-----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, Wlyba6+FvUqXzG4ARwTuu2HbtKRBXujUwVXfjwXtEP3eYD2NNMbCTGx++bEiiIgm 0rVCWxcylbUcYHkCCTNcdQ== 0000950129-97-001386.txt : 19970401 0000950129-97-001386.hdr.sgml : 19970401 ACCESSION NUMBER: 0000950129-97-001386 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 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: 97570450 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. - 12/31/96 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 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 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. [X] As of March 14, 1997, the registrant had 6,861,999 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 $36.0 million. DOCUMENTS INCORPORATED BY REFERENCE None. ================================================================================ 2 SERV-TECH, INC. AND SUBSIDIARIES TABLE OF CONTENTS
PAGE ---- PART I Item 1. Business.................................................... 1 Item 2. Properties.................................................. 9 Item 3. Legal Proceedings........................................... 9 Item 4. Submission of Matters to a Vote of Security Holders......... 9 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters......................................... 10 Item 6. Selected Financial Data..................................... 11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 12 Item 8. Financial Statements and Supplementary Data................. 18 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................... 41 PART III Item 10. Directors and Executive Officers of the Registrant.......... 41 Item 11. Executive Compensation...................................... 43 Item 12. Security Ownership of Certain Beneficial Owners and Management.................................................. 48 Item 13. Certain Relationships and Related Transactions.............. 49 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K......................................................... 51
i 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) SECO Industries, Inc. ("SECO"); 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, and power industries. SECO provides specialty electrical and instrumentation contracting services to the processing, petrochemical, power, pulp and paper, and food processing industries. The Environmental business formulates specialty chemicals to meet specific customer needs primarily in the hydrocarbon processing, pulp and paper, and wastewater industries. Also included in Environmental is specialty decontamination services provided primarily to the hydrocarbon processing industry through the Company's subsidiary ST Environmental, and refined-product and heavy oil tank cleaning services provided through Terminal Technologies, Inc., a subsidiary of the Company. 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 July 1996, the Company announced its intent to discontinue its engineering, procurement and construction ("EPC") operations. The EPC operations provided a full range of engineering, procurement and construction services primarily to the refining, petrochemical and food processing industries. As of July 1996, the discontinued EPC operations consisted of: (i) several domestic EPC projects (which have now been completed); (ii) F.C. Schaffer and Associates, Inc. ("Schaffer") which includes the Finchaa Sugar Factory project, expected to be completed during the latter part of 1997 (see Discontinued EPC Operations section below), and a consulting engineering practice; (iii) a construction company in Orange, Texas (which has been closed and the majority of its remaining assets sold); and (iv) engineering operations in Lake Charles and New Orleans, Louisiana (which have been sold). See "Discontinued EPC Operations" section below for additional information regarding these operations. With the exception of the Finchaa project, all EPC operations have ceased. MERGER On March 5, 1997, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") by and among Philip Environmental Inc., an Ontario, Canada corporation ("Philip"), Taro Aggregates Ltd., an Ontario, Canada corporation and wholly-owned subsidiary of Philip ("Taro"), ST Acquisition Corporation, a Texas corporation and wholly-owned subsidiary of Taro ("Sub"), and the Company. Pursuant to the Merger Agreement, Sub will be merged with and into the Company, and the Company will become a wholly-owned subsidiary of Taro and an indirect, wholly-owned subsidiary of Philip. Under the terms of the Merger Agreement, each share of the Company's Common Stock, par value $.50 per share ("Company Common Stock") will be exchanged for 0.403 share of Philip common stock, no 1 4 par value ("Philip Common Stock") (except for shares held by persons who perfect and exercise dissenters' rights under Texas law), provided that Philip will pay cash in lieu of any fractional shares of Philip Common Stock to which holders of Company Common Stock would otherwise be entitled. Based upon the closing price of Philip Common Stock on March 5, 1997, each share of Company Common Stock is valued at $6.60 per share. In aggregate, the transaction is valued at approximately $72.0 million, including the assumption of approximately $21.0 million of Company indebtedness. The transaction is subject to regulatory and shareholder approvals, and is expected to close by June 30, 1997. Philip is a fully integrated, resource recovery and industrial services company providing metals processing and mill services, solid and liquid by-products recovery and industrial and remediation services to all major industry sectors. Philip Common Stock trades on the New York Stock Exchange. SPECIALTY SERVICES Specialty Service's principal market has been the petroleum refining industry in the United States. Its customers include the majority of the ten largest integrated oil companies and many of the large independent 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. Consequently, 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, tower and vessel maintenance services increased, the Company developed the planning capabilities, operational 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. In addition, 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 are typically 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, 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, and 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." 2 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 extreme 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. SECO In September 1991, Serv-Tech acquired SECO, a specialty contracting company engaged primarily in electrical and instrumentation projects. SECO's clients are primarily petroleum, petrochemical, paper, food processing, mining, marine 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. 3 6 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 hook-up. SECO begins a project by identifying a project management team, which reviews the project's scope and specifications, and develops a construction schedule. Project personnel, including engineers, supervisors, foremen and craftsmen, are assigned to the project. Weekly schedules are developed through the joint efforts of the project management team and crew foremen, and progress against the schedules is closely monitored. In addition, inspections of each task are conducted to assure compliance with customer specifications and industry codes. SECO's activities are labor intensive, and the ability to assemble the right number and mix of skilled craftsmen is critical to project success. Individual projects may require staffing levels of over 150 craftsmen. During 1994, SECO diversified into the areas of clean-fuels projects (Mobil Oil Clean Fuels project in Torrance, California), food processing (carrots in California; rice and salt in Louisiana) and riverboat casinos. In 1995 and 1996, SECO executed two large oil production projects, the Shell Mars and Ram Powell deep-water production platforms. SECO is currently involved in the Shell Ursa deep-water production platform project. The operations of SECO are expected to continue to include deep-water production platform projects as well as continued diversification into food processing, petrochemical and other industries. 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 percent 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 that 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 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 that 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 4 7 leaves the product distribution terminal as a dried solid. An 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-percent interest in Chemisolv and acquired the remaining 50-percent 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, 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 percent. 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." DISCONTINUED EPC OPERATIONS 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 provided 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 was able to perform such jobs, beginning with field inspection activity, through total project management, which included mechanical, civil, structural, electrical, process and instrumentation engineering. 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 project was completed in 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 a $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. At December 31, 1996, the Finchaa project was approximately 80 percent complete. Engineering, procurement and construction projects are typically of longer duration with more predictable manpower levels than the Company's specialty services work. Gross profit margins on construction contracts, however, are lower than specialty services due to the better defined design and scope of work and less critical nature of completion schedules compared to specialty services projects. 5 8 In July 1996, the Company announced its intent to discontinue its engineering, procurement and construction ("EPC") operations. At July 1996, the discontinued EPC operations consisted of: (i) several domestic EPC projects (which have now been completed); (ii) Schaffer, which includes the Finchaa Sugar Factory project as well as a consulting engineering practice; (iii) a construction company in Orange, Texas (which has been closed and the majority of its remaining assets sold); and (iv) engineering operations in Lake Charles and New Orleans, Louisiana (which have been sold). With the exception of the Finchaa project, which is expected to be completed during late-1997, all EPC operations have ceased. BUSINESS SEGMENT FINANCIAL INFORMATION For certain financial information relating to each of the Company's operating segments, see Note 15 of Notes to Consolidated Financial Statements. CUSTOMERS AND MARKETING The Company derives most of its revenues from continuing operations 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. 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. Chevron USA, Inc. accounted for 15 percent of the Company's revenues from continuing operations in 1996 and 14 percent in 1995, and Mobil Oil Corporation accounted for 29 percent of the Company's revenues from continuing operations in 1994. The following table sets forth the Company's ten largest customers, based upon revenues from continuing operations, for each of 1996, 1995 and 1994:
1996 1995 1994 ---- ---- ---- Chevron USA, Inc. Chevron USA, Inc. Mobil Oil Corporation McDermott, Inc. Mobil Oil Corporation Chevron USA, Inc. Mobil Oil Corporation Atlas Processing Company Texaco, Inc. Conoco, Inc. E. I. DuPont Conoco, Inc. Phillips Petroleum Company Unocal, Inc. Exxon USA, Inc. Fluor Daniel, Inc. Basis Petroleum, Inc. Atlantic-Richfield Company Basis Petroleum, Inc. Vista Chemical Uno-Ven, Inc. Shell Oil Products McDermott, Inc. McDermott, Inc. B. P. Oil Company Coastal Refining B. P. Oil Company Nooter Construction Texaco, Inc. Coastal Refining
The Company maintains close contact with its customers and reviews available industry information 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 primarily based on either detailed time and material billing schedules or are fixed-price based. The Company has encouraged its customers to seek firm-bid turnkey proposals for its Specialty Services 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 6 9 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 1996, approximately 78 percent of the Company's revenues were derived from time and material contracts (versus fixed-price). A new pricing method, "performance pricing", developed by the Company's Specialty Services group, involves contractual arrangements with the customer based on performance, considering the benefits of the Company's expertise, including reducing refinery downtime, increased efficiency and improved safety. 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. 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. SECO services are marketed through offices in Metairie, Louisiana, and five 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 19 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 May 10, 2015. 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 Revenue backlog for SECO was $29.1 million, $17.1 million, and $18.0 million as of December 31, 1996, 1995 and 1994, respectively. Revenue backlog at December 31, 1996, includes $9.4 million related to the Shell URSA project and $6.0 million related to an additional deep-water drilling platform project, on which work is scheduled to start in late-1997 and early-1998, respectively. Backlog for the other operating groups is not meaningful due to the short lead time and duration of the projects. 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. COMPETITION The market for the Company's specialty and environmental services is highly fragmented and competitive. Many of the Company's competitors have greater financial and other resources than does 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. 7 10 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 wastewater facilities. The Company has designed and installed for several of its customers a closed-loop system to circulate and filter water used in its Fast Clean(R) system. This minimizes water usage and reduces the volume of wastewater 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 a comprehensive property and casualty risk management program. This program includes statutory worker's compensation insurance in accordance with various states requirements and general liability insurance with an occurrence annual aggregate coverage limit of approximately $100 million. The Company's general liability insurance, although comprehensive, 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. See Note 5 of Notes to Consolidated Financial Statements for further discussion of the Company's working capital facility. QUARTERLY FLUCTUATIONS The Company's revenues and operating income have historically been subject to significant, seasonal fluctuations with respect to its Specialty Services and Environmental groups. This is due primarily to the 8 11 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. EMPLOYEES At December 31, 1996, the Company had 969 full-time employees, of which 173 were salaried and 796 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 639 to 1,267 per week during 1996, averaging 1,059 employees on a weekly basis. The number of employees fluctuates significantly due to changing demand during the peak turnaround periods. 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. The Company's two union 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. SECO occupies 27,500 square feet of leased property located in Metairie, Louisiana. The Company leases an aggregate of approximately 200,000 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 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. 9 12 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company 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 --------------- ---- --- 1996: First Quarter............................................. 7 5 1/4 Second Quarter............................................ 8 5 1/4 Third Quarter............................................. 6 1/4 2 3/4 Fourth Quarter............................................ 3 3/8 2 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
At March 14, 1997, there were approximately 2,160 shareholders of the Company Common Stock. The average of the high and low bid quotations on such date was $5.25. 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. 10 13 ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31, ------------------------------------------------------------ 1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- IN THOUSANDS, EXCEPT PER SHARE DATA OPERATING DATA Revenues........................ $142,386 $194,831 $167,834 $156,277 $144,051 Depreciation and amortization... 6,005 6,161 5,380 3,914 3,241 Special charge.................. -- -- (12,225)(b) -- -- Operating income (loss) from continuing operations......... (5,860)(a) 2,342 (9,322)(b) 6,791 8,981 Net income (loss) from continuing operations......... (2,464)(a) (774) (9,313)(b) 3,073 5,472 Earnings (loss) per share from continuing operations......... (0.37)(a) (0.11) (1.52)(b) 0.52 0.94 Weighted average number of shares outstanding............ 6,714 6,720 6,117 5,889 5,789 BALANCE SHEET DATA Cash and short-term investments................... $ 4,533 $ 287 $ 1,302 $ 15,650 $ 4,813 Working capital................. 6,669 23,815 22,238 30,053 18,414 Property, plant and equipment, net........................... 26,275 30,023 29,908 25,287 24,152 Total assets.................... 81,144 107,795 94,118 92,368 86,273 Long-term debt, excluding current maturities............ 13,835 15,170 15,025 15,140 8,152 Stockholders' equity............ 37,232 52,930 50,564 53,954 51,352 Capital expenditures............ 2,027 5,444 4,830 4,666 5,687
- --------------- Note: (a) 1996 results include a $3,480 ($2,297, or $0.35 per share, on an after-tax basis) charge for the impairment of certain obsolete equipment, the write-off of an uncollectible receivable, and severance related costs. Excluding the effect of this charge, the operating loss from continuing operations was $2,380. Also, included in the 1996 results is the $5,842 ($3,856, or $0.57 per share, on an after-tax basis) net proceeds from the Stewart & Stevenson award, see Note 8 of Notes to Consolidated Financial Statements. Excluding the effect of these two items, the net loss from continuing operations was $4,023, or $0.60 per share. (b) Excluding the effect of the $12,225 ($10,020, or $1.64 per share, on an after-tax basis) special charge, operating income, net income and earnings per share from continuing operations for 1994 were $2,903, $707, and $0.12, respectively. See Note 9 of Notes to Consolidated Financial Statements for information related to the special charge. 11 14 ITEM 7. 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 included elsewhere in this Report. CONTINUING OPERATIONS The year ended December 31, 1996 net loss from continuing operations of $2.5 million, or $0.37 per share, includes a $2.3 million, or $0.35 per share charge for the impairment of certain equipment that will no longer be utilized in the future operations of the Company, the write-off of an uncollectible receivable and severance related costs. Additionally, included in the 1996 loss is $5.8 million ($3.9 million, or $0.57 per share, on an after-tax basis), of net proceeds from the Stewart & Stevenson settlement (see Note 8 of Notes to Consolidated Financial Statements). Excluding the effects of these two items, the Company generated a net loss from continuing operations of $4.0 million, or $0.60 per share, compared to a net loss of $0.8 million, or $0.11 per share in 1995, and a net loss of $9.3 million, or $1.52 per share, in 1994. The 1994 net loss includes a special charge of $10.0 million, or $1.64 per share. Excluding the effect of the special charge, the Company generated net earnings from continuing operations in 1994 of $0.7 million, or $0.12 per share. Consolidated revenues for 1996 decreased 26.9 percent to $142.4 million from $194.8 million in 1995, which was 16.1 percent higher than 1994 consolidated revenues of $167.8 million. The 1996 decrease in revenues was attributable primarily to lower levels of activity in the specialty turnaround maintenance business, Specialty Services, resulting from delays in scheduled maintenance at refinery facilities. The increase in 1995 was due to increased levels of activity in Specialty Services and the Company's Environmental and Performance Chemicals business, which provides tank cleaning, decontamination services and specialty chemicals. Consolidated gross profit margins as a percentage of revenues were 21.0 percent for 1996, increasing from 1995 margins of 18.8 percent. This increase in gross profit margins was due primarily to improved Specialty Services project mix, management and performance. The 1995 consolidated gross profit margin increased from 17.2 percent in 1994. This increase was mainly attributable to improved Specialty Services and Environmental and Performance Chemical profit margins over 1994. Consolidated selling, general and administrative expenses for 1996 of $35.8 million include a pre-tax charge of $3.5 million, discussed above. Excluding this charge, 1996 overhead expenses decreased $2.0 million, or 6.0 percent to $32.3 million in 1996 from $34.3 million in 1995. The decrease is lower than the 26.9 percent decrease in revenue for the same period due to the level of fixed overhead costs inherent in the business which do not decrease with lower revenue levels. Consolidated selling, general and administrative expenses in 1995 were $8.3 million, or 32.1 percent, higher than the 1994 level of $26.0 million, resulting primarily from the expansion of the Specialty Services and the Environmental and Performance Chemical businesses. The expansion of the Specialty Services business included the acquisition of Hartney Industrial Services ("Hartney") in June 1994. Interest expense increased in 1996 to $2.4 million compared to $1.9 million in 1995. See Note 5 of Notes to Consolidated Financial Statements for discussion of the restructuring of the Company's debt and the related increase in interest costs. In 1995 interest expense increased $0.5 million from $1.4 million in 1994. These increases are due to a higher level of working capital borrowings under the Company's revolving line of credit necessary to support the Company's level of business activity. Interest income increased in 1996 to $0.1 million following a decrease in 1995 from 1994 of $0.5 million. The 1996 increase was primarily due to interest income generated on the Stewart & Stevenson settlement proceeds. The 1995 decrease resulted primarily from lower available cash balances during the year. In 1996, other income of $5.9 million includes the net effect of the Stewart & Stevenson litigation settlement which the Company received during the year. After payment of attorney's fees and a payment to the Company's founder, Richard W. Krajicek, the Company received and recorded a $5.8 million net settlement, or $3.9 million on an after-tax basis (see Note 8 of Notes to Consolidated Financial Statements). 12 15 Minority interest includes the minority shareholders portion of ST Piping, Inc. ("ST Piping") 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 4 of Notes to Consolidated Financial Statements). The reduced level of minority ownership in ST Piping coupled with its reduced level of earnings in 1996 as compared to 1995, due to the lower levels of specialty turnaround maintenance activity during 1996, have caused the decrease in minority interest in 1996. Minority interest in 1995 increased over 1994 due to a higher level of ST Piping earnings in 1995. SPECIALTY SERVICES In 1996, Specialty Services revenues decreased $52.9 million, or 40.1 percent from 1995 revenues of $131.9 million. Specialty Services revenues increased $18.3 million, or 16.1 percent, in 1995 over 1994 revenues of $113.5 million. The 1996 revenue decrease was attributable to lower levels of business activity throughout the turnaround maintenance business, resulting from delays in scheduled maintenance at refinery facilities which were experiencing improved margins. The increase in 1995 was mainly due to the acquisition of Hartney in June 1994, which generated revenues of $21.6 million in 1995, coupled with increased refinery spending during the year. Operating income of $0.1 million in 1996 includes a $1.4 million pre-tax charge for the impairment of certain obsolete equipment and the write-off of an uncollectible receivable. Excluding the effect of this charge, operating income was $1.5 million compared to $4.7 million in the prior year. This decrease is consistent with the reduced levels of turnaround maintenance revenues as discussed above. Operating income in 1995 was $1.0 million lower than the 1994 level of $5.7 million, excluding a $10.6 million pre-tax special charge recorded during 1994. Higher levels of revenues and gross profit in 1995 were offset by increased selling, general and administrative expenses. The increased level of overhead expenses was attributable primarily to the acquisition of Hartney in June, 1994. SECO SECO revenues were $50.0 million in 1996, a decrease of $2.2 million from 1995 revenues of $52.2 million. In 1995, revenues increased 5.6 percent from 1994's level of $49.4 million. The 1996 decrease in revenue is attributed to decreased activity in onshore projects, due to a reduced number of refinery turnaround projects in 1996, as discussed above, offset partially by an increase in offshore drilling platform revenue. Revenues from deepwater drilling platform installations were $10.1 million, $7.1 million and $1.3 million for 1996, 1995 and 1994, respectively. In October 1996, SECO was awarded a contract for work on the deck module fabrication of the Shell URSA tension leg platform, currently scheduled for completion in July 1998. Revenues for 1996 included only $0.1 million attributable to the Shell URSA project. Operating income amounted to $3.5 million in 1996, a decrease of 4.8 percent from the 1995 level of $3.7 million. However, operating income as a percentage of revenue remained at 7.1 percent for both periods. Operating income increased by $0.3 million in 1995 from $3.4 million in 1994. This increase is consistent with the increased level of revenue experienced in 1995. Revenue backlog was $29.1 million, $17.1 million, and $18.0 million as of December 31, 1996, 1995 and 1994, respectively. Revenue backlog at December 31, 1996, includes $9.4 million related to the Shell URSA project and $6.0 million related to an additional deep-water drilling platform project, on which work is scheduled to start in late-1997 and early-1998, respectively. 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. ENVIRONMENTAL AND PERFORMANCE CHEMICALS Environmental and Performance Chemicals 1996 revenues remained constant with the 1995 level of $16.4 million. In 1995, revenue increased $7.8 million, or 90.6 percent from $8.6 million in 1994. Chemisolv 13 16 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 was attributable to increased activity in the Company's tank cleaning services. The $1.4 million operating loss in 1996, includes a $0.7 million pre-tax charge for the write-off of certain tank cleaning equipment that will not be utilized in the future operations of the Company. Excluding the effects of this charge, the operating loss of $0.7 million was down $1.0 million from 1995 operating income of $0.2 million. This reduction was due to increased research and development expenditures related to the development of the new paper-strengthening technology, Mastiff (SM). Operating income in 1995 increased $0.4 million from a $0.2 million loss in 1994. Higher gross profit margins recognized on decontamination services and increased activity in the tank cleaning business contributed to the improved operating results which were partially offset by Chemisolv operating losses. CORPORATE AND OTHER The operating loss of $8.0 million includes a $1.3 million pre-tax charge primarily for severance related costs and some consulting and professional fees. Excluding this charge, the 1996 operating loss of $6.7 million increased $0.4 million from 1995. This increase is mainly attributable to costs related to professional services necessary to study and identify strategic alternatives available to the Company. These expenses were incurred during the latter part of 1996. DISCONTINUED OPERATIONS In July 1996, the Company announced its intent to discontinue its engineering, procurement and construction ("EPC") operations. The EPC operations provided a full range of engineering consultation and project management services primarily to the refining, petrochemical and food processing industries. The discontinued EPC operations consisted of, (i) several domestic EPC projects (which have now been completed), (ii) F.C. Schaffer and Associates, which includes the Finchaa Sugar Factory project as well as a consulting engineering practice, (iii) a construction company in Orange, Texas (which has been closed and substantially all remaining assets have been sold) and (iv) engineering operations in Lake Charles and New Orleans, Louisiana (which have been sold). The 1996 net loss from discontinued operations of $10.3 million (net of income tax benefit of $4.4 million), or $1.54 per share, included a $9.7 million ($6.6 million, or $0.99 per share, on an after-tax basis) charge primarily for the write-down of the profitability on several domestic EPC projects and the Finchaa Sugar Factory project. The Finchaa project was written down to a $4.5 million loss ($2.9 million, or $0.43 per share, on an after-tax basis) during the fourth quarter. Excluding the effects of this charge, the net loss from discontinued operations was $3.7 million, or $0.55 per share for 1996 compared to net income of $2.8 million (net of income tax expense of $0.7 million), or $0.42 per share for 1995 and net income of $0.5 million (net of income tax expense of $0.1 million), or $0.08 per share for 1994. Additionally, in conjunction with the decision to discontinue the EPC operations, the Company recorded a $4.3 million (net of income tax benefit of $1.0 million), or $0.64 per share, estimated loss on disposal of the EPC operations for the estimated loss on sale and disposal of certain EPC divisions and the related write-off of goodwill. The estimated loss on disposal of the EPC operations includes a $0.3 million, or $0.05 per share, estimated loss during phase-out period. Net current assets from discontinued operations at December 31, 1996 consisted primarily of working capital associated with the Finchaa project and the consulting engineering practice of F.C. Schaffer and Associates. Net non-current assets from discontinued operations consisted primarily of property and equipment, net of a note payable of $0.7 million. Revenues generated by the discontinued EPC operations for 1996, 1995 and 1994 were $70.3 million, $84.7 million and $13.3 million, respectively. 1996 and 1995 revenues included $38.9 million and $32.8 million related to the Finchaa Sugar Factory Project, respectively. 14 17 FINCHAA SUGAR FACTORY PROJECT During the first quarter of 1995, F. C. Schaffer & Associates ("Schaffer"), a subsidiary of the Company, 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 warranty and training period. In conjunction with the effectiveness of the contract, the Company received an advance payment equal to 20.0 percent of the contract value. The Company has issued letters of credit to support performance and the 20.0 percent advance payment. At December 31, 1996, letters of credit of $6.3 million were outstanding to support the unrecovered portion of the advance payment and $8.3 million to support project performance guarantees, see Note 5 of Notes to Consolidated Financial Statements. Contractual payment amounts to Schaffer are supported by a revolving letter of credit issued by the Ethiopian government via the African Development Bank. As of December 31, 1996, the Finchaa project was approximately 80 percent complete. VOLATILITY AND SEASONALITY OF REVENUES 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 April, and September through November. The exact timing and duration of these periods will largely depend on the demand for the customers' products. In addition, most of the Specialty Services contracts are short in duration, and large individual contracts may significantly influence results in any specific quarter. OTHER The Company has a combination of contractual and discretionary bonus programs for key personnel throughout most of its operating groups. Payments under discretionary plans total, in the aggregate, approximately eight 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 contractual 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 20.0 percent of the fully-burdened operating earnings of the respective group. 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. LIQUIDITY AND CAPITAL RESOURCES Capital expenditures for 1996, excluding acquisitions, were $2.0 million, primarily for the purchase of equipment necessary to support the operations and expansion of the Company's operating groups. Capital expenditures for 1997, excluding acquisitions, are expected to be approximately $1.5 million, primarily for the purchase and manufacture of equipment to support the Company's business activities. At December 31, 1996, the Company's working capital totaled approximately $8.2 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 $26.5 million revolving line of credit with two banks (the "Revolver"), which expires in December 1997. The $26.5 million credit facility decreases to $23.5 million at April 30, 1997, and $19.5 million at June 30, 1997. At December 31, 1996, $5.6 million was outstanding under the revolving line of credit. Additionally, the Company has irrevocable letters of credit totaling $4.6 million outstanding to guarantee certain of the Company's insurance programs and bid bonds, leaving $16.3 million available for borrowing under the Revolver. However, subsequent to December 31, 1996, the Company has drawn approximately $12.9 million against the revolving line of credit in order to fund working capital requirements 15 18 consistent with increased first quarter 1997 revenue activity. These amounts are expected to be repaid during the second quarter of 1997 as receivables are collected from the seasonably high point of the Company's turnaround maintenance business. In addition, the Company has $15.0 million in Senior Notes Payable due June 2003 (See Note 5 of Notes to Consolidated Financial Statements). As a result of the fourth quarter 1996 net loss, the Company was in violation of various financial covenants. The Company received waivers from its lenders with respect to such covenant violations as well as waivers necessary to enter into the Merger Agreement with Philip Environmental Inc. (See "Subsequent Event" below). In 1995, Schaffer secured an $83 million contract to engineer, design, procure and construct a sugar factory and ethanol plant in Finchaa, Ethiopia. In conjunction with the effectiveness of the contract, the Company received an advance payment equal to 20.0 percent of the contract value. The project is financed by the African Development Bank. Contractual payment amounts to Schaffer are supported by a revolving letter of credit issued by the Ethiopian government via the African Development Bank. The Company has issued letters of credit to support performance and the 20.0 percent advance payment. At December 31, 1996, letters of credit of $6.3 million were outstanding to support the unrecovered portion of the advance payment and $8.3 million to support project performance guarantees. For the year ended December 31, 1996, net cash flows from continuing operations were $7.9 million resulting primarily from depreciation and amortization of $6.0 million, the $1.4 million charge, net decrease in accounts receivable of $9.4 million, offset by a decrease in accounts payable and accrued liabilities of $6.7 million. The decreases were due primarily to the lower level of business activity during 1996. Net cash provided by investing activities amounted to $0.2 million, resulting from $1.7 million in proceeds from sales of property, plant and equipment and $0.8 million in investing activities related to the discontinued EPC operations, partially offset by $2.0 million in capital expenditures. Cash flows used in financing activities totaled $2.1 million resulting from net principal payments of long-term debt and financing costs incurred related to the November 1996 debt restructuring (see Note 5 of Notes to Consolidated Financial Statements), and $0.7 million of debt payments related to the discontinued EPC operations. 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 may be supplemented with other external sources of funds to meet additional cash requirements, if necessary. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS During 1996, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 121 "Accounting for the Impairment of Long-Lived Assets to be Disposed Of". This statement requires that long-lived assets and certain identifiable intangible assets to be held and used by an entity be reviewed for impairment whenever events or changes indicate the carrying amount of an asset may not be recoverable. The adoption of SFAS No. 121 had no effect on the consolidated financial statements for the year ended December 31, 1996. 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 recognizes no compensation expense for stock options granted. Accordingly, the Company has adopted the disclosure-only provisions of SFAS No. 123, see Note 10 of Notes to Consolidated Financial Statements. 16 19 SUBSEQUENT EVENT On March 5, 1997, the Company entered into the Merger Agreement. Pursuant to the Merger Agreement, Sub will be merged with and into the Company, and the Company will become a wholly-owned subsidiary of Taro and an indirect, wholly-owned subsidiary of Philip. Under the terms of the Merger Agreement, each share of Company Common Stock will be exchanged for 0.403 share of Philip Common Stock (except for shares held by persons who perfect and exercise dissenters' rights under Texas law), provided that Philip will pay cash in lieu of any fractional shares of Philip Common Stock to which holders of Company Common Stock would otherwise be entitled. Based upon the closing price of Philip Common Stock on March 5, 1997, each share of Company Common Stock is valued at $6.60 per share. In aggregate, the transaction is valued at approximately $72.0 million, including the assumption of approximately $21.0 million of Company indebtedness. The transaction is subject to regulatory and shareholder approvals, and is expected to close by June 30, 1997. Philip is a fully integrated, resource recovery and industrial services company providing metals processing and mill services, solid and liquid by-products recovery and industrial and remediation services to all major industry sectors. Philip Common Stock trades on the New York Stock Exchange. 17 20 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS
PAGE ---- Consolidated Balance Sheets................................. 19 Consolidated Statements of Operations....................... 20 Consolidated Statements of Changes in Stockholders' Equity.................................................... 21 Consolidated Statements of Cash Flows....................... 22 Notes to Consolidated Financial Statements.................. 23 Independent Auditors' Report................................ 40
18 21 SERV-TECH, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS
DECEMBER 31, --------------------------- 1996 1995 ----------- ------------ Current Assets: Cash and cash equivalents................................. $ 4,532,622 $ 287,356 Accounts receivable, net.................................. 23,402,942 31,941,127 Costs and estimated earnings in excess of billings on uncompleted contracts.................................. 1,479,518 2,111,396 Prepaid expenses.......................................... 839,969 768,161 Inventory................................................. 2,026,359 2,102,245 Deferred income taxes..................................... 3,246,448 4,532,761 Net current assets from discontinued operations........... 378,326 16,276,603 ----------- ------------ Total current assets.............................. 35,906,184 58,019,649 Property, plant and equipment, net.......................... 26,275,026 30,022,511 Intangible assets, net...................................... 14,189,083 14,748,088 Other assets................................................ 2,230,681 1,884,763 Net non-current assets, discontinued operations............. 1,714,503 3,120,272 ----------- ------------ Total assets...................................... $80,315,477 $107,795,283 =========== ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable.......................................... $ 7,497,878 $ 13,295,347 Accrued liabilities....................................... 12,672,252 13,545,808 Revolving line of credit.................................. 5,559,169 6,500,000 Billings in excess of costs and estimated earnings on uncompleted contracts.................................. 390,897 359,415 Income taxes payable...................................... -- 295,865 Current maturities of long-term debt...................... 1,587,269 207,732 ----------- ------------ Total current liabilities......................... 27,707,465 34,204,167 Long-term debt, less current maturities..................... 13,835,000 15,169,998 Deferred income taxes....................................... 954,317 5,006,320 Minority interest and other................................. 586,905 484,952 Commitments and Contingencies (Note 11) 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 6,873,709 and 6,752,671, respectively........................................... 3,436,855 3,376,336 Additional paid-in capital................................ 43,346,804 43,489,763 Retained (deficit) earnings............................... (9,457,021) 7,675,586 Cumulative translation adjustments........................ (44,505) (64,982) Treasury stock, at cost, 13,774 and 193,358 shares, respectively........................................... (50,343) (1,546,857) ----------- ------------ Total stockholders' equity........................ 37,231,790 52,929,846 ----------- ------------ Total liabilities and stockholders' equity........ $80,315,477 $107,795,283 =========== ============
The accompanying notes are an integral part of the consolidated financial statements. 19 22 SERV-TECH, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, -------------------------------------------- 1996 1995 1994 ------------ ------------ ------------ Revenues......................................... $142,385,571 $194,830,759 $167,833,853 Costs of services................................ 112,462,899 158,139,025 138,925,050 ------------ ------------ ------------ Gross profit........................... 29,922,672 36,691,734 28,908,803 Selling, general and administrative expenses..... 35,782,864 34,349,971 26,005,980 Special charge................................... -- -- 12,225,182 ------------ ------------ ------------ Operating income (loss)........................ (5,860,192) 2,341,763 (9,322,359) ------------ ------------ ------------ Other income (expense): Interest expense............................... (2,357,795) (1,945,683) (1,438,213) Interest income................................ 148,869 34,832 511,357 Other, net..................................... 5,944,218 126,929 4,016 ------------ ------------ ------------ Total other income (expense)........... 3,735,292 (1,783,922) (922,840) ------------ ------------ ------------ Minority interest and other...................... (101,953) (415,425) (260,305) Equity in losses of affiliates................... -- (24,331) (226,700) ------------ ------------ ------------ Pre-tax income (loss) from continuing operations..................................... (2,226,853) 118,085 (10,732,204) Income tax expense (benefit)..................... 237,000 892,000 (1,419,000) ------------ ------------ ------------ Net loss from continuing operations.............. $ (2,463,853) $ (773,915) $ (9,313,204) Income (loss) from discontinued operations, net of income taxes................................ (10,342,208) 2,835,034 517,868 Estimated loss on disposal of discontinued operations, net of tax benefit................. (4,326,546) -- -- ------------ ------------ ------------ Net income (loss)...................... $(17,132,607) $ 2,061,119 $ (8,795,336) ============ ============ ============ Loss per share from continuing operations........ $ (0.37) $ (0.11) $ (1.52) Earnings (loss) per share from discontinued operations..................................... (2.18) 0.42 0.08 ------------ ------------ ------------ Net income (loss) per share............ $ (2.55) $ 0.31 $ (1.44) ============ ============ ============ Weighted average common shares outstanding....... 6,714,335 6,720,134 6,117,434 ============ ============ ============
The accompanying notes are an integral part of the consolidated financial statements. 20 23 SERV-TECH, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
COMMON STOCK ADDITIONAL RETAINED CUMULATIVE TREASURY STOCK ---------------------- PAID-IN EARNINGS TRANSLATION ---------------------- SHARES AMOUNT CAPITAL (DEFICIT) ADJUSTMENTS SHARES AMOUNT --------- ---------- ----------- ------------ ----------- -------- ----------- Balance, December 31, 1993........ 5,810,978 $2,905,490 $36,881,683 $ 14,409,803 $(243,456) -- $ -- Exercise of stock options....... 43,800 21,900 184,526 -- -- -- -- Issuance of common stock........ 650,000 325,000 4,762,500 -- -- -- -- Translation adjustments......... -- -- -- -- 111,531 -- -- Net loss........................ -- -- -- (8,795,336) -- -- -- --------- ---------- ----------- ------------ --------- -------- ----------- Balance, December 31, 1994........ 6,504,778 3,252,390 41,828,709 5,614,467 (131,925) -- -- Exercise of stock options....... 40,000 20,000 121,250 -- -- -- -- Issuance of common stock........ 207,893 103,946 1,539,804 -- -- -- -- Purchase of treasury stock...... -- -- -- -- -- (203,873) (1,630,984) Transfer of treasury stock to 401(k) plan................... -- -- -- -- -- 10,515 84,127 Translation adjustments......... -- -- -- -- 66,943 -- -- Net income...................... -- -- -- 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) Issuance of common stock........ 73,778 36,889 270,421 -- -- (10,322) (22,767) Restricted stock awards issued........................ 64,800 32,400 388,800 -- -- -- -- Restricted stock awards forfeited..................... (17,540) (8,770) (106,696) -- -- -- -- Transfer of treasury stock to 401(k) plan................... -- -- (695,484) -- -- 189,906 1,519,281 Translation adjustments......... -- -- -- -- 20,477 -- -- Net loss........................ -- -- -- (17,132,607) -- -- -- --------- ---------- ----------- ------------ --------- -------- ----------- Balance, December 31, 1996........ 6,873,709 $3,436,855 $43,346,804 $ (9,457,021) $ (44,505) (13,774) $ (50,343) ========= ========== =========== ============ ========= ======== =========== TOTAL ------------ Balance, December 31, 1993........ $ 53,953,520 Exercise of stock options....... 206,426 Issuance of common stock........ 5,087,500 Translation adjustments......... 111,531 Net loss........................ (8,795,336) ------------ Balance, December 31, 1994........ 50,563,641 Exercise of stock options....... 141,250 Issuance of common stock........ 1,643,750 Purchase of treasury stock...... (1,630,984) Transfer of treasury stock to 401(k) plan................... 84,127 Translation adjustments......... 66,943 Net income...................... 2,061,119 ------------ Balance, December 31, 1995........ 52,929,846 Issuance of common stock........ 284,543 Restricted stock awards issued........................ 421,200 Restricted stock awards forfeited..................... (115,466) Transfer of treasury stock to 401(k) plan................... 823,797 Translation adjustments......... 20,477 Net loss........................ (17,132,607) ------------ Balance, December 31, 1996........ $ 37,231,790 ============
The accompanying notes are an integral part of the consolidated financial statements. 21 24 SERV-TECH, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ------------------------------------------ 1996 1995 1994 ------------ ------------ ------------ Cash flows from operating activities: Net income (loss)...................................... $(17,132,607) $ 2,061,119 $ (8,795,336) Adjustments to reconcile net income (loss) to net cash provided by continuing operations: (Income) loss from discontinued operations........... 10,342,208 (2,835,034) (517,868) Loss on disposal of discontinued operations.......... 4,326,546 -- -- Depreciation and amortization........................ 6,004,942 6,160,642 5,380,282 Non-cash charges..................................... 1,387,207 -- 12,225,182 Minority interest and other.......................... 101,953 415,425 260,305 Equity in losses of affiliates....................... -- 24,331 226,700 Provision for losses on accounts and notes receivable........................................ (850,932) 1,218,579 (1,529,454) Deferred income taxes................................ 540,000 (883,000) (1,084,647) Other................................................ (39,399) 64,635 109,805 ------------ ------------ ------------ 4,679,918 6,226,697 6,274,969 Changes in assets and liabilities, net of effect from acquisitions of businesses: Accounts receivable.................................. 9,389,116 554,376 (747,233) Net change in billings, costs and estimated earnings on uncompleted contracts.......................... 663,360 315,250 1,259,598 Inventory............................................ 75,886 (374,509) (38,938) Prepaid expenses..................................... (71,808) 450,807 10,565 Other assets......................................... 179,511 (584,384) (40,703) Accounts payable..................................... (5,797,469) 4,116,650 (3,447,231) Accrued liabilities.................................. (873,556) (332,335) (974,535) Income taxes payable................................. (295,865) 295,865 206,181 ------------ ------------ ------------ Net cash provided by operating activities of continuing operations...................... 7,949,093 10,668,417 2,502,673 Net cash used by discontinued operations............. (1,770,443) (8,426,500) (2,488,568) ------------ ------------ ------------ Net cash provided by operating activities.... 6,178,650 2,241,917 14,105 ------------ ------------ ------------ Cash flows from investing activities: Capital expenditures................................. (2,027,194) (5,443,934) (4,829,855) Investing activities related to discontinued operations........................................ 776,265 (1,046,257) (911,432) Investments in and advances to affiliates............ -- (34,450) (671,387) Acquisitions of businesses, net of cash acquired..... -- (625,514) (2,316,050) Intangible assets.................................... (229,274) (243,303) (161,769) Proceeds from sale of property, plant and equipment......................................... 1,683,809 148,625 77,864 ------------ ------------ ------------ Net cash provided by (used in) investing activities................................. 203,606 (7,244,833) (8,812,629) ------------ ------------ ------------ Cash flows from financing activities: Proceeds from issuance of debt....................... 13,784,423 31,000,000 8,000,000 Principal payments of debt........................... (14,690,162) (24,994,490) (12,554,198) Financing costs...................................... (525,429) -- (300,000) 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) Purchase of preferred stock of a subsidiary.......... -- -- (800,000) Financing activities of discontinued operations...... (705,822) (527,243) -- ------------ ------------ ------------ Net cash provided by (used in) financing activities................................. (2,136,990) 3,988,533 (5,550,183) ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents... 4,245,266 (1,014,383) (14,348,707) Cash and cash equivalents at beginning of year......... 287,356 1,301,739 15,650,446 ------------ ------------ ------------ Cash and cash equivalents at end of year............... $ 4,532,622 $ 287,356 $ 1,301,739 ============ ============ ============
The accompanying notes are an integral part of the consolidated financial statements. 22 25 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. Research and Development Costs The Company expenses all research and development costs as they are named. These costs, primarily related to Chemisolv's new paper-strengthening technology Mastiff (SM), amounted to 0, $0.2 million and $0.9 million for 1994, 1995 and 1996, respectively. 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. 23 26 SERV-TECH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 20 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, 1996 and 1995, cash and cash equivalents include restricted balances of $0.3 million and $0.6 million, respectively. 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. 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. 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. 24 27 SERV-TECH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Concentration of Credit Risk The Company provides specialized turnaround maintenance, electrical and instrumentation, 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 3 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 these type of short-term 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 During 1996, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 121 "Accounting for the Impairment of Long-Lived Assets to be Disposed Of". This statement requires that long-lived assets and certain identifiable intangible assets to be held and used by an entity be reviewed for impairment whenever events or changes indicate the carrying amount of an asset may not be recoverable. The adoption of SFAS No. 121 had no effect on the consolidated financial statement for the year ended December 31, 1996. 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 recognizes no compensation expense for stock options granted. Accordingly, the Company has adopted the disclosure-only provisions of SFAS No. 123, see Note 10. Reclassifications Certain reclassifications have been made in order to conform to current year presentation with no effect on net income (loss). 25 28 SERV-TECH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 2. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS Additional information regarding certain balance sheet accounts at December 31, 1996 and 1995 is presented below:
1996 1995 ----------- ----------- Accounts receivable: Contracts............................................... $23,565,801 $32,741,509 Income taxes............................................ 220,879 -- Other................................................... 520,560 954,848 ----------- ----------- 24,307,240 33,696,357 Less allowance for doubtful accounts.................... (904,298) (1,755,230) ----------- ----------- $23,402,942 $31,941,127 =========== ===========
Bad debt expense was approximately $0.2 million, $1.1 million and $0.9 million for the years ended December 31, 1996, 1995, and 1994, respectively.
1996 1995 ----------- ----------- Property, plant and equipment, at cost: Land and improvements................................... $ 1,303,646 $ 1,303,646 Buildings and improvements.............................. 5,219,509 5,065,445 Operating machinery and equipment....................... 33,632,149 35,631,879 Furniture and office equipment.......................... 6,363,635 5,026,875 ----------- ----------- 46,518,939 47,027,845 Less accumulated depreciation........................... (20,387,080) (17,579,372) ----------- ----------- 26,131,859 29,448,473 Construction-in-progress................................ 143,167 574,038 ----------- ----------- $26,275,026 $30,022,511 =========== ===========
Depreciation expense was approximately $5.0 million, $5.2 million and $4.4 million for the years ended December 31, 1996, 1995, and 1994, respectively.
