-----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, J7OUpS+rf6GGV6CJvVvf9IpliK8bGn/OIvnapPWld4HZYGH40Txdw33+O8uldW3g yWARWOQVkrnYgE0fclbPmA== 0000052466-01-000002.txt : 20010328 0000052466-01-000002.hdr.sgml : 20010328 ACCESSION NUMBER: 0000052466-01-000002 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010327 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IONICS INC CENTRAL INDEX KEY: 0000052466 STANDARD INDUSTRIAL CLASSIFICATION: SPECIAL INDUSTRY MACHINERY, NEC [3559] IRS NUMBER: 042068530 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-07211 FILM NUMBER: 1580672 BUSINESS ADDRESS: STREET 1: 65 GROVE ST CITY: WATERTOWN STATE: MA ZIP: 02172 BUSINESS PHONE: 6179262500 10-K405 1 0001.txt FORM 10-K 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, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from: to: -------------------- ------------------- Commission File Number: 1-7211 IONICS, INCORPORATED (Exact name of registrant as specified in its charter) MASSACHUSETTS 04-2068530 (State or other jurisdiction of (IRS Employer Identification Number) incorporation or organization) 65 Grove Street, Watertown, Massachusetts 02472 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (617) 926-2500 Securities registered pursuant to Section 12(b) of the Act: Title of each class: Common Stock, $1 par value Name of each exchange on which registered: New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of 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. [ ] State the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant. The aggregate market value shall be computed by reference to the price at which the common equity was sold, or the average bid and asked prices of such common equity, as of a specified date within 60 days prior to the date of filing. The aggregate market value of the Common Stock of the registrant held by non-affiliates as of March 16, 2001 was $397,895,987 (16,024,949 shares at $24.83 per share) (includes shares owned by a trust for the indirect benefit of a non-employee director, and by a trust for the indirect benefit of a spouse of a non-employee director). For purposes of this disclosure, non-affiliates are deemed to be all persons other than members of the Board of Directors of registrant. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. As of March 16, 2001, 16,413,366 shares of Common Stock, $1 par value, were issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of registrant's Annual Report to stockholders for the fiscal year ended December 31, 2000, included as Exhibit 13 to this Form 10-K. Part I, Part II, Part IV Portions of the Proxy Statement for registrant's 2001 Annual Meeting of Stockholders which will be filed with the commission within 120 days after the close of registrant's fiscal year. Part III PART I Statements in this Annual Report on Form 10-K which are not historical facts, so-called "forward looking statements," are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Readers are cautioned that all forward-looking statements involve risks and uncertainties, including those detailed in the Company's filings with the Securities and Exchange Commission. ITEM 1. BUSINESS Ionics, Incorporated ("Ionics," or the "Company") is a leading water purification company engaged worldwide in the supply of water and of water treatment equipment through the use of proprietary separations technologies and systems. Ionics' products and services are used by the Company or its customers to desalt brackish water and seawater, to purify and supply bottled water, to treat water in the home, to manufacture and supply water treatment chemicals and ultrapure water, to process food products, recycle and reclaim process water and wastewater, and to measure levels of waterborne contaminants and pollutants. The Company's customers include industrial companies, consumers, municipalities and other governmental entities, and utilities. Unless the context indicates otherwise, the terms "Ionics" and "Company" as used herein includes Ionics, Incorporated and all its subsidiaries. The Company's business activities are reported in four business group segments. The current reporting reflects the business group structure, which the Company put into place in the latter part of 1998. The business group structure is based upon defined areas of management responsibility with respect to markets, applications and products. These business group segments are the Equipment Business Group, Ultrapure Water Group, Consumer Water Group, and Instrument Business Group. In 2000, these segments accounted for approximately 43.2%, 27.9%, 22.8% and 6.1%, respectively, of the Company's total revenues. Approximately 42% of the Company's 2000 revenues were derived from foreign sales or operations. Over fifty years ago, the Company pioneered the development of the ion-exchange membrane and the electrodialysis process. Since that time, the Company has expanded its separations technology base to include a number of membrane and non-membrane-based separations processes which the Company refers to as The Ionics Toolbox(R). These separations processes include electrodialysis reversal (EDR), reverse osmosis (RO), ultrafiltration (UF), microfiltration (MF), electrodeionization (EDI), electrolysis, ion exchange, carbon adsorption, and thermal processes such as evaporation and crystallization. The Company believes that it is the world's leading manufacturer of ion-exchange membranes and of membrane-based systems for the desalination of water. The Company was incorporated in Massachusetts in 1948. The Company's principal executive offices are located at 65 Grove Street, Watertown, Massachusetts 02472. FINANCIAL INFORMATION ABOUT BUSINESS SEGMENTS Equipment Business Group The Equipment Business Group accounted for approximately 43.2% of revenues in 2000. This segment provides technologies, treatment systems and services for seawater desalination, brackish water desalination, wastewater reuse and recycle, potable water and high purity water. In addition, this segment includes the Company's custom fabrication activities and food and chemical processing activities. Desalination and Related Water Treatment Equipment Opportunities for the sale of desalination and related water treatment equipment arise from changes in the needs of people and municipalities, from industrial shifts and growth, and from environmental concerns. With less than 1% of the total water on the planet fresh and usable, desalination has played an important role in creating new water sources. The Company sells a wide spectrum of products and systems to serve this market, which utilize technologies including EDR, ion exchange, EDI, RO, UF, ozonation and carbon adsorption. Depending on the customers' needs, the Company provides standardized versions of systems utilizing one or more of the technologies mentioned, or can supply complete turnkey plants that may include standardized models as well as peripheral water treatment equipment, complete engineering services, process and equipment design, project engineering, commissioning, I-1 operator training and field service. During 2000, the Company was awarded 20 desalination contracts, including a one million-gallon per day seawater desalting project by the government of the United Arab Emirates and two contracts for brackish water RO plants in the Middle East region. Wastewater Treatment Equipment The market for wastewater treatment, recycle and reuse has shown significant growth as world demand for water of specified quality continues to increase and as regulations limiting waste discharges to the environment continue to mount. The wastewater market is increasingly driven by the concept of what Ionics calls "Total Water Management(R)," which involves the recognition that the water streams which enter, leave or become part of a process can be treated for use, recycle or discharge to achieve overall economic efficiencies. Ionics services the wastewater market with proprietary brine concentrators and crystallizers, traditional wastewater treatment equipment, and special EDR membrane-based concentrators for recycle and reuse. The Company designs, engineers and constructs brine concentrators, evaporators and crystallizers which are used to clean, recover and recycle wastewater, particularly in "zero liquid discharge" industrial uses. Such systems may also incorporate EDR membrane systems as preconcentrators. The Company was awarded seven zero liquid discharge contracts, including a $20 million contract during 2000 to supply and install an integrated water and wastewater treatment system for a "greenfield" 1000 megawatt merchant power plant being built near Bakersfield, California. Ionics also designs, engineers and constructs customized systems for industrial wastewater customers which may include conventional treatment systems as well as advanced separation technologies such as EDR, RO, UF and MF. Typical industrial customers are power stations, chemical and petrochemical plants, metalworking and automobile factories, textile manufacturers and a variety of other industrial applications. The Company also provides custom and packaged sewage treatment systems for municipalities and advanced membrane systems that treat waste from conventional sewage treatment plants so that the treated wastewater can be recycled and reused for irrigation and process water needs. Drinking Water Supply Ionics' position as a seller of purified or treated water has evolved from its traditional role as a supplier of water treatment equipment. In certain situations, opportunities are available for the Company to provide a complete service package involving financing, construction, operation and maintenance of water treatment facilities. Ionics, through its wholly owned subsidiary, Ionics Iberica, S.A., owns and operates a 5.5 million gallon per day capacity brackish water EDR facility and a 3.6 million gallon per day RO seawater facility on Grand Canary Island, Spain. Under long-term contracts, the Company is selling the desalted water from both facilities to the local water utility for distribution. The Company's wholly owned subsidiary, Ionics (Bermuda) Ltd., owns and operates a 600,000 gallon per day EDR brackish water desalting plant on the island of Bermuda. This plant supplies fresh water under a long-term contract with Watlington Waterworks Ltd., a Bermuda corporation partially owned by Ionics. Construction is underway in Trinidad for what will be the largest seawater desalination plant in the Western Hemisphere and the second largest in the world. The 109,000 cubic meter (28.8 million gallon) per day seawater reverse osmosis (SWRO) desalination plant will provide the Water and Sewerage Authority of Trinidad and Tobago and the industries of the Point Lisas Industrial Estate with a high quality water supply for industrial requirements. This $120 million project is a joint venture between the Company and its local partner, Hafeez Karamath Engineering Services Ltd. The plant is scheduled to start delivering water later this year. The Company also owns and operates more than 30 desalination plants on a number of Caribbean islands, which provide drinking water to hotels, resorts and governmental entities. Drinking water on these islands is usually supplied pursuant to water supply contracts with terms ranging from five to ten years. On the island of Barbados, a 30,000 cubic meter per day brackish water RO plant started up successfully in the first quarter of 2000, and is providing fresh potable drinking water to about one-fifth of the island's population. Desalinated water is being provided to the Barbados Water Authority on a build, own, operate ("BOO") basis by a joint venture between Ionics and its local I-2 partner, Williams Industries. On the island of Anguilla, Ionics signed a contract in 2000 to expand Ionics' existing desalination plant by 50% to 900,000 gallons per day. This project is expected to be completed by the summer of 2001. The Company was a member of one of the three teams prequalified in 2000 to bid on a new 36 million gallon per day seawater desalination BOO project in Ashkelon, Israel. Chemical Supply The Company uses its Cloromat(R) electrolytic membrane-based technology to produce sodium hypochlorite and related chlor-alkali chemicals for industrial, commercial and other non-consumer applications. The Company's wholly owned Australian subsidiary, Elite Chemicals Pty. Ltd. (Elite), utilizes Cloromat systems to produce sodium hypochlorite on-site in Brisbane for the industrial, commercial and janitorial supply of bleach products, and to supply sodium hypochlorite to treat the City of Brisbane's drinking water supply. Elite also distributes bleach products to the Sydney area. The Company also owns sodium hypochlorite generating facilities in Ludlow, MA and Acapulco, Mexico. Food Processing Under an agreement with a major U.S. dairy cooperative, the Company oversees whey processing activities at two plants owned by the cooperative, and receives a processing fee based on the production of demineralized whey for its services. Included in the equipment being utilized by the Company at these plants are its Electromat(R) electrodialysis systems. Custom Fabricated Products At its Bridgeville, Pennsylvania facility, the Company fabricates specially designed products for industrial and defense-related applications. The Company's experience and expertise in design, welding, machining and assembly to meet exceptionally fine tolerances have been utilized to fabricate products ranging from intricate small parts to large multi-ton assemblies. In 2000, the Company continued work on a contract received in 1999 for the fabrication of storage systems to contain spent nuclear fuel at a decommissioned U.S. nuclear energy plant. Ultrapure Water Group The Ultrapure Water Group accounted for approximately 27.9% of the Company's 2000 revenues. This segment provides equipment and services for specialized industrial users of ultrapure water, such as companies in the life sciences, microelectronics and power industries. Ultrapure water is water that has been purified by a series of processes to the degree that remaining impurities are measured in parts per billion or trillion. Ultrapure Water Equipment The demand for technologically advanced ultrapure water equipment and systems has increased as the industries, which use ultrapure water, have become more knowledgeable about their quality requirements. Ultrapure water needs are particularly important in the semiconductor, pharmaceutical, petroleum and power generation industries. The semiconductor industry in particular has increasingly demanded higher purity water as the circuits on silicon wafers have become more densely packed. The Company supplies sophisticated ultrapure water systems, which utilize a combination of ion exchange, EDI, RO and UF technologies. These systems are either trailer-mounted or land-based and vary from standardized modules to large multimillion dollar systems, depending on the customer's requirements. During 2000, the Company was awarded a contract to design, construct and commission a complete ultrapure water system for a new semiconductor facility in Singapore. This plant will treat the Singapore municipal source water to supply the semiconductor manufacturing facility with ultrapure water containing impurities of less than 10 parts per trillion. In China, a project to design and supply an ultrapure water and wastewater treatment plant for a major semiconductor manufacturing facility in Tianjin, which had been on hold, was authorized to proceed. Included in the equipment sold by the Ultrapure Water Group is the Company's Ozgen(R) ozone-generation equipment, which is being utilized by semiconductor plants as well as for swimming pool and aquarium disinfection. I-3 The Company established the Ionics Life Sciences division at the beginning of 1999 to expand its delivery of ultrapure water equipment and services to the pharmaceutical and biotechnology industries. Ultrapure Water Supply In industries such as power generation, semiconductors, pharmaceuticals and biotechnology, ultrapure water is critical to product quality and yield. Depending on the composition and quantity of the impurities to be removed or treated, any one of several membrane separations methods can be utilized to provide ultrapure water to the customer. Ionics has pioneered in the application of three membrane technologies (EDR, RO and UF) combined together in a mobile system called the "triple membrane" trailer (TMT) for use in the commercial processing of ultrapure water. Ionics provides ultrapure water services and the production and sale of ultrapure water from trailer-mounted units at customer sites. The Company's EDI technology is becoming increasingly utilized in the production of ultrapure water. EDI is a continuous, electrically driven, membrane-based water purification process, which produces ultrapure water without the use of strong chemical regenerants, such as sulfuric acid and caustic soda, which are commonly required. The Company's TMT-II trailers utilize a combination of EDI, RO and UF technologies and represent what the Company believes to be the most advanced technology used in the commercial processing of ultrapure water. At the end of 2000, Company-owned or operated equipment for the production of ultrapure water and other purified process water under contract with companies in various industries had a total capacity of approximately 25,000 gallons per minute. The Company has been expanding its ultrapure water activities into the Asian market. In November 1997, the Company acquired a majority interest in a Malaysian company, now called Ionics Enersave Engineering Sdn Bhd, which provides ultrapure water services and systems to the southeast Asian and China markets. The Company established an ultrapure water sales, service and regeneration facility in Singapore in 1998, and opened an office in Taiwan in 1999. One of the Company's important ultrapure water service activities is ion-exchange regeneration services, which are provided at four U.S. and four overseas locations. In addition to commissioning the Singapore facility in 1998, the Company began operations in 1999 at a 66,000 square foot building in San Jose, California which contains resin regeneration, manufacturing and service facilities. The Company also provides system sanitization and high-flow deionization services at customer sites. Consumer Water Group This business group segment accounted for approximately 22.8% of the Company's 2000 revenues. The Company's consumer water products serve the bottled water, home water purification, and consumer bleach-based product market areas. Aqua Cool(R) Pure Bottled Water Ionics entered the bottled water business in 1984. The Company's strategy is to utilize its proprietary desalination and purification technology to produce a brand of drinking water, Aqua Cool(R) Pure Bottled Water, which can be reproduced with uniform consistency and high quality at numerous locations around the world. Distribution operations have been established at eight Company-owned locations throughout England; at 16 Company-owned locations serving a number of metropolitan areas in the eastern, southeastern and central United States; and, through joint ventures, in Bahrain, Kuwait and Saudi Arabia. The Company's business focuses on the sale of Aqua Cool in five-gallon bottles to a variety of commercial and residential customers. The Company has recently expanded its product-line to include office coffee service and other services complementary to bottled water distribution. In 2000, the Company's domestic bottled water business was affected by charges relating to accounts receivable, by increased fuel, labor and other distribution costs, and by a transition to a new computerized billing and accounting system. The Company closed two unprofitable distribution centers, has increased prices, and is focusing on improving the profitability of its domestic bottled water operations. At the end of 2000, there were a total of 33 Aqua Cool distribution centers in the United States and overseas, supplied with Aqua Cool Pure Bottled Water by ten regional water purification and bottling facilities, supplying a customer base of approximately 165,000. Early in 1999, the Company acquired Aquarelle SA I-4 (now called Aqua Cool France), a French bottled water distributor with five locations in France, with the intent of expanding the Company's bottled water operations into continental Europe. Home Water Purification Systems Point-of-Use Devices The Company participates in the "point-of-use" market for over- and under-the-sink water purifiers through the sale of RO and activated carbon-based filtering devices, and through the manufacture and sale of HYgene(R), a proprietary, EPA-registered, silver-impregnated activated carbon filtering medium. The Company incorporates HYgene, which is designed to prevent bacterial build-up while providing the capability of removing undesirable tastes and odors from the water supply, into its own bacteriostatic water conditioners and also sells HYgene to manufacturers of household point-of-use water filters. Point-of-Entry Devices Ionics' point-of-entry water products include ion-exchange water conditioners to "soften" hard water, and chemicals and media for filtration and treatment. The Company sells its products, under the General Ionics and other brand names, through both independent distributorships and wholly owned sales and service dealerships. In 2000, the Company opened a wholly owned sales and service center in Denver, Colorado. In 1999, the Company commenced operations in Galway, Ireland, to provide bacteriostatic water conditioning systems to the European marketplace. In 2000, the Company further expanded its operations by starting operations in Dublin and three other locations in Ireland and in Portugal. Bleach-Based Consumer Products The Company's Elite Consumer Products division operates a Cloromat(R) facility to produce and distribute bleach-based products for the consumer market, primarily one-gallon bleach products under private label or under the Company's own "Elite(R)", "Super ValueTM" and "UltraPureTM" brands, and methanol-based automobile windshield wash solution. These operations are conducted in a 129,000 square foot manufacturing facility located in Ludlow, Massachusetts. Instrument Business Group The Company's Instrument Business Group accounted for approximately 6.1% of the Company's 2000 revenues. During 2000, the Ionics Instrument Division, which was located in Watertown, Massachusetts, was moved and consolidated with Ionics Sievers Instruments, located in Boulder, Colorado. This business group also includes Ionics Agar Environmental, located in Herzlia, Israel. The Company has become a leading manufacturer of instruments that measure total organic carbon across the water "spectrum" from ultrapure water to wastewater. The Sievers(R) Model 400 TOC analyzer is the only on-line TOC analyzer designed specifically to comply with new United States Pharmacopoeia (USP) requirements for determining water quality in the pharmaceutical industry. In 1999, Ionics Sievers introduced TOC analyzers sensitive to the parts-per-trillion range, designed specifically for ultrapure water measurement in the semiconductor and power generation industries. In addition to the Sievers product line, the Company offers a full line of TOC monitors for process water and wastewater applications. The Company's other instrument products, which are used both in the laboratory and on-line, measure and detect, among other things, total carbon, sulfur, nitric oxide, chemical oxygen demand and total oxygen demand. The Company also sells instruments for the measurement of dissolved metals and specific chemical analyzers for ammonia, phosphates, nitrates and chlorine. With the acquisition of Ionics Agar Environmental in 1999, the Company now also offers a line of instruments for the detection of thin layers of oil on water. The Company's Leakwise(R) oil-on-water detection systems are used by a range of industries from oil refining to power generation. I-5 OTHER INFORMATION CONCERNING THE BUSINESS OF THE COMPANY Raw Materials and Sources of Supply All raw materials and parts and supplies essential to the business of the Company can normally be obtained from more than one source. The Company produces the membranes required for its equipment and systems that use the ED, EDR, MF, UF, RO and EDI processes. Membranes used for the RO process are also purchased from outside suppliers and are normally available from multiple sources. During 2000, the Company formed a joint venture with Toray Industries, Inc. and Mitsui & Co. to manufacture and market RO membranes for the desalination of seawater and brackish water using Toray's proprietary RO manufacturing technology. Ionics has a 43% interest in the joint venture company, Toray Membrane America, Inc. Patents and Trademarks The Company believes that its products, know-how, servicing network and marketing skills are more significant to its business than trademarks or patent protection of its technology. Nevertheless, the Company has a policy of applying for patents both in the United States and abroad on inventions made in the course of its research and development work for which a commercial use is considered likely. The Company owns numerous United States and foreign patents and trademarks and has issued licenses thereunder, and currently has additional pending patent applications. Of the approximately 77 outstanding U.S. patents held by the Company, a substantial portion involves membranes, membrane technology and related separations processes such as ED and EDR, RO, UF and EDI. The Company does not believe that any of its individual patents or groups of related patents, nor any of its trademarks, is of sufficient importance that its termination or abandonment, or the cancellation of licenses extending rights thereunder, would have a material adverse effect on the Company. Seasonality The activities of the Company's businesses are not of a seasonal nature, other than certain activities of the Consumer Products segment. Bottled water sales and bleach products for swimming pool use tend to increase during the summer months. Also, sales levels for automobile windshield wash solution increase in the winter months. Customers The nature of the Company's business is such that it frequently has in progress large contracts with one or more customers for specific projects; however, there is no one customer whose purchases account for 10% or more of the Company's consolidated revenues and whose loss would have a material adverse effect on the Company and its subsidiaries taken as a whole. Backlog The Company's backlog of firm orders was $270,622,000 at December 31, 2000 and $241,332,000 at December 31, 1999. For multi-year contracts, the Company includes in reported backlog the revenues associated with the first five years of the contract. For multi-year contracts, which are not otherwise included in backlog, the Company includes in backlog up to one year of revenues. The Company expects to fill approximately 65% of its December 31, 2000 backlog during 2001. The Company does not believe that there are any seasonal aspects to its backlog figures. Government Contracts The Company does not believe that any of its sales under U.S. Government contracts or subcontracts during 2000 are subject to renegotiation. The Company has not had adjustments to its negotiated contract prices, nor are any proceedings pending for such adjustments. Research and Development The Company is actively engaged in research and development directed toward products for use in water purification, processing and measurement, and separations technology. The Company's research and development expenses were approximately $7,980,000 in 2000, $7,066,000 in 1999, and $6,635,000 in 1998. I-6 Competition The Company experiences competition from a variety of sources with respect to virtually all of its products, systems and services, although the Company knows of no single entity that competes with it across the full range of its products and services. Competition in the markets served by the Company is based on a number of factors, which may include price, technology, applications experience, know-how, availability of financing, reputation, product warranties, reliability, service and distribution. With respect to the Company's Equipment Business Group, there are a number of companies, including several sizable chemical companies that manufacture membranes, but not equipment. There are numerous smaller companies, primarily fabricators, that build water treatment and desalination equipment, but which generally do not have their own proprietary membrane technology. A limited number of companies manufacture both membranes and equipment. The Company has numerous competitors in its conventional water treatment, instruments and fabricated products business lines. In 2000, the International Desalination Association released a report providing data regarding the manufacturers of desalination equipment. According to the report, which covered land-based water desalination plants delivered or under construction as of December 31, 1999, with a capacity to produce 100 cubic meters (approximately 25,000 gallons) or more of fresh water daily, the Company ranked first in terms of the cumulative number of such plants sold, having sold more than the next three manufacturers combined. In addition, the Company ranked first in the total capacity of such plants sold. With respect to the Ultrapure Water Group business segment, the Company competes with suppliers of ultrapure water services on a national and regional basis, and with other manufacturers of membrane-related equipment. With respect to the Company's Consumer Water Group business segment, there are numerous bottled water companies, which compete with the Company, including several which are much larger than the Company. Most of the Company's competitors in point-of-entry and point-of-use products for the home are small assemblers, serving local or regional markets. However, there are also several large companies competing nationally in these markets. In the case of its silver-impregnated activated carbon product lines, the Company knows of two competitors with which it competes on a national basis. The Company competes with many suppliers of bleach and bleach-based cleaning products and automobile windshield wash for the consumer market, a number of which are much larger than the Company. The Company is unable to state with certainty its relative market position in all aspects of its business. Many of its competitors have financial and other resources greater than those of the Company. Environmental Matters Continued compliance by the Company and its subsidiaries with federal, state and local provisions regulating the discharge of materials into the environment or otherwise relating to the protection of the environment is expected to have no material effect upon capital expenditures, earnings or the competitive position of the Company or any of its subsidiaries. In May 1998, a wholly owned California subsidiary of the Company was notified by the U.S. Environmental Protection Agency ("EPA") that it was a potentially responsible party (PRP) in connection with the Operating Industries, Inc. Superfund Site in Monterey Park, California. Because of its relatively small volumetric contribution of waste to the site, the subsidiary was eligible to participate in a de minimis settlement, and in January 1999 made a full and timely payment of $13,685 in settlement. The Company was notified in 1992 that it is a potentially responsible party (PRP) at a Superfund Site, Solvent Recovery Services of New England in Southington, Connecticut (the "SRS Site"). Ionics' share of assessments to date for site work totals approximately $65,000. The United States Environmental Protection Agency ("EPA") has delayed issuing a decision regarding clean-up methods and costs. While it is too soon to predict the scope and cost of the final remedy that the EPA will select, based upon the large number of PRPs identified, the Company's small volumetric ranking (approximately 0.5%) and the identities of the larger PRPs, the Company believes that its liability in this matter will not have a material effect on the Company or its financial position. I-7 By letter dated March 29, 2000, the Company and other PRPs for the SRS Site were notified that they may also have potential liability with respect to the Angelillo Property Superfund Site, also in Southington, Connecticut (the "Angelillo Site"), because hazardous materials were allegedly shipped from the SRS Site to the Angelillo Site. It is too early to determine what liability, if any, the Company may incur arising out of the EPA's claim with respect to the Angelillo Site. The Company has never had a product liability claim grounded in environmental liability, and believes that the nature of its products and business makes such a claim unlikely. Employees The Company and its consolidated subsidiaries employ approximately 2,900 full-time persons. None of the Company's employees are represented by unions or have entered into workplace agreements with the Company, except for the employees of the Company's Australian subsidiary, certain employees of an Aqua Cool distribution center in Pennsylvania, and certain employees of the Company's Spanish subsidiary. The Company considers its relations with its employees to be good. Foreign Operations The Company's sales to customers in foreign countries primarily involve desalination systems, ultrapure water systems, water and wastewater treatment systems, Cloromat systems, products and services related to these foregoing systems, instruments and bottled water. The Company seeks to minimize financial risks relating to its international operations. Wherever possible, the Company obtains letters of credit or similar payment assurances denominated in U.S. dollars. If U.S. dollar payments cannot be secured, the Company, where appropriate, enters into foreign currency hedging transactions. The Company also uses foreign sources for equipment parts and may borrow funds in local (foreign) currencies to offset the asset risk of foreign currency devaluation. Net foreign currency transaction (losses)/gains included in income before income taxes and minority interest totaled $(782,000) in 2000, $11,000 in 1999, and $(28,000) in 1998. The Company engages in certain foreign operations both directly and through the following wholly owned subsidiaries: Aqua Cool France S.A.; Aqua Design, Inc. (including its subsidiaries and affiliates); Elite Chemicals Pty. Ltd.; Favourable Trading Ltd.; Global Water Services, S.A.; Ionics Acapulco S.A.; Ionics Agar Environmental Ltd.; Ionics Asia-Pacific Pte Ltd.; Ionics (Bermuda) Ltd.; Ionics Constructors Trinidad, Ltd.; Ionics Foreign Sales Corporation Limited; Ionics France S.A.; Ionics (Korea) Inc.; Ionics Iberica, S.A.; Ionics Italba, S.p.A.; Ionics Nederland B.V.; Ionics Taiwan, Inc.; Ionics (U.K.) Limited; Ionics Watertec Pty. Ltd.; Resources Conservation Co. International; and Separatech Ltd. In 1997, the Company acquired, through its Spanish subsidiary, a 55% ownership interest in Ionics Enersave Engineering Sdn Bhd, a Malaysian corporation with subsidiary operations in China. The Company also engages in