-----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, WLQzUm9JfcNahGb/yJ/toBNI/C3S9keP41lmjYo97D/AOnJX8ATvIwAScmC+2yJn 56HGDcOWz951BD1nh54Djw== 0000950129-02-001663.txt : 20020415 0000950129-02-001663.hdr.sgml : 20020415 ACCESSION NUMBER: 0000950129-02-001663 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020401 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN PLUMBING & MECHANICAL INC CENTRAL INDEX KEY: 0001072258 STANDARD INDUSTRIAL CLASSIFICATION: CONSTRUCTION SPECIAL TRADE CONTRACTORS [1700] IRS NUMBER: 760577628 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 333-81139 FILM NUMBER: 02595961 BUSINESS ADDRESS: STREET 1: 1905 LOUIS HENNA BLVD CITY: ROUND ROCK STATE: TX ZIP: 78664 BUSINESS PHONE: 7132437350 MAIL ADDRESS: STREET 1: 515 POST OAK BLVD STREET 2: SUITE 450 CITY: HOUSTON STATE: TX ZIP: 77027 10-K405 1 h95061e10-k405.txt AMERICAN PLUMBING & MECHANICAL, INC. - 12/31/2001 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 333-81139 American Plumbing & Mechanical, Inc. (Exact name of Registrant as Specified in Its Charter) Delaware 76-0577626 (State or Other Jurisdiction (IRS Employer of Incorporation or Organization) Identification No.) 1950 LOUIS HENNA BLVD. ROUND ROCK, TEXAS 78664 (Address of Principal Executive Offices) (ZIP Code) Securities to be registered pursuant to Section (b) of the Act: None Securities to be registered pursuant to Section (g) of the Act: None Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 of 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |X| As of March 26, 2002, there were outstanding 13,211,383 shares of common stock and 331,116 shares of Class B common stock of the Registrant. The aggregate market value of voting stock held by non-affiliates of the Registrant is not determinable as such shares were privately placed and there is no public market for such shares. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant's Proxy Statement (the "Proxy Statement") are incorporated by reference in Part III of this Annual Report on Form 10-K (the "Form 10-K"). ================================================================================ TABLE OF CONTENTS PART I............................................................................................................1 Item 1. Business..............................................................................................1 Industry Overview............................................................................................2 Growth Strategy..............................................................................................3 Services.....................................................................................................4 Operations...................................................................................................5 Property and Equipment.......................................................................................6 Regulation...................................................................................................6 Employees....................................................................................................7 Item 2. Properties............................................................................................7 Item 3. Legal Proceedings.....................................................................................7 Item 4. Submission of Matters to a Vote of Security Holders..................................................8 PART II...........................................................................................................9 Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.................................9 Item 6. Selected Financial Data..............................................................................10 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................11 2001 compared to 2000.......................................................................................11 2000 compared to 1999......................................................................................11 Liquidity and Capital Resources.............................................................................12 Recent Accounting Pronouncements............................................................................13 Item 7-A. Quantitative and Qualitative Disclosures About Market Risks........................................14 Item 8. Financial Statements and Supplemental Data...........................................................15 Item 9. Changes and Disagreements with Accountants on Accounting and Financial Disclosure....................42 PART III.........................................................................................................42 Item 10. Directors and Executive Officers of the Registrant..................................................42 Item 11. Executive Compensation..............................................................................42 Item 12. Security Ownership of Certain Beneficial Owners of Management.......................................42 Item 13. Certain Relationships and Related Transactions......................................................42 PART IV..........................................................................................................43 Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....................................43
FORWARD-LOOKING STATEMENTS This report contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended ("Securities Act") and Section 21E of the Exchange Act to be covered by safe harbors created thereby. Such forward-looking statements are made only as of the date of this report and involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of the Company, or industry results, to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Readers are cautioned that such information involves risks and uncertainties, including those created by general market conditions, competition and the possibility that events may occur which limit the ability of American Plumbing & Mechanical, Inc. and subsidiaries ("AMPAM" or the "Company") to maintain or improve its operating results. Such risks, uncertainties and other important factors include, among others, retention of key management, a national economic downturn or one or more regional downturns in construction, shortages of labor and specialty building materials, difficulty in obtaining or increased costs associated with debt financing, seasonal fluctuations in the demand for plumbing and HVAC systems, and the use of incorrect estimates for bidding a fixed price contract. All statements, other than statements of historical facts, included or incorporated by reference in this report that address activities, events or developments that the Company expects or anticipates will or may occur in the future, including such things as future capital expenditures (including the amount and nature thereof), business strategy and measures to implement such strategy, competitive strengths, goals, expansion and growth of the Company's business and operations, plans, references to future success, as well as other statements which include words such as "anticipate," "believe," "plan," "estimate," "expect," and "intend" and other similar expressions, constitute forward-looking statements. Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and the inclusion of such information should not be regarded as a representation that it will occur. PART I ITEM 1. BUSINESS American Plumbing & Mechanical, Inc. is the largest company in the United States focused primarily on the plumbing contracting services industry. AMPAM also provides heating, ventilation and air conditioning ("HVAC") and mechanical contracting services. The Company provides services to three identifiable industry segments - single family residential, multifamily residential and commercial customers. American Plumbing & Mechanical, Inc. (a Delaware corporation) was organized in June 1998, and acquired ten U.S. businesses (the "Founding Companies") on April 1, 1999. The Founding Companies operated as leading regional providers of plumbing and mechanical contracting services for an average of approximately 31 years prior to being acquired by AMPAM. AMPAM believes that by combining these regional leaders into one organization, it has created a national provider capable of strengthening and broadening relationships with its consolidating customer base and enhancing its operating efficiency. Subsequent to the acquisition of the Founding Companies, and through December 31, 2001, the Company has acquired all of the outstanding stock of three companies and the assets of a fourth, and opened several new locations ("Start-ups"). The Company currently serves its customers out of 31 operating locations in 20 states. During 2001, AMPAM derived approximately 53%, 29% and 18% of its revenues from single family residential, multifamily residential and commercial customers, respectively. These three reporting segments all operate domestically, share the same growth strategies, and provide plumbing and HVAC services. However, these different segments provide services to different customers, as well as have 1 different competitors as mentioned below. For financial information on reporting segments, see note 14 to the consolidated financial statements. SINGLE FAMILY AND MULTIFAMILY RESIDENTIAL AMPAM provides plumbing and HVAC construction services, as well as maintenance and repair services to single family and multifamily residential customers. The single family residential market includes housing projects, small condominium projects, and town house development. The multifamily residential market includes large condominiums and apartment projects. As of December 31, 2001, AMPAM had multifamily residential backlog of $152 million, a significant portion of which is expected to be completed during 2002. The single family and multifamily residential customers include local, regional and national residential builders and developers. AMPAM's single family and multifamily residential segments have a diverse customer base with no customer representing more than 10% of the annual revenues for either segment. AMPAM's single family and multifamily residential segments have many diverse competitors, considering the different services provided (plumbing, HVAC and maintenance and repair). AMPAM competes with a number of local, regional and national contractors. The main areas of competition include price, quality of services provided and customer service. COMMERCIAL AMPAM provides plumbing, HVAC and mechanical contracting services to commercial customers. The commercial market includes retail establishments, office buildings, hotels, assisted-living centers, waste water and water purification plants, manufacturing plants and other industrial complexes; and public and private institutional buildings including schools, hospitals, dormitories, military and other governmental facilities, stadiums, arenas, convention centers, airports and prisons. As of December 31, 2001, AMPAM had commercial backlog of $80 million. Commercial projects typically take between one to two years to complete. Although AMPAM's commercial segment has a diverse customer base, one customer during 2001 did account for 14 percent of revenues for this segment. Although the loss of this one customer would negatively impact the earnings of the commercial segment, AMPAM does not believe the loss of this customer would have a material adverse effect on the Company as a whole as revenues from this particular customer accounted for less than three percent of the Company's revenues in 2001. AMPAM's commercial segment has many diverse competitors, considering the different services provided (plumbing, HVAC, mechanical and maintenance and repair). The main areas of competition include price, quality of services provided and customer service. INDUSTRY OVERVIEW General. Virtually all construction and renovation in the United States generates demand for plumbing and mechanical contracting services. AMPAM estimates that the plumbing and mechanical contracting work it performs accounts for approximately 8% to 12% of the total construction cost of commercial projects, and 5% to 10% of the total construction cost of residential projects. The plumbing and mechanical contracting service industry is highly fragmented, and AMPAM estimates it to include at least 40,000 companies. Generally, these companies are small, owner-operated, independent contractors who serve customers in a local market, and have limited access to capital for investment in infrastructure, technology and expansion. 2001 marked the tenth year of expansion for the construction industry. Total construction advanced 3% during 2001 to $485.2 billion, down from 5% growth in 2000 and 11% growth in 1999. For the construction industry as a whole, the commercial/industrial construction segment was down 4% during 2001, whereas the residential segment 2 grew 4% during 2001. A weak economy and the events of September 11th contributed to declined growth in the commercial segment, whereas lower interest rates enhanced the growth of the single family residential segment. AMPAM believes that its customers generally select plumbing and mechanical contractors with a large, trained workforce that are able to meet their location and scheduling requirements, while also providing reliable high-quality service. AMPAM obtains a significant portion of its contracts on negotiated terms through existing customer relationships instead of through competitive bid processes. Because many projects utilize repetitive floor plans, AMPAM is able to prefabricate some of the material necessary to complete the project, which ultimately increases productivity and profitability by reducing construction time, labor costs and skill requirements. The level of construction activity depends on many factors, including interest rates, tax considerations, demand for housing and general economic conditions. AMPAM serves many of the more rapidly growing metropolitan areas, including Orlando, Tampa, Jacksonville, Naples, Sarasota, Ft Myers, Miami and Pensacola, Florida; Atlanta, Georgia; Charlotte, North Carolina; Denver, Colorado; Richmond, Newport News and Arlington, Virginia; Washington D.C.; Baltimore, Maryland; Austin, Houston, Dallas, and San Antonio, Texas; Cincinnati and Columbus, Ohio; Phoenix, Arizona; Las Vegas, Nevada; Indianapolis, Indiana; Jersey City, New Jersey; Riverside, Los Angeles, San Diego, Sacramento, Corona, and the San Fernando Valley, California, among others. The Company also has the ability to mobilize its workforce to other geographic markets based on the demands of its customers. These metropolitan areas have experienced significant new construction activity over the last several years, and demographic trends indicate continued growth in these areas. GROWTH STRATEGY Over the past two years, AMPAM has entered new markets through Start-ups. These Start-ups initially focus on serving existing customers of AMPAM in the new market to build their base. From this base, these Start-ups work to develop relationships with new customers. Over the past year, the Company has also grown by expanding the services it provides at its existing locations. During 2000, AMPAM incorporated operating subsidiaries in Denver, Colorado and Dallas, Texas. The Denver location provides single family and multifamily plumbing services; whereas the Dallas location provides single family plumbing services. During 2001, AMPAM incorporated three new operating subsidiaries. The Company commenced single family plumbing operations in Charlotte, North Carolina and in Sacramento, California. The Company commenced commercial plumbing operations in Sacramento, California. In addition, operations were expanded in Houston, Texas to provide single family plumbing, and in Tampa, Florida, Baltimore, Maryland, Atlanta, Georgia and Denver, Colorado to provide multi-family HVAC. For 2002, the Company intends to grow in the same manner as it has this past year - through new Start-ups and by expanding the services provided by existing locations. AMPAM continues to evaluate additional markets to assess the potential for future start-ups. All costs associated with Start-ups are included in the results of operations when incurred. 3 SERVICES Plumbing. Plumbing services provided by AMPAM are primarily the installation of systems that convey domestic water throughout a building, systems that transport sanitary waste out of a building to a sewer connection, and systems that transport natural gas to various equipment or appliances such as heaters, boilers, ovens and stoves. A domestic water system typically includes separate piping for hot and chilled water, as well as a number of fixtures such as sinks, bathtubs and showers. Typical construction projects include the installation, maintenance and repair of domestic water systems, sanitary waste and vent systems, fire protection systems, natural gas piping systems, integrated systems that transport hot and chilled water, steam, fuels, and other liquid and gaseous substances, and the related equipment such as water heaters, plumbing fixtures, boilers, chillers and pumps. In some areas of the country, the Company also installs heating, ventilation and air conditioning systems. For both residential and commercial customers, plumbing contracting projects begin with project design and engineering in which the locations, configuration and specifications for the plumbing systems to be installed are determined. Whether the design is provided by the customer, or produced by AMPAM, the type, size and design of piping, fittings, valves, fixtures and other equipment is typically entered into AMPAM's computer systems which handle estimation, materials ordering and job scheduling functions. Substantially all of the equipment and component parts AMPAM installs are purchased from third-party wholesale suppliers or directly from the manufacturers and resold to the customer as part of the contracted installation. Orders and deliveries are coordinated to match the project schedule. Whenever possible, a significant portion of the plumbing and piping assembly is prefabricated at AMPAM facilities in order to reduce on-site installation time, increase quality control and reduce material costs and service time. Once the job moves onto the construction site, connections are made to the municipal sewage system and supply, drainage piping is installed within the construction "footings" along the building's perimeter, and risers are installed to elevate the piping above the level of the foundation. These risers are designed to either be contained within the walls for extension into upper floors, or to connect with fixtures to be installed in specified locations on ground level floors. After the foundation is poured and the framing for the walls and floors of the upper levels of the building is constructed, piping systems are extended to supply the fixtures and systems throughout the building and venting systems are installed. Once the walls have been covered, and the flooring, ceiling and roofing completed, fixtures (including sinks, hot water heaters, toilets, baths, faucets and spigots) are installed and the system is connected to the water main and gas supply. Municipal inspectors also generally tour a job site several times during the construction process to assure compliance with the applicable plumbing codes. Mechanical. Mechanical contracting services provided by AMPAM consist primarily of the installation of mechanical and process piping and tubing, including systems which convey hot and chilled water, steam, medical gas, fuels and other liquid and gaseous substances, as well as the installation of related equipment and fixtures which store, pump, regulate and measure the distribution of these substances. In some cases, these mechanical systems are critical to the underlying business of the future tenant, as in the case of water treatment plants, chemical plants and medical laboratories. Mechanical contracting services provided by AMPAM also include the installation of the piping portion of HVAC systems, including the piping and tubing used to convey hot and chilled water to the heating or cooling systems and the related boilers, chillers, cooling towers, pumps, valves and control devices. Mechanical contracting services are typically provided to commercial customers. See "HVAC" below. Mechanical contracting projects begin with project design and engineering, which may be produced by AMPAM or specified by the customer. In response to customer demand, AMPAM may develop some or all of the design parameters using its CAD programs, or AMPAM may "value engineer" customer supplied specifications in order to suggest more efficient installation configurations or lower 4 cost components. Prefabrication at AMPAM facilities may also be employed to pre-assemble various piping and mechanical configurations prior to deployment at the construction site. Most mechanical projects begin with the installation of distribution piping and duct systems within the walls and between the floor and ceilings in accordance with technical design specifications, after the foundation has been poured. Once the distribution and main service lines have been installed, service branches to various equipment are completed, and the equipment and controls are then balanced and commissioned. HVAC. In some regions, the Company also offers HVAC contracting services. HVAC systems typically involve piping and air-handling components. The piping component, as described above, is often classified as a mechanical contracting service. However, in contrast to mechanical services, the air handling component of an HVAC system includes the ductwork and ventilation systems that carry air rather than hot or chilled water or other liquids or gaseous substances. Equipment and fixtures related to the air-handling component of an HVAC system include heaters, compressors, air handlers and air conditioning units. Typically, HVAC installation projects begin with the customer providing the architectural plans and mechanical drawings for the building to be constructed. The process of on-site installation is similar to that required for mechanical systems. Maintenance and Repair. Maintenance and repair contracting services are generally provided on a per visit basis and through short-term and long-term maintenance contracts. Revenue from repair and maintenance contracting services has historically fluctuated, representing a smaller portion of the overall revenue . OPERATIONS Contracting. Single family and multifamily residential work is generally obtained through relationships with existing customers and referrals, with pricing being negotiated with the particular customer. Commercial work is typically awarded through a competitive bid process, which is often limited to approved bidders who meet bonding and other requirements. Contracts may provide precise specifications for the work to be completed, require the contractor to design and build the plumbing system, or may permit the contractor to provide revised specifications for the project. AMPAM's plumbing contracts are generally structured on a fixed cost basis. Revenues for a typical multifamily residential plumbing project for installation in a low-rise apartment complex range from approximately $500,000 to $1,500,000. Single family residential projects vary based on the size of the development, and revenues for each home range from approximately $6,000 to $15,000. Revenues from a single commercial mechanical contracting project generally range from approximately $500,000 to $10,000,000, depending upon the size of the building involved, the nature of the plumbing and mechanical contracting services involved, and the specific equipment and fixtures to be installed. Engineering and Design. AMPAM has engineering and design capabilities which enable it to offer a high level of service to its customers. These capabilities may be offered "in-house" or obtained from third parties, as appropriate. CAD systems may be used to "value engineer" the project by providing cost saving alternatives to the specifications and designs provided by the customer, or to actually design and build the plumbing and mechanical systems to be installed. CAD systems can be used to automate the production of blueprints and specifications, produce a schedule of required assemblies, and to assist in selecting the materials and equipment to be used. AMPAM is further developing its "value engineering" and design-and-build capabilities to help capture higher margins resulting from the cost savings passed on to the customer. Purchasing. AMPAM estimates that its cost of materials purchased represents approximately 38% of AMPAM's revenues. AMPAM purchases copper, steel, cast iron, PVC and ABS pipe, valves, hangers, fire protection and sprinkler systems, plumbing fixtures, drains, water heaters, boilers, chillers, air 5 handling units and pumps, and other materials from a number of manufacturers. AMPAM purchases these materials directly from the manufacturer or through wholesalers and other distributors. In some instances, AMPAM receives discounts from wholesalers in return for prompt payment, and AMPAM negotiates with wholesalers to receive discounts whenever possible. As a result of its size, AMPAM negotiates directly with many national manufacturers to participate in rebate programs offered by those manufacturers. Management Information Systems. AMPAM has centralized the consolidated accounting and financial reporting activities at its corporate headquarters while basic accounting activities are conducted at the operating level. Several of the acquired companies, serving both the residential and commercial markets, possess software systems which handle estimation, materials, ordering and job scheduling functions. During 2002, AMPAM will begin the process of implementing the J.D. Edwards computer system as the standard information system throughout the Company. The estimated completion date of the project is 2005. AMPAM believes that common information systems will result in more meaningful comparisons between locations, improved controls, better communication and enhanced field management tools. Recruiting and Training. Recruiting and training primarily occur at the local level for each operating unit of AMPAM, but are also supplemented by national programs. During 2001, AMPAM initiated a new management trainee program which focuses on promoting from within, as well as providing college graduates with 1-2 years "hands on" experience in all facets of their respective segment. AMPAM also shares best practices in recruiting, selection, training, and apprenticeship programs from among the different locations. AMPAM believes it is able to attract highly qualified candidates as a result of its national size, potential for growth and advancement, as well as its health, disability and life insurance, and retirement benefits. Intellectual Property and Licensing. AMPAM has obtained certain trademarks and trade names for its products and services to distinguish genuine AMPAM products and services from its competitors' products and services. During 2001, AMPAM underwent a national branding effort, renaming all locations to "AMPAM" to promote nationwide name recognition. Seasonality. The plumbing and mechanical contracting services industry is influenced by seasonal factors, which generally result in lower activity during winter months than in other periods. As a result, AMPAM expects that its revenues and profits will generally be lower in the first and fourth quarters of each fiscal year, and higher in the second and third quarters. PROPERTY AND EQUIPMENT AMPAM operates a fleet of approximately 2,000 owned and leased trucks, vans and support vehicles, as well as heavy machinery including cranes, backhoes and high-lifts. The Company believes these vehicles are adequate for AMPAM's current operations. REGULATION Operations and Licensing. AMPAM's business is subject to various federal, state and local laws, regulations, ordinances and policies relating to, among other things: o the licensing and certification of plumbers and technicians; o AMPAM's advertising, warranties and disclosures to its customers; o the bidding process required to obtain plumbing and mechanical contracts; and o the applicable plumbing, mechanical and building codes with which AMPAM must comply. 6 Most states require that at least one of AMPAM's employees be a licensed master plumber, and many jurisdictions regulate the number and level of license holders who must be present on a construction site during the installation of plumbing and mechanical systems. Some jurisdictions require AMPAM to obtain a building permit for each plumbing or mechanical project. In addition, AMPAM must comply with labor laws and regulations, including those that relate to verification by employers of legal immigration or work permit status of employees. Environmental Health and Safety. AMPAM is subject to safety standards established and enforced by, among others, the Occupational Safety and Health Administration. AMPAM is also subject to various environmental laws and regulations relating to the use, storage, transportation and disposal of various materials. To the extent that AMPAM performs work involving air conditioning and refrigeration systems, it is subject to additional restrictions and regulations governing the availability, handling and recycling of various refrigerants due to the phase-out of ozone-depleting substances under the Montreal Protocol and the Clean Air Act. EMPLOYEES At December 31, 2001, AMPAM had approximately 5,600 employees. Currently, none of AMPAM's employees are members of unions or work under a collective bargaining agreement. AMPAM believes that its relationship with its employees is satisfactory. ITEM 2. PROPERTIES The Company's subsidiaries operate out of 30 leased facilities and one owned facility in 20 states. The warehouses, administrative offices and shops are generally covered by operating leases ranging from five to ten years, and are on terms the Company believes to be commercially reasonable. AMPAM leases fifteen facilities, and owns one facility for single family residential operations, consisting of warehouse, office and shop space. The Company leases nine facilities for multifamily residential operations, also consisting of warehouse, office and shop space. For commercial operations, the Company leases six locations, consisting primarily of office and shop space. Certain of the facilities are leased from related parties (see note 6 to the consolidated financial statements and information for Item 13 incorporated by reference from the Proxy Statement). AMPAM believes its facilities are adequate for its present needs. AMPAM also believes that suitable additional or replacement space will be available as required. The Company leases its executive offices in Round Rock, Texas. ITEM 3. LEGAL PROCEEDINGS In October 2001, AMPAM and its operating subsidiary AMPAM Christianson, L.P. filed suit against two former stockholders of Christianson Enterprises who are current holders of Series A Redeemable Preferred Stock ("preferred stock") alleging, among other things, breaches of certain provisions of the underlying acquisition agreement pursuant to which AMPAM purchased Christianson Enterprises n/k/a AMPAM Christianson. In February 2002, the defendants filed a counterclaim alleging, among other things, anticipatory breach of the acquisition agreement. In March 2002, the parties entered into a settlement agreement and general release pursuant to which the defendants and related parties will tender all of their preferred stock and AMPAM will pay the defendants and related parties $3.1 million. As of March 12, 2002, the defendants and their related parties held 524,435 shares of preferred stock with a liquidation value of $6,817,655 and were due approximately $500,000 for outstanding but undeclared dividends, all of which will be included in the settlement. The settlement agreement becomes effective 7 upon the transfer of the referenced consideration that is scheduled to take place on or before April 21, 2002, at which time the parties will have no further duties, obligations, or liabilities to each other related to the acquisition agreement or preferred stock and the parties' agreement to release any and all claims against each other will become effective. AMPAM also has, from time to time, been a party to litigation arising in the normal course of business. Most of the litigation involves claims for personal injury, property damage, and/or warranty/defect claims incurred in connection with its operations. Management believes that none of these actions, individually or in the aggregate, will have a material adverse effect on the financial condition or results of operations of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 8 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS As of March 26, 2002, there were approximately 92 holders of the Company's common stock and approximately 6 holders of the Company's Class B common stock, neither of which has an established public trading market. AMPAM does not anticipate paying cash dividends on its common stock in the foreseeable future. AMPAM expects that it will retain all available earnings generated by its operations for the development and growth of its business. Any future determination as to the payment of dividends will be made at the discretion of the Company's Board of Directors and will depend upon the Company's operating results, financial condition, capital requirements, general business conditions and such other factors as the Board of Directors deems relevant. The Company's debt instruments include certain restrictions on the payment of cash dividends on the common stock. (see note 5 to the consolidated financial statements). 9 ITEM 6. SELECTED FINANCIAL DATA The following selected historical financial data reflects the results and financial position of Christianson Enterprises, the accounting acquiror, for the periods prior to April 1, 1999. Results of operations for the year ended December 31, 1999 represent Christianson's results for the three months ended March 31, 1999, and the consolidated results of AMPAM for the remainder of the year. Results of operations for the year ended December 31, 2000 and December 31, 2001 represent the consolidated results of AMPAM. See note 11 to the consolidated financial statements for details on Company acquisitions made in 1999 and 2000.
Year Ended December 31, (In Thousands) ------------------------------------------------------------------ 1997 1998 1999 2000 2001 ---- ---- ---- ---- ---- STATEMENT OF OPERATIONS DATA: Revenues $ 50,909 $ 63,374 $ 334,002 $ 557,887 $ 606,225 Cost of revenues (including depreciation) 37,504 45,704 269,972 459,429 505,781 ---------- --------- --------- --------- --------- Gross profit 13,405 17,670 64,030 98,458 100,444 Selling, general and administrative expenses 11,497 17,078 29,590 46,442 61,106 Noncash stock compensation expense - - 7,992 - - Goodwill amortization - - 3,303 5,569 5,648 ---------- --------- --------- --------- --------- Income from operations (a) 1,908 592 23,145 46,447 33,690 Interest and other income (expense), net 59 56 (11,905) (17,569) (17,368) ---------- --------- --------- --------- --------- Income before provision for income taxes 1,967 648 11,240 28,878 16,322 Provision for income taxes (c) 77 32 7,859 13,519 8,753 ---------- --------- --------- --------- --------- Income before extraordinary loss 1,890 616 3,381 15,359 7,569 Extraordinary loss (b) - - 455 887 - ---------- --------- --------- --------- -------- Net income (a) $ 1,890 616 2,926 $ 14,472 $ 7,569 ========== ========= ========= ========= ======== BALANCE SHEET DATA (AT END OF PERIOD) Total assets (d) $ 7,634 11,210 267,751 318,466 $ 322,899 Long-term debt, net of current maturities(e) 329 349 150,258 178,860 168,203 Total stockholders' equity (d) 5,685 6,301 43,391 63,308 69,174
(a) The level of net income in periods prior to April 1, 1999 are primarily attributable to the level of owner's compensation paid during those periods. (b) The extraordinary loss for 1999 and 2000 are attributable to the early extinguishments of debt net of tax benefit. (c) Prior to the merger on April 1, 1999, Christianson elected S Corporation status. Consequently, the provision for income taxes prior to April 1, 1999 consists of only state income taxes. (d) Upon adoption of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets", on January 1, 2002, the Company incurred a write-down of the goodwill associated with its commercial operations of approximately $35 million. See note 2 to the consolidated financial statements. (e) Amounts shown for 1999, 2000, and 2001 include the redeemable preferred stock of $13.6 million. 10 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. 2001 COMPARED TO 2000 Revenues for the year ended December 31, 2001 increased 9% to $606.2 million, versus $557.9 million for 2000. Revenues from single family and multifamily residential operations increased 11% and 20%, respectively; whereas revenues from commercial operations decreased 9%. Single family residential Start-ups had revenues of $8.2 million. The increase in residential revenues is due to Start-ups, increased volume at existing locations, and price increases initiated to cover increased operating costs. The decrease in commercial revenues was due to increased competition and the economic slowdown. Gross profit increased $1.9 million, or 2%, from $98.5 million for the year ended December 31, 2000, to $100.4 million for the 2001. The increase in gross profit was primarily due to an increase in volume on single family residential operations, including residential Start-up increases of $0.8 million, offset by decreases in gross profit in the multifamily residential and commercial operating segments. Gross margin decreased from 17.6% for the year ended December 31, 2000, to 16.6% for the year ended December 31, 2001. The decrease in gross margins for the multifamily and commercial segments is primarily attributable to increased competition, lower demand and increases in certain material and labor costs. General and administrative expenses for 2001 were $61.1 million (10% of revenues), versus $46.4 million (8% of revenues) in 2000. The increase in selling, general and administrative expenses was primarily due to the increase in health and business insurance costs of $7.6 million (from $2.4 million in 2000 to $10.0 million in 2001), and increased volume. Additionally, the Company incurred increased costs of approximately $4.8 million on certain previously announced strategic initiatives, including Start-ups, branding, warranty programs and the systems project (from $0.8 million in 2000 to $5.6 million in 2001). Income from operations decreased $12.7 million from $46.4 million for the year ended December 31, 2000, to $33.7 million for the year ended December 31, 2001. The decrease in income from operations was primarily due to increased volume, offset by decreased margins and higher selling, general and administrative expenses. Interest expense decreased $0.2 million, reflecting lower interest rates. The decrease in the provision for income taxes of $4.7 million results from lower taxable income. Net income decreased $6.9 million, from $14.5 million for the year ended December 31, 2000, to $7.6 million for 2001. 2000 COMPARED TO 1999 Revenues increased $223.9 million, or 67%, from $334.0 million for the year ended December 31, 1999, to $557.9 million for the year ended December 31, 2000. The growth was primarily due to the subsequent acquisitions, as well as having a full year's results of the Founding Companies included in 2000. The Company also experienced increased activity in the single family residential and multifamily housing markets, and initiated modest price increases in certain markets in an attempt to cover increased operating costs. 11 Gross profit increased $34.5 million, or 54%, from $64.0 million for the year ended December 31, 1999, to $98.5 million for the year ended December 31, 2000. The increase in gross profit was primarily due to the subsequent acquisitions, as well as having a full year's results of the Founding Companies included in 2000. The increase in gross profit, generated by higher levels of activity, was partially offset by increases in certain material and labor costs. Gross margin decreased from 19% for the year ended December 31, 1999, to 18% for the year ended December 31, 2000. The decrease is attributable to the acquired companies, particularly those in the commercial market, which have historically generated lower margins than Christianson. Decreases in gross margin were also attributable to higher material and labor costs. Selling, general and administrative expenses increased $16.8 million, or 57%, from $29.6 million for the year ended December 31, 1999, to $46.4 million for the year ended December 31, 2000. The increase in selling, general and administrative expenses was primarily due to the acquired companies and the corporate general and administrative costs incurred after April 1, 1999. The noncash stock compensation charge in 1999 represents the value of shares issued to management in connection with the formation of the business. No such share issuance was made in 2000. Income from operations increased $23.3 million from $23.1 million for the year ended December 31, 1999, to $46.4 million for the year ended December 31, 2000. The increase in income from operations was primarily due to the acquired companies, increases in the volume of work performed and the reduction in Christianson's officers' compensation. Results for the year ended December 31, 1999 were also burdened by the noncash stock compensation charge. Interest Expense increased by $6.4 million from $12.1 million for the year ended December 31, 1999 to $18.5 million for the year ended December 31, 2000. The increase was due to higher average levels of indebtedness, partially offset by lower average interest rates due to the repurchase of $30.0 million of the Senior Subordinated Notes in 2000. The increase in income tax expense resulted from the Company recording federal income taxes for the period after April 1, 1999. Prior to this date, Christianson elected S Corporation status. The extraordinary item that occurred in 2000 related to the write-off of transaction costs associated with the repurchase of $30.0 million of Senior Subordinated Notes. The 1999 extraordinary item related to the write-off of loan costs and unamortized discount associated with the $30.0 million Subordinated Loan entered into on April 1, 1999, that was repaid with the proceeds from the Senior Subordinated Note offering on May 19, 1999. Net income increased $11.6 million, or 400%, from $2.9 million for the year ended December 31, 1999, to $14.5 million for the year ended December 31, 2000. The increase was due to the acquired companies, offset by lower gross margins. Additionally, 1999 results reflected the one time charges resulting from the initial organization of the Company. LIQUIDITY AND CAPITAL RESOURCES As of December 31, 2001, AMPAM had $58.1 million in working capital and $154.7 million of outstanding indebtedness, including capital lease obligations totaling $1.1 million. For the year ended December 31, 2001, net cash provided by operating activities was $22.6 million. Cash used in investing activities was $7.8 million for the year ended December 31, 2001, resulting primarily from purchases of property and equipment and payments of earnout clauses 12 contained in the purchase agreements of the Founding Companies, offset by proceeds received on the sale of property and equipment. At December 31, 2001 no additional earnout payments were due the founders. Cash used in financing activities for the year ended December 31, 2001 was $13.2 million. Net payments under the Bank Credit Facility of $10.0 million were made during the year. Additionally, the Company made payments to the former stockholders of Christianson, the accounting acquiror, under earnout agreements contained in the purchase agreement. These payments were treated as distributions. For the year ended December 31, 2000, net cash provided by operating activities was $4.6 million. Cash used in investing activities was $22.2 million for the year ended December 31, 2000, resulting primarily from an acquisition completed in the first quarter of 2000, purchases of property and equipment, and payments of earnout clauses contained in the purchase agreements of the Founding Companies. At December 31, 2000 earnout payments due founders were approximately $3.9 million. Cash provided by financing activities for the year ended December 31, 2000 was $17.3 million. Net borrowings under the Bank Credit Facility of $58.0 million were used to repurchase of a portion of the Senior Subordinated Notes and to repurchase certain Class B shares. Additionally, the Company made payments to the former stockholders of Christianson, the accounting acquiror, under earnout agreements contained in the purchase agreement. These payments were treated as distributions. The Company's Credit Facility, with a total commitment of $95 million, as amended, matures on March 31, 2004. The Credit Facility bears interest, at the option of the Company, at the base rate of the arranging bank plus an applicable margin, or at LIBOR plus an applicable margin. As of December 31, 2001, the Company had borrowings of $60.0 million leaving $35.0 million available under the Credit Facility. After April 1, 2002, the holders of the preferred stock may require the Company to redeem the preferred stock (in whole or in part). The redemption price per share will be equal to the liquidation value ($13 per share) plus accrued and unpaid dividends through the date of redemption. As discussed in Item 3., in settlement of a lawsuit, the Company will receive all of the preferred stock held the defendants and related parties and the Company will pay the defendants $3.1 million. As of March 12, 2002, the defendants and their related parties held 524,435 shares of preferred stock. The settlement also includes approximately $0.5 million in undeclared preferred dividends that are due the defendants thru March 31, 2002. The remaining preferred stock has a redemption value of approximately $6.8 million. The provisions of the Company's Credit Facility restrict the Company's ability to redeem the remaining shares of preferred stock. At December 31, 2001, undeclared dividends in arrears approximate $0.7 million. See note 8 and note 12 to the consolidated financial statements for more information. The Company's capital expenditure budget for 2002, is approximately $6 million. These expenditures primarily relate to the purchase of vehicles and equipment and expenditures related to the installation of a company wide computer information system. The capital expenditures are expected to be funded from cash flows from operations and borrowings under the Credit Facility. Capital expenditures for the year ended December 31, 2001, were approximately $9.2 million. AMPAM anticipates that its cash flow from operations and borrowings under the Credit Facility will provide sufficient cash to enable the Company to meet its working capital needs, debt service requirements and planned capital expenditures for property and equipment through the foreseeable future. RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141, "Business Combinations," ("SFAS 141"). SFAS 141 requires the purchase method of accounting for business combinations initiated after June 30, 2001 and that intangible assets be 13 identified and recognized apart from goodwill if they meet certain criteria. The use of the pooling-of-interests method is prohibited. The adoption of SFAS 141 did not have a significant impact on the Company's financial statements In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 142 addresses the accounting and reporting for acquired goodwill and other intangible assets, and provides that goodwill should not be amortized. Rather, it must be tested for impairment annually or more frequently if circumstances indicate potential impairment. SFAS 142 was effective January 1, 2002. SFAS 142 also requires the Company to complete a transitional goodwill impairment test within six months from the date of adoption. The adoption of SFAS 142 on January 1, 2002, resulted in a write-down of goodwill of approximately $35 million. The goodwill impairment was generated by the commercial segment of AMPAM's operations. This write-down of goodwill was recorded as a cumulative effect of a change in accounting principle and will be reflected in the Company's 2002 first quarter Form 10-Q. On December 31, 2001, the Company has $154.7 million of goodwill on the balance sheet, and recognized $5.6 million of goodwill amortization expense for the year ended December 31, 2001. In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations," ("SFAS 143"). It addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It also applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, and development and/or the normal operation of a long-lived asset, except for certain obligations of lessees. The Company adopted SFAS No. 143 on January 1, 2002. The adoption of SFAS No. 143 did not have a significant impact on its financial statements. In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," ("SFAS 144"). It addresses the financial accounting and reporting for the impairment of long-lived assets. This statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business. The Company adopted SFAS No. 144 on January 1, 2002. The Company's adoption of SFAS 144 did not have a significant impact on its financial statements. ITEM 7-A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS AMPAM is exposed to various market risks primarily related to potential adverse changes in interest rates as discussed below. In the normal course of business, the Company employs established policies and procedures to manage this risk. The Company's exposure to changes in interest rates primarily results from its short-term and long-term debt with both fixed and floating interest rates. The Company's debt with fixed interest rates consists of Senior Subordinated Notes and capital leases. Debt with variable interest rates consists primarily of the Credit Facility. On January 2, 2001 and extended effective September 28, 2001, in order to mitigate the interest rate risk associated with its variable rate debt, the Company entered into an interest rate swap with a notional amount of $30.0 million that will expire on September 28, 2002. Under the original terms of the swap, the Company paid interest at a fixed rate of 8.84% and received interest based on the 90 day LIBOR rate. Under the extension, payments are made based on a fixed rate of 3.51% and 14 received on a LIBOR based variable rate (1.91% at December 31, 2001), reducing the fixed rate associated with this transaction to 6.51%. The swap is settled on a quarterly basis with the interest rate differential received or paid by AMPAM recognized as an adjustment to interest expense. The Company has designated the interest rate swap agreement as a cash flow hedge of future interest payments on its variable rate long-term debt (See note 5 to the consolidated financial statements). The following table presents the Company's financial instruments and related average interest rates by year of maturity and their fair market value at December 31, 2001 ($ in thousands). A one percent increase in the interest rate on the variable rate debt would result in an annual increase of $0.6 million in interest expense.
