement delivered or which may in the future be delivered in connection herewith or arising from or relating to any banking relationship existing in connection with this Agreement, and agrees, to the extent permitted by applicable law, that any such action or proceeding shall be tried before a court and not before a jury. Section 12.18. Final Agreement of the Parties. This Agreement (including the schedules and exhibits hereto), the notes and the other Loan Documents constitute a "Loan Agreement" as defined in Section 26.02(A) of the Texas business and commerce code, and represent the final agreement between the parties relating to the subject matter hereof and thereof and may not be contradicted by evidence of prior, contemporaneous or subsequent oral agreements of the parties. There are no unwritten oral agreements between the parties. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized as of the date first above written. SERV-TECH, INC. By: ---------------------------------------- David P. Tusa Senior Vice President of Finance and Administration GUARANTORS: ADVANCED REFRACTORY SERVICES, INC. -61- 67 CASTING CONCEPTS, INC. CHEMI-SOLV, INC. CHEMISOLV HOLDINGS, INC. CHEMISOLV, LTD. CON-SEAL, INC. DELTA MAINTENANCE, INC. DM ACQUISITION CORPORATION ENTERPRISE SERVICE CORPORATION F. C. SCHAFFER & ASSOCIATES, INC. HARTNEY CORPORATION HARTNEY INDUSTRIAL SERVICES CORPORATION HILL TECHNICAL SERVICES, INC. MAC-TECH, INC. PETRO RECOVERY SYSTEMS, INC. PETROCHEM FIELD SERVICES DE VENEZUELA, S.A. PRS HOLDING, INC. REFINERY MAINTENANCE INTERNATIONAL LTD. SECO INDUSTRIES, INC. SERV-TECH MEXICANA, S. DE R.L. SERV-TECH DE MEXICO, S. DE R.L. SERV-TECH EPC - HOUSTON, INC. SERV-TECH EPC, INC. SERV-TECH EUROPE, GMBH SERV-TECH INTERNATIONAL SALES, INC. SERV-TECH OF NEW MEXICO, INC. By: ----------------------------------------- David P. Tusa Title: Senior Vice President of Finance and Administration -62- 68 GUARANTORS: SERV-TECH SERVICES, INC. SERV-TECH SUDAMERICANA, S.A. ST PIPING, INC. TALBERT & ASSOCIATES, INC. TERMINAL TECHNOLOGIES, INC. TIPCO ACQUISITION CORP. TOTAL REFRACTORY SYSTEMS, INC. TURNAROUND MAINTENANCE, INC. UNITED INDUSTRIAL MATERIALS, INC. By: ---------------------------------------- David P. Tusa Senior Vice President of Finance and Administration -63- 69 TEXAS COMMERCE BANK NATIONAL ASSOCIATION, as Agent and Individually, as a Bank By: ---------------------------------------- Curtis D. Karges Senior Vice President BANKS: BANK ONE, TEXAS, NA By: ---------------------------------------- Barry A. Kelly Vice President, Unit Manager -64- 70 TEXAS COMMERCE BANK NATIONAL ASSOCIATION, as Agent and Individually, as a Bank By: ---------------------------------------- Curtis D. Karges Senior Vice President BANKS: BANK ONE, TEXAS, NA By: ---------------------------------------- Barry A. Kelly Vice President, Unit Manager -65- 71 AMENDMENT TO CREDIT AGREEMENT This AMENDMENT TO CREDIT AGREEMENT (this "Agreement"), effective as of July ____, 1995, by and among SERV-TECH, INC., a Texas corporation ("Borrower"), the undersigned Subsidiaries of the Borrower, as Guarantors ("Guarantors"), and TEXAS COMMERCE BANK NATIONAL ASSOCIATION, a national banking association, as Agent (the "Agent") for itself and for BANK ONE, TEXAS, NA (collectively, the "Banks"). Capitalized terms used herein, unless otherwise defined, are as defined in the hereafter referenced Credit Agreement. WHEREAS, Borrower, the Agent and the Banks have executed that certain $35,000,000.00 Credit Agreement dated as of May 15, 1995 (the "Credit Agreement"); and WHEREAS, in connection therewith, certain Subsidiaries of the Borrower also executed the Credit Agreement to evidence their guaranty of the Obligations; and WHEREAS, Borrower has requested the Banks to modify certain terms of the Credit Agreement; and WHEREAS, the Banks have agreed to do so, provided Borrower and the Guarantors ratify and confirm all of their obligations under the Credit Agreement and the Loan Documents. NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. Amendment to Section 8.03. Section 8.03(f) of the Credit Agreement is hereby deleted and the following substituted therefor: "(f) Additional Indebtedness of F. C. Schaffer up to a maximum of $10,000,000.00 for the sole purpose of causing third party financial institutions to issue Commercial Letters of Credit in support of the FINCHAA Project, which additional Indebtedness may be guaranteed by the Company." 2. Ratification. Borrower agrees and acknowledges that except as amended and modified by this Agreement, the Credit Agreement, the Note and the Loan Documents shall continue in full force and effect. Nothing in this Agreement releases any right, claim, lien, security interest or entitlement of the Banks created by or contained in any of such documents nor is Borrower released from any covenant, warranty or obligation created by or contained therein. 72 3. Representations and Warranties. Borrower hereby represents and warrants to the Banks that (a) this Agreement has been duly executed and delivered on behalf of the Borrower, (b) this Agreement constitutes a valid and legally binding agreement enforceable against Borrower in accordance with its terms, (c) the representations and warranties contained in the Credit Agreement and the Loan Documents are true and correct on and as of the date hereof in all material respects as though made as of the date hereof except as heretofore otherwise disclosed in writing to the Agent (other than those of such representations and warranties which by their express terms speak to a date on or before the date hereof), (d) no Default exists under the Credit Agreement or any of the Loan Documents and (e) the execution, delivery and performance of this Agreement has been duly authorized by Borrower. Borrower will, upon request by the Agent, provide satisfactory evidence of items (a) and (e) above. 4. Counterparts. This Agreement may be signed in any number of counterparts, each of which shall be construed as an original, but all of which together shall constitute one and the same instrument. 5. Guarantors' Ratification. The Guarantors execute this Agreement for the purpose of acknowledging and approving same, ratifying the Guaranty of each of them and reaffirming that the Guaranties are in full force and effect and remain the joint and several liability of each Guarantor, notwithstanding the amendments made herein. 6. Choice of Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, EXCEPT TO THE EXTENT THAT THE LAWS OF THE UNITED STATES OF AMERICA AND ANY RULES, REGULATIONS OR ORDERS ISSUED OR PROMULGATED THEREUNDER APPLICABLE TO THE AFFAIRS AND TRANSACTIONS OF ANY BANK OTHERWISE PREEMPT TEXAS LAW, IN WHICH EVENT SUCH FEDERAL LAW SHALL CONTROL. 7. Final Agreement of the Parties. THIS AGREEMENT, AND THE CREDIT AGREEMENT AND THE OTHER LOAN DOCUMENTS CONSTITUTE A "LOAN AGREEMENT" AS DEFINED IN SECTION 26.02(A) OF THE TEXAS BUSINESS AND COMMERCE CODE, AND REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. -2- 73 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized as of the date first above written. BORROWER: SERV-TECH, INC. By: ---------------------------------------- David P. Tusa Senior Vice President of Finance and Administration GUARANTORS: ADVANCED REFRACTORY SERVICES, INC. CASTING CONCEPTS, INC. CHEMI-SOLV, INC. CHEMISOLV HOLDINGS, INC. CHEMISOLV, LTD. CON-SEAL, INC. DELTA MAINTENANCE, INC. DM ACQUISITION CORPORATION ENTERPRISE SERVICE CORPORATION F. C. SCHAFFER & ASSOCIATES, INC. HARTNEY CORPORATION HARTNEY INDUSTRIAL SERVICES CORPORATION HILL TECHNICAL SERVICES, INC. MAC-TECH, INC. PETRO RECOVERY SYSTEMS, INC. PETROCHEM FIELD SERVICES DE VENEZUELA, S.A. PRS HOLDING, INC. REFINERY MAINTENANCE INTERNATIONAL LTD. -3- 74 SECO INDUSTRIES SERV-TECH MEXICANA, S. DE R.L. SERV-TECH DE MEXICO, S. DE R.L. SERV-TECH EPC - HOUSTON, INC. SERV-TECH EPC, INC. SERV-TECH EUROPE, GMBH SERV-TECH INTERNATIONAL SALES, INC. SERV-TECH OF NEW MEXICO, INC. SERV-TECH SERVICES, INC. SERV-TECH SUDAMERICANA, S.A. ST PIPING, INC. TALBERT & ASSOCIATES, INC. TERMINAL TECHNOLOGIES, INC. TIPCO ACQUISITION CORP. TOTAL REFRACTORY SYSTEMS, INC. TURNAROUND MAINTENANCE, INC. UNITED INDUSTRIAL MATERIALS, INC. By: ---------------------------------------- David P. Tusa Senior Vice President of Finance and Administration -4- 75 BANKS: TEXAS COMMERCE BANK NATIONAL ASSOCIATION, Individually and as Agent By: ---------------------------------------- Curtis D. Karges Senior Vice President BANK ONE, TEXAS, NA By: ---------------------------------------- Barry A. Kelly Vice President, Unit Manager -5- 76 STATE OF TEXAS } } COUNTY OF HARRIS } The foregoing instrument was acknowledged before me this _______ day of July, 1995, by David P. Tusa, Senior Vice President of Finance and Administration of SERV-TECH, INC., a Texas corporation, on behalf of said corporation and the Subsidiaries named therein. ----------------------------------- Notary Public, State of Texas STATE OF TEXAS } } COUNTY OF HARRIS } The foregoing instrument was acknowledged before me this ________ day of July, 1995, by Curtis D. Karges, Senior Vice President of TEXAS COMMERCE BANK NATIONAL ASSOCIATION, a national banking association, on behalf of said corporation. ----------------------------------- Notary Public, State of Texas STATE OF TEXAS } } COUNTY OF HARRIS } The foregoing instrument was acknowledged before me this _______ day of July, 1995, by Barry A. Kelly, Vice President, Unit Manager of BANK ONE, TEXAS, NA, a national banking association, on behalf of said association. ----------------------------------- Notary Public, State of Texas -6- EX-10.37 8 AGREEMENT FOR SERV-TECH TURNAROUND SERVICES MNGMNT 1 Exhibit 10.37 AGREEMENT FOR SERV-TECH TURNAROUND SERVICES MANAGEMENT GROUP Serv-Tech, Inc. hereby agrees to the following Employee Bonus Plan: EMPLOYEE BONUS PLAN 1. The Covered Entity will include the following divisions of Serv-Tech's U.S.Turnaround Maintenance operations: West Lake, Houston (South and Central), Baton Rouge, St. Louis, West Coast, New Jersey, Central Equipment, QA/QC, Safety and Purchasing. The Covered Entity excludes Life Guard(SM) decontamination, specialty welding, heat treating, refractory and other related turnaround services. 2. The Covered Entity shall also include the following current Serv-Tech offices, equipment and other leases: Houston (portion to be negotiated),Baton Rouge, St. Louis, West Coast (portion to be negotiated), and Sulphur (new) divisions, and all of the equipment utilized in all of the divisions of Serv-Tech's U.S. Turnaround Maintenance. 3. Serv-Tech and the Management Group will mutually agree as to the employees that will be initially retained by the Covered Entity. 4. The Management Group will be entitled to participation in a profit-sharing program as follows: Mike Krajicek 4.0% Mark Bortka 2.0% Greg Nichols 1.4% Mac Bozarth 1.4% James Amuny 1.4% Jeff Wilson 1.4% Mike Prevost* 1.2% "Gulf Coast Manager" 1.2% Terry Jennings (Safety) 0.6% Tom Peterson (QA/QC) 0.6% Doug Bender 0.4% Steve Rediess 0.4% To be determined 4.0% * or National Sales Manager 5. The profit-share amount is equal to pre-tax earnings (according to generally accepted accounting principles; determined in conjunction with the Serv-Tech, Inc. annual audit of the Covered Entity multiplied by the above percentages. Page 1 of 4 2 AGREEMENT FOR SERV-TECH TURNAROUND SERViCES MANAGEMENT GROUP 6. Additionally, the profit-share percentages shall be increased by twenty-five percent (25%) applicable only to the excess of pre-tax earnings of the Covered Entity over the Serv-Tech, Inc. Board-approved Plan amount. 7. All such profit-sharing amounts shall be payable on March 31 following the subject year, except that sixty-six percent (66%) of the amounts determined in item 6 above will be payable in three (3) equal installments beginning March 31 of the second year following the subject year. All payment obligations noted in items 4., 5., 6., and 7. are conditioned upon and subject to continued employment by the Covered Entity of the Management Group member through the time payment is due above. 8. The earnings of Covered Entity will bear all direct costs of business, such as insurance, benefits, out-of-pocket and other costs that may be incurred on its behalf. Additionally, the Covered Entity will be initially charged an amount equal to three percent (3%) of revenues. This amount is subject to annual re-negotiation. Serv-Tech will provide legal, tax, accounting, payroll, human resources, and similar services. 9. The Management Group's initial annual salary rate shall be: Mike Krajicek $150,000 Mark Bortka $100,000 Greg Nichols $ 90,000 Mac Bozarth $ 70,000 Jim Amuny $ 85,000 10. The following Management Group will be entitled to the following Serv-Tech stock options vesting over a three-year period. The options will be priced at market price at date of grant. Vesting is conditioned upon and subject to continued employment by the Covered Entity of the Management Group member as well as other conditions specified in the Serv-Tech Stock Option Plan. Mike Krajicek 50,000 Mark Bortka 20,000 Mac Bozarth 20,000 11. The Management Group will have the right of first refusal to purchase the Covered Entity should Serv-Tech desire to sell the Covered Entity to a third party. The Management Group, acting through Mike Krajicek as sole agent, shall have sixty (60) days in which to consummate a transaction at the same price and terms as that offered by proposed purchaser and with security acceptable to Serv-Tech. Page 2 of 4 3 AGREEMENT FOR SERV-TECH TURNAROUND SERVICES MANAGEMENT GROUP 12. Should Serv-Tech sell the Covered Entity to a third party (not including the Management Group), Management Group will be entitled to twenty percent (20%) of the difference between the purchase price and the net book value of the Covered Entity, determined in accordance with generally accepted accounting principles, multiplied by the same percentages in item 4. above. Such amount is payable conditioned upon actual payment received by Serv-Tech. All rights in Items 11. and 12. shall only accrue to Management Group members as are employed by the Covered Entity at that time. 13. The earnings of the Covered Entity will be charged interest on working capital (computed monthly on all accounts receivable over 60 days) and for all capital infusions at a rate consistent with that paid by Serv-Tech to its bankers. 14. Michael Krajicek will receive an employment agreement that will include benefits as follows (but such benefits to not be payable or provided for any period after Michael Krajicek's 65th birthday): (a) a 12-month severance (lump-sum payment) and 12-month insurance (at his then present insurance premium cost) in the event he is terminated without cause prior to a Change in Control (as Change in Control is defined in Richard Daerr's current employment agreements; and (b) if Michael Krajicek is terminated without cause within three (3) years after a Change in Control, the same 12-months plus six (6) additional months monthly payments and insurance if Michael Krajicek is not comparably employed at the end of the such 12-month period. THE ACQUISITION TRANSACTION Serv-Tech hereby agrees to purchase all of the capital stock of American Mechanical Services ("AMS") on the following terms: $300,000 cash, less debt assumed as shown on balance sheet (the shareholders represent that there is not more than $300,000 in debt), plus 70,000 unregistered shares of Serv-Tech stock. Serv-Tech will also receive an exclusive, fully paid-up license for all of AMS' and its principals' patents and technology. Should Serv-Tech desire to manufacture AMS' patented lance and extractor equipment for internal use, then James Amuny would be entitled to a cash payment of $7,500 per lance and $25,000 per extractor during the applicable patent term. Should the lance be manufactured and sold to a third party, Jim Amuny will receive $15,000 per lance; should the extractor be manufactured and sold to a third party, Jim Amuny will receive $50,000 per extractor. The owned facility in Sulpher, Louisiana, will be retained by the AMS shareholders and leased to Serv-Tech for a total monthly lease rate of $3,000, for 36 months. This acquisition is subject to due diligence satisfactory to Serv-Tech and the execution of final definitive documents Page 3 of 4 4 AGREEMENT FOR SERV-TECH TURNAROUND SERVICES MANAGEMENT GROUP on terms mutually agreeable to Serv-Tech, Inc. and AMS shareholders. The shareholders of AMS hereby represent that there are no outstanding options, warrants, or other rights to purchase or issue any capital stock. SERV-TECH, INC.: ______________________________________________ Senior Vice President, Finance and Administration ______________________________________________ Vice President, General Counsel FOR ITEMS 1 - 14: ______________________________________________ Michael W. Krajicek FOR ACQUISITION TRANSACTION: ______________________________________________ James Amuny as agent for all Shareholders of AMS, including without limitation J.C. Ellender and Robert Amuny Page 4 of 4 EX-10.38 9 AGREEMENT RELATING TO EMPLOYMENT PERFORMANCE 1 EXHIBIT 10.38 DATED December 31, 1995 (1) CHEMISOLV LIMITED AND (2) CHEMISOLV HOLDINGS INC AND (3) SERV-TECH INC AND (4) CLEMENT CYRIL ARMITAGE AGREEMENT RELATING TO EMPLOYMENT PERFORMANCE BONUSES ALSOP WILKINSON INDIA BUILDINGS LIVERPOOL L2 ONH REF: MJP/KAC/AG-5311.B 2 THIS AGREEMENT IS MADE ON DECEMBER 31, 1995 BETWEEN: (1) CHEMISOLV LIMITED WHOSE REGISTERED OFFICE IS AT THORNLEY HOUSE, CARRINGTON BUSINESS PARK, MANCHESTER, M31 4SG ("THE EMPLOYER"); (2) CHEMISOLV HOLDINGS INC WHOSE REGISTERED OFFICE IS AT 5200 CEDAR CREST BOULEVARD, HOUSTON, TEXAS 77087, USA ("HOLDINGS"); (3) SERV-TECH INC WHOSE REGISTERED OFFICE IS AT 5200 CEDAR CREST BOULEVARD, HOUSTON, TEXAS 77087, USA ("SERV-TECH"); AND (4) CLEMENT CYRIL ARMITAGE WHOSE ADDRESS IS AT WILD HEDGES, 4 DAISYBANK CRESCENT, AUDLEM, CREWE, CW3 OHD ("THE EMPLOYEE") WHEREAS: (A) This Agreement is inter alia supplemental to the employment agreement dated 4th November 1994 and made between the Employee and the Employer ("the Employment Agreement"). (B) In order to encourage the Employee to further develop the Relevant Intellectual Property (as hereinafter defined) the Employer has agreed that in addition to the salary and other emoluments payable by it to the Employee pursuant to the Employment Agreement, Employer and Holdings shall pay or caused to be paid to the Employee the Income Performance Bonus and the Revenue Performance Bonus upon the terms and conditions set out in this Agreement. (C) In consideration of the services to be provided by the Employee to the Employer, Holdings and other members of the Chemisolv Group, Serv-Tech has agreed to guarantee the performance by the Employer and Holdings of all of their respective obligations hereunder upon the terms and conditions set out in this Agreement. IT IS HEREBY AGREED: -1- 3 1 DEFINITIONS AND INTERPRETATION In this Agreement the following words and expressions shall (except where the context otherwise requires) have the following meanings:- "affiliate" in relation to any company shall mean and include all of its parents, subsidiaries or other entities which are, directly or indirectly, 50% or more owned or owned by or under common ownership with the relevant company (and "affiliate" shall be construed accordingly) "Chemisolv Accounts" means, in relation to any Financial Year, the audited consolidated income (profit) and loss account of Holdings and its subsidiaries for that Financial Year and the audited consolidated balance sheet of Holdings and its subsidiaries as at the last day of the relevant Financial Year in each case as part of the Serv-Tech consolidated annual audit and which shall have been prepared in accordance with the provisions of clause 4 below "Chemisolv Group" means Holdings, the Employer and all other subsidiaries of either Holdings or the Employer "Chemisolv's Accountants" means the auditors for the time being of Holdings appointed by the Serv-Tech Group who shall be responsible for preparing the audited financial statements of Holdings and its subsidiaries for each financial year -2- 4 "European Member" means any member of the Chemisolv Group which is incorporated in the continent of Europe or which primarily carries on or undertakes business itself (not through its subsidiaries) in the continent of Europe (including "Financial Year" means each financial year of Holdings commencing on 1st January in each calendar year and ending on 31st December in the same calendar year (the first Financial Year being that commencing on 1st January 1996) "Income" means, in relation to any Financial Year, the consolidated income before taxation of Holdings and its subsidiaries as shown in the Chemisolv Accounts for that Financial Year after making the adjustments referred to in clause 4 below "Income Performance Bonus" means the income performance bonus payable by Holdings to the Employee pursuant to clause 3.1 below of the Performance Awarded "Majority of the Performance such Employees for the time Awarded Employees" being employed by members of the Chemisolv of the Performance Awarded Group who between them have the majority of points of all the Performance Awarded Employees who are so employed at the relevant time and for this purpose each Performance Awarded Employee shall -3- 5 have such number of points as is set out in parenthesis after his name in the definition of "Performance Awarded Employees" below "Relevant Intellectual Property" means (in relation to the inventions known as "Mastiff" and "Magnetic De-Inking" as they existed on 1st April 1995 and all improvements thereafter and hereafter made to such inventions) all patents, inventions, know-how, trade secrets and other confidential information, registered designs, copy rights, design rights, rights equivalent to copy right and design rights, registered trademarks, registered service marks, registered business names, trade names, registrations of an application to register any of the aforesaid items, rights in the nature of any of the aforesaid items in any country whatsoever in the World, rights in the nature of unfair competition rights and rights to sue for passing off "Non-European Member" means any member of the Chemisolv Group which is not a European Member "Performance Awarded Employees" means Messrs Ralph J Davies (13), David M Owen (13), Clement C Armitage (13), James R Duffy (13), W Harry Corbett (6), Christopher Bennett (6) and Kenneth Mackintosh (6) -4- 6 "Relevant Business" means any business directly connected with the application of speciality chemicals in the treatment of water and waste or directly connected with the paper industry including the manufacture or recycling of paper, or the strengthening of paper and any business derived from the Relevant Intellectual Property or the application thereof "Relevant Fraction" 13/70 thirteen seventieths "Revenue Performance Bonus" means the revenue performance bonus payable to the Employee pursuant to clause 3.2 below means in relation to any company which is registered in England and "subsidiary" Wales any subsidiary undertaking (within the meaning of the Companies Act 1985 as amended by the Companies Act 1989) of such company and in relation to any company which is incorporated in the USA, any entity which is 50% or more directly or indirectly owned or controlled by such company (and "subsidiaries" shall be construed accordingly) "Serv-Tech Group" means Serv-Tech and all of its subsidiaries and affiliates other than any member of the Chemisolv Group -5- 7 2 AMENDMENTS TO THE EMPLOYMENT AGREEMENT The Employment Agreement shall be and is hereby amended as follows:- 2.1 by deleting the last sentence of clause 3.2. 2.2 by adding the following new clause 3.4: "3.4 Inventions and Patents 3.4.1 The Employee agrees that the Employee will promptly and fully inform and disclose to the Employer all inventions, designs, improvements, and discoveries that the Employee conceives or discovers during the employment that pertain or relate to the business of the Employer or its subsidiaries or to any experimental work carried on by the Employer or its subsidiaries, whether conceived by the Employee alone or with others and whether or not conceived during regular working hours. 3.4.2 The Employee agrees that he will promptly and fully inform and disclose to the Employer all inventions, designs, improvements and discoveries that the employee may conceive or discover in the period of one (1) year following the termination of the employment that pertain or relate to the business of the Employer in which the Employee was involved or any business in which the Employee was involved of any subsidiary or affiliate company or to any experimental work carried on by the Employer or its subsidiary in which the Employee was involved whether conceived by the Employee alone or with others. All such invention, designs, improvements and discoveries conceived or discovered in accordance with Articles 3.4.1 and 3.4.2 above shall be the exclusive property of the Employer. The Employee shall assist the Employer to obtain patents on all such inventions, designs, improvements and discoveries deemed patentable by the Employer and shall execute all documents and do all things reasonably necessary (without incurring any expenditure) to obtain letters patent, vest the Employer with full and exclusive title -6- 8 thereto and so far as he is reasonably able (without incurring any expenditure) protect the same against infringement by others. 2.3 by deleting existing clauses 5.1, 5.2 and 6 and by adding the following new clauses, 5.1 to 10.14 inclusive; "5.1 The terms of the Employee's employment under this agreement (the "Employment") shall commence on 4th November 1994, and shall continue until determined in accordance with the provisions of this agreement. The Employee's period of continuous employment commenced on 12th February 1987. 5.2 The Employment shall continue until one or more of the following occurs: 5.2.1 the Employee dies or resigns (excluding Constructive Dismissal) or becomes eligible for retirement and decides to retire in accordance with the Company Pension Scheme or becomes sixty five years old when this Employment Agreement shall automatically terminate; 5.2.2 the Employee is dismissed because he is permanently incapacitated through injury or illness from performing his duties and is not able to perform work of a comparable nature; For the purpose of this clause, permanent incapacity means: - 5.2.2.1 That a medical opinion has been obtained from a physician designated by the Employer which states that the Employee has no reasonable prospects of returning to comparable work; or 5.2.2 that the Employee has been absent from work from incapacity for at least twenty- -7- 9 six (26) weeks and a medical opinion has been obtained from a physician designated by the Employer which states that the Employee is incapacitated to the extent that he is not expected to be fit enough to return to comparable work within the next twenty-six (26) week period. The Employee hereby agrees he will, upon request of the Employer at any time, allow himself to be examined by a physician designated by the Employer for purposes of determining incapacity and will agree to such physician submitting a written report to the Employer with regards to such information as the Employer may reasonably require. The Employee hereby agrees that if he unreasonably refuses to allow such examination or unreasonably refuses to give consent to the report being given to the Employer, such refusal shall if not cured within seven (7) days of written notice by Employer to Employee's last known address, be itself grounds for termination pursuant to Article 5.2.2 as if such examination and report had shown such permanent incapacity; The Employer hereby agrees that he will act reasonably in reaching a decision that the employee is permanently incapacitated, which shall include: 1 Disclosing to the employee all medical opinions obtained, prior to any decision being made. 2 Allowing the Employee a reasonable opportunity of disagreeing with the medical opinion(s) including obtaining his own medical opinion which the employer shall consider and take into account. -8- 10 3 Acting in good faith in reaching a decision to dismiss. Any such termination for permanent incapacity shall require that the Employer gives the Employee at least twelve (12) weeks notice in writing to the Employee of any such termination. 5.2.3 the Employee is dismissed following proper disciplinary procedure (as indicated below) for "Cause" as defined below:- "Cause" shall mean that the Employee has committed an act or acts of gross misconduct. Gross misconduct includes: (a) theft by the Employee from the Employer; (b) being convicted of a criminal offence involving fraud or moral turpitude apart from an offence that in the reasonable opinion of the Employer's Board of Directors does not affect the Employee's position as an Employee; (c) being personally liable in a civil action involving fraud or moral turpitude other than such an action which in the reasonable opinion of the Employer's Board of Directors does not affect the Employee's position as an Employee; (d) a serious breach of any of the provisions of the Non-Competition and Confidentiality Agreement dated 4th November 1994 as amended by the variation agreement of today's date; (e) serious, persistent and wilful disregard by the Employee of reasonable instructions issued by the Employer, in circumstances where the Employee has been issued with prior -9- 11 appropriate warnings including a final written warning; (f) serious physical violence or (after warning) repeated threats of physical violence committed by the Employee in the work place; (g) wilful or persistent unbusinesslike conduct in the course of his duties hereunder in circumstances where the Employee has been issued with prior appropriate warnings including a final written warning. The above list is not exhaustive or exclusive and offenses of a similar nature and severity will fall within the definition of "Cause". 5.2.4 The Employer dismisses the Employee for any reason other than those reasons in 5.2.1 or 5.2.3 above (including a termination by the Employer of the Employee without cause) upon the Employer giving at least twelve (12) weeks notice in writing to the Employee of any such termination. 5.3 Where the employment is terminated by the Employer for any reason other than those set out in Articles 5.2.1, 5.2.2 and 5.2.3 above, the Employer shall pay to the Employee twelve (12) equal monthly payments over a period of one year (365 days) each payment to be equivalent to the Employee's monthly salary at the time of dismissal together with either continuation of all other benefit under this Employment Agreement or with an additional payment of an amount which properly compensates the Employee for loss of such other benefits from the date of termination (except where the Employee becomes sixty-five (65) years old during the course of 365 days following termination in which event the payments and other benefits shall only continue to be paid up to and including the Employee's sixty-fifth (65th) birthday. -10- 12 Those twelve (12) monthly payments and/or continuation of other benefits shall be in settlement of all statutory rights and all contractual claims that the Employee may have against the Employer arising out of the terms of this Employment Agreement (except, for the avoidance of doubt, for any income performance bonus and any revenue performance bonus which may be payable under a separate agreement relating to employment performance bonuses) and shall represent the full extent of the Employer's liability to the Employee under the terms of this Employment Agreement. To the extent that any statutory rights or payment obligations pursuant to this Employment Agreement cannot, by law or otherwise be so cancelled or limited these twelve (12) monthly payments shall be reduced by such amounts as are required by such statutory rights or obligations to be paid or provided. 5.4 The Employee may terminate the Employment upon the giving of at least two months notice to the Employer." 5.5 The Employer may, at its discretion, require the Employee to stay away from the work place, to undertake other duties or to take other reasonably requested measures pending the conclusion of a disciplinary investigation or an investigation into the permanent incapacity of the Employee pursuant to Articles 6 or 5.2.2 or otherwise. In making any such decision the Employer shall at all times act in good faith. 6 Disciplinary Procedure No disciplinary action (including dismissal) will be taken against the Employee except and until the Employer has undertaken a reasonable investigation into the allegations against the Employee. This investigation will include a disciplinary hearing at which the allegations will be heard and decided upon by the Board of Directors (the "Board") of the Employer. The Employee will have at least three (3) days prior notice in writing of this disciplinary hearing and will be provided notice, at that stage, of the allegations against him. The Employee will have an opportunity to put forward his own evidence and state his case. The Employee will -11- 13 also have a right to be represented by a colleague or advisor should he wish. The Directors considering the allegation shall decide upon the allegations upon hearing the evidence presented and such decision shall be final, binding and conclusive unless not made in good faith by the Directors. The decision shall be made by a majority of the Directors present at the hearing. If the Employee is a Director, he shall not so vote on the decision nor shall he be counted as a Director present at the hearing in determining a majority decision. 7. Grievance In the event of the Employee having a grievance relating to his employment, then he should first raise the matter informally with the person against whom he has the grievance. In the event of the grievance not being resolved to the satisfaction of the Employee, the Employee shall submit details of the grievance, in writing, to the Board of Directors of the Employer who shall consider and decide what should be done about the grievance. The decision of the board shall be final. 8. Pension The Employee is an existing member of the Employer's pension fund (or 401 (k) plan). During the Employee's employment under this agreement, the Employer shall ensure that its contributions amounting to the present percentage - as of the date of execution hereof - of the Employee's gross salary, are made by the Employer to the pension fund on a monthly basis (or in the case of a 401 (k) plan, the same Employer's matching percentage - as of the date of execution hereof - of the Employee's contribution to the 401 (k) plan). This benefit is separate to and over and above any other benefits and entitlements that the Employee has pursuant to this Agreement. Full details of the pension fund (401 (k) plan) are available from the Company Secretary. 