various foreign operations through investments in affiliated companies and joint venture relationships. The activities include the production, sale and distribution of bottled water through a 40% owned affiliate in Bahrain, a 40% owned affiliate in Saudi Arabia, and a 49% owned affiliate in Kuwait. In addition, the Company has a 26% ownership interest in Watlington Waterworks, Limited in Bermuda. Watlington collects, treats and distributes water throughout Bermuda for both potable and non-potable uses. The Company also has a 50% ownership interest in Yuasa-Ionics Co., Ltd., Tokyo, Japan, which among its activities serves as a distributor of certain of the Company's products in Japan; and, through Ionics Iberica, S.A., a 20% interest in Grupo Empresarial de Mejoramiento Ambiental, S. de R. L. de C. V., which provides water treatment services in Mexico. Through its Italian subsidiary, the Company has a 75% ownership interest (increased from 50% at the beginning of 2000) in Agrinord S.r.l., an Italian company engaged in waste treatment operations. In 1999, the Company acquired a controlling interest in Ionics Freshwater Ltd., a Barbados corporation which owns and operates a major brackish water desalination facility in Barbados. In 2000, the Company formed a joint venture with Toray Industries, Inc. and Mitsui & Co. (U.S.A.), Inc. to manufacture and market RO membranes. The Company has a 43% ownership in the joint venture company, Toray Membrane America, Inc. The Company also holds a 40% interest in Desalination Company of Trinidad and Tobago Ltd., which is constructing and will own and operate a major seawater desalination facility in Trinidad. I-8 Further geographical and financial information concerning the Company's foreign operations appears in Notes 1, 5, 9, 14, 15 and 16 to the Company's Consolidated Financial Statements included as part of the Company's 2000 Annual Report to Stockholders, which Notes are included in Exhibit 13 and are incorporated herein by reference. FINANCIAL INFORMATION ABOUT GEOGRAPHICAL AREAS The information contained in Note 16 of Notes to Consolidated Financial Statements contained in the Company's Annual Report to Stockholders for the year ended December 31, 2000 is included in Exhibit 13 and is incorporated herein by reference. ITEM 2. PROPERTIES The Company's executive offices are located in Watertown, Massachusetts. Manufacturing and other operations are carried out in a number of locations. The following table provides certain information as to the Company's principal general offices and manufacturing facilities: Business Segment Property Approximate Square Location Utilizing the Location Interest Feet of Floor Space - -------- ---------------------- -------- ------------------- Watertown, MA Equipment Business Group Owned 134,000 (headquarters) Instrument Business Group Consumer Water Group Watertown, MA Equipment Business Group Owned 127,000 Consumer Water Group Bridgeville, PA Equipment Business Group Owned 77,000 Canonsburg, PA Equipment Business Group Leased 88,000 Elkton, MD Consumer Water Group Owned 234,000 Ludlow, MA Consumer Water Group Owned 129,000 San Jose, CA Ultrapure Water Group Owned 66,000 Boulder, CO Instrument Business Group Leased 74,000 Sydney, Australia Equipment Business Group Owned 140,000 Brisbane, Australia Equipment Business Group Owned 38,000 Brisbane, Australia Ultrapure Water Group Leased 62,000 London, England Consumer Water Group Owned 36,000 The Company also owns or leases smaller facilities in which its business segments conduct business. The Company makes use primarily of leased facilities for its Aqua Cool bottled water distribution centers. The majority of these facilities contain less than 10,000 square feet. The Company considers the business facilities that it utilizes to be adequate for the uses to which they are being put. ITEM 3. LEGAL PROCEEDINGS The Company is involved in the normal course of its business in various litigation matters, some of which are in the pre-trial discovery stages. The Company believes generally that it has meritorious defenses and that none of the pending matters will have an outcome material to the financial condition or business of the Company. I-9 The Company was notified in 1992 that it is a potentially responsible party (PRP) at a Superfund Site, Solvent Recovery Services of New England in Southington, Connecticut (the "SRS Site"). Ionics' share of assessments to date for site work totals approximately $65,000. The United States Environmental Protection Agency ("EPA") has delayed issuing a decision regarding clean-up methods and costs. While it is too soon to predict the scope and cost of the final remedy that the EPA will select, based upon the large number of PRPs identified, the Company's small volumetric ranking (approximately 0.5%) and the identities of the larger PRPs, the Company believes that its liability in this matter will not have a material effect on the Company or its financial position. By letter dated March 29, 2000, the Company and other PRPs for the SRS Site were notified that they may also have potential liability with respect to the Angelillo Property Superfund Site, also in Southington, Connecticut (the "Angelillo Site"), because hazardous materials were allegedly shipped from the SRS Site to the Angelillo Site. It is too early to determine what liability, if any, the Company may incur arising out of the EPA's claim with respect to the Angelillo Site. On March 27, 1998, the Company was served with a summons and complaint in connection with a lawsuit now captioned United States Filter Corporation, U.S. Filter/Ionpure, Inc., IP Holding Company, Millipore Corporation and Millipore Investment Holdings Limited v. Ionics, Incorporated, filed in the U.S. District Court, District of Massachusetts (Boston). Plaintiffs allege that the Company is infringing a certain reissue patent, which issued on March 10, 1998, by making, selling, offering to sell and using the Company's electrodeionization (EDI) systems within the United States. On June 10, 1999, the Company was served by the plaintiffs in the pending suit with a second summons and complaint alleging infringement of six EDI-related patents issued earlier than the reissue patent which is the subject of the first lawsuit. The Company has been vigorously defending plaintiffs' infringement claims in these lawsuits, and believes that it has valid defenses to such claims. Trial has been scheduled in the first case, and the second case is still in the discovery stages. On October 14, 2000, the Company was served with a summons and complaint in connection with a lawsuit captioned United States Filter Corporation and U.S. Filter/Ionpure, Inc. v. Ionics, Incorporated, filed in the U.S. District Court, District of Massachusetts (Boston). Plaintiffs allege infringement of a U.S. patent involving a certain aspect of reverse osmosis technology. This case is in the pre-discovery stage. The Company is engaged in settlement discussions with United States Filter Corporation with respect to all pending patent infringement litigation matters, although there is no assurance that settlement will be achieved. The Company established a reserve in the fourth quarter of 2000 that it believes will be sufficient to cover future charges in connection with the resolution of the litigation. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report. I-10 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS --------------------------------------------------------------------- The Company's common stock is traded on the New York Stock Exchange under the symbol ION. As of March 16, 2001, there were approximately 1,200 shareholders of record. No cash dividends were paid in either 2000 or 1999 pursuant to the Company's current policy to retain earnings for use in its business. Also, the Company's principal domestic credit facility does not permit the payment by the Company of cash dividends to its shareholders. During the period January 1, 1999 to December 31, 2000, the range of high and low sales prices of the common stock for each quarterly period was as follows: 2000 1999 ----------------------------- --------------------------- High Low High Low -------------- -------------- ------------- ------------- First Quarter $37 11/16 $24 1/2 $35 3/4 $24 7/8 Second Quarter 30 5/8 20 5/8 36 11/16 29 3/8 Third Quarter 34 1/16 20 13/16 36 15/16 27 1/4 Fourth Quarter 29 7/16 18 3/16 33 1/4 25 1/2 ITEM 6. SELECTED FINANCIAL DATA The information required by this Item 6, captioned "Selected Financial Data - Statement of Operations Data" and "Selected Financial Data - Balance Sheet Data" and contained in the Company's Annual Report to Stockholders for the year ended December 31, 2000, is included on page 29 of Exhibit 13 and is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION ----------------------------------------------------------------- The information required by this Item 7, contained in the Company's Annual Report to Stockholders for the year ended December 31, 2000, is included on pages 2 through 6 of Exhibit 13 and is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Derivative Instruments The Company had no foreign exchange contracts outstanding at December 31, 2000. The Company has no other derivative financial instruments or other financial and commodity instruments for which fair value disclosure would be required under SFAS No. 119. The Company holds no investment securities that would require disclosure of market risk. Market Risk The Company's primary market risk exposures are in the areas of interest rate risk and foreign currency exchange rate risk. The Company's investment portfolio of cash equivalents is subject to interest rate fluctuations, but the Company believes this risk is not material due to the short-term nature of these investments. At December 31, 2000, the Company had $75.0 million of short-term debt and $10.9 million of long-term debt outstanding. The major portion of this debt has variable interest rates and, therefore, interest rate risk. However, a hypothetical increase of 10% in these interest rates for a one-year period would result in additional interest expense after taxes that would not be material in the aggregate. The Company's net foreign currency exchange loss was $0.8 million in 2000 compared to a gain of $11,000 in 1999. The Company's exposure to foreign currency exchange rate fluctuations is moderated by the fact that the operations of its international subsidiaries are primarily conducted in their respective local currencies. Also, in certain situations, the Company will consider entering into forward exchange contracts to mitigate the impact of foreign currency exchange fluctuations. II-1 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements of the Company contained in the Company's Annual Report to Stockholders for the year ended December 31, 2000 are included on pages 6-28 of Exhibit 13. Selected quarterly financial data contained in the Company's Annual Report for the year ended December 31, 2000 under "Selected Financial Data - Selected Quarterly Financial Data (unaudited)" is included on page 29 of Exhibit 13. These materials are incorporated herein by reference. The Schedule required under Regulation S-X is filed under "Financial Statement Schedules" pursuant to Item 14 hereof. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE --------------------------------------------------------------- This item is not applicable to the Company. II-2 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by Item 10 with respect to directors is hereby incorporated by reference from the Company's definitive proxy statement for the Annual Meeting of Stockholders to be held May 2, 2001, which will be filed with the Securities and Exchange Commission within 120 days of the close of the Company's fiscal year. The information regarding executive officers is as follows: Age as of Positions Name March 1, 2001 Presently Held Arthur L. Goldstein* 65 President, Chief Executive Officer and Director since 1971; Chairman of the Board since 1990 William E. Katz 76 Executive Vice President since 1983; Director since 1961 Edward J. Cichon 46 Vice President, Equipment Business Group since July 1998 Alan M. Crosby 48 Vice President, Consumer Products Group since March 2000 Anthony Di Paola 34 Vice President and Corporate Controller since May 2000 Gary W. Groom 50 Vice President, Project Finance and Treasurer since December 2000 Stephen Korn 55 Vice President, General Counsel and Clerk since 1989 Daniel M. Kuzmak 48 Vice President, Finance and Chief Financial Officer since January 11, 2001 William J. McMahon 45 Vice President, Ultrapure Water Group since November 2000 Theodore G. Papastavros 67 Vice President since 1975; Vice President, Strategic Planning since 1990 Michael W. Routh 53 Vice President, Instrument Business Group since April 2000 - ------------------ * Member of Executive Committee There are no family relationships between any of the officers or directors. Executive officers of the Company are appointed each year at the meeting of directors held on the date of the annual meeting of shareholders. There are no arrangements or understandings pursuant to which any executive officer was selected. Except for Messrs. Cichon, Di Paola, Groom, Kuzmak, McMahon and Routh, all of the above executive officers have been employed by the Company in various capacities for more than five years. III-1 Prior to joining the Company in July, 1998, Mr. Cichon served as a Senior Vice President of Metcalf & Eddy, Inc., a water and wastewater engineering and services firm, where he was employed for 18 years. Mr. Di Paola served in various finance and accounting positions with Thyssen-Dover Elevator Company North America from 1997 until he joined the Company, including as Corporate Controller from 1998 to 2000. Prior to 1997, he served as Assistant Controller for Vector Health Systems, Incorporated. Mr. Groom was employed by Raytheon Engineers & Constructors from 1994 until he joined the Company in December 2000. He held the position of Vice President, Project Finance and Development from 1994 to 1998. Mr. Kuzmak joined the Company after 15 years with ABB and its U.S. subsidiary, including serving as Chief Financial Officer of ABB Inc. (US) from 1998 to 2000, and Vice President, Finance of ABB Nuclear Operations and ABB Nuclear Business from 1995 to 1998. Mr. McMahon served as President and Chief Executive Officer of Stone & Webster/Sonat Energy Resources LLC from 1998 until he joined the Company; President of Stone & Webster Energy Services from 1997 to 1998; and General Manager/Environmental Systems of DB Riley Consolidated, Inc. from 1995 to 1997. Mr. Routh served as President of the Baird Division of Thermo Instrument Systems, Inc. from 1995 to 1997, and General Manager of the Spectroscopy Division of BioRad Laboratories, Inc., from 1998 to March, 2000. ITEM 11. EXECUTIVE COMPENSATION The information required by Item 11 is hereby incorporated by reference from the Company's definitive proxy statement for the Annual Meeting of Stockholders to be held May 2, 2001, which will be filed with the Securities and Exchange Commission within 120 days of the close of the Company's fiscal year. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Item 12 is hereby incorporated by reference from the Company's definitive proxy statement for the Annual Meeting of Stockholders to be held May 2, 2001, which will be filed with the Securities and Exchange Commission within 120 days of the close of the Company's fiscal year. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by Item 13 is hereby incorporated by reference from the Company's definitive proxy statement for the Annual Meeting of Stockholders to be held May 2, 2001, which will be filed with the Securities and Exchange Commission within 120 days of the close of the Company's fiscal year. III-2 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K --------------------------------------------------------------- (a) 1. Financial Statements See Index to Financial Statements and Financial Schedules on page IV-7. The Financial Statement Schedules are filed as part of this Annual Report on Form 10-K. 2. Financial Statement Schedules See Index to Financial Statements and Financial Statement Schedules on page IV-7. 3. Exhibits Exhibit No.Description 3.0 Articles of Organization and By-Laws 3.1 Restated Articles of Organization filed * April 16, 1986 (filed as Exhibit 3.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997). 3.1(a) Amendment to Restated Articles of * Organization filed June 19, 1987 (filed as Exhibit 3.1(a) to the Company's Annual Report on Form 10-K for the year ended December 31, 1997). 3.1(b) Amendment to Restated Articles of Organization * filed May 13, 1988 (filed as Exhibit 3.1(b) to Registration Statement No. 33-38290 on Form S-2 effective January 24, 1991). 3.1(c) Amendment to Restated Articles of * Organization filed May 8, 1992 (filed as Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ending June 30, 1996. 3.1(d) Amendment to Restated Articles of * Organization filed May 8, 1998 (filed as Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ending March 31, 1998). 3.2 By-Laws, as amended through May 2, 2000 * (filed as Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2000). 4.0 Instruments defining the rights of security holders, including indentures 4.1 Renewed Rights Agreement, dated as of August * 19, 1997 between Registrant and BankBoston N.A. (filed as Exhibit 1 to the Company's Current Report on Form 8-K dated August 27, 1997). 4.2 Form of Common Stock Certificate (filed as * Exhibit 4.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997). IV-1 10.0 Material Contracts 10.1 1979 Stock Option Plan, as amended * through February 22, 1996 (filed as Exhibit 10.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995). 10.2 1986 Stock Option Plan for * Non-Employee Directors, as amended through February 19, 1997 (filed as Exhibit 10.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996). 10.3 Second Amended and Restated Credit * Agreement dated as of July 28, 2000, among the Company, Fleet National Bank and Fleet National Bank as agent (filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2000.) 10.3(1) Amended Agreement No. 1 to Second Amended and Restated Credit Agreement among the Company, Fleet National Bank and Fleet National Bank as Agent dated March 1, 2001. 10.3(2) Security Agreement dated as of March 1, 2001 by and among the Company, certain of its domestic subsidiaries, and Fleet National Bank as agent. 10.3(3) Escrow Agreement dated as of March 1, 2001 by and among the Company, Hutchins, Wheeler & Dittmar, and Fleet National Bank as agent. 10.3(4) Seventh Amended and Restated Revolving Credit Note dated March 1, 2001. 10.4 Operating Agreement dated as of * September 27, 1989 between the Company and Aqua Cool Enterprises, Inc. (filed as Exhibit 10.4 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997). 10.5 Term Lease Master Agreement dated as * of September 27, 1989 between the Company and Aqua Cool Enterprises, Inc. (filed as Exhibit 10.5 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997). 10.6 Option Agreement dated as of September 27, * 1989 among the Company, Aqua Cool Enterprises, Inc. and the other parties named therein (filed as Exhibit to the Company's registration statement on Form S-2, No. 33-38290, effective January 24, 1991). 10.7 1994 Restricted Stock Plan (filed as Exhibit * 10.12 to the Company's Annual Report on Form 10-K dated March 30, 1995). IV-2 10.8 1997 Stock Incentive Plan (filed as Exhibit * 10.12 to the Company's Annual Report on Form 10-K dated December 31, 1996). 10.9 Ionics, Incorporated Supplemental * Executive Retirement Plan effective as of January 1, 1996 (filed as Exhibit 10.9 to the Company's Annual Report on Form 10-K dated December 31, 1997). 10.10 Form of Employee Retention Agreement * dated February 24, 1998 between the Company and certain officers of the Company and its subsidiaries (filed as Exhibit 10.10 to the Company's Annual Report on Form 10-K dated December 31, 1997). 10.11 1998 Non-Employee Directors Fee Plan * (filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ending September 30, 1998). 10.12 Shareholders' Agreement dated as of * May 12, 2000, by and among the Company, Hafeez Karamath Engineering Services Limited, and Desalination Company of Trinidad and Tobago Ltd., as amended on June 16, 2000 (filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2000.) 10.13 Loan Agreement dated as of October 25, 2000 between the Company and Hafeez Karamath Engineering Services Limited. 13.0 Annual Report to Stockholders for the year ended December 31, 2000 (furnished for the information of the Commission and not to be deemed "filed" as part of this Report except to the extent that portions thereof are expressly incorporated herein by reference). 21.0 Subsidiaries of the Registrant. 23.0 Consents 23.1 Consent of PricewaterhouseCoopers LLP to incorporation by reference of that firm's report dated March 19, 2001, which is contained in the Registrant's Annual Report to Stockholders for the year ended December 31, 2000, and is included on page 6 of Exhibit 13 to this Form 10-K. 24.0 Power of Attorney. -------------------------- * incorporated herein by reference (b) Reports on Form 8-K No reports on Form 8-K were filed by the Registrant during the last quarter of fiscal 2000. IV-3 Undertaking For purposes of complying with the amendments to the rules governing Form S-8 effective July 13, 1990 under the Securities Act of 1933, the undersigned hereby undertakes as follows, which undertaking shall be incorporated by reference into Registrant's registration statements on Form S-8 Nos. 33-14194, 33-5814, 33-2092, 2-72936, 2-82780, 2-64255, 33-41598, 33-54293, 33-59051, 333-05225, 333-29135, 33-54400 and 333-39684. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. IV-4 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. IONICS, INCORPORATED (Registrant) By: /s/Arthur L. Goldstein ---------------------- Arthur L. Goldstein, Chairman of the Board, President and Chief Executive Officer Date: March 27, 2001 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date: March 27, 2001 By: /s/Arthur L. Goldstein ---------------------- Arthur L. Goldstein, Chairman of the Board, President and Chief Executive Officer (principal executive officer) and Director Date: March 27, 2001 By: /s/Daniel M. Kuzmak ------------------- Daniel M. Kuzmak Vice President, Finance and Chief Financial Officer (principal financial officer) Date: March 27, 2001 By: /s/Anthony Di Paola ------------------- Anthony Di Paola Vice President and Corporate Controller (principal accounting officer) IV-5 Date: March 27, 2001 By: /s/Douglas R. Brown -------------------------- Douglas R. Brown, Director Date: March 27, 2001 By: /s/Stephen L. Brown -------------------------- Stephen L. Brown, Director Date: March 27, 2001 By: /s/William L. Brown --------------------------- William L. Brown, Director Date: March 27, 2001 By: /s/Arnaud de Vitry d'Avaucourt ------------------------------------ Arnaud de Vitry d'Avaucourt, Director Date: March 27, 2001 By: /s/Kathleen F. Feldstein ------------------------------- Kathleen F. Feldstein, Director Date: March 27, 2001 By: /s/William E. Katz ------------------------- William E. Katz, Director Date: March 27, 2001 By: /s/William K. Reilly --------------------------- William K. Reilly, Director By: -------------------------- John J. Shields, Director Date: March 27, 2001 By: /s/Carl S. Sloane ------------------------ Carl S. Sloane, Director Date: March 27, 2001 By: /s/Daniel I. C. Wang --------------------------- Daniel I. C. Wang, Director Date: March 27, 2001 By: /s/Mark S. Wrighton -------------------------- Mark S. Wrighton, Director Date: March 27, 2001 By: /s/Allen S. Wyett ------------------------ Allen S. Wyett, Director IV-6 IONICS, INCORPORATED INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES PAGES Report of Independent Accountants 6* Financial Statements: Consolidated Statements of Operations for the Years Ended December 31, 2000, 1999 and 1998 8* Consolidated Balance Sheets as of December 31, 2000 and 1999 9* Consolidated Statements of Cash Flows for the Years Ended December 31, 2000, 1999 and 1998 10* Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2000, 1999 and 1998 11* Notes to Consolidated Financial Statements 12-28* Supporting Financial Statement Schedules for the years ended December 31, 2000, 1999 and 1998: Schedule II - Valuation and Qualifying Accounts IV-8 Report of Independent Accountants on Financial Statement Schedule IV-9 - ------------------ All other schedules are omitted because the amounts are immaterial, the schedules are not applicable, or the required information is shown in the financial statements or the notes thereto. *Page references are to the portions of the Company's Annual Report for the year ended December 31, 2000 that are contained in Exhibit 13 to this Annual Report on Form 10-K, which pages are incorporated in this Report by reference. IV-7
IONICS, INCORPORATED SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS Additions Additions Balance at Charged to Due to End of Costs and Acquired Balance at Prior Year Expenses Businesses Deductions(A) End of Year ---------- -------- ---------- ---------- ----------- Allowance for doubtful accounts and uncollectible notes receivable: Years ended: December 31, 2000 $3,620,000 $4,605,000 $599,000 $3,574,000 $5,250,000 ========== ========== ======== ========== ========== December 31, 1999 $2,891,000 $2,643,000 $ 6,000 $1,920,000 $3,620,000 ========== ========== ======== ========== ========== December 31, 1998 $2,289,000 $1,319,000 $ 0 $ 717,000 $2,891,000 ========== ========== ========= ========== ==========
(A) Deductions result primarily from the write-off of accounts. IV-8 Report of Independent Accountants on Financial Statement Schedules To the Board of Directors of Ionics, Incorporated: Our audits of the consolidated financial statements referred to in our report dated March 19, 2001, which appears in Exhibit 13 to this Form 10-K also included an audit of the financial statement schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. /s/PricewaterhouseCoopers LLP Boston, Massachusetts March 19, 2001 IV-9 EXHIBIT INDEX Exhibit No. Description Sequentially Numbered Page - ----------- ----------- -------------------------- 3.0 Articles of Organization and By-Laws 3.1 Restated Articles of Organization filed * April 16, 1986 (filed as Exhibit 3.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997). 3.1(a) Amendment to Restated Articles of * Organization filed June 19, 1987 (filed as Exhibit 3.1(a) to the Company's Annual Report on Form 10-K for the year ended December 31, 1997). 3.1(b) Amendment to Restated Articles of Organization * filed May 13, 1988 (filed as Exhibit 3.1(b) to Registration Statement No. 33-38290 on Form S-2 effective January 24, 1991). 3.1(c) Amendment to Restated Articles of * Organization filed May 8, 1992 (filed as Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ending June 30, 1996. 3.1(d) Amendment to Restated Articles of * Organization filed May 8, 1998 (filed as Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ending March 31, 1998). 3.2 By-Laws, as amended through May 2, 2000 * (filed as Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2000). 4.0 Instruments defining the rights of security holders, including indentures 4.1 Renewed Rights Agreement, dated as of August * 19, 1997 between Registrant and BankBoston N.A. (filed as Exhibit 1 to the Company's Current Report on Form 8-K dated August 27, 1997). 4.2 Form of Common Stock Certificate (filed as * Exhibit 4.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997). IV-10 10.0 Material Contracts 10.1 1979 Stock Option Plan, as amended * through February 22, 1996 (filed as Exhibit 10.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995). 10.2 1986 Stock Option Plan for * Non-Employee Directors, as amended through February 19, 1997 (filed as Exhibit 10.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996). 10.3 Second Amended and Restated Credit * Agreement dated as of July 28, 2000, among the Company, Fleet National Bank and Fleet National Bank as agent (filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2000.) 10.3(1) Amended Agreement No. 1 to Second Amended and Restated Credit Agreement among the Company, Fleet National Bank and Fleet National Bank as Agent dated March 1, 2001. 10.3(2) Security Agreement dated as of March 1, 2001 by and among the Company, certain of its domestic subsidiaries, and Fleet National Bank as agent. 10.3(3) Escrow Agreement dated as of March 1, 2001 by and among the Company, Hutchins, Wheeler & Dittmar, and Fleet National Bank as agent. 10.3(4) Seventh Amended and Restated Revolving Credit Note dated March 1, 2001. 10.4 Operating Agreement dated as of * September 27, 1989 between the Company and Aqua Cool Enterprises, Inc. (filed as Exhibit 10.4 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997). 10.5 Term Lease Master Agreement dated as * of September 27, 1989 between the Company and Aqua Cool Enterprises, Inc. (filed as Exhibit 10.5 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997). 10.6 Option Agreement dated as of September 27, * 1989 among the Company, Aqua Cool Enterprises, Inc. and the other parties named therein (filed as Exhibit to the Company's registration statement on Form S-2, No. 33-38290, effective January 24, 1991). 10.7 1994 Restricted Stock Plan (filed as Exhibit * 10.12 to the Company's Annual Report on Form 10-K dated March 30, 1995). IV-11 10.8 1997 Stock Incentive Plan (filed as Exhibit * 10.12 to the Company's Annual Report on Form 10-K dated December 31, 1996). 10.9 Ionics, Incorporated Supplemental * Executive Retirement Plan effective as of January 1, 1996 (filed as Exhibit 10.9 to the Company's Annual Report on Form 10-K dated December 31, 1997). 10.10 Form of Employee Retention Agreement * dated February 24, 1998 between the Company and certain officers of the Company and its subsidiaries (filed as Exhibit 10.10 to the Company's Annual Report on Form 10-K dated December 31, 1997). 10.11 1998 Non-Employee Directors Fee Plan * (filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ending September 30, 1998). 10.12 Shareholders' Agreement dated as of * May 12, 2000, by and among the Company, Hafeez Karamath Engineering Services Limited, and Desalination Company of Trinidad and Tobago Ltd., as amended on June 16, 2000 (filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2000.) 10.13 Loan Agreement dated as of October 25, 2000 between the Company and Hafeez Karamath Engineering Services Limited. 13.0 Annual Report to Stockholders for the year ended December 31, 2000 (furnished for the information of the Commission and not to be deemed "filed" as part of this Report except to the extent that portions thereof are expressly incorporated herein by reference). 21.0 Subsidiaries of the Registrant. 23.0 Consents 23.1 Consent of PricewaterhouseCoopers LLP to incorporation by reference of that firm's report dated March 19, 2001, which is contained in the Registrant's Annual Report to Stockholders for the year ended December 31, 2000, and is included on page 6 of Exhibit 13 to this Form 10-K. 24.0 Power of Attorney. -------------------------- * incorporated herein by reference IV-12 Exhibit 10.3(1) AMENDMENT AGREEMENT NO. 1 TO SECOND AMENDED AND RESTATED CREDIT AGREEMENT This AMENDMENT AGREEMENT NO. 1 (this "Amendment"), is made as of March 1, 2001, by and among IONICS, INCORPORATED (the "Borrower"), a Massachusetts corporation having its principal place of business at 65 Grove Street, Watertown, Massachusetts 02472, FLEET NATIONAL BANK (referred to herein as "FNB"), with offices at 100 Federal Street, Boston, Massachusetts 02110, and the other banking institutions listed on Schedule 1 to the Credit Agreement (as hereinafter defined) (FNB and such other banking institutions being collectively referred to herein as the "Banks" and each a "Bank") and FNB as agent for the Banks (the "Agent"). WHEREAS, the Borrower, the Banks and the Agent are parties to that certain Second Amended and Restated Credit Agreement, dated as of July 28, 2000 (as amended and in effect from time to time, the "Credit Agreement"), pursuant to which the Banks, upon certain terms and conditions, have made loans to the Borrower; and WHEREAS, the Agent and the Borrower are parties to a certain fee letter agreement, dated July 28, 2000 (the "Fee Letter"), pursuant to which certain fees have and are to be paid by the Borrower to the Agent; WHEREAS, the Borrower has requested and the Banks and the Agent have agreed, on the terms and subject to the conditions set forth herein, to amend the Credit Agreement and the Fee Letter; NOW, THEREFORE, the parties hereto hereby agree as follows: ss.1. Defined Terms. Capitalized terms which are used herein without definition and which are defined in the Credit Agreement shall have the same meanings herein as in the Credit Agreement. ss.2. Amendment of Credit Agreement. The Credit Agreement is hereby amended as follows: (a) Section 1.1 of the Credit Agreement is amended by deleting the table and the text following the table contained in the definition of Applicable Margin and restating it in its entirety as follows:
---------- -------------------------------- -------------- -------------- ------------ ------------------- Letter Prime LIBOR of Rate Rate Credit Commitment Level Leverage Ratio Loans Loans Fee Fee Rate ---------- -------------------------------- -------------- -------------- ------------ ------------------- ---------- -------------------------------- -------------- -------------- ------------ ------------------- I Greater than or equal to 0.25% 2.25% 2.25.% 0.375% 3.00:1.00 ---------- -------------------------------- -------------- -------------- ------------ ------------------- ---------- -------------------------------- -------------- -------------- ------------ ------------------- II Less than 3.00:1.00 but 0.25% 2.00% 2.00% 0.375% greater than or equal to 2.50:1.00 ---------- -------------------------------- -------------- -------------- ------------ ------------------- ---------- -------------------------------- -------------- -------------- ------------ ------------------- III Less than 2.50:1.00 but 0.25% 1.75% 1.75% 0.375% greater than or equal to 2.00:1.00 ---------- -------------------------------- -------------- -------------- ------------ ------------------- ---------- -------------------------------- -------------- -------------- ------------ ------------------- IV Less than 2.00:1.00 but 0.25% 1.50% 1.50% 0.250% greater than or equal to 1.50:1.00 ---------- -------------------------------- -------------- -------------- ------------ ------------------- ---------- -------------------------------- -------------- -------------- ------------ ------------------- V Less than 1.50:1.00 but 0.25% 1.25% 1.25% 0.250% greater than or equal to 1.00:1.00 ---------- -------------------------------- -------------- -------------- ------------ ------------------- ---------- -------------------------------- -------------- -------------- ------------ ------------------- VI Less than 1.00:1.00 0.25% 1.00% 1.00% 0.150% ---------- -------------------------------- -------------- -------------- ------------ -------------------