1996 1995 ----------- ----------- Intangible assets: Patents (net of accumulated amortization of $586,686 and $468,977 at December 31, 1996 and 1995, respectively)........................................ $ 1,268,314 $ 1,118,430 Covenants not to compete (net of accumulated amortization of $2,125,000 and $1,712,510 at December 31, 1996 and 1995, respectively)..................... 535,893 948,383 Excess of costs over net assets of businesses acquired (net of accumulated amortization of $1,444,498 and $977,001 at December 31, 1996 and 1995, respectively)........................................ 12,384,876 12,681,275 ----------- ----------- $14,189,083 $14,748,088 =========== ===========
Amortization expense was approximately $1.0 million, for each of the years ended December 31, 1996, 1995 and 1994. 26 29 SERV-TECH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1996 1995 ----------- ----------- Accrued liabilities: Wages and payroll taxes................................. $ 2,482,899 $ 2,493,105 Insurance............................................... 5,443,798 7,433,850 Other................................................... 4,745,555 3,618,853 ----------- ----------- $12,672,252 $13,545,808 =========== ===========
3. DISCONTINUED OPERATIONS In July 1996, the Company announced its intent to discontinue its engineering, procurement and construction ("EPC") operations. The EPC operations provided a full range of engineering consultation and project management services primarily to the refining, petrochemical and food processing industries. The discontinued EPC operations consisted of, (i) several domestic EPC projects (which have now been completed), (ii) F.C. Schaffer and Associates which includes the Finchaa Sugar Factory project as well as a consulting engineering practice, (iii) a construction company in Orange, Texas (which has been closed and substantially all remaining assets have been sold) and (iv) engineering operations in Lake Charles and New Orleans, Louisiana (which have been sold). The 1996 net loss from discontinued operations of $10.3 million (net of income tax benefit of $4.4 million), or $1.54 per share, included a $9.7 million ($6.6 million, or $0.99 per share, on an after-tax basis) charge primarily for the write-down of the profitability on several domestic EPC projects and the Finchaa Sugar Factory project. The Finchaa project was written down to a $4.5 million loss ($2.9 million, or $0.43 per share, on an after-tax basis) during the fourth quarter of 1996. Excluding the effects of this charge, the net loss from discontinued operations was $3.7 million, or $0.55 per share for 1996 compared to net income of $2.8 million (net of income tax expense of $0.7 million), or $0.42 per share for 1995 and net income of $0.5 million (net of income tax expense of $0.1 million), or $0.08 per share for 1994. Additionally, in conjunction with the decision to discontinue the EPC operations, the Company recorded a $4.3 million (net of income tax benefit of $1.0 million), or $0.64 per share, estimated loss on disposal of the EPC operations for the estimated loss on sale and disposal of certain EPC divisions and the related write-off of goodwill. The estimated loss on disposal of the EPC operations includes $0.3 million, or $0.05 per share, estimated losses during phase-out period. Net current assets from discontinued operations at December 31, 1996 consisted primarily of working capital associated with the Finchaa project and the consulting engineering practice of F.C. Schaffer and Associates. Net non-current assets from discontinued operations consisted primarily of property and equipment, net of a note payable of $0.7 million. Revenues generated by the discontinued EPC operations for 1996, 1995 and 1994 were $70.3 million, $84.7 million and $13.3 million, respectively. 1996 and 1995 revenues included $38.9 million and $32.8 million related to the Finchaa Sugar Factory Project, respectively. Finchaa Sugar Factory Project During the first quarter of 1995, F. C. Schaffer & Associates ("Schaffer"), a subsidiary of the Company, 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 warranty and training period. In conjunction with the effectiveness of the contract, the Company received an advance payment equal to 20% of the contract value. The Company has issued letters of credit to support performance and the 20% advance payment. At December 31, 1996, letters of credit of $6.3 million were outstanding to support the unrecovered portion of the advance payment and $8.3 million to support project 27 30 SERV-TECH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) performance guarantees, see Note 5. Contractual payment amounts to Schaffer are supported by a revolving letter of credit to be issued by the Ethiopian government via the African Development Bank. As of December 31, 1996, the Finchaa project was approximately 80% complete. 4. ACQUISITIONS ST Piping 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. Pro forma results were not material to the Company's financial position or results of operations. Hartney 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. Chemisolv 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, 1994, are as follows:
(IN THOUSANDS, EXCEPT PER SHARE DATA) ---------------------- Revenues.................................................... $186,600 Net income (loss)........................................... (8,869) Earnings (loss) per share................................... $ (1.37)
28 31 SERV-TECH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. SECO 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. 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. 5. LONG-TERM DEBT In November 1996, the Company reached agreement with its lenders regarding the restructuring of its debt facilities including the: (i) $15.0 million notes held by four insurance companies (the "Notes"), (ii) revolving line of credit with two banks (the "Revolver"), and (iii) the letters of credit supporting performance and advance payment amounts related to the Finchaa Sugar Factory project totaling $14.6 million at December 31, 1996. Effective November 12, 1996, under the new agreements, the Notes accrue interest at a rate of 10.50% with 0.25% incremental increases each quarter beginning January 1, 1998, through December 31, 1998 (rate caps at 11.50% through maturity). The Notes are collateralized by substantially all assets of the Company. Monthly principal payments of $208,333 are payable beginning July 1997, through the June 2003 maturity date. The Revolver permits borrowings up to $26.5 million until April 30, 1997, when it decreases to $23.5 million, and further reduces to $19.5 million at June 30, 1997, until its scheduled December 31, 1997 maturity. Interest is payable monthly at a rate equivalent to either eurodollar plus 4.09% (at December 31, 1996 the adjusted rate was 9.59%) or prime plus 1.0% (9.25% at December 31, 1996). Borrowings under the Revolver are collateralized by substantially all assets of the Company. The Company pays a commitment fee of 0.25 percent on the unused portion. At December 31, 1996, working capital borrowings of $5.6 million were outstanding under the Revolver. Additionally, the Company has irrevocable letters of credit totaling $4.6 million outstanding, to guarantee certain of the Company's insurance programs and bid bonds, leaving total availability under the Revolver, at $16.3 million. Borrowings under the Revolver are also subject to a borrowing base computation, which is limited primarily to 75% of eligible accounts receivable, as defined. The Notes, Revolver and Finchaa LOC agreements contain covenants, which require, among others, that the Company maintain: (i) minimum consolidated net worth, (ii) minimum cash flow (defined as earnings before interest, taxes, depreciation and amortization), and (iii) minimum fixed charge coverage. Additionally, the Company is limited in its debt-to-capitalization ratio as well as capital expenditures. Draws, if any, under the Finchaa LOC would represent loans, which would be secured by substantially all assets of the Company. As a result of the fourth quarter 1996 net loss, the Company was in violation of various financial covenants. The Company received waivers from its lenders with respect to such covenant violations as well as waivers necessary to enter into the definitive merger agreement with Philip Environmental Inc. (See Note 17). 29 32 SERV-TECH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) At December 31, 1996 and 1995, long-term debt consisted of the following:
1996 1995 ----------- ----------- The Notes................................................. $15,000,000 $15,000,000 Other various notes payable............................... 422,269 377,730 ----------- ----------- 15,422,269 15,377,730 Less current maturities................................... (1,587,269) (207,732) ----------- ----------- $13,835,000 $15,169,998 =========== ===========
The aggregate maturities of long-term debt during the five years subsequent to December 31, 1996, are approximately $1.6 million, $2.6 million, $2.5 million, $2.5 million, and $2.5 million, respectively. 6. INCOME TAXES The components of the income tax provision (benefit) from continuing operations for the three years ended December 31, 1996, were as follows:
1996 1995 1994 --------- ---------- ----------- Federal: Current..................................... $(303,000) $1,430,000 $ (212,000) Deferred.................................... 468,919 (753,240) (1,396,548) State: Current..................................... -- 345,000 350,000 Deferred.................................... 71,081 (129,760) (205,452) Foreign-current............................... -- -- 45,000 --------- ---------- ----------- $ 237,000 $ 892,000 $(1,419,000) ========= ========== ===========
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, 1996, is analyzed as follows:
1996 1995 1994 ----------------- ---------------- ------------------- Amount computed using the statutory rate................ $(757,130) (34.0)% $ 40,149 34.0% $(3,648,949) (34.0)% Losses of tax entities for which no tax benefit is recognized.................... 617,572 27.7 177,000 150.0 181,217 1.7 Minority interest............... 34,664 1.6 141,245 119.6 88,504 0.8 State taxes, net of federal tax benefit....................... 71,081 3.2 227,452 192.6 10,418 0.1 Write down of certain equity investments and other intangibles................... -- -- -- -- 880,435 8.2 Nondeductible expenses.......... 344,370 15.5 242,583 205.4 697,538 6.5 Other........................... (73,557) (3.3) 63,571 53.8 371,837 3.5 --------- ----- -------- ----- ----------- ----- $ 237,000 10.6% $892,000 755.4% $(1,419,000) (13.2)% ========= ===== ======== ===== =========== =====
30 33 SERV-TECH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The components of the net deferred income tax asset (liability) from continuing operations at December 31, 1996 and 1995, consisted of the following:
1996 1995 ----------- ----------- Current deferred tax assets: Difference in recognition of insurance claims........... $ 363,190 $ 2,630,595 Difference in recognition of financial statement accruals............................................. 2,465,453 1,168,794 Difference in recognition of allowance for doubtful accounts............................................. 417,805 733,372 ----------- ----------- Total net current deferred tax asset.................... 3,246,448 4,532,761 ----------- ----------- Noncurrent deferred tax liabilities: Property, plant and equipment basis and depreciation differences.......................................... (2,971,502) (4,287,000) Differences in recognition of certain intangible assets............................................... 453,211 (719,320) Net operating loss carryforward......................... 2,924,408 -- Alternative minimum tax credit carryforward............. 169,566 -- ----------- ----------- Total noncurrent deferred tax assets (liabilities)...... 575,683 (5,006,320) Less: Valuation allowance............................... (1,530,000) -- ----------- ----------- Net noncurrent deferred tax liabilities................. (954,317) (5,006,320) ----------- ----------- Net deferred tax asset (liability)........................ $ 2,292,131 $ (473,559) =========== ===========
The Company recorded a valuation allowance for deferred tax assets in 1996 of $1,530,000. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. In order to fully realize all deferred tax assets, the Company will need to generate future taxable income of approximately $8,600,000 prior to the expiration of the net operating loss carryforwards in 2011. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences, net of the existing valuation allowances at December 31, 1996. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. 7. RELATED PARTY TRANSACTION/TREASURY STOCK In August, 1995, Richard W. Krajicek retired as Chairman of the Company. Mr. Krajicek was subsequently retained by the Company under a five year consulting agreement. Mr. Krajicek, along with certain family members, owned 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 "Krajicek Agreement"). 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 Krajicek Agreement. The Company recently reached an agreement with Mr. Krajicek to defer, to no earlier than September 30, 1997 unless agreed by the Company, the cash obligation that may be due, if any, during the period 31 34 SERV-TECH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) beginning November 9, 1996. Additionally, the cash obligation that may be due, if any, during the period beginning November 9, 1997 has been deferred to no earlier than February 1, 1998. Based upon the current level of the Serv-Tech stock price ($5.375 per share as of March 14, 1997), Mr. Krajicek would be due approximately $0.5 million (associated with the period beginning November 9, 1996), if the stock were sold pursuant to the terms of the Krajicek Agreement. See Note 8 for additional related party information regarding Mr. Krajicek. 8. STEWART & STEVENSON SETTLEMENT On July 25, 1996, the Company received a $30.0 million verdict by a Houston, Texas jury on a retrial against Stewart & Stevenson Services, Inc. ("Stewart & Stevenson") for breach of an agreement that contained confidential information and trade secrets. Before the trial, the parties entered into a settlement agreement by which Stewart & Stevenson waived its right of appeal of the trial-court judgment in the case and guaranteed a minimum recovery of $250,000 in exchange for a $20.0 million cap on any recovery by the Company. In September 1996, after payment of attorney's fees and a payment to the Company's founder, Richard W. Krajicek, the Company received and recorded a $5.8 million net settlement ($3.9 million on an after-tax basis, or $0.57 per share). 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 that management believed would generate acceptable returns on investments and elimination of activities that did not meet this criteria. As a result of this review, the Company recorded a special charge of $12.2 million, which consisted of non-cash 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 non-cash 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 1996. 32 35 SERV-TECH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. During 1996, 64,800 restricted stock awards were granted under the Plan. Compensation expense associated with the vesting of stock awards was $0.1 million in 1996. 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 1996. 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. Subject to various conditions, 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, directors, employees and consultants of the Company. The Agreements provide for the issuance of 378,000 shares of Company common stock at exercise prices ranging from $3.00 -- $7.75 and are exercisable, subject to various conditions, for various terms of 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, 1996:
NUMBER OPTION PRICE OF SHARES PER SHARE --------- -------------- Outstanding December 31, 1993............................. 772,750 2.500 - 12.375 Granted................................................. 486,500 6.250 - 9.125 Exercised............................................... (43,800) 2.500 - 6.625 Cancelled............................................... (102,700) 6.625 - 12.375 --------- Outstanding December 31, 1994........................... 1,112,750 2.500 - 12.375 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 Granted................................................. 1,026,900 3.000 - 6.813 Cancelled............................................... (985,650) 3.000 - 12.375 --------- Outstanding December 31, 1996........................... 1,107,400 3.000 - 9.125 ========= Exercisable as of December 31, 1996....................... 372,500 3.000 - 9.125 =========
Included in the 1996 stock option cancellations and grants are 736,900 options which were exchanged, in October 1996, for options with a three-year vesting schedule and an option price of $3.00 per share (the then current market price of Serv-Tech stock). Of the 1,107,400 stock options outstanding at December 31, 1996, 33 36 SERV-TECH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 731,900 have an option price of $3.00 per share. The remaining 375,500 stock options outstanding have option prices ranging from $5.625 to $9.125 per share. The Company had 461,800, 503,050, and 280,250, shares of Common Stock available for grant under existing stock option plans at December 31, 1996, 1995, and 1994, respectively. As discussed in Note 1, the Company has elected to continue to measure compensation cost related stock options in accordance with APB 25. However, if compensation costs were measured using the fair value of the stock options on the date of grant, during 1995 and 1996, in accordance with SFAS No. 123, the Company's net earnings (loss) would be as follows:
1996 1995 ---------------------------- ------------------------- AS REPORTED PROFORMA AS REPORTED PROFORMA ------------ ------------ ----------- ---------- Net earnings (loss)................... $(17,132,607) $(17,296,362) $2,061,119 $1,986,346 Earnings (loss) per share............. $ (2.55) $ (2.58) $ 0.31 $ 0.30
The weighted average fair value of options granted in 1995 and 1996 were $3.74 and $2.11, respectively. The fair value of each option was determined using the Black-Scholes option valuation model with the following assumptions (i) risk free interest rate of 6.46 percent, (ii) expected volatility of 49.27 percent, and (iii) expected option life of 6 years and (iv) no annualized dividend yield. 11. COMMITMENTS AND CONTINGENCIES 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. At December 31, 1996, the Company had irrevocable letters of credit outstanding of approximately $19.8 million. The letters of credit were issued primarily to (i) guarantee certain of the Company's insurance programs amounting to $4.6 million, (ii) support Finchaa Sugar Factory Project procurement amounting to $0.6 million, (iii) $6.3 million to support the unrecovered portion of the Finchaa project advance payment and (iv) to support job performance guarantees on the Finchaa project amounting to $8.3 million. Operating Lease 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 $2.5 million, $2.3 million, and $2.2 million for the years ended December 31, 1996, 1995, and 1994, respectively. The following is a schedule of minimum rental commitments under noncancelable operating leases. Minimum lease payments have not been reduced by minimum sublease rentals of $2,258,000 due in the future.
YEARS ENDING DECEMBER 31, - ------------------------- 1997.................................................. $2,678,000 1998.................................................. 1,858,000 1999.................................................. 1,382,000 2000.................................................. 980,000 2001.................................................. 842,000 Thereafter............................................ 3,615,000
34 37 SERV-TECH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) INSURANCE The Company maintains a comprehensive property and casualty risk management program including 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. 12. 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. 13. SUPPLEMENTAL CASH FLOW INFORMATION Cash paid during the three years ended December 31, 1996, for interest and income taxes was as follows:
1996 1995 1994 ---------- ---------- ---------- Interest....................................... $2,337,433 $1,960,000 $1,432,000 Income taxes................................... 980,348 1,681,000 2,738,000
The following non-cash transactions have been excluded from the consolidated statement of cash flows for the three years ended December 31, 1996:
1996 1995 1994 -------- ---------- ---------- Translation adjustments of equity investments... $ 20,477 $ 66,943 $ 111,531 Common stock issued in connection with certain acquisitions.................................. 280,000 1,643,750 5,087,500 Treasury stock transferred to the Company 401(k) plan.......................................... 823,797 84,127 -- Acquisition of property, plant, and equipment in settlement of certain receivables............. -- -- 536,000 Additional compensation earned under the terms of an earn-out agreement...................... -- 410,000 --
35 38 SERV-TECH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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, 1996, are summarized as follows:
1995 1994 ----------- ------------ Fair value of current assets, net of cash acquired....... $ 623,917 $ 11,049,660 Fair value of noncurrent assets, excluding intangibles... 1,135,797 5,511,264 Intangible assets*....................................... 338,314 2,047,207 Liabilities assumed or incurred.......................... (1,472,514) (16,292,081) ----------- ------------ $ 625,514 $ 2,316,050 =========== ============
- --------------- * Net of approximately $1.5 million in 1995 and $5.1 million in 1994 non-cash consideration. 14. DEFINED CONTRIBUTION PLANS The Company maintains a defined contribution 401(k) plan 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 $0.7 million, $0.7 million, and $0.6 million in 1996, 1995, and 1994, respectively. The Company recently amended its 401(k) plan, effective, April 1, 1997, to replace the Company matching contribution with a discretionary profit sharing contribution determined by the Company's Board of Directors on an annual basis (in arrears). 15. BUSINESS SEGMENT AND MAJOR CUSTOMERS The Company's operations include three primary business segments: (i) Specialty Services, (ii) SECO Industries ("SECO") 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. SECO installs electrical and instrumentation systems for offshore production platforms, refineries, petrochemical processing plants and food processing plants. 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 (See Note 4). 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. 36 39 SERV-TECH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Summarized financial information by business segment for each of the three years ended December 31, 1996, is set forth below.
ENVIRONMENTAL SPECIALTY & PERFORMANCE CORPORATE SERVICES SECO CHEMICALS & OTHER CONSOLIDATED --------- ------- ------------- --------- ------------ 1996 Revenues for customers........ $ 78,858 $47,232 $16,296 $ -- $142,386 Intersegment revenues......... 109 2,746 -- (2,855)(1) -- -------- ------- ------- ------- -------- Total revenues................ 78,967 49,978 16,296 (2,855) 142,386 -------- ------- ------- ------- -------- Operating profit (loss)....... 47(2) 3,524 (1,442)(3) (7,989)(4) (5,860) Identifiable assets........... 36,418 13,557 13,343 12,428 75,746 Depreciation and amortization............... 2,733 798 1,642 832 6,005 Capital expenditures.......... 998 56 884 89 2,027 1995 Revenues for customers........ $130,103 $49,573 $15,155 $ -- $194,831 Intersegment revenues......... 1,755 2,620 1,284 (5,659)(1) -- -------- ------- ------- ------- -------- Total revenues................ 131,858 52,193 16,439 (5,659) 194,831 -------- ------- ------- ------- -------- Operating profit (loss)....... 4,658 3,699 230 (6,245) 2,342 Identifiable assets........... 42,131 24,180 11,039 11,048 88,398 Depreciation and amortization............... 3,238 935 1,528 460 6,161 Capital expenditures.......... 1,716 246 1,588 1,894 5,444 1994 Revenues for customers........ $113,541 $45,547 $ 8,624 $ 122 $167,834 Intersegment revenues......... -- 3,895 -- (3,895)(1) -- -------- ------- ------- ------- -------- Total revenues................ 113,541 49,442 8,624 (3,773) 167,834 -------- ------- ------- ------- -------- Special Charge(5)............. 10,599 -- -- 1,626 12,225 Operating profit (loss)....... (4,935) 3,380 (219) (7,548) (9,322) Identifiable assets........... 47,786 19,970 5,964 13,314 87,034 Depreciation and amortization............... 3,060 920 680 720 5,380 Capital expenditures.......... 3,311 643 648 228 4,830
- --------------- (1) Elimination of intersegment revenue. (2) Includes a $1.4 million pre-tax charge for the impairment of certain obsolete equipment and the write-off of an uncollectible receivable. (3) Includes a $0.7 million pre-tax second quarter charge for the write-off of certain tank cleaning equipment that will not be used in the future operations of the Company. (4) Includes a second quarter pre-tax charge of $1.3 million primarily related to severance costs, consulting and professional fees. (5) Includes a $12.2 million pre-tax special charge. See Note 9 for additional information. Significant sales to individual customers shown as a percentage of total revenues were 15% in 1996, 14% in 1995, and 29% in 1994. 37 40 SERV-TECH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 16. UNAUDITED SELECTED QUARTERLY FINANCIAL DATA
QUARTER ------------------------------------------ FIRST SECOND THIRD FOURTH ------- -------- ------- ------- IN THOUSANDS, EXCEPT PER SHARE DATA 1996 Revenues........................................ $33,314 $ 38,471 $34,375 $36,226 Gross profit.................................... 7,500 7,719 7,196 7,508 Net income (loss) from continuing operations.... 199 (3,327)(a) 3,174(b) (2,510) Income (loss) from discontinued operations, net of income taxes(c)........................... (1,229) (10,505) -- (2,935)(d) Net income (loss)............................... (1,030) (13,832) 3,174 (5,445) Earnings (loss) per share from continuing operations................................... 0.03 (0.50) 0.47 (0.37) Earnings (loss) per share from discontinued operations................................... (0.18) (1.57) -- (0.43) Net income (loss) per share..................... (0.15) (2.07) 0.47 (0.80)
QUARTER ------------------------------------------ FIRST SECOND THIRD FOURTH ------- -------- ------- ------- 1995 Revenues........................................ $60,324 $ 45,877 $30,017 $58,613 Gross profit.................................... 10,817 8,307 6,048 11,520 Net income (loss) from continuing operations.... 836 (252) (1,648) 290 Income (loss) from discontinued operations, net of income taxes.............................. 682 919 333 901 Net income (loss)............................... 1,517 666 (1,314) 1,192 Earnings (loss) per share from continuing operations................................... 0.12 (0.04) (0.24) 0.04 Earnings (loss) per share from discontinued operations................................... 0.10 0.14 0.05 0.13 Net income (loss) per share..................... 0.23 0.10 (0.19) 0.18
- --------------- (a) Includes a $3.5 million pre-tax (or $2.3 million after-tax) charge for the impairment of certain equipment, an uncollectible receivable, and severance related costs. (b) Includes a $5.8 million pre-tax (or $3.9 million after-tax) Stewart & Stevenson settlement. See Note 8 for additional information. (c) See Note 3 for a discussion of the discontinued EPC operations. (d) Increase in loss from discontinued operations related to an additional Finchaa project write-down, see Note 3. 17. SUBSEQUENT EVENT On March 5, 1997, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") by and among Philip Environmental Inc. an Ontario, Canada corporation, ("Philip"), Taro Aggregates, Ltd., an Ontario, Canada corporation and wholly-owned subsidiary of Philip ("Taro"), ST Acquisition Corporation, a Texas corporation and wholly-owned subsidiary of Taro ("Sub"), and the Company. Pursuant to the Merger Agreement, Sub will be merged with and into the Company, and the Company will become a wholly-owned subsidiary of Taro and an indirect, wholly-owned subsidiary of Philip. Under the terms of the Merger Agreement, each share of the Company's Common Stock, par value $.50 per share ("Company Common Stock") will be exchanged for 0.403 share of Philip common stock, no par 38 41 SERV-TECH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) value ("Philip Common Stock") (except for shares held by persons who perfect and exercise dissenters' rights under Texas law), provided that Philip will pay cash in lieu of any fractional shares of Philip Common Stock to which holders of Company Common Stock would otherwise be entitled. Based upon the closing price of Philip Common Stock on March 5, 1997, each share of Company Common Stock is valued at $6.60 per share. In aggregate, the transaction is valued at approximately $72.0 million, including the assumption of approximately $21.0 million of Company indebtedness. The transaction is subject to regulatory and shareholder approvals, and is expected to close by June 30, 1997. Philip is a fully integrated, resource recovery and industrial services company providing metals processing and mill services, solid and liquid by-products recovery and industrial and remediation services to all major industry sectors. Philip Common Stock trades on the New York Stock Exchange. 39 42 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Serv-Tech, Inc.: We have audited the accompanying consolidated balance sheets of Serv-Tech, Inc. and Subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for the years 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 audits. The accompanying consolidated statements of operations, changes in stockholders' equity and cash flows of Serv-Tech, Inc. and Subsidiaries, for the year 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 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 1996 and 1995 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Serv-Tech, Inc. and Subsidiaries at December 31, 1996 and 1995, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP Houston, Texas February 26, 1997 40 43 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Set forth below is certain information as of March 14, 1997, with respect to each of the members of the Board of Directors and Executive Officers, including the business experience of each during at least the past 5 years and the age of each on March 14, 1997. Robert J. Cresci, 53, has been a Director of the Company since November, 1984, Chairman of the Board since August, 1995, and President and Chief Executive Officer since May, 1996. Mr. Cresci has been a Managing Director of Pecks Management Partners Ltd., an investment management firm, since September, 1990. Mr. Cresci currently serves on the boards of Bridgeport Machines, Inc., EIS International, Inc., Sepracor, Inc., Vestro Natural Foods, Inc., Olympic Financial, Ltd., GeoWaste, Inc., Hitox, Inc., Natures Elements, Inc., Garnet Resources Corporation, HarCor Energy, Inc., Meris Laboratories, Inc., Film Roman, Inc., Educational Medical, Inc. and several private companies. D.D. (Del) Hock, 62, was appointed a Director of the Company by the Board of Directors in January, 1996. Mr. Hock is the retired Chairman and Chief Executive Officer of Public Service Company of Colorado, an investor-owned electric, natural gas, and thermal energy utility. He began his career with Public Service Company in 1962 and held numerous positions in the Company, including Vice President of accounting, Senior Vice President of utility services, President, Chief Operating Officer, and Chief Executive Officer. Mr. Hock serves on the board of numerous charitable and power industry organizations, including Edison Electric Institute, Electric Power Research Institute, The Western Energy Supply and Transmission (WEST) Associates, and the Association of Edison Illuminating Companies. He is also a director of Hathaway Corporation and American Century Investments. Mike M. Mustafoglu, 46, has been a Director of the Company since May, 1995. Since 1991, he has served as President of TransGlobal Financial Corporation, a merchant banking and financial advisory firm. Between 1984 and June, 1996, he served in executive capacities with the Oxbow Group of companies as President of Oxbow Energy, Oxbow Hydrocarbons and Oxbow Petroleum, and, between 1992 and 1995, has served as a Director and co-founder of ECO(2), Inc., a NASDAQ listed recycling company. From 1977 to 1984, Mr. Mustafoglu was Vice President Finance of Getty Oil Canada, owned by Getty Oil Company, an integrated natural resources company, and from 1974 to 1977, he was an Exploration Geophysicist for Shell Oil Company, an integrated petroleum company. In addition, he is a former member of the Board of Directors of National Petroleum Refiners Association; Independent Petroleum Association of America and the Economic Council of Palm Beach County. John B. O'Brien, 54, was elected a Director of the Company in May, 1993. He has served as President of Baker & O'Brien, Inc., a Dallas, Texas based engineering consulting firm serving the oil, gas and related industries, since January, 1993. From 1987 through 1992, Mr. O'Brien was Vice President and a director of Muse, Stancil & Co., an energy consulting firm. He has been involved in the domestic and international petroleum refining industry for more than 30 years, first as a chemical engineer with Caltex Petroleum Corporation and later as a consultant. James M. Piette, 72, was appointed a Director of the Company by the Board of Directors in January, 1995. Mr. Piette is the retired Vice Chairman, of Union Camp Corp., a paper, chemical, and wood products company, where he served from 1951 to 1991 as a director, Senior Executive Vice President and Vice Chairman. Mr. Piette also serves on the Boards of Union Mission and Savannah Electric and Power Company, and is a Fellow and member of the Technical Association of the Pulp and Paper Industry (TAPPI). In addition, Mr. Piette is a member of several vocational, community and charitable organizations. 41 44 Frank A. Perrone, 51, has been a Director of the Company since May, 1996, and has served as Vice President, General Counsel and Corporate Secretary since November, 1994. Mr. Perrone was the Senior Corporate Counsel, Southern District of Jacobs Engineering Group Inc. from August, 1994 to November, 1994. He was Vice President, General Counsel and Corporate Secretary of CRSS Inc. from 1983 to July, 1994. He served as General Attorney for Dresser Industries, Inc. from 1977 to 1982 and as an Assistant District Attorney for Harris County, Texas from 1973 to 1977. David P. Tusa, 36, has been Senior Vice President, Finance and Administration since August, 1994. Mr. Tusa previously held positions of Vice President, Controller of National Convenience Stores and Corporate Controller of CRSS Inc. since April, 1990. Prior to this Mr. Tusa was with the public accounting and consulting firm of KPMG Peat Marwick since January 1983, and most recently as a Senior Manager. He holds a B.B.A. in Accounting from the University of Houston and is a Certified Public Accountant. Dale W. Wilhelm, 34, has been Corporate Controller since September, 1994. Mr. Wilhelm previously held the position of Assistant Corporate Controller of CRSS Inc. since May, 1990. Prior to this Mr. Wilhelm was with the public accounting and consulting firm of KPMG Peat Marwick since September 1995, and most recently as an Audit Manager. He holds a B.B.A. in Accounting from the University of Texas at Austin and is a Certified Public Accountant. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Exchange Act requires the Company directors and executive officers, and persons who own more than 10% of a registered class of the Company's equity securities ("Reporting Persons") to file reports of ownership and changes in ownership with the Securities and Exchange Commission and NASDAQ. Reporting Persons are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file. Based solely upon a review of such forms and any amendments thereto furnished to the Company during the period January 1, 1996, to December 31, 1996, and on written representations of certain Reporting Persons that no Forms 5 were required for those persons, the Company believes there were no known failures to file or unreported transactions by Reporting Persons. 42 45 ITEM 11. EXECUTIVE COMPENSATION Summary Compensation Table. The following table sets forth all compensation paid by the Company in 1996 to the Chief Executive Officer and to each of the four most highly compensated executive officers of the Company whose compensation exceeded $100,000 ("Named Executives"). SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION ---------------------------------- AWARDS PAYOUTS ANNUAL COMPENSATION ----------------------- ------- ------------------------------------ RESTRICTED SECURITIES OTHER ANNUAL STOCK UNDERLYING LTIP ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) AWARDS(2) OPTIONS(3) PAYOUTS COMPENSATION(4) - --------------------------- ---- -------- ------- --------------- ---------- ---------- ------- --------------- Robert J. Cresci(5),....... 1996 0 0 $103,650 0 86,900(6) 0 -- Chairman of the Board, 1995 0 0 $ 37,500 0 10,900(6) 0 -- President and Chief 1994 0 0 $ 5,000 0 0 0 -- Executive Officer Richard L. Daerr(5),....... 1996 $ 99,836(7) 0 $ 7,900(7) 0 20,000 0 $465,837(12) Former President and 1995 $200,000 0 $ 11,856 0 0 0 $ 2,058 Chief Executive Officer 1994 $ 63,030 $40,000 $ 13,000 0 180,000 0 -- Larry A. Talbert(5),....... 1996 $ 54,754(8) 0 $ 3,216(8) $19,500 0 0 $404,738(13) Former President, 1995 $138,145 $40,000 $ 15,772 0 0 0 $ 20,749 Serv-Tech EPC, Inc. 1994 $125,525 $25,000 $ 1,044 0 75,000 0 $ 3,238 David P. Tusa(5),.......... 1996 $140,000 $50,000 $ 10,248 $12,188 75,000(9) 0 $ 5,111 Senior Vice President, 1995 $132,000 $25,000 $ 11,736 0 10,000(9) 0 $ 1,193 Finance & Administration 1994 $ 40,392 $25,000 $ 3,274 0 50,000(9) 0 $ 132 Frank A. Perrone(5),....... 1996 $122,000 $20,000 $ 8,616 $12,188 50,000(10) 0 $ 4,410 Vice President, General 1995 $115,000 $15,000 $ 10,056 0 0 0 $ 320 Counsel and Corporate 1994 $ 16,668 $ 7,500 $ 1,119 0 35,000(10) 0 $ 29 Secretary Dale W. Wilhelm(5)......... 1996 $ 83,000 $32,500 $ 8,616 $ 3,047 15,000(11) 0 $ 204 Corporate Controller 1995 $ 79,000 $ 7,500 $ 10,056 0 0 0 $ 226 1994 $ 24,148 $ 7,500 $ 3,364 0 15,000(11) 0 $ 50
- --------------- (1) "Other Annual Compensation" includes amounts paid as auto allowances and company paid insurance of $10,248 for Mr. Tusa, and $8,616 for Mr. Perrone and Mr. Wilhelm. Also includes $90,000 in Retainer Fees and $13,650 in Board and Committee Meeting Fees for Mr. Cresci. (2) Includes the number and value of restricted (unvested) shares held by the Named Executives as of December 31, 1996, as follows: Mr. Talbert 6,000 shares and $14,625, Mr. Tusa 3,000 shares and $7,313, Mr. Perrone 3,000 shares and $7,313, and Mr. Wilhelm 750 shares and $1,828, respectively. Under the Securities and Exchange Commission rules on executive compensation disclosure, all restricted stock was valued using the average of the high and low prices of the Company's unrestricted Common Stock on the National Association of Securities Dealers Automated Quotation System ("NASDAQ") as of December 31, 1996, which was $2.4375. (3) On October 1, 1996, the Compensation Committee approved an exchange of outstanding options held by current directors and active employees for options with an exercise price of $3.00 per share and a 3 year vesting schedule (see Serv-Tech, Inc. Compensation Committee Report On Executive Compensation -- Compensation Program Components). (4) "All Other Compensation" includes Company matching contributions to the Company's 401(k) Plan and the premiums paid on life insurance policies in excess of $50,000 under the Group Life Insurance Plan. Under the Company's 401(k) Plan, each eligible employee may elect to contribute up to 20% of his or her salary and to have such deferred amounts invested in the plan. The Company contributes $.50 (in Company common stock) for every $1.00 contributed by a participant, limited to 6% of the salary of such participating employee. (5) Mr. Cresci has been a Director of the Company since November, 1984, and Chairman of the Board since August, 1995, and President and Chief Executive Officer since May, 1996. Mr. Daerr joined the 43 46 Company in August, 1994 and served as President and Chief Executive Officer from October, 1994 to May 23, 1996. Mr. Talbert served as Executive Vice President, Operations from August 9, 1995, until January 29, 1996. Mr. Tusa joined the Company in August, 1994 and became an executive officer of the Company in October, 1994. Mr. Perrone joined and became an executive officer of the Company in November, 1994. Mr. Wilhelm joined and became an executive officer of the Company in September, 1994. (6) Includes 30,900 share options previously granted and outstanding, including the 10,900 share options originally granted in 1995, which were subsequently exchanged for a like number of new share options granted on October 1, 1996, at an exercise price of $3.00 per share. See footnotes (1) and (2) of the table entitled "Option Grants In Last Fiscal Year". (7) "Salary" includes $99,836 from January, 1996 to May 23, 1996. "Other Annual Compensation" includes $2,400 auto allowance and $5,500 company paid insurance. (8) "Salary" includes $18,251 for January, 1996. "Other Annual Compensation" includes $3,216 company paid insurance. (9) Includes 60,000 share options originally granted in 1994 and 1995 that were subsequently exchanged for a like number of new share options granted on October 1, 1996, at an exercise price of $3.00 per share vesting over 3 years. See footnotes (1) and (3) of the table entitled "Option Grants In Last Fiscal Year". (10) Includes 35,000 share options originally granted in 1994 that were subsequently exchanged for a like number of new share options granted on October 1, 1996, at an exercise price of $3.00 per share vesting over 3 years. See footnotes (1) and (4) of the table entitled "Option Grants In Last Fiscal Year". (11) Includes 15,000 share options originally granted in 1994 that were subsequently exchanged for a like number of new share options granted on October 1, 1996, at an exercise price of $3.00 per share vesting over 3 years. See footnotes (1) and (5) of the table entitled "Options Grants In Last Fiscal Year". (12) "All Other Compensation" includes a $440,000 separation payment and $21,600 auto allowance (2 years allowance) pursuant to Mr. Daerr's Employment Agreement in conjunction with the termination of his employment on May 23, 1996. (13) "All Other Compensation" includes a $440,503 separation payment pursuant to Mr. Talbert's Employment Agreement in conjunction with the termination of his employment on January 29, 1996. Employment Agreements. On August 29, 1994, and November 10, 1994, the Company entered into employment agreements with Messrs. David P. Tusa, Senior Vice President, Finance & Administration and Frank A. Perrone, Vice President, General Counsel and Corporate Secretary, respectively. These agreements are for 3 year rolling terms and provide that in the event of termination of employment, the executive will receive as a lump sum his annual base salary plus employee benefits up to 1 year after such termination, except that in the event of a termination within 3 years of a Change in Control of the Company, as defined in the agreement, Messrs. Tusa and Perrone would receive 18 months base salary and benefits. The agreements further require that the executive not engage as an officer, employee or otherwise in providing turnaround services for a competitor of the Company for 1 year after termination by the executive of his employment with the Company. The Company has agreed to provide certain supplemental benefits to Dale W. Wilhelm, Corporate Controller. Specifically, if Mr. Wilhelm's employment is terminated either by the Company, without cause or by resignation of Mr. Wilhelm prior to reaching the age of 64 1/2, the Company will pay Mr. Wilhelm a lump sum severance payment equal to 12 months of his salary (plus car allowance) at the time of such termination or resignation. In addition, Mr. Wilhelm will be entitled to retain certain benefits (group health, dental and car allowance) on the then current terms and cost for the 12 months subsequent to such termination or resignation, unless Mr. Wilhelm becomes eligible for such benefits from a subsequent employer. Directors' Fees and Options. The Company paid non-Chairman directors who are not employees of the Company at an annual rate of $12,000. The Company paid the Chairman of the Board at an annual rate of $75,000 until May 23, 1996, at which time the annual rate was increased to $100,000 when the Chairman also 44 47 assumed the position of Company President and Chief Executive Officer. The Company also paid $1,000 for each Board meeting attended and $800 for each Committee meeting attended by non-employee directors and reimburses their expenses incurred in attending Board and Committee meetings. Additionally, each newly elected Board member receives a non-qualified stock option for 5,000 shares vesting over 5 years, and each re-elected Board member receives a non-qualified stock option for 1,000 fully vested shares. Option Grants. The following table sets forth the individual grants of stock options made by the Company during 1996 to the Named Executives: OPTION GRANTS IN LAST FISCAL YEAR(1)
INDIVIDUAL GRANTS ---------------------------------------------------------------------------- NUMBER OF SECURITIES % OF TOTAL UNDERLYING OPTIONS GRANTED OPTIONS TO EMPLOYEES IN EXERCISE OR EXPIRATION GRANT DATE NAME GRANTED 1996 FISCAL YEAR BASE PRICE DATE PRESENT VALUE ---- ---------- ---------------- ----------- ---------- ------------- Robert J. Cresci.............. 86,900(2) 8.46% $3.00 10-1-06 $174,193(6) Richard L. Daerr.............. 20,000 1.95% $6.25 5-24-97 -- Larry A. Talbert.............. -- -- -- -- -- David P. Tusa................. 75,000(3) 7.30% $3.00 10-1-06 $147,750(6) Frank A. Perrone.............. 50,000(4) 4.87% $3.00 10-1-06 $ 98,500(6) Dale W. Wilhelm............... 15,000(5) 1.46% $3.00 10-1-06 $ 29,550(6)
- --------------- (1) On October 1, 1996, the Compensation Committee approved an exchange of outstanding options held by current directors and active employees for new options with an exercise price of $3.00 per share and a 3 year vesting schedule (see Serv-Tech, Inc. Compensation Committee Report On Executive Compensation -- Compensation Program Components). (2) Includes 30,900 share options previously granted and outstanding, which were exchanged for a like number of new share options granted on October 1, 1996, at an exercise price of $3.00 per share. Of the 86,900 share options granted, 25,000 share options vested on the date of grant (October 1, 1996). The remaining 61,900 share options vest on various dates over a 3 year period ending October 1, 1999 (see footnote (1) above). (3) Includes 60,000 share options previously granted and outstanding, which were exchanged for a like number of new share options granted on October 1, 1996, at an exercise price of $3.00 per share. The 75,000 share options vest over a 3 year period ending October 1, 1999 (see footnote (1) above). (4) Includes 35,000 share options previously granted and outstanding, which were exchanged for a like number of new share options granted on October 1, 1996, at an exercise price of $3.00 per share. The 50,000 share options vest over a 3 year period ending October 1, 1999 (see footnote (1) above). (5) Includes 15,000 share options previously granted and outstanding, which were exchanged for a like number of new share options granted on October 1, 1996, at an exercise price of $3.00 per share. The 15,000 share options vest over a 3 year period ending October 1, 1999 (see footnote (1) above). (6) Grant date present value is based upon the Black-Scholes option pricing model. The Black-Scholes option value was based upon the following assumptions: (i) no annualized dividend yield, (ii) an annualized stock price volatility factor of .4927, (iii) a risk free interest rate of 6.46%, (iv) options exercised 10 years from the date of grant, and (v) a discount rate of 3% per year during the 3 year vesting period to reflect the risk of forfeiture of unvested stock options. These assumptions were based upon 6 years of historical monthly trading data. Option Exercises and Year-End Option Values. The following table sets forth the year-end values of unexercised options held by the Named Executives at December 31, 1996, where the value of the underlying stock exceeds the exercise price. The Company has not granted any stock appreciation rights. 45 48 AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND DECEMBER 31, 1996 OPTION VALUES None of the Named Executives exercised any stock options in the 1996 fiscal year.
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING OPTIONS AT IN-THE-MONEY OPTIONS DECEMBER 31, 1996 AT DECEMBER 31, 1996(1) ---------------------------- ---------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ----------- ------------- ----------- ------------- Robert J. Cresci........................... 25,000 61,900 0 0 Richard L. Daerr........................... 200,000 0 0 0 Larry A. Talbert........................... 69,000 36,000 0 0 David P. Tusa.............................. 0 75,000 0 0 Frank A. Perrone........................... 0 50,000 0 0 Dale W. Wilhelm............................ 0 15,000 0 0
- --------------- (1) The value of options was calculated using the average of the high and low prices of the Company's Common Stock on the NASDAQ as of December 31, 1996, which was $2.4375. During October, 1996, 736,900 then outstanding stock options were exchanged for stock options with a 3 year vesting schedule and an option price of $3.00 per share, the then current market price of Company Stock (the "Exchange"). Participation in the Exchange by Named Executives is as follows: EXCHANGE OF OPTIONS TABLE
MARKET PRICE EXERCISE LENGTH OF ORIGINAL NUMBER OF OF STOCK PRICE NEW OPTION TERM OPTIONS AT TIME OF AT TIME OF EXERCISE REMAINING AT DATE NAME DATE EXCHANGED EXCHANGE EXCHANGE PRICE OF EXCHANGE ---- --------- --------- ---------- ---------- -------- ------------------ Robert J. Cresci...... 10/1/96 10,000 $ 3.00 $12.375 $ 3.00 4 years, one month 10/1/96 5,000 $ 3.00 $ 8.25 $ 3.00 6 years, seven months 10/1/96 6,000 $ 3.00 $ 7.75 $ 3.00 7 years, one month 10/1/96 1,000 $ 3.00 $ 6.75 $ 3.00 8 years, four months 10/1/96 8,900 $ 3.00 $ 5.625 $ 3.00 8 years, ten months --------- 30,900 David P. Tusa......... 10/1/96 50,000 $ 3.00 $ 6.25 $ 3.00 8 years, one month 10/1/96 10,000 $ 3.00 $ 6.75 $ 3.00 8 years, four months --------- 60,000 Frank A. Perrone...... 10/1/96 35,000 $ 3.00 $ 6.25 $ 3.00 8 years, one month Dale W. Wilhelm....... 10/1/96 15,000 $ 3.00 $ 6.25 $ 3.00 8 years, one month
SERV-TECH, INC. COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION In fiscal year 1996, the Compensation Committee (the "Committee") was comprised of 3 non-salaried directors, Messrs. O'Brien (Chairman) Hock and Piette, who also comprise the Administrative Committee of the Company's Long Term Incentive Plan. For the remainder of this report, the Administrative Committee is considered a part of the Compensation Committee except as otherwise indicated. The Compensation Committee makes recommendations to the Board regarding executive officer salaries and bonuses, and the Administrative Committee of the Long Term Incentive Plan makes decisions regarding stock option grants and stock awards. All recommendations of the Compensation Committee are reviewed and approved by the entire Board of Directors (except that directors who are also executive officers or serve as Chairman of the Board abstain from voting with respect to their own compensation) except as otherwise indicated. 46 49 COMPENSATION POLICY The compensation policy of the Company, which is endorsed by the Committee, is that a substantial portion of the annual compensation for each executive officer should relate to and be dependent upon the performance of the Company as well as the individual contribution of each officer. Consequently, the compensation program is designed to motivate senior management and to align the interests of executive officers with the long-term interest of shareholders. COMPENSATION PROGRAM COMPONENTS The executive compensation program is comprised of salary, annual cash bonus awards and long-term incentive opportunities primarily in the form of stock options. Base Salary -- At senior executive levels, base salaries are modest by industry standards. Actual salaries are based on individual performance, comparative levels of responsibility and competitive marketplace relationships. Annual Bonus Awards -- Except for bonus amounts awarded on the basis of exceptional and meritorious achievement, the Company awards annual bonuses based on the attainment of certain operating objectives. Executive officer bonuses are derived from a specific quantitative formula approved by the Compensation Committee based on ultimate financial performance of the Company and its operating subsidiaries as measured against Board approved financial goals. Stock Option Plans -- The Committee strongly believes that it is in the best interest of the shareholders for the Company compensation to be tied directly to shareholder return by the participation of key executives in long-term incentive stock awards. Therefore, key executives and management are eligible to receive, from time to time, stock options which give them the right to purchase stock in the future at a specified price. The number of stock options granted to executive officers is based on individual performance, performance of the Company's subsidiaries and competitive practices. In view of the decline in price of the Company's stock price in 1996 and the need to maintain an incentive for Company management, the Committee approved the exchange of all outstanding stock options held by current directors and active employees for new stock options with a $3.00 per share exercise price and a new 3 year vesting period. Except with respect to non-employee directors and except with respect to 25,000 share options to the Chairman, Mr. Cresci, all stock options issued pursuant to the October 1, 1996, exchange have a new 3 year vesting schedule regardless of the majority-vested status of the stock options so exchanged. COMPENSATION OF THE CHIEF EXECUTIVE OFFICER As Chairman of the Board, Mr. Cresci's retainer is determined by the members of the Compensation Committee based on the performance of the Company and the efforts of Mr. Cresci. The Board raised Mr. Cresci's annual retainer from $75,000 to $100,000 effective May 23, 1996, to reflect Mr. Cresci's additional duties as President and Chief Executive Officer of the Company commencing as of that date. COMPENSATION COMMITTEE John B. O'Brien, Chairman D. D. Hock James M. Piette 47 50 PERFORMANCE GRAPH The following graph compares the performance of the Company's Common Stock to the NASDAQ Total Return Index and to an index of peer companies selected by the Company since December 31, 1991.
MEASUREMENT PERIOD (FISCAL YEAR COVERED) SERV-TECH S&P 500 PEER GROUP 1991 100.00 100.00 100.00 1992 93.30 107.70 75.10 1993 82.20 118.20 64.40 1994 57.80 119.80 58.40 1995 52.20 164.80 49.90 1996 21.70 203.20 58.10
The lines in the graph assume that the value of an investment in the Company's Common Stock on each index was $100 on December 31, 1991 and that any dividends were reinvested. The companies in the peer group are Allwaste, Inc., Chempower, Inc., Gundle SLT Environmental, Inc., GZA Geoenvironmental Technology, Inc., C. H. Heist Corp. and Matrix Service Company. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Principal Holders of Securities. The following table sets forth certain information as of March 14, 1997, with respect to: (i) each person known by the Company to own beneficially more than 5% of the Company's shares of outstanding Common Stock; and (ii) all directors and executive officers as a group.
NAME OF BENEFICIAL AMOUNT AND NATURE OF PERCENT OWNER AND ADDRESS BENEFICIAL OWNERSHIP OF CLASS ------------------ -------------------- -------- Heartland Advisors, Inc....................... 1,013,100(1) 14.9% 790 North Milwaukee Street Milwaukee, WI 53202 Richard W. Krajicek........................... 559,618(2) 8.16% 1111 Hermann Drive Houston, TX 77004 Dimensional Fund Advisors Inc................. 354,655(3) 5.21% 1299 Ocean Avenue, 11th Floor Santa Monica, CA 90401 All directors and executive officers.......... 247,590(4) 3.61% as a group (8 persons)
- --------------- (1) The shares of common stock are held in investment advisory accounts of Heartland Advisors, Inc. As a result, various persons have the right to receive or the power to direct the receipt of dividends from, or the proceeds from the sale of, the securities. The interests of one such account, Heartland Group, Inc., a 48 51 registered investment company, relates to more than 5% of the class. The number of Company shares owned was as of December 31, 1996, as Heartland Advisors, Inc. has not provided more current data. (2) Includes 25,313 shares owned by Mr. Krajicek's spouse and 102,850 shares held by Merit Systems, Inc., a Louisiana corporation, of which Mr. Krajicek is a principal shareholder, an officer and a director, and also includes shares that represent options currently exercisable or exercisable within 60 days to purchase 8,000 shares of Common Stock. (3) Officers of Dimensional Fund Advisors Inc. also serve as officers of DFA Investment Dimensions Group Inc. (the "Fund") and The DFA Investment Trust Company (the "Trust"), both of which are registered open-end management investment companies. In their positions as officers of the Fund and the Trust, those persons vote an aggregate of 56,900 additional shares owned by the Fund and 50,355 shares owned by the Trust. The number of Company shares shown owned was as of December 31, 1996, as Dimensional Fund Advisors Inc. has not provided more current data. (4) Includes shares that represent options currently exercisable or exercisable within 60 days to purchase 85,000 shares of Common Stock granted to all directors and executive officers as a group. Security Ownership of Management. The following table sets forth certain information as of March 14, 1997, with respect to: (i) each Named Executive; (ii) each director; and (iii) all directors and executive officers as a group.