Fair 2002 2003 2004 2005 2006 Thereafter Value -------- -------- -------- -------- -------- ---------- ---------- Interest Rate Swap $ 315 $ -- $ -- $ -- $ -- $ -- $ 315 Variable Rate Debt $ -- $ -- $60,000 $ -- $ -- $ -- $ 60,000 Average Interest Rate --% --% 4.97% --% --% -- % 4.97% Fixed Rate Debt $ 167 $ 117 $ 109 $ 39 $ 37 $ 94,266 $ 94,735 Average Interest Rate 10.5% 10.5% 10.5% 10.5% 10.5% 11.6% 11.5%
The average interest rate for the variable rate debt (Credit Facility) shown in the table above does not reflect the 6.51% that will be paid under the interest rate swap on $30.0 million for the first nine months of 2002. The interest rate swap represents the unrealized loss as of December 31, 2001. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA 15 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of American Plumbing & Mechanical, Inc.: We have audited the accompanying consolidated balance sheets of American Plumbing & Mechanical, Inc., and Subsidiaries (the "Company") as of December 31, 2001 and 2000, and the related consolidated statements of income, stockholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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, such 2001 and 2000 consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2001 and 2000, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. DELOITTE & TOUCHE LLP Houston, Texas March 28, 2002 16 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To American Plumbing & Mechanical, Inc., and Subsidiaries: We have audited the accompanying consolidated statements of income, cash flows and stockholders' equity of American Plumbing & Mechanical, Inc., and Subsidiaries for the year ended December 31, 1999. These consolidated 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 auditing standards generally accepted in the United States. 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 consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of American Plumbing & Mechanical, Inc., and Subsidiaries for the year ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. ARTHUR ANDERSEN LLP Austin, Texas February 11, 2000 17 AMERICAN PLUMBING & MECHANICAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In Thousands, Except Share Data)
December 31, ---------------------------- 2000 2001 ----------- ---------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 87 $ 1,666 Accounts receivable, net 96,616 96,412 Inventories 8,678 12,460 Costs and estimated earnings in excess of billings on uncompleted contracts 23,888 26,523 Prepaid expenses and other current assets 3,083 5,358 --------- --------- Total current assets 132,352 142,419 PROPERTY AND EQUIPMENT, net 21,741 21,702 GOODWILL, net 160,387 154,739 OTHER NONCURRENT ASSETS 3,986 4,039 --------- --------- Total assets $ 318,466 $ 322,899 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses $ 56,417 $ 69,465 Accounts payable, related parties, including acquisition consideration payable 3,920 -- Billings in excess of costs and estimated earnings on uncompleted contracts 13,544 14,718 Current maturities of capital lease obligations 700 167 --------- --------- Total current liabilities 74,581 84,350 LONG-TERM LIABILITIES: Long-term debt 165,225 154,568 Deferred income taxes 1,717 1,172 --------- --------- Total liabilities 241,523 240,090 COMMITMENTS AND CONTINGENCIES (note 12) SERIES A REDEEMABLE PREFERRED STOCK, $.01 par value, $13 liquidation value, 10,000,000 shares authorized, 1,048,820 shares issued and outstanding 13,635 13,635 STOCKHOLDERS' EQUITY: Common stock, $.01 par value, 100,000,000 shares authorized, 13,271,383 and 13,211,383 shares issued and outstanding at December 31, 2000 and December 31, 2001, respectively 133 132 Class B common stock, $.01 par value, 5,000,000 shares authorized, 331,116 shares issued and outstanding 3 3 Additional paid-in capital 41,952 41,805 Retained earnings 21,220 27,426 Accumulated other comprehensive loss - (192) --------- --------- Total stockholders' equity 63,308 69,174 --------- --------- Total liabilities and stockholders' equity $ 318,466 $ 322,899 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 18 AMERICAN PLUMBING & MECHANICAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In Thousands)
Year Ended December 31, ------------ ------------ ------------- 1999 2000 2001 --------- --------- --------- REVENUES $334,002 $ 557,887 $ 606,225 COST OF REVENUES (including depreciation) 269,972 459,429 505,781 -------- --------- --------- Gross profit 64,030 98,458 100,444 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 29,590 46,442 61,106 NONCASH STOCK COMPENSATION EXPENSE 7,992 -- -- GOODWILL AMORTIZATION 3,303 5,569 5,648 -------- --------- --------- Income from operations 23,145 46,447 33,690 OTHER INCOME (EXPENSE): Interest expense (12,137) (18,518) (18,312) Interest and dividend income 172 154 100 Other 60 795 844 -- -- -- -------- --------- --------- Other expense, net (11,905) (17,569) (17,368) -------- --------- --------- INCOME BEFORE PROVISION FOR INCOME TAXES and EXTRAORDINARY LOSS 11,240 28,878 16,322 PROVISION FOR INCOME TAXES 7,859 13,519 8,753 -------- --------- --------- INCOME BEFORE EXTRAORDINARY LOSS 3,381 15,359 7,569 EXTRAORDINARY LOSS ON DEBT EXTINGUISHMENT, net of tax benefit 455 887 - -------- --------- --------- NET INCOME 2,926 14,472 7,569 PREFERRED DIVIDENDS 1,023 1,363 1,363 -------- --------- --------- NET INCOME AVAILABLE TO COMMON STOCKHOLDERS $ 1,903 $ 13,109 $ 6,206 ======== ======== =========
The accompanying notes are an integral part of these consolidated financial statements. 19 AMERICAN PLUMBING & MECHANICAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands)
Year Ended December 31, -------------------------------------- 1999 2000 2001 ---------- ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 2,926 $ 14,472 $ 7,569 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 6,535 10,715 11,291 Noncash compensation expense 7,992 -- -- Amortization of deferred compensation expense 343 307 182 Extraordinary loss on early extinguishments of debt 769 1,365 -- (Gain) / loss on disposal of property and equipment 183 (176) (358) Deferred income taxes 1,529 2,055 1,283 Increase (decrease) in cash flows from: Accounts receivable, net (10,324) (16,354) 30 Inventories (1,697) (8) (3,782) Costs and estimated earnings in excess of billings on uncompleted Contracts (2,775) (6,567) (2,635) Prepaid expenses and other current assets 1,546 707 (555) Accounts payable and accrued expenses (1,683) 2,118 8,454 Billings in excess of costs and estimated earnings on uncompleted Contracts 6,230 (4,022) 1,174 Other, net (1,883) (55) (80) -------- -------- ------- Net cash provided by operating activities 9,691 4,557 22,573 -------- -------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions of property and equipment (5,077) (7,881) (9,225) Proceeds from sale of property and equipment 101 661 3,571 Earnout payments to founding company stockholders -- (3,605) (2,164) Acquisition of companies, net of cash acquired (77,955) (11,353) -- -------- -------- ------- Net cash used in investing activities (82,931) (22,178) (7,818) -------- -------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings on subordinated loan 30,000 -- -- Payments on subordinated loan (30,000) -- -- Net borrowings/(payments) on bank Credit Facility 10,975 58,000 (10,000) Buyback of Class B common stock -- (6,966) -- Distributions to stockholders (46,409) (2,634) (1,756) Payments on long-term debt and capital lease obligations (10,628) (183) (739) Issuance of senior subordinated notes 118,668 -- -- Principal payments on senior subordinated notes -- (29,539) -- Preferred dividends (1,023) (1,363) (681) Proceeds from sale of common stock 70 -- -- -------- -------- ------- Net cash provided by (used in) financing activities 71,653 17,315 (13,176) -------- -------- ------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,587) (306) 1,579 CASH AND CASH EQUIVALENTS, beginning of year 1,980 393 87 -------- -------- -------- CASH AND CASH EQUIVALENTS, end of year $ 393 $ 87 $ 1,666 ======== ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for: Interest $ 11,174 $ 19,125 17,642 Income taxes 8,400 17,257 1,217 Noncash Item: Capital lease additions 534 -- 94
The accompanying notes are an integral part of these consolidated financial statements. 20 AMERICAN PLUMBING & MECHANICAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In Thousands, Except Share Data)
Class B Accumulated Common Stock Common Stock Additional Other Total ------------ ------------ Stock Paid-In Retained Comprehensive Stockholders Shares Amount Shares Amount Warrants Capital Earnings Loss Equity ------ ------ ------ ------ -------- ------- -------- ------------- ------------ BALANCE, December 31, 1998 82,200 $ 82 -- $ -- $ -- $ 11 $ 6,208 $ -- $ 6,301 Exchange of accounting acquiror stock (82,200) (82) -- -- -- 82 -- -- -- Issuance of stock to accounting acquiror 926,772 9 -- -- -- (9) -- -- -- Issuance of stock to stockholders of founding companies and promoter 8,012,918 80 2,146,587 21 -- 76,869 -- -- 76,970 Distribution to accounting acquiror -- -- -- -- -- (60,159) -- -- (60,159) Issuance of shares to management 844,000 9 276,930 3 -- 7,980 -- -- 7,992 Stock issuance costs -- -- -- -- -- (3,573) -- -- (3,573) Amortization of deferred compensation expense -- -- -- -- -- 343 -- -- 343 Issuance of common stock warrants -- -- -- -- 300 -- -- -- 300 Expiration of common stock warrants -- -- -- -- (300) 300 -- -- -- Sale of common stock 10,000 -- -- -- -- 70 -- -- 70 Issuance of stock to stockholders of subsequent acquisitions 1,471,539 15 -- -- -- 13,229 -- -- 13,244 Preferred dividends -- -- -- -- -- -- (1,023) -- (1,023) Net income -- -- -- -- -- -- 2,926 -- 2,926 ---------- --- --------- --- -- ------ ----- ---- -------- BALANCE, December 31, 1999 11,265,229 113 2,423,517 24 -- 35,143 8,111 -- 43,391 Amortization of deferred compensation expense -- -- -- -- -- 307 -- -- 307 Issuance of stock for acquisition 1,346,154 13 -- -- -- 13,447 -- -- 13,460 Issuance of stock to stockholders of founding companies - "Earnout Shares" 659,926 7 -- -- -- -- -- -- 7 Issuance of stock for options exercised 74 -- -- -- -- -- -- -- -- Buyback of Class B common stock -- -- (2,092,401) (21) -- (6,945) -- -- (6,966) Preferred dividends -- -- -- -- -- -- (1,363) -- (1,363) Net income -- -- -- -- -- -- 14,472 -- 14,472 ---------- --- --------- --- -- ------ ----- ---- -------- BALANCE, December 31, 2000 13,271,383 133 331,116 3 -- 41,952 21,220 - -- 63,308 Amortization of deferred compensation expense -- -- -- -- -- 182 -- -- 182 Received and cancelled common stock (60,000) (1) -- -- -- (329) -- -- (330) Preferred dividends -- -- -- -- -- -- (1,363) -- (1,363) Net income -- -- -- -- -- -- 7,569 -- -- Other comprehensive loss -- -- -- -- -- -- -- (192) -- Total comprehensive income -- -- -- -- -- -- 7,569 (192) 7,377 ----------- ----- -------- ----- ------ -------- -------- ----- ------ BALANCE, December 31, 2001 $13,211,383 $ 132 331,116 $ 3 $ -- $ 41,805 $ 27,426 $(192) 69,174 =========== ===== ======== ===== ====== ======== ======== ===== ======
The accompanying notes are an integral part of these consolidated financial statements. 21 AMERICAN PLUMBING & MECHANICAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BUSINESS AND ORGANIZATION: American Plumbing & Mechanical, Inc. (collectively with its subsidiaries "AMPAM" or the "Company"), is the largest company in the United States focused primarily on the plumbing contracting services industry. AMPAM also provides heating, ventilation and air conditioning ("HVAC") and mechanical contracting services. American Plumbing & Mechanical, Inc. (a Delaware corporation), was organized in June 1998, and acquired ten U.S. businesses (the "Founding Companies") on April 1, 1999. The acquisitions were accounted for using the purchase method of accounting with Christianson Enterprises, Inc. and affiliates ("Christianson") being reflected as the accounting acquiror. Subsequently, the Company acquired the outstanding stock of three additional companies and the assets of a fourth company. The Company currently serves its customers out of 31 operating locations in 20 states. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements present Christianson as the accounting acquiror. These financial statements consolidate Christianson with the consolidated results of AMPAM since April 1, 1999. All significant intercompany transactions have been eliminated in consolidation. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts reflected in the accompanying balance sheet for cash, accounts receivable, costs and estimated earnings in excess of billings on uncompleted contracts, accounts payable and accrued expenses, and billings in excess of costs and estimated earnings on uncompleted contracts approximate fair value due to the short term nature of the instruments. As of December 31, 2001, the Senior Subordinated Notes traded at 94% of par value reflecting an approximate fair value of $89.3 million. The Credit Facility has a variable interest rate. Therefore, the Company believes its carrying value approximates fair value. The approximate fair value of the interest rate swap reflected in accounts payable and accrued expenses was $315,000. The fair value of this instrument is based on market quotes. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the use of estimates and assumptions by management in determining the reported amounts of assets and liabilities, disclosures of contingent liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. 22 INVENTORIES Inventories consist of parts and supplies held for use in the ordinary course of business and are stated at the lower of cost or market, which approximates the first in, first out method. PROPERTY AND EQUIPMENT Property and equipment are stated at cost, and depreciation is computed using the straight-line method over the estimated useful lives of the assets. Expenditures for repairs and maintenance are charged to expense when incurred. Expenditures for major renewals and betterments, which extend the useful lives of existing equipment, are capitalized and depreciated. Upon retirement or disposition of property and equipment, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in the statement of income. LONG-LIVED ASSETS In the event that facts and circumstances indicate that property and equipment or other long-lived assets may be impaired, an evaluation of recoverability would be performed. If an evaluation is required, the estimated future undiscounted cash flows associated with the asset are compared to the asset's carrying amount to determine if an impairment is necessary. The effect of any impairment would be to expense the difference between the estimated fair value of such asset and its carrying value. GOODWILL The Company recorded as goodwill the excess of the purchase price paid for business acquisitions over the fair value of the net assets acquired. Through December 31, 2001, goodwill was amortized to income on a straight-line basis over a 30 year period. On January 1, 2002, AMPAM adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets". See "Recent Accounting Pronouncements" below. DEBT ISSUANCE COSTS Debt issuance costs as of December 31, 2000 and 2001 of approximately $3.8 million and $3.6 million, respectively, related to AMPAM's Senior Subordinated Notes and the Bank Credit Facility are included in Other Noncurrent Assets. These capitalized costs are amortized to interest expense over the scheduled maturity of the debt, which approximates the effective interest method. For the years ended December 31, 1999, 2000 and 2001, approximately $0.7 million, $0.9 million and $0.8 million was amortized to interest expense, respectively. In conjunction with the $30.0 million repurchase of the Senior Subordinated Notes in 2000, $1.4 million was charged to expense as an extraordinary loss (See note 5). REVENUE RECOGNITION The Company recognizes revenue from construction contracts on the percentage-of-completion method measured by the percentage of cost incurred to total estimated costs for each contract. Contract costs include all direct material and labor costs. Provisions for the total estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, estimated profitability, and final contract settlements may result in revisions to costs and income, the effects of which are recognized in the period the revisions are determined. Revenues from services are recognized when services are performed. The current asset, "Costs and estimated earnings in excess of billings on uncompleted contracts," represents revenues recognized in excess of amounts billed. The current liability, "Billings in excess of costs and estimated earnings on uncompleted contracts," represents billings in excess of revenues recognized. 23 WARRANTY COSTS For certain contracts, the Company warrants labor for one year after completion of a plumbing or air conditioning installation. The Company generally warrants labor for 90 days after plumbing and air conditioner repairs. A reserve for warranty costs is recorded based upon the historical level of warranty claims and management's estimate of future costs. PROVISION FOR DOUBTFUL ACCOUNTS The Company provides an allowance for doubtful accounts based upon an estimate of uncollectible accounts. The accompanying consolidated statement of income reflects bad debt expense of $700,000 for the year ended December 31, 2001. PREACQUISITION OFFICERS' COMPENSATION OF THE ACCOUNTING ACQUIROR Total officers' compensation of the accounting acquiror for the three months ended March 31, 1999, was $400,000. This amount is included within selling, general, and administrative expenses in the accompanying statements of income. INCOME TAXES For the three months ended March 31, 1999, Christianson elected S Corporation status. Under S Corporation status, as defined by the Internal Revenue Code, Christianson itself was not subject to taxation for federal purposes; rather, the stockholders reported their share of Christianson's taxable earnings or losses on their personal tax returns. Certain states do not recognize S Corporation status for purposes of state taxation. Consequently, the provision for current and deferred income taxes for the three months ended March 31, 1999, consists of only state income taxes. Christianson terminated its S Corporation status concurrent with the effective date of the merger discussed in note 11. Deferred tax assets and liabilities are recorded for future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and are measured using enacted tax rates. RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141, "Business Combinations," ("SFAS 141"). SFAS 141 requires the purchase method of accounting for business combinations initiated after June 30, 2001 and that intangible assets be identified and recognized apart from goodwill if they meet certain criteria. The use of the pooling-of-interests method is prohibited. The adoption of SFAS 141 did not have a significant impact on the Company's financial statements. In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 142 addresses the accounting and reporting for acquired goodwill and other intangible assets, and provides that goodwill should not be amortized. Rather, it must be tested for impairment annually or more frequently if circumstances indicate potential impairment. SFAS 142 was effective January 1, 2002. SFAS 142 also requires the Company to complete a transitional goodwill impairment test within six months from the date of adoption. The adoption of SFAS 142 on January 1, 2002, resulted in a write-down of goodwill of approximately $35 million (unaudited). The goodwill impairment was generated by the commercial segment of AMPAM's operations. This write-down of goodwill was recorded as a cumulative effect of a change in accounting principle and will be reflected in the Company's 2002 first quarter Form 10-Q. On December 31, 2001, the Company has $154.7 million of goodwill on the balance 24 sheet, and recognized $5.6 million of goodwill amortization expense for the year ended December 31, 2001. In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations," ("SFAS 143"). It addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It also applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, and development and/or the normal operation of a long-lived asset, except for certain obligations of lessees. The Company adopted SFAS No. 143 on January 1, 2002. The adoption of SFAS No. 143 did not have a significant impact on its financial statements. In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," ("SFAS 144"). It addresses the financial accounting and reporting for the impairment of long-lived assets. This statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business. The Company adopted SFAS No. 144 on January 1, 2002. The Company's adoption of SFAS 144 did not have a significant impact on its financial statements. Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards 133, as amended by Statement of Financial Accounting Standards No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities" ("SFAS 138"), which requires the Company to measure all derivative instruments at fair value and to recognize them in the balance sheet as an asset or liability, depending on the Company's rights or obligations under the applicable derivative contract. There was no significant financial impact to the Company upon adoption of SFAS 133. On January 2, 2001, and subsequently extended on September 28, 2001, the Company entered into an interest rate swap agreement with a notional amount of $30.0 million. See note 5. OTHER COMPREHENSIVE INCOME Other comprehensive income refers to revenues, expenses, gains and losses that under generally accepted accounting principles are included in comprehensive income but are excluded from net income as these amounts are recorded directly as an adjustment to shareholders' equity. The Company's other comprehensive loss is attributed to adjustments for unrealized losses, net of tax, on the interest rate swap discussed above and in note 5. USE OF DERIVATIVES The Company may use derivative instruments, such as interest rate swaps, to manage its exposure to variable interest rate risk. Net payments or receipts under the Company's interest rate swap agreements are recorded as adjustments to interest expense. RECLASSIFICATIONS Certain reclassifications have been made to the prior-year financial statements to conform to the current-year presentation. 25 3. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS: Accounts receivable consist of the following (in thousands):
December 31, ------------------------------ 2000 2001 ------------- ------------ Contract receivables $ 76,756 $ 74,573 Retainage 15,496 19,163 Other accounts receivable 6,466 4,814 Allowance for uncollectible accounts (2,102) (2,138) -------- -------- $ 96,616 $ 96,412 ======== ========
Installation contracts in progress are as follows (in thousands):
December 31, ------------------------------ 2000 2001 ------------- ------------ Costs incurred on contracts in progress $ 273,801 $ 376,775 Estimated earnings on contracts in progress 75,421 101,302 --------- --------- 349,222 478,077 Less - Billings to date (338,878) (466,272) --------- --------- $ 10,344 $ 11,805 ========= ======== Costs and estimated earnings in excess of billings on uncompleted contracts $ 23,888 $ 26,523 Billings in excess of costs and estimated earnings on uncompleted contracts (13,544) (14,718) --------- --------- $ 10,344 $ 11,805 ========= ========
Accounts payable and accrued expenses consist of the following (in thousands):
December 31, ------------------------------- 2000 2001 ------------- ------------- Accounts payable, trade $ 28,113 $ 30,795 Current income taxes payable 1 4,045 Deferred income taxes 5,511 9,019 Accrued payroll and vacation 5,980 6,639 Accrued bonuses 3,785 2,967 Accrued interest 2,725 2,397 Accrued insurance 5,012 2,870 Accrued retainage -- 2,135 Accrued warranty costs 1,518 2,487 Other accrued expenses 3,772 6,111 -------- -------- $ 56,417 $ 69,465 ======== ========
26 PROPERTY AND EQUIPMENT, NET: Property and equipment, net consists of the following (in thousands):
Estimated December 31, Useful Lives ------------------------------ In Years 2000 2001 ------------ -------------- ------------ Land $ 602 $ 954 Buildings and leasehold improvements 15 - 30 7,012 7,821 Vehicles and machinery equipment 5 20,506 22,074 Computer and office equipment 3 - 7 4,658 6,306 Construction in progress -- 1,505 -------- -------- 32,778 38,660 Less - Accumulated depreciation and amortization (11,037) (16,958) -------- -------- $ 21,741 $ 21,702 ======== ========
Capital leases of approximately $4,301,000 and $2,580,000 as of December 31, 2000, and 2001, are included in vehicles and machinery equipment and building and leasehold improvements as appropriate. Capital lease amortization expense of $233,000, $648,000 and $591,000 is recognized for 1999, 2000 and 2001, respectively. The accompanying consolidated statements of income reflect depreciation and amortization expense of $3,232,000, $5,146,000 and $5,643,000 for the years ended December 31, 1999, 2000, and 2001, respectively. 5. LONG TERM DEBT: Long-term debt consists of the following (in thousands):
December 31, ------------------------------ 2000 2001 ------------- ------------ Senior Subordinated Notes $ 93,371 $ 93,586 Bank Credit Facility 70,000 60,000 Capital lease obligations and other long-term obligations 2,554 1,149 --------- -------- 165,925 154,735 Less - Current maturities (700) (167) --------- -------- $ 165,225 $ 154,568 ========= =========
At December 31, 2001, future principal payments of long-term debt are as follows (in thousands): Year ending December 31- 2002 $ 167 2003 117 2004 60,109 2005 39 2006 37 Thereafter 94,266 --------- $ 154,735 =========
27 SENIOR SUBORDINATED NOTES On May 19, 1999, the Company completed an offering of $125.0 million of 11 5/8% senior subordinated notes due in 2008 (the "Senior Subordinated Notes"). The Senior Subordinated Notes are subordinated to all existing and future senior indebtedness of the Company and are guaranteed by each of the Company's current and future subsidiaries. Separate financial information of the subsidiary guarantors is not presented as the parent company has no independent assets or operations, and the guarantees as to the Senior Subordinated Notes are full and unconditional and joint and several. There are no restrictions on the ability of the parent company to obtain funds from the subsidiary guarantors. The Company has the option to redeem the Senior Subordinated Notes at any time on or after 2004 at specified redemption prices. Before 2002, the Company also had the option, under certain circumstances, to redeem up to 35% of the aggregate principal amount of the Senior Subordinated Notes at specified redemption prices. Additionally, the Company is required under certain circumstances to offer to repurchase the Senior Subordinated Notes at specified redemption prices in the event of a change in control. The terms of the Senior Subordinated Notes limit the ability of the Company to, among other things, incur additional indebtedness, dispose of assets, make acquisitions, make other investments, pay dividends and to make various other payments. The Senior Subordinated Notes are reflected in the accompanying balance sheet net of an original issuance discount of approximately $2.4 million which is being amortized to interest expense over the term of the bonds. The net proceeds from the offering of approximately $117.7 million (net of offering expenses), were used to (1) repay the outstanding indebtedness incurred in connection with the Company's consolidation on April 1, 1999 including (a) $70.3 million under the $95.0 million Bank Credit Facility; (b) a $30.0 million Subordinated Loan; (c) the Seller and Sponsor Notes ($8.9 million as of April 1, 1999); and (2) for general corporate purposes. During the third and fourth quarters of 2000, AMPAM repurchased approximately $30.0 million in face value of its outstanding 11 5/8% Senior Subordinate Notes at various prices ranging from 95.5 to 100.0 percent of par value. In conjunction with the repurchase, the Company recognized an extraordinary loss of $1.4 million ($0.9 million, net of taxes) related to capitalized issuance costs attributable to the notes repurchased and transaction costs associated with the repurchase. All notes repurchased were retired. THE BANK CREDIT FACILITY The bank credit facility, as amended, (the "Credit Facility") is a senior secured revolving commitment in an aggregate principal amount of $95.0 million. Amounts initially borrowed under the Credit Facility were used to fund a part of the cash portion of the consideration for the Founding Company acquisitions. The initial borrowings were repaid with the proceeds from the Senior Subordinated Notes. During 2000, the Credit Facility was used to (a) fund an acquisition, (b) repurchase Senior Subordinate Notes, and (c) repurchase Class B common stock. During 2001, the Credit Facility was used to provide financing of general corporate activities. The Credit Facility bears interest, at the option of the Company, at the base rate of the arranging bank plus an applicable margin or at LIBOR, plus an applicable margin. The applicable margin fluctuates based on the Company's ratio of funded debt to EBITDA and is between 1.75% and 3.00% above LIBOR or 0.25% and 1.50% above the agent bank's base rate. Interest on base rate loans is payable quarterly in arrears and interest on LIBOR loans is payable at the end of each borrowing period. During 2001, the Company amended and restated its Credit Facility to extend the maturity to March 31, 2004. All principal amounts borrowed will be payable in full at maturity. The Credit Facility is secured by (1) the accounts receivable, inventory, equipment and other personal property of the Company, and (2) all of the capital stock owned by AMPAM of its existing or later-formed domestic subsidiaries. The Company is required to make prepayments or commitment 28 reductions on the Credit Facility under certain circumstances. As of December 31, 2001, the interest rate on the Credit Facility was 4.97%. The Credit Facility requires the Company to maintain compliance with certain specified financial covenants including maximum ratios of funded debt to EBITDA, a minimum fixed charge coverage ratio, a minimum net worth, a capital expenditure covenant and other restrictive covenants. Additionally, the terms of the Credit Facility limit the ability of the Company to incur additional indebtedness, dispose of assets, make acquisitions or other investments, and to make various other payments. The Company is in compliance with the covenants of the Credit Facility. As of December 31, 2001, the Company had borrowings of $60.0 million, leaving $35.0 million in availability under the Credit Facility. THE SUBORDINATED LOAN The Company had a senior subordinated loan in an aggregate principal amount of $30.0 million used to fund a portion of the cash consideration of the Founding Companies. During 1999, the Company repaid the $30.0 million outstanding under this loan with the proceeds from the Senior Subordinated Notes discussed above. Upon repayment, the Company wrote off deferred loan issuance costs of $0.5 million and the discount of approximately $0.3 million. The expense is reflected as an extraordinary item net of the tax benefit of $0.3 million. THE SELLER NOTES On April 1, 1999, the Company issued $5.8 million principal amount of Seller Notes due on April 1, 2002. The Seller Notes bore interest at the rate of 10% per annum. The Seller Notes were repaid upon the issuance of the Senior Subordinated Notes discussed above. THE SPONSOR NOTE On April 1, 1999, the Company issued a subordinated Note payable to Sterling City Capital, LLC in settlement of the amounts due to them of $3.1 million. The Sponsor Note was due on April 1, 2002 and bore interest payable quarterly at the annual rate of 10%. The Sponsor Note was repaid by the Company upon the issuance of the Senior Subordinated Note offering discussed above. INTEREST RATE SWAP Effective January 2, 2001, and extended effective September 28, 2001, in order to mitigate the interest rate risk associated with its variable rate debt, the Company entered into an interest rate swap with a notional amount of $30.0 million that will expire on September 28, 2002. Under the original terms of the swap, the Company paid interest at a fixed rate of 8.84% and was paid interest based on the 90 day LIBOR rate. Under the extension, payments are made based on a fixed rate of 3.51% and received on a LIBOR based variable rate (1.91% at December 27, 2001), reducing the fixed rate associated with this transaction to 6.51%. The swap is settled on a quarterly basis with the interest rate differential received or paid by AMPAM recognized as an adjustment to interest expense. The Company has designated the interest rate swap agreement as a cash flow hedge of future interest payments on its variable rate long-term debt. On December 31, 2001, the Company has a derivative liability of $315,000, based on quoted market rates, included in the accounts payable and accrued liabilities section of the balance sheet. A corresponding amount, net of income tax benefit of $123,000, was recorded as a component of stockholders' equity as accumulated other comprehensive loss. 29 OPERATING LEASES: The Company leases various facilities under noncancelable operating leases from related parties and believes such leases to be commercially reasonable. The Company also leases certain facilities, vehicles and equipment under operating leases from third parties. Lease expiration dates vary, and future minimum lease payments are as follows (in thousands):
Related Third Parties Parties ------------ ------------- Year ending December 31- 2002 $ 2,029 $ 2,994 2003 1,845 2,002 2004 1,059 1,683 2005 595 1,064 2006 479 860 Thereafter - 1,667 ---------- ---------- $ 6,007 $ 10,270 ========== ==========
Rent payments to related parties were $2.4 million, $2.4 million, and $2.0 million for the years ended December 31, 1999, 2000 and 2001, respectively. Total rent expense was $2.5 million, $5.7 million, and $8.6 million for the year ended December 31, 1999, 2000 and 2001, respectively. 7. INCOME TAXES: Federal and state income taxes are as follows (in thousands):
Year Ended December 31, ---------------------------------------------- 1999 2000 2001 ----------- -------------- ------------- Federal: Current $ 4,986 $ 10,051 $ 6,236 Deferred 1,180 1,519 1,167 State: Current 1,344 1,413 1,234 Deferred 349 536 116 -------- -------- ------- $ 7,859 $ 13,519 $ 8,753 ======== ======== =======
30 Actual income tax expense differs from income tax expense computed by applying the U.S. federal statutory corporate rate of 35 percent to income before provision for income taxes as follows (in thousands):
Year Ended December 31, ----------------------------------------------- 1999 2000 2001 ------------ -------------- ------------ Provision at the statutory rate $ 3,934 $ 10,107 $ 5,714 Increase (decrease) resulting from: Earnings of Christianson taxed as an S Corporation (1,247) -- -- Permanent differences: Amortization of non-deductible goodwill 1,152 1,918 1,944 Stock compensation expense 2,797 -- -- Other 65 231 218 State income tax, net of benefit for federal deduction 1,158 1,267 877 Other -- (4) -- -------- ------- ------- $ 7,859 $13,519 $ 8,753 ======== ======== =======
Deferred income taxes result from temporary differences in the recognition of income and expenses for financial reporting purposes and for tax purposes. The tax effects of these temporary differences, representing deferred tax assets and liabilities, result principally from the following (in thousands):
December 31, ------------------------------ 2000 2001 ------------ ------------- Deferred income tax assets: Reserves and accrued expenses $ 2,467 $ 4,147 Deferred income tax liabilities: Property and equipment (1,696) (1,172) Revenue recognition (5,511) (9,019) Other (21) -- -------- ------- Total deferred income tax liabilities (7,228) (10,191) -------- -------- Net deferred income tax liabilities $(4,761) $ (6,044) ======== =========
The net deferred tax assets and liabilities are comprised of the following (in thousands):
December 31, ------------------------------ 2000 2001 ------------ ------------- Deferred tax assets: Current $ 2,467 4,147 Deferred tax liabilities: Current (5,511) (9,019) Long-term (1,717) (1,172) -------- ------- Total deferred income tax liabilities (7,228) (10,191) -------- ------- Net deferred income tax liabilities $ (4,761) $ (6,044) ======== =========
31 8. STOCKHOLDERS' EQUITY: COMMON STOCK At December 31, 2001, AMPAM's $.01 par value common stock is not traded on a public market. It is held by private investors, management, founders and relatives of founders, and directors. Of these common shares, 100,000,000 shares are authorized and 13,271,383 and 13,211,383 shares issued and outstanding at December 31, 2000 and December 31, 2001, respectively. During 2001, AMPAM received and cancelled 60,000 shares of its common stock as a component of a settlement reached with certain stockholders. During 2000, the Company issued 1,346,154 shares of common stock in connection with the LDI acquisition. The shares were valued at $10.00 per share for a total increase in additional paid in capital of $13.5 million. In April 2000, pursuant to the terms of "Earn-Out" provisions contained in the original acquisition agreements, the Company issued 659,926 shares of common stock to certain former stockholders of certain Founding Companies. No future share issuance is required under the terms of any of the acquisition agreements relating to any of the Acquired Companies. Pursuant to the terms of the acquisition agreements of the Founding Companies and the three subsequent stock acquisitions, on the third anniversary of their respective acquisitions, certain stockholders were entitled to require the Company to repurchase up to ten percent of their stock on an annual basis until their total paid cash consideration was equal to fifty percent of their total consideration. The agreed upon repurchase price was $13 per share. Effective as of March 26, 2002, the majority of the stockholders with such repurchase rights amended their respective acquisition agreements to provide that the repurchase will not occur until the Company has such funds available, whether through one or more private or commercial borrowings, a public or private sale of securities or assets of the Company, or any other method of obtaining available funds deemed to be in the best interest of the Company by its Board of Directors. CLASS B COMMON STOCK In connection with the organization and initial capitalization of AMPAM, the Company issued 2,092,401 shares of Class B common stock at $.01 par value. AMPAM subsequently issued 331,116 additional shares of Class B common stock and 844,000 shares of common stock to certain management of AMPAM and other individuals. The shares of Class B common stock have rights similar to shares of common stock, except the Class B shares are entitled to elect one member of the board of directors, are entitled to one-fourth of one vote for each share held on all other matters, and are subordinate in liquidation to all other classes of stock. Each share of Class B common stock will automatically convert to common stock (as adjusted proportionately to give effect to any stock dividends, combinations, splits or other similar events with respect to the common stock) on a share-for-share basis in the event AMPAM consummates any of the following events: (i) an initial public offering of common stock; (ii) any sale of all or substantially all of the Company's assets in one transaction or a series of related transactions; (iii) any merger or consolidation that involves AMPAM in which AMPAM is not the surviving entity; or, (iv) any transaction after which the common stock and common stock equivalents held by persons other than the holders of common stock as of April 1, 1999 constitutes 50% or more of the common stock outstanding as of the date of the consummation of such transaction. Furthermore, if the Class B common stock has not previously been converted into common stock before April 1, 2002, AMPAM will have the option to redeem all outstanding shares of Class B common stock for $.01 a share. 32 On April 1, 1999, the Company recorded a nonrecurring noncash compensation charge related to all shares issued to management of approximately $8.0 million which represented the difference between the estimated fair value ($7.50 a share for common stock and $6.00 a share for Class B common stock) of such shares and their recorded values. Compensation expense was recognized for shares issued to management of the Company: (1) who were formerly management of the accounting acquiror; and, (2) who did not participate in negotiating the acquisitions of the Founding Companies. On April 1, 1999, the Company reflected the shares previously issued to Sterling City Capital, LLC, certain consultants, and, certain non-Christianson members of management as acquisition costs (i.e. goodwill valued at $7.50 a share for common stock and $6.00 a share for Class B common stock) in connection with the acquisitions. In February 2000, the Company agreed to purchase approximately 1.5 million shares of Class B common stock from Sterling City Capital, LLC, the original sponsor of the Company, at a price of $3.25 per share. On April 7, 2000, the Company completed the transaction with funding from the Company's Credit Facility. A similar offer was made to the holders of the remaining 0.9 million shares of Class B common stock; however, the members of the Company's management that are holders of the Class B common stock did not tender their shares (331,116 shares). The purchase of the remaining shares (approximately 600,000 shares) closed in May 2000, and was also funded from the Company's Credit Facility. The Company does not intend to redeem the remaining 331,116 Class B shares held by management as of April 1, 2002. SERIES A REDEEMABLE PREFERRED STOCK An aggregate of 1,048,820 shares of preferred stock was issued to certain stockholders of Christianson on April 1, 1999. Such Christianson stockholders received their acquisition consideration solely in the form of cash and shares of preferred stock. The preferred stock is cumulative, redeemable and convertible and was recorded at its estimated fair value of $13 per share. The holders of the preferred stock are entitled to receive dividends at an annual rate of 10% based on the liquidation value (as defined below). The dividends are payable in cash semiannually in arrears. The dividend payment dates are June 30 and December 31, beginning on June 30, 1999. The holders of the preferred stock are also entitled to receive additional dividends on an equal share-for-share basis with the common stock to the extent that the Company has paid cumulative dividends on a base amount of $13.00 per share of common stock, as proportionately adjusted for any stock dividends, combinations, splits or other similar events with respect to such shares. However, the right of the holders of the preferred stock to receive this preferential dividend will extinguish 40 days after the 25th day following the date of the final prospectus related to an initial public offering of the Company's common stock. After, such time, the holders will be entitled to share equally, on a per share basis, in any dividends of the Company with the holders of common stock. The preferred stock is senior to all other classes of the Company's capital stock (including the common stock) in right of liquidation, dividends and distributions. The liquidation value of the preferred stock is $13.00 per share, plus accrued and unpaid dividends, as adjusted proportionately for any stock dividends, combinations, splits, or other similar events with respect to such shares, at liquidation value. In addition, the preferred stock shares equally, on a per-share basis, with the common stock after each share is paid the common stock base amount, plus a cumulative amount of dividends equal to 10% from the later to occur on the date of issuance of the preferred stock or the date of the issuance of such share of common stock. 33 Except under certain circumstances, the preferred stock is not entitled to vote as a separate class, but votes together with the holders of shares of all other classes of common stock of the Company as one class on all matters submitted to a vote of the Company's stockholders. Each holder of shares of preferred stock is entitled to the number of votes equal to the largest number of full shares of common stock into which all shares of preferred stock held by such holder could be converted at the record date for the determination of the stockholders entitled to vote on such matters. In all cases where the holders of shares of preferred stock are required by law to vote separately as a class, such holders are entitled to one vote for each such share. The preferred stock is redeemable at the Company's option, in whole or in part, prior to an initial public offering ("IPO") of AMPAM common stock for the greater of (i) the fair market value of the preferred stock, or (ii) $13.00 per share of preferred stock, plus, in each case, accrued and unpaid dividends thereon. After an IPO, the Company has the right to redeem, in whole or in part, the preferred stock at any time and from time to time, at a price equal to the trading price of the common stock at the time of redemption but in no event for less than $13.00 per share of preferred stock, plus accrued and unpaid dividends. After April 1, 2002, the holders of the preferred stock may require the Company to redeem the preferred stock (in whole or in part). In each such case, the redemption price per share will be equal to the liquidation value plus accrued and unpaid dividends through the date of redemption. Due to the litigation with certain preferred stockholders (see note 12), the December 31, 2001 dividend was not declared or paid at that time. At December 31, 2001, dividends in arrears approximate d $0.7 million. As of March 27, 2002, the dividends due preferred stockholders not involved in the litigation were declared and paid. The preferred dividends due to the preferred stockholders being sued by the Company are covered by the settlement. Prior to the filing of a registration statement by the Company with the Securities and Exchange Commission with respect to an IPO, the holders of preferred stock may convert the preferred stock into common stock on a share-for-share basis. Not later than the twenty-fifth day after the date of the final prospectus relating to such an IPO, the Company will give notice to each holder of preferred stock to the effect that the preferred stock will automatically convert into shares of common stock on the 40th day thereafter unless such holder gives the Company written notice on or before such date that such holder elects such conversion not occur with respect to such holder's shares of preferred stock. In the event the Company does not receive such notice on or before such date, the preferred stock shall be converted into common stock at a conversion ratio equal to the liquidation value (without inclusion of accrued but unpaid dividends) divided by the price per share to the public in the IPO, effective as of such date. The Company may convert the preferred stock following the consummation of an IPO on a share-for-share basis, unless such conversion would result in the holder of preferred stock receiving common stock having a value of less than $13.00 per share, in which case the conversion would be made at a conversion ratio equal to the liquidation value (without inclusion of accrued but unpaid dividends) divided by the price per share to the public in the IPO. 34 In the event the holders of the preferred stock choose to require the Company to purchase their preferred stock and the Company does not do so, the Company shall be prohibited from the following activities without the affirmative vote of not less than a majority of the holders of the preferred stock, voting together as a single class: (i) incur any additional indebtedness for borrowed money other than borrowings under any credit facility to which the Company is a party at such time and as in effect when any redemption payment becomes due and is unpaid or at the time any dividend payment becomes due and is unpaid; (ii) effect (or make any agreement or become obligated to effect) any (a) sale, lease, assignment, transfer or other conveyance of the assets of the Company or its subsidiaries which individually or in the aggregate would constitute a significant subsidiary, (b) consolidation or merger involving the Company or any of its subsidiaries, or (c) dissolution, liquidation or winding-up of the Company or any of its subsidiaries; provided however that in no event shall the Company effect any sale, lease, assignment, transfer or other conveyance of the assets of the Company or its subsidiaries to affiliates of the Company; (iii) make (or permit any subsidiary to make) any loan or advance to, or own any stock or other securities of, any subsidiary or other corporation, partnership, or other entity unless it is wholly owned by the Company and except for any such loans and advances which do not in the aggregate exceed $250,000; (iv) make any loan or advance to any person, including, without limitation, any employee or director of the Company or any subsidiary, except advances and similar expenditures in the ordinary course of business; or (v) acquire, by purchase, exchange, merger or otherwise, all of substantially all of the properties or assets of any other corporation or entity. 9. STOCK-BASED COMPENSATION: In February 1999, the Company's board of directors and stockholders approved the Company's 1999 Stock Plan, or the "stock plan," which provides for the granting or awarding of incentive or nonqualified stock options, stock appreciation rights, restricted or phantom stock, and other incentive awards to directors, officers, key employees and consultants of the Company. The number of shares authorized and reserved for issuance under the stock plan is the greater of 3.7 million shares or 15% of the aggregate number of shares of common stock outstanding. The terms of the option awards will be established by the Compensation Committee of the Company's Board of Directors. The Company granted nonqualified stock options to purchase a total of approximately 2.0 million shares of common stock at prices of $7.00, $9.00, and $10.00 per share to key employees of the Company at the consummation of the acquisitions. In 2000 and 2001, additional options for 294,690 and 437,350 common shares, respectively, were granted at $10.00 and $10.20 per share, respectively. These options vest at the rate of 20 percent per year, commencing on the first anniversary of the grant date and will expire at the earliest of ten years from the date of grant, three months following termination of employment other than due to death or disability, or one year following termination of employment due to death or disability. 35 For the options granted at $7.00 per share, compensation expense is being recognized for the excess of the fair market value of the stock over the grant price (compensation expense of $0.50 per share). Approximately $0.3 million for the nine months ended December 31, 1999, $0.3 million for the year ended December 31, 2000, and $0.2 million for the year ended December 31, 2001 was recognized as compensation expense in the financial statements. Approximately $0.4 million and $0.2 million of unamortized deferred compensation expense existed at December 31, 2000 and December 31, 2001, respectively. Pursuant to Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation," ("SFAS 123") the Company uses the Black-Scholes pricing model to measure the pro-forma compensation expense attributable to stock options granted to employees, based on the following assumptions:
1999 2000 2001 -------------- -------------- ----------- Risk-free interest rate 5.3% - 6.6% 5.03% 3.9% - 4.9% Expected dividend yield --% --% --% Expected lives 5 Years 5 Years 5 Years Volatility --% --% --%
The weighted average fair value of the options granted in 1999, 2000 and 2001 was $2.21, $2.20, and $2.24 respectively. Had compensation cost for all option issuances been determined consistent with SFAS 123, it would not have had a material impact on the Company's net income for 1999, 2000 or 2001. The following table summarizes activity under the Company's stock option plan:
Weighted Average Shares Exercise Price Balance, December 31, 1998 --------- ----------------- Granted (range of exercise prices, $7.00 to $9.00) 2,012,402 $ 7.16 Forfeited (range of exercise prices, $7.00 to $9.00) (98,643) 7.25 --------- Balance, December 31, 1999 1,913,759 7.16 Granted (exercise price of $10.00) 294,690 10.00 Forfeited (exercise price of $7.00) (69,426) 10.00 Exercised (exercise price of $7.00) (74) 7.00 --------- Balance, December 31, 2000 2,138,949 7.20 Granted (exercise price of $10.20) 437,350 10.20 Forfeited (exercise prices of $7, $9, $10 and $10.20) (231,793) 7.62 --------- Balance, December 31, 2001 2,344,506 7.72 ========= Exercisable, December 31, 2001 810,542 $ 7.16
As of December 31, 2001, approximately 1.4 million options for common stock are available for grant under the Company's stock option plan. The Company has reserved 108,928 shares of its common stock for issuance to certain current and former employees pursuant to the Founding Companies acquisition agreements. 36 10. EMPLOYEE BENEFIT PLANS: Prior to July 1, 2000, some of the Acquired Companies had 401(k) and defined contribution profit-sharing plans in place. These plans had varied contribution rates and vesting schedules. On July 1, 2000, AMPAM combined the assets of the various plans into a unified AMPAM 401(k) plan. The Company matches employee contributions to the 401(k) plan at varying rates. Company contributions to the various plans in 1999 and 2000 were $0.8 million and $2.1 million, respectively. Contributions to the unified AMPAM 401(k) plan in 2001 were $2.1 million. 11. ACQUISITIONS: The Company has accounted for all of its acquisitions using the purchase method of accounting. The assets acquired and liabilities assumed are recorded at fair value. The excess of the purchase price over the fair value of the net assets acquired is recorded as goodwill. The results of operations of the acquired companies are included in the accompanying financial statements from the date of acquisition forward. FOUNDING COMPANIES On April 1, 1999 AMPAM acquired the ten Founding Companies contemporaneously with the related initial financings. The acquisition consideration delivered upon the closing of the acquisitions consisted of: (i) $99.9 million in cash, (ii) $5.8 million of Seller Notes, (iii) 8,898,618 shares of common stock ($7.50 per share, or $66.7 million), and, (iv) 1,048,820 shares of preferred stock ($13.00 per share, or $13.6 million). Additionally, approximately 2.1 million shares of Class B common stock issued to Sterling City Capital, LLC and certain consultants was reflected as part of the purchase price (i.e., goodwill). Included in the $99.9 million cash acquisition consideration was an estimated amount based on the level of working capital of each Founding Company as of the closing date. The cash portion of the acquisition consideration attributable to the level of working capital was increased by approximately $12.0 million based on the actual working capital as of the closing date. The stockholders of each of the Founding Companies were also entitled to distributions of certain non-operating assets of the Founding Companies (subject to assumption of related liabilities), retained earnings of the Founding Companies (if a C corporation), or the positive amount of the accumulated adjustment account (if an S corporation). In addition to the acquisition consideration and other payments and distributions described above, the stockholders of certain Founding Companies (including certain former stockholders of Christianson) received additional consideration because their Founding Company generated actual adjusted net income for the year ended December 31, 1999, in excess of a designated target level of net income for that period. Additional consideration of $9.8 million was issued to the former stockholders of four of the non-Christianson entities and is reflected as goodwill in the financial statements of the Company. The cash portion of the consideration ($5.8 million) was included in Accounts Payable - Related Parties as of December 31, 1999, while the stock portion of the additional consideration ($4.0 million; 443,759 shares valued at $9 per share - excluding 216,167 shares issued to Christianson) resulted in an increase in Additional Paid In Capital in 1999. Additionally, the cash portion of the Christianson consideration ($4.3 million) was included in Accounts Payable - Related Parties and 37 was charged to Additional Paid In Capital. The stockholders entitled to additional consideration received their stock in April 2000, and the cash is being paid out as allowed by the terms of the Senior Subordinated Notes. As of December 31, 2000, approximately $3.9 million of the cash payment was included in the current liabilities section of the balance sheet (under the heading "Accounts payable, related parties, including acquisition consideration payable"). This amount was paid out during 2001, leaving nothing payable at December 31, 2001. No other earn-outs are owed. SUBSEQUENT ACQUISITIONS On September 30, 1999 AMPAM acquired all of the outstanding stock of two entities and the assets of a third entity. The acquisition consideration delivered upon closing of the acquisitions consisted of: (i) $16.4 million in cash; and (ii) 1,471,539 shares of common stock ($9.00 per share or $13.2 million). On March 1, 2000, the Company acquired the stock of Lindy Dennis Industries and related affiliates (collectively "LDI," renamed "AMPAM LDI"), headquartered in Corona, California. The consideration paid by the Company for AMPAM LDI consisted of 1,346,154 shares of the Company's common stock and approximately $12.0 million in cash. The cash portion of the consideration was funded through borrowings under the Company's existing $95.0 million Credit Facility. The pro forma data presented below consists of the income statement data presented in the accompanying consolidated financial statements plus pro forma income statement data for all companies as if the acquisitions and related financing were effective on January 1, 1999 (in thousands):
December 31, ---------------------- 1999 2000 --------- -------- (Unaudited) Revenues $488,061 $566,717 Net income available to common shareholders 8,295 13,859
12. COMMITMENTS AND CONTINGENCIES: LITIGATION In October 2001, AMPAM and its operating subsidiary AMPAM Christianson, L.P. filed suit against two former stockholders of Christianson Enterprises who are current holders of Series A Redeemable Preferred Stock ("preferred stock") alleging, among other things, breaches of certain provisions of the underlying acquisition agreement pursuant to which AMPAM purchased Christianson Enterprises n/k/a AMPAM Christianson. In February 2002, the defendants filed a counterclaim alleging, among other things, anticipatory breach of the acquisition agreement. In March 2002, the parties entered into a settlement agreement and general release pursuant to which the defendants and related parties will tender all of their preferred stock and AMPAM will pay the defendants and related parties $3.1 million. As of March 12, 2002, the defendants and their related parties held 524,435 shares of preferred stock with a liquidation value of $6,817,655 and were due approximately $500,000 for outstanding but undeclared dividends, all of which will be included in the settlement. The settlement agreement becomes effective upon the transfer of the referenced consideration that is scheduled to take place on or before April 21, 2002, at which time the parties will have no further duties, obligations, or liabilities to each other related 38 to the acquisition agreement or preferred stock and the parties' agreement to release any and all claims against each other will become effective. The Company is also involved in other disputes or legal actions arising in the ordinary course of business. Management does not believe the outcome of such legal actions will have a material adverse effect on the Company's financial position or results of operations. INSURANCE As of January 1, 2000, the Company became self insured for health care, workers' compensation, and general, property and auto liability up to predetermined amounts above which third party insurance applies. As of December 31, 2001, the Company has fully accrued for the expected costs under the self insured programs. These accruals are based on industry development factors that may change based upon AMPAM's actual claim experience. The Company is fully insured through third party insurance for all other types of exposures including an umbrella policy. 13. MAJOR CUSTOMERS AND RISK CONCENTRATION: For the years ended December 31, 1999 and 2000, no customer exceeded 10 percent of total revenues for AMPAM. For the year ended 2001, no single family or multifamily residential customer exceeded 10 percent of the single family or multifamily residential revenues. However, for the commercial segment, one customer accounted for 14 percent of revenues for this segment. Although the loss of this one particular customer would negatively impact the earnings of the commercial segment, AMPAM does not believe the loss of this customer would have a material adverse effect on the Company, taken as a whole, as revenues from this particular customer accounted for less than three percent of the Company's total revenues. In general, the Company performs its services under contract terms that entitle it to progress payments and is typically, by law, granted a lien interest on the work until paid. The Company is exposed to potential credit risk related to changes in business and economic factors. However, management believes that its contract acceptance, and billing and collection policies are adequate to minimize the potential credit risk. The Company's customers are primarily in the construction industry. Accordingly, the Company is exposed to risks of fluctuations in construction in the areas in which it operates. 14. OPERATING SEGMENTS: The Company modified its internal organizational structure during the fourth quarter of 2001 and divided its business into the three reporting segments: single family residential, multifamily residential and commercial. The Company's reportable segments offer the same products and services to distinct customer groups. They are managed separately because each business requires different operating and marketing strategies. During 2001, AMPAM derived approximately 53%, 29% and 18% of its revenues from single family residential, multifamily residential and commercial customers. These three reporting segments all operate domestically, with no intersegment or foreign sales. These segments share the same growth strategies and provide plumbing and HVAC services; however, these different segments provide services to different customers, as well as have different competitors. AMPAM provides plumbing, HVAC and maintenance and repair services to single family and multifamily residential customers. The single family residential market includes housing projects, small 39 condominium projects, and town house development. The multifamily residential market includes large condominiums and apartment projects. AMPAM provides plumbing, HVAC, maintenance and repair, and mechanical contracting services to commercial customers. The commercial market includes retail establishments, office buildings, hotels, assisted-living centers, waste water and water purification plants, manufacturing plants and other industrial complexes and public and private institutional buildings including schools, hospitals, dormitories, military and other governmental facilities, stadiums, arenas, convention centers, airports and prisons. The financial information presented for each segment does not allocate corporate overhead costs. Corporate expenses in the years presented included costs related to operational, sales and marketing, accounting and administrative support. Corporate assets primarily include cash, deferred tax assets, debt issuance costs, goodwill and other intangible assets, fixed assets related to the Company's corporate office and non-trade accounts receivable. Segment information for the years ended December 31, 1999, 2000 and 2001 is as follows (in thousands):
Single 2001 Family Multifamily Commercial Corporate Total ---------- ----------- ---------- --------- --------- Revenues $ 318,363 $ 175,689 $ 112,173 $ -- $ 606,225 Gross profit 56,782 34,305 9,705 (348) 100,444 Income from operations 29,653 20,845 1,958 (18,766) 33,690 Total assets 60,880 51,266 12,244 198,509 322,899 Capital spending 4,276 1,194 2,095 1,660 9,225 Depreciation expense 2,750 1,077 1,718 98 5,643 Single 2000 Family Multifamily Commercial Corporate Total ---------- ----------- ---------- --------- --------- Revenues $ 287,250 $ 146,867 $ 123,770 $ - $ 557,887 Gross profit 50,381 35,011 13,066 - 98,458 Income from operations 29,758 23,732 5,389 (12,432) 46,447 Total assets 81,966 61,672 30,022 144,806 318,466 Capital spending 3,398 2,847 1,612 24 7,881 Depreciation expense 2,710 771 1,603 62 5,146 Single 1999 Family Multifamily Commercial Corporate Total ---------- ----------- ---------- --------- --------- Revenues $ 185,165 $ 53,137 $ 95,700 $ - $ 334,002 Gross profit 41,744 12,133 10,481 (328) 64,030 Income from operations 25,489 8,931 4,028 (15,303) 23,145 Total assets 73,882 36,907 31,457 125,505 267,751 Capital spending 2,734 330 1,793 220 5,077 Depreciation expense 1,856 279 1,070 27 3,232
40 15. QUARTERLY INFORMATION: (UNAUDITED) Quarterly financial information for the years ended December 31, 2001 and 2000 is summarized as follows (in thousands):
2001 For the Quarter Ended, ---------------------------------------------------------------- March 31 June 30 September 30 December 31 -------------- -------------- ------------ ----------- Revenues $ 143,394 $ 160,687 $ 157,663 $ 144,481 Gross profit 22,522 28,189 26,275 23,458 Net income 802 3,972 2,205 590 2000 For the Quarter Ended, ---------------------------------------------------------------- March 31 June 30 September 30 December 31 -------------- -------------- ------------ ----------- Revenues $ 125,137 $ 141,679 $ 145,460 $ 145,611 Gross profit 22,147 26,516 26,516 23,279 Income before extraordinary loss 2,447 5,014 4,986 2,912 Net income 2,447 5,014 4,642 2,369
The plumbing and mechanical contracting services industry is influenced by seasonal factors, which generally result in lower activity during winter months than in other periods. As a result, AMPAM expects that its revenues and profits will generally be lower in the first and fourth quarters of each fiscal year, and higher in the second and third quarters. 41 ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE The Company had no changes and/or disagreements with Deloitte & Touche LLP (the Company's current Accountants) during fiscal year 2001. During 2000, the Company changed Accountants from Arthur Andersen LLP to Deloitte & Touche LLP. AMPAM had no disagreements with Arthur Andersen. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ITEM 11. EXECUTIVE COMPENSATION ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS OF MANAGEMENT ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required by these items is hereby incorporated by reference to the Company's definitive proxy statement which will be filed with the Commission within 120 days of December 31, 2001. 42 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Financial Statements and Supplementary Data, Financial Statement Schedules and Exhibits . None (b) Reports on Form 8-K None (c) Exhibits. EXHIBIT NO. DESCRIPTION ----------- ----------- 3.1 -- Amended and Restated Certificate of Incorporation. (Incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-4 (File No. 333-81139) of the Company) 3.2 -- Amended and Restated Bylaws. (Incorporated by reference to Exhibit 3.2 to the Registration Statement on Form S-4 (File No. 333-81139) of the Company) 3.3 -- Certificate of Designations of 10% Cumulative Redeemable Convertible Preferred Stock, Series A. (Incorporated by reference to Exhibit 3.3 to the Registration Statement on Form S-4 (File No. 333-81139) of the Company) 4.1 -- Indenture, dated May 19, 1999, by and among American Plumbing & Mechanical, Inc. and the subsidiaries named therein and State Street Bank and Trust Company covering to $125,000,000 11 5/8% Senior Subordinated Notes due 2008. (Incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-4 (File No. 333-81139) of the Company) 4.2 -- Form of American Plumbing & Mechanical, Inc. 11 5/8% Senior Subordinated Note due 2008. (Incorporated by reference to Exhibit 4.3 to the Registration Statement on Form S-4 (File No. 333-81139\) of the Company) 10.1 -- Form of Officer and Director Indemnification Agreement. (Incorporated by reference to Exhibit 10.1 to the Registration Statement on Form S-4 (File No. 333-81139) of the Company) 10.2 -- American Plumbing & Mechanical, Inc. 1999 Stock Plan. (Incorporated by reference to Exhibit 10.2 to the Registration Statement on Form S-4 (File No. 333-81139) of the Company) *10.3 -- $95.0 million Senior Secured Credit Facility Agreement dated March 31, 2001 among American Plumbing & Mechanical, Inc., Bank One, NA and the other lenders party thereto. 43 10.4 -- Transfer Restriction and Expense Reimbursement Agreement. (Incorporated by reference to Exhibit 10.4 to the Registration Statement on Form S-4 (File No. 333-81139) of the Company) 10.5 -- Employment Agreement between the Company and Robert Christianson. (Incorporated by reference to Exhibit 10.15 to the Registration Statement on Form S-4 (File No. 333-81139\) of the Company) 10.6 -- Employment Agreement between the Company and Robert Richey. (Incorporated by reference to Exhibit 10.16 to the Registration Statement on Form S-4 (File No. 333-81139) of the Company) 10.7 -- Employment Agreement between the Company and David Baggett. (Incorporated by reference to Exhibit 10.17 to the Registration Statement on Form S-4 (File No. 333-81139) of the Company) 10.8 -- Employment Agreement between the Company, Croson Florida and James Croson. (Incorporated by reference to Exhibit 10.19 to the Registration Statement on Form S-4 (File No. 333-81139) of the Company) 10.9 -- Employment Agreement between the Company, Sherwood and Robert Sherwood. (Incorporated by reference to Exhibit 10.21 to the Registration Statement on Form S-4 (File No. 333-81139) of the Company) *10.10 -- Employment Agreement between the Company and Lloyd C. Smith. *10.11 -- Employment Agreement between the Company, Atlas and Stephen F. Turner. *10.12 -- Employment Agreement between the Company, Parks and Charles E. Parks III. 10.13 -- First Supplemental Indenture between the Company, Parks Mechanical Construction Corporation, a Delaware corporation, Atlas Plumbing & Mechanical, LLC, a Delaware limited liability company and State Street Bank and Trust Company, as Trustee, dated October 14, 1999. (Incorporated by reference to Exhibit 10.24 to the Registration Statement on Form S-4 (File No. 333-81139) of the Company) *21.1 -- List of Subsidiaries. *24.1 -- Power of Attorney. ----------------- * Filed herewith. 44 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. AMERICAN PLUMBING & MECHANICAL, INC. Date: March 28, 2002 By: /s/ Robert C. Christianson* --------------------------------------- Robert C. Christianson, Chairman of the Board of Directors and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed by the following persons in the capacities indicated on March 28, 2002.