9. Permanent Health (or Long-Term Disability) Insurance During the Employee's employment under this Agreement, the Employee (and his spouse and children) is entitled to continue to receive then available benefits under the Employer's Permanent Health -12- 14 Insurance (or Long-Term Disability) scheme or plan for which the Employer will pay the same percentage of the insurance premiums as on the date of execution hereof. Full details of the scheme are available from the Company Secretary. 10. Miscellaneous 10.1 Notices Any notice required or permitted under this Agreement shall be in writing and shall be deemed to be delivered (i) upon physical delivery (if hand delivered) or (ii) three business days after deposit in the mail (if mailed), postage, prepaid, certified or registered mail, return receipt requested, addressed as follows: The Employer: Chemisolv Limited Thornley House Carrington Business Park Manchester, M31 4SG, UK with a copy (which Serv-Tech, Inc shall not constitute Attention: General Counsel notice) to: 5200 Cedar Crest Boulevard Houston, TX 77087 The Employee: Clement Cyril Armitage Wild Hedges 4 Daisybank Crescent Audlem Crewe, CW3 OHD Notice given in any other manner shall be effective when received by the addressee. The address for notice may be changed by notice given in accordance with this provision. 10.2 Amendments This Agreement and any attachments incorporated by reference constitute the entire agreement between the parties and may not be amended, supplemented, waived or terminated except by written instrument executed by the parties. -13- 15 10.3 Waiver No waiver of any provision of this Agreement shall constitute a waiver of any other provision of this Agreement, nor shall such waiver constitute a waiver of any subsequent breach of such provision. 10.4 Preservations of Business Fiduciary Responsibility and Non- Competition 10.4.1 During the period of employment hereunder, the Employee shall act in the best interest of the Employer. For example, the Employee shall not, directly or indirectly, in any capacity, act in competition with the Employer or its Affiliates. During the term of this Agreement and therefore, the Employer shall not divulge or use confidential information of the Employer or its Affiliates in any manner except in furtherance of the Employer's business. 10.4.2 The Employer shall not, in the United States or the United Kingdom, for a period of one (1) year after the termination of the employment hereunder, either by himself or for or with any other person, firm or company, directly or indirectly, in the capacity as stockholder, owner, partner, officer, director, agent, contractor, promoter, consultant, employee or otherwise, canvass, solicit or otherwise endeavour to (i) entice away from the Employer or its Affiliates any of their employees or (ii) solicit, entice, or otherwise conduct business with or for any person, firm or company who, at any time during the employment hereunder, was a customer (or a potential customer that had then previously been solicited or otherwise contacted by or on behalf of the Employer or Affiliate) of the Employer or Affiliate and with whom the Employee had any dealings. 10.4.3 In addition, for a period of one (1) year commencing with the date of termination of his employment -14- 16 hereunder pursuant to Article 5.2.4 subject to Employer's compliance with its obligations pursuant to Article 5.3, the Employee shall not, in the United States or the United Kingdom, in the capacity as stockholder, owner, partner, officer, director, agent, contractor, promoter, consultant, employee or otherwise, directly or indirectly, participate in the promotion, financing, ownership, operation, management or otherwise of any business or entity with respect to the Restricted Business. For the purposes of this Article 10.4.3 above, Restricted Business means the formulating, utilizing, distributing and/or selling of speciality chemicals to, for or in the refining, chemical, petrochemical, paper and pulp or food processing industries, as well as any other business engaged in by the Employer during the time in which the Employee is employed by the Employer and for which such other business the Employee shall have had dealings. 10.4.4 Nothing in this Agreement shall prevent the Employee from holding (whether as an owner or otherwise) passive investments in publicly quoted companies. Nothing herein shall preclude the Employee from rendering or selling any services or products not included in the Restricted Business to or from any person, even if such person was or is a customer of Serv-Tech or the Employer. 10.5 Binding Effect This Agreement shall be binding upon the Employee and his heirs, executors, administrators and legal representatives and upon the Employer and its successors and assigns. 10.6 Governing Law The validity, construction and enforcement of this Agreement shall be governed be the place of the Employee's employment on the date of execution hereof. -15- 17 10.7 Severability If any provision of this Agreement is declared unenforceable by a court of last resort, such declaration shall not effect the validity of any other provision of this Agreement. 10.8 Construction The headings contained in this Agreement are in reference purposes only and shall not effect this Agreement in any manner whatsoever. Whatever required by the context, any gender shall include any other gender, the singular shall include the plural, and the plural shall include the singular. 10.9 Time for Performance If the time for performance of any obligation set forth in this Agreement falls on a Saturday, Sunday or legal holiday, compliance with such obligation on the next business day following such Saturday, Sunday or legal holiday shall be deemed acceptable. 10.10 Multiple Counterparts: Understanding This Agreement may be executed in multiple counterparts, each of which shall be deemed an original but all of which shall be deemed one instrument. The Employee acknowledges that he had read this Agreement and understands that entering into this Agreement is a condition of employment. 10.11 If any additional actions and documents may be required to effectuate the expressed intent of this Agreement, the parties herein agree to perform such action and prepare and execute any such documents as reasonably requested by the other parties hereto. 10.12 In the event any provision of this Agreement shall be determined to be invalid, void or unenforceable under the appropriate law, such provision shall be construed by changing it to the least extent possible so as to make it valid and enforceable while at the same time -16- 18 maximising the observance of the intent originally manifested to the greatest extent possible. 10.13 "Subsidiary" shall include all 50% or more, directly or indirectly, owned or controlled entities. "Affiliates" shall include all parents, subsidiaries or other entities which are, directly or indirectly, 50% or more owning of, owned by or under common ownership with the referenced entity. 10.14 This Agreement (together with these amendments) supersedes such other contracts of employment (whether written or oral or implied by law) which previously existed between the Employer and the Employee. 3 PERFORMANCE BONUSES 3.1 For each Financial Year or part of a Financial Year during which the Employee is employed by the Employer or any other company in the Chemisolv Group and, if the Employee ceases to be so employed prior to 31st December 2000 by reason of the termination of his employment for a reason other than a dismissal for cause or his death or his resignation (excluding constructive dismissal without cause), for each Financial Year up to and including the Financial Year ending on 31st December 2000, the Employer shall pay or cause to be paid to the Employee a bonus (herein referred to as "the Income Performance Bonus") which shall be calculated in accordance with the following formula:- B=RF x P x I x D/365 Where: B represents the bonus payable in respect of the relevant Financial Year RF represents the Relevant Fraction P shall be 20% in relation to each Financial Year beginning 1st January 1996, and thereafter up to and including the Financial Year ending on 31st December -17- 19 2000 and shall be 12% for each applicable Financial Year thereafter I represents the Income for the relevant Financial Year less any loss for a prior Financial Year to the extent that the same has not previously been applied in reducing I for the purpose of calculating B for any prior Financial Year. D represents the number of whole days in the relevant Financial Year during which the Employee is employed by the Employer or any other company in the Chemiso1v Group. The Income Performance Bonus payable in respect of any Financial Year shall be paid within 10 working days of the amount of such Income Performance Bonus having been reported on or determined in accordance with clause 4 below. 3.2 If either:- 3.2.1 the Employee shall have continued to be employed by the Employer or any other company in the Chemisolv Group until 31st December 2000; or 3.2.2 the Employee's employment with the Employer and the Chemisolv Group shall have been terminated at any time (whether prior to or after 31st December 2000) for any reason other than as a result of his death, resignation or a termination for Cause (as defined in the Employment Agreement as amended by clause 2 of this Agreement); then with effect from the later of 1st January 2001 and the date on which the Employee's employment by the Employer and the Chemisolv Group shall terminate for any reason whatsoever (whether with or without Cause) (hereinafter referred to as "the Termination Date") Employer and Holdings shall cease to incur additional obligations under Clause 3.1 above but instead shall pay or cause to be paid to the Employee in respect of each Financial Year ending after the later of the Termination Date and 1st January 2001 a bonus (herein -18- 20 referred to as "the Revenue Performance Bonus") which shall be calculated in accordance with the following formula:- B = RF x 3% x (A + B + C) Where: B represents the Revenue Performance Bonus payable in respect of the relevant Financial Year RF represents the Relevant Fraction A shall be the aggregate amount of all royalties earned by all companies in the Chemisolv Group in respect of the relevant Financial Year to the extent generated by the licensing or other exploitation of the Relevant Intellectual Property B shall be the aggregate of all sales or revenues or turnover of all companies in the Chemisolv group in respect of the relevant Financial Year from the sale of any products, chemicals or services to the extent that such products, chemicals or services are used in the application of any of the Relevant Intellectual Property C shall be the aggregate of all sales or revenues or turnover of all companies in the Chemisolv Group in respect of the relevant Financial Year from customers or clients or licensees but only to the extent that such sales revenues or turnover directly relate to or concern the application or exploitation of any of the Relevant Intellectual Property PROVIDED THAT if in relation to the first Financial Year in respect of which the Revenue Performance Bonus becomes payable the Employee shall have been employed by any member of the Chemisolv Group during such financial year, then for that Financial Year B shall be multiplied by 365 - D/365 where D represents the number of days during such first Financial Year that the Employee was employed by a member of the Chemiso1v Group -19- 21 The amount of revenue or turnover earned in respect of any Financial Year shall not be counted more than once in calculating the aggregate of A+B+C for one Financial Year and shall not be calculated within the aggregate of A+B+C for another Financial Year. The sum of A+B+C shall be reduced by any commissions, royalties, discounts, profit sharing or other payments applicable to agents, distributors, licensors, sub-contractors, Joint Venture partners or other such persons to the extent that they have been properly and reasonably made for the purpose of generating the royalties and revenues comprising A+B+C and to the extent that they have not already been taken into account in determining the respective amounts of A, B or C. The Revenue Performance Bonus payable in respect of any Financial Year shall be payable as to half of the amount thereof within 10 working days of the amount of the Revenue Performance Bonus having been determined pursuant to clause 4 below and as to the balance thereof on the date which occurs 6 months thereafter. 3.3 The Employee acknowledges that the amounts of the Income Performance Bonus and the Revenue Performance Bonus and the long term interests of the Serv-Tech Group will be influenced by the strategies and policies of the Chemisolv Group concerning pricing, discounts, royalties, agency fees, commissions and other material terms and conditions to be offered and accepted by the Chemisolv Group upon which the Relevant Intellectual Property will be exploited (which may involve sales, licensing, sub-contracting and other similar transactions or arrangements) and accordingly, the Employee acknowledges both that (i) the Chemisolv Group shall be required to comply with written strategies and policies (concerning the terms and conditions of sales, pricing, discounts, royalties, agency fees, licensing, commissions, subcontracting, joint ventures and other such arrangements and undertakings) as reasonably agreed from time to time by the Chemisolv Group and the Chief Financial Officer of the Serv-Tech Group or his designee, and (ii) all material undertakings, contracts and other obligations of the Chemisolv Group ("material" in relation to any undertaking, contract or obligation being one involving the payment to or from -20- 22 the Chemisolv Group of aggregate sums in excess of $500,000) shall be subject to the prior written approval of the Chief Financial Officer of the Serv-Tech Group or his designee, provided that such approval shall not be unreasonably withheld or delayed and in determining what is reasonable or unreasonable due regard shall be given to prudent business practice and the fiduciary duty which Serv-Tech owes to its shareholders. 3.4 If the amount of any Income Performance Bonus or Revenue Performance Bonus payable in respect of any Financial Year by Holdings is not allowed by either the Inland Revenue, the Internal Revenue Service or other relevant tax agencies as a deduction for the purposes of US income tax, UK corporation tax or similar taxes of other tax jurisdictions (the relevant amount not so allowed being hereinafter referred to as "the Relevant Amount") then if the direct effect thereof is that any member of the Chemisolv Group becomes liable to pay tax in excess of the amount which would otherwise have been paid had the Relevant Amount been so allowed as aforesaid (which excess tax shall be reported on or determined in accordance with clause 4 and is hereinafter referred to as "the Excess Tax") the amount of the relevant Income Performance Bonus or Revenue Performance Bonus (as the case may be) shall be reduced by an amount equal to half of the amount of the Excess Tax or to the extent that such performance bonus has already been paid the Employee shall repay to Holdings an amount equal to half of the amount of the Excess Tax (and Holdings shall account for such amount received to such member or members of the Chemisolv Group as may be appropriate). If in relation to any Financial Year there is any Excess Tax the amount thereof shall be as reported by Chemisolv's Accountants or as otherwise determined pursuant to Clause 4 below. 3.5 The payments in clause 3.1 and 3.2 shall cease in any event after the Financial Year ended 31st December 2015. 4 CHEMISOLV'S ACCOUNTS 4.1 For the purpose of determining the Income Performance Bonus and the Revenue Performance Bonus payable to the Employee in respect of any Financial Year the Chemisolv Accounts shall for each financial year -21- 23 up to and including the financial year ending on 31st December 2015 be prepared:- 4.1.1 in accordance with the requirements of all relevant statutes and generally accepted accounting principles applicable in the USA; 4.1.2 so as to show a true and fair view of the consolidated income on ordinary activities before taxation (and the royalties and revenues referred to in clause 3.2 above of Holdings and its subsidiaries (including the Employer) for such Financial Year ("the Consolidated Income" or "royalties" and "revenues"); 4.1.3 on a basis consistent with the accounting policies applied in the preparation of all previous accounts. 4.2 The Income for each Financial Year shall be calculated by making the following adjustments to the Consolidated Income (to the extent not already taken into account in the preparation of the Chemisolv Accounts); 4.2.1 there shall be added back any provision or charge made in respect of any taxation calculated by reference to the income, profits or gains of Holdings and its subsidiaries in respect of such Financial Year but only to the extent that the same is reflected in the Chemisolv Accounts before arriving at the Consolidated Income; 4.2.2 there shall be added back excess depreciation arising on the upward revaluation of any fixed assets (for the avoidance of doubt including the Relevant Intellectual Property) but only to the extent that the same is reflected in the Chemisolv Accounts before arriving at the Consolidated Income; 4.2.3 there shall be added back any charge or provision made for any dividends declared paid or made in or in respect of such Financial Year to any member of the Serv-Tech -22- 24 Group but only to the extent that any such charge or provision is reflected in the Chemisolv Accounts before arriving at the Consolidated Income; 4.2.4 there shall be charged or provided for all normal working or management expenses and outgoings incurred in connection with the business of Holdings and its subsidiaries including salaries, pensions and other remuneration but excluding and after adding back the amount of any Income Performance Bonus or Revenue Performance Bonus payable either to the Employee or to any of the other Performance Awarded Employees; 4.2.5 there shall be deducted all out-of-pocket expenses properly incurred by any Member of the Serv-Tech Group on behalf of any member of the Chemiso1v Group (such as legal fees for outside counsel) to the extent that the same are not already charged in the Chemisolv Accounts. 4.2.6 there shall be added back an amount equal to the aggregate of any management or service charges (eg. corporate charge) payable or paid by any European Member to Serv-Tech or to any other member of the Serv-Tech Group which is charged or provided for in the Chemisolv Accounts other than out-of-pocket expenses properly incurred on behalf of European Members, such as legal fees for outside counsel; 4.2.7 there shall be added back an amount equal to the aggregate of any management or service charges (eg. corporate charge) payable or paid by any Non-European Member to Serv-Tech or to any other Member of the Serv-Tech Group which is charged or provided for in the Chemisolv Accounts to the extent that such charges:- (a) in relation to the Financial Year ending 31st December 1996 exceed 5% of the gross revenue of the Non-European Members for such financial year; -23- 25 (b) in relation to all subsequent Financial Years, exceed the cost of the services, facilities or other support actually provided as reasonably allocated to the Non-European Members 4.2.8 after adding back any payment included in the financial statements in relation to income tax (including payment for group relief), dividends or transfers to balance sheet reserves for income tax or dividends but in each case only to the extent that these are charged against profit before income tax in the Chemisolv Accounts. 4.2.9 there shall be added/(deducted) thereto an amount equal to the amount by which the full arms-length market value of any goods or services supplied or provided by any member of the Chemisolv Group to any member of the Serv- Tech Group in the relevant Financial Year exceeds/(is less than) the actual value of any consideration received by any such member of the Chemisolv Group for any such goods and services so supplied or provided; 4.2.10 there shall be added back an amount equal to the aggregate of all interest paid or payable by any member of the Chemisolv Group to any member of the Serv-Tech Group in respect of loans made by any member of the Serv-Tech Group which is charged or provided for in the Chemisolv Accounts to the extent that such interest exceeds the interest which Serv-Tech would have had to pay to its bankers on the amounts of such loans had it borrowed equivalent amounts from its bankers; 4.2.11 there shall be added thereto an amount equal to the amount by which the amount of all interest earned by all members of the Chemisolv Group on all monies loaned by them or any of them to any member of the Serv-Tech Group during the relevant Financial Year is less than the amount of interest which such members of the Chemisolv Group would have earned had such monies been loaned at full commercial rates of interest on arms-length terms. -24- 26 4.2.12 if any member of the Serv-Tech Group has injected or infused capital into any member whether by way of cash or assets (the value thereof being hereinafter referred to as "the Capital Amount") there shall be deducted a sum in respect of interest on such part of the Capital Amount as has not been repaid to the relevant member of the Serv-Tech Group at the rate of interest equal to the lowest annual rate of interest at which Serv-Tech borrows or could borrow money from its bankers. 4.2.13 there shall be deducted on an allocated basis the effect on income of sales of LifeGuard (and its improvements) and related products, services, licenses or royalties to or by the Serv-Tech Group. 4.3 Holdings and Serv-Tech shall (at the joint and equal expense of Holdings and Serv-Tech) procure that Chemisolv's Accountants shall report in writing in substantially the form of the report set out in the Schedule hereto in respect of each Financial Year the amount of the Income, the Income Performance Bonus, the Revenue Performance Bonus, and the Excess Tax (as defined in clause 3.4 above if any) for the relevant Financial Year as soon as reasonably practicable following the production of the Chemisolv Accounts for the relevant Financial Year and in any event (except for Excess Tax) by no later than 30th June in the following Financial Year. A copy of such report together with all working papers and any accompanying explanations reasonably necessary to understand the basis on which the Income, the Income Performance Bonus, the Revenue Performance Bonus and the Excess tax (as defined in clause 3.4 above if any) in respect of each Financial Year have been computed shall be forwarded by Holdings to the Employee forthwith upon the same being produced by Chemisolv's Accountants. In reporting on the amount of the Income, the Income Performance Bonus, the Revenue Performance Bonus and the Excess Tax (as defined in clause 3.4 above if any) in respect of each Financial Year Chemisolv's Accountants shall act as experts and not as arbitrators and their report as to the amount of the Income, the Income Performance Bonus, the Revenue Performance Bonus and the Excess Tax (as defined in clause 3.4 above if any) in respect of each Financial Year shall in the absence of fraud or manifest error be -25- 27 final and binding upon Holdings, the Employer Serv-Tech and the Employee. 4.4 The Employee shall be entitled at any time in the period of twenty eight days following receipt by them of any report referred to in Clause 4.3 and any accompanying working papers and explanations to dispute the amount of the Income, the Income Performance Bonus, the Revenue Performance Bonus and the Excess Tax (as defined in clause 3.4 above if any) for the relevant Financial Year disclosed therein by notice in writing to Holdings. Any such notice shall set out in reasonable detail the grounds for dispute and any suggested adjustment and if either no such notice is given by the Employee or within a period of twenty one days following such notice the Employee and Holdings shall agree the amount of the Income, the Income Performance Bonus, the Revenue Performance Bonus and the Excess Tax (as defined in clause 3.4 above if any) for the relevant Financial Year as set out in the said report or any amended amounts then the amount of the Income, the Income Performance Bonus, the Revenue Performance Bonus and the Excess Tax (as defined in clause 3.4 above if any) for the relevant Financial Year as set out in the original report or any amended amounts subsequently agreed shall be final and binding on the parties hereto except for matters involving fraud or manifest error. 4.5 If the Employee shall have given notice of dispute pursuant to Clause 4.4 but no agreement shall be reached within the period of twenty one days following as to the amount of any of the Income, the Income Performance Bonus, the Revenue Performance Bonus and the Excess Tax (as defined in clause 3.4 above if any) for the relevant Financial Year then such dispute shall be promptly referred to an independent firm of Certified Public Accountants appointed by agreement between Holdings and the Employee or in default of agreement nominated at the request of either of them by the President for the time being of the American Institute of Certified Public Accountants. The determination of such firm of Certified Public Accountants who shall act as experts and not as arbitrators as to the amount of the Income, the Income Performance Bonus, the Revenue Performance Bonus and the Excess Tax (as defined in clause 3.4 above if any) (as the case may be) for the relevant Financial Year shall be final and binding upon the parties hereto except for -26- 28 matters involving fraud or manifest error. Such firm of Certified Public Accountants shall be entitled to call for and inspect the working papers of Chemisolv's Accountants or of Holdings or of the Employee and such other documents as they consider reasonably necessary and the parties hereto will promptly supply any such working papers or other documents in their possession or under their control. 4.6 In the event of any sale or assignment of any Relevant Intellectual Property asset of Chemisolv Group, the sale or assignment price shall be excluded from the Income Performance Bonus calculation and the Revenue Performance Bonus calculation unless the provisions of clause 5.4.1 have not been complied with in full. 5 SERV-TECH'S COVENANTS Serv-Tech hereby covenants with and undertakes to the Employee that during each Financial Year so far as it is able in all cases and subject in all cases to conformity with Serv-Tech's fiduciary duty to its shareholders and conformity with prudent business practice, Serv-Tech shall not do and it shall procure that no member of the Chemisolv Group or the Serv-Tech Group shall do anything the commission of which will or may materially and adversely affect the profitability or revenues of the Chemisolv Group or any member thereof and in particular but without prejudice to the generality of the foregoing Serv-Tech shall in all cases so far as it is able and subject to all cases to conformity with Serv-Tech's fiduciary duty to the shareholders and conformity with prudent business practice procure that:- 5.1 the employment of any of the Performance Awarded Employees shall not be terminated otherwise than pursuant to the provisions of his employment agreement provided that in the event of a breach of this clause 5.1 then in assessing damages for breach of this Agreement no regard shall be had to any salary entitlement of any Performance Awarded Employee or with respect to any resulting transfer from Income Performance Bonus to Revenue Performance Bonus which may occur as a result of such termination; 5.2 Holdings shall not pursue a dividend policy which would reasonably be considered to impede the growth of the revenue and income of the -27- 29 Chemisolv Group or which would leave any member of the Chemisolv Group with a shortage of necessary working capital; 5.3 save with the prior written agreement of the Employee no management charges or other similar charges will be levied on any member of the Chemisolv Group by Serv-Tech or by any other member of the Serv-Tech Group save in relation to the Financial Year ending 31st December 1996 for charges not exceeding 5% of the gross revenues of the Non-European Members for such Financial Year and save in relation to all subsequent Financial Year for charges not exceeding the cost of services, facilities or other support actually provided and as reasonably allocated to the Non-European Members. However, Serv-Tech may charge the Chemisolv Group for any out-of-pocket expenses properly incurred on their (the Chemisolv Group) account (e.g. legal fees for outside counsel); 5.4 no member of the Chemisolv Group shall (save with the prior written consent of the Employee);- 5.4.1 prior to 1st January 2016, sell transfer assign or otherwise dispose of a material part of its assets or undertaking or any Relevant Intellectual Property (or interest therein) or contract so to do or dispose of any subsidiary or any of the shares in any subsidiary (and Serv-Tech shall not without such consent as aforesaid dispose of Holdings or any interest or shares in Holdings) provided in all cases that the required consent of the Employee shall not be unreasonably withheld and for the avoidance of doubt such consent shall be deemed to be given unless written notice refusing to give consent and setting forth the reasons for such refusal is given within 30 days of such consent having been requested in writing and provided that any withholding of such consent shall only be reasonable if the Employee is reasonably of the opinion that any right or prospective right of his to receive or any prospect of him receiving any Income Performance Bonus or any Revenue Performance Bonus may be prejudiced or adversely affected and shall not in any event be reasonable if both:- -28- 30 (a) the proposed Purchaser transferee or assignee of the relevant assets, undertaking, Relevant Intellectual Property, subsidiary or shares as aforesaid ("the Relevant Assets") shall have agreed in writing that it will assume and honour all obligations of the Employer and Holdings and Serv-Tech under this Agreement (including the obligations under clauses 4 and 5 hereof and the obligations to pay the Income Performance Bonus or Royalty Performance Bonus payable under this Agreement) but only to the extent that such obligations relate to or derive from the Relevant Assets and that with regard to the Relevant Assets it will in all material respects provide the Employee with substantially the same contractual rights and arrangements concerning the calculation and payment of the Income Performance Bonus or Royalty Performance Bonus (as the case may be)as those provided for by the provisions of this Agreement; and (b) the proposed Purchaser transferee or assignee is of the same or greater financial strength then Serv-Tech having regard to their respective shareholders' equity (assets less liabilities), and liquidity. 5.4.2 not acquire any material assets or any new business or undertaking or any shares unless the acquisition has been approved by the Majority of the Performance Awarded Employees (if any); 5.4.3 be prevented or restricted from being able to use the name Chemisolv and the goodwill of the business hitherto carried on under that name; 5.4.4 unless approved by the Majority of the Performance Awarded Employees (if any) borrow any amount in excess of the amount required to meet its working capital requirements from time to time for the avoidance of doubt excluding any borrowings for any member of the Serv-Tech Group relating to the acquisition of any -29- 31 capital asset the acquisition of which has been approved by a Majority of the Performance Related Employees if any and without prejudice of the Serv-Tech Group's entitlement to make the charge referred to in clause 4.2.12 above; 5.4.5 unless approved by a Majority of the Performance Awarded employees create any charge lien (other than a lien arising by operation of law) or other encumbrance over the whole or any part of its undertaking property, assets or Relevant Intellectual Property except for the purpose of securing its indebtedness to its bankers or sureties for sums borrowed or bonds provided in the ordinary and proper course of its business; 5.4.6 (save in the ordinary course of business) and unless approved by a Majority of the Performance Awarded Employees make any loan or advance or give any credit (other than normal trade credit) as principal except for the purpose of making deposits with bankers; 5.4.7 (save in the ordinary course of business) and unless by a Majority of the Performance Awarded Employees take or agree to take any freehold or leasehold interest (except normal office and operations space) in or any licence over any land; 5.4.8 commence any action for winding up or dissolution; 5.4.9 change its accounting reference date or change the accounting policies normally adopted by it save as may be required or allowed from time to time to comply with legal requirements, statements of standard accounting practice, UK GAAP or US GAAP as applicable. 