NAME OF AMOUNT AND NATURE OF PERCENT BENEFICIAL OWNER BENEFICIAL OWNERSHIP (1) OF CLASS ---------------- ------------------------ -------- Robert J. Cresci............................ 170,000(2) 2.48% Richard L. Daerr............................ 200,000(2) 2.91% Larry A. Talbert............................ 82,800(2) 1.21% David P. Tusa............................... 6,440(2) 0.09% Frank A. Perrone............................ 4,440(2) 0.06% Dale W. Wilhelm............................. 1,210(2) 0.02% D. D. Hock.................................. 13,000(2) 0.19% Mike M. Mustafoglu.......................... 12,000(2) 0.17% John B. O'Brien............................. 16,000(2) 0.23% James M. Piette............................. 24,500(2) 0.36% All directors and executive officers........ 247,590(2) 3.61% as a group (8 persons)
- --------------- (1) Except as otherwise indicated below, all shares are owned directly and the owner has sole voting and dispositive authority with respect to such shares. (2) Includes shares that represent options currently exercisable or exercisable within 60 days to purchase 354,000 shares of Common Stock. The foregoing includes the following specific individuals: Mr. Daerr 200,000 shares; Mr. Talbert 69,000 shares; Mr. Cresci 31,000 shares; Mr. Hock 12,000 shares; Mr. Mustafoglu 12,000 shares; Mr. O'Brien 16,000 shares; and Mr. Piette 14,000 shares. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS As disclosed in Note 17 of Notes to the Consolidated Financial Statements in Item 8 above, the Company recently entered into an Agreement and Plan of Merger with Philip Environmental, Inc. (the "Merger"). Upon consummation of the Merger, the Company will pay to Mr. Robert J. Cresci, Chairman, President and Chief Executive Officer an amount equal to $150,000. In addition, upon consummation of the Merger, the Company will pay transaction bonuses to David P. Tusa, Senior Vice President, Finance and Administration, Frank A. Perrone, Vice President, General Counsel and Corporate Secretary, and Dale W. Wilhelm, Corporate Controller, in the amounts of $140,000, $50,000, and $45,000, respectively. The Employment Agreement of Mr. Tusa dated as of August 29, 1994, as amended, and the Employment Agreement of Mr. Perrone dated as of November 10, 1994, as amended, (collectively, the "Employment Agreements"), each provide for the payment of certain benefits to Mr. Tusa and Mr. Perrone 49 52 (each being referred to as the "Executive") upon termination of their employment within three years after a Change in Control (as defined in the Agreements). The Merger will constitute a "Change in Control" under the Agreements. Accordingly, if within three years after the consummation of the Merger, either (i) the Company terminates the Executive's employment for any reason (other than the Executive's retirement, disability or death) or (ii) the Executive resigns from his employment with the Company for any reason, then the Executive will be entitled to receive the following benefits from the Company: (i) a cash payment equal to (a) the Executive's base salary (plus car allowance) for either the 18 month period ending immediately before consummation of the Merger or the 18 month period ending immediately before the termination of the Executive's employment, whichever is greater, minus (b) the minimum amount required to avoid certain adverse excise tax and federal income tax consequences to the Executive and the Company, respectively, resulting from "excess parachute payments"; (ii) medical and life insurance coverage, paid by the Company, as in effect immediately before the Merger for a period of 18 months after the Executive's termination, unless the Executive becomes eligible for such coverage from a subsequent employer; and (iii) 18 months of additional service credit for all purposes, including vesting, retirement, eligibility, and benefit accrual, under all employee benefit plans sponsored by the Company in which the Executive participated immediately before the Merger. The Company has agreed to provide certain supplemental benefits to Mr. Wilhelm. Specifically, if Mr. Wilhelm's employment is terminated either by the Company, without cause or by resignation of Mr. Wilhelm prior to reaching the age of 64 1/2, the Company will pay Mr. Wilhelm a lump sum severance payment equal to 12 months of his salary (plus car allowance) at the time of such termination or resignation. In addition, Mr. Wilhelm will be entitled to retain certain benefits (group health, dental and car allowance) on the then current terms and cost for the 12 months subsequent to such termination or resignation, unless Mr. Wilhelm becomes eligible for such benefits from a subsequent employer. 50 53 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Financial Statements and Schedules: (1) Consolidated Financial Statements: See Index to Financial Statements in Item 8, which information is herein incorporated by reference. (2) Consolidated Financial Statement Schedules:
PAGE ---- II. Valuation and Qualifying Accounts....................... 53 Independent Auditors' Report............................. 54
(3) Exhibits: The exhibits listed on the accompanying Exhibit Index are filed as part of this report. (b) Reports on Form 8-K: The Company filed on March 6, 1997, a Current Report on Form 8-K dated March 5, 1997, with the Securities and Exchange Commission in connection with entering an Agreement and Plan of Merger with Philip Environmental Inc., an Ontario, Canada corporation. The Company filed on October 9, 1996, a Current Report on Form 8-K dated September 30, 1996, with the Securities and Exchange Commission in connection with termination of merger negotiations with HydroChem Holdings, Inc. 51 54 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 /s/ ROBERT J. CRESCI ----------------------------------- Robert J. Cresci, Chairman, President, CEO Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ ROBERT J. CRESCI Chairman, President, CEO, Director March 28, 1997 - ----------------------------------------------------- (Robert J. Cresci) /s/ DAVID P. TUSA Senior Vice President, Finance and March 28, 1997 - ----------------------------------------------------- Administration (David P. Tusa) /s/ MIKE M. MUSTAFOGLU Director March 28, 1997 - ----------------------------------------------------- (Mike M. Mustafoglu) /s/ JOHN B. O'BRIEN Director March 28, 1997 - ----------------------------------------------------- (John B. O'Brien) /s/ D. D. (DEL) HOCK Director March 28, 1997 - ----------------------------------------------------- (D. D. (Del) Hock) /s/ JAMES M. PIETTE Director March 28, 1997 - ----------------------------------------------------- (James M. Piette) /s/ FRANK A. PERRONE Director, Vice President, General March 28, 1997 - ----------------------------------------------------- Counsel, Secretary (Frank A. Perrone) /s/ DALE W. WILHELM Corporate Controller March 28, 1997 - ----------------------------------------------------- (Dale W. Wilhelm)
52 55 SCHEDULE II SERV-TECH, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS FOR THE THREE YEARS ENDED DECEMBER 31, 1996
COL. A. COL. B COL. C -- ADDITIONS COL. D COL. F ------- ---------- ---------------------------- ----------- ------------ (1) (2) BALANCE AT CHARGED TO CHARGED TO BALANCE BEGINNING COSTS AND OTHER ACCOUNTS- DEDUCTIONS- AT END DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE OF PERIOD ----------- ---------- ---------- --------------- ----------- ------------ December 31, 1996: Allowance for doubtful accounts................. 1,755,230 177,476 -- 1,028,408(A) 904,298 December 31, 1995: Allowance for doubtful accounts................. 1,677,334 1,123,775 74,043(B) 1,119,922(A) 1,755,230 December 31, 1994: Allowance for doubtful accounts................. 225,388 903,809 835,285(B) 287,148(A) 1,677,334
- --------------- (A) Represents recoveries and uncollectible accounts written off. (B) Represents allowance for doubtful accounts of companies acquired at date of acquisition. 53 56 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Serv-Tech, Inc.: Under date of February 26, 1997, we reported on the consolidated balance sheets of Serv-Tech, Inc. and Subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the years in the two year period ended December 31, 1996, as contained in the annual report on Form 10-K for the year 1996. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedule as listed in the accompanying Index to Financial Statements. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG PEAT MARWICK LLP Houston, Texas February 26, 1997 54 57 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION ------- ----------- 2.1(5) -- Agreement and Plan of Merger dated June 14, 1994, among Serv-Tech, Inc., Hartney Acquisition Corporation and Hartney Industrial Services Corporation. 3.1(1) -- Restated Articles of Incorporation of Serv-Tech, Inc. 3.2(1) -- Bylaws, as amended, of Serv-Tech, Inc. 4.1(1) -- Specimen stock certificate evidencing Common Stock of Serv-Tech, Inc. 10.1(1) -- United States Patent Number 4,817,653 (Tank Cleaning, Water Washing Robot), dated April 4, 1989. 10.2(1) -- United States Patent Number 4,805,653 (Mobile Articulatable Tube Bundle Cleaner), dated February 21, 1989. 10.3(1) -- United States Patent Number 4,666,365 (Tube Bundle Pulling Apparatus), dated May 19, 1987. 10.4(1) -- United States Patent Number 4,575,305 (Truck-Mounted Tube Bundle Pulling Apparatus), dated March 11, 1986. 10.5(2) -- United States Patent No. 4,856,545 (Multi-Lance Tube Bundle Cleaner), dated August 15, 1989. 10.6(2) -- United States Patent No. 4,869,638 (Aerial Bundle Puller), dated September 26, 1989. 10.7(3) -- United States Patent No. 4,954,267 (Hydrocarbon Reclaimer System), dated September 4, 1990. 10.8(3) -- United States Patent No. 4,945,933 (Liquid Circulator Useful for Dispersing Sediment Contained in a Storage Tank), dated August 7, 1990. 10.9(3) -- United States Patent No. 5,032,054 (Aerial Bundle Puller), dated July 16, 1991. 10.10(3) -- United States Patent No. 5,091,016 (Method for Dispersing Sediment Contained in a Storage Tank), dated February 25, 1992. 10.11(6) -- United States Patent No. 5,356,482 (Process for Vessel Decontamination), dated October 18, 1994. 10.12(6) -- United States Patent No. 5,261,600 (Vertical Tube Bundle Cleaner), dated November 16, 1993. 10.13(6) -- United States Patent No. 5,173,007 (Method and Apparatus for In-Line Blending of Aqueous Emulsions), dated December 22, 1992. 10.14(6) -- United States Patent No. 5,389,156 (Decontamination of Hydrocarbon Process Equipment), dated February 14, 1995. 10.15(3)(10) -- Amended and Restated 1986 Incentive Stock Option Plan of Serv-Tech, Inc. 10.16(3)(10) -- Amended and Restated 1989 Incentive Stock Option Plan of Serv-Tech, Inc. 10.17(3)(10) -- Amended and Restated 1989 Director Stock Option Plan of Serv-Tech, Inc. 10.18(4) -- 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. 10.19(4)(10) -- Employment Agreement, dated May 11, 1992, between the Company and Larry A. Talbert. 10.20(4) -- Registration Rights Agreement, dated May 11, 1992, between Serv-Tech, Inc. and Larry A. Talbert.
58
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.21(4) -- Earnout Agreement, dated May 11, 1992, between Serv-Tech, Inc. and Larry A. Talbert. 10.22(6)(10) -- Employment Agreement, dated August 9, 1994, between Serv-Tech, Inc., and Richard L. Daerr. 10.23(6)(10) -- Employment Agreement, dated August 29, 1994, between Serv-Tech, Inc., and David P. Tusa. 10.24(6)(10) -- Employment Agreement, dated November 10, 1994, between Serv-Tech, Inc., and Frank A. Perrone. 10.25(9)(10) -- Serv-Tech, Inc. 1995 Long Term Incentive Plan. 10.26(7) -- United States Patent No. 5,403,145 (Street Legal, Mobil, Truck Mounted Tube Bundle Pulling Apparatus), dated April 4, 1995. 10.27(7) -- United States Patent No. 5,425,814 (Method for Quick Turnaround of Hydrocarbon Processing Units), dated June 20, 1995. 10.28(7) -- United States Patent No. 5,460,331 (Apparatus for Dispersion of Sludge in a Crude Oil Storage Tank), dated October 24, 1995. 10.29(7) -- United States Patent No. 5,485,966 (Remotely Controlled Chopping Machine for Tank Cleaning), dated January 23, 1996. 10.30(7) -- 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. 10.31(7)(10) -- Agreement for Serv-Tech Turnaround Services Management Group. 10.32(7)(10) -- Agreement Relating to Employment Performance Bonuses by and between Chemisolv, Limited and Chemisolv Holdings, Inc. and Serv-Tech, Inc. and the Chemisolv Management Group. 10.33(7)(10) -- Option Assignment Agreement by and between Chemisolv Holdings, Inc. and Chemisolv, Limited and Serv-Tech, Inc. and the Chemisolv Option Holders and Laserdisk, Limited. 10.34(7) -- Guaranteed Unsecured Loan Notes by and between Chemisolv Holdings, Inc. and Serv-Tech, Inc. and the Chemisolv Management Group. 10.35(8) -- Agreement and Plan of Merger, dated March 5, 1997, by and among Philip Environmental Inc., an Ontario, Canada corporation ("Philip"), Taro Aggregate Ltd, an Ontario, Canada corporation and wholly-owned subsidiary of Philip ("Taro"), ST Acquisition Corporation, a newly-formed Texas Corporation and wholly-owned subsidiary of Taro and Serv-Tech, Inc. 10.36 -- First Amended and Restated Credit Agreement among Serv-Tech, Inc. and Texas Commerce Bank National Association, and Bank One, Texas, N.A., dated November 12, 1996. 10.37 -- Note Restructuring Amendment, dated November 12, 1996, to Note Purchase Agreement by and between Serv-Tech, Inc. and Principal Mutual Life Insurance Company, TMG Life Insurance Company, The Security Mutual Life Insurance Company, and Berkshire Life Insurance Company. 10.38 -- Amended and Restated Continuing Reimbursement Agreement, dated November 12, 1996, by and between F.C. Schaffer & Associates, Inc. and ABN AMRO Bank, N.V.
59
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.39 -- Intercreditor Agreement, dated November 12, 1996, by and among Principal Mutual Life Insurance Company, TMG Life Insurance Company, Berkshire Life Insurance Company, and The Security Mutual Life Insurance Company; Texas Commerce Bank National Association and Bank One, Texas, N.A.; and ABN AMRO Bank, N.V. 10.40(10) -- Amendment to Employment Agreement, dated March 5, 1997, by and between David P. Tusa and Serv-Tech, Inc. 10.41(10) -- Amendment to Employment Agreement, dated March 5, 1997, by and between Frank A. Perrone and Serv-Tech, Inc. 10.42(10) -- Employment Agreement, dated March 5, 1997 by and between Dale W. Wilhelm and Serv-Tech, Inc. 10.43 -- First Amendment to the First Amended and Restated Credit Agreement, dated March 17, 1997, among Serv-Tech, Inc. and Texas Commerce Bank National Association, and Bank One, Texas, N.A. 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 statements of operations, changes in stockholders' equity and cash flow for 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. (3) Incorporated by reference from the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1991. (4) Incorporated by reference from the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1993. (5) Incorporated by reference from the registrant's Report on Form 8-K, dated June 14, 1994. (6) Incorporated by reference from the registrant's Annual Report on Form 10-K for the fiscal year December 31, 1994. (7) Incorporated by reference from the registrant's Annual Report on Form 10-K for the fiscal year December 31, 1995. (8) Incorporated by reference from the registrant's Current Report on Form 8-K dated March 5, 1997. (9) Incorporated by reference from the registrant's Form S-8 (Registration No. 33-62139) filed with the Securities and Exchange Commission on August 25, 1995. (10) Management contract or compensatory plan or agreement. EX-10.36 2 FIRST AMENDED & RESTATED CREDIT AGREEMENT 1 EXHIBIT 10.36 ================================================================================ FIRST AMENDED AND RESTATED CREDIT AGREEMENT $23,500,000.00 REDUCING REVOLVING CREDIT LOAN AMONG 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 DATED AS OF NOVEMBER 12, 1996 ================================================================================ 2 TABLE OF CONTENTS
PAGE ---- ARTICLE I DEFINITIONS; ACCOUNTING TERMS; INTERPRETATION .......... 1 Section 1.01. Definitions ............................................ 1 Section 1.02. Types of Advances ...................................... 15 Section 1.03. Accounting Terms ....................................... 15 ARTICLE II THE LOANS .............................................. 15 Section 2.01. The Loans .............................................. 15 Section 2.02. The Notes .............................................. 16 Section 2.03. Notice of Advance ...................................... 16 Section 2.04. Disbursement of Funds .................................. 16 Section 2.05. Conversions and Continuances ........................... 17 Section 2.06. Voluntary Prepayments .................................. 17 Section 2.07. Mandatory Repayments and Reduction of Commitment ....... 18 Section 2.08. Method and Place of Payment ............................ 18 Section 2.09. Pro Rata Advances ...................................... 19 Section 2.10. Interest ............................................... 19 Section 2.11. Interest Periods ....................................... 20 Section 2.12. Interest Rate Not Ascertainable ........................ 21 Section 2.13. Change in Legality ..................................... 21 Section 2.14. Increased Costs, Taxes or Capital Adequacy Requirements ........................................... 22 Section 2.15. Eurodollar Advance Prepayment and Default Penalties .... 23 Section 2.16. Voluntary Reduction of Commitment ...................... 23 Section 2.17. Tax Forms .............................................. 23 ARTICLE III LETTERS OF CREDIT ...................................... 24 Section 3.01. Letters of Credit ...................................... 24 Section 3.02. Letter of Credit Requests .............................. 25 Section 3.03. Letter of Credit Participations ........................ 25 Section 3.04. Increased Costs ........................................ 27 Section 3.05. Conflict between Applications and Agreement ............ 27 ARTICLE IV FEES ................................................... 28 Section 4.01. Fees ................................................... 28 ARTICLE V CONDITIONS PRECEDENT AND WAIVER OF PRIOR DEFAULTS ...................................... 28 Section 5.01. Conditions Precedent to the Initial Advance ............ 28 Section 5.02. Conditions Precedent to All Credit Events .............. 31 Section 5.03. Delivery of Documents .................................. 32 Section 5.04. Waiver of Existing Known Defaults ...................... 32
-i- 3 ARTICLE VI REPRESENTATIONS AND WARRANTIES ......................... 33 Section 6.01. Organization and Qualification ......................... 33 Section 6.02. Authorization and Validity ............................. 33 Section 6.03. Governmental Consents .................................. 33 Section 6.04. Conflicting or Adverse Agreements or Restrictions ...... 33 Section 6.05. Title to Assets ........................................ 34 Section 6.06. Litigation ............................................. 34 Section 6.07. Financial Statements ................................... 34 Section 6.08. Default ................................................ 34 Section 6.09. Investment Company Act. ................................ 34 Section 6.10. Public Utility Holding Company Act ..................... 34 Section 6.11. ERISA .................................................. 35 Section 6.12. Tax Returns and Payments ............................... 35 Section 6.13. Environmental Matters .................................. 35 Section 6.14. Purpose of Loans ....................................... 36 Section 6.15. Franchises and Other Rights ............................ 36 Section 6.16. Subsidiaries and Assets ................................ 36 Section 6.17. Solvency ............................................... 36 ARTICLE VII AFFIRMATIVE COVENANTS .................................. 36 Section 7.01. Information Covenants .................................. 36 Section 7.02. Books, Records and Inspections ......................... 39 Section 7.03. Insurance and Maintenance of Properties ................ 39 Section 7.04. Payment of Taxes ....................................... 39 Section 7.05. Corporate Existence .................................... 39 Section 7.06. Compliance with Statutes ............................... 40 Section 7.07. ERISA .................................................. 40 Section 7.08. Additional Subsidiaries ................................ 40 ARTICLE VIII NEGATIVE COVENANTS ..................................... 40 Section 8.01. Change in Business and Compensation Structure .......... 40 Section 8.02. Consolidation, Merger or Sale of Assets ................ 41 Section 8.03. Indebtedness ........................................... 41 Section 8.04. Liens .................................................. 42 Section 8.05. Investments ............................................ 42 Section 8.06. Restricted Payments .................................... 42 Section 8.07. Change in Accounting ................................... 43 Section 8.08. Change of Certain Indebtedness ......................... 43 Section 8.09. FINCHAA Project ........................................ 43 Section 8.10. Transactions with Affiliates ........................... 43 Section 8.11. Consolidated Net Worth ................................. 43 Section 8.12. Minimum EBITDA ......................................... 44 Section 8.13. Total Debt to Capitalization Ratio ..................... 44
-ii- 4 Section 8.14. Capital Expenditures ................................... 44 Section 8.15. Fixed Charge Coverage Ratio ............................ 44 ARTICLE IX GUARANTY ............................................... 44 Section 9.01. Guaranty ............................................... 44 Section 9.02. Continuing Guaranty .................................... 45 Section 9.03. Effect of Debtor Relief Laws ........................... 46 Section 9.04. Waiver of Subrogation .................................. 46 Section 9.05. Subordination .......................................... 47 Section 9.06. Waiver ................................................. 47 Section 9.07. Full Force and Effect .................................. 48 ARTICLE X EVENTS OF DEFAULT AND REMEDIES ........................ 48 Section 10.01. Events of Default ..................................... 48 Section 10.02. Primary Remedies ...................................... 50 Section 10.03. Other Remedies ........................................ 50 ARTICLE XI THE AGENT ............................................. 50 Section 11.01. Authorization and Action .............................. 50 Section 11.02. Agent's Reliance ...................................... 51 Section 11.03. Agent and Affiliates; TCB and Affiliates .............. 51 Section 11.04. Bank Credit Decision .................................. 52 Section 11.05. Agent's Indemnity ..................................... 52 Section 11.06. Successor Agent ....................................... 53 Section 11.07. Notice of Default ..................................... 53 ARTICLE XII MISCELLANEOUS ......................................... 54 Section 12.01. Amendments ............................................ 54 Section 12.02. Notices ............................................... 54 Section 12.03. No Waiver; Remedies ................................... 55 Section 12.04. Costs, Expenses and Taxes ............................. 55 Section 12.05. Release and Indemnity ................................. 56 Section 12.06. Right of Setoff ....................................... 57 Section 12.07. Governing Law ......................................... 57 Section 12.08. Interest .............................................. 57 Section 12.09. Survival of Representations and Warranties ............ 58 Section 12.10. Successors and Assigns; Participations ................ 58 Section 12.11. Confidentiality ....................................... 59 Section 12.12. Pro Rata Treatment .................................... 60 Section 12.13. Separability .......................................... 60 Section 12.14. Execution in Counterparts ............................. 60 Section 12.15. Additional Exposure ................................... 60 Section 12.16. Interpretation ........................................ 61
-iii- 5 Section 12.17. Submission to Jurisdiction ............................ 62 Section 12.18. Waiver of Jury Trial .................................. 62 Section 12.19. Final Agreement of the Parties ........................ 63
Exhibits and Schedules: - ----------------------- Exhibit 1.01 Form of Borrowing Base Certificate Exhibit 1.01A Administrative Questionnaire Exhibit 2.02 Form of Revolving Credit Note Exhibit 2.03 Form of Notice of Advance Exhibit 2.05 Form of Notice of Conversion Exhibit 3.02 Form of Letter of Credit Request Exhibit 12.10 Form of Assignment and Acceptance Exhibit 12.10(d) Form of Participation Certificate Schedule 1.01 Eligible Accounts Schedule 3.01(a) Existing Letters of Credit Schedule 6.04 Agreements Schedule 6.06 Litigation Schedule 6.13 Exceptions to Environmental Matters Schedule 6.16A Subsidiaries Schedule 6.16B Material Subsidiaries Schedule 7.03 Existing Insurance Policies Schedule 8.03(b) Existing Indebtedness Schedule 8.04(a) Existing Liens Schedule 8.05(b) Investments -iv- 6 First Amended and Restated Credit Agreement INTRODUCTION THIS FIRST AMENDED AND RESTATED CREDIT AGREEMENT dated as of November 12, 1996 (this "Agreement") is among 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"), as the Issuing Bank, and as agent for the other Banks (in such capacity together with any other Person who becomes the agent the "Agent"). The Company, the Guarantors, the Agent and the Banks are parties to that one certain Credit Agreement dated May 15, 1995 (as amended and modified from time to time, the "Prior Credit Agreement") pursuant to which the Banks extended up to a $35,000,000.00 revolving credit to the Company and the Guarantors guaranteed same (the "Prior Indebtedness"). The Company has now requested that the Banks provide the Company with a new credit facility, pursuant to which the Banks will commit to make a reducing revolving credit loan of up to $23,500,000.00 to the Company to refinance the Prior Indebtedness, to finance permitted capital expenditures, to provide for the issuance of Letters of Credit by the Issuing Bank, and for use as working capital. The Company has also asked the Banks to waive certain defaults under the Prior Credit Agreement, including defaults occasioned by the Company's default under documentation with the Other Senior Lenders (as herein defined), and to consent to the modification of such documentation in a manner consistent herewith. In connection therewith, the Banks have agreed to restate the Prior Credit Agreement and the Agent has agreed to serve as Agent for the Banks. The Agent, the Banks and the Company hereby agree that, upon the fulfillment of the conditions contained in Section 5.01 and the refinancing of the Prior Indebtedness, the Prior Credit Agreement shall automatically terminate and shall be restated by this Agreement. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants set forth herein, the Company, the Agent and the Banks agree to amend and restate the Prior Credit Agreement in its entirety 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: "ABN AMRO" has the meaning provided in the definition of Other Senior Lenders. -1- 7 "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 or services rendered billed within thirty (30) days of the providing of such goods or services or, in the case of cost-plus contracts only, for which there is no fixed, maximum guaranteed price, 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. "Additional Exposure" means the additional credit exposure of TCB, up to a maximum of $2,000,000.00, incurred due to the cash management services and daily advances provided by TCB to the Company or any of its Subsidiaries in addition to TCB's portion of the Commitment and any other services described herein. "Administrative Questionnaire" means the questionnaire attached hereto as Exhibit 1.01A to be completed by each Bank and returned to the Agent. "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 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 -2- 8 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 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. "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 75% 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. -3- 9 "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 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 the Internal Revenue Code of 1986 and the regulations promulgated thereunder. "Collateral" means all, or substantially all, of the assets of the Company and its material Subsidiaries, real and personal, tangible and intangible, all as more fully described in the Security Documents. "Collateral Agent" means TCB in its capacity as Collateral Agent under the Intercreditor Agreement. "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, which Commitment shall, until June 30, 1997 include the Supplemental Commitment and shall total $23,500,000.00 and after said date, shall total $19,500,000.00, except as otherwise provided herein in Sections 2.01(b), 2.07(c) or elsewhere. "Commitment Fee" has the meaning specified in Section 4.01(b). "Company" has the meaning specified in the introduction to this Agreement. "Consolidated Net Worth" means total assets minus total liabilities. "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. -4- 10 "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. "Default Rate" means the lesser of (i) the Highest Lawful Rate and (ii) the Alternate Base Rate plus three percent (3%). "Designated Payment Date" means the first day of each month; provided, however, if 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 pre-tax income for such period, plus the aggregate amount which was deducted for such period in determining such consolidated, pre-tax income in respect of interest expense (including amortization of debt discount, imputed interest and capitalized interest), plus depreciation and amortization, plus income attributable to any minority interest in any Person, for so long as said Person remains a Guarantor, provided, the calculations of EBITDA for the period up to and including September 30, 1996, but not thereafter, shall be based on consolidated, pre-tax income from continuing operations only and shall exclude all special charges and non-recurring write downs. For periods after September 30, 1996 such calculations shall include all special charges and all non-continuing operations. "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 (a) any Account which meets all of the following criteria on the date of determination: (i) 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; (ii) 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); (iii) does not include any amount that is held back by any party as retainage or assurance of the future performance of the Company unless the applicable project is fully and finally completed and the Company is entitled to and does bill for such retainage; -5- 11 (iv) has not been challenged by the obligor thereon; (v) in respect of which no notice of the bankruptcy, insolvency or dissolution of the obligor thereon is known to the Company; (vi) is not owed by (i) a foreign Person unless supported by a letter of credit or other insurance satisfactory to the Agent (including the Revolving Letter of Credit issued by ABN AMRO for the account of the African Development Bank and all renewals, extensions or replacements thereof), (ii) the United States government or (iii) any Affiliate of the Company or of any Subsidiary; and (vii) is not owed by an obligor that has 30% or more of its aggregate accounts payable to the Company more than 120 days old. (b) Notwithstanding the above, for the interim, weekly updates only of the monthly Borrowing Base Certificate required by Section 7.01(f), (but not for the monthly Borrowing Base Certificate required by Section 7.01(e)), Eligible Accounts may also include costs in excess of current billings on fixed-price, maximum guaranteed contracts, subject to the other limitations therefor contained in the definition of Accounts. "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 $1,000,000,000.00; (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 $1,000,000,000.00; 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. -6- 12 "ERISA" means the Employee Retirement Income Security Act of 1974 and the regulations promulgated thereunder. "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, the Guarantors and the Banks. "Existing Letters of Credit" means all letters of credit issued by TCB, outstanding on the Execution Date and described on Schedule 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" has the meaning provided in the introduction to this Agreement and, except as otherwise agreed by the Banks and the Company, shall include all of the Subsidiaries of the Company. "Guaranty" means the document described in Section 5.01(c), and contained in 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, hedge or swap agreements 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. "Intercreditor Agreement" means that certain Intercreditor Agreement of even date herewith, executed by the Banks, the Agent as Collateral Agent and the Other Senior Lenders, and approved and agreed to by the Company and the Guarantors, setting forth certain agreements between said parties in regard to the Collateral, all as described therein, and, among other things, establishing that the Liens in favor of the Banks are first and prior Liens in respect of the Supplemental Commitment and are pari passu with Liens in favor of the Other Senior Lenders in respect of the balance of the Commitment. "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. "Krajicek Note" means that certain promissory note to Richard W. Krajicek payable by the Company, due November, 1999, bearing interest at 8% per annum given to satisfy the Company's obligations to pay the "short-fall" as that term is used in paragraph 17 of that certain consulting agreement between the Company and R. W. Krajicek dated August 9, 1995. "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). -9- 15 "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. "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, (a) with respect to any Eurodollar Rate Advance for any Margin Period, 4.09%, and (b) with respect to any Alternate Base Rate Advance, 1.0%. "Margin Period" means a period commencing on the date on which the quarterly or annual financial statements of the Company are required to be 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 required to be 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), but excluding occurrences affecting the industry as a whole and routine cycles in the business of the Company and its Subsidiaries, (a) a material adverse effect on the financial condition, 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. "Material Subsidiary" means any Subsidiary of the Company listed on Schedule 6.16B. "Maturity Date" means the earlier of: December 31, 1997, unless accelerated pursuant to Section 2.07(d) or Section 10.02, provided all sums advanced under the Supplemental Commitment shall be due on June 30, 1997, and the Supplemental Commitment shall expire on such date. -10- 16 "Maximum Guaranteed Amount" means for each Guarantor the maximum amount which any Guarantor could pay under the Guaranty without having such payment set aside as a fraudulent transfer or conveyance or similar action under the Bankruptcy Code or any applicable state law. "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. "Noteholders" has the meaning provided in the definition of Other Senior Lenders. "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. "Other Senior Lenders" means ABN AMRO N.V., Houston Agency ("ABN AMRO"), a banking organization organized under the laws of the Netherlands, with an office in Houston, Texas, and the following entities: Principal Mutual Life Insurance Company ("Principal"), having its principal place of business at 711 High Street, Des Moines, Iowa 50392-0800, TMG Life Insurance Company, having its principal place of business at 401 North Executive Drive, Brookfield, Wisconsin 53008, Berkshire Life Insurance Company, having its principal place of business at 700 South Street, Pittsfield, Massachusetts 01202, and Security Mutual Life Insurance Company, having its principal place of business at 200 Centennial Mall North, Lincoln, Nebraska 68501 (said latter four entities herein referred to as the "Noteholders"). "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. "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to all or any of its functions under ERISA. -11- 17 "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 $100,000,000.00 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 $2,000,000,000.00 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. "Permitted Liens" shall mean: (a) Liens for taxes, assessments, levies or other governmental charges not yet due or which are being contested in good faith by appropriate proceedings and for which adequate reserves are maintained in accordance with GAAP; (b) Liens in connection with worker's compensation, unemployment insurance or other social security, old age pension or public liability obligations not yet due or which are being contested in good faith by appropriate proceedings and for which adequate reserves are maintained in accordance with GAAP; (c) operator's, vendors', carriers', warehousemen's, repairmen's, mechanics', workers', materialmen's or other like Liens arising by operation of law in the ordinary course of business (or deposits to obtain the release of any such Lien) and securing amounts not yet due or which are being contested in good faith by appropriate proceedings and for which adequate reserves are maintained in accordance with GAAP; (d) deposits to secure insurance in the ordinary course of business; (e) deposits to secure the performance of bids, tenders, contracts (other than contracts for the payment of money or the -12- 18 deferred purchase price of goods or services), leases, licenses, franchises, trade contracts, statutory obligations, surety and appeal bonds and performance bonds and other obligations of a like nature incurred in the ordinary course of business; (f) easements, rights of way, covenants, restrictions, reservations, exceptions, encroachments, zoning and similar restrictions and other similar encumbrances (other than to secure the payment of borrowed money or the deferred purchase price of goods or services) or title defects, in each case incurred in the ordinary course of business which, in the aggregate, are not substantial in amount, and which do not in any case singly or in the aggregate materially detract from the value or usefulness of the Property subject thereto for the business conducted by the Company and its Subsidiaries or materially interfere with the ordinary conduct of the business of the Company and its Subsidiaries; (g) bankers' liens arising by operation of law; (h) inchoate Liens arising under ERISA to secure contingent liabilities of the Company and its Subsidiaries; and (i) Liens on assets of Subsidiaries to secure indebtedness to the Company provided same are collaterally assigned to the Collateral Agent, provided further, such Liens may be incurred only to the extent the underlying Indebtedness is otherwise permitted under the terms of this Agreement. "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 contributes or has an obligation or liability to contribute, including any such plan that may have been terminated. "Principal" has the meaning provided in the definition of Other Senior Lenders. "Prior Credit Agreement" has the meaning provided in the introduction to this Agreement. "Prior Indebtedness" has the meaning provided in the introduction to this Agreement. "Property" means any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible. "Regulations A, D, U and X" means Regulations A, D, U and X of the Board as the same are from time to time in effect, and all official rulings and interpretations thereunder or thereof. -13- 19 "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 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. "Security Documents" means the documents described in Section 5.01 (c) and (d), executed by the Company and its Subsidiaries in favor of TCB, as Collateral Agent, for the benefit of the Banks and the Other Senior Lenders, pursuant to the terms hereof and of the Intercreditor Agreement. "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 -14- 20 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. "Supplemental Commitment" means the $4,000,000.00 of additional funds available over and above the basic Commitment of $19,500,000.00, which Supplemental Commitment shall be available only until June 30, 1997, and which Supplemental Commitment shall, while existent, unless otherwise specified, be considered a part of the Commitment. "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 (including, as applicable, the Supplemental Commitment) less (i) the outstanding Advances, (ii) any outstanding Letters of Credit, and (iii) any unreimbursed fundings under any Letters of Credit, all as provided in Section 3.01(c). 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. ARTICLE II THE LOANS SECTION 2.01. The Loans. (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 up to the maximum amount of its Commitment, 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) in the case of Eurodollar Rate Advances, shall be made in the minimum amount of $500,000.00 and integral multiples thereof or in the remaining balance of the Commitment, (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, (iv) shall, in the aggregate, not exceed the lesser of the Borrowing Base or the maximum total -15- 21 amount of the Commitment (which shall, prior to June 30, 1997, but not thereafter, include the Supplemental Commitment) and (v) shall be made under the Supplemental Agreement only if the remainder of the Commitment is fully advanced. There shall be no further Advances after the Maturity Date. (b) Any mandatory repayments made pursuant to Section 2.07(a)(i) as a result of a reduction in the Commitment pursuant to Section 2.07(c) shall automatically reduce the Commitment by the amount of all such repayments. If the Supplemental Commitment, or any portion thereof is still in existence at the time of such payments, they shall first reduce the Supplemental Commitment until it is fully extinguished, and, thereafter, the remainder of the Commitment. (c) The Loans shall be used to refinance the Prior Indebtedness, 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. 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 -16- 22 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"), substantially in the form of Exhibit 2.05 hereto, 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 of Conversion. 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 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; and (b) 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 and Reduction of Commitment. (a) The Company shall repay Advances on any day on which the aggregate outstanding principal amount of the Loans exceeds the lesser of (i) the Commitment or, (ii) as shown by the most recent -17- 23 Borrowing Base Certificate or interim update thereof, the then current Borrowing Base, in the amount of such excess. (b) The Company shall repay any outstanding portion of the Supplemental Commitment on or before June 30, 1997, and such Supplemental Commitment shall terminate on that date. (c) In addition to the above, the Commitment shall reduce, at any time the Company or any of its Subsidiaries makes a payment to any of the Other Senior Lenders, in an amount sufficient to maintain the identical ratio between the total amount of the Commitment and the amount of Indebtedness owing to such Other Senior Lenders, which reduction, as of the Effective Date, in respect of the Indebtedness owing to the Noteholders, will equal a minimum of $201,389.00 per month, payable on each Designated Payment Date, commencing July 1, 1997. (d) The aggregate amount of all Advances under the Notes, if not sooner paid, (and all accrued, unpaid interest) shall be due and payable, and the Commitment shall terminate, on the Maturity Date. SECTION 2.08. Method and Place of Payment. (a) 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. (b) All of the Company's and the Subsidiaries' accounts receivable (excluding any accounts receivable of Schaffer required to be deposited into any other account as agreed to by the Banks and the Other Senior Lenders) will be deposited by the Company's and its Subsidiaries' third party account debtors into one or more of the Company's or one or more of its Subsidiaries lockbox and lockbox accounts maintained with the Agent, pursuant to the Cash Management Lock Box Agreements (the "Cash Management and Lock Box Agreements") currently in effect between the Company or one or more of its Subsidiaries and the Agent. Said accounts shall be restricted accounts and the Agent shall have the right, but not the obligation, and the Company hereby grants the Agent the right, to deduct and set-off any amounts owing to the Banks or the Other Senior Lenders under this Agreement from the collections made pursuant to the above-referenced Cash Management and Lock Box Agreements. All collected funds will be swept daily by the Agent and applied to reduce the amount outstanding on the Loans. The Company irrevocably authorizes the Bank to make, and irrevocably appoints the Bank as its attorney-in-fact (which power shall be coupled with an interest), to make transfers of funds to and from the Cash Management and Lock Box Account, necessary to accomplish the purposes of the Loan Documents. 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 -18- 24 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 plus the Margin for Alternate Base Rate Advances. 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. (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 Margin for Eurodollar Rate Advances. 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, may be adjusted, if applicable, 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 one month, 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 December 1, 1996 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 -19- 25 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 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 applicable Maturity Date. -20- 26 (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 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 -21- 27 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 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 -22- 28 payable (at the due date thereof, by notice of prepayment or otherwise). Such 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 and, provided, further, the Company shall have made comparable provisions reducing the outstanding principal balance owing on its Indebtedness owing to the Other Senior Lenders in accordance with the terms of the Intercreditor Agreement. 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 may 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. -23- 29 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 equal to $6,000,000.00, 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 outstanding and all other Advances under the Notes then outstanding, would exceed the lesser of the Borrowing Base or the Commitment; 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 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 so long as said Letters of Credit are outstanding 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 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 -24- 30 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 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 -25- 31 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, the 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. (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 the Issuing Bank's gross negligence or willful misconduct. IT IS THE EXPRESS INTENTION OF THE PARTIES HERETO THAT THE 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 SOLE OR CONTRIBUTORY NEGLIGENCE. The Company agrees that any action taken or omitted by the 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 -26- 32 of Commerce and adhered to by the Issuing Bank) 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 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 for 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 on the Execution Date the fees described in that one certain letter agreement of even date herewith by and between Chase Securities Inc. and the Company. (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 -27- 33 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 $40,000.00 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 2% of the face amount of such Letters of Credit of which .125% goes to the Issuing Bank and 1.875% 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 AND WAIVER OF PRIOR DEFAULTS 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, all in form and substance satisfactory to the Agent: (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, except as otherwise agreed, as Guarantors, for the benefit of the Banks; (d) each of the following security documents (the "Security Documents") granting a first and prior Lien or security interest on the Collateral to the Agent for the benefit of itself and the Banks as security for the Supplemental Commitment, pro rata, and a second lien, subordinate only to said first and prior Lien, to the Collateral Agent for the Banks and the Other Senior Lenders as security for the Obligations, for the Additional Exposure owed to TCB, and for certain Indebtedness owed to the Other Senior Lenders, all to the extent described therein: (i) Security Agreements executed by the Company and its domestic Subsidiaries for the benefit of the Collateral Agent covering all personal property assets of the Company and each of such Subsidiaries (except as otherwise agreed to by the Banks and the Other Senior Lenders and provided therein), accompanied by all documents, instruments -28- 34 and other items necessary to obtain and perfect a Lien thereon, including all promissory notes, certificates of title to vehicles and equipment, chattel paper and similar items; (ii) Pledge Agreements executed by the Company and any of its Subsidiaries owning stock in any other Subsidiary (except as otherwise agreed to the Bank and the Other Senior Lenders and provided therein) for the benefit of the Collateral Agent pledging to the Collateral Agent all stock in any domestic Subsidiaries or Affiliates and 65% of all stock in any foreign Subsidiaries owned by any of the pledging parties, accompanied by original stock certificates evidencing such shares and executed stock powers for such certificates; (iii) Mortgages or deeds of trust executed by the Company and its Subsidiaries for the benefit of the Collateral Agent granting to the Collateral Agent a Lien on all real property, including owned real estate, leases, mineral interests or similar items owned by the Company or any of its Subsidiaries, except as otherwise agreed to by the Banks and the Other Senior Lenders, accompanied by, if reasonably requested by the Collateral Agent, the following, all in form, substance and amount reasonably satisfactory to the Collateral Agent: (x) a mortgagee's title insurance policy issued by a company satisfactory to the Collateral Agent insuring the Liens granted as first and prior Liens; (y) MAI appraisals for all real estate on which a Lien in favor of the Agent is being granted, such appraisals to set forth the market value of each parcel and to be in compliance with Title XI of the Financial Institutions Reform, Recovery and Enforce Act of 1989, as amended 12 U.S.C. 3331, et seq., and The Regulations and Statements of General Policy on Appraisals promulgated by the Federal Deposit Insurance Corporation, 12 C.F.R. Part 32, as amended; and (z) an environmental assessment of any parcel of the real property owned by the Company valued in excess of $100,000.00 on which a Lien in favor of the Collateral Agent is being granted, conducted by an environmental engineering firm reasonably accepted to the Collateral Agent and a Phase II environmental audit or other supplemental data on such parcels of land as the Collateral Agent may reasonably request based on the information received in the environmental assessment on such site, conducted by an environmental engineering firm reasonably acceptable to the Collateral Agent and containing recommended remediation measures and cost estimates associated with such measures satisfactory to the Collateral Agent in its sole discretion. Failure of the Collateral Agent to request the information contained in this paragraph prior to the Execution Date shall not preclude it from requesting such -29- 35 information at any time thereafter, in its sole discretion, during the time the Loan is outstanding; and (iv) UCC-1 and UCC-3 Financing Statements and other documents or instruments necessary to perfect the Liens granted in the Security Documents. (e) 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; (f) 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 Material Subsidiaries, the bylaws, as amended and in effect, of the Company and each of its Material 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 since June 30, 1996; (g) favorable, signed opinions addressed to the Agent and the Banks from Liddell, Sapp, Zivley, Hill and LaBoon, L.L.P., counsel to the Company and the Guarantors, and to the Collateral Agent, the Banks and the Other Senior Lenders in form and substance satisfactory to said Persons and their counsel; (h) the most current, revised budget for the FINCHAA Project; (i) 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; (j) 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 business requires such qualifications and where the failure to so qualify would have a Material Adverse Effect; -30- 36 (k) certificates of insurance as contemplated by Section 7.03(a); (l) UCC searches and other title information reasonably requested by the Agent on the Company and each of its Material Subsidiaries; (m) evidence satisfactory to the Agent of the repayment of the Prior Indebtedness and termination of all parties' rights and obligations in regard thereto; (n) the Intercreditor Agreement executed by the Banks and the Other Senior Lenders and approved and accepted by the Company and the Guarantors; and (o) evidence satisfactory to the Banks that the Company, its relevant Subsidiaries and the Other Senior Lenders have all executed documents resulting in the Company and such Subsidiaries being in compliance with all documentation evidencing any Indebtedness owing to such Other Senior Lenders. 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. -31- 37 (e) No Material Adverse Effect shall have occurred since the delivery of the most recent financial statements delivered pursuant to Section 7.01(b). (f) Except for any foreign Subsidiaries, all Persons that have become Subsidiaries subsequent to the Execution Date shall have executed a Guaranty. (g) The Agent shall have received or waived all required Borrowing Base Certificates and all weekly interim updates thereof and the most recently received certificate or weekly update shall indicate that such Advance will not cause the total of outstanding Advances and issued Letters of Credit to exceed the Borrowing Base. (h) The Agent shall have received such other approvals, opinions or documents as the Agent or the Banks may reasonably request. 