Signature Title --------- ----- /s/ Robert A. Christianson* Chairman of the Board of Directors and ----------------------------------- Chief Executive Officer Robert A. Christianson /s/ Robert C. Richey* Senior Vice President, Chief Operating ----------------------------------- Officer and Director Robert C. Richey /s/ David C. Baggett President, Director, Chief Financial ----------------------------------- Officer and Chief Accounting Officer David C. Baggett /s/ Albert W. Niemi, Jr.* ----------------------------------- Director Albert W. Niemi, Jr. /s/ Richard M. Pollard* ----------------------------------- Director Richard M. Pollard /s/ Susan O. Rheney* ----------------------------------- Director Susan O. Rheney /s/ Robert W. Sherwood* ----------------------------------- Director Robert W. Sherwood /s/ Lloyd C. Smith* ----------------------------------- Director Lloyd C. Smith /s/ Charles E. Parks III* ----------------------------------- Director Charles E. Parks III /s/ James A. Croson * ----------------------------------- Director James A. Croson /s/ Stephen F. Turner* ----------------------------------- Director Stephen F. Turner /s/ Michael E. Workman* ----------------------------------- Director Michael E. Workman * By: /s/ David C. Baggett ----------------------------------- David C. Baggett Pursuant to a Power-of-Attorney Filed with this Form 10-K On March 28, 2002
45 INDEX TO EXHIBITS EXHIBIT NO. DESCRIPTION ----------- ----------- 3.1 -- Amended and Restated Certificate of Incorporation. (Incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-4 (File No. 333-81139) of the Company) 3.2 -- Amended and Restated Bylaws. (Incorporated by reference to Exhibit 3.2 to the Registration Statement on Form S-4 (File No. 333-81139) of the Company) 3.3 -- Certificate of Designations of 10% Cumulative Redeemable Convertible Preferred Stock, Series A. (Incorporated by reference to Exhibit 3.3 to the Registration Statement on Form S-4 (File No. 333-81139) of the Company) 4.1 -- Indenture, dated May 19, 1999, by and among American Plumbing & Mechanical, Inc. and the subsidiaries named therein and State Street Bank and Trust Company covering to $125,000,000 11 5/8% Senior Subordinated Notes due 2008. (Incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-4 (File No. 333-81139) of the Company) 4.2 -- Form of American Plumbing & Mechanical, Inc. 11 5/8% Senior Subordinated Note due 2008. (Incorporated by reference to Exhibit 4.3 to the Registration Statement on Form S-4 (File No. 333-81139\) of the Company) 10.1 -- Form of Officer and Director Indemnification Agreement. (Incorporated by reference to Exhibit 10.1 to the Registration Statement on Form S-4 (File No. 333-81139) of the Company) 10.2 -- American Plumbing & Mechanical, Inc. 1999 Stock Plan. (Incorporated by reference to Exhibit 10.2 to the Registration Statement on Form S-4 (File No. 333-81139) of the Company) *10.3 -- $95.0 million Senior Secured Credit Facility Agreement dated March 31, 2001 among American Plumbing & Mechanical, Inc., Bank One, NA and the other lenders party thereto. 10.4 -- Transfer Restriction and Expense Reimbursement Agreement. (Incorporated by reference to Exhibit 10.4 to the Registration Statement on Form S-4 (File No. 333-81139) of the Company) 10.5 -- Employment Agreement between the Company and Robert Christianson. (Incorporated by reference to Exhibit 10.15 to the Registration Statement on Form S-4 (File No. 333-81139\) of the Company) 10.6 -- Employment Agreement between the Company and Robert Richey. (Incorporated by reference to Exhibit 10.16 to the Registration Statement on Form S-4 (File No. 333-81139) of the Company) 10.7 -- Employment Agreement between the Company and David Baggett. (Incorporated by reference to Exhibit 10.17 to the Registration Statement on Form S-4 (File No. 333-81139) of the Company) 10.8 -- Employment Agreement between the Company, Croson Florida and James Croson. (Incorporated by reference to Exhibit 10.19 to the Registration Statement on Form S-4 (File No. 333-81139) of the Company) 10.9 -- Employment Agreement between the Company, Sherwood and Robert Sherwood. (Incorporated by reference to Exhibit 10.21 to the Registration Statement on Form S-4 (File No. 333-81139) of the Company) *10.10 -- Employment Agreement between the Company and Lloyd C. Smith. *10.11 -- Employment Agreement between the Company, Atlas and Stephen F. Turner. *10.12 -- Employment Agreement between the Company, Parks and Charles E. Parks III. 10.13 -- First Supplemental Indenture between the Company, Parks Mechanical Construction Corporation, a Delaware corporation, Atlas Plumbing & Mechanical, LLC, a Delaware limited liability company and State Street Bank and Trust Company, as Trustee, dated October 14, 1999. (Incorporated by reference to Exhibit 10.24 to the Registration Statement on Form S-4 (File No. 333-81139) of the Company) *21.1 -- List of Subsidiaries. *24.1 -- Power of Attorney. --------------- * Filed herewith. EX-10.3 3 h95061ex10-3.txt $95.0 MILLION SENIOR SECURED CREDIT FACILITY AGMT. EXHIBIT 10.3 ================================================================================ CREDIT AGREEMENT Dated as of March 31, 2001 $95,000,000 Senior Secured Credit Facility ---------- AMERICAN PLUMBING & MECHANICAL, INC. as Borrower BANK ONE, NA, Individually, as LC Issuer and as Agent CREDIT LYONNAIS NEW YORK BRANCH as Documentation Agent AND THE LENDERS NAMED HEREIN ================================================================================ TABLE OF CONTENTS
Page ---- ARTICLE I DEFINITIONS..............................................................................................1 1.01 Certain Defined Terms...........................................................................1 ARTICLE II THE CREDITS.............................................................................................16 2.01. Commitment.....................................................................................16 2.02. Required Payments..............................................................................16 2.03. Ratable Loans..................................................................................17 2.04. Types of Advances..............................................................................17 2.05. Commitment Fee; Reductions in Aggregate Commitment.............................................17 2.06. Minimum Amount of Each Advance.................................................................17 2.07. Swing Loans....................................................................................17 2.08. Optional Principal Payments....................................................................18 2.09. Method of Selecting Types and Interest Periods for New Advances................................18 2.10. Conversion and Continuation of Outstanding Advances............................................19 2.11. Changes in Interest Rate, etc..................................................................20 2.12. Rates Applicable After Default.................................................................20 2.13. Method of Payment..............................................................................20 2.14. Noteless Agreement; Evidence of Indebtedness...................................................21 2.15. Telephonic Notices.............................................................................21 2.16. Interest Payment Dates; Interest and Fee Basis.................................................22 2.17. Notification...................................................................................22 2.18. Lending Installations..........................................................................22 2.19. Non-Receipt of Funds by the Agent..............................................................22 2.20. Facility LCs...................................................................................23 2.21. Replacement of Lender..........................................................................27 ARTICLE III CHANGE IN CIRCUMSTANCES.................................................................................27 3.01. Yield Protection...............................................................................27 3.02. Changes in Capital Adequacy Regulations........................................................28 3.03. Availability of Types of Advances..............................................................29 3.04. Funding Indemnification........................................................................29 3.05. Taxes..........................................................................................29 3.06. Lender Statements; Survival of Indemnity.......................................................31 ARTICLE IV CONDITIONS PRECEDENT....................................................................................31 4.01. Conditions Precedent to Effectiveness..........................................................31 4.02. Each Credit Extension..........................................................................33
(i) ARTICLE V REPRESENTATIONS AND WARRANTIES .........................................................................34 5.01. Existence and Standing.........................................................................34 5.02. Authorization and Validity.....................................................................34 5.03. No Conflict; Government Consent................................................................34 5.04. Financial Statements...........................................................................35 5.05. Material Adverse Change........................................................................35 5.06. Taxes..........................................................................................35 5.07. Litigation and Contingent Obligations..........................................................35 5.08. Subsidiaries...................................................................................35 5.09. ERISA..........................................................................................35 5.10. Accuracy of Information........................................................................35 5.11. Regulation U...................................................................................36 5.12. Material Agreements............................................................................36 5.13. Compliance With Laws...........................................................................36 5.14. Ownership of Properties........................................................................36 5.15. Plan Assets; Prohibited Transactions...........................................................36 5.16. Environmental Matters..........................................................................36 5.17. Investment Company Act.........................................................................37 5.18. Public Utility Holding Company Act.............................................................37 5.19. Permitted Senior Subordinated Debt.............................................................37 5.20. Solvency.......................................................................................37 5.21. General Purpose of Facility....................................................................37 ARTICLE VI COVENANTS...............................................................................................37 6.01. Financial and Other Reporting..................................................................38 6.02. Use of Proceeds................................................................................39 6.03. Notice of Default..............................................................................39 6.04. Conduct of Business............................................................................39 6.05. Taxes..........................................................................................39 6.06. Insurance......................................................................................39 6.07. Compliance with Laws...........................................................................39 6.08. Maintenance of Properties......................................................................40 6.09. Inspection.....................................................................................40 6.10. Dividends......................................................................................40 6.11. Indebtedness...................................................................................40 6.12. Merger.........................................................................................41 6.13. Sale of Assets.................................................................................41 6.14. Investments and Acquisitions...................................................................41 6.15. Liens..........................................................................................42 6.16. Sale of Accounts...............................................................................43 6.17. Affiliates.....................................................................................43 6.18. New Subsidiaries...............................................................................43 6.19. Amendments to Material Agreements..............................................................43 6.20. Permitted Senior Subordinated Debt.............................................................43
(ii) 6.21. Sale and Leaseback Transactions and other Off-Balance Sheet Liabilities........................44 6.22. Contingent Obligations.........................................................................44 6.23. Letters of Credit..............................................................................44 6.24. No Lien Restriction............................................................................44 6.25. Financial Contracts............................................................................44 6.26. Financial Covenants............................................................................44 6.27. Capital Expenditures...........................................................................45 ARTICLE VII DEFAULTS................................................................................................45 7.01. Misrepresentation..............................................................................45 7.02. Nonpayment of Obligations......................................................................45 7.03. Certain Covenants..............................................................................45 7.04. Other Breach...................................................................................45 7.05. Other Indebtedness.............................................................................45 7.06. Bankruptcy, Reorganization, etc................................................................46 7.07. Appointment of Receiver........................................................................46 7.08. Seizure of Property............................................................................46 7.09. Judgment.......................................................................................46 7.10. Excessive Unfunded ERISA Liabilities...........................................................47 7.11. Withdrawal Liability...........................................................................47 7.12. Reorganization of Multiemployer Plan...........................................................47 7.13. Environmental Release or Violation.............................................................47 7.14. Change of Control..............................................................................47 7.15. Unremedied Default.............................................................................47 7.16. Guaranty.......................................................................................47 7.17. Lack of Acceptable Security Interest...........................................................47 7.18. ERISA Misrepresentation........................................................................48 7.19. Breach of Rate Hedging Obligation, etc.........................................................48 ARTICLE VIII ACCELERATION, WAIVERS, AMENDMENTS AND REMEDIES..........................................................48 8.01. Acceleration; Facility LC Collateral Account...................................................48 8.02. Other Remedies.................................................................................49 8.03. Amendments.....................................................................................49 8.04. Preservation of Rights.........................................................................50 ARTICLE IX GENERAL PROVISIONS......................................................................................50 9.01. Survival of Representations....................................................................50 9.02. Governmental Regulation........................................................................50 9.03. Headings.......................................................................................50 9.04. Entire Agreement...............................................................................51 9.05. Several Obligations; Benefits of this Agreement................................................51 9.06. Expenses; Indemnification......................................................................51 9.07. Numbers of Documents...........................................................................52
(iii) 9.08. Accounting.....................................................................................52 9.09. Credit Agreement Controls......................................................................52 9.10. Severability of Provisions.....................................................................52 9.11. Nonliability of Lenders........................................................................52 9.12. Confidentiality................................................................................52 9.13. Nonreliance....................................................................................53 ARTICLE X THE AGENT...............................................................................................53 10.01. Appointment; Nature of Relationship............................................................53 10.02. Powers.........................................................................................53 10.03. General Immunity...............................................................................53 10.04. No Responsibility for Loans, Recitals, etc.....................................................53 10.05. Action on Instructions of Lenders..............................................................54 10.06. Employment of Agents and Counsel...............................................................54 10.07. Reliance on Documents; Counsel.................................................................54 10.08. Agent's Reimbursement and Indemnification......................................................54 10.09. Notice of Default..............................................................................55 10.10. Rights as a Lender.............................................................................55 10.11. Lender Credit Decision.........................................................................55 10.12. Successor Agent................................................................................56 10.13. Agent's Fee....................................................................................56 10.14. Delegation to Affiliates.......................................................................56 10.15. Execution of Collateral Documents..............................................................56 10.16. Collateral Releases............................................................................57 10.17. Documentary Agent..............................................................................57 10.18. Highest Lawful Rate............................................................................57 10.19. Chapter 346 Inapplicable.......................................................................58 ARTICLE XI SETOFF; RATABLE PAYMENTS................................................................................58 11.01. Setoff.........................................................................................58 11.02. Ratable Payments...............................................................................58 ARTICLE XII BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS.......................................................59 12.01. Successors and Assigns.........................................................................59 12.02. Participations.................................................................................59 12.03. Assignments....................................................................................60 12.04. Dissemination of Information...................................................................61 12.05. Tax Treatment..................................................................................61 ARTICLE XIII NOTICES.................................................................................................61 13.01. Notices........................................................................................61 13.02. Change of Address..............................................................................61
(iv) ARTICLE XIV COUNTERPARTS............................................................................................62 ARTICLE XV CHOICE OF LAW; CONSENTS; WAIVER OF JURY TRIAL...........................................................62 15.01. Choice of Law..................................................................................62 15.02. Consent to Jurisdiction........................................................................62 15.03. Waiver of Jury Trial...........................................................................62 ARTICLE XVI AMENDMENT AND RESTATEMENT...............................................................................63 16.01. Amendment and Restatement......................................................................63
SCHEDULES AND EXHIBITS Schedule I Pricing Schedule Schedule II Lending Installation Schedule Schedule III Listing of Subsidiaries and Ownership Schedule IV Schedule of Material Agreements Schedule V Existing Exceptions to Unencumbered Title Exhibit A Form of Note Exhibit B Form of Borrowing Notice Exhibit C Form of Conversion/Continuation Notice Exhibit D Form of Compliance Certificate Exhibit E Form of Money Transfer Instruction Exhibit F Form of Guaranty Exhibit G Form of Security Agreement Exhibit H Form of Stock Pledge Agreement Exhibit I Form of Note Pledge Agreement Exhibit J Form of Assignment Agreement (v) CREDIT AGREEMENT This Agreement, dated as of March 31, 2001, is among American Plumbing & Mechanical, Inc., a Delaware corporation, the Lenders, Credit Lyonnais New York Branch, as Documentation Agent, and Bank One, NA, as LC Issuer and as Agent. The parties hereto agree as follows: ARTICLE I DEFINITIONS 1.01 Certain Defined Terms: As used in this Agreement, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): "Acceptable Security Interest" means, in any Property, a Lien granted pursuant to a Collateral Document (i) which exists in favor of the Agent for the benefit of itself, the LC Issuer, the Lenders and, with respect to each Related Rate Hedging Agreement that is registered with the Agent, the Rate Hedge Lender thereon, (ii) which is valid and first priority, (iii) which secures the Obligations, and (iv) which is (or, upon appropriate filing of the financing statements already delivered to the Agent, will be) perfected and is enforceable by the Agent, for the benefit of itself, the LC Issuer, the Lenders and the Rate Hedge Lenders, if any, against the grantor thereof. "Acquisition" means any transaction, or any series of related transactions, consummated on or after the date hereof, by which the Borrower or any of its Subsidiaries (i) acquires any going business or all or substantially all of the assets of any firm, corporation or limited liability company, or division thereof, whether through purchase of assets, merger or otherwise or (ii) directly or indirectly acquires (in one transaction or as the most recent transaction in a series of transactions) at least a majority (in number of votes) of the securities of a corporation which have ordinary voting power for the election of directors (other than securities having such power only by reason of the happening of a contingency) or a majority (by percentage or voting power) of the outstanding ownership interests of a partnership or limited liability company. "Advance" means a borrowing hereunder, (i) made by the Lenders on the same Borrowing Date, or (ii) converted or continued by the Lenders on the same date of conversion or continuation, consisting, in either case, of the aggregate amount of the several Loans of the same Type and, in the case of Eurodollar Loans, for the same Interest Period. "Affiliate" of any Person means any other Person directly or indirectly controlling, controlled by or under common control with such Person. A Person shall be deemed to control another Person if the controlling Person owns ten percent (10%) or more of any class of voting securities (or other ownership interests) of the controlled Person or possesses, directly or indirectly, the power to direct or cause the direction of the management or policies of the controlled Person, whether through ownership of stock, by contract or otherwise. "Agent" means Bank One, NA in its capacity as contractual representative of the Lenders pursuant to Article X, and not in its individual capacity as a Lender, and any successor Agent appointed pursuant to Article X. "Aggregate Commitment" means the aggregate of the Commitments of all the Lenders, as reduced from time to time pursuant to the terms hereof. "Aggregate Outstanding Credit Exposure" means, at any time, the aggregate of the Outstanding Credit Exposure of all the Lenders. "Agreement" means this credit agreement, as it may be amended or modified and in effect from time to time. "Alternate Base Rate" means, for any day, a rate of interest per annum equal to the higher of (i) the Corporate Base Rate for such day and (ii) the sum of the Federal Funds Effective Rate for such day plus one-half percent (1/2%) per annum. "Applicable Fee Rate" means, at any time, the percentage rate per annum at which Commitment Fees are accruing on the unused portion of the Aggregate Commitment at such time as set forth in the Pricing Schedule. "Applicable Margin" means, with respect to Advances of any Type at any time, the percentage rate per annum which is applicable at such time with respect to Advances of such Type as set forth in the Pricing Schedule. "Arranger" means Banc One Capital Markets, Inc., a Delaware corporation, and its successors. "Article" means an article of this Agreement unless another document is specifically referenced. "Assignment Agreement" is defined in Section 12.03.01. "Authorized Officer" means any of the President, Chief Financial Officer, Chief Operating Officer, Treasurer, or any Vice President of the Borrower, acting singly. "Available Aggregate Commitment" means, at any time, the Aggregate Commitment then in effect minus the Aggregate Outstanding Credit Exposure at such time. "Bank One" means Bank One, NA in its individual capacity, and its successors. "Borrower" means American Plumbing & Mechanical, Inc., a Delaware corporation, and its successors and assigns. "Borrower Preferred Stock" means the Preferred Stock of the Borrower issued pursuant to the Certificate of Designation. "Borrowing Date" means a date on which an Advance is made hereunder. "Borrowing Notice" is defined in Section 2.09. 2 "Business Day" means (i) with respect to any borrowing, payment or rate selection of Eurodollar Advances, a day (other than a Saturday or Sunday) on which banks generally are open in Chicago and New York for the conduct of substantially all of their commercial lending activities and on which dealings in United States dollars are carried on in the London interbank market and (ii) for all other purposes, a day (other than a Saturday or Sunday) on which banks generally are open in Chicago for the conduct of substantially all of their commercial lending activities. "Capital Expenditures" means, without duplication, any expenditures for any purchase or other acquisition of any asset which, in accordance with GAAP, are classified as a fixed or capital asset on a consolidated balance sheet of the Borrower and its Subsidiaries. "Capital Stock" means all capital stock and all other shares, partnership interests, equity interests, ownership interests, participations, rights or other equivalents (however designated) of capital stock issued by any entity (whether a corporation, a partnership or another entity). "Capitalized Lease" of a Person means any lease of Property by such Person as lessee which, in accordance with GAAP, is capitalized on a balance sheet of such Person. "Capitalized Lease Obligations" of a Person means the amount of the obligations of such Person under Capitalized Leases which, in accordance with GAAP, are shown as a liability on a balance sheet of such Person. "Cash Equivalent Investments" means (i) short-term obligations of, or fully guaranteed by, the United States of America, (ii) commercial paper rated A-1 or better by S&P or P-1 or better by Moody's, (iii) demand deposit accounts maintained in the ordinary course of business, and (iv) certificates of deposit issued by and time deposits with commercial banks (whether domestic or foreign) having capital and surplus in excess of $100,000,000; provided in each case that the same provides for payment of both principal and interest (and not principal alone or interest alone) and is not subject to any contingency regarding the payment of principal or interest. "Certificate of Designation" means the Certificate of Designations of Ten Percent Cumulative Redeemable Convertible Preferred Stock, Series A (Par Value $0.01 per Share) of Borrower dated March 31, 1999. "Change in Control" means (i) the acquisition by any Person, or two or more Persons acting in concert, of beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission under the Securities Exchange Act of 1934) of thirty percent (30%) or more of the outstanding shares of voting stock of the Borrower; or (ii) individuals who, as of the date hereof, constitute the Board of Directors of Borrower cease for any reason to constitute at least a majority of the Board of Directors of the Borrower; provided that any individual becoming a director of the Borrower subsequent to the date hereof whose election, or nomination for election by the Borrower's shareholders, as the case may be, was approved by a vote of at least a majority of the directors then comprising the incumbent board shall be considered as though such individual were a member of the incumbent board but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Securities Exchange Act 3 of 1934) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board of Directors of the Borrower; or the consummation of any transaction the result of which is that any Person or group beneficially owns more of the voting stock of the Borrower than is beneficially owned, in the aggregate, by the holders on the date hereof. "Code" means the Internal Revenue Code of 1986, as amended, reformed or otherwise modified from time to time. "Collateral Documents" means, collectively, the Security Agreements, the Stock Pledge Agreements, the Note Pledge Agreements, assignments, financing statements, lien consents and waivers and all other similar documents executed by Borrower or any Pledgor granting to the Agent and the Lenders an Acceptable Security Interest in substantially all of the personal property of the Borrower and its Subsidiaries (including the securities and other ownership interests in all of the Borrower's subsidiaries) as security for the Obligations. "Commitment" means, for each Lender, the obligation of such Lender to make Loans to, and participate in Facility LCs issued upon the application of, the Borrower in an aggregate amount not exceeding the amount set forth opposite its signature below or as set forth in any Assignment Agreement relating to any assignment that has become effective pursuant to Section 12.03.02, as such amount may be reduced from time to time by such Lender's Pro Rata Share of each principal payment made on the Loans pursuant to clause (i) of Section 2.02, as such amount may be further modified from time to time pursuant to the terms hereof. "Consolidated Capital Expenditures" means, with reference to any period, the Capital Expenditures of the Borrower and its Subsidiaries calculated on a consolidated basis for such period. "Consolidated Cash Interest Expense" means, with reference to any period, the cash interest expense of the Borrower and its Subsidiaries calculated on a consolidated basis for such period. "Consolidated Cash Taxes" means, with reference to any period, the aggregate pro forma amount of income Taxes of the Borrower and its Subsidiaries calculated on a consolidated basis for such period at an assumed tax rate of twenty percent (20%) of Consolidated EBITDA for each such period; provided that if from time to time the actual tax rate is significantly different from such assumed tax rate, then either the Agent (at the direction of the Required Lenders) or the Borrower, may request a redetermination of the assumed tax rate and the redetermined tax rate (or if applicable, rates) shall become the assumed tax rate for calculation purposes upon such redetermination until any future redetermination. "Consolidated EBITDA" means, with reference to any period, on a trailing four fiscal quarter basis (using the historical financial results of any other business acquired in an Acquisition, to the extent applicable, without duplication, on a pro forma basis, consistent with SEC regulations), the sum of Consolidated Net Income plus, to the extent deducted in determining Consolidated Net Income, (i) Consolidated Interest Expense, (ii) provisions for taxes based on income or revenues, (iii) depreciation, (iv) amortization, (v) other non-cash expenses, and (vi) any extraordinary or non-recurring losses minus, to the extent included in determining Consolidated Net Income, any 4 extraordinary or non-recurring gains, all calculated on a consolidated basis for the Borrower and its Subsidiaries and as determined in accordance with GAAP. "Consolidated Funded Total Debt" means at any time the aggregate dollar amount of Consolidated Indebtedness which has actually been funded and is outstanding at such time, whether or not such amount is due or payable at such time. "Consolidated Indebtedness" means at any time the Indebtedness of the Borrower and its Subsidiaries calculated on a consolidated basis as of such time. "Consolidated Interest Expense" means, with reference to any period, the interest expense of the Borrower and its Subsidiaries calculated on a consolidated basis for such period. "Consolidated Net Income" means, with reference to any period, the net income (or loss) of the Borrower and its Subsidiaries calculated on a consolidated basis for such period. "Consolidated Net Worth" means at any time the consolidated stockholders' equity of the Borrower and its Subsidiaries calculated on a consolidated basis as of such time and shall include the value of Borrower Preferred Stock acquired by the Borrower pursuant to the mandatory redemption provisions of such Borrower Preferred Stock and shall not be reduced by virtue of any put rights on Borrower's common stock. "Consolidated Senior Total Debt" means at any time the difference of Consolidated Indebtedness minus the aggregate dollar amount of Permitted Senior Subordinated Debt which has actually been funded and is outstanding at such time. "Contingent Obligation" of a Person means any agreement, undertaking or arrangement by which such Person assumes, guarantees, endorses, contingently agrees to purchase or provide funds for the payment of, or otherwise becomes or is contingently liable upon, the obligation or liability of any other Person, or agrees to maintain the net worth or working capital or other financial condition of any other Person, or otherwise assures any creditor of such other Person against loss, including, without limitation, any comfort letter, take-or-pay contract or the obligations of any such Person as general partner of a partnership with respect to the liabilities of the partnership. "Conversion/Continuation Notice" is defined in Section 2.10. "Controlled Group" means all members of a controlled group of corporations or other business entities and all trades or businesses (whether or not incorporated) under common control which, together with the Borrower or any of its Subsidiaries, are treated as a single employer under Section 414 of the Code. "Corporate Base Rate" means a rate per annum equal to the corporate base rate of interest announced by Bank One from time to time, changing when and as said corporate base rate changes. 5 "Credit Extension" means the making of any Advance, the conversion of any Advance into, or continuation of any Advance as, a Eurodollar Advance, or the issuance or Modification of any Facility LC. "Credit Extension Date" means the Borrowing Date for an Advance or the issuance date for a Facility LC. "Default" means an event described in Article VII. "Discretionary Capital Expenditures" means Consolidated Capital Expenditures associated with (i) new business startups, (ii) capital spending on land, buildings or tenant improvements, or (iii) capital spending on computer equipment and related equipment. "Distribution" means any direct or indirect dividend, distribution or other payment of any kind or character (whether in cash, securities or other Property) (i) in respect of any Permitted Senior Subordinated Debt, any Capital Stock, any class of preferred stock or any other ownership interest or to the holders, as such, of any Permitted Senior Subordinated Debt, any class of Capital Stock, any class of preferred stock or any other ownership interest (including without limitation, pursuant to a merger or consolidation) or (ii) in consideration for or otherwise in connection with any retirement, purchase, redemption or other acquisition of any Permitted Senior Subordinated Debt, any Capital Stock, any preferred stock or any other ownership interest or any options, warrants or rights to purchase or acquire any Permitted Senior Subordinated Debt, any Capital Stock, any preferred stock or any other ownership interest. "EBIT" means, with reference to any period and for any Person, the net income of such Person during such period plus, to the extent deducted from revenues in determining net income, (i) interest expense of such Person during such period, (ii) expense for taxes paid or accrued by such Person during such period, and (iii) extraordinary losses of such Person during such period, minus, to the extent included in net income, extraordinary gains of such Person during such period. "Eligible Institution" means (i) any Lender, (ii) a commercial bank or other financial institution organized under the laws of the United States, or any state thereof, and having total assets in excess of $1,000,000,000, (iii) 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, (iv) the central bank of any country which is a member of the Organization for Economic Cooperation and Development or any successor organization and (v) any other bank or financial institutions approved by the Agent and the Required Lenders (such approval not to be unreasonably withheld). "Environmental Laws" means all laws, rules, regulations, principles of common law, codes, ordinances, orders, decrees, judgments, injunctions, notices or binding agreements issued, promulgated, issued or entered into by any governmental authority, relating in any way to the environment, preservation or reclamation of natural resources, the management, release or threatened release of any Hazardous Substance or to health and safety matters. 6 "Equity Offering" of any Person means an offering of any Capital Stock of such Person issued or to be issued by such Person as consideration to one or more other Persons. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and any rule or regulation issued thereunder. "Eurodollar Advance" means an Advance which, except as otherwise provided in Section 2.12, bears interest at the applicable Eurodollar Rate. "Eurodollar Base Rate" means, with respect to a Eurodollar Advance for the relevant Interest Period, the rate determined by the Agent to be the rate at which Bank One offers to place deposits in U.S. dollars with first-class banks in the London interbank market at approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period, in the approximate amount of Bank One's relevant Eurodollar Loan and having a maturity equal to such Interest Period. "Eurodollar Loan" means a Loan which, except as otherwise provided in Section 2.12, bears interest at the applicable Eurodollar Rate. "Eurodollar Rate" means, with respect to a Eurodollar Advance for the relevant Interest Period, the sum of (i) the quotient of (a) the Eurodollar Base Rate applicable to such Interest Period, divided by (b) one minus the Reserve Requirement (expressed as a decimal) applicable to such Interest Period, plus (ii) the Applicable Margin. The Eurodollar Rate shall be rounded to the next higher multiple of 1/16 of 1% if the rate is not such a multiple. "Excluded Taxes" means, in the case of each Lender or applicable Lending Installation and the Agent, taxes imposed on its overall net income, and franchise taxes imposed on it, by (i) the jurisdiction under the laws of which such Lender or the Agent is incorporated or organized or (ii) the jurisdiction in which the Agent's or such Lender's principal executive office or such Lender's applicable Lending Installation is located. "Exhibit" refers to an exhibit to this Agreement, unless another document is specifically referenced. "Facility LC" is defined in Section 2.20.01. "Facility LC Application" is defined in Section 2.20.03. "Facility LC Collateral Account" is defined in Section 2.20.11. "Facility Termination Date" means March 31, 2004 or any earlier date on which the Aggregate Commitment is reduced to zero or otherwise terminated pursuant to Section 2.05 or 8.01. "Federal Funds Effective Rate" means, for any day, an interest rate per annum 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 for such day (or, if such day is not a Business Day, for the immediately preceding Business Day) by the Federal Reserve Bank 7 of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations at approximately 10:00 a.m. (Chicago time) on such day on such transactions received by the Agent from three Federal funds brokers of recognized standing selected by the Agent in its sole discretion. "Financial Contract" of a Person means (i) any exchange-traded or over-the-counter futures, forward, swap or option contract or other financial instrument with similar characteristics, or (ii) any agreements, devices or arrangements providing for payments related to fluctuations of interest rates, exchange rates, forward rates or commodity prices, including, but not limited to, interest rate swap or exchange agreements, forward currency exchange agreements, interest rate cap or collar protection agreements, forward rate currency or interest rate options. "Floating Rate" means, for any day, a rate per annum equal to (i) the Alternate Base Rate for such day plus (ii) the Applicable Margin, in each case changing when and as the Alternate Base Rate changes. "Floating Rate Advance" means an Advance which, except as otherwise provided in Section 2.12, bears interest at the Floating Rate. "Floating Rate Loan" means a Loan which, except as otherwise provided in Section 2.12, bears interest at the Floating Rate. "GAAP" means U.S. generally accepted accounting principles and policies as in effect from time to time, applied in a manner consistent with that used in preparing the financial statements referred to in Section 5.04. "Guarantor" means each presently existing or hereafter formed or acquired, directly or indirectly owned, Subsidiary of Borrower, other than any such Subsidiary that is deemed to not be "material" by the Required Lenders. "Guaranty" means each guaranty executed by a Guarantor in favor of the Agent, for the ratable benefit of the Lenders, guaranteeing or purporting to guarantee all or any portion of the Obligations, substantially in the form of Exhibit F, as it may be amended or otherwise modified from time to time. "Hazardous Substances" means: (i) those substances included within any applicable federal or state statutory or regulatory definition or listing of "hazardous substance," "special waste," "hazardous waste," "extremely hazardous substance," "regulated substance," "hazardous material," or "toxic substance," under any Environmental Law, (ii) any material, waste or substance either which is or which contains: (A) petroleum, oil or a fraction or constituent thereof, (B) explosives, (C) radioactive materials (including naturally occurring radioactive materials), (D) solid wastes that post imminent and substantial endangerment to health or the environment, (E) asbestos or asbestos- containing material as defined by any Environmental Law, and (iii) any and all other substances, materials, or wastes that are or become classified or regulated as hazardous or toxic under any applicable federal, state or local law or regulation. 8 "Highest Lawful Rate" means, on any day, the maximum nonusurious rate of interest permitted for that day by whichever of applicable federal or Texas law permits the higher interest rate, stated as a rate per annum. On each day, if any, that applicable Texas law establishes the Highest Lawful Rate, the Highest Lawful Rate shall be the "weekly ceiling" (as defined in Section 303 of the Texas Finance Code -- the "Texas Finance Code" --, as amended) for that day. The Lender may from time to time, as to current and future balances, implement any other ceiling under the Texas Finance Code by notice to the Company if and to the extent permitted by the Texas Finance Code. "Indebtedness" of a Person means such Person's (i) obligations for borrowed money or arising out of any extension of credit to or for the account of such Person, including without limitation, extensions of credit in the form of reimbursement or payment obligations of such Person relating to any acceptance, letter of credit or similar facility issued for the account of such Person or accepted by banks and other institutions, (ii) obligations representing the deferred purchase price of Property or services (other than accounts payable arising in the ordinary course of such Person's business payable on terms customary in the trade), (iii) obligations, whether or not such Person has assumed or become liable for the payment thereof, secured by (of for which the holder of such obligations has any existing right, contingent or otherwise, to be secured by) any Lien on or payable out of the proceeds or production from any Property (equal to the fair market value of such Property if the holder of such obligations is owed no duty, contingent or otherwise, from and has no recourse to such Person except for the grant of such Lien) now or hereafter owned or acquired by such Person, (iv) obligations of such Person which are evidenced by notes, bonds, debentures, acceptances, or other instruments, but excluding obligations arising as a result of such Person's endorsement in the ordinary course of business of negotiable instruments in the course of collection, (v) Capitalized Lease Obligations of such Person, and (vi) any other obligation for borrowed money or other financial accommodation which in accordance with GAAP would be shown as a liability on the consolidated balance sheet of such Person. "Interest Period" means, with respect to a Eurodollar Advance, a period of one, two, three or six months commencing on a Business Day selected by the Borrower pursuant to this Agreement. Such Interest Period shall end on the day which corresponds numerically to such date one, two, three or six months thereafter, provided, however, that if there is no such numerically corresponding day in such next, second, third or sixth succeeding month, such Interest Period shall end on the last Business Day of such next, second, third or sixth succeeding month. If an Interest Period would otherwise end on a day which is not a Business Day, such Interest Period shall end on the next succeeding Business Day, provided, however, that if said next succeeding Business Day falls in a new calendar month, such Interest Period shall end on the immediately preceding Business Day. "Investment" of a Person means any loan, advance (other than commission, travel and similar advances to officers and employees made in the ordinary course of business), extension of credit (other than accounts receivable arising in the ordinary course of business on terms customary in the trade) or contribution of capital by such Person; stocks, bonds, mutual funds, partnership interests, notes, debentures or other securities owned by such Person; any deposit accounts and certificate of deposit owned by such Person; and structured notes, derivative financial instruments and other similar instruments or contracts owned by such Person. 9 "IPO" of a Person means an Equity Offering through an initial public offering by such Person of its Capital Stock which is registered under the Securities Act of 1933, amended. "LC Fee" is defined in Section 2.20.04. "LC Issuer" means Bank One (or any subsidiary or affiliate of Bank One designated by Bank One) in its capacity as issuer of Facility LCs hereunder. "LC Obligations" means, at any time, the sum, without duplication, of (i) the aggregate undrawn stated amount under all Facility LCs outstanding at such time plus (ii) the aggregate unpaid amount at such time of all Reimbursement Obligations. "LC Payment Date" is defined in Section 2.20.05. "Lenders" means the lending institutions listed on the signature pages of this Agreement and their respective successors and assigns. "Lending Installation" means, with respect to a Lender or the Agent, the office, branch, subsidiary or affiliate of such Lender or the Agent listed on the Lending Installation Schedule or otherwise selected by such Lender or the Agent pursuant to Section 2.18. "Lending Installation Schedule" means the schedule of Lending Installations attached as Schedule II. "Letter of Credit" of a Person means a letter of credit or similar instrument which is issued upon the application of such Person or upon which such Person is an account party or for which such Person is in any way liable. "Lien" means any lien (statutory or other), mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including, without limitation, the interest of a vendor or lessor under any conditional sale, Capitalized Lease or other title retention agreement), whether or not filed, recorded or otherwise perfected under applicable law. "Loan" means, with respect to a Lender, such Lender's loan made pursuant to Article II (or any conversion or continuation thereof). "Loan Documents" means this Agreement, the Facility LC Applications, all Notes issued pursuant to Section 2.14 (if any), the Collateral Documents, the Guaranties and all other agreements, instruments or documents to which the Borrower, any Guarantor or any Pledgor is a party and which are executed and delivered from time to time in connection with this Agreement, and all amendments, modifications, renewals, restatement, replacements or extensions thereof in accordance with their respective terms.. "Material Adverse Effect" means a material adverse effect on (i) the business, Property, operations, performances, condition (financial or otherwise), or results of operations of the Borrower 10 and its Subsidiaries taken as a whole, (ii) the ability of the Borrower or any Obligor to perform any of its obligations under the Loan Documents to which it is a party, or (iii) the validity or enforceability of any of the Loan Documents or, except as may be caused solely by an action or omission of such Person constituting gross negligence, the rights or remedies of the Agent, the LC Issuer or the Lenders thereunder. "Material Agreements" means those agreements and contracts listed on Schedule IV and all other agreements, instruments and other documents relating to any Acquisition or any Permitted Senior Subordinated Debt. "Material Indebtedness" is defined in Section 7.05. "Modify" and "Modification" are defined in Section 2.20.01. "Moody's" means Moody's Investors Service, Inc. "Multiemployer Plan" means a Plan maintained pursuant to a collective bargaining agreement or any other arrangement to which the Borrower or any member of the Controlled Group is a party to which more than one employer is obligated to make contributions. "Non-Hostile Acquisition" means an Acquisition by the Borrower, directly or indirectly through one or more of its Subsidiaries, (i) if such Acquisition is of the voting securities of a Target, then the Target is in the same or a similar line of business as the Borrower, and such Acquisition does not involve an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Securities Exchange Act of 1934) or other actual or threatened solicitation of proxies or consents by or on behalf of Borrower, any Affiliate of Borrower and all Persons acting with Borrower or such Affiliate as a group (as defined in Section 13(d) of the Securities Exchange Act of 1934) to acquire beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission under the Securities Exchange Act of 1934) of at least twenty percent (20%) of voting securities of the Target, and (ii) in connection with such Acquisition (1) no Default or Unmatured Default exists, or would result (on a pro forma basis) from such Acquisition, (2) the sum of cash consideration plus Indebtedness assumed by the Borrower or any Affiliate of Borrower or otherwise secured by a Lien on Property involved in such Acquisition plus the aggregate amount of cash deferred compensation related to such Acquisition (such sum being the "Consideration") does not exceed the lesser of (a) $3,000,000 for any single Acquisition, or (b) together with the Consideration of all other Acquisitions made since the beginning of the then most-recently ended four fiscal quarters, $20,000,000, and (3) the total consideration for such Acquisition does not exceed 6.50x such Target's adjusted EBIT for the most recent four fiscal quarters of such Target. "Non-U.S. Lender" is defined in Section 3.05(iv). "Note" means any promissory note issued at the request of a Lender pursuant to Section 2.14 in the form of Exhibit A. 11 "Note Pledge Agreement" means each note pledge agreement executed by a Pledgor securing, or purporting to secure, all or any portion of the Obligations, substantially in the form of Exhibit I, as may be amended or otherwise modified from time to time. "Obligations" means all unpaid principal of and accrued and unpaid interest on the Loans, all Reimbursement Obligations, all accrued and unpaid fees and all expenses, reimbursements, indemnities and other obligations of the Borrower to the Lenders or to any Lender, the Agent, the LC Issuer or any indemnified party arising under the Loan Documents. "Obligor" means, without duplication, the Borrower, each Guarantor, each Pledgor and any other Affiliate of Borrower that enters into a Loan Document from time to time for the benefit of the Agent and the Lenders. "Off-Balance Sheet Liability" of a Person means (i) any repurchase obligation or liability of such Person with respect to accounts or notes receivable sold by such Person, (ii) any liability under any Sale and Leaseback Transaction which is not a Capitalized Lease, (iii) any liability under any so- called "synthetic lease" transaction entered into by such Person, or (iv) any obligation arising with respect to any other transaction which is the functional equivalent of or takes the place of borrowing but which does not constitute a liability on the balance sheets of such Person. "Other Taxes" is defined in Section 3.05(ii). "Outstanding Credit Exposure" means, as to any Lender at any time, the sum of (i) the aggregate principal amount of its Loans outstanding at such time, plus (ii) an amount equal to its Pro Rata Share of the LC Obligations at such time. "Participants" is defined in Section 12.02.1. "Payment Date" means the last day of each March, June, September and December. "PBGC" means the Pension Benefit Guaranty Corporation, or any successor thereto. "Permitted Acquisition" means each Non-Hostile Acquisition and any other Acquisition to which the Required Lenders have given their written consent. "Permitted Sale and Leaseback Transactions" means Sale and leaseback Transactions not to exceed $10,000,000 in the aggregate from and after the date hereof (with a sublimit of $5,000,000, in the aggregate from and after the date hereof, for real Property owned by the Borrower or any of its Subsidiaries as of the date hereof), all of the net proceeds of which are applied to the outstanding principal balance of the Obligations. "Permitted Senior Subordinated Debt" means the Borrower's 11 5/8% Senior Subordinated Notes due 2008 issued under an indenture dated May 19, 1999 in the original principal amount of $125,000,000 and with $94,995,000 outstanding as of March 31, 2001. 12 "Person" means any natural person, corporation, firm, joint venture, partnership, limited liability company, association, enterprise, trust or other entity or organization, or any government or political subdivision or any agency, department or instrumentality thereof. "Plan" means an employee pension benefit plan which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code as to which the Borrower or any member of the Controlled Group may have any liability, other than a Multiemployer Plan. "Pledgor" means each presently existing or hereafter formed or acquired, directly or indirectly owned, Subsidiary of Borrower, other than any such Subsidiary that the Required Lenders agree to not require to grant a lien to secure all or any part of the Obligations. "Preferred Stock" means, as applied to any corporation, shares of such corporation which shall be entitled to preference or priority over any other shares of such corporation in respect of either the payment of dividends or the distribution of assets upon liquidation. "Pricing Schedule" means Schedule I attached hereto, identified as such. "Pro Rata Share" means, with respect to a Lender, a portion equal to a fraction the numerator of which is such Lender's Commitment and the denominator of which is the Aggregate Commitment. "Property" of a Person means any and all property, whether real, personal, tangible, intangible, or mixed, of such Person, or other assets owned, leased or operated by such Person. "Purchasers" is defined in Section 12.03.01. "Rate Hedge Lender" means a Lender or Affiliate thereof party to one or more Related Rate Hedging Agreements, who has registered with the Agent each such Related Rate Hedging Agreement intended (i) to be pari passu with the guaranty of the Obligations by the Guarantors, and (ii) to be secured by the Lien of the Agent and the Lenders pursuant to the Collateral Documents. "Rate Hedging Agreement" means an agreement, device or arrangement providing for payments which are related to fluctuations of interest rates, exchange rates or forward rates, including, but not limited to, dollar-denominated or cross-currency interest rate exchange agreements, forward currency exchange agreements, interest rate cap or collar protection agreements, forward rate currency or interest rate options, puts and warrants. "Rate Hedging Obligations" of a Person means any and all obligations of such Person, whether absolute or contingent and howsoever and whensoever created, arising, evidenced or acquired (including all renewals, extensions and modifications thereof and substitutions therefor), under (i) any and all Rate Hedging Agreements, and (ii) any and all cancellations, buy backs, reversals, terminations or assignments of any Rate Hedging Agreement. "Regulation D" means Regulation D of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor thereto or other regulation or official 13 interpretation of said Board of Governors relating to reserve requirements applicable to member banks of the Federal Reserve System. "Regulation U" means Regulation U of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor or other regulation or official interpretation of said Board of Governors relating to the extension of credit by banks for the purpose of purchasing or carrying margin stocks applicable to member banks of the Federal Reserve System. "Related Rate Hedging Agreement" means a Rate Hedging Agreement between the Borrower and a Lender or Affiliate thereof and related to the Loans hereunder providing for a fixed rate of interest on a notional amount, for all such Rate Hedging Agreements, not in excess of the Aggregate Commitment. "Reportable Event" means a reportable event as defined in Section 4043 of ERISA and the regulations issued under such section, with respect to a Plan, excluding, however, such events as to which the PBGC has by regulation waived the requirement of Section 4043(a) of ERISA that it be notified within 30 days of the occurrence of such event, provided, however, that a failure to meet the minimum funding standard of Section 412 of the Code and of Section 302 of ERISA shall be a Reportable Event regardless of the issuance of any such waiver of the notice requirement in accordance with either Section 4043(a) of ERISA or Section 412(d) of the Code. "Reports" is defined in Section 9.06. "Required Lenders" means Lenders in the aggregate having at least sixty percent (60%) of the Aggregate Commitment or, if the Aggregate Commitment has been terminated, Lenders in the aggregate holding at least sixty percent (60%) of the Aggregate Outstanding Credit Exposure. "Reserve Requirement" means, with respect to an Interest Period, the maximum aggregate reserve requirement (including all basic, supplemental, marginal and other reserves) which is imposed under Regulation D on Eurocurrency liabilities. "Reimbursement Obligations" means, at any time, the aggregate of all obligations of the Borrower then outstanding under Section 2.20 to reimburse the LC Issuer for amounts paid by the LC Issuer in respect of any one or more drawings under Facility LCs. "S&P" means Standard and Poor's Ratings Services, a division of The McGraw Hill Companies, Inc. "Sale and Leaseback Transaction" means any sale or other transfer of Property by any Person with the intent to lease such Property as lessee. "Schedule" refers to a specific schedule to this Agreement, unless another document is specifically referenced. "Scheduled Preferred Dividend Payments" means at any time the aggregate dollar amount of payments that would be payable by the Borrower and its Subsidiaries to Persons (other than the 14 Borrower or any Wholly-Owned Subsidiary of the Borrower) over the four fiscal quarters following the most recently ended fiscal quarter of the Borrower if the most recent preferred dividend rate(s) were to continue uninterrupted. "Section" means a numbered section of this Agreement, unless another document is specifically referenced. "Security Agreement" means each security agreement executed by a Pledgor securing, or purporting to secure, all or any portion of the Obligations, substantially in the form of Exhibit G, as may be amended or otherwise modified from time to time. "Single Employer Plan" means a Plan maintained by the Borrower or any member of the Controlled Group solely for employees of the Borrower and/or any member of the Controlled Group. "Stock Pledge Agreement" means each stock pledge agreement executed by a Pledgor securing, or purporting to secure, all or any portion of the Obligations, substantially in the form of Exhibit H, as may be amended or otherwise modified from time to time. "Subsidiary" of a Person means (i) any corporation more than fifty percent (50%) of the outstanding securities having ordinary voting power to elect a majority of the board of directors of such corporation of which shall at the time be owned or controlled, directly or indirectly, by such Person or by one or more of its Subsidiaries or by such Person and one or more of its Subsidiaries, or (ii) any partnership, limited liability company, association, joint venture or similar business organization more than fifty percent (50%) of the ownership interests having ordinary voting power to elect a majority of Persons performing functions similar to those of a board of directors of a corporation of which shall at the time be so owned or controlled, in each case irrespective of whether or not at the time securities or other ownership interests of any other class or classes of such corporation or such other entity shall or might have voting power upon the occurrence of any contingency. Unless otherwise expressly provided, all references herein to a "Subsidiary" shall mean a Subsidiary of the Borrower. "Swing Loan" is defined in Section 2.07. "Target" means a Person (other than a natural person) that is the subject of a proposed or actual Acquisition. "Taxes" means any and all present or future taxes, duties, levies, imposts, deductions, charges or withholdings, and any and all liabilities with respect to the foregoing, but excluding Excluded Taxes. "Transferee" is defined in Section 12.04. "Type" means, with respect to any Advance, its nature as a Floating Rate Advance or a Eurodollar Advance. 