5.5 if Serv-Tech or any subsidiary or holding company of Serv-Tech other than a member of the Chemisolv Group proposes to acquire any company or business any part of which competes or may reasonably be considered to compete either directly or indirectly with any Relevant Business for the time being carried on by Holdings or any -30- 32 member of the Chemisolv Group a Majority of the Performance Awarded Employees shall be given a reasonable opportunity to evaluate such company or business and if they so require such part of such company or business as so competes shall be acquired by a member of the Chemisolv Group rather than by Serv-Tech or any other member of the Serv-Tech Group; 5.6 Serv-Tech will provide and Holdings shall provide the Employee with copies of all audited annual financial statement of Holdings and its subsidiaries included in Serv-Tech's annual audit and unaudited quarterly financial statements of Holdings and its subsidiaries within seven days of the same being available and, as soon as practicable and in any event within 35 business days after the end of each calendar month, management accounts of Holdings and each of its subsidiaries for that month and, from time to time, with such financial and other information as the Employee may reasonably in writing require. Employee shall keep all such information confidential and shall not use or disclose it except to the extent required for the enforcement of his rights hereunder; 5.7 Serv-Tech shall not and no member of the Serv-Tech Group shall divert away from Holdings or any other member of the Chemisolv Group any existing business or any new or prospective business of a kind which comprises any of the Relevant Business and which Holdings or any such member is willing and able to perform; 5.8 any expansion, development or evolution by Serv-Tech or Holdings of the Relevant Business will only be effected through Holdings or a wholly owned subsidiary of Holdings; 5.9 Holdings and each of its subsidiaries shall carry on and conduct its business and affairs in a proper and efficient manner and for its own benefit and that each of Holdings and its subsidiaries shall transact all its business on arm's length terms and for full consideration; 5.10 each of Holdings and its subsidiaries shall not enter into any agreement or agreements restricting its competitive freedom to carry on the Relevant Business by such means and from and to such persons as, it may think fit other than for the purpose of -31- 33 exploiting the Relevant Intellectual Property in the ordinary course of business; 5.11 the routine day to day management of each of Holdings and its subsidiaries and the routine day to day business of each of Holdings and its subsidiaries shall be undertaken and transacted by such of the Performance Awarded Employees who for the time being are employed by any member of the Chemisolv Group; 5.12 Serv-Tech shall use all reasonable and proper means in its power to maintain, improve and extend the Relevant Business carried on by Holdings and its subsidiaries and to further the reputation and interests of the Holdings and its subsidiaries in relation to the Relevant Business including the provision of appropriate capital and working capital by loan or otherwise. Serv-Tech acknowledges that the restrictions contained in this Clause 5 are reasonable and necessary to assure to the Employee the full value and benefit of their right to receive the Income Performance Bonus and the Revenue Performance Bonus in accordance with the provisions of Clauses 3 and 4. 6 GUARANTEE AND INDEMNITY 6.1 In consideration of the Employee entering into this Agreement Serv-Tech hereby unconditionally and irrevocably guarantees to the Employee the due and punctual performance and observance by each of Holdings and the Employer of all its obligations, commitments, undertakings, warranties, indemnities and covenants under or pursuant to this Agreement and agrees to indemnify the Employee against all losses, damages, costs and expenses (including legal costs and expenses) (together with any VAT thereon) which the Employee may suffer through or arising from any breach by either the Employer or Holdings of such obligations, commitments, warranties, undertakings, indemnities or covenants. The liability of Serv-Tech as aforesaid shall not be released or diminished by any arrangements or alterations of terms (whether of this Agreement or otherwise) or any forbearance, neglect or delay in seeking performance of the obligations hereby imposed or any granting of time for such performance. -32- 34 6.2 If and whenever either Holdings or the Employer defaults for any reason whatsoever in the performance of any obligation or liability undertaken or expressed to be undertaken by it under or pursuant to this Agreement, Serv-Tech shall forthwith upon demand unconditionally perform (or procure performance of) and satisfy (or procure the satisfaction of) the obligation or liability in regard to which such default has been made in the manner prescribed by this Agreement and so that the same benefits shall be conferred on the Employee as they would have received if such obligation or liability had been duly performed and satisfied by either Holdings or the Employer (as the case may be). Serv-Tech hereby waives any rights which it may have to require the Employee to proceed first against or claim payment from either Holdings or the Employer (as the case may be) to the intent that as between the Employee and Serv-Tech the latter shall be liable as if it were primarily liable and as if it had entered into all undertakings, agreements and other obligations jointly and severally with the Employee. 6.3 This guarantee and indemnity is to be a continuing guarantee and indemnity to the Employee for all obligations, commitments, warranties, undertakings, indemnities and covenants on the part of Holdings and the Employer under or pursuant to this Agreement notwithstanding any settlement of account or other matter or thing whatsoever. 6.4 This guarantee and indemnity is in addition to and without prejudice to and not in substitution for any rights or security which the Employee may now or hereafter have or hold for the performance and observance of the obligations, commitments, undertakings, covenants, indemnities and warranties of Holdings and the Employer under or in connection with this Agreement. 6.5 In the event of Serv-Tech having taken or taking any security from either Holdings or the Employer in connection with this guarantee and indemnity, Serv-Tech hereby undertakes to hold the same in trust for the Employee pending discharge in full of all Serv-Tech's obligations under this Agreement. Serv-Tech shall not, after any claim has been made pursuant to this Clause 6, claim from either Holdings or the Employer any sum which may be owing to it from either Holdings or the Employer or having the benefit of any -33- 35 set-off or counterclaim or proof against or dividend, composition or payment by either Holdings or the Employer until all sums due and owing to the Employee in respect hereof shall have been paid in full. 6.6 As a separate and independent stipulation, Serv-Tech agrees that any obligation expressed to be undertaken by either Holdings or the Employer under this Agreement (including, without limitation, any monies expressed to be payable under this Agreement) which may not be enforceable against or recoverable from either Holdings or the Employer by reason of its dissolution, any legal limitation, disability or incapacity or any other fact or circumstance shall nevertheless be enforceable against or recoverable from Serv-Tech as though the same had been incurred by Serv-Tech and Serv-Tech were primarily liable in respect thereof and shall be performed or paid by Serv-Tech on demand. 6.7 The foregoing guarantees and indemnities of Serv-Tech as well as its other obligations in this Agreement, shall cease solely in relation to any obligation of Holdings or the Employer which is assumed by a purchaser, transferee or assignee in the circumstances referred to in clause 5.4.1 above provided always that the provisions of clause 5.4.1 have been fully complied with. 7 COUNTERPARTS This Agreement may be executed in any number of counterparts each of which when executed by one or more of the parties hereto shall constitute an original but all of which shall constitute one and the same instrument. 8 GOVERNING LAW This Agreement shall be governed by and construed in accordance with English Law and the parties hereby submit for all purposes in connection with this agreement to the exclusive jurisdiction of the English Courts. 9 NOTICES Any notice to be given pursuant to the terms of this Agreement must be gIven in writing to the party due to receive such notice at his or its address set out in this Agreement or such other address as may have been notified for the purpose to the other parties in accordance with this -34- 36 clause. Notice shall be delivered personally or sent by first class pre-paid recorded delivery or registered post (air mail if overseas) or by facsimile transmission and shall be deemed to be given in the case of delivery on delivery and in the case of posting (in the absence of evidence of earlier receipt) within 48 hours after posting (6 days if sent by air mail) and in the case of facsimile transmission on completion of the transmission. 10 DEDUCTION OF TAX If the Employer, Holdings or Serv-Tech is so required by law it shall deduct tax from any amount payable by it hereunder and shall deliver to the Employee in respect of the amount so paid by it, a certificate as to the gross amount so paid by it, a certificate as to the gross amount of such payment amount of tax deducted and the actual amount paid or to be paid and certifying that it has paid or will pay the amount of tax deducted to the Inland Revenue, Internal Revenue Service or other appropriate taxing authority. 11 INVALIDITY The invalidity illegality or unenforceability of any provision of this Agreement shall not affect the continuation in force of the remainder of this Agreement. 12 VARIATION No variation of this Agreement or any of the documents in the Agreed Form shall be valid unless it is in writing and signed by or on behalf of each of the parties hereto. AS WITNESSED THE PARTIES OR THEIR DULY AUTHORISED REPRESENTATIVES HAVE EXECUTED THIS AGREEMENT AS A DEED AND DELIVERED THE SAME THE DAY AND YEAR FIRST ABOVE WRITTEN -35- 37 SCHEDULE FORM OF REPORT TO BE GIVEN BY CHEMISOLV'S ACCOUNTANTS PURSUANT TO CLAUSE 4.3 INDEPENDENT AUDITOR'S REPORT The Board of Directors A Company Inc: We have audited the accompanying balance sheets of Chemisolv Holdings, Inc. and subsidiaries as of December 31, 1996, and the related statements of earnings, retained earnings, cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Chemisolv Holdings, Inc. and subsidiaries, as of December 31, 1996, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplementary information attached in Schedule 1 related to the calculation of Employment Performance Bonuses is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. SIGNED KPMG PEAT MARWICK L.L.P FEBRUARY 2, 1997 -36- 38 SCHEDULE 1 REPORT AS TO INCOME PERFORMANCE BONUSES/ REVENUE PERFORMANCE BONUSES FOR THE PURPOSES OF CLAUSE 4.3 OF THE AGREEMENT DATED [ ] 1995 BETWEEN (1) CHEMISOLV LIMITED (2) CHEMISOLV HOLDINGS INC (3) SERV-TECH INC AND (4) [RJ DAVIES][DM OWEN][CC ARMITAGE][JR DUFFY] ("The Agreement") (All expressions used in this Schedule shall have the meanings ascribed to them in the Agreement). Calculation of Income Performance Bonuses/Revenue Performance Bonuses in relation to the Agreement in respect of year ending [ ]. The Income Performance Bonuses/Revenue Performance Bonuses for the year ended 31st December [ ] have been calculated as follows: Pre-tax profits per Chemisolv Holdings Inc. audited accounts attached L. Adjustments required pursuant to the Agreement:- Clause 4.2.1 L. Clause 4.2.2 L. etc L. ------ L. Less losses not previously taken into account in accordance with the agreement L. ------ Income to be applied in Income Performance Bonus formula L. ====== Profit percentage for the year ending 31st December [ ] 20/12% Accordingly the Income Performance Bonuses/Revenue Performance Bonuses due to Messrs Davies, Owen, Armitage, Duffy, etc pursuant to Clause [ ] of the Agreement in respect of the Financial Year ended [ ] are as follows:- Relevant Bonus Percentage RJ Davies DM Owen CC Armitage JR Duffy etc (Suitably modified with reference to royalties/sales, etc, in the case of Revenue Performance bonus payable under Clause 3.2). -37- 39 EXECUTED (but not delivered ) until the date hereof) as a ) Deed by CHEMISOLV LIMITED ) acting by Ralph J. Daniels ) Director /s/ RALPH J. DANIELS Clement C. Armitage ) Director /s/ CLEMENT C. ARMITAGE EXECUTED (but not delivered ) until the date hereof) as a ) Deed by CHEMISOLV HOLDINGS INC ) acting by ) Direcotr /s/ [ILLEGIBLE] ) Direcotr /s/ [ILLEGIBLE] EXECUTED (but not delivered ) until the date hereof) as a ) Deed by SERV-TECH INC ) acting by ) Director /s/ MICHAEL T. WILLARD ) Director /s/ MICHAEL T. WILLARD SIGNED (but not delivered ) until the date hereof) as a ) Deed by the said ) CLEMENT CYRIL ARMITAGE ) /s/ CLEMENT CYRIL ARMITAGE in the presence of ) Signature of Witness [ILLEGIBLE] Name [ILLEGIBLE] Address ABACUS COURT MARSHALL STREET MANCHESTER OCCUPATION ACCOUNTANT
-38- EX-10.39 10 OPTION ASSIGNMENT AGREEMENT - CHEMISOLV HOLDINGS 1 EXHIBIT 10.39 DATED DECEMBER 31, 1995 (1) CHEMISOLV HOLDINGS INC. AND (2) CHEMISOLV LIMITED AND (3) SERV-TECH INC. AND (4) R J DAVIES, D M OWEN, C C ARMITAGE, J R DUFFY, W H CORBETT, C BENNETT AND K MACKINTOSH AND (5) LASERDISK LIMITED OPTION ASSIGNMENT AGREEMENT ALSOP WILKINSON INDIA BUILDINGS LIVERPOOL L2 ONH REI: MJP/PH/AG-5312.117 2 THIS OPTION ASSIGNMENT AGREEMENT made on December 31, 1995 BETWEEN: (1) CHEMISOLV HOLDINGS INC. ("Chemisolv") (2) CHEMISOLV LIMITED ("Limited") (3) SERV-TECH INC. ("Serv-Tech") (4) RALPH J DAVIES ("Davies"), DAVID M OWEN ("Owen"), CLEMENT C ARMITAGE ("Armitage"), JAMES R DUFFY ("Duffy"), W HARRY CORBETT ("Corbett"), CHRISTOPHER BENNETT ("Bennett") and KENNETH MACKINSTOSH ("Mackintosh") (each of such individuals being hereinafter referred to individually as "Option Holder" as collectively referred to as "Option Holders") (5) LASERDISK LIMITED ("Newco") DO HEREBY AGREE as follows in consideration for the following provisions and other good and valuable consideration, the receipt, adequacy and sufficiency of all of which are hereby acknowledged by the parties, including, without limitation, L.1 hereby paid by Serv-Tech as agent for Chemisolv to DOTSPEC and to each of the Option Holders and the following provisions:- 1 The Option Holders hereby assign to DOTSPEC Limited, a British private company limited by shares ("DOTSPEC"), and DOTSPEC, hereby assumes all of the interests of Option Holders in the Option Agreement ("Option Agreement") dated 4th November 1994, by and between Chemisolv limited and Option Holders (other than Bennett and Mackintosh) except that (a) the option exercise price in Article 3 shall be amended to be L.1, (b) the option exercise period in Article 2.3 shall be amended to be limited to any time within twenty (20) days of the date of this Agreement, and (c) this option shall only be exercised by written notice from DOTSPEC to the Prescient of Serv-Tech, Inc. as agent for Chemisolv and received by him during such twenty (20) day period referenced in (b) above and indicating that DOTSPEC exercises the said option and tendering (at anytime thereafter) L.1 to Serv-Tech as agent for Chemisolv. The above referenced Option Agreement is, subject to the amendments referred to above, incorporated herein by reference. -1- 3 Each of Chemisolv and Limited consents to the assignment hereby effected. The parties agree that there shall be no further assignment of the Option Agreement or the rights therein or in this Article 1 without Serv-Tech, Inc.'s prior written consent. 2 The Option Holders hereby grant to Chemisolv the option ("the Chemisolv Option") to purchase all (100%) of the issued shares in the capital of DOTSPEC ("the Shares") (which definition shall be deemed in all cases to include one hundred per cent (100%) of the issued shares in the capital of DOTSPEC) for the consideration described below. The consideration payable for the Shares ("the Consideration") upon exercise of the Chemisolv Option shall be:- (a) the payment to the Option Holders of the sum of E700 (which shall be apportioned between them in the following proportions:- Davies - 13/70 Owen - 13/70 Armitage - 13/70 Duffy - 13/70 Corbett - 6/70 Bennett - 6/70 Mackintosh - 6/70
(the "Relevant Fractions")); and (b) the issue to the Option Holders of Loan Notes (in the form of that set out in Exhibit B) for each of the calendar years 2001 to 2015 -2- 4 inclusive ("the Loan Notes") it being agreed that the fractions to be inserted in the Loan Notes to be issued to each of the Option Holders respectively shall be the Relevant Fractions set opposite their names above. In this regard, the Option Holders represent and warrant that they own all of the Shares, that such Shares constitute all of the issued shares in the capital of DOTSPEC, that they are free and clear of any liens, encumbrances or restrictions of any nature (except for these rights under the Chemisolv Option), and that they shall continue to own all of the Shares free and clear of any liens, encumbrances or restrictions of any nature (except for these rights under the Chemisolv Option) from this date until the later of the end of this Chemisolv Option exercise period or the transfer of ownership of the Shares to Chemisolv pursuant to this Agreement following the exercise of the Chemisolv Option. The Option Holders hereby appoint Alsop Wilkinson as their agent for the purpose of receiving on their behalf the Consideration and any notice exercising the Chemisolv Option. The period during which the Chemisolv Option may be exercised shall be the period of thirty (30) days from the third day following the date of this Agreement and shall be exercised by Serv-Tech (on behalf of and agent for Chemisolv) delivering to Alsop Wilkinson (on behalf of and as agent of the Option Holders) within such thirty (30) day period the following: (a) written notice exercising the Chemisolv Option; (b) the sum of E700; (c) the Loan Notes duly executed by Chemisolv and by Serv-Tech as guarantor (which items are hereinafter referred to as the "Closing Items"). Upon Alsop Wilkinson's receipt of the Closing Items, the Option Holders shall transfer the Shares to Serv-Tech as agent for Chemisolv and shall procure the delivery by Alsop Wilkinson to Serv-Tech as agent for Chemisolv of stock transfer forms for the Shares in favour of Chemisolv duly executed by the Option Holders together with the share certificates in respect of the Shares. In order to partially secure the obligations of Option Holders in this regard, upon execution of this Agreement, Option Holders shall deliver to Alsop Wilkinson (in care of Michael Prince) to hold pending the receipt by them of the Closing Items such stock transfer forms duly executed and the share certificates, in both cases representing the Shares. Upon receipt of the Closing Items by Alsop Wilkinson, the duly -3- 5 executed stock transfer forms and share certificates shall be held by Alsop Wilkinson in trust for Chemisolv and Alsop Wilkinson shall deal with such items as requested in writing by the President of Serv-Tech as agent for Chemisolv. The Option Holders hereby also represent and warrant that the facts stated herein and as represented in Exhibit A and incorporated herein by reference are true and correct as of the execution hereof and, that such facts remain true and correct from this date continuously through the later of the end of this option exercise period or the transfer of ownership of the Shares to Chemisolv. Option Holders and DOTSPEC also agree, represent and warrant that no additional shares in the capital stock of DOTSPEC shall be issued after the execution of this Agreement, subscribed for issue, or the subject of any option (except for this Chemisolv Option), warrant or other commitment or undertaking to issue (except for any new shares to the Option Holders all of which shares shall be transferred to Chemisolv hereunder). The Option Holders agree, represent and warrant that any such new shares in DOTSPEC being issued to Option Holders shall be considered included among the Shares which are subject to this Chemisolv Option, and in all events this Chemisolv Option shall at the time of exercise result in a transfer of all of the then issued shares in the capital of DOTSPEC to Serv-Tech as agent for Chemiso1v and that there shall be no stock subscription, option (other than this Chemisolv Option), warrant or other commitment or undertaking involving then current or future capital stock of DOTSPEC. In any event, the representations and warranties of the Option Holders shall survive any exercise of the Chemisolv Option, transfer of ownership of the Shares to Chemiso1v and/or the expiration of the exercise period but save in the case of fraud no claim shall be made thereunder at any time after the expiry of two years from the date of transfer of the Shares to Chemisolv. 3 Each Option Holder represents and warrants that he has not transferred, encumbered, restricted, assigned nor disposed any of his Option -4- 6 Agreement rights or contracted to do so prior to the execution hereof, nor will he do either in the future, and that he is not restricted from entering into this Agreement and that this Agreement is legally valid and binding on him. DOTSPEC hereby represents and warrants that it shall not, without Serv-Tech, Inc.'s prior written consent, assign or attempt to assign its option rights assumed herein, and DOTSPEC shall not, and the Option Holders agree that they shall not, and that they shall cause DOTSPEC to not, prior to the later of the expiration of Chemisolv's option rights or the transfer of the Shares to Chemisolv pursuant to Chemisolv's Option, transfer, encumber or otherwise dispose of any of the Shares or DOTSPEC's operations, business, assets or rights, including, without limitation, its option rights, or contract to do so, or undertake any debts, liabilities, obligations or duties except as indicated herein or as necessary to exercise its option under the Option Agreement or to preserve its corporate existence and good standing status and then in the case of such preservation only after written notification thereof to, and prior written approval by, the President of Serv-Tech, Inc. Similarly, Chemisolv agrees that it shall not assign the Chemisolv Option except with the prior written consent of the Option Holders and Serv-Tech. 4 If additional actions and documents are required to effectuate the expressed intent of this Agreement, the parties hereto agree to perform such action and prepare and execute such documents as reasonably requested by any of the other parties hereto. 5 The Option Holders' representations, warranties, agreements and obligations pursuant to this Agreement are joint and several. This Agreement shall be binding on the successors of Chemisolv and Limited. 6 For the purposes of this Article 6, the expression "Non-Hydrocarbon Business Asset" shall mean any asset, business or undertaking of Chemisolv or Limited or any Subsidiary of either of such companies which is primarily used or applied in relation to or for the purposes of carrying on any of their respective business activities other than their hydrocarbon business activities (for the avoidance of doubt including any undertaking or goodwill associated therewith and any patent or other -5- 7 intellectual property which relates to or concerns the inventions known as "Mastiff" and "Magnetic De-Inking" and any improvements thereto). If at any time Chemisolv or Limited or any Subsidiary of Chemisolv or Limited (the "Relevant Seller") wishes to sell any Non-Hydrocarbon Business Asset ("the Relevant Non-Hydrocarbon Business Asset") on any particular terms ("the Relevant Terms") it shall not do so, and Serv- Tech shall procure that it shall not do so without first having given Newco (being a company controlled and owned absolutely by the Option Holders) the option to purchase the Relevant Non-Hydrocarbon Business Asset on terms and conditions which are no less favourable to the Option Holders than the Relevant Terms. Such option shall be communicated by written notice in writing given by the Relevant Seller to Newco (as agent for the Option Holders) which notice shall set out details of the Relevant Non-Hydrocarbon Business Asset being offered and the Relevant Terms and shall provide that such option shall be capable of being exercised within thirty (30) days of the giving of such notice by Newco giving to Serv-Tech (as agent for the Relevant Seller) written notice of exercise of such option ("the Exercise Notice") and providing to Serv- Tech (as such agent as aforesaid) during such thirty (30) day period for the giving of the Exercise Notice such comfort from Newco and prospective financiers) of Newco (subject to the results of reasonable due diligence by Newco and such financiers)) as Serv-Tech may reasonably request to satisfy Serv-Tech that Newco shall be capable of purchasing the Relevant Non-Hydrocarbon Business Asset on the Relevant Terms within sixty (60) days of the giving of the Exercise Notice or such longer period as Serv-Tech shall agree. If Newco shall not give such Exercise Notice as aforesaid or, having done so shall have failed to give such comfort as aforesaid or having done so shall have failed to purchase the Relevant Non-Hydrocarbon Business Asset on the Relevant Terms within the said sixty (60) day period or such extended period as Serv-Tech may have agreed the Relevant Seller shall, on the expiry of either the thirty (30) day period (if no such Exercise Notice and comfort as aforesaid has been given) or the sixty (60) day period or such extended period as aforesaid (if such Exercise Notice and comfort as aforesaid has been given) be at liberty to sell the Relevant Non-Hydrocarbon Business Asset within a one hundred and twenty (120) day -6- 8 period from the expiry of the aforesaid relevant thirty (30), sixty (60) day or extended period (as the case may be) but only on terms and conditions which are no more favourable to a purchaser than the Relevant Terms. In addition, no sale of any Relevant Non-Hydrocarbon Business Asset by Chemisolv of Limited or any of their respective Subsidiaries shall take place prior to 1st January 2016, without the prior written consent of Newco which consent shall not be unreasonably withheld and for the avoidance of doubt such consent shall be deemed to be given unless written notice refusing to give consent and setting forth the reasons for such refusal is given within 30 days of such consent having been requested in writing and provided that any withholding of such consent shall only be reasonable if Newco is reasonably of the opinion that either any right or prospective right of the Option Holders to receive, or any prospect of the Option Holders receiving, any royalty, bonus or other payment entitlement which is dependent to the performance or holding of the whole or any part of the Relevant Non-Hydrocarbon Business Asset proposed to be sold may be prejudiced or adversely affected and shall not in any event be reasonable if both (a) the proposed Purchaser, transferee or assignee of the relevant assets, undertaking, Relevant Intellectual Property, subsidiary or shares as aforesaid ("the Relevant Assets") shall have agreed in writing with each of the Option Holders that it will assume and honour all obligations of the Employer and Holdings to pay any income performance bonus or revenue performance bonus which is dependent upon the performance or holding of the Relevant Assets to the extent that such obligations relate to or derive from the Relevant Assets and that with regard to the Relevant Assets it will in all material respects provide each Option Holder with substantially the same contractual rights and arrangements concerning the calculation and payment of any income performance bonus or revenue performance bonus as those provided for by any agreements with the Option Holders which govern the same; and (b) the proposed Purchaser, transferee or assignee is of the same or greater financial strength than Serv-Tech having regard to their -7- 9 respective shareholders' equity (assets less liabilities)and liquidity. 7 This Option Assignment Agreement shall be governed by and construed in accordance with the internal laws of England and Wales without regard to any rules concerning conflicts of laws and the parties hereto hereby submit to the exclusive jurisdiction of the High Court of Justice in England and Wales. However, any dispute with respect to Article 6 shall be decided pursuant to the Commercial Arbitration Rules (including the Expedited Procedures) of the American Arbitration Association and the arbitration shall be held in London, England. The administration of the arbitration shall be through the New York Regional Office of the American Arbitration Association. The arbitrator's decision shall be final and binding and shall be enforced by any court of competent jurisdiction. In the case of any such arbitration, the Option Holders will be considered as one (1) person (acting through their agent Davies or other replacement agent). Expenses of arbitration shall be assessed by the arbitrator. 8 Option Holders and DOTSPEC represent that Magnetic De-Inking inventions and patent rights are owned entirely by DOTSPEC and any ownership by DOTSPEC will not have been or be transferred or assigned to any other person except to Chemisolv. 9 In the event any provision of this Agreement or its exhibits shall be determined to be invalid, void or unenforceable under applicable law, such provision shall be construed by changing it to the least extent possible so as to make it valid and enforceable while at the same time maximising its observance of the intent originally manifested to the greatest extent possible. 10 "Subsidiary" shall in relation to any company include all of its 50% or more, directly or indirectly, owned or controlled entities. "Affiliates" shall in relation to any company include all of its parents, subsidiaries or other entities which are, directly or -8- 10 indirectly, 50% or more owning of, owned by or under common ownership with the referenced entity. 11 This Agreement shall be binding upon the successor in title of Serv- Tech, Chemisolv and Limited but shall not be assignable by any party. This Agreement may be validly executed by signature of the parties on any number of counterparts or several separate multi-parts and/or on facsimile copies and such multi-parts and copies shall be as valid as if signed by all parties on one original copy and each of which when executed by one or more of the parties shall constitute an original all of which shall constitute one and the same instrument. 12 GUARANTEE AND INDEMNITY 12.1 In consideration of the Option Holders and Newco entering into this Agreement Serv-Tech hereby unconditionally and irrevocably guarantees to the Option Holders and Newco the due and punctual performance and observance by each of Chemisolv and Limited of all its obligations, commitments, undertakings, warranties, indemnities and covenants under or pursuant to this Agreement and agrees to indemnify the Option Holders or Newco against all losses, damages, costs and expenses (including legal costs and expenses) (together with any VAT thereon) which the Option Holders or Newco may suffer through or arising from any breach by either Chemiso1v or Limited of such obligations, commitments, warranties, undertakings, indemnities or covenants. The liability of Serv-Tech as aforesaid shall not be released or diminished by any arrangements or alterations of terms (whether or this Agreement or otherwise) or any forbearance, neglect or delay in seeking performance of the obligations hereby imposed or any granting of time for such performance. 12.2 If and whenever either Chemiso1v or Limited defaults for any reason whatsoever in the performance of any obligation or liability undertaken or expressed to be undertaken by it under or pursuant to this Agreement, Serv-Tech shall forthwith upon demand unconditionally perform (or procure performance of) and satisfy (or procure the satisfaction of) the obligation or liability in regard -9- 11 to which such default has been made in the manner prescribed by this Agreement and so that the same benefits shall be conferred on the Option Holders and Newco as they would have received if such obligation or liability had been duly performed and satisfied by either Chemisolv or Limited (as the case may be). Serv-Tech hereby waives any rights which it may have to require the Option Holders or Newco to proceed first against or claim payment from either Chemisolv or Limited (as the case may be) to the intent that as between the Option Holders and Newco on the one hand and Serv-Tech on the other the latter shall be liable as if it were primarily liable and as if it had entered into all undertakings, agreements and other obligations jointly and severally with the Option Holders and Newco. 12.3 This guarantee and indemnity is to be a continuing guarantee to the Option Holders and Newco for all obligations, commitments, warranties, undertakings, indemnities and covenants on the part of Chemisolv and Limited under or pursuant to this Agreement notwithstanding any settlement of account or other matter or thing whatsoever. 12.4 This guarantee and indemnity is in addition to and without prejudice to and not in substitution for any rights or security which the Option Holders and Newco may now or hereafter have or hold for the performance and observance of the obligations, commitments, undertakeings, covenants, indemnities and warranties of Chemisolv and Limited under or in connection with this Agreement. 12.5 In the event of Serv-Tech having taken or taking any security from either Chemisolv or Limited in connection with this guarantee and indemnity, Serv-Tech hereby undertakes to hold the same in trust for the Option Holders and Newco pending discharge in full of all Serv-Tech's obligations under this Agreement. Serv-Tech shall not, after any claim has been made pursuant to this Article 13 claim from either Chemisolv or Limited any sum which may be owing to it from either Chemisolv or Limited or having the benefit of any set- off or counterclaim or proof against or dividend, composition or -10- 12 payment by either Chemisolv or Limited until all sums due and owing to the Option Holders and Newco in respect hereof shall have been paid in full. 12.6 As a separate and independent stipulation, the Guarantor agrees that any obligation expressed to be undertaken by either Chemisolv or Limited under this Agreement (including, without limitation, any monies expressed to be payable under this Agreement) which may not be enforceable against or recoverable from either Chemisolv or Limited by reason of its dissolution, any legal limitation, disability or incapacity or any other fact or circumstance shall nevertheless be enforceable against or recoverable from Serv-Tech as though the same had been incurred by Serv-Tech and Serv-Tech were primarily liable in respect thereof and shall be performed or paid by Serv-Tech on demand. 12.7 Wherever in this Agreement it is provided that any Subsidiary of Chemisolv or Limited must either perform some act or not perform some act, Serv-Tech shall procure that such Subsidiary shall so perform, or not perform (as the case may be) the relevant act. 12.8 The foregoing guarantees and indemnities of Serv-Tech as well as its other obligations in this Agreement, shall cease solely in relation to any obligation of Chemisolv or Limited which is assumed by a purchaser, transferee or assignee in the circumstances referred to in Article 6 hereof provided that the provisions of Article 6 have been fully complied with. 13 Any notice to be given to or by Chemisolv or Limited herein or any option exercise by Chemisolv as referenced herein shall be given to or by the President of Serv-Tech as agent for Chemisolv and Limited. 