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. SECTION 5.04. Waiver of Existing Known Defaults. The Company has disclosed in writing to the Agent and the Banks all defaults and Events of Default that may exist under the Prior Credit Agreement and the Loan Documents executed in connection therewith immediately prior to closing under this Agreement. Each of the Banks, in consideration of the agreements of the Company hereunder, hereby waives each such default or Event of Default. The Banks hereby represent and warrant to the Company that, as of the Execution Date, they known of no other default or Event of Default under the Prior Credit Agreement, or the Loan Documents executed in connection therewith, and no default or Event of Default resulting from the execution and delivery of this Agreement or any of the Loan Documents or any of the other documentation executed and delivered or transactions effected as of the Execution Date. It is specifically agreed and understood that such waivers of defaults or Events of Default by the Banks shall not constitute a waiver of any other, similar or future default or Event of Default under any of the Loan Documents. -32- 38 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 duly formed or organized, validly existing and, except for Mac-TecTech, Inc., is in good standing under the laws of the state of its organization, (b) has the power to own its property and to carry on its business as now conducted and (c) is duly qualified 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. 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. -33- 39 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, 1995 and the unaudited consolidated balance sheet, income statement and statement of cash flows for the six (6) months ended June 30, 1996 (such 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 June 30, 1996. SECTION 6.08. Default. After giving effect to the transactions on the date hereof, including the transactions with the Other Senior Lenders, 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 -34- 40 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 all material respects, 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 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. -35- 41 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 has 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 and Assets. The Subsidiaries listed on Schedule 6.16A are all of the Subsidiaries of the Company as of the Execution Date. None of said Subsidiaries, except for the Material Subsidiaries listed on Schedule 6.16B, or Subsidiaries chartered and existing in jurisdictions outside the United States, owns assets having an aggregate market value in excess of $100,000.00. 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 and (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). 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 30 days after the close of each month, the consolidated and consolidating balance sheet of the Company and its Subsidiaries as of the end of such month and the related consolidated and consolidating statements of income for such month and, within 40 days after the close of each month, statements of cash flows for such month and in each case, also for the portion of the fiscal year ended at the end of such month, setting forth, in each case, comparative consolidated figures for the related periods in the prior fiscal year, all of -36- 42 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. (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 -37- 43 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 statements 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 20 days after the end of each month, (i) a Borrowing Base Certificate and (ii) a summary report of all Accounts of the Company and its Subsidiaries and, within 30 days after the end of each month, (x) the monthly FINCHAA Project status report,, (y) a statement of income and a balance sheet for F. C. Schaffer, and (z) 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) Weekly, on Tuesday of each week for the week preceding the immediately prior week: (i) an interim update of the most recently submitted Borrowing Base Certificate; (ii) the listing of accounts receivable for the FINCHAA Project; and (iii) a summary report of the balance and activity of all bank accounts of the Company, F. C. Schaffer or any other Subsidiary relating in any way to the FINCHAA Project. (g) Promptly following 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. (h) 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. (i) 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 -38- 44 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 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, which policies shall name the Collateral Agent for the benefit of the Banks and the Other Senior Lenders, as a loss payee. 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 which shall name the Collateral Agent, for the benefit of the Banks and the Other Senior Lenders, as an additional insured. The Company shall provide the Agent a listing of all such insurance and such other certificates and other evidence thereof, prior to the execution date hereof and annually thereafter. 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 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. Except as otherwise previously disclosed to the Agent with respect to Serv-Tech Europe, GmbH and Refinery Maintenance, Inc., each of the Company and its Subsidiaries will do all things necessary to preserve and keep in full force and effect (a) the existence of such Person, and (b) unless the failure to do so would not reasonably be expected to have a Material Adverse Effect, the rights and franchises of each of the Company and its Subsidiaries. -39- 45 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. SECTION 7.08. Additional Subsidiaries. The Company will immediately cause any Person that becomes a domestic 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, except as otherwise provided herein, 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 and Compensation Structure. The Company will not, and will not permit any of its Subsidiaries to, engage in any businesses not of the same general type as those conducted by the Company on the Execution Date. The Company and its Subsidiaries, on a consolidated basis, will not materially increase its compensation structure for its existing staff or increase overall salary levels or bonuses for its existing staff in any year by more than 7 1/2% in excess of the prior year's level, provided nothing herein shall prevent the Company or -40- 46 any Subsidiary from hiring additional personnel as needed in accordance with prudent business practice. SECTION 8.02. Consolidation, Merger or Sale of Assets. Except as previously disclosed to the Agent, 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. 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; (d) Indebtedness arising as a result of the endorsement in the ordinary course of business of negotiable instruments in the course of collection; (e) guaranties of any Indebtedness of any Person not to exceed in the aggregate $250,000.00, 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 or the guaranty by the Subsidiaries of the Indebtedness owing by the Company to the Noteholders as of the Execution Date; (f) 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 $250,000.00 in the aggregate during the term hereof; and (g) renewals and extensions (in the same or lesser principal amount on similar terms and conditions) of any Indebtedness listed in subparagraphs (b), (e) and (f) 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 -41- 47 (a) Liens existing on the Execution Date and listed on Schedule 8.04(a); (b) Liens securing currently secured Indebtedness permitted under Section 8.03 (b) or (f) above; (c) Permitted Liens; and (d) any renewal, extension or replacement of any Lien referred to in subparagraphs (a) and (b) 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 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), including Investments in the Subsidiaries, direct and indirect; (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 Company may make Investments permitted under Section 8.09 below. SECTION 8.06. Restricted Payments. (a) The Company will not pay any dividends or redeem, retire, purchase, guaranty the value of 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, except to the extent that the consideration therefor consists solely of shares of stock (including warrants, rights or options relating thereto) of the Company or except as previously disclosed to the Agent in respect of dividends paid by ST Piping, Inc., a Subsidiary of the Company. (b) The Subsidiaries may declare dividends, make or repay any loans or advances, or otherwise transfer any money or other assets to the Company during the term hereof except in the ordinary course of business, all such dividends, loans or transfers which represent the proceeds of any sale or disposition of non-inventory assets, or of any divestiture of all or part of the stock of any -42- 48 entity shall be simultaneously transferred to the Collateral Agent for the benefit of the Banks and the Other Senior Lenders in accordance with the terms of the Intercreditor Agreement. 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 Event of Default to make any voluntary prepayments of principal or interest on any other of the Company's Indebtedness except in accordance with the terms of the Intercreditor Agreement. 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 $2,000,000.00 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. Consolidated Net Worth. The Company will not permit its Consolidated Net Worth to be less $38,500,000.00 as of December 31, 1996, (ii) $39,000,000.00 as of March 31, 1997, (iii) $39,500,000.00 as of June 30, 1997, (iv) $40,000,000.00 as of September 30, 1997 and (v) $40,500,000.00 as of December 31, 1997, and at all times thereafter during the term hereof, plus, in all cases increasing by 100% of the value of any consideration received (other than from the Company or any Subsidiary) 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 8.12. Minimum EBITDA. The Company will not permit its consolidated EBITDA, computed quarterly on a rolling four quarters basis, to be less than (i) $4,000,000.00 for the four (4) fiscal quarters ending December 31, 1996, (ii) $5,000,000.00 for the four (4) fiscal quarters ending March 31, 1997, (iii) $7,100,000.00 for the four (4) fiscal quarters ending June 30, 1997, (iv) $9,000,000.00 for the four (4) fiscal quarters ending September 30, 1997 -43- 49 and (v) $11,000,000.00 for the four (4) fiscal quarters ending December 31, 1997, and at all times thereafter during the term hereof, provided, the special charge taken by the Company, in regard to the Krajicek Note, shall not be included in making these calculations. SECTION 8.13. Total Debt to Capitalization Ratio: The Company will not permit the ratio of (a) its total Funded Debt to (b) the Company's total capitalization to be greater than (i) .5 to 1.0 as of December 31, 1996, March 31, 1997 and June 30, 1997 and (ii), .45 to 1.0 as of September 30, 1997 and December 31, 1997 and at all times thereafter. SECTION 8.14. Capital Expenditures. The Company will not permit total consolidated capital expenditures (including Capitalized Lease Obligations) (i) for the fiscal quarters ending December 31, 1996, March 31, 1997 and June 30, 1997 to be greater than $250,000.00 per fiscal quarter, and (ii) for the fiscal quarter ending September 30, 1997 and December 31, 1997, to be greater than $500,000.00 per fiscal quarter. SECTION 8.15. Fixed Charge Coverage Ratio. The Company will not permit the ratio of (a) EBITDA to (b) the sum of: required principal repayments on all Funded Debt, plus required interest payments, all calculated for the preceding four (4) quarters on a rolling four quarter basis, to be less than (i) 1.34 to 1.0 for the fiscal quarter ending December 31, 1996, (ii) 1.46 to 1.0 for the fiscal quarter ending March 31, 1997, (iii) 2.32 to 1.0 for the fiscal quarter ending June 30, 1997, (iv) 1.82 to 1.0 for the fiscal quarter ending September 30, 1997 and (v) 2.5 to 1.0 for the fiscal quarter ending December 31, 1997, provided the special charge taken by the Company in regard to the Krajicek Note shall not be included in making these calculations. 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. This -44- 50 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. 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 -45- 51 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 (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. 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, unless and until the Obligations of the Company guaranteed hereby have been fully and finally satisfied. Until such time, 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 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, or any security that the Agent or any Bank now has or -46- 52 hereafter acquires, whether or not such claim, right or remedy arises in equity, under contract, by statute, under common law or otherwise. If any amount shall be paid to a Guarantor by the Company or another Guarantor after payment in full of the Obligations, and the Obligations shall thereafter be reinstated in whole or in part and the Agent or any Bank forced to repay and sums received by any of them in payment of the Obligations, this Guaranty shall be automatically reinstated and 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 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, -47- 53 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; 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; or (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 and Indebtedness owing to the Other Senior Lenders) 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 -48- 54 (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) the Company shall be in default in respect of any Indebtedness owing to any of the Other Senior Lenders; or (h) any Person shall make any draw under or present any Letter of Credit issued by ABN AMRO for the account of the Company, F. C. Schaffer or any direct or indirect Subsidiary of either, for payment in whole or in part; or (i) 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 (j) a Change of Control shall occur. 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 -49- 55 (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 or under any applicable state or federal law. 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 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 -50- 56 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 or cable) reasonably believed by it to be genuine and signed or sent by the proper party or parties. 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, -51- 57 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 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 -52- 58 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 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. -53- 59 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 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: Gale Manning -54- 60 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, and provided further that communications sent by telecopy after 5:00 P.M., Houston, Texas time, shall be effective on the next succeeding business day. 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 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, -55- 61 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. Release and Indemnity. (a) The Company and each of its Subsidiaries, for themselves, their officers, agents, successors and assigns (the "Releasing Parties") do hereby release and forever discharge the Agent and the Banks and each Affiliate thereof and their respective employees, officers, directors, trustees, agents, successors, assigns or other representatives from any and all claims (civil or criminal), demands, damages, actions, cross-actions, causes of action, costs and expenses (including legal expenses), of any kind or nature whatsoever, which any Releasing Party has held or may now or in the future own or hold, whether known or unknown, for or because of any matter or thing done, omitted or suffered to be done on or before the Execution Date hereof by any of such Person (i) arising directly or indirectly out of the Prior Credit Agreement or the Loan Documents or any other documents, instruments or any other transactions relating thereto and/or (ii) relating directly or indirectly to all transactions by and between any of the Releasing Parties and the Agent or the Banks. Such release, waiver, acquittal and discharge shall and does include, without limitation, any claims of usury which may or could be asserted by the Releasing Parties. This release shall not include a release of the Agent or the Banks from any claim by the Releasing Parties for breach by the Agent or the Banks of this Agreement. (b) The Company shall and hereby does 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. (C) WITHOUT LIMITING ANY PROVISION OF THIS AGREEMENT, IT IS THE EXPRESS INTENTION OF THE PARTIES HERETO THAT EACH PERSON TO BE INDEMNIFIED HEREUNDER SHALL BE INDEMNIFIED AND HELD HARMLESS AGAINST ANY AND ALL LOSSES, LIABILITIES, CLAIMS OR 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 OF STRICT LIABILITY. Without prejudice to the survival of any other obligations of the Company hereunder and under the other Loan Documents, -56- 62 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. 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 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 -57- 63 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 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 -58- 64 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, substantially in the form of Exhibit 12.10(c) hereto, 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 from the Assignee Bank 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 (unless otherwise agreed to by the assigning Bank, the Eligible Assignee thereunder and the Agent) shall be at least five Business Days after the execution thereof, (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). (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, (i) 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 and (ii) make any assignment or participation in order to effect the terms and requirements of the Intercreditor Agreement. In the event of any participation under this paragraph (d) of Section 12.10, the participation certificate utilized shall be in the form of Exhibit 12.10(d). 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 -59- 65 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 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. Additional Exposure. The Company and its Subsidiaries acknowledge that TCB, individually, is incurring the Additional Exposure because of the cash management services and daylight overdraft advances provided by TCB to the Company and its Subsidiaries on a completely voluntary basis and without obligation to do so. The Company hereby acknowledges and agrees that TCB may, at any time, cease to provide such services and neither Company nor any Subsidiary shall have any claim or right against TCB in regard to said services or TCB's decision to stop providing same. -60- 66 SECTION 12.16. 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; (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. -61- 67 (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 12.17. 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 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 ANY SUCH COURT THAT ANY SUCH ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. SECTION 12.18. 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. -62- 68 SECTION 12.19. 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. -63- 69 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/DEBTOR: SERV-TECH, INC. By: /s/ DAVID P. TUSA -------------------------------------- David P. Tusa Senior Vice President of Finance and Administration DEBTORS/SUBSIDIARIES: ADVANCED REFRACTORY SERVICES, INC. AMERICAN MECHANICAL SERVICES, INC. CASTING CONCEPTS, INC. CON-SEAL, 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. ST PIPING, INC. TOTAL REFRACTORY SYSTEMS, INC. TURNAROUND MAINTENANCE, INC. UNITED INDUSTRIAL MATERIALS, INC. By: /s/ DAVID P. TUSA --------------------------------------- David P. Tusa Vice President -64- 70 SECO INDUSTRIES, INC. SERV-TECH ENGINEERS, INC. SERV-TECH EPC, INC. By: /s/ DAVID P. TUSA --------------------------------------- David P. Tusa Senior Vice President of Finance and Administration PRS HOLDINGS, INC. By: /s/ DAVID P. TUSA --------------------------------------- David P. Tusa Senior Vice President DELTA MAINTENANCE, INC. PETRO RECOVERY SYSTEMS, INC. SERV-TECH CONSTRUCTION AND MAINTENANCE, INC. (Formerly Serv Tech EPC - Houston, Inc.) SERV-TECH INTERNATIONAL SALES, INC. SERV-TECH OF NEW MEXICO, INC. SERV-TECH SERVICES, INC. TERMINAL TECHNOLOGIES, INC. TIPCO ACQUISITION CORP. By: /s/ DAVID P. TUSA --------------------------------------- David P. Tusa President -65- 71 AGENT/SECURED PARTY: AMOUNT OF COMMITMENT TEXAS COMMERCE BANK NATIONAL - -------------------- ASSOCIATION, as Agent and Individually, as a Bank $16,786,050.00 By: /s/ CURTIS D. KARGES -------------------------------------- Curtis D. Karges Senior Vice President BANKS: AMOUNT OF COMMITMENT BANK ONE, TEXAS, NA - -------------------- $6,713,950.00 By: /s/ JOHN E. ELAM, JR. --------------------------------------- John E. Elam, Jr. Vice President -66- EX-10.37 3 NOTE RESTRUCTURING AGREEMENT 1 EXHIBIT 10.37 NOTE RESTRUCTURING AMENDMENT TO NOTE PURCHASE AGREEMENTS DATED AS OF NOVEMBER 12, 1996 SERV-TECH, INC. $15,000,000 RESTATED SENIOR NOTES DUE JUNE 15, 2003 2 TABLE OF CONTENTS 1. STATUS OF ORIGINAL NOTE PURCHASE AGREEMENT AND PRIOR AMENDMENTS . . . . . . . . . . . . . . . . . . . . . . 3 2. ISSUANCE OF RESTATED SENIOR NOTES IN EXCHANGE FOR ORIGINAL SENIOR NOTES . . . . . . . . . . . . . . . . . . 3 2.1 ISSUANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2.2 INTEREST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2.3 REPAYMENT OF PRINCIPAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2.4 MATURITY DATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2.5 CALCULATION AND PAYMENT OF MAKE-WHOLE AMOUNT . . . . . . . . . . . . . . . . . . . . . . . 4 3. COLLATERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 3.1 COLLATERAL SECURITY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 3.2 PRIORITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 4. FEES AND EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 4.1 RESTRUCTURING FEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 4.2 EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 5. ACKNOWLEDGMENT OF FULL PERFORMANCE; RELEASE; WAIVER OF EXISTING DEFAULTS . . . . . . . . . . . . . . . . . . 7 5.1 FULL PERFORMANCE BY NOTEHOLDERS AND RELEASE . . . . . . . . . . . . . . . . . . . . . . . . 7 5.2 WAIVER OF EXISTING KNOWN DEFAULTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 6. CLOSING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 6.1 TIME AND PLACE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 6.2 DOCUMENTS TO BE DELIVERED AT CLOSING. . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 6.3 CONDITIONS TO CLOSING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 7. WARRANTIES AND REPRESENTATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 7.1 RESTATEMENT OF CERTAIN WARRANTIES AND REPRESENTATIONS . . . . . . . . . . . . . . . . . . . 10 7.2 FINANCIAL STATEMENTS; INDEBTEDNESS; MATERIAL ADVERSE CHANGE. . . . . . . . . . . . . . . . 11 7.3 SUBSIDIARIES AND AFFILIATES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 7.4 FULL DISCLOSURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 7.5 SALE OF RESTATED SENIOR NOTES IS LEGAL AND AUTHORIZED; OBLIGATIONS ARE ENFORCEABLE . . . . 13 7.6 GOVERNMENTAL CONSENT TO SALE OF RESTATED SENIOR NOTES . . . . . . . . . . . . . . . . . . . 13 7.7 NO DEFAULT AT CLOSING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 8. REGISTRATION; EXCHANGE; SUBSTITUTION OF RESTATED SENIOR NOTES . . . . . . . . . . . . . . . . . . . . . . . 13 9. COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 9.1 PRIOR COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 9.2 CONSOLIDATED NET WORTH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 9.3 FIXED CHARGE COVERAGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 9.4 LEVERAGE RATIO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 9.5 FUNDED DEBT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
-i- 3 9.6 RESTRICTED SUBSIDIARY INDEBTEDNESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 9.7 LIENS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 9.8 RESTRICTED PAYMENTS AND RESTRICTED INVESTMENTS . . . . . . . . . . . . . . . . . . . . . . 19 9.9 MERGER, CONSOLIDATION, ETC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 9.10 TRANSFER OF PROPERTY, ETC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 9.11 TRANSACTIONS WITH AFFILIATES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 9.12 CONSOLIDATED EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 9.13 CONSOLIDATED CAPITAL EXPENDITURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 10. INFORMATION AND CERTIFICATES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 10.1 ADDITIONAL FINANCIAL AND BUSINESS INFORMATION . . . . . . . . . . . . . . . . . . . . . . . 23 11. EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 11.1 NATURE OF EVENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 12. TERMS DEFINED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 12.1 RESTRICTED INVESTMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 12.2 CONSOLIDATED EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 12.3 CONSOLIDATED CAPITAL EXPENDITURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 12.4 R.W. KRAJICEK NOTE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Exhibits - -------- Exhibit A - Form of Restated Senior Note Exhibit B - Property to be Encumbered Exhibit C - Collateral Documentation List Exhibit D - Schedule of Restated Senior Notes with Payees Exhibit E - Form of Closing Opinion from Company's Counsel Exhibit F - Secretary's Certificate with - Resolutions - Amendments to Articles - Amendments to Bylaws - Incumbency Exhibit G - Officer's Closing Certificate Exhibit H - List of Affiliates for which Good Standing Certificates are Delivered Annexes - ------- Annex 1 - Financial Statements Annex 2 - Indebtedness of Company and Restricted Subsidiaries Annex 3 - Subsidiaries and Affiliates
-ii- 4 NOTE RESTRUCTURING AMENDMENT This Note Restructuring Amendment to Note Purchase Agreements (this "Amendment") is made and entered into as of the 12th of November, 1996, by and between SERV-TECH, INC. (the "Company") and PRINCIPAL MUTUAL LIFE INSURANCE COMPANY, TMG LIFE INSURANCE COMPANY, THE SECURITY MUTUAL LIFE INSURANCE COMPANY, and BERKSHIRE LIFE INSURANCE COMPANY ("Noteholders"), purchasers of the Company's $15,000,000 of 8.41% Senior Notes due June 15, 2003 (the "Original Senior Notes") pursuant to certain Note Purchase Agreements dated as of June 1, 1993 between the Company and each Noteholder (the "Original Note Purchase Agreements"), as amended by First, Second, Third, Fourth, Fifth and Sixth Amendments to Note Purchase Agreements, executed as of March 22, 1995, August 8, 1995, November 13, 1995, March 11, 1996, May, 1996 and August 14, 1996, respectively (together the "Prior Amendments"). RECITALS A. The Company currently owes $15,000,000 in aggregate principal amount to the Noteholders as evidenced by the Original Senior Notes. B. The Company currently owes an aggregate of $19,454,067 (the "Existing Bank Loan") to Texas Commerce Bank National Association and BankOne Texas, N.A. (the "Banks"), pursuant to a Credit Agreement dated as of May 15, 1995, as amended and restated by Amendments to Credit Agreement effective as of July 19, 1995 and August 14, 1996 and as further amended contemporaneously herewith (the "Credit Agreement") and the notes thereunder (the "Bank Notes"). The Company is also obligated on certain conditions to reimburse TCB for certain liabilities incurred from time to time by the Company through its use of cash management services provided by TCB, including any overdrafts by the Company and amounts of automated clearing house funds that may erroneously be credited to the Company's account with TCB (the "Cash Management Liabilities"). 5 C. The Company and certain of its subsidiaries are obligated, on certain conditions, pursuant to a Guaranty (the "ABN Guaranty") dated as November 1, 1994, to reimburse ABN AMRO Bank, N.V. ("ABN") with respect to performance security and advance payment letters of credit (the "ABN Letters of Credit"), currently in the aggregate amount of $15,195,368.77, issued by ABN pursuant to its Continuing Reimbursement Agreement with F.C. Schaffer & Associates, Inc. dated as of November 1, 1994 as amended by First and Second Amendments to Continuing Reimbursement Agreement dated July ___, 1995 and April 30, 1996, respectively. (The ABN Guaranty, ABN Letters of Credit, Continuing Reimbursement Agreement and related documents, as amended to date, are hereinafter referred to as the "ABN Documents"). D. The Company is now in default and has therefore requested certain financial accommodations from the Noteholders, the Banks, and ABN by way of amendment and adjustment to the terms, conditions, and provisions of the Original Note Purchase Agreement, the Credit Agreement, and the ABN Documents. E. The Noteholders have agreed to modification of the Original Note Purchase Agreements and, in connection therewith, to exchange of the Original Senior Notes for Restated Senior Notes (defined below) all on the terms and conditions provided for below. F. Terms capitalized in this Amendment shall have the meanings assigned to them in the Original Note Purchase Agreement except as otherwise specifically provided for herein. AGREEMENT NOW, THEREFORE, in consideration of these premises and for other good and valuable consideration, the receipt of which is acknowledged by all parties, the parties to this Amendment agree as follows: 2 6 1. STATUS OF ORIGINAL NOTE PURCHASE AGREEMENT AND PRIOR AMENDMENTS 1.1 Except as specifically amended or waived below, the Original Note Purchase Agreements shall continue in full force and effect and references to "Notes" therein shall instead be read as references to the Restated Senior Notes. 1.2 At Closing hereunder the Prior Amendments shall be replaced and superseded in their entirety by this Amendment. 2. ISSUANCE OF RESTATED SENIOR NOTES IN EXCHANGE FOR ORIGINAL SENIOR NOTES 2.1 ISSUANCE. The Company has authorized the issuance of Fifteen Million Dollars ($15,000,000) in aggregate principal amount of its Restated Senior Notes due June 15, 2003 (the "Restated Senior Notes"). The Restated Senior Notes shall be in the form of Exhibit A hereto, and shall have the terms as herein and therein provided, and the terms therein provided are incorporated herein by reference as if set forth herein in full. At Closing hereunder, the Restated Senior Notes shall be delivered to the Noteholders in exchange for the Original Senior Notes, which shall be replaced and superseded by Restated Senior Notes dated November 1, 1996. At Closing the Original Senior Notes shall be marked "CANCELLED" and returned to the Company. 2.2 INTEREST. (a) PAYMENT. Accrued and unpaid interest on the Restated Senior Notes shall be payable on the first Business Day of each month beginning December 1, 1996. (b) INTEREST RATE. The Restated Senior Notes shall bear interest at an annual rate: (i) From November 1, 1996, through December 31, 1997, of ten and one-half percent (10.50%); 3 7 (ii) From January 1, 1998, through March 31, 1998, of ten and three-quarters percent (10.75%); and (iii) For each fiscal quarter beginning after March 31, 1998, at a rate that is one-quarter percent (0.25%) per annum greater than the rate for the next preceding fiscal quarter, but not to exceed eleven and one-half percent (11.50%) per annum. 2.3 REPAYMENT OF PRINCIPAL. SCHEDULED MANDATORY PRINCIPAL AMORTIZATION PAYMENTS. The Company shall pay, and there shall become due and payable, Two Hundred Eight Thousand Three Hundred Thirty-three and 33/100 Dollars ($208,333.33) in principal amount of the Restated Senior Notes on the first Business Day of each month beginning July 1, 1997, until maturity or full repayment of the Restated Senior Notes in accordance with the terms hereof. 2.4 MATURITY DATE. MATURITY DATE. Unless sooner accelerated pursuant to the terms thereof or the terms of the Original Note Purchase Agreement as amended hereby or prepaid in full, all then outstanding principal and accrued and unpaid interest on the Restated Senior Notes shall be due and payable in full on June 15, 2003 (the "Maturity Date"). 2.5 CALCULATION AND PAYMENT OF MAKE-WHOLE AMOUNT. (a) ASSUMED 8.41% INTEREST RATE. Notwithstanding the adjustment to interest rate provided in Section 2.2 above, an interest rate of 8.41% per annum, payable semi-annually on June 15 and December 15 in each year, shall be assumed for the sole purpose of calculating any Make-Whole Amount that may come due under the Original Note Purchase Agreement as amended hereby. 4 8 (b) NO MAKE-WHOLE AMOUNT DUE FROM CHANGE IN SCHEDULED MANDATORY PRINCIPAL AMORTIZATION PAYMENTS. No Make-Whole Amount shall ever be due on Closing hereunder or as a result of the change in scheduled mandatory principal amortization payments from the Original Senior Notes to the Restated Senior Notes as provided in Section 2.3 above. Otherwise, Make-Whole Amounts shall be due and payable upon any optional or mandatory prepayment of principal or repayment of principal upon acceleration or demand prior to the Maturity Date. 3. COLLATERAL 3.1 COLLATERAL SECURITY. The Restated Senior Notes and all obligations of the Company to the Noteholders under the Original Note Purchase Agreement as amended hereby shall be guaranteed by those Affiliates and Subsidiaries of the Company listed on Annex 3 hereto ("Guarantors") and shall be secured by security agreements, pledges, mortgages, trust deeds and/or other collateral transfer or assignment documentation (the "Collateral Security Documentation") to TCB as collateral agent for the Noteholders, the Banks and ABN encumbering in favor of the Noteholders, the Banks and ABN substantially all of the material assets of the Company and its Subsidiaries. Property to be encumbered pursuant to the Collateral Security Documentation includes, but is not limited to, that property listed on Exhibit B hereto. The Collateral Security Documentation and related collateral documentation is listed on Exhibit C hereto. 3.2 PRIORITY. The liens and security interests to be granted to TCB as collateral agent for the Noteholders pursuant to Section 3.1 above shall be the same liens and security interests to be contemporaneously granted in favor of the Banks and ABN to secure all obligations of the Company to the Banks and ABN for the Cash Management Liabilities not exceeding $2,000,000.00 at any one time outstanding and under the Credit Agreement and the ABN 5 9 Documents. Such liens and security interests shall be junior only to liens and security interests in favor of the Banks granted to secure repayment of a new revolving line of credit to the Company in an aggregate amount not to exceed $4 million at any one time outstanding (the "Senior Secured Loan"), available until and maturing on June 30, 1997. 4. FEES AND EXPENSES 4.1 RESTRUCTURING FEE. At Closing hereunder the Company shall pay to each Noteholder other than Principal Mutual Life Insurance Company a fee ("Note Restructuring Fee") in an amount equal to one half percent (0.50%) of the principal balance of each Restated Senior Note to be issued hereunder to it. A Note Restructuring Fee shall be paid at such time to Principal Mutual Life Insurance Company in the amount of six tenths percent (0.60%) of the principal balance of the Restated Senior Note to be issued hereunder to Principal Mutual Life Insurance Company. 4.2 EXPENSES. The Company shall pay upon presentation of an invoice therefor the reasonable fees and expenses incurred by the Noteholders in connection with the debt restructuring which is the subject of this Amendment, including but not limited to, the reasonable fees and expenses of outside counsel, reasonable travel expenses, filing and recording fees, postage, courier, copying, telecopy, telephone expenses and the like. The Company shall not be responsible for the fees and expenses of more than one outside law firm for all Noteholders. 5. ACKNOWLEDGMENT OF FULL PERFORMANCE; RELEASE; WAIVER OF EXISTING DEFAULTS 5.1 FULL PERFORMANCE BY NOTEHOLDERS AND RELEASE. By executing this Amendment the Company confirms and acknowledges that the Noteholders, and each of them, have fully paid the purchase price for the Original Senior Notes and the Restated Senior Notes and have fully, fairly and completely performed each and every obligation of the Noteholders to the Company owing in connection with the Original Senior 6 10 Notes and the Restated Senior Notes. The Company further acknowledges that the indebtedness evidenced by the Original Senior Notes, before exchanged for the Restated Senior Notes, and by the Restated Senior Notes, once exchanged for the Original Senior Notes, is the just indebtedness of the Company, owing to the Noteholders according to its terms, without defense, setoff or counterclaim. In consideration of the execution of this Amendment by the Noteholders, the Company by executing this Amendment releases and waives any claim it might have as of Closing hereunder against the Noteholders, or any of them, whether known or unknown, in any way related to the Original Senior Notes, the Original Note Purchase Agreement, the Restated Senior Notes or this Amendment. 5.2 WAIVER OF EXISTING KNOWN DEFAULTS. The Company has disclosed in writing to the Noteholders all Events of Default that may exist under the Original Note Purchase Agreements and the Original Senior Notes immediately prior to closing under this Amendment. Each of the Noteholders, in consideration of the agreements of the Company hereunder, hereby waives each such default or Event of Default. The Noteholders hereby represent and warrant to the Company that, as of Closing hereunder, they know of no other default or Event of Default under the Original Note Purchase Agreements, or the Original Senior Notes, and no default or Event of Default resulting from the execution and delivery of the Restated Senior Notes, this Amendment, the Collateral Documentation or any of the other documentation executed and delivered or transactions effected at Closing. It is agreed and understood that such waivers of defaults or Events of Default by the Noteholders shall not constitute a waiver of any other, similar or future default or Event of Default under the Original Note Purchase Agreements as amended hereby or the Restated Senior Notes. 6. CLOSING 6.1 TIME AND PLACE. 7 11 The closing ("Closing") of the Company's exchange of the Original Senior Notes for the Restated Senior Notes will be held on November 13, 1996 (the "Closing Date") at 10:00 a.m., local time, at the office of Andrews & Kurth, Houston, Texas. At the Closing the Company will exchange the Restated Senior Notes for the Original Senior Notes held by the Noteholders in the principal amounts indicated on Exhibit D hereto. 6.2 DOCUMENTS TO BE DELIVERED AT CLOSING. At the Closing the Company will deliver to the Noteholders or their agents, duly executed by the Company where appropriate, the following documents and things: (a) This Amendment; (b) The Restated Senior Notes; (c) Copies of the Collateral Security Documentation; (d) The Note Restructuring Fee and payment of all expenses of Noteholders as provided in Section 4.2 above; (e) Payment of all accrued interest due the Noteholders through Closing; (f) The opinion of Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P. addressed to Noteholders substantially in the form of Exhibit E hereto; (g) Secretary's Certificate from the Company in the form of Exhibit F attaching copies of board resolutions authorizing entry into this Amendment, issuance of the Restated Senior Notes and related matters; any amendments to Company Articles and Bylaws since June 1, 1993; and as to the incumbency of officers authorized to sign documents for the Company and Guarantors in connection with Closing; (h) An Officer's Closing Certificate in the form of Exhibit G concerning accuracy of warranties of the Company and other matters at and as of the Closing Date; 8 12 (i) Copies of all amendments or supplements to the Credit Agreement and all documents relating to the Senior Secured Loan; (j) Copies of all amendments or supplements to the ABN Documents; and (k) Good Standing Certificates for the Company and each Affiliate listed on Exhibit H hereto. At the Closing the Noteholders will deliver to the Company or its agents the Original Senior Notes marked "CANCELLED". 6.3 CONDITIONS TO CLOSING. The Noteholders' obligation at Closing to exchange the Original Senior Notes for the Restated Senior Notes is subject to the following conditions precedent to be met at or prior to Closing and upon Closing such conditions shall be deemed satisfied or if not satisfied, deemed waived: (a) The Noteholders shall have received each of the documents identified in Section 6.2 above, and any other documents relating thereto which Noteholders may reasonably request, each in form and content satisfactory to the Noteholders and their counsel; (b) All amounts due for interest accrued and unpaid through the date of Closing, the Note Restructuring Fee, and reimbursement of fees and expenses to the Noteholders under Section 4.2 shall be paid to the Noteholders; (c) Noteholders shall be satisfied in their sole discretion with the credit restructuring arrangements reached between the Company and the Banks and between the Company and ABN; (d) No default or condition which would constitute a default with the giving of notice and/or the passage of time, except those that are the subject of a written waiver as called for in Section 5.2, shall exist under the Original Note Purchase 9 13 Agreement as amended hereby, the Credit Agreement, as amended, or the ABN Documents, as amended; (e) An intercreditor and collateral agency agreement or agreements, on terms satisfactory to Noteholders, shall be entered into by and among the Noteholders, the Banks, and ABN relating to the rights and obligations among said creditors in dealing with the Company and collateral for the Company's obligations to said creditors; and (f) All proceedings taken in connection with the issuance and exchange of the Restated Senior Notes for the Original Senior Notes and all documents and papers relating thereto shall be satisfactory to the Noteholders and their counsel. The Noteholders and their counsel shall have received copies of such documents and papers as they may reasonably request in connection therewith, all in form and substance satisfactory to the Noteholders and their counsel. 7. WARRANTIES AND REPRESENTATIONS The Company hereby supplements and modifies the warranties and representations contained in Article 2 of the Original Note Purchase Agreement as follows: 7.1 RESTATEMENT OF CERTAIN WARRANTIES AND REPRESENTATIONS. The Company hereby restates as of Closing hereunder, with the modifications specified below, the warranties and representations contained in Section 2.4 ("Title to Properties"), Section 2.5 ("Taxes"), Section 2.6 ("Pending Litigation"), Section 2.8 ("Corporate Organization and Authority" except as to the good standing of Mac-Tech, Inc.), Section 2.9 ("Charter Instruments, Other Agreements"), Section 2.10 ("Restrictions on Company and Subsidiaries"), Section 2.11 ("Compliance with Laws"), and Section 2.13 ("Environmental Compliance") of the Original Note Purchase Agreement. (a) SECTION 2.4(a). The reference to Annex 3 shall be to Annex 1 of this Amendment; (b SECTION 2.5. 10 14 (i) The reference in subsection (a)(ii) to "fiscal years 1990 through 1992" is replaced with "fiscal years 1993 through 1995"; (ii) The references to Annex 3 in subsections (b)(i) and (ii) shall be to Annex 1 of this Amendment; (c) SECTION 2.8(d). The reference to Annex 3 shall be to Annex 3 of this Amendment; (d) SECTION 2.9. The reference to absence of defaults and violations of the terms of agreements or instruments is subject to receiving the waivers to be given in connection with Closing hereunder; and (e) SECTION 2.10(b). The reference to Annex 3 shall be to Annex 2 of this Amendment. 7.2 FINANCIAL STATEMENTS; INDEBTEDNESS; MATERIAL ADVERSE CHANGE. (a) FINANCIAL STATEMENTS. The Company has provided the Noteholders with its financial statements described in Annex 1 hereto. Such financial statements have been prepared in accordance with generally accepted accounting principles consistently applied, and present fairly, in all material respects, the consolidated financial position of the Company and its consolidated subsidiaries as of such dates and the results of its operations and cash flows for such periods. (b) INDEBTEDNESS. Annex 2 hereto lists all indebtedness of the Company and the Restricted Subsidiaries as of the Closing Date, and provides the following information with respect to each item of such indebtedness: the holder thereof and type thereof; the outstanding amount; the current portion; and the collateral securing such indebtedness, if any. (c) MATERIAL ADVERSE CHANGE. Since June 30, 1996, there has been no change in the business, prospects, profits, Properties or condition (financial or 11 15 otherwise) of the Company and its Restricted Subsidiaries taken as a whole except (i) changes in the ordinary course of business that, in the aggregate for all such changes, could not reasonably be expected to have a Material Adverse Effect, and (ii) changes that have been disclosed in writing to the Noteholders. 7.3 SUBSIDIARIES AND AFFILIATES. Annex 3 hereto sets forth the information for Subsidiaries and Affiliates called for in Section 2.3(a) of the Original Note Purchase Agreement, amended to be accurate as of the Closing Date hereunder. 7.4 FULL DISCLOSURE. None of the financial statements referred to in Section 7.2 above, this Amendment, and any written statement furnished by or on behalf of the Company to the Noteholders in connection with the negotiation or closing of the sale of the Restated Senior Notes, taken as a whole, contains any untrue statement of material fact or omits a material fact necessary to make the statements contained therein and herein not misleading. There is no fact that the Company has not disclosed to the Noteholders in writing that has had or, so far as the Company can now reasonably foresee, could reasonably be expected to have a Material Adverse Effect. 7.5 SALE OF RESTATED SENIOR NOTES IS LEGAL AND AUTHORIZED; OBLIGATIONS ARE ENFORCEABLE. The Company hereby represents and warrants to the Noteholders, with respect to this Amendment and the Restated Senior Notes, each of those matters set forth in Section 2.14 of the Original Note Purchase Agreement except to the extent said Section relates to creation of liens against property of the Company or Subsidiaries. 12 16 7.6 GOVERNMENTAL CONSENT TO SALE OF RESTATED SENIOR NOTES. The Company hereby represents and warrants to the Noteholders, with respect to the Restated Senior Notes, each of those matters set forth in Section 2.15 of the Original Note Purchase Agreement except as required by the Collateral Documentation. 7.7 NO DEFAULT AT CLOSING. Upon receipt of the waivers referred to in Section 5.2 above and waivers from the Banks and ABN to be delivered at Closing, no event has occurred and no condition exists that upon the execution and delivery of this Amendment and the exchange of the Restated Senior Notes for the Original Senior Notes, would constitute a Default or an Event of Default. 8. REGISTRATION; EXCHANGE; SUBSTITUTION OF RESTATED SENIOR NOTES. The Company hereby makes and restates with respect to the Restated Senior Notes each of the agreements and undertakings contained in Article 5 of the Original Note Purchase Agreement with respect to the Original Senior Notes. 9. COVENANTS. 9.1 PRIOR COVENANTS. The Company reaffirms as of the Closing Date hereunder each of the covenants, except as specifically amended below, contained in Article 6 of the Original Note Purchase Agreement and, in connection with entry into this Amendment and issuance of the Restated Senior Notes makes the following additional and supplemental covenants. 9.2 CONSOLIDATED NET WORTH. The Company's covenant concerning consolidated net worth contained in Section 6.4 of the Original Note Purchase Agreement is replaced in its entirety with the following: 6.4 CONSOLIDATED NET WORTH. Through the fiscal quarter ending December 31, 1997, the Company will not permit Consolidated Net Worth, determined as of the end of each fiscal quarter of the Company, to be less than the following amounts: 13 17 ================================================================================ Quarter Ended 12-31-96 3-31-97 6-30-97 9-30-97 12-31-97 - -------------------------------------------------------------------------------- Amount $38.5 $39.0 $39.5 $40.0 $40.5 (in millions) ================================================================================
Following the fiscal quarter ending December 31, 1997, the Company will not at any time permit Consolidated Net Worth, determined as of the end of the fiscal quarter of the Company then most recently ended, to be less than the sum of (a) Forty Million Five Hundred Thousand Dollars ($40,500,000), plus (b) the sum of the Fiscal Quarter Net Worth Increase Amounts for all fiscal quarters of the Company ended during the period beginning January 1, 1998 and ending at such time. "Consolidated Net Worth" means total assets minus total liabilities of the Company and the Restricted Subsidiaries, determined on a consolidated basis for such Persons in accordance with GAAP. "Fiscal Quarter Net Worth Increase Amount" means, for any fiscal quarter of the Company, the greater of (i) fifty percent (50%) of Consolidated GAAP Net Income for such fiscal quarter, and (ii) Zero Dollars ($0). 9.3 FIXED CHARGE COVERAGE. The Company's covenant with respect to fixed charge coverage contained in Section 6.5 of the Original Note Purchase Agreement is hereby replaced in its entirety with the following: 6.5 FIXED CHARGE COVERAGE. Determined as of the end of each fiscal quarter of the Company beginning December 31, 1996, the Company will not permit the ratio of (a) EBITDA for the period of four (4) consecutive fiscal quarters of the Company then most recently ended to 14 18 (b) The sum of required principal payments on all Debt (excluding obligations in respect of Capital Leases), plus required interest payments, all calculated for the preceding four (4) fiscal quarters to be less than the following ratios: ================================================================================ 4 Quarters Ended 12-31-96 3-31-97 6-30-97 9-30-97 12-31-97 - -------------------------------------------------------------------------------- Ratio 1.34:1 1.46:1 2.32:1 1.82:1 2.50:1 ================================================================================
provided however, the non-cash charge related to the R.W. Krajicek Note shall not be included in making these calculations. For each four consecutive fiscal quarters ending each quarter after December 31, 1997, the Company will not permit such ratio to be less than 2.25 to 1. 9.4 LEVERAGE RATIO. The Company's covenant with respect to leverage ratio contained in Section 6.6 of the Original Note Purchase Agreement is hereby replaced in its entirety with the following: 6.6 LEVERAGE RATIO. The Company will not at any time permit the ratio of (a) Consolidated Debt, determined as of the end of the fiscal quarter of the Company then most recently ended, to (b) Consolidated Capitalization, determined as of the end of such fiscal quarter to exceed the following ratios: ================================================================================ Quarter Ended 12-31-96 3-31-97 6-30-97 9-30-97 12-31-97 - -------------------------------------------------------------------------------- Ratio 0.50:1 0.50:1 0.50:1 0.45:1 0.45:1 ================================================================================