15 "Unfunded Liabilities" means the amount (if any) by which the present value of all vested and unvested accrued benefits under all Single Employer Plans exceeds the fair market value of all such Plan assets allocable to such benefits, all determined as of the then most recent valuation date for such Plans using PBGC actuarial assumptions for single employer plan terminations. "Unmatured Default" means an event which but for the lapse of time or the giving of notice, or both, would constitute a Default. "Wholly-Owned Subsidiary" of a Person means (i) any Subsidiary all of the outstanding voting securities of which shall at the time be owned or controlled, directly or indirectly, by such Person or one or more Wholly-Owned Subsidiaries of such Person, or by such Person and one or more Wholly-Owned Subsidiaries of such Person, or (ii) any partnership, limited liability company, association, joint venture or similar business organization one hundred percent (100%) of the ownership interests having ordinary voting power of which shall at the time be so owned or controlled. ARTICLE II THE CREDITS 2.01. Commitment. From and including the date hereof and prior to the Facility Termination Date, each Lender severally agrees, on the terms and conditions set forth in this Agreement, to (i) make Loans to the Borrower and (ii) participate in Facility LCs issued upon the request of Borrower, provided that, after giving effect to the making of each such Loan and the issuance of each such Facility LC, such Lender's Outstanding Credit Exposure shall not exceed its Commitment. Subject to the terms of this Agreement, the Borrower may borrow, repay and reborrow at any time prior to the Facility Termination Date. The Commitments to extend credit hereunder shall expire on the Facility Termination Date. The LC Issuer will issue Facility LCs hereunder on the terms and conditions set forth in Section 2.20. 2.02. Required Payments. The Aggregate Outstanding Credit Exposure and all other unpaid Obligations shall be paid in full by the Borrower on the Facility Termination Date. Notwithstanding anything to the contrary contained in this Agreement or in any other Loan Document, if at any time the sum of the aggregate principal amount of all Loans outstanding at such time plus the aggregate amount of all LC Obligations at such time exceeds the Aggregate Commitment at such time, the Borrower shall immediately prepay the principal of the Loans in an amount at least equal to such excess. In addition to the amounts required above, the Borrower shall make, promptly but in no event beyond five (5) Business Days after the receipt thereof, the following mandatory principal payments on the Loans: (i) one hundred percent (100%) of the cash proceeds from any claim on insurance covering any Property of Borrower or any of its Subsidiaries with proceeds which, after deducting therefrom the amount of such proceeds applied or to be promptly applied toward the repair or replacement of damaged Property which was the subject of such claim, is greater than $100,000; 16 (ii) one hundred percent (100%) of the net proceeds realized from an Equity Offering of the Borrower and any of its Subsidiaries (other than with respect to the issuance of preferred stock in connection with a Permitted Acquisition) minus the amount of such proceeds paid on the Borrower Preferred Stock. (iii) one hundred percent (100%) of the nets proceeds received from the issuance of any public or private debt financing by the Borrower or any of its Subsidiaries. 2.03. Ratable Loans. Each Advance hereunder shall consist of Loans made from the several Lenders ratably according to their Pro Rata Shares. 2.04. Types of Advances. The Advances may be Floating Rate Advances or Eurodollar Advances, or a combination thereof, selected by the Borrower in accordance with Sections 2.09 and 2.10; provided that no more than six (6) Eurodollar Advances may be outstanding at any time. 2.05. Commitment Fee; Reductions in Aggregate Commitment. The Borrower agrees to pay to the Agent for the account of each Lender, according to its Pro Rata Share, a commitment fee at a per annum rate equal to the Applicable Fee Rate on the average daily unused portion of the Aggregate Commitment (without regard to any outstanding Swing Loans) from the date hereof to and including the Facility Termination Date, which commitment fee shall be payable in arrears on each Payment Date hereafter and on the Facility Termination Date. The Borrower may permanently reduce the Aggregate Commitment in whole, or in part ratably among the Lenders in integral multiples of $5,000,000, upon at least three (3) Business Days' written notice to the Agent, which notice shall specify the amount of any such reduction, provided, however, that the amount of the Aggregate Commitment may not be reduced below the Aggregate Outstanding Credit Exposure. All accrued commitment fees shall be payable on the effective date of any termination of the obligations of the Lenders to make Credit Extensions hereunder. 2.06. Minimum Amount of Each Advance. Each Eurodollar Advance shall be in the minimum amount of $3,000,000 (and in multiples of $500,000 if in excess thereof), and each Floating Rate Advance (other than a Swing Loan) shall be in the minimum amount of $1,000,000 (and in multiples of $500,000 if in excess thereof), provided, however, that any Floating Rate Advance may be in the amount of the Available Aggregate Commitment. Each borrowing on a Swing Loan hereunder shall be in an aggregate amount of not less than $100,000 and in multiples of $100,000 if in excess thereof. 2.07. Swing Loans. (i) In addition to the Loans, Agent shall, from time to time upon the request of the Borrower, if the applicable conditions precedent specified in Sections 4.01 and 4.02 have been satisfied, make loans (the "Swing Loans") to the Borrower in an aggregate amount which shall not exceed the Available Aggregate Commitment on such Business Day; provided that the aggregate amount of Swing Loans outstanding at any time shall not exceed $10,000,000; provided further that the sum of aggregate amount of Swing Loans outstanding at any time plus the Aggregate Outstanding Credit Exposure at such time shall not exceed the Aggregate Commitment at such time. Swing Loans shall constitute "Loans" for all purposes hereunder, except they shall be held by Agent and shall not be considered a utilization of the Aggregate Commitment hereunder for purposes of 17 calculating fees hereunder. Subject to the terms and conditions of this Agreement, all Swing Loans shall be made as Floating Rate Loans and may be borrowed, paid, or repaid and reborrowed pursuant to this Agreement and all such Swing Loans shall be due and payable in full on the Facility Termination Date. All Swing Loans shall bear interest based on applicable Floating Rate. (ii) At any time before or after a Default or Unmatured Default, upon the request of Agent or the Borrower through the Agent, each Lender other than Agent shall be deemed, without further action by any Person, to have purchased from Agent a participation in any one or more Swing Loans described in such notice in an amount equal to such Lender's Pro Rata Share of such Swing Loans. The Agent shall notify each such Lender of the amount of such participation and such Lender will transfer to Agent on the next Business Day following such request, in immediately available funds, the amount of its participation. Whenever, at any time after Agent has received from any Lender such Lender's participating interest in a Swing Loan, Agent receives from Borrower any payment on account thereof, Agent will pay to such Lender its participating interest in such amount (appropriately adjusted, in the case of interest payments, to reflect the period of time during which such Lender's participating interest was outstanding and funded) which payment shall be subject to repayment by such Lender if such payment received by Agent is required to be returned. Each Lender's obligation to purchase such participating interests shall be absolute and unconditional and shall not be affected by any circumstance, including, without limitation, (A) any set-off, counterclaim, recoupment, defense or other right which such Lender or any other Person may have against Agent or any other Person for any reason whatsoever; (B) the occurrence or continuance of a Default or an Unmatured Default or the termination of the Commitments; (C) any adverse change in the condition (financial or otherwise) of the Borrower or any other Person; (D) any breach of this Agreement by the Borrower or any other Lender; or (E) any other circumstance, happening or event whatsoever, whether or not similar to any of the foregoing. Each Swing Loan, once so participated by any Lender, shall cease to be a Swing Loan with respect to that amount for purposes of this Agreement but shall continue to be a Loan. 2.08. Optional Principal Payments. The Borrower may from time to time pay, without penalty or premium, (i) all outstanding Floating Rate Advances, or (ii) for any outstanding Floating Rate Advance (other than a Swing Loan), any portion of such Floating Rate Advance in a minimum aggregate amount of $1,000,000 or any integral multiple of $100,000 in excess thereof, in each case upon prior notice to the Agent by 12:00 p.m. noon (Chicago time) one (1) Business Day prior to the proposed prepayment. The Borrower may from time to time pay, without penalty or premium, all or any portion of outstanding Swing Loans, but partial payments thereon shall be in an aggregate principal amount of at least $100,000, upon prior notice to the Agent by 12:00 p.m. noon (Chicago time) on the same Business Day as the date of the proposed prepayment. The Borrower may from time to time pay, subject to the payment of any funding indemnification amounts required by Section 3.04 but without penalty or premium, all outstanding Eurodollar Advances, upon three (3) Business Days' prior notice to the Agent. 2.09. Method of Selecting Types and Interest Periods for New Advances. The Borrower shall select the Type of Advance and, in the case of each Eurodollar Advance, the Interest Period applicable thereto from time to time; provided, that Borrower may not select a Eurodollar Advance as the Type of Advance if a Default or Unmatured Default is in existence on the proposed Borrowing Date. The Borrower shall give the Agent irrevocable notice (a "Borrowing Notice") substantially 18 in the form of Exhibit B not later than 12:00 p.m. noon (Chicago time) at least one (1) Business Day before the Borrowing Date of each Floating Rate Advance (other than a Swing Loan), three (3) Business Days before the Borrowing Date for each Eurodollar Advance, and on the Borrowing Date for a Swing Loan, specifying: (i) the Borrowing Date, which shall be a Business Day, of such Advance, (ii) the aggregate amount of such Advance, (iii) the Type of Advance selected, and (iv) in the case of each Eurodollar Advance, the Interest Period applicable thereto. Not later than 12:00 p.m. noon (Chicago time) on each Borrowing Date (other than with respect to a Borrowing Notice for a Swing Loan), each Lender shall make available its Loan or Loans in funds immediately available in Chicago to the Agent at its address specified pursuant to Article XIII. Not later than 3:00 p.m. (Chicago time) on each Borrowing Date for a Swing Loan, the Agent shall make available its Swing Loan or Swing Loans in funds immediately available in Chicago to the Borrower. The Agent will make the funds so received from the Lenders available to the Borrower at the Agent's aforesaid address. 2.10. Conversion and Continuation of Outstanding Advances. Floating Rate Advances shall continue as Floating Rate Advances unless and until such Floating Rate Advances are converted into Eurodollar Advances pursuant to this Section 2.10 or are repaid in accordance with Section 2.08. Each Eurodollar Advance shall continue as a Eurodollar Advance until the end of the then applicable Interest Period therefor, at which time such Eurodollar Advance shall be automatically converted into a Floating Rate Advance unless (x) such Eurodollar Advance is or was repaid in accordance with Section 2.08 or (y) the Borrower shall have given the Agent a Conversion/Continuation Notice (as defined below) requesting that, at the end of such Interest Period, all or a portion of the outstanding principal amount of such Eurodollar Advance continue as a Eurodollar Advance for the same or another Interest Period. Subject to the terms of Section 2.06, the Borrower may elect from time to time to convert all or any part of a Floating Rate Advance into a Eurodollar Advance. The Borrower shall give the Agent irrevocable notice (a "Conversion/Continuation Notice") in the form of Exhibit C of each conversion of a Floating Rate Advance into a Eurodollar Advance or continuation of a Eurodollar Advance not later than 12:00 p.m. noon (Chicago time) at least three (3) Business Days prior to the date of the requested conversion or continuation, specifying: (i) the requested date, which shall be a Business Day, of such conversion or continuation, (ii) the aggregate amount and Type of the Advance which is to be converted or continued, and (iii) the amount of such Advance which is to be converted into or continued as a Eurodollar Advance and the duration of the Interest Period applicable thereto; 19 provided, that no Advances may be converted into or continued as a Eurodollar Advance if a Default is in existence on or an Unmatured Default existed thirty (30) days prior to the date of the proposed conversion or continuation, provided further that any Advance that is converted into or continued as an Eurodollar Advance shall not have an Interest Period greater than one month. 2.11. Changes in Interest Rate, etc. Each Floating Rate Advance shall bear interest on the outstanding principal amount thereof, for each day from and including the date such Advance is made or is automatically converted from a Eurodollar Advance into a Floating Rate Advance pursuant to Section 2.10, to but excluding the date it is paid or is converted into a Eurodollar Advance pursuant to Section 2.10, at a rate per annum equal to the Floating Rate for such day. Changes in the rate of interest on that portion of any Advance maintained as a Floating Rate Advance will take effect simultaneously with each change in the Alternate Base Rate. Each Eurodollar Advance shall bear interest on the outstanding principal amount thereof from and including the first day of the Interest Period applicable thereto to (but not including) the last day of such Interest Period at the interest rate determined by the Agent as applicable to such Eurodollar Advance based upon the Borrower's selections under Sections 2.09 and 2.10 and otherwise in accordance with the terms hereof. No Interest Period may end after the Facility Termination Date. 2.12. Rates Applicable After Default. Notwithstanding anything to the contrary contained in Section 2.09 or 2.10, during the continuance of a Default or on and after the thirtieth day of a continuing Unmatured Default, no Advance may be made as, converted into or continued as a Eurodollar Advance. During the continuance of a Default or Unmatured Default the Required Lenders may, at their option, by notice to the Borrower (which notice may be revoked at the option of the Required Lenders notwithstanding any provision of Section 8.03 requiring unanimous consent of the Lenders to changes in interest rates), declare that (i) each outstanding Eurodollar Advance shall bear interest for the remainder of the applicable Interest Period at the rate otherwise applicable to such Interest Period plus two percent (2%) per annum, (ii) each Floating Rate Advance and each Swing Loan shall bear interest at a rate per annum equal to the Floating Rate in effect from time to time plus two percent (2%) per annum, and (iii) the LC Fee shall be increased by two percent (2%) per annum; provided that, during the continuance of a Default under Section 7.06 or 7.07, the interest rates set forth in clauses (i) and (ii) above and the increase in the LC Fee set forth in clause (iii) above shall be applicable to all Credit Extensions without any election or action on the part of the Agent or any Lender. 2.13. Method of Payment. All payments of the Obligations hereunder shall be made, without setoff, deduction, or counterclaim, in immediately available funds to the Agent at the Agent's address specified pursuant to Article XIII, or at any other Lending Installation of the Agent specified in writing by the Agent to the Borrower, by 12:00 p.m. noon (Chicago time) on the date when due and shall (except in the case of Reimbursement Obligations for which the LC Issuer has not been fully indemnified by the Lenders, or as otherwise specifically required hereunder) be applied ratably by the Agent among the Lenders. Each payment delivered to the Agent for the account of any Lender shall be delivered promptly by the Agent to such Lender in the same type of funds that the Agent received at its address specified pursuant to Article XIII or at any Lending Installation specified in a notice received by the Agent from such Lender. The Agent is hereby authorized to charge the account of the Borrower maintained with Bank One for each payment of principal, interest, Reimbursement Obligations and fees as it becomes due hereunder. Each reference 20 to the Agent in this Section 2.13 shall also be deemed to refer, and shall apply equally, to the LC Issuer, in the case of payments required to be made by the Borrower to the LC Issuer pursuant to Section 2.20.06. 2.14. Noteless Agreement; Evidence of Indebtedness. (i) Each Lender shall maintain in accordance with its usual practice an account or accounts evidencing the indebtedness of the Borrower to such Lender resulting from each Loan made by such Lender from time to time, including the amounts of principal and interest payable and paid to such Lender from time to time hereunder. (ii) The Agent shall also maintain accounts in which it will record (a) the amount of each Loan made hereunder, the Type thereof and the Interest Period with respect thereto, (b) the amount of any principal or interest due and payable or to become due and payable from the Borrower to each Lender hereunder, (c) the original stated amount of each Facility LC and the amount of LC Obligations outstanding at any time, and (d) the amount of any sum received by the Agent hereunder from the Borrower and each Lender's share thereof. The Borrower's obligation on the Swing Loans shall be recorded as loans and advances made by the Agent in accordance with its customary accounting practices. The Agent is authorized to record advances and interest on the Swing Loans and repayments of the Swing Loans in its books and records and the net balance reflected in such records shall be controlling absent manifest error as to the Borrower's indebtedness with respect to Swing Loans. (iii) The entries maintained in the accounts maintained pursuant to paragraphs (i) and (ii) above shall be prima facie evidence of the existence and amounts of the Obligations therein recorded, absent manifest error; provided, however, that the failure of the Agent or any Lender to maintain such accounts or any error therein shall not in any manner affect the obligation of the Borrower to repay the Obligations in accordance with their terms. (iv) Any Lender may request that its Loans be evidenced by a promissory note (a "Note"). In such event, the Borrower shall execute and deliver to such Lender a Note payable to the order of such Lender. Thereafter, the Loans evidenced by such Note and interest thereon shall at all times (including after any assignment pursuant to Section 12.03) be represented by one or more Notes payable to the order of the payee named therein or any assignee pursuant to Section 12.03, except to the extent that any such Lender or assignee subsequently returns any such Note for cancellation and requests that such Loans once again be evidenced as described in paragraphs (i) and (ii) above. 2.15. Telephonic Notices. The Borrower hereby authorizes the Lenders and the Agent to extend, convert or continue Advances, effect selections of Types of Advances and to transfer funds based on telephonic notices made by any person or persons the Agent or any Lender in good faith believes to be acting on behalf of the Borrower, it being understood that the foregoing authorization is specifically intended to allow Borrowing Notices and Conversion/Continuation Notices to be given telephonically. The Borrower agrees to deliver promptly to the Agent a written confirmation, if such confirmation is requested by the Agent or any Lender, of each telephonic notice signed by an Authorized Officer. If the written confirmation differs in any material respect from the action taken by the Agent and the Lenders, the records of the Agent and the Lenders shall govern absent manifest error. 21 2.16. Interest Payment Dates; Interest and Fee Basis. Interest accrued on each Floating Rate Advance shall be payable on each Payment Date, commencing with the first such date to occur after the date hereof and at maturity. Interest accrued on each Eurodollar Advance shall be payable on the last day of its applicable Interest Period, on any date on which the Eurodollar Advance is prepaid, whether by acceleration or otherwise, and at maturity. Interest accrued on each Eurodollar Advance having an Interest Period longer than three months shall also be payable on the last day of each three-month interval during such Interest Period. Interest, commitment fees and LC Fees shall be calculated for actual days elapsed on the basis of a 360-day year; provided that interest on Floating Rate Advances shall be calculated for actual days elapsed on the basis of a 365 days year. Interest shall be payable for the day an Advance is made but not for the day of any payment on the amount paid if payment is received prior to 12:00 p.m. noon (Chicago time) at the place of payment. If any payment of principal of or interest on an Advance or Swing Loan, or any fee or other amount payable hereunder, shall become due on a day which is not a Business Day, such payment shall be made on the next succeeding Business Day and, in the case of a principal payment, such extension of time shall be included in computing interest in connection with such payment. 2.17. Notification. Promptly after receipt thereof, the Agent will notify each Lender of the contents of each Aggregate Commitment reduction notice, Borrowing Notice, Conversion/Continuation Notice, and repayment notice received by it hereunder. Promptly after notice from the LC Issuer, the Agent will notify each Lender of the contents of each request for issuance of a Facility LC hereunder. The Agent will notify each Lender of the interest rate applicable to each Eurodollar Advance promptly upon determination of such interest rate and will give each Lender prompt notice of each change in the Alternate Base Rate. 2.18. Lending Installations. Each Lender may book its Loans and its participation in any LC Obligations and the LC Issuer may book the Facility LCs at any Lending Installation selected by such Lender or the LC Issuer, as the case may be, and may change its Lending Installation from time to time. All terms of this Agreement shall apply to any such Lending Installation, and the Loans, Facility LCs, participations in LC Obligations and any Notes issued hereunder shall be deemed held by each Lender or the LC Issuer, as the case may be, for the benefit of any such Lending Installation. Each Lender and the LC Issuer may, by written notice to the Agent and the Borrower in accordance with Article XIII, designate replacement or additional Lending Installations through which Loans will be made by it or Facility LCs will be issued by it and for whose account Loan payments or payments with respect to Facility LCs are to be made. 2.19. Non-Receipt of Funds by the Agent. Unless the Borrower or a Lender, as the case may be, notifies the Agent prior to the date on which it is scheduled to make payment to the Agent of (i) in the case of a Lender, the proceeds of a Loan or (ii) in the case of the Borrower, a payment of principal, interest or fees to the Agent for the account of the Lenders, that it does not intend to make such payment, the Agent may assume that such payment has been made. The Agent may, but shall not be obligated to, make the amount of such payment available to the intended recipient in reliance upon such assumption. If such Lender or the Borrower, as the case may be, has not in fact made such payment to the Agent on or before when such payment is due, the recipient of such payment shall, on demand by the Agent, repay to the Agent the amount so made available together with interest thereon in respect of each day during the period commencing on the date such amount was so made available by the Agent until the date the Agent recovers such amount at a rate per 22 annum equal to (x) in the case of payment by a Lender, the Federal Funds Effective Rate for such day for the first Business Day and, thereafter, the interest rate applicable to the relevant Loan or (y) in the case of payment by the Borrower, the interest rate applicable to the relevant Loan. Nothing herein shall be deemed to relieve any Lender or the Borrower, as the case may be, from its obligations hereunder or to prejudice any rights any party hereto may have against such Lender or Borrower as a result of any default by such Lender or Borrower, respectively. 2.20. Facility LCs. 2.20.01. Issuance. The LC Issuer hereby agrees, on the terms and conditions set forth in this Agreement, to issue standby and commercial letters of credit (each, a "Facility LC") and to renew, extend, increase, decrease or otherwise modify each Facility LC ("Modify," and each such action a "Modification"), from time to time from and including the date hereof and prior to the Facility Termination Date upon the request of the Borrower; provided that after giving effect to each such issued or Modified Facility LC (i) the aggregate amount of the outstanding LC Obligations shall not exceed $10,000,000 and (ii) the Aggregate Outstanding Credit Exposure shall not exceed the Aggregate Commitment. No Facility LC shall have an expiry date later than the earlier of (x) the fifth Business Day prior to the Facility Termination Date and (y) one year after its issuance. 2.20.02. Participations. Upon the issuance or Modification by the LC Issuer of a Facility LC in accordance with this Section 2.20, the LC Issuer shall be deemed, without further action by any party hereto, to have unconditionally and irrevocably sold to each Lender, and each Lender shall be deemed, without further action by any party hereto, to have unconditionally and irrevocably purchased from the LC Issuer, a participation in such Facility LC (and each Modification thereof) and the related LC Obligations in proportion to its Pro Rata Share. 2.20.03. Notice. Subject to Section 2.20.01, the Borrower shall give the LC Issuer notice prior to 12:00 p.m. noon (Chicago time) at least three (3) Business Days prior to the proposed date of issuance or Modification of each Facility LC, specifying the beneficiary, the proposed date of issuance (or Modification) and the expiry date of such Facility LC, and describing the proposed terms of such Facility LC and the nature of the transactions proposed to be supported thereby. Upon receipt of such notice, the LC Issuer shall promptly notify the Agent, and the Agent shall promptly notify each Lender, of the contents thereof and of the amount of such Lender's participation in such proposed Facility LC. The issuance or Modification by the LC Issuer of any Facility LC shall, in addition to the conditions precedent set forth in Article IV (the satisfaction of which the LC Issuer shall have no duty to ascertain), be subject to the conditions precedent (i) that such Facility LC shall be satisfactory to the LC Issuer and (ii) that the Borrower shall have executed and delivered such application agreement and/or such other instruments and agreements relating to such Facility LC as the LC Issuer shall have requested (each, a "Facility LC Application"). In the event of any conflict between the terms of this Agreement and the terms of any Facility LC Application, the terms of this Agreement shall control. 23 2.20.04. LC Fees. The Borrower shall pay to the Agent, for the account of the Lenders ratably in accordance with their respective Pro Rata Shares, with respect to each Facility LC, a letter of credit fee at a per annum rate equal to the Applicable Margin for Eurodollar Loans in effect from time to time on the average daily undrawn stated amount under such Facility LC, such fee ("LC Fee") to be payable in arrears on each Payment Date. The Borrower shall also pay to the LC Issuer for its own account (x) at the time of issuance of each Facility LC, a fronting fee in an amount to be agreed upon between the LC Issuer and the Borrower, and (y) documentary and processing charges in connection with the issuance or Modification of and draws under Facility LCs in accordance with the LC Issuer's standard schedule for such charges as in effect from time to time. 2.20.05. Administration; Reimbursement by Lenders. Upon receipt from the beneficiary of any Facility LC of any demand for payment under such Facility LC, the LC Issuer shall notify the Agent and the Agent shall promptly notify the Borrower and each other Lender as to the amount to be paid by the LC Issuer as a result of such demand and the proposed payment date (the "LC Payment Date"). The responsibility of the LC Issuer to the Borrower and each Lender shall be only to determine that the documents (including each demand for payment) delivered under each Facility LC in connection with such presentment shall be in conformity in all material respects with such Facility LC. The LC Issuer shall endeavor to exercise the same care in the issuance and administration of the Facility LCs as it does with respect to letters of credit in which no participations are granted, it being understood that in the absence of any gross negligence or willful misconduct by the LC Issuer, each Lender shall be unconditionally and irrevocably liable without regard to the occurrence of any Default or any condition precedent whatsoever, to reimburse the LC Issuer on demand for (i) such Lender's Pro Rata Share of the amount of each payment made by the LC Issuer under each Facility LC to the extent such amount is not reimbursed by the Borrower pursuant to Section 2.20.06 below, plus (ii) interest on the foregoing amount to be reimbursed by such Lender, for each day from the date of the LC Issuer's demand for such reimbursement (or, if such demand is made after 11:00 a.m. (Chicago time) on such date, from the next succeeding Business Day) to the date on which such Lender pays the amount to be reimbursed by it, at a rate of interest per annum equal to the Federal Funds Effective Rate for the first three days and, thereafter, at a rate of interest equal to the rate applicable to Floating Rate Advances. 2.20.06. Reimbursement by Borrower. The Borrower shall be irrevocably and unconditionally obligated to reimburse the LC Issuer on the applicable LC Payment Date for any amounts to be paid by the LC Issuer upon any drawing under any Facility LC, without presentment, demand, protest or other formalities of any kind; provided that neither the Borrower nor any Lender shall hereby be precluded from asserting any claim for direct (but not consequential) damages suffered by the Borrower or such Lender to the extent, but only to the extent, caused by (i) the willful misconduct or gross negligence of the LC Issuer in determining whether a request presented under any Facility LC issued by it complied with the terms of such Facility LC or (ii) the LC Issuer's failure to pay under any Facility LC issued by it after the presentation to it of a request strictly complying with the terms and conditions of such Facility LC. All such amounts paid by the LC Issuer and remaining unpaid by the Borrower shall bear interest, payable on demand, for each day until paid at a 24 rate per annum equal to (x) the rate applicable to Floating Rate Advances for such day if such day falls on or before the applicable LC Payment Date and (y) the sum of two percent (2%) per annum plus the rate applicable to Floating Rate Advances for such day if such day falls after such LC Payment Date. The LC Issuer will pay to each Lender ratably in accordance with its Pro Rata Share all amounts received by it from the Borrower for application in payment, in whole or in part, of the Reimbursement Obligation in respect of any Facility LC issued by the LC Issuer, but only to the extent such Lender has made payment to the LC Issuer in respect of such Facility LC pursuant to Section 2.20.05. Subject to the terms and conditions of this Agreement (including without limitation the submission of a Borrowing Notice in compliance with Section 2.09 and the satisfaction of the applicable conditions precedent set forth in Article IV), the Borrower may request an Advance hereunder for the purpose of satisfying any Reimbursement Obligation. 2.20.07. Obligations Absolute. The Borrower's obligations under this Section 2.20 shall be absolute and unconditional under any and all circumstances and irrespective of any setoff, counterclaim or defense to payment which the Borrower may have or have had against the LC Issuer, any Lender or any beneficiary of a Facility LC. The Borrower further agrees with the LC Issuer and the Lenders that the LC Issuer and the Lenders shall not be responsible for, and the Borrower's Reimbursement Obligation in respect of any Facility LC shall not be affected by, among other things, the validity or genuineness of documents or of any endorsements thereon, even if such documents should in fact prove to be in any or all respects invalid, fraudulent or forged, or any dispute between or among the Borrower, any of its Affiliates, the beneficiary of any Facility LC or any financing institution or other party to whom any Facility LC may be transferred or any claims or defenses whatsoever of the Borrower or of any of its Affiliates against the beneficiary of any Facility LC or any such transferee. The LC Issuer 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 Facility LC. The Borrower agrees that any action taken or omitted by the LC Issuer or any Lender under or in connection with each Facility LC and the related drafts and documents, if done without gross negligence or willful misconduct, shall be binding upon the Borrower and shall not put the LC Issuer or any Lender under any liability to the Borrower. Nothing in this Section 2.20.07 is intended to limit the right of the Borrower to make a claim against the LC Issuer for damages as contemplated by the proviso to the first sentence of Section 2.20.06. 2.20.08. Actions of LC Issuer. The LC Issuer shall be entitled to rely, and shall be fully protected in relying, upon any Facility LC, draft, writing, resolution, notice, consent, certificate, affidavit, letter, cablegram, telegram, telecopy, telex or teletype message, statement, order or other document believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons, and upon advice and statements of legal counsel, independent accountants and other experts selected by the LC Issuer. The LC Issuer shall be fully justified in failing or refusing to take any action under this Agreement unless it shall first have received such advice or concurrence of the Required Lenders as it reasonably deems appropriate or it shall first be indemnified to its reasonable satisfaction by the Lenders against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. Notwithstanding any other 25 provision of this Section 2.20, the LC Issuer shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement in accordance with a request of the Required Lenders, and such request and any action taken or failure to act pursuant thereto shall be binding upon the Lenders and any future holders of a participation in any Facility LC. 2.20.09. Indemnification. The Borrower hereby agrees to indemnify and hold harmless each Lender, the LC Issuer and the Agent, and their respective directors, officers, agents and employees from and against any and all claims and damages, losses, liabilities, costs or expenses which such Lender, the LC Issuer or the Agent may incur (or which may be claimed against such Lender, the LC Issuer or the Agent by any Person whatsoever) by reason of or in connection with the issuance, execution and delivery or transfer of or payment or failure to pay under any Facility LC or any actual or proposed use of any Facility LC, including, without limitation, any claims, damages, losses, liabilities, costs or expenses which the LC Issuer may incur by reason of or in connection with (i) the failure of any other Lender to fulfill or comply with its obligations to the LC Issuer hereunder (but nothing herein contained shall affect any rights the Borrower may have against any defaulting Lender) or (ii) by reason of or on account of the LC Issuer issuing any Facility LC which specifies that the term "Beneficiary" included therein includes any successor by operation of law of the named Beneficiary, but which Facility LC does not require that any drawing by any such successor Beneficiary be accompanied by a copy of a legal document, satisfactory to the LC Issuer, evidencing the appointment of such successor Beneficiary; provided that the Borrower shall not be required to indemnify any Lender, the LC Issuer or the Agent for any claims, damages, losses, liabilities, costs or expenses to the extent, but only to the extent, caused by (x) the willful misconduct or gross negligence of the LC Issuer in determining whether a request presented under any Facility LC complied with the terms of such Facility LC or (y) the LC Issuer's failure to pay under any Facility LC after the presentation to it of a request strictly complying with the terms and conditions of such Facility LC. Nothing in this Section 2.20.09 is intended to limit the obligations of the Borrower under any other provision of this Agreement. 2.20.10. Lenders' Indemnification. Each Lender shall, ratably in accordance with its Pro Rata Share, indemnify the LC Issuer, its affiliates and their respective directors, officers, agents and employees (to the extent not reimbursed by the Borrower) against any cost, expense (including reasonable counsel fees and disbursements), claim, demand, action, loss or liability (except such as result from such indemnitees' gross negligence or willful misconduct or the LC Issuer's failure to pay under any Facility LC after the presentation to it of a request strictly complying with the terms and conditions of the Facility LC) that such indemnitees may suffer or incur in connection with this Section 2.20 or any action taken or omitted by such indemnitees hereunder. 2.20.11. Facility LC Collateral Account. The Borrower agrees that it will, upon the request of the Agent or the Required Lenders and until the final expiration date of any Facility LC and thereafter as long as any amount is payable to the LC Issuer or the Lenders in respect of any Facility LC, maintain a special collateral account pursuant to arrangements satisfactory to the Agent (the "Facility LC Collateral Account") at the Agent's office at the address specified pursuant to Article XIII, in the name of such Borrower but under the sole 26 dominion and control of the Agent, for the benefit of the Lenders and in which such Borrower shall have no interest other than as set forth in Section 8.01. The Borrower hereby pledges, assigns and grants to the Agent, on behalf of and for the ratable benefit of the Lenders and the LC Issuer, a security interest in all of the Borrower's right, title and interest in and to all funds which may from time to time be on deposit in the Facility LC Collateral Account to secure the prompt and complete payment and performance of the Obligations. The Agent will invest any funds on deposit from time to time in the Facility LC Collateral Account in certificates of deposit of Bank One having a maturity not exceeding 30 days. Nothing in this Section 2.20.11 shall either obligate the Agent to require the Borrower to deposit any funds in the Facility LC Collateral Account or limit the right of the Agent to release any funds held in the Facility LC Collateral Account in each case other than as required by Section 8.01. 2.20.12. Rights as a Lender. In its capacity as a Lender, the LC Issuer shall have the same rights and obligations as any other Lender. 2.21. Replacement of Lender. If the Borrower is required pursuant to Section 3.01, 3.02 or 3.05 to make any additional payment to any Lender or if any Lender's obligation to make or continue, or to convert Floating Rate Advances into, Eurodollar Advances shall be suspended pursuant to Section 3.03 (any Lender so affected an "Affected Lender"), the Borrower may elect, if such amounts have been paid within ninety days of such election or continue to be charged or such suspension is still effective, to replace such Affected Lender as a Lender party to this Agreement; provided that no Default or Unmatured Default shall have occurred and be continuing at the time of such replacement; and provided further that, concurrently with such replacement, (i) another bank or other entity which is reasonably satisfactory to the Borrower and the Agent shall agree, as of such date, to purchase for cash the Advances and other Obligations due to the Affected Lender pursuant to an Assignment Agreement and to become a Lender for all purposes under this Agreement and to assume all obligations of the Affected Lender to be terminated as of such date and to comply with the requirements of Section 12.03 applicable to assignments, and (ii) the Borrower shall pay to such Affected Lender in same day funds on the day of such replacement all interest, fees and other amounts then accrued but unpaid to such Affected Lender by the Borrower hereunder to and including the date of termination, including without limitation payments due to such Affected Lender under Sections 3.01, 3.02, 3.04 and 3.05. Nothing herein shall be deemed to relieve any Lender or the Borrower, as the case may be, from its obligations hereunder or to prejudice any rights any party hereto may have against such Lender or Borrower as a result of any default by such Lender or Borrower, respectively. ARTICLE III CHANGE IN CIRCUMSTANCES 3.01. Yield Protection. On or after the date hereof, if the adoption of any law or any governmental or quasi-governmental rule, regulation, policy, guideline or directive (whether or not having the force of law), or any change after the date hereof in the interpretation or administration thereof by any governmental or quasi-governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or after the date hereof compliance by any 27 Lender or applicable Lending Installation or the LC Issuer with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency: (i) subjects any Lender or any applicable Lending Installation or the LC Issuer to any Taxes, or changes the basis of taxation of payments (other than with respect to Excluded Taxes) to any Lender or the LC Issuer in respect of its Eurodollar Loans, Facility LCs or participations therein, or (ii) imposes or increases or deems applicable any reserve, assessment, insurance charge, special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Lender or any applicable Lending Installation or the LC Issuer (other than reserves and assessments taken into account in determining the interest rate applicable to Eurodollar Advances), or (iii) imposes any other condition the result of which is to increase the cost to any Lender or any applicable Lending Installation or the LC Issuer of making, funding or maintaining its Eurodollar Loans, or of issuing or participating in Facility LCs or reduces any amount receivable by any Lender or any applicable Lending Installation or the LC Issuer in connection with its Eurodollar Loans, Facility LCs or participations therein, or requires any Lender or any applicable Lending Installation or the LC Issuer to make any payment calculated by reference to the amount of Eurodollar Loans, Facility LCs or participations therein held or interest or LC Fees received by it, by an amount deemed material by such Lender or the LC Issuer, as the case may be; and the result of any of the foregoing is to increase the cost to such Lender or applicable Lending Installation or the LC Issuer, as the case may be, of making or maintaining its Eurodollar Loans or Commitment, or of issuing or participating in Facility LCs or to reduce the return received by such Lender or applicable Lending Installation or the LC Issuer, as the case may be, in connection with such Eurodollar Loans, Commitment, Facility LCs or participations therein, then, within five (5) Business Days of demand by such Lender or the LC Issuer, the Borrower shall pay such Lender or LC Issuer, as the case may be, such additional amount or amounts as will compensate such Lender or the LC Issuer, for such increased cost or reduction in amount received. A certificate of the Lender (i) stating that the compensation sought to be recovered hereunder is generally being charged to other customers of such Lender and (ii) setting forth in reasonable detail such amount or amounts as shall be necessary to compensate to such Letter for any of the foregoing, shall be conclusive absent manifest error. The Borrower shall not be obligated to pay reimbursement compensation to any Lender for additional costs under this Section 3.01 incurred or accrued more than two hundred seventy (270) days prior to the date that such Lender or the Agent notifies the Borrower thereof. 3.02. Changes in Capital Adequacy Regulations. If a Lender or the LC Issuer determines the amount of capital required or expected to be maintained by such Lender or the LC Issuer, any Lending Installation of such Lender or the LC Issuer or any corporation controlling such Lender or the LC Issuer is increased as a result of a Change (defined below), then, within five (5) Business Days of demand by such Lender or the LC Issuer, the Borrower shall pay such Lender or the LC Issuer the amount necessary to compensate for any shortfall in the rate of return on the portion 28 of such increased capital which such Lender or the LC Issuer determines is attributable to this Agreement, its Outstanding Credit Exposure or its Commitment to make Loans and issue or participate in Facility LCs, as the case may be, hereunder (after taking into account such Lender's or the LC Issuer's policies as to capital adequacy). A certificate of the Lender (i) stating that the compensation sought to be recovered hereunder is generally being charged to other customers of such Lender and (ii) setting forth in reasonable detail such amount or amounts as shall be necessary to compensate to such Letter for such Change, shall be conclusive absent manifest error. The Borrower shall not be obligated to pay reimbursement compensation to any Lender for additional costs under this Section 3.02 incurred or accrued more than two hundred seventy (270) days prior to the date that such Lender or the Agent notifies the Borrower thereof. "Change" means (i) any change after the date hereof in the Risk-Based Capital Guidelines (defined below) or (ii) any adoption of or change in any other law, governmental or quasi-governmental rule, regulation, policy, guideline, interpretation, or directive (whether or not having the force of law) after the date hereof which affects the amount of capital required or expected to be maintained by any Lender or the LC Issuer or any Lending Installation or any corporation controlling any Lender or the LC Issuer. "Risk-Based Capital Guidelines" means (i) the risk-based capital guidelines in effect in the United States on the date hereof, including transition rules, and (ii) the corresponding capital regulations promulgated by regulatory authorities outside the United States implementing the July 1988 report of the Basle Committee on Banking Regulation and Supervisory Practices Entitled "International Convergence of Capital Measurements and Capital Standards," including transition rules, and any amendments to such regulations adopted prior to the date hereof. 3.03. Availability of Types of Advances. If any Lender determines that maintenance of its Eurodollar Loans at a suitable Lending Installation would violate any applicable law, rule, regulation, or directive, whether or not having the force of law, or if the Required Lenders determine that (i) deposits of a type and maturity appropriate to match fund Eurodollar Advances are not available or (ii) the interest rate applicable to Eurodollar Advances does not accurately reflect the cost of making or maintaining Eurodollar Advances, then the Agent shall suspend the availability of Eurodollar Advances and require any affected Eurodollar Advances to be repaid or converted to Floating Rate Advances, subject to the payment of any funding indemnification amounts required by Section 3.04. 3.04. Funding Indemnification. If any payment of a Eurodollar Advance occurs on a date which is not the last day of the applicable Interest Period, whether because of acceleration, prepayment or otherwise, or a Eurodollar Advance is not made on the date specified by the Borrower for any reason other than default by the Lenders, the Borrower will indemnify each Lender for any loss in the nature of breakage costs, expense or cost incurred by it resulting therefrom, including, without limitation, any loss, expense or cost in liquidating or employing deposits acquired to fund or maintain such Eurodollar Advance. 3.05. Taxes. (i) All payments by the Borrower to or for the account of any Lender, the LC Issuer or the Agent hereunder or under any Note or Facility LC Application shall be made free and clear of and without deduction for any and all Taxes. If the Borrower shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder to any Lender, the LC Issuer or the Agent, (a) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 3.05) such 29 Lender or the Agent (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (b) the Borrower shall make such deductions, (c) the Borrower shall pay the full amount deducted to the relevant authority in accordance with applicable law and (d) the Borrower shall furnish to the Agent the original copy of a receipt evidencing payment thereof within 30 days after such payment is made. (ii) In addition, the Borrower hereby agrees to pay any present or future stamp or documentary taxes and any other excise or property taxes, charges or similar levies which arise from any payment made hereunder or under any Note or Facility LC Application, or from the execution or delivery of, or otherwise with respect to, this Agreement or any Note or Facility LC Application ("Other Taxes"). (iii) The Borrower hereby agrees to indemnify the Agent, the LC Issuer and each Lender for the full amount of Taxes or Other Taxes (including, without limitation, any Taxes or Other Taxes imposed on amounts payable under this Section 3.05) paid by the Agent, the LC Issuer or such Lender and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto. Payments due under this indemnification shall be made within 30 days of the date the Agent, the LC Issuer or such Lender makes demand therefor pursuant to Section 3.06. (iv) Each Lender that is not incorporated under the laws of the United States of America or a state thereof (each a "Non-U.S. Lender") agrees that it will, not less than ten (10) Business Days after the date hereof, (i) deliver to each of the Borrower and the Agent two duly completed copies of United States Internal Revenue Service Form 1001 or 4224, certifying in either case that such Lender is entitled to receive payments under this Agreement without deduction or withholding of any United States federal income taxes, and (ii) deliver to each of the Borrower and the Agent a United States Internal Revenue Form W-8 or W-9, as the case may be, and certify that it is entitled to an exemption from United States backup withholding tax. Each Non-U.S. Lender further undertakes to deliver to each of the Borrower and the Agent (x) renewals or additional copies of such form (or any successor form) on or before the date that such form expires or becomes obsolete, and (y) after the occurrence of any event requiring a change in the most recent forms so delivered by it, such additional forms or amendments thereto as may be reasonably requested by the Borrower or the Agent. All forms or amendments described in the preceding sentence shall certify that such Lender is entitled to receive payments under this Agreement without deduction or withholding of any United States federal income taxes, unless an event (including without limitation any change in treaty, law or regulation) has occurred prior to the date on which any such delivery would otherwise be required which renders all such forms inapplicable or which would prevent such Lender from duly completing and delivering any such form or amendment with respect to it and such Lender advises the Borrower and the Agent that it is not capable of receiving payments without any deduction or withholding of United States federal income tax. (v) For any period during which a Non-U.S. Lender has failed to provide the Borrower with an appropriate form pursuant to clause (iv), above (unless such failure is due to a change in treaty, law or regulation, or any change in the interpretation or administration thereof by any governmental authority, occurring subsequent to the date on which a form originally was required to be provided), such Non-U.S. Lender shall not be entitled to indemnification under this Section 3.05 with respect to Taxes imposed by the United States; provided that, should a Non-U.S. Lender which is otherwise 30 exempt from or subject to a reduced rate of withholding tax become subject to Taxes because of its failure to deliver a form required under clause (iv), above, the Borrower shall take such steps as such Non-U.S. Lender shall reasonably request to assist such Non-U.S. Lender to recover such Taxes. (vi) Any Lender that is entitled to an exemption from or reduction of withholding tax with respect to payments under this Agreement or any Note pursuant to the law of any relevant jurisdiction or any treaty shall deliver to the Borrower (with a copy to the Agent), at the time or times prescribed by applicable law, such properly completed and executed documentation prescribed by applicable law as will permit such payments to be made without withholding or at a reduced rate. (vii) If the U.S. Internal Revenue Service or any other governmental authority of the United States or any other country or any political subdivision thereof asserts a claim that the Agent did not properly withhold tax from amounts paid to or for the account of any Lender (because the appropriate form was not delivered or properly completed, because such Lender failed to notify the Agent of a change in circumstances which rendered its exemption from withholding ineffective, or for any other reason), such Lender shall indemnify the Agent fully for all amounts paid, directly or indirectly, by the Agent as tax, withholding therefor, or otherwise, including penalties and interest, and including taxes imposed by any jurisdiction on amounts payable to the Agent under this subsection, together with all costs and expenses related thereto (including attorneys fees and time charges of attorneys for the Agent, which attorneys may be employees of the Agent). The obligations of the Lenders under this Section 3.05(vii) shall survive the payment of the Obligations and termination of this Agreement. 3.06. Lender Statements; Survival of Indemnity. To the extent reasonably possible, each Lender shall designate an alternate Lending Installation with respect to its Eurodollar Loans to reduce any liability of the Borrower to such Lender under Sections 3.01, 3.02 and 3.05 or to avoid the unavailability of Eurodollar Advances under Section 3.03, so long as such designation is not, in the judgment of such Lender, disadvantageous to such Lender. Each Lender shall deliver a written statement of such Lender to the Borrower (with a copy to the Agent) as to the amount due, if any, under Section 3.01, 3.02, 3.04 or 3.05. Such written statement shall set forth in reasonable detail the calculations upon which such Lender determined such amount and shall be final, conclusive and binding on the Borrower in the absence of manifest error. Determination of amounts payable under such Sections in connection with a Eurodollar Loan shall be calculated as though each Lender funded its Eurodollar Loan through the purchase of a deposit of the type and maturity corresponding to the deposit used as a reference in determining the Eurodollar Rate applicable to such Loan, whether in fact that is the case or not. Unless otherwise provided herein, the amount specified in the written statement of any Lender shall be payable on demand after receipt by the Borrower of such written statement. The obligations of the Borrower under Sections 3.01, 3.02, 3.04 and 3.05 shall survive payment of the Obligations and termination of this Agreement. ARTICLE IV CONDITIONS PRECEDENT 4.01. Conditions Precedent to Effectiveness. The obligations of each Lender under this Agreement are subject to the conditions that the Borrower has furnished to the Agent with sufficient copies for the Lenders, each in form and substance satisfactory to the Agent, the following: 31 (i) This Agreement duly executed by the Borrower, the Lenders and the Agent. (ii) The Notes requested by the Lenders pursuant to Section 2.14, each payable to the order of one such requesting Lender. (iii) The Guaranties. (iv) The Security Agreements. (v) The Stock Pledge Agreements, in each case together with the stock certificates and instruments described in the schedules thereto endorsed in blank (or in the case of stock certificates, accompanied by appropriate stock powers). (vi) The Note Pledge Agreements, together with the intercompany promissory notes and other instruments described in the schedules thereto, in each case duly endorsed to the order of the Agent. (vii) Copies of the certificate of incorporation of the Borrower, together with all amendments, and certificates of existence and good standing, each certified by the appropriate governmental officer in its jurisdiction of incorporation. (viii) A certificate of the Secretary of the Borrower certifying (a) copies of the resolutions of the Board of Directors of the Borrower approving this Agreement, the Notes, the Collateral Documents of the Borrower and the other Loan Documents of the Borrower and of all documents evidencing other necessary corporate action and governmental approvals, if any, with respect to the foregoing; and (b) that attached thereto are true and complete copies of the by-laws of the Borrower. (ix) An incumbency certificate, executed by the Secretary of the Borrower, which shall identify by name and title and bear the signatures of Authorized Officers and any other officers of the Borrower authorized to sign the Loan Documents to which the Borrower is a party, upon which certificate the Agent and the Lenders shall be entitled to rely until informed of any change in writing by the Borrower. (x) Copies of the articles or certificate of incorporation of each Obligor (other than the Borrower), together with all amendments, and certificates of existence and good standing, each certified by the appropriate governmental officer in its jurisdiction of incorporation. (xi) A certificate of the Secretary of each Obligor (other than the Borrower) certifying (a) copies of the resolutions of the Board of Directors or such Obligor approving the Loan Documents of such Obligor and of all documents evidencing other necessary corporate action and governmental approvals, if any, with respect to the foregoing; and (b) that attached thereto are true and complete copies of the by-laws of such Obligor. 