14 For the purpose of giving or receiving any notice hereunder on behalf of the Option Holders, Davies shall (unless and until the Option Holders otherwise agree or nominate another of their number) as the agent of the Option Holders and (unless otherwise provided herein) all notices to be given to or by the Option Holders under this Agreement shall be given to -11- 13 or by Davies (or such other of the Option Holders as the Option Holders may hereafter nominate as their agent). Immediately upon the death or disability of Davies or such other person who is the nominated agent of the Option Holders or upon the Option Holders nominating another of them to be their agent, the Option Holders shall provide Chemisolv and Serv- Tech with a name of one of their group to act as their successor agent for the giving and receipt of notices hereunder and taking of other action by the Option Holders' agent as referenced herein. 15 Any notice to be given pursuant to the terms of this Agreement must be given in writing to the party due to receive such notice at his or its address set out in this Agreement or such other address as may have been notified for the purpose to the other parties in accordance with this clause. Notice shall be delivered personally or sent by first class pre-paid recorded delivery or registered post (air mail if overseas) or by facsimile transmission and shall be deemed to be given in the case of delivery on delivery and in the case of posting (in the absence of evidence of earlier receipt) within forty-eight (48) hours after posting (six (6) days if sent by air mail) and in the case of facsimile transmission on completion of the transmission. The address for service of notices of Davies and any successor agent of the Option Holders shall be Thornley House, Carrington Business Park, Manchester, M31 4SG, UK. The address for service of notices of Serv-Tech, Inc. as agent for Chemisolv and Limited shall be 5200 Cedar Crest Blvd., Houston, Texas 77087, USA. Either the agent for the Option Holders or Serv-Tech may provide the other parties with a new address for purposes of such notices. 16 The form of Loan Notes is as set out in Exhibit B. 17 Each Option Holder hereby represents, warranties and agrees that this Agreement is legally binding on him and that he has not transferred, assigned or otherwise disposed of any of his rights under the Option Agreement, nor will he do so in the future, and has not individually or collectively chosen, nor will he do so in the future, any other persons or entities to participate therein with the Option Holders. -12- 14 Serv-Tech, Chemisolv and Limited hereby represent, warrant and agree with the Option Holders that each of Serv-Tech, Chemisolv and Limited has full power and authority to enter into and perform this Agreement and all documents referred to herein which constitute binding obligations on each of them in accordance with their respective terms. 18 The invalidity, illegality or unenforceability of any provision of this Agreement shall not affect the continuation in force of the remainder of this Agreement. Any invalid, illegal or unenforceable provision shall be enforced by the appropriate court or arbitrator, as the case may be, as if it had been originally written (and it shall be so deemed amended) to the least extent to make it valid, legal and enforceable. 19 No variation of this Agreement or any of the documents in the Agreed Form shall be valid unless it is in writing and signed by or on behalf of each of the parties hereto. 20 This Agreement constitutes the entire agreement between the parties with respect to the subject matter of this Agreement and supersede and extinguish any representations and warranties previously given or made other than those contained herein or therein. 21 If Chemisolv, Limited or Serv-Tech is so required by law it shall deduct tax from any amount payable by it hereunder and shall deliver to each Option Holder in respect of the amount so paid by it, a certificate as to the gross amount so paid by it, a certificate as to the gross amount of such payment that amount of tax deducted and the actual amount paid or to be paid and certifying that it has paid or will pay the amount of tax deducted to the Inland Revenue Internal Revenue Service or other appropriate taxing authority. AS WITNESSED the parties or their duly authorised representatives have executed this Agreement as a Deed and delivered the same the day and year first above written. -13- 15 EXECUTED (but not delivered ) until the date hereof) as a ) Deed by CHEMISOLV LIMITED ) acting by Ralph J. Davies ) Director /s/ RALPH J. DAVIES Clement C. Armitage ) Director /s/ CLEMENT C. ARMITAGE EXECUTED (but not delivered ) until the date hereof) as a ) Deed by CHEMISOLV HOLDINGS INC ) acting by ) Director /s/ [ILLEGIBLE] ) Director /s/ [ILLEGIBLE] EXECUTED (but not delivered ) until the date hereof) as a ) Deed by LASERDISK LIMITED ) acting by Ralph J. Davies ) Director /s/ RALPH J. DAVIES [ILLEGIBLE] ) Director /s/ [ILLEGIBLE] EXECUTED (but not delivered ) until the date hereof) as a ) Deed by DOTSPEC ) acting by Ralph J. Davies ) Director /s/ RALPH J. DAVIES [ILLEGIBLE] ) Director /s/ [ILLEGIBLE] EXECUTED (but not delivered ) until the date hereof) as a ) Deed by SERV-TECH INC ) acting by ) Director /s/ [ILLEGIBLE] ) Director /s/ [ILLEGIBLE] -14- 16 SIGNED (but not delivered ) until the date hereof) as a ) Deed by the said RALPH J DAVIES ) /s/ RALPH J. DAVIES in the presence of ) Signature of Witness A. E. HO Name AMY E. HO Address INDIA BUILDINGS, LIVERPOOL Occupation SOLICITOR SIGNED (but not delivered ) until the date hereof) as a ) Deed by the said DAVID M. OWEN ) /s/ DAVID M. OWEN in the presence of ) Signature of Witness A. E. HO Name AMY E. HO Address INDIA BUILDINGS, LIVERPOOL Occupation SOLICITOR SIGNED (but not delivered ) until the date hereof) as a ) Deed by the said CLEMENT C. ARMITAGE ) /s/ CLEMENT C. ARMITAGE in the presence of ) Signature of Witness A. E. HO Name AMY E. HO Address INDIA BUILDINGS, LIVERPOOL Occupation SOLICITOR -15- 17 SIGNED (but not delivered ) until the date hereof) as a ) Deed by the said JAMES R. DUFFY ) /s/ JAMES R. DUFFY in the presence of ) Signature of Witness FRANK PERRONE Name FRANK PERRONE Address 5200 Cedar Crest Blvd. Houston, TEXAS 77087 Occupation SIGNED (but not delivered ) until the date hereof) as a ) Deed by the said HARRY CORBETT ) /s/ HARRY CORBETT in the presence of ) Signature of Witness FRANK PERRONE Name FRANK PERRONE Address 5200 Cedar Crest Blvd. Houston, TEXAS 77087 Occupation SIGNED (but not delivered ) until the date hereof) as a ) Deed by the said CHRISTOPHER BENNETT ) /s/ CHRISTOPHER BENNETT in the presence of ) Signature of Witness AMY E. HO Name AMY E. HO Address INDIA BUILDINGS, LIVERPOOL Occupation SOLICITOR -16- 18 SIGNED (but not delivered ) until the date hereof) as a ) Deed by the said KENNETH MACKINTOSH ) /s/ KENNETH MACKINTOSH in the presence of ) Signature of Witness A.E. HO Name A.E. HO Address INDIA BUILDINGS, LIVERPOO Occupation SOLICITOR -17- 19 EXHIBIT A The Option Holders represent and warrant that the enclosed written responses (with the responses being in parentheses) are true and correct in all material respects with respect to each of the categories of information below as applicable to DOTSPEC on the date hereof and shall remain true for all periods continuously through the later of the expiration of Chemisolv's option exercise period and the transfer of the Shares to Chemisolv. These representations and warranties shall then survive the expiration and/or exercise of such option exercise by Chemisolv and/or any transfer of ownership of the Shares to Chemisolv. * Tax returns. (None since no business transacted). * Incorporation documents, corporate articles and minutes. (See Statutory Books and register of DOTSPEC). * Shareholder agreement, voting agreements, option agreements, etc. (None). * Share ledger showing ownership (showing Option Holders owning all issued shares in the capital of DOTSPEC). * List of assets and liabilities, current balance sheet and income statement for last five (5) fiscal years. (None since no business has ever been transacted except for ownership of an unencumbered and unrestricted asset consisting of the Magnetic De-Inking patent rights and application which asset is wholly owned by DOTSPEC except to the extent previously transferred to Chemisolv). * All contracts or obligations. (None). * List of past or present employees. (None). * List of bank accounts, any guarantees or indemnities of any nature. (None). * Any claims against DOTSPEC or contingent obligations. (None other than (1) an obligation to a patent agent to discharge patent application fees -18- 20 in the region of E7000; and (2) an obligation to pay Dr. R Bialecki L.5000 in respect of letters of support and patent obligations). * Any partnerships, subsidiaries, affiliates. (None). * Written summary of all business and operations conducted by DOTSPEC since its inception. (No business transacted). -19- EX-10.40 11 GUARANTEED UNSECURED LOAN NOTES-CHEMISOLV HOLDINGS 1 EXHIBIT 10.40 CHEMISOLV HOLDINGS INC Registered Office: Issue of variable rate 2001/2015 Guaranteed Unsecured Loan Notes pursuant to the authority of the Articles of Incorporation of Chemisolv Holdings Inc and the authority of a resolution of the Board of Directors of Chemisolv Holdings Inc dated December 1995. CERTIFICATE NO: 1 NOTEHOLDER: Clement Cyril Armitage 1. Chemisolv Holdings Inc ("Chemisoly") will on 31st December 2016 or on such earlier date as the principal monies hereby covenanted to be paid shall become payable in accordance with the conditions attached hereto which are applicable to this Loan Note ("the Conditions") pay to Clement Cyril Armitage of Wild Hedges, 4 Daisybank Crescent, Audlem, Crewe, CW3 OHD the Principal Sum (as defined in the Conditions) to be determined in accordance with and pursuant to the Conditions or such part thereof as is then outstanding under this Note in accordance with the Conditions and will with effect from the Determination Date (as defined in the Conditions) pay interest on such Principal Sum at the Interest Rate (as defined in the Conditions) on each Interest Payment Date (as defined in the Conditions). 2. This Note is issued subject to and with the benefit of the Conditions which each of Chemisolv Holdings Inc and Serv-Tech Inc ("Serv-Tech") agree shall be binding on them and enforceable by the Noteholder. 3. Serv-Tech Inc hereby guarantees the due payment of the Principal Sum and interest thereon in accordance with the Conditions. 4. This Note and the Conditions shall be governed by and construed in accordance with English Law. EXECUTED AS A DEED BY Chemiso1v Holdings Inc and Serv-Tech Inc on 1995 2 EXECUTED as a deed (but ) not delivered until the ) date hereof) on behalf ) of Chemisolv Holdings Inc ) by its authorised officers ) /s/ [ILLEGIBLE] -------------------------------- Director /s/ [ILLEGIBLE] -------------------------------- Director EXECUTED as a deed (but ) not delivered until the ) date hereof) on behalf ) of Serv-Tech Inc as Guarantor ) by its authorised officers ) /s/ [ILLEGIBLE] -------------------------------- Director /s/ [ILLEGIBLE] -------------------------------- Director -2- 3 CONDITIONS 1 In this Note (including these Conditions) unless there is something in the subject or context inconsistent therewith the following expressions shall have the following meanings:- "Base Rate" means LIBOR (as hereinafter defined) less @%; "Business Day" a day on which banks are open for business in the City of London (not being a Saturday); "Chemisolv Accounts" means the audited consoli- dated income (profit) and loss account of the Company and its subsidiaries for the Financial Year and the audited consolidated balance sheet of the Company and its subsidiaries as at the last day of the Financial Year as part of the Serv-Tech annual audit which shall have been prepared in accordance with the provisions of Condition 4 below "Chemisolv Group" means the Company, Chemisolv Limited and all other subsidiaries of either the Company or Chemisolv Limited "Chemisolv's Accountants" means the auditors for the time being of the Company appointed by Serv-Tech who shall be responsible for preparing the audited financial statements of the Company and its subsidiaries for each financial year -3- 4 "the Company" means Chemisolv Holdings Inc which was incorporated in the State of Delaware; "Determination Date" means the date upon which the Principal Sum shall have been determined and become binding on the Company and the Noteholder in accordance with Condition 2 below; "Financial Year" means the financial year of the Company commencing on 1st January and ending on 31st December in the same calendar year "First Interest Period" the period commencing on the Determination Date and ending on and including whichever of 31st March 30th June 30th September and 31st December shall first occur after the Determination Date; "First Redemption Date" the last day of the First Interest Period; "Interest Period" the First Interest Period or any Subsequent Interest Period as the case may be; "Interest Payment Date" the last day of each Interest Period; "LIBOR" means the London Inter Bank Offer Rate; "Interest Rate" in respect of each Interest Period a rate per annum equal to 1 per -4- 5 centum per annum below the Base Rate; "Majority of the Performance such of the Performance Awarded Employees" Awarded Employees for the time being employed by members of the Chemisolv Group who between them have the majority of points of all the Performance Awarded Employees who are so employed at the relevant time and for this purpose each Performance Awarded Employee shall have such number of points as is set out in parenthesis after his name in the definition of "Performance Awarded Employees" below "the Note" this Note (being one of the Notes); "the Notes" all or any one of the 105 variable rate 2001/2015 Guaranteed Unsecured Loan Notes constituted by a resolution of the directors of the Company on December 1995 and issued to the Vendors; "Noteholder" the person or persons whose name and address are entered on the Register as the holder or holders of this Note and includes in each case the personal representatives of the registered holder or holders and "Noteholders" means the registered holders for the time being of the Notes; "Performance Awarded means Messrs Ralph J Davies (13), -5- 6 Employees" David M Owen (13), Clement C Armitage (13), James R Duffy (13), W Harry Corbett (6), Christopher Bennett (6) and Kenneth Mackintosh (6) "Principal Sum" means the principal sum outstanding and remaining unpaid by the Company on the Note which shall be determined and shall be binding on the Company and the Noteholder in accordance with Condition 2; "Redemption Date" means the First Redemption Date and thereafter the 31st March, 30th June, 30th September or 31st December in each year whilst the Principal Sum is outstanding or at such other times if agreed by the Company; "Relevant Business" means any business directly connected with the application of speciality chemicals in the treatment of water and waste or directly connected with the paper industry including the manufacture or recycling of paper, or the strengthening of paper and any business derived from the Relevant Intellectual Property or the application thereof "The Register" means the register of Noteholders to be kept by the Company under Condition 9 hereof; "Relevant Intellectual means (in relation to the -6- 7 Property" inventions known as "Mastiff" and "Magnetic De-Inking" as they existed on 1st April 1995 and all improvements thereafter and hereafter made to such inventions) all patents, inventions, know-how, trade secrets and other confidential information, registered designs, copy rights, design rights, rights of equivalent to copy right and design rights, registered trademarks, registered service marks, registered business names, trade names, registrations of the aforesaid items, rights in the nature of any of the aforesaid items in any country whatsoever in the World, rights in the nature of unfair competition rights and rights to sue for passing off "Relevant Fraction" means, 13/70 "the Revenues" the Royalty Revenues, the Product and Service Revenues and the Customer Revenues defined and referred to in Condition 2.1 "Serv-Tech" Serv-Tech Inc whose registered office and address for notices is CT Corporation System, 811 Dallas Avenue, Houston, Texas 77002 and which was incorporated in the State of Texas; "Subsequent Interest Period" each successive period of three -7- 8 months commencing on and including the day after the preceding Interest Period and ending on and including the next following 31st March, 30th June, 30th September or 31st December (whichever first occurs) or if any such date is not a Business Day ending on and including the Business Day next following such date. "subsidiary" means in relation to any company which is registered in England and Wales any subsidiary undertaking (within the meaning of the Companies Act 1985 as amended by the Companies Act 1989) of such company and in relation to any company which is incorporated in the USA, any entity which is 50% or more directly or indirectly owned or controlled by such company (and "subsidiaries" shall be construed accordingly) "the Vendors" means Messrs Ralph J Davies, David M Owen, Clement C Armitage, James R Duffy, W Harry Corbett, Christopher Bennett and Kenneth Mackintosh Words denoting persons only shall include bodies corporate unincorporated associations partnerships and words incorporating the singular number only shall include the plural and vice versa. Headings in these Conditions are for ease of reference only and shall not affect the interpretation thereof. 2 Principal Sum and Interest 2.1 The Principal Sum shall be calculated in accordance with the following formula -8- 9 PS = RF x 1.67% x (A + B + C) Where: PS represents the Principal Sum RF represents the Relevant Fraction A shall be the aggregate amount of all royalties earned during the Financial Year by all companies in the Chemisolv Group to the extent generated by the licensing or other exploitation of the Relevant Intellectual Property("Royalty Revenues") B shall be the aggregate of all sales or revenues or turnover during the Financial Year of all companies in the Chemisolv group from the sale of any products, chemicals or services to the extent that such products, chemicals or services are used in the application of any of the Relevant Intellectual Property ("Product and Service Revenues") C shall be the aggregate of all sales or revenues or turnover during the Financial Year of all companies in the Chemisolv Group from customers or clients or licensees but only to the extent that such sales, revenues or turnover directly relate to or concern the application or exploitation of any of the Relevant Intellectual Property ("Customer Revenues") 2.2 The amount of revenue or turnover earned in respect of any Financial Year shall not be counted more than once in financial year shall not be counted more than once in calculating the aggregate of A+B+C for one Financial Year and shall not be calculated within the aggregate of A+B+C for another Financial Year. The sum of A+B+C shall be reduced by any commissions, royalties, discounts, profit sharing or other payments applicable to agents, distributors, licensors, sub-contractors, Joint Venture -9- 10 partners, or other such persons to the extent that they have been properly and reasonably made for the purpose of generating the royalties and revenues comprising A+B+C and to the extent that they have not already been taken into account in determining the respective amounts of A, B or C. 2. 3 The Noteholder acknowledges that the Principal Sum and the long term interests of the Serv-Tech Group will be influenced by the strategies and policies of the Chemisolv Group concerning pricing, discounts, royalties, agency fees, commissions and other material terms and conditions to be offered and accepted by the Chemisolv Group upon which the Relevant Intellectual Property will be exploited (which may involve sales, licensing, sub-contracting and other similar transactions or arrangements) and accordingly, the Noteholder acknowledges both that (i) the Chemisolv Group shall be required to comply with written strategies and policies (concerning the terms and conditions of sales, pricing, discounts, royalties, agency fees, licensing, commissions, subcontracting, joint ventures and other such arrangements and undertakings) as reasonably agreed from time to time by the Chemisolv Group and the Chief Financial Officer of the Serv-Tech Group or his designee, and (ii) all material undertakings, contracts and other obligations of the Chemisolv Group ("material" in relation to any undertaking, contract or obligation being one involving the payment to or from the Chemisolv Group of aggregate sums in excess of $500,000) shall be subject to the prior written approval of the Chief Financial Officer of the Serv-Tech Group or his designee, provided that such approval shall not be unreasonably withheld or delayed and in determining what is reasonable or unreasonable due regard shall be given to prudent business practice and the fiduciary duty which Serv-Tech owes to its shareholders. 2.4 The Principal Sum outstanding on this Note shall bear interest from and including the commencement of the First Interest Period (but excluding) the day upon which it is repaid by the Company in accordance with Condition 3 hereof and such interest shall in respect of each Interest Period be payable at the Interest Rate -10- 11 and be paid (less any withholdings or deductions of tax which may be made if required by law in accordance with Condition 17) by the Company in arrears on the appropriate Interest Payment Date to the Noteholder entitled to receive the same. Any interest on the Principal Sum which is not paid within seven Business Days of the Relevant Interest Payment Date shall bear interest at the Interest Rate from and including the day following the seventh Business Day after the relevant Interest Payment Date to the date of payment. 2.5 Interest in respect of each Interest Period will be calculated on the basis of a 365 day year and will accrue on a day to day basis. 2.6 Interest on the Note shall cease to accrue on the 31st December 2016. 3 Repayment 3.1 At any time after the First Redemption Date the Noteholder may demand in writing substantially in the form attached hereto as Schedule 1 ("a Redemption Notice") that all or part of the Principal Sum (subject to a minimum of L.10,000 in respect of a part redemption) held by such Noteholder shall be rep aid at par (together with unpaid interest to the relevant Redemption Date) by the Company on such Redemption Date or as is specified in such notice provided always that such notice is served no later than 10 Business Days prior to the relevant Redemption Date. 3.2 The Principal Sum together with unpaid interest shall (unless, in the case of both the Principal Sum and unpaid interest, such sums have been previously repaid or paid by the Company) be repaid on 31st December 2016 (and if such day is not a Business Day the next following Business Day) to the Noteholder or as the Noteholder may direct in writing whose receipt shall be a sufficient discharge and the Company shall not be concerned as to the application of any such sums. All monies payable by the Company or Serv-Tech to the Noteholder in respect of the -11- 12 Principal Sum or interest thereon shall be paid as provided for in Condition 12. 3.3 On or before the due date for any repayment or redemption hereunder the Noteholder shall surrender the Note to be repaid to the Company for retention by the Company. In the event of a repayment or redemption of part only of the Principal Sum (provided the Noteholder has surrendered his Note to the Company) the Company will issue a further Note in substantially the same form in respect of the balance of the (or if applicable deemed reduced) Principal Sum which remains outstanding and for the avoidance of doubt no fee will be payable by the Noteholder in respect of the issue of such a Note. 3.4 In the event of any Noteholder whose Notes or any part of whose Notes are liable to be repaid under these Conditions failing to surrender such Notes pursuant to condition 3.3 above, the Company shall be entitled to pay the moneys payable in respect thereof into a designated deposit account with Barclays Bank PLC (or such other bank as the Company may elect) to be held on trust for such Noteholder and to enter the details of the repayment in the Register. Upon such entry in the Register as aforesaid, such Notes will be cancelled to the extent of the amount repaid and all obligations of the Company in respect of the amount so repaid will cease. Any interest earned in respect of such designated deposit account will accrue for the benefit of the Company unless otherwise resolved by the Company. 3.5 At any time whilst any part of the Principal Sum remains outstanding the Noteholder may by giving notice to the Company (the "Currency Conversion Notice") elect to convert the Principal Sum (or such part thereof as is specified in the Currency Conversion Notice) into either pounds sterling (where the Principal Sum is calculated in US Dollars) or into US Dollars (where the Principal Sum is calculated in pounds sterling) provided always that the Noteholder shall not be entitled to serve a Currency Conversion Notice after:- -12- 13 3.5.1 30th November 2016: 3.5.2 a Redemption Notice has been served on the Company; or 3.5.3 the happening of an Event of Default. 3.6 The rate of exchange for the conversion shall be the rate at which pounds sterling or US Dollars (as the case may be) may be purchased from Barclays Bank plc at 11.00 am on the date being 5 Business Days following the service of the Currency Conversion Notice and all necessary costs of the conversion shall be for the account of the Noteholder. 4 Early Repayment The Principal Sum (if ascertained) shall immediately become payable together with all unpaid interest thereon to the date of payment on the happening of any one or more of the following Events of Default:- 4.1 if a petition shall be presented for the winding up of the Company or for the making of an administration order in relation to the Company or if an effective resolution is passed for the winding up of the Company except for the purpose of a solvent reconstruction or amalgamation; 4.2 if any encumbrancer shall take possession or a receiver shall be appointed of the undertaking property and assets of the Company or any part thereof; 4.3 if a distress execution or other process shall be levied or enforced upon or against any of the assets or property of the Company and shall not be discharged within 7 days of being levied or enforced; 4.4 if the Company is deemed to be unable to pay its debts for the purposes of Section 123(l) of the Insolvency Act 1986; 4.5 if the Company makes default for a period of 30 days in the payment of any interest hereby covenanted to be paid and the -12- 14 Noteholder by notice calls in the Principal Sum before such interest is paid; 4.6 if default shall be made by the Company in the performance of any covenant condition or obligation (other than the covenant for payment of interest) binding on the Company under the Note; 4.7 if a meeting of the Company is convened for the purpose of making or proposing to make or entering into any arrangement or composition with or assignment for the benefit of its creditors; 4.8 if the Company agrees to sell transfer or otherwise dispose of the whole or a substantial part of its undertaking property and assets; or 4.9 if the Company ceases or threatens to cease to carry on business. 5 Chemisolv's Accounts 5.1 For the purpose of determining the Principal Sum the Chemisolv Accounts for the Financial Year shall be prepared:- 5.1.1 in accordance with the requirements of all relevant statutes and generally accepted accounting principles applicable in the USA; 5.1.2 so as to show a true and fair view of the Revenues (as defined in Condition 1) which are relevant for the purpose of determining the Principal Sum pursuant to Condition 2.1 above; 5.1.3 on a basis consistent with the accounting policies applied in the preparation of all previous accounts. 5.2 The Company and Serv-Tech shall at the joint and equal expense of the Company and Serv-Tech procure that Chemisolv's Accountants shall report in writing in substantially the form of the report set out in Schedule 2 hereto in respect of the -14- 15 Financial Year the amount of the Revenues as soon as reasonably practicable following the production of the Chemisolv Accounts for the Financial Year and in any event by no later than 30th June in the following Financial Year. A copy of such report together with all working papers and any accompanying explanations reasonably necessary to understand the basis on which the Revenues have been computed shall be forwarded by the Company to the Noteholder forthwith upon the same being produced by Chemisolv's Accountants. In reporting on the amount of the Revenues and Chemisolv's Accountants shall act as experts and not as arbitrators and their certificate as to the amount of the Revenues in respect of the Financial Year shall in the absence of fraud or manifest error be final and binding upon the Company, Serv-Tech and the Noteholder. 5.3 The Noteholder shall be entitled at any time in the period of twenty eight days following receipt by them of any report referred to in Condition 5.2 and any accompanying working papers and explanations to dispute the amount of the Revenues for the Financial Year disclosed therein by notice in writing to the Company. Any such notice shall set out in reasonable detail the grounds for dispute and any suggested adjustment and if either no such notice is given by the Noteholder or within a period of twenty one days following such notice the Noteholder and the Company shall agree the amount of the Revenues for the Financial Year as set out in the said report or any amended amounts then the amount of the Revenues for the Financial Year as set out in the original report or any amended amounts subsequently agreed shall be final and binding on the Company, Serv-Tech and the Noteholder except for matters involving fraud or manifest error. 5.4 If the Noteholder shall give notice of dispute pursuant to Condition 5.3 but no agreement shall be reached within the period of twenty one days following as to the amount of any of the Revenues for the Financial Year then such dispute shall be promptly referred to an independent firm of Certified Public Accountants appointed by agreement between the Company and the Noteholder or in default of agreement nominated at the request -15- 16 of either of them by the President for the time being of the American Institute of Certified Public Accountants. The determination of such firm of Certified Public Accountants who shall act as experts and not as arbitrators as to the amount of the Revenues for the Financial Year shall be final and binding upon the Company, Serv-Tech and the Noteholder except in relation to matters involving fraud or manifest error. Such firm of Certified Public Accountants shall be entitled to call for and inspect the working papers of Chemisolv's Accountants or of the Company or of the Noteholder and such other documents as they consider reasonably necessary and the Company, Serv-Tech and the Noteholder will promptly supply any such working papers or other documents in their possession or under their control. 