For each fiscal quarter ending after December 31, 1997, the Company shall not permit such ratio to exceed 0.45 to 1.0. 15 19 9.5 FUNDED DEBT. The Company's covenant with respect to Funded Debt contained in Section 6.7 of the Original Note Purchase Agreement is hereby replaced in its entirety with the following: 6.7 FUNDED DEBT. The Company will not, and will not permit any Restricted Subsidiary to, at any time after issuance of the Restated Senior Notes incur or in any other manner become liable in respect of any Funded Debt (other than Funded Debt of a Restricted Subsidiary to the Company) except, (a) guaranties of any Indebtedness of any Person not to exceed in the aggregate $250,000.00, 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 or Indebtedness to the Banks; (b) Indebtedness secured by Purchase Money Liens incurred in connection with acquisition of tangible assets from any third party not to exceed $250,000.00 in the aggregate during the term hereof; and (c) renewals and extensions (in the same or lesser principal amount on similar terms and conditions) of any Indebtedness listed in subparagraphs (a) and (b) of this Section 6.7. 9.6 RESTRICTED SUBSIDIARY INDEBTEDNESS. The Company's covenant with respect to Restricted Subsidiary Indebtedness in Section 6.8 of the Original Note Purchase Agreement is hereby replaced in its entirety with the following: 6.8 RESTRICTED SUBSIDIARY INDEBTEDNESS. The Company will not at any time permit the sum of (a) Total Restricted Subsidiary Indebtedness at such time, plus, without duplication, (b) the aggregate amount of all (i) Indebtedness and (ii) other obligations, in each case outstanding at such time and secured by Liens permitted by Section 6.9(a), to exceed ten percent (10%) of Consolidated Capitalization at such time. 16 20 9.7 LIENS. The Company's covenant with respect to restriction of Liens contained in subparagraph 6.9(a) of the Original Note Purchase Agreement is hereby replaced in its entirety with the following: (a) 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, except (i) Liens existing on the date of Closing and listed on Annex 2 and Liens granted in connection with Closing in favor of the Noteholders, the Banks and ABN; (ii) Liens for taxes, assessments, levies or other governmental charges not yet due or which are being contested in good faith by appropriate proceedings and for which adequate reserves are maintained in accordance with GAAP; (iii) Liens in connection with worker's compensation, unemployment insurance or other social security, old age pension or public liability obligations not yet due or which are being contested in good faith by appropriate proceedings and for which adequate reserves are maintained in accordance with GAAP; (iv) Operators', vendors', carriers', warehousemen's, repairmen's, mechanics', workers', materialmen's or other like Liens arising by operation of law in the ordinary course of business (or deposits to obtain the release of any such Lien) and securing amounts not yet due or which are being contested in good faith by appropriate proceedings and for which adequate reserves are maintained in accordance with GAAP; (v) deposits to secure insurance in the ordinary course of business; (vi) deposits to secure the performance of bids, tenders, contracts (other than contracts for the payment of money or the deferred purchase price of goods or services), leases, licenses, franchises, trade contracts, statutory obligations, surety and appeal bonds and performance bonds and other obligations of a like nature incurred in the ordinary course of business; (vii) easements, rights of way, covenants, restrictions, reservations, exceptions, encroachments, zoning and similar restrictions and other similar encumbrances (other than to secure the payment of borrowed money or the deferred purchase price of goods or services) or title defects, in each case incurred in the 17 21 ordinary course of business which, in the aggregate, are not substantial in amount, and which do not in any case singly or in the aggregate materially detract from the value or usefulness of the property subject thereto for the business conducted by the Company and its Subsidiaries or materially interfere with the ordinary conduct of the business of the Company and its Subsidiaries; (viii) bankers' liens arising by operation of law; (ix) inchoate Liens arising under ERISA to secure contingent liabilities of the Company and its Subsidiaries; (x) liens on assets of Subsidiaries to secure indebtedness to the Company, provided same are collaterally assigned to the Collateral Agent, provided further, such liens may be incurred only to the extent the underlying Indebtedness is otherwise permitted under the terms of this Amendment; and (xi) any renewal, extension or replacement of any Lien referred to in subparagraph (a)(i) through (x) 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 Indebtedness secured thereby shall not exceed the principal amount of the Indebtedness so secured at the time of such extension, renewal or replacement. 9.8 RESTRICTED PAYMENTS AND RESTRICTED INVESTMENTS. The Company's covenant with respect to Restricted Payments and Restricted Investments contained in Section 6.10 of the Original Note Purchase Agreement is hereby replaced in its entirety with the following: 6.10 RESTRICTED PAYMENTS AND RESTRICTED INVESTMENTS. The Company will not, and will not permit any Restricted Subsidiary to, declare or make any Restricted Payment or make any Restricted Investment, except dividends with respect to ST Piping, Inc. in accordance with contractual obligations existing on the date hereof. 18 22 9.9 MERGER, CONSOLIDATION, ETC. The Company's covenant with respect to merger and related matters contained in Section 6.11 of the Original Note Purchase Agreement is hereby amended by deletion of subparagraph (b) in its entirety. 9.10 TRANSFER OF PROPERTY, ETC. The Company's covenant with respect to transfers of property, etc. contained in Section 6.12 of the Original Note Purchase Agreement is hereby replaced in its entirety with the following: 6.12 TRANSFERS OF PROPERTY, RESTRICTED SUBSIDIARY STOCK. (a) TRANSFERS OF PROPERTY. The Company will not, and will not permit any Restricted Subsidiary to, sell (including, without limitation, any sale and subsequent leasing as lessee of such Property), lease as lessor, transfer or otherwise dispose of any Property (collectively referred to as "Transfers"), except: (i) Transfers of inventory and of obsolete or worn out Property, in each case in the ordinary course of business of the Company or such Restricted Subsidiary; (ii) Transfers from the Company to a Wholly-Owned Restricted Subsidiary; (iii) Transfers from a Restricted Subsidiary to the Company or to a Wholly-Owned Restricted Subsidiary; (iv) any other Transfer of Property at any time to a Person, other than an Affiliate, for an Acceptable Consideration if: (A) the sum of (1) the greater of (x) the Fair Market Value of such Property and (y) the current book value of such Property, plus (2) the aggregate of the amounts representing, in each case, the greater of the Fair Market Value or the book value of each other item of Property of the Company and the Restricted Subsidiaries Transferred (other than in Excluded Transfers) after the Closing Date, would not exceed ten percent (10%) of Consolidated Net 19 23 Tangible Assets determined as of the date of such Transfer; (B) the sum of (1) the Operating Income Contribution Percentage of such Property plus (2) the Operating Income Contribution Percentage of all other Property of the Company and the Restricted Subsidiaries Transferred (other than in Excluded Transfers) after the Closing Date, would not exceed ten percent (10%); and (C) immediately before and after the consummation of such Transfer, and after giving effect thereto, no Default or Event of Default would exist; provided, that any Transfer of Property shall be excluded for purposes of the foregoing clauses (iv)(A) and (iv)(B), if, within two hundred forty (240) days after such Transfer, the entire proceeds of such Transfer, net of reasonable and ordinary transaction costs and expenses incurred in connection with such Transfer, are applied by the Company or such Restricted Subsidiary to: (y) invest in new operating assets of a similar nature of the Company or any Restricted Subsidiary; or (z) pay, prior to its scheduled maturity, ratably to all holders thereof based on the then outstanding aggregate principal amount thereof, Qualified Senior Funded Debt, together with any Make-Whole Amount or premium required to be paid in connection therewith pursuant to Section 4.2 hereof or pursuant to any applicable provisions of any other agreement with respect to Qualified Senior Funded Debt; further provided, that any Material Subsidiary organized under the laws of Germany may sell, transfer or convey any of its properties and assets for Fair Market Value (whether in one transaction or in a series of transactions) to any Person if the proceeds of any such sale, transfer or conveyance are immediately distributed by such Material Subsidiary to the Company or a Guarantor and held by the Collateral Agent in an account at the Collateral Agent which is subject to a lien or security interest in favor of the Collateral Agent. (b) TRANSFERS OF RESTRICTED SUBSIDIARY STOCK. The Company will not, and will not permit any Restricted Subsidiary to, Transfer any shares of the stock (or any warrants, rights or options to purchase stock or other Securities exchangeable for or convertible into stock) of a Restricted Subsidiary (such stock, warrants, rights, options and other 20 24 Securities herein called "Restricted Subsidiary Stock"), nor will any Restricted Subsidiary issue, sell or otherwise dispose of any shares of its own Restricted Subsidiary Stock, provided that the foregoing restrictions do not apply to: (i) the issuance by a Restricted Subsidiary of shares of its own Restricted Subsidiary Stock to the Company or a Wholly-Owned Restricted Subsidiary; (ii) Transfers (other than leases) by the Company or a Restricted Subsidiary of shares of Restricted Subsidiary Stock to the Company or to a Wholly- Owned Restricted Subsidiary; (iii) the issuance by a Restricted Subsidiary of directors' qualifying shares; and (iv) the Transfer of all of the Restricted Subsidiary Stock of a Restricted Subsidiary owned by the Company and the other Restricted Subsidiaries if: (A) such Transfer satisfies the requirements of Section 6.12(a) hereof; (B) in connection with such Transfer the entire Investment (whether represented by stock, Indebtedness, claims or otherwise) of the Company and the other Restricted Subsidiaries in such Restricted Subsidiary is Transferred to a Person other than the Company or a Restricted Subsidiary not being simultaneously disposed of; (C) the Restricted Subsidiary being disposed of has no continuing Investment in any other Restricted Subsidiary not being simultaneously disposed of or in the Company; and (D) immediately before and after the consummation of such Transfer, and after giving effect thereto, no Default or Event of Default would exist. For purposes of determining the book value of Property constituting Restricted Subsidiary Stock being Transferred as provided in clause (iv) immediately above, such book value shall be deemed to be the aggregate book value of the Property of the Restricted Subsidiary that shall have issued such Restricted Subsidiary Stock. 21 25 9.11 TRANSACTIONS WITH AFFILIATES. The Company's covenant with respect to Transactions with Affiliates contained in Section 6.15 of the Original Note Purchase Agreement is hereby replaced in its entirety with the following: 6.15 TRANSACTIONS WITH AFFILIATES. The Company will not, and will not permit any Restricted Subsidiary to, enter into any transaction, including, without limitation, the purchase, sale or exchange of Property or the rendering of any service, with any Affiliate, except in the ordinary course of and pursuant to the reasonable requirements of the Company's or such Restricted Subsidiary's business and upon fair and reasonable terms no less favorable to the Company or such Restricted Subsidiary than would obtain in a comparable arm's-length transaction with a Person not an Affiliate. 9.12 CONSOLIDATED EBITDA. The following covenant shall be added as Section 6.19 of the Original Note Purchase Agreement concerning achieving earnings: 6.19 CONSOLIDATED EBITDA. Through the fiscal quarter ending December 31, 1997, the Company will not at any time permit Consolidated EBITDA for the period of four (4) consecutive fiscal quarters of the Company, determined as of the end of each fiscal quarter of the Company, to be less than the following amounts: ================================================================================ Quarter Ended 12-31-96 3-31-97 6-30-97 9-30-97 12-31-97 - -------------------------------------------------------------------------------- Amount $4.0 $5.0 $7.1 $9.0 $11.0 (in millions) ================================================================================
provided however, the non-cash charge related to the R.W. Krajicek Note shall not be included in making these calculations. Following the fiscal quarter ending December 31, 1997, the Company shall not permit Consolidated EBITDA for any period of four (4) consecutive fiscal quarters of the Company to be less than $11.0 million. 9.13 CONSOLIDATED CAPITAL EXPENDITURES. The following covenant shall be added as Section 6.20 of the Original Note Purchase Agreement concerning capital expenditures: 22 26 6.20 CONSOLIDATED CAPITAL EXPENDITURES. Through the fiscal quarter ending December 31, 1997, the Company will not permit Consolidated Capital Expenditures for each fiscal quarter to exceed the following amounts: ================================================================================ Quarter Ended 12-31-96 3-31-97 6-30-97 9-30-97 12-31-97 - -------------------------------------------------------------------------------- Amount $250 $250 $250 $500 $500 (in thousands) ================================================================================
Following the fiscal quarter ending December 31, 1997, the Company shall not permit Consolidated Capital Expenditures for any fiscal quarter to exceed $500 thousand. 10. INFORMATION AND CERTIFICATES The Company agrees that it shall continue to provide to the holders of the Restated Senior Notes the information, certificates and access for inspection that was to be provided to holders of the Original Senior Notes pursuant to Article 7 of the Original Note Purchase Agreement, in addition to the following. 10.1 ADDITIONAL FINANCIAL AND BUSINESS INFORMATION. Subparagraphs (l) and (m) are added to Section 7.1 "Financial and Business Information" as follows: (l) MONTHLY STATEMENTS -- as soon as practicable after the end of each monthly fiscal period in each fiscal year of the Company (other than the last monthly fiscal period of each fiscal quarter of the Company) and in any event within forty (40) days with respect to cash flows and with respect to other reports within thirty (30) days, duplicate copies of (i) a consolidated balance sheet of the Company and its subsidiaries and of the Company and the Restricted Subsidiaries as at the end of such month, and (ii) consolidated statements of income, changes in stockholders' equity and cash flows of the Company and its subsidiaries and of the Company and the Restricted Subsidiaries for such month and for the portion of the fiscal year ending with such month, 23 27 setting forth in each case in reasonable detail, prepared in accordance with GAAP, subject to changes resulting from year-end adjustments. (m) DUPLICATE REPORTS -- contemporaneously with transmitting required financial and/or business reports to the Banks or ABN, copies of the same. 11. EVENTS OF DEFAULT Except as waived in Section 5.2 above and as specifically modified below, all Events of Default and remedies shall apply to the Restated Senior Notes as provided for the Original Senior Notes in Article 8 of the Original Note Purchase Agreement. 11.1 NATURE OF EVENTS. Section 8.1 of the Original Note Purchase Agreements is deleted in its entirety and replaced with the following: 8.1 NATURE OF EVENTS. An "Event of Default" shall exist if any of the following occurs and is continuing: (a) PRINCIPAL OR MAKE-WHOLE AMOUNT PAYMENTS -- the Company shall fail to make any payment of principal or Make-Whole Amount on any Restated Senior Note on or before the date such payment is due; (b) INTEREST PAYMENTS -- the Company shall fail to make any payment of interest on any Restated Senior Note on or before the date such payment is due; (c) NON PAYMENT DEFAULTS -- the Company or any Subsidiary shall fail to perform or observe any covenant or the Company or any Subsidiary shall fail to comply with any other provision hereof; (d) DRAFTS ON ABN LETTERS OF CREDIT -- any draft or other demand for payment is made under any ABN Letter of Credit; (e) WARRANTIES OR REPRESENTATIONS -- any warranty, representation or other statement by or on behalf of the Company contained herein or in any certificate or instrument furnished in compliance with or in reference hereto shall have been false or misleading in any material respect when made; 24 28 (f) DEFAULT ON INDEBTEDNESS OR SECURITY - -- (i) the Company or any Restricted Subsidiary shall fail to make any payment on any Indebtedness or any Security when due; or (ii) any event shall occur or any condition shall exist in respect of any Indebtedness or any Security of the Company or any Restricted Subsidiary, or under any agreement securing or relating to any such Indebtedness or Security, that immediately or with any one or more of the passage of time or the giving of notice: (A) causes (or permits any one or more of the holders thereof or a trustee therefor to cause) such Indebtedness or Security, or a portion thereof, to become due prior to its stated maturity or prior to its regularly scheduled date or dates of payment; or (B) permits any one or more of the holders thereof or a trustee therefor to require the Company or any Restricted Subsidiary to repurchase such Indebtedness or Security from such holder and any such holder or trustee exercises (or attempts to exercise) such right; in all respects without giving effect to any amendment or waiver thereof after the date hereof, and provided that the aggregate amount of all obligations in respect of all such Indebtedness and Securities referred to in this clause (f) exceeds at any time Five Hundred Thousand Dollars ($500,000); (g) INVOLUNTARY BANKRUPTCY PROCEEDINGS -- (i) a receiver, liquidator, custodian or trustee of the Company or any Restricted Subsidiary, or of all or any part of the Property of either, shall be appointed by court order and such order shall remain in effect for more than sixty (60) days, or an order for relief shall be entered with respect to the Company or any Restricted Subsidiary, or the Company or any Restricted Subsidiary shall be adjudicated a bankrupt or insolvent; (ii) any of the Property of the Company or any Restricted Subsidiary shall be sequestered by court order and such order shall remain in effect for more than sixty (60) days; or (iii) a petition shall be filed against the Company or any Restricted Subsidiaries under any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt, dissolution or liquidation law of any jurisdiction, whether now or hereafter in 25 29 effect, and shall not be dismissed within sixty (60) days after such filing; (h) VOLUNTARY PETITIONS -- the Company or any Restricted Subsidiary shall file a petition in voluntary bankruptcy or seeking relief under any provision of any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt, dissolution or liquidation law of any jurisdiction, whether now or hereafter in effect, or shall consent to the filing of any petition against it under any such law; (i) ASSIGNMENTS FOR BENEFIT OF CREDITORS, ETC. -- the Company or any Restricted Subsidiary shall make an assignment for the benefit of its creditors, or admits in writing its inability, or fails, to pay its debts generally as they become due, or shall consent to the appointment of a receiver, liquidator or trustee of the Company or any Restricted Subsidiary or of all or any part of the Property of either; or (j) UNDISCHARGED FINAL JUDGMENTS -- a final judgment or final judgments for the payment of money aggregating in excess of Five Hundred Thousand Dollars ($500,000) is or are outstanding against any one or more of the Company and the Restricted Subsidiaries and any one of such judgments shall have been outstanding for more than thirty (30) days from the date of its entry and shall not have been discharged in full or stayed. If any action, condition, event or other matter would, at any time, constitute an Event of Default under any provision of this Section 8.1, then an Event of Default shall exist, regardless of whether the same or a similar action, condition, event or other matter is addressed in a different provision of this Section 8.1 and would not constitute an Event of Default at such time under such different provision. 12. TERMS DEFINED The following terms shall have the added or amended meanings to those specified in Section 9.1 of the Original Note Purchase Agreement. 12.1 RESTRICTED INVESTMENTS. The definition of "Restricted Investments" appearing at pages 56 and 57 of the Original Note Purchase Agreement is hereby amended by deleting subparagraph (h) thereof appearing at page 57. 26 30 12.2 CONSOLIDATED EBITDA. Consolidated EBITDA - means, for any period, the consolidated pre-tax income for such period, plus the aggregate amount which was deducted for such period in determining consolidated pre-tax income in respect of interest expense (including amortization of debt discount, imputed interest and capitalized interest), plus depreciation and amortization, plus income attributable to any minority interest in any Person, for so long as said Person remains a Guarantor, provided, the calculations of EBITDA for the period up to and including September 30, 1996, but not thereafter, shall be based on consolidated, pre-tax income from continuing operations only and shall exclude all special charges and non-recurring write downs; for periods after September 30, 1996 such calculations shall include all special charges and all non-continuing operations. 12.3 CONSOLIDATED CAPITAL EXPENDITURES. Consolidated Capital Expenditures - means all payments for or Debt incurred in connection with fixed assets or improvements or for replacements, substitutions or additions thereto, that have a useful life of more than one year and which are required to be capitalized under GAAP. 12.4 R.W. KRAJICEK NOTE. The R.W. Krajicek Note - means that certain promissory note to Richard W. Krajicek payable by the Company, due November, 1999, bearing 8 percent interest, given to satisfy the Company's obligation to pay the "short-fall" as that term is used in paragraph 17 of that certain consulting agreement between the Company and R. W. Krajicek dated August 9, 1995. 27 31 Executed by the Company and the holders of all of the Original Senior Notes as of the date above first written. PRINCIPAL MUTUAL LIFE SERV-TECH, INC. INSURANCE COMPANY By: /s/ JOHN D. CLEAVENGER By: /s/ DAVID P. TUSA -------------------------------------------- -------------------------------------------- Name: John D. Cleavenger, Counsel Name: David P. Tusa ------------------------------------------- ------------------------------------------ Title: Title: Senior Vice President ------------------------------------------ ----------------------------------------- By: /s/ STEPHEN G. SKRIVANEK -------------------------------------------- Name: Stephen G. Skrivanek, Counsel ------------------------------------------- Title: ------------------------------------------ TMG LIFE INSURANCE COMPANY By: /s/ ROBERT R. LAPOINTE -------------------------------------------- Name: Robert R. Lapointe ------------------------------------------- Title: Vice President ------------------------------------------ By: /s/ MICHAEL J. CAREW -------------------------------------------- Name: Michael J. Carew ------------------------------------------- Title: Assistant Vice President ------------------------------------------ BERKSHIRE LIFE INSURANCE COMPANY By: /s/ ELLEN I. WHITTAKER -------------------------------------------- Name: Ellen I. Whittaker ------------------------------------------- Title: Investment Officer ------------------------------------------ THE SECURITY MUTUAL LIFE INSURANCE COMPANY By: /s/ KEVIN W. HAMMOND -------------------------------------------- Name: Kevin W. Hammond ------------------------------------------- Title: Vice President ------------------------------------------ Chief Investment Officer ------------------------------------------
32 EXHIBIT A (FORM OF RESTATED SENIOR NOTE) SERV-TECH, INC. Restated Senior Note due June 15, 2003 No. R- (Place of Execution) $ November 1, 1996 SERV-TECH, INC., a Texas corporation (the "Company"), for value received, hereby promises to pay to or registered assigns the principal sum of DOLLARS ($ ) on June 15, 2003 and to pay interest (computed on the basis of a 360-day year of twelve 30-day months) on the unpaid principal balance thereof on the first Business Day of each month beginning December 1, 1996 at the rate of ten and one-half percent (10.50%) from November 1, 1996, through December 31, 1997, at the rate of ten and three quarters percent (10.75%) from January 1, 1998 through March 31, 1998, and at a rate that is one-quarter percent (0.25%) greater than the rate for the preceding fiscal quarter, but not to exceed eleven and one-half percent (11.50%) per annum, for each successive fiscal quarter beginning after March 31, 1998 until the principal amount hereof shall become due and payable or is fully repaid; and to pay on demand interest on any overdue principal (including any overdue prepayment of principal) and Make-Whole Amount, if any, and (to the extent permitted by applicable law) on any overdue installment of interest, at a rate equal to the lesser of (a) the highest rate allowed by applicable law and (b) thirteen and one-half percent (13.50%) per annum. Payments of principal, Make-Whole Amount, if any, and interest shall be made in such coin or currency of the United States of America as at the time of payment is legal tender for the payment of public and private debts to the registered holder hereof at the address shown in the register maintained by the Company for such purpose, in the manner provided in the Amended Note Purchase Agreement (defined below). This Note is one of an issue of Notes of the Company issued in an aggregate principal amount limited to Fifteen Million Dollars ($15,000,000) pursuant to the Company's Note Restructuring Amendment to Note Purchase Agreements, dated as of November , 1996 (the "Note Restructuring Amendment"), which amends the Company's separate Note Purchase Agreements, each dated as of June 1, 1993 (collectively, and as amended by the Note Restructuring Amendment, the "Amended Note Purchase Agreement"). This Note is entitled to the benefits of the Amended Note Purchase 33 Agreement and the terms thereof are incorporated herein by reference. Capitalized terms used herein and not otherwise defined herein have the meanings specified in the Amended Note Purchase Agreement. As provided in the Amended Note Purchase Agreement, this Note is subject to prepayment in whole or in part, in certain cases without a Make-Whole Amount and in other cases with a Make-Whole Amount. The Company agrees to make required prepayments on account of such Notes in accordance with the provisions of the Amended Note Purchase Agreement. This Note is a registered Note and is transferable only by surrender thereof at the principal office of the Company as specified in the Amended Note Purchase Agreement, duly endorsed or accompanied by a written instrument of transfer duly executed by the registered holder of this Note or its attorney duly authorized in writing. Under certain circumstances, as specified in the Amended Note Purchase Agreement, the principal of this Note (in certain cases together with any applicable Make-Whole Amount) may be declared due and payable in the manner and with the effect provided in the Amended Note Purchase Agreement. THIS NOTE AND THE AMENDED NOTE PURCHASE AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, INTERNAL NEW YORK LAW. SERV-TECH, INC. By: _______________________________ Name: _______________________________ Title: _______________________________ -2- 34 EXHIBIT B PROPERTY TO BE ENCUMBERED I. PERSONAL PROPERTY. The personal property of Serv-Tech, Inc. and certain of its subsidiaries (collectively, the "Debtors" and individually, a "Debtor"), including accounts, inventory, general intangibles, equipment, titled vehicles, contracts, patents, trademarks, instruments, documents and capital stock, now owned or hereafter acquired, and the products and proceeds of such collateral. II. REAL PROPERTY. The real property of certain Debtors, and improvements thereon, which property is located at: A. 5200 Cedar Crest, City of Houston, Harris County, Texas B. 6845 Dixie Drive, City of Houston, Harris County, Texas C. 5722 Waltrip, City of Houston, Harris County, Texas D. 5730 Waltrip, City of Houston, Harris County, Texas E. 506 Nebraska, City of Houston, Harris County, Texas F. 2104 Engineer's Road, City of Belle Chase, Parish of Plaquemines, Louisiana G. 456 Highlandia Drive, City of Baton Rouge, Parish of East Baton Rouge, Louisiana H. 330 Walcot Road, City of Westlake, Louisiana 35 SAVE AND EXCEPT THE FOLLOWING: Chemisolv Holdings, Inc. Chemisolv, Inc. Chemisolv, Ltd. All assets of above companies. Delta Maintenance, Inc. Restrictive cash for securing insurance claims. Seco Industries, Inc. Restrictive cash for securing insurance claims. Serv-Tech, Inc. L.100,000 restrictive cash held for the account of Chemisolv Ltd. by Royal Bank of Scotland (security for working capital loan). Restrictive cash for securing insurance claims. Serv-Tech EPC, Inc. All assets of a certain division, Constructors and Fabricators. All rights, contracts, agreements, documents and instruments related directly or indirectly to the FINCHAA Project. 36 EXHIBIT C COLLATERAL DOCUMENTATION LIST I. SECURITY AGREEMENT. A Security Agreement dated as of November 12, 1996, executed by Serv-Tech, Inc. and certain subsidiaries of Serv-Tech, Inc. (collectively, the "Debtors" or individually, a "Debtor") for the benefit of Texas Commerce Bank National Association II. CERTIFICATES OF TITLE. Certificates of title covering titled vehicles registered to certain Debtors under the Texas Certificate of Title act or similar law other jurisdictions III. UCC FINANCING STATEMENTS. Individual UCC Financing statements in the name of each Debtor, to be filed centrally in all of the jurisdictions in which such Debtor has ongoing operations IV. DEEDS OF TRUST AND MORTGAGES. Deed of trust and mortgages encumbering the real property of certain Debtors, and improvements thereon, which property is located at: A. 5200 Cedar Crest, City of Houston, Harris County, Texas B. 6845 Dixie Drive, City of Houston, Harris County, Texas C. 5722 Waltrip, City of Houston, Harris County, Texas D. 5730 Waltrip, City of Houston, Harris County, Texas E. 506 Nebraska, City of Houston, Harris County, Texas F. 2104 Engineer's Road, City of Belle Chase, Parish of Plaquemines, Louisiana G. 456 Highlandia Drive, City of Baton Rouge, Parish of East Baton Rouge, Louisiana H. 330 Walcot Road, City of Westlake, Louisiana 37 EXHIBIT D SCHEDULE OF RESTATED SENIOR NOTES WITH PAYEES
Note Principal Payee Registration No. Amount ----- ---------------- ----------- Principal Mutual Life Insurance Company R-_ $12,000,000 Principal Mutual Life Insurance Company R-_ $ 1,000,000 TMG Life Insurance Company R-_ $ 750,000 Berkshire Life Insurance Company R-_ $ 750,000 The Security Mutual Life Insurance Company R-_ $ 500,000
D-1 38 EXHIBIT E FORM OF CLOSING OPINION FROM COMPANY'S COUNSEL 39 EXHIBIT F SECRETARY'S CERTIFICATE SERV-TECH, INC. I, _______________________, hereby certify that I am the duly elected, qualified and acting Secretary of SERV-TECH, INC., a Texas corporation (the "Company"), and that, as such, I have access to its corporate records and am familiar with the matters certified herein, and I am authorized to execute and deliver this certificate in the name and on behalf of the Company, and that: 1. This certificate is being delivered pursuant to SECTION 6.2(g) of the Company's Note Restructuring Amendment to Note Purchase Agreements, dated as of November __, 1996 (the "Note Restructuring Amendment"), with the Noteholders listed therein (the "Noteholders"). The terms used in this certificate and not defined herein have the respective meanings specified in the separate Note Purchase Agreements, each dated as of June 1, 1993 (collectively, the "Original Note Purchase Agreement," and, as amended by the Note Restructuring Agreement, the "Amended Note Purchase Agreement"), with the Noteholders. 2. Attached hereto as Attachment A is a true and correct copy of resolutions, and the preamble thereto, adopted by the Board of Directors on November 7, 1996, and such resolutions and preamble set forth in Attachment A hereto were duly adopted by the Board of Directors and are in full force and effect on and as of the date hereof, not having been amended, altered or repealed, and such resolutions are filed with the records of the Board of Directors. 3. The documents listed below were executed and delivered by the Company pursuant to and in accordance with the resolutions set forth in Attachment A hereto and such documents as executed are substantially in the form submitted to and approved by the board of directors of the Company as aforementioned: (a) The Note Restructuring Amendment, providing for the amendment of the Original Note Purchase Agreement and the issuance by the Company of its Restated Senior Notes due June 15, 2003 (the "Restated Senior Notes"); and (b) the Restated Senior Notes; and (c) The Security Agreement, Deeds of Trust and Mortgages, pursuant to which the Company and certain affiliates of the Company pledge collateral as security for the company's obligations under the Amended Note Purchase Agreement. 40 4. Except as provided in the documents attached hereto as Attachment B, the bylaws of the Company have been in full effect in their present form at all times from June 22, 1993 to the date hereof, inclusive, without modification or amendment in any respect. 5. Each of the following named persons is and has been a duly elected, qualified and acting officer of the Company holding the office or offices set forth below opposite such person's name and has been duly authorized to execute the Note Restructuring Amendment and each other document to be executed and delivered in connection with the execution and delivery of the Note Restructuring Amendment:
Name Office Signature - ---- ------ --------- - ------------------------------ ------------------------- -------------------- - ------------------------------ ------------------------- --------------------
6. The signature appearing opposite the name of each such person set forth above is such person's genuine signature. 7. Attached hereto as Attachment [C] is a good standing certificate with respect to the Company from the State of Texas dated October 16, 1996. 8. Except as provided in the documents attached hereto as Attachment D, there have been no amendments or supplements to or restatements of the articles of incorporation of the Company from June 22, 1993 to the date hereof, inclusive. IN WITNESS WHEREOF, I have executed this certificate in the name and on behalf of the Company on November __, 1996. SERV-TECH, INC. By: --------------------------------- Name: ------------------------------- Secretary -2- 41 OFFICER'S CERTIFICATE SERV-TECH, INC. AFFILIATES I, David Tusa, hereby certify that I am the duly elected, qualified and acting executive officer of each of the undersigned companies (collectively, the "Companies," or individually, a "Company"), and that, as such, I have access to their corporate records and am familiar with the matters certified herein, and I am authorized to execute and deliver this certificate in the name and on behalf of the Companies, and that: 1. This certificate is being delivered in connection with the Companies' execution of four separate Guaranty Agreements (the "Guaranty Agreements"), in favor of Principal Mutual Life Insurance Company, TMG Life Insurance Company, Berkshire Life Insurance Company and The Security Mutual Life Insurance Company (collectively, the "Noteholders"), respectively, pursuant to which the Companies jointly and severally guarantee the performance of certain obligations of Serv-Tech, Inc. (the "Borrower") to the Noteholders. 2. Attached hereto as Attachment E are true and correct copies of resolutions, and the preambles thereto, separately adopted by the Board of Directors of each Company, and such resolutions and preambles were duly adopted by each Company's Board of Directors and are in full force and effect on and as of the date hereof, not having been amended, altered or repealed, and such resolutions are filed with the records of each Company's Board of Directors. 3. The Guaranty Agreements were executed and delivered by the Companies pursuant to and in accordance with the resolutions attached hereto and, as executed, are substantially in the form submitted to and approved by the Board of Directors of each Company as aforementioned. 4. The signature appearing above the name of each person named in the resolutions set forth in Attachment E is such person's genuine signature. 42 IN WITNESS WHEREOF, I have executed this certificate in the name and on behalf of the Companies on November __, 1996. COMPANIES: ADVANCED REFRACTORY SERVICES, INC. AMERICAN MECHANICAL SERVICES, INC. CASTING CONCEPTS, INC. CON-SEAL, 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. ST PIPING, INC. TOTAL REFRACTORY SYSTEMS, INC. TURNAROUND MAINTENANCE, INC. UNITED INDUSTRIAL MATERIALS, INC. By: --------------------------------------- Name: David Tusa Title: Vice President SECO INDUSTRIES, INC. SERV-TECH ENGINEERS, INC. SERV-TECH EPC, INC. By: --------------------------------------- Name: David Tusa Title: Senior Vice President of Finance and Administration PRS HOLDING, INC. By: --------------------------------------- Name: David Tusa Title: Senior Vice President -2- 43 DELTA MAINTENANCE, INC. PETRO RECOVERY SYSTEMS, INC. SERV-TECH CONSTRUCTION AND MAINTENANCE, INC. (FORMERLY SERV TECH EPC - HOUSTON, INC.) SERV-TECH OF NEW MEXICO, INC. SERV-TECH SERVICES, INC. TERMINAL TECHNOLOGIES, INC. TIPCO ACQUISITION CORP. By: --------------------------------------- Name: David Tusa Title: President -3- 44 EXHIBIT G OFFICERS' CLOSING CERTIFICATE SERV-TECH, INC. We, __________________________ and _______________________, each hereby certify that we are, respectively, the _______________________________ and the ________________________________ of SERV-TECH, INC., a Texas corporation (the "Company"), and that, as such, we have access to its corporate records and are familiar with the matters certified herein, and we are authorized to execute and deliver this certificate in the name and on behalf of the Company, and that: 1. This certificate is being delivered pursuant to SECTION 6.2(h) of the Company's Note Restructuring Amendment to Note Purchase Agreements, dated as of November __, 1996 (the "Note Restructuring Agreement"), with the Noteholders listed therein (the "Noteholders"). The terms used in this certificate and not defined herein have the respective meanings specified in the separate Note Purchase Agreements, each dated as of June 1, 1993 (collectively, the "Note Purchase Agreement"), with each of the purchasers listed in Annex 1 thereto, as amended by the Note Restructuring Amendment. 2. Except as disclosed and waived pursuant to SECTION 5.2 of the Note Restructuring Amendment, the warranties and representations contained in SECTION 2 of the Note Purchase Agreement and in SECTION 7 of the Note Restructuring Amendment are true in all material respects on the date hereof with the same effect as though made on and as of the date hereof. 3. The Company has performed and complied with all agreements and conditions contained in the Note Purchasing Agreement and the Note Restructuring Amendment that are required to be performed or complied with by the Company before or at the date hereof, except as disclosed and waived. 4. _________________________, from June 22, 1993 to the date hereof, inclusive, has been and is the duly elected, qualified and acting Secretary of the Company, and the signature appearing on the Certificate of Secretary dated the date hereof and delivered to the Noteholders contemporaneously herewith is such person's genuine signature. 45 IN WITNESS WHEREOF, we have executed this certificate in the name and on behalf of the Company on November __, 1996. SERV-TECH, INC. By: --------------------------------- Name: ------------------------------- Title: ------------------------------ By: --------------------------------- Name: ------------------------------- Title: ------------------------------ -2- 46 EXHIBIT H LIST OF AFFILIATES FOR WHICH GOOD STANDING CERTIFICATES HAVE BEEN DELIVERED 47 FINANCIAL STATEMENTS SERV-TECH, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET
June 30, December 31, 1996 1995 ----------- ------------ (unaudited) ASSETS CURRENT ASSETS; Cash and cash equivalents........................................................ $ - $ 287,356 Accounts receivable, net......................................................... 31,417,263 31,941,127 Costs and estimated earnings in excess of billings on uncompleted contracts...... 1,958,757 2,111,396 Inventory........................................................................ 2,255,765 1,700,462 Prepaid expenses................................................................. 1,105,657 768,161 Deferred income taxes............................................................ 4,241,425 4,345,398 Net current assets from discontinued operations.................................. 9,289,150 16,865,749 ----------- ------------ Total current assets........................................................... 50,268,017 58,019,649 PROPERTY, PLANT AND EQUIPMENT, NET................................................. 27,009,012 29,325,986 INTANGIBLE ASSETS, NET............................................................. 14,552,276 14,748,088 OTHER ASSETS....................................................................... 2,844,592 1,884,763 DEFERRED INCOME TAXES.............................................................. 433,040 - NET NON-CURRENT ASSETS, DISCONTINUED OPERATIONS.................................... 1,968,702 3,623,219 ----------- ------------ Total assets................................................................... $97,875,639 $107,601,705 =========== ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable................................................................. $13,712,242 $ 13,295,347 Accrued liabilities.............................................................. 14,103,082 13,545,808 Billings in excess of costs and estimated earnings on uncompleted contracts...... 387,084 359,415 Revolving line of credit......................................................... 14,500,000 6,500,000 Income taxes payable............................................................... - 295,865 Other.............................................................................. 545,507 207,732 ----------- ------------ Total current liabilities...................................................... 43,247,915 34,204,167 LONG-TERM DEBT, LESS CURRENT MATURITIES............................................ 15,170,000 15,170,000 DEFERRED INCOME TAXES.............................................................. - 4,812,740 MINORITY INTEREST.................................................................. 534,456 484,952 CONTINGENCIES (Note 5) STOCKHOLDERS' EQUITY: Preferred stock, $1 par value; 2,000,000 shares authorized; no shares issued and outstanding................................................................ - - Common stock, par value $.50, authorized 20,000,000 shares; issued and outstanding shares of 6,806,849 and 6,752,671, respectively.................... 3,403,425 3,376,336 Additional paid-in capital....................................................... 43,817,584 43,489,763 Retained earnings (deficit)...................................................... (7,185,958) 7,675,586 Treasury stock, at cost, 120,606 and 193,358 shares, respectively................ (961,816) (1,546,857) Cumulative translation adjustment................................................ (149,967) (64,982) ----------- ------------ Total stockholders' equity..................................................... 38,923,268 52,929,846 ----------- ------------ Total liabilities and stockholders' equity..................................... $97,875,639 $107,601,705 =========== ============
The accompanying notes are an integral part of the consolidated financial statements. -3- 48 SERV-TECH, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (unaudited)
For the Three Months For the Six Months Ended June 30, Ended June 30, -------------------------- ---------------------------- 1996 1995 1996 1995 ----------- ----------- ----------- ------------ Revenues ............................................ $ 38,471,348 $45,876,770 $ 71,581,267 $106,201,050 Costs of services ................................... 30,752,085 37,569,722 56,362,019 87,076,932 ------------ ----------- ------------- ------------ Gross profit ...................................... 7,719,263 8,307,048 15,219,248 19,124,118 Selling, general and administrative expenses ........ 11,684,617 7,888,115 18,829,266 16,185,301 ------------ ----------- ------------ ------------ Operating income (loss) ........................... (3,965,354) 418,933 (3,070,018) 2,938,817 Other income (expense): Interest expense .................................. (527,704) (501,833) (1,070,268) (914,395) Interest income .................................. 39,926 12,375 50,730 40,059 Other, net ........................................ (34,825) 44,025 (24,727) 113,342 ------------ ----------- ------------- ------------ (522,603) (445,433) (1,044,265) (760,994) ------------ ----------- ------------- ----------- Minority interest ................................... (14,532) (55,891) (49,504) (369,279) Equity in earnings of affiliates .................... - - - (24,331) ------------ ----------- ------------- ------------ Pre-tax earnings (loss) from continuing operations .. (4,502,489) (82,391) (4,163,887) 1,784,213 Income tax benefit (expense) ........................ 1,175,000 (4,000) 1,036,000 (911,000) Net income (loss) from continuing operations ........ (3,327,489) (86,391) (3,127,787) 873,213 Income (loss) from discontinued operations, net of income taxes ............................... (6,178,334) 752,679 (7,407,208) 1,310,397 Estimated loss on disposal of discontinued operations, net of tax benefit .................... (4,326,546) - (4,326,546) - ------------ ----------- ------------ ------------ Net income (loss) ................................... (13,832,369) 666,288 (14,861,541) 2,183,610 ============ =========== ============ ============ Earnings (loss) per share from continuing operations ........................................ (0.50) (0.01) (0.47) 0.13 Earnings (loss) per share from discontinued operations ........................................ (1.57) 0.11 (1.76) 0.19 ------------ ----------- ------------ ------------ Net income (loss) per share ......................... (2.07) 0.10 (2.23) 0.32 ============ =========== ============ ============ Weighted average common shares outstanding .......... 6,672,561 6,734,343 6,650,039 6,726,574 ============ =========== ============ ============
The accompanying notes are an integral part of the consolidated financial statements. -4- 49 SERVE-TECH, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS for the six months ended June 30, 1996 and 1995 (unaudited) 1996 1995 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) from continuing operations...... $(3,127,787) $ 873,213 Adjustments: Depreciation and amortization..................... 3,030,054 3,133,559 Provision for losses on accounts and notes receivable...................................... 48,775 382,648 Deferred income taxes............................. (1,036,000) (532,542) Non-cash charges.................................. 1,387,207 - Equity in losses of affiliates.................... - 24,331 Minority interest................................. 49,504 369,279 Other............................................. 94,609 96,781 ----------- ----------- 446,362 4,347,269 Change in assets and liabilities, not of effect from acquisitions of businesses: Accounts receivable............................ 475,089 (6,838,688) Net change in costs, estimated earnings and billings on uncompleted contracts............ 180,308 176,677 Inventory...................................... (555,303) (758,065) Prepaid expenses and other current assets...... (337,495) 268,227 Other assets................................... (959,829) (707,052) Accounts payable............................... 416,895 3,969,572 Accrued liabilities............................ 355,710 (265,775) ----------- ----------- Net cash provided by operating activities.... 21,737 192,165 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures............................ (1,085,853) (1,423,125) Payments to discontinued operations............. (7,100,000) (4,400,000) Investments in and advances to affiliates....... - (290,263) Acquisition of businesses, net of cash acquired...................................... - (625,514) Intangible assets............................... (328,957) (67,530) Proceeds from disposition of property, plant and equipment................................. - 140,000 ----------- ----------- Net cash used in investing activities........ (8,514,810) (6,666,432) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of debt.................. 13,756,450 13,000,000 Principal payments of debt...................... (5,550,733) (7,827,472) ----------- ----------- Net cash provided by financing activities.... 8,205,717 5,172,528 ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...................................... (287,356) (1,301,739) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD... 287,356 1,301,739 ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD......... $ - $ - =========== =========== The accompanying notes are an integral part of the consolidated financial statements. -5- 50 ANNEX 2 INDEBTEDNESS OF COMPANY AND RESTRICTED SUBSIDIARIES** PAGE 1 OF 6
Continued Operations Balance at Current Notes Payable: Description 9/30/96 Portion Collateral - -------------------- ----------- ---------- ------- ---------- Associate Leasing Promissory Note $ 8,744 $ 8,744 Secured - Equipment Associate Leasing Promissory Note 8,744 8,744 Secured - Equipment Control and Inspection Services, Inc. Promissory Note 212,500 42,500 Unsecured Security Mutual Life Insurance Co. Promissory Note 500,000 0 Secured Berkshire Life Insurance Co. Promissory Note 750,000 0 Secured TMG Life Insurance Co. Promissory Note 750,000 0 Secured Principal Mutual Life Insurance Co. Promissory Note 1,000,000 0 Secured Principal Mutual Life Insurance Co. Promissory Note 12,000,000 0 Secured Texas Commerce Bank Advances Under Loan Agreement 14,500,000 14,500,000 Secured ----------- ----------- SUBTOTAL $29,729,988 $14,559,988 =========== ===========
** Includes Annex 2 Supplement 51 PAGE 2 OF 6
Discontinued Operations Balance at Current Notes Payable: Description 9/30/96 Portion Collateral - ----------------------- ----------- ---------- ------- ---------- F.C. Schaffer Arkel Bonus Promissory Note $ 34,199 $ 34,199 Unsecured F.C. Schaffer Children Promissory Note 24,500 24,500 Unsecured F.C. Schaffer (LAFLACA) Promissory Note 102,135 102,135 Unsecured F.C. Schaffer Promissory Note 20,500 20,500 Unsecured Safeline Leasing Promissory Note 11,927 8,943 Secured - Equipment Constructors & Fabricators, Inc. Promissory Note 1,425,000 237,500 Secured - Accounts ----------- ----------- Receivable, Equipment SUBTOTAL $ 1,618,261 $ 427,777 =========== ===========
52 PAGE 3 OF 6
Continued Operations Balance at Current Guaranties: Description 9/30/96 Portion Collateral - -------------------- ----------- ---------- ------- ---------- Royal Bank of Scotland Overdraft Facility for 285,366* 285,366* Restricted Cash from Chemisolv, Ltd. Serv-Tech, Inc., secured by A/R and equipment ----------- ----------- SUBTOTAL $ 285,366* $ 286,366* *Exchange rate of 1.563L. to U.S. $ at 9/30/96 TOTAL $31,633,615 $15,273,131 =========== ===========
53 PAGE 4 OF 6 LETTERS OF CREDIT: ABN-AMRO Bank F. C. Schaffer & Associates, Inc. Finchaa Project Letters of Credit @ 9/30/96
U.S $ Beneficiary Description of L/C Commitment L/C No. Issue Date Term Date Commitment - ----------- ------------------ ---------- ------- ---------- --------- ---------- Finchaa Sugar Factory Performance-Birr ETB 7,540,406 S601225 11/01/94 40 months $1,391,218.82 Finchaa Sugar Factory Performance-USD $ 7,001,681 S601224 11/01/94 40 months 7,001,681.00 Finchaa Sugar Factory Advance Payment-USD $ 4,845,435 S601241 11/17/94 28 months 4,845,435.00 Finchaa Sugar Factory Advance Payment-Birr ETB10,607,124 S601242 11/17/94 28 months 1,975,033.95 -------------- Total $15,195,368.77 ============== (Exchange Rate of ETB 5.42/$1 approx. @8/31/96)
54 Page 5 of 6 LETTERS OF CREDIT: Texas Commerce Bank Revolving Credit Line $35,000,000 September 30, 1996
EXPIRATION DESCRIPTION U.S. $ EXPIRATION BENEFICIARY APPLICANT DATE OF L/C L/C NO. COMMITMENT COMMITMENT DATE - ----------- --------- ---------- ----------- ------- ---------- ---------- ---------- National Union Fire Workers' Comp 11/01/97 w/ Insurance Co. STI Standby Insurance I-412953 $ 382,000.00 $ 382,000.00 renewals National Union Fire Workers' Comp 06/30/97 w/ Insurance Co. STI Standby Insurance I-420972 224,000.00 224,000.00 renewals National Union Fire Workers' Comp 11/26/96 w/ Insurance Co. STI Standby Insurance I-429895 790,000.00 790,000.00 renewals Liberty Mutual Workers' Comp 05/26/97 w/ Insurance Co. STI Standby Insurance I-438893 500,000.00 500,000.00 renewals National Union Fire Workers' Comp 01/01/97 w/ Insurance Co. STI Standby Insurance I-451142 613,266.00 613,266.00 renewals Westdeutsche Indus- WIV Guarantee 03/31/97 w/ trienstandhaltungs STI- Standby L. Bauch I-444335 FF 2,230,000.00 429,300.21 renewals Eur. National Union Fire Workers' Comp 06/01/97 w/ Insurance Co. STI Standby Insurance I-447624 1,601,016.00 1,601,016.00 renewals National Union Fire Workers' Comp 06/01/97 w/ Insurance Co. SECO Standby Insurance I-448690 113,000.00 113,000.00 renewals Coastal Aruba Performance Refining Co. NC ST EPC Standby Guarantee I-458218 301,485.00 301,485.00 12/18/96 ------------- $4,954,067.21
55 PAGE 6 OF 6 COMMERCIAL LETTERS OF CREDIT FOR FINCHAA PROJECT: Whitney National Bank September 30, 1996
TYPE ISSUANCE TOTAL EXPIRY AMOUNT BENEFICIARY APPLICANT L/C DESCRIPTION DATE L/C NO. COMMITMENT DATE REMAINING - ----------- --------- ---- ----------- -------- ------- ---------- ------ --------- Allis Mineral Sys. F.C. Schaffer Comml PO# FA000209 07/13/95 C33280 $ 250,000.00 01/20/96 $ 0.00 Hindustan Dorr- Oliver F.C. Schaffer Comml PO# FA000216 07/13/95 C33281 546,442.50 04/21/96 0.00 Varco Pruden Bldg. F.C. Schaffer Comml PO# FA000206 07/13/95 C33282 133,120.70 02/22/96 0.00 Western States Machine F.C. Schaffer Comml PO# FA000213 07/13/95 C33283 761,696.90 01/31/96 0.00 Zurn Indus., Inc. F.C. Schaffer Comml PO# FA000207 07/13/95 C33284 2,413,610.50 11/15/96 241,361.05 Codistil S/A Dedini F.C. Schaffer Comml PO# FA000241 09/13/95 C33375 2,523,542.00 06/30/96 0.00 Dresser Rand F.C. Schaffer Comml PO# FA000247 10/25/95 C33455 565,122.00 09/06/96 282,561.00 Dearborn Mid-West Conveyor F.C. Schaffer Comml PO# FA000612 05/17/96 C33808 628,349.75 11/30/96 628,349.75 Paharpur Cooling Towers Ltd. F.C. Schaffer Comml PO# FA000635 05/17/96 C33807 15,095.00 10/16/96 15,095.00 Surrendra Engr. F.C. Schaffer Comml PO# FA000238,205 05/22/96 C33815 1,284,600.00 10/06/96 1,180,740.00 Standard Serv. & Consultant F.C. Schaffer Comml PO# FA000657,658, 666 08/23/96 C34017 255,288.75 11/10/96 255,288.75 ------------- ------------- TOTAL $9,376,868.10 $2,603,395.55 ============= =============
56 ANNEX II SUPPLEMENT Indebtedness All indebtedness and obligations of every kind directly or indirectly arising pursuant to or evidenced by any and all of the following agreements and instruments, including all attachments, exhibits and schedules to any of them, as the same may be amended from time to time: 1. Note Restructure Amendment to Note Purchase Agreements dated as of November 12, 1996 among Serv-Tech, Inc., Principal Mutual Life Insurance Company, TMG Life Insurance Company, The Security Mutual Life Insurance Company, and Berkshire Life Insurance Company. 2. Restated Senior Note due June 15, 2003, No. R- , issued as of November 12, 1996 in the original principal amount of $12,000,000 in favor of Principal Mutual Life Insurance Company. 3. Restated Senior Note due June 15, 2003, No. R- , issued as of November 12, 1996 in the original principal amount of $1,000,000 in favor of Principal Mutual Life Insurance Company. 4. Restated Senior Note due June 15, 2003, No. R- , issued as of November 12, 1996 in the original principal amount of $750,000 in favor of Berkshire Life Insurance Company. 5. Restated Senior Note due June 15, 2003, No. R- , issued as of November 12, 1996 in the original principal amount of $500,000 in favor of The Security Mutual Life Insurance Company. 6. Restated Senior Note due June 15, 2003, No. R- , issued as of November 12, 1996 in the original principal amount of $750,000 in favor of TMG Life Insurance Company. 7. Guaranty dated as of November 12, 1996 by Serv-Tech, Inc. and certain subsidiaries thereof in favor of Principal Mutual Life Insurance Company. 8. Guaranty dated as of November 12, 1996 by Serv-Tech, Inc. and certain subsidiaries thereof in favor of TMG Life Insurance Company. 57 9. Guaranty dated as of November 12, 1996 by Serv-Tech, Inc. and certain subsidiaries thereof in favor of The Security Mutual Life Insurance Company. 10. Guaranty dated as of November 12, 1996 by Serv-Tech, Inc. and certain subsidiaries thereof of Berkshire Life Insurance Company. 11. First Amended and Restated Credit Agreement $23,500,000 Reducing Revolving Credit Loan dated as of November 12, 1996 among Serv-Tech, Inc., certain subsidiaries thereof, and Texas Commerce Bank National Association. 12. Revolving Credit Note dated November 12, 1996 by Serv-Tech, Inc. issued to Texas Commerce Bank National Association in the original principal amount of $12,786,050. 13. Revolving Credit Note dated November 12, 1996 by Serv-Tech, Inc. issued to Bank One, Texas, NA in the original principal amount of $6,713,950. 14. Security Agreement dated November 12, 1996 by Serv-Tech, Inc. and certain subsidiaries thereof for the benefit of Texas Commerce Bank National Association. 15. Deed of Trust, Security Agreement, Fixtures Financing Statement and Assignment of Rents and Leases dated as of November 12, 1996 from Serv-Tech, Inc. and certain subsidiaries thereof to David L. Mendez as trustee for the benefit of Texas Commerce Bank National Association. 16. Deed of Trust, Security Agreement, Fixtures Financing Statement and Assignment of Rents and Leases dated as of November 12, 1996 from Hartney Industrial Services Corporation thereof to David L. Mendez as trustee for the benefit of Texas Commerce Bank National Association. 17. Deed of Trust, Security Agreement, Fixtures Financing Statement and Assignment of Rents and Leases dated as of November 12, 1996 from Total Refractory Systems, Inc. thereof to David L. Mendez as trustee for the benefit of Texas Commerce Bank National Association. 18. Mortgage, Security Agreement & Fixtures Financing Statement dated as of November 12, 1996 from Serv-Tech, Inc. to Texas Commerce Bank National Association. 2 58 19. Mortgage, Security Agreement & Fixtures Financing Statement dated as of November 12, 1996 from SECO Industries, Inc. to Texas Commerce Bank National Association. 20. Intercredit Agreement dated as of November 12, 1996 among Principal Mutual Life Insurance Company, TMG Life Insurance Company, The Security Mutual Life Insurance Company, and Berkshire Life Insurance Company. 21. Amended and Restated Continuing Reimbursement Agreement dated as of November 12, 1996 between ABN AMRO Bank N.V. and F.C. Schaffer & Associates, Inc. 22. Amended and Restated Guaranty dated as of November 12, 1996 by Serv-Tech, Inc. and certain subsidiaries thereof. 59 LIENS Attached are the known UCC filings for the Company and subsidiaries. The following exceptions to these filings are listed below. 1. The UCC filing by Litwin Engineers and Constructors, Inc. is to be terminated. The project was completed last year and all parties paid. We have requested Litwin to issue the termination. 2. The UCC filings by Serv-Tech, Inc. (STI) as the Secured Party were placed at the time STI acquired the Hartney Companies for an existing debt owed to STI. 3. All of the UCC filings for F. C. Schaffer and Associates represents the activities of the non-core business which was purchased by the Schaffer principals as indicated by the enclosed Assignment, Bill of Sale, Conveyance and Assumption, and Stock Purchase Agreement. This represents assets and liabilities which were not assumed by Serv-Tech in the Schaffer acquisition. Exhibit A to the assignment represents the Assets and Liabilities that were acquired in the Agreement. 4. All other UCC filings are for various equipment purchases, to include phone and computer equipment in the ordinary course of business. 60 EXISTING LIENS