32 (xii) An incumbency certificate for each Obligor (other than the Borrower), executed by the Secretary of such Obligor, which shall identify by name and title and bear the signatures of officers of such Obligor authorized to sign the Loan Documents to which such Obligor is a party, upon which certificate the Agent and the Lenders shall be entitled to rely until informed of any change in writing by such Obligor. (xiii) A certificate, signed by the chief financial officer of the Borrower, (a) stating that no Default or Unmatured Default has occurred and is continuing, and (b) indicating that after giving effect to this Agreement and the other Loan Documents, the Borrower and each Obligor is solvent and is able to pay its debts and liabilities as they become due and will not be left with unreasonably small capital with which to engage in its respective business. (xiv) A written opinion of in-house counsel to the Borrower and the other Obligors, addressed to the Agent and the Lenders in form and substance reasonably satisfactory to the Agent and the Lenders. (xv) Written money transfer instructions, in substantially the form of Exhibit E, addressed to the Agent and signed by an Authorized Officer, together with such other related money transfer authorizations as the Agent may have reasonably requested. (xvi) An insurance binder evidencing appropriate liability and casualty insurance for each Obligor. (xvii) Evidence of payment of fees owing to the Lenders, including payment of an amendment fee to each Lender in an amount equal to 0.50% times the Commitment of such Lender. (xviii) Such other documents as any Lender or its counsel may reasonably request. 4.02. Each Credit Extension. The obligation of each Lender or the LC Issuer to make any Credit Extension hereunder is subject to the further condition precedent that upon the effectiveness of the proposed Credit Extension, the following statements shall be true and correct: (i) There exists no Default or Unmatured Default, and no Default or Unmatured Default would result from the proposed Credit Extension or the application of proceeds therefrom. (ii) The representations and warranties contained in Article V are true and correct as of such Credit Extension Date except to the extent any such representation or warranty is stated to relate solely to an earlier date, in which case such representation or warranty shall have been true and correct on and as of such earlier date. Each Borrowing Notice, Conversion/Continuation Notice, or request for the issuance or Modification of a Facility LC with respect to each such Credit Extension shall constitute a representation and warranty by the Borrower that the conditions contained in Sections 4.02(i) and 4.02(ii) will have been satisfied as of the applicable Credit Extension Date. 33 ARTICLE V REPRESENTATIONS AND WARRANTIES In order to induce the Agent and the Lenders to enter into this Agreement and to make the Advances provided for herein, the Borrower for itself and each of its Subsidiaries, on or as of the occurrence of each Credit Extension (except to the extent such representation or warranty expressly relate to an earlier date), represents and warrants to the Agent and the Lenders that: 5.01. Existence and Standing. Each of the Borrower and its Subsidiaries is a corporation, partnership (in the case of Subsidiaries only) or limited liability company duly and properly incorporated or organized, as the case may be, validly existing and (to the extent such concept applies to such entity) in good standing under the laws of its jurisdiction of incorporation or organization and has all requisite authority to conduct its business in each jurisdiction in which its business is conducted. 5.02. Authorization and Validity. Each Obligor has the power and authority and legal right to execute and deliver the Loan Documents to which it is a party and to perform its obligations thereunder. The execution and delivery by each Obligor of the Loan Documents to which it is a party and the performance of its obligations thereunder have been duly authorized by proper corporate proceedings, and the Loan Documents to which each Obligor is a party constitute legal, valid and binding obligations of such Obligor enforceable against such Obligor in accordance with their terms, except as enforceability may be limited by bankruptcy, insolvency or similar laws affecting the enforcement of creditors' rights generally. 5.03. No Conflict; Government Consent. Neither the execution and delivery by any Obligor of the Loan Documents to which it is a party, nor the consummation of the transactions therein contemplated, nor compliance with the provisions thereof will violate (i) any law, rule, regulation, order, writ, judgment, injunction, decree or award binding on the Borrower or any of its Subsidiaries or (ii) the Borrower's or any Subsidiary's articles or certificate of incorporation, partnership agreement, certificate of partnership, articles or certificate of organization, by-laws, or operating or other management agreement, as the case may be, or (iii) the provisions of any indenture, instrument or agreement to which the Borrower or any of its Subsidiaries is a party or is subject, or by which it, or its Property, is bound, or conflict with or constitute a default thereunder, or result in, or require, the creation or imposition of any Lien in, of or on the Property of the Borrower or any of its Subsidiaries pursuant to the terms of any such indenture, instrument or agreement. No order, consent, adjudication, approval, license, authorization, or validation of, or filing, recording or registration with, or exemption by, or other action in respect of any governmental or public body or authority, or any subdivision thereof, which has not been obtained by the Borrower or any of its Subsidiaries, is required to be obtained by the Borrower or any of its Subsidiaries in connection with the execution and delivery of the Loan Documents, the borrowings under this Agreement, the payment and performance by the Borrower of the Obligations or the legality, validity, binding effect or enforceability of any of the Loan Documents. 5.04. Financial Statements. The consolidated financial statements of the Borrower and its Subsidiaries heretofore delivered to the Lenders were prepared in accordance with generally accepted 34 accounting principles in effect on the date such statements were prepared and fairly present the consolidated financial condition and operations of the Borrower and its Subsidiaries at such date and the consolidated results of their operations for the period then ended. 5.05. Material Adverse Change. Since December 31, 2000 there has been no change in the business, Property, operations, performance, condition (financial or otherwise) or results of operations of the Borrower and its Subsidiaries which could have a Material Adverse Effect. 5.06. Taxes. The Borrower and its Subsidiaries have filed all United States federal tax returns and all other tax returns which are required to be filed and have paid all taxes due pursuant to said returns or pursuant to any assessment received by the Borrower or any of its Subsidiaries, except such taxes, if any, as are being contested in good faith and as to which adequate reserves have been provided in accordance with GAAP and as to which no Lien exists. No tax liens have been filed and no claims are being asserted with respect to any such taxes. The charges, accruals and reserves on the books of the Borrower and its Subsidiaries in respect of any taxes or other governmental charges are adequate. If any Subsidiary of the Borrower is a limited liability company, each such limited liability company qualifies for partnership tax treatment under United States federal tax law. 5.07. Litigation and Contingent Obligations. There is no litigation, arbitration, governmental investigation, proceeding or inquiry pending or, to the knowledge of any of their officers, threatened against or affecting the Borrower or any of its Subsidiaries which could have a Material Adverse Effect or which seeks to prevent, enjoin or delay the making of any Credit Extension. Other than any liability incident to any litigation, arbitration or proceeding which could not have a Material Adverse Effect, the Borrower and its Subsidiaries have no material contingent obligations not provided for or disclosed in the financial statements referred to in Section 5.04. 5.08. Subsidiaries. Schedule III contains an accurate list of all Subsidiaries of the Borrower as of the date hereof, setting forth their respective jurisdictions of organization and the percentage of their respective capital stock or other ownership interests owned by the Borrower or other Subsidiaries. All of the issued and outstanding shares of capital stock or other ownership interests of such Subsidiaries have been (to the extent such concepts are relevant with respect to such ownership interests) duly authorized and issued and are fully paid and non-assessable. 5.09. ERISA. To the extent that none of the following could have a Material Adverse Effect, (i) the Unfunded Liabilities of all Single Employer Plans neither in the aggregate exceed $1,000,000 nor could have a Material Adverse Effect; (ii) neither the Borrower nor any other member of the Controlled Group has incurred, or is expected to incur, any withdrawal liability to Multiemployer Plans either in excess of $1,000,000 in the aggregate or which could have a Material Adverse Effect; (iii) each Plan complies in all material respects with all applicable requirements of law and regulations, no Reportable Event has occurred with respect to any Plan, neither the Borrower nor any other member of the Controlled Group has withdrawn from any Plan or initiated steps to do so, and no steps have been taken to reorganize or terminate any Plan. 5.10. Accuracy of Information. No information, exhibit or report furnished by the Borrower or any of its Subsidiaries to the Agent or to any Lender in connection with the negotiation 35 of, or compliance with, the Loan Documents contained any material misstatement of fact or omitted to state a material fact or any fact necessary to make the statements contained therein, together with all exhibits, reports and other information furnished by the Borrower and its Subsidiaries to the Agent and the Lenders, taken as a whole, not misleading. 5.11. Regulation U. Margin stock (as defined in Regulation U) constitutes less than twenty-five percent (25%) of the value of those assets of the Borrower and its Subsidiaries which are subject to any limitation on sale, pledge, or other restriction hereunder. 5.12. Material Agreements. Neither the Borrower nor any Subsidiary is a party to any agreement or instrument or subject to any charter or other corporate restriction which could have a Material Adverse Effect. Neither the Borrower nor any Subsidiary is in default in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in (i) any agreement to which it is a party, which default could have a Material Adverse Effect or (ii) any one or more agreements or instruments evidencing or governing Material Indebtedness. 5.13. Compliance With Laws. The Borrower and its Subsidiaries have complied with all applicable statutes, rules, regulations, orders and restrictions of any domestic or foreign government or any instrumentality or agency thereof having jurisdiction over the conduct of their respective businesses or the ownership of their respective Property except for any failure to comply with any of the foregoing which could not have a Material Adverse Effect. 5.14. Ownership of Properties. Except as set forth on Schedule V, on the date hereof, the Borrower and its Subsidiaries will have good title, free of all Liens other than those permitted by Section 6.15, to all of the Property and assets reflected in the Borrower's most recent consolidated financial statements provided to the Agent as owned by the Borrower and its Subsidiaries. 5.15. Plan Assets; Prohibited Transactions. The Borrower is not an entity deemed to hold "plan assets" within the meaning of 29 C.F.R. Section 2510.3-101 of an employee benefit plan (as defined in Section 3(3) of ERISA) which is subject to Title I of ERISA or any plan (within the meaning of Section 4975 of the Code), and neither the execution of this Agreement nor the making of any Credit Extension hereunder gives rise to a prohibited transaction within the meaning of Section 406 of ERISA or Section 4975 of the Code. 5.16. Environmental Matters. In the ordinary course of its business, the officers of the Borrower consider the effect of Environmental Laws on the business of the Borrower and its Subsidiaries, in the course of which they identify and evaluate potential risks and liabilities accruing to the Borrower due to Environmental Laws. On the basis of this consideration, the Borrower has concluded that Environmental Laws do not have a Material Adverse Effect. Neither the Borrower nor any Subsidiary has received any notice to the effect that its operations are not in compliance with any of the requirements of applicable Environmental Laws or are the subject of any federal or state investigation evaluating whether any remedial action is needed to respond to a release of any toxic or Hazardous Substance into the environment, which non-compliance or remedial action could have a Material Adverse Effect. 36 5.17. Investment Company Act. Neither the Borrower nor any Subsidiary is an "investment company" or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended. 5.18. Public Utility Holding Company Act. Neither the Borrower nor any Subsidiary is a "holding company" or a "subsidiary company" of a "holding company", or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company", within the meaning of the Public Utility Holding Company Act of 1935, as amended. 5.19. Permitted Senior Subordinated Debt. The Obligations constitute senior indebtedness which is entitled to the benefits of the subordination provisions of all outstanding Permitted Senior Subordinated Debt. 5.20. Solvency. (i) As of the date hereof, (a) the fair value of the business of the Borrower and its Subsidiaries on a consolidated basis, will exceed the debts and liabilities, subordinated, contingent or otherwise, of the Borrower and its Subsidiaries on a consolidated basis; (b) the present fair saleable value of the Property of the Borrower and its Subsidiaries on a consolidated basis will be greater than the amount that will be required to pay the probable liability of the Borrower and its Subsidiaries on a consolidated basis on their debts and other liabilities, subordinated, contingent or otherwise, as such debts and other liabilities become absolute and matured; (c) the Borrower and its Subsidiaries on a consolidated basis expect to be able to pay their debts and liabilities, subordinated, contingent or otherwise, as such debts and liabilities become absolute and matured; and (d) the Borrower and its Subsidiaries on a consolidated basis believe that they do not have unreasonably small capital with which to conduct the businesses in which they are engaged as such businesses are now conducted and are proposed to be conducted after the date hereof. (ii) The Borrower does not intend to, or to permit any of its Subsidiaries to, and does not believe that it or any of its Subsidiaries will, incur debts beyond its ability to pay such debts as they mature, taking into account the timing of and amounts of cash to be received by it or any such Subsidiary and the timing of the amounts of cash to be payable on or in respect of its Indebtedness or the Indebtedness of any such Subsidiary. 5.21. General Purpose of Facility. The Borrower warrants and represents to the Agent the LC Issuer and the Lenders and all other future owners and holders of this Agreement, the Notes and the other Loan Documents, that all Credit Extensions are and will be for business, commercial, investment or other similar purpose and not primarily for personal, family, household or agricultural use, as such terms are used in the Texas Finance Code. ARTICLE VI COVENANTS So long as any Reimbursement Obligation or any other amount payable by the Borrower hereunder or under any Note shall remain unpaid or any Lender shall have any obligation to lend hereunder, and until all of the Commitments and all of the Letters of Credit are terminated, unless the Required Lenders shall otherwise consent in writing: 37 6.01. Financial and Other Reporting. The Borrower will maintain, for itself and each Subsidiary, a system of accounting established and administered in accordance with generally accepted accounting principles, and furnish to the Lenders: (i) Within ninety (90) days after the close of each of its fiscal years, an unqualified audit report certified by independent certified public accountants acceptable to the Lenders, prepared in accordance with GAAP on a consolidated and consolidating basis (consolidating statements need not be certified by such accountants and need not cover cash flow reporting) for itself and its Subsidiaries, including balance sheets as of the end of such period, related profit and loss and reconciliation of surplus statements, and a statement of cash flows, accompanied by any management letter prepared by said accountants. (ii) Within forty-five (45) days after the close of the first three quarterly periods of each of its fiscal years, for itself and its Subsidiaries, consolidated and consolidating unaudited balance sheets as at the close of each such period and consolidated and consolidating profit and loss and reconciliation of surplus statements and a statement of cash flows for the period from the beginning of such fiscal year to the end of such quarter, all certified by its chief financial officer (consolidating statements need not cover cash flow reporting). (iii) As soon as available, but in any event within ninety (90) days after the beginning of each fiscal year of the Borrower, a copy of the plan and forecast (including a projected consolidated balance sheet, income statement and funds flow statement) of the Borrower for such fiscal year. (iv) Together with the financial statements required under Sections 6.01(i) and 6.01(ii), a compliance certificate in substantially the form of Exhibit D signed by an Authorized Officer of the Borrower showing the calculations necessary to determine compliance with this Agreement and stating that no Default or Unmatured Default exists, or if any Default or Unmatured Default exists, stating the nature and status thereof, and including a report of Consolidated Capital Expenditures (with Consolidated Capital Expenditures of a maintenance nature separately identified and reported) for the then most-recently ended four fiscal quarters. (v) Within 270 days after the close of each fiscal year, a statement of the Unfunded Liabilities of each Single Employer Plan, certified as correct by an actuary enrolled under ERISA. (vi) As soon as possible and in any event within five (5) Business Days after the Borrower knows that any Reportable Event has occurred with respect to any Plan, a statement, signed by the chief financial officer of the Borrower, describing said Reportable Event and the action which the Borrower proposes to take with respect thereto. (vii) As soon as possible and in any event within five (5) Business Days after receipt by the Borrower, a copy of (a) any notice or claim to the effect that the Borrower or any of its Subsidiaries is or may be liable to any Person as a result of the release by the Borrower, any of its Subsidiaries, or any other Person of any toxic or hazardous waste or substance into the environment, and (b) any notice alleging any violation of any federal, state or local environmental, health or safety law or regulation by the Borrower or any of its Subsidiaries, which, in either case, could have a Material Adverse Effect. 38 (viii) Promptly upon the filing thereof, copies of all registration statements and annual, quarterly, monthly or other regular reports which the Borrower or any of its Subsidiaries files with the Securities and Exchange Commission. (ix) Such other information (including non-financial information) of the Borrower or any of its Subsidiaries as the Agent or any Lender may from time to time reasonably request. 6.02. Use of Proceeds. The Borrower will, and will cause each Subsidiary to, use the proceeds of the Credit Extension for general corporate purposes and, for Permitted Acquisitions and for intercompany loans to increase the working capital of any Subsidiary of the Borrower that is an Obligor. The Borrower will not, nor will it permit any Subsidiary to, use any of the proceeds of the Advances (i) to purchase or carry any "margin stock" (as defined in Regulation U) or to extend credit to any Person for that purpose or (ii) in any manner which violates or results in a violation of any law or regulation, including without limitation, any regulation of the Board of Governors of the Federal Reserve System or the Securities Exchange Act of 1934, in each case as now or hereafter in effect. 6.03. Notice of Default. The Borrower will, and will cause each Subsidiary to, give prompt notice in writing to the Agent of the occurrence of any Default or Unmatured Default, and (ii) of any development, financial or otherwise which could have a Material Adverse Effect. 6.04. Conduct of Business. The Borrower will, and will cause each Subsidiary to, (i) carry on and conduct its business in substantially the same manner and in substantially the same fields of enterprise as it is presently conducted and do all things necessary to remain duly incorporated or organized, validly existing and (to the extent such concept applies to such entity) in good standing as a domestic corporation, partnership or limited liability company in its jurisdiction of incorporation or organization, as the case may be and, (ii) except where the failure to do so could have a Material Adverse Effect, maintain all requisite authority to conduct its business in each jurisdiction in which its business is conducted. 6.05. Taxes. The Borrower will, and will cause each Subsidiary to, timely file complete and correct United States federal and applicable foreign, state and local tax returns required by law and pay when due all taxes, assessments and governmental charges and levies upon it or its income, profits or Property, except those which are being contested in good faith by appropriate proceedings and with respect to which adequate reserves have been set aside in accordance with GAAP. At any time that any Subsidiary of the Borrower is organized as a limited liability company, each such limited liability company will qualify for partnership tax treatment under United States federal tax law. 6.06. Insurance. The Borrower will, and will cause each Subsidiary to, maintain with financially sound and reputable insurance companies insurance on substantially all their Property in such amounts and covering such risks as is consistent with sound business practice, and the Borrower will furnish to any Lender upon request full information as to the insurance carried. 6.07. Compliance with Laws. The Borrower will, and will cause each Subsidiary to, comply with all laws, rules, regulations, orders, writs, judgments, injunctions, decrees or awards to 39 which it may be subject which could have a Material Effect including, without limitation, all Environmental Laws. 6.08. Maintenance of Properties. The Borrower will, and will cause each Subsidiary to, do all things necessary to maintain, preserve, protect and keep substantially all of its Property in good repair, working order and condition, and make all necessary and proper repairs, renewals and replacements so that its business carried on in connection therewith may, in all material respect, be properly conducted at all times. 6.09. Inspection. The Borrower will, and will cause each Subsidiary to, permit the Agent and the Lenders, by their respective representatives and agents, to inspect any of the Property, books and financial records of the Borrower and each Subsidiary, to examine and make copies of the books of accounts and other financial records of the Borrower and each Subsidiary, and upon reasonable prior notice to discuss the affairs, finances and accounts of the Borrower and each Subsidiary with, and to be advised as to the same by, their respective officers at such times during normal business hours and intervals as the Agent or any Lender may designate. 6.10. Dividends. The Borrower will not, nor will it permit any Subsidiary to, declare or pay any dividends or make any Distribution on its Capital Stock (other than dividends payable in its own Capital Stock) or redeem, repurchase or otherwise acquire or retire any of its Capital Stock at any time outstanding, except that (i) any Subsidiary of the Borrower may declare and pay dividends and make Distributions (a) to a Wholly-Owned Subsidiary of the Borrower that is a Guarantor if no Default or Unmatured Default would result from such declaration, payment or making, or (b) to the Borrower, and (ii) the Borrower (x) may declare and pay dividends on Borrower Preferred Stock to the holders thereof if no Default or Unmatured Default exists at the time of such declaration or payment and if no Default or Unmatured Default would result from such declaration or payment or (y) may make Distributions in the manner expressly specified in clause (ii) and (iii) of Section 2.02. 6.11. Indebtedness. The Borrower will not, nor will it permit any Subsidiary to, create, incur or suffer to exist any Indebtedness, except: (i) the Loans, the Reimbursement Obligations and other Indebtedness arising under this Agreement and the Loan Documents. (ii) current liabilities incurred in the ordinary course of business. (iii) trade payables in the ordinary course of business. (iv) Permitted Senior Subordinated Debt. (iii) Indebtedness arising under Related Rate Hedging Agreements. (v) (a) Indebtedness arising out of Capitalized Leases, (b) purchase money Indebtedness representing the portion of the purchase price of Property acquired by the Borrower or such Subsidiary which may be secured by Liens permitted by Section 6.15(vii), (c) Indebtedness assumed by the Borrower in connection with a Permitted 40 Acquisition and (d) unsecured Indebtedness, in the aggregate for clauses (a) through (d), inclusive, of this Section 6.11(v), of $5,000,000 in the aggregate outstanding at any time. (vi) Indebtedness not exceeding $5,000,000 in the aggregate at any time acquired in Permitted Acquisition and released within 30 days from the close of Acquisition in which such Indebtedness was acquired. (vii) Capitalized Lease Obligations arising under Permitted Sale and Leaseback Transactions. 6.12. Merger. The Borrower will not, nor will it permit any Subsidiary to, merge or consolidate with or into any other Person, or sell, convey, transfer, lease or otherwise dispose of (whether in one transaction or in a series of transactions) all or substantially all of its assets (whether now owned or hereafter acquired), except that (i) a Subsidiary may merge into the Borrower or a Wholly-Owned Subsidiary and (ii) the Target of the Permitted Acquisition may merge into a Wholly-Owned Subsidiary, in each case if immediately prior to and after giving effect to such merger no event has occurred and is continuing, or would result, which constitutes a Default or Unmatured Default. 6.13. Sale of Assets. The Borrower will not, nor will it permit any Subsidiary to, lease, sell or otherwise dispose of its Property to any other Person, except: (i) Sales of inventory in the ordinary course of business. (ii) Sales of worn-out or obsolete equipment in the normal course of business, if no Default exists at the time of such sale. (iii) Replacement of equipment in the normal course of business with other equipment at least as useful and beneficial to the Borrower and its Subsidiaries and their respective businesses as the equipment replaced if no Default exists at the time of such replacement and an Acceptable Security Interest exists in such other equipment at the time of and at all times after such replacement. (iv) Leases, sales or other dispositions of its Property that do not exceed $100,000 for any single item of such Property and that, together with all other Property of the Borrower and its Subsidiaries previously leased, sold or disposed of (other than Property described in clauses (i) through (iii) of this Section 6.13) during the twelve-month period ending with the month in which any such lease, sale or other disposition occurs, do not exceed $100,000 in the aggregate. (v) Permitted Sale and Leaseback Transactions. 6.14. Investments and Acquisitions. The Borrower will not, nor will it permit any Subsidiary to, make or suffer to exist any Investments (including without limitation, loans and advances to, and other Investments in, Subsidiaries), or commitments therefor, or to create any 41 Subsidiary or to become or remain a partner in any partnership or joint venture, or to make any Acquisition of any Person, except (i) Cash Equivalent Investments, (ii) existing Investments in Subsidiaries and other Investments in existence on the date hereof and described in Schedule III, (iii) Wholly-Owned Subsidiaries in compliance with Section 6.18, and (iv) Permitted Acquisitions not described on Schedule III. 6.15. Liens. The Borrower will not, nor will it permit any Subsidiary to, create, incur, or suffer to exist any Lien in, of or on the Property of the Borrower or any of its Subsidiaries, except: (i) Liens for taxes, assessments or governmental charges or levies on its Property if the same shall not at the time be delinquent or thereafter can be paid without penalty, or are being contested in good faith and by appropriate proceedings and for which adequate reserves in accordance with GAAP shall have been set aside on its books. (ii) Liens imposed by law, such as carriers', warehousemen's and mechanics' liens and other similar liens arising in the ordinary course of business which secure payment of obligations not more than 60 days past due or which are being contested in good faith by appropriate proceedings and for which adequate reserves shall have been set aside on its books. (iii) Liens arising out of pledges or deposits under worker's compensation laws, unemployment insurance, old age pensions, or other social security or retirement benefits, or similar legislation. (iv) Rights of set off arising under common law or by statute. (v) Utility easements, building restrictions and such other encumbrances or charges against real property as are of a nature generally existing with respect to properties of a similar character and which do not in any material way affect the marketability of the same or interfere with the use thereof in the business of the Borrower or its Subsidiaries. (vi) Liens existing on the date hereof and listed on Schedule V and renewals and extensions thereof. (vii) Liens securing the Indebtedness permitted by clauses (a), (b) and (c) of Section 6.11(v) and placed on Property, contemporaneously with the purchase thereof, by the Borrower or any of its Subsidiaries to secure all of a portion of the purchase price therefor, provided that such Lien shall not extend to any other Property of the Borrower or its Subsidiaries. (viii) Liens in favor of the Agent, for the benefit of the Lenders, granted pursuant to any Collateral Document. (ix) UCC protective filings with respect to personal property permitted to be leased hereunder by the Borrower or its Subsidiaries in the ordinary course of business. 42 (x) Liens securing judgments and orders which do not exceed $1,000,000 in the aggregate at any time and which, individually or in the aggregate, could not have a Material Adverse Effect. 6.16. Sale of Accounts. The Borrower will not, nor will it permit any Subsidiary to, sell or otherwise dispose of any notes receivable or accounts receivable, with or without recourse. 6.17. Affiliates. The Borrower will not, and will not permit any Subsidiary to, directly or indirectly (i) enter into any transaction (including, without limitation, the purchase or sale of any Property or service) with, or make any payment or transfer to, any Affiliate or (ii) make any material arrangement or other material transaction with or for the benefit of any Affiliate, in each case except in the ordinary course of business and pursuant to the reasonable requirements of the Borrower's or such Subsidiary's business and upon fair and reasonable terms no less favorable to the Borrower or such Subsidiary than the Borrower or such Subsidiary would obtain in a comparable arms-length transaction with a Person not an Affiliate. 6.18. New Subsidiaries. Contemporaneously with the creation or acquisition of any direct or indirect Subsidiary of the Borrower (a "New Subsidiary"), the Borrower shall, or shall cause the parent of such New Subsidiary to: (a) grant or cause to be granted to the Agent, pursuant to Note Pledge Agreements and Stock Pledge Agreements, an Acceptable Security Interest in (i) all Capital Stock and other Investments in such New Subsidiary; (b) cause each such New Subsidiary to guaranty the payment and performance of the Obligations by executing and delivering to the Agent a Guaranty; and (c) cause each such New Subsidiary to execute and deliver to the Agent a Security Agreement and such other Collateral Documents as the Agent may reasonably request to grant the Agent and the Lenders an Acceptable Security Interest on all personal property of such New Subsidiary. 6.19. Amendments to Material Agreements. The Borrower will not, and will not permit any Subsidiary to amend, waive, terminate or otherwise modify, or to cancel or breach any term or provision of, any Material Agreement, except the amendment, waiver or modification of those, but only those terms and provisions whose amendment, waiver or modification thereunder are clearly beneficial to the Borrower and its Subsidiaries and could not have an adverse effect on the performance of any Obligation or on any right or benefit available to the Agent, the LC Issuer or any Lender. 6.20. Permitted Senior Subordinated Debt. The Borrower will not, and will not permit any Subsidiary to, make any amendment or modification to the indenture, note or other agreement evidencing or governing any Permitted Senior Subordinated Debt, or directly or indirectly voluntarily prepay, defease or in substance defease, purchase, redeem, retire or otherwise acquire, any Permitted Senior Subordinated Debt, except (i) promptly upon the issuance of Capital Stock, net proceeds 43 therefrom applied as permitted in accordance with Section 2.02(ii) and (ii) any amendment or modification allowed under Section 6.19. 6.21. Sale and Leaseback Transactions and other Off-Balance Sheet Liabilities. The Borrower will not, nor will it permit any Subsidiary to, enter into or suffer to exist any (i) Sale and Leaseback Transaction other than Permitted Sale and Leaseback Transactions or (ii) any other transaction pursuant to which it incurs or has incurred Off-Balance Sheet Liabilities, except for Related Rate Hedging Obligations. 6.22. Contingent Obligations. The Borrower will not, nor will it permit any Subsidiary to, make or suffer to exist any Contingent Obligation (including, without limitation, any Contingent Obligation with respect to the obligations of a Subsidiary), except (i) by endorsement of instruments for deposit or collection in the ordinary course of business, (ii) the Reimbursement Obligations, (iii) each Guaranty of the Obligations, and (iv) as permitted by Section 6.25. 6.23. Letters of Credit. The Borrower will not, nor will it permit any Subsidiary to, apply for or become liable upon or in respect of any Letter of Credit other than Facility LCs. 6.24. No Lien Restriction. The Borrower will not, nor will it permit any Subsidiary to, enter into any contract or agreement which in any way limits or restricts the Borrower or any of its Subsidiaries from granting an Acceptable Security Interest on any Property or from granting a Lien on its Property to secure a Related Rate Hedging Agreement. 6.25. Financial Contracts. The Borrower will not, nor will it permit any Subsidiary to, enter into or remain liable upon any Financial Contract, except Rate Hedging Agreements permitted hereunder. 6.26. Financial Covenants. 6.26.01. Total Debt to EBITDA Ratio. The Borrower will not permit the ratio, determined as of the end of each of its fiscal quarters for the then most- recently ended four fiscal quarters, of (i) Consolidated Funded Total Debt to (ii) Consolidated EBITDA to be greater than 3.50 to 1.0. 6.26.02. Senior Debt to EBITDA Ratio. The Borrower will not permit the ratio, determined as of the end of each of its fiscal quarters for the then most- recently ended four fiscal quarters, of (i) Consolidated Senior Total Debt to (ii) Consolidated EBITDA to be greater than 2.25 to 1.0. 6.26.03. Fixed Charge Coverage Ratio. The Borrower will not permit the ratio, determined as of the end of each of its fiscal quarters for the then most- recently ended four fiscal quarters, of (i) Consolidated EBITDA minus the sum of Consolidated Cash Taxes and Consolidated Capital Expenditures other than Discretionary Capital Expenditures, to (ii) Consolidated Cash Interest Expense, plus current maturities of principal Indebtedness, plus Scheduled Preferred Dividend Payments, plus one seventh (1/7th) of the Aggregate Outstanding Credit Exposure, 44 all calculated for the Borrower and its Subsidiaries on a consolidated basis, to be less than 1.25 to 1.0. 6.26.04. Minimum Net Worth. The Borrower will at all times maintain Consolidated Net Worth of not less than the sum of (i) $56,977,000 plus (ii) seventy-five percent (75%) of Consolidated Net Income earned in each fiscal quarter beginning with the quarter ending March 31, 2001 (without deduction for losses) plus (iii) one hundred percent (100%) of the net proceeds realized from each sale of any common stock, preferred stock or other equity of the Borrower and any of its Subsidiaries; provided, however, that the required Consolidated Net Worth shall be adjusted dollar-for-dollar for any non-cash write-downs of goodwill specifically associated with any authoritative accounting pronouncements derived from the FASB Exposure Draft originally issued September 7, 1999. 6.27. Capital Expenditures. The Borrower will not, nor will it permit any Subsidiary to, pay or incur Consolidated Capital Expenditures for the then most-recently ended four fiscal quarters in excess of the lesser of (i) $12,000,000 or (ii) two percent (2%) of consolidated revenues of the Borrower for the then most-recently ended four fiscal quarters. ARTICLE VII DEFAULTS The occurrence of any one or more of the following events shall constitute a Default: 7.01. Misrepresentation. Any representation or warranty made or deemed made by or on behalf of the Borrower or any of its Subsidiaries to the Lenders, the LC Issuer or the Agent under or in connection with this Agreement, any Credit Extension, or any certificate or information delivered in connection with this Agreement or any other Loan Document shall be false in any material respect on the date as of which made or deemed made. 7.02. Nonpayment of Obligations. Nonpayment of principal of any Loan when due, nonpayment of any Reimbursement Obligation within one (1) Business Day after the same becomes due, or nonpayment of interest upon any Loan or of any commitment fee, LC Fee or other obligations under any of the Loan Documents within five days after the same becomes due. 7.03. Certain Covenants. The breach by the Borrower of any of the terms or provisions either of Section 6.02, or any of Sections 6.10 through 6.26, inclusive. 7.04. Other Breach. The breach by the Borrower (other than a breach which constitutes a Default under another Section of this Article VII) of any of the terms or provisions of this Agreement which is not remedied within thirty (30) days after written notice from the Agent or any Lender. 7.05. Other Indebtedness. Failure of the Borrower or any of its Subsidiaries, or any Obligor to pay when due any Indebtedness aggregating in excess of $1,000,000 ("Material Indebtedness"); or the default by the Borrower or any of its Subsidiaries or any Obligor in the 45 performance of any term, provision or condition contained in any agreement under which any such Material Indebtedness was created or is governed, or any other event shall occur or condition exist, the effect of which default or event is to cause, or to permit the holder or holders of such Material Indebtedness to cause, such Material Indebtedness to become due prior to its stated maturity; or any Material Indebtedness of the Borrower or any of its Subsidiaries or any Obligor shall become due and payable or required to be prepaid or repurchased (other than by a regularly scheduled payment) prior to the stated maturity thereof; or the Borrower or any of its Subsidiaries or any Obligor shall not pay, or admit in writing its inability to pay, its debts generally as they become due. 7.06. Bankruptcy, Reorganization, etc. The Borrower or any of its Subsidiaries or any Obligor shall (i) have an order for relief entered with respect to it under the Federal bankruptcy laws as now or hereafter in effect, (ii) make an assignment for the benefit of creditors, (iii) apply for, seek, consent to, or acquiesce in, the appointment of a receiver, custodian, trustee, examiner, liquidator or similar official for it or any Property with an aggregate value exceeding $1,000,000, (iv) institute any proceeding seeking an order for relief under the Federal bankruptcy laws as now or hereafter in effect or seeking to adjudicate it a bankrupt or insolvent, or seeking dissolution, winding up, liquidation, reorganization, arrangement, adjustment or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors or fail to file an answer or other pleading denying the material allegations of any such proceeding filed against it, (v) take any corporate or partnership action to authorize or effect any of the foregoing actions set forth in this Section 7.06 or (vi) fail to contest in good faith any appointment or proceeding described in Section 7.07. 7.07. Appointment of Receiver. Without the application, approval or consent of the Borrower, any of its Subsidiaries or any Obligor, a receiver, trustee, examiner, liquidator or similar official shall be appointed for the Borrower, any of its Subsidiaries or any Obligor or any Property with an aggregate value exceeding $1,000,000, or a proceeding described in Section 7.06(iv) shall be instituted against the Borrower, any of its Subsidiaries or any Obligor and such appointment continues undischarged or such proceeding continues undismissed or unstayed for a period of 60 consecutive days. 7.08. Seizure of Property. Any court, government or governmental agency shall condemn, seize or otherwise appropriate, or take custody or control of, all or any portion of the Property of the Borrower and its Subsidiaries or any Obligor which, when taken together with all other Property of the Borrower and its Subsidiaries or any Obligor so condemned, seized, appropriated, or taken custody or control of, during the twelve-month period ending with the month in which any such action occurs, has an aggregate value in excess of $1,000,000. 7.09. Judgment. The Borrower or any of its Subsidiaries shall fail within 30 days to pay, bond or otherwise discharge one or more (i) judgments or orders for the payment of money in excess of $1,000,000 (or the equivalent thereof in currencies other than U.S. Dollars) in the aggregate, or (ii) nonmonetary judgments or orders which, individually or in the aggregate, could have a Material Adverse Effect, which judgment(s), in any such case, is/are not stayed on appeal or otherwise being appropriately contested in good faith. 46 7.10. Excessive Unfunded ERISA Liabilities. The Unfunded Liabilities of all Single Employer Plans shall exceed in the aggregate $1,000,000 or any Reportable Event which could have a Material Adverse Effect shall occur in connection with any Plan. 7.11. Withdrawal Liability. The Borrower or any other member of the Controlled Group shall have been notified by the sponsor of a Multiemployer Plan that it has incurred withdrawal liability to such Multiemployer Plan in an amount which, when aggregated with all other amounts required to be paid to Multiemployer Plans by the Borrower or any other member of the Controlled Group as withdrawal liability (determined as of the date of such notification), exceeds $1,000,000 or could have a Material Adverse Effect. 7.12. Reorganization of Multiemployer Plan. The Borrower or any other member of the Controlled Group shall have been notified by the sponsor of a Multiemployer Plan that such Multiemployer Plan is in reorganization or is being terminated, within the meaning of Title IV of ERISA, if as a result of such reorganization or termination (i) the aggregate annual contributions of the Borrower and the other members of the Controlled Group (taken as a whole) to all Multiemployer Plans which are then in reorganization or being terminated have been or will be increased over the amounts contributed to such Multiemployer Plans for the respective plan years of each such Multiemployer Plan immediately preceding the plan year in which the reorganization or termination occurs by an amount exceeding $1,000,000 or (ii) such reorganization or termination could have a Material Adverse Effect. 7.13. Environmental Release or Violation. The Borrower or any of its Subsidiaries shall (i) be the subject of any proceeding or investigation pertaining to the release by the Borrower, any of its Subsidiaries or any other Person of any toxic or Hazardous Substance into the environment, or (ii) violate any Environmental Law, which, in the case of an event described in clause (i) or clause (ii), could have a Material Adverse Effect. 7.14. Change of Control. The occurrence of a Change in Control other than pursuant to an IPO of the Borrower. 7.15. Unremedied Default. The occurrence of any "default", as defined in any Loan Document (other than this Agreement) or the breach of any of the terms or provisions of any Loan Document (other than this Agreement), which default or breach continues beyond any period of grace therein provided. 7.16. Guaranty. Any Guaranty shall fail to remain in full force or effect or any action shall be taken to discontinue or to assert the invalidity or unenforceability of any Guaranty, or any Guarantor shall fail to comply with any of the terms or provisions of any Guaranty to which it is a party, or any Guarantor shall deny that it has any further liability under any Guaranty to which it is a party, or shall give notice to such effect. 7.17. Lack of Acceptable Security Interest. Any Collateral Document shall for any reason fail to create an Acceptable Security Interest in any collateral purported to be covered thereby, except as permitted by the terms of any Collateral Document, or any Collateral Document shall fail to remain in full force or effect or any action shall be taken to discontinue or to assert the invalidity or 47 unenforceability of any Collateral Document, or the Borrower or any Pledgor shall fail to comply with any of the terms or provisions of any Collateral Document. 7.18. ERISA Misrepresentation. The representations and warranties set forth in Section 5.15 (entitled "Plan Assets; Prohibited Transactions") shall at any time not be true and correct. 7.19. Breach of Rate Hedging Obligation, etc. The Borrower or any of its Subsidiaries shall fail to pay when due any Rate Hedging Obligation, obligation under a Sale and Leaseback Transaction or Contingent Obligation, or the breach by the Borrower or any of its Subsidiaries of any term, provision or condition contained in any Rate Hedging Agreement, any Sale and Leaseback Transaction or any Contingent Obligation, and such non-payment or breach could have a Material Adverse Effect, or a default (however so named) by the Borrower or any of its Subsidiaries of any term, provision or condition contained in any Related Rate Hedging Agreement. ARTICLE VIII ACCELERATION, WAIVERS, AMENDMENTS AND REMEDIES 8.01. Acceleration; Facility LC Collateral Account. (i) If any Default described in Section 7.06 or 7.07 occurs with respect to the Borrower, the obligations of the Lenders to make Loans hereunder and the obligation and power of the LC Issuer to issue Facility LCs shall automatically terminate and the Obligations shall immediately become due and payable without any election or action on the part of the Agent, the LC Issuer or any Lender, and the Borrower will be and become thereby unconditionally obligated, without any further notice, act or demand, to pay to the Agent an amount in immediately available funds, which funds shall be held in the Facility LC Collateral Account, equal to the difference of (x) the amount of LC Obligations at such time minus (y) the amount on deposit in the Facility LC Collateral Account at such time which is free and clear of all rights and claims of third parties and has not been applied against the Obligations (such difference, the "Collateral Shortfall Amount"). If any other Default occurs, the Required Lenders (or the Agent with the consent of the Required Lenders) may (a) terminate or suspend the obligations of the Lenders to make Loans hereunder, or declare the Obligations to be due and payable, or both, whereupon the Obligations shall become immediately due and payable, without presentment, demand, protest or notice of any kind, all of which the Borrower hereby expressly waives, and (b) upon notice to the Borrower and in addition to the continuing right to demand payment of all amounts payable under this Agreement, make demand on the Borrower to pay, and the Borrower will, forthwith upon such demand and without any further notice or act, pay to the Agent the Collateral Shortfall Amount, which funds shall be deposited in the Facility LC Collateral Account. (ii) If at any time while any Default is continuing, the Agent determines that the Collateral Shortfall Amount as such time is greater than zero, the Agent may make demand on the Borrower to pay, and the Borrower will, forthwith upon such demand and without any further notice or act, pay to the Agent the Collateral Shortfall Amount, which funds shall be deposited in the Facility LC Collateral Account. 48 (iii) The Agent may at any time or from time to time after funds are deposited in the Facility LC Collateral Account, apply such funds to the payment of the Obligations and any other amounts as shall from time to time have become due and payable by the Borrower to the Lenders or the LC Issuer under the Loan Documents. (iv) At any time which any Default is continuing, neither the Borrower nor any Person claiming on behalf of or through the Borrower shall have any right to withdraw any of the funds held in the Facility LC Collateral Account. After all of the Obligations have been indefeasibly paid in full and the Aggregate Commitment has been terminated, any funds remaining in the Facility LC Collateral Account shall be returned by the Agent to the Borrower or paid to whomever may be legally entitled thereto at such time. (v) If, within thirty (30) days after acceleration of the maturity of the Obligations or termination of the obligations of the Lenders to make Loans and the obligation and power of the LC Issuer to issue Facility LCs hereunder as a result of any Default (other than any Default as described in Section 7.06 or 7.07 with respect to the Borrower) and before any judgment or decree for the payment of the Obligations due shall have been obtained or entered, the Required Lenders (in their sole discretion) shall so direct, the Agent shall, by notice to the Borrower, rescind and annul such acceleration and/or termination. 8.02. Other Remedies. If any Default occurs, the Agent may, and upon the request of the Required Lenders shall, proceed to protect and enforce the rights of the Agent and the Lenders by suit in equity, 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 pursuant to any other Loan Document; or may proceed to enforce the payment of any amounts outstanding hereunder, under the Notes and under the other Loan Documents in the manner set forth herein and therein; or may proceed to foreclose upon any Lines granted pursuant to the Collateral Documents and other Loan Documents in the manner set forth therein, it being the intention that no remedy conferred herein or in any other Loan Document 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 statue or otherwise. 8.03. Amendments. Subject to the provisions of this Article VIII, the Required Lenders (or the Agent with the consent in writing of the Required Lenders) and the Borrower may enter into agreements supplemental hereto for the purpose of adding or modifying any provisions to the Loan Documents or changing in any manner the rights of the Lenders or the Borrower hereunder or waiving any Default hereunder; provided, however, that no such supplemental agreement shall, without the consent of all of the Lenders: (i) Extend the final maturity of any Loan, or extend the expiry date of any Facility LC to a date after the Facility Termination Date or forgive all or any portion of the principal amount thereof or any Reimbursement Obligation related thereto, or reduce the rate or extend the time of payment of interest or fees thereon or Reimbursement Obligations related thereto. 49 (ii) Reduce the percentage specified in the definition of Required Lenders. (iii) Extend the Facility Termination Date, or reduce the amount or extend the payment date for, the mandatory payments required under Section 2.02, or increase the amount of the Aggregate Commitment, the Commitment of any Lender hereunder or the commitment to issue Facility LCs, or permit the Borrower to assign its rights under this Agreement. (iv) Amend this Section 8.03. (v) Release any guarantor of any Credit Extension or, except as provided in the Collateral Documents, release any Lien (a) on Capital Stock of any Subsidiary comprising Collateral or (b) on any material portion of the Collateral. No amendment of any provision of this Agreement relating to the Agent shall be effective without the written consent of the Agent, and no amendment of any provision relating to the LC Issuer shall be effective without the written consent of the LC Issuer. The Agent may waive payment of the fee required under Section 12.03.02 without obtaining the consent of any other party to this Agreement. 8.04. Preservation of Rights. No delay or omission of the Lenders, the LC Issuer or the Agent to exercise any right under the Loan Documents shall impair such right or be construed to be a waiver of any Default or an acquiescence therein, and the making of a Credit Extension notwithstanding the existence of a Default or the inability of the Borrower to satisfy the conditions precedent to such Credit Extension shall not constitute any waiver or acquiescence. Any single or partial exercise of any such right shall not preclude other or further exercise thereof or the exercise of any other right, and no waiver, amendment or other variation of the terms, conditions or provisions of the Loan Documents whatsoever shall be valid unless in writing signed by the Lenders required pursuant to Section 8.03, and then only to the extent in such writing specifically set forth. All remedies contained in the Loan Documents or by law afforded shall be cumulative and all shall be available to the Agent, the LC Issuer and the Lenders until the Obligations have been paid in full and all of the Commitments have been terminated. ARTICLE IX GENERAL PROVISIONS 9.01. Survival of Representations. All representations and warranties of the Borrower contained in this Agreement shall survive the making of the Credit Extensions herein contemplated. 9.02. Governmental Regulation. Anything contained in this Agreement to the contrary notwithstanding, neither the LC Issuer nor any Lender shall be obligated to extend credit to the Borrower in violation of any limitation or prohibition provided by any applicable statute or regulation. 9.03. Headings. Section headings in the Loan Documents are for convenience of reference only, and shall not govern the interpretation of any of the provisions of the Loan Documents. 50 9.04. Entire Agreement. The Loan Documents embody the entire agreement and understanding among the Borrower, the Agent, the LC Issuer and the Lenders and supersede all prior agreements and understandings among the Borrower, the Agent, the LC Issuer and the Lenders relating to the subject matter thereof other than the fee letter described in Section 10.13. 9.05. Several Obligations; Benefits of this Agreement. The respective obligations of the Lenders hereunder are several and not joint and no Lender shall be the partner or agent of any other (except to the extent to which the Agent is authorized to act as such). The failure of any Lender to perform any of its obligations hereunder shall not relieve any other Lender from any of its obligations hereunder. This Agreement shall not be construed so as to confer any right or benefit upon any Person other than the parties to this Agreement and their respective successors and assigns, provided, however, that the parties hereto expressly agree that the Arranger shall enjoy the benefits of the provisions of Sections 9.06, 9.11 and 10.11 to the extent specifically set forth therein and shall have the right to enforce such provisions on its own behalf and in its own name to the same extent as if it were a party to this Agreement. 9.06. Expenses; Indemnification. (i) The Borrower shall reimburse the Agent and the Arranger for any costs, internal charges and out-of-pocket expenses (including attorneys' fees and time charges of attorneys for the Agent, which attorneys may be employees of the Agent) paid or incurred by the Agent or the Arranger in connection with the preparation, negotiation, execution, delivery, syndication, review, amendment, modification, and (excluding internal charges prior to an Unmatured Default) administration of the Loan Documents. The Borrower also agrees to reimburse the Agent, the Arranger, the LC Issuer and the Lenders for any costs, internal charges and out-of-pocket expenses (including attorneys' fees and time charges of attorneys for the Agent, the Arranger, the LC Issuer and the Lenders, which attorneys may be employees of the Agent, the Arranger, the LC Issuer or the Lenders) paid or incurred by the Agent, the Arranger, the LC Issuer or any Lender in connection with the collection and enforcement of the Loan Documents. Expenses being reimbursed by the Borrower under this Section 9.06 include, without limitation, costs and expenses incurred in connection with the Reports described in the following sentence. The Borrower acknowledges that from time to time Bank One may prepare and may distribute to the Lenders (but shall have no obligation or duty to prepare or to distribute to the Lenders) certain audit reports (the "Reports") pertaining to the Borrower's assets for internal use by Bank One from information furnished to it by or on behalf of the Borrower, after Bank One has exercised its rights of inspection pursuant to this Agreement. (ii) THE BORROWER HEREBY FURTHER AGREES TO INDEMNIFY THE AGENT, THE ARRANGER, THE LC ISSUER AND EACH LENDER, ITS DIRECTORS, OFFICERS AND EMPLOYEES AGAINST ALL LOSSES, CLAIMS, DAMAGES, PENALTIES, JUDGMENTS, LIABILITIES AND EXPENSES (INCLUDING, WITHOUT LIMITATION, ALL EXPENSES OF LITIGATION OR PREPARATION THEREFOR WHETHER OR NOT THE AGENT, THE ARRANGER, THE LC ISSUER OR ANY LENDER IS A PARTY THERETO) WHICH ANY OF THEM MAY PAY OR INCUR ARISING OUT OF OR RELATING TO THIS AGREEMENT, THE OTHER LOAN DOCUMENTS, THE TRANSACTIONS CONTEMPLATED HEREBY OR THE DIRECT OR INDIRECT APPLICATION OR PROPOSED APPLICATION OF THE PROCEEDS OF ANY CREDIT EXTENSION HEREUNDER, INCLUDING WITHOUT LIMITATION, 51 THOSE ARISING OUT OF ORDINARY NEGLIGENCE, EXCEPT TO THE EXTENT THAT THEY ARE DETERMINED IN A FINAL NON-APPEALABLE JUDGMENT BY A COURT OF COMPETENT JURISDICTION TO HAVE RESULTED FROM THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF THE PARTY SEEKING INDEMNIFICATION. The obligations of the Borrower under this Section 9.06 shall survive the termination of this Agreement. 9.07. Numbers of Documents. All statements, notices, closing documents, and requests hereunder shall be furnished to the Agent with sufficient counterparts so that the Agent may furnish one to each of the Lenders. 9.08. Accounting. Except as provided to the contrary herein, all accounting terms used herein shall be interpreted and all accounting determinations hereunder shall be made in accordance with GAAP. 9.09. Credit Agreement Controls. In the event of any conflict or inconsistencies among this Agreement and any of the other Loan Documents, the terms and provisions of this Agreement shall prevail and control. 9.10. Severability of Provisions. Any provision in any Loan Document that is held to be inoperative, unenforceable, or invalid in any jurisdiction shall, as to that jurisdiction, be inoperative, unenforceable, or invalid without affecting the remaining provisions in that jurisdiction or the operation, enforceability, or validity of that provision in any other jurisdiction, and to this end the provisions of all Loan Documents are declared to be severable. 9.11. Nonliability of Lenders. The relationship between the Borrower on the one hand and the Lenders, the LC Issuer and the Agent on the other hand shall be solely that of borrower and lender. Neither the Agent, the Arranger, the LC Issuer nor any Lender shall have any fiduciary responsibilities to the Borrower. Neither the Agent, the Arranger, the LC Issuer nor any Lender undertakes any responsibility to the Borrower to review or inform the Borrower of any matter in connection with any phase of the Borrower's business or operations. The Borrower agrees that neither the Agent, the Arranger, the LC Issuer nor any Lender shall have liability to the Borrower (whether sounding in tort, contract or otherwise) for losses suffered by the Borrower in connection with, arising out of, or in any way related to, the transactions contemplated and the relationship established by the Loan Documents, or any act, omission or event occurring in connection therewith, unless it is determined in a final non- appealable judgment by a court of competent jurisdiction that such losses resulted from the gross negligence or willful misconduct of the party from which recovery is sought. Neither the Agent, the Arranger, the LC Issuer nor any Lender shall have any liability with respect to, and the Borrower hereby waives, releases and agrees not to sue for, any special, indirect or consequential damages suffered by the Borrower in connection with, arising out of, or in any way related to the Loan Documents or the transactions contemplated thereby. 