Notwithstanding the foregoing, (a) until the delivery by the Borrower to the Agent of the Compliance Certificate pursuant to ss.8.4(c) for the period ending December 31, 2000, the Applicable Margin shall be the Applicable Margin set forth above in Level I, and (b) if the Borrower fails to deliver any Compliance Certificate pursuant to ss.8.4(c) hereof then, for the period commencing on the next Adjustment Date to occur subsequent to such failure through the date immediately following the date on which such Compliance Certificate is delivered, the Applicable Margin shall be the highest Applicable Margin set forth above. (b) Section 1.1 of the Credit Agreement is further amended by adding the following new - definitions in the appropriate alphabetical order: EBIT: With respect to any fiscal period, an amount equal to the sum of (a) Consolidated Net Income (or Deficit) of the Borrower and its Subsidiaries for such fiscal period, plus (b) in each case to the extent deducted in the calculation of such Person's Consolidated Net Income and without duplication, (i) income tax expense for such period, plus (ii) Consolidated Total Interest Expense paid or accrued during such period, minus, (c) to the extent added in computing Consolidated Net Income, and without duplication, all noncash gains (including income tax benefits) for such period, all as determined in accordance with generally accepted accounting principles. Escrow Agent: Hutchins, Wheeler & Dittmar, A Professional Corporation. Escrow Agreement. The Escrow Agreement, dated as of March 1, 2001, among the Agent, the Borrower and the Escrow Agent. Security Agreement: The Security Agreement, dated as of March 1, 2001, among the Borrower, its domestic Subsidiaries (except Inactive Subsidiaries) and the Agent, in form and substance satisfactory to the Agent. Security Documents: The Security Agreement, UCC-1 financing statements and other security documents among the Borrower, its domestic Subsidiaries (other than the Inactive Subsidiaries) and the Agent entered into after the Closing Date, pursuant to which the Borrower and its domestic Subsidiaries (other than the Inactive Subsidiaries) shall have granted to the Agent for the benefit of the Banks and the Agent a perfected first priority security interest in and lien on all of their assets other than real property, motor vehicles, boats and other property subject to a certificate of title or other registration statute of the United States, any state or jurisdiction and the stock of any of the Borrower's Subsidiaries. Triggering Event: The occurrence of an Event of Default. (c) Section 2.3 of the Credit Agreement is amended by deleting the date "March 31, 2001" and substituting the date "May 15, 2001" therefor. (d) Section 6 of the Credit Agreement is amended by deleting suchss.6 and restating it in - its entirety as follows: 6. COLLATERAL SECURITY AND GUARANTIES. 6.1 Security of Borrower and its Subsidiaries. On or prior to March 1, 2001, the Borrower and each of its domestic Subsidiaries (other than the Inactive Subsidiaries) shall have executed and delivered into escrow pursuant to the Escrow Agreement the Security Agreement, a UCC-1 financing statement for each jurisdiction in which the Borrower and its domestic Subsidiaries (other than the Inactive Subsidiaries) maintains Collateral (as hereinafter defined) and such other Security Documents as the Agent may reasonably request. Upon the occurrence of a Triggering Event, the Security Documents shall be delivered by the Escrow Agent to the Agent pursuant to the Escrow Agreement and all filings and other actions necessary to perfect the security interest granted by the Borrower and such domestic Subsidiaries to the Agent pursuant to the Security Documents shall be made or taken, whereupon the Obligations shall be secured by a perfected first priority security interest (subject only to Permitted Liens entitled to priority under applicable law) in all of the Borrower's and such domestic Subsidiaries' assets (other than real property, motor vehicles, boats, and other property subject to a certificate of title or other registration statute of the United States, any state or jurisdiction and the stock of any of the Borrower's Subsidiaries), whether now owned or hereafter acquired (the "Collateral"), pursuant to the terms of the Security Documents to which the Borrower or any such domestic Subsidiary is a party. 6.2 Guaranties. The Obligations shall also be guaranteed pursuant to the terms of the Guaranty. Upon the occurrence of a Triggering Event, the obligations of the Borrower's domestic Subsidiaries under the Guaranty shall be in turn secured by a perfected first priority security interest in the assets of the Borrower's domestic Subsidiaries described in ss.6.1. 6.3 Release of Security Interest. Upon the earlier to occur of (a) May 16, 2001 so long as no Default or Event of Default shall have occurred and be continuing and (b) the first date thereafter on which all Defaults and Events of Default shall have been cured or waived, all existing liens on the Collateral in favor of the Agent and the Banks shall be automatically terminated and the Agent will promptly deliver to the Borrower, at the sole cost and expense of the Borrower, UCC-3 termination statements and all such other documents as the Borrower may reasonably request to evidence termination of such liens. If no Triggering Event shall have occurred on or prior to May 15, 2001, the Security Documents shall be canceled and delivered by the Escrow Agent to the Borrower in accordance with the terms of the Escrow Agreement. (e) Section 10.1 of the Credit Agreement is amended by deleting suchss.10.1 and restating - it in its entirety as follows: 10.1. Leverage Ratio. The Borrower will not, as of the end of any Reference Period ending on the last day of any fiscal quarter described in the table set forth below, permit the Leverage Ratio for such Reference Period to exceed the ratio set forth opposite such fiscal quarter in such table: ------------------------------------- ------------------------------------- Fiscal Quarter Ratio ------------------------------------- ------------------------------------- ------------------------------------- ------------------------------------- FQ4 2000 3.25:1.00 ------------------------------------- ------------------------------------- ------------------------------------- ------------------------------------- FQ1 2001 3.00:1.00 ------------------------------------- ------------------------------------- ------------------------------------- ------------------------------------- FQ2 2001 3.00:1.00 ------------------------------------- ------------------------------------- ------------------------------------- ------------------------------------- FQ3 2001 2.75:1.00 ------------------------------------- ------------------------------------- ------------------------------------- ------------------------------------- FQ4 2001 and thereafter 2.50:1.00 ------------------------------------- ------------------------------------- (f) Section 10.2 of the Credit Agreement is amended by deleting suchss.10.2 and restating - it in its entirety as follows: 10.2. Minimum EBITDA. The Borrower will not, as of the end of any Reference Period ending on the last day of any fiscal quarter described in the table set forth below, permit Consolidated EBITDA of the Borrower and its Consolidated Subsidiaries for such Reference Period to be less than the amount set forth opposite such fiscal quarter in such table: ------------------------------------- ------------------------------------- Date Amount ------------------------------------- ------------------------------------- ------------------------------------- ------------------------------------- FQ4 2000 $33,000,000 ------------------------------------- ------------------------------------- ------------------------------------- ------------------------------------- FQ1 2001 $34,000,000 ------------------------------------- ------------------------------------- ------------------------------------- ------------------------------------- FQ2 2001 $38,000,000 ------------------------------------- ------------------------------------- ------------------------------------- ------------------------------------- FQ3 2001 $41,000,000 ------------------------------------- ------------------------------------- ------------------------------------- ------------------------------------- FQ4 2001 and thereafter $50,000,000 ------------------------------------- ------------------------------------- (g) Section 10.4 of the Credit Agreement is amended by deleting suchss.10.4 and restating - it in its entirety as follows: 10.4 Capital Expenditures. The Borrower will not make, or permit any Consolidated Subsidiary to make, Capital Expenditures during any fiscal year described in the table set forth below, that exceed in the aggregate the amount set forth opposite such fiscal year in such table: --------------------------------------- ----------------------------------- Fiscal Year Amount --------------------------------------- ----------------------------------- --------------------------------------- ----------------------------------- 2000 $60,000,000 --------------------------------------- ----------------------------------- --------------------------------------- ----------------------------------- 2001 and thereafter $40,000,000 --------------------------------------- ----------------------------------- (h) Section 10 of the Credit Agreement is further amended by adding the following new - ss.10.5: 10.5 Ratio of EBIT to Interest Expense. The Borrower will not, as of the end of any Reference Period ending on the last day of any fiscal quarter described in the table set forth below, permit the ratio of EBIT to Consolidated Total Interest Expense for such Reference Period to be less than the ratio set forth opposite such fiscal quarter in such table: - --------------------------------------- ----------------------------------- Fiscal Quarter Ratio - --------------------------------------- ----------------------------------- - --------------------------------------- ----------------------------------- Q1 2001 3.00:1.00 - --------------------------------------- ----------------------------------- - --------------------------------------- ----------------------------------- Q2 2001 3.00:1.00 - --------------------------------------- ----------------------------------- - --------------------------------------- ----------------------------------- Q3 2001 3.00:1.00 - --------------------------------------- ----------------------------------- - --------------------------------------- ----------------------------------- Q4 2001 and thereafter 3.00:1.00 - --------------------------------------- ----------------------------------- Solely for the purpose of this ss.10.5, (a) Reference Period shall mean (i) for Q1 2001, the period commencing on 01/01/01 and ending on 03/31/01, (ii) for Q2 2001, the period commencing on 01/01/01 and ending on 06/30/01, (iii) for Q3 2001, the period commencing on 01/01/01 and ending on 09/30/01, and (b) for Q4 2001 and each fiscal quarter thereafter, Reference Period shall have the meaning set forth in ss.1.1 for such term. ss.3. Amendment of Schedules to Credit Agreement. (a) Schedule 1 of the Credit Agreement is amended by deleting the reference to (i) the amount "$70,000,000" and substituting the amount "$80,000,000" therefor and (ii) the date "3/31/01" and substituting the date "5/15/01" therefor. (b) Schedules 7.7, 7.17, 7.18(a), 7.18(b) and 9.5.2 of the Credit Agreement are amended by deleting such Schedules in their entirety and substituting the attached Schedules 7.7, 7.17, 7.18(a), 7.18(b) and 9.5.2 therefor. ss.4. Amendment to Fee Letter. The Fee Letter is hereby amended by deletingeach reference to the date "March 31, 2001" in the second paragraph of such Letter and substituting the date "May 15, 2001" therefor. ss.5. Effectiveness. This Amendment shall be effective as of 12:01 a.m. December 31, 2000, except with respect toss.2(a) of this Amendment in which case the effective date shall be March 1, 2001, subject to the satisfaction of the following conditions: (a) Delivery. The Borrower, the Banks and the Agent shall have executed and delivered to the Agent this Amendment. (b) Loan Note. The Borrower shall have executed and delivered to the Agent an amended and restated Revolving Credit Note (the "New Note") payable to FNB in the original principal amount of $80,000,000. (c) Security Documents and Escrow Agreement. The Borrower and its Subsidiaries shall have executed and delivered (i) to the Agent the Escrow Agreement and (ii) to the Escrow Agent the Security Documents. (d) Updated Lien Searches. The Agent shall have received updated lien searches with respect to each jurisdiction in which a UCC-1 is to be filed upon the occurrence of a Triggering Event. (e) Opinion. The Agent shall have received a draft opinion of counsel to the Borrower and its domestic Subsidiaries in form and substance reasonably satisfactory to the Agent and its counsel with respect to the Security Documents (the "Opinion"). (f) Resolutions. The Borrower shall have delivered to the Agent resolutions of the Board of Directors of the Borrower evidencing its authorization of the Borrower's execution and delivery of this Amendment, the New Note, the Escrow Agreement and the Security Documents to which it is a party and the obligations contemplated therein along with an officer's certificate with respect thereto. (g) Proceedings and Documents. All proceedings in connection with the transactions contemplated by this Amendment and all documents incident thereto shall be reasonably satisfactory in substance and form to the Banks and the Agent, and the Agent shall have received all information and such counterpart originals or certified or other copies of such documents as the Agent may reasonably request. (h) Upfront Fee. The Borrower shall have paid to the Agent for the Agent's account an upfront fee in the amount of $150,000, $50,000 of which has been paid to the Agent prior to the date hereof. ss.6. Conditions Subsequent. The domestic Subsidiaries of the Borrower (other than Inactive Subsidiaries) shall deliver to the Agent (a) no later than March 6, 2001, resolutions of the Board of Directors of each of the domestic Subsidiaries of the Borrower (other than the Inactive Subsidiaries) evidencing its authorization of such Subsidiary's execution and delivery of the Security Documents to which it is a party and the obligations contemplated therein along with an officer's certificate with respect thereto, and (b) the date on which clause (a) above shall have been satisfied, the Agent shall have received a final executed copy of the Opinion. The Borrower hereby agrees with the Agent and the Banks that failure to provide the aforementioned items on or prior to the date specified herein shall constitute an Event of Default under the Credit Agreement. ss.7. Representations and Warranties. The Borrower represents and warrants to the Banks and the Agent as follows: (a) Representations and Warranties in Credit Agreement. The representations and warranties of the Borrower contained in the Credit Agreement, (i) were true and correct in all material respects when made, and (ii) except to the extent such representations and warranties by their terms are made solely as of a prior date, continue to be true and correct in all material respects on the date hereof. (b) Authority, Etc. The execution and delivery by the Borrower of this Amendment and the performance by the Borrower of all of its agreements and obligations under this Amendment (i) are within the corporate authority of the Borrower, (ii) have been duly authorized by all necessary corporate proceedings by the Borrower, (iii) do not conflict with or result in any breach or contravention of any provision of law, statute, rule or regulation to which the Borrower is subject or any judgment, order, writ, injunction, license or permit applicable to the Borrower, and (iv) do not conflict with any provision of the corporate charter or by-laws of, or any agreement or other instrument binding upon, the Borrower. (c) Enforceability of Obligations. This Amendment, and the Credit Agreement as amended hereby, constitute the legal, valid and binding obligations of the Borrower enforceable against in accordance with their respective terms. Immediately prior to and after giving effect to this Amendment, no Default or Event of Default exists under the Credit Agreement or any other Loan Document. ss.8. No Waiver. Except as otherwise expressly provided for in this Amendment, nothing in this Amendment shall extend to or affect in any way any of the Borrower's obligations or any of the rights and remedies of the Banks or the Agent in respect of the Credit Agreement arising on account of the occurrence of any Event of Default, all of which are expressly preserved. ss.9. Miscellaneous Provisions. (a) Except as otherwise expressly provided by this Amendment, all of the terms, conditions and provisions of the Credit Agreement shall remain the same. It is declared and agreed by each of the parties hereto that the Credit Agreement, as amended hereby, shall continue in full force and effect, and that this Amendment and the Credit Agreement shall be read and construed as one instrument. (b) THIS AMENDMENT IS INTENDED TO TAKE EFFECT AS AN AGREEMENT UNDER SEAL AND SHALL BE CONSTRUED ACCORDING TO AND GOVERNED BY THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS. (c) This Amendment may be executed in any number of counterparts, but all such counterparts shall together constitute but one instrument. In making proof of this Amendment it shall not be necessary to produce or account for more than one counterpart signed by each party hereto by and against which enforcement hereof is sought. (d) The Borrower hereby agrees to pay to the Agent, on demand by the Agent, all reasonable out-of-pocket costs and expenses incurred or sustained in connection with the preparation of this Amendment (including reasonable legal fees). [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] IN WITNESS WHEREOF, the parties hereto have executed this Amendment as an agreement under seal of the date first written above. IONICS, INCORPORATED By:/s/ Daniel M. Kuzmak --------------------------------------------- Name: Daniel M. Kuzmak Title: Vice President, Finance and Chief Financial Officer FLEET NATIONAL BANK, individually and as Agent By: /s/John C. Dunne -------------------------------------------- John C. Dunne, Senior Vice President RATIFICATION OF GUARANTY Each of the undersigned Guarantors hereby acknowledges and consents to the foregoing Amendment No. 1 as of March 1, 2001, and agrees that the applicable Guaranty from such Guarantor in favor of the Agent for the benefit of the Agent and the Banks and all other Loan Documents to which each of the Guarantors are a party remain in full force and effect, and each of the Guarantors confirms and ratifies all of its obligations thereunder. AQUA COOL ENTERPRISES, INC. By: /s/ Theodore G. Papastavros -------------------------------- Name: Theodore G. Papastavros Title: Treasurer AQUA DESIGN, INC. By: /s/ Edward J. Cichon -------------------------------- Name: Edward J. Cichon Title: President FIDELITY PUREWATER, INC. By: /s/ Anthony DiPaola ---------------------------------- Name: Anthony DiPaola Title: Treasurer FIDELITY WATER SYSTEMS, INC. By: /s/ Anthony DiPaola ----------------------------------- Name: Anthony DiPaola Title: Treasurer IONICS KOREA, INC. By: /s/ Arthur L. Goldstein ------------------------------------- Name: Arthur L. Goldstein Title: President IONICS LIFE SCIENCES, INC. By: /s/ Theodore G. Papastavros ------------------------------------ Name: Theodore G. Papastavros Title: Treasurer IONICS ULTRAPURE WATER CORPORATION By: /s/ Stephen Korn ------------------------------------- Name: Stephen Korn Title: Secretary RESOURCES CONSERVATION CO. INTERNATIONAL By: /s/ Stephen Korn ------------------------------------- Name: Stephen Korn Title: Secretary SEPARATION TECHNOLOGY INC. By: /s/ Ark W. Pang -------------------------------------- Name: Ark W. Pang Title: President SIEVERS INSTRUMENTS, INC. By: /s/ Stephen Korn ------------------------------------- Name: Stephen Korn Title: Secretary
Schedule 7.7 Litigation A. PENDING LITIGATION - ---------------------------------------------- ------------ ---------------------------------------- ------------------------------- Date Litigants Served Counsel Court - ---------------------------------------------- ------------ ---------------------------------------- ------------------------------- Bernard Andrieu v. Ionics France and 9/2000 Alex Blumrosen Le Tribunal de Commerce Ionics, Incorporated Nicola Kompf de Creteil Bernard-Hertz-Bejot (employment termination in violation of Societe d'Avocats agreement) 8, rue Murillo 75008 Paris, France 33-1-43-1880 80 (tel) 33-1-43-1880 90 (fax) - ---------------------------------------------- ------------ ---------------------------------------- ------------------------------- *Baggaley & Anor; Batson; Thompson; Wilson; 3/2000 Paul Cantwell, Partner Superior Court of New South and White vs. Stidym Distributors Pty. Ltd. Craig Terrill & Associates Wales, Northern Rivers Registry and Elite Chemicals Pty. Ltd. Level 6, 231 George Street Queensland, Australia (economic loss due to negligence) Brisbane, QLD 4000 Australia 011-61-7-3211-0011 (tel) 011-61-7 3211-0022 (fax) - ---------------------------------------------- ------------ ---------------------------------------- ------------------------------- *Deborah Brandes v. Ionics, Inc. et al 4/10/98 Keith A. Guarnuccio, Esq. Supreme Court of the (personal injury) Ahmuty, Demers & McManus State of New York 200 I.U. Willets Road County of Nassau Albertson, NJ 11507 516-294-5433 (tel) 516-294-5387 (fax) - ---------------------------------------------- ------------ ---------------------------------------- ------------------------------- Hynes v. Ionics Ultrapure Water Corporation 4/99 Peter A. Viano, Esq. Workers' Comp Haworth, Bradshaw, Stallknecht & Barber Appeals Board 333 West San Carlos Street, Suite 1150 California San Jose, CA 95103 (408) 293-9393 (tel) - ---------------------------------------------- ------------ ---------------------------------------- ------------------------------- Ionics, Incorporated v. Namibia Water Corp. 2/16/01 William A. McCormack, Esq. U.S. District Court, District Ltd; FirstRand Bank Ltd. and State Street Bingham Dana LLP of MA, Boston Bank and Trust Company 150 Federal Street Boston, MA 02110 (suit to prevent drawdown of bid bond and (617) 951-8335 (tel) recoup bidding expenses) (617) 951-8736 (fax) - ---------------------------------------------- ------------ ---------------------------------------- ------------------------------- Alex Long and Arthur Wilson 3/7/97 Jonathan D. Wolf, Esq. U.S. District Court v. Fidelity Water Systems, Inc., Berliner Cohen Northern District of California Fidelity Purewater, Inc., Scott Batiste, Ten Almaden Boulevard Household Retail Service, Inc. and Eleventh Floor Household Bank (Nevada), N.A. San Jose, CA 95113-2233 (class action lawsuit for violation of 408-998-5388 (tel) state and federal regulation) 408-286-5600 (fax) - ---------------------------------------------- ------------ ---------------------------------------- ------------------------------- *Insurance Co.-appointed Counsel
A. PENDING LITIGATION (Continued) - ---------------------------------------------- ------------ ---------------------------------------- ------------------------------- Date Litigants Served Counsel Court - ---------------------------------------------- ------------ ---------------------------------------- ------------------------------- Dee Miller v. Fidelity Purewater, Inc., 6/7/2000 Jonathan D. Wolf California Supreme Court Scott Batiste and Does 1-50 Berliner Cohen Ten Almaden Boulevard - 11th Floor (wrongful sales practices) San Jose, CA 95113 408-998-5388 (tel) 408-286-5600 (fax) - ---------------------------------------------- ------------ ---------------------------------------- ------------------------------- Primera Foods Corporation v. Separation 6/21/00 Daniel J. Boivin, Esq. American Arbitration Technology, Inc. and Ionics, Incorporated Meshbesher & Spence Association, Minneapolis, MN (breach of contract and warranty) 1616 Park Avenue Minneapolis, MN 55404 612-544-5959 (tel) 612-339-9188 - ---------------------------------------------- ------------ ---------------------------------------- ------------------------------- Teresa Readnower v. General Ionics 1/18/01 Charles E. Boyle, Esq. U.S. EEOC Diefenderfer, Hoover, Boyle & Wood Cincinnati Office (sex discrimination, harassment, retaliation) 1420 Grant Building Pittsburgh, PA 15219 412-471-1100 (tel) 412-471-5125 (fax) - ---------------------------------------------- ------------ ---------------------------------------- ------------------------------- Robelle Industries, Inc. v. 3/8/95 Marie F. Mercier, Esq. Superior Court Ionics, Incorporated Kotin, Crabtree & Strong Norfolk County, MA (breach of contract, tortious interference) One Bowdoin Square Boston, MA 02114-2919 617-227-7031 (tel) 617-367-2988 (fax) - ---------------------------------------------- ------------ ---------------------------------------- ------------------------------- Eduardo E. Rojas v. Ionics, Incorporated et 12/13/00 Marie F. Mercier, Esq. U.S. District Court al on Ionics - Kotin, Crabtree & Strong District of Massachusetts One Bowdoin Square Boston (breach of contract and breach of fiduciary Boston, MA 02114-2925 duty) 617-227-7031 (tel) 617-367-2988 (fax) - ---------------------------------------------- ------------- --------------------------------------- ------------------------------- Salas v. Apollo Ultrapure Water Systems, Inc. 12/30/96 Rex Altman, Esq. Workers Compensation (wrongful termination claim) Altman & Schoemaker Appeals Board 16255 Ventura Blvd., Suite 1110 State of California Encino, CA 91436 818-995-0080 (tel) 818-995-3419 (fax) - ---------------------------------------------- ------------ ---------------------------------------- ------------------------------- *Insurance Co.-appointed Counsel
A. PENDING LITIGATION (Continued) - --------------------------------------------- ------------- -------------------------------------- -------------------------------- Litigants Date Served Counsel Court - --------------------------------------------- ------------- -------------------------------------- --------------------------------- Samsung Austin Semiconductor L.P. v. Suit Marshall Searcy, Esq. District Court for Travis County, Nomura Micro Science, U.S.A., Inc., brought Kelly, Hart & Hallman Texas, 98th Judicial District Ionics Pure Solutions and Ionics, 12/28/00; 201 Main Street, Suite 2500 Incorporated Ionics not Fort Worth, TX 76102 yet served. 817-332-2500 (tel) 817-878-9280 (fax) - --------------------------------------------- ------------- -------------------------------------- --------------------------------- *Zelia and Manuel Santos v. 9/13/99 Cindy Newman, Esq. Superior Court of New Jersey Edwin J. Petruzzi and Ionics, Stevens & Minter Law Division Incorporated/Aqua Cool One Harmon Plaza Union County Secaucus, New Jersey 07094 201-319-5700 (tel) 201-319-0151 (fax) - --------------------------------------------- ------------- -------------------------------------- --------------------------------- 3/27/98 James S. Dittmar, Esq. U.S. District Court United States Filter Corporation and Hutchins, Wheeler & Dittmar Boston IP Holdings v. Ionics 101 Federal Street (patent infringement) Boston, MA 02110 (3 cases pending) 617-951-6600 (tel) 617-951-1295 (fax) Stanley L. Amberg, Esq. Orrick Herrington & Sutcliffe LLP 666 Fifth Avenue New York, NY 10103 212-506-5285 (tel) 212-506-5151 (fax) Anthony J. Fitzpatrick, Esq. Duane. Morris & Heckscher, LLP One International Place, 14th Floor Boston, MA 02110-2600 617-598-3120 (tel) 617-598-3101 (fax) - --------------------------------------------- ------------- -------------------------------------- --------------------------------- *Insurance Co.-appointed Counsel
A. PENDING LITIGATION (Continued) Date Litigants Served Counsel Court - --------------------------------------------- ----------- ---------------------------------------- --------------------------------- 8/21/00 Brian Yakura, Esq. Superior Court for the State of *Cynthia Walker et al v. Ionics, Brown & Boland California Incorporated Ten Rincon Center Solano County and Agustin Sanchez 121 Spear Street, Suite 410 Vallejo, CA 94590 San Francisco, CA 94105 (auto accident) 415-836-2626 (tel) 415-836-3104 (fax) - --------------------------------------------- ----------- ---------------------------------------- --------------------------------- 11/29/00 Linda Taylor, Esq. California Dept. of Fair Chris Wells v. Ionics Ultrapure Water Employment and Housing and EEOC (discrimination complaint - disability) - --------------------------------------------- ----------- ---------------------------------------- --------------------------------- 5/11/99 Mitchell E. Pak, Esq. Supreme Court Elsa Zegelstein and Joseph Zegelstein v. Jacobowitz, Garfinkel & Lesman State of New York Ionics, Incorporated and Igor Makhnin 110 William Street County of Kings (automobile accident) New York, NY 10038-3901 212-809-8000 (tel) 212-344-8263 (fax) - --------------------------------------------- ----------- ---------------------------------------- --------------------------------- *Insurance Co.-appointed Counsel
B. THREATENED LITIGATION 1. By letter dated December 6, 2000, counsel for Bond Properties LLC, owner of property adjacent to the Silresim superfund site in Lowell, Massachusetts, notified Ionics and 20 other potentially responsible parties who had participated in the 1992 Silresim consent decree arrangement, that its property has become contaminated by groundwater pollution migrating from the Silresim site. The owner is seeking payment of $1,576,000 to cover environmental response costs plus diminution of the property's fair market value, and in addition attorney's fees, consulting fees and expert fees. Ionics' volumetric percentage among the notified group (which does not include all participants in the Silresim settlement) is approximately 1.9%. It is Ionics' current intention to participate in a group defense against the owner's claims. 2. In July, 1999 SeparaTech Limited ("SeparaTech"), an English subsidiary of Separation Technology, Inc., a U.S. subsidiary of Ionics, Incorporated, received a letter from Glanbia Ingredients ("Glanbia") of Ireland threatening to institute legal proceedings unless it received compensation for losses allegedly resulting from a breach of contract. Glanbia claims that ultrafiltration equipment sold by SeparaTech in 1997 to Avonmore Foods, Glanbia's predecessor, to upgrade its whey processing plant failed to perform according to contract specifications, resulting in losses of IR(pound)560,000 (approximately US$670,000). Corporate Counsel to Ionics responded to Glanbia in September, 1999 asserting that SeparaTech had met its contractual obligations. Glanbia reasserted its claims in a letter dated July 20, 2000, to which Ionics' Corporate Counsel responded in August, 2000, again asserting that SeparaTech Limited met its contractual obligations. There have been no further developments in this matter. 3. Ionics was contacted in September 2000 by an attorney representing Mahaan Proteins Limited ("Mahaan"), formerly known as Lacto Protein India Ltd., an Indian company that purchased a reverse osmosis system for whey processing from SeparaTech Limited ("SeparaTech") in 1995. SeparaTech, an English company, and its U.S. parent, Separation Technology, Inc. ("STI"), were acquired by Ionics in 1996. Mahaan claims that SeparaTech breached its contract by delivering equipment that did not conform to contract specifications and did not perform as warranted. Mahaan is claiming damages against SeparaTech, STI and Ionics in excess of $20 million. Ionics and its affiliates believe that SeparaTech met its contractual and warranty obligations to Mahaan and that they have valid defenses to the claims, and intend to vigorously defend themselves in the event Mahaan institutes litigation. Schedule 7.17 Environmental Matters Portions of the Real Estate used by Borrower or by its domestic Subsidiaries are used for the generation, handling, processing, transportation and storage, including underground tank storage, of Hazardous Substances. Such activities are conducted in accordance with the applicable Environmental Laws and in compliance with applicable valid permits. No disposal of Hazardous Substances occurs on Real Estate used by Borrower or by its domestic Subsidiaries and there are no known ongoing sources of release or threats of release to the environment with respect to such Real Estate. To the best of the Borrower's knowledge: (i) there have been no past releases that would have a material adverse effect on the value of the Real Estate; and (ii) Neither the Borrower, its domestic Subsidiaries, nor any of the Real Estate used by the Borrower or by its domestic Subsidiaries is subject to any applicable environment law requiring the performance of Hazardous Substances site assessments, or the removal or remediation of Hazardous Substances. The Borrower was notified in 1992 that it is a potentially responsible party (PRP) at a Superfund Site, Solvent Recovery Services (SRS) in Southington, Connecticut. Borrower's share of assessments to date for site work totals approximately $65,000. The ultimate site clean-up cost is currently not expected to exceed $59 million, of which the Borrower's share would not exceed $308,000, including the amounts that have already been assessed. The Borrower was notified in March, 2000 that it is a potentially responsible party (PRP) in a related Superfund Site, the Angelillo Property Site. These sites are related in that materials from the SRS site were allegedly transported to the Angelillo site. The EPA has spent approximately $1,155,000 to date at the Angelillo site, and is seeking recovery of those costs from the SRS PRP group. Ionics' proportion of those costs is expected to be similar to the SRS site, on the order of 0.5%. An investigation conducted by the Attorney General of the Commonwealth of Massachusetts into certain former operations of a division of the Borrower during portions of the years 1991 through 1995 was concluded in August, 2000. Pursuant to a settlement agreement entered in civil proceedings, Ionics paid a civil penalty of $425,000 to the Commonwealth of Massachusetts and contributed $110,000 to fund a watershed protection plan for the Connecticut River Basin. By letter dated December 6, 2000, counsel for Bond Properties LLC, owner of property adjacent to the Silresim Superfund site in Lowell, Massachusetts, notified Ionics and 20 other participants in the Silresim Consent Decree arrangement, that its property has become contaminated by groundwater pollution migrating from the Silresim site. The owner is seeking payment of $1,576,000 to cover environmental response costs plus diminution of the property's fair market value, and in addition attorneys' fees, consulting fees and expert fees. Ionics' volumetric percentage among the notified group (which does not include all participants in the Silresim settlement) is approximately 1.9%. Ionics is participating in a group defense against the owner's claims.