Debtor Secured Party Filing UCC or Lessee or Lessor Jurisdiction Recordation - -------------------------------------------------------------------------------------------------- United Industrial Best Material Handling, Inc. Texas/ No. 93-043792 Materials, Inc. 5450 Navigation Secretary of March 5, 1993 6845 Dixie Drive Houston, TX 77011 the State Houston, TX 77087 - -------------------------------------------------------------------------------------------------- Serv-Tech, Inc. MetLife Capital, Limited Texas/ No. 92-200577 5200 Cedar Crest Blvd. Partnership Secretary of October 14, 1992; Houston, TX 77087 C-97550 the State Amended by Bellevue, WA 98009 No. 92-75812 December 10, 1992 - -------------------------------------------------------------------------------------------------- Serv-Tech, Inc. Commercial Equipment Texas/ No. 93-259927 5200 Cedar Crest Blvd. Leasing Co., Inc. Secretary of February 8, 1993 Houston, TX 77087 745 E. Mulberry, Suite 210 the State San Antonio, TX 78212 - -------------------------------------------------------------------------------------------------- Serv-Tech, Inc. Toshiba America Texas/ No. 95-058119 5200 Cedar Crest Blvd. Information Systems, Inc. Secretary of March 24, 1995 Houston, TX 77087 6333 Edgewood Road NE the State Cedar Rapids, IA 52411 - -------------------------------------------------------------------------------------------------- Serv-Tech, Inc. Comdisco, Inc. Texas/ No. 95-0069556 5200 Cedar Crest Blvd. 6111 E. River Road Secretary of April 12, 1995 Houston, TX 77087 Rosemont, IL 60018; the State Amended by; and Assigned to No. 95-670281 The CIT Group/Equipment June 8, 1995; Financing, Inc. Assigned to CIT by 1620 Fountainhead No. 95-670280 Parkway, Suite 600 June 8, 1995 Tempe, Arizona 85282 - --------------------------------------------------------------------------------------------------
61 - -------------------------------------------------------------------------------------------------- Delta Maintenance, Inc. ORIX Credit Alliance, Inc. Louisiana/ No. 09-91303 9191 Veterans 9400 SW Barner Rd. #200 Caddo Parish April 26, 1993 Memorial Blvd. Portland, OR 97225-6655 Baton Rouge, LA 70821 Tax ID No. 13-2507476 Tax ID No. 72-0719253 - --------------------------------------------------------------------------------------------------- F.C. Schaeffer & Valley Sugar Properties, Inc. Texas/ No. 91-230202 Associates, d.b.a. Belle P.O. Box 120 Secretary of December 2, 1991 Ricker Farms, Inc. White Castle, LA 70788 the State 1020 Florida Blvd. Baton Rouge, LA 70802 - --------------------------------------------------------------------------------------------------- F.C. Schaeffer & Valley Sugar Properties, Inc. Texas/ No. 91-230203 Associates, d.b.a. P.O. Box 120 Secretary of December 2, 1991 LaFlaca Cane Farms, Inc. White Castle, LA 70788 the State 1020 Florida Blvd. Baton Rouge, LA 70802 - --------------------------------------------------------------------------------------------------- F.C. Schaeffer & Valley Sugar Properties, Inc. Texas/ No. 91-230204 Associates, d.b.a. GHD P.O. Box 120 Secretary of December 2, 1991 Corporation . White Castle, LA 70788 the State 1020 Florida Blvd. Baton Rouge, LA 70802 - --------------------------------------------------------------------------------------------------- Laflaca Cane Farms, Inc. Valley Sugar Properties, Inc. Texas/ No. 92-146246 1020 Florida Blvd. P.O. Box 120 Secretary of July 23, 1992 Baton Rouge, LA 70802 White Castle, LA 70788 the State - --------------------------------------------------------------------------------------------------- GHD Corporation Valley Sugar Properties, Inc. Texas/ No. 92-146247 1020 Florida Blvd. P.O. Box 120 Secretary of July 23, 1992 Baton Rouge, LA 70802 White Castle, LA 70788 the State - --------------------------------------------------------------------------------------------------- Belle Ricker Farms, Inc. Valley Sugar Properties, Inc. Texas/ No. 92-146248 1020 Florida Blvd. P.O. Box 120 Secretary of July 23, 1992 Baton Rouge, LA 70802 White Castle, LA 70788 the State - --------------------------------------------------------------------------------------------------- F.C. Schaeffer & Valley Sugar Properties, Inc. Texas/ No. 92-146249 Associates, Inc. P.O. Box 120 Secretary of July 23, 1992 1020 Florida Blvd. White Castle, LA 70788 the State Baton Rouge, LA 70802 - ---------------------------------------------------------------------------------------------------
62 - --------------------------------------------------------------------------------------------------- F.C. Schaeffer & Valley Sugar Properties, Inc. Texas/ No. 92-146250 Associates, Inc. P.O. Box 120 Secretary of July 23, 1992 1020 Florida Blvd. White Castle, LA 70788 the State Baton Rouge, LA 70802 and Francis C. Schaffer, et al. - --------------------------------------------------------------------------------------------------- GHD Corporation, et al. Valley Sugar Properties, Inc. Texas/ No. 93-124581 1020 Florida Blvd. P.O. Box 120 Secretary of June 25, 1992 Baton Rouge, LA 70802 White Castle, LA 70788 the State and Marie Campesi, et al. - --------------------------------------------------------------------------------------------------- GHD Corporation, et al. Valley Sugar Properties, Inc. Texas/ No. 94-230382 1020 Florida Blvd. P.O. Box 120 Secretary of November 28, 1994 Baton Rouge, LA 70802 White Castle, LA 70788 the State and Marie Campesi, et al. - --------------------------------------------------------------------------------------------------- F.C. Schaeffer & Valley Sugar Properties, Inc. Louisiana/ No. 17-1078198 Associates, Inc. et al. 1048 Florida Blvd. East Baton June 5, 1992 1020 Florida Blvd. Baton Rouge, LA 70788 Rouge Parish/ Baton Rouge, LA 70802 Clerk of Court - ---------------------------------------------------------------------------------------------------
63 ANNEX 3 Subsidiaries and Affiliates
Percentage State/Country Date of Date Acquired, Federal ID Nature of Subsidiaries and Affiliates of Ownership of Incorporation Incorporation if applicable Number Business - --------------------------- ------------ ---------------- ------------- -------------- ---------- --------- Advanced Refractory Services, Inc. 100% Nevada 12/26/91 06/14/94 76-0283174 Refractory services American Mechanical Services, Inc. 100% Louisiana 03/08/85 09/06/96 72-1067641 Industrial maintenance and constructing and fabricating industrial equipment Casting Concepts, Inc. 100% Texas 12/17/93 06/14/94 76-0433974 Fabrication Chemi-Solv, Inc. 50% Texas 10/05/87 03/14/91 76-0230090 Performance chemical development and sales - U.S. 50% - 10/05/87 11/07/94 - Chemisolv Holdings, Inc. 50% Delaware 03/14/91 03/14/91 76-0380074 Holding company 50% - 03/14/91 11/07/94 - Chemisolv Limited 50% United Kingdom 06/21/85 03/14/91 N/A Performance chemical development and sales - U.K. 50% - 06/21/85 11/07/94 - Con-Seal, Inc. 100% Nevada 11/07/89 06/14/94 76-0292240 Refractory services Delta Maintenance, Inc. 100% Louisiana 09/15/72 09/15/92 72-0719253 Turnaround maintenance services DM Acquisition Corporation 100% Nevada 09/14/92 N/A 88-0291611 Holding company Enterprise Service Corporation 100% North Carolina 10/01/91 N/A 56-1752650 Aviation F. C. Schaffer & Associates, Inc. 100% Louisiana 06/25/68 10/25/94 72-0650854 Sugar mill design, engineering and construction management Hartney Corporation 100% Nevada 06/19/84 06/19/94 76-0109676 Holding company Hartney Industrial Services Corporation 100% Nevada 10/21/91 06/14/94 76-0350313 Holding company Hill Technical Services, Inc. 30% Texas 02/16/94 05/20/94 76-0427657 Heat treating 70% - 02/16/94 04/01/95 - Mac-Tech, Inc. 100% Texas 12/09/83 N/A 74-1398758 Inactive company Petro Recovery Systems, Inc. 100% Texas 11/03/88 03/14/91 76-0362573 Inactive company Petrochem Field Services de Venezuela, S.A. 100% Venezuela 12/21/92 12/21/92 N/A Turnaround maintenance services PRS Holding, Inc. 100% Texas 03/13/91 N/A 76-0500096 Holding company Refinery Maintenance International Limited 100% United Kingdom 09/20/89 N/A Turnaround maintenance services - U.K. SECO Industries, Inc. 100% Louisiana 12/23/65 09/20/91 72-0627047 Electrical and instrumentation installation Serv-Tech Construction and Maintenance, Inc. (formerly Serv-Tech EPC - Houston, Inc.) 100% Texas 04/05/90 07/12/94 76-0396065 Construction services Serv-Tech de Mexico, S. de R.L. 100% Mexico 03/24/95 N/A STM9503264GA Limited liability company - for operations Serv-Tech Engineers, Inc. 100% Louisiana 09/28/95 N/A 72-1212309 Engineering and design services Serv-Tech EPC, Inc. 100% Nevada 12/12/94 N/A 72-1285495 Engineering, procurement and construction services Serv-Tech Europe GmbH 100% Germany 02/04/92 N/A N/A Turnaround maintenance services - Europe Serv-Tech International Sales, Inc. 100% Virgin Islands 10/03/94 N/A 66-0515688 Foreign sales corporation - Virgin Islands Serv-Tech Mexicana, S. de R.L. 100% Mexico 03/24/95 N/A STM950375URB Limited liability company- to hold employees Serv-Tech of New Mexico, Inc. 100% New Mexico 12/28/87 09/24/91 Applied for Turnaround maintenance services - New Mexico Serv-Tech Services, Inc. 100% Texas 11/14/83 N/A 76-0092646 Administrative company Serv-Tech Sudamericana, S.A. 98% Venezuela 07/01/94 N/A N/A Turnaround maintenance services - Venezuela Serv-Tech, Inc. Parent Texas 01/30/62 N/A 74-1398757 Parent company ST Piping, Inc. 90% Texas 09/13/90 N/A 76-0317640 Specialty welding services 02/28/92 Talbert & Associates, Inc. with Merger merged into Serv-Tech effective Engineers, Inc. 100% Nevada 09/28/95 05/11/92 72-1212309 Engineering and design services Terminal Technologies, Inc. 100% Texas 12/12/91 N/A 76-0362572 Tank cleaning for product storage tanks TIPCO Acquisition Corp. 100% Texas 04/16/93 N/A Applied for Holding company Total Refractory Systems, Inc. 100% Nevada 06/19/84 06/14/94 76-0109675 Refractory services Turnaround Maintenance, Inc. 100% Nevada 12/26/91 06/14/94 76-0338967 Inactive company United Industrial Materials, Inc. 100% Nevada 12/26/91 06/14/94 76-0317881 Distribution materials and supplies
EX-10.38 4 AMENDED & RESTATED CONTINUING REIMBURSEMENT AGRMNT 1 EXHIBIT 10.38 AMENDED AND RESTATED CONTINUING REIMBURSEMENT AGREEMENT THIS AMENDED AND RESTATED CONTINUING REIMBURSEMENT AGREEMENT (this "AGREEMENT"), dated as of November 12, 1996, is by and between F. C. Schaffer & Associates Inc., a Louisiana corporation (the "CUSTOMER"), and ABN AMRO Bank, N.V., a Netherlands chartered bank, acting through its Houston Agency (the "BANK"). WITNESSETH A. The Customer and the Bank have entered into that certain Continuing Reimbursement Agreement dated as of November 1, 1994 (the "PRIOR AGREEMENT"). B. This Agreement amends, restates and supersedes the Prior Agreement in its entirety. C. The Bank and Principal Mutual Life Insurance Company, TMG Life Insurance Company, Berkshire Life Insurance Company and The Security Mutual Life Insurance Company (collectively, together with any successors or assigns thereto, the "NOTEHOLDERS"), and Texas Commerce Bank National Association and Bank One Texas, N.A. (collectively, together with any successors or assigns thereto, the "BANK GROUP") have entered into an Intercreditor Agreement of even date herewith (the "INTERCREDITOR AGREEMENT"). WHEREAS, the Customer and the Bank hereby agree as follows: 1. SCOPE OF THIS AGREEMENT. The Customer has previously requested that the Bank issue, and the Bank has so issued, four letters of credit for the Customer's account and for the benefit of The General Manager, Finchaa Sugar Factory of the Transitional Government of Ethiopia in connection with that certain Contract No. FP-03 for the Design, Supply, Construction and Commissioning of Finchaa Sugar Factory and Ethanol Plant (the "CONTRACT") dated as of October 4, 1994, by and between the Customer and Finchaa Sugar Factory of the Transitional Government of Ethiopia (now known as the Finchaa Sugar Factory Project of the Federal Democratic Republic of Ethiopia) (the "FINCHAA SUGAR FACTORY"), two performance security letters of credit in the original face amounts of $7,001,681 USD and 7,540,406 Birr (collectively, as heretofore amended, the "PERFORMANCE SECURITY LETTER OF CREDIT") and two advance payment letters of credit in the original face amounts of $14,003,364 USD and 15,080,813 Birr (collectively, as heretofore amended, the "ADVANCE PAYMENT LETTER OF CREDIT"). The Bank has also issued, at the request of the Finchaa Sugar Factory, a letter of credit for the benefit of the Customer as a method of disbursement of certain sums due to it from the Finchaa Sugar Factory under the Contract in connection with Finchaa Sugar Factory and Ethanol Plant (the "FINCHAA PROJECT"), the draws under which are reimbursed and guaranteed by the African Development Bank ("ADB") (as heretofore amended, the "REVOLVING LETTER OF CREDIT") (the Performance Security Letter of Credit, the Advance Payment Letter of Credit and the Revolving Letter of Credit are sometimes hereinafter referred to as a "LETTER OF CREDIT" or collectively as the "LETTERS 2 OF CREDIT"). The issuance of, and the agreement to issue, the Letters of Credit in response to such requests shall be deemed to incorporate by reference and to have been made automatically subject to the terms and conditions of this Agreement. Each of the terms, conditions, and obligations in the applications with respect to the Performance Security Letter of Credit and the Advance Payment Letter of Credit shall be incorporated herein with respect to such Letter of Credit issued and shall constitute obligations of the Customer hereunder. To the extent of any inconsistency between any of such applications and this Agreement, the terms and provisions of this Agreement shall prevail. The Customer hereby acknowledges and agrees that the Finchaa Sugar Factory has requested that the expiry date of the Revolving Letter of Credit be extended to April 23, 1998, and the Revolving Letter of Credit has been so extended, and it hereby agrees to such amendment. 2. REIMBURSEMENT. The Customer agrees to reimburse the Bank, immediately upon written demand, for any payment the Bank makes under the Performance Security Letter of Credit or the Advance Payment Letter of Credit. The Customer also agrees to reimburse the Bank, immediately upon written demand, for any reasonable expense the Bank incurs in connection with making payment under either such Letter of Credit. All payment obligations of the Customer hereunder shall be in United States Dollars, converted, if necessary, from Birr to United States Dollars on the date of payment of any draw under the Performance Security Letter of Credit or the Advance Payment Letter of Credit, as the case may be, at the exchange rate paid by the Bank to purchase the Birr necessary to cover any such draw. 3. ISSUANCE FEES AND RESTRUCTURE FEE. The Customer agrees to pay to the Bank with respect to each of the Advance Payment Letter of Credit and the Performance Security Letter of Credit a nonrefundable fee, quarterly in advance commencing as of October 1, 1996, and quarterly thereafter, equal to the higher of 2.0% per annum or the rate per annum for the issuance of letters of credit provided for in the First Amended and Restated Credit Agreement among Serv- Tech, Inc. ("SERV-TECH"), the Guarantors named therein, Texas Commerce Bank National Association ("TCB"), as Agent, and the Bank Group dated as of November 12, 1996 (the "BANK AGREEMENT") of the face amount of each such Letter of Credit at the beginning of each calendar quarter calculated on the basis of a 365-day year and the actual days in such calendar quarter and based on the scheduled expiration of such Letter of Credit. The Customer also agrees to pay to the Bank with respect to the Revolving Letter of Credit a nonrefundable fee, quarterly in advance commencing as of October 1, 1996, and quarterly thereafter, equal to 1/2% per annum of the $12,500,000 face amount thereof or such reduced face amount thereof pursuant to the terms of the Revolving Letter of Credit, at the beginning of each calendar quarter calculated on the basis of a 365-day year and the actual days in such calendar quarter and based on the scheduled expiration of such Letter of Credit. The Customer agrees to pay to the Bank a nonrefundable restructure fee of $113,965.27 as a condition precedent to the effectiveness of this Agreement. 4. POST-ISSUANCE COSTS. The Customer agrees to pay to the Bank, immediately upon written demand, any and all reasonable costs arising after issuance of any Letter of Credit that the Bank may reasonably pay or incur under or in connection with a Letter of Credit or this -2- 3 Agreement, including, without limitation, reasonable legal fees arising from the enforcement of this Agreement. If the Bank determines that the effect of any change from the date hereof in any applicable law, governmental regulation, guideline or order or in the interpretation thereof by any governmental authority charged with the administration thereof (including the imposition of or change in any reserve, capital, special deposit, insurance, or similar requirement) is to increase the cost of issuing or maintaining any Letter of Credit, to reduce the Bank's return on its capital as a result of so issuing or maintaining any Letter of Credit, or to reduce the amount of any payment to be made to the Bank in respect of any obligation hereunder, then the Customer will pay to the Bank, on demand, such additional amounts as the Bank may determine to be required to compensate the Bank on an after-tax basis for such additional cost or reduction of amounts receivable hereunder. Any additional payments under this clause will be computed in accordance with generally accepted accounting principles ("GAAP") from the effective date at which such additional costs or reduction in amounts receivable have to be borne by the Bank. 5. INTEREST. (a) The Customer agrees to pay to the Bank, without demand unless otherwise specified below, interest on all amounts due from it but unpaid hereunder as set forth below: (i) All amounts drawn under the Revolving Letter of Credit from the date of such draw until the date such amount is reimbursed by the ADB shall bear interest, payable upon written demand on the last business day of each calendar month after any such draw, at a daily fluctuating interest rate per annum equal to the higher of (a) the fluctuating overnight money market rate of interest announced by the Bank from time to time at its Chicago, Illinois office in effect on such day, or (b) the sum of (x) the rate per annum (rounded upwards, if necessary, to the nearest 1/100th of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the next business day on which the Bank is open, provided, that (A) if such day is not such a business day, the rate on such transactions on the immediately preceding business day as so published on the next business day shall apply, and (B) if no such rate is published on such next business day, the rate for such day shall be the average rate quoted to the Bank by three (3) members of the Federal Reserve System on such day for such transactions as determined by the Bank, plus (y) 0.50% per annum (the "FEDERAL FUNDS RATE"); (ii) All amounts drawn under the Performance Security Letter of Credit from the date of such draw until the date such amount is reimbursed by the Customer shall bear interest at a daily fluctuating interest rate per annum equal to the higher of the fluctuating commercial loan rate of interest announced by the Bank from time to time at its Chicago, Illinois office as its base rate for U.S. Dollar loans in the United States of America in effect on such day (which rate is not necessarily its lowest rate charged by the Bank on loans to any of its customers) or the Federal Funds Rate (the "BASE RATE") plus 3% per annum; and -3- 4 (iii) All amounts drawn under the Advance Payment Letter of Credit shall bear interest from the date of such draw until the date such amount is reimbursed by the Customer at a daily fluctuating interest rate per annum equal to the Base Rate plus 3% per annum. 6. USURY SAVINGS CLAUSE. If at any time the interest rate applicable to any amount outstanding hereunder exceeds the maximum rate or the amount of interest which the Bank is allowed by law to contract for, charge, take, reserve or receive (the "HIGHEST LAWFUL RATE"), the rate of interest on such outstanding amount shall be limited to the Highest Lawful Rate, but any subsequent reductions in the interest rate shall not reduce the rate of interest thereon below the Highest Lawful Rate until the total amount of interest accrued thereon equals the amount of interest which would have accrued thereon if the interest rate had at all times been in effect. In the event that at maturity (stated or by acceleration), or at final payment of all obligations hereunder, the total amount of interest paid or accrued thereon is less than the amount of interest which would have accrued thereon if the interest rate applicable thereto had at all times been in effect, then, at such time and to the extent permitted by law, the Customer shall pay an amount equal to the difference between (a) the lesser of the amount of interest which would have accrued thereon if the interest rate applicable thereto had at all times been in effect and the amount of interest which would have accrued thereon if the Highest Lawful Rate had at all times been in effect, and (b) the amount of interest actually paid or accrued on all obligations hereunder. To the extent that Article 5069-1.04 of the Texas Revised Civil Statutes is relevant to the Bank for the purpose of determining the Highest Lawful Rate, the Bank hereby elects to determine the applicable rate ceiling under such Article by the indicated (Weekly) rate ceiling from time to time in effect, subject to its right subsequently to change such method in accordance with applicable law. To the extent the interest received hereunder exceeds the Highest Lawful Rate, the Bank shall refund to the Customer the amount of the excess or shall credit the amount of the excess against amounts owing hereunder and the Bank shall not be subject to any of the penalties provided by law for contracting for, taking, reserving, charging or receiving interest in excess of the Highest Lawful Rate. 7. PAYMENTS. All payments by the Customer to the Bank hereunder shall be made in immediately available U.S. Dollars at the Bank's office as set forth on the signature page hereto or at such other place within the continental United States of America as the Bank may designate in writing, without any withholding, deduction, or set off. The Bank may open and debit (under written advice to the Customer) a new account in the name of the Customer to effect such payments in respect of the Customer's obligations hereunder. 8. WAIVER OF EXISTING KNOWN DEFAULTS. The Customer has disclosed in writing to the Bank all defaults and Events of Default that may exist under the Prior Agreement and the Guaranty dated as of November 1, 1994, executed in connection therewith (the "PRIOR GUARANTY") immediately prior to closing under this Agreement. The Bank, in consideration of the agreements of the Customer hereunder, hereby waives each such default or Event of Default. -4- 5 The Bank hereby represents and warrants to the Customer that, as of closing hereunder, it knows of no other default or Event of Default under the Prior Agreement or the Prior Guaranty, and no default or Event of Default resulting from the execution and delivery of this Agreement or any of the other documentation executed and delivered at closing or transactions effected. It is agreed and understood that such waivers of defaults or Events of Default by the Bank shall not constitute a waiver of any other default or Event of Default under the Prior Agreement or the Prior Guaranty or any similar or future default or Event of Default hereunder or under the Amended and Restated Guaranty of even date herewith. 9. RELEASE AND INDEMNITY. (a) The Customer for itself and its directors, officers, employees, shareholders, agents, successors, assigns, other representatives, affiliates and attorneys do hereby release and forever discharge the Bank and its directors, officers, employees, shareholders, agents, successors, assigns, other representatives, affiliates and attorneys (each a "RELEASED PARTY") from any and all losses, claims, demands, damages, causes of actions, actions, cross-actions, judgments, liabilities, penalties, costs and expenses (including attorneys' fees and other legal expenses) of any kind or nature whatsoever ("CLAIMS"), which any of such persons has owned or held, or may now or in the future own or hold, whether known or unknown, contingent or liquidated, for or because of any action, inaction, omission, statement or publication on or before the date hereof by any Released Party arising directly or indirectly out of any of the Letters of Credit or the Prior Agreement, or any other documents or instruments executed in connection therewith or any other transactions relating directly or indirectly thereto, including, without limitation, any claims of usury which may or could be asserted by any such persons. (b) The Customer agrees to indemnify and hold harmless each of the Released Parties, on demand and to the fullest extent permitted by law, against all Claims which any of the Released Parties may pay or incur arising directly or indirectly out of any of the Letters of Credit, the Prior Agreement, this Agreement, any other documents or instruments executed in connection therewith or any other transactions relating directly or indirectly thereto, including, without limitation, actions commenced by Finchaa Sugar Factory for wrongful dishonor or non-payment and actions commenced by Schaffer to enjoin honor or payment to attach the proceeds of honor or payment or for wrongful dishonor or non-payment, regardless of whether any of such Claims are founded in whole or in part upon the alleged negligence of any of the Released Parties other than those which arise from the gross negligence or willful misconduct of the party claiming indemnification. WITHOUT LIMITING ANY PROVISION OF THIS AGREEMENT, IT IS EXPRESSLY INTENDED BY THE PARTIES THAT EACH OF SUCH RELEASED PARTIES TO BE INDEMNIFIED HEREUNDER SHALL BE INDEMNIFIED AND HELD HARMLESS AGAINST ANY AND ALL CLAIMS ARISING OUT OF OR RESULTING FROM THE ORDINARY SOLE OR CONTRIBUTORY NEGLIGENCE OF SUCH RELEASED PARTY OR IMPOSED UPON SUCH RELEASED PARTY UNDER ANY THEORY OF STRICT LIABILITY. The Customer, upon written demand by the Bank, shall reimburse the Bank for any legal or other expenses incurred in connection with investigating or defending against any of the foregoing except if the same is directly due to the gross negligence or willful misconduct of the Released Party. -5- 6 10. REPRESENTATIONS AND WARRANTIES OF THE CUSTOMER. The Customer represents and warrants to the Bank as follows: (a) CORPORATE EXISTENCE. The Customer is a corporation duly formed and validly existing and in good standing under the laws of the State of Louisiana. The Customer has all requisite corporate power and authority to conduct its business, to own its properties, and to execute and deliver and perform all of its obligations under this Agreement and the Contract. To the best of the Customer's knowledge, the Customer has all licenses, certificates, permits, franchises and other governmental authorizations necessary to own and operate its business and properties and is duly qualified or licensed and is authorized to do business and is in good standing as a foreign corporation in each state as necessary to own and operate its business and properties. (b) DUE AUTHORIZATION. The execution, delivery and performance by the Customer of this Agreement and the Contract are within the Customer's corporate powers, have been duly authorized by all necessary corporate action, and do not, and will not, contravene (i) any provision of its articles of incorporation or bylaws, (ii) any applicable law or (iii) any contractual restriction binding on or affecting the Customer, and except as provided herein, do not result in or require the creation of any lien, security interest or other charge or encumbrance upon or with respect to any of its properties. (c) APPROVALS. No authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for the due execution, delivery and performance by the Customer of this Agreement except as have been duly obtained or made and as are in full force and effect. No authorization or approval or other action by, and no notice to or filing with, any federal or state governmental authority or regulatory body with the United States is required for the due execution, delivery and performance by the Customer of the Contract, except as have been duly obtained or made and as are in full force and effect. (d) BINDING NATURE OF OBLIGATIONS. This Agreement is the legal, valid and binding obligation of the Customer enforceable against the Customer in accordance with its terms. (e) PENDING LITIGATION. Except as listed in the attached Schedule 1, there is no pending or threatened action, investigation or proceeding before any court, governmental agency or arbitrator against or affecting the Customer which could reasonably be expected to have a material adverse effect on the financial condition, operations, properties or prospects of the Customer or the ability of the Customer to perform its obligations hereunder or under the Contract or which purports to affect the legality, validity or enforceability of this Agreement or the Contract. -6- 7 (f) FINANCIAL STATEMENTS. The financial statements for the calendar quarter dated June 30, 1996, present fairly in all material respects the financial position of the Customer as of such date and the results of its operations and cash flows for such period. Since such date there has been no change in its business, operations, properties, condition (financial or otherwise) or prospects except changes which could not reasonably be expected to have a material adverse effect on any thereof or on the ability of the Customer to perform its obligations hereunder or under the Contract. (g) INDEBTEDNESS. The financial statements described in Section 8(f) reflect all indebtedness for borrowed money, bonds, notes and similar instruments and all outstanding bonds, notes and similar instruments and letters of credit issued for the Customer's account, all obligations of the Customer pursuant to a guaranty, all leases which would be capitalized lease obligations under GAAP, all obligations of other persons secured by any properties of the Customer and all obligations under any interest rate protection agreements and agreements to protect against fluctuations in commodity prices or currency exchange rates of the Customer as of the date hereof (collectively, "INDEBTEDNESS"). (h) TITLE TO PROPERTIES. The Customer has good and indefeasible title to all of its properties reflected on the financial statements referred to in Section 8(f), except for such failures as are immaterial to such financial statement, and all such property is free from liens, charges and encumbrances not permitted hereunder. (i) COMPLIANCE WITH LAW. The Customer is not in violation of any law, ordinance, governmental rule or regulation to which it is subject which could reasonably be expected to have a material adverse effect on the Customer. The Customer is in compliance with the Employee Retirement Income Security Act of 1974, as amended from time to time ("ERISA") and in compliance in all material respects with all federal, state, county, regional or local law, statutes or regulations enacted in connection with or relating to the protection of the environment, including, but not limited to, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended from time to time, the Resource Conservation and Recovery Act of 1976, as amended from time to time, and the Superfund Amendments and Reauthorization Act of 1986, as amended from time to time, and any orders, decrees or judgments issued by any court of competent jurisdiction in connection with any of the foregoing ("ENVIRONMENTAL PROTECTION LAWS"). The Customer is not subject to any liability under any Environmental Protection Laws and the Customer has not received any notice or communication from any governmental authority asserting any such liability, notice of any lien on any property owned or previously owned of the Customer or any notice designating any property of the Customer as a hazardous substance disposal or removal site, a "Super Fund" clean-up site or as candidate for removal or closure. -7- 8 (j) TAXES. The Customer has filed all United States and foreign federal income tax returns and all other material tax returns or appropriate extensions for filing, which are required to be filed by it and has paid all taxes due pursuant to such returns or pursuant to any assessments received by the Customer. The charges, accruals and reserves on the books of the Customer in respect of taxes or other governmental charges are adequate under GAAP as in effect on the date thereof. (k) SUBSIDIARIES. The Customer has no corporate subsidiaries and it is not the partner of any general partnership, joint venture or limited partnership or the member of any limited liability company. The Customer is a wholly owned subsidiary of Serv-Tech, subject only to that certain Grant of Option dated as of October 17, 1994, granted to F. C. Schaffer and that certain Grant of Repurchase Option dated as of October 14, 1994 granted to F. C. Schaffer and others. Ninety-six shares of Class C Voting Common Stock were issued to F. C. Schaffer on May 16, 1995 pursuant to the Grant of Option dated as of October 17, 1994. These 96 shares issued to F. C. Schaffer represent 20% of the aggregate voting power of the Customer's outstanding shares and 100% of the issued and outstanding Class C Voting Common Stock. (l) FULL DISCLOSURE. No information furnished by the Customer in writing in connection with the establishment of any Letter of Credit or with this Agreement contains or will contain any untrue statement of a material fact or omits or will omit to state a material fact necessary to make the statements contained therein or herein not misleading except to the extent a written waiver with respect thereto has been given by the Bank. (m) PUBLIC UTILITY HOLDING COMPANY. The Customer is not a "holding company," a "subsidiary company" of a "holding company" or an "affiliate" of a "holding company" or a "subsidiary company" of a "holding company," within the meaning of the Public Utility Company Act of 1935, as amended. (n) INVESTMENT COMPANY. The Customer is not an "investment company" or a company "controlled" by an "investment company," within the meaning of the Investment Company Act of 1940, as amended. 11. AFFIRMATIVE COVENANTS. So long as a drawing is available under any Letter of Credit, or the Bank shall have any commitment hereunder, or the Customer shall have any obligation to pay any amount to the Bank hereunder, the Customer will, unless the Bank shall otherwise consent in writing: (a) PRESERVATION OF EXISTENCE. Preserve and maintain its corporate existence and all rights, privileges, licenses and franchises necessary and desirable in the normal conduct of its business and in the performance of its obligations under the Contract and not dissolve or otherwise discontinue its existence or operations. (b) COMPLIANCE WITH LAWS. Comply in all material respects with the requirements of all applicable laws, ordinances, governmental rules or regulations and orders of any governmental or regulatory authority or arbitration, including ERISA and all Environmental Protection Laws, and obtain all necessary licenses, permits, certificates, -8- 9 franchises or other governmental authorizations necessary to the ownership of its properties, the operation of its business or its performance under the Contract. (c) PAYMENT OF TAXES. Pay and discharge, before the same shall become delinquent, (i) all taxes, assessments and governmental charges or levies imposed upon it or upon its properties, and (ii) all lawful claims which, if unpaid, might by law become a lien upon its properties; provided, however, that the Customer shall not be required to pay or discharge any such tax, assessment, charge or claim that is being contested in good faith and by proper proceedings, so long as the charges, accruals and reserves on the books of the Customer with respect thereto are adequate under GAAP and so long as no tax sale may occur during such proceedings. (d) EXAMINATION RIGHTS. At any reasonable time and from time to time, permit the Bank or any agents or representatives thereof, during normal business hours to examine and make copies of and abstracts from the records and books of and accounts of, and visit the properties of, the Customer and to discuss the affairs, finances and accounts of the Customer and the Contract with any of its officers and independent public accountants. (e) KEEPING OF BOOKS. Keep proper books and records and accounts, in which full and correct entries shall be made of all financial transactions and the assets and business of the Customer and the Customer's performance under the Contract in accordance with GAAP consistently applied. (f) MAINTENANCE OF PROPERTIES. Maintain and preserve all of its properties which are used or useful in the conduct of its business in good working order and condition, ordinary wear and tear excepted. (g) MAINTENANCE OF INSURANCE. Maintain insurance with responsible and reputable insurance companies in such amounts and covering such risks as is customarily carried by companies of established reputations engaged in the same or similar businesses and similarly situated, and upon request of the Bank (i) deliver to the Bank certificates of insurance or copies of policies of insurance required to be carried by or on behalf of the Customer pursuant hereto and (ii) cause each such policy of insurance to contain a notice of cancellation provision satisfactory to the Bank and in accordance with insurance industry practice. Maintain all insurance as required under the Contract. (h) REPORTING REQUIREMENTS. Furnish (or cause to be furnished) to the Bank the following: (i) as soon as possible and in any event within three (3) days after the occurrence of each Event of Default or each event which, with the giving of notice or time elapse, or both, would constitute an Event of Default ("DEFAULT") -9- 10 continuing on the date of such statement, a statement of the Chief Executive Officer or the Chief Financial Officer of the Customer setting forth details of such Default or Event of Default or event and the action which the Customer proposes to take with respect thereto; (ii) (x) within ten (10) days after the end of each month, (A) copies of all change orders, variations or amendments requested and/or approved by any party to the Contract with respect to the Finchaa Project, (B) a monthly site report, (C) a listing of draws on the Revolving Letter of Credit by invoice number, (D) a variation summary with supporting details on all variations since the previous summary and (E) copies of all material correspondence between Tate & Lyle Technical Services or any other Finchaa Project engineer, the Finchaa Project owner or the ADB with the Customer or Serv-Tech; and (y) within thirty (30) days after the end of each month, (A) the monthly Finchaa Project status report, (B) a report (aged) of all accounts of the Customer, segregating accounts of the Customer with respect to the Finchaa Project, (C) a statement of income and a balance sheet for the Customer, (D) a schedule of cash flows and monthly project budget for the Finchaa Project, including the Customer's then projected net income (loss) with respect thereto, (E) a "Billing Through" report (Certificate of Payment from Tate & Lyle Technical Services), (F) a time and materials schedule, (G) a monthly progress report, (H) a construction progress report and forecast, and (I) a master invoice log; (iii) duplicate financial and/or business reports furnished to the Noteholders, TCB or the Bank Group contemporaneously with transmitting thereto; and (iv) such other information respecting the business, properties, operations, condition or (financial or otherwise) or prospects of the Customer, the Contract or the Finchaa Project as the Bank may from time to time reasonably request. (i) FINCHAA PROJECT ACCOUNT. The Customer shall maintain with ABN AMRO Bank N.V., or such other financial institution as agreed to in writing by the Bank, the Noteholders and the Bank Group, a segregated account into which all proceeds of any draw upon the Revolving Letter of Credit, together with all proceeds of, or sums paid to Customer pursuant to, the Contract or the Finchaa Project (including any insurance proceeds with respect thereto) shall be immediately deposited by the Customer. The Customer shall not commingle the funds in connection with the Contract or the Finchaa Project with funds from any other source. The Customer shall use the funds in such account only for performing its obligations under the Contract and for reimbursements to Serv-Tech and its affiliates of costs incurred on the Customer's behalf directly in connection with the Contract, and shall not use such funds for any other purpose, -10- 11 including, without limitation, for any general corporate purposes or for any other projects of the Customer. Such account shall be so maintained until the Contract has been completed, the Finchaa Project has been accepted by the owner pursuant to the terms of the Contract and the Bank has no further liability whatsoever under any of the Letters of Credit, subject to the terms of the Intercreditor Agreement. (j) CUSTOMER ACCOUNT. The Customer, upon written request from the Bank, shall maintain a segregated account or accounts into which all of the Customer's funds from sources other than those described in Section 11(i) shall be deposited and shall not commingle such funds with funds of Serv-Tech, any affiliate or any other person. Any such account shall be subject to the terms of the Intercreditor Agreement. (k) TRAVEL EXPENSES. The Customer shall be responsible for any reasonable travel expenses incurred by any consultants and professionals, the Bank, and any of its consultants and professionals pursuant to site inspections or evaluations of the Finchaa Project. 12. NEGATIVE COVENANTS. So long as a drawing is available under any Credit, or the Bank shall have any commitment hereunder, or the Customer shall have any obligation to pay any amount to the Bank hereunder, the Customer will not, without the prior written consent of the Bank: (a) AMENDMENT OF CORPORATE DOCUMENTS. Enter into or consent to any amendment or modification of its articles of incorporation or bylaws in any way which would adversely affect the Bank. (b) LIENS, ETC. Create, assume or suffer to exist any lien, security interest or other charge or encumbrance upon ("LIEN") or with respect to any of its properties, whether now owned or hereafter acquired, or assign any right to receive income, except (i) Liens existing on the Execution Date and listed on Schedule _______; (ii) Liens securing Indebtedness permitted under Section ______ above; (iii) Permitted Liens; (iv) any renewal, extension or replacement of any Lien referred to in subparagraphs (i) and (ii) 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 -11- 12 and provided further that the principal amount of the Indebtedness secured thereby shall not exceed the principal amount of the Indebtedness so secured at the time of such extension, renewal or replacement; and (v) Liens granted to TCB as Collateral Agent for the Bank, the Bank Group and the Noteholders on even date herewith, and any renewals, extensions and modifications thereof or additions thereto. (c) INDEBTEDNESS. Create, assume or suffer to exist any Indebtedness except: (i) under this Agreement; (ii) purchase money Indebtedness in connection with the purchase of assets so long as such Indebtedness does not exceed eighty percent (80%) of the purchase price of such assets and does not exceed $100,000 in the aggregate; (iii) other unsecured Indebtedness not to exceed $100,000; (iv) unsecured Indebtedness in connection with trade letters of credit issued as of the date hereof on behalf of the Customer in the ordinary course of business, provided that no such letters of credit are increased in amount; and (v) unsecured Indebtedness owed to Serv-Tech which is subordinated to the obligations of the Customer to the Bank pursuant to the terms of the Guaranty (as hereinafter defined) in an amount not to exceed $2,000,000 in connection with the Finchaa Project and in an amount not to exceed $1,000,000 in connection with the operation of the Customer's business other than the Finchaa Project; and (vi) the Guaranty to the Noteholders of even date herewith. (d) SALES, ETC. OF ASSETS. Sell, lease, transfer or otherwise dispose of any of its assets, except in the ordinary course of business. (e) MERGER, CONSOLIDATION, ETC. (i) MERGER AND CONSOLIDATION. The Customer will not merge with or into or consolidate with any other person or permit any other person to merge or consolidate with or into it. (ii) ACQUISITION OF STOCK, ETC. The Customer will not acquire any stock of any corporation or materially all the assets of any entity. -12- 13 (f) CHANGE IN BUSINESS OR THE CONTRACT. Enter into any business which is different from or is not connected with the business in which the Customer is engaged on the date hereof or amend the Contract without the consent of the Bank, where such amendment would extend the term of the Contract, change the price of the Contract, reduce the amounts owing to the Customer under the Contract, or otherwise adversely affect the Customer's ability to perform the Contract or the Customer's anticipated profit from the Contract as of the date hereof. (g) DIVIDENDS. The Customer shall not redeem, purchase or otherwise acquire any shares of its capital stock, make any loans or advances to stockholders or any other persons or entities, declare or pay any dividends on its capital stock, make any distribution or payment to stockholders, or set aside any funds for such purpose other than the repayment of any Indebtedness permitted in Section 11(c)(v) so long as no Significant Event (as defined in the Intercreditor Agreement) shall have occurred and be continuing. (h) TRANSACTIONS WITH AFFILIATES. The Customer will not enter into any transaction, including, without limitation, the purchase, sale or exchange of property or the rendering of any service, with any affiliate, except in the ordinary course of and pursuant to the reasonable requirements of the Customer's business and upon fair and reasonable terms no less favorable to the Customer than would obtain in a comparable arm's-length transaction with a person not an affiliate. (i) REPAYMENT OF INTERCOMPANY DEBT. The Customer shall not repay any Indebtedness to Serv-Tech permitted hereunder if a Significant Event (as defined in the Intercreditor Agreement) shall have occurred and be continuing. 13. CONDITIONS. The effectiveness of this Agreement is conditioned upon receipt by the Bank of the following in form and substance acceptable to the Bank: (a) a duplicate of this Agreement duly signed on behalf of the Customer and its remaining in full force and effect with respect to the obligations of the Customer; (b) a certified copy of the resolutions of the Board of Directors of the Customer authorizing the execution and delivery of this Agreement; (c) a Certificate of Incumbency specifying the names and titles of the authorized individuals under such board resolution; (d) authenticated signatures of the persons specified in such board resolution; (e) an amended and restated guaranty of Serv-Tech and its subsidiaries listed therein and any other domestic subsidiaries from time to time required to execute a Guaranty pursuant to the terms thereof (the "SUBSIDIARIES") (the "GUARANTY") with respect to the obligations of the Customer hereunder duly executed and accompanied by (i) certified copies of a resolution of each of the Boards of Directors of Serv-Tech and the Subsidiaries authorizing the execution and delivery of the Guaranty together with a certificate of incumbency specifying the names and titles of the applicable authorized individuals under such board resolutions and the authenticated -13- 14 signatures of such persons; (f) a written opinion by the Customer's, Serv- Tech's and the Subsidiaries' legal counsel in a form satisfactory to the Bank; (g) payment of all costs (including reasonable attorneys' fees) of the Bank in connection with documenting the restructure described in this Agreement; (h) the Intercreditor Agreement in form and substance satisfactory to the Bank executed by the Bank, the Bank Group and the Noteholders under that certain Note Purchase Agreement dated as of June 1, 1993, as amended prior to and on the date hereof (the "NOTE PURCHASE AGREEMENT"); (i) a written opinion provided by Jones, Walker, Waechter Poitevent, Carrere & Denegre, L.L.P. on or before November 18, 1996; and (j) documentation in form and substance satisfactory to the Bank that Serv-Tech has restructured all indebtedness owed to the Bank Group and the Noteholders, that Serv-Tech and it subsidiaries have granted liens on all their material assets to the Bank Group, the Noteholders and the Bank and that Serv-Tech and its subsidiaries are in compliance with all such restructured loan documentation. Serv-Tech, the Subsidiaries and any other subsidiaries as are hereafter required to execute a Guaranty pursuant to the terms hereof, are collectively referred to as the "GUARANTORS." 14. EVENTS OF DEFAULT. The occurrence of any of the following events shall be an "EVENT OF DEFAULT" hereunder: (a) NON-PAYMENT OF MONETARY OBLIGATIONS HEREUNDER. The Customer shall fail to pay any amount payable hereunder when due; (b) BREACH OF WARRANTIES. Any representation or warranty of the Customer made in writing herein or in connection with this Agreement or any of the Letters of Credits shall prove to have been incorrect in any material respect when made; (c) OTHER DEFAULTS. The Customer shall fail to perform or observe any other term, covenant or agreement contained in this Agreement on its part to be performed or observed; (d) NON-PAYMENT OF OTHER MONETARY OBLIGATIONS. The Customer shall fail to pay any indebtedness (excluding indebtedness under this Agreement) in excess of $50,000 individually or in the aggregate, or any interest or premium thereon, when due (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise) and such failure shall continue after the applicable grace period, if any, specified in the agreement or instrument relating to such indebtedness; or any other default under any agreement or instrument relating to any such indebtedness, or any other event, shall occur and shall continue after the applicable grace period, if any, specified in such agreement or instrument, if the effect of such default or event is to accelerate, or to permit the acceleration of, the maturity of such indebtedness; or any such indebtedness shall be declared to be due and payable, or required to be prepaid (other than by a regularly scheduled required prepayment), prior to the stated maturity thereof; -14- 15 (e) BANKRUPTCY, INSOLVENCY, ETC. The Customer or any of the Guarantors shall fail to pay its debts generally, or shall make a general assignment for the benefit of creditors; or any proceeding shall be instituted by or against the Customer or any of the Guarantors seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee, or other similar official for it or any substantial part of its property and, if instituted against the Customer or any of the Guarantors, shall remain undismissed for a period of sixty (60) days, or an order for relief as defined in the United States Bankruptcy Reform Act of 1978, as amended, shall be rendered prior to the expiration of that sixty (60) day period; or any judgment, writ, warrant of attachment or execution or similar process shall be issued or levied against any substantial part of the property of the Customer or any of the Guarantors, and shall not be released, vacated or fully bonded within sixty (60) days after its issue or levy, or the Customer or any of the Guarantors shall take any action to authorize any of the actions set forth above in this subsection (e); (f) INVALIDITY, ETC. Any provision of this Agreement or the Guaranty shall at any time for any reason cease to be valid and binding on the Customer or any of the Guarantors, as the case may be, or shall be declared by any court, arbitrator or governmental authority or agency to be null and void, or the validity or enforceability thereof shall be contested by the Customer or any of the Guarantors, as the case may be, or a proceeding shall be commenced by any governmental agency or authority having jurisdiction over the Customer or any of the Guarantors, as the case may be, seeking to establish the invalidity or unenforceability thereof, or the Customer or any of the Guarantors, as the case may be, shall deny in writing that it has any or further liability or obligation under this Agreement or the Guaranty, as the case may be; (g) JUDGMENTS. The Customer shall fail to pay, bond or otherwise discharge, or stay on appeal or otherwise appropriately contest in good faith in a manner that stays execution, any money judgment or order in excess of $50,000 against it or its assets at least five (5) days prior to the date on which any steps may be taken to execute on such judgment; (h) GUARANTY DEFAULT. Any "Event of Default" under and as defined in the Guaranty shall have occurred and be continuing; (i) CONTRACT DEFAULT. A Default (as defined in the Contract) shall occur under the Contract pursuant to Section 27 thereof or otherwise, the Contract shall terminate or be declared terminated, be declared null and void or be contested by the Finchaa Sugar Factory, any other governmental authority, or the ADB; -15- 16 (j) NOTE PURCHASE AGREEMENT AND BANK AGREEMENT. A default or an event of default shall occur under the Note Purchase Agreement or the Bank Agreement, in all respects without giving effect to any amendment or waiver thereof after the date hereof; provided that (i) it shall also be an Event of Default hereunder if a default or an event of default shall occur in any of such agreements as same may be amended after the date hereof, (ii) if either the Note Purchase Agreement or the Bank Agreement, shall cease to be in full force and effect, it shall also be an Event of Default hereunder if any default or event of default would have occurred if such agreement, in all respects without giving effect to any amendment or waiver thereof after the date hereof, was then in full force and effect; and (iii) if the Note Purchase Agreement is replaced, it shall also be an Event of Default hereunder in any default or event of default occurs under any such replacement agreement; (k) TERMINATION OF BANK AGREEMENT. The Bank Agreement shall cease to be in full force and effect; (l) OWNERSHIP OF CUSTOMER. Serv-Tech shall fail to own, directly or indirectly, 100% of the capital stock of the Customer or to control the Board of Directors thereof while the Letters of Credit are outstanding; or (m) WHITNEY NATIONAL BANK LETTERS OF CREDIT. A default or an event of default shall occur under any documents or instruments evidencing (i) any credit facility with Whitney National Bank pursuant to which letters of credit are issued for the account of the Customer or (ii) any guaranty of Serv-Tech or any other affiliate of Serv-Tech thereof. 