9.12. Confidentiality. Each Lender agrees to hold any confidential information which it may receive from the Borrower pursuant to this Agreement in confidence, except for disclosure (i) to its Affiliates and to other Lenders and their respective Affiliates, (ii) to legal counsel, accountants, and other professional advisors to such Lender or to a Transferee, (iii) to regulatory officials, (iv) to 52 any Person as requested pursuant to or as required by law, regulation, or legal process, (v) to any Person in connection with any legal proceeding to which such Lender is a party, (vi) to such Lender's direct or indirect contractual counterparties in swap agreements or to legal counsel, accountants and other professional advisors to such counterparties, and (vii) permitted by Section 12.04. 9.13. Nonreliance. Each Lender hereby represents that it is not relying on or looking to any margin stock (as defined in Regulation U of the Board of Governors of the Federal Reserve System) for the repayment of the Credit Extensions provided for herein. ARTICLE X THE AGENT 10.01. Appointment; Nature of Relationship. Bank One, NA is hereby appointed by each of the Lenders as its contractual representative (herein referred to as the "Agent") hereunder and under each other Loan Document, and each of the Lenders irrevocably authorizes the Agent to act as the contractual representative of such Lender with the rights and duties expressly set forth herein and in the other Loan Documents. The Agent agrees to act as such contractual representative upon the express conditions contained in this Article X. Notwithstanding the use of the defined term "Agent," it is expressly understood and agreed that the Agent shall not have any fiduciary responsibilities to any Lender by reason of this Agreement or any other Loan Document and that the Agent is merely acting as the contractual representative of the Lenders with only those duties as are expressly set forth in this Agreement and the other Loan Documents. In its capacity as the Lenders' contractual representative, the Agent (i) does not hereby assume any fiduciary duties to any of the Lenders, (ii) is a "representative" of the Lenders within the meaning of Section 9-105 of the Uniform Commercial Code and (iii) is acting as an independent contractor, the rights and duties of which are limited to those expressly set forth in this Agreement and the other Loan Documents. Each of the Lenders hereby agrees to assert no claim against the Agent on any agency theory or any other theory of liability for breach of fiduciary duty, all of which claims each Lender hereby waives. 10.02. Powers. The Agent shall have and may exercise such powers under the Loan Documents as are specifically delegated to the Agent by the terms of each thereof, together with such powers as are reasonably incidental thereto. The Agent shall have no implied duties to the Lenders, or any obligation to the Lenders to take any action thereunder except any action specifically provided by the Loan Documents to be taken by the Agent. 10.03. General Immunity. Neither the Agent nor any of its directors, officers, agents or employees shall be liable to the Borrower, the Lenders or any Lender for any action taken or omitted to be taken by it or them hereunder or under any other Loan Document or in connection herewith or therewith except to the extent such action or inaction is determined in a final non-appealable judgment by a court of competent jurisdiction to have arisen from the gross negligence or willful misconduct of such Person. 10.04. No Responsibility for Loans, Recitals, etc. Neither the Agent nor any of its directors, officers, agents or employees shall be responsible for or have any duty to ascertain, inquire into, or verify (a) any statement, warranty or representation made in connection with any Loan Document 53 or any borrowing hereunder; (b) the performance or observance of any of the covenants or agreements of any obligor under any Loan Document, including, without limitation, any agreement by an obligor to furnish information directly to each Lender; (c) the satisfaction of any condition specified in Article IV, except receipt of items required to be delivered solely to the Agent; (d) the existence or possible existence of any Default or Unmatured Default; (e) the validity, enforceability, effectiveness, sufficiency or genuineness of any Loan Document or any other instrument or writing furnished in connection therewith; (f) the value, sufficiency, creation, perfection or priority of any Lien in any collateral security; or (g) the financial condition of the Borrower or any guarantor of any of the Obligations or of any of the Borrower's or any such guarantor's respective Subsidiaries. The Agent shall have no duty to disclose to the Lenders information that is not required to be furnished by the Borrower to the Agent at such time, but is voluntarily furnished by the Borrower to the Agent (either in its capacity as Agent or in its individual capacity). 10.05. Action on Instructions of Lenders. The Agent shall in all cases be fully protected in acting, or in refraining from acting, hereunder and under any other Loan Document in accordance with written instructions signed by the Required Lenders, and such instructions and any action taken or failure to act pursuant thereto shall be binding on all of the Lenders. The Lenders hereby acknowledge that the Agent shall be under no duty to take any discretionary action permitted to be taken by it pursuant to the provisions of this Agreement or any other Loan Document unless it shall be requested in writing to do so by the Required Lenders. NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED HEREIN OR IN ANY OTHER LOAN DOCUMENT, EACH OF THE AGENT AND THE LC ISSUER SHALL BE FULLY JUSTIFIED IN FAILING OR REFUSING TO TAKE ANY ACTION HEREUNDER AND UNDER ANY OTHER LOAN DOCUMENT UNLESS IT SHALL FIRST BE INDEMNIFIED TO ITS SATISFACTION BY THE LENDERS AGAINST ANY AND ALL LIABILITY, LOSSES, DAMAGES JUDGMENTS, COSTS, EXPENSES AND DISBURSEMENTS OF ANY KIND OR NATURE WHATSOEVER WHICH MAY BE IMPOSED UPON, INCURRED BY OR ASSERTED AGAINST SUCH AGENT OR LC ISSUER IN ANY WAY RELATING TO OR ARISING OUT OF ITS TAKING OR CONTINUING TO TAKE ANY ACTION. 10.06. Employment of Agents and Counsel. The Agent may execute any of its duties as Agent hereunder and under any other Loan Document by or through employees, agents, and attorneys-in-fact and shall not be answerable to the Lenders, except as to money or securities received by it or its authorized agents, for the default or misconduct of any such agents or attorneys-in-fact selected by it with reasonable care. The Agent shall be entitled to advice of counsel concerning the contractual arrangement between the Agent and the Lenders and all matters pertaining to the Agent's duties hereunder and under any other Loan Document. 10.07. Reliance on Documents; Counsel. The Agent shall be entitled to rely upon any Note, notice, consent, certificate, affidavit, letter, telegram, statement, paper or document believed by it to be genuine and correct and to have been signed or sent by the proper person or persons, and, in respect to legal matters, upon the opinion of counsel selected by the Agent, which counsel may be employees of the Agent. 10.08. Agent's Reimbursement and Indemnification. The Lenders agree to reimburse and indemnify the Agent ratably in proportion to their respective Commitments (or, if the Commitments 54 have been terminated, in proportion to their Commitments immediately prior to such termination) (i) for any amounts not reimbursed by the Borrower for which the Agent is entitled to reimbursement by the Borrower under the Loan Documents, (ii) for any other expenses incurred by the Agent on behalf of the Lenders, in connection with the preparation, execution, delivery, administration and enforcement of the Loan Documents (including, without limitation, for any expenses incurred by the Agent in connection with any dispute between the Agent and any Lender or between two or more of the Lenders) and (iii) for any liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind and nature whatsoever which may be imposed on, incurred by or asserted against the Agent in any way relating to or arising out of the Loan Documents or any other document delivered in connection therewith or the transactions contemplated thereby (including, without limitation, for any such amounts incurred by or asserted against the Agent in connection with any dispute between the Agent and any Lender or between two or more of the Lenders), or the enforcement of any of the terms of the Loan Documents or of any such other documents, provided that (i) no Lender shall be liable for any of the foregoing to the extent any of the foregoing is found in a final non-appealable judgment by a court of competent jurisdiction to have resulted from the gross negligence or willful misconduct of the Agent and (ii) any indemnification required pursuant to Section 3.05(vii) shall, notwithstanding the provisions of this Section 10.08, be paid by the relevant Lender in accordance with the provisions thereof. The obligations of the Lenders under this Section 10.08 shall survive payment of the Obligations and termination of this Agreement. 10.09. Notice of Default. The Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Unmatured Default hereunder unless the Agent has received written notice from a Lender or the Borrower referring to this Agreement describing such Default or Unmatured Default and stating that such notice is a "notice of default". In the event that the Agent receives such a notice, the Agent shall give prompt notice thereof to the Lenders. 10.10. Rights as a Lender. In the event the Agent is a Lender, the Agent shall have the same rights and powers hereunder and under any other Loan Document with respect to its Commitment and its Loans as any Lender and may exercise the same as though it were not the Agent, and the term "Lender" or "Lenders" shall, at any time when the Agent is a Lender, unless the context otherwise indicates, include the Agent in its individual capacity. The Agent and its Affiliates may accept deposits from, lend money to, and generally engage in any kind of trust, debt, equity or other transaction, in addition to those contemplated by this Agreement or any other Loan Document, with the Borrower or any of its Subsidiaries in which the Borrower or such Subsidiary is not restricted hereby from engaging with any other Person. The Agent, in its individual capacity, is not obligated to remain a Lender. 10.11. Lender Credit Decision. Each Lender acknowledges that it has, independently and without reliance upon the Agent, the Arranger or any other Lender and based on the financial statements prepared by the Borrower and such other documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement and the other Loan Documents. Each Lender also acknowledges that it will, independently and without reliance upon the Agent, the Arranger or any other Lender 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. 55 10.12. Successor Agent. The Agent may resign at any time by giving written notice thereof to the Lenders and the Borrower, such resignation to be effective upon the appointment of a successor Agent or, if no successor Agent has been appointed, forty-five days after the retiring Agent gives notice of its intention to resign. The Agent may be removed at any time with or without cause by written notice received by the Agent from the Required Lenders, such removal to be effective on the date specified by the Required Lenders. Upon any such resignation or removal, the Borrower (if no Default or Unmatured Default shall exist) and the Required Lenders shall have the right to appoint, on behalf of the Borrower and the Lenders, a successor Agent. If no successor Agent shall have been so appointed by the Borrower (if applicable) and the Required Lenders within thirty days after the resigning Agent's giving notice of its intention to resign, then the resigning Agent may appoint, on behalf of the Borrower and the Lenders, a successor Agent. Notwithstanding the previous sentence, the Agent may at any time without the consent of the Borrower or any Lender, appoint any of its Affiliates which is a commercial bank as a successor Agent hereunder. If the Agent has resigned or been removed and no successor Agent has been appointed, the Lenders may perform all the duties of the Agent hereunder and the Borrower shall make all payments in respect of the Obligations to the applicable Lender and for all other purposes shall deal directly with the Lenders. No successor Agent shall be deemed to be appointed hereunder until such successor Agent has accepted the appointment. Any such successor Agent shall be a commercial bank having capital and retained earnings of at least $100,000,000. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the resigning or removed Agent. Upon the effectiveness of the resignation or removal of the Agent, the resigning or removed Agent shall be discharged from its duties and obligations hereunder and under the Loan Documents. After the effectiveness of the resignation or removal of an Agent, the provisions of this Article X shall continue in effect for the benefit of such Agent in respect of any actions taken or omitted to be taken by it while it was acting as the Agent hereunder and under the other Loan Documents. In the event that there is a successor to the Agent by merger, or the Agent assigns its duties and obligations to an Affiliate pursuant to this Section 10.12, then the term "Corporate Base Rate" as used in this Agreement shall mean the prime rate, base rate or other analogous rate of the new Agent. 10.13. Agent's Fee. The Borrower agrees to pay to the Agent and the LC Issuer, for their own respective accounts, the fees agreed to by the Borrower pursuant to that certain fee letter agreement dated April 17, 2001 among the Borrower, the Arranger and Bank One, NA, or as otherwise agreed from time to time. 10.14. Delegation to Affiliates. The Borrower and the Lenders agree that the Agent may delegate any of its duties under this Agreement to any of its Affiliates. Any such Affiliate (and such Affiliate's directors, officers, agents and employees) which performs duties in connection with this Agreement shall be entitled to the same benefits of the indemnification, waiver and other protective provisions to which the Agent is entitled under Articles IX and X. 10.15. Execution of Collateral Documents. The Lenders hereby empower and authorize the Agent to execute and deliver to the Borrower on their behalf the Collateral Documents and all related financing statements and any financing statements, agreements, documents or instruments as shall be necessary or appropriate to effect the purposes of the Collateral Documents. 56 10.16. Collateral Releases. The Lenders hereby empower and authorize the Agent to execute and deliver to the Borrower on their behalf any agreements, documents or instruments as shall be necessary or appropriate to effect any releases of Collateral which shall be permitted by the terms hereof or of any other Loan Document or which shall otherwise have been approved by the Required Lenders (or, if required by the terms of Section 8.03, all of the Lenders) in writing, and in each case all other action reasonably incidental thereto. 10.17. Documentary Agent. The Lender that is the Documentation Agent shall not have any right, power, obligation, liability, responsibility or duty under this Agreement other than those applicable to all Lenders generally. Without limiting the foregoing, no Lender shall have or be deemed to have a fiduciary relationship with any other Lender. Each Lender hereby makes the same acknowledgments with respect to such Lenders as it makes with respect to the Agent in Section 10.11. 10.18. Highest Lawful Rate. 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, the LC Issuer or any Lender 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 which are for the use, forbearance or detention of money under this Agreement or such Loan Document shall in no event exceed that amount of money which would cause the effective rate of interest to exceed the Highest Lawful Rate. Anything in this Agreement, any Note or any other Loan Document to the contrary notwithstanding, if the Borrower shall ever be required to pay interest on any Note at a rate in excess of the Highest Lawful Rate, or if the effective rate of interest which would otherwise be payable under this Agreement, any Note or any other Loan Document would exceed the Highest Lawful Rate, or if the holder of any 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 Borrower under this Agreement, such Note and the other Loan Documents to a rate in excess of the Highest Lawful Rate, then (i) the amount of interest which would otherwise be payable by the Borrower under this Agreement, such Note and other Loan Documents shall be reduced to the amount allowed under applicable law, and (ii) any unearned interest paid by the Borrower or any interest paid by the Borrower in excess of the Highest Lawful Rate shall be in the first instance credited on the principal of such Note with the excess thereof, if any, refunded to the Company. It is further agreed that, without limitation of the foregoing, all calculations of the rate of interest contracted for, charged or received by the Agent, the LC Issuer or any Lender under the Notes or under this Agreement or the other Loan Documents made for the purpose of determining whether such rate exceeds the Highest Lawful Rate applicable to the Agent, the LC Issuer or any Lender shall be made, to the extent permitted by usury laws applicable to the Agent, the LC Issuer or any Lender (now or hereafter enacted), by amortizing, prorating and spreading during the period of the full stated term of the Loans and the Notes all interest at any time contracted for, charged or received by the Agent, the LC Issuer or such Lender in connection therewith. If at any time and from time to time, (i) the amount of interest payable to the Agent, the LC Issuer or any Lender on any date shall be computed at the Highest Lawful Rate 57 pursuant to this Section 10.18 and (ii) in respect of any subsequent interest computation period the amount of interest otherwise payable to the Agent, the LC Issuer or any Lender would be less than the amount of interest payable to the Agent, the LC Issuer or such Lender, as the case may be, computed at the Highest Lawful Rate, then the amount of interest payable to the Agent, the LC Issuer or such Lender, as the case may be, in respect of such subsequent interest computation period shall continue to be computed at the Highest Lawful Rate until the total amount of interest payable to the Agent, the LC Issuer or such Lender, as the case may be, shall equal the total amount of interest which would have been payable to the Agent, the LC Issuer or such Lender if the total amount of interest had been computed without giving effect to this Section 10.18. 10.19. Chapter 346 Inapplicable. The Borrower agrees, pursuant to Chapter 346 ("Chapter 346") of the Texas Finance Code, that Chapter 346 (which relates to open-end line of credit revolving loan accounts) shall not apply to the Obligations and that none of the Notes nor any Credit Extension shall be governed by Chapter 346 or subject to its provisions in any manner whatsoever. ARTICLE XI SETOFF; RATABLE PAYMENTS 11.01. Setoff. In addition to, and without limitation of, any rights of the Lenders under applicable law, if the Borrower becomes insolvent, however evidenced, or any Default occurs, any and all deposits (including all account balances, whether provisional or final and whether or not collected or available) and any other Indebtedness at any time held or owing by any Lender or any Affiliate of any Lender to or for the credit or account of the Borrower may be offset and applied toward the payment of the Obligations owing to such Lender, whether or not the Obligations, or any part hereof, shall then be due. 11.02. Ratable Payments. If any Lender, whether by setoff or otherwise, has payment made to it upon its Outstanding Credit Exposure (other than payments received pursuant to Section 3.01, 3.02, 3.04 or 3.05) in a greater proportion than that received by any other Lender, such Lender agrees, promptly upon demand, to purchase a portion of the Aggregate Outstanding Credit Exposure held by the other Lenders so that after such purchase each Lender will hold its Pro Rata Share of the Aggregate Outstanding Credit Exposure. If any Lender, whether in connection with setoff or amounts which might be subject to setoff or otherwise, receives collateral or other protection for its Obligations or such amounts which may be subject to setoff, such Lender agrees, promptly upon demand, to take such action necessary such that all Lenders share in the benefits of such collateral ratably in proportion to their respective Pro Rata Shares of the Aggregate Outstanding Credit Exposure. In case any such payment is disturbed by legal process, or otherwise, appropriate further adjustments shall be made. 58 ARTICLE XII BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS 12.01. Successors and Assigns. The terms and provisions of the Loan Documents shall be binding upon and inure to the benefit of the Borrower and the Lenders and their respective successors and assigns, except that (i) the Borrower shall not have the right to assign its rights or obligations under the Loan Documents and (ii) any assignment by any Lender must be made in compliance with Section 12.03. Notwithstanding clause (ii) of this Section 12.01, any Lender may at any time, without the consent of the Borrower or the Agent, assign all or any portion of its rights under this Agreement and any Note to a Federal Reserve Bank; provided, however, that no such assignment to a Federal Reserve Bank shall release the transferor Lender from its obligations hereunder. The Agent may treat the Person which made any Loan or which holds any Note as the owner thereof for all purposes hereof unless and until such Person complies with Section 12.03 in the case of an assignment thereof or, in the case of any other transfer, a written notice of the transfer is filed with the Agent. Any assignee or transferee of the rights to any Loan or any Note agrees by acceptance of such transfer or assignment to be bound by all the terms and provisions of the Loan Documents. 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 the rights to any Loan (whether or not a Note has been issued in evidence thereof), shall be conclusive and binding on any subsequent holder, transferee or assignee of the rights to such Loan. 12.02. Participations. 12.02.1. Permitted Participants; Effect. Any Lender may, in the ordinary course of its business and in accordance with applicable law, at any time sell to one or more Eligible Institutions ("Participants") participating interests in any Outstanding Credit Exposure of such Lender, any Note held by such Lender, any Commitment of such Lender or any other interest of such Lender under the Loan Documents. In the event of any such sale by a Lender of participating interests to a Participant, such Lender's obligations under the Loan Documents shall remain unchanged, such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, such Lender shall remain the owner of its Outstanding Credit Exposure and the holder of any Note issued to it in evidence thereof for all purposes under the Loan Documents, all amounts payable by the Borrower under this Agreement shall be determined as if such Lender had not sold such participating interests, and the Borrower and the Agent shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under the Loan Documents. 12.02.2. Voting Rights. Each Lender shall retain the sole right to approve, without the consent of any Participant, any amendment, modification or waiver of any provision of the Loan Documents other than any amendment, modification or waiver with respect to any Credit Extension or Commitment in which such Participant has an interest which forgives principal, interest, fees or any Reimbursement Obligation or reduces the interest rate or fees payable with respect to any such Credit Extension or Commitment, extends the Facility Termination Date, postpones any date fixed for any regularly-scheduled payment of principal of or interest on, any Loan in which such Participant has an interest, or any regularly scheduled payment of fees on any such Credit Extension or Commitment, 59 releases any guarantor of any such Credit Extension or, except in accordance with the terms hereof, release any Lien (a) on Capital Stock of any Subsidiary comprising Collateral or (b) on any material portion of the Collateral, if any, securing any such Credit Extension. 12.02.3. Benefit of Setoff. The Borrower agrees that each Participant shall be deemed to have the right of setoff provided in Section 11.01 in respect of its participating interest in amounts owing under the Loan Documents to the same extent as if the amount of its participating interest were owing directly to it as a Lender under the Loan Documents, provided that each Lender shall retain the right of setoff provided in Section 11.01 with respect to the amount of participating interests sold to each Participant. The Lenders agree to share with each Participant, and each Participant, by exercising the right of setoff provided in Section 11.01, agrees to share with each Lender, any amount received pursuant to the exercise of its right of setoff, such amounts to be shared in accordance with Section 11.02 as if each Participant were a Lender. 12.03. Assignments. 12.03.01. Permitted Assignments. Any Lender may, in accordance with applicable law, at any time assign to one or more Eligible Institutions ("Purchasers") all or any part of its rights and obligations under the Loan Documents. Such assignment ("Assignment Agreement") shall be substantially in the form of Exhibit J or in such other form as may be agreed to by the parties thereto. The consent of the Borrower and the Agent shall be required prior to an assignment becoming effective with respect to a Purchaser which is not a Lender or an Affiliate thereof; provided, however, that if a Default has occurred and is continuing, the consent of the Borrower shall not be required. Such consent shall not be unreasonably withheld or delayed. Each such assignment with respect to a Purchaser which is not a Lender or an Affiliate thereof shall (unless each of the Borrower and the Agent otherwise consents) be in an amount not less than the lesser of (i) $5,000,000 or (ii) the remaining amount of the assigning Lender's Commitment (calculated as at the date of such assignment) or outstanding Loans (if the applicable Commitment has been terminated). 12.03.02. Effect; Effective Date. Upon (i) delivery to the Agent of an assignment, together with any consents required by Section 12.03.01, and (ii) payment of a $3,500 fee to the Agent for processing such assignment (unless such fee is waived by the Agent), such assignment shall become effective on the effective date specified in such assignment. The assignment shall contain a representation by the Purchaser to the effect that none of the consideration used to make the purchase of the Commitment and Outstanding Credit Exposure under the applicable assignment agreement constitutes "plan assets" as defined under ERISA and that the rights and interests of the Purchaser in and under the Loan Documents will not be "plan assets" under ERISA. On and after the effective date of such assignment, such Purchaser shall for all purposes be a Lender party to this Agreement and any other Loan Document executed by or on behalf of the Lenders and shall have all the rights and obligations of a Lender under the Loan Documents, to the same extent as if it were an original party hereto, and no further consent or action by the Borrower, the Lenders or the Agent shall be required to release the transferor Lender with respect to the percentage of the Aggregate Commitment and Outstanding Credit Exposure assigned to such Purchaser. Upon 60 the consummation of any assignment to a Purchaser pursuant to this Section 12.03.02, the transferor Lender, the Agent and the Borrower shall, if the transferor Lender or the Purchaser desires that its Loans be evidenced by Notes, make appropriate arrangements so that new Notes or, as appropriate, replacement Notes are issued to such transferor Lender and new Notes or, as appropriate, replacement Notes, are issued to such Purchaser, in each case in principal amounts reflecting their respective Commitments, as adjusted pursuant to such assignment. 12.04. Dissemination of Information. The Borrower authorizes each Lender to disclose to any Participant or Purchaser or any other Eligible Institution acquiring an interest in the Loan Documents by operation of law (each a "Transferee") and any prospective Transferee any and all information in such Lender's possession concerning the creditworthiness of the Borrower and its Subsidiaries, including without limitation any information contained in any Reports; provided that each Transferee and prospective Transferee agrees to be bound by Section 9.11 of this Agreement. 12.05. Tax Treatment. If any interest in any Loan Document is transferred to any Transferee which is organized under the laws of any jurisdiction other than the United States or any State thereof, the transferor Lender shall cause such Transferee, concurrently with the effectiveness of such transfer, to comply with the provisions of Section 3.05(iv). ARTICLE XIII NOTICES 13.01. Notices. Except as otherwise permitted by Section 2.15 with respect to Borrowing Notices and Conversion/Continuation Notices, all notices, requests and other communications to any party hereunder shall be in writing (including electronic transmission, facsimile transmission or similar writing) and shall be given to such party: (x) in the case of the Borrower or the Agent, at its address or facsimile number set forth on the signature pages hereof, (y) in the case of any Lender, at its address or facsimile number set forth in the Lending Installation Schedule or (z) in the case of any party, at such other address or facsimile number as such party may hereafter specify for the purpose by notice to the Agent and the Borrower in accordance with the provisions of this Section 13.01. Each such notice, request or other communication shall be effective (i) if given by facsimile transmission, when transmitted to the facsimile number specified in this Section 13.01 and confirmation of receipt is received, (ii) if given by mail, 72 hours after such communication is deposited in the mails with first class postage prepaid, addressed as aforesaid, or (iii) if given by any other means, when delivered (or, in the case of electronic transmission, received) at the address specified in this Section 13.01; provided that notices to the Agent under Article II shall not be effective until received. 13.02. Change of Address. The Borrower, the Agent and any Lender may each change the address for service of notice upon it by a notice in writing to the other parties hereto. 61 ARTICLE XIV COUNTERPARTS This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one agreement, and any of the parties hereto may execute this Agreement by signing any such counterpart. This Agreement shall be effective when it has been executed by the Borrower, the Agent and the Lenders, the LC Issuer and each party has notified the Agent by facsimile transmission or telephone that it has taken such action. ARTICLE XV CHOICE OF LAW; CONSENTS; WAIVER OF JURY TRIAL 15.01. Choice of Law. THE LOAN DOCUMENTS (OTHER THAN THOSE CONTAINING A CONTRARY EXPRESS CHOICE OF LAW PROVISION) SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAW (WITHOUT REGARD TO THE CONFLICT OF LAWS PROVISIONS) OF THE STATE OF TEXAS, BUT GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO NATIONAL BANKS. 15.02. Consent to Jurisdiction. THE BORROWER HEREBY IRREVOCABLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF ANY UNITED STATES FEDERAL OR STATE COURT SITTING IN HOUSTON, TEXAS IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO ANY LOAN DOCUMENTS AND THE BORROWER HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH COURT AND IRREVOCABLY WAIVES ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE AS TO THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH A COURT OR THAT SUCH COURT IS AN INCONVENIENT FORUM. NOTHING HEREIN SHALL LIMIT THE RIGHT OF THE AGENT, THE LC ISSUER OR ANY LENDER TO BRING PROCEEDINGS AGAINST THE BORROWER IN THE COURTS OF ANY OTHER JURISDICTION. ANY JUDICIAL PROCEEDING BY THE BORROWER AGAINST THE AGENT, THE LC ISSUER OR ANY LENDER OR ANY AFFILIATE OF THE AGENT, THE LC ISSUER OR ANY LENDER INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH ANY LOAN DOCUMENT SHALL BE BROUGHT ONLY IN A COURT IN HOUSTON, TEXAS. 15.03. Waiver of Jury Trial. THE BORROWER, THE AGENT, THE LC ISSUER AND EACH LENDER HEREBY WAIVE TRIAL BY JURY IN ANY JUDICIAL PROCEEDING INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER (WHETHER SOUNDING IN TORT, CONTRACT OR OTHERWISE) IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH ANY LOAN DOCUMENT OR THE RELATIONSHIP ESTABLISHED THEREUNDER. 62 ARTICLE XVI AMENDMENT AND RESTATEMENT 16.01. Amendment and Restatement. This Agreement amends and restates in its entirety that certain Credit Agreement dated as of March 31, 1999 executed by and among Borrower, Credit Lyonnais New York Branch, as Documentation Agent, and Bank One, NA (formerly known as The First National Bank of Chicago), as LC Issuer and as Agent, and certain lenders therein named. IN WITNESS WHEREOF, the Borrower, the Lenders, the LC Issuer and the Agent have executed this Agreement as of the date first above written. AMERICAN PLUMBING & MECHANICAL, INC. By: ---------------------------------------- Stephen M. Smith, Treasurer Address: 1950 Louis Henna Blvd. Round Rock, Texas 78664 Attention: Stephen M. Smith Telephone: (512) 246-5265 FAX: (512) 246-5290 63 BANK ONE, NA, Individually, as LC Issuer and as Agent By: ---------------------------------------- Greg Smothers, Vice President Commitment: Address: Bank One, NA $25,000,000 910 Travis Street, 7th Floor Houston, Texas 77002 Attention: Greg Smothers Telephone: (713) 751-3838 FAX: (713) 751-6777 64 CREDIT LYONNAIS NEW YORK BRANCH Individually and as Documentation Agent By: ---------------------------------------- Name: -------------------------------------- Title: ------------------------------------- Commitment: $25,000,000 65 UNION BANK OF CALIFORNIA, N.A. By: ---------------------------------------- Name: -------------------------------------- Title: ------------------------------------- Commitment: $20,000,000 66 FLEET NATIONAL BANK By: ---------------------------------------- Name: -------------------------------------- Title: ------------------------------------- Commitment: $10,000,000 67 COMERICA BANK By: ---------------------------------------- Name: -------------------------------------- Title: ------------------------------------- Commitment: $7,500,000 68 BAY VIEW FINANCIAL CORPORATION By: ---------------------------------------- Name: -------------------------------------- Title: ------------------------------------- Commitment: $7,500,000 69 EX-10.10 4 h95061ex10-10.txt EMPLOYMENT AGREEMENT - LLOYD C. SMITH EXHIBIT 10.10 EMPLOYMENT AGREEMENT This Employment Agreement (the "Agreement") by and between American Plumbing and Mechanical, Inc., a Delaware corporation (the "Company" or "AMPAM") and all its subsidiaries, and Lloyd C. Smith ("Executive") is hereby entered into effective as of the date of the closing of the transactions contemplated in the Agreement and Plan of Merger dated February 14, 2000 between AMPAM, LDI Mechanical, Inc., Lindy Dennis Industries, Inc., LDI Heating & Air Conditioning, LDI Mechanical, Krahenbuhl Plumbing Incorporated, Krahenbuhl Fire Sprinklers LLC and Green Valley Plumbing, Inc. and the stockholders and members of the acquired companies (the "Effective Date"). RECITALS The following statements are true and correct: Whereas, as of the Effective Date, the Company and the subsidiaries of the Company (the Company and such subsidiaries being collectively, the "AMPAM Companies") provide plumbing and mechanical contracting services; and Whereas, the Company wishes to employ Executive, and Executive wishes to be employed by the Company, on the terms set forth herein; and Whereas, in the course of his employment with the Company, Executive will become familiar with and aware of information as to the AMPAM Companies' customers and specific manner of doing business, including the processes, techniques and trade secrets used by the AMPAM Companies, and future plans with respect thereto, all of which has been and will be established and maintained at great expense to the AMPAM Companies and which constitutes trade secrets and the valuable goodwill of the AMPAM Companies. Therefore, in consideration of the mutual promises, terms, covenants and conditions set forth herein and the performance of each, it is hereby agreed as follows: AGREEMENTS 1. Employment and Duties. a. The Company hereby employs Executive as President of LDI Mechanical, Inc., a Delaware corporation, and National Director of Heating and Air Conditioning of the Company. As such, Executive shall have the responsibilities, duties and authority customarily appertaining to such office and such other duties as may be reasonably we assigned to Executive and which are consistent with such position. In his capacity as National Director of Heating and Air Conditioning of the Company, Executive shall report to the Chief Operating Officer of the Company unless otherwise directed by the Board of Directors. Executive hereby accepts this employment upon the terms and -1- conditions herein contained and, subject to paragraph 1.c., agrees to devote substantially all of his time, attention and efforts during normal business hours, excluding any periods of vacation or sick leave, to promote and further the business and interests of the Company and its affiliates. b. Executive shall faithfully adhere to, execute and fulfill all reasonable and lawful policies established by the Company, to the extent such policies have been communicated to Executive in writing and are not inconsistent with any of the terms of this Agreement. c. Executive shall not, during the term of his employment hereunder, engage in any other business activity pursued for gain, profit or other pecuniary advantage to the extent such activity interferes materially with Executive's duties and responsibilities hereunder. The foregoing limitations shall not prohibit Executive from making personal investments in such form or manner as will not materially interfere with Executive's performance of his duties under this Agreement. d. Executive shall be entitled to four weeks of paid vacation per calendar year. 2. Compensation. For all services rendered by Executive, the Company shall compensate Executive as follows: a. Base Salary. The base salary payable to Executive during the term shall be $200,000.00 per year ("Base Salary") payable in accordance with the Company's payroll procedures for officers, but not less frequently than twice monthly. On an annual basis such base salary shall be reviewed by the Board of Directors of the Company (the "Board"), and may be adjusted at its discretion in light of the Executive's position, responsibilities, performance and such other reasonable, job related factors that the Board deems appropriate; provided, however, as adjusted Base Salary may not be less than that amount in effect on the Effective Date. b. Annual Bonus. The Company will adopt an incentive bonus plan under which Executive and other officers of the Company will be eligible to receive annual bonus awards in amounts that are competitive with those provided to similarly situated executives and commensurate with the performance of the AMPAM Companies, as reasonably determined by the Board. Executive will be entitled to and will be paid a bonus under such plan for the period that begins on and following the Effective Date. c. Executive Perquisites and Benefits. Executive shall be entitled to receive additional benefits and compensation from the Company in the form and to the extent specified below: 1. Executive shall be reimbursed for all business travel and other out-of-pocket expenses reasonably incurred by Executive in the performance of his duties pursuant to this Agreement and in accordance with the Company's policy for its officers, including, without limitation, continuing education, license and -2- administrative fees. All such expenses shall be appropriately documented in reasonable detail by Executive upon submission of any request for reimbursement, and in a format and manner consistent with the Company's expense reporting policy. 2. Executive shall be entitled to participate in all bonus and incentive compensation plans and to receive all fringe benefits and perquisites offered by the Company to any of the Company's similarly situated executives, including, without limitation, participation in the various employee benefit plans or programs provided to the employees of the Company in general, subject to the regular eligibility requirements with respect to each of such benefit plans or programs, and such other benefits or perquisites as may be approved for Executive by the Board during the term of this Agreement, all on a basis as favorable to Executive as may be provided or offered by the Company to other comparable officers (in terms of position) of the Company. Notwithstanding the above, until the Company establishes employee welfare and pension benefit plans for its officers, Executive shall participate in such plans of the AMPAM Companies as may be designated. The Company shall provide Executive with such other perquisites as may be deemed appropriate for Executive by the AMPAM Board during the term of this Agreement. 3. Notwithstanding the above, the Board may offer or provide to Executive, or to any other officer or executive of the Company or any AMPAM Company, special compensation, benefits, and/or perquisites, in order to attract or retain that executive or officer where the Board determines, in its discretion, that the offer or provision of such special compensation, benefits, and/or perquisites are in the best interests of AMPAM or any AMPAM Company. Should the Board make such determination and offer or provide special compensation, benefits and/or perquisites to an officer or executive, Executive will not automatically be entitled to such special compensation, benefits and/or perquisites. 3. Non-Competition Agreement. a. Executive acknowledges that as a consequence of his employment with the Company, he will be furnished or have access to Confidential Information (as defined below). Executive further recognizes that the Company's willingness to enter into this Agreement is based in material part on Executive's agreement to the provisions of this paragraph 3 and that Executive's breach of the provisions of this paragraph 3 could materially damage the Company. Subject to the further provisions of this Agreement, Executive will not, during the term of his employment with the Company and for a period of two years immediately following the termination of such employment for any reason, directly or indirectly, for himself or on behalf of or in conjunction with any other person, company, partnership, corporation or business of whatever nature: -3- 1. engage, as an officer, director, shareholder, owner, partner, joint venture, or in a managerial capacity, whether as an employee, independent contractor, consultant or advisor, or as a sales representative, whether paid or unpaid, in any plumbing, piping, mechanical, heating, ventilation or air-conditioning contracting, installation or services business directly related thereto (such business and operations referred to herein as the "Plumbing and Mechanical Business"), in direct competition with any of the AMPAM Companies within 100 miles of where any of the AMPAM Companies conducts business including any territory serviced by any of the AMPAM Companies during the term of Executive's employment (the "Territory"); 2. call upon any person who is, at that time, an employee of the AMPAM Companies for the purpose or with the intent of enticing such employee away from or out of the employ of the AMPAM Companies; 3. call upon any person or entity which is, at that time, or which has been, within one year prior to that time, a customer of the AMPAM Companies within the Territory for the purpose of soliciting customers, orders or contracts for any Plumbing and Mechanical Business within the Territory; 4. call upon any prospective acquisition candidate, on Executive's own behalf or on behalf of any competitor, which candidate was, to Executive's knowledge after due inquiry, either called upon by the AMPAM Companies or for which the AMPAM Companies made an acquisition analysis, for the purpose of acquiring such entity; 5. disclose customers, whether in existence or proposed, of the AMPAM Companies to any person, firm, partnership, corporation or business for any reason or purpose whatsoever except to the extent that the AMPAM Companies has in the past disclosed such information to the public, any person, firm, partnership, corporation, business, or other entity, for valid business reasons; or 6. testify as an expert witness in plumbing and mechanical services matters for an adverse party to any of the AMPAM Companies in litigation; provided that nothing contained in this paragraph 3.a.6. shall interfere with Executive's duty to testify as a witness if required by law. Notwithstanding the above, the foregoing covenant shall not be deemed to prohibit Executive from (i) acquiring as an investment not more than 1% of the capital stock of a company engaged in the Plumbing and Mechanical Business, whose stock is traded on a national securities exchange, the NASDAQ Stock Market or on an over-the-counter or similar market, (ii) acquiring as an investment not more than 1% of the capital stock of a competing business whose stock is not publicly traded if the Board consents to such acquisition, or (iii) engaging in activities, directly or indirectly, related to owning, leasing, developing, or selling real estate. ANY OWNERSHIP INTEREST IN ANY BUSINESS -4- WHICH IS IN COMPETITION WITH THE AMPAM COMPANIES SHALL IMMEDIATELY BE DISCLOSED TO THE BOARD BY EXECUTIVE. b. Because of the difficulty of measuring economic losses to the Company as a result of a breach of the foregoing covenant, and because of the immediate and irreparable damage that could be caused to the Company for which they would have no other adequate remedy, Executive agrees that foregoing covenant may be enforced by the Company, in the event of breach by him, by injunctions, restraining orders, and orders of specific performance issued by a court of competent jurisdiction. Executive further agrees to waive any requirement for the Company's securing or posting of any bond in connection with such remedies. c. It is agreed by the parties that the foregoing covenants in this paragraph 3 impose a reasonable restraint on Executive in light of the activities and business of the AMPAM Companies on the date of the execution of this Agreement and the current plans of the AMPAM Companies; but it is also the intent of the Company and Executive that, subject to paragraph 3.d. hereof, such covenants be construed and enforced in accordance with the changing activities, business and locations of the AMPAM Companies throughout the term of this covenant, whether before or after the date of termination of the employment of Executive, unless the Executive was conducting such new business prior to the AMPAM Companies conducting such new business. For example, if, during the term of Executive's employment, any of the AMPAM Companies engages in new and different activities, enters a new business or establishes new locations for its current or new activities or business in addition to or other than the activities or business enumerated under the Recitals above or the locations currently established therefor, then, subject to paragraph 3.d. hereof, through the term of this covenant Executive will be precluded from soliciting the customers or employees of such new activities or business or from such new location and from directly competing with such new business activities, or locations within 100 miles of where such new activities, business or locations are conducted, unless Executive was conducting such new activities or business prior to any of the AMPAM Companies conducting such new activities or business. d. It is further agreed by the parties hereto that, in the event that Executive shall cease to be employed hereunder and shall enter into a business or pursue other activities not in competition with the Plumbing and Mechanical Business of the AMPAM Companies or related activities or business in locations the operation of which, under such circumstances, does not violate clause a.1. of this paragraph 3, and in any event such new business, activities or location are not in violation of this paragraph 3 or of Executive's obligations under this paragraph 3, if any, Executive shall not be chargeable with a violation of this paragraph 3 if the AMPAM Companies shall at any time after the termination of Executive's employment enter the same, similar or a competitive (i) business, (ii) course of activities or (iii) location, as applicable. e. The covenants in this paragraph 3 are severable and separate, and the non-enforceability of any specific covenant shall not affect the provisions of any other covenant. Moreover, in the event any court of competent jurisdiction shall determine that the scope, time or territorial restrictions set forth are unreasonable, then it is the intention -5- of the parties that such restrictions be enforced to the fullest extent which the court deems reasonable, and the Agreement shall thereby be reformed. f. All of the covenants in this paragraph 3 shall be construed as an agreement independent of any other provision in this Agreement, and the existence of any claim or cause of action of Executive against any of the AMPAM Companies, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by the Company of such covenants. It is specifically agreed that the period of two years (subject to the further provisions of this Agreement) following termination of employment stated at the beginning of this paragraph 3, during which the agreements and covenants of Executive made in this paragraph 3 shall be effective, shall be computed by excluding from such computation any time during which Executive is in violation of any provision of this paragraph 3. g. The Company and the Executive hereby agree that this covenant is a material and substantial part of this transaction. 4. Term; Termination; Rights on Termination. The term of this Agreement shall begin on the Effective Date and continue for five years (the "Initial Term"), unless terminated sooner as herein provided; however, beginning on the fifth anniversary of the Effective Date and on each anniversary thereafter the term shall automatically continue for one year on the same terms and conditions contained herein in effect as of the time of renewal (the "Extended Term") unless not less than six months prior to any such anniversary either party shall give written notice to the other party that the term shall not be so extended; provided further, however, upon a Change in Control (as defined in paragraph 11 .c.) during the Initial Term or any Extended Term the term of this Agreement shall automatically continue following such Change in Control for a period equal to the then remaining term or two years, whichever period is longer (such longer period being an Extended Term), unless earlier terminated as provided in paragraph 11. This Agreement and Executive's employment may be terminated in any one of the followings ways: a. Death. The death of Executive shall immediately terminate this Agreement with no severance compensation due Executive's estate; provided, however, for the 90-day period following Executive's death, the Company, at its sole cost and expense, shall continue to provide Executive's then qualified beneficiaries with coverage under the Company's group health plan in which Executive participated immediately prior to Executive's death or a successor plan thereto, subject to the tans of such plan as it may be amended ("Company Health Plan"). Thereafter, the Company shall provide continuation of coverage elections to such qualified beneficiaries as are required by law. b. Disability. If Executive becomes entitled to and receives benefits under an insured long term disability plan of the AMPAM Companies (incurs a "Disability"), the Company, with the approval of a majority of the members of the Board, may terminate this Agreement and Executive's employment hereunder. In the event this Agreement is terminated as a result of Executive's Disability, Executive shall have no right to any severance compensation; provided, however, (i) for 12 months thereafter or until Executive's death, if earlier, the Company shall continue to pay Executive an amount equal to Executive's monthly adjusted Base Salary (computed by reference to -6- Executive's annual adjusted Base Salary at the time of his termination) reduced by any cash benefits payable to Executive under such long term disability plan and (ii) the Company, at its sole cost and expense, shall continue the coverage of Executive and his qualified beneficiaries (for as long as they are qualified beneficiaries thereunder) under the Company Health Plan for as long as Executive continues to qualify for and receive benefits under such long term disability plan, but not to exceed five years. Thereafter, the Company shall provide continuation of coverage elections to Executive and his qualified beneficiaries as required by law. c. Cause. The Company may terminate this Agreement and Executive's employment for "Cause", which shall be: (I) Executive's willful and material breach of this Agreement (which remains uncured for 30 days after Executive's receipt of written notice of need to cure); (2) Executive's gross negligence in the performance or intentional nonperformance (in either case continuing for 30 days after Executive's receipt of written notice of need to cure) of any of Executive's material duties and responsibilities hereunder; (3) Executive's dishonesty or fraud with respect to the business, reputation or affairs of the AMPAM Companies; or (4) Executive's conviction of a felony crime involving moral turpitude. Any termination for Cause must be approved by a majority of the eligible members of the Board (FOR THIS PURPOSE, ANY MEMBER OF THE BOARD REASONABLY BELIEVED BY A MAJORITY OF THE BOARD TO BE AT FAULT IN THE EVENTS LEADING THE BOARD TO CONSIDER TERMINATING EXECUTIVE FOR CAUSE SHALL ALSO BE EXCLUDED, INCLUDING EXECUTIVE IF EXECUTIVE IS A MEMBER OF THE BOARD.). For purposes hereof, no act, or failure to act, on Executive's part shall be deemed "willful" unless done, or omitted to be don; by Executive not in good faith and/or without reasonable belief that Executive's action or omission was in the best interest of the Company. Notwithstanding the foregoing, Executive shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to Executive a Notice of Termination and a copy of a resolution duly adopted by the Board, finding that in the good faith opinion of the Board, Executive was guilty of conduct set forth above and specifying the particulars thereof in detail. In the event of a termination for Cause, Executive shall have no right to any severance compensation. d. Without Cause or For Good Reason. Executive may only be terminated without Cause and other than due to Disability by the Company during either the Initial Term or Extended Term if such termination is approved by a majority of the members of the Board. Executive may, with Good Reason, terminate this Agreement and Executive's employment, effective two (2) weeks after delivery of written notice to the Company. Should Executive be terminated by the Company without Cause and other than due to Disability or should Executive terminate with Good Reason during the Initial Term, Executive shall receive from the Company, in addition to any accrued but unpaid salary, bonus and benefits, in a lump sum payment due on the effective date of termination, an amount equivalent to the annual adjusted Base Salary at the rate then in effect for (i) whatever dine period is remaining under the Initial Term (but in no event more than two years) or (ii) for one year, whichever amount is greater. Should Executive be terminated by the Company without Cause and other than due to Disability or should Executive terminate with Good Reason during the Extended Term, Executive shall receive from the Company, in a lump sum payment due on the effective date of -7- termination, an amount equivalent to the adjusted Base Salary at the rate then in effect for one year. Further, any termination by the Company without Cause or due to Disability or by Executive for Good Reason Whether during the Initial Term or any Extended Term shall operate to shorten the period set forth in paragraph 3.a. and during which the terms of paragraph 3 apply to one year from the date of termination of employment If Executive resigns or otherwise terminates his employment without Good Reason, rather than the Company terminating his employment pursuant to that paragraph 4.d., Executive shall receive no severance compensation. e. Executive shall have "Good Reason" to terminate his employment hereunder and may terminate for Good Reason, effective upon two weeks notice, as a consequence of any of the following events, unless such event is agreed to in writing by Executive: (a) a material reduction in his authority, title, responsibilities or duties; (B) Executive's adjusted Base Salary is reduced below that in effect on the Effective Date; (c) the relocation of the Company's principal executive offices or Executive's principal office to a location outside of Riverside County or Orange County in the state of California; (d) the assignment to Executive of any duties or responsibilities which are materially inconsistent with Executive's title, position or responsibilities as in effect immediately prior to such assignment; or (e) any material breach by the Company of any provision of this Agreement; provided, however, Good Reason shall exist with respect to a matter only if such matter is not corrected by the Company within 30 days of its receipt of written notice of such matter from Executive, and in no event shall a termination by Executive occurring more than 60 days following the date of an event described above be a termination for Good Reason due to such event. f. Resignation Without Good Reason. Executive may, without Good Reason (as hereinafter defined), terminate this Agreement and Executive's employment, effective 30 days after written notice is provided to the Company. If Executive resigns or otherwise terminates his employment without Good Reason, rather than the Company terminating his employment pursuant to tat paragraph 4.d., Executive shall receive all accrued but unpaid salary, bonus and benefits. Under no circumstance where Executive terminates Executive's employment without Good Reason, shall Executive be entitled to any pro rata share or payment of any bonus or other compensation which has not yet been determined or which requires employment at the time of the determination or award for eligibility. g. Upon termination of this Agreement for any reason provided above, in addition to the above payments, if any, Executive shall be entitled to receive all compensation earned, accrued vacation and reimbursements due through the effective date of termination, paid to Executive in a lump sum on the effective date of termination. In addition, a termination of this Agreement shall not alter or impair any of Executive's vested rights or benefits, if any, under any (i) employee benefit plan of the AMPAM Companies or (ii) deferred compensation plan, including, without limitation, any stock option plan, of the AMPAM Companies. All other rights and obligations of the on Company and Executive under this Agreement shall cease as of the effective date of termination, except that Executive's obligations under paragraphs 3, 5, 6, 7, and 8 herein and the Company's obligations under paragraphs 11.d. and 14 shall survive such -8- termination in accordance with their terms, unless or except as expressly provided otherwise in this Agreement. 5. Return of Company Property. All records, designs, patents, business plans, financial statements, manuals, memoranda, lists and other property delivered to or compiled by Executive by or on behalf of any of the AMPAM Companies or their representatives, vendors or customers which pertain to the business of any AMPAM Companies shall be and remain the property of the AMPAM Companies, as the case may be, and be subject at all times to their discretion and control. Likewise, all correspondence, reports, records, charts, advertising materials and other similar data pertaining to the business, activities or future plans of the AMPAM Companies which is collected by Executive shall be delivered promptly to the Company without request by it upon termination of Executive's employment and Executive shall not retain any copies of the same. 6. Intellectual Property. Executive shall disclose promptly to the Company any and all conceptions, ideas, designs, plans, know-how, processes, improvements and other discoveries, whether patentable or not, which (i) are conceived or made by Executive, solely or jointly with another, during the period of employment or thereafter, (ii) are directly related to the plumbing and mechanical business or activities of the AMPAM Companies, and (iii) Executive conceives as a result of his employment by the Company, including any predecessor (collectively, the "Intellectual Property"). Executive hereby assigns and agrees to assign all his interests therein to the Company or its nominee. Whenever requested to do so by the Company, Executive shall execute any and all applications, assignments or other instruments that the Company shall deem necessary to apply for and obtain Letters Patent of the United States or any foreign country or to otherwise protect the Company's interest therein. Executive must also render to the Company, at the Company's expense, assistance in the perfection, enforcement and defense of any Intellectual Property. 