Schedule 7.18(a) Subsidiaries of Borrower Jurisdiction of Name Address Incorporation - ----------------------------------------------------- ----------------------------------------------------- ------------------------ - ----------------------------------------------------- ----------------------------------------------------- ------------------------ 1. Agrinord S.R.L. (75%) Isola della Scala, Verona, Italy Italy - ----------------------------------------------------- ----------------------------------------------------- ------------------------ - ----------------------------------------------------- ----------------------------------------------------- ------------------------ 2. Aqua Cool Enterprises, Inc. 65 Grove Street, Watertown, MA 02472 MA - ----------------------------------------------------- ----------------------------------------------------- ------------------------ - ----------------------------------------------------- ----------------------------------------------------- ------------------------ 3. Aqua Cool France, S.A.. 3 Grand Rue, 60240 Liantcourt St. Pierre, France France - ----------------------------------------------------- ----------------------------------------------------- ------------------------ - ----------------------------------------------------- ----------------------------------------------------- ------------------------ 4. Aqua Design Anguilla Limited P. O. Box 1336, The Valley, Anguilla, B.W.I. Anguilla - ----------------------------------------------------- ----------------------------------------------------- ------------------------ - ----------------------------------------------------- ----------------------------------------------------- ------------------------ 5. Aqua Design (Antigua) Limited P.O. Box W-1012, St. Johns, Antigua, W.I. Antigua & Barbuda - ----------------------------------------------------- ----------------------------------------------------- ------------------------ - ----------------------------------------------------- ----------------------------------------------------- ------------------------ 6. Aqua Design Bahamas Limited The Pilot House, Suite #10, East Bay Street, Bahamas Nassau, Bahamas N-1836-A040 - ----------------------------------------------------- ----------------------------------------------------- ------------------------ - ----------------------------------------------------- ----------------------------------------------------- ------------------------ 7. Aqua Design (BVI) Ltd. Road Reef Marina, Road Town, Tortola, B.W.I. British Virgin Islands - ----------------------------------------------------- ----------------------------------------------------- ------------------------ - ----------------------------------------------------- ----------------------------------------------------- ------------------------ 8. Aqua Design (Curacao) N.V. Gosieweg 113, Curacao, Neth. Antilles Curacao, Neth. Antilles - ----------------------------------------------------- ----------------------------------------------------- ------------------------ - ----------------------------------------------------- ----------------------------------------------------- ------------------------ 9. Aqua Design, Inc. 4710 Eisenhower Blvd., Tampa, FL 33634 California - ----------------------------------------------------- ----------------------------------------------------- ------------------------ - ----------------------------------------------------- ----------------------------------------------------- ------------------------ 10. Aqua Design International Limited P.O. Box 1336, The Valley, Anguilla, B.W.I. Anguilla - ----------------------------------------------------- ----------------------------------------------------- ------------------------ - ----------------------------------------------------- ----------------------------------------------------- ------------------------ 11. Aqua Design (Netherlands Antilles) N.V. 85 Wells Road, Unit #26, Cole Bay, St. Maarten Netherlands Antilles - ----------------------------------------------------- ----------------------------------------------------- ------------------------ - ----------------------------------------------------- ----------------------------------------------------- ------------------------ 12. Aqua Design (Saba) N.V. Fort Bay, The Bottom, Saba, Neth. Antilles, Saba, Neth. Antilles - ----------------------------------------------------- ----------------------------------------------------- ------------------------ - ----------------------------------------------------- ----------------------------------------------------- ------------------------ 13. Aqua Design V.I., Inc. St. Thomas, US VI 00802 U. S. Virgin Islands - ----------------------------------------------------- ----------------------------------------------------- ------------------------ - ----------------------------------------------------- ----------------------------------------------------- ------------------------ 14. Condado Holding Limited (Inactive) ------ Anguilla, B.W.I. - ----------------------------------------------------- ----------------------------------------------------- ------------------------ - ----------------------------------------------------- ----------------------------------------------------- ------------------------ 15. David Holding Limited (Inactive) ------ Anguilla, B.W.I. - ----------------------------------------------------- ----------------------------------------------------- ------------------------ - ----------------------------------------------------- ----------------------------------------------------- ------------------------ 16. Elite Chemicals Pty. Ltd. 1873 Lytton Road, Lytton, Brisbane, Queensland Australia 4178, Australia - ----------------------------------------------------- ----------------------------------------------------- ------------------------ - ----------------------------------------------------- ----------------------------------------------------- ------------------------ 17. Favourable Trading Limited D/B/A Ionics, Units #19 & #20, 20 Royal Rock Buildings, Royal Republic Of Ireland Ireland Rock Industrial Estate, Ballybane, Galway, Ireland - ----------------------------------------------------- ----------------------------------------------------- ------------------------ - ----------------------------------------------------- ----------------------------------------------------- ------------------------ 18. Fidelity Purewater, Inc. 5900 Silver Creek Valley Road, California San Jose, CA 95138-1009 - ----------------------------------------------------- ----------------------------------------------------- ------------------------ - ----------------------------------------------------- ----------------------------------------------------- ------------------------ 19. Fidelity Water Systems, Inc. 5900 Silver Creek Valley Road, California San Jose, CA 95138-1009 - ----------------------------------------------------- ----------------------------------------------------- ------------------------ - ----------------------------------------------------- ----------------------------------------------------- ------------------------ 20. Global Water Services, S.A. 12 Waterside Way, London SW17 0XH, England Panama - ----------------------------------------------------- ----------------------------------------------------- ------------------------ - ----------------------------------------------------- ----------------------------------------------------- ------------------------ 21. Ionics Acapulco, S. A. de C.V. Margarita Maza de Juarez #1-A, Mexico Col. Jose Lopez Portillo, Acapulco GRO, Mexico - ----------------------------------------------------- ----------------------------------------------------- ------------------------ - ----------------------------------------------------- ----------------------------------------------------- ------------------------ 22. Ionics Agar Environmental Ltd. Glil Yam, Herzlia, P.O. Box 434, Israel Herzlia B 46103, Israel - ----------------------------------------------------- ----------------------------------------------------- ------------------------ - ----------------------------------------------------- ----------------------------------------------------- ------------------------ 23. Ionics Aqua Design Bonaire N.V. Kaya Carlos Nicholas 3, P.O. Box 381, Karlendijk, Bonaire, Neth. Antilles Bonaire, Neth. Antilles - ----------------------------------------------------- ----------------------------------------------------- ------------------------ - ----------------------------------------------------- ----------------------------------------------------- ------------------------ 24. Ionics Asia Pacific Pte Ltd. 59 Lorong 23 Geylang, Singapore 388383 Singapore - ----------------------------------------------------- ----------------------------------------------------- ------------------------ - ----------------------------------------------------- ----------------------------------------------------- ------------------------ 25. Ionics (Bermuda) Ltd. P. O. Box DV560, Devonshire, Bermuda Bermuda - ----------------------------------------------------- ----------------------------------------------------- ------------------------ - ----------------------------------------------------- ----------------------------------------------------- ----------------------- 26. Ionics Constructors Trinidad Ltd. Building D, Second Floor, Grand Bazaar, Valsayn, Trinidad Trinidad, W.I. - ----------------------------------------------------- ----------------------------------------------------- ------------------------ - ----------------------------------------------------- ----------------------------------------------------- ------------------------ 27. Ionics Enersave Engineering Sdn. Bhd. (55%) Lot 4, Jalan Kemajuan Satu 16/17A Malaysia 40000 Shah Alam, Selangor, Malaysia - ----------------------------------------------------- ----------------------------------------------------- ------------------------ - ----------------------------------------------------- ----------------------------------------------------- ------------------------ 28. Ionics Foreign Sales Corporation Limited 65 Grove Street, Watertown, MA 02472 Jamaica - ----------------------------------------------------- ----------------------------------------------------- ------------------------ - ----------------------------------------------------- ----------------------------------------------------- ------------------------ 29. Ionics France S.A. 121 Av. De 8 Mai 1945, 94170 LePerreu, France France - ----------------------------------------------------- ----------------------------------------------------- ------------------------ - ----------------------------------------------------- ----------------------------------------------------- ------------------------ 30. Ionics Iberica, S.A. Edificio Mercurio, Torre 2050B, 35100 Playa del Spain Ingles, Gran Canaria, Spain - ----------------------------------------------------- ----------------------------------------------------- ------------------------
Schedule 7.18(a) Subsidiaries of Borrower (Continued) - ---------------------------------------------------- -------------------------------------------------- ---------------------------- Jurisdiction of Name Address Incorporation - ---------------------------------------------------- -------------------------------------------------- ---------------------------- - ---------------------------------------------------- -------------------------------------------------- ---------------------------- 31. Ionics Italba, S.p.A. Via Livraghi 1/B, Milano 20126, Italy Italy - ---------------------------------------------------- -------------------------------------------------- ---------------------------- - ---------------------------------------------------- ------------------------------------------------- ----------------------------- 32. Ionics Korea, Inc. Rm. 516, Sung Gee Officetel, 702-13 Delaware Yoksam-Dong, Kangnam-Ku, Seoul 135-080, Korea - ---------------------------------------------------- ------------------------------------------------- ----------------------------- - ---------------------------------------------------- ------------------------------------------------- ----------------------------- 33. Ionics Life Sciences, Inc. 113 Dickinson Road, Suite A5, NJ North Wales, PA 19454-2534 - ---------------------------------------------------- ------------------------------------------------- ----------------------------- - ---------------------------------------------------- -------------------------------------------------- ---------------------------- 34. Ionics-Mega a.s. (80%) (Inactive) ----- Czech Republic - ---------------------------------------------------- -------------------------------------------------- ---------------------------- - ---------------------------------------------------- -------------------------------------------------- ---------------------------- 35. Ionics Nederland, B.V. (Inactive) ----- Netherlands - ---------------------------------------------------- -------------------------------------------------- ---------------------------- - ---------------------------------------------------- -------------------------------------------------- ---------------------------- 36. Ionics Securities Corporation ----- MA (Inactive) - ---------------------------------------------------- -------------------------------------------------- ---------------------------- - ---------------------------------------------------- -------------------------------------------------- ---------------------------- 37. Ionics Taiwan, Inc. 20F-2, No. 130, Juang Jing Road Taiwan His Chih, Taipei County, Taiwan, ROC - ---------------------------------------------------- -------------------------------------------------- ---------------------------- - ---------------------------------------------------- -------------------------------------------------- ---------------------------- 38. Ionics Tampa Bay, Inc. (Inactive) ----- Florida - ---------------------------------------------------- -------------------------------------------------- ---------------------------- - ---------------------------------------------------- -------------------------------------------------- ---------------------------- 39. Ionics (UK) Ltd. 12 Waterside Way, London SW 17 0XH, England England - ---------------------------------------------------- -------------------------------------------------- ---------------------------- - ---------------------------------------------------- -------------------------------------------------- ---------------------------- 40. Ionics Ultrapure Water Corporation 5900 Silver Creek Valley Road, California San Jose, CA 95138-1009 - ---------------------------------------------------- -------------------------------------------------- ---------------------------- - ---------------------------------------------------- -------------------------------------------------- ---------------------------- 41. Ionics Water Resources Ltd. c/o Baratz Gilat, Bar-Nathan & Co. Israel (stock not yet issued) 8 Shaul Hamelech Blvd. Tel Aviv 64733, Israel - ---------------------------------------------------- -------------------------------------------------- ---------------------------- - ---------------------------------------------------- -------------------------------------------------- ---------------------------- 42. Ionics Watertec Pty. Ltd. 5 Perivale Street, Darra, Australia Brisbane 4076, Australia - ---------------------------------------------------- -------------------------------------------------- ---------------------------- - ---------------------------------------------------- -------------------------------------------------- ---------------------------- 43. Miller Holding Limited (Inactive) ----- Anguilla, B.W.I. - ---------------------------------------------------- -------------------------------------------------- ---------------------------- - ---------------------------------------------------- -------------------------------------------------- ---------------------------- 44. Resources Conservation Co. International 3006 Northrup Way, Bellevue, WA 98004-1407 Delaware - ---------------------------------------------------- -------------------------------------------------- ---------------------------- - ---------------------------------------------------- -------------------------------------------------- ---------------------------- 45. Separatech Ltd. 12 Waterside Way, London SW 17 OXH, England England - ---------------------------------------------------- -------------------------------------------------- ---------------------------- - ---------------------------------------------------- -------------------------------------------------- ---------------------------- 46. Separation Technology, Inc. 65 Grove Street, Watertown, MA 02472 Minnesota - ---------------------------------------------------- -------------------------------------------------- ---------------------------- 47. Sievers Instruments, Inc. 6060 Spine Road, Boulder, Colorado 80301 Colorado - ---------------------------------------------------- -------------------------------------------------- ----------------------------
Schedule 7.18(b) Joint Ventures and Partnerships Of Borrower and Its Subsidiaries - --------------------------------------------------------------------------------------- --------- -------------------------- Aqua Cool - Kuwait 49% Kuwait - --------------------------------------------------------------------------------------- --------- -------------------------- - --------------------------------------------------------------------------------------- --------- -------------------------- Aqua Cool - Saudi Arabia 40% Saudi Arabia - --------------------------------------------------------------------------------------- --------- -------------------------- - --------------------------------------------------------------------------------------- --------- -------------------------- Aqua Design Ltd. 39% Cayman Islands - --------------------------------------------------------------------------------------- --------- -------------------------- - --------------------------------------------------------------------------------------- --------- -------------------------- Desalination Company of Trinidad and Tobago Ltd. 40% Trinidad - --------------------------------------------------------------------------------------- --------- -------------------------- - --------------------------------------------------------------------------------------- --------- -------------------------- Grupo Empresarial de Mejoramiento Ambiental, S. de R. L. de C.V. 20% Mexico - --------------------------------------------------------------------------------------- --------- -------------------------- - --------------------------------------------------------------------------------------- --------- -------------------------- Ionics Freshwater Ltd. 50% Barbados - --------------------------------------------------------------------------------------- --------- -------------------------- - --------------------------------------------------------------------------------------- --------- -------------------------- Ionics Water Solutions Lda. 51% Portugal - --------------------------------------------------------------------------------------- --------- -------------------------- - --------------------------------------------------------------------------------------- --------- -------------------------- Ionics-Mega a.s. 80% Czech Republic - --------------------------------------------------------------------------------------- --------- -------------------------- - --------------------------------------------------------------------------------------- --------- -------------------------- Jalal-Ionics Ltd. 40% Bahrain - --------------------------------------------------------------------------------------- --------- -------------------------- - --------------------------------------------------------------------------------------- --------- -------------------------- Toray Membrane America, Inc. 43% MA - --------------------------------------------------------------------------------------- --------- -------------------------- - --------------------------------------------------------------------------------------- --------- -------------------------- Watlington Waterworks Ltd. 26% Bermuda - --------------------------------------------------------------------------------------- --------- -------------------------- - --------------------------------------------------------------------------------------- --------- -------------------------- Yuasa-Ionics Co. Ltd. 50% Japan - --------------------------------------------------------------------------------------- --------- --------------------------
In addition, there are proposed joint venture project companies in Egypt, Israel, Kuwait and Jamaica. Schedule 9.5.2 In December 2000, Borrower sold certain membrane manufacturing equipment to Toray Membrane America, Inc. for a purchase price of $8,500,000. Exhibit 10.3(2) SECURITY AGREEMENT SECURITY AGREEMENT, dated as of March 1, 2001, among (i) IONICS, INCORPORATED, a Massachusetts corporation (the "Borrower"), (ii) AQUA COOL ENTERPRISES, INC., a Massachusetts corporation, AQUA DESIGN, INC., a California corporation, FIDELITY PUREWATER, INC., a California corporation, FIDELITY WATER SYSTEMS, INC., a California corporation, IONICS KOREA, INC., a Delaware corporation, IONICS LIFE SCIENCES, INC., a New Jersey corporation, IONICS ULTRAPURE WATER CORPORATION, a California corporation, RESOURCES CONSERVATION CO. INTERNATIONAL, a Delaware corporation, SEPARATION TECHNOLOGY, INC, a Minnesota corporation, and SIEVERS INSTRUMENTS, INC., a Colorado corporation (collectively, the "Guarantors" and together with the Borrower, the "Companies"), and (iii) FLEET NATIONAL BANK, a national banking association, as agent (hereinafter, in such capacity, the "Agent") for itself and other banking institutions (hereinafter, collectively, the "Banks") which are or may become parties to a Second Amended and Restated Revolving Credit Agreement, dated as of July 28, 2000July 28, 2000 (as amended and in effect from time to time, the "Credit Agreement"), among the Borrower, the Banks and the Agent. WHEREAS, pursuant to that certain Guaranty, dated as of July 28, 2000, each of the Guarantors has guaranteed the Obligations of the Borrower under the Credit Agreement; WHEREAS, the Borrower and the Guarantors are members of a group of related corporations, the success of any one of which is dependent in part on the success of the other members of such group; WHEREAS, the Guarantors expect to receive substantial direct and indirect benefits from the extensions of credit to the Borrower by the Banks pursuant to the Credit Agreement (which benefits are hereby acknowledged); WHEREAS, it is a condition precedent to the Banks' making any further loans or otherwise extending credit to the Borrower under the Credit Agreement that the Companies execute and deliver to the Agent, for the benefit of the Banks and the Agent, a security agreement in substantially the form hereof; and WHEREAS, each of the Companies wishes to grant security interests in favor of the Agent, for the benefit of the Banks and the Agent, as herein provided; NOW, THEREFORE, in consideration of the promises contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Definitions. All capitalized terms used herein without definitions shall have the respective meanings provided therefor in the Credit Agreement. All terms defined in the Uniform Commercial Code of the The Commonwealth of Massachusetts and used herein shall have the same definitions herein as specified therein; provided, however, that the term "instrument" shall be such term as defined in Article 9 of the Uniform Commercial Code of such jurisdiction rather than Article 3. 2. Grant of Security Interest. 2.1. Collateral Granted. Each of the Companies hereby grants to the Agent, for the benefit of the Banks and the Agent, to secure the payment and performance in full of all of the Obligations, a security interest in and so pledges and assigns to the Agent, for the benefit of the Banks and the Agent, the following properties, assets and rights of each such Company, wherever located, whether now owned or hereafter acquired or arising, and all proceeds and products thereof (all of the same being hereinafter called the "Collateral"): All personal and fixture property of every kind and nature including without limitation all furniture, fixtures, equipment, raw materials, inventory, other goods, accounts, contract rights, rights to the payment of money, insurance refund claims and all other insurance claims and proceeds, tort claims, chattel paper, documents, instruments, securities and other investment property, deposit accounts, rights to proceeds of letters of credit and all general intangibles including, without limitation, all tax refund claims, license fees, patents, patent applications, trademarks, trademark applications, trade names, copyrights, copyright applications, rights to sue and recover for past infringement of patents, trademarks and copyrights, computer programs, computer software, engineering drawings, service marks, customer lists, goodwill, and all licenses, permits, agreements of any kind or nature pursuant to which such Company possesses, uses or has authority to possess or use property (whether tangible or intangible) of others or others possess, use or have authority to possess or use property (whether tangible or intangible) of such Company, and all recorded data of any kind or nature, regardless of the medium of recording including, without limitation, all software, writings, plans, specifications and schematics. 2.2. Delivery of Instruments, etc. (a) Pursuant to the terms hereof, each of the Companies has endorsed, assigned and delivered to the Agent all negotiable or non-negotiable instruments, certificated securities and chattel paper pledged by it hereunder, together with instruments of transfer or assignment duly executed in blank as the Agent may have specified. In the event that any Company shall, after the date of this Agreement, acquire any other negotiable or non-negotiable instruments, certificated securities or chattel paper to be pledged by it hereunder, such Company shall forthwith endorse, assign and deliver the same to the Agent, accompanied by such instruments of transfer or assignment duly executed in blank as the Agent may from time to time specify. (b) To the extent that any securities now or hereafter acquired by any Company are uncertificated and are issued to such Company or its nominee directly by the issuer thereof, such Company shall cause the issuer to note on its books the security interest of the Agent in such securities and shall cause the issuer, pursuant to an agreement in form and substance satisfactory to the Agent, to agree to comply with instructions from the Agent as to such securities, without further consent of such Company or such nominee. To the extent that any securities, whether certificated or uncertificated, or other investment property now or hereafter acquired by any Company are held by such Company or its nominee through a securities intermediary or commodity intermediary, such Company shall, at the request of the Agent, cause such securities intermediary or (as the case may be) commodity intermediary, pursuant to an agreement in form and substance satisfactory to the Agent, to agree to comply with entitlement orders or other instructions from the Agent to such securities intermediary as to such securities or other investment property, or (as the case may be) to apply any value distributed on account of any commodity contract as directed by the Agent to such commodity intermediary, without further consent of such Company or such nominee. The Agent agrees with each such Company that the Agent shall not give any such entitlement orders or instructions or directions to any such issuer, securities intermediary or commodity intermediary unless an Event of Default has occurred and is continuing and the Agent has elected to exercise its rights and remedies as contemplated by ss.14. (c) To the extent that any Company is a beneficiary under any written letter of credit now or hereafter issued in favor of such Company, such Company shall deliver such letter of credit to the Agent. The Agent shall from time to time, at the request and expense of such Company, make such arrangements with such Company as are in the Agent's reasonable judgment necessary and appropriate so that such Company may make any drawing to which such Company is entitled under such letter of credit, without impairment of the Agent's perfected security interest in such Company's rights to proceeds of such letter of credit or in the actual proceeds of such drawing. At the Agent's request, such Company shall, for any letter of credit, whether or not written, now or hereafter issued in favor of such Company as beneficiary, execute and deliver to the issuer and any confirmer of such letter of credit an assignment of proceeds form, in favor of the Agent and satisfactory to the Agent and such issuer or (as the case may be) such confirmer, requiring the proceeds of any drawing under such letter of credit to be paid directly to the Agent during the continuance of any Event of Default for application as provided in the Credit Agreement. 2.3. Excluded Collateral. Notwithstanding the foregoing provisions of this ss.2, such grant of security interest, pledge and assignment shall not extend to, and the term "Collateral" shall not include, (a) real property, motor vehicles, boats and other property subject to a certificate of title or other registration statute of the United States, any state or jurisdiction or the stock of any of the Guarantors and (b) any chattel paper and general intangibles which are now or hereafter held by any Company as licensee, lessee or otherwise, to the extent that (i) such chattel paper and general intangibles are not assignable or capable of being encumbered as a matter of law or under the terms of the license, lease or other agreement applicable thereto (but solely to the extent that any such restriction shall be enforceable under applicable law), without the consent of the licensor or lessor thereof or other applicable party thereto and (ii) such consent has not been obtained; provided, however, that the foregoing grant of security interest shall extend to, and the term "Collateral" shall include, (A) any and all proceeds of such chattel paper and general intangibles to the extent that the assignment or encumbering of such proceeds is not so restricted and (B) upon any such licensor, lessor or other applicable party consent with respect to any such otherwise excluded chattel paper or general intangibles being obtained, thereafter such chattel paper or general intangibles as well as any and all proceeds thereof that might have theretofore have been excluded from such grant of a security interest and the term "Collateral". 3. Title to Collateral, etc. Each of the Companies is the owner of the Collateral pledged by such Company free from any adverse lien, security interest or other encumbrance, except for the security interest created by this Agreement and other liens permitted by the Credit Agreement. None of the Collateral constitutes, or is the proceeds of, "farm products" as defined in ss.9-109(3) of the Uniform Commercial Code of the The Commonweath of Massachusetts. None of the account debtors in respect of any accounts, chattel paper or general intangibles and none of the obligors in respect of any instruments included in the Collateral is a governmental authority subject to the Federal Assignment of Claims Act. 4. Continuous Perfection. Each Company's place of business or, if more than one, chief executive office is indicated on the Perfection Certificate delivered to the Agent by such Company (each a "Perfection Certificate"). None of the Companies will change the same, or the name, identity or corporate structure of such Company in any manner, without providing at least thirty (30) days prior written notice to the Agent. The Collateral (other than inventory and obsolete assets sold or otherwise disposed of in the ordinary course of business consistent with past practices), to the extent not delivered to the Agent pursuant to ss.2.2, will be kept at those locations listed on the Perfection Certificates and the Companies will not remove the Collateral from such locations, without providing at least thirty (30) days prior written notice to the Agent. 5. No Liens. Except for the security interest herein granted and liens permitted by the Credit Agreement, each Company shall be the owner of its Collateral free from any lien, security interest or other encumbrance, and such Company shall defend the same against all claims and demands of all persons at any time claiming the same or any interests therein adverse to the Agent or any of the Banks. No Company shall pledge, mortgage or create, or suffer to exist a security interest in the Collateral in favor of any person other than the Agent, for the benefit of the Banks and the Agent, except for liens permitted by the Credit Agreement. 6. No Transfers. No Company will sell or offer to sell or otherwise transfer the Collateral or any interest therein except for (i) sales and leases of inventory in the ordinary course of business and (ii) sales or other dispositions of obsolescent items of equipment in the ordinary course of business consistent with past practices. 7. Insurance. 7.1. Maintenance of Insurance. Each of the Companies will maintain with financially sound and reputable insurers insurance with respect to its properties and business against such casualties and contingencies as shall be in accordance with general practices of businesses engaged in similar activities in similar geographic areas. Such insurance shall be in such minimum amounts that such Company will not be deemed a co-insurer under applicable insurance laws, regulations and policies and otherwise shall be in such amounts, contain such terms, be in such forms and be for such periods as may be reasonably satisfactory to the Agent. In addition, all such insurance shall be payable to the Agent as loss payee under a "standard" or "New York" loss payee clause for the benefit of the Banks and the Agent. Without limiting the foregoing, such Company will (i) keep all of its physical property insured with casualty or physical hazard insurance on an "all risks" basis, with broad form flood and earthquake coverages and electronic data processing coverage, with a full replacement cost endorsement and an "agreed amount" clause in an amount equal to 100% of the full replacement cost of such property, (ii) maintain all such workers' compensation or similar insurance as may be required by law and (iii) maintain, in amounts equal to those generally maintained by businesses engaged in similar activities in similar geographic areas, general public liability insurance against claims of bodily injury, death or property damage occurring, on, in or about the properties of such Company; business interruption insurance; and product liability insurance. 7.2. Insurance Proceeds. The proceeds of any casualty insurance in respect of any casualty loss of any of the Collateral shall, subject to the rights, if any, of other parties with a prior interest in the property covered thereby, (i) so long as no Event of Default has occurred and is continuing and to the extent that the amount of such proceeds is less than $500,000, be disbursed to the Company which has suffered the loss for direct application by such Company solely to the repair or replacement of such Company's property so damaged or destroyed and (ii) in all other circumstances, be held by the Agent as cash collateral for the Obligations. The Agent may, at its sole option, disburse from time to time all or any part of such proceeds so held as cash collateral, upon such terms and conditions as the Agent may reasonably prescribe, for direct application by such Company solely to the repair or replacement of such Company's property so damaged or destroyed, or the Agent may apply all or any part of such proceeds to the Obligations with the Total Commitment (if not then terminated) being reduced by the amount so applied to the Obligations. 7.3. Notice of Cancellation, etc. All policies of insurance shall provide for at least thirty (30) days prior written cancellation notice to the Agent. In the event of failure by any Company to provide and maintain insurance as herein provided, the Agent may, at its option, provide such insurance and charge the amount thereof to the Borrower. Each Company shall furnish the Agent with certificates of insurance and policies evidencing compliance with the foregoing insurance provision. 8. Maintenance of Collateral; Compliance with Law. Each of the Companies will keep the Collateral in good order and repair (ordinary wear and tear and insured casualties excepted) and will not use the same in violation of law or any policy of insurance thereon. The Agent, or its designee, may inspect the Collateral at any reasonable time during normal business hours and, so long as no Default or Event of Default shall have occurred and be continuing, upon prior notice to the applicable Company, wherever located. The Company will pay promptly when due all taxes, assessments, governmental charges and levies upon the Collateral or incurred in connection with the use or operation of such Collateral or incurred in connection with this Agreement unless such taxes, assessments, governmental charges or levies are being contested in good faith by any of the Companies and for which adequate reserves have been set aside on the books of such Company. Each of the Companies has at all times operated, and such Company will continue to operate, its business in material compliance with all applicable provisions of the federal Fair Labor Standards Act, as amended, and with all applicable provisions of federal, state and local statutes and ordinances dealing with the control, shipment, storage or disposal of hazardous materials or substances. 9. Collateral Protection Expenses; Preservation of Collateral. 9.1. Expenses Incurred by Agent. In its discretion, the Agent may discharge taxes and other encumbrances at any time levied or placed on any of the Collateral (unless such taxes or other encumbrances are being contested in good faith by any of the Companies and for which adequate reserves have been set aside on the books of such Company), make repairs thereto during the continuance of an Event of Default or any time if the Agent reasonably believes such repairs are necessary to prevent the loss or deterioration of such Collateral, and pay any necessary filing fees. The Companies agree to reimburse the Agent on demand for any and all expenditures so made. The Agent shall have no obligation to any Company to make any such expenditures, nor shall the making thereof relieve any Company of any default. 9.2. Agent's Obligations and Duties. Anything herein to the contrary notwithstanding, each of the Companies shall remain liable under each contract or agreement comprised in the Collateral to be observed or performed by such Company thereunder. Neither the Agent nor any Bank shall have any obligation or liability under any such contract or agreement by reason of or arising out of this Agreement or the receipt by the Agent or any Bank of any payment relating to any of the Collateral, nor shall the Agent or any Bank be obligated in any manner to perform any of the obligations of such Company under or pursuant to any such contract or agreement, to make inquiry as to the nature or sufficiency of any payment received by the Agent or any Bank in respect of the Collateral or as to the sufficiency of any performance by any party under any such contract or agreement, to present or file any claim, to take any action to enforce any performance or to collect the payment of any amounts which may have been assigned to the Agent or to which the Agent or any Bank may be entitled at any time or times. The Agent's sole duty with respect to the custody, safe keeping and physical preservation of the Collateral in its possession, under ss.9-207 of the Uniform Commercial Code of the The Commonwealth of Massachusetts or otherwise, shall be to deal with such Collateral in the same manner as the Agent deals with similar property for its own account. 10. Securities and Deposits. The Agent may at any time, at its option, transfer to itself or any nominee any securities constituting Collateral, and if an Event of Default shall have occurred and be continuing, receive any income thereon and hold such income as additional Collateral or apply it to the Obligations. If an Event of Default shall have occurred and be continuing, whether or not any Obligations are due, the Agent may demand, sue for, collect, or make any settlement or compromise which it deems desirable with respect to the Collateral. If an Event of Default shall have occurred and be continuing, regardless of the adequacy of Collateral or any other security for the Obligations, any deposits or other sums at any time credited by or due from the Agent or any Bank to any of the Companies may at any time be applied to or set off against any of the Obligations. 11. Notification to Account Debtors and Other Obligors. If an Event of Default shall have occurred and be continuing, each of the Companies shall, at the request of the Agent, notify account debtors on accounts, chattel paper and general intangibles of such Company and obligors on instruments for which such Company is an obligee of the security interest of the Agent in any account, chattel paper, general intangible or instrument and that payment thereof is to be made directly to the Agent or to any financial institution designated by the Agent as the Agent's agent therefor, and the Agent may itself, if an Event of Default shall have occurred and be continuing, without notice to or demand upon any Company, so notify account debtors and obligors. After the making of such a request or the giving of any such notification, each such Company shall hold any proceeds of collection of accounts, chattel paper, general intangibles and instruments received by such Company as trustee for the Agent, for the benefit of the Banks and the Agent, without commingling the same with other funds of such Company and shall turn the same over to the Agent in the identical form received, together with any necessary endorsements or assignments. The Agent shall apply the proceeds of collection of accounts, chattel paper, general intangibles and instruments received by the Agent to the Obligations, such proceeds to be immediately entered after final payment in cash or solvent credits of the items giving rise to them. 12. Further Assurances. Each of the Companies, at its own expense, shall do, make, execute and deliver all such additional and further acts, things, deeds, assurances and instruments as the Agent may reasonably require more completely to vest in and assure to the Agent and the Banks their respective rights hereunder or in any of the Collateral, including, without limitation, (i) executing, delivering and, where appropriate, filing financing statements and continuation statements under the Uniform Commercial Code, (ii) obtaining governmental and other third party consents and approvals, including without limitation any consent of any licensor, lessor or other applicable party referred to in ss.2.3, (iii) using its reasonable best efforts to obtain waivers from mortgagees and landlords and (iv) taking all actions required by Sections 8-313 and 8-321 of the Uniform Commercial Code (1990) or Sections 8-106 and 9-115 of the Uniform Commercial Code (1994), as applicable in each relevant jurisdiction, with respect to certificated and uncertificated securities. 