5.5 In the event of any sale or assignment of any Relevant Intellectual Property asset of any member of the Chemisolv Group, the sale or assignment price shall be excluded from the calculation of the Principal Sum unless the provisions of condition 6.1.1 shall not have been complied with in full. 6 Covenants by Serv-Tech Serv-Tech hereby covenants with and undertakes to the Noteholder that in respect of the Financial Year so far as it is able in all cases and subject in all cases to conformity with Serv-Tech's fiduciary duty to its shareholders and conformity with prudent business practice. Serv-Tech shall not do and it shall procure that no member of the Chemisolv Group or any other subsidiary of Serv-Tech does or omits to do anything the commission or omission of which will or may materially and adversely affect the amount of the Revenues and in particular but without prejudice to the generality of the foregoing Serv-Tech shall in all cases so far as it is able and subject in all cases to conformity with Serv-Tech's fiduciary duties to its shareholders and conformity with prudent business practice procure that:- 6.1 no member of the Chemisolv Group shall (save with the prior written consent of the Noteholder);- -16- 17 6.1.1 prior to 1st January 2016 sell transfer assign or otherwise dispose of a material part of its assets or undertaking or any Relevant Intellectual Property (or interest therein) or contract so to do or dispose of any subsidiary or any of the share in any subsidiary (and Serv-Tech shall not without such consent as aforesaid dispose of Holdings or any interest or shares in Chemisolv) provided in all cases that the required consent of the Noteholder shall not be unreasonably withheld and for the avoidance of doubt such consent shall be deemed to be given unless written notice refusing to give consent and setting forth the reasons for such refusal is given within 30 days of such consent having been requested in writing and provided that any withholding of such consent shall only be reasonable if the Noteholder is reasonably of the opinion that any right or prospective right of his to receive or any prospect of him receiving any Principal Sum may be prejudiced or adversely affected and shall not in any event be reasonable if both:- (a) the proposed purchaser transferee or assignee of the relevant assets, undertaking, Relevant Intellectual Property, Subsidiary or shares as aforesaid ("the Relevant Assets") shall have agreed in writing that it will assume and honour all obligations of Chemisolv and Serv-Tech under this Loan Note (Including those in conditions 5 and 6 hereof and the obligations to pay the Principal Sum under this Note) but only to the extent that such obligations relate to or derive from the Relevant Assets and that with regard to the Relevant Assets it will in all material respects provide the Noteholder with substantially the same contractual rights and arrangements concerning the calculation and payment of the Principal Sum as those provided by the provisions of this Loan Note; and -17- 18 (b) the proposed Purchaser transferee or assignee is of the same or greater financial strength then Serv-Tech having regard to their respective shareholders' equity (assets less liabilities), and liquidity; 6.1.2 not acquire any material assets or new business or undertaking or any shares unless the acquisition has been approved by the Majority of the Performance Awarded Employees (if any); 6.1.3 unless approved by a Majority of the Performance Awarded Employees create any charge lien (other than a lien arising by operation of law) or other encumbrance over the whole or any part of the Relevant Intellectual Property or of its undertaking property or assets except for the purpose of securing its indebtedness to its bankers or sureties for sums borrowed or bonds procured in the ordinary and proper course of its business; 6.1.4 change its accounting reference date or change the accounting policies normally adopted by it save as may be required or allowed from time to time to comply with legal requirements or Statements of Standard Accounting Practice or UK GAAP or US GAAP as applicable; 6.2 Serv-Tech shall not and no member of the Serv-Tech Group shall divert away from the Company or any other member of the Chemisolv Group any existing business or any new or prospective business of a kind which comprises any of the Relevant Business and which the Company or any such member is willing and able to perform; 6.3 any expansion, development or evolution by Serv-Tech or the Company of the Relevant Business will only be effected through the Company or a wholly owned subsidiary of the Company; -18- 19 6.4 the Company and each of its subsidiaries shall carry on and conduct its business and affairs in a proper and efficient manner and for its own benefit and that each of the Company and its subsidiaries transacts all its business on arm's length terms and for full consideration; 6.5 each of the Company and its subsidiaries shall not enter into any agreement or agreements restricting its competitive freedom to carry on the Relevant Business by such means and from and to such persons as it may think fit other than for the purpose of exploiting the Relevant Intellectual Property in the ordinary course of business; and 6.6 Serv-Tech shall use all reasonable and proper means in its power to maintain, improve and extend the Relevant Business carried on by the Company and its subsidiaries and to further the reputation and interests of the Company and its subsidiaries in relation to the Relevant Business including the provision of appropriate capital and working capital by loan or otherwise 6.7 Serv-Tech will provide and Holdings shall provide the Noteholder with copies of all audited annual financial statement of Chemisolv and its subsidiaries included in Serv-Tech's annual audit and quarterly unaudited financial statements of Chemisolv and its subsidiaries within seven days of the same being available and, as soon as practicable and in any event within 35 business days after the end of each calendar month, management accounts of Chemisolv and each of its subsidiaries for that month and, from time to time, with such financial and other information as the Noteholder may in writing reasonably require. The Noteholder shall keep all such information confidential and shall not use or disclose it except to the extent required for the enforcement of his rights hereunder; Serv-Tech acknowledges that the restrictions contained in this Condition 6 are reasonable and necessary to assure to the Noteholder the full value and benefit of his right to receive the Principal Sum in accordance with the provisions of Condition 2. -18- 20 7 Guarantee and Indemnity 7.1 In consideration of the Noteholder accepting this Note Serv-Tech hereby unconditionally and irrevocably guarantees to the Noteholder the due and punctual performance and observance by the Company of all its obligations, commitments, undertakings, warranties, indemnities and covenants under or pursuant to this Note and agrees to indemnify the Noteholder against all losses, damages, costs and expenses (including legal costs and expenses) (together with any VAT thereon) which the Noteholder may suffer through or arising from any breach by the Company of such obligations, commitments, warranties, undertakings, indemnities or covenants. The liability of Serv-Tech as aforesaid shall not be released or diminished by any arrangements or alterations of terms (whether of this Agreement or otherwise) or any forbearance, neglect or delay in seeking performance of the obligations hereby imposed or any granting of time for such performance. 7.2 If and whenever either the Company defaults for any reason whatsoever in the performance of any obligation or liability undertaken or expressed to be undertaken by it under or pursuant to this Agreement, Serv-Tech shall forthwith upon demand unconditionally perform (or procure performance of) and satisfy (or procure the satisfaction of) the obligation or liability in regard to which such default has been made in the manner prescribed by this Agreement and so that the same benefits shall be conferred on the Noteholder as he would have received if such obligation or liability had been duly performed and satisfied by the Company. Serv-Tech hereby waives any rights which it may have to require the Noteholder to proceed first against or claim payment from the Company to the intent that as between the Noteholder and Serv-Tech the latter shall be liable as if it were primarily liable and as if it had entered into all undertakings, agreements and other obligations jointly and severally with the Noteholder. 7.3 This guarantee and indemnity is to be a continuing guarantee and indemnity to the Noteholder for all obligations, commitments, -20- 21 warranties, undertakings, indemnities and covenants on the part of the Company under or pursuant to the Note notwithstanding any settlement of account or other matter or thing whatsoever. 7.4 This guarantee and indemnity is in addition to and without prejudice to and not in substitution for any rights or security which the Noteholder may now or hereafter have or hold for the performance and observance of the obligations, commitments, undertakings, covenants, indemnities and warranties of the Company under or in connection with the Note. 7.5 In the event of Serv-Tech having taken or taking any security from the Company in connection with this guarantee and indemnity, Serv-Tech hereby undertakes to hold the same in trust for the Noteholder pending discharge in full of all Serv-Tech's obligations under this Agreement. Serv-Tech shall not, after any claim has been made pursuant to this Condition 7, claim from the Company any sum which may be owing to it from the Company or having the benefit of any set-off or counterclaim or proof against or dividend, composition or payment by the Company until all sums due and owing to the Noteholder in respect hereof shall have been paid in full. 7.6 As a separate and independent stipulation, Serv-Tech agrees that any obligation expressed to be undertaken by the Company under the Note (including, without limitation, any monies expressed to be payable under the Note) which may not be enforceable against or recoverable from the Company by reason of its dissolution, any legal limitation, disability or incapacity or any other fact or circumstance shall nevertheless be enforceable against or recoverable from Serv-Tech as though the same had been incurred by Serv-Tech and Serv-Tech were primarily liable in respect thereof and shall be performed or paid by Serv-Tech on demand. 7.7 The foregoing guarantee and indemnity of Serv-Tech as well as its other obligations under this Note, shall cease solely in relation to any obligation of the Company which is assumed by a Purchaser, transferee or assignee in the circumstances referred -21- 22 to in condition 6.1.1 above provided always that the provisions of condition 6.1.1 have been fully complied with. 8 Variation of Rights The Noteholders shall have power exercisable with the consent in writing of the holders of not less than 75 per cent in nominal value of the Notes (whether before or after the principal monies thereunder shall have become payable) to sanction any modification alteration abrogation or arrangement in respect of the rights of the Noteholders against the Company which shall be proposed by the Company and the Company shall not except with such consent or sanction agree with any Noteholder any alteration whatever of the Notes or any modification alteration abrogation or arrangement in respect of the rights of any Noteholders against the Company or of the Company against any Noteholders. 9 Register 9.1 A Register of Noteholders will be kept by the Company. There shall be entered into the Register:- 9.1.1 the names and addresses of the Noteholders; 9.1.2 the amount of the holding of each of the Noteholders; 9.1.3 the date upon which each person was registered as a Noteholder; 9.1.4 the date upon which each person ceased to be a Noteholder; 9.1.5 the date of issue of the Note; and 9.1.6 details of any repayment of the Notes. 9.2 Any change of name and address on the part of a Noteholder must be communicated to the Company as soon as is reasonable and the Register will be altered accordingly. 10 Transfers 10.1 Save for the transfers of this Note by the Noteholder to the Noteholder's spouse any lineal descendant of the Noteholder, any parent of the Noteholder or to any lineal descendant of any such parent (hereinafter referred to as "privileged relations") or to -22- 23 any trustee of any trust or settlement of which the only beneficiaries comprise a privilege relation or privileged relations or by any trustee of such trust or settlement to a beneficiary thereof or to a new trustee, this Note shall not be transferable. A transfer of this Note shall be in writing under the hand of the transferor and in the usual common form or such other form as is acceptable to the directors of the Company. The transfer shall be lodged with the Company together with such evidence of the title of the transferor (including production of this Note) as the Company may reasonably require and thereupon the transferee shall be registered as the holder of this Note. The Company shall be entitled to retain the transfer. 10.2 The Company may charge a fee of L.10 for the registration of any transfer or change in ownership of this Note. 11 Notice of Trustees Excluded 11.1 The Company will recognise each of the Noteholders as the absolute owner of the Notes in respect of which he is registered and the Company shall not be affected by notice of any other right title or claim of any person to this Note other than the Noteholders. 11.2 The Company shall not be bound to take notice or see to the execution of any trust (whether express implied or constructive) to which the Notes may be subject. 11.3 A receipt by the Noteholder for moneys payable in respect of the Note shall be a good discharge to the Company and Serv-Tech notwithstanding any notice it may have whether express or otherwise of the right title interest or claim of any other person to or in such Note or moneys. 11.4 The Note will be paid without regard to any equities set off or cross claim between the Company and the original or any intermediate holder. -23- 24 12 Payments to Noteholder The Principal Sum and interest due and payable on and pursuant to this Note to the Noteholder will be paid by way of bankers telegraphic transfer to such bank account as the Noteholder shall have in writing notified to the Company or Serv-Tech. In default of such notification payment of such monies unless otherwise agreed between the Company and the Noteholder may be made by cheque posted in a prepaid letter to the Noteholder if he is a sole holder or to the first named of joint holders at his address or to such other person or address as the Noteholder or joint holders may request in writing. Such payment by such telegraphic transfer of by any such cheque (following clearance thereof shall (unless otherwise agreed) for all purposes be deemed to be payment and satisfaction of the Principal Sum and/or interest represented thereby. 13 No Set-off The monies hereby covenanted to be paid shall be paid and this Note shall be transferable without regard to any set off cross claim or equities between the Company and the original or any intermediate holder and the receipt of the sole holder or the first named of joint holders shall be a good discharge to the Company. 14 Lost or Destroyed Notes If this Note is worn out defaced lost or destroyed it may be renewed on payment of such fee not exceeding L.25 and on such reasonable terms as to evidence of identity and indemnity in respect of the expenses incurred by the Company in investigating or verifying title as the directors of the Company shall think fit provided that in the case of defacement of this Note it must be surrendered before the new Note is issued. Stamp duty (if any) payable on such renewal shall be borne by the Noteholder. 15 Meetings of Noteholders 15.1 The Company may convene a meeting of the Noteholders. The Company shall convene a meeting of the Noteholders within ten (10) days of receiving a request(s) from five (5) holders of Notes or holder(s) of one-tenth of the value of the Aggregate Principal Sum (as hereinafter defined) outstanding in respect of -24- 25 the Notes. Any such meeting shall be held at such place as the Company shall determine having due regard to the convenience of the Noteholders. 15.2 When a meeting is convened at least ten (10) days' notice (exclusive in each case of the day on which the notice is served or deemed to be served and of the day for which the notice is given) shall be given to the Noteholders. The notice shall specify the place day and hour of meeting the general nature of the business to be transacted and the terms of any resolution to be passed. 15.3 Subject as hereinafter provided the quorum for passing a Resolution shall be one (1) present in person or by proxy holding a simple majority of the aggregate amount of the Principal Sum evidenced by this Note and the Notes ("the Aggregate Principal Sum"). The Noteholder or Noteholders present in person or by proxy shall form a quorum for the transaction of any other business. No business shall be transacted at any meeting unless the requisite quorum is present at the commencement of business. 15.4 If within thirty (30) minutes of the time appointed for the meeting a quorum is not present the meeting shall stand adjourned to such day and time and to such place as may be appointed by the Company and at such adjourned meeting all of the Noteholders whether in person or by proxy shall be a quorum for the transaction of any business. 15.5 The chairman may with the consent of any meeting at which a quorum is present and shall if so directed by the meeting adjourn the meeting from time to time and from place to place but no business shall be transacted at any adjourned meeting except business which might lawfully have been transacted at the meeting from which the adjournment took place. 15.6 At any meeting a resolution put to the vote of the meeting shall be decided on a show of hands unless (before or on the -25- 26 declaration of the result of the show of hands) a poll is so demanded by the chairman or by one (1) or more Noteholders present in person or by proxy. Unless a poll is demanded a declaration by the chairman that a resolution has been carried or carried unanimously or by a particular majority or not carried by a particular majority or lost shall be conclusive evidence of the fact. 15.7 If a poll is duly demanded it shall be taken in such a manner as the chairman may direct and the result of a poll shall be deemed to be the resolution of the meeting at which the poll is demanded. 15.8 A poll demanded on any question shall be taken forthwith. 15.9 On a show of hands every Noteholder who (being an individual) is present in person or (being a corporation) is present by its duly authorised representative or by one of its officers as its proxy shall have one vote. On a poll every Noteholder who is present in person or by proxy shall have one vote for every L.1 of the Aggregate Principal Sum evidenced by the Note (as if no reduction had been made for the purpose of Condition 4) of which he is the holder. 15.10 In the case of joint Noteholders the vote of the senior who tenders a vote whether in person or by proxy shall be accepted to the exclusion of the votes of the other joint holders and for this purpose seniority shall be determined by the order in which the names stand in the Register in respect of the joint holding. 15.11 On a poll votes may be given either personally or by proxy and a Noteholder entitled to more than one (1) vote need not (if he votes) use all his votes or cast all the votes he uses in the same way. 15.12 The instrument appointing a proxy shall be in the usual common form or such other form as the directors of the Company may -26- 27 approve. A person appointed to act as proxy need not be a Noteholder. 15.13 The instrument appointing a proxy and the power of attorney or other authority (if any) under which it is signed or a notarially certified copy of such power or authority shall be deposited at the registered office of the Company or such other place as shall be specified in the notice concerning the meeting not less than forty eight (48) hours before the time appointed for the meeting or adjourned meeting at which the person named in the instrument proposes to vote. No instrument appointing a proxy shall be valid after the expiration of twelve (12) months from the date named in it as the date of its execution. 15.14 A Resolution passed at a meeting of the Noteholders duly convened and held in accordance with these conditions shall be binding upon all the Noteholders whether present or not present at the meeting and each of the Noteholders shall be bound to give effect thereto accordingly. 15.15 The expression "Resolution" means a resolution passed at a meeting of the Noteholders duly convened and held in accordance with the provisions herein contained and carried by a majority consisting of not less than a simple majority of the persons voting thereat upon a show of hands or if a poll is duly demanded by a majority consisting of not less than a simple majority of the votes given in such poll. 15.16 A resolution in writing signed on or on behalf of the holder or holders of Notes evidencing a simple majority of the Aggregate Principal Sum shall for all purposes be as valid and effectual as a Resolution passed at a meeting of the Noteholders duly convened and held in accordance with the provisions herein contained. Such resolution in writing may be contained in one document or in several documents in like form each signed by or on behalf of one or more of the Noteholders. -27- 28 16 Notices Any notice to be given in connection with this Note must be given in writing to the party due to receive such notice at (in the case of the Company or Serv-Tech) at its registered office set out on this Note or such other address or addresses as may from time to time be notified to the Noteholder or (in the case of the Noteholder) his address as set out in the Register. Notice must be delivered personally or sent by first class pre-paid post and shall be deemed to be given in the case of delivery on delivery unless after 5.00 p.m. or on a day not being a Business Day when the notice shall be deemed to have been received at the commencement of the next Business Day and in the case of posting (in the absence of evidence of earlier receipt) within 24 hours after posting (5 Business Days if sent by air mail). 17 Deduction of Tax If the Company is so required by law the Company shall deduct tax from any amount payable by it hereunder in respect of interest paid on the relevant Notes and shall deliver to the relevant Noteholder in respect of the amount so paid by it a certificate as to the gross amount of such payment, the amount of tax deducted and the actual amount paid or to be paid and certifying that the Company has paid or will pay the amount of tax deducted, to the Inland Revenue, Internal Revenue Service or other applicable taxing authority. 18 Incorporation of conditions The Note shall be held subject to these Conditions which shall be binding on the Company, Serv-Tech and the Noteholder and all persons claiming through or under any of them. -28- 29 SCHEDULE 1 REDEMPTION NOTICE I/We being the Registered Holder(s) of the Note represented by this Certificate HEREBY:- A. GIVE NOTICE that I/We require the Company to redeem *ALL/(L. only) of the said Note on or (if that date is not a Business Day) on the last preceding Business Day. B. AUTHORISE the despatch of:- (i) a cheque or other method of payment so agreed in accordance with the terms of the said Note for the amount of the capital monies and interest payable in respect of the Notes so to be redeemed made payable to ** .......................................................... (Name to be completed in Capital Letters) (ii) A note in my/our name(s) for the balance (if any) of the Principal Sum represented by this Note by registered post at my/our risk to the relevant address given below Address (a) For despatch of redemption payment (in full) ........................................ ........................................ ........................................ ........................................ TO BE COMPLETED IN CAPITAL LETTERS (b) For despatch of any balance note (if different from (a)) ........................................ ........................................ ........................................ ........................................ Signature(s) (1) ............................................ of (2) ............................................ Noteholder(s) (3) ....................................... (4) ............................................ Dated this day of * Complete as appropriate -29- 30 ** If this space is left blank the cheque will be made payable to the Registered Holder (s) -30- 31 SCHEDULE 2 FORM OF REPORT TO BE GIVEN BY CHEMISOLV'S ACCOUNTANTS PURSUANT TO CONDITION 5.2 INDEPENDENT AUDITOR'S REPORT The Board of Directors A Company Inc: We have audited the accompanying balance sheets of Chemisolv Holdings, Inc. and subsidiaries as of December 31, 1996, and the related statements of earnings, retained earnings, cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Chemisolv Holdings, Inc. and subsidiaries, as of December 31, 1996, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplementary information attached in Schedule 1 related to the calculation of Revenues is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. Signed KPMG PEAT MARWICK L.L.P February 2, 1997 -31- 32 SCHEDULE 1 REPORT AS TO REVENUES FOR THE PURPOSE OF CONDITION 5.2 OF THE CONDITIONS ATTACHED TO THE GUARANTEED UNSECURED LOAN NOTES ISSUED BY CHEMISOLV HOLDINGS INC PURSUANT TO THE AUTHORITY OF A RESOLUTION OF THE BOARD OF DIRECTORS OF CHEMISOLV HOLDINGS INC DATED DECEMBER 1995 ("The Loan Notes") (All expressions used in this Schedule shall have the meanings ascribed to them in the Loan Notes). Calculation of Revenues in respect of year ending [ ]. The Revenues for the year ended 31st December [ ] have been calculated as follows: Royalty Revenues L. Product and Service Revenues L. Customer Revenues L. ------ Revenues for the year ending 31st December L. ====== Accordingly the Principal Sums due to Messrs Davies, Owen, Armitage, Duffy, etc pursuant to the Loan Notes in respect of the Financial Year ended [ ] are as follows:- Relevant Principal Sum Fraction RJ Davies DM Owen CC Armitage JR Duffy etc -32- EX-13.1 12 PORTIONS OF THE 1995 ANNUAL REPORT TO SHAREHOLDERS 1 Serv-Tech 1995 Annual Report [PHOTO] 2 Serv-Tech: Integrity & Excellence 3 [PHOTO] Serv-Tech, Inc. is a leading provider of innovative maintenance, engineering, and construction services and products to process industries worldwide, employing highly advanced proprietary equipment and technology. 4 Financial Highlights 3 Letter to Shareholders 4-6 Serv-Tech Technology 7 Q & A 8-9 Serv-Tech Specialty Services 10-13 Serv-Tech EPC 14-17 Serv-Tech Environmental & Performance Chemicals 18-21 Officers & Management Group 22 Board of Directors 23 Financials 25-47 5 FINANCIAL HIGHLIGHTS In thousands, except per share data
YEAR ENDED DECEMBER 31, 1995 1994 (a) 1993 1992 1991 OPERATING DATA Revenues $ 279,566 $ 181,087 $ 162,021 $ 148,019 $ 88,341 Depreciation and amortization 6,804 5,709 4,194 3,492 2,270 Special charge - (12,225) - - - Operating income (loss) 6,478 (8,682) 6,519 9,210 5,088 Net income (loss) 2,061 (8,795) 2,919 5,639 3,239 Earnings (loss) per share 0.31 (1.44) 0.50 0.97 0.62 Weighted average number of shares outstanding 6,720 6,117 5,889 5,789 5,166 BALANCE SHEET DATA Cash and short-term investments $ 1,347 $ 1,851 $ 15,948 $ 4,888 $ 5,820 Working capital 23,232 22,238 30,053 17,462 15,065 Property, plant and equipment, net 32,415 30,594 25,727 24,559 24,617 Total assets 112,245 98,315 93,295 86,842 65,172 Long-term debt, excluding current maturities 16,595 15,025 15,140 8,161 201 Stockholders' equity 52,930 50,564 53,954 51,352 43,977 Capital expenditures 6,180 5,194 4,864 5,995 9,957
Note: (a) Excluding the effect of the special charge, operating income, net income and earnings per share for 1994 were $3,543, $1,225, and $.19, respectively. See Note 9 of Notes to Consolidated Financial Statements for information related to the special charge. REVENUE GROWTH For the year ended December 31 (millions of dollars) [LINE GRAPH] REVENUE BACKLOG As of December 31 (millions of dollars) [LINE GRAPH] 3. 6 Letter to Shareholders With a clear and focused strategy, 1995 was a benchmark year of strong growth, solid business development, technological innovation and an improved organizational structure. Serv-Tech is one of the most technologically sophisticated providers of specialty services to the refinery turnaround maintenance market. Its leading capabilities include a full range of mechanical turnaround maintenance, specialty welding, refractory and patented chemical decontamination services. The extensive list of Serv-Tech technologies is testimony of the substantial investment the Company has made over the years to be the best in servicing this market. We will continue to emphasize our unique position as the provider of the most comprehensive set of specialty turnaround maintenance services available from any single source in the industry. We recognize, however, that the refinery turnaround maintenance market has certain seasonality characteristics that affect consistent quarter-to-quarter earnings. Thus, in 1995, we continued to focus the Company on expanding the industries served and the services and technologies provided by Serv-Tech. As a result, we have experienced growth in our engineering, procurement and construction ("EPC") services, our technology-driven product and crude oil tank cleaning services, Terminal Technologies, Inc. ("TTI"), and our specialty chemical business, Chemisolv. We also have invested in the development of two new technologies: WELDSMARTTM and MastiffSM. With this activity has come expansion beyond the hydrocarbon industry into the food, sugar, and pulp and paper industries. Our intent was to set a strategy that would position Serv-Tech for revenue and profitability growth over the next several years, with a goal of reaching $500 million in revenue and a return on equity of 15 percent or better. In working toward this goal, accomplishments in 1995 include the following: * Net earnings growth of 71 percent; revenue growth of 54 percent to a record $280 million; * EPC operations revenue growth from $63 million to over $134 million; * Strong first and fourth quarter 1995 performances by our Turnaround Services division; * A high level of repeat business and project alliances, in addition to securing ten annual maintenance contracts with refineries; * Continuation of our tradition of developing highly innovative technology to enhance our customers' operating performance; 4. 7 * Progress toward creating a more cohesive business organization; and * Reduction of overhead to 14.5 percent of revenue, compared to third and fourth quarter 1994 levels of 20 percent and 17 percent, respectively. FINANCIAL PERFORMANCE In 1995 we generated record revenue of $280 million, versus $181 million in 1994. Earnings grew to $2.1 million, or $0.31 per share, compared to $1.2 million, or $0.19 per share, in 1994, exclusive of the 1994 special after-tax charge of $10 million, or $1.63 per share. Although most Serv-Tech operating units contributed to these improved earnings, our engineering and construction, refractory, and specialty welding groups substantially improved their performance compared with 1994. Revenue was higher across the board from all business units, including $134 million from our Specialty Services unit and $134 million from Serv-Tech EPC (including $52 million from SECO Industries, Inc.). Backlog totaled $96 million at year-end 1995, compared to $88 million at year-end 1994. The December 31, 1995, backlog included $84 million attributable to Serv-Tech EPC (including $17 million from SECO) and $10 million from the Specialty Services segment. OPERATIONAL HIGHLIGHTS The people in each of our operating units made outstanding contributions in 1995, in both financial performance and in positioning Serv-Tech for future growth. With a continued focus on our customer alliances, SECO secured two back-to-back electrical and instrumentation ("E & I") contracts with J. Ray McDermott, Inc. for Shell's Mars and Ram/Powell deep water production platforms. SECO also provided complex E & I services for two major clean fuels projects for Ultramar Refinery and Mobil Oil Company. TTI formed an alliance agreement with Amoco's Petroleum Products division to service their marketing terminal facilities. This alliance opens up long-term opportunities in the tank cleaning and tank management areas, for both TTI and ST Environmental, to service Amoco's pipeline, refining, and chemical facilities in the future. Truly a win-win combination for our customers and Serv-Tech. Formation of new customer relationships with British Petroleum, Coastal Oil Company, Firestone and Union Carbide were established by combining the Company's technical capabilities with the expansion of our EPC services. EPC's largest domestic contract award, the $20 million Conoco Tank Farm project, contributed to EPC's financial performance this year, in addition to forming a strong customer relationship with Conoco. The award of the $83 million Finchaa, Ethiopia, sugar factory project to F.C. Schaffer & Associates, Inc. was a major milestone for the Company in 1995. We see a number of additional sugar project opportunities in Africa and South America over the next several years. Particularly noteworthy was the financial performance of our refractory group, Hartney Industrial Services, and our specialty welding operations, ST Piping, and the first and fourth quarter performances of our Turnaround Services division. Major turnarounds for Atlas Processing Company, Chevron, Dupont, Star Enterprise, Unocal, and Vista Chemical contributed to successful performances by these specialty services groups. As an industry leader in the field of technology, Serv-Tech made substantial progress in 1995 in the development of three innovative technology processes: Mastiff(SM), WELDSMART(TM), and Heat Guard(SM). Development of these new chemical technologies and processes is creating new opportunities for our performance chemicals, environmental and specialty products divisions (Chemisolv, ST Environmental and Hill Technical Services). Our customers look to us to solve many of their inherent, technically complex problems requiring research and development. Our commitment to developing new technologies aimed at solving the problems of process plant owners continues. It is technology and smarter solutions that make the Serv-Tech family of companies a preferred provider of services and products to process industries. 5 8 BOARD OF DIRECTORS During 1995, Richard W. Krajicek, entrepreneur, founder and former Chairman of the Board of Serv-Tech, Inc., retired. Throughout his career and the development of Serv-Tech, he continually focused on creating new technologies to provide superior service and the safest work environment possible. Many thanks to Dick for his numerous contributions and achievements which remain a vital part of Serv-Tech. Also in the fall of 1995 and early 1996, two members were added to Serv-Tech's Board of Directors. Dr. Charles M. Balch, Executive Vice President for Health Affairs, M. D. Anderson Cancer Center, and Mr. D. D. "Del" Hock, Chairman, Public Service Company of Colorado, represent expertise and leadership capabilities in the medical and power industries. Their talent and experience add a new dimension to our Board. We look forward to their industry insight and contributions. LOOKING FORWARD We will continue to emphasize our specialty services and technologies in the refinery turnaround maintenance market. We will also stay focused on our strategy to expand the services and products we offer as well as the industries we serve. Our 1996 goals include the following: * Continued revenue and earnings growth; * Commercialization of additional technologies and expansion of Serv-Tech into global markets; * Continued expansion of our EPC services with special emphasis on our market differentiators in electrical, instrumentation and control systems, and sugar processing expertise; * Securing another major sugar project in Africa or South America; * Developing or acquiring market differentiating process technology; * Continued improvement of our cost structure; and * Further progress toward our goal of $500 million in revenue and 15 percent return on equity. Although we see a softer than usual spring 1996 refinery turnaround maintenance market, overall long-term market conditions in the hydrocarbon processing industry continue to be attractive. Increasing global competition and environmental regulations require our customers to continue to improve maintenance and operations of their facilities, fueling the demand for our specialty services, EPC and E & I capabilities. Our employees have demonstrated exceptional determination and commitment to our goals, as we have made significant changes over the past 18 months to position the Company for the future. Our heartfelt thanks go to all the Serv-Tech team members for their hard work and commitment to the future of the Company. We also thank our customers for providing us with the opportunity to serve them and our shareholders for their continued support. Sincerely, Robert J. Cresci Robert J. Cresci Chairman of the Board Richard L. Daerr Richard L. Daerr President & CEO Increasing global competition and environmental regulations continue to require our customers to improve maintenance and operations of their facilities, fueling the demand for our specialty services, EPC and E&I capabilities. 