15. RIGHT OF SET-OFF. Upon the occurrence and during the continuance of any Default or any Event of Default, the Bank is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by the Bank to or for the credit or the account of the Customer against any and all of the obligations of the Customer now or hereafter existing under this Agreement, irrespective of whether or not the Bank shall have made any demand hereunder and although such obligations may be contingent or unmatured; provided, however, the amount so set off shall be held as collateral pursuant to the terms and conditions of the Intercreditor Agreement. 16. LIMITED LIABILITY. So long as the Bank has exercised reasonable care and has acted in good faith, the Bank shall not be responsible to the Customer for, and the Bank's right to reimbursement, indemnification, and other payments hereunder shall not be impaired by (i) any act or omission for which banks are relieved of responsibility under the Uniform Customs and Practice for Documentary Credits, 1993 revision, ICC Publication No. 500 (1993), (ii) any -16- 17 recommendation or failure to recommend the inclusion or exclusion of any particular term or wording in a Letter of Credit, (iii) honor or dishonor or refusal of any demand under a Letter of Credit following the Customer's refusal to confirm that such demand is entitled to be honored or that the Bank is entitled to be reimbursed, (iv) any lack of validity or enforceability of this Agreement or document or instrument executed in connection therewith, (v) any amendment or waiver of or any consent to depart from all or any of the provisions of this Agreement or any document or instrument executed in connection therewith; (vi) the existence of any claim, set-off, defense or other right the Customer may have at any time against a beneficiary of a Letter of Credit (or any person for whom a beneficiary may be acting), the Bank or any other person, whether in connection with this Agreement, another document or instrument executed in connection therewith or any unrelated transaction; (vii) any statement or any other document presented under a 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; (viii) payment by the Bank under a Letter of Credit against presentation to the Bank of a draft or certificate that does not comply with the terms of the Letter of Credit, provided that the Bank's determination that documents presented under the Letter of Credit comply with the terms thereof did not constitute gross negligence or willful misconduct of the Bank; or (ix) any other act or omission to act or delay of any kind by the Bank or any other person or any other event or circumstance whatsoever that might, but for the provisions of this Section, constitute a legal or equitable discharge of the Customer's obligations hereunder. The Bank shall not be liable for any special, indirect, or consequential damages unless there is a judicial finding by a court of competent jurisdiction that such damages resulted solely from the Bank's bad faith or willful misconduct. 17. MISCELLANEOUS. (a) NO WAIVER; AMENDMENT. No amendment or waiver of any provision hereof shall be enforceable against the Bank unless in writing and signed by the Bank, and then only in the specific instance and for the specific purposes for which given. Nothing herein shall affect the Bank's duties or a beneficiary's rights under a Letter of Credit unless such Letter of Credit is so amended. (b) APPLICABLE LAW AND VENUE. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS AND THE APPLICABLE LAWS OF THE UNITED STATES OF AMERICA. The Customer (i) agrees that any suit, action or other legal proceeding arising out of or relating to this Agreement may be brought in a court of competent jurisdiction in the State of Texas or in the Courts of the United States of America located in such State, and that any suit, action or other legal proceeding arising out of or relating to any Letter of Credit issued hereunder may be brought, at the option of the Bank, either in such a court or any other appropriate court of competent jurisdiction, (ii) consents to the jurisdiction of any such court in any such suit, action or proceeding, and (iii) waives any objection or immunity which it may have to the laying of -17- 18 venue of any suit, action or proceeding in any of such courts and any claim that any such suit, action or proceeding has been brought in an inconvenient forum. (c) COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same document. (d) SEVERABILITY. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions of this Agreement, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. (e) SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and warranties made in this Agreement or in any certificate delivered pursuant hereto shall survive the execution and delivery of this Agreement, and no investigation by the Bank shall affect the representations and warranties or the right of the Bank to rely upon them. (f) HEADINGS. Section headings used in this Agreement are for reference only and shall not affect the construction of this Agreement. (g) NOTICES. All notices hereunder shall be in writing, shall be hand delivered, deposited into the United States mail (registered or certified mail), postage prepaid, sent by overnight courier or sent by confirmed facsimile transmission and shall be addressed to the parties hereto at the respective addresses set forth opposite their signatures below or such other address as such party shall designate in writing and furnish to the other party. Any notice shall be deemed to be received when actually received unless so addressed and deposited in the United States mail as so designated in which event it shall be deemed received on the third succeeding business day after the date of such deposit. (h) WAIVER OF JURY TRIAL. THE CUSTOMER HEREBY EXPRESSLY WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT, ANY LETTER OF CREDIT OR THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT. (i) NOTICE OF ENTIRE AGREEMENT. This Agreement constitutes the entire understanding between the Customer and the Bank and supersedes all earlier or contemporaneous agreements, whether written or oral, concerning the subject matter thereof. THIS WRITTEN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED -18- 19 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 duly executed and delivered by their respective authorized officers as of the date first above written. F. C. SCHAFFER & ASSOCIATES, INC. Address: 1020 Florida Boulevard Baton Rouge, Louisiana 70802 By: /s/ DAVID TUSA --------------------------------------- Name: David Tusa ------------------------------------- Title: Director, Vice President & CFO ------------------------------------ -19- 20 ABN AMRO BANK N.V., HOUSTON AGENCY Three Riverway, Suite 1700 Houston, Texas 77056 BY: ABN AMRO NORTH AMERICA, INC. By: /s/ MICHAEL N. OAKES --------------------------------------- Name: Michael N. Oakes Title: Vice President & Director By: /s/ H. GENE SHIELS --------------------------------------- Name: H. Gene Shiels ------------------------------------- Title: Vice President & Director ------------------------------------ -20- 21 SCHEDULE I - PENDING LITIGATION NONE EX-10.39 5 INTERCREDITOR AGREEMENT 1 EXHIBIT 10.39 INTERCREDITOR AGREEMENT 2 TABLE OF CONTENTS
Page ARTICLE I - DEFINITIONS AND CONSTRUCTION . . . . . . . . . . . . . . . 2 1.1 Definitions. . . . . . . . . . . . . . . . . . . . . . 2 ARTICLE II - PAYMENTS OF LIABILITIES . . . . . . . . . . . . . . . . . 8 2.1 Payments Prior to Significant Event . . . . . . . . . 8 2.2 "True Up" Participation Purchase Between Banks and Noteholders to Maintain Original Principal Ratio Following Significant Event . . . . . . . . . . 9 2.3 Payment on or After Significant Event . . . . . . . . 9 2.4 Relative Rights . . . . . . . . . . . . . . . . . . . 9 2.5 Avoided Payments . . . . . . . . . . . . . . . . . . . 9 2.6 Obligations Several . . . . . . . . . . . . . . . . . 10 2.7 Participation Terms . . . . . . . . . . . . . . . . . 10 ARTICLE III - AMENDMENT AND ACCELERATION OF LENDING AGREEMENTS . . . . . . . . . . . . . . . . . . . . 11 3.1 Lending Agreements . . . . . . . . . . . . . . . . . . 11 3.2 Credit Agreement . . . . . . . . . . . . . . . . . . . 11 3.3 Note Agreements . . . . . . . . . . . . . . . . . . . 11 3.4 ABN Amendment and ABN Guaranty . . . . . . . . . . . . 12 3.5 Acceleration . . . . . . . . . . . . . . . . . . . . . 12 ARTICLE IV - REPRESENTATIONS, COVENANTS AND RIGHTS OF LENDERS . . . . . 13 4.1 Non-Reliance . . . . . . . . . . . . . . . . . . . . . 13 4.2 Representations and Warranties . . . . . . . . . . . . 13 4.3 Covenants of Creditors . . . . . . . . . . . . . . . . 13 4.4 Headings . . . . . . . . . . . . . . . . . . . . . . . 15 4.5 Plural Terms . . . . . . . . . . . . . . . . . . . . . 15 ARTICLE V - CONDITIONS TO EFFECTIVENESS; DELIVERY OF DOCUMENTS . . . . . . . . . . . . . . . 15
Table of Contents Page 1 3 5.1 Conditions to Effectiveness . . . . . . . . . . . . . 15 ARTICLE VI - MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . 16 6.1 Notices . . . . . . . . . . . . . . . . . . . . . . . 16 6.2 Waivers; Amendments . . . . . . . . . . . . . . . . . 16 6.3 Successors and Assigns . . . . . . . . . . . . . . . . 16 6.4 No Third Party Rights . . . . . . . . . . . . . . . . 17 6.5 Partial Invalidity . . . . . . . . . . . . . . . . . . 18 6.6 Equitable Remedies . . . . . . . . . . . . . . . . . . 18 6.7 Jury Trial . . . . . . . . . . . . . . . . . . . . . . 18 6.8 Counterparts . . . . . . . . . . . . . . . . . . . . . 18 6.9 Governing Law . . . . . . . . . . . . . . . . . . . . 18 6.10 Construction . . . . . . . . . . . . . . . . . . . . . 18 ARTICLE VII - COLLATERAL AGENT . . . . . . . . . . . . . . . . . . . . 18 7.1 Designation of Agent . . . . . . . . . . . . . . . . . 18 7.2 Duties of Collateral Agent . . . . . . . . . . . . . . 19 7.3 Delegation Duties, Etc . . . . . . . . . . . . . . . . 21 7.4 Indemnification . . . . . . . . . . . . . . . . . . . 22 7.5 Exculpatory Provisions . . . . . . . . . . . . . . . . 22 7.6 Knowledge of Default . . . . . . . . . . . . . . . . . 23 7.7 Collateral Agent in its Individual Capacity . . . . . 23 7.8 Resignation or Removal of Collateral Agent . . . . . . 24 7.9 Creditors as Owners . . . . . . . . . . . . . . . . . 24 7.10 Compensation . . . . . . . . . . . . . . . . . . . . . 24 EXHIBITS/SCHEDULES: Exhibit A - Security Agreement Exhibit B - Deeds of Trust/Mortgages Exhibit C - Participation Certificate Exhibit D - Notice of Assignment Schedule 1 - Address for Notices CONSENTS: Consent and Agreement of the Company and its Affiliates
Table of Contents Page 2 4 INTERCREDITOR AGREEMENT THIS INTERCREDITOR AGREEMENT (this "Agreement") dated as of November 12, 1996 is entered into by and among: (1) Principal Mutual Life Insurance Company, TMG Life Insurance Company, Berkshire Life Insurance Company and The Security Mutual Life Insurance Company (individually, a "Noteholder" and collectively, the "Noteholders") ; (2) Texas Commerce Bank National Association ("TCB") and Bank One, Texas, N.A. (individually, a "Bank" and collectively, the "Banks"); and (3) ABN AMRO Bank, N.V., a Netherlands chartered Bank acting through its Houston agency ("ABN"). RECITALS A. Pursuant to a Credit Agreement ($35,000,000 Revolving Credit Loan) dated as of May 15, 1995, as amended by Amendments to Credit Agreement effective as of July 19, 1995, and as of August 14, 1996 (as amended, the "Prior Credit Agreement") the Banks have advanced funds to and issued certain letters of credit (the "Banks' L/C's") on behalf of Serv-Tech, Inc. (the "Company"). The face amount of the Banks' L/C's plus principal currently advanced under the Credit Agreement is $19,454,067. The Company's obligations under the Credit Agreement are guaranteed by Affiliates of the Company identified in the Credit Agreement. The Company also is obligated to reimburse TCB for certain liabilities incurred by the Company from time to time through its use of cash management services provided by TCB, including overdrafts by the Company and amounts of automated clearing house funds that may erroneously be credited to the Company's account with TCB (to the maximum extent of $2,000,000.00, the "Cash Management Liabilities"). B. Pursuant to a Note Purchase Agreement dated as of June 1, 1993, as amended by the First through Sixth Amendment to Note Purchase Agreement effective as of October 1, 1994, April 1, 1995, October 1, 1994, January 1, 1996, April 1, 1996 and July 1, 1996, respectively (as amended, the "Note Purchase Agreement"), the Noteholders have purchased obligations (evidenced by notes issued pursuant to the Note Purchase Agreement, "Senior Notes") of the Company in an aggregate principal amount equal to $15,000,000. C. ABN has issued four (4) Letters of Credit which are unexpired as of the date hereof in the aggregate face amount of approximately $15,195,369 as of September 30, 1996 (such Letters of Credit, as amended from time to time, "ABN Letters of Credit"). The ABN Letters of Credit are issued for the account of F. C. 5 Schaffer & Associates, Inc. ("FCS"). FCS is obligated to repay sums that ABN may advance under the Letters of Credit pursuant to the terms of a Continuing Reimbursement Agreement dated as of November 1, 1994, as amended by First and Second Amendments dated July 1, 1995 and April 30, 1996, respectively ("Prior Reimbursement Agreement"). ABN has also issued a Letter of Credit, as amended from time to time, for the benefit of FCS for the account of Finchaa Sugar Factory ("Revolving L/C"). ABN is to be reimbursed for advances made on the Revolving L/C by The African Development Bank. Pursuant to the terms of the Prior Reimbursement Agreement, FCS is obligated to pay interest on the advances made by ABN on the Revolving L/C until ABN is reimbursed by The African Development Bank. The obligations of FCS under the Prior Reimbursement Agreement are guaranteed by the Company and its Affiliates under its Guaranty dated as of November 1, 1994 ("Prior ABN Guaranty"). D. The Company under each of the Prior Credit Agreement, the Note Purchase Agreement and the Prior ABN Guaranty and FCS under the Prior Reimbursement Agreement has requested that the respective documents be amended as set forth in the First Amended and Restated Credit Agreement (the "Credit Agreement"), the Note Restructuring Amendment, the ABN Amendment, and the ABN Guaranty (all as defined below) (collectively, the "Amendments"). E. As a condition to execution and delivery of the Amendments, each of the Banks, Noteholders and ABN are requiring the execution and delivery of this Agreement. AGREEMENT NOW, THEREFORE, in consideration of the foregoing recitals and the covenants hereinafter contained, the parties hereto agree as follows: ARTICLE I DEFINITIONS AND CONSTRUCTION 1.1 Definitions. For purposes of this Agreement, the following capitalized terms shall have the following meanings: "ABN" shall have the meaning assigned to same in the first paragraph of this Agreement. "ABN Amendment" shall mean that certain Amended and Restated Continuing Reimbursement Agreement of even date herewith, executed by ABN and FCS, as it may be amended from time to time. -2- 6 "ABN Guaranty" shall mean the Amended and Restated Guaranty of the Company and the Affiliates named therein of even date herewith as it may be amended from time to time. "ABN Letters of Credit" shall have the meaning assigned to same in Recital C above. "ABN Liabilities" shall mean all sums advanced by ABN on the ABN Letters of Credit and not yet repaid by FCS, the Company or any of their Affiliates, to ABN under the ABN Amendment or the ABN Guaranty and all accrued but unpaid interest, fees, charges, and rights to reimbursement for costs due under the ABN Amendment or the ABN Guaranty. "Affiliate" shall mean, with respect to any Person, another Person which controls, is controlled by, or is under common control with, such Person. "Agent Bank" shall mean Texas Commerce Bank National Association as agent under the Credit Agreement and its successors and assigns. "Amendments" shall have the meaning assigned to same in Recital D above. "Assignee Creditor" shall have the meaning assigned to same in Section 6.3(b). "Assignment" shall have the meaning assigned to same in Section 6.3(b). "Assignor Creditor" shall have the meaning assigned to same in Section 6.3(b). "Available Proceeds" shall mean all payments received by any Creditor from and after the date of the occurrence of a Significant Event including, without limitation, (i) any payment received from or on account of any Obligor, (ii) any payment received as a result of the exercise of any right of setoff or rights under any banker's or other lien or counterclaim, or any exercise of rights under a theory of trust or constructive trust or other equitable, common law, statutory, or other legal rights, or (iii) any payment received as a result of the exercise of any right or remedy under any Lending Agreement or any agreement, document or instrument delivered in connection with any Lending Agreement, in each case, irrespective of whether such proceeds or payments are received before or after the commencement of any bankruptcy or other similar proceeding by or against the Company or any of its Affiliates. "Avoided Payment" shall mean, any amounts received by any Creditor in respect of any portion of the Liabilities, which, in each case, are subsequently avoided or otherwise required to be returned to any Obligor or its representative, trustee, -3- 7 receiver, or successor in interest, whether by court order, settlement or otherwise. "Bank" or "Banks" shall have the meaning assigned to same in the first paragraph of this Agreement. "Banks' L/C's" shall have the meaning assigned to it in Recital A above. "Business Day" shall mean any day which is not a Saturday or Sunday or a day on which commercial banks are authorized not to do business or required to close in Houston, Texas. "Cash Collateral Account(s)" shall mean interest-bearing accounts established by the Collateral Agent for funds held to secure the Letter of Credit Obligations. Funds in the Cash Collateral Account(s) shall be federally insured or invested in United States Treasury obligations either directly or by purchase of an interest in funds which invest in such Treasury obligations. "Cash Management Liabilities" shall have the meaning assigned to same in Recital A above. "Closing Date" shall mean the date on which the last of the Note Restructuring Amendment, Senior Note Guaranty, the Credit Agreement, the ABN Amendment and the ABN Guaranty becomes effective. "Collateral" shall mean all or substantially all of the assets of the Company and its Affiliates which shall secure all of the Liabilities. "Collateral Agent" shall mean Texas Commerce Bank, National Association, as agent for the parties to this Agreement under the terms and conditions set forth in Article VII below. "Company" shall have the meaning assigned to same in Recital A above. "Credit Agreement" shall mean that certain First Amended and Restated Credit Agreement of even date herewith executed by the Banks, the Company and certain Affiliates of the Company as Guarantors as it may be amended from time to time. "Credit Agreement Liabilities" shall mean all obligations of the Company and its Affiliates, as defined in the Credit Agreement or any document executed in connection therewith, including obligations related to the Banks' L/C's. "Creditor" shall mean each Noteholder, each Bank, TCB with respect to the Cash Management Liabilities and ABN, and "Creditors" shall mean all Noteholders, TCB with respect to the Cash Management Liabilities, all Banks and ABN, collectively. -4- 8 "Creditor Groups" shall mean the Banks considered as a group, the Noteholders considered as a group, ABN, and TCB only with respect to the Cash Management Liabilities. "Deeds of Trust/Mortgages" shall have the meaning assigned to same in Section 7.2 hereof. "Event of Default" shall mean an Event of Default under the Credit Agreement, Note Purchase Agreement, the Senior Note Guaranty, the ABN Amendment or the ABN Guaranty occurring after the date hereof. "Guarantors" shall mean the Persons which are guarantors under the Credit Agreement, the ABN Guaranty and Senior Note Guaranty. "L/C Reduction Notice" shall have the meaning assigned to it in Section 4.3(f). "Lending Agreements" shall mean the Credit Agreement, the Note Purchase Agreement, the Senior Note Guaranty, the ABN Amendment, the ABN Guaranty, and all promissory notes, security agreements, guaranties or other documents executed in connection with any of the above or the Cash Management Liabilities by any Obligor pursuant to each such agreement. "Letter of Credit Obligations" shall mean at any specified time the total contingent exposure of the issuer of the ABN Letters of Credit and the Banks' L/C's. "Liabilities" shall mean collectively, the Credit Agreement Liabilities, the Cash Management Liabilities, the Note Liabilities and the ABN Liabilities. "Lien" shall mean, with respect to any property, any security interest, mortgage, pledge, lien, claim, charge or other encumbrance in, of, or on such property or the income therefrom, including, without limitation, the interest of a vendor or lessor under a conditional sale agreement, capitalized lease obligation or other title retention agreement. "Make-Whole Amount" shall refer to the obligation of the Company to reimburse the Banks and/or Noteholders for losses suffered due to prepayment of principal as more fully described and defined in Section 2.15 of the Credit Agreement and Section 4.2 and 9.1 of the Note Purchase Agreement. "Note Liabilities" shall mean all obligations, of any Obligor to any Noteholder arising under the Note Purchase Agreement or under any other document executed in connection therewith and all obligations of all the Guarantors under the Senior Note Guaranty. -5- 9 "Note Purchase Agreement" shall have the meaning assigned to same in Recital B above, as amended by the Note Restructuring Amendment. "Note Restructuring Amendment" shall mean the Note Restructuring Amendment to Note Purchase Agreement dated as of the date hereof between the Company and the Noteholders. "Noteholder" and "Noteholders" shall have the meaning assigned to same in the first paragraph of this Agreement. "Noteholder Basic Make-Whole Amount" shall mean the Make-Whole Amount calculated as set forth in the Note Purchase Agreement using as a discount rate the greater of the Make-Whole Discount Rate as set forth in the Note Purchase Agreement, or 6.469%. "Noteholder Excess Make-Whole Amount" shall mean the difference between the Make-Whole Amount calculated as set forth in the Note Purchase Agreement and the Noteholder Basic Make-Whole Amendment; provided however, the Noteholder Excess Make-Whole Amount may never be less than $0. "Notice of Assignment" shall have the meaning assigned to same in Section 6.3. "Obligor" shall mean the Company or any Affiliate of the Company. "Original Principal Ratio" shall mean the ratio for sharing between the Banks and Noteholders of 49.1525% of the Bank to 50.8475% for the Noteholders [same being the ratio of the Outstanding Principal under the Credit Agreement on August 14, 1996, to the Outstanding Principal under the Senior Notes on August 14, 1996.] "Outstanding Principal" shall mean, with respect to the Noteholders, all principal outstanding as of a given date under the Note Purchase Agreement. With respect to the Banks "Outstanding Principal" shall mean all principal outstanding as of a given date as loans under the Credit Agreement, and any sums advanced but not repaid under the Banks' L/C's. With respect to ABN "Outstanding Principal" shall mean any sums advanced but not reimbursed under any ABN Letters of Credit. With respect to TCB "Outstanding Principal" shall mean sums advanced to or on behalf of the Company as part of the Cash Management Liabilities for which TCB has in writing demanded reimbursement and which ten (10) days thereafter remains outstanding. "Payment Default" shall mean the failure of any Obligor to make any payment when due or within any applicable grace period under any of the Lending Agreements. "Person" shall mean and include natural persons, corporations, limited partnerships, general partnerships, joint -6- 10 stock companies, joint ventures, associations, companies, trusts, banks, trust companies, land trusts, business trusts or other organizations, whether or not legal entities, and governments and agencies and political subdivisions thereof. "Prior ABN Guaranty" shall have the meaning assigned to same in Recital C above. "Prior Credit Agreement" shall have the meaning assigned to same in Recital A above. "Prior Reimbursement Agreement" shall have the meaning assigned to same in Recital C above. "Proportionate Share" shall mean as of a specified date (i) with respect to the Banks, a percentage equal to the ratio of the Banks' Total Exposure to all Creditor Groups' Total Exposure; (ii) with respect to the Noteholders, a percentage equal to the ratio of the Noteholders' Total Exposure to all Creditor Groups' Total Exposure; (iii) with respect to ABN, a percentage equal to the ratio of the ABN Total Exposure to all Creditor Groups' Total Exposure; and (iv) with respect to TCB, a percentage equal to the ratio of the TCB Total Exposure to all Creditor Groups' Total Exposure. "Required Banks" shall mean, as of any date, Banks which have fifty-one percent (51%) of the Credit Agreement Liabilities. "Required Creditors" shall mean, as of any date, both (i) any two of Required Banks, Required Noteholders, or ABN, and (ii) any combination of Creditor Groups which hold three-quarters of the aggregate Outstanding Principal for all Creditors. "Required Noteholders" shall mean, as of any date, Noteholders holding 51% or more of the principal amount of the Note Liabilities. "Revolving L/C" shall have the meaning assigned to same in Recital C above. "Security Agreement" shall have the meaning assigned to same in Section 7.2(a) below. "Senior Note Guaranty" shall mean the Guaranty Agreement executed by Affiliates of the Company contemporaneously with the execution of, and as a prerequisite to, the effectiveness of the Note Restructuring Amendment. "Senior Notes" shall have the meaning assigned to same in Recital B above. "Significant Event" shall mean (i) the occurrence of a Payment Default; (ii) the acceleration of the maturity of or the other exercise of remedies for a default or an event of default -7- 11 under the Credit Agreement, ABN Amendment, ABN Guaranty, Note Purchase Agreement, or Senior Note Guaranty; (iii) any draft or other demand for payment made under any ABN Letter of Credit; (iv) Banks fail or cease for any reason to make Advances (as defined in the Credit Agreement including, without limitation, advances under the Supplemental Commitment prior to January 31, 1997, when Borrowing Base capacity (as defined in the Credit Agreement) exists therefore; (v) any Creditor shall exercise any setoff or banker's lien right or any rights under a theory of trust or constructive trust or other equitable, common law, statutory, or other legal rights, or (vi) Company or any Guarantor shall file or have filed against it any petition seeking relief against the Company or any Guarantor as a debtor or bankrupt or seeking other relief under the bankruptcy, reorganization, debtor's relief, or insolvency or other similar laws of the United States, any state or any other jurisdiction either domestic or foreign. "Supplemental Commitment" shall mean the agreement of the Banks contained in the Credit Agreement, under which the Banks agree to provide a supplemental revolving line of credit to the Company in the maximum principal amount of $4,000,000 subject to the terms set forth therein. "Supplemental Commitment Liabilities" shall mean all obligations including all principal, interest and fees due from the Company and its Affiliates under the Supplemental Commitment. "TCB" shall have the meaning assigned to same in the first paragraph of this Agreement. "Total Exposure" shall mean, for any Creditor, the sum of Outstanding Principal plus the amount, if any, of such Creditors Letter of Credit Obligations; provided, however, that Total Exposure for TCB under the Cash Management Liabilities shall mean sums advanced to or on behalf of the Company for which TCB has in writing demanded reimbursement and which ten (10) days thereafter remain outstanding. ARTICLE II PAYMENTS OF LIABILITIES 2.1 Payments Prior to Significant Event. Prior to the date on which a Significant Event shall have occurred, each Bank or Noteholder may receive and accept from the Company or any of its Affiliates repayments of Cash Management Liabilities, payments under the Credit Agreement and the Note Purchase Agreement, and ABN may receive and accept fees due it with respect to the ABN Letters of Credit and fees and interest with respect to the Revolving L/C. -8- 12 2.2 "True Up" Participation Purchase Between Banks and Noteholders to Maintain Original Principal Ratio Following Significant Event. Promptly following the occurrence of the first Significant Event to occur after the date hereof, and prior to application of Available Proceeds in accordance with Section 2.3 below, either the Banks or the Noteholders shall purchase from the other, a participation interest in the Note Liabilities or the Credit Agreement Liabilities held by the other in an amount sufficient to ensure that, as between the Banks and Noteholders, each holds an amount of Outstanding Principal as of such date so as to maintain the Original Principal Ratio. 2.3 Payment on or After Significant Event. (a) Upon or simultaneously with the occurrence of a Significant Event, all Available Proceeds shall be first used to pay all Supplemental Commitment Liabilities. Upon payment in full thereof, all remaining Available Proceeds shall be shared by Creditors in accordance with their respective Creditor Group's Proportionate Shares determined as of the date such payment is received; provided, however, that the portion of sums due any Creditor with respect to Letter of Credit Obligations shall be paid to the Collateral Agent to be held by the Collateral Agent in such Creditor's Cash Collateral Account. (b) If, on or after the date on which a Significant Event shall have occurred, any Creditor receives and applies any Available Proceeds to its own debt (other than payments made in accordance with this Section 2.3), then such Creditor shall purchase from each other Creditor a participation interest in such other Creditor's Total Exposure equal to such other Creditor's Proportionate Share of such Available Proceeds, determined as of the date such payment is received; provided, however, that the amount payable with respect to the Letter of Credit Obligations shall be paid to the Collateral Agent for deposit into the appropriate Cash Collateral Account. 2.4 Relative Rights. This Agreement defines certain rights of Noteholders, ABN, and Banks as among themselves. Nothing in this Agreement is intended to affect or impair (i) as between Noteholders and the Company and Guarantors, the Note Liabilities, Note Purchase Agreement, the Senior Note Guaranty or any document, instrument or agreement delivered in connection with the Note Purchase Agreement, (ii) as between Banks and the Company and the Guarantors of the obligations of the Company and such Guarantors under the Credit Agreement or any document, instrument or agreement delivered in connection with the Credit Agreement, or (iii) as between ABN and FCS and the Guarantors of the obligations of FCS under the ABN Amendment, the ABN Guaranty or any documents, instruments or agreements delivered in connection therewith. 2.5 Avoided Payments. If at any time any Creditor is determined to have received a payment which later becomes an -9- 13 Avoided Payment and the amount of such Avoided Payment is not equal to such Creditor's Proportionate Share of all Avoided Payments determined to have been returned by all Creditors (such Proportionate Share to be determined as of the date each such Avoided Payment was made by the Obligor) then each Creditor having returned an Avoided Payment which is less than such Creditor's Proportionate Share of all Avoided Payments shall purchase from each Creditor having returned an Avoided Payment which is greater than such Creditor's Proportionate Share of all Avoided Payments a participation interest in the Liabilities owing to such other Creditors, such that all Creditors share all Avoided Payments pro rata based on their Proportionate Shares (determined as of the date each such Avoided Payment was made by the applicable Obligor). 2.6 Obligations Several. The obligations of Creditors under this Agreement are several and not joint. No Creditor shall be responsible for any failure by any other Creditor to make any payment or to perform its obligation to purchase any participation, and no failure by any Creditor to make any payment or to perform its obligation to purchase any participation shall excuse any other Creditor from its obligations to make any payment or to purchase any participation. 2.7 Participation Terms. In the event any participation is purchased and sold pursuant to Sections 2.2, 2.3, or 2.5: (i) it shall be purchased and sold based on a price equal to the purchasing Creditor's Proportionate Share of the undiscounted principal held by the selling Creditor; (ii) it shall include in such purchase, in addition to the principal purchased all interest and other entitlements associated therewith; (iii) such participation shall not affect the selling Creditor's obligations under the applicable Lending Agreement; (iv) such selling Creditor shall remain solely responsible to the other parties to such Lending Agreement for the performance of such obligations; and (v) the Company, Guarantors, and all Obligors, if applicable, and the other Creditor parties to such Lending Agreement shall continue to deal solely and directly with such selling Creditor in connection with such selling Creditor's rights and obligations under such Lending Agreement; provided, however, the purchasing participant shall be entitled to vote its proportionate interest under the appropriate Lending Agreement with respect to requiring the relevant Creditor Group to take or omit to take any action under such Lending Agreement and shall be bound by all decisions made under or in connection with the applicable Lending Agreement. The owner of the facility in which a participation is purchased shall issue a Participation Certificate in the form of Exhibit C attached hereto to the party purchasing the participation. -10- 14 ARTICLE III AMENDMENT AND ACCELERATION OF LENDING AGREEMENTS 3.1 Lending Agreements. Except as set forth in Section 3.2, 3.3 or 3.4, any Creditor may, in accordance with the terms of its Lending Agreement, amend, restate, supplement or otherwise modify any provisions of its Lending Agreement or any of the documents, agreements or instruments delivered in connection with its Lending Agreement. In addition, Creditors may charge the Obligors incidental service fees charged to the Creditors' customers generally as they may charge from time to time without regard to the restrictions in Section 3.2, 3.3, or 3.4 below. Such incidental fees shall include service charges related to deposit accounts, wire transfer fees, and the like. It shall not include Letter of Credit Fees, non-usage fees or other fees specifically identified in any of the Lending Agreement. 3.2 Credit Agreement. Without the consent of Required Noteholders and ABN, Banks shall not amend, restate, supplement or otherwise modify the Credit Agreement, the or any of the documents, agreements or instruments delivered in connection with the Credit Agreement in any manner which (i) changes the Credit Agreement Aggregate Commitment, (ii) increases the interest rates, fees or indemnities payable to the Banks thereunder, (iii) changes the scheduled date for any principal or interest payment due thereunder, (iv) changes the date as set forth in Section 3.1 of the Credit Agreement by which any letter of credit issued pursuant to the Credit Agreement must expire, (v) releases the Company or any Guarantor from any obligations due thereunder, or (vi) otherwise amends, restates, supplements or modifies any of the payment terms or provisions or any definition (to the extent such definitions relate thereto) in the Credit Agreement, or any of the documents, agreements or instruments delivered in connection with the Credit Agreement. Without the consent of Required Noteholders and ABN, Banks shall not amend, restate, supplement or otherwise modify any of the covenants contained in Sections 8.03, 8.04, 8.05, 8.09, 8.11, 8.12, 8.13, 8.14 or 8.15 of the Credit Agreement, or any definition applicable to such covenants to the extent relating thereto, or amend, restate, supplement or otherwise modify the Events of Default specified in the Credit Agreement. 3.3 Note Agreements. Without the consent of Required Banks and ABN, Noteholders shall not amend, restate, supplement or otherwise modify the Note Purchase Agreement or any of the documents, agreements or instruments delivered in connection with the Note Purchase Agreement in any manner which (i) changes the loans, advances or other financial accommodations to Borrower thereunder, (ii) increases the interest rates, fees, Make-Whole Amount or indemnities payable to the Noteholders thereunder, (iii) changes the scheduled date for any principal or interest payment due thereunder, (iv) releases the Company or any Guarantor from any obligations due thereunder, or (v) otherwise amends, restates, supplements or modifies any of the payment terms or -11- 15 provisions or any definition (to the extent such definitions relate thereto) in the Note Purchase Agreement or any of the documents, agreements or instruments delivered in connection with the Note Purchase Agreement. Without the consent of Required Banks and ABN, Noteholders shall not amend, restate, supplement or otherwise modify any of the covenants contained in Sections 6.4, 6.5, 6.6, 6.7, 6.8, 6.12, 6.19 and 6.20 of the Note Purchase Agreement or Sections 9.2, 9.3, 9.5, 9.6, 9.10, 9.12 and 9.13 of the Note Restructuring Amendment or any definition applicable to such covenants to the extent relating thereto, or amend, restate, supplement or otherwise modify the Events of Default specified in the Note Purchase Agreement. 3.4 ABN Amendment and ABN Guaranty. Without the consent of Required Banks and Required Noteholders, ABN shall not amend, restate, supplement or otherwise modify the ABN Amendment, ABN Guaranty or other agreements related to issuance of the ABN Letters of Credit in any manner which (i) changes the financial accommodations to FCS or any Obligor thereunder, (ii) increases the interest rates or fees thereunder, (iii) changes the scheduled date for any principal or interest payment due thereunder, (iv) releases FCS or any Guarantor from any obligations due thereunder, or (v) otherwise amends, restates, supplements or modifies any of the payment terms or provisions or any definition (to the extent such definitions relate thereto) in the ABN Amendment, the ABN Guaranty or any of the documents, agreements or instruments delivered in connection therewith. Without the consent of Required Banks and the Required Noteholders, ABN shall not amend, restate, supplement or otherwise modify any of the covenants of the Note Restructuring Amendment and Note Purchase Agreement identified in Section 3.3 above and of the Credit Agreement identified in Section 3.2 above which are incorporated by reference into Section 3.1 of the ABN Guaranty or any definition applicable to such covenants to the extent relating thereto, or amend, restate, supplement or otherwise modify the Events of Default specified in the ABN Amendment or ABN Guaranty. Notwithstanding the provisions of this Section 3.4, ABN shall be permitted to increase the amount of the ABN Letters of Credit by a total of not more than Three Million Dollars ($3,000,000.00), which shall include increases of not more than Two Million Dollars ($2,000,000.00) in the amount of the Advance Payment Letter of Credit (as defined in the ABN Amendment) and an increase of not more than One Million Dollars ($1,000,000.00) in the amount of the Performance Security Letter of Credit (as defined in the ABN Amendment). 3.5 Acceleration. Nothing contained in this Agreement shall prevent any Creditor from taking any remedial action otherwise permitted under the terms of its Lending Agreement, including, without limitation, declaring the acceleration of the maturity of any of the Liabilities or obtaining a money judgment against any Obligor or demanding payment under the ABN Amendment or the ABN Guaranty so long as all receivership, repossession, attachment, foreclosure, setoff, execution, post-judgment collection procedures or any other action affecting the Collateral -12- 16 are conducted pursuant to Article VII hereof, in accordance with the terms of this Agreement. ARTICLE IV REPRESENTATIONS, COVENANTS AND RIGHTS OF LENDERS 4.1 Non-Reliance. Each Creditor represents that it has, independently and without reliance on any other Creditor, and based on such documents and information as it has deemed appropriate, made its own appraisal of the financial condition and affairs of Obligors and its own decision to enter into this Agreement, and agrees that it will, independently and without reliance upon any other Creditor, and based on such documents and information as it shall deem appropriate at the time, continue to make its own appraisals and decisions in taking or not taking action under this Agreement or any Lending Agreement. Except for notices, reports and other documents and information expressly required to be furnished to the other Creditors by any Creditor hereunder, no Creditor shall have any duty or responsibility to provide any other Creditor with any credit or other information concerning any Obligor which may come into the possession of Creditor or any of its or their Affiliates. 4.2 Representations and Warranties. Each Creditor represents and warrants to each other Creditor that (a) such Creditor is a corporation or association duly organized, validly, existing and in good standing under the laws of its jurisdiction of incorporation or organization; (b) the execution, delivery and performance by such Creditor of this Agreement are within the power of such Creditor and have been duly authorized by all necessary actions on the part of such Creditor; and (c) this Agreement has been duly executed and delivered by such Creditor and constitutes the legal, valid and binding obligation of such Creditor, enforceable against it in accordance with its terms, except as limited by bankruptcy, insolvency or other laws of general application relating to or affecting the enforcement of creditors' rights generally. 4.3 Covenants of Creditors. Each Creditor covenants and agrees with each other Creditor as follows: (a) Security. Except as specifically provided for herein with respect to the Supplemental Commitment Liabilities, unless all Creditors receive the same benefit on a pari passu basis, (i) no Creditor shall take or hold as security for the Liabilities any property of any Obligor or any other Person, and (ii) no Creditor shall accept any guaranty of the Liabilities other than the Guaranties in effect as of the date hereof (including the Senior Note Guaranty) or guaranties from entities which become Subsidiaries of the Company subsequent to the date hereof; provided, however, that it shall not be a violation of the -13- 17 terms hereof for ABN or any of the Banks to open and maintain accounts of any Obligor with respect to which such institution by operation of law may have a banker's lien or right of setoff. (b) Notice of Amendment, Default or Set-Off. Promptly after entering into any amendment or modification of a any agreement with the Company or its Affiliates, Agent Bank, ABN, Banks or Noteholders, as applicable, shall provide notice of such amendment or modification to the other Creditors, provided that failure to give such notice shall not affect the validity of such amendment or modification. Promptly after delivering to or receiving from any Obligor notice of the occurrence of any Event of Default, Agent Bank, ABN, or each Bank or each Noteholder, as applicable, shall deliver a copy of such notice to the other Creditors, provided that failure to deliver such notice shall not affect the validity of any such notice delivered to any Obligor. Promptly after exercising any set-off or banker's lien right or any exercise of rights under a theory of constructive trust or other equitable, common law, statutory or legal rights provided by law or by any agreement with the Company or any Affiliate, the Creditor exercising such right shall provide notice to the Collateral Agent and each other Creditor of such exercise and of the Available Proceeds received as a result of such exercise. (c) Bankruptcy. In any bankruptcy proceeding of any Obligor unless Required Banks, Required Noteholders, ABN, and TCB agree, (i) no Creditor shall, with respect to its claim regarding the Liabilities, vote in favor of any plan of reorganization which is inconsistent with this Agreement, and (ii) each Creditor shall, with respect to its claim regarding the Liabilities, actively oppose or shall join in opposing any plan of reorganization proposed in any such bankruptcy which is inconsistent with this Agreement. (d) Application of Set-Off Payments to Liabilities. Each Creditor agrees that it shall apply all amounts received by exercise of any right of set-off or banker's lien to the Liabilities in accordance with the provisions of this Agreement prior to the application of any such amount to any liability or obligation which is not a Liability. (e) Cooperation; Further Assurances. Each Creditor shall cooperate fully with each other Creditor to the end that the terms of this Agreement may be carried out promptly and fully. Without limiting the generality of the foregoing, each Creditor shall respond promptly to any request by any other Creditor regarding the amount of any Liabilities owed to such Creditor. Each Creditor shall execute and deliver such other agreements, documents and instruments and agrees to take such other action as shall be reasonably necessary to carry out the terms of this Agreement. -14- 18 (f) L/C Reduction Notice. The Banks and ABN covenant and agree that after the first Significant Event to occur after the date hereof, they will use their best efforts to promptly give notice to the Collateral Agent when their respective Letter of Credit Obligations are reduced for any reason, including by expiration of a Letter of Credit or the permanent reduction of exposure under an unexpired Letter of Credit. Such notice shall be in writing, certified as true, correct and complete by the party serving such notice and stating the date and of the amount of such reduction. The Company, its Affiliates, the beneficiary of any Letter of Credit and all other persons not a party to this Agreement shall have no rights under this subsection 4.3(f), and the failure of ABN or any of the Banks to give the notice herein required shall have no effect on any action taken by ABN or the Banks with respect to the Company or any of its Affiliates or any other party. 4.4 Headings. Headings in this Agreement are for convenience of reference only and are not part of the substance hereof. 4.5 Plural Terms. All terms defined in this Agreement in the singular form shall have comparable meanings when used in the plural form and vice versa. ARTICLE V CONDITIONS TO EFFECTIVENESS; DELIVERY OF DOCUMENTS 5.1 Conditions to Effectiveness. This Agreement shall become a binding obligation of each Creditor from and after the Closing Date upon the occurrence of the following events: (a) The Prior Credit Agreement shall have been amended and restated) by the Credit Agreement. (b) The Note Restructuring Amendment and the Senior Note Guaranty shall have become effective. (c) The ABN Amendment and the ABN Guaranty shall have become effective. (d) Each Creditor shall have executed and delivered this Agreement. (e) The Security Agreements, Deeds of Trust/Mortgages, and Financing Statements as defined in Section 7.2(a) shall have been executed. (f) The Consent and Agreement hereto shall have been fully executed. -15- 19 ARTICLE VI MISCELLANEOUS 6.1 Notices. Except as otherwise specified herein, all notices, requests, demands, consents, instructions or other communications under this Agreement shall be in writing and delivered by hand or mailed, first class postage prepaid, or sent by overnight courier, or by confirmed telefax transmission (confirmed by hand-delivery or overnight courier copy sent the same day such telefax is sent), in each case addressed to the party to which such notice is requested or permitted to be given or made, at the address or telecopy number specified beneath the heading "Address for Notices" under the name of such Creditor in Schedule 1, or at such other address or telecopy number of which such Person shall have notified in writing the party giving such notice, provided that any notice given by any Noteholder or ABN to Banks shall be given to Agent Bank. 6.2 Waivers; Amendments. Any term, covenant, agreement or condition of this Agreement may be amended or waived if such amendment or waiver is in writing and is signed by the Required Banks, TCB, ABN, and the Required Noteholders. No failure or delay by any Creditor in exercising any right hereunder shall operate as a waiver thereof or of any other right nor shall any single or partial exercise or of any other right preclude any other further exercise thereof or of any other right. Unless otherwise specified in such waiver or consent, a waiver or consent given hereunder shall be effective only in the specific instance and for the specific purpose for which given. 6.3 Successors and Assigns. (a) Binding Effect. This Agreement shall be binding upon and inure to the benefit of Creditors and their respective successors and assigns. (b) Assignments. In connection with any assignment by any Creditor (an "Assignor Creditor") to any other Person (an "Assignee Creditor") of all or any portion of the Assignor Creditor's rights under such Assignor Creditor's Lending Agreements (as permitted thereby), such Assignor Creditor shall also assign to the Assignee Creditor and Assignee Creditor shall assume all or an allocable portion of such Assignor Creditor's rights and obligations under this Agreement (such an assignment to be referred to herein as an "Assignment") subject to the following: (i) Each Assignor Creditor shall notify each other Creditor of each Assignment by delivering to such other Creditor a copy of a Notice of Assignment in the form of Exhibit D, appropriately completed and duly executed by such Assignor Creditor and Assignee Creditor -16- 20 (a "Notice of Assignment"), which specifies (x) the name, notice address and wire instructions of such Assignee Creditor; (y) the respective principal portion of the Liabilities of Assignor Creditor and Assignee Creditor after the Assignment; and (z) the date as of which Assignee Creditor is assuming obligations under Section 2.5 (Avoided Payments) with respect to payments made by any Obligor. (ii) From and after the date of delivery of the Notice of Assignment, (x) the new Assignee Creditor reflected therein shall be a Creditor hereunder and shall have the rights, duties and obligations of such a Creditor (with respect to the principal portion of the Liabilities so assigned and assumed) under this Agreement, and (y) Schedule 1 shall be deemed to be amended on such date to reflect the information set forth in the Notice of Assignment. (iii) Any Assignment shall not release Assignor Creditor from its obligations hereunder to any other Creditor unless (x) Required Creditors agree, or (y) (A) such Assignee Creditor (in its capacity as a principal and not as nominee or trustee for any other Person) assumes in writing all of the obligations hereunder and under the assigned Lending Agreement; and (B) Assignee Creditor (in its capacity as a principal) shall be a Qualified Institutional Buyer under Rule 144A of the Securities and Exchange Commission. Upon delivery of a Notice of Assignment with respect to an Assignment complying with this Section 6.3(b)(iii), Assignor Creditor shall be released from all further obligations under this Agreement with respect to the Liabilities thereby assigned. (c) Participations and Other Transfers. Nothing contained in this Agreement is intended to limit the right of any Creditor to sell participations in or otherwise transfer its rights in its Liabilities and its Lending Agreements; provided, however, that no participant or other transferee who is not also an Assignee Creditor shall be entitled to exercise any of the rights and remedies provided to Creditors hereunder. (d) Disclosure. Creditors may disclose the terms of this Agreement and any financial or other information relating to any Obligor to each other or to any potential Assignee Creditor, participant or other transferee. 6.4 No Third Party Rights. Nothing expressed in or to be implied from this Agreement is intended to give, or shall be construed to give, any Person, other than Creditors and their permitted successors and assigns hereunder, any benefit or legal or equitable right, remedy or claim under or by virtue of this Agreement or under or by virtue of any provision herein. -17- 21 6.5 Partial Invalidity. If at any time any provision of this Agreement is or becomes illegal, invalid or unenforceable in any respect under the law of any jurisdiction, neither the legality, validity or enforceability of the remaining provisions of this Agreement nor the legality, validity or enforceability of such provision under the law of any other jurisdiction shall in any way be affected or impaired thereby. 