13. Power of Attorney. 13.1. Appointment and Powers of Agent. Each of the Companies hereby irrevocably constitutes and appoints the Agent and any officer or agent thereof, with full power of substitution, as its true and lawful attorneys-in-fact with full irrevocable power and authority in the place and stead of such Company or in the Agent's own name, for the purpose of carrying out the terms of this Agreement, to take any and all appropriate action and to execute any and all documents and instruments that may be necessary or desirable to accomplish the purposes of this Agreement and, without limiting the generality of the foregoing, hereby gives said attorneys the power and right, on behalf of such Company, without notice to or assent by such Company, to do the following: (a) upon the occurrence and during the continuance of an Event of Default, generally to sell, transfer, pledge, make any agreement with respect to or otherwise deal with any of the Collateral in such manner as is consistent with the Uniform Commercial Code of the The Commonwealth of Massachusetts and as fully and completely as though the Agent were the absolute owner thereof for all purposes, and to do at such Company's expense, at any time, or from time to time, all acts and things which the Agent deems necessary to protect, preserve or realize upon the Collateral and the Agent's security interest therein, in order to effect the intent of this Agreement, all as fully and effectively as such Company might do, including, without limitation, (i) the filing and prosecuting of registration and transfer applications with the appropriate federal or local agencies or authorities with respect to trademarks, copyrights and patentable inventions and processes, (ii) upon written notice to such Company, the exercise of voting rights with respect to voting securities, which rights may be exercised, if the Agent so elects, with a view to causing the liquidation in a commercially reasonable manner of assets of the issuer of any such securities and (iii) the execution, delivery and recording, in connection with any sale or other disposition of any Collateral, of the endorsements, assignments or other instruments of conveyance or transfer with respect to such Collateral; and (b) to file such financing statements with respect hereto, with or without such Company's signature, or a photocopy of this Agreement in substitution for a financing statement, as the Agent may deem appropriate and to execute in such Company's name such financing statements and amendments thereto and continuation statements which may require such Company's signature. 13.2. Ratification by Company. To the extent permitted by law, each of the Companies hereby ratifies all that said attorneys shall lawfully do or cause to be done by virtue hereof. This power of attorney is a power coupled with an interest and shall be irrevocable. 13.3. No Duty on Agent. The powers conferred on the Agent hereunder are solely to protect the interests of the Agent and the Banks in the Collateral and shall not impose any duty upon the Agent to exercise any such powers. The Agent shall be accountable only for the amounts that it actually receives as a result of the exercise of such powers and neither it nor any of its officers, directors, employees or agents shall be responsible to such Company for any act or failure to act, except for the Agent's own gross negligence or willful misconduct. 14. Remedies. If an Event of Default shall have occurred and be continuing, the Agent may, without notice to or demand upon any Company, declare this Agreement to be in default, and the Agent shall thereafter have in any jurisdiction in which enforcement hereof is sought, in addition to all other rights and remedies, the rights and remedies of a secured party under the Uniform Commercial Code, including, without limitation, the right to take possession of the Collateral, and for that purpose the Agent may, so far as such Company can give authority therefor, enter upon any premises on which the Collateral may be situated and remove the same therefrom. The Agent may in its discretion require such Company to assemble all or any part of the Collateral at such location or locations within the state(s) of such Company's principal office(s) or at such other locations as the Agent may designate. Unless the Collateral is perishable or threatens to decline speedily in value or is of a type customarily sold on a recognized market, the Agent shall give to such Company at least seven (7) Business Days prior written notice of the time and place of any public sale of Collateral or of the time after which any private sale or any other intended disposition is to be made. Each of the Companies hereby acknowledges that seven (7) Business Days prior written notice of such sale or sales shall be reasonable notice. In addition, each of the Companies waives any and all rights that it may have to a judicial hearing in advance of the enforcement of any of the Agent's rights hereunder, including, without limitation, its right following an Event of Default to take immediate possession of the Collateral and to exercise its rights with respect thereto. To the extent that any of the Obligations are to be paid or performed by a person other than one of the Companies, each of the Companies waives and agrees not to assert any rights or privileges which it may have under ss.9-112 of the Uniform Commercial Code of the The Commonwealth of Massachusetts. 15. No Waiver, etc. Except for notices required hereunder or under the Credit Agreement, each of the Companies waives demand, notice, protest, notice of acceptance of this Agreement, notice of loans made, credit extended, Collateral received or delivered or other action taken in reliance hereon and all other demands and notices of any description. With respect to both the Obligations and the Collateral, each of the Companies assents to any extension or postponement of the time of payment or any other indulgence, to any substitution, exchange or release of or failure to perfect any security interest in any Collateral, to the addition or release of any party or person primarily or secondarily liable, to the acceptance of partial payment thereon and the settlement, compromising or adjusting of any thereof, all in such manner and at such time or times as the Agent may deem advisable. The Agent shall have no duty as to the collection or protection of the Collateral or any income thereon, nor as to the preservation of rights against prior parties, nor as to the preservation of any rights pertaining thereto beyond the safe custody thereof as set forth in ss.9.2. The Agent shall not be deemed to have waived any of its rights upon or under the Obligations or the Collateral unless such waiver shall be in writing and signed by the Agent with the consent of the Majority Banks. No delay or omission on the part of the Agent in exercising any right shall operate as a waiver of such right or any other right. A waiver on any one occasion shall not be construed as a bar to or waiver of any right on any future occasion. All rights and remedies of the Agent with respect to the Obligations or the Collateral, whether evidenced hereby or by any other instrument or papers, shall be cumulative and may be exercised singularly, alternatively, successively or concurrently at such time or at such times as the Agent deems expedient. 16. Marshalling. Neither the Agent nor any Bank shall be required to marshal any present or future collateral security (including but not limited to this Agreement and the Collateral) for, or other assurances of payment of, the Obligations or any of them or to resort to such collateral security or other assurances of payment in any particular order, and all of the rights of the Agent hereunder and of the Agent or any Bank in respect of such collateral security and other assurances of payment shall be cumulative and in addition to all other rights, however existing or arising. To the extent that it lawfully may, each of the Companies hereby agrees that it will not invoke any law relating to the marshalling of collateral which might cause delay in or impede the enforcement of the Agent's rights under this Agreement or under any other instrument creating or evidencing any of the Obligations or under which any of the Obligations is outstanding or by which any of the Obligations is secured or payment thereof is otherwise assured, and, to the extent that it lawfully may, each of the Companies hereby irrevocably waives the benefits of all such laws. 17. Proceeds of Dispositions; Expenses. Each of the Companies shall pay to the Agent on demand any and all expenses, including reasonable attorneys' fees and disbursements, incurred or paid by the Agent in protecting, preserving or enforcing the Agent's rights under or in respect of any of the Obligations or any of the Collateral. After deducting all of said expenses, the residue of any proceeds of collection or sale of the Obligations or Collateral shall, to the extent actually received in cash, be applied to the payment of the Obligations in such order or preference as the Bank may determine or in such order or preference as is provided in the Credit Agreement, proper allowance and provision being made for any Obligations not then due. Upon the final payment and satisfaction in full of all of the Obligations and after making any payments required by Section 9-504(1)(c) of the Uniform Commercial Code of the The Commonwealth of Massachusetts, any excess shall be returned to the applicable Company, and such Company shall remain liable for any deficiency in the payment of the Obligations. 18. Overdue Amounts. Until paid, all amounts due and payable by the Companies hereunder shall be a debt secured by the Collateral and shall bear, whether before or after judgment, interest at the rate of interest for overdue principal set forth in the Credit Agreement. 19. Governing Law; Consent to Jurisdiction. THIS AGREEMENT IS INTENDED TO TAKE EFFECT AS A SEALED INSTRUMENT AND SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE THE COMMONWEALTH OF MASSACHUSETTS. Each of the Companies agrees that any suit for the enforcement of this Agreement may be brought in the courts of the The Commonwealth of Massachusetts or any federal court sitting therein and consents to the non-exclusive jurisdiction of such court and to service of process in any such suit being made upon such Company by mail at the address specified under its signature on the signature pages hereto. Each of the Companies hereby waives any objection that it may now or hereafter have to the venue of any such suit or any such court or that such suit is brought in an inconvenient court. 20. Waiver of Jury Trial. EACH OF THE COMPANIES, THE AGENT AND THE BANKS WAIVES ITS RIGHT TO A JURY TRIAL WITH RESPECT TO ANY ACTION OR CLAIM ARISING OUT OF ANY DISPUTE IN CONNECTION WITH THIS AGREEMENT, ANY RIGHTS OR OBLIGATIONS HEREUNDER OR THE PERFORMANCE OF ANY SUCH RIGHTS OR OBLIGATIONS. Except as prohibited by law, each of the Companies waives any right which it may have to claim or recover in any litigation referred to in the preceding sentence any special, exemplary, punitive or consequential damages or any damages other than, or in addition to, actual damages. Each of the Companies (i) certifies that neither the Agent or any Bank nor any representative, agent or attorney of the Agent or any Bank has represented, expressly or otherwise, that the Agent or any Bank would not, in the event of litigation, seek to enforce the foregoing waivers and (ii) acknowledges that, in entering into the Credit Agreement and the other Loan Documents to which the Agent or any Bank is a party, the Agent and the Banks are relying upon, among other things, the waivers and certifications contained in this ss.20. 21. Concerning Revised Article 9 of the Uniform Commercial Code. The parties acknowledge and agree to the following provisions of this Agreement in anticipation of the possible application, in one or more jurisdictions to the transactions contemplated hereby, of the revised Article 9 of the Uniform Commercial Code in the form or substantially in the form approved by the American Law Institute and the National Conference of Commissioners on Uniform State Law and contained in the 1999 official text of Revised Article 9 ("Revised Article 9"). 21.1. Attachment. In applying the law of any jurisdiction in which Revised Article 9 is in effect, the Collateral (other than Collateral excluded by the terms of ss.2.3) is all assets of the Companies, whether or not within the scope of Revised Article 9. The Collateral shall include, without limitation, the following categories of assets as defined in Revised Article 9: goods (including inventory, equipment and any accessions thereto), instruments (including promissory notes), documents, accounts (including health-care-insurance receivables), chattel paper (whether tangible or electronic), deposit accounts, letter-of-credit rights (whether or not the letter of credit is evidenced by a writing), commercial tort claims, securities and all other investment property, general intangibles (including payment intangibles and software), supporting obligations and any and all proceeds of any thereof, wherever located, whether now owned and hereafter acquired. If any Company shall at any time, whether or not Revised Article 9 is in effect in any particular jurisdiction, acquire a commercial tort claim, as defined in Revised Article 9, such Company shall immediately notify the Agent in a writing signed by such Company of the brief details thereof and grant to the Agent in such writing a security interest therein and in the proceeds thereof, all upon the terms of this Agreement, with such writing to be in form and substance satisfactory to the Agent. 21.2. Perfection by Filing. The Agent may at any time and from time to time, pursuant to the provisions of ss.13, file financing statements, continuation statements and amendments thereto that describe the Collateral as all assets of the applicable Company or words of similar effect and which contain any other information required by Part 5 of Revised Article 9 for the sufficiency or filing office acceptance of any financing statement, continuation statement or amendment, including whether such Company is an organization, the type of organization and any organization identification number issued to such Company. Each of the Companies agrees to furnish any such information to the Agent promptly upon request. Any such financing statements, continuation statements or amendments may be signed by the Agent on behalf of such Company, as provided in ss.13, and may be filed at any time in any jurisdiction whether or not Revised Article 9 is then in effect in that jurisdiction. 21.3. Other Perfection, etc. Each of the Companies shall at any time and from time to time, whether or not Revised Article 9 is in effect in any particular jurisdiction, take such steps as the Agent may reasonably request for the Agent (a) to obtain an acknowledgement, in form and substance satisfactory to the Agent, of any bailee having possession of any of the Collateral that the bailee holds such Collateral for the Agent, (b) to obtain "control" of any investment property, deposit accounts, letter-of-credit rights or electronic chattel paper (as such terms are defined in Revised Article 9 with corresponding provisions in Rev. ss.ss. 9-104, 9-105, 9-106 and 9-107 relating to what constitutes "control" for such items of Collateral), with any agreements establishing control to be in form and substance satisfactory to the Agent, and (c) otherwise to insure the continued perfection and priority of the Agent's security interest in any of the Collateral and of the preservation of its rights therein, whether in anticipation and following the effectiveness of Revised Article 9 in any jurisdiction. 21.4. Other Provisions. In applying the law of any jurisdiction in which Revised Article 9 is in effect, the following references to sections in this Agreement to existing Article 9 of that jurisdiction shall be to the Revised Article 9 Section of that jurisdiction indicated below:
@@ ------------------------------------- ----------------------------------- ----------------------------------- Agreement Section Existing Article 9 Revised Article 9 ------------------------------------- ----------------------------------- ----------------------------------- 3 ss. 9-109(3) Rev.ss.9-102(a)(34) ------------------------------------- ----------------------------------- ----------------------------------- ------------------------------------- ----------------------------------- ----------------------------------- 9.2 ss. 9-207 Rev.ss.9-207 ------------------------------------- ----------------------------------- ----------------------------------- ------------------------------------- ----------------------------------- ----------------------------------- 12 ss.ss.8-106 and 9-115 (1994) Rev.ss.ss.8-106 and 9-106 ------------------------------------- ----------------------------------- ----------------------------------- ------------------------------------- ----------------------------------- ----------------------------------- 17 ss. 9-504(1)(c) Rev.ss.ss.9-608(a)(1)(C) and 9-615(a)(3) ------------------------------------- ----------------------------------- ----------------------------------- @@
21.5. Savings Clause. Nothing contained in this ss.21 shall be construed to narrow the scope of the Agent's security interest in any of the Collateral or the perfection or priority thereof or to impair or otherwise limit any of the rights, powers, privileges or remedies of the Agent or any Bank hereunder except (and then only to the extent) mandated by Revised Article 9 to the extent then applicable. 22. Miscellaneous. The headings of each section of this Agreement are for convenience only and shall not define or limit the provisions thereof. This Agreement and all rights and obligations hereunder shall be binding upon each of the Companies and its respective successors and assigns, and shall inure to the benefit of the Agent, the Banks and their respective successors and assigns. If any term of this Agreement shall be held to be invalid, illegal or unenforceable, the validity of all other terms hereof shall in no way be affected thereby, and this Agreement shall be construed and be enforceable as if such invalid, illegal or unenforceable term had not been included herein. Each of the Companies acknowledges receipt of a copy of this Agreement. IN WITNESS WHEREOF, intending to be legally bound, each of the Companies has caused this Agreement to be duly executed as of the date first above written. IONICS, INCORPORATED By: /s/ Daniel M. Kuzmak --------------------------------- Name: Daniel M. Kuzmak Title: Vice President, Finance and Chief Financial officer Address: 65 Grove Street Watertown, MA 02472 AQUA COOL ENTERPRISES, INC. By: /s/ Theodore G. Papastavros ----------------------------------- Name: Theodore G. Papastavros Title: Treasurer Address: 65 Grove Street Watertown, MA 02472 AQUA DESIGN, INC. By: /s/ Edward J. Cichon -------------------------------------- Name: Edward J. Cichon Title: President Address: 4710 Eisenhower Boulevard Tampa, FL 33634 FIDELITY PUREWATER, INC. By: /s/ Anthony DiPaola --------------------------------------- Name: Anthony DiPaloa Title: Treasurer Address: 5900 Silver Creek Valley Road San Jose, CA 95138-1009 FIDELITY WATER SYSTEMS, INC. By: /s/ Anthony DiPaola ----------------------------------------- Name: Anthony DiPaola Title: Treasurer Address: 5900 Silver Creek Valley Road San Jose, CA 95138-1009 IONICS KOREA, INC. By: /s/ Arthur L. Goldstein ---------------------------------------- Name: Arthur L. Goldstein Title: President Address: Rm. 516, Sung Gee Officetel 702-13 Yonksam-Dong Kangnam-Ku, Seoul 135-080, Korea IONICS LIFE SCIENCES, INC. By: /s/ Theodore G. Papastavros ----------------------------------- Name: Theodore G. Papastavros Title: Treasurer Address: 113 Dickinson Road, Suite A-5 North Wales, PA 19454-2534 IONICS ULTRAPURE WATER CORPORATION By: /s/ Stephen Korn --------------------------------------- Name: Stephen Korn Title: Secretary Address: 5900 Silver Creek Valley Road San Jose, CA 95138-1009 RESOURCES CONSERVATION CO. INTERNATIONAL By: /s/ Stephen Korn --------------------------------------- Name: Stephen Korn Title: Secretary Address: 3006 Northrup Way Bellevue, WA 98004-1407 SEPARATION TECHNOLOGY INC. By: /s/ Ark W. Pang --------------------------------------- Name: Ark W. Pang Title: President Address: 1983 Sloan Place St. Paul, MN 55117 SIEVERS INSTRUMENTS, INC. By: /s/ Stephen Korn --------------------------------------- Name: Stephen Korn Title: Secretary Address: 6060 Spine Road Boulder, CO 80301 Accepted: FLEET NATIONAL BANK, as Agent By: /s/ John C. Dunne -------------------------- John C. Dunne, Senior Vice President CERTIFICATE OF ACKNOWLEDGMENT COMMONWEALTH OF MASSACHUSETTS ) ) ss. COUNTY OF SUFFOLK ) Before me, the undersigned, a Notary Public in and for the county aforesaid, on this 1st day of March, 2001, personally appeared Daniel M. Kuzmak to me known personally, and who, being by me duly sworn, deposes and says that he is the Vice President, Finance and Chief Financial Officer of Ionics, Incorporated, and that said instrument was signed and sealed on behalf of said corporation by authority of its Board of Directors, and said Daniel M. Kuzmak acknowledged said instrument to be the free act and deed of said corporation. /s/ Stephen Korn ------------------------------------- Notary Public My commission expires: 9/9/2005 CERTIFICATE OF ACKNOWLEDGMENT COMMONWEALTH OF MASSACHUSETTS ) ) ss. COUNTY OF SUFFOLK ) Before me, the undersigned, a Notary Public in and for the county aforesaid, on this 1st day of March, 2001, personally appeared Theodore G. Papastavros to me known personally, and who, being by me duly sworn, deposes and says that he is the Treasurer of Aqua Cool Enterprises, Inc., and that said instrument was signed and sealed on behalf of said corporation by authority of its Board of Directors, and said Theodore G. Papastavros acknowledged said instrument to be the free act and deed of said corporation. /s/ Stephen Korn ------------------------------------- Notary Public My commission expires: 9/9/2005 CERTIFICATE OF ACKNOWLEDGMENT COMMONWEALTH OF MASSACHUSETTS ) ) ss. COUNTY OF SUFFOLK ) Before me, the undersigned, a Notary Public in and for the county aforesaid, on this 1st day of March, 2001, personally appeared Edward J. Cichon to me known personally, and who, being by me duly sworn, deposes and says that he is the President of Aqua Design, Inc., and that said instrument was signed and sealed on behalf of said corporation by authority of its Board of Directors, and said Edward J. Cichon acknowledged said instrument to be the free act and deed of said corporation. /s/ Stephen Korn ------------------------------------- Notary Public My commission expires: 9/9/2005 CERTIFICATE OF ACKNOWLEDGMENT COMMONWEALTH OF MASSACHUSETTS ) ) ss. COUNTY OF SUFFOLK ) Before me, the undersigned, a Notary Public in and for the county aforesaid, on this 1st day of March, 2001, personally appeared Anthony DiPaola to me known personally, and who, being by me duly sworn, deposes and says that he is the Treasurer of Fidelity Purewater, Inc., and that said instrument was signed and sealed on behalf of said corporation by authority of its Board of Directors, and said Anthony DiPaola acknowledged said instrument to be the free act and deed of said corporation. /s/ Stephen Korn ------------------------------------- Notary Public My commission expires: 9/9/2005 CERTIFICATE OF ACKNOWLEDGMENT COMMONWEALTH OF MASSACHUSETTS ) ) ss. COUNTY OF SUFFOLK ) Before me, the undersigned, a Notary Public in and for the county aforesaid, on this 1st day of March, 2001, personally appeared Anthony DiPaola to me known personally, and who, being by me duly sworn, deposes and says that he is the Treasurer of Fidelity Water Systems, Inc., and that said instrument was signed and sealed on behalf of said corporation by authority of its Board of Directors, and said Anthony DiPaola acknowledged said instrument to be the free act and deed of said corporation. /s/ Stephen Korn ------------------------------------- Notary Public My commission expires: 9/9/2005 CERTIFICATE OF ACKNOWLEDGMENT COMMONWEALTH OF MASSACHUSETTS ) ) ss. COUNTY OF SUFFOLK ) Before me, the undersigned, a Notary Public in and for the county aforesaid, on this 1st day of March, 2001, personally appeared Arthur L. Goldstein to me known personally, and who, being by me duly sworn, deposes and says that he is the President of Ionics Korea, Inc., and that said instrument was signed and sealed on behalf of said corporation by authority of its Board of Directors, and said Arthur L. Goldstein acknowledged said instrument to be the free act and deed of said corporation. /s/ Stephen Korn ------------------------------------- Notary Public My commission expires: 9/9/2005 CERTIFICATE OF ACKNOWLEDGMENT COMMONWEALTH OF MASSACHUSETTS ) ) ss. COUNTY OF SUFFOLK ) Before me, the undersigned, a Notary Public in and for the county aforesaid, on this 1st day of March, 2001, personally appeared Theodore G. Papastavros to me known personally, and who, being by me duly sworn, deposes and says that he is the Treasurer of Ionics Life Sciences, Inc., and that said instrument was signed and sealed on behalf of said corporation by authority of its Board of Directors, and said Theodore G. Papastavros acknowledged said instrument to be the free act and deed of said corporation. /s/ Stephen Korn ------------------------------------- Notary Public My commission expires: 9/9/2005 CERTIFICATE OF ACKNOWLEDGMENT COMMONWEALTH OF MASSACHUSETTS ) ) ss. COUNTY OF SUFFOLK ) Before me, the undersigned, a Notary Public in and for the county aforesaid, on this 1st day of March, 2001, personally appeared Stephen Korn to me known personally, and who, being by me duly sworn, deposes and says that he is the Secretary of Ionics Ultrapure Water Corporation, and that said instrument was signed and sealed on behalf of said corporation by authority of its Board of Directors, and said Stephen Korn acknowledged said instrument to be the free act and deed of said corporation. /s/ S. Peter Mosgofian --------------------------------------- Notary Public My commission expires: May 7, 2004 CERTIFICATE OF ACKNOWLEDGMENT COMMONWEALTH OF MASSACHUSETTS ) ) ss. COUNTY OF SUFFOLK ) Before me, the undersigned, a Notary Public in and for the county aforesaid, on this 1st day of March, 2001, personally appeared Stephen Korn to me known personally, and who, being by me duly sworn, deposes and says that he is the Secretary of Resources Conservation Co. International, and that said instrument was signed and sealed on behalf of said corporation by authority of its Board of Directors, and said Stephen Korn acknowledged said instrument to be the free act and deed of said corporation. /s/ S. Peter Mosgofian --------------------------------------- Notary Public My commission expires: May 7, 2004 CERTIFICATE OF ACKNOWLEDGMENT COMMONWEALTH OF MASSACHUSETTS ) ) ss. COUNTY OF SUFFOLK ) Before me, the undersigned, a Notary Public in and for the county aforesaid, on this 1st day of March, 2001, personally appeared Ark W. Pang to me known personally, and who, being by me duly sworn, deposes and says that he is the President of Separation Technology Inc., and that said instrument was signed and sealed on behalf of said corporation by authority of its Board of Directors, and said Ark W. Pang acknowledged said instrument to be the free act and deed of said corporation. /s/ Stephen Korn --------------------------------------- Notary Public My commission expires: 9/9/2005 CERTIFICATE OF ACKNOWLEDGMENT COMMONWEALTH OF MASSACHUSETTS ) ) ss. COUNTY OF SUFFOLK ) Before me, the undersigned, a Notary Public in and for the county aforesaid, on this 1st day of March, 2001, personally appeared Stephen Korn to me known personally, and who, being by me duly sworn, deposes and says that he is the Secretary of Sievers Instruments, Inc., and that said instrument was signed and sealed on behalf of said corporation by authority of its Board of Directors, and said Stephen Korn acknowledged said instrument to be the free act and deed of said corporation. /s/ S. Peter Mosgofian --------------------------------------- Notary Public My commission expires: May 7, 2004 Exhibit 10.3(3) ESCROW AGREEMENT THIS ESCROW AGREEMENT, entered into as of the 1st day of March, 2001 by and among Ionics, Incorporated, a Massachusetts corporation (the "Company"), Fleet National Bank as agent (the "Agent") for itself and such other financial institutions that are or may become parties to that certain Credit Agreement (as defined below) from time to time in accordance with the provisions thereof (collectively referred to herein as the "Banks") and Hutchins, Wheeler & Dittmar, A Professional Corporation, as the escrow agent (the "Escrow Agent"). WHEREAS, the Company, the Banks and the Agent have entered into a Second Amended and Restated Revolving Credit Agreement (as amended from time to time and in effect, the "Credit Agreement"), dated as of July 28, 2000, pursuant to which the Banks have agreed to make certain loans to the Company; WHEREAS, the Company and its domestic Subsidiaries have agreed to grant to Agent on behalf of the Banks and the Agent a security interest in all of their personal property subject to and in accordance with the terms of ss.6 of the Credit Agreement and the Security Agreement, dated as of the date hereof, among the Company, its domestic Subsidiaries and the Agent (the "Security Agreement"); WHEREAS, pursuant to the terms of the Credit Agreement, the Company and each of its domestic Subsidiaries, shall execute and deliver to the Escrow Agent on or prior to March 1, 2001, the Security Agreement and the Financing Statements to be filed in each of the jurisdictions specified on Schedule I hereto (collectively, the "Security Documents"); and WHEREAS, pursuant to the terms of this Agreement, the Escrow Agent shall deliver to Agent or the Company, as the case may be, the Security Documents upon the conditions and at such times as provided for herein; NOW, THEREFORE, in consideration of the foregoing, and of the mutual covenants and agreements hereinafter set forth, the parties, intending to be bound legally, agree as follows: ss.1. Definitions. All capitalized terms used in this Agreement and not otherwise defined herein shall have the respective meanings ascribed to them in the Credit Agreement. ss.2. Security Documents. -------- --------- (a) Delivery to Escrow Agent. On or prior to March 1, 2001, the Company shall, and shall cause each of its domestic Subsidiaries to, execute and deliver to the Escrow Agent the Security Documents to which they are a party to be held in escrow by the Escrow Agent. (b) Receipt by Escrow Agent. The Escrow Agent hereby acknowledges receipt of and accepts the Security Documents in escrow and agrees to hold and keep same in accordance with the terms and conditions hereof, and to deliver the Security Documents upon the occurrence of the conditions hereinafter set forth. (c) Delivery to Agent. The Escrow Agent shall deliver the Security Documents to the Agent immediately upon receipt by the Escrow Agent of a written notice from the Agent (with a copy to the Company), including a certificate from the Agent, stating that an Event of Default has occurred and is continuing (hereinafter referred to as a "Triggering Event"). (d) Delivery to Company. On May 16, 2001, unless prior to such date the Escrow Agent has received a written notice from the Agent in accordance with ss.2(c) above stating that a Triggering Event has occurred, the Escrow Agent shall deliver the Security Documents to the Company. ss.3.1. Duties. The Escrow Agent undertakes to perform all duties which are expressly set forth in this Agreement. ss.3.2. Expenses. If the Escrow Agent's duties and responsibilities are increased beyond that contemplated within this Agreement, compensation will be allowed as agreed upon in writing by all of the parties hereto. Such fees and expenses shall be borne by the Company. ss.3.3. Indemnification. The Company agrees to indemnify and hold harmless the Escrow Agent, its officers, partners, employees and agents against any and all costs, losses, claims, damages, liabilities and expenses (including reasonable costs of investigation, court costs and attorney's fees) which may be imposed upon the Escrow Agent in connection with its acceptance of appointment as Escrow Agent hereunder (except those arising out of the Escrow Agent's failure to comply with the provisions of this Agreement or the gross negligence or willful misconduct of the Escrow Agent), including any litigation arising from this Agreement or involving the subject matter hereof, and all such costs and expenses shall be for the account of and shall be borne and said by the Company as a condition to termination of this Agreement. ss.3.4. Dispute. In the event of any disagreement among any of the parties to this Agreement, the Escrow Agent shall refuse to comply with any such claims or demands as long as such disagreements may continue, and in so refusing, the Escrow Agent shall make no delivery or other disposition of any property then held by it under this Agreement and in so doing the Escrow Agent may continue to refrain from acting until (a) the rights of adverse claimants shall have been finally adjudicated in a court assuming and having jurisdiction over the property involved herein or affected hereby and all appeal periods with respect thereto have expired with no appeal having been taken, or (b) all differences shall have been settled by agreement and the Escrow Agent shall have been notified in writing of such agreement signed by the Company and the Agent. In the event of a final adjudication of the rights and obligations of the parties by a court of competent jurisdiction, the Escrow Agent shall comply with the instructions of such court. In the event differences between the Company and the Agent shall be settled by agreement, the Escrow Agent shall comply with the instructions signed by the Company and the Agent. ss.3.5. Resignation. The Escrow Agent reserves the right to resign as Escrow Agent at any time, provided thirty (30) days' prior written notice is given to the other parties hereto. The other parties hereto reserve the right to remove the Escrow Agent at any time, provided thirty (30) days' prior written notice is given to the Escrow Agent. The Escrow Agent neither approves nor disapproves of this transaction, nor does it recommend for or against, nor does it have an opinion as to the legality or validity of this transaction. ss.4. Liabilities of Escrow Agent; Etc. ----------- -- ------ ----- --- 4.1. Limitations. The Escrow Agent shall be liable only to accept, hold and deliver the Security Documents as may be delivered to the Escrow Agent in accordance with the provisions of this Agreement and any amendments hereto, provided, however, that the Escrow Agent shall not incur any liability with respect to (a) any action taken or omitted in good faith upon the advice of its counsel given with respect to any questions relating to the duties and responsibilities of the Escrow Agent under this Agreement, or (b) any action taken or omitted in reliance upon any instrument (including the execution, the identity or authority of any person executing such instrument, its validity and effectiveness, and the truth and accuracy of any information contained therein) which the Escrow Agent shall in good faith believe to be genuine, to have been signed by a proper person or persons and to conform to the provisions of this Agreement. ss.4.2. Collateral Agreements. The Escrow Agent shall not be bound in any way by any contract or agreement between the other parties hereto, whether or not it has knowledge of any such contract or agreement or of its terms or conditions. ss.4.3. Escrow Agent as Counsel to Company. The Agent hereby acknowledges that (a) as of the date hereof the Escrow Agent is counsel to the Company and (b) in the event of a dispute between the Company and the Agent or any of the Banks, the Escrow Agent in its capacity as counsel to the Company shall not be prohibited from representing the Company in connection with such dispute. Notwithstanding the foregoing, the Escrow Agent shall at all times strictly comply with its obligations under this Agreement. ss.5. Termination. This Agreement shall terminate on the earliest of (a) the date the Escrow Agent delivers the Security Documents to the Agent in accordance with the terms of this Agreement and (b) the date on which the Escrow Agent receives from the Agent and the Company a written notice stating that this Agreement has been terminated. This Agreement shall not be otherwise terminated. ss.6. Other Provisions. ----- ---------- 6.1. Notices. All notices and other communications required or permitted to be given under or by reason of this Agreement shall be in writing and shall be deemed to have been duly given on the date of personal delivery to or on the date of receipt at the addresses set forth in this ss.6.1 or at such other address as may be specified in writing by the party to whom notice is to be given. If mailed by first-class, postage prepaid, registered mail, return receipt requested, such written notices shall be deemed to have been received as of the date set forth on the return receipt. Notices, demands, and communications will, unless another address is specified in writing, be sent to the persons and at the addresses indicated below: To Company: ---------- Ionics, Incorporated 65 Grove Street Watertown, MA 02472 Attention: General Counsel Copy (which shall not constitute notice) to: Hutchins, Wheeler & Dittmar, A Professional Corporation 101 Federal Street Boston, Massachusetts 02110 Attention: Jack H. Fainberg, Esq. To Agent: Fleet National Bank 100 Federal Street Boston, Massachusetts 02110 Attention: John C. Dunne, Senior Vice President Copy (which shall not constitute notice) to: Bingham Dana LLP 150 Federal Street Boston, Massachusetts 02110 Attention: Linda J. Groves, Esq. To Escrow Agent: --------------- Hutchins, Wheeler & Dittmar,A Professional Corporation 101 Federal St. Boston, Massachusetts 02110 Attention: Jack H. Fainberg, Esq. 6.2. Benefit and Assignment. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns as permitted hereunder. No person or entity other than the parties hereto is or shall be entitled to bring any action to enforce any provision of this Agreement against any of the parties hereto, and the covenants and agreements set forth in this Agreement shall be solely for the benefit of, and shall be enforceable only by, the parties hereto or their respective successors and assigns as permitted hereunder. No party to this Agreement may assign this Agreement or any rights hereunder without the prior written consent of the parties hereto. 6.3. Entire Agreement; Amendment. This Agreement, together with the Credit Agreement and the Security Agreement, contains all the terms agreed upon by the parties with respect to the subject matter hereof and supersedes all prior oral or written agreements, commitments or understandings with respect to such matters. This Agreement may be amended only by a written instrument signed by the party against whom enforcement or any waiver, change, modification, extension or discharge is sought. 6.4. Headings. The headings of the sections and subsections of this Agreement are for purposes of reference only and do not evidence the intentions of the parties. 6.5. Governing Law. This Agreement shall be governed by, and construed according to, the laws of The Commonwealth of Massachusetts (without regard to the choice of law provisions thereof). 6.6. Counterparts. This Agreement may be signed upon any number of counterparts with the same effect as if the signatures on all counterparts are upon the same instrument. THE REMAINDER OF THIS PAGE LEFT INTENTIONALLY BLANK IN WITNESS WHEREOF, the parties hereto have executed this ESCROW AGREEMENT as of the date set forth above. IONICS, INCORPORATED By:/s/ Daniel M. Kuzmak ------------------------------------ Name: Daniel M. Kuzmak Title: Vice President, Finance and Chief Financial Officer FLEET NATIONAL BANK, AS AGENT By:/s/ John C Dunne ------------------------------------ John C. Dunne, Senior Vice President HUTCHINS, WHEELER & DITTMAR, as Escrow Agent By:/s/ Jack Fainberg ------------------------------------ Name: Jack Fainberg Title: Shareholder Exhibit 10.3(4) SEVENTH AMENDED AND RESTATED REVOLVING CREDIT NOTE $80,000,000 March 1, 2001 FOR VALUE RECEIVED, the undersigned IONICS, INCORPORATED (the "Borrower"), hereby promises to pay to the order of FLEET NATIONAL BANK, a national banking association (the "Bank") at the Agent's head office at 100 Federal Street, Boston, Massachusetts, 02110. (a) prior to or on December 31, 2004, the principal amount of Eighty Million Dollars ($80,000,000) or, if less, the aggregate unpaid principal amount of the Revolving Credit Loans advanced by the Bank to the Borrower pursuant to the Second Amended and Restated Credit Agreement, dated as of July 28, 2000 (as amended and in effect from time to time, the "Credit Agreement"), among the Borrower, the Bank and the other parties thereto; (b) the principal outstanding hereunder from time to time at the times provided in the Credit Agreement; and (c) interest on the principal balance hereof from time to time outstanding from the Closing Date under the Credit Agreement through and including the maturity date hereof at the times and at the rate provided in the Credit Agreement. This Note is an amendment and restatement in its entirety of the Sixth Amended and Restated Loan Note issued by the Borrower to the Bank in the original principal amount of $70,000,000, dated July 28, 2000 (the "Amended Note"). The Note is issued in substitution for, and not in payment of, the Amended Note. This Note evidences borrowings under and has been issued by the Borrower in accordance with the terms of the Credit Agreement. The Bank and any holder hereof is entitled to the benefits of the Credit Agreement and the other Loan Documents, and may enforce the agreements of the Borrower contained therein, and any holder hereof may exercise the respective remedies provided for thereby or otherwise available in respect thereof, all in accordance with the respective terms thereof. All capitalized terms used in this Note and not otherwise defined herein shall have the same meanings herein as in the Credit Agreement. The Borrower irrevocably authorizes the Bank to make or cause to be made, at or about the time of the drawdown date of any Loan or at the time of receipt of any payment of principal of this Note, an appropriate notation on the grid attached to this Note, or the continuation of such grid, or any other similar record, including computer records, reflecting the making of such Loan or (as the case may be) the receipt of such payment. The outstanding amount of the Revolving Credit Loans set forth on the grid attached to this Note, or the continuation of such grid, or any other similar record, including computer records, maintained by the Bank with respect to any Revolving Credit Loans shall be prima facie evidence of the principal amount thereof owing and unpaid to the Bank, but the failure to record, or any error in so recording, any such amount on any such grid, continuation or other record shall not limit or otherwise affect the obligation of the Borrower hereunder or under the Credit Agreement to make payments of principal of and interest on this Note when due. The Borrower has the right in certain circumstances and the obligation under certain other circumstances to prepay the whole or part of the principal of this Note on the terms and conditions specified in the Credit Agreement. If any one or more of the Events of Default shall occur, the entire unpaid principal amount of this Note and all of the unpaid interest accrued thereon may become or be declared due and payable in the manner and with the effect provided in the Credit Agreement. No delay or omission on the part of the Bank or any holder hereof in exercising any right hereunder shall operate as a waiver of such right or of any other rights of the Bank or such holder, nor shall any delay, omission or waiver on any one occasion be deemed a bar or waiver of the same or any other right on any further occasion. The Borrower and every endorser and guarantor of this Note or the obligation represented hereby waives presentment, demand, notice, protest and all other demands and notices in connection with the delivery, acceptance, performance, default or enforcement of this Note, and assents to any extension or postponement of the time of payment or any other indulgence, to any substitution, exchange or release of collateral and to the addition or release of any other party or person primarily or secondarily liable. THIS NOTE AND THE OBLIGATIONS OF THE BORROWER HEREUNDER SHALL FOR ALL PURPOSES BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAW OF THE COMMONWEALTH OF MASSACHUSETTS (EXCLUDING THE LAWS APPLICABLE TO CONFLICTS OR CHOICE OF LAW). THE BORROWER AGREES THAT ANY SUIT FOR THE ENFORCEMENT OF THIS NOTE MAY BE BROUGHT IN THE COURTS OF THE COMMONWEALTH OF MASSACHUSETTS OR ANY FEDERAL COURT SITTING THEREIN AND THE CONSENT TO THE NONEXCLUSIVE JURISDICTION OF SUCH COURT AND THE SERVICE OF PROCESS IN ANY SUCH SUIT BEING MADE UPON THE BORROWER BY MAIL AT THE ADDRESS SPECIFIED IN ss.20 OF THE CREDIT AGREEMENT. THE BORROWER HEREBY WAIVES ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH SUIT OR ANY SUCH COURT OR THAT SUCH SUIT IS BROUGHT IN AN INCONVENIENT COURT. This Note shall be deemed to take effect as a sealed instrument under the laws of the Commonwealth of Massachusetts IN WITNESS WHEREOF, the undersigned has caused this Note to be signed in its corporate name and its corporate seal to be impressed thereon by its duly authorized officer as of the day and year first above written. [Corporate Seal] IONICS, INCORPORATED By:/s/ Daniel M. Kuzmak --------------------------------- Name: Daniel M. Kuzmak Title:Vice President, Finance and Chief Financial Officer