6 9 SERV-TECH TECHNOLOGY 1984 FAST DRAW(R) HEAT EXCHANGER BUNDLE EXTRACTOR* 1985 FAST CLEAN(R) 8-LANCE HEAT EXCHANGER CLEANING UNIT* 1986 AERIAL HEAT EXCHANGER BUNDLE EXTRACTION UNIT* 1987 "NO MAN ENTRY" TANK CLEANING SYSTEM* 1988 REMOTE CONTROLLED TANK CLEANING SYSTEM* 1989 CRUDE OIL SLUDGE DISPERSENT SYSTEM* 1990 SECOND GENERATION FAST CLEAN SYSTEM* 1991 TOWER & VESSEL DECONTAMINATION SYSTEM*, HYDROCARBON RECLAIMER SYSTEM* 1992 VOLATILE ORGANIC COMPOUND REMOVAL SYSTEM* 1993 LIFE GUARD(R) DECONTAMINATION SYSTEM* 1994 WELDSMART(TM)**, FAST TRACK(SM)**, MASTIFF(SM)**, PROCESS FOR PAPER DE-INKING** 1995 NUTRISOLV(SM), HEAT GUARD(SM) *Patented, **Patent Pending 10 Q & A [PHOTO] A conversation with Richard Daerr, President & Chief Executive Officer, Serv-Tech, Inc. WHEN DO YOU ANTICIPATE ACHIEVING YOUR GOAL OF $500 MILLION IN REVENUE AND 15 PERCENT RETURN ON EQUITY? In 1995 we made significant progress toward this goal by attaining $280 million in revenue. This was an improvement of $99 million, or 54 percent, over 1994 revenue. That's quite an accomplishment by the Serv-Tech team. We also made progress in growing our earnings, although we were short of our earnings expectations going into the year. We believe our goal is achievable over the next several years, as we continue to build Serv-Tech as a premier, integrated provider of technology-driven specialty services and products to the hydrocarbon, food, pulp and paper, and power industries. WHAT CONTRIBUTED TO YOUR 1995 EARNINGS BEING BELOW EARLIER EXPECTATIONS? Early in the year, we believed we could achieve $.60 to $.75 per share. Our actual results of $.31 per share were improved over 1994 and compared favorably to our industry peer group, but were short of our early estimate. There were two primary reasons for the shortfall. The first was the effect of several under-performing maintenance projects. The more significant factor, however, was that traditional summer refinery turnaround maintenance slowdown was more significant than we anticipated. During the summer months when gasoline demand is high, refineries tend to minimize turnaround maintenance work. WHAT IS YOUR STRATEGY FOR REDUCING THE SEASONALITY IMPACT OF THE TURNAROUND MAINTENANCE BUSINESS? Our Specialty Services segment contains three divisions: Turnaround Services, Specialty Welding, and Refractory. All of these divisions and Serv-Tech Environmental, our refinery decontamination operation, are affected by the seasonality inherent in the refinery turnaround maintenance market. Some of the things we are doing to minimize the seasonality factor are: * Expand annual maintenance, engineering and construction alliances with refineries; * Structure our overhead to be more consistent with the seasonality of the business; * Expand our UK and northern Europe presence; * Expand our opportunities for cross-utilization of sales and resources throughout the Company; and * Diversify our revenue base beyond our Specialty Services and the hydrocarbon industry; 8 11 I believe we have made significant progress in each of these areas, but we will have to make additional progress throughout 1996 in order to maximize the returns from our Specialty Services businesses. THE COMPANY HAS GONE THROUGH AN EXTENSIVE ORGANIZATIONAL RESTRUCTURING, COMBINING MULTIPLE OPERATING UNITS INTO DISTINCT OPERATING DIVISIONS. DID YOU ACHIEVE THE RESULTS YOU HAD ANTICIPATED WITH THIS RESTRUCTURE? Yes, most definitely. We now offer our customers single point responsibility for a total package of services and capabilities, utilizing cross-services, and maximizing the resources across Serv-Tech's operating divisions. Because we are an integrated organization, we have attained a leaner overhead structure. However, we are flexible enough to react quickly to our customers' needs by utilizing an array of Company resources. We offer our customers a package of total solutions, in addition to our services, which are tailored to their specifications at the lowest possible price. WHAT IS THE OUTLOOK FOR 1996? The hydrocarbon turnaround maintenance market is starting slow but should accelerate later in the year. We expect to see improved gross profit margins from this segment with our more focused and selective business development process. This, combined with performance pricing by the Turnaround Services division, should yield lower risk and improved profit performance. We are pursuing a number of opportunities in our EPC segment, emphasizing our electrical, instrumentation and control systems, and sugar processing capabilities. We are also hopeful that MastiffSM, our paper strengthening technology, and WELDSMARTTM, our welding technology, should be commercialized by mid-year and become growing revenue contributors later in the year. WHAT EXACTLY IS MASTIFF(SM) AND WHY ARE YOU SO POSITIVE ABOUT IT? Mastiff(SM) is a potential breakthrough technology that could significantly improve how paper is made from recycled fiber. It is a new approach to increasing the strength of paper and box board through the application of patented chemistry. The process has demonstrated meaningful increases in strength on a wide range of papers but is particularly suited to the production of packing paper and box board using recycled fiber. In addition to paper strengthening, the process has demonstrated increased paper machine production speed and lower energy consumption. Full-scale commercialization trials are progressing at three separate mill locations in the United Kingdom. These trials, which will determine commercial viability, should be completed during the first half of 1996. SHOULD WE EXPECT ANOTHER PROJECT LIKE THE FINCHAA SUGAR PROJECT ON THE HORIZON? Our goal is to extrapolate off the success of the $83 million Ethiopia sugar factory project. There are a number of sugar project opportunities in Africa and South America that our F.C. Schaffer group is currently pursuing. These projects often include ethanol and cogeneration facilities as well. THIS IS THE SECOND YEAR YOU HAVE MENTIONED WELDSMARTTM . TELL ME MORE ABOUT THE TECHNOLOGY AND YOUR PLANS FOR COMMERCIALIZATION? WELDSMART(TM) is a technology that could change the way welding and heat treating services are provided in many applications. It is designed to improve both welding productivity and the consistency of welding performance. The unit also provides a detailed computer record of each weld to ensure conformity to specified procedures. Commercialization of WELDSMARTTM is proceeding and should be completed during the first half of 1996. We will feature WELD-SMARTTM at the American Welding Society Exposition in April 1996, in Chicago, Illinois. WHAT IS THE MOST IMPORTANT INGREDIENT IN SERV-TECH'S CONTINUED SUCCESS? The energy, enthusiasm and commitment of all the people at Serv-Tech. They brought us to where we are today, and they are the key to our future. We look forward to the continued success and contributions from the team at Serv-Tech. [PHOTO] 9 12 Serv-Tech Specialty Services [PHOTO] 13 [PHOTO] Serv-Tech Specialty Services provides total project management, including heat exchanger maintenance, towers and vessels, heat treating, specialty welding, furnace repair, boiler retubes, process piping, heavy rigging and code repairs, primarily in refineries, petrochemical facilities and power plants. 14 Serv-Tech Specialty Services [PHOTO] Hartney's Advanced Refractory Services quality control technician inspecting a 24-inch reformer. Top 10 Turnaround Services Clients (Revenue in millions of dollars) [BAR CHART] Chevron USA, Inc. Mobil Oil Atlas Processing Company Vista Chemical Coastal Oil Company Phibro Energy USA, Inc. Farmland Industries, Inc. Dupont Phillips 66 Company Unocal Serv-Tech's technology and expertise offer considerable value to independents as well as major refineries and petrochemical customers. Serv-Tech's Specialty Services segment offers refineries, petrochemical facilities and power plants a complete package of maintenance, repair, cleaning, specialty fabrication, welding and other specialty services that assure maximum operating efficiency as well as employee and environmental safety. These services are provided by a team of skilled professionals, utilizing highly innovative technologies and proprietary equipment. The specialty services are provided through three primary divisions: Turnaround Services (turnaround and maintenance), ST Piping (specialty welding), and Hartney Industrial Services (refractory). As an industry leader, the group generated $134 million in revenue for the year, an increase of $21 million, or 18 percent, over 1994 revenue of $113 million. Revenue contribution by sector was $89 million, $23 million, and $22 million for Turnaround Services, ST Piping and Hartney Industrial Services, respectively. The new "performance pricing" structure developed by the Turnaround Services division was enthusiastically received by many of its customers. These contractual arrangements, based on performance, consider the total benefits of using Serv-Tech's Specialty Services such as reduced refinery downtime, increased efficiency, higher revenue and improved safety. It is a true win-win situation, providing the highest value to the customer and an acceptable rate of return to Serv-Tech. The new "performance pricing" structure developed by the Turnaround Services division was enthusiastically received by many of its customers. Our Turnaround Services division is creating alliances and partnerships with certain large contractors to provide specialty services to accounts where the industrial contractor has an established, long-term relationship. We are seeking projects that utilize our core capabilities, traditional services and proprietary equipment. This more focused and selective process, combined with "performance pricing", should yield lower risk, higher margin contracts. Key strategic initiatives have been implemented to help offset the seasonality inherent to the petrochemical turnaround business: * Establish annual contracts with several major clients to utilize our specialized equipment and experienced field personnel on a day-to-day basis during the off season; * Continued consolidation and sharing of resources with other business units for better utilization of personnel and equipment year round; and * Expand our specialty services through strategic acquisitions and newly-developed technologies to service industries with varying peak spending cycles. 12 15 [PHOTO] Hartney's mechanical specialists vib-casting refractory concrete at the Galena Park, Texas, shop facilities. ST Piping is a premier provider of refinery maintenance and welding repair services, specializing in emergency operations. This division experienced tremendous growth in 1995, generating $23 million in revenue versus $15 million in 1994. Although ST Piping's revenue base has historically been driven by West Coast activity, the division is implementing a growth strategy that encompasses more Gulf Coast projects. ST Piping has and will continue to be a solid contributor to the Specialty Services group performance. Hartney Industrial Services, acquired in 1994, is a leading contractor and fabricator specializing in the installation of brick and other lining and coating systems designed to protect processing equipment from extreme heat and corrosive substances (refractory services). Hartney has developed several new service lines, including fiberglass installation and repair, sandblasting, specialty painting and other services. In 1995, Hartney aggressively pursued the power industry and secured several contracts, including one of the largest power plant turnarounds in the United States. Hartney continues to focus significant efforts on industries that do not experience the same seasonality as refineries, such as the cement, power and petrochemical industries. Our Hill Technical division designs, manufactures and applies specialized welding and heat treatment equipment and services. Hill is currently in the final stages of developing WELDSMART(TM), a patented welding technology. WELDSMART(TM) is an innovation in manual welding technology, designed to improve both welding productivity and the consistency of welding performance. The WELD-SMART(TM) unit will not only facilitate consistent welding, but will also provide a detailed computer record of each weld to ensure conformity to specifications. Commercialization of WELDSMART(TM) is proceeding and should be completed during the first half of 1996. Hill Technical will be featuring the unit at the American Welding Society Exposition in April 1996, in Chicago, Illinois. REVENUE GROWTH For the year ended December 31 (millions of dollars) [GRAPH] Looking ahead, 1996 will be a year filled with new opportunities and challenges, as we expand our specialty services and newly-developed technologies throughout the industries we serve. [PHOTO] ST Piping personnel have developed a reputation for superb craftsmanship and perform-ance, including welds with exceptionally low rejection rates. 13 16 SERV-TECH EPC [PHOTO] 17 Serv-Tech EPC provides turnkey, single source responsibility for engineering, procurement and construction on domestic and international projects ranging in size to $100 million for clients in the refining, hydrocarbon processing, petrochemical, food, power, and pulp and paper industries. In addition to serving these industries, SECO, the E&I division of Serv-Tech EPC, performs electrical and instrumentation installations for offshore drilling platforms, clean fuels projects, refining, petrochemical and food process-ing facilities. [PHOTO] 18 SERV-TECH EPC [PHOTO] [PHOTO] [PHOTO] [PHOTO] The 480-foot boom of a 1,000 ton capacity truck crane reaches skyward as Serv-Tech crews assemble a flare stack for a major national refiner. The 52-inch diameter stack was set in three separate lifts over a three day period. 1995 was a year of major growth for Serv-Tech's engineering, procurement and construction segment, Serv-Tech EPC. During 1995, Serv-Tech's electrical and instrumentation operation, SECO Industries, was integrated into Serv-Tech EPC, creating a premier integrated provider of multi-disciplined services to the refining, offshore, hydrocarbon processing, petrochemical, power, pulp and paper, and food processing industries. Collectively, the group generated $134 million in revenues, an increase of 114 percent over the 1994 revenue level of $63 million. The group also enters 1996 with a strong backlog level of $84 million. Three large projects were major contributors to Serv-Tech EPC's 1995 revenue. The first was F.C. Schaffer & Associates' $83 million contract to engineer, design and construct a 4,000 metric ton-per-day sugar factory and 45,000 liter-per-day ethanol plan t in Finchaa, Ethiopia, which was approximately 40 percent complete at year-end 1995. Schaffer's vast experience and capabilities in the sugar process field were a critical component to the awarding of the project. Sugar related projects will remain a key business development focal point for 1996 and beyond. The second major project was the design and construction of the $20 million Conoco Tank Farm project. This facility is associated with Conoco's $750 million Hydrocracker Pumping and Storage Facility in Westlake, Louisiana, which represents EPC's largest domestic award to date. The third project by Serv-Tech's E & I division, SECO Industries, was the MARS production platform in the deep waters of the Gulf of Mexico. Jointly owned by Shell Offshore and British Petroleum, the MARS platform is designed for drilling and production operations at a world-record water depth of 2,933 feet. As the operator, Shell has created a uniquely structured, multi-contractor allied team that is working together from project feasibility analysis to platform completion. Costing approximately $1.2 billion and 1.3 million manhours, the MARS project is currently the highest profile offshore project under construction. In its final stages, the MARS platform is on schedule and under budget, quite a feat for a project of this magnitude. Customer satisfaction and an excellent reputation are primary contributors to Serv-Tech's success. In 1995, the EPC operations experienced high levels of repeat business, developed industry alliances and obtained numerous new customers, including British Petroleum, Coastal Oil Company, Firestone and Union Carbide Corporation. Customer satisfaction and an excellent reputation are primary contributors to Serv-Tech's success. 16 19 [PHOTO] SECO provides QAQC inspection personnel. In late 1995 SECO was awarded its third consecutive contract to provide E&I services to another Shell Oil deep water production platform. The Ram/Powell platform will be designed and fabricated by the "Topside Alliance Construction Team" (TACT), with J. Ray McDermott, Inc. remaining the lead contractor. SECO has allied itself with McDermott, whereby SECO is the preferred provider of complex E&I systems for these massive production platforms being built for deep water use. With improved exploration technolog y stimulating drilling and production operations in the deep waters of the Gulf of Mexico, SECO anticipates additional construction activity throughout 1996 and beyond. In 1995 we made significant progress with engineering and maintenance alliance opportunities. We will continue to actively pursue these type of long-term relationships. REVENUE GROWTH For the year ended December 31 (millions of dollars) [GRAPH] Progressing into 1996, the newly integrated Serv-Tech EPC organization will continue to expand its client base focusing on market sectors where we have successfully differentiated ourselves. We will continue to pursue multi-disciplined lump sum design/build projects up to the value range of $100 million. Several potential projects with the desired differentiating factors have already been identified, and discussions are underway with a major refinery to qualify for three separate projects totaling approximately $50 million. We will aggressively market ourselves as a premier provider of control system designs and installations, and expect SECO to continue to have success as a premier electrical and instrumentation contractor for offshore drilling and production platforms. We are excited about the opportunities available to our EPC group and the markets we serve. REVENUE BACKLOG As of December 31 (millions of dollars) [GRAPH] [PHOTO] A Shell Tension Leg Platform located dockside during final hookup and testing. 17 20 Serv-Tech Environmental and Performance Chemicals provides custom formulations to meet specific customer needs in hydrocarbon processing, pulp and paper processing, and wastewater treatment. Specialty chemical programs for the paper industry include new technologies for de-inking and strengthening paper and paper board products. [PHOTO] 21 Serv-Tech Environmental & Performance Chemicals [PHOTO] 22 SERV-TECH ENVIRONMENTAL & PERFORMANCE CHEMICALS Serv-Tech offers highly customized solutions to customer needs through the application of advanced chemical technologies and patented processes. [PHOTO] Mastiff(SM) increases paper production and quality, and enables greater recycling of fibers. Serv-Tech's Environmental Services and Performance Chemicals segment provides sophisticated chemicals and systems to the hydrocarbon processing, pulp, paper and wastewater treatment industries. Serv-Tech offers highly customized solutions to customer needs through the application of advanced chemical technologies and patented processes. Such solutions include systems to enhance finished product quality, maximize production output, minimize downtime and optimize energy requirements as well as meet environmental regulations and recommendations. This segment includes the Chemisolv, Serv-Tech Environmental, and Terminal Technologies ("TTI") divisions of Serv-Tech, which collectively generated $16 million in revenue for 1995, versus the 1994 level of $9 million. Technology is a critical component in the continued growth of this group, whether it is Serv-Tech Environmental's Life Guard(R) Decontamination, TTI's Hydrocarbon Reclaimer or Chemisolv's Mastiff(SM) technology. HYDROCARBON PROCESSING Serv-Tech Environmental provides oil refineries and petrochemical plants with broad-based chemical expertise and application experience to develop safe and effective treatment programs for decontamination, towers, vessels, pipework and heat exchangers. One of the most successful technologies is the patented Life Guard(R) system which removes free hydrocarbons, including volatile and toxic products, from refinery towers and vessels. The decontamination is performed within a closed-loop system to prevent hazardous contaminants from entering a plant's waste stream. Since its introduction in late 1992, the Life Guard(R) system has been applied in over 500 systems. In 1995 the ST Environmental group, which manages the Life Guard(R) system, increased its customer base by approximately 20 percent, in addition to experiencing an increasing amount of repeat business from their growing satisfied customer base. Serv-Tech Environmental and Chemisolv recently introduced a unique energy management system for heat exchangers that combines Serv-Tech's patented technologies Fast Draw(R), Fast Clean(R) and Life Guard(R) systems with its newly developed antifoulant products and monitoring system. This exclusive new system, Heat Guard(SM), provides plant operators with a means to monitor and manage the most critical heat transfer areas of the plant and realize significant energy savings on an ongoing basis, all in a single program. 20 23 [PHOTO] The patented HP 2000 system has externally controlled and operated equipment that allows up to 90 percent of the cleaning to be performed before the tank is even opened, minimizing out-of-service time. Another highly successful product line servicing the hydrocarbon processing and storage industries is the patented Hydrocarbon Reclaimer System developed by TTI. It provides turnkey tank cleaning, sludge processing and waste management services on above-ground storage tanks. Its effectiveness is substantiated by an alliance agreement TTI signed with Amoco's Petroleum Products division in December 1995, to clean 70 to 100 tanks per year with the Hydrocarbon Reclaimer System. The system specifically cleans tanks that store lighter oils and distilates. However, discussions are well under way to pursue an alliance with Amoco to utilize another Serv-Tech patented system, the HP 2000, which cleans heavy oil storage tanks. PULP & PAPER Chemisolv's well-established expertise in the pulp and paper industry has led to the development of a potential breakthrough technology that could significantly improve the way paper is made from recycled fiber. Mastiff(SM) is a patent pending technology that increases the strength and stiffness of paper and board. The process has demonstrated meaningful increases in strength on a wide range of papers, but is particularly suited to the production of packaging paper and box board using recycled fiber. In addition to paper strengthening, the process has demonstrated increased paper machine production speed and reduced energy consumption. Full-scale commercialization trials are progressing at three separate locations in Europe, and are expected to be completed during the first half of 1996. WASTEWATER TREATMENT Chemisolv solves wastewater treatment problems for oil refineries and petrochemical plants, as well as the pulp and paper, steelmaking, food processing and textile industries. Chemisolv's experienced chemists develop "custom blend" products and programs for virtually every customer, sometimes creating completely new product concepts. In 1995 Chemisolv launched Nutrisolv(SM), a program that monitors and adjusts the conditions of microbiological organisms in water treatment plants to assure their "health" for optimum removal of waste. Chemisolv is developing strong relationships with world-class waste treatment plant EPC companies, which have increasingly led to Chemisolv being specified as the chemical treatment supplier of choice at the start-up of new facilities. 1996 should prove to be an exciting year for the Environmental Services and Performance Chemicals segment, as we seek opportunities to expand into additional industries and locations utilizing the synergistic marketing relationships established by other Serv-Tech divisions. For instance, Chemisolv will seek opportunities to apply its specialty chemical expertise to help solve problems in the sugar refining industry in alliance with the F.C. Schaffer group of Serv-Tech EPC. We are also pleased about the opportunity to further exploit our environmental and performance chemical capabilities on a global basis. REVENUE GROWTH FOR THE YEAR ENDED DECEMBER 31 (millions of dollars) [GRAPH] 21. 24 CORPORATE OFFICERS Robert J. Cresci Chairman of the Board Richard L. Daerr President & Chief Executive Officer David P. Tusa Senior Vice President, Finance & Administration Frank A. Perrone Vice President, General Counsel & Corporate Secretary H. Pat Solis Treasurer, Director of Investor Relations Dale W. Wilhelm Corporate Controller Judith A. Dolifka Assistant Corporate Controller OPERATING GROUP MANAGEMENT SERV-TECH SPECIALTY SERVICES Michael J. Krajicek President, Turnaround & Maintenance Services Mark E. Bortka Vice President, Turnaround Operations, Turnaround & Maintenance Services Robert R. Cradeur Vice President, Manufacturing Services James N. Lanclos Vice President, Business Development Leslie R. Slack President, ST Piping, Inc. Terry L. McGregor President, Hartney Industrial Services Corp. Christopher J. Bloch President, Hill Technical Services, Inc. SERV-TECH ENVIRONMENTAL & PERFORMANCE CHEMICALS Ralph J. Davies President, Chemisolv, Inc. James R. Duffy Vice President & General Manager, Chemisolv, Inc. David M. Owen Director, Research & Development, Chemisolv, Inc. Clem C. Armitage General Manager, Chemisolv, Ltd. Raju K. Mehta Technical Director, Chemisolv, Inc. W. Harry Corbett Business Manager, Chemisolv, Inc. Timothy P. Greene General Manager, Terminal Technologies, Inc. Michael D. Bayse Business Manager, Serv-Tech Environmental Services SERV-TECH EPC James J. Degnan President, Serv-Tech EPC, Inc. Owen J. Batt Manager of International Operations, Serv-Tech EPC, Inc. Steve D. Bieber Manager of Project Support Services, Serv-Tech EPC, Inc. Michael A. Connally Manager of Projects, Serv-Tech EPC, Inc. Glenn G. Dubuc Manager of District Operations, SECO Industries Bryan A. Landry Manager of Projects, SECO Industries Steve R. Pierce Sr. Vice President, Finance & Administration, Serv-Tech EPC, Inc. Francis C. Schaffer President, F.C. Schaffer & Associates, Inc. Edward I. Stanley Senior Vice President & Manager of Engineering, Serv-Tech Engineers, Inc. William P. Taunton Manager of District Operations, Serv-Tech EPC, Inc. James P. Uhl Manager, Business Development, Serv-Tech EPC, Inc. 22. 25 BOARD OF DIRECTORS [PHOTO] Back Row (from left to right) Charles M. Balch, M.D. Executive Vice President for Health Affairs, M.D. Anderson Cancer Center D.D. "Del" Hock Chairman, Public Service Company of Colorado John B. O'Brien President, Baker & O'Brien, Inc. James M. Piette Retired Vice Chairman, Union Camp Corp. Mike M. Mustafoglu President, Oxbow Energy, Inc. Michael T. Willis President & Chief Executive Officer, CORESTAFF, Inc. Front Row (from left to right) Richard L. Daerr President & Chief Executive Officer, Serv-Tech, Inc. Robert J. Cresci Chairman of the Board, Serv-Tech, Inc. Managing Director, Pecks Management Partners Ltd. 23 26 FINANCIAL REVIEW Management's Discussion and Analysis of Financial Condition and Results of Operations....................................... 27 Market and Dividend Information................................... 31 Independent Auditors' Report...................................... 31 Consolidated Balance Sheets....................................... 32 Consolidated Statements of Operations............................. 33 Consolidated Statements of Changes in Stockholders' Equity......................................... 34 Consolidated Statements of Cash Flows............................. 35 Notes to Consolidated Financial Statements........................ 36
25 27 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Consolidated Financial Statements and related notes thereto and "Financial Highlights" included elsewhere in this Report. For the year ended December 31, 1995, the Company recorded net income of $2.1 million, or $0.31 per share, compared to a net loss of $8.8 million, or $1.44 loss per share, in 1994 and net earnings of $2.9 million, or $0.50 per share, in 1993. The 1994 net loss includes a special charge of $10.0 million, or $1.63 per share. Excluding the effect of the special charge, the Company generated net earnings in 1994 of $1.2 million, or $0.19 per share. Consolidated revenues for 1995 were $279.6 million, an increase of 54.4 percent over 1994 revenues of $181.1 million, which were 11.8 percent higher than 1993 revenues of $162.0 million. The 1995 increase in revenues was generated primarily from expansion of the Company's engineering, procurement and construction business ("EPC") which includes its electrical and instrumentation subsidiary SECO Industries ("SECO"). The increase in 1994 revenues was attributable to increased levels of activity in the Company's turnaround maintenance and specialty services ("Specialty Services") business and EPC. EPC revenues for 1995 includes $32.8 million attributable to the Finchaa Sugar Factory and Ethanol Plant Project that was approximately 40.0 percent complete at December 31, 1995. Additionally, 1995 EPC revenues include $16.5 million related to the $20.7 million Conoco Tank Farm Project in Westlake, Louisiana. Consolidated gross profit margins as a percentage of revenues were 17.4 percent for 1995, relatively unchanged from 1994 margins of 17.7 percent. Excluding the Finchaa project, the consolidated gross profit percentage for 1995 was 18.9 percent. The 1995 increased gross profit, excluding the Finchaa project, is due primarily to improved Specialty Services profit margins over 1994. The 1994 consolidated gross profit percentage decreased slightly from the 1993 level of 18.7 percent. This decrease resulted primarily from the completion of several large electrical and instrumentation installations on offshore platforms during 1993 for which there were no comparable projects during 1994. Consolidated selling, general and administrative expenses increased 47.2 percent to $42.0 million in 1995 from $28.6 million in 1994. The increase is attributable primarily to acquisitions during 1995 and the latter half of 1994 including Hartney Industrial Services ("Hartney") in June 1994. Higher overhead expenses are also due to increased amortization of acquisition costs, increased international activity and expansion of the Company's EPC and Environmental and Performance Chemicals businesses. Consolidated selling, general and administrative expenses in 1994 were $4.8 million, or 20.2 percent, higher than the 1993 level of $23.8 million, resulting primarily from the expansion of Specialty Services and the acquisition of Hartney. The consolidated increases in overhead are consistent with the higher level of activity and growth of the Company. Consolidated overhead as a percentage of revenue actually decreased from 15.8 percent in 1994 to 15.0 percent in 1995. Interest expense increased in 1995 to $2.0 million compared to $1.4 million in 1994. In 1994 interest expense increased $0.4 million from $1.0 million in 1993. The 1995 increase is due to a higher level of working capital borrowings during the year under the Company's revolving line of credit necessary to support the higher level of business activity. The 1994 increase in interest expense over 1993 is due primarily to the Company's issuance of $15.0 million in 8.41 percent senior notes payable in June 1993. Interest income decreased $0.5 million in 1995 from 1994's level of $0.5 million which was a decrease of $0.3 million over 1993. The decreases resulted primarily from lower available cash balances during the periods. In 1995, minority interest and other include the earnings participation by the former shareholders of F. C. Schaffer & Associates, Inc. in the estimated profits of the Finchaa project amounting to approximately $0.6 million (see Note 4 of Notes to Consolidated Financial Statements). Minority interest and other also includes the minority shareholders portion of ST Piping, Inc. earnings. Effective May 18, 1995, the Company acquired an additional 20 percent of the outstanding common stock of ST Piping, Inc. from the minority shareholders of that company. Prior to the acquisition, the Company owned 70 percent (see Note 3 of Notes to Consolidated Financial Statements). 27 28 SPECIALTY SERVICES In 1995, Specialty Services revenues increased $20.9 million, or 18.4 percent, over 1994 revenues of $113.5 million. Specialty Services revenues increased $22.2 million, or 24.3 percent, in 1994 over 1993 revenues of $91.3 million. The 1995 revenue increase is consistent with increased refinery maintenance spending during the year. Also, the increases in 1995 and 1994 revenues were attributable to the acquisition of Hartney in June, 1994, which generated revenues of $21.6 million in 1995 and $14.5 million in 1994. In addition, during 1994, Specialty Services completed two major projects for a West Coast refinery which contributed revenues of approximately $28.4 million. Operating income in 1995 was $4.3 million compared to $5.7 million in the prior year, excluding a $10.6 million pre-tax special charge recorded during 1994. Operating income in 1994 (excluding the special charge) was $1.5 million higher than 1993 operating income of $4.2 million. Higher levels of revenues and gross profit in each period were offset by increased selling, general and administrative expenses. The increased level of overhead expenses in both periods was attributable primarily to the acquisition of Hartney in June, 1994, and an increase in international activity. EPC EPC revenues were $134.4 million in 1995, an increase of $71.7 million, or 114.3 percent over 1994 revenues of $62.7 million. The higher level of revenues resulted primarily from the introduction of procurement and construction services and expansion of its engineering services in the latter half of 1994. Also, as previously discussed, 1995 EPC revenues include approximately $32.8 million and $16.5 million attributable to the Finchaa and Conoco Tank Farm Projects, respectively. SECO contributed $51.8 million to 1995 EPC revenues, a slight increase over 1994 revenues of $48.7 million. In 1994, EPC revenues were comparable to the 1993 level of $62.8 million. Revenue growth of $8.2 million in 1994 from the expansion and introduction of new services discussed above was offset by an $8.3 million decrease in SECO revenues which experienced an historically high level of revenues during 1993. Operating income amounted to $8.2 million in 1995, more than double the 1994 level. The increase resulted primarily from the higher level of revenues and gross profits which were offset partially by higher selling, general and administrative expenses. Additionally, $1.8 million of the 1995 operating income was attributable to the Finchaa project. The increase in overhead expenses is primarily due to the expansion of these services and is consistent with the increased level of business activity. In 1994, EPC operating income was $4.0 million, a decrease of $4.6 million from 1993 levels of $8.6 million. The decrease was attributable primarily to a $5.4 million decrease in SECO operating income directly related to the decrease in the subsidiary's revenues discussed above. Such decrease was offset slightly by a $0.9 million increase in other EPC services. ENVIRONMENTAL AND PERFORMANCE CHEMICALS Environmental and Performance Chemicals ("Environmental") revenues increased $7.8 million, or 90.6 percent, to $16.4 million in 1995. Chemisolv Holdings ("Chemisolv"), the Company's performance chemical subsidiary acquired in November, 1994, contributed $5.1 million to the increase in revenues. The remaining $2.7 million increase is attributable to increased activity in the Company's tank cleaning services. Environmental revenues in 1994 were $8.6 million, approximately the same as 1993. Operating income in 1995 was $0.2 million compared to an operating loss of $0.2 million in 1994 and an operating loss of $0.4 million in 1993. Higher gross profit margins recognized on decontamination services and increased activity in the tank cleaning business have contributed to the improved operating results which have been partially offset by Chemisolv operating losses. Chemisolv operating losses are attributable to the higher levels of overhead expenses incurred primarily with the continued development of their new paper strengthening technology, Mastiff(SM). IMPACT OF INFLATION AND CHANGING PRICES Inflation and changing prices have not significantly affected the Company's operating results or the markets in which the Company performs services. 28 29 BACKLOG Revenue backlog as of December 31, 1995, was $96.1 million. Revenue backlog by operating segment for the three years ended December 31, 1995, is as follows (in thousands):