6.6 Equitable Remedies. Each party to this Agreement recognizes that money damages may provide an insufficient remedy for breach of their respective obligations under this Agreement and therefore agrees that specific performance of its obligations, and such other equitable remedies as may be appropriate, may be granted to each party hereunder. Remedies herein provided are cumulative and not exclusive of any remedies provided by law. 6.7 JURY TRIAL. EACH CREDITOR, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY AS TO ANY ISSUE RELATING TO THIS AGREEMENT IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT, OR ANY OF THE TRANSACTIONS OR EVENTS REFERENCED HEREIN OR CONTEMPLATED HEREBY. 6.8 Counterparts. This Agreement may be executed in any number of identical counterparts, any set of which signed by all the parties hereto shall be deemed to constitute a complete, executed original for all purposes. 6.9 Governing Law. This Agreement shall be governed by and construed in accordance with the substantive laws of the State of Texas without reference to any choice of law rules. 6.10 Construction. This Agreement is the result of negotiations among, and has been reviewed by, each Creditor and its respective counsel. Accordingly, this Agreement shall be deemed to be the product of all parties hereto and shall not be construed against any party hereto on the ground that such party drafted this Agreement. To the extent there is any inconsistency between the terms of this Agreement and the terms of any Lending Agreement, the terms of this Agreement shall control. ARTICLE VII COLLATERAL AGENT 7.1 Designation of Agent. Texas Commerce Bank National Association is hereby designated the Collateral Agent by each of the other Creditors to perform such duties on behalf of the other Creditors and itself, and to have such powers as are set forth herein. In performing its functions and duties under this Agreement, the Collateral Agent shall act solely as agent of the Creditors and does not assume and shall not be deemed to have -18- 22 assumed any obligation toward or relationship of agency or trust hereunder with or for any Obligor. The Collateral Agent shall not have, by reason of this Agreement, a fiduciary relationship with any Creditor, and nothing in this Agreement, expressed or implied, is intended or shall be so construed to impose upon the Collateral Agent any obligations in respect of this Agreement or the other instruments and agreements referred to herein except as expressly set forth herein or therein. 7.2 Duties of Collateral Agent. (a) The Collateral Agent shall have no duties or responsibilities, other than those expressly set forth herein. It shall be responsible for obtaining the signatures of the Company and appropriate Affiliates on Security Agreements substantially in the form attached hereto as Exhibit A ("Security Agreements") and Deeds of Trust or Mortgages substantially in the form attached hereto as Exhibit B ("Deeds of Trust/Mortgages") pursuant to which the Company and appropriate Affiliates pledge the Collateral as security for all of the Company's obligations to the Banks, the Noteholders and ABN. The Collateral Agent shall also obtain executed financing statements to be filed to perfect the security interests and liens created by such Security Agreements and Deeds of Trust/Mortgages ("Financing Statements"). (b) Collateral Agent shall be responsible for filing the Deeds of Trust/Mortgages and Financing Statements in such offices as directed by the Creditor Groups to pay such fees and expenses as are required in connection therewith and to make such filings and pay such fees as are required to continue such perfection. (c) (i) Collateral Agent shall take such actions and perform such duties as required of the Secured Party under the terms of the Security Agreement or Mortgagee Beneficiary or Secured Party under the Deeds of Trust/Mortgages; (ii) upon the written instructions of the Required Creditors, but not before, Collateral Agent (and no other party) shall take such acts as directed by the Required Creditors that are necessary or desirable to exercise any right of the Creditors or any of them with respect to any of the Collateral or proceeds thereof, to foreclose upon such Collateral, conduct foreclosure sales where appropriate, to collect proceeds of Collateral and to distribute such proceeds to the Creditors as appropriate; (iii) the Collateral Agent may release Collateral of a value of not more than $50,000 so long as collateral of a similar nature and of equal or greater value is simultaneously substituted therefor or the Creditor Groups agree and consent and vehicles with a market value of less than $15,000 sold in the ordinary course of business; and (iv) Collateral Agent may at any time not take or refrain from taking any of the actions authorized by Section 7.2(c)(i) or (iii), until it receives instructions from the Required Creditors provided that doing so will not endanger the Creditors' secured -19- 23 interest in the Collateral and the Collateral Agent promptly seeks such instructions. (d) Each Creditor agrees that no other Creditor shall have any right individually to realize upon the security interest granted by any of the Security Agreements or Deeds of Trust or to otherwise enforce or exercise any remedy in respect of the Collateral, it being understood and agreed that such remedies may be exercised only by the Collateral Agent for the ratable benefit of the Creditors and each Creditor further agrees that it shall not individually institute any judicial action pertaining to the Collateral or exercise any other remedy pertaining to the Collateral, except with the consent of the Required Creditors hereof; provided that nothing contained in this Agreement shall be deemed or construed to limit in any fashion, (w) the right of the Creditors to accelerate or demand payment pursuant to documents evidencing the Company's or any Affiliate's indebtedness to them, or (x) to limit the rights of TCB, in its capacity as a Bank, to receive and collect proceeds in the Company's lockbox account with TCB and hold and distribute same pursuant to the terms hereof, (y) the right of ABN to receive and disburse funds from the account it holds in the name of F. C. Schaffer into which proceeds from the FINCHAA Sugar Refinery Project are paid and thereafter disbursed, provided, further, following a Significant Event all such receipts and disbursements of TCB and ABN shall be for the benefit of all of the Creditors in accordance with Section 2.3 hereof, or (z) to prohibit the filing of collection actions by individual Creditors so long as no action is taken against any of the Collateral except as specifically permitted herein. Notwithstanding the above provisions of this Section 7.2(d), it shall not be a violation of the terms of this Agreement if any institution exercises its rights under Banker's Liens or right of setoff to take proceeds of accounts of any Obligor held at their respective institutions so long as such taking is done to preserve or protect the interests of Creditors in such funds and if such amounts are distributed pursuant to Section 7.2(e) as proceeds of Collateral. (e) Distribution of the proceeds of such Collateral shall be made in the following order: First, to the Collateral Agent to pay the reasonable costs and expenses of performing its duties hereunder, including those related to foreclosure, sale, and collection of proceeds thereof; Second, to the Banks in payment of the Supplemental Commitment Liabilities; Third, to the Creditors, pro rata, (i) in payment of principal, interest, and fees (including Make-Whole Amounts for Banks and the Noteholder Basic Make-Whole Amount) due Creditors with respect to money loaned under the Credit Agreement or the Note Purchase Agreement, and in payment of TCB's Outstanding Principal and under the Cash Management Liability, (ii) in payment of money advanced but not reimbursed under any ABN Letter of Credit or Bank L/C, and (iii) to create Cash Collateral Accounts to secure the Letter -20- 24 of Credit Obligations; Fourth, to Noteholders for the Noteholder Excess Make-Whole Amount, if any; and Fifth, to all Creditors pro rata for costs and expenses for which such Creditors are entitled to reimbursement plus the Noteholder Excess Make-Whole Amount, and Sixth, to the Obligors as required by law. (f) Distribution of the contents of the Cash Collateral Accounts shall be made as follows: (i) Upon receipt of a written request from TCB or ABN certifying that a draft(s) has been made and paid on a Letter of Credit and giving the amount and date of such payment, the Collateral Agent shall distribute funds to the issuer of such Letter of Credit from the applicable Cash Collateral Account in an amount determined by multiplying the amount in the Cash Collateral Account by a fraction, the numerator of which is the amount of the draft(s) and the denominator of which is the total amount of the exposure of the issuer under the Bank L/C's or the ABN Letters of Credit, as the case may be, which were outstanding and unexpired immediately prior to the payment of the draft(s); (ii) Upon receipt of a L/C Reduction Notice certifying that a Letter of Credit has expired or that the issuers' exposure under an unexpired Letter of Credit has been permanently reduced and giving the amount and date of such reduction of the issuer's Letter of Credit Obligations, the Collateral Agent shall distribute pursuant to the terms of Section 7.2(e) to the Creditors in their Proportionate Shares determined immediately after the date of the reduction of exposure, funds from the applicable Cash Collateral Account in an amount determined by multiplying the amount in said Cash Collateral Account by a fraction, the numerator of which is the amount of the reduction of the issuers' Letter of Credit Obligations and the denominator of which is the Letter of Credit Obligations of the issuer immediately prior to the reduction. (g) Collateral Agent shall promptly send to each Creditor copies of any notices it receives with respect to the Security Agreement or Deeds of Trust/Mortgages or the Collateral from any Obligor or any other source and prior to any distribution shall give notice to each Creditor Group of the Total Exposure and Letter of Credit Obligations to be used in calculating the distribution. 7.3 Delegation Duties, Etc. The Collateral Agent may execute any of its respective duties and perform any of its respective powers hereunder by or through agents or employees and shall be entitled to consult with legal counsel and any accountant or other professional selected by it. The Collateral Agent shall not be responsible for the negligence or misconduct of any agents or attorneys-in-fact selected by it with reasonable care. -21- 25 7.4 Indemnification. Each Creditor does hereby indemnify the Collateral Agent in its capacity as such, and its directors, officers, employees or agents, to the extent not reimbursed promptly by the Company or any other Obligor, pro rata according to their Proportionate Shares from and against any and all claims, liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever that may be imposed on, incurred by or asserted against it in any way relating to or arising out of this Agreement, the Senior Notes, the Credit Agreement, the ABN Letters of Credit or any of the other documents or any action taken or omitted to be taken or suffered in good faith by any of them hereunder or thereunder, provided that no Bank, Noteholder or ABN shall be liable for any portion of any of the foregoing items resulting from the gross negligence or willful misconduct of the Collateral Agent or any of its respective directors, offices, employees or agents. Without limiting the foregoing, each Bank, each Noteholder, and ABN agrees to reimburse the Collateral Agent promptly upon demand for its Proportionate Share of any out-of-pocket expenses (including reasonable counsel fees and disbursements) incurred by the Collateral Agent in connection with the execution, administration or enforcement of rights and responsibilities under, or amendment, modification or waiver of any provision of, this Agreement, to the extent that the Collateral Agent is not promptly reimbursed for such expenses by the Company or any other Obligor. If the Collateral Agent is subsequently reimbursed by the Company or any other Obligor for such expenses, the Collateral Agent shall remit to the Creditors their pro rata shares of such reimbursement. As a Creditor, Texas Commerce Bank shall bear its pro rata share of all expenses and indemnities to be reimbursed to the Collateral Agent. The obligation of each Creditor hereunder shall be several and not joint and several. 7.5 Exculpatory Provisions. (a) Neither the Collateral Agent, nor any of its officers, directors, employees or agents shall be liable for any action taken or omitted to be taken or suffered in good faith by it hereunder or in connection herewith, except that the Collateral Agent shall be liable for its own gross negligence or willful misconduct. Neither the Collateral Agent nor any of its directors, officers, employees or agents, shall be liable in any manner for the effectiveness, enforceability, collectability, genuineness, perfection, validity, sufficiency or the due execution of this Agreement, the Security Agreements, the Deeds of Trust/Mortgages, the Financing Statements or any of the other documents executed in connection therewith or for the due authorization, authenticity or accuracy of the representations and warranties herein or in any other certificate, report, notice, consent, opinion, statement, or other document furnished or to be furnished hereunder, and shall be entitled to rely upon any of the foregoing believed by it to be genuine and correct and to have been signed and sent or made by the proper party. The Collateral Agent shall be under no duty or responsibility to -22- 26 any Creditor to ascertain or to inquire into the performance or observance by the Company or any Affiliate of any of the provisions hereof or of any document executed and delivered in connection herewith. Each Creditor acknowledges that it has taken and will continue to take such action and to make such investigation as it deems necessary to inform itself of the affairs of the Company and the other Obligors and each Creditor acknowledges that it has made and will continue to make its own independent investigation of the creditworthiness and the business and operations of the Company and the other Obligors and that, in entering into this Agreement and in making its extensions of credit, it has not relied and will not rely upon any information or representations furnished or given by the Collateral Agent or any other Creditor. (b) If the Collateral Agent shall request instruction from the Banks, TCB, Noteholders and/or ABN with respect to any act or action (including the failure to take an action) in connection with any Obligor's obligations under the Lending Agreements, the Collateral Agent shall be entitled to refrain from such act or taking such action unless and until it shall have received instructions form the Creditors whose consent to such action or inaction is required pursuant to the terms of this Agreement. Without prejudice to the generality of the foregoing, (i) the Collateral Agent shall be entitled to rely, and shall be fully protected in relying, upon any communication, instrument or document believed by it to be genuine and correct and to have been signed or sent by the proper party or parties, and shall be entitled to rely and shall be protected in relying on opinions and judgments of attorneys, accountants, experts and other professional advisors selected by it and (ii) no Creditor shall have any right of action whatsoever against the Collateral Agent as a result of the Collateral Agent acting or (where so instructed) refraining from acting under this Agreement with respect to any Obligor's obligations under the Lending Agreements in accordance with the instructions of all of the Creditors whose consent to such action or inaction is required pursuant to the terms of this Agreement. 7.6 Knowledge of Default. It is expressly understood and agreed that the Collateral Agent shall be entitled to assume that no Defaults or Event of Default has occurred and is continuing, unless the officers of the Collateral Agent immediately responsible for matters concerning this Agreement shall have been notified in writing by (a) the Company or any other Obligor, or (b) any Creditor that such Creditor considers that an Event of Default has occurred and is continuing and specifying the nature thereof. 7.7 Collateral Agent in its Individual Capacity. The Collateral Agent shall have the same rights and powers hereunder as any Creditor with respect to this Agreement, all extensions of credit made by the Collateral Agent, and any renewals, extensions or deferrals of the payment thereof, and may exercise the same as -23- 27 though it were not the Collateral Agent. The Collateral Agent may accept deposits from, lend money to and generally engage in any kind of banking, trust, financial advisory or other business with the Company or any Affiliate of the Company as if it were not performing the duties specified herein, and may accept reasonable and customary fees and other consideration from the Company for services in connection with this Agreement and otherwise without having to account for the same to the Creditors. 7.8 Resignation or Removal of Collateral Agent. If at any time the Collateral Agent deems it advisable, in its sole discretion, it may submit to each of the Creditors and the Company a written notification of its intention to resign as Collateral Agent under this Agreement, such resignation to be effective only at such time within thirty (30) days after such written notification that a successor Collateral Agent, satisfactory to the Required Creditors, has been appointed and accepted such appointment in writing, or at such time more than thirty (30) days after such written notification that a successor Collateral Agent has been identified by the original Collateral Agent, and such successor has accepted such appointment in writing. In the event that the Collateral Agent shall have breached any of its material obligations to the Creditors hereunder, the Required Creditors other than the Collateral Agent may remove the Collateral Agent and appoint a successor Collateral Agent from among themselves or otherwise, effective on the date specified by them, by written notice to the Collateral Agent and the Company. 7.9 Creditors as Owners. The Collateral Agent may deem and treat each Creditor as the owner of such Creditor's indebtedness for all purposes hereof unless and until a written notice of the assignment or transfer thereof shall have been filed with the Collateral Agent. Any request, authority or consent of any person who at the time of making such request or giving such authority or consent is the owner of such indebtedness shall be conclusive and binding on any subsequent owner, transferee or assignee of such indebtedness. 7.10 Compensation. The Company shall pay to the Collateral Agent for its own account the Collateral Agent's fee of $10,000 payable upon execution of this Agreement. -24- 28 NOTEHOLDERS: PRINCIPAL MUTUAL LIFE INSURANCE COMPANY By: /s/ JOHN D. CLEAVENGER -------------------------------------------- Name: John D. Cleavenger, Counsel ------------------------------------------- Title: ------------------------------------------ By: /s/ STEPHEN G. SKRIVANEK -------------------------------------------- Name: Stephen G. Skrivanek, Counsel ------------------------------------------- Title: ------------------------------------------ TMG LIFE INSURANCE COMPANY By: /s/ ROBERT R. LAPOINTE -------------------------------------------- Name: Robert R. Lapointe ------------------------------------------- Title: Vice President ------------------------------------------ By: /s/ MICHAEL J. CAREW -------------------------------------------- Name: Michael J. Carew ------------------------------------------- Title: Assistant Vice President ------------------------------------------ BERKSHIRE LIFE INSURANCE COMPANY By: /s/ ELLEN I. WHITTAKER -------------------------------------------- Name: Ellen I. Whittaker ------------------------------------------- Title: Investment Officer ------------------------------------------ THE SECURITY MUTUAL LIFE INSURANCE COMPANY By: /s/ KEVIN W. HAMMOND -------------------------------------------- Name: Kevin W. Hammond ------------------------------------------- Title: Vice President ------------------------------------------ Chief Investment Officer ------------------------------------------ 29 BANKS: TEXAS COMMERCIAL BANK NATIONAL ASSOCIATION By: /s/ CURTIS D. KARGES ------------------------------------------ Name: Curtis D. Karges ------------------------------------------ Title: Senior Vice President ------------------------------------------ BANK ONE, TEXAS, N.A. By: /s/ JOHN E. ELAM, JR. ------------------------------------------ Name: John E. Elam, Jr. ------------------------------------------ Title: Vice President ------------------------------------------ ABN: ABN AMRO BANK, N.V., HOUSTON AGENCY By: ABN AMRO NORTH AMERICA, INC. By: /s/ H. GENE SHIELS ------------------------------------------ Name: H. Gene Shiels ------------------------------------------ Title: Vice President and Director ------------------------------------------ By: /s/ CHARLES W. RANDALL ------------------------------------------ Name: Charles W. Randall ------------------------------------------ Title: Senior Vice President and ------------------------------------------ Managing Director ------------------------------------------ 30 EXHIBIT A SECURITY AGREEMENT DUE TO THE LARGE VOLUME OF MATERIAL, THIS EXHIBIT HAS BEEN INTENTIONALLY OMITTED. PARTIES TO THE AGREEMENT HAVE BEEN SUPPLIED COPIES. 31 EXHIBIT B DEEDS OF TRUST/MORTGAGE DUE TO THE LARGE VOLUME OF MATERIAL, THIS EXHIBIT HAS BEEN INTENTIONALLY OMITTED. PARTIES TO THE AGREEMENT HAVE BEEN SUPPLIED COPIES. 32 EXHIBIT C PARTICIPATION CERTIFICATE Reference is made to the Intercreditor Agreement dated November __, 1996, executed by Principal Mutual Life Insurance Company, TMG Life Insurance Company, Berkshire Life Insurance Company and the Security Mutual Life Insurance Company (individually, a "Noteholder" and collectively, the "Noteholders"); Texas Commerce Bank National Association ("TCB") and Bank One, Texas, N.A. (individually, a "Bank" and collectively, the "Banks"); and ABN AMRO Bank, N.V., a Netherlands chartered Bank acting through its Houston agency ("ABN"). All capitalized terms used herein shall have the meaning set forth herein or, if no definition is contained herein, as set forth in the Intercreditor Agreement. 1. ___________________________________________ ("Assignee"), has purchased from ________________________________________ ("Assignor") and Assignor has sold and assigned to Assignee a __________ percent (__%) interest in and to Assignor's rights, title and interest as of the date hereof in all Outstanding Principal, together with interest and other entitlements associated therewith, under the terms of Assignor's Lending Agreement with the Company and its Affiliates. 2. The participation purchased and evidenced by this Certificate shall be held pursuant to and governed by all of the terms of the Intercreditor Agreement and, in particular, Section 2.7 thereof. Dates this _____ day of _________, 199_. ASSIGNOR ASSIGNEE (Name of Assignor) (Name of Assignee) By: By: ------------------------------ ----------------------------------- Name: Name: ------------------------------ ----------------------------------- Title: Title: ------------------------------ ----------------------------------- 33 EXHIBIT D Notice of Assignment THIS NOTICE OF ASSIGNMENT is sent pursuant to the requirements of Section 6.3 of that certain Intercreditor Agreement dated November _____, 1996 ("Intercreditor Agreement") by and between ABN AMRO BANK, N.V., a Netherlands Chartered Bank acting through its Houston agency, PRINCIPAL MUTUAL LIFE INSURANCE COMPANY, TMG LIFE INSURANCE COMPANY, BERKSHIRE LIFE INSURANCE COMPANY, SECURITY MUTUAL LIFE INSURANCE COMPANY, TEXAS COMMERCE BANK N.A., and BANK ONE TEXAS, N.A. (collectively the "Creditors"). By this Notice ___________________________ ("Assignor") notifies the other Creditors that it has assigned and transferred an interest in its financial accommodation made to ____________________________ to ___________________________ as "Assignee" together with corresponding rights and obligations of Assignor under any Guaranties, Security Agreements, Deeds of Trust, Mortgages or other agreements made or executed in connection therewith (the "Facility"). Assignor certifies that: (1) Such Assignment is made in compliance with the terms of the Intercreditor Agreement; (2) Assignor has seen and reviewed the Intercreditor Agreement and is fully aware of and consents to its terms; (3) Assignor has purchased ___________ percent (__%) of Assignee's interest in the Facility; (4) Assignee has retained ____________ percent (__%) interest in the Facility. (5) Assignor's address is as follows: ---------------------------------------- ---------------------------------------- ---------------------------------------- ---------------------------------------- Telecopier No.: (___) ------------------ Wire Transfer Instructions ; ---------------------- and (6) The Assignment is effective as of ____________ __, 1996. Exhibit D Page 1 34 (5) Assignor's address is as follows: ---------------------------------------- ---------------------------------------- ---------------------------------------- ---------------------------------------- Telecopier No.: (___) ------------------ Wire Transfer Instructions ; ---------------------- and (6) The Assignment is effective as of ____________ __, 1996. Exhibit D Page 1 35 Dated this ______ day of _____________________, 199__. ASSIGNOR: ASSIGNEE: - ------------------------------- ---------------------------------- By: By: ---------------------------- ------------------------------ Name: Name: -------------------------- ---------------------------- Its: Its: ---------------------- ------------------------ Exhibit D Page 2 36 CONSENT AND AGREEMENT The Company and its Affiliates executing this Consent and Agreement hereby certify and agree as follows: (1) They have read, reviewed and understood the terms and conditions set forth in the foregoing Intercreditor Agreement; (2) They understand and agree that sums received by any party to the Intercreditor Agreement from or on behalf of the Company or any of its Affiliates after the occurrence of a Significant Event will be distributed to Creditors and applied to the obligations of the Company or its Affiliates to the Creditors in the amounts and in the manner described in the Intercreditor Agreement even if some other distribution may be set out in other agreements with certain of the Creditors; (3) They shall have no claims or right of action against any Creditor for actions taken or not taken in compliance with the terms of the Intercreditor Agreement; (4) They are not third party beneficiaries of the Intercreditor Agreement and they shall have no legal or equitable right, remedy, or claim under or by virtue of the Intercreditor Agreement or by virtue of any provision therein; and (5) They understand and agree that the parties to the Intercreditor Agreement may amend or modify its terms from time to time with or without notice to the Company or its Affiliates and that such amendment shall be effective without the knowledge, consent or further agreement of the Company or any of its Affiliates. -1- 37 Dated November __, 1996. SERV-TECH, INC. By:/s/ DAVID TUSA ------------------------------------------------- Name: David Tusa Title: Senior Vice President of Finance and Administration ADVANCED REFRACTORY SERVICES, INC. AMERICAN MECHANICAL SERVICES, INC. CASTING CONCEPTS, INC. CON-SEAL, 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. ST PIPING, INC. TOTAL REFRACTORY SYSTEMS, INC. TURNAROUND MAINTENANCE, INC. UNITED INDUSTRIAL MATERIALS, INC. By:/s/ DAVID TUSA ------------------------------------------------- Name: David Tusa Title: Vice President SECO INDUSTRIES, INC. SERV-TECH ENGINEERS, INC. SERV-TECH EPC, INC. By:/s/ DAVID TUSA ------------------------------------------------- Name: David Tusa Title: Senior Vice President of Finance and Administration PRS HOLDING, INC. By:/s/ DAVID TUSA ------------------------------------------------- Name: David Tusa Title: Senior Vice President -2- 38 DELTA MAINTENANCE, INC. PETRO RECOVERY SYSTEMS, INC. SERV-TECH CONSTRUCTION AND MAINTENANCE, INC. (FORMERLY SERV TECH EPC - HOUSTON, INC.) SERV-TECH INTERNATIONAL SALES, INC. SERV-TECH OF NEW MEXICO, INC. SERV-TECH SERVICES, INC. TERMINAL TECHNOLOGIES, INC. TIPCO ACQUISITION CORP. By:/s/ DAVID TUSA ------------------------------------------------- Name: David Tusa Title: President -3- 39 SCHEDULE 1 Address for Notices Texas Commerce Bank 713 Main Street Houston, Texas 77002 Attention: Mr. Curtis D. Karges Telecopy No: (713) 216-6004 Bank One Texas, N.A. Bank One Center Building 910 Travis, 7th Floor Houston, Texas 77002 Attention: John Elam Telecopy No.: (713) 751-6199 ABN AMRO Bank N.V., Houston Agency Three Riverway, Suite 1700 Houston, Texas 77056 Attention: Charles W. Randall Senior Vice President and Managing Director Telecopy No: (713) 629-7533 Principal Mutual Life Insurance Company 711 High Street Des Moines, Iowa 50392-0810 Attention: Investment Department/ Accounting & Treasury Telecopy No: (515) 248-2490 Principal Mutual Life Insurance Company 711 High Street Des Moines, Iowa 50392-0810 Attention: Investment Department/ Securities Division Telecopy No: (515) 248-2490 TMG Life Insurance Company The Mutual Group (U.S.) 401 North Executive Drive Brookfield, Wisconsin 53008-0980 Attention: Ms. Lisa Harris Telecopy No: (414) 797-3988 Berkshire Life Insurance Company 700 South Street Pittsburgh, Massachusetts 01201 Attention: Securities Department Telecopy No: (413) 443-9397 The Security Mutual Life Insurance Company of Lincoln, Nebraska 200 Centennial Mall North (68508) Post Office Box 82248 Lincoln, Nebraska 68501 Attention: Kevin Hammond Telecopy No: (402) 434-9599 Schedule 1 Page 1 EX-10.40 6 AMENDMENT TO EMPLOYMENT AGREEMENT (DAVID P. TUSA) 1 EXHIBIT 10.40 AMENDMENT TO EMPLOYMENT AGREEMENT This Amendment to Employment Agreement is entered into as of this 5th day of March, 1997 by and between David P. Tusa (the "Executive") and Serv- Tech, Inc. (the "Company"). Reference is made to that certain Employment Agreement dated August 29, 1994 by and between the Executive and the Company (as amended, the "Employment Agreement"). The Employment Agreement is hereby amended as follows: 1. Section 3.1 of the Employment Agreement shall be amended to read in full as follows: Section 3.1. Basic Severance Payment. (a) If the Executive incurs a Qualifying Termination at any time after the Effective Date, the Company shall pay to the Executive in a lump sum within 30 days of the Qualifying Termination, a cash amount equal to: (i) the greater of: (A) his Base Salary (plus car allowance) for the 18- month period ending immediately before the Change in Control occurs; or (B) his Base Salary (plus car allowance) for the 18- month period ending immediately before the Qualifying Termination occurs, minus (ii) the Reduction Amount (as defined below). (b) The Reduction Amount shall be the minimum amount required (which may be zero but may not be less than zero) so as to avoid the making of "excess parachute payments" that would subject the Executive to excise tax under Section 4999 of the Internal Revenue Code of 1986, as amended from time to time (the "Code") or would be nondeductible by the Company for Federal income tax purposes by reason of Section 280G of the Code. The Reduction Amount shall be determined by independent firms of certified public accountants in accordance with the Code and any applicable regulations thereunder and interpretations thereof. All expenses incurred in making such determinations, whether incurred by the accounting firms, by the Company, or by the Executive, shall be paid directly by the Company. In determining the Reduction Amount, the accounting firms shall take into account any and all compensation and benefits to which the Executive may be entitled, to the extent that such compensation and benefits are to be taken into account under applicable law in making such a determination, and shall take into account and apply, to the extent permissible under applicable law, the provisions of Section 280G of the Code relating to the reasonable compensation for personal services. 2 (c) The Company agrees to cooperate reasonably with the Executive to avoid the making of any excess parachute payments, including without limitation (i) assisting the Executive in establishing that some or all of the payments received by the Executive contingent on a change described in Section 280G(b)(2)(A)(i) of the Code ("Change in Control") are reasonable compensation for personal services actually rendered by the Executive before the date of such change or to be rendered by the Executive on or after the date of such change, or (ii) changing the terms of any options to acquire common stock of the Company that the Executive holds in a manner not materially adverse to the Company in order to minimize the value of any acceleration of such option upon a Change in Control, such as by reducing the period during which the options are exercisable following a Change in Control. Notwithstanding the foregoing, the Company shall not be required to take any actions which its tax advisor advises it in writing (i) is improper or (ii) exposes the Company to material liability. (d) The Company shall make any payment required to be made under this Agreement in cash and on demand. Any payment required to be paid by the Company under this Agreement which is not paid within five days of receipt by the Company of the Executive's demand therefor shall thereafter be deemed delinquent, and the Company shall pay to the Executive immediately upon demand interest at the highest nonusurious rate per annum allowed by applicable law from the date such payment becomes delinquent to the date of payment of such delinquent sum. 2. Section 6.2 of the Employment Agreement shall be amended to read in full as follows: Section 6.2. Non-Competition. To induce the Company to enter into this Agreement, the Executive agrees that, from the Effective Date until the first to occur of (a) the Executive's Retirement; (b) the first anniversary date of a termination of his employment under Section 1.6(d) or due to a Qualifying Termination; and (c) a material breach by the Company of this Agreement; the Executive shall not engage in as an officer, director, owner, partner, promoter, consultant, manager, or otherwise, or assist in or carry on through a proprietorship, corporation, partnership or other form of business entity, the business of providing turnaround services, consisting of turnaround planning and management, heat exchanger services, and tower and vessel maintenance. $25,000 of any payments made by the Company to the Executive pursuant to Section 1.6(d) or Section 3.1 of this Agreement shall be made in consideration for the Executive's agreements contained in this Section 6.2. 3 IN WITNESS WHEREOF, the undersigned have executed this Amendment to Employment Agreement as of the date first set forth above. SERV-TECH, INC. By: /s/ FRANK PERRONE ------------------------------------- Name: Frank Perrone ---------------------------------- Title: Vice President, Secretary ---------------------------------- /s/ DAVID P. TUSA ---------------------------------------- David P. Tusa EX-10.41 7 AMENDMENT TO EMPLOYMENT AGREEMENT - FRANK PERRONE 1 EXHIBIT 10.41 AMENDMENT TO EMPLOYMENT AGREEMENT This Amendment to Employment Agreement is entered into as of this 5th day of March, 1997 by and between Frank A. Perrone (the "Executive") and Serv- Tech, Inc. (the "Company"). Reference is made to that certain Employment Agreement dated November 10, 1994 by and between the Executive and the Company (as amended, the "Employment Agreement"). The Employment Agreement is hereby amended as follows: 1. Section 3.1 of the Employment Agreement shall be amended to read in full as follows: Section 3.1. Basic Severance Payment. (a) If the Executive incurs a Qualifying Termination at any time after the Effective Date, the Company shall pay to the Executive in a lump sum within 30 days of the Qualifying Termination, a cash amount equal to: (i) the greater of: (A) his Base Salary (plus car allowance) for the 18- month period ending immediately before the Change in Control occurs; or (B) his Base Salary (plus car allowance) for the 18- month period ending immediately before the Qualifying Termination occurs, minus (ii) the Reduction Amount (as defined below). (b) The Reduction Amount shall be the minimum amount required (which may be zero but may not be less than zero) so as to avoid the making of "excess parachute payments" that would subject the Executive to excise tax under Section 4999 of the Internal Revenue Code of 1986, as amended from time to time (the "Code") or would be nondeductible by the Company for Federal income tax purposes by reason of Section 280G of the Code. The Reduction Amount shall be determined by independent firms of certified public accountants in accordance with the Code and any applicable regulations thereunder and interpretations thereof. All expenses incurred in making such determinations, whether incurred by the accounting firms, by the Company, or by the Executive, shall be paid directly by the Company. In determining the Reduction Amount, the accounting firms shall take into account any and all compensation and benefits to which the Executive may be entitled, to the extent that such compensation and benefits are to be taken into account under applicable law in making such a determination, and shall take into account and apply, to the extent permissible under applicable law, the provisions of Section 280G of the Code relating to the reasonable compensation for personal services. 2 (c) The Company agrees to cooperate reasonably with the Executive to avoid the making of any excess parachute payments, including without limitation (i) assisting the Executive in establishing that some or all of the payments received by the Executive contingent on a change described in Section 280G(b)(2)(A)(i) of the Code ("Change in Control") are reasonable compensation for personal services actually rendered by the Executive before the date of such change or to be rendered by the Executive on or after the date of such change, or (ii) changing the terms of any options to acquire common stock of the Company that the Executive holds in a manner not materially adverse to the Company in order to minimize the value of any acceleration of such option upon a Change in Control, such as by reducing the period during which the options are exercisable following a Change in Control. Notwithstanding the foregoing, the Company shall not be required to take any actions which its tax advisor advises it in writing (i) is improper or (ii) exposes the Company to material liability. (d) The Company shall make any payment required to be made under this Agreement in cash and on demand. Any payment required to be paid by the Company under this Agreement which is not paid within five days of receipt by the Company of the Executive's demand therefor shall thereafter be deemed delinquent, and the Company shall pay to the Executive immediately upon demand interest at the highest nonusurious rate per annum allowed by applicable law from the date such payment becomes delinquent to the date of payment of such delinquent sum. 2. Section 6.2 of the Employment Agreement shall be amended to read in full as follows: Section 6.2. Non-Competition. To induce the Company to enter into this Agreement, the Executive agrees that, from the Effective Date until the first to occur of (a) the Executive's Retirement; (b) the first anniversary date of a termination of his employment under Section 1.6(d) or due to a Qualifying Termination; and (c) a material breach by the Company of this Agreement; the Executive shall not engage in as an officer, director, owner, partner, promoter, consultant, manager, or otherwise, or assist in or carry on through a proprietorship, corporation, partnership or other form of business entity, the business of providing turnaround services, consisting of turnaround planning and management, heat exchanger services, and tower and vessel maintenance. $25,000 of any payments made by the Company to the Executive pursuant to Section 1.6(d) or Section 3.1 of this Agreement shall be made in consideration for the Executive's agreements contained in this Section 6.2. 3 IN WITNESS WHEREOF, the undersigned have executed this Amendment to Employment Agreement as of the date first set forth above. SERV-TECH, INC. By: /s/ DAVID TUSA ------------------------------------- Name: David Tusa ------------------------------------ Title: Sr. V.P. Finance & Administration ---------------------------------- /s/ FRANK PERRONE ---------------------------------------- Frank Perrone EX-10.42 8 EMPLOYMENT AGREEMENT - DALE W. WILHELM 1 EXHIBIT 10.42 March 5, 1997 Mr. Dale W. Wilhelm 1047 Thornton Houston, TX 77018 Dear Dale: In your role as a corporate officer of Serv-Tech, Inc., the Company has agreed to provide you with certain supplemental benefits as follows: 1. In the event of termination of your employment by Serv-Tech without cause or your resignation prior to your age 64 1/2, you will be entitled to a lump sum severance payment equal to twelve (12) months salary (plus car allowance) at the time of the cessation of your employment, less applicable deductions. The foregoing shall be in lieu of severance payments otherwise due. 2. Additionally, you will be entitled to certain benefits (group health, dental and car allowance) on the then current terms and cost for the twelve (12) months subsequent to your above termination without cause or your resignation. Group health and dental coverage will cease upon your eligibility to so receive group health and dental coverage from any subsequent employer. 3. Should a termination occur in conjunction with a change in control of Serv-Tech, Inc. (as defined in Schedule A), you will also be eligible for a discretionary transaction bonus determined by the Board of Directors of the Company in its sole discretion. 4. This Agreement replaces and supersedes your Agreement dated July 9, 1996 with the Company. Sincerely, /s/ DAVID P. TUSA - ----------------------------------------------- David P. Tusa Sr. Vice President, Finance and Administration EX-10.43 9 AMEND. #1 TO FIRST AMENDED & RESTATED CREDIT AGRMT 1 EXHIBIT 10.43 FIRST AMENDMENT TO THE FIRST AMENDED AND RESTATED CREDIT AGREEMENT This FIRST AMENDMENT TO THE FIRST AMENDED AND RESTATED CREDIT AGREEMENT dated as of March 17th, 1997 (the "Amendment") is to the First Amended and Restated Credit Agreement dated as of November 12, 1996 (as amended, supplemented or otherwise modified from time to time, the "Restated Credit Agreement") among 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"), as the Issuing Bank, and as agent for the other Banks (in such capacity together with any other Person who becomes the agent the "Agent"). The Other Senior Lenders join in this Amendment for the limited purposes hereinbelow stated. WHEREAS, the Company, the Guarantors, the Agent and the Banks were parties to that one certain Credit Agreement dated May 15, 1995 (as amended and modified from time to time, the "Prior Credit Agreement") pursuant to which the Banks extended up to a $35,000,000.00 revolving credit to the Company and the Guarantors guaranteed same (the "Prior Indebtedness"); and WHEREAS, the Banks provided the Company with a new credit facility under the Restated Credit Agreement, pursuant to which the Banks committed to make a reducing revolving credit loan of up to $23,500,000.00 to the Company to refinance the Prior Indebtedness, to finance permitted capital expenditures, to provide for the issuance of Letters of Credit by the Issuing Bank, and for use as working capital. The Company also asked the Banks to waive certain defaults under the Prior Credit Agreement, including defaults occasioned by the Company's default under documentation with the Other Senior Lenders (as therein defined), and to consent to the modification of such documentation in a manner consistent therewith. In connection therewith, the Banks agreed to restate the Prior Credit Agreement and the Agent agreed to serve as Agent for the Banks; and WHEREAS, simultaneously with the execution of the Restated Credit Agreement, the Banks and the Other Senior Lenders executed the Intercreditor Agreement; and WHEREAS, the Company asked the Banks to waive certain financial covenants and restrictions contained in the Restated Credit Agreement, and the Banks have done so by Waiver to First Amended and Restated Credit Agreement dated February 28, 1997; and WHEREAS, the Company has now asked the Banks to amend certain other provisions of the Restated Credit Agreement and to extend additional credit to the Company and the Banks and are willing to do so subject to the terms and conditions set forth herein. 2 NOW, THEREFORE, in consideration of the foregoing and the mutual covenants set forth herein, the Company, the Agent and the Banks agree as follows: 1. Defined Terms. Unless otherwise defined herein, capitalized terms used herein have the meanings assigned to them in the Restated Credit Agreement. 2. Amendment. The Restated Credit Agreement is hereby amended as follows: (a) The definition of Commitment in the Restated Credit Agreement is hereby deleted and the following substituted therefor: " 'Commitment' and 'Commitments' means the several obligations 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 or on the signature page of any amendment to this Amendment or any Assignment and Acceptance, whichever is the latest with respect to such Bank, and all other duties and obligations of the Banks hereunder, which Commitment shall (i) until April 30, 1997 include a Supplemental Commitment of $7,000,000.00 and a total Commitment for all Banks of $26,500,000.00, and, thereafter (ii) until June 30, 1997 shall include a Supplemental Commitment of $4,000,000.00 and shall total $23,500,000.00 for all Banks and (iii) after June 30, 1997, shall not include any Supplemental Commitment and shall total $19,500,000.00 for all Banks, except as otherwise provided herein in Sections 2.01(b), 2.07(c) or elsewhere." (b) The definition of Supplemental Commitment in the Restated Credit Agreement is hereby deleted and the following substituted therefor: " 'Supplemental Commitment' means the $7,000,000.00 of additional funds available over and above the basic Commitment of $19,500,000.00, which Supplemental Commitment shall be available only until April 30, 1997, and the $4,000,000.00 of additional funds available thereafter only until June 30, 1997, which Supplemental Commitment shall, while existent, unless otherwise specified, be considered a part of the Commitment." (c) Section 2.07(b) of the Restated Credit Agreement is hereby deleted and the following substituted therefor: -2- 3 "(b) The Company shall repay any outstanding portion of the Supplemental Commitment in excess of $4,000,000.00 by the amount of such excess, on or before April 30, 1997, and shall repay the remaining outstanding portion of the Supplemental Commitment on or before June 30, 1997, on which date such Supplemental Commitment shall terminate." 3. Conditions to Effectiveness. This Amendment shall become effective upon the receipt by the Agent of: (a) counterparts of this Amendment, duly executed and delivered by an authorized officer of the Company, the Guarantors, the Banks, the Agent and each of the Other Senior Lenders, and (b) an Amendment fee, for the benefit of the Banks, pro-rata, equal to .75% of the increased amount of the Supplement Commitment, or $22,500.00. 4. Representations and Warranties. The Company hereby confirms that the representations and warranties contained in the Restated Credit Agreement are true and correct as of the date hereof, except to the extent such representations and warranties specifically relate to an earlier date, in which case they were true and correct as of such earlier date. 5. Continuing Effect of the Restated Credit Agreement. This Amendment shall not constitute a waiver of any provision not expressly referred to herein and shall not be construed as a consent to any action on the part of the Company, any Subsidiary or the Guarantors that would require a waiver or consent of the Banks or of the Agent or an amendment or modification to any term of the Restated Credit Agreement except as expressly stated herein. Except as expressly modified hereby, the provisions of the Restated Credit Agreement are and shall remain in full force and effect. 6. Guarantor Ratification. The Guarantors execute this Amendment to guaranty the Loans and the Obligations, as amended hereby, to ratify and confirm the Guaranty, the effectiveness thereof and the liability of each of them thereunder and to state that the Guaranty is in full force and effect notwithstanding the execution hereof and that the Guaranty extends to all of the Obligations, including the amended Supplemental Commitment. 7. Other Senior Lenders Ratification. The Other Senior Lenders each execute this Amendment, in accordance with the provisions of Section 3.2 of the Intercreditor Agreement, solely for the purpose of acknowledging the terms hereof, agreeing to the increase in the Supplemental Commitment described herein, agreeing that such increased Indebtedness of the Company to the Banks shall be entitled to the same priority as the Supplemental Commitment was previously, and that this Amendment does not create any default, nor have any of said parties declared any default, under any documentation existing between the applicable Other Senior Lender and the Company. -3- 4 8. Counterparts. This Amendment may be executed by all parties hereto in any number of separate counterparts and all of such counterparts taken together shall be deemed to constitute one and the same instrument. 9. Headings Descriptive. The headings of the several sections and subsections of this Amendment are inserted for convenience only and shall not in any way affect the meaning or construction of any provision of this Amendment. 10. Percentage of Commitment. As of the date of this Amendment, TCB's percentage share of the Commitment is 71.5% and Bank One's percentage share is 28.5%. 11. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS. -4- 5 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers thereunto duly authorized as of the date first above written. BORROWER/DEBTOR: SERV-TECH, INC. By: /s/ DAVID P. TUSA ------------------------------- David P. Tusa Senior Vice President of Finance and Administration 6 DEBTORS/SUBSIDIARIES: ADVANCED REFRACTORY SERVICES, INC. AMERICAN MECHANICAL SERVICES, INC. CASTING CONCEPTS, INC. CON-SEAL, 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. ST PIPING, INC. TOTAL REFRACTORY SYSTEMS, INC. TURNAROUND MAINTENANCE, INC. UNITED INDUSTRIAL MATERIALS, INC. By: /s/ DAVID P. TUSA ---------------------------------- David P. Tusa Vice President SECO INDUSTRIES, INC. SERV-TECH ENGINEERS, INC. SERV-TECH EPC, INC. By: /s/ DAVID P. TUSA ---------------------------------- David P. Tusa Senior Vice President of Finance and Administration 7 PRS HOLDINGS, INC. By: /s/ DAVID P. TUSA ---------------------------------- David P. Tusa Senior Vice President DELTA MAINTENANCE, INC. PETRO RECOVERY SYSTEMS, INC. SERV-TECH CONSTRUCTION AND MAINTENANCE, INC. (Formerly Serv Tech EPC -Houston, Inc.) SERV-TECH INTERNATIONAL SALES, INC. SERV-TECH OF NEW MEXICO, INC. SERV-TECH SERVICES, INC. TERMINAL TECHNOLOGIES, INC. TIPCO ACQUISITION CORP. By: /s/ DAVID P. TUSA ------------------------------------- David P. Tusa President 8 AGENT/SECURED PARTY: AMOUNT OF COMMITMENT TEXAS COMMERCE BANK NATIONAL - -------------------- ASSOCIATION, as Agent and Individually, as a Bank $18,947,500.00* By: /s/ JAMES W. SHREVE ------------------------------ James W. Shreve Vice President BANKS: AMOUNT OF COMMITMENT BANK ONE, TEXAS, N.A. - -------------------- $7,552,500.00* By: /s/ JOHN E. ELAM, JR. ------------------------------ John E. Elam, Jr. Vice President * Includes pro rata share of up to $7,000,000.00 Supplemental Commitment to be reduced as hereinabove stated. 9 OTHER SENIOR LENDERS: ABN AMRO BANK N.V., HOUSTON AGENCY By: /s/ C.W. RANDALL ------------------------------------- Name: C.W. Randall ----------------------------------- Title: Senior Vice President ---------------------------------- By: /s/ MICHAEL N. OAK ------------------------------------- Name: Michael N. Oak ----------------------------------- Title: Vice President ---------------------------------- PRINCIPAL MUTUAL LIFE INSURANCE COMPANY By: /s/ JOHN D. CLEAVENGER ------------------------------------- Name: John D. Cleavenger ----------------------------------- Title: Counsel ---------------------------------- By: /s/ SARAH J. PITTS ------------------------------------- Name: Sarah J. Pitts ----------------------------------- Title: Counsel ---------------------------------- TMG LIFE INSURANCE COMPANY By: /s/ ROBERT R. LAPOINTE ------------------------------------- Name: Robert R. Lapointe ----------------------------------- Title: Vice President ---------------------------------- By: /s/ MICHAEL J. STEPPE ------------------------------------- Name: Michael J. Steppe ----------------------------------- Title: Vice President ---------------------------------- 10 BERKSHIRE LIFE INSURANCE COMPANY By: /s/ ELLEN I. WHITTAKER ------------------------------------- Name: Ellen I. Whittaker ----------------------------------- Title: Investment Officer ---------------------------------- THE SECURITY MUTUAL LIFE INSURANCE COMPANY By: /s/ KEVIN W. HAMMOND ------------------------------------- Name: Kevin W. Hammond ----------------------------------- Title: Chief Investment Officer ---------------------------------- EX-21.1 10 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 Hartney Industrial Services Corporation Nevada F.C. Schaffer & Associates, Inc. Louisiana Delta Maintenance, Inc. Louisiana Chemisolv Holdings, Inc. Delaware Hill Technical Services, Inc. Texas
EX-23.1 11 CONSENT OF KPMG PEAT MARWICK LLP 1 EXHIBIT 23.1 The Board of Directors Serv-Tech, Inc.: We consent to incorporation by reference in the registration statement No. 33-62139 on Form S-8 of Serv-Tech, Inc. of our reports dated February 26, 1997, relating to the consolidated balance sheets of Serv-Tech, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the years in the two-year period ended December 31, 1996, and the related consolidated financial statement schedule, which reports appear in the December 31, 1996 annual report on Form 10-K of Serv-Tech, Inc. KPMG PEAT MARWICK LLP Houston, Texas March 27, 1997 EX-27 12 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED FINANCIAL STATEMENTS OF SERV-TECH, INC. AND SUBSIDIARIES AS OF DECEMBER 31, 1996, AND FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS. 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 4,532,622 0 24,307,240 (904,298) 2,026,359 34,376,184 46,662,106 (20,387,080) 81,144,101 27,707,465 15,170,000 0 0 3,436,855 33,794,935 81,144,101 142,385,571 142,385,571 0 112,462,899 0 0 2,357,795 (2,226,853) 237,000 (2,463,853) (14,668,754) 0 0 (14,668,754) (2.55) 0
EX-99.1 13 OPINION OF COOPERS & LYBRAND 1 EXHIBIT 99.1 REPORT OF INDEPENDENT ACCOUNTANTS The Board of Directors and Shareholders of Serv-Tech, Inc. We have audited the consolidated statements of operations, changes in stockholders' equity and cash flows of Serv-Tech, Inc. for the year ended December 31, 1994. 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 audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated results of operations and the cash flows of Serv-Tech, Inc. for the year ended December 31, 1994, in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Houston, Texas February 17, 1995 -----END PRIVACY-ENHANCED MESSAGE-----