7. Trade Secrets. Executive agrees that he will not, during or after the term of this Agreement, disclose the specific terms of the AMPAM Companies' relationships or agreements with its respective vendors or customers or any other trade secret of the AMPAM Companies, whether in existence or proposed, to any person, firm, partnership, corporation or business for any reason or purpose whatsoever, except as required by law and prior to any such disclosure Executive shall give the Company prior written notice thereof and the opportunity to contest such disclosure. 8. Confidentiality. a. Executive acknowledges and agrees that all Confidential Information (as defined below) of the Company is confidential and a valuable, special and unique asset of the Company that gives the Company an advantage over its actual and potential, current and future competitors. Executive further acknowledges and agrees that Executive owes the Company a fiduciary duty to preserve and protect all Confidential Information from 7 unauthorized disclosure or unauthorized use, that certain Confidential Information constitutes "trade secrets" under applicable laws and, that unauthorized disclosure or unauthorized use of the Confidential Information would irreparably injure the Company. -9- b. Both during the term of Executive's employment and after the termination of Executive's employment for any reason (including wrongful termination), Executive shall hold all Confidential Information in strict confidence, and shall not use any Confidential Information except for the benefit of the Company, in accordance with the duties assigned to Executive. Executive shall not, at any time (either during or after the term of Executive's employment), disclose any Confidential Information to any person or entity (except other employees of the Company who have a need to know the information in connection with the performance of their employment duties, and who have been informed of the confidential nature of the confidential information and have agreed to keep it confidential), or copy, reproduce, modify, transmit, including electronic transmission, decompile or reverse engineer any Confidential Information, or remove any Confidential Information from the Company's premises, without the prior written consent of the Board, or permit any other person to do so. Executive shall take reasonable precautions to protect the physical security of all documents and other material containing Confidential Information (regardless of the medium on which the Confidential Information is stored). This Agreement applies to all Confidential Information, whether now known or later to become known to Executive. c. Upon the termination of Executive's employment with the Company for any reason, and upon written request of the Company at any other time, Executive shall promptly surrender and deliver to the Company all documents and other written material of any nature containing or pertaining to any Confidential Information and shall not retain any such document or other material. Within ten days of a written request by the Company, Executive shall certify to the Company in writing that all such materials have been returned. d. As used in this Agreement, the term "Confidential Information" shall mean any information or material known to or used by or for the AMPAM Companies (whether or not owned or developed by the AMPAM Companies and whether or not developed by Executive) that is not generally known to persons in the Plumbing and Mechanical Business, except as provided in this paragraph. Confidential Information includes, but is not limited to, the following: all trade secrets of the AMPAM Companies; all information that the AMPAM Companies have marked as confidential or has otherwise described to Executive (either in writing or orally) as confidential; all nonpublic information concerning the AMPAM Companies' products, services, prospective products or services, research, product designs, prices, discounts, costs, marketing plans, marketing techniques, market studies, test data, customers, customer lists and records, suppliers and contracts; all AMPAM Companies' business records and plans; all AMPAM Companies' personnel files; all financial information of or concerning the AMPAM Companies; all information relating to operating system software, application software, software and system methodology, hardware platforms, technical information, inventions, computer programs and listings, source codes, object codes, copyrights and other intellectual property; all technical specifications; any proprietary information belonging to the AMPAM Companies; all computer hardware or software manuals; all training or instruction manuals; and all data and all computer system passwords and user codes. For purposes hereof, Confidential Information shall not include such information (i) which becomes or is already known to the public or some -10- other party through no fault of Executive; or (ii) the disclosure of which (x) is required by law (including regulations and rulings) or the order of any competent governmental authority or (y) Executive reasonably believes is required in connection with the defense of a lawsuit against Executive, provided that in either case, prior to disclosing any information, Executive shall give prior written notice thereof to the Company and provide the Company with the opportunity to contest such disclosure. 9. No Prior Agreements. Executive hereby represents and warrants to the Company that the execution of this Agreement by Executive and his employment by the Company and the performance of his duties hereunder will not violate or be a breach of any agreement, including any non-competition agreement, invention or secrecy agreement, with a former employer, client or any other person or entity. Further, Executive agrees to indemnify the Company for any loss, including, but not limited to, reasonable attorneys' fees and expenses, the Company may incur based upon or arising out of Executive's breach of this paragraph 9. 10. Assignment; Binding Effect. Executive understands that he has been selected for employment by the Company on the basis of his personal qualifications, experience and skills. Executive agrees, therefore, that he cannot assign all or any portion of his performance under this Agreement. Subject to the preceding two sentences and the express provisions of paragraph 12 below, this Agreement shall be binding upon, inure to the benefit of and be enforceable by the parties hereto and their respective hefts, legal representatives, successors and assigns. The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and assets of the Company to expressly assume and agree in writing reasonably satisfactory to Executive to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such written agreement prior to the effectiveness of any such succession shall be a material breach of this Agreement. 11. Change in Control. a. Executive understands and acknowledges that the Company may be merged or consolidated with or into another entity and that such entity shall automatically succeed to the rights and obligations of the Company hereunder or that the Company may undergo a Change in Control (as defined below). In the event a Change in Control is initiated or occurs during the Initial Term or an Extended Term, then the provisions of this paragraph 11 shall be applicable. b. In the event of a Change in Control wherein the Company and Executive have not received written notice at least ten business days prior to the date of the event giving rise to the Change in Control from the successor to all or a substantial portion of the Company's business and/or assets that such successor is willing as of the closing to assume and agrees to perform, or continue to cause the Company to perform, the Company's obligations under this Agreement in the same manner and to the same extent that the Company is hereby required to perform, then Executive may, at Executive's sole discretion, elect to terminate Executive's employment on the effective date of such Change in Control by providing written notice to the Board at least five business days -11- prior to the closing of the transaction giving rise to the Change in Control. In such case, Executive shall be deemed to have terminated Executive's employment for Good Reason on such date; provided, however, the amount of the lump sum severance payment due Executive shall be triple the amount calculated under the terms of paragraph 4.d. c. A "Change in Control" shall be deemed to have occurred if: 1. any person, entity or group (as such terms are used in Sections 13d. and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Act")), other than persons and entities which owned any capital stock of the Company at the closing date of the transactions contemplated in the Acquisition Agreements, the AMPAM Companies or an employee benefit plan of the AMPAM Companies, acquires, directly or indirectly, the beneficial ownership (as defined in Section 13(d) of the Act) of any voting security of the Company and immediately after such acquisition such person, entity or group is, directly or indirectly, the beneficial owner of voting securities representing 50% or more of the total voting power of all of the then outstanding voting securities of the Company entitled to vote generally in the election of directors; 2. upon the first purchase of the Company's common stock pursuant to a tender or exchange offer (other than a tender or exchange offer made by the Company); 3. the stockholders of the Company shall approve a merger, consolidation, recapitalization or reorganization of the Company, or a reverse stock split of outstanding voting securities, or consummation of any such transaction if stockholder approval is not obtained, other than any such transaction which would result in at least 75% of the total voting power represented by the voting securities of the surviving entity outstanding immediately after such transaction being beneficially owned by the holders of all of the outstanding voting securities of the Company immediately prior to the transactions with the voting power of each such continuing holder relative to other such continuing holders not substantially altered in the transaction; 4. the stockholders of the Company shall approve a plan of complete liquidation or dissolution of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets; or 5. if, at any time during any period of two consecutive years, individuals who at the beginning of such period constitute the Board cease for any reason to constitute at least a majority thereof, unless the election or nomination for the election by the Company's stockholders of each new director was approved a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period. d. If it shall be determined that any payment made or benefit provided to Executive in connection with a change in control (as defined in Section 280G of the -12- Internal Revenue Code of 1986, as amended (the "Code"), or any successor thereto) of the Company occurring after the Effective Date and on or before the termination of this Agreement, whether or not made or provided pursuant to this Agreement, is subject to the excise tax imposed by Section 4999 of the Code, the Company shall pay Executive an amount of cash (the "Additional Amount") such that the net amount received by Executive after paying all applicable taxes on such Additional Amount and any penalties, interest and other reasonable costs incurred as a result of such excise tax or additional payment, shall be equal to the amount that Executive would have received if Section 4999 were not applicable. 12. No Mitigation or Offset. Executive shall not be required to mitigate the amount of any Company payment provided for in this Agreement by seeking other employment or otherwise. The amount of any payment required to be paid to Executive by the Company pursuant to this Agreement shall not be reduced by any amounts that are owed to the Company by Executive, provided that Executive (i) executes and delivers to the Company a promissory note evidencing a promise by Executive to pay the full amount of any amounts owed to the Company within 12 months from the date of Executive's termination of employment and (ii) provides such collateral reasonably satisfactory to the Company to ensure payment of such promissory note. 13. Release. Notwithstanding anything in this Agreement to the contrary, Executive shall not be entitled to receive any severance payments pursuant to paragraphs 4 or 11 of this Agreement unless Executive has executed (and not revoked) a general release of all claims, known or unknown, Executive may have against the Company, its subsidiaries, their directors, officers, and employees, in a form of such release reasonably acceptable to the Company. 14. Indemnification. In the event Executive is made a party to any threatened, pending or completed action, suit or proceeding, whether civil, derivative, subrogation, criminal, administrative or investigative (other than an action by the Company against Executive and a derivative action shall not be considered an action by the Company), by reason of the fact that he is or was performing services for the Company or any of the AMPAM Companies or any present or future subsidiary thereof, or as an executive officer of the AMPAM Companies prior to the date of this Agreement, then the Company shall indemnify Executive against all expenses (including attorneys' fees), judgments, fines and amounts paid in settlement, as actually and reasonably incurred by Executive in connection therewith. In the event that both Executive and the Company are made a party to the same third-party action, complaint, suit or proceeding, the Company agrees to engage competent legal representation, and Executive agrees to use the same representation, provided that if counsel selected by the Company shall have a conflict of interest that prevents such counsel from representing Executive, Executive may engage separate counsel and the Company shall pay as incurred all reasonable attorneys' fees and reasonable expenses of such separate counsel, provided further that Executive may at anytime, at Executive's sole expense, hire separate counsel to represent Executive in such matter. Further, while Executive is expected at all times to use his best efforts to faithfully discharge his duties under this Agreement Executive cannot be held liable to the Company for errors or omissions made in good faith where Executive has not exhibited gross, willful and wanton negligence and misconduct nor performed criminal and fraudulent acts which materially damage the business of the Company. The Company shall indemnify Executive against and hold Executive harmless -13- from any costs, expenses (including reasonable attorneys' fees as provided in this paragraph), liabilities, losses and exposures for Executives s services as an employee, officer and director of the Company (or any of AMPAM Companies or any successor) to the maximum extent permitted under applicable law. The indemnification required by this paragraph 14. shall be made by the Company by periodic payments promptly as and when bills are received or liabilities are incurred. The provisions of this paragraph shall survive the termination of this Agreement. 15. Complete Agreement. This Agreement supersedes, and replaces in full, all representations, understandings and agreements (oral or written) between Executive and the Company or any of the AMPAM Companies or any of their officers, directors or representatives existing as of the Effective Date and covering the same subject matter as this Agreement, but excluding the Agreement and Plan of Merger among AMPAM, LDI Mechanical, Inc., Lindy Dennis Industries, Inc., LDI Heating & Air Conditioning, LDI Mechanical, Krahenbuhl Plumbing Incorporated, Krahenbuhl Fire Sprinklers LLC and Green Valley Plumbing, Inc. and the stockholders and members of the acquired companies dated February 14, 2000, which shall not be affected by this Agreement. This written Agreement is the final, complete and exclusive statement and expression of the agreement between the Company and Executive and of all the terms of this Agreement, and it cannot be varied, contradicted or supplemented by evidence of any prior or contemporaneous oral or written agreements. This written Agreement may not be modified after the Effective Date except by a further writing signed by a duly authorized officer of the Company and Executive, and no term of this Agreement may be waived except by writing signed by the party waiving the benefit of such term. Without limiting the generality of the foregoing, either party's failure to insist on strict compliance with this Agreement shall not be deemed a waiver thereof. 16. Notice. Whenever any notice is required hereunder, it shall be given in writing addressed as follows: To the Company: American Plumbing and Mechanical, Inc. 1502 Augusta, Suite 425 Houston, Texas 77057 Attn: Mr. Carl Wimberly To Executive: Mr. Lloyd C. Smith 9625 Gavin Stone Avenue Las Vegas, NV 89145 Notice shall be deemed given and effective on the earlier of three days after the deposit in the U.S. mail of a writing addressed as above and sent first class mail, certified, return receipt requested, or when actually received. Either party may change the address for notice by notifying the other party of such change in accordance with this paragraph 16. 17. Severability: Headings. If any portion of this Agreement is held invalid or inoperative, the other portions of this Agreement shall be deemed valid and operative and, so far as is reasonable and possible, effect shall be given to the intent manifested by the portion held invalid or inoperative. The paragraph headings herein are for reference purposes only and are -14- not intended in any way to describe, interpret, define or limit the extent or intent of the Agreement or of any part hereof. 18. Dispute Resolutions. Except with respect to injunctive relief as provided in paragraph 3.b., neither party shall institute a proceeding in any court or administrative agency to resolve a dispute between the parties before that party has sought to resolve the dispute through direct negotiation with the other party. If the dispute is not resolved within two weeks after a demand for direct negotiation, the parties shall attempt to resolve the dispute through mediation. If the parties do not promptly agree on a mediator, the parties shall request the Association of Attorney Mediators in Harris County, Texas (or if the Company's principal offices are not in Harris County, a similar organization in the county in which the Company's principal offices are located) to appoint a mediator certified by the Supreme Court of Texas. If the mediator is unable to facilitate a settlement of the dispute within a reasonable period of time, as determined by the mediator, the mediator shall issue a written statement to the parties to that effect and any unresolved dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration, conducted before a single arbitrator in the city in which the Company has its principal offices, in accordance with the Commercial Arbitration ~Rules of the American Arbitration Association then in effect. The arbitrator shall have the authority to order back-pay, severance compensation, vesting of options (or cash compensation in lieu of vesting of options), reimbursement of costs and expenses, including those incurred to enforce this Agreement including reasonable attorneys' fees and interest thereon in the event the arbitrator determines that Executive was involuntarily terminated by the Company without Disability or Cause, as defined in paragraphs 4%. and 4.c., respectively, or that the Company has otherwise materially breached this Agreement. A decision by the arbitrator shall be final and binding. Judgment may be entered on the arbitrator's award in any court having jurisdiction. The costs and expenses, including reasonable attorneys' fees, of the prevailing party in any dispute arising under this Agreement will be promptly paid by the other party. 19. Governing Law. This Agreement shall in all respects be construed according to the laws of the State of Texas without regard to its conflicts of law provisions. 20. Counterparts. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original and all of which together shall constitute but one and the same instrument. -15- IN WITNESS WHEREOF, the parties hereto have executed this Agreement effective for all purposes as of the Effective Date. Date: , 2000 --------------- AMERICAN PLUMBING AND MECHANICAL, INC. By ----------------------------------------- /s/ DAVID C. BAGGETT ----------------------------------------- David C. Baggett, Chief Financial Officer Date: February 29, 2000 EXECUTIVE /s/ LLOYD C. SMITH ----------------------------------------- Mr. Lloyd C. Smith -16- EX-10.11 5 h95061ex10-11.txt EMPLOYMENT AGREEMENT - STEPHEN F. TURNER EXHIBIT 10.11 EMPLOYMENT AGREEMENT This Employment Agreement (the "Agreement") by and between Atlas Plumbing & Mechanical, L.L.C. (the "Company"), American Plumbing and Mechanical, Inc., a Delaware corporation ("AMPAM"), and Stephen F. Turner ("Executive") is hereby entered into effective as of the date of the closing of the transactions contemplated in the Agreement and Plan of Merger dated as of September 16, 1999 by and among the Company, Atlas Plumbing & Mechanical, Inc., Atlas Plumbing & Mechanical, Inc.'s shareholders and AMPAM (the "Effective Date"). RECITALS The following statements are true and correct: Whereas, as of the Effective Date, the Company, AMPAM, and the subsidiaries of AMPAM (AMPAM and such subsidiaries, including the Company, being collectively, the "AMPAM Companies") provide plumbing and mechanical contracting services; and Whereas, the Company wishes to employ Executive, and Executive wishes to be employed by the Company, on the terms set forth herein; and Whereas, in the course of his employment with the Company, Executive will become familiar with and aware of information as to the Company's and the AMPAM Companies' customers and specific manner of doing business, including the processes, techniques and trade secrets used by the Company and the AMPAM Companies, and future plans with respect thereto, all of which has been and will be established and maintained at great expense to the Company and the AMPAM Companies and which constitutes trade secrets and the valuable goodwill of the Company and the AMPAM Companies. Therefore, in consideration of the mutual promises, terms, covenants and conditions set forth herein and the performance of each, it is hereby agreed as follows: AGREEMENTS 1. Employment and Duties. a. The Company hereby employs Executive as the Chief Executive Officer of the Company. As such, Executive shall have the responsibilities, duties and authority customarily appertaining to such office and such other duties as may be reasonably assigned to Executive and which are consistent with such position. Executive shall report to the Board of Directors of the Company (the "Board") unless otherwise directed by the Board. Executive hereby accepts this employment upon the terms and conditions herein contained and, subject to paragraph 1(c), agrees to devote substantially all of his time, attention and efforts during normal business hours, excluding any periods of vacation or sick leave, to promote and further the business and interests of the Company and its affiliates. b. Executive shall faithfully adhere to, execute and fulfill all reasonable and lawful policies established by the Company, to the extent such policies have been communicated to Executive in writing and are not inconsistent with any of the terms of this Agreement c. Executive shall not, during the term of his employment hereunder, engage in any other business activity pursued for gain, profit or other pecuniary advantage to the extent such activity interferes materially with Executive's duties and responsibilities hereunder. The foregoing limitations shall not prohibit Executive from (i) serving on civic and charitable boards, subject to the Company's policies and standards; (ii) making personal investments in such form or manner as will not materially interfere with Executive's performance of his duties under this Agreement and (iii) owning an interest in, serving on the board of or otherwise participating in the business of Crystal Homes, L.L.C., 9095 Owens, L.L.C. and Atlas Real Estate, L.L.C. (or their successors) or from engaging in other real estate activities related thereto. d. Executive shall be entitled to vacation in accordance with the policies of the Company. 2. Compensation. For all services rendered by Executive, the Company shall compensate Executive as follows: a. Base Salary. The base salary (the "Base Salary") payable to Executive during the term shall be $200,000 per year, payable in accordance with the Company's payroll procedures for officers, but not less frequently than twice monthly. On an annual basis such Base Salary shall be reviewed by the Board of Directors of AMPAM (the "AMPAM Board"), and may be increased or decreased at its discretion in light of the Executive's position, responsibilities, performance and such other reasonable, job related factors that the AMPAM Board deems appropriate; provided, however, Base Salary, as adjusted, may not be less than that amount in effect on the Effective Date. b. Annual Bonus. In addition to the Base Salary, Executive shall be entitled to receive an Annual Bonus for calendar year 1999 of up to 100% of 2 Executive's Base Salary should the 1999 calendar year Adjusted EBITDA of the Company and Atlas Plumbing & Mechanical, Inc., combined, equal or exceed $4,500,000 and which shall accrue proportionately once such Adjusted EBITDA reaches $4,000,000. An example of the manner in which the Annual Bonus shall accrue is attached hereto as Schedule A. Executive shall be entitled to receive an Annual Bonus for calendar year 2000 of up to 100% of Executive's then Base Salary should the Company's 2000 calendar year Adjusted EBITDA equal or exceed $5,850,000 and which shall accrue proportionately once said Adjusted EBITDA reaches $5,200,000. "Adjusted EBITDA" shall mean, as of a specified date, the Company's (or the Company and Atlas Plumbing & Mechanical, Inc.'s in the case of the 1999 calendar year) earnings before interest, taxes, depreciation and amortization computed for the twelve (12) full calendar months immediately preceding such specified date, and shall exclude any corporate charges or credits from AMPAM (or any of its affiliates) to the Company and exclude any effect of the Tim Lear Phantom Stock deferred compensation plan, and shall include for the 1999 calendar year addbacks as categorized in the Atlas Plumbing & Mechanical, Inc.'s Information Memorandum dated May 1999 and shall treat as operating leases those leases which Atlas Plumbing & Mechanical, Inc. has in the past treated as operating leases. AMPAM shall adopt an incentive bonus plan for subsequent years under which Executive and other officers of the AMPAM Companies will be eligible to receive annual bonus awards in amounts that are competitive with those provided to similarly situated executives within the AMPAM Companies and commensurate with the performance of the Company, as reasonably determined by the AMPAM Board. Annual Bonuses and any other performance or incentive bonuses shall not be unreasonably withheld, and any such bonus based on the previous calendar year shall be paid to the Executive in lump sum no later than April 30th of the year following the year in which the bonus was earned. c. Executive Perquisites and Benefits. Executive shall be entitled to receive additional benefits and compensation from the Company in the form and to the extent specified below: i. Executive shall be reimbursed for all business travel and other out-of-pocket expenses reasonably incurred by Executive in the performance of his duties pursuant to this Agreement and in accordance with the AMPAM's policy for similarly situated officers. All such expenses shall be appropriately documented in reasonable detail by Executive upon submission of any request for reimbursement, and in a format and manner consistent with the AMPAM's expense reporting policy. ii. Executive shall be entitled to participate in all incentive compensation plans and to receive all fringe benefits and perquisites offered by the Company or AMPAM to any of the Company's or AMPAM Companies' similarly situated executives, including, without limitation, 3 participation in the various employee benefit plans or programs provided to the employees of the Company or the AMPAM Companies in general, subject to the regular eligibility requirements with respect to each of such benefit plans or programs, and such other benefits or perquisites as may be approved for Executive by the Board (or AMPAM Board, as the case may be) during the term of this Agreement, all on a basis as favorable to Executive as may be provided or offered by the Company to other comparable officers (in terms of position) of the Company. Notwithstanding the above, until the Company establishes employee welfare and pension benefit plans for its officers, Executive shall participate in such plans of the AMPAM Companies as may be designated. The Company shall provide Executive with such other perquisites as may be deemed appropriate for Executive by the AMPAM Board during the term of this Agreement. iii. Notwithstanding the above, the Board may offer or provide to Executive, or to any other officer or executive of the Company, AMPAM, or any AMPAM Company, special compensation, benefits, and/or perquisites, in order to attract or retain that executive or officer where the Board determines, in its discretion, that the offer or provision of such special compensation, benefits, and/or perquisites are in the best interests of AMPAM or any AMPAM Company. 3. Non-Competition Agreement. a. Executive acknowledges that as a consequence of his employment with the Company, he will be furnished or have access to Confidential Information (as defined below). Executive further recognizes that the Company's and AMPAM's willingness to enter into this Agreement is based in material part on Executive's agreement to the provisions of this paragraph 3 and that Executive's breach of the provisions of this paragraph 3 could materially damage the Company and AMPAM. Subject to the further provisions of this Agreement (including but not limited to paragraph 4(d) below), Executive will not during the term of his employment with any of the AMPAM Companies and for a period of two years (subject to the further provisions of this Agreement) immediately following the termination of such employment for any reason, directly or indirectly, for himself or on behalf of or in conjunction with any other person, company, partnership, corporation or business of whatever nature: i. engage, as an officer, director, shareholder, owner, partner, joint venturer, or in a managerial capacity, whether as an employee, independent contractor, consultant or advisor, or as a sales representative, whether paid or unpaid, in any plumbing, piping, mechanical, heating, ventilation or air-conditioning contracting, installation or services business 4 directly related thereto (such business and operations referred to herein as the "Plumbing and Mechanical Business"), in direct competition with any AMPAM Company within 100 miles of where any AMPAM Company conducts business including any territory serviced by an AMPAM Company during the term of Executive's employment (the "Territory"); ii. call upon any person who is, at that time, an employee of any AMPAM Company for the purpose or with the intent of enticing such employee away from or out of the employ of the AMPAM Company; iii. call upon any person or entity which is, at that time, or which has been, within one year prior to that time, a customer of an AMPAM Company within the Territory for the purpose of soliciting customers, orders or contracts for any Plumbing and Mechanical Business within the Territory; iv. call upon any prospective acquisition candidate, on Executive's own behalf or on behalf of any competitor, which candidate was, to Executive's knowledge after due inquiry, either called upon by an AMPAM Company or for which an AMPAM Company made an acquisition analysis, for the purpose of acquiring such entity; v. disclose customers, whether in existence or proposed, of the AMPAM Companies to any person, firm, partnership, corporation or business for any reason or purpose whatsoever except to the extent that the AMPAM Companies has in the past disclosed such information to the public for valid business reasons; or vi. testify as an expert witness in plumbing and mechanical services matters for a party adverse to an AMPAM Company in litigation; provided that nothing contained in this paragraph 3(a)(vi) shall interfere with Executive's duty to testify as a witness if required by law. Notwithstanding the above, the foregoing covenant shall not be deemed to prohibit Executive from (i) acquiring as an investment not more than 1% of the capital stock of a company engaged in the Plumbing and Mechanical Business, whose stock is traded on a national securities exchange, the NASDAQ Stock Market or on an over-the-counter or similar market, (ii) acquiring as an investment not more than 1% of the capital stock of a business involved in the Plumbing and Mechanical Business whose stock is not publicly traded if the Board consents to such acquisition or (iii) owning an interest in, serving on the board of or otherwise participating in the business of Crystal Homes, L.L.C., 9095 Owens, L.L.C. and Atlas Real Estate, L.L.C. (or their successors) or from engaging in other real estate activities related thereto. Any ownership interest in any business 5 which is in competition with AMPAM shall immediately be disclosed to the Board by Executive. b. Because of the difficulty of measuring economic losses to the AMPAM Companies as a result of a breach of the foregoing covenant, and because of the immediate and irreparable damage that could be caused to one or more of the AMPAM Companies for which they would have no other adequate remedy, Executive agrees that the foregoing covenant may be enforced by any AMPAM Company, in the event of breach by him, by injunctions, restraining orders, and orders of specific performance issued by a court of competent jurisdiction. Executive further agrees to waive any requirement that AMPAM Companies secure or post any bond in connection with such remedies. c. It is agreed by the parties that the foregoing covenants in this paragraph 3 impose a reasonable restraint on Executive in light of the activities and business of the AMPAM Companies on the date of the execution of this Agreement and the current plans of the AMPAM Companies; but it is also the intent of the Company and Executive that, subject to paragraph 3(d) hereof, such covenants be construed and enforced in accordance with the changing activities, business and locations of the AMPAM Companies throughout the term of this covenant whether before or after the date of termination of the employment of Executive, unless the Executive was conducting such new business prior to any AMPAM Company conducting such new business. For example, if, during the term of Executive's employment, an AMPAM Company engages in new and different activities, enters a new business or establishes new locations for its current or new activities or business in addition to or other than the activities or business enumerated under the Recitals above or the locations currently established therefor, then, subject to paragraph 3d. hereof, through the term of this covenant Executive will be precluded from soliciting the customers or employees of such new activities or business or from such new location and from directly competing with such new business activities, or locations within 100 miles of where such new activities, business or locations are conducted, unless Executive was conducting such new activities or business prior to any AMPAM Company conducting such new activities or business. d. It is further agreed by the parties hereto that, in the event that Executive shall cease to be employed hereunder and shall enter into a business or pursue other activities not in competition with the Plumbing and Mechanical Business of the AMPAM Companies or related activities or business in locations the operation of which, under such circumstances, does not violate clause (a)(i) of this paragraph 3, and in any event such new business, activities or location are not in violation of this paragraph 3 or of Executive's obligations under this paragraph 3, if any, Executive shall not be chargeable with a violation of this paragraph 3 if the AMPAM Companies shall at any time after the termination of Executive's employment enter the same, similar or a competitive (i) business, (ii) course of activities or (iii) location, as applicable. 6 e. The covenants in this paragraph 3 are severable and separate, and the unenforceability of any specific covenant shall not affect the provisions of any other covenant. Moreover, in the event any court of competent jurisdiction shall determine that the scope, time or territorial restrictions set forth are unreasonable, then it is the intention of the parties that such restrictions be enforced to the fullest extent which the court deems reasonable, and the Agreement shall thereby be reformed. f. All of the covenants in this paragraph 3 shall be construed as an agreement independent of any other provision in this Agreement (except for paragraph 4(d)), and the existence of any claim or cause of action of Executive against an AMPAM Company (except for paragraph 4(d)), whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by the Company of such covenants. It is specifically agreed that the period of two years (subject to the further provisions of this Agreement) following termination of employment stated at the beginning of this paragraph 3, during which the agreements and covenants of Executive made in this paragraph 3 shall be effective, shall be computed by excluding from such computation any time during which Executive is in violation of any provision of this paragraph 3. g. The Company and the Executive hereby agree that this covenant is a material and substantial part of this transaction. 4. Term; Termination; Right on Termination. The term of this Agreement shall begin on the Effective Date and continue for five years (the "Initial Term"), unless terminated sooner as herein provided; however, beginning on the fifth anniversary of the Effective Date and on each anniversary thereafter the term shall automatically continue for one year on the same terms and conditions contained herein in effect as of the time of renewal (the "Extended Term") unless not less than six months prior to any such anniversary either party shall give written notice to the other party that the term shall not be so extended; provided further, however, upon a Change in Control (as defined in paragraph 11(e)) during the Initial Term or any Extended Term the term of this Agreement shall automatically continue following such Change in Control for a period equal to the then remaining term or two years, whichever period is longer (such longer period being an Extended Term), unless earlier terminated as provided in paragraph 11. This Agreement and Executive's employment may be terminated in any one of the following ways: a. Death. The death of Executive shall immediately terminate this Agreement with no severance compensation due Executive's estate; provided, however, that the Executive shall be entitled to receive all compensation and benefits specified in the Agreement which shall have accrued prior to the date of such termination, and provided that for the 90-day period following Executive's 7 death, the Company, at its sole cost and expense, shall continue to provide Executive's then qualified beneficiaries with coverage under the Company's group health plan in which Executive participated immediately prior to Executive's death or a successor plan thereto, subject to the terms of such plan as it may be amended ("Company Health Plan"). Thereafter, the Company shall provide continuation of coverage elections to such qualified beneficiaries as are required by law. b. Disability. If Executive becomes entitled to and receives benefits under an insured long term disability plan of an AMPAM Company (incurs a "Disability"), the Company, with the approval of a majority of the members of the Board, may terminate this Agreement and Executive's employment hereunder. In the event this Agreement is terminated as a result of Executive's Disability, Executive shall have no right to any severance compensation; provided, however, (i) for 12 months thereafter or until Executive's death, if earlier, the Company shall continue to pay Executive an amount equal to Executive's monthly Base Salary (computed by reference to Executive's Annual Base Salary at the time of his termination) reduced by any cash benefits payable during such time to Executive under such long term disability plan and (ii) the Company, at its sole cost and expense, shall continue the coverage of Executive and his qualified beneficiaries (for as long as they are qualified beneficiaries thereunder) under the Company Health Plan for as long as Executive continues to qualify for and receive benefits under such long term disability plan, but not to exceed five years. Thereafter, the Company shall provide continuation of coverage elections to Executive and his qualified beneficiaries as required by law. c. Cause. The Company may terminate this Agreement and Executive's employment 30 days after written notice to Executive for "Cause", which shall be: (i) Executive's willful and material breach of this Agreement (which remains uncured at the end of such 30-day period); (ii) Executive's gross negligence in the performance or intentional nonperformance (in either case continuing for 30 days after receipt of written notice of need to cure) of any of Executive's material duties and responsibilities hereunder; (iii) Executive's dishonesty or fraud with respect to the business, reputation or affairs of an AMPAM Company which materially and adversely affects an AMPAM Company (monetarily or otherwise); or (iv) Executive's conviction of a felony crime involving moral turpitude. Any termination for Cause must be approved by a majority of the eligible members of the Board (For this purpose, any member of the Board reasonably believed by a majority of the Board to be at fault in the events leading the Board to consider terminating Executive for Cause shall also be excluded, including Executive if Executive is a member of the Board.). For purposes hereof no act, or failure to act, on Executive's part shall be deemed "willful" unless found by the Board, in its discretion, to be done, or omitted to be done, by Executive not in good faith and without reasonable belief that Executive's action or omission was in the best interest of the Company. Notwithstanding the foregoing, Executive shall not be deemed to have been 8 terminated for Cause unless and until there shall have been delivered to Executive a copy of a resolution duly adopted by the Board, finding that, in the good faith discretion of the Board, Executive was guilty of conduct set forth above and specifying the particulars thereof in detail. In the event of a termination for Cause, Executive shall have no right to any severance compensation. d. Without Cause or For Good Reason. Executive may only be terminated without Cause and other than due to Disability by the Company during either the Initial Term or Extended Term if such termination is approved by a majority of the members of the Board. Should Executive be terminated by the Company without Cause and other than due to Disability or should Executive terminate with Good Reason during the Initial Term, Executive shall receive from the Company, in addition to any accrued but unpaid salary, bonus, and benefits, in a lump sum payment due on the effective date of termination, an amount equivalent to the Annual Base Salary at the rate then in effect for (i) whatever time period is remaining under the Initial Term (but in no event more than two years) or (ii) for one year, whichever amount is greater. Should Executive be terminated by the Company without Cause and other than due to Disability or should Executive terminate with Good Reason during the Extended Term, Executive shall receive from the Company, in a lump sum payment due on the effective date of termination, an amount equivalent to the Base Salary at the rate then in effect for one year. Further, any termination by the Company without Cause or due to Disability or by Executive for Good Reason whether during the Initial Term or any Extended Term shall (except as otherwise provided in paragraph 4(g) below) operate to shorten the period set forth in paragraph 3(a) and during which the terms of paragraph 3 apply to one year from the date of termination of employment. If Executive resigns or otherwise terminates his employment without Good Reason, rather than the Company terminating his employment pursuant to this paragraph 4(d), Executive shall receive no severance compensation. e. Executive shall have "Good Reason" to terminate his employment hereunder as a consequence of any of the following events, unless such event is agreed to in writing by Executive: (i) a material reduction in his authority, title, responsibilities or duties; (ii) Executive's Base Annual Salary is reduced below that in effect on the Effective Date; (iii) the relocation of the Company's principal executive offices or Executive's principal office to a location outside northern Virginia; (iv) the assignment to Executive of any duties or responsibilities which are materially inconsistent with Executive's title, position or responsibilities as in effect immediately prior to such assignment; (v) failure to pay in a timely manner any compensation due to Executive; or (vi) any material breach by the Company of any provision of this Agreement. Provided, however, Good Reason shall exist with respect to a matter only if such matter is not corrected by the Company or AMPAM within 30 days of its receipt of written notice of such matter from Executive, and in no event shall a termination by Executive occurring more than 60 days following the date of an event described above be a termination for Good Reason due to such event. 9 f. Resignation Without Good Reason. Executive may, without Good Reason (as defined in paragraph 4(e)), terminate this Agreement and Executive's employment, effective 30 days after written notice is provided to the Company. If Executive resigns or otherwise terminates his employment without Good Reason, rather than the Company terminating his employment pursuant to paragraph 4(d), Executive shall receive all accrued but unpaid salary, bonus and benefits. Under no circumstance where Executive terminates Executive's employment without Good Reason, shall Executive be entitled to any pro rata share or payment of any bonus or other compensation which has not yet been determined or which requires employment at the time of the determination or award for eligibility. g. If termination of Executive's employment arises out of the Company's failure to pay Executive on a timely basis the amounts to which he is entitled under this Agreement or as a result of any other material breach of this Agreement by the Company, as determined by a court of competent jurisdiction or pursuant to the provisions of paragraph 18 below, the Company shall pay all amounts and damages to which Executive may be entitled as a result of such breach, including interest thereon and all reasonable legal fees and expenses and other costs incurred by Executive to enforce his rights hereunder. Further, none of the provisions of paragraph 3 shall apply in the event this Agreement is terminated as a result of a breach by the Company. h. Upon termination of this Agreement for any reason provided above, in addition to the above payments, if any, Executive shall be entitled to receive all compensation earned, accrued vacation and reimbursements due through the effective date of termination, paid to Executive in a lump sum on the effective date of termination. In addition, a termination of this Agreement shall not alter or impair any of Executive's vested rights or benefits, if any, under any (i) employee benefit plan of the AMPAM Companies or (ii) deferred compensation plan, including, without limitation, any stock option plan, of the AMPAM Companies. All other rights and obligations of the Company and Executive under this Agreement shall cease as of the effective date of termination, except that Executive's obligations under paragraphs 3 (if any), 5, 6, 7, and 8 herein and the Company's obligations under paragraphs 11 and 14 shall survive such termination in accordance with their terms, unless or except as expressly provided otherwise in this Agreement. 5. Return of Company Property. All records, designs, patents, business plans, financial statements, manuals, memoranda, lists and other property delivered to or compiled by Executive by or on behalf of any AMPAM Companies or their representatives, vendors or customers which pertain to the business of any AMPAM Companies shall be and remain the property of the AMPAM Company, as the case may be, and be subject at all times to their discretion and control. Likewise, all 10 correspondence, reports, records, charts, advertising materials and other similar data pertaining to the business, activities or future plans of the AMPAM Company which is collected by Executive shall be delivered promptly to the Company without request by it upon termination of Executive's employment and Executive shall not retain any copies of the same. 6. Intellectual Property. Executive shall disclose promptly to the Company any and all conceptions, ideas, designs, plans, know-how, processes, improvements and other discoveries, whether patentable or not, which (i) are conceived or made by Executive, solely or jointly with another, during the period of employment or thereafter, (ii) are directly related to the Plumbing and Mechanical Business or activities of an AMPAM Company, and (iii) Executive conceives as a result of his employment by the Company, including any predecessor (collectively, the "Intellectual Property"). Executive hereby assigns and agrees to assign all his interests therein to the Company or its nominee. Whenever requested to do so by the Company, Executive shall execute any and all applications, assignments or other instruments that the Company shall deem necessary to apply for and obtain Letters Patent of the United States or any foreign country or to otherwise protect the Company's interest therein. Executive must also render to the Company, at the Company's expense, assistance in the perfection, enforcement and defense of any Intellectual Property. 7. Trade Secrets. Executive agrees that he will not during or after the term of this Agreement disclose the specific terms of an AMPAM Company's relationships or agreements with its respective vendors or customers or any other trade secret of an AMPAM Company, whether in existence or proposed, to any person, firm, partnership, corporation or business for any reason or purpose whatsoever, except as required by law and prior to any such disclosure Executive shall give the Company prior written notice thereof and the opportunity to contest such disclosure. 8. Confidentiality. a. Executive acknowledges and agrees that all Confidential Information (as defined below) of the AMPAM Companies is confidential and a valuable, special and unique asset of the AMPAM Companies that gives the AMPAM Companies an advantage over its actual and potential, current and future competitors. Executive further acknowledges and agrees that Executive owes the Company and the AMPAM Companies a fiduciary duty to preserve and protect all Confidential Information from unauthorized disclosure or unauthorized use, that certain Confidential Information constitutes "trade secrets" under applicable laws and, that unauthorized disclosure or unauthorized use of the Confidential Information would irreparably injure the Company and the AMPAM Companies. b. Both during the term of Executive's employment and after the termination of Executive's employment for any reason (including wrongful termination), Executive shall hold all Confidential Information in strict confidence, 11 and shall not use any Confidential Information except for the benefit of the AMPAM Companies, in accordance with the duties assigned to Executive. Executive shall not at any time (either during or after the term of Executive's employment), disclose any Confidential Information to any person or entity (except other employees of the AMPAM Companies who have a need to know the information in connection with the performance of their employment duties, and who have been informed of the confidential nature of the confidential information and have agreed to keep it confidential), or copy, reproduce, modify, transmit, including electronic transmission, decompile or reverse engineer any Confidential Information, or remove any Confidential Information from the premises of any AMPAM Company, without the prior written consent of the Board, or permit any other person to do so. Executive shall take reasonable precautions to protect the physical security of all documents and other material containing Confidential Information (regardless of the medium on which the Confidential Information is stored). This Agreement applies to all Confidential Information, whether now known or later to become known to Executive. c. Upon the termination of Executive's employment with the Company for any reason, and upon written request of the Company at any other time, Executive shall promptly surrender and deliver to the Company all documents and other written material of any nature containing or pertaining to any Confidential Information and shall not retain any such document or other material. Within ten (10) days of a written request by the Company, Executive shall certify to the Company in writing that all such materials have been returned. d. As used in this Agreement the term "Confidential Information" shall mean any information or material known to or used by or for an AMPAM Company (whether or not owned or developed by the AMPAM Company and whether or not developed by Executive) that is not generally known to persons in the Plumbing and Mechanical Business, except as provided in this paragraph. Confidential Information includes, but is not limited to, the following: all trade secrets of the AMPAM Companies; all information that an AMPAM Company has marked as confidential or has otherwise described to Executive (either in writing or orally) as confidential; all nonpublic information concerning the AMPAM Company's products, services, prospective products or services, research, product designs, prices, discounts, costs, marketing plans, marketing techniques, market studies, test data, customers, customer lists and records, suppliers and contracts; all AMPAM Company business records and plans; all AMPAM Company personnel files; all financial information of or concerning the AMPAM Companies; all information relating to operating system software, application software, software and system methodology, hardware platforms, technical information, inventions, computer programs and listings, source codes, object codes, copyrights and other intellectual property; all technical specifications; any proprietary information belonging to an AMPAM Company; all computer hardware or software manuals; all training or instruction manuals; and all data and all computer system passwords 12 and user codes. For purposes hereof, Confidential Information shall not include such information (i) which becomes or is already known to the public or some other party through no fault of Executive; or (ii) the disclosure of which (x) is required by law (including regulations and rulings) or the order of any competent governmental authority or (y) Executive reasonably believes is required in connection with the defense of a lawsuit against Executive, provided that in either case, prior to disclosing any information, Executive shall give prior written notice thereof to the Company and provide the Company with the opportunity to contest such disclosure. 9. No Prior Agreements. Executive hereby represents and warrants to the Company that the execution of this Agreement by Executive and his employment by the Company and the performance of his duties hereunder will not violate or be a breach of any agreement, including any non-competition agreement invention or secrecy agreement, with a former employer, client or any other person or entity. Further, Executive agrees to indemnify the Company and the AMPAM Companies for any loss, including, but not limited to, reasonable attorneys' fees and expenses, the Company and any AMPAM Company may incur based upon or arising out of Executive's breach of this paragraph 9. 10. Assignment; Binding Effect. Executive understands that he has been selected for employment by the Company on the basis of his personal qualifications, experience and skills. Executive agrees, therefore, that he cannot assign all or any portion of his performance under this Agreement. Subject to the preceding two sentences and the express provisions of paragraph 12 below, this Agreement shall be binding upon, inure to the benefit of and be enforceable by the parties hereto and their respective heirs, legal representatives, successors and assigns. The Company and AMPAM will require any successor (whether direct or indirect by purchase, merger, consolidation or otherwise) to all or substantially all of the business and assets of the Company or AMPAM to expressly assume and agree in writing reasonably satisfactory to Executive to perform this Agreement in the same manner and to the same extent that the Company or AMPAM would be required to perform it if no such succession had taken place. Failure of the Company or AMPAM to obtain such written agreement prior to the effectiveness of any such succession shall be a material breach of this Agreement. 11. Change in Control. a. Executive understands and acknowledges that the Company may be merged or consolidated with or into another entity and that such entity shall automatically succeed to the rights and obligations of the Company hereunder or that the Company may undergo a Change in Control (as defined below). In the event a Change in Control is initiated or occurs during the Initial Term or an Extended Term, then the provisions of this paragraph 11 shall be applicable. 13 b. In the event of a Change in Control wherein AMPAM and Executive have not received written notice at least ten business days prior to the date of the event giving rise to the Change in Control from the successor to all or a substantial portion of the AMPAM's business and/or assets that such successor is willing as of the closing to assume and agrees to perform, or continue to cause the Company to perform, the Company's obligations under this Agreement in the same manner and to the same extent that the Company is hereby required to perform, then Executive may, at Executive's sole discretion, elect to terminate Executive's employment on the effective date of such Change in Control by providing written notice to the AMPAM Board at least five business days prior to the closing of the transaction giving rise to the Change in Control. In such case, the applicable provisions of paragraph 4(d) will apply as though the Company had terminated Executive without Cause; however, the amount of the lump sum severance payment due Executive shall be triple the amount calculated under the terms of paragraph 4(d), but shall in no event exceed six times Executive's annual base salary. c. In any Change in Control situation, Executive may, at Executive's sole discretion, elect to terminate Executive's employment upon the effective date of such Change in Control by providing written notice to the AMPAM Board at least five business days prior to the closing of the transaction giving rise to the Change in Control. In such case, the applicable provisions of paragraph 4(d) will apply as though the Company had terminated Executive without Cause; however, the amount of the lump sum severance payment due Executive shall be double the amount calculated under the terms of paragraph 4(d), but shall in no event exceed four times Executive's annual base salary. d. If, on or within two years following the effective date of a Change in Control the Company terminates Executive's employment other than for Cause or Disability or Executive terminates his employment for Good Reason, or if Executive's employment with the Company is terminated by the Company within three months before the effective date of a Change in Control and it is reasonably demonstrated that such termination (i) was at the request of a third party that has taken steps reasonably calculated to effect a Change in Control, or (ii) otherwise arose in connection with or anticipation of a Change in Control, then Executive shall receive from Company, in a lump sum payment due on the effective date of termination, the greater of (i) the equivalent of three times Executive's Base Annual Salary at the rate then in effect or (ii) the Base Salary at the rate then in effect for whatever period is then remaining on the Initial Term, if any, which payment shall be in lieu of any amounts otherwise payable pursuant to paragraph 4(d). 