- ------------------- -------------------- ------------------------ -------------------- -------------------- Amount of Balance of Amount Principal Paid Principal Notation Date of Loan or Prepaid Unpaid Made By: - ------------------- -------------------- ------------------------ -------------------- -------------------- - ------------------- -------------------- ------------------------ -------------------- -------------------- - ------------------- -------------------- ------------------------ -------------------- -------------------- - ------------------- -------------------- ------------------------ -------------------- -------------------- - ------------------- -------------------- ------------------------ -------------------- --------------------
EXHIBIT 10.13 LOAN AGREEMENT THIS LOAN AGREEMENT, dated as of October 25, 2000, is entered into by and between HAFEEZ KARAMATH ENGINEERING SERVICES LIMITED ("HKES"), a corporation duly organized and existing under the laws of Trinidad, West Indies, with its principal place of business at 56 Cyrus Trace, El Sorocco Extension, San Juan, Trinidad, W.I. executed in trust for an affiliate of HKES, organized or to be organized under the laws of Saint Lucia, and which will assume all rights and obligations of HKES hereunder, as if it were the original named party hereto in full substitution for HKES (the "Borrower"), with the agreement by the parties that until the affiliate assumes all rights and obligations of HKES hereunder, HKES will continue to be liable for the performance of all obligations of the Borrower under this Agreement and entitled to the benefits of this Agreement (the "Borrower"), and IONICS, INCORPORATED, a corporation duly organized and existing under the laws of the Commonwealth of Massachusetts, United States of America, with its principal place of business at 65 Grove Street, Watertown, Massachusetts, U.S.A. ("Ionics"), executed in trust for an affiliate of Ionics, organized or to be organized under the laws of Saint Lucia, and which will assume all rights and obligations of Ionics hereunder, as if it were the original named party hereto in full substitution for Ionics (the "Lender"), with the agreement by the parties that until the affiliate assumes all rights and obligations of Ionics hereunder, Ionics will continue to be liable for the performance of all obligations of the Lender under this Agreement and entitled to the benefits of this Agreement. WITNESSETH: WHEREAS, Borrower, Lender and The Desalination Company of Trinidad and Tobago Limited, a limited liability company duly organized and existing under the laws of Trinidad, West Indies, with its principal place of business at 56 Cyrus Trace, El Sorocco Extension, San Juan, Trinidad, W.I. ("Desalcott"), have entered into a Shareholder's Agreement dated May 12, 2000 (the "Shareholders' Agreement"), providing, among other things, for the purchase and ownership by Lender and Borrower of shares in Desalcott; WHEREAS, in connection with the Shareholders' Agreement, the Borrower has requested that the Lender make a term loan to the Borrower in the original principal amount of U.S.$10,000,000.00 for the purpose of financing the purchase by the Borrower of 200 ordinary shares in Desalcott; and WHEREAS, the Lender is willing to make the term loan to the Borrower in the original principal amount of U.S.$10,000,000.00 for such purpose on the terms and subject to the conditions of this Agreement. NOW, THEREFORE, in consideration of the premises and covenants herein contained, the parties hereto agree as follows: SECTION 1. DEFINITIONS AND PRINCIPLES OF CONSTRUCTION 1.01. Defined Terms. The following terms (except as otherwise expressly provided or unless the context otherwise requires) for all purposes of this Agreement shall have the respective meanings hereinafter specified: "Affiliate" shall mean, a body corporate, limited liability company, limited partnership or other legal entity which is a subsidiary of another or both are subsidiaries of the same body corporate or each of them is controlled by the same person. For this purpose, "control" or "controlled" has the meaning described in Section 4 of the Companies Act of 1995, as in effect on the date this Agreement is executed. "Agreement" shall mean this Loan Agreement, including any Schedule, Annex, Exhibit or any other attachment hereto, as amended, supplemented, extended or otherwise modified from time to time. "Alternate Rate" shall mean the rate per annum equal to the Base Rate plus two percent (2.00%) per annum. "Applicable Margin" shall mean two percent (2.00%) per annum. "Base Rate" shall mean, as of the date of any determination thereof, the interest rate announced by Citibank, N.A. from time to time as its prime rate, which prime rate may be adjusted on a daily basis. Accordingly, any change in the Base Rate due to a change in the prime rate shall be effective as of the date of any change in the prime rate. "Borrower's Country" shall mean the Republic of Trinidad and Tobago. "Borrower Documents" shall mean this Agreement, the Pledge Agreement and all other documents and instruments to be executed and delivered by the Borrower under this Agreement. "Borrower's Shares" shall mean all of the shares owned at any time by Borrower in Desalcott. "Business Day" shall mean any day on which commercial banks in New York, New York, and Port of Spain, Trinidad are open for domestic and foreign exchange business. "Closing Date" shall mean the date on which occurs the "Capitalization Date" (as such term is defined in the Shareholders' Agreement) and closing for the purchase of shares under the Shareholders' Agreement and each of the other conditions precedent to the effectiveness of this Agreement shall have been met or performed to the satisfaction of the Lender. "Collateral" includes the two hundred (200) ordinary Shares in Desalcott which will be purchased by the Borrower with the proceeds of the Loan, plus all dividends and other distributions paid or payable with respect to the Pledged Shares, subject to the provisions of clause 2.06 of this Agreement, together with all other property and assets now or from time to time hereafter pledged to secure the Loan or any other obligation or indebtedness of the Borrower to the Lender. "Default" shall mean an event which with the giving of notice or the lapse of time, or both, would become an Event of Default. "Default Rate" shall mean, as of the date of and determination thereof, the rate per annum equal to the sum of (x) the rate then applicable to the Loan and (y) four percent (4.00%) per annum, but in no event in excess of the maximum rate permitted by applicable law. "Determination Date" has the meaning given to it in the definition of Libo Rate. "Dollars" or "$" shall mean the lawful currency of the United States of America. "Eurodollar Rate" shall mean, at the time any determination thereof is to be made, an interest rate per annum (computed on the actual number of days elapsed over a 360-day year equal to the sum of (i) the Applicable Margin, plus (ii) the Libo Rate. "Event of Default" shall have the meaning set forth in Section 7.01 hereof. "First Priority Security Interest" shall mean any first priority security interest in Borrower's Shares, whether now existing or hereinafter arising, granted by the Borrower to any of (i) Republic Bank Limited, Republic Finance and Merchant Bank Limited, or the other financial institutions (collectively, the "Bank") which become lenders pursuant to Clause 29.2 of the Project Loan Agreement dated July 13, 2000 between Desalcott and the Bank (the "Project Loan Agreement"), pursuant to a charge of shares agreement entered or to be entered into among Pledgor, Pledgee, Desalcott and the Bank (ii) any bridge, construction or short-term lenders providing financing for the design, engineering, construction and operation of the desalination plant being constructed by Desalcott in Point Lisas, Republic of Trinidad and Tobago (the "Project"); and (iii) the Overseas Private Investment Corporation and/or other permanent project finance lender providing financing for the Project. "Governmental Authority" shall mean, as to any Person, any government (or any political subdivision or jurisdiction thereof), court, bureau, agency or other governmental authority having jurisdiction over such Person, or any of its business, operations or properties. "Guaranty" shall mean, as to any Person, all liabilities or obligations of such Person in respect of any Indebtedness or other obligations of others guaranteed, directly or indirectly, in any manner by such Person, or in effect guaranteed, directly or indirectly, by such Person through an agreement, contingent or otherwise, to purchase such Indebtedness or obligation, or to purchase or sell property, or to purchase or sell services, primarily for the purpose of enabling the debtor to make payment of such Indebtedness or obligation or to assure the owner of such Indebtedness or obligation against loss, or to supply funds to or in any manner invest in the debtor, or otherwise. "Indebtedness" of any Person shall mean (a) all indebtedness for borrowed money or for the deferred purchase price of any property (other than accounts payable to trade creditors under customary trade credit terms) or services for which the Person is liable as principal, (b) all indebtedness (excluding unaccrued finance charges) secured by a Lien on property owned or being purchased by the Person, whether or not such indebtedness shall have been assumed by the Person, (c) all Capitalized Lease Obligations (excluding unaccrued finance charges) of the Person, (d) any arrangement (commonly described as a sale-and-leaseback transaction) with any financial institution or other lender or investor providing for the leasing to the Person of property which at the time has been or is to be sold or transferred by the Person to the lender or investor, or which has been or is being acquired from another Person by the lender or investor for the purpose of leasing the property to the Person, (e) all obligations of partnerships or joint ventures in respect of which the Person is primarily or secondarily liable as a partner or joint venturer or otherwise (provided that in any event for purposes of determining the amount of the Indebtedness, the full amount of such obligations, without giving effect to the contingent liability or contributions of other participants in the partnership or joint venture, shall be included), (f) all redeemable preferred stock of such Person (valued at the greater of its voluntary or involuntary liquidation preference plus accrued and unpaid dividends), (g) all obligations of such Person in respect of letters of credit, bankers' acceptances or similar obligations issued or created for the account of such Person, and (h) all liabilities of such Person in respect of foreign currency or other hedging arrangements and in respect of interest rate protection or hedging arrangements entered into by such Person to fix the floating interest rate, float the fixed interest rate or otherwise cap or limit the interest rate, exposure of such Person. "Interest Payment Date" shall mean the date which is twenty-four months after the Closing Date and the same day of each sixth (6th) month thereafter and at maturity; provided that if any such day is not a Business Day, such Interest Payment Date will be the immediately following Business Day. "Investments" shall mean, with respect to any Person, all advances, loans or extensions of credit to any other Person, all purchases or commitments to purchase any stock, bonds, notes, debentures or other securities of any other Person, and any other investment in any other Person, including partnerships or joint ventures, whether by capital contribution or otherwise, the Guaranty of any Indebtedness of any other Person or the subordination of any claim against any other Person to other Indebtedness of such Person. "Lender's Office" shall mean Lender's office located at 65 Grove Street, Watertown, MA 02472-2882. "Libo Rate" shall mean, as of the date of any determination thereof, the rate of interest equal to the six (6) month London interbank offered rate as published in the "Money Rates" section of The Wall Street Journal (or such other periodical or service reasonably selected by the Lender in the event that The Wall Street Journal is no longer published or no longer publishes six (6) month Libo Rates) on the date that is two (2) Business Days prior to such date of determination. The Libo Rate shall be determined as of the Closing Date and as of the same day of each sixth (6th) month thereafter (each such date being a "Determination Date"), with any change in the Libo Rate resulting from any change in such published rate to be effective as of the applicable Determination Date for which such determination is being made. "Lien" shall mean a mortgage, pledge, lien, security interest or other charge or encumbrance or any segregation of assets or revenues or other preferential arrangement (whether or not constituting a security interest) whether voluntary or involuntary, whether granted by agreement, statute or otherwise, with respect to any present or future assets, including fixtures, revenues or rights or the receipt of income of the Person referred to in the context in which the term is used. "Loan" shall have the meaning set forth in Section 2.02 hereof, or, where the context so requires or permits, the outstanding principal balance thereof. "Maturity Date" shall mean the date which is one hundred twenty six (126) months following the Closing Date, or, if such date in not a Business Day, on the immediately following Business Day. "Other Taxes" shall have the meaning set forth in Section 4.01. "Principal Payment Date" shall mean the date which is forty-two (42) months after the Closing Date, and the same day of each sixth (6) month thereafter, provided that if any such day is not a Business Day, such Principal Payment Date will be the immediately following Business Day. "Person" shall mean any natural person, corporation, unincorporated organization, trust, joint-stock company, joint venture, association, company, partnership or government, or any agency or political subdivision of any government. "Pledge Agreement" shall mean that certain Pledge Agreement, dated as of the Closing Date, from the Borrower in favor of the Lender, in form and substance satisfactory to the Lender and the Lender's counsel, together with all modifications, amendments, supplements and extensions thereof. "Pledged Shares" shall mean the two hundred (200) ordinary shares in Desalcott which will be purchased by Borrower with the proceeds of the Loan. "Project Loan Agreement" has the meaning given to it in the definition of First Priority Security Interest. "Subsidiary" shall mean any Person in which the Borrower may own, directly or indirectly, an equity interest of more than 50%, or which may effectively be controlled by the Borrower, during the term of this Agreement, as well as all Subsidiaries and other Persons from time to time included in the consolidated financial statements of the Borrower. For this purpose, "control" or "controlled" has the meaning described in Section 4 of the Companies Act of 1995, as in effect on the date this Agreement is executed. "TT Dollars" or "TT$" shall mean lawful currency of the Republic of Trinidad and Tobago. "Taxes" shall have the meaning set forth in Section 4.01. "Transaction Documents" shall mean the Borrower Documents and all other documents, statements and opinions now or at any time hereafter executed and delivered in conjunction herewith or therewith, and all other documents, statements and opinions described in the Closing Document List attached hereto as Exhibit C. "U.S." or "United States" shall mean the United States of America. "U.S. Dollars", or "U.S.$" shall mean the lawful currency of the United States of America. 1.02. Principles of Construction. -------------------------- (a) The words "herein", "hereof", "hereby", "hereto", "hereunder" and words of similar import refer to this Agreement as a whole and not to any particular article, section, paragraph or other subdivision of this Agreement. (b) The meanings set forth for defined terms in Section 1.01 of this Agreement shall be equally applicable to both the singular and plural forms of the defined terms. (c) The headings of the sections and subsections herein are for convenience only and shall not affect the meaning or construction of any provision of this Agreement. (d) Unless specified otherwise, all references to "this Agreement" and to Sections, Annexes, Exhibits, and Schedules are to Sections, Annexes, Exhibits, and Schedules of this Agreement, as the same may be amended, modified or supplemented from time to time. (e) All capitalized terms used herein and not otherwise defined herein will have the meaning assigned to them in the Pledge Agreement. SECTION 2. THE LOAN 2.01. Availability. Subject to the terms and conditions provided herein, the Lender agrees, on the terms, and subject to the conditions of this Agreement, to make a term loan to or for the account of the Borrower to be paid to Desalcott, on behalf of the Borrower, in the original principal amount of U.S.$10,000,000.00 (the "Loan") on the Closing Date. Notwithstanding, the Lender may make advances on account of the Loan to Borrower (to be paid directly to Desalcott on behalf of the Borrower) prior to the Closing Date, all of which advances will be governed by the terms of this Agreement, except that for purposes of determining the interest rate to govern the advance, the Libo Rate as in effect on the date the advance is made shall be used, and notwithstanding any references to Lender's rights being tied to the Closing Date as provided in this Agreement, Lender shall be entitled to all rights of this Agreement with respect to any advance made prior to the Closing Date as of the date the advance is made. 2.02. Purpose. The entire proceeds of the Loan shall be used by Desalcott, on behalf of the Borrower, solely for the purpose of financing the Borrower's purchase from Desalcott of two hundred ordinary shares of Desalcott. 2.03. Loan. The Loan shall be evidenced by, and repaid with interest in accordance with the provisions of this Agreement. 2.04. Principal Repayment. The Borrower shall repay to the Lender the aggregate principal amount of the Loan in fourteen (14) consecutive installments as follows: in thirteen (13) equal semi-annual payments of U.S.$714,285.71 each, commencing on the date which is forty-two (42) months after the Closing Date, and continuing semi-annually on the same day of each sixth (6th) month period thereafter, together with a final installment of principal equal to the entire unpaid principal balance of the Loan, together with all accrued and unpaid interest thereon, due and payable in full on the Maturity Date, provided that, prior to the Maturity Date, accrued principal obligations (including principal payments due and payable in prior periods but for the limitations on payment contained in this Section 2.04) will be payable only to the extent of dividends or other distributions payable by Desalcott on the Pledged Shares. Nothing herein, however, shall be deemed or construed to, in any manner or respect, affect, impair or diminish the absolute and unconditional obligation of the Borrower to repay the Loan in full by the Maturity Date, whether or not sufficient dividends are paid or payable by Desalcott on the Pledged Shares. 2.05. Interest Payment.(a) The unpaid principal amount of the Loan shall bear interest from the date disbursed until maturity (whether by acceleration or otherwise) at a rate per annum equal to the applicable Eurodollar Rate from time to time in effect. Accrued interest shall be due and payable on each Interest Payment Date, commencing with the first such date to occur subsequent to the funding of the Loan, and shall be calculated on the basis of a 360-day year for the actual number of days elapsed (i.e. 1/360's of a full year's interest shall accrue for each day any portion of the Loan is outstanding), provided that, prior to the Maturity Date, accrued interest will only be payable to the extent of dividends or other distributions payable by Desalcott on the Pledged Shares, subject to the provisions of clause 2.06 of this Agreement. Nothing herein, however, shall be deemed or construed to, in any manner or respect, affect, impair or diminish the absolute and unconditional obligation of the Borrower to repay all interest accrued on the Loan in full by the Maturity Date, whether or not sufficient dividends are paid or payable by Desalcott on the Pledged Shares. (b) After the Maturity Date, any principal amount of the Loan not paid in full at maturity and any accrued and unpaid interest on the Loan (to the fullest extent permitted by applicable law) shall bear interest until paid in full, payable on demand, at a rate per annum equal to the Default Rate. (c) Prior to the Maturity Date, any installment of principal not paid in full on the applicable Payment Date (to the fullest extent permitted by applicable law) shall bear interest until paid in full, payable on demand, at a rate per annum equal to the Default Rate, provided that Desalcott has paid dividends or other distributions on the Pledged Shares sufficient to pay such required principal installment. Prior to the Maturity Date, if Desalcott has not paid dividends or other distributions on the Pledged Shares sufficient to pay such principal installment, any principal not paid in full on the applicable Payment Date shall bear interest at the applicable Eurodollar Rate pursuant to Section 2.05(a). (d) Prior to the Maturity Date, any accrued and unpaid interest on the Loan (to the fullest extent permitted by applicable law) shall bear interest until paid in full, payable on demand, at a rate per annum equal to the Default Rate, provided that Desalcott has paid dividends or other distributions on the Pledged Shares sufficient to pay such interest. If Desalcott has not paid dividends or other distributions on the Pledged Shares sufficient to pay such interest, any such accrued and unpaid interest on the Loan shall bear interest at the applicable Eurodollar Rate pursuant to Section 2.05(a). 2.06.(a) Dividends: All dividends and other distributions arising out of the Pledged Shares shall be paid into an escrow term account held jointly in the name of the Borrower and the Lender and to be disbursed to satisfy the immediately succeeding payment of principal and interest under clause 2.04 and clause 2.05 of this Agreement. Any excess thereof shall be paid into the escrow account described in paragraph (b) of this clause. (b) Surplus dividends: In the event that the distribution of dividends and other distributions on the Pledged Shares exceed that required for debt servicing under clauses 2.04 and 2.05 of this Agreement, such surplus distributions will be placed in an interest bearing escrow term account held jointly in the name of the Borrower and the Lender a period not to exceed six months at a time. Where the value of the escrow account is in excess of one installment of Interest Payment as determined by this agreement, any such excess will be promptly returned free of encumbrance to the Borrower. 2.07. Prepayment. (a) Prepayment. The Borrower has the right to prepay, without penalty, all or any part of the principal of the Loan on any Payment Date, provided that (a) Borrower must notify Lender at least five (5) days in advance that it intends to make such a pre-payment; (b) the Borrower shall pay all accrued and unpaid interest on the amount prepaid to the date of prepayment; and (c) each partial prepayment shall be applied to the remaining principal installments in the inverse order of their maturities. (b) Notwithstanding anything in this Agreement to the contrary, the principal, and interest accrued on the Loan shall be immediately due and payable upon the sale by Borrower of any or all the Pledged Shares. 2.08. Eurodollar Rate. (a) If prior to the commencement of any Interest Period, the Lender has determined that adequate and fair means do not exist for ascertaining the Libo Rate, then the Lender shall promptly transmit notice thereof to the Borrower, and the Loan shall instead be funded as, remain, or be converted into a loan bearing interest at the Alternate Rate, payable on each Interest Payment Date thereafter, commencing with the first such Interest Payment Date to occur thereafter. (b) As soon as practicable after 11:00 A.M., New York time, on the date two (2) Business Days prior to the Closing Date and each Determination Date thereafter, the Lender shall determine (which determination, absent manifest error, shall be final and conclusive) the Eurodollar Rate which shall be applicable to the Loan until the next Determination Date and shall promptly give notice thereof (in writing, by telex or by telephone confirmed in writing) to the Borrower. (c) In the event that after the Closing Date any change occurs in any applicable law, regulation, treaty or directive within the Borrower's Country or interpretation thereof by any authority charged with the administration or interpretation thereof, or any condition is imposed by any authority or any change occurs in any condition imposed by any authority within the Borrower's Country on or prior to the date hereof, which: (1) subjects the Lender to any additional tax, incremental duties or other additional and/or incremental charges, or changes the basis of taxation of payments to the Lender on account of principal of or interest on the Loan or fees in respect of the Lender's obligation to make the Loan or other amounts payable to the Lender hereunder with respect to the Loan; or (2) imposes, modifies or determines applicable any reserve, deposit or similar requirements against any assets held by, deposits with or for the account of, or the Loan or commitments by, any office of any Lender in connection with the Loan to the extent the amount of which is in excess of, or was not applicable at the time of computation of, the amounts provided for in the definition of Eurodollar Rate or Alternate Rate; or (3) imposes upon the Lender any other condition with respect to the Loan, which, as a result thereof, (x) increases the cost to the Lender of making or maintaining the Loan, or (y) reduces the net amount of any payment received by the Lender in respect of the Loan (whether of principal, interest, commitment fees or otherwise), or (z) requires the Lender to make any payment on or calculated by reference to the gross amount of any sum received by it in respect of the Loan, in each case by an amount which the Lender in it's reasonable judgement deems material; then and in any such case the Borrower shall pay to the Lender such amount or amounts as will compensate the Lender for any increased cost, deduction or payment actually incurred or made by the Lender. The Lender shall promptly notify the Borrower of any event of which it has knowledge, which will entitle the Lender to compensation in accordance with this subsection (c) and shall submit satisfactory documentary evidence supporting any such claim for such amount or amounts. The demand for payment made by the Lender shall state the subjection or change which has occurred or the reserve or deposit requirements or other conditions which have been imposed on the Lender or the request, direction or requirement with which it has complied, together with the date thereof, the amount of such cost, reduction or payment and the way in which such amount has been calculated. The statements of the Lender as to the additional amounts payable pursuant to this subsection (C) shall, in the absence of manifest error, be binding and conclusive. SECTION 3. CONDITIONS PRECEDENT 3.01. Conditions Precedent to the Effectiveness of this Agreement and the making of the Loan. This Agreement shall not be effective and the Lender shall have no obligation to fund all or any portion of the Loan hereunder until the following conditions have been met to the satisfaction of the Lender in its sole and absolute discretion: (a) This Agreement has been executed by the Borrower and the Lender; and (b) The Lender shall have received such evidence as it may require of the authority of the Borrower to enter into this Agreement, the Pledge Agreement and each of the other Borrower Documents, and the specimen signatures and evidences of authority of the persons who will execute this Agreement, the Pledge Agreement and other documents required by this Agreement; and (c) (i) all representations and warranties made by the Borrower herein or otherwise in writing in connection herewith, shall be true and correct in all material respects, (ii) no Default or Event of Default shall have occurred and be continuing, and (iii) a certificate to this effect, substantially in the form of Exhibit B attached hereto and made a part hereof shall have been issued to the Lender; and (d) The Pledge Agreement, duly executed and completed by the Borrower, in form and substance satisfactory to the Lender and the Lender's counsel, shall have been delivered to the Lender; and (e) The Borrower shall have complied with all of its respective obligations hereunder, including without limitation, the payment of all fees then due hereunder; (f) All of the conditions precedent set forth in Sections 3.1(a) through 3.1(d) and 3.1(f) through 3.1(h) of the Shareholders' Agreement will have been satisfied to Lender's reasonable satisfaction; and (g) The Borrower shall have delivered, or caused to have been delivered, to the Lender each of the certificates and other documents described in the Closing Document List attached hereto as Exhibit C and made a part hereof and all additional opinions, certificates and documents that the Lender or the Lender's counsel may reasonably require, and all such opinions, certificates and documents specified in this Section 3.01 shall be satisfactory in form and substance to the Lender and the Lender's counsel. SECTION 4. FEES AND EXPENSES 4.01 Taxes. ----- (a) All payments by the Borrower under this Agreement, the Pledge Agreement and each of the other Transaction Documents shall be made without setoff, deduction or counterclaim and in such amounts as may be necessary in order that all payments, after deduction or withholding for or on account of any present or future taxes, levies, imposts, duties or other charges of whatsoever nature imposed by the Borrower's Country or any political subdivision or taxing authority thereof (collectively, the "Taxes"), shall not be less than the amounts otherwise specified to be paid under this Agreement, the Pledge Agreement and each of the other Transaction Documents. Notwithstanding anything contained in this Section 4.01 to the contrary, the Borrower shall not be liable for the payment of any tax on or measured by net income imposed upon the Lender pursuant to the income tax laws of the United States or the Borrower's Country, or any political subdivision of either thereof. (b) The Borrower shall pay any present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies imposed by the Borrower's Country or any political subdivision or taxing authority thereof which arise from any payment made hereunder, under the Pledge Agreement or under any of the other Transaction Documents or from the execution, delivery or registration of, or otherwise with respect to, this Agreement, the Pledge Agreement or any of the other Transaction Documents (herein referred to as "Other Taxes"). (c) The Borrower shall pay all Taxes and Other Taxes when due (and indemnify the Lender against any liability therefor) and shall promptly (and in any event not later than 30 days thereafter) furnish to the Lender any certificates, receipts and other documents which may be required (in the judgment of the Lender) to establish any tax credit to which the Lender may be entitled. (d) The Borrower shall indemnify the Lender for the full amount of Taxes and Other Taxes (including, without limitation, Taxes and Other Taxes imposed by any jurisdiction on amounts payable under this Section 4.01) paid by the Lender or any liability (including interest and penalties) arising therefrom or with respect thereto, whether or not such Taxes or Other Taxes were correctly or legally assessed. In the event that the Borrower seeks to challenge the assessment of such Taxes or Other Taxes, the Lender undertakes to cooperate with the Borrower in this regard, and at the Borrower's expense, and further if the Borrower is successful in such challenge, the result of which is to render a refund of such Taxes or Other Taxes, then the Lender would ensure that recovery of such Taxes or Other Taxes would be credited to the account of the Borrower. (e) If Ionics receives the benefit of a credit against its income tax obligations for the amount of any tax withheld by Borrower on payments to the Lender, to the extent Ionics is able to utilize the credit to achieve a reduction in the United States income taxes that would otherwise be owed by it, Lender shall notify Borrower in writing and Borrower may set off the amount of such credit utilized by Ionics against the next payment owed by it to Lender. (f) Without prejudice to the survival of any other agreement of the Borrower hereunder, the obligations of the Borrower under this Section 4.01 shall survive the termination of this Agreement and the repayment of the Loan. 4.02 Expenses. The Borrower agrees, whether or not the transactions hereby contemplated are ever consummated or the Loan contemplated hereunder is funded, to pay, or reimburse the Lender promptly upon demand for the payment of all reasonable costs and expenses arising in connection with the preparation, negotiation, execution and delivery of, this Agreement, the Pledge Agreement and the other Transaction Documents, including, without limitation all reasonable legal fees and costs and all stamp taxes (including interest and penalties, if any) which may be payable under the laws of the Borrower's Country in respect of the Transaction Documents. SECTION 5. PAYMENTS 5.01. Method of Payment. ----------------- (a) All payments to be made by the Borrower to the Lender under this Agreement shall be made without set-off, counterclaim or deduction to the Lender in Dollars in immediately available and freely transferable funds not later than 11:00 A.M. (Boston, Massachusetts time) on the date on which due at an account of the Lender at an institution either in the United States or in Saint Lucia as the Lender may specify in a written notice delivered to the Borrower. (b) Except as otherwise provided herein, whenever any payment falls due on a day which is not a Business Day, the due date for payment shall be extended to the next following Business Day and interest shall be computed in accordance with Section 2.05 hereof taking into account such additional day(s). 5.02. Application of Payments. Prior to the occurrence of an Event of Default, the Lender shall apply payments received by it under this Agreement or any of the other Transaction Documents in the following order of priority: (i) to interest due pursuant to Section 2.05(d), (ii) to interest due pursuant to Section 2.05(b), (iii) to interest due pursuant to Section 2.05(c), (iv) to interest due pursuant to Section 2.05(a), (v) to all other amounts due and not otherwise provided for in this Section 5.02, (vi) to the installments of principal then due and payable, and (vii) to the remaining principal installments in the inverse order of maturity. Following the occurrence and during the continuance of any Event of Default, all such payments shall be applied by the Lender in such order of application as the Lender in its sole and absolute discretion shall elect, provided that such application relates to the Loan, interest charges and other amounts due in connection with this Loan Agreement. 