December 31, 1995 1994 1993 - ----------------------------------------------------------------------------- EPC............................... $ 83,739 $ 47,255 $ 25,600 Specialty Services................ 9,928 39,708 17,350 Environmental..................... 2,418 1,100 - --------------------------------------- $ 96,085 $ 88,063 $ 42,950 =======================================
EPC revenue backlog as of December 31, 1995, includes $48.0 million related to the Finchaa project. The decrease in Specialty Services revenue backlog from December 31, 1994, is consistent with a slow starting 1995 turnaround maintenance season which is attributable to many refineries delaying their scheduled maintenance until late 1996 or 1997. While backlog can be an indication of expected future revenues, backlog is subject to revisions from time-to-time due to cancellations, modifications and changes in the scope of projects or their design and construction schedules. There can be no assurance whether or when backlog will be realized as revenue. LIQUIDITY AND CAPITAL RESOURCES Capital expenditures for 1995, excluding acquisitions, were $6.2 million, primarily for the purchase of equipment to support the expansion of the Company's EPC and performance chemical businesses. In addition, the Company acquired a new computer system and related software. Capital expenditures for 1996, excluding acquisitions, are expected to be approximately $4.0 to $5.0 million, primarily for the purchase and manufacture of equipment to support continued expansion of the Company's business activities. At December 31, 1995, the Company's working capital totaled approximately $23.2 million. The Company has been able to finance its working capital requirements through its cash flows from operations and bank borrowings. The Company maintains a $35.0 million revolving line of credit with two banks which expires in May, 1997. At December 31, 1995, $6.5 million was outstanding under the revolving line of credit and $22.3 was available for borrowing. In addition, the Company has $15.0 million in 8.41 percent Senior Notes Payable due June 2003 (see Note 5 of Notes to Consolidated Financial Statements). As further discussed in Note 4 of Notes to Consolidated Financial Statements, in 1995 the Company secured an $83.0 million contract to engineer, design, procure and construct a 4,000 metric ton cane-per-day sugar factory and 45,000 liter-per-day ethanol facility in Finchaa, Ethiopia. The project, which is financed by the African Development Bank, is expected to be completed in the latter part of 1997. On February 7, 1995, the Company received an advanced payment equal to 20 percent of the contract value. The Company issued letters of credit to support performance and the 20 percent advance payment. The outstanding portion of the letters of credit total $23.4 million at December 31, 1995. Subsequent to December 31, 1995, the outstanding portion has been reduced to $20.5 million. Contractual payments to the Company are supported by a revolving letter of credit issued by the Ethiopian government via the African Development Bank. The project is expected to be self funding and, therefore, should not require working capital support other than that received from the project owner. For the year ended December 31, 1995, net cash flows from operations were $2.2 million resulting primarily from net income of $2.1 million, depreciation and amortization of $6.8 million, net increase in accounts payable and accrued liabilities of $1.3 million, offset by an increase in accounts receivable of $3.7 million and net increases in uncompleted contracts of $5.7 million. The increases were due primarily to the higher level of business activity during 1995. Net expenditures used in investing activities amounted to $6.7 million, consisting primarily of $6.2 million in capital expenditures and $0.9 million in acquisitions of businesses (see Note 3 of Notes to Consolidated Financial Statements). Cash flows provided by financing activities totaled $4.0 million resulting from net borrowings under the Company's revolving line of credit. The borrowings were offset partially by the acquisition of $1.6 million in treasury stock in October, 1995 (see Note 8 of Notes to Consolidated Financial Statements). 29 30 OTHER Specialty Services revenues and operating income are subject to significant quarterly fluctuations, affected primarily by the timing of planned shutdowns at its customers' facilities. In general, scheduled turnarounds fall predominantly in two seasonal periods--February through May and September through November. The exact timing and duration of these periods will largely depend on the demand for the customers' products and availability of feedstocks for processing. In addition, most of the Specialty Services contracts are short in duration, and large individual contracts may significantly influence results in any specific quarter. The Company has discretionary bonus programs for key personnel throughout most of its operating groups. Payments under these plans total, in the aggregate, approximately 8 percent of operating earnings of each unit. For the Turnaround Maintenance division of Specialty Services and the Chemisolv division of Environmental and Performance Chemicals, the Company has established profit sharing programs in lieu of the discretionary programs noted above. The Specialty Services and Chemisolv programs generally provide for a profit sharing pool to be established equal to 20 percent of the operating earnings of the respective group. Management believes that existing cash, cash flow from operations and existing credit facilities will be sufficient to meet the current ongoing requirements of the operations of the Company. In addition, the above sources can be supplemented with other external sources of funds to meet additional cash requirements, if necessary. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS In March, 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 121 "Accounting for the Impairment of Long-Lived Assets to be Disposed Of". The Company will adopt SFAS No. 121 during the first quarter of 1996. Management has not yet determined what impact, if any, the adoption of SFAS No. 121 will have on the Company's financial position or results of operations. SFAS No. 123 "Accounting for Stock Based Compensation" was issued in October, 1995. SFAS No. 123 defines a fair value based method of accounting for employee stock options. Under this fair value method, compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period; however, SFAS No. 123 allows an entity to continue to measure compensation cost in accordance with Accounting Principal Board Statement No. 25 ("APB 25"). The Company will continue to account for stock option grants in accordance with APB 25, and accordingly, recognizes no compensation expense for stock options granted. 30 31 MARKET AND DIVIDEND INFORMATION The Company's common stock is traded in the over-the-counter market and is quoted on the National Association of Securities Dealers' Automated quotations System ("NASDAQ") National Market System under the symbol "STEC". The following table sets forth the quarterly high and low bid quotations of the common stock, as quoted by NASDAQ, for the calendar quarters indicated.
Calendar Period High Low - ------------------------------------------------------------------------------- 1995: First Quarter.......................................... 8 3/4 6 Second Quarter......................................... 9 1/4 6 5/8 Third Quarter.......................................... 9 6 1/2 Fourth Quarter......................................... 8 1/2 5 1/8 1994: First Quarter.......................................... 12 3/4 8 3/4 Second Quarter......................................... 10 3/4 7 1/2 Third Quarter.......................................... 10 1/4 7 1/4 Fourth Quarter......................................... 10 1/2 5 7/8
At March 15, 1996, there were approximately 2,200 shareholders of the common stock. The average of the high and low bid quotations on such date was $5.5625. The Company has not paid dividends on its common stock, and the Board of Directors of the Company presently intends to continue a policy of retaining earnings for use in the Company's operations and to fund the Company's working capital requirements and growth opportunities. INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Serv-Tech, Inc.: We have audited the accompanying consolidated balance sheet of Serv-Tech, Inc. and Subsidiaries as of December 31, 1995, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. The accompanying consolidated balance sheet of Serv-Tech, Inc. and Subsidiaries, as of December 31, 1994, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the two years in the period ended December 31, 1994, were audited by other auditors whose report thereon dated February 17, 1995, expressed an unqualified opinion on those statements. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the 1995 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Serv-Tech, Inc. and Subsidiaries as of December 31, 1995, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP Houston, Texas February 16, 1996 31 32 Serv-Tech, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS
December 31, 1995 1994 - ----------------------------------------------------------------------------------------------------------------------- Assets Current Assets: Cash and cash equivalents......................................................... $ 1,347,475 $ 1,851,431 Accounts receivable, net ......................................................... 41,686,672 37,887,180 Costs and estimated earnings in excess of billings on uncompleted contracts ...... 8,693,468 3,172,181 Prepaid expenses ................................................................. 1,619,903 1,636,979 Inventory......................................................................... 2,102,245 1,324,568 Deferred income taxes ............................................................ 4,922,070 3,580,581 ------------ ------------ Total current assets.......................................................... 60,371,833 49,452,920 Property, plant and equipment, net..................................................... 32,414,756 30,594,051 Investments in and advances to affiliates ............................................. - 966,277 Intangible assets, net................................................................. 17,442,812 15,943,203 Other assets........................................................................... 2,015,984 1,358,807 ------------ ------------ Total assets.................................................................. $112,245,385 $ 98,315,258 ============ ============ Liabilities and Stockholders' Equity Current Liabilities: Accounts payable.................................................................. $ 12,662,352 $ 11,396,235 Accrued liabilities............................................................... 15,278,640 13,500,090 Revolving line of credit.......................................................... 6,500,000 - Billings in excess of costs and estimated earnings on uncompleted contracts....... 1,343,826 1,407,013 Income taxes payable.............................................................. 728,597 - Other............................................................................. 626,566 911,483 ------------ ------------ Total current liabilities..................................................... 37,139,981 27,214,821 Long-term debt, less current maturities ............................................... 16,594,998 15,025,140 Deferred income taxes ................................................................. 5,095,608 4,649,227 Minority interest and other ........................................................... 484,952 862,429 Commitments and Contingencies (Note 12) Stockholders' Equity: Preferred stock, $1 par value, 2,000,000 shares authorized; no shares issued or outstanding..................................... - - Common stock, par value $.50, authorized 20,000,000 shares; issued shares of 6,752,671 and 6,504,778, respectively.................. 3,376,336 3,252,390 Additional paid-in capital........................................................ 43,489,763 41,828,709 Retained earnings................................................................. 7,675,586 5,614,467 Cumulative translation adjustments................................................ (64,982) (131,925) Treasury stock, at cost, 193,358 shares........................................... (1,546,857) - ------------ ------------ Total stockholders' equity.................................................... 52,929,846 50,563,641 ------------ ------------ Total liabilities and stockholders' equity.................................... $112,245,385 $ 98,315,258 ============ ============
The accompanying notes are an integral part of the consolidated financial statements. 32 33 Serv-Tech, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31, 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------- Revenues.......................................................... $ 279,566,348 $ 181,086,770 $ 162,021,399 Costs of services................................................. 231,042,006 148,979,186 131,736,993 ----------------------------------------------------- Gross profit.................................................. 48,524,342 32,107,584 30,284,406 Selling, general and administrative expenses...................... 42,046,618 28,563,990 23,764,981 Special charge.................................................... - 12,225,182 - ----------------------------------------------------- Operating income (loss)....................................... 6,477,724 (8,681,588) 6,519,425 ----------------------------------------------------- Other income (expense): Interest expense.............................................. (1,990,837) (1,445,116) (1,001,515) Interest income............................................... 44,929 511,357 785,911 Other, net.................................................... 116,689 4,016 (67,536) ----------------------------------------------------- Total other expense........................................... (1,829,219) (929,743) (283,140) ----------------------------------------------------- Minority interest and other....................................... (999,055) (260,305) (419,208) Equity in losses of affiliates.................................... (24,331) (226,700) (679,216) ----------------------------------------------------- Income (loss) before provision for income taxes................... 3,625,119 (10,098,336) 5,137,861 Provision (benefit) for income taxes.............................. 1,564,000 (1,303,000) 2,218,724 ----------------------------------------------------- Net income (loss) ................................................ $ 2,061,119 $ (8,795,336) $ 2,919,137 ===================================================== Earnings (loss) per share......................................... $ .31 $ (1.44) $ .50 ===================================================== Weighted average common shares outstanding ....................... 6,720,134 6,117,434 5,888,508 =====================================================
The accompanying notes are an integral part of the consolidated financial statements. 33 34 Serv-Tech, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Common Stock Additional Retained Cumulative Treasury Stock Total Paid-In Earnings Translation Shares Amount Capital Adjustments Shares Amount - ----------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1992.......... 5,810,978 $2,905,490 $36,881,683 $11,490,666 $ 74,565 - $ - $51,352,404 Translation adjustments....... - - - - (318,021) - - (318,021) Net income.................... - - - 2,919,137 - - - 2,919,137 ---------------------------------------------------------------------------------------------- Balance, December 31, 1993.......... 5,810,978 2,905,490 36,881,683 14,409,803 (243,456) - - 53,953,520 Exercise of stock options 43,800 21,900 184,526 - - - - 206,426 Issuance of common stock...... 650,000 325,000 4,762,500 - - - - 5,087,500 Translation adjustments....... - - - - 111,531 - - 111,531 Net loss...................... - - - (8,795,336) - - - (8,795,336) ---------------------------------------------------------------------------------------------- Balance, December 31, 1994.......... 6,504,778 3,252,390 41,828,709 5,614,467 (131,925) - - 50,563,641 Exercise of stock options..... 40,000 20,000 121,250 - - - - 141,250 Issuance of common stock...... 207,893 103,946 1,539,804 - - - - 1,643,750 Purchase of treasury stock.... - - - - - (203,873) (1,630,984) (1,630,984) Transfer of treasury stock to 401(k) plan.............. - - - - - 10,515 84,127 84,127 Translation adjustments ...... - - - - 66,943 - - 66,943 Net income.................... - - - 2,061,119 - - - 2,061,119 ---------------------------------------------------------------------------------------------- Balance, December 31, 1995.......... 6,752,671 $3,376,336 $43,489,763 $ 7,675,586 $ (64,982) (193,358) $(1,546,857) $52,929,846 ==============================================================================================
The accompanying notes are an integral part of the consolidated financial statements. 34 35 Serv-Tech, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------------ Cash flows from operating activities: Net income (loss) ........................................................... $ 2,061,119 $ (8,795,336) $ 2,919,137 Adjustments: Depreciation and amortization .................................... 6,803,623 5,709,415 4,193,760 Special charge ................................................... - 12,225,182 - Minority interest and other ................................ 999,055 260,305 419,208 Equity in losses of affiliates ................................ 24,331 226,700 679,216 Provision for losses on accounts and notes receivable .......... 1,245,072 981,536 399,042 Deferred income taxes ............................................ (895,108) (1,394,091) 481,724 Other ......................................................... 22,482 145,320 141,456 ------------------------------------------- 10,260,574 9,359,031 9,233,543 Changes in assets and liabilities, net of effect from acquisitions of businesses: Accounts receivable ............................................. (3,676,228) (7,647,085) 3,625,304 Net change in billings, costs and estimated earnings on uncompleted contracts ....................................... (5,697,633) 1,446,123 (3,186,074) Inventory ........................................................ (374,509) (38,938) 123,339 Prepaid expenses ................................................ 91,190 (304,852) 479,016 Other assets .................................................... (402,401) (49,196) (189,197) Accounts payable ................................................ 767,864 (2,169,450) (3,240,599) Accrued liabilities .............................................. 544,461 (581,528) 2,246,370 Income taxes payable ........................................ 728,599 - (707,256) Other liabilities ........................................ - - (435,000) ------------------------------------------- Net cash provided by operating activities .................... 2,241,917 14,105 7,949,446 ------------------------------------------- Cash flows from investing activities: Capital expenditures ..................................................... (6,179,544) (5,193,674) (4,864,423) Investments in and advances to affiliates ................................ (34,450) (671,387) 1,525,094 Acquisitions of businesses, net of cash acquired ......................... (866,057) (2,435,628) - Intangible assets ........................................................ (117,306) (337,677) (405,168) Proceeds from sale of property, plant and equipment ..................... 462,951 77,864 205,484 ------------------------------------------- Net cash used in investing activities ........................ (6,734,406) (8,560,502) (3,539,013) ------------------------------------------- Cash flows from financing activities: Proceeds from issuance of debt ........................................ 31,000,000 8,000,000 20,000,000 Principal payments of debt .............................................. (25,521,733) (12,554,198) (13,043,307) Financing costs ......................................................... - (300,000) (226,843) Proceeds from issuance of common stock .................................. 141,250 146,426 - Purchase of treasury stock .............................................. (1,630,984) - - Payments of dividends on preferred stock of a subsidiary ................. - (42,411) (80,000) Purchase of preferred stock of a subsidiary .............................. - (800,000) - ------------------------------------------- Net cash provided by (used in) financing activities .......... 3,988,533 (5,550,183) 6,649,850 ------------------------------------------- Net increase (decrease) in cash and cash equivalents ........................ (503,956) (14,096,580) 11,060,283 Cash and cash equivalents at beginning of year............................... 1,851,431 15,948,011 4,887,728 ------------------------------------------- Cash and cash equivalents at end of year..................................... $ 1,347,475 $ 1,851,431 $ 15,948,011 ===========================================
The accompanying notes are an integral part of the consolidated financial statements. 35 36 Serv-Tech, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies Basis of Presentation The consolidated financial statements include the accounts of Serv-Tech, Inc., and its majority-owned subsidiaries. The Company's investments in affiliated companies (50% and less owned) are accounted for in accordance with the equity method. All significant intercompany balances and transactions are eliminated. Revenues and Costs Recognition The Company engages in fixed price and modified fixed price contracts and contracts based on costs incurred plus applicable profit percentages (time and material contracts). Revenues from fixed price and modified fixed price contracts are recognized on the percentage-of-completion method, measured primarily by the percentage of costs incurred to date to estimated total costs for each contract (cost-to-cost method). Management believes this method is the most appropriate measure of progress on contracts. Revenues from time and material contracts are recognized currently as costs are incurred in performing the work. Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools and repairs. Selling, general, and administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions and estimated profitability may result in revisions to costs and income which are recognized in the period in which the revisions are determined. The asset, "Costs and estimated earnings in excess of billings on uncompleted contracts," represents revenues recognized in excess of amounts billed. The liability, "Billings in excess of costs and estimated earnings on uncompleted contracts", represents billings in excess of revenues recognized. Cash and Cash Equivalents Cash and cash equivalents include cash, tax free municipal bond funds and other highly liquid investments with maturities of three months or less at the date of acquisition. Cash equivalents are stated at cost which approximates market value. Inventory Inventory consists primarily of materials and supplies and is stated at the lower of cost or market. Cost is determined principally by the average cost method. Property, Plant and Equipment Property, plant and equipment are recorded at cost. Major renewals and betterments which extend the lives of equipment are capitalized while all other repairs and maintenance are charged to operations as incurred. Disposals are removed at cost less accumulated depreciation with any resulting gain or loss reflected in results of operations. For financial reporting purposes, depreciation for all property, plant and equipment is provided using the straight-line method over the estimated useful lives of the depreciable assets, ranging from three to 30 years. Accelerated methods are generally used for income tax purposes. Intangible Assets Intangible assets are carried at cost and amortized using the straight line method over their legal or estimated useful lives. These lives range from 20 to 40 years for excess of costs over net assets of businesses acquired, 17 years for patents and three to five years for covenants not to compete. The Company's management assesses, at least quarterly, recorded balances of excess of costs over net assets of businesses acquired net of accumulated amortization for impairment in light of historic and projected operating trends and profitability, new product development and strategic direction of the Company. Restricted Cash At December 31, 1995 and 1994, cash and cash equivalents, include restricted balances of $0.6 million. The balances are restricted for the guarantee of indebtedness of a subsidiary and for the payment of claims, expenses and premiums under certain insurance policies. Any unused balances are refundable to the Company. 36 37 Foreign Currency Translation The assets and liabilities of the Company's foreign affiliates are translated at year-end exchange rates, while income and expenses are translated at average rates during the year. Translation adjustments are recorded as a separate component of stockholders' equity. Income Taxes The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement carrying amounts and tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. The Company does not provide deferred income taxes on undistributed earnings of equity affiliates because such earnings are considered to be permanently reinvested. The amount of deferred income taxes not provided is immaterial. Earnings (Loss) per Common Share of Stock Primary and fully diluted earnings (loss) per common share are based on the weighted average number of shares outstanding during the year after consideration of the dilutive effect of stock options reflected under the treasury stock method. Fully diluted earnings per share are not presented because such amounts would be similar to amounts computed for primary earnings per share. Concentration of Credit Risk The Company provides specialized turnaround maintenance, engineering, procurement and construction, and environmental services, primarily to the hydrocarbon (petroleum and natural gas related products) processing and production industries principally in the United States. The Company performs ongoing credit evaluations of its customers' financial condition. Although generally no collateral is required from its customers, the Company may place liens against the property constructed or serviced if payment default occurs. The Company maintains reserves for potential losses and such losses have been within management's expectations. See Note 4 regarding the Finchaa project. Excess cash is invested principally in tax-free municipal bond funds consisting of securities of municipalities with strong credit ratings. These investments generally mature within three months and, therefore, bear minimal risk. The Company has not experienced any losses on its investments. Use of Estimates Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. Impact of Recently Issued Accounting Standards In March, 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 121 "Accounting for the Impairment of Long-Lived Assets to be Disposed Of". The Company will adopt SFAS No. 121 during the first quarter of 1996. Management has not yet determined what impact, if any, the adoption of SFAS No. 121 will have on the Company's financial position or results of operations. SFAS No. 123 "Accounting for Stock Based Compensation" was issued in October 1995. SFAS No. 123 defines a fair value based method of accounting for employee stock options. Under this fair value method, compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period; however, SFAS No. 123 allows an entity to continue to measure compensation cost in accordance with Accounting Principal Board Statement No. 25 ("APB 25"). The Company will continue to account for stock option grants in accordance with APB 25, and accordingly, recognizes no compensation expense for stock options granted. Reclassifications Certain reclassifications have been made in order to conform to current year presentation with no effect on earnings. 37 38 2. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS Additional information regarding certain balance sheet accounts at December 31, 1995 and 1994 is presented below:
1995 1994 - ---------------------------------------------------------------------------------------------------------- Accounts receivable: Contracts ....................................................... $ 42,208,999 $ 36,082,430 Income taxes..................................................... - 3,061,820 Other............................................................ 1,420,757 482,361 ---------------------------------- 43,629,756 39,626,611 Less allowance for doubtful accounts............................. (1,943,084) (1,739,431) ---------------------------------- $ 41,686,672 $ 37,887,180 ==================================
Bad debt expense was approximately $1.2 million, $1.0 million and $0.4 million for the years ended December 31, 1995, 1994, and 1993, respectively. Property, plant and equipment, at cost: Land and improvements............................................ $ 1,341,646 $ 1,303,646 Buildings and improvements....................................... 5,432,715 4,725,379 Operating machinery and equipment................................ 35,572,153 30,836,180 Furniture and office equipment................................... 7,894,026 4,359,057 ---------------------------------- 50,240,540 41,224,262 Less accumulated depreciation.................................... (18,590,493) (13,454,446) ---------------------------------- 31,650,047 27,769,816 Construction-in-progress ........................................ 764,709 2,824,235 ---------------------------------- $ 32,414,756 $ 30,594,051 ==================================
Depreciation expense was approximately $5.5 million, $4.6 million and $3.3 million for the years ended December 31, 1995, 1994, and 1993, respectively. Intangible assets: Patents (net of accumulated amortization of $468,977 and $363,081 at December 31, 1995 and 1994, respectively) ....................................... $ 1,118,430 $ 996,400 Covenants not to compete (net of accumulated amortization of $2,079,162 and $1,429,162 at December 31, 1995 and 1994, respectively) ..................... 1,081,731 1,720,838 Excess of costs over net assets of businesses acquired (net of accumulated amortization of $1,176,975 and $601,392 at December 31, 1995 and 1994, respectively) .................................. 15,242,651 13,225,965 ---------------------------------- $ 17,442,812 $ 15,943,203 ==================================
Amortization expense was approximately $1.3 million, $1.1 million and $0.9 million for the years ended December 31, 1995, 1994 and 1993, respectively. Accrued liabilities: Wages and payroll taxes ...................................... $ 3,615,702 $ 2,986,835 Insurance ..................................................... 7,843,405 6,483,549 Other.......................................................... 3,819,533 4,029,706 ---------------------------------- $ 15,278,640 $ 13,500,090 ==================================