14 e. A "Change in Control" shall be deemed to have occurred if: i. any person, entity or group (as such terms are used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Act")), other than persons and entities which owned any capital stock of AMPAM at the closing date of the transactions contemplated in the Agreement and Plan of Merger, the AMPAM Companies or an employee benefit plan of the AMPAM Companies, acquires, directly or indirectly, the beneficial ownership (as defined in Section 13(d) of the Act) of any voting security of AMPAM and immediately after such acquisition such person, entity or group is, directly or indirectly, the beneficial owner of voting securities representing 50% or more of the total voting power of all of the then outstanding voting securities of AMPAM entitled to vote generally in the election of directors; ii. upon the first purchase of the AMPAM's common stock pursuant to a tender or exchange offer (other than a tender or exchange offer made by the Company); iii. the stockholders of AMPAM shall approve a merger, consolidation, recapitalization or reorganization of AMPAM, or a reverse stock split of outstanding voting securities, or consummation of any such transaction if stockholder approval is not obtained, other than any such transaction which would result in at least 75% of the total voting power represented by the voting securities of the surviving entity outstanding immediately after such transaction being beneficially owned by the holders of all of the outstanding voting securities of AMPAM immediately prior to the transactions with the voting power of each such continuing holder relative to other such continuing holders not substantially altered in the transaction; iv. the stockholders of AMPAM shall approve a plan of complete liquidation or dissolution of AMPAM or an agreement for the sale or disposition by AMPAM of all or substantially all of its assets; or v. if, at any time during any period of two consecutive years, individuals who at the beginning of such period constitute the AMPAM Board cease for any reason to constitute at least a majority thereof, unless the election or nomination for the election by AMPAM's stockholders of each new director was approved a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period. f. Notwithstanding anything in this Agreement to the contrary, a termination pursuant to paragraph 11(b), (c), or (d) shall operate to automatically waive in full the noncompetition restrictions imposed on Executive pursuant to paragraph 3. 15 g. If it shall be determined that any payment made or benefit provided to Executive in connection with a change in control (as defined in Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), or any successor thereto) of AMPAM occurring after the Effective Date and on or before the termination of this Agreement whether or not made or provided pursuant to this Agreement is subject to the excise tax imposed by Section 4999 of the Code, AMPAM shall pay Executive an amount of cash (the "Additional Amount") such that the net amount received by Executive after paying all applicable taxes on such Additional Amount and any penalties, interest and other reasonable costs incurred as a result of such excise tax or additional payment, shall be equal to the amount that Executive would have received if Section 4999 were not applicable. 12. No Mitigation or Offset. Executive shall not be required to mitigate the amount of any Company payment provided for in this Agreement by seeking other employment or otherwise. The amount of any payment required to be paid to Executive by the Company pursuant to this Agreement shall not be reduced by any amounts that are owed to the Company by Executive, provided that Executive (i) executes and delivers to the Company a promissory note evidencing a promise by Executive to pay the full amount of any amounts owed to the Company within 12 months from the date of Executive's termination of employment and (ii) provides such collateral reasonably satisfactory to the Company to ensure payment of such promissory note. 13. Release. Notwithstanding anything in this Agreement to the contrary, Executive shall not be entitled to receive any severance payments pursuant to paragraphs 4 or 11 of this Agreement unless Executive has executed (and not revoked) a general release of all claims, known or unknown, Executive may have against the Company, AMPAM, its subsidiaries, their directors, officers, and employees, in a form of such release reasonably acceptable to the Company and AMPAM. 14. Indemnification. In the event Executive is made a party to any threatened, pending or completed action, suit or proceeding, whether civil, derivative, subrogation, criminal, administrative or investigative (other than an action by the Company against Executive and a derivative action shall not be considered an action by the Company), by reason of the fact that he is or was performing services for the Company or any AMPAM Company or any present or future subsidiary thereof, or as an executive officer of an AMPAM Company prior to the date of this Agreement, then the Company shall indemnify, defend and hold harmless the Executive against all expenses (including attorneys' fees), judgments, fines and amounts paid in settlement, as actually and reasonably incurred by Executive in connection therewith. In the event that both Executive and the Company are made a party to the same third-party action, complaint, suit or proceeding, the Company agrees to engage competent legal representation, and Executive agrees to use the same representation, provided that if counsel selected by the Company shall have a conflict of interest that prevents such counsel from representing 16 Executive, Executive may engage separate counsel and the Company shall pay as incurred all reasonable attorneys' fees and reasonable expenses of such separate counsel, provided further that Executive may at any time, at Executive's sole expense, hire separate counsel to represent Executive in such matter. Further, while Executive is expected at all times to use his best efforts to faithfully discharge his duties under this Agreement, Executive cannot be held liable to the Company for errors or omissions made in good faith where Executive has not exhibited gross, willful and wanton negligence and misconduct nor performed criminal and fraudulent acts which materially damage the business of the Company. The Company shall indemnify and defend Executive against and hold Executive harmless from any costs, expenses (including reasonable attorneys' fees as provided in this paragraph), liabilities, losses and exposures for Executive's services as an employee, officer and director of the Company (or any AMPAM Company or any successor) to the maximum extent permitted under applicable law. The indemnification required by this paragraph 14 shall be made by the Company by periodic payments promptly as and when bills are received or liabilities are incurred. The provisions of this paragraph shall survive the termination of this Agreement. 15. Complete Agreement. This Agreement supersedes, and replaces in full, all representations, understandings and agreements (oral or written) between Executive and the Company or any AMPAM Company or any of their officers, directors or representatives existing as of the Effective Date and covering the same subject matter as this Agreement but excluding the Agreement and Plan of Merger dated as of September [ ], 1999 by and among the Company, Atlas Plumbing & Mechanical, Inc., Atlas Plumbing & Mechanical, Inc.'s shareholders and AMPAM, which shall not be affected by this Agreement. This written Agreement is the final, complete and exclusive statement and expression of the agreement between the Company, AMPAM, and Executive and of all the terms of this Agreement, and it cannot be varied, contradicted or supplemented by evidence of any prior or contemporaneous oral or written agreements. This written Agreement may not be modified after the Effective Date except by a further writing signed by a duly authorized officer of the Company and Executive, and no term of this Agreement may be waived except by writing signed by the party waiving the benefit of such term. Without limiting the generality of the foregoing, either party's failure to insist on strict compliance with this Agreement shall not be deemed a waiver thereof. 16. Notice Whenever any notice is required hereunder, it shall be given in writing addressed as follows: To the Company: American Plumbing and Mechanical, Inc. 1950 Louis Henna Blvd. Round Rock, Texas 78664 Attn: Mr. Chet Harris To Executive: Mr. Stephen F. Turner 6219 Winslow Court Fairfax Station, VA 22039 17 Notice shall be deemed given and effective on the earlier of three days after the deposit in the U.S. mail of a writing addressed as above and sent first class mail, certified, return receipt requested, or when actually received. Either party may change the address for notice by notifying the other party of such change in accordance with this paragraph 16. 17. Severability; Headings. If any portion of this Agreement is held invalid or inoperative, the other portions of this Agreement shall be deemed valid and operative and, so far as is reasonable and possible, effect shall be given to the intent manifested by the portion held invalid or inoperative. The paragraph headings herein are for reference purposes only and are not intended in any way to describe, interpret, define or limit the extent or intent of the Agreement or of any part hereof 18. Dispute Resolutions. Except with respect to injunctive relief as provided in paragraph 3(b), neither party shall institute a proceeding in any court or administrative agency to resolve a dispute between the parties before that party has sought to resolve the dispute through direct negotiation with the other party. If the dispute is not resolved within two weeks after a demand for direct negotiation, the parties shall attempt to resolve the dispute through mediation. If the parties do not promptly agree on a mediator, the parties shall request the Association of Attorney Mediators in Travis County, Texas (or if the Company's principal offices are not in Travis County, a similar organization in the county in which the Company's principal offices are located) to appoint a mediator certified by the Supreme Court of Texas. If the mediator is unable to facilitate a settlement of the dispute within a reasonable period of time, as determined by the mediator, the mediator shall issue a written statement to the parties to that effect and any unresolved dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration, conducted before a single arbitrator in the city in which AMPAM has its principal offices, in accordance with the Commercial Arbitration Rules of the American Arbitration Association then in effect. The arbitrator shall have the authority to order back-pay, severance compensation, vesting of options (or cash compensation in lieu of vesting of options), reimbursement of costs and expenses, including those incurred to enforce this Agreement including reasonable attorneys' fees and interest thereon in the event the arbitrator determines that Executive was involuntarily terminated by the Company without Disability or Cause, as defined in paragraphs 4(b) and 4(c), respectively, or that the Company has otherwise materially breached this Agreement. A decision by the arbitrator shall be final and binding. Judgment may be entered on the arbitrator's award in any court having jurisdiction. The costs and expenses, including reasonable attorneys' fees, of the substantially prevailing party in any dispute arising under this Agreement will be promptly paid by the other party. 19. Governing Law. This Agreement shall in all respects be construed according to the laws of the State of Texas without regard to its conflicts of law provisions. 20. AMPAM Guaranty. AMPAM hereby irrevocably and unconditionally 18 guarantees to Executive the payment of all amounts and the performance of all other obligations of the Company in accordance with the terms of this Agreement. 21. Counterparts. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original and all of which together shall constitute but one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement effective for all purposes as of the Effective Date. Date: September 30, 1999 AMERICAN PLUMBING AND MECHANICAL, INC. By /s/ DAVID C. BAGGETT ------------------------------------------- David C. Baggett Chief Financial Officer Date: , 1999 ------------- ATLAS PLUMBING & MECHANICAL, L.L.C. By /s/ DAVID C. BAGGETT ------------------------------------------- David C. Baggett Chief Financial Officer Date: September 30, 1999 EXECUTIVE /s/ STEPHEN F. TURNER --------------------------------------------- Stephen F. Turner 19 SCHEDULE A -- EXAMPLE OF THE MANNER IN WHICH THE ANNUAL BONUS ACCRUES Actual combined Adjusted EBITDA of the Company and Atlas Plumbing & Mechanical, Inc. for 1999: $4,250,000 Target combined Adjusted EBITDA of the Company and Atlas Plumbing & Mechanical, Inc. for 1999: $4,500,000 PERCENTAGE OF TARGET ACHIEVED(1): 50%
SHAREHOLDER MAXIMUM BONUS ACTUAL BONUS - ----------- ------------- ------------ Stephen F. Turner $200,000 $100,000
(1) The Annual Bonus accrues proportionately once the Adjusted EBITDA reaches $4,000,000 up to $4,500,000. 20 EX-10.12 6 h95061ex10-12.txt EMPLOYMENT AGREEMENT - CHARLES E. PARKS III EXHIBIT 10.12 EMPLOYMENT AGREEMENT This Employment Agreement (the "Agreement") by and between Parks Acquisition Corporation (the "Company"), American Plumbing and Mechanical, Inc., a Delaware corporation ("AMPAM"), and Mr. Charles B. Parks, III. ("Executive") is hereby entered into effective as of the date of the closing or the transactions contemplated in the various Acquisition Agreements dated September 16, 1999 between the Company and AMPAM. RECITALS The following statements are true and correct: Whereas, as of the Effective Date, the Company, AMPAM, and the subsidiaries of AMPAM (AMPAM and such subsidiaries, including the Company, being collectively, the "AMPAM Companies") provide plumbing and mechanical contracting services; and Whereas, the Company wishes to employ Executive, and Executive wishes to be employed by the Company, on the terms set forth herein; and Whereas, in the course of his employment with the Company, Executive will become familiar with and aware of information as to the Company's and the AMPAM Companies' customers and specific manner of doing business, including the processes, techniques and trade secrets used by the Company and the AMPAM Companies, and future plans with respect thereto, all of which has been and will be established and maintained at great expense to the Company and the AMPAM Companies and which constitutes trade secrets and the valuable goodwill of the Company and the AMPAM Companies. Therefore, in consideration of the mutual promises, terms, covenants and conditions set forth herein and the performance of each, it is hereby agreed as follows: AGREEMENTS 1. Employment and Duties. a. The Company hereby employs Executive as the President of the Company. As such, Executive shall have the responsibilities, duties and authority customarily appertaining to such office and such other duties as may be reasonably 1 assigned to Executive and which are consistent with such position. Executive shall report to the Board of Directors of the Company (the "Board") unless otherwise directed by the Board. Executive hereby accepts this employment upon the terms and conditions herein contained and, subject to paragraph 1(c), agrees to devote substantially all of his time, attention and efforts during normal business hours, excluding any periods of vacation or sick leave, to promote and further the business and interests of the Company and its affiliates. b. Executive shall faithfully adhere to, execute and fulfill all reasonable and lawful policies established by the Company, to the extent such policies have been communicated to Executive in writing and are not inconsistent with any of the terms of this Agreement. c. Executive shall not, during the term of his employment hereunder, engage in any other business activity pursued for gain, profit or other pecuniary advantage to the extent such activity interferes materially with Executive's duties and responsibilities hereunder. The foregoing limitations shall not prohibit Executive from making personal investments in such form or manner as will not materially interfere with Executive's performance of his duties under this Agreement. d. Executive shall be entitled to vacation in accordance with the policies of the Company. 2. Compensation. For all services rendered by Executive, the Company shall compensate Executive as follows: a. Base Salary. The base salary (the "Base Salary") payable to Executive during the term shall be $150,000 per year, payable in accordance with the Company's payroll procedures for officers, but not less frequently than twice monthly. On an annual basis such Base Salary shall be reviewed by the Board of Directors of AMPAM (the "AMPAM Board"), and may be increased or decreased at its discretion in light of the Executive's position, responsibilities, performance and such other reasonable, job related factors that the AMPAM Board deems appropriate; provided, however, Base Salary, as adjusted, may not be less than that amount in effect on the Effective Date. b. Annual Bonus. AMPAM will adopt an incentive bonus plan under which Executive and other officers of the AMPAM Companies will be eligible to receive annual bonus awards in amounts that are competitive with those provided to similarly situated executives and commensurate with the performance of the Company, as reasonably determined by the AMPAM Board. If this incentive bonus plan is adopted by June 30, 2000, Executive will be eligible to receive a bonus determined pursuant to this plan for the three month period ended December 2 31, 1999, payable within 30 days subsequent to the plan's adoption but in no event prior to April 30, 2000. If this plan is adopted after June 30, 2000, Executive will be eligible to receive a bonus determined pursuant to this plan payable by April 30, 2001 for the fifteen month period ended December 31, 2000. c. Executive Perquisites and Benefits. Executive shall be entitled to receive additional benefits and compensation from the Company in the form and to the extent specified below: 1. Executive shall be reimbursed for all business travel and other out-of-pocket expenses reasonably incurred by Executive in the performance of his duties pursuant to this Agreement and in accordance with the AMPAM's policy for similarly situated officers. All such expenses shall be appropriately documented in reasonable detail by Executive upon submission of any request for reimbursement, and in a format and manner consistent with the AMPAM's expense reporting policy. 2. Executive shall be entitled to participate in all incentive compensation plans and to receive all fringe benefits and perquisites offered by the Company or AMPAM to any of the Company's or AMPAM Companies' similarly situated executives, including, without limitation, participation in the various employee benefit plans or programs provided to the employees of the Company or the AMPAM Companies in general, subject to the regular eligibility requirements with respect to each of such benefit plans or programs, and such other benefits or perquisites as may be approved for Executive by the Board during the term of this Agreement, all on a basis as favorable to Executive as may be provided or offered by the Company to other comparable officers (in terms of position) of the Company. Notwithstanding the above, until the Company establishes employee welfare and pension benefit plans for its officers, Executive shall participate in such plans of the AMPAM Companies as may be designated. The Company shall provide Executive with such other perquisites as may be deemed appropriate for Executive by the AMPAM Board during the term of this Agreement. 3. Notwithstanding the above, the Board may offer or provide to Executive, or to any other officer or executive of the Company, AMPAM, or any AMPAM Company, special compensation, benefits, and/or perquisites, in order to attract or retain that executive or officer where the Board determines, in its discretion, that the offer or provision of such special compensation, benefits, and/or perquisites are in the best interests of AMPAM or any AMPAM Company. 3 3. Non-Competition Agreement. a. Executive acknowledges that as a consequence of his employment with the Company, he will be furnished or have access to Confidential Information (as defined below). Executive further recognizes that the Company's and AMPAM's willingness to enter into this Agreement is based in material part on Executive's agreement to the provisions of this paragraph 3 and that Executive's breach of the provisions of this paragraph 3 could materially damage the Company and AMPAM. Subject to the further provisions of this Agreement, Executive will not, during the term of his employment with any of the AMPAM Companies and for a period of two years immediately following the termination of such employment for any reason, directly or indirectly, for himself or on behalf of or in conjunction with any other person, company, partnership, corporation or business of whatever nature: 1. engage, as an officer, director, shareholder, owner, partner, joint venturer, or in a managerial capacity, whether as an employee, independent contractor, consultant or advisor, or as a sales representative, whether paid or unpaid, in any plumbing, piping, mechanical, heating, ventilation or air-conditioning contracting, installation or services business directly related thereto (such business and operations referred to herein as the "Plumbing and Mechanical Business"), in direct competition with any AMPAM Company within 100 miles of where any AMPAM Company conducts business including any territory serviced by an AMPAM Company during the term of Executive's employment (the "Territory"); 2. call upon any person who is, at that time, an employee of any AMPAM Company for the purpose or with the intent of enticing such employee away from or out of the employ of the AMPAM Company; 3. call upon any person or entity which is, at that time, or which has been, within one year prior to that time, a customer of an AMPAM Company within the Territory for the purpose of soliciting customers, orders or contracts for any Plumbing and Mechanical Business within the Territory; 4. call upon any prospective acquisition candidate, on Executive's own behalf or on behalf of any competitor, which candidate was, to Executive's knowledge after due inquiry, either called upon by an AMPAM Company or for which an AMPAM Company made an acquisition analysis, for the purpose of acquiring such entity; 4 5. disclose customers, whether in existence or proposed, of the AMPAM Companies to any person, firm, partnership, corporation or business for any reason or purpose whatsoever except to the extent that the AMPAM Companies has in the past disclosed such information to the public for valid business reasons; or 6. testify as an expert witness in plumbing and mechanical services matters for a party adverse to an AMPAM Company in litigation; provided that nothing contained in this paragraph 4(a)(vi) shall interfere with Executive's duty to testify as a witness if required by law. Notwithstanding the above, the foregoing covenant shall not be deemed to prohibit Executive from acquiring as an investment (i) not more than 1% of the capital stock of a company engaged in the Plumbing and Mechanical Business, whose stock is traded on a national securities exchange, the NASDAQ Stock Market, or on an over-the-counter or similar market or (ii) not more than 1% of the capital stock of a competing business whose stock is not publicly traded if the Board consents to such acquisition. Any ownership interest in any business which is in competition with AMPAM shall immediately be disclosed to the Board by Executive. b. Because of the difficulty of measuring economic losses to the AMPAM Companies as a result of a breach of the foregoing covenant, and because of the immediate and irreparable damage that could be caused to one or more AMPAM Company for which they would have no other adequate remedy, Executive agrees that foregoing covenant may be enforced by any AMPAM Company, in the event of breach by him, by injunctions, restraining orders, and orders of specific performance issued by a court of competent jurisdiction. Executive further agrees to waive any requirement that AMPAM Companies secure or post any bond in connection with such remedies. c. It is agreed by the parties that the foregoing covenants in this paragraph 3 impose a reasonable restraint on Executive in light of the activities and business of the AMPAM Companies on the date of the execution of this Agreement and the current plans of the AMPAM Companies; but it is also the intent of the Company and Executive that, subject to paragraph 3(g) hereof, such covenants be construed and enforced in accordance with the changing activities, business and locations of the AMPAM Companies throughout the term of this covenant, whether before or after the date of termination of the employment of Executive, unless the Executive was conducting such new business prior to any AMPAM Company conducting such new business. For example, if, during the term of Executive's employment, an AMPAM Company engages in new and different activities, enters a new business or establishes new locations for its current or new activities or business in addition to or other than the activities or 5 business enumerated under the Recitals above or the locations currently established therefor, then, subject to paragraph 3g. hereof, through the term of this covenant Executive will be precluded from soliciting the customers or employees of such new activities or business or from such new location and from directly competing with such new business activities, or locations within 100 miles of where such new activities, business or locations are conducted, unless Executive was conducting such new activities or business prior to any AMPAM Company conducting such new activities or business. d. It is further agreed by the parties hereto that, in the event that Executive shall cease to be employed hereunder and shall enter into a business or pursue other activities not in competition with the Plumbing and Mechanical Business of the AMPAM Companies or related activities or business in locations the operation of which, under such circumstances, does not violate clause (a)(i) of this paragraph 3, and in any event such new business, activities or location are not in violation of this paragraph 3 or of Executive's obligations under this paragraph 3, if any, Executive shall not be chargeable with a violation of this paragraph 3 if the AMPAM Companies shall at any time after the termination of Executive's employment enter the same, similar or a competitive (i) business, (ii) course of activities or (iii) location, as applicable. e. The covenants in this paragraph 3 are severable and separate, and the unenforceability of any specific covenant shall not affect the provisions of any other covenant. Moreover, in the event any court of competent jurisdiction shall determine that the scope, time or territorial restrictions set forth are unreasonable, then it is the intention of the parties that such restrictions be enforced to the fullest extent which the court deems reasonable, and the Agreement shall thereby be reformed. f. All of the covenants in this paragraph 3 shall be construed as an agreement independent of any other provision in this Agreement, and the existence of any claim or cause of action of Executive against an AMPAM Company, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by the Company of such covenants. It is specifically agreed that the period of two years (subject to the further provisions of this Agreement) following termination of employment stated at the beginning of this paragraph 3, during which the agreements and covenants of Executive made in this paragraph 3 shall be effective, shall be computed by excluding from such computation any time during which Executive is in violation of any provision of this paragraph 3. g. The Company and the Executive hereby agree that this covenant is a material and substantial part of this transaction. 4. Term; Termination; Rights on Termination. The term of this Agreement 6 shall begin on the Effective Date and continue for five years (the "Initial Term"), unless terminated sooner as herein provided; however, beginning on the fifth anniversary of the Effective Date and on each anniversary thereafter the term shall automatically continue for one year on the same terms and conditions contained herein in effect as of the time of renewal (the "Extended Term") unless not less than six months prior to any such anniversary either party shall give written notice to the other party that the term shall not be so extended; provided further, however, upon a Change in Control (as defined in paragraph 11(e)) during the Initial Term or any Extended Term the term of this Agreement shall automatically continue following such Change in Control for a period equal to the then remaining term or two years, whichever period is longer (such longer period being an Extended Term), unless earlier terminated as provided in paragraph 11. This Agreement and Executive's employment may be terminated in any one of the following ways: a. Death. The death of Executive shall immediately terminate this Agreement with no severance compensation due Executive's estate; provided, however, (i) should Executive's Death occur prior to December 31, 2000, the Company shall pay the amount of Executive's bonus for fiscal year 2000 as provided in paragraph 2.b. and (ii) for the 90-day period following Executive's death, the Company, at its sole cost and expense, shall continue to provide Executive's then qualified beneficiaries with coverage under the Company's group health plan in which Executive participated immediately prior to Executive's death or a successor plan thereto, subject to the terms of such plan as it may be amended ("Company Health Plan"). Thereafter, the Company shall provide continuation of coverage elections to such qualified beneficiaries as are required by law. b. Disability. If Executive becomes entitled to and receives benefits under an insured long term disability plan of an AMPAM Company (incurs a "Disability"), the Company, with the approval of a majority of the members of the Board, may terminate this Agreement and Executive's employment hereunder. In the event this Agreement is terminated as a result of Executive's Disability, Executive shall have no right to any severance compensation; provided, however, (i) should Executive's Disability occur prior to December 31, 2000, the Company shall pay the amount of Executive's bonus for fiscal year 2000 as provided in paragraph 2.b. (ii) for 12 months thereafter or until Executive's death, if earlier, the Company shall continue to pay Executive an amount equal to Executive's monthly base salary (computed by reference to Executive's Annual Base Salary at the time of his termination) reduced by any cash benefits payable to Executive under such long term disability plan and (iii) the Company, at its sole cost and expense, shall continue the coverage of Executive and his qualified beneficiaries (for as long as they are qualified beneficiaries thereunder) under the Company Health Plan for as long as Executive continues to qualify for and receive benefits under such long term disability plan, but not to exceed five years. Thereafter, the Company shall provide continuation of coverage elections to Executive and his qualified beneficiaries as required by law. 7 c. Cause. The Company may terminate this Agreement and Executive's employment 30 days after written notice to Executive for "Cause", which shall be: (1) Executive's willful and material breach of this Agreement (which remains uncured at the end of such 30-day period); (2) Executive's gross negligence in the performance or intentional nonperformance (in either case continuing for 30 days after receipt of written notice of need to cure) of any of Executive's material duties and responsibilities hereunder; (3) Executive's dishonesty or fraud with respect to the business, reputation or affairs of an AMPAM Company which materially and adversely affects an AMPAM Company (monetarily or otherwise); or (4) Executive's conviction of a felony crime involving moral turpitude. Any termination for Cause must be approved by a majority of the eligible members of the Board (For this purpose, any member of the Board reasonably believed by a majority of the Board to be at fault in the events leading the Board to consider terminating Executive for Cause shall also be excluded, including Executive if Executive is a member of the Board.). For purposes hereof, no act, or failure to act, on Executive's part shall be deemed "willful" unless found by the Board, in its discretion, to be done, or omitted to be done, by Executive not in good faith and without reasonable belief that Executive's action or omission was in the best interest of the Company. Notwithstanding the foregoing, Executive shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to Executive a copy of a resolution duly adopted by the Board, finding that, in the good faith discretion of the Board, Executive was guilty of conduct set forth above and specifying the particulars thereof in detail. In the event of a termination for Cause, Executive shall have no right to any severance compensation. d. Without Cause or For Good Reason. Executive may only be terminated without Cause and other than due to Disability by the Company during either the Initial Term or Extended Term if such termination is approved by a majority of the members of the Board. Should Executive be terminated by the Company without Cause and other than due to Disability or should Executive terminate with Good Reason during the Initial Term, Executive shall receive from the Company, in addition to any accrued but unpaid salary, bonus, and benefits, in a lump sum payment due on the effective date of termination, an amount equivalent to the Annual Base Salary at the rate then in effect for (i) whatever time period is remaining under the Initial Term (but in no event more than two years) or (ii) for one year, whichever amount is greater. Should Executive be terminated by the Company without Cause and other than due to Disability or should Executive terminate with Good Reason during the Extended Term, Executive shall receive from the Company, in a lump sum payment due on the effective date of termination, an amount equivalent to the base salary at the rate then in effect for one year. Further, any termination by the Company without Cause or due to 8 Disability or by Executive for Good Reason whether during the Initial Term or any Extended Term shall operate to shorten the period set forth in paragraph 3a. and during which the terms of paragraph 3 apply to one year from the date of termination of employment. If Executive resigns or otherwise terminates his employment without Good Reason, rather than the Company terminating his employment pursuant to that paragraph 4d., Executive shall receive no severance compensation. e. Executive shall have "Good Reason" to terminate his employment hereunder as a consequence of any of the following events, unless such event is agreed to in writing by Executive: (a) a material reduction in his authority, title, responsibilities or duties; (b) Executive's Base Annual Salary is reduced below that in effect on the Effective Date; (c) the relocation of the Company's principal executive offices or Executive's principal office to a location outside the county of Los Angeles; (d) the assignment to Executive of any duties or responsibilities which are materially inconsistent with Executive's title, position or responsibilities as in effect immediately prior to such assignment; provided, however, Good Reason shall exist with respect to a matter only if such matter is not corrected by the Company or AMPAM within 30 days of its receipt of written notice of such matter from Executive, and in no event shall a termination by Executive occurring more than 60 days following the date of an event described above be a termination for Good Reason due to such event. f. Resignation Without Good Reason. Executive may, without Good Reason (as hereinafter defined), terminate this Agreement and Executive's employment, effective 30 days after written notice is provided to the Company. If Executive resigns or otherwise terminates his employment without Good Reason, rather than the Company terminating his employment pursuant to that paragraph 4(d), Executive shall receive all accrued but unpaid salary, bonus and benefits. Under no circumstance where Executive terminates Executive's employment without Good Reason, shall Executive be entitled to any pro rata share or payment of any bonus or other compensation which has not yet been determined or which requires employment at the time of the determination or award for eligibility. g. Upon termination of this Agreement for any reason provided above, in addition to the above payments, if any, Executive shall be entitled to receive all compensation earned, accrued vacation and reimbursements due through the effective date of termination, paid to Executive in a lump sum on the effective date of termination. In addition, a termination of this Agreement shall not alter or impair any of Executive's vested rights or benefits, if any, under any (i) employee benefit plan of the AMPAM Companies or (ii) deferred compensation plan, including, without limitation, any stock option plan, of the AMPAM Companies. All other rights and obligations of the Company and Executive under this 9 Agreement shall cease as of the effective date of termination, except that Executive's obligations under paragraphs 3, 5, 6, 7, and 8 herein and the Company's obligations under paragraphs 11(g) and 14 shall survive such termination in accordance with their terms, unless or except as expressly provided otherwise in this Agreement. 5. Return of Company Property. All records, designs, patents, business plans, financial statements, manuals, memoranda, lists and other property delivered to or compiled by Executive by or on behalf of any AMPAM Companies or their representatives, vendors or customers which pertain to the business of any AMPAM Companies shall be and remain the property of the AMPAM Company, as the case may be, and be subject at all times to their discretion and control. Likewise, all correspondence, reports, records, charts, advertising materials and other similar data pertaining to the business, activities or future plans of the AMPAM Company which is collected by Executive shall be delivered promptly to the Company without request by it upon termination of Executive's employment and Executive shall not retain any copies of the same. 6. Intellectual Property. Executive shall disclose promptly to the Company any and all conceptions, ideas, designs, plans, know-how, processes, improvements and other discoveries, whether patentable or not, which (i) are conceived or made by Executive, solely or jointly with another, during the period of employment or thereafter, (ii) are directly related to the plumbing and mechanical business or activities of an AMPAM Company, and (iii) Executive conceives as a result of his employment by the Company, including any predecessor (collectively, the "Intellectual Property"). Executive hereby assigns and agrees to assign all his interests therein to the Company or its nominee. Whenever requested to do so by the Company, Executive shall execute any and all applications, assignments or other instruments that the Company shall deem necessary to apply for and obtain Letters Patent of the United States or any foreign country or to otherwise protect the Company's interest therein. Executive must also render to the Company, at the Company's expense, assistance in the perfection, enforcement and defense of any Intellectual Property. 7. Trade Secrets. Executive agrees that he will not, during or after the term of this Agreement, disclose the specific terms of an AMPAM Company's relationships or agreements with its respective vendors or customers or any other trade secret of an AMPAM Company, whether in existence or proposed, to any person, firm, partnership, corporation or business for any reason or purpose whatsoever, except as required by law and prior to any such disclosure Executive shall give the Company prior written notice thereof and the opportunity to contest such disclosure. 8. Confidentiality. a. Executive acknowledges and agrees that all Confidential Information 10 (as defined below) of the AMPAM Companies is confidential and a valuable, special and unique asset of the AMPAM Companies that gives the AMPAM Companies an advantage over its actual and potential, current and future competitors. Executive further acknowledges and agrees that Executive owes the Company and the AMPAM Companies a fiduciary duty to preserve and protect all Confidential Information from unauthorized disclosure or unauthorized use, that certain Confidential Information constitutes "trade secrets" under applicable laws and, that unauthorized disclosure or unauthorized use of the Confidential Information would irreparably injure the Company and the AMPAM Companies. b. Both during the term of Executive's employment and after the termination of Executive's employment for any reason (including wrongful termination), Executive shall hold all Confidential Information in strict confidence, and shall not use any Confidential Information except for the benefit of the AMPAM Companies, in accordance with the duties assigned to Executive. Executive shall not, at any time (either during or after the term of Executive's employment), disclose any Confidential Information to any person or entity (except other employees of the AMPAM Companies who have a need to know the information in connection with the performance of their employment duties, and who have been informed of the confidential nature of the confidential information and have agreed to keep it confidential), or copy, reproduce, modify, transmit, including electronic transmission, decompile or reverse engineer any Confidential Information, or remove any Confidential Information from the premises of any AMPAM Company, without the prior written consent of the Board, or permit any other person to do so. Executive shall take reasonable precautions to protect the physical security of all documents and other material containing Confidential Information (regardless of the medium on which the Confidential Information is stored). This Agreement applies to all Confidential Information, whether now known or later to become known to Executive. c. Upon the termination of Executive's employment with the Company for any reason, and upon written request of the Company at any other time, Executive shall promptly surrender and deliver to the Company all documents and other written material of any nature containing or pertaining to any Confidential Information and shall not retain any such document or other material. Within ten days of a written request by the Company, Executive shall certify to the Company in writing that all such materials have been returned. d. As used in this Agreement, the term "Confidential Information" shall mean any information or material known to or used by or for an AMPAM Company (whether or not owned or developed by the AMPAM Company and whether or not developed by Executive) that is not generally known to persons in the Plumbing and Mechanical Business, except as provided in this paragraph. Confidential Information includes, but is not limited to, the following: all trade 11 secrets of the AMPAM Companies; all information that an AMPAM Company has marked as confidential or has otherwise described to Executive (either in writing or orally) as confidential; all nonpublic information concerning the AMPAM Company's products, services, prospective products or services, research, product designs, prices, discounts, costs, marketing plans, marketing techniques, market studies, test data, customers, customer lists and records, suppliers and contacts; all AMPAM Company business records and plans; all AMPAM Company personnel files; all financial information of or concerning the AMPAM Companies; all information relating to operating system software, application software, software and system methodology, hardware platforms, technical information, inventions, computer programs and listings, source codes, object codes, copyrights and other intellectual property; all technical specifications; any proprietary information belonging to an AMPAM Company; all computer hardware or software manuals; all training or instruction manuals; and all data and all computer system passwords and user codes. For purposes hereto Confidential Information shall not include such information (i) which becomes or is already known to the public or some other party through no fault of Executive; or (ii) the disclosure of which (x) is required by law (including regulations and rulings) or the order of any competent governmental authority or (y) Executive reasonably believes is required in connection with the defense of a lawsuit against Executive, provided that in either case, prior to disclosing any information, Executive shall give prior written notice thereof to the Company and provide the Company with the opportunity to contest such disclosure. 9. No Prior Agreements. Executive hereby represents and warrants to the Company that the execution of this Agreement by Executive and his employment by the Company and the performance of his duties hereunder will not violate or be a breach of any agreement, including any non-competition agreement, invention or secrecy agreement, with a former employer, client or any other person or entity. Further, Executive agrees to indemnify the Company and the AMPAM Companies for any loss, including, but not limited to, reasonable attorneys' fees and expenses, the Company and any AMPAM Company may incur based upon or arising out of Executive's breach of this paragraph 9. 10. Assignment; Binding Effect. Executive understands that he has been selected for employment by the Company on the basis of his personal qualifications, experience and skills. Executive agrees, therefore, that he cannot assign all or any portion of his performance under this Agreement. Subject to the preceding two sentences and the express provisions of paragraph 12 below, this Agreement shall be binding upon, inure to the benefit of and be enforceable by the parties hereto and their respective heirs, legal representatives, successors and assigns. The Company and AMPAM will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and assets of the Company or AMPAM to expressly assume and agree in writing reasonably satisfactory to Executive to perform this 12 Agreement in the same manner and to the same extent that the Company or AMPAM would be required to perform it if no such succession had taken place. Failure of the Company or AMPAM to obtain such written agreement prior to the effectiveness of any such succession shall be a material breach of this Agreement. 11. Change in Control. a. Executive understands and acknowledges that the Company may be merged or consolidated with or into another entity and that such entity shall automatically succeed to the rights and obligations of the Company hereunder or that the Company may undergo a Change in Control (as defined below). In the event a Change in Control is initiated or occurs during the Initial Term or an Extended Term, then the provisions of this paragraph 11 shall be applicable. b. If, on or within two years following the effective date of a Change in Control the Company terminates Executive's employment other than for Cause or Disability or Executive terminates his employment for Good Reason, or if Executive's employment with the Company is terminated by the Company within three months before the effective date of a Change in Control and it is reasonably demonstrated that such termination (i) was at the request of a third party that has taken steps reasonably calculated to effect a Change in Control, or (ii) otherwise arose in connection with or anticipation of a Change in Control, then Executive shall receive from Company, in a lump sum payment due on the effective date of termination, the greater of (i) the equivalent of three times Executive's Base Annual Salary at the rate then in effect, or (ii) the base salary for whatever period is then remaining on the Initial Term, if any, which payment shall be in lieu of any amounts otherwise payable pursuant to paragraph 4d. c. A "Change in Control" shall be deemed to have occurred if: 1. any person, entity or group (as such terms are used in Sections 13d. and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Act")), other than persons and entities which owned any capital stock of AMPAM at the closing date of the transactions contemplated in the Acquisition Agreements, the AMPAM Companies or an employee benefit plan of the AMPAM Companies, acquires, directly or indirectly, the beneficial ownership (as defined in Section 13(d) of the Act) of any voting security of AMPAM and immediately after such acquisition such person, entity or group is, directly or indirectly, the beneficial owner of voting securities representing 50% or more of the total voting power of all of the then outstanding voting securities of AMPAM entitled to vote generally in the election of directors; 2. upon the first purchase of the AMPAM's common stock 13 pursuant to a tender or exchange offer (other than a tender or exchange offer made by the Company); 3. the stockholders of AMPAM shall approve a merger, consolidation, recapitalization or reorganization of AMPAM, or a reverse stock split of outstanding voting securities, or consummation of any such transaction if stockholder approval is not obtained, other than any such transaction which would result in at least 75% of the total voting power represented by the voting securities of the surviving entity outstanding immediately after such transaction being beneficially owned by the holders of all of the outstanding voting securities of AMPAM immediately prior to the transactions with the voting power of each such continuing holder relative to other such continuing holders not substantially altered in the transaction; 4. the stockholders of AMPAM shall approve a plan of complete liquidation or dissolution of AMPAM or an agreement for the sale or disposition by AMPAM of all or substantially all of its assets; or 5. if, at any time during any period of two consecutive years, individuals who at the beginning of such period constitute the Board cease for any reason to constitute at least a majority thereof, unless the election or nomination for the election by AMPAM's stockholders of each new director was approved a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period. d. If it shall be determined that any payment made or benefit provided to Executive in connection with a change in control (as defined in Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), or any successor thereto) of AMPAM occurring after the Effective Date and on or before the termination of this Agreement, whether or not made or provided pursuant to this Agreement, is subject to the excise tax imposed by Section 4999 of the Code, AMPAM shall pay Executive an amount of cash (the "Additional Amount") such that the net amount received by Executive after paying all applicable taxes on such Additional Amount and any penalties, interest and other reasonable costs incurred as a result of such excise tax or additional payment, shall be equal to the amount that Executive would have received if Section 4999 were not applicable. 12. No Mitigation or Offset. Executive shall not be required to mitigate the amount of any Company payment provided for in this Agreement by seeking other a employment or otherwise. The amount of any payment required to be paid to Executive by the Company pursuant to this Agreement shall not be reduced by any amounts that are owed to the Company by Executive, provided that Executive (i) executes and delivers to the Company a promissory note evidencing a promise by Executive to pay the full amount 14 of any amounts owed to the Company within 12 months from the date of Executive's termination of employment and (ii) provides such collateral reasonably satisfactory to the Company to ensure payment of such promissory note. 13. Release. Notwithstanding anything in this Agreement to the contrary, Executive shall not be entitled to receive any severance payments pursuant to paragraphs 4 or 11 of this Agreement unless Executive has executed (and not revoked) a general release of all claims, known or unknown, Executive may have against the Company, AMPAM, its subsidiaries, their directors, officers, and employees, in a form of such release reasonably acceptable to the Company and AMPAM. 14. Indemnification. In the event Executive is made a party to any threatened, pending or completed action, suit or proceeding, whether civil, derivative, subrogation, criminal, administrative or investigative (other than an action by the Company against Executive and a derivative action shall not be considered an action by the Company), by reason of the fact that he is or was performing services for the Company or any AMPAM Company or any present or future subsidiary thereof, or as an executive officer of an AMPAM Company prior to the date of this Agreement, then the Company shall indemnify Executive against all expenses (including attorneys' fees), judgments, fines and amounts paid in settlement, as actually and reasonably incurred by Executive in connection therewith. In the event that both Executive and the Company are made a party to the same third-party action, complaint, suit or proceeding, the Company agrees to engage competent legal representation, and Executive agrees to use the same representation, provided that if counsel selected by the Company shall have a conflict of interest that prevents such counsel from representing Executive, Executive may engage separate counsel and the Company shall pay as incurred all reasonable attorneys' fees and reasonable expenses of such separate counsel, provided further that Executive may at any time, at Executive's sole expense, hire separate counsel to represent Executive in such matter. Further, while Executive is expected at all times to use his best efforts to faithfully discharge his duties under this Agreement, Executive cannot be held liable to the Company for errors or omissions made in good faith where Executive has not exhibited gross, willful and wanton negligence and misconduct nor performed criminal and fraudulent acts which materially damage the business of the Company. The Company shall indemnify Executive against and hold Executive harmless from any costs, expenses (including reasonable attorneys' fees as provided in this paragraph), liabilities, losses and exposures for Executive's services as an employee, officer and director of the Company (or any AMPAM Company or any successor) to the maximum extent permitted under applicable law. The indemnification required by this paragraph 14 shall be made by the Company by periodic payments promptly as and when bills are received or liabilities are incurred. The provisions of this paragraph shall survive the termination of this Agreement. 15. Complete Agreement. This Agreement supersedes, and replaces in full, all representations, understandings and agreements (oral or written) between Executive and 15 the Company or any AMPAM Company or any of their officers, directors or representatives existing as of the Effective Date and covering the same subject matter as this Agreement, but excluding the Acquisition Agreement among AMPAM, the Company, the Executive and other stockholders of the Company, dated September 16, 1999, which shall not be affected by this Agreement. This written Agreement is the final, complete and exclusive statement and expression of the agreement between the Company, AMPAM, and Executive and of all the terms of this Agreement, and it cannot be varied, contradicted or supplemented by evidence of any prior or contemporaneous oral or written agreements. This written Agreement may not be modified after the Effective Date except by a further writing signed by a duly authorized officer of the Company and Executive, and no term of this Agreement may be waived except by writing signed by the party waiving the benefit of such term. Without limiting the generality of the foregoing, either party's failure to insist on strict compliance with this Agreement shall not be deemed a waiver thereof 16. Notice. Whenever any notice is required hereunder, it shall be given in writing addressed as follows: To the Company: American Plumbing and Mechanical, Inc. 1950 Louis Hernia Blvd. Round Rock, Texas 78664 Attn: Mr. Chet Harris To Executive: Mr. Charles E. Parks, III 1600 Espinosa Circle Palos Verdes Estates, CA 90274 Notice shall be deemed given and effective on the earlier of three days after the deposit in the U.S. mail of a writing addressed as above and sent first class mail, certified, return receipt requested, or when actually received. Either party may change the address for notice by notifying the other party of such change in accordance with this paragraph 16. 17. Severability: Headings. If any portion of this Agreement is held invalid or inoperative, the other portions of this Agreement shall be deemed valid and operative and, so far as is reasonable and possible, effect shall be given to the intent manifested by the portion held invalid or inoperative. The paragraph headings herein are for reference purposes only and are not intended in any way to describe, interpret, define or limit the extent or intent of the Agreement or of any part hereof 18. Dispute Resolutions. Except with respect to injunctive relief as provided in paragraph 3b., neither party shall institute a proceeding in any court or administrative agency to resolve a dispute between the parties before that party has sought to resolve the dispute through direct negotiation with the other party. If the dispute is not resolved within two weeks after a demand for direct negotiation, the parties shall attempt to 16 resolve the dispute through mediation. If the parties do not promptly agree on a mediator, the parties shall request the Association of Attorney Mediators in Travis County, Texas (or if the Company's principal offices are not in Travis County, a similar organization in the county in which the Company's principal offices are located) to appoint a mediator certified by the Supreme Court of Texas. If the mediator is unable to facilitate a settlement of the dispute within a reasonable period of time, as determined by the mediator, the mediator shall issue a written statement to the parties to that effect and any unresolved dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration, conducted before a single arbitrator in the city in which AMPAM has its principal offices, in accordance with the Commercial Arbitration Rules of the American Arbitration Association then in effect. The arbitrator shall have the authority to order back-pay, severance compensation, vesting of options (or cash compensation in lieu of vesting of options), reimbursement of costs and expenses, including those incurred to enforce this Agreement, including reasonable attorneys' fees and interest thereon in the event the arbitrator determines that Executive was involuntarily terminated by the Company without Disability or Cause, as defined in paragraphs 4b. and 4c., respectively, or that the Company has otherwise materially breached this Agreement. A decision by the arbitrator shall be final and binding. Judgment may be entered on the arbitrator's award in any court having jurisdiction. The costs and expenses, including reasonable attorneys' fees, of the prevailing party in any dispute arising under this Agreement will be promptly paid by the other party. 19. Government Law. This Agreement shall in all respects be construed according to the laws of the State of Texas without regard to its conflicts of law provisions. 20. Counterparts. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original and all of which together shall constitute but one and the same instrument. 17 IN WITNESS WHEREOF, the parties hereto have executed this Agreement effective for all purposes as of the Effective Date. Date: September 30, 1999 AMERICAN PLUMBING AND MECHANICAL, INC. By /s/ DAVID C. BAGGETT ---------------------------------------- David C. Baggett Chief Financial Officer DATE: September 30, 1999 EXECUTIVE /s/ CHARLES E. PARKS, III ------------------------------------------ Charles E. Parks, III 18 EX-21.1 7 h95061ex21-1.txt LIST OF SUBSIDIARIES EXHIBIT 21.1 LIST OF SUBSIDIARIES Name State of formation - ---- ------------------ AMPAM Atlas Plumbing, LLC Delaware (f/k/a Atlas Plumbing & Mechanical, LLC) AMPAM Christianson, LP Delaware (f/k/a Christianson Enterprises, LP) AMPAM Corporate Services, LP Delaware AMPAM Colorado, Inc. Delaware AMPAM Commercial Midwest, LLP Delaware (f/k/a Croson-Teepe, LLP) AMPAM Commercial Northwest, Inc. Delaware AMPAM Commercial Sherwood Mechanical, Inc. California (f/k/a Sherwood Mechanical, Inc.) AMPAM Commercial Southeast, Inc. Florida (f/k/a Nelson Mechanical Contractors, Inc.) AMPAM Dallas, LP Delaware AMPAM Holdings, LLC Delaware AMPAM J.A. Croson Company Florida (f/k/a J.A. Croson Company of Florida) AMPAM LDI Mechanical, Inc. California (f/k/a LDI Mechanical Corporation) AMPAM Management Company, Inc. Delaware AMPAM Miller Mechanical, Inc. Georgia (f/k/a Miller Mechanical Contractors, Inc.) AMPAM North Carolina, Inc. Delaware AMPAM Parks Mechanical, Inc. Delaware (f/k/a Parks Mechanical Construction Corporation) EX-24.1 8 h95061ex24-1.txt POWER OF ATTORNEY EXHIBIT 24.1 POWER OF ATTORNEY Each of the undersigned, a director of American Plumbing & Mechanical, Inc. (the "Company"), does hereby constitute and appoint David C. Baggett, as his/her true and lawful attorney-in-fact, with full power of substitution and resubstitution, for him and in his place and stead, to sign the Company's Form 10-K Annual Report, and all amendments thereto that such attorney-in-fact may deem necessary or appropriate, pursuant to Section 13 of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2001, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities Exchange Commission, granting unto such attorney-in-fact full power and authority to sign such documents on behalf of the undersigned and to make such filing, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that such attorney-in-fact, or his substitutes, may lawfully do or cause to be done by virtue hereof. Dated: March 28, 2002 AMERICAN PLUMBING & MECHANICAL, INC. /s/ ROBERT A. CHRISTIANSON /s/ ROBERT W. SHERWOOD - -------------------------- ---------------------- Robert A. Christianson, Director Robert W. Sherwood, Director /s/ ALBERT W. NIEMI /s/ LLOYD C. SMITH - -------------------- ------------------ Albert W. Niemi, Director Lloyd C. Smith, Director /s/ RICHARD M. POLLARD /s/ JAMES A. CROSON - --------------------------- ------------------- Richard M. Pollard, Director James A. Croson, Director /s/ SUSAN O. RHENEY /s/ CHARLES E. PARKS III - ------------------- ------------------------ Susan O. Rheney, Director Charles E. Parks III, Director /s/ ROBERT C. RICHEY /s/ STEPHEN F. TURNER - -------------------- --------------------- Robert C. Richey, Director Stephen F. Turner, Director /s/ MICHAEL E. WORKMAN ---------------------- Michael E. Workman, Director
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