5.03. Authorizations for Payments. The Borrower shall promptly obtain and maintain in full force and effect all authorizations, consents and approvals and filings with any governmental authority in the Borrower's Country which may at any time be required under the laws of the Borrower's Country (including all laws and regulations with respect to the availability and transfer of Dollars) to make payments as and when due under this Agreement, the Pledge Agreement and each of the other Transaction Documents. SECTION 6. REPRESENTATIONS, WARRANTIES AND COVENANTS 6.01 Representations and Warranties. In order to induce the Lender to enter into this Agreement and to make the Loan and other financial accommodations provided for herein, the Borrower represents and warrants to the Lender that: (a) the Borrower is duly organized and validly existing under the laws of the Borrower's Country and is duly qualified or licensed to transact business in all places where such qualification or license is necessary in view of its business operations and/or the ownership of its properties, and the Borrower has the corporate power to make and perform this Agreement, the Pledge Agreement and each of the other Borrower Documents; (b) the execution, delivery and performance by the Borrower of this Agreement, the Pledge Agreement, each of the other Borrower Documents and any additional documents contemplated to be executed in connection herewith (i) have been duly authorized by all necessary corporate action of the Borrower and the Borrower has full authority to request the Loan as provided in this Agreement, (ii) have been duly authorized, if so required, by all necessary legislative, administrative and other governmental action, and (iii) do not and will not contravene its charter or any treaty, law, rule, regulation, order, decree, judgment, award, injunction or similar legal restriction applicable to the Borrower or any contractual restriction binding on or affecting the Borrower or by which it or any of its property may be bound; and do not and will not, with the passage of time or the giving of notice, result in a breach of, or constitute a default or require any consent under, or result in the creation of any Lien, charge or encumbrance, except that the Collateral will be subject to the First Priority Security Interest and except for such consents required by the Project Loan Agreement, upon any property or assets of the Borrower pursuant to, any instrument or agreement to which the Borrower is a party or by which the Borrower or its properties may be bound or affected, except in favor of the Lender; (c) this Agreement, the Pledge Agreement and each of the other Borrower Documents constitute the legal, valid and binding obligations of the Borrower enforceable in accordance with their respective terms except that the enforceability thereof may be subject to the effects of any applicable bankruptcy, insolvency, reorganization, moratorium or other similar law now or hereafter in effect relating to creditors' rights and to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law); (d) all consents, approvals and authorizations, if any, of governmental authorities in the Borrower's Country necessary for the execution, delivery and performance by the Borrower of the Borrower Documents have been obtained and are in full force and effect, and the requirements of any and all laws and regulations of the Borrower's Country with respect to the availability and transfer of Dollars required to make all payments on the Loan, the Pledge Agreement and all other payments contemplated by the Borrower Documents have been met; and the Borrower is not in default under any order, decree, ruling, regulation, closing agreement or other decision or instrument of any governmental commission, bureau or other administrative agency or public regulatory body having jurisdiction over the Borrower, which default would have a material adverse effect on the Borrower; (e) no legal proceedings are pending or, to the best of the Borrower's knowledge and belief, threatened before any court or governmental agency which might (i) materially and adversely affect the Borrower's financial condition, business or operations, (ii) restrain or enjoin or have the effect of restraining or enjoining the Borrower's performance or observance of the terms and conditions of this Agreement, the Pledge Agreement or any of the other Transaction Documents or (iii) in any other manner question the validity, binding effect or enforceability of this Agreement, the Pledge Agreement or any of the other Transaction Documents; (f) this Agreement and the transactions contemplated hereby constitute commercial activities of the Borrower, and the Borrower is subject to private commercial law with respect thereto. The Borrower is not entitled to any immunity whether on grounds of sovereign immunity or otherwise, from set-off or from any legal proceedings in Republic of Trinidad and Tobago to enforce or collect upon the Loan, the Pledge Agreement or any other liability or obligation of the Borrower relating to or arising from the transactions contemplated by this Agreement (including, without limitation, immunity from service of process, immunity from jurisdiction or judgment of any court or tribunal, immunity from execution of a judgment, and immunity of any of the Collateral from attachment prior to any entry of judgment, or from attachment in aid of execution upon a judgment); in respect of any matter arising under this Agreement; (g) the Borrower has filed or caused to be filed, or has obtained extensions to file all federal, state and local tax returns which are required to be filed, and has paid or caused to be paid, or has reserved on its books amounts sufficient for the payment of, all taxes as shown on said returns or on any assessment received by it, to the extent that the taxes have become due, except as otherwise permitted by the provisions hereof. No tax liens have been filed nor has the Borrower been notified of, or otherwise has knowledge of, any claim being asserted with respect to any such taxes, fees or other charges which could have a material adverse effect on the business or financial condition of the Borrower. The Borrower has set up reserves which are reasonably believed by the officers of the Borrower to be adequate for the payment of said taxes for the years that have not been audited by the respective tax authorities or for which a return has not, as of the date hereof, been required to be filed by applicable law. (h) The Borrower is not a party to any agreement or instrument or subject to any court order or judgment, governmental decree, charter or other corporate restriction adversely affecting its business, properties or assets, operations or condition (financial or otherwise). The Borrower is not in default in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any agreement or instrument to which it is a party or by which the Borrower or any of its properties may be bound or affected, or under any law, regulation, decree, order or the like, which default has or may in the future have a material adverse effect on the business or prospects of the Borrower; and (i) The principal office, chief executive office and principal place of business of the Borrower is at the location set forth below its signature at the end of this Agreement. 6.02 Affirmative Covenants of the Borrower. The Borrower covenants and agrees that, until all amounts owing under this Agreement, the Pledge Agreement and each of the other Transaction Documents have been paid in full, the Borrower will, unless the Lender consents in writing: (a) Use the proceeds of the financing only for the purposes set forth in Section 2.02 of this Agreement (as herein agreed to by the Borrower and the Lender) and furnish the Lender with all evidence that it may reasonably require with respect to such use; (b) Do or cause to be done all things necessary to maintain, preserve and keep in full force and effect its existence in the jurisdiction of its incorporation, and qualify and remain qualified in each jurisdiction where qualification is necessary or desirable in view of its business operations or the ownership of its properties; (c) Pay and discharge or cause to be paid and discharged promptly all taxes, assessments and governmental charges or levies imposed upon it or upon its property or upon any part thereof, before the same shall become in default, as well as all lawful claims for labor, materials and supplies or otherwise which, if unpaid, might become a Lien upon such properties or any part thereof; provided, however, that the Borrower shall not be required to pay and discharge or to cause to be paid and discharged any tax, assessment, charge, levy or claim so long as the Borrower shall have provided written notice to the Lender thereof and the validity thereof shall be continuously and diligently contested in good faith by appropriate proceedings and the Borrower shall have set aside on its books adequate reserves with respect to any tax, assessment, charge, levy or claim, so contested; (d) Continue to conduct and operate its business substantially as conducted and operated during the present and preceding fiscal year (including the preservation of the Borrower's current management team or one of comparable quality and skill); at all times maintain, preserve and protect all rights, privileges, patents, franchises and trade names necessary or desirable in the conduct of its business and preserve all the remainder of its property used or useful in the conduct of its business and keep the same in good repair, working order and condition, and from time to time make, or cause to be made, all needful and proper repairs, replacements, betterments and improvements thereto so that the business carried on in connection therewith may be conducted properly and advantageously at all times; (e) Furnish or cause to be furnished to the Lender all financial information and statements, books, records and other documents and information which Borrower provides to Republic Bank, the Overseas Private Investment Corporation or any lender holding a First Priority Security Interests, at the same time or promptly after such information, financial statements, books, records or other documents and information are furnished to any such lenders; (f) Furnish or caused to be furnished to the Lender promptly, from time to time, such other information regarding the operations, business, affairs and financial condition of the Borrower as the Lender may reasonably request. (g) Promptly, but in no event later than five (5) days after the occurrence of an Event of Default or a Default, or of any event which otherwise has or may have a negative effect on the Lender's ability to collect on Borrower's obligations under this Agreement, the Pledge Agreement or any of the other Transaction Documents, notify the Lender by telefax, telex or cable of the particulars of such occurrence and the action taken and proposed to be taken by the Borrower with respect thereto; (g) Duly observe, conform and comply with all laws, decisions, judgments, rules, regulations and orders of all governmental authorities relative to the conduct of its business, its properties, and assets, except those being contested in good faith by appropriate proceedings diligently pursued; and obtain, maintain and keep in full force and effect all governmental licenses, authorizations, consents, approvals and permits necessary to the proper conduct of its business and the observance and performance of the terms of this Agreement, the Pledge Agreement and each of the other Transaction Documents, including, without limitation, all foreign exchange approvals with respect to the availability of Dollars necessary to make all required payments under this Agreement, the Pledge Agreement and each of the other Transaction Documents, as the case may be; and from time to time, do and perform any and all acts and execute any and all documents that may be necessary or reasonably requested by the Lender in order to effect the purpose of this Agreement and to protect the interests of the Lender in this Agreement, the Pledge Agreement and each of the other Transaction Documents; and (h) Ensure that the Lender shall, at all times during which any portion of the Loan is outstanding, have a valid, perfected security interest (subordinate only to any First Priority Security Interest) in the Borrower's Shares and in any other property and assets more particularly described in the Pledge Agreement, whether now existing or hereafter created or acquired, and wherever located. The Borrower hereby covenants and agrees that it will execute and deliver, and cause to be executed and delivered, to the Lender all such documents and instruments as the Lender may reasonably request, together with such financing statements, affidavits, notices and other similar instruments, all in form and substance reasonably satisfactory to the Lender and the Borrower hereby agrees to pay the cost of filing the same in any public office deemed advisable by the Lender and agrees to do such other acts and things, all as the Lender may from time to time reasonably request so as to maintain a valid, perfected security interest (subordinate only to any First Priority Security Interest) in favor of the Lender in the Collateral and in any other property and assets described in the Pledge Agreement, whether presently existing or hereafter created or acquired. 6.03 Negative Covenants of the Borrower. The Borrower covenants that it will not, without the prior written consent of the Lender, until payment in full of all obligations and indebtedness of the Borrower hereunder, under the Pledge Agreement and under each of the other Transaction Documents: (a) Dissolve or liquidate, or become a party to any merger or consolidation, or acquire by purchase, lease or otherwise all or substantially all of the assets or capital stock of any Person other than Desalcott; or (b) Declare or pay any dividend or authorize or make any other distribution on any capital stock of the Borrower, whether now or hereafter outstanding, or make any payment on account of the purchase, acquisition, redemption or other retirement of any shares of such stock during the occurrence of any Default or Event of Default or if, after giving effect thereto, a Default or Event of Default shall be reasonably likely to occur or will have occurred and be continuing. SECTION 7. EVENTS OF DEFAULT 7.01.Events of Default. Upon the occurrence of any of the following events or conditions (each an "Event of Default"): (a) The Borrower shall fail to pay, when due (whether by acceleration, maturity or otherwise), any principal of or interest on the Loan in accordance with clauses 2.04, 2.05, and 2.06 of this Agreement, or any other sum payable to the Lender under this Agreement, the Pledge Agreement or any of the Transaction Documents; or (b) Any representation or warranty made by the Borrower in this Agreement or in any of the other Transaction Documents or in connection herewith or therewith, or any statement made in any certificate, report or financial statement furnished by the Borrower to the Lender has proven to have been false or misleading in any material respect when made, provided that if Lender informs Borrower that it has committed any of the actions referred to in this section 7.01 (b), Borrower will have 10 days in order to correct any such misrepresentation or warranty, failing which the event will become an Event of Default ; or ( c ) Failure by the Borrower to perform or comply with any of the covenants or provisions set forth in this Agreement (exclusive of any event specified as an Event of Default in any other subsection of this Section 7.01), which has a material effect on this Agreement, the Collateral, or the Borrower's ability to perform under this Agreement, and which continues for a period of ten (10) days following notice thereof from the Lender to the Borrower; or (d)There shall occur any default (other than a default which is provided for elsewhere in this Section 7.01) in the due observance or performance of any covenant, condition or agreement on the part of the Borrower to be observed or performed pursuant to the terms of any of the Transaction Documents which remains uncured beyond any applicable period of grace provided therefor in any such Transaction Documents; or (e) Desalcott shall (1) default in the payment of principal or interest on any Indebtedness owed to the Bank, the Overseas Private Investment Corporation or any other lender holding a First Priority Security Interest, beyond the period of grace, if any, provided in the instrument or agreement under which such Indebtedness was created; or (2) or any other default occurs in respect of such Indebtedness, the effect of which default is to cause, or permit the holder or holders of such Indebtedness (or a trustee or agent on behalf of such holder or holders) to cause such Indebtedness to become due prior to its stated maturity; provided that such occurrence will cease to be an Event of Default if the Bank or the Overseas Private Investment Corporation or any such lender holding a First Priority Security Interest provides written notice to the Lender that the default has been cured or waived and that it is not pursuing a foreclosure or other action against Desalcott or the Collateral as a result of the default and at the time of notice there is no other Event of Default under this Section 7.01, and provided further that if thereafter there occurs a further event described in this Section 7.01 (e), or if the Bank or the Overseas Private Investment Corporation or any other such lender holding a First Priority Security Interest thereafter re-initiates foreclosure or other such action as a result of the initial default, an Event olf Default will be deemed to occur and the Lender may proceed to fully enforce its rights in accordance with this Agreement; or (f) The Borrower shall fail to furnish to the Lender notice of default in accordance with Section 6.02(f) hereof immediately after any such default becomes known to the Chief Executive Officer or the Chief Financial Officer of the Borrower, whether or not notification to the Borrower is furnished by the Lender; or (g) any one of the documents evidencing or securing all or any portion of the obligations and indebtedness of the Borrower hereunder, under the Pledge Agreement and under each of the other Transaction Documents, or any Lien granted thereunder, shall terminate, cease to be effective or cease to be the legally valid, binding and enforceable obligation of the Borrower hereunder or thereunder; the Borrower shall, directly or indirectly, contest in any manner such effectiveness, validity, binding nature or enforceability; or any Lien securing, in whole or in part, any Indebtedness of the Borrower owed to the Lender or pledged to the Lender as collateral security for any such Indebtedness shall cease to be effective or have the priority purported to be given under any document or instrument evidencing or creating such Lien; or (h) The Borrower or Desalcott shall (1) voluntarily terminate operations or apply for or consent to the appointment of, or the taking of possession by, a receiver, custodian, trustee or liquidator of the Borrower, or of all or a substantial part of the assets of the Borrower, (2) admit in writing its inability, or be generally unable, to pay its debts as the debts become due, (3) make a general assignment for the benefit of its creditors, (4) commence a voluntary case under any law relating to bankruptcy, insolvency, reorganization, winding-up, or composition or adjustment of debts (as now or hereafter in effect), (5) file a petition seeking to take advantage of any other law relating to bankruptcy, insolvency, reorganization, winding-up, or composition or adjustment of debts, (6) fail to controvert in a timely and appropriate manner, or acquiesce in writing to, any petition filed against it in an involuntary case under any law relating to bankruptcy, insolvency, reorganization, winding-up, or composition or adjustment of debts, or (7) take any corporate action for the purpose of effecting any of the foregoing; or (i) Without its application, approval or consent, a proceeding shall be commenced, in any court of competent jurisdiction, seeking in respect of the Borrower or Desalcott: the liquidation, reorganization, dissolution, winding-up, or composition or readjustment of debt, the appointment of a trustee, receiver, liquidator or the like of the Borrower or Desalcott or of all or any substantial part of the assets of the Borrower or Desalcott, or other like relief in respect of the Borrower or Desalcott under any law relating to bankruptcy, insolvency, reorganization, winding-up, or composition or adjustment of debts unless such proceeding is contested in good faith by the Borrower or Desalcott; and, if the proceeding is being contested in good faith by the Borrower or Desalcott, the same shall continue undismissed, or unstayed and in effect, for any period of sixty (60) consecutive days, or an order for relief against the Borrower or Desalcott shall be entered in any involuntary case under any law relating to bankruptcy, insolvency, reorganization, winding-up, or composition or adjustment of debts; or (j) If any other event occurs or any other circumstance arises which is likely materially and adversely to affect the ability of the Borrower to perform all or any of its obligations hereunder, under the Pledge Agreement or under any of the other Transaction Documents Lender will provide written notice thereof to Borrower together with a description of such event or circumstances. Within 10 days thereafter, Borrower will in good faith prepare and send to Lender a written plan of the steps Borrower will take to avoid any material adverse affect to Lender or on Borrower's ability to perform its obligations hereunder, under the Pledge Agreement or under any other Transaction Documents. In all cases, Borrower will respond to Lender's concerns and recommendations in this respect in good faith. If Borrower fails to prepare and deliver such written plan within such ten (10) day period or thereafter to comply with such plan, an Event of Default will be deemed to occur; THEREUPON, in the case of any such event other than an event described in subsection (i) or subsection (j) of this Section 7.01, the Lender may by written notice to the Borrower immediately declare the principal of, and interest accrued on, the Loan, forthwith due and payable, whereupon the same shall become immediately due and payable; provided, however, that upon the uccurrence of any event described in subsection (i) or subsection (j) of this section 7.01, the principal of, and accrued interest on, of the Loan, shall become immediately due and payable, both as to principal and interest, without presentment, demand, protest, or other notice of any kind, all of which are hereby expressly waived, anything contained herein, or in any of the other Transaction Documents to the contrary notwithstanding. Upon the happening and continuance of any Event of Default specified in this Agreement, the Lender shall be permitted to proceed to protect and enforce its rights under this Agreement, the Pledge Agreement and the other Transaction Documents, and each of them, and any of the other documents and instruments executed and delivered in connection with this Agreement by such suits, actions or special proceedings in equity or at law, or by proceedings in the office of any board or officer having jurisdiction, either for specific performance of any covenant or agreement contained herein or in aid or execution of any power herein or therein granted or for the enforcement of any proper legal or equitable remedy, as the Lender, being advised by counsel chosen by the Lender, shall deem most effectual to protect and enforce such rights. In the enforcement of any remedy described above, the Lender shall be entitled to sue for, enforce payment of and receive any and all amounts then or during any Event of Default becoming or remaining due from the Borrower for principal, interest or otherwise under any of the provisions of this Agreement, the Pledge Agreement or any of the other Transaction Documents, as the case may be, together with interest on overdue payments at the Default Rate and all costs and expenses of collection and of all proceedings hereunder. SECTION 8. GOVERNING LAW AND JURISDICTION 8.01.GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE REPUBLIC OF TRINIDAD AND TOBAGO WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF LAWS THEREUNDER. 8.02. Waiver of Immunity. The Borrower hereby irrevocably agrees that to the extent that the Borrower or any of its assets has or hereafter may acquire any right of immunity related to or arising from the transactions contemplated by this Agreement or any of the Borrower Documents, whether characterized as sovereign immunity or otherwise, from any legal proceedings, to enforce or collect upon the Loan, the Pledge Agreement or any other liability or obligation of the Borrower related to or arising from the transactions contemplated by this Agreement or any of the Borrower Documents, including, without limitation, immunity from service of process, immunity from jurisdiction or judgment of any court or tribunal, immunity from execution of a judgment, and immunity of any of its property from attachment prior to any entry of judgment, or from attachment in aid of execution upon a judgment, it hereby expressly and irrevocably waives any such immunity. 8.03 Arbitration. In the event of a dispute between the parties to this Agreement in any way related to or arising out of this Agreement or the transactions contemplated herein ("Dispute"), each party shall attempt in good faith to resolve the dispute promptly through negotiations. If the dispute has not been resolved through negotiation within five (5) days after the delivery of a notice of dispute by either party, either party may institute arbitration proceedings at any time thereafter by delivering written demand for arbitration to the other party in the manner described in Section 9.02. The dispute shall then be exclusively and finally settled and resolved by binding arbitration in accordance with the Arbitration Act of Trinidad and Tobago supplemented by the International Rules of Arbitration of the International Chamber of Commerce . Such arbitration proceedings shall be held in London, England and shall be subject to the choice of law provisions set forth in Section 8.01. For purposes of this section 8.03, the parties hereby waive any and all objections to venue that they may have under the laws of any state or country, including, without limitation, any argument that jurisdiction, situs, and/or venue are inconvenient or otherwise improper. Any decision or award of the arbitrator or arbitration panel, as the case may be, shall be expressed in United States dollars and shall be final and binding on the parties to the arbitration proceeding. The parties hereby waive, to the extent permitted by law, any and all rights to appeal or to review such award by any court or tribunal. The parties hereto agree that the arbitral award may be enforced against the parties to the arbitration proceeding or their assets wherever they may be found and that a judgment upon the arbitral award may be entered in any court having jurisdiction therefor. The procedures established in this Section 8.03 shall be the sole, exclusive procedures for the resolution of Disputes between the parties, provided, however, that either may seek a preliminary injunction or other preliminary judicial relief if, in its reasonable, good-faith judgment, such action is necessary to avoid irreparable damage. Each party further agrees that process may be served upon such party in any manner authorized under the laws of the Republic of Trinidad and Tobago, and waives any objections that such party may otherwise have to such process. SECTION 9. MISCELLANEOUS 9.01. Computations. Each determination of an interest rate or fee by the Lender pursuant to any provision of this Agreement, the Pledge Agreement or any of the other Transaction Documents shall be conclusive and binding on the Borrower in the absence of manifest error. Except as otherwise provided herein, all computations of interest hereunder shall be made on the basis of a year of 360 days and actual days elapsed. All such calculations shall include the first day and exclude the last day of the period of calculation. 9.02. Notices. Unless otherwise specified herein, all notices or other communication given hereunder shall be in writing and shall be given by internationally recognized overnight courier, facsimile or personal delivery and shall be deemed to be given or made for purposes of this Agreement two (2) Business Days following the date when the same is sent by overnight courier or on the day sent by facsimile or personally delivered (unless sent or delivered after 5:00 P.M. using the time in the place to which the message is being delivered). Unless otherwise specified in a notice delivered or received in accordance with the foregoing provisions of this Section 9.02, all notices shall be given to or made upon the respective parties hereto at their respective addresses as indicated herein: To the Borrower: To the Lender: Hafeez Karamath Engineering Services Ltd. Ionics, Incorporated Cyrus Trace, El Socorro Ext. 65 Grove Street San Juan, Trinidad, W.I. Watertown, MA 02472 Facsimile No: (868) 675-2679 Facsimile No: (617) 926-9277 9.03 Disposition of Indebtedness. The Lender may, without the approval or consent of the Borrower, sell, assign, transfer, pledge, negotiate, grant participation in or otherwise dispose of all or any part of the indebtedness of the Borrower under this Agreement, the Pledge Agreement or any of the other Transaction Documents to any party, and any such party shall enjoy all the rights and privileges of the Lender under this Agreement, the Pledge Agreement and the other Transaction Documents. The Borrower shall accord full recognition to any such assignment, and all rights and remedies of the Lender in connection with the interest so assigned shall be as fully enforceable by such assignee as they were by the Lender before such assignment. The Lender may disclose to the proposed assignee or participant and to any Affiliate of the Lender (whether or not a proposed assignee or participant), any information that the Borrower is required to deliver to the Lender pursuant to this Agreement or that the Lender may otherwise have with respect to the Borrower, its business and/or assets from time to time. The Borrower hereby agrees to cooperate fully with the Lender in providing any such information to any proposed assignee or participant. 9.04. Benefit of Agreement. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective successors and assigns of the parties hereto, provided that the Borrower shall not assign or transfer any of its interest, rights or obligations hereunder without the prior written consent of the Lender. 9.05. No Waiver; Remedies Cumulative. No failure or delay on the part of the Lender in exercising any right, power or privilege hereunder, under the Pledge Agreement or under any of the other Transaction Documents and no course of dealing between the Borrower and the Lender shall operate as a waiver thereof; nor shall any single or partial exercise of any right power or privilege hereunder, under the Pledge Agreement or under any of the other Transaction Documents preclude any other right, power or privilege hereunder or thereunder. The rights and remedies herein expressly provided are cumulative and not exclusive of any rights or remedies which the Lender would otherwise have. No notice to or demand on the Borrower in any case shall entitle the Borrower to any other or further notice or demand in similar or other circumstances or constitute a waiver of the rights of the Lender to any other or further action in any circumstances without notice or demand. 9.06. Amendment or Waiver. No course of dealing between the Lender and the Borrower shall be effective to amend, modify or change any provision of this Agreement. This Agreement may not be amended, discharged or terminated without the written consent of the Lender and the Borrower, and no provision hereof may be waived without the written consent of the Lender. 9.07. Judgment Currency. All payments of principal, interest or fees due hereunder, under the Pledge Agreement and under each of the other Transaction Documents shall be made in Dollars, regardless of any law, rule, regulation or statute, whether now or hereafter in existence or in effect in any jurisdiction, which affects or purports to affect such obligations. To the fullest extent permitted by applicable law, the obligation of the Borrower in respect of any amount due under this Agreement, the Pledge Agreement or any other Transaction Document shall, notwithstanding any payment in any other currency (whether pursuant to a judgment or otherwise), be discharged only to the extent of the amount in Dollars that the person entitled to receive that payment may, in accordance with normal banking procedures, purchase with the sum paid in that other currency (after any premium and costs of exchange) on the Business Day immediately following the day on which such person receives such payment. If the amount in Dollars that may be so purchased for any reason falls short of the amount originally due, the Borrower shall pay such additional amounts, in Dollars, as may be necessary to compensate for the shortfall. Any obligation of the Borrower not discharged by such payment shall, to the fullest extent permitted by applicable law, be due as a separate and independent obligation and, until discharged as provided herein, shall continue in full force and effect. 9.08 Severability. In the event that any one or more of the provisions contained in this Agreement shall for any reason be held to be invalid, illegal or unenforceable in any respect, this Agreement shall be construed as if such illegal or unenforceable provision had never been contained herein. 9.09. Prior Agreements Superseded. This Agreement, the Pledge Agreement and each of the Transaction Documents constitute the entire understanding among the parties hereto with respect to the subject matter hereof and supersede all prior agreements and understandings, if any, and any representations, whether verbal or written, made by or on behalf of the Lender to the Borrower relating to the subject matter hereof. The Lender shall have only such duties and obligations as are expressly specified in this Agreement and no duties, obligations or fiduciary responsibilities shall be implied to the Lender. Each of the parties hereto hereby further agrees that the Lender shall be deemed to have acted in good faith to the extent that the Lender performs its obligations in accordance with the terms of this Agreement. This Agreement, the Pledge Agreement and each of the other Transaction Documents were drafted with the joint participation of the Borrower and the Lender and shall be construed neither against nor in favor of either of them, but rather in accordance with the fair meaning thereof. 9.10. Survival of Representations. All representations and warranties made herein shall survive the execution and delivering of this Agreement, the Pledge Agreement and each of the Transaction Documents, and shall continue in full force and effect so long as the Loan is outstanding and unpaid. 9.11. Limit on Interest. Anything herein to the contrary notwithstanding, the obligations of the Borrower under this Agreement, the Pledge Agreement and each of the Transaction Documents shall be subject to the limitation that payments of interest to the Lender shall not be required to the extent that receipt of any such payment by the Lender would be contrary to provisions of law applicable to the Lender (if any) which limit the maximum rate of interest which may be charged or collected by the Lender; provided, however, that nothing herein shall be construed to limit the Lender to presently existing maximum rates of interest, if an increased interest rate is hereafter permitted by reason of applicable federal or state legislation. In the event that the Borrower makes any payment of interest, fees or other charges, however denominated, pursuant to this Agreement, the Pledge Agreement or any of the Transaction Documents, which payment results in the interest paid by the Borrower to the Lender to exceed the maximum rate of interest permitted by applicable law, any excess over such maximum shall be applied in reduction of the principal balance owed to the Lender as of the date of such payment, or if such excess exceeds the amount of principal owed to the Lender as of the date of such payment, the difference shall be paid by the Lender to the Borrower. 9.12. Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original and all of which when taken together shall constitute but one and the same instrument. 9.13. Right of Setoff. Upon the occurrence and during the continuance of any Event of Default, the Lender is hereby authorized at any time and from time to time, without notice to the Borrower (any such notice being expressly waived by the Borrower), to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and any other Indebtedness owing by the Lender to or for the account of the Borrower against any and all of the obligations of the Borrower now or hereafter existing under this Agreement, the Pledge Agreement or any of the Transaction Documents as the case may be, or any other instrument executed in connection with this Agreement, the Pledge Agreement or any of the Transaction Documents, as the case may be, or constituting security therefor, irrespective of whether or not the Lender shall have made demand under this Agreement, the Pledge Agreement or any of the Transaction Documents, as the case may be, and although such obligations may be unmatured. The Lender agrees promptly to notify the Borrower after any such setoff and application, provided that the failure to give such notice shall not affect the validity of such setoff and application. The rights of the Lender under this Section 9.13 are in addition to other rights and remedies (including, without limitation, other rights of setoff) which the Lender may have. 9.14. Indemnification. The Borrower hereby agrees to defend, protect, indemnify, and hold harmless the Lender and each of its Affiliates, officers, directors, employees, attorneys and agents (collectively, the "Indemnitees") from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, claims, costs, expenses and disbursements imposed on, incurred by, or asserted against such Indemnitees, in proceedings which may be taken by the Lender for the purpose of enforcing or realizing the security granted (collectively, the "Indemnified Matters") in lawful exercise of its powers as Lender under this Agreement; provided, however, the Borrower shall not be obligated to indemnify and hold harmless any Indemnitee hereunder with respect to any Indemnified Matter to the extent any loss or damage suffered or incurred by such Indemnitee is caused by or results from the willful misconduct or gross negligence of such Indemnitee, as determined by a final, non-appealable order of a court of competent jurisdiction. To the extent that the undertaking to indemnify, pay and hold harmless set forth in the preceding sentence may be unenforceable because it is violative of any law or public policy, the Borrower shall contribute the maximum portion which it is permitted to pay and satisfy under applicable law, to the payment and satisfaction of all Indemnified Matters incurred by the Indemnitees. 9.15. Collection Costs. The Borrower hereby agrees to pay all reasonable costs and expenses incurred by the Lender, including reasonable attorneys' fees (including those for appellate proceedings), incurred in connection with any Event of Default, or in connection with the collection or attempted collection or enforcement of Borrower's obligations under this Agreement, or in connection with the protection of any collateral given as security for the payment of Borrower's obligations under this Agreement, whether or not legal proceedings may have been instituted. 9.16. Rights of Third Parties. All conditions of the Lender hereunder are imposed solely and exclusively for the benefit of the Lender and its successors and assigns, and no other person shall have standing to require satisfaction of such conditions or be entitled to assume that the Lender will make the Loan in the absence of strict compliance with any and all other provisions thereof, and no other person shall, under any circumstances, be deemed to be a beneficiary of this Agreement, the Pledge Agreement or any of the other Transaction Documents, any rights of which may be freely waived in whole or in part by the Lender at any time if, in its sole discretion, it deems it desirable to do so. 9.17. The Borrower Not the Lender's Agent. Nothing in this Agreement, the Pledge Agreement or any of the other Transaction Documents shall be construed to make the Borrower the Lender's agent for any purpose whatsoever, the Borrower and the Lender partners, or joint or co-venturers, and the relationship of the parties shall, at all times, be that of debtor and creditor. 9.18. Waiver of Defenses. The Borrower hereby waives presentment for payment, demand, protest, notice of dishonor, notice of acceleration of maturity, and all defenses on the ground of extension of time for payment of Borrower's obligation under this Agreement (except for such extensions of time as may have been granted by the Lender in writing from time to time), and agree to continue and remain bound for the payment of principal, interest and all other sums payable hereunder, notwithstanding any change or changes by way of release, surrender, exchange or substitution of any security for the Loan or by way of any extension or extensions of time for payment of principal or interest. The Borrower further hereby waives all and every kind of notice of such change or changes and agrees that the same may be made without notice to or consent of the Borrower. IN WITNESS WHEREOF, each of the parties hereto has caused this Loan Agreement to be effective as of the date first above written, but have in fact caused this Loan Agreement to be duly executed and delivered as of this 25th day of October, 2000. Lender: Borrower: IONICS, INCORPORATED HAFEEZ KARAMATH ENGINEERING SERVICES, LTD. By: /s/ Edward J. Cichon By: /s/ Hafeez Karamath -------------------------------- ---------------------------------------- (Signature) (Signature) Name: Edward J. Cichon Name: Hafeez Karamath -------------------------------- ---------------------------------------- (Print) (Print) Title: Vice President Title: Exec. Chairman ------------------------------- ---------------------------------------- (Print) (Print) To the Lender: To the Borrower: Ionics, Incorporated Hafeez Karamath Engineering Services Ltd. 65 Grove Street Cyrus Trace, El Socorro Ext. Watertown, MA 02472 San Juan, Trinidad, W.I. Facsimile No: (617) 926-9277 Facsimile No: (868) 675-2679 Witness: Donne Denbow Witness: Gary L. Podrabsky EXHIBIT A FORM OF PLEDGE AGREEMENT STOCK PLEDGE AGREEMENT This Stock Pledge Agreement ("Pledge Agreement") dated as of October 25, 2000, is entered into between Hafeez Karamath Engineering Services Limited ("HKES") a corporation duly organized and existing under the laws of Trinidad, West Indies, with its principal place of business at 56 Cyrus Trace, El Sorocco Extension, San Juan, Trinidad, W.I., executed in trust for an affiliate of HKES, organized or to be organized under the laws of Saint Lucia, and which will assume all rights and obligations of HKES hereunder, as if it were the original named party hereto in full substitution for HKES (the Pledgor), with the agreement by the parties that until the affiliate assumes all rights and obligations of HKES hereunder, HKES will continue to be liable for the performance of all obligations of the Pledgor and entitled to the benefits of this Pledge Agreement, and Ionics, Incorporated, a corporation duly organized and existing under the laws of the Commonwealth of Massachusetts, United States of America, with its principal place of business at 65 Grove Street, Watertown, Massachusetts, U.S.A. ("Ionics"), executed in trust for an affiliate of Ionics, organized or to be organized under the laws of Saint Lucia, and which will assume all rights and obligations of Ionics hereunder, as if it were the original named party hereto in full substitution for Ionics (the Pledgee), with the agreement by the parties that until the affiliate assumes all rights and obligations of Ionics hereunder, Ionics will continue to be liable for the performance of all obligations of the Pledgee and entitled to the benefits of this Pledge Agreement. Recitals A. Pursuant to a Loan Agreement of even date herewith by and between Pledgor and Pledgee ("Loan Agreement"), Pledgee is making a loan to Pledgor in the principal amount of U.S.