38 39 3. ACQUISITIONS Effective May 18, 1995, the Company acquired an additional 20% of the outstanding common stock of its specialty welding subsidiary, ST Piping, Inc., from the minority shareholders of that company. Consideration for the purchase consisted of $0.6 million cash and 180,000 shares of Company common stock with a fair market value of approximately $1.4 million (total consideration of $2.0 million). ST Piping, Inc. was formed in January, 1991, between the Company (70% owner) and the Management Group of that company. This transaction now brings the Company ownership to 90%. The purchase price and expenses associated with the acquisition exceeded the fair value of net assets by approximately $1.2 million and is included in intangible assets. The Company's consolidated financial statements have included the results of operations of ST Piping, Inc. since January 1, 1991. Effective July 31, 1995, the Company acquired substantially all the assets and assumed certain liabilities of Constructors and Fabricators, Inc. ("C&F"), a construction service company located in Orange, Texas. The purchase price of $2.4 million consisted of $0.5 million in cash and a $1.9 million note payable (Note 5). The purchase price and expenses associated with the acquisition exceeded the fair market value of net assets by approximately $0.4 million and has been included in intangible assets. Pro forma results were not material to the Company's financial position or results of operations. Effective June 14, 1994, the Company acquired all of the outstanding common stock of Hartney Industrial Services Corporation ("Hartney"), a Houston, Texas, company, in exchange for 450,000 shares of Company common stock with a fair market value of $3.7 million. In addition, the Company paid $0.5 million in cash for non-competition and confidentiality agreements entered into with the selling shareholders. Pursuant to the terms of an earnout agreement, the Company may be required to pay additional amounts based on Hartney's pre-tax earnings through December 31, 1998. Amounts earned under the terms of the agreement will be recorded as excess of costs over net assets of businesses acquired. The purchase price and expenses associated with the acquisition exceeded the fair value of net assets by approximately $3.0 million. Hartney is a specialty contractor which provides refractory, acid-proofing and other corrosion prevention services to the petroleum refining, petrochemical, cement, power generation and waste incineration industries. Effective November 8, 1994, the Company acquired the remaining 50% interest in its affiliate Chemisolv Holdings, Inc. ("Chemisolv"), a specialty chemical treatment company with operations in the United Kingdom and the United States. The purchase price consisted primarily of 200,000 shares of Company common stock with a fair market value of $1.4 million. In addition, the Company paid $0.5 million for non-competition and confidentiality agreements entered into with the selling shareholders, consisting of $0.2 million cash and a $0.3 million note payable due January, 1995. The purchase price and expenses associated with the acquisition exceeded the fair value of net assets of the business acquired by approximately $1.8 million. Unaudited pro forma combined results, assuming the Hartney and Chemisolv acquisitions had occurred at January 1, 1993, are as follows:
Year Ended December 31, (in thousands, except per share data) 1994 1993 - --------------------------------------------------------------------------- Revenues ................................. $ 199,853 $ 189,570 Net income (loss)......................... (8,869) 2,295 Earnings (loss) per share................. $ (1.37) $ 0.35
The unaudited pro forma summary is not necessarily indicative either of results of operations that would have occurred had the acquisitions been made at the beginning of the periods presented, or of future results of operations of the combined companies. All acquisitions have been accounted for using the purchase method; accordingly, the assets and liabilities have been recorded at their estimated fair values at the date of acquisition. The excess purchase price and related expenses over the fair value of net assets acquired is included in "excess of costs over net assets of businesses acquired". Under the purchase method of accounting, the results of operations are included in the consolidated financial statements from their acquisition dates. 39 40 4. F.C. Schaffer acquisition and Finchaa Sugar Mill Project The Company acquired F.C. Schaffer and Associates of Baton Rouge, Louisiana ("Schaffer"), an engineering and construction management company specializing in sugar mill design in late 1994. On February 7, 1995, Schaffer secured an $83 million contract to engineer, design, procure and construct a 4,000 metric ton cane-per-day sugar factory and 45,000 liter-per-day ethanol plant in Finchaa, Ethiopia. The project, which is financed by the African Development Bank, is expected to be completed in the latter part of 1997 followed by a twelve month training and warranty period. In conjunction with the effectiveness of the contract, the Company received an advance payment equal to 20% of the contract value. The Company issued letters of credit to support performance and the 20% advance payment totaling $24.0 million. The outstanding portion of the letters of credit totalled $23.4 million at December 31, 1995. Subsequent to December 31, 1995, the outstanding portion has been reduced to $20.5 million. Contractual payment amounts to Schaffer are supported by a revolving letter of credit issued by the Ethiopian government via the African Development Bank. Included in the 1995 statement of operations is $32.8 million and $1.8 million in revenues and gross profits, respectively, related to the Finchaa project. In accordance with the terms of the acquisition agreement, former shareholders of Schaffer will participate in the earnings of the Finchaa project. This deferred purchase price is estimated to be in the range of 30%-35% of the project profits and is recognized as an expense over the life of the project. The amounts accrued under this arrangement totaled approximately $0.6 million for the year ended December 31, 1995, and are reflected in the statement of operations as minority interest and other. The Schaffer acquisition has been accounted for using the purchase method of accounting. Pro forma results are not material to the Company's financial position or results of operations. 5. Long-term Debt The Company has outstanding with four life insurance companies an aggregate $15 million in 8.41% Senior Notes Payable due June 2003 ("The Notes"). The Notes are not collateralized. The Company is required to make six equal annual sinking fund payments commencing at the end of the fifth year through the tenth year at par plus accrued interest. The Notes contain certain covenants which require, among other things, that the Company maintain (i) minimum tangible net worth, (ii) minimum ratio of total debt to adjusted net worth, and (iii) minimum fixed charge coverage ratio. In addition, the Notes provide certain restrictions on the payment of dividends. At December 31, 1995, the Company maintained a revolving line of credit agreement with two banks (the "Revolving Note"). The Revolving Note provides for borrowings up to $35.0 million and expires May, 1997. Interest is payable monthly, at rates not exceeding the bank's prime rate. The Company's weighted average borrowing rate at December 31, 1995, was 7.325%. The Revolving Note contains certain covenants which require, among other things, that the Company maintain (i) minimum consolidated tangible net worth, (ii) minimum consolidated net worth, (iii) funded debt coverage ratio, and (iv) fixed charge coverage ratio. The Revolving Note is not collateralized and the Company pays a commitment fee of .25% on the unused portion. In addition, the Revolving Note provides certain restrictions on the payment of dividends. At December 31, 1995, working capital borrowings of $6.5 million were outstanding under the Revolving Note. At December 31, 1995, the Company had outstanding, against the Revolving Note, irrevocable letters of credit amounting to approximately $6.2 million. The letters of credit were issued to guarantee certain of the Company's insurance programs and bid bonds. At December 31, 1995 and 1994, long-term debt consisted of the following:
1995 1994 - ------------------------------------------------------------------------------------------------------------------- The Notes............................................................ $ 15,000,000 $ 15,000,000 Promisory note payable (Note 3), due in eight semi-annual installments of $237,500 plus interest at 7 1/2% through July 1999. The note is collateralized by certain acquired assets......................................... 1,662,500 - Other various notes payable.......................................... 559,064 336,623 ----------------------------------- 17,221,564 15,336,623 Less current maturities ........................................... (626,566) (311,483) ----------------------------------- $ 16,594,998 $ 15,025,140 ===================================
The aggregate maturities of long-term debt during the five years subsequent to December 31, 1995, are approximately $0.6 million, $0.6 million, $3.1 million, $3.0 million, and $2.5 million, respectively. 41 6. Income Taxes The components of the income tax provision (benefit) for the three years ended December 31, 1995, were as follows:
1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------- Federal: Current................................................ $ 1,957,000 $ (10,000) $ 1,528,000 Deferred............................................... (780,243) (1,499,487) 419,965 State: Current................................................ 489,000 382,000 209,000 Deferred............................................... (114,757) (220,513) 61,759 Foreign-current................................................ 13,000 45,000 - -------------------------------------------------------- $ 1,564,000 $ (1,303,000) $ 2,218,724 ========================================================
The difference between the effective rate reflected in the income tax provision (benefit) and the statutory federal tax rate for the three years ended December 31, 1995, is analyzed as follows:
1995 1994 1993 - ---------------------------------------------------------------------------------------------------------------------------- Amount computed using the statutory rate..................... $ 1,232,540 34.0% $ (3,433,434) (34.0)% $ 1,746,873 34.0% Losses of tax entities for which no tax benefit is recognized................................ 177,000 4.9 181,217 1.8 326,000 6.3 Minority interest..................................... 324,000 8.9 88,504 .9 115,000 2.2 State taxes, net of federal tax benefit.................................. 323,000 8.9 31,607 .3 200,000 3.9 Write down of certain equity investments and other intangibles........................ - - 880,435 8.7 - - Nondeductible expenses................................ 255,713 7.1 739,450 7.3 198,602 3.9 Foreign tax credit.................................... (505,743) (14.0) - - - - Other................................................. (242,510) (6.7) 209,221 2.1 (367,751) (7.1) -------------------------------------------------------------------- $ 1,564,000 43.1% $ (1,303,000) (12.9)% $ 2,218,724 43.2% ====================================================================
The components of the net deferred income tax asset (liability) at December 31, 1995 and 1994, consisted of the following:
1995 1994 - ------------------------------------------------------------------------------------------------------------------------ Current deferred tax assets (liabilities): Difference in recognition of insurance claims....................... $ 2,739,000 $ 2,179,000 Difference in recognition of certain financial statement accruals................................................ 1,320,070 757,581 Difference in recognition of allowance for doubtful accounts................................................. 757,000 644,000 Cash to accrual adjustments by subsidiaries at acquisition date............................................... 106,000 - ------------------------------------- Total net current deferred tax asset................................ 4,922,070 3,580,581 ------------------------------------- Noncurrent deferred tax liabilities: Property, plant and equipment basis and depreciation differences .............................................. (4,374,000) (3,853,000) Differences in recognition of certain intangible assets and other............................................ (721,608) (796,227) ------------------------------------- Total noncurrent deferred tax liabilities .............................. (5,095,608) (4,649,227) ------------------------------------- Net deferred tax liability............................................... $ (173,538) $ (1,068,646) =====================================
41 42 7. Minority Interest In May, 1995, the Company acquired 20% of the minority interest of its specialty welding subsidiary, ST Piping, Inc. (Note 3). During 1994, the Company paid $800,000 to purchase all of the outstanding redeemable preferred stock of SECO held by a former shareholder of that company. Prior to July, 1994, annual cumulative dividends of $10 per share were paid monthly and included in minority interest in the statement of operations. 8. Related Party Transaction/Treasury Stock In August, 1995, Richard W. Krajicek retired as Chairman of the Company. Mr. Krajicek has been subsequently retained by the Company under a five year consulting agreement. Mr. Krajicek, along with certain family members, owns 815,491 common shares of Company common stock. The Company has agreed to pay Mr. Krajicek an amount equal to the shortfall, if any, between the average sales price and $8.00 per share for up to 203,873 shares sold per year commencing on November 9, 1995, and ending on November 9, 1999. The average sales price, related to stock sold, shall be computed in arrears at the end of each twelve month period and shall be based on the highest priced 203,873 shares (or portion thereof) sold during such period. On October 1, 1995, the Company purchased 203,873 shares of Serv-Tech stock from Mr. Krajicek at the then fair market price of $8.00 per share or a total of $1.6 million, leaving 611,618 shares subject to the agreement noted above. 9. Special Charge During the third quarter of 1994, management performed a comprehensive review of the Company's operating investment activities and structure. This review was performed in light of management's new strategy for growth which focuses on operations which management believed would generate acceptable returns on investments and elimination of activities which did not meet this criteria. As a result of this review, the Company recorded a special charge of $12.2 million which consisted of noncash write-offs including goodwill and other intangibles ($3.5 million), equipment ($1.6 million), and investment in affiliates ($1.2 million). Additionally, the special charge included certain project related reserves ($2.2 million) and accruals for employee related and other costs ($3.7 million). The noncash write-offs for goodwill and investments in affiliates were primarily a result of management's decision to de-emphasize certain domestic and foreign operations. 10. Long-Term Incentive Compensation, Stock Options and Stock Award Plans On May 18, 1995, the shareholders approved the 1995 Long-Term Incentive Plan ("Plan") administered solely by the Long-Term Incentive Plan Committee of the Board of Directors ("Committee"). The Plan permits the issuance of stock options, stock appreciation rights ("SARs"), restricted stock awards, performance grants and any other awards deemed consistent with the plan to key employees of the Company and certain other key individuals, who perform services for the Company. The Plan reserves 300,000 shares of Company common stock for distribution. Under the terms of the Plan, options granted may be either nonqualified or incentive stock options and the exercise price, determined by the Committee, may not be less than 50 percent of the fair market value of the underlying common shares at the time the option is granted; however, in the case of incentive stock options issued to employees of the Company, the option price may not be less than the fair market value of a share on the date of grant. The Committee may grant SARs either alone, or in conjunction with stock options, performance grants or other awards. Upon exercise of such rights, the optionee surrenders the exercisable portion of the option in exchange for payment of the difference between the aggregate option price and the aggregate fair market value on the date of surrender. Payment may be in the form of cash and/or common stock valued at its fair market value on the date of surrender. SARs utilize the same shares reserved for issuance of options, and the exercise of a SAR or option automatically cancels the related option or SAR. SARs become exercisable and expire on the same dates as the related options. There were no SARs issued during 1995. Restricted stock awards are issuances of a given number of shares of Company common stock that are restricted as to the sale and transfer of the shares; participants are entitled to all rights of a shareholder. Restricted stock awards vest 20 percent on the date of grant with the remaining shares vesting within four years. The cost of the awards are charged to expense over the vesting period. There were no restricted stock awards granted under the Plan during 1995. 42 43 Performance grants entitle a participant to receive specified awards, as determined by the Committee, if certain performance objectives are achieved during a specified period. There were no performance grants awarded under the plan during 1995. Prior to the Plan, the Company had two Incentive Stock Option Plans ("ISO Plans") that provided up to 920,000 shares of common stock to selected officers and key employees of the Company. The outstanding options are exercisable for up to ten years at an option price not less than market price on the date the option is granted. In connection with the establishment of the Plan, the ISO Plans were amended to prohibit the grant of additional common stock options, thereby canceling the remaining shares of Company stock available for future awards, except for any options which become available by way of forfeiture of any presently outstanding options. The Company maintains a Director Stock Option Plan that provides up to 50,000 shares of common stock for issuance to certain non-employee directors of the Company. The stock options are exercisable for up to ten years, at an option price not less than the market price on the date the option is granted. The Company has nonqualified stock options, not granted pursuant to a shareholder approved plan, with certain key officers of the Company. The Agreements provide for the issuance of 383,000 shares of Company common stock at exercise prices ranging from $6.25 - $7.75 and are exercisable for up to ten years. The following table sets forth pertinent information regarding stock option transactions for each of the three years in the period ended December 31, 1995:
Number Option Price of Shares Per Share Outstanding December 31, 1992 .................... 642,000 $ 2.500 - 13.000 Granted .......................................... 414,750 6.625 - 7.750 Cancelled ........................................ (284,000) 8.250 - 13.000 ---------- Outstanding December 31, 1993 .................... 772,750 2.500 - 13.000 Granted .......................................... 486,500 6.250 - 9.125 Exercised ........................................ (43,800) 2.500 - 6.625 Cancelled ........................................ (102,700) 6.625 - 13.375 ---------- Outstanding December 31, 1994 .................... 1,112,750 2.500 - 13.000 Granted .......................................... 256,400 5.625 - 8.750 Exercised ........................................ (40,000) 7.250 - 8.625 Cancelled ........................................ (263,000) 6.250 - 9.125 ---------- Outstanding December 31, 1995 .................... 1,066,150 2.500 - 9.125 ========== Exercisable as of December 31, 1995 .............. 435,100 ==========
The Company had 503,050, 280,250, and 7,250, shares of Common Stock available for grant under existing stock option plans at December 31, 1995, 1994, and 1993, respectively. 11. Preferred Stock The Company can issue up to 2,000,000 shares of preferred stock with a par value of $1.00 per share, none of which are issued or outstanding. The Company's Board of Directors is authorized to divide the preferred stock into series and to fix and determine the relative rights and preferences of each series. 43 44 12. COMMITMENTS AND CONTINGENCIES Contingencies On January 26, 1990, the Company filed a petition in the 125th Judicial District Court of Harris County, Texas, seeking injunctive and monetary relief against three defendants. The Company alleged various claims, including, the breach of a secrecy agreement, civil conspiracy, tortious interference with the Company's business relationships and misappropriation of confidential and/or trade secret information by all defendants. On June 11, 1992, the jury found in favor of the Company, awarding $17.5 million in actual damages and legal fees. In December 1992, the Company received a partial settlement from two of the defendants of approximately $2.7 million, net of $1.5 million in legal fees and other expenses. In April, 1994, the 14th Court of Appeals of the State of Texas reversed the judgment against the three defendants. The reversal by the Appeals Court does not affect the partial settlement received in December 1992. The Supreme Court of Texas has affirmed the Court of Appeals decision and has remanded the case to trial court. The Company is involved in various claims and disputes incidental to its business. The Company believes that the disposition of all such claims and disputes, individually or in the aggregate, should not have a material adverse effect upon the Company's financial position, results of operations or cash flows. Commitments The Company has entered into operating leases for various types of equipment and for its building facilities. Most leases contain purchase and renewal options at fair market and rental values. Rental expense was approximately $2.8 million, $2.7 million, and $2.0 million for the years ended December 31, 1995, 1994, and 1993, respectively. At December 31, 1995, minimum rental commitments under noncancelable operating leases are as follows:
Years Ending December 31, 1996............................... $2,448,000 1997............................... 1,920,000 1998............................... 1,232,000 1999............................... 1,016,000 2000............................... 1,828,000 Thereafter......................... 36,000
Insurance The Company maintains worker's compensation insurance for its employees and other coverages for normal business risks. In many cases, the Company is responsible for the payment of incurred claims up to specified individual and aggregate limits, over which a third party insurer is contractually liable for any additional payment of such claims. Accordingly, the Company bears certain economic risks related to these coverages. The Company records an accrual equal to the estimated costs expected to result from incurred claims plus an estimate of claims incurred but not reported based on the best available information. However, the nature of these claims is such that actual development of the claims may vary significantly from the estimated accruals. All changes in the accrual estimates are accounted for on a prospective basis and could have a significant impact on the Company's financial position or results of operations. 13. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying values of cash and cash equivalents, accounts receivable and payable, accrued liabilities and the Revolving Note are considered to approximate fair value due to the short-term nature of these instruments. The carrying value of long-term debt is estimated to approximate fair value based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. In the normal course of business, the Company issues letters of credits and other guarantees which are not reflected in the consolidated balance sheet. In the past no significant claims have been made against these financial instruments and management expects no material losses to occur. 44 45 14. SUPPLEMENTAL CASH FLOW INFORMATION Cash paid during the three years ended December 31, 1995, for interest and income taxes was as follows:
1995 1994 1993 --------------------------------------- Interest........................... $ 1,960,000 $ 1,432,000 $ 950,000 Income taxes....................... 1,681,000 2,738,000 3,279,000
The following non-cash transactions have been excluded from the consolidated statement of cash flows for the three years ended December 31, 1995:
1995 1994 1993 --------------------------------------- Translation adjustments of equity investments.............. $ 66,943 $ 111,531 $ (318,021) Common stock issued in connection with certain acquisitions....... 1,643,750 5,087,500 -- Treasury stock transferred to the Company 401(k) plan............. 84,127 -- -- Acquisition of property, plant, and equipment in settlement of certain receivables............. -- 536,000 -- Additional compensation earned under the terms of an earnout agreement....................... 410,000 -- --
Components of cash used for acquisitions as reflected in the Consolidated Statement of Cash Flows for the three years in the period ended December 31, 1995, are summarized as follows:
1995 1994 1993 --------------------------------------- Fair value of current assets, net of cash acquired............ $ 1,851,859 $ 11,592,501 $ -- Fair value of noncurrent assets, excluding intangibles........... 2,169,797 5,511,264 -- Intangible assets*................. 760,035 3,047,207 -- Liabilities assumed or incurred.... (3,915,634) (17,715,344) -- ----------- ------------ --------- $ 866,057 $ 2,435,628 $ -- =========== ============ =========
* Net of approximately $1.6 million in 1995 and $5.1 million in 1994 non-cash consideration. 15. DEFINED CONTRIBUTION PLANS The Company maintains a defined contribution plan 401(k) for its permanent employees. Under the plan, eligible employees may contribute amounts through payroll deductions for investment in various funds established by the plan. The Company matches 50% of a participant's voluntary contribution up to a maximum of 6% of a participant's compensation in Company common stock. The costs of the plan were $0.8 million, $0.6 million, and $0.6 million in 1995, 1994, and 1993, respectively. 45 46 16. BUSINESS SEGMENT AND MAJOR CUSTOMERS The Company's operations include three primary business segments: (i) Specialty Services, (ii) Serv-Tech EPC ("EPC") and (iii) Environmental and Performance Chemicals ("Environmental"). Specialty Services provides specialized turnaround maintenance, welding, boiler repair and refractory services primarily to the refining, petrochemical, power, paper and cement industries. The EPC business provides a full range of engineering, construction, project management services and installation of electrical and instrumentation systems primarily for the refining, petrochemical and food processing industries. Environmental includes tank cleaning, decontamination services and the Company's specialty chemical company, Chemisolv. The operations and assets of Chemisolv have been included from the date of acquisition, November 1994 (Note 3). Operating profit (loss) is defined as total revenue less direct and operating expenses. Identifiable assets are those assets directly identifiable with operations in each segment. Corporate and Other consist primarily of cash and cash equivalents, certain receivables and the corporate facilities. During 1995 the Company redefined its business segments; accordingly, segment information for 1994 and 1993 has been reclassified to conform to the 1995 presentation. Summarized financial information by business segment for each of the three years ended December 31, 1995, is set forth below.
Environmental & Specialty Performance Corporate & Services EPC Chemicals Other Consolidated - ---------------------------------------------------------------------------------------------------------- (in thousands) 1995 Revenues for customers........... $132,658 $131,753 $15,155 $ -- $279,566 Intersegment revenues............ 1,755 2,620 1,284 (5,659)(1) -- ------------------------------------------------------------------ Total revenues................... 134,413 134,373 16,439 (5,659) 279,566 ------------------------------------------------------------------ Operating profit (loss).......... 4,292 8,201 230 (6,245) 6,478 Identifiable assets.............. 42,131 48,027 11,039 11,048 112,245 Depreciation and amortization.... 3,238 1,578 1,528 460 6,804 Capital expenditures............. 1,524 1,174 1,588 1,894 6,180 1994 Revenues for customers........... $113,541 $ 58,800 $ 8,624 $ 122 $181,087 Intersegment revenues............ -- 3,895 -- (3,895)(1) -- ------------------------------------------------------------------ Total revenues................... 113,541 62,695 8,624 (3,773) 181,087 ------------------------------------------------------------------ Special Charge(2)................ 10,599 -- -- 1,626 12,225 Operating profit (loss).......... (4,935) 4,020 (219) (7,548) (8,682) Identifiable assets.............. 47,786 31,251 5,964 13,314 98,315 Depreciation and amortization.... 3,060 1,249 680 720 5,709 Capital expenditures............. 3,311 1,007 648 228 5,194 1993 Revenues for customers........... $ 91,335 $ 62,204 $ 8,482 $ -- $ 162,021 Intersegment revenues............ -- 561 -- (561)(1) -- ------------------------------------------------------------------ Total revenues................... 91,335 62,765 8,482 (561) 162,021 ------------------------------------------------------------------ Operating profit (loss).......... 4,194 8,564 (436) (5,803) 6,519 Identifiable assets.............. 39,041 33,348 3,831 17,075 93,295 Depreciation and amortization.... 2,272 956 447 519 4,194 Capital expenditures............. 2,308 985 1,360 211 4,864
(1) Elimination of intersegment revenue (2) See Note 9 for additional information regarding the special charge. Significant sales to individual customers shown as a percentage of total revenues were 12% in 1995, 27% in 1994 and 20%, 12% and 10% in 1993. 46 47 17. UNAUDITED SELECTED QUARTERLY FINANCIAL DATA
In thousands, except per share data Quarter First Second Third Fourth ------------------------------------------- 1995 Revenues.................... $71,550 $65,748 $ 52,080 $90,188 Gross profit................ 12,549 11,316 8,960 15,699 Net income (loss)........... 1,517 666 (1,314) 1,192 Earnings (loss) per share... 0.23 0.10 (0.19) 0.18 Quarter First Second Third Fourth ------------------------------------------- 1994 Revenues.................... $57,053 $32,210 $ 41,432 $50,392 Gross profit................ 8,528 7,610 6,920 9,050 Net income (loss)........... 1,509 501 (10,961)(1) 156 Earnings (loss) per share... .25 .08 (1.72) .02
(1) Includes a $12.2 million special charge. See Note 9 for additional information. 47 48 CORPORATE INFORMATION ANNUAL MEETING The Annual Meeting of Shareholders of Serv-Tech, Inc. will be held at 10:00 a.m., on May 23, 1996, at the Texas Commerce Center Auditorium, 601 Travis, Houston, Texas. FINANCIAL INFORMATION Additional financial information such as Form 10-K, Form 10-Q, and proxy statements may be obtained at no charge upon written request to: Serv-Tech, Inc. 5200 Cedar Crest Boulevard Houston, Texas 77087 (713) 644-9974 MAJOR OFFICE LOCATIONS SERV-TECH, INC. - CORPORATE OFFICE 5200 Cedar Crest Blvd. Houston, Texas 77087 (713) 644-9974, 800-666-6252 SERV-TECH SPECIALTY SERVICES SERV-TECH SERVICES 330 Walcot Westlake, Louisiana 70669 (318) 882-1313 ST PIPING, INC. 19701 S. Vermont Torrance, California 90502 (310) 325-1600 HARTNEY INDUSTRIAL SERVICES CORP. 6845 Dixie Drive Houston, Texas 77087 (713) 643-8434 DELTA INDUSTRIAL SERVICES, INC. 851 Highway 79 South Winfield, Missouri 63389 (314) 665-5310 HILL TECHNICAL SERVICES, INC. 5200-A Cedar Crest Boulevard Houston, Texas 77087 (713) 640-1155 STOCK TRADING NASDAQ-National Market Symbol: STEC REGISTRAR AND TRANSFER AGENT Society National Bank c/o KeyCorp Shareholder Services, Inc. 700 Louisiana, Suite 2620 Houston, Texas 77002-2729 INVESTOR RELATIONS COUNSEL Cameron Associates, Inc. 424 Madison Avenue, 5th floor New York, New York 10017-1106 (212) 644-9560 SERV-TECH EPC SERV-TECH EPC, INC., SERV-TECH ENGINEERS, INC. AND SECO INDUSTRIES, INC. Three Lakeway Center 3838 N. Causeway Blvd., Suite 2200 Metairie, Louisiana 70002 (504) 834-8100 F.C. SCHAFFER & ASSOCIATES, INC. 1020 Florida Boulevard Baton Rouge, Louisiana 70802 (504) 343-9262 SERV-TECH ENVIRONMENTAL & PERFORMANCE CHEMICALS PERFORMANCE CHEMICALS CHEMISOLV, INC. 5200 Cedar Crest Boulevard Houston, Texas 77087 (713) 644-3797 CHEMISOLV, LTD. Thornley House Carrington Business Park Urmston, Manchester, M314SG 011-441-61-775-4488 SERV-TECH ENVIRONMENTAL 5200 Cedar Crest Boulevard Houston, Texas 77087 (713) 644-9974 TERMINAL TECHNOLOGIES, INC. 3620 Kennesaw North Industrial Parkway, Suite G Kennesaw, Georgia 30144 (770) 499-1267 49 [SERV-TECH LOGO] Annual Report Design by Alicia W. Noack, Houston, Texas Printed in the USA. Copy Rights 1996 Serv-Tech, Inc. All rights reserved. [RECYCLED PAPER LOGO] As part of our commitment to the environment, this annual report was printed on recycled paper. EX-21.1 13 SUBSIDIARIES OF SERV-TECH, INC. 1 EXHIBIT 21.1 SUBSIDIARIES OF SERV-TECH, INC. State or Other Jurisdiction Name of Subsidiary Incorporation or Organization - ----------------------------- ----------------------------- SECO Industries, Inc. Louisiana Serv-Tech EPC, Inc. Nevada ST Piping, Inc. Texas Terminal Technologies, Inc. Texas Serv-Tech Engineers, Inc. Louisiana Delta Maintenance, Inc. Louisiana Chemisolv Holdings, Inc. Delaware Hill Technical Services, Inc. Texas EX-23.1 14 CONSENT OF KPMG PEAT MARWICK, LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS The Board of Directors Serv-Tech, Inc.: We consent to incorporation by reference in the registration statements (Nos. 33-64501, 33-62139, 33-58850 and 33-33378) and the currently effective amendments thereto on Forms S-8 of Serv-Tech, Inc. of our report dated February 16, 1996, relating to the consolidated balance sheet of Serv-Tech, Inc. and subsidiaries as of December 31, 1995, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for the year ended December 31, 1995, and all related schedules, which report appears in the December 31, 1995, annual report on Form 10-K of Serv-Tech, Inc. KPMG PEAT MARWICK LLP Houston, Texas March 29, 1996 EX-27 15 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF SERV-TECH, INC. AND SUBSIDIARIES AS OF DECEMBER 31, 1995 AND FOR THE YEAR THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS. YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 1,347,475 0 43,629,756 1,943,084 2,102,245 60,371,833 51,005,249 18,590,493 112,245,385 37,139,981 23,721,564 0 0 3,376,336 49,553,510 112,245,385 279,566,348 279,566,348 0 231,042,006 0 1,245,072 1,990,837 3,625,119 1,564,000 2,061,119 0 0 0 2,061,119 0.31 0.31
EX-99.1 16 REPORT OF INDEPENDENT ACCOUNTANTS 1 EXHIBIT 99.1 Report of Independent Accountants To the Board of Directors and Shareholders of Serv-Tech, Inc.: We have audited the consolidated balance sheet of Serv-Tech, Inc. and Subsidiaries as of December 31, 1994, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the two years in the period ended December 31, 1994. We have also audited the financial statement schedule for the years ended December 31, 1994 and 1993 as listed in the index on page 14 of this Form 10-K. These financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Serv-Tech, Inc. and Subsidiaries as of December 31, 1994, and the consolidated results of their operations and cash flows for each of the two years in the period ended December 31, 1994 in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein. In 1993 the Company adopted the method of accounting for income taxes prescribed by Statement of Financial Accounting Standards No. 109. COOPERS & LYBRAND L.L.P. Houston, Texas February 17, 1995 -----END PRIVACY-ENHANCED MESSAGE-----