$10,000,000 (the Loan) to be used by Pledgor to purchase 200 ordinary shares of common stock (the "Pledged Shares") in The Desalination Company of Trinidad and Tobago, a limited liability company duly organized and existing under the laws of Trinidad, West Indies, with its principal place of business at 56 Cyrus Trace, El Sorocco Extension, San Juan, Trinidad, W.I. (Desalcott). B. As a material inducement to cause Pledgee to make the Loan to Pledgor, Pledgor has agreed to pledge to Pledgee as security for all of Pledgor's obligations under the Loan Agreement the Pledged Shares. C. All capitalized terms used herein and not otherwise defined herein will have the meaning assigned to them in the Loan Agreement. Agreement 1. The Pledgor hereby grants, pledges and assigns to the Pledgee a continuous security interest in the Pledged Shares and in all dividends and other distributions, cash or non-cash, from time to time distributed on the Pledged Shares, as security for Pledgor's obligations under the Loan Agreement and the performance of Pledgor's covenants contained herein and in the Loan Agreement, subject only to a First Priority Security Interest in the Pledged Shares, whether now existing or hereinafter arising, granted by Pledgor to any of (i) Republic Bank Limited, Republic Finance and Merchant Bank Limited, and the other financial institutions which become lenders pursuant to Clause 26.2 of the Project Loan Agreement dated July 13, 2000 between Desalcott and the Bank (in its various capacities) (collectively, the "Bank"), pursuant to a charge of shares agreement entered or to be entered into among Pledgor, Pledgee, Desalcott and the Bank (the "Charge of Shares Agreement"); (ii) any bridge, construction or short-term lenders providing financing to Desalcott in connection with the engineering, design, construction and operation of the desalination plant being constructed by Desalcott in Point Lisas, Republic of Trinidad and Tobago (the "Project") (together with the Bank, the "Short-Term Lenders"); and (iii) the Overseas Private Investment Corporation or other permanent project finance lender for the Project (collectively, the "Long-Term Lenders", and together with the Bank and the Short-Term Lenders, the "First Priority Interest Holders", with each being referred to individually as a "First Priority Interest Holder"). (The first priority security interest granted by Pledgor to a First Priority Interest Holder shall be referred to herein as the "First Priority Security Interest"). To the extent that all of the Pledged Shares have not been purchased by Pledgor at the time of execution of this Pledge Agreement, Pledgor agrees to execute all documents and do all things required in order to grant and maintain Pledgee's perfected security interest in the Pledged Shares and Pledgee's other rights contained in this Pledge Agreement with respect to the Pledged Shares, and such of the Pledged Shares as may be issued to Pledgor from time to time after the execution of this Agreement and become subject to the terms of this Pledge Agreement under clause 13 hereof. 2. The Pledgee hereby accepts the Pledgor's pledge of the Pledged Shares as security for the payment of Pledgor's obligations under the Loan Agreement and the performance of Pledgor's covenants contained herein and in the Loan Agreement. 3. Upon execution of this Pledge Agreement, Pledgor shall deliver to the Bank a written notice in a form prepared by Pledgee ("Notice of Pledge") notifying the Bank of this Pledge Agreement and Pledgor's pledge to Pledgee of a second priority security interest the Collateral. Further, upon any future granting of a First Priority Security Interest in the Pledged Shares by the Pledgor to a First Priority Interest Holder, Pledgor shall deliver a Notice of Pledge to such First Priority Interest Holder. 4. Upon execution of this Pledge Agreement, Pledgor shall instruct the Bank to (i) hold the certificates evidencing the Pledged Shares (the Certificates) as Pledgee's agent to secure Pledgor's obligations under the Loan Agreement and perfect the pledge of the Pledged Shares contained herein pursuant to a Collateral Sharing Agreement among the Bank, Pledgor and Pledgee and in the form attached as Exhibit A (the "Collateral Sharing Agreement"), and (ii) transfer the Certificates directly to Pledgee upon receipt of notification from the Bank of termination of the Bank's First Priority Security Interest, unless the Pledgee has sent written notice to the Bank prior to that date notifying the Bank that this Pledge Agreement and Pledgee's second priority security interest in the Pledged Shares has terminated, in which case the Collateral Sharing Agreement shall also terminate. If upon termination of the Project Loan Agreement, Desalcott re-finances with one or more Long-Term Lenders the obligations secured by the Charge of Shares Agreement and a First Priority Security Interest in the Pledged Shares is to be granted to such Long-Term Lender(s) under a pledge agreement between Pledgor and the Long-Term Lender(s) ("Long-Term Lender Pledge Agreement"), the Pledgor agrees to provide equivalent instructions to the collateral agent under the Long-Term Lender Pledge Agreement ("Collateral Agent") as those contained in clauses (i) and (ii) above of this Section 4, and to require the Collateral Agent to execute and deliver a collateral sharing agreement upon substantially the same terms as contained in the Collateral Sharing Agreement. 5. Upon notice of termination of the First Priority Security Interest having been given by the Bank or the Collateral Agent to the Pledgee, and , after delivery by the Bank or the Collateral Agent of the Certificates to Pledgee, the Pledgee will be entitled to hold the Certificates and the undated share tranfer until Pledgee confirms in writing the termination of this Pledge Agreement. The Bank or the Collateral Agent entitled to hold the Certificates under a Collateral Sharing Agreement shall be referred herein as a "Trustee". Upon receipt of the Certificates by Pledgee, the Bank or the Collateral Trustee, as the case may be, shall cease to be a Trustee and Pledgee shall be referred to herein as a Trustee. 6. Pledgor covenants with Pledgee that until payment in full of the principal and interest on the Loan, it will not: (a) sell, lease, assign, transfer, encumber or otherwise dispose of (Transfer) any of its assets or revenues whether now owned or hereafter acquired, other than in the ordinary course of business; (b) Transfer the Pledged Shares, except pursuant to any loan or pledge agreement between Pledgor and a First Priority Security Holder; or (c) make any payment on account of the purchase, acquisition, redemption or other retirement of any of its shares. 7. Pledgor further covenants with Pledgee that it will not declare or pay any dividend or authorize or make any other distribution on its capital stock, whether now or hereafter outstanding, unless: (a) the dividend or other distribution is paid or distributed within fifteen (15) days after an Interest Payment Date (as defined in the Loan Agreement); and (b) whether or not sufficient dividends have been paid by Desalcott on the Pledged Shares, on the date of declaration of a dividend or other distribution by the Pledgor: (i) no amortized principal amount of the Loan is unpaid (without taking into account whether the amortized principal is not yet payable because Desalcott has not declared and paid sufficient dividends); and (ii) no accrued interest (without taking into account whether the interest is not yet payable because Desalcott has not declared and paid sufficient dividends) on the Loan is unpaid. 8. Upon an occurrence of an Event of Default permitting the enforcement of the Loan Agreementin accordance with clause 7.01 thereof, , Pledgee shall be entitled to foreclose on its security interest in the Pledged Shares and to exercise all rights of a Pledgee under the laws of the Republic of Trinidad and Tobago for Pledgee to effectively foreclose its security interest. Without limiting the generality of the foregoing, Pledgee may, upon occurrence of such an Event of Default, sell the Pledged Shares in the manner authorized by Clause 16 of this Pledge Agreement, and may seek to foreclose its security interest in the Pledged Shares immediately, or take other appropriate action either alone or in conjunction with any First Priority Security Holder in existence at the time of Default. Notice of any such sale given at least ten (10) days prior thereto shall constitute reasonable notice to Pledgor. Upon any sale of any of the Pledged Shares hereunder (whether by virtue of the power of sale herein granted, pursuant to judicial process or otherwise), the receipt of the Pledgee or the officer making the sale shall be a sufficient discharge to the purchaser or purchasers of the Pledged Shares so sold, and such purchaser or purchasers shall not be obligated to see to the application of any part of the purchase money paid over to the Pledgee or such officer or be answerable in any way for the misapplication or non-application thereof. Each purchaser at any sale shall take the Pledged Shares absolutely free from any claim or right on the part of the Pledgor subject to any First Priority Security Interest in the Pledged Shares, and the Pledgor, upon any sale of the Pledged Shares pursuant to this Section 8, hereby waives and releases (to the extent permitted by law) all rights of redemption or stay which the Pledgor now has or may at any time in the future have under any rule of law or statute now existing or hereafter enacted. Pledgor agrees that nothing contained in the Shareholders' Agreement dated May 12, 2000 among Desalcott, Pledgor and Pledgee will be construed to prevent or restrict Pledgee from exercising any of its rights under this Pledge Agreement upon the occurrence of such an Event of Default, it being understood that the exercise of Pledgee's rights is subject to any rights of the First Priority Interest Holders to which Lender is subordinate. 9. Until an Event of Default occurs, but not subsequent thereto, the Pledgor is entitled, subject to the Charge of Shares Agreement and any future pledge agreement between the Pledgor and a First Priority Security Holder, with respect to the Pledged Shares to: (i) vote the Pledged Shares at meetings of shareholders, (ii) execute consents in respect of the Pledged Shares, (iii) consent to, ratify or waive notice of meetings of stockholders and (iv) receive dividends or other distributions, cash or non-cash, from time to time distributed on the Pledged Shares; to be disbursed in the manner set out in clause 2.06 of the Loan Agreement, and pursuant to Section 2.05 or 2.07, as the case may be, and any principal payable on the Loan due as of the date of the next installment payment pursuant to Section 2.04 of the Loan Agreement. Upon declaration of a dividend or other distributions, Pledgor shall provide both the Pledgee and the escrow agent with a Dividend Payout Certificate, in the form attached hereto as Exhibit B, stating the amount of any dividend or other distribution the Pledgor has received to pursuant to this Section 9. If necessary, and upon the receipt of the written request from the Pledgor, the Pledgee agrees to execute and deliver appropriate proxies to the Pledgor; provided that all such action taken or proposed to be taken by Pledgor shall be consistent with the terms of this Pledge Agreement. 10. The Pledgor hereby represents and warrants that (i) it is the beneficial owner of, and has good and marketable title to, the Pledged Shares, subject to no lien whatsoever, except the liens and security interests created by this Pledge Agreement and by the Charge of Shares Agreement and the First Priority Security Interest granted on the Pledged Shares; (ii) it has full power, authority and legal right to pledge the Pledged Shares pursuant to this Pledge Agreement; (iii) no consent of any other party (including, without limitation, any stockholder or creditor of the Pledgor) except consents required from the First Priority Interest Holders which will have been obtained prior to or at the time of closing of the Loan Agreement, and no order, consent, license, permit, approval, validation or authorization of, exemption by, notice to or registration with (other than as required by the Loan Agreement or this Pledge Agreement), recording, filing or declaration with, any governmental or public body or authority is required to be obtained by the Pledgor in connection with the execution, delivery or performance of this Pledge Agreement or consummation of the transactions contemplated hereby, including, without limitation, the grant by Pledgor to Pledgee of a valid second priority security interest in the Pledged Shares and the exercise by the Pledgee of the voting (upon the occurrence of an Event of Default as provided in Section 9 above) or other rights provided for in this Pledge Agreement or the remedies in respect of the Pledged Shares pursuant to this Pledge Agreement (except as may be required in connection with the disposition of the Pledged Shares by laws affecting the offering and sale of securities generally); (iv) all of the Pledged Shares have been duly and validly issued, and are fully paid; (v) this Pledge Agreement, the Collateral Sharing Agreement, or other collateral sharing agreement made between the Pledgor, Pledgee, and any other holder of a First Priority Security Interest, and the undated share transfers of the Pledged Shares are and will be valid and legally binding obligations of Pledgor, enforceable against it in accordance with the terms hereof; and (vi) the pledge by Pledgor and holding of the Pledged Shares by the Bank pursuant to the Loan Agreement, this Pledge Agreement and the Collateral Sharing Agreement creates a valid second priority security interest in the Pledged Shares, and the proceeds thereof, which security interest is not subject to any prior lien or any agreement purporting to grant to any third party a lien on the property or assets of the Pledgor which would include the Pledged Shares, except for the Bank's First Priority Security Interest granted pursuant to the Charge of Shares Agreement, or any other First Priority Security Interest granted to the holder thereof. 11. The Pledgor covenants and agrees that the (i) Pledgor will defend the Pledgee's right, title and security interest in and to the Pledged Shares and the proceeds thereof against the claims and demands of all persons whomsoever; (ii) Pledgor will not, with respect to the Pledged Shares, without the prior written consent of the Pledgee, enter into any shareholder agreements, voting agreements, voting trusts, trust deeds, irrevocable proxies or any other similar agreements or instruments, provided that the Pledgee recognizes that the Pledged Shares are or may be subject to the First Priority Security Interest held by the First Priority Interest Holders. 12. If an Event of Default shall have occurred and be continuing and the Pledgor shall have received from the Pledgee a written request or requests that the Pledgor cause any registration, qualification or compliance under any laws of the Republic of Trinidad and Tobago or laws thereof to be enacted with respect to the Pledged Shares, the Pledgor as soon as practicable and will use its best efforts to cause the registration to be effected (and be kept effective) and will use its best efforts to cause such qualification and compliance to be effected (and be kept effective) as may be so requested and as would grant a valid second priority interest in the Pledged Shares, or if all First Priority Security Interests have been released, a valid and perfected first priority security interest in the Pledged Shares or permit or facilitate the sale and distribution of the Pledged Shares, including, without limitation, appropriate compliance with all government requirements, and reasonably do or cause to be done all such other acts and things as may be necessary to grant a valid second priority interest in the Pledged Shares, or if all First Priority Security Interests have been released, a valid and perfected first priority security interest so as to make a sale of the Pledged Shares by the Pledgee valid and binding in compliance with applicable laws. 13. During the term of this Pledge Agreement, if any issue of new shares or share dividends or other change is declared with respect to the Pledged Shares or made in the capital structure of the Pledged Shares, or any subscription, warrant or other option is issued with respect to the Pledged Shares, or any cash or property dividend is paid on the Pledged Shares, all new, substituted, or additional shares or other securities issued by reason of such issue, change or option or any cash or property distributed as a result of such dividend shall be delivered to and held by the Trustee under the terms of this Pledge Agreement in the same manner as the Pledged Shares subject to clause 2.06 of the Loan Agreement. Thereafter, the term Pledged Shares in this Pledge Agreement shall be deemed to include such shares or securities and, where applicable, such cash or property the Pledgor is not entitled to receive pursuant to Section 14. 14. The Pledgor shall: (i) whether or not the transactions hereby contemplated are consummated, pay or reimburse the Pledgee promptly upon demand for the payment of all reasonable costs and expenses of the Pledgee incurred after the date hereof in connection with the preservation of rights under, and enforcement of, and, after an Event of Default, the renegotiation or restructuring of this Pledge Agreement and any amendment, waiver or consent relating thereto (including, without limitation, the reasonable fees and disbursements of counsel for the Pledgee); (ii) excluding the initial stamp duty due and payable with respect hereto, pay and hold the Pledgee harmless from and against any and all future stamp duties or any other excise or property taxes, charges or similar levies or recording costs which arise from any payment made hereunder or from the execution, delivery or registration of, or otherwise with respect to this Pledge Agreement and hold the Pledgee harmless from and against any and all liabilities with respect to or resulting from any delay or omission to pay any such duties, taxes, charges or levies; and (iii) indemnify the Pledgee, its officers, directors, employees, representatives and agents from and hold each of them harmless against any and all reasonable costs, losses, liabilities, claims, damages or expenses actually incurred by any of them (whether or not any of them is a designated party thereto) arising out of or by reason of any litigation or other proceeding related to this Pledge Agreement. Notwithstanding anything in this Pledge Agreement to the contrary, the Pledgor shall not be responsible to the Pledgee or any officer, director, employee, representative or agent of the Pledgee for any losses, damages, liabilities or expenses which result from such person's gross negligence or willful misconduct. The Pledgor's obligations under this Section 14 shall survive any termination of this Pledge Agreement. 15. No delay on the part of the Pledgee in exercising its rights under this Pledge Agreement shall waive these rights, nor shall the waiver of any breach under this Pledge Agreement operate as a waiver of any subsequent breach. 16. The Pledgee does not have any liability or obligation to take steps to preserve the value of the Pledged Shares, or to collect or to enforce any obligation secured by the Pledged Shares, whether by giving notice, demanding payment, protesting or instituting suit or otherwise. The Pledgee shall not incur any liability as a result of the sale of the Pledged Shares, or any part thereof, at any private or public sale conducted in a manner which is commercially reasonable in accordance with the laws of Trinidad and Tobago relating to sale by mortgagees . On a proposed sale of the Pledged Shares, the Pledgee agrees to use commercially reasonable efforts to obtain the best price available, and will, at Pledgor's expense, have an independent valuation made of the Pledged Shares. Provided the Pledgee complies with the above, the Pledgor hereby waives any claims against the Pledgee arising by reason of the fact that the price at which the Pledged Shares may have been sold was less than the aggregate amount of the Loan or less than the amount of the independent valuation. 17. Upon payment of the Loan in full plus accrued and unpaid interest, including payment of any default interest or cost of collection, the Pledgee shall notify the Trustee of the termination of Pledgee's second priority security interest. If the Pledgee is the Trustee, the Pledgee shall return the Certificates and blank transfers executed by the Pledgor, and all other collateral held pursuant to this Pledge Agreement to the Pledgor within fifteen (15) business days after Pledgee receives such payment or payments, and this Pledge Agreement and the Collateral Sharing Agreement if in existence shall immediately terminate, except for Pledgor's obligations under Section 14 above. 18. This Pledge Agreement may be modified only by a written instrument signed by the parties. 19. Any notice or other communication required or permitted under this Pledge Agreement shall be in writing and shall be deemed to have been duly given upon (i) hand delivery or confirmation of receipt of facsimile or (ii) five (5) days after mailing, if properly addressed and sent by certified or registered mail, return receipt requested, postage prepaid, or (iii) two (2) days after delivery, properly addressed, to an internationally recognized overnight courier service, delivery costs prepaid, addressed as follows: (i) If to the Pledgor, to: Hafeez Karamath Engineering Services, Ltd. Cyrus Trace, El Socorro Ext. San Juan, Trinidad, W.I. Facsimile: 868-675-2679 (ii) If to the Pledgee, to: Ionics, Incorporated 65 Grove Street Watertown, MA 02472 Facsimile: 617-926-9277 Each Party may designate another address or person for receipt of notices under this Pledge Agreement by giving notice in accordance with this Section to the other parties. 20. The Pledgor agrees that it will do such acts and things and promptly execute and deliver to the Pledgee such additional conveyances, assignments, agreements and instruments as the Pledgee may reasonably require or deem advisable to carry into effect the purposes of this Pledge Agreement to perfect its second priority security interest, or after termination of all First Priority Security Interests, a first priority security interest in the Pledged Shares, and to further assure and confirm unto the Pledgee its rights, powers and remedies hereunder, including, without limitation, the execution and delivery of such proxies and other documents as may be necessary to allow Pledgee to exercise its rights (including, without limitation, voting powers vested in Pledgee upon an Event of Default in accordance with Section 9 above) with respect to the Pledged Shares and Pledgor shall deliver upon receipt all dividends, interest and other cash payments and cash proceeds which it may receive with respect to the Pledged Shares subject to clause 2.06 of the Loan Agreement to be held as additional security for Pledgor's obligations under the Loan Agreement and this Pledge Agreement in accordance with the terms of this Pledge Agreement. 21. Upon the occurrence of an Event of Default resulting in the enforcement of the Loan Agreement in accordance with clause 7.01 thereof, and for the purposes set out in clause 20 of this Pledge Agreement ( in the latter instance whether or not an Event of Default has occurred) but not otherwise, the Pledgor hereby absolutely and irrevocably constitutes and appoints the Pledgee as the Pledgor's true and lawful attorney-in-fact, with full power of substitution, in the name of the Pledgor: (a) to execute and do all such assurances, acts and things which the Pledgor ought to do but has failed to do under the covenants and provisions contained in this Pledge Agreement; (b) to take any and all such action as the Pledgee may, in its sole discretion, determine as necessary or advisable for the purpose of maintaining, preserving or protecting the security constituted by this Pledge Agreement or any of the rights, remedies, powers or privileges of the Pledgee under this Pledge Agreement, including the granting of any authority to the Bank deemed necessary or appropriate by the Pledgee to perfect, protect and preserve its security interest in the Pledged Shares and rights hereunder; and (c) generally, in the name of the Pledgor exercise all or any of the powers, authorities, and discretions conferred on or reserved to the Pledgee by or pursuant to this Pledge Agreement, and (without prejudice to the generality of any of the foregoing) to seal and deliver or otherwise perfect any instrument or document of conveyance, agreement, or act as the Pledgee may deem proper in or for the purpose of exercising any of such powers, authorities or discretions. The Pledgor hereby ratifies and confirms, and hereby agrees to ratify and confirm, whatever lawful acts the Pledgee shall do or purport to do in the exercise of the power of attorney granted to the Pledgee pursuant to this Section 21, which power of attorney, being given for security and coupled with an interest, is irrevocable. 22. This Pledge Agreement (together with the Loan Agreement and any Collateral Sharing Agreement between Pledgor and the Bank) constitutes the entire agreement with respect to the pledge of the Pledged Shares to the Pledgee and supersedes all prior agreements and understandings, both written and oral, between the parties with respect to the pledge. It may be executed simultaneously in several counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument. Delivery of the executed signature page hereof by facsimile transmission shall constitute effective and binding execution and delivery hereof. Any party signifying execution of this Pledge Agreement by facsimile agrees to provide the other party with an original signed Pledge Agreement by overnight courier (for delivery on the next business day). 23. The invalidity or unenforceability of any one or more phrases, sentences, clauses or sections in this Pledge Agreement shall not affect the validity or enforceability of the remaining portions of this Pledge Agreement or any part thereof. 24. The terms and provisions of this Pledge Agreement shall be binding upon the Pledgor and its successors, assigns and legal representatives and shall inure to the benefit of the Pledgee and its successors, assigns and legal representatives. 25. This Pledge Agreement shall be governed by and construed in accordance with the laws of the Republic of Trinidad and Tobago. 26. Pledgor hereby irrevocably agrees that to the extent that Pledgor or its respective assets has or hereafter may acquire any right of immunity related to or arising from the transactions contemplated by the Loan Agreement or this Pledge Agreement, whether characterized as sovereign immunity or otherwise, from any legal proceedings to enforce or collect upon the Loan Agreement or this Pledge Agreement or any other liability or obligation of Pledgor related to Pledgee, including, without limitation, immunity from service of process, immunity from jurisdiction or judgment of any court or tribunal, immunity from execution of a judgment, and immunity of any of its property from attachment prior to any entry of judgment, or from attachment in aid of execution upon a judgment, Pledgor hereby expressly and irrevocably waives any such immunity. 27. In the event of a dispute between the parties to this Pledge Agreement in any way related to or arising out of this Pledge Agreement or the transactions contemplated herein ("Dispute"), each party shall attempt in good faith to resolve the dispute promptly through negotiations. If the dispute has not been resolved through negotiation within five (5) days after the delivery of a notice of dispute by either party, either party may institute arbitration proceedings at any time thereafter by delivering written demand for arbitration to the other party in the manner described in Section 19. The dispute shall then be exclusively and finally settled and resolved by binding arbitration in accordance with the Arbitration act of Trinidad and Tobago supplemented by the International Rules of Arbitration of the International Chamber of Commerce .. Such arbitration proceedings shall be held in London, England and shall be subject to the choice of law provisions set forth in Section 25. For purposes of this section 25, the parties hereby waive any and all objections to venue that they may have under the laws of any state or country, including, without limitation, any argument that jurisdiction, situs, and/or venue are inconvenient or otherwise improper. Any decision or award of the arbitrator or arbitration panel, as the case may be, shall be expressed in United States dollars and shall be final and binding on the parties to the arbitration proceeding. The parties hereby waive, to the extent permitted by law, any and all rights to appeal or to review such award by any court or tribunal. The parties hereto agree that the arbitral award may be enforced against the parties to the arbitration proceeding or their assets wherever they may be found and that a judgment upon the arbitral award may be entered in any court having jurisdiction therefor. The procedures established in this Section 27 shall be the sole, exclusive procedures for the resolution of Disputes between the parties, provided, however, that either may seek a preliminary injunction or other preliminary judicial relief if, in its reasonable, good-faith judgment, such action is necessary to avoid irreparable damage. Each party further agrees that process may be served upon such party in any manner authorized under the laws of the Republic of Trinidad and Tobago, and waives any objections that such party may otherwise have to such process. 28. In the event of any suit, action or arbitration or other proceeding arising out of or based on this Pledge Agreement, the prevailing Party shall be entitled to such costs as may be awarded by the Court or the Arbitrator in question. In the presence of: HAFEEZ KARAMATH ENGINEERING SERVICES, LTD. /s/ Andre LeBlanc By: /s/ Hafeez Karamath ----------------- --------------------------- Name: Andre LeBlanc Name: Hafeez Karamath Title: Executive Chairman /s/ Donne Denbow ----------------- Name: Donne Denbow IONICS, INCORPORATED /s/ Gary L. Podrabsky By: /s/ Edward J. Cichon --------------------- --------------------- Name: Gary L. Podrabsky Name: Edward J. Cichon Title: Vice President /s/ John C. Kiernan -------------------- Name: Witness: /s/ Donne Denbow ----------------- EXHIBIT B FORM OF CERTIFICATE OF CHAIRMAN OF BORROWER The undersigned, , Chairman of HAFEEZ KARAMATH ENGINEERING SERVICES, LTD., a corporation duly organized and existing under the laws of the Republic of Trinidad and Tobago (the "Company"), does hereby certify, pursuant to Section 3.01(c) of that certain Loan Agreement dated as of September , 2000 (the "Loan Agreement") between the Company and IONICS, INCORPORATED, a corporation duly organized and existing under the laws of Massachusetts, U.S.A., as a Lender, as follows on behalf of the Company (capitalized terms used herein shall have the meanings given such terms in the Loan Agreement): (i) The representations and warranties of the Company contained in Section 6 of the Loan Agreement are true and correct in all material respects on and as of the date hereof with the same effect as though all such representations and warranties had been made or given on the date hereof; and (ii) No Event of Default, nor any event which, upon notice or lapse of time or both, would constitute such an Event of Default, has occurred or will have occurred after giving effect to the making of the Loan on the date hereof. IN WITNESS WHEREOF, the undersigned has executed this Certificate on this ___ day of September, 2000. HAFEEZ KARAMATH ENGINEERING SERVICES, LTD., a corporation duly organized and existing under the laws of the Republic of Trinidad and Tobago By: ---------------------------------------------------- Chief Financial Officer EXHIBIT C CLOSING DOCUMENT LIST The following documents shall be delivered in connection with that certain Loan Agreement (the "Agreement"), dated as of September _____, 2000, between HAFEEZ KARAMATH ENGINEERING SERVICES LTD. (the "Borrower") and IONICS, INCORPORATED (the "Lender"). A. Basic Loan Documents. -------------------- 1. Agreement. 2. Stock Pledge Agreement dated as of Septemer __, 2000 (the "Pledge Agreement"), from the Borrower to the Lender. (Exhibit A) 3. Blank Share Transfer relating to Borrower's Shares 4. Share Certificates evidencing the Borrower's ownership of the Borrower's shares. (A copy will be delivered since the Original will be at the Bank) 5. Certificate of Chairman of the Borrower (Exhibit B). 6. Collateral Sharing Agreement with Republic Bank or other bridge lender to Desalcott, or Letter of Consent issued by the Bank pending the finalization of the Collateral Sharing Agreement 7. Statement of Charge to be filed with the Registrar of Companies. B. Organizational Documents. ------------------------ 1. Articles of Incorporation and By-laws. 2. 3. Board Resolution authorizing the Transactions contemplated in the Agreement. 4. Shareholders resolution amending the Articles of Incorporation of Desalcott. 5. Opinion of Borrower's Counsel. EX-13 2 0002.txt ANNUAL REPORT EXHIBIT 13 IONICS, INCORPORATED PORTIONS OF ANNUAL REPORT TO STOCKHOLDERS OF IONICS, INCORPORATED FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 (The following sections constitute an Exhibit to Form 10-K: Management's Discussion and Analysis of Results of Operations and Financial Condition; Report of Independent Accountants; Consolidated Statements of Operations; Consolidated Balance Sheets; Consolidated Statements of Cash Flow; Consolidated Statements of Stockholders' Equity; Notes to Consolidated Financial Statements; Selected Financial Data. - ------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The following discussion and analysis of results of operations and financial condition refers to the activities of the Company's four business groups, which comprise the Company's reportable operating segments. These groups are the Equipment Business Group (EBG), Ultrapure Water Group (UWG), Consumer Water Group (CWG) and Instrument Business Group (IBG). See Note 16 to the consolidated financial statements for a more detailed description of these four business groups. RESULTS OF OPERATIONS 2000 Compared to 1999 The Company reported a 32.5% increase in revenues and a net loss of $1.9 million in 2000. The decrease in the Company's operating performance resulted primarily from the performance of CWG and EBG. CWG results reflect charges associated with the Company's decision to abandon plans to establish a bleach-manufacturing plant in Elkton, MD. Additionally, CWG results were impacted by inventory adjustments as well as charges relating to accounts receivable and notes receivable in both its domestic Aqua Cool and home water businesses, as well as residual costs associated with a system conversion in its domestic Aqua Cool business. The decrease in EBG operating performance was impacted by a shift in the product mix to lower margin capital projects, primarily the Trinidad project, as well as charges in inventory, accounts receivable and the Company's decision to write down the value of goodwill associated with an acquisition made in 1996. UWG operating performance reflected continued pricing pressure on the capital equipment business, as well as losses on several projects in the Far East. IBG operating performance improved from 1999 to 2000. IBG EBIT increased $0.5 million on increased revenues despite expenses recognized during 2000 for charges associated with relocating the Watertown, MA-based instrument operations to Boulder, CO. These expenses reflected charges for inventory, relocation expenses and accounts receivable. The Company also incurred significant litigation-related costs, primarily attributable to three patent infringement lawsuits brought against the Company. Revenues Consolidated revenues were $474.6 million in 2000, compared with $358.2 million in 1999. The increased revenues resulted from revenue growth across all four of the Company's business groups. EBG revenues increased by $64.5 million in 2000 over 1999, primarily due to increased sales of capital equipment (including the desalination plant project in Trinidad) and partial delivery of a storage system to manage the containment of spent nuclear fuel at a commercial U.S. nuclear energy plant. UWG revenues increased $38.7 million in 2000 from 1999, primarily as a result of increased capital equipment sales to the microelectronics industry, predominantly in the Far East. CWG revenues increased by $11.8 million in 2000 from 1999, reflecting growth in both domestic and European operations for Aqua Cool and home water. IBG revenues increased $1.4 million in 2000 compared to 1999, resulting primarily from increased sales to the microelectronics industry. 1999 Compared to 1998 Revenues Consolidated revenues were $358.2 million in 1999, compared with $351.3 million in 1998. Higher revenues in both EBG and CWG offset revenue declines in UWG and IBG. EBG revenues increased by $10.9 million in 1999 over 1998, primarily due to increased sales of capital equipment, particularly water reuse equipment and desalination equipment. The revenue increase also reflects engineering and design work begun on a contract to manufacture a storage system to manage the containment of spent nuclear fuel. UWG revenues decreased by $17.8 million in 1999 from 1998. UWG primarily serves the microelectronics industry and, to a lesser extent, the power and pharmaceutical industries. As was the case in 1998, revenues in 1999 from the microelectronics industry continued to reflect a significant decline, primarily due to a continuing slowdown in capital spending for new manufacturing facilities. CWG revenues increased by $15.7 million in 1999 from 1998, primarily reflecting continued growth for bottled water and home water products and services. Through the acquisition of Aquarelle SA (now called Aqua Cool France), the Company entered the French bottled water market at the beginning of 1999. The bottled water business also continued to expand its customer base in both the United States and the United Kingdom. Such expansion is being achieved primarily through internal growth and, to a lesser extent, through small acquisitions in geographic areas contiguous to existing locations. In the home water business, the Company opened its first international office, in the Republic of Ireland, during the second quarter of 1999. IBG revenues declined by $1.9 million in 1999 from 1998 levels. In the first half of 1998, IBG benefited from strong demand for the Group's TOC analyzers as a result of the adoption of a new U.S. pharmaceutical industry standard for measuring water purity. Sales of TOC instruments began to increase in the second half of 1999 as compared to the first half of the year, as a result of new European pharmaceutical regulations and new product offerings. Cost of Sales and Operating Expenses 2000 Compared to 1999 Cost of sales as a percentage of revenues was 73.8% and 66.4% in 2000 and 1999, respectively. The increase in cost of sales as a percentage of revenues from 1999 to 2000 includes increases in all four of the business groups and is attributable to several factors. For EBG, cost of sales as a percentage of revenues increased to 80.2% in 2000 from 72.3% in 1999, reflecting a shift in business mix to lower margin capital equipment, increased costs on certain long-term contracts, as well as inventory-related charges and unrecoverable business development expenses primarily relating to the Trinidad project. Cost of sales as a percentage of revenues for UWG increased from 75.5% in 1999 to 80.5% in 2000, reflecting the continued competitive environment in the microelectronics industry for ultrapure water capital equipment, as well as a change in product mix from higher margin service business to lower margin capital equipment sales. Cost of sales as a percentage of revenue increased from 56.0% in 1999 to 61.2% in 2000 for CWG. Factors affecting this increase are primarily attributable to increased fuel and labor costs associated with the bottled water group as well as inventory-related charges that occurred late in 2000. IBG cost of sales as a percentage of revenues increased from 41.9% in 1999 to 44.4% in 2000. The increase in cost of sales in 2000 is primarily attributable to inventory charges incurred in 2000, relating to the relocation of the Watertown, MA-based instrument group to Boulder, CO. Operating expenses as a percentage of revenues increased to 26.3% in 2000 compared to 25.7% in 1999. The increase in 2000 compared to 1999 was attributable to increased legal costs related primarily to the Company's involvement in patent infringement lawsuits, as well as additional charges relating to accounts receivable. Also, the Company recognized asset impairment charges attributable to the Company's decision to abandon plans to commence bleach-manufacturing operations in Elkton, Maryland and to write down the value of goodwill associated with an acquisition made in 1996. 1999 Compared to 1998 Cost of sales as a percentage of revenues was 66.4% and 67.4% in 1999 and 1998, respectively. The improvement in 1999 compared to 1998 is attributable to the decrease in cost of sales as a percentage of revenues for UWG to 75.5% in 1999 from 78.2% in 1998. This decrease resulted primarily from the higher proportion of the Group's revenues in 1999 which were derived from higher margin service business compared to equipment business. Cost of sales as a percentage of revenues for EBG increased to 72.3% in 1999 from 71.5% in 1998. This increase was the result of a shift in the mix of contracts to lower margin equipment business. Cost of sales as a percentage of revenues for IBG increased to 41.9% in 1999 from 39.9% in 1998, primarily due to a higher portion of revenues being derived from Ionics Sievers' lower margin service business. Cost of sales as a percentage of revenues for CWG remained the same in 1999 and 1998 at 56.0%. Overall gross margins for the Company also benefited from the change in mix of the Company's sales. CWG sales grew 19.4% in 1999 (with 44.0% gross margins), while UWG sales declined 16.0% in 1999 (with gross margins of 24.5%). Operating expenses as a percentage of revenues were 25.7% in 1999, an increase from 23.6% in 1998. Increased operating expenses as a percentage of revenues in 1999 as compared to 1998 were attributable to: start-up expenses for several new operating facilities in Asia, the United States and Europe; increased expenses relative to revenues in UWG; expenses relating to the Company's Y2K program; and continued expenses in defense of pending patent infringement litigation. In addition, the higher operating expenses as a percentage of revenues in 1999 reflected the impact of higher revenue growth in CWG, which generally has higher operating expenses as a percentage of revenues than the other business groups. The Company also established additional bad debt reserves in 1999, primarily for UWG and to a lesser extent for CWG and EBG. CWG also incurred additional expenses in 1999 in conjunction with the installation of a new information system for the U.S. Aqua Cool business. Interest, Equity Income and Taxes Interest income was $1.3 million in 2000, $1.0 million in 1999 and $1.1 million in 1998. Interest expense, net of capitalized interest, was $4.9 million, $0.7 million and $0.3 million in 2000, 1999 and 1998, respectively. The increased interest costs reflect the higher average borrowings of the Company in 2000, primarily from increased revenues and resulting accounts receivable increases, as well as borrowings related to certain long-term contracts. Equity income increased to $1.6 million in 2000 from $1.1 million and $0.6 million in 1999 and 1998, respectively. The increase in equity income in 2000 resulted primarily from realization of full-year equity income for two projects located in Mexico that began operation in 1999. The Company's effective tax rate was 34.0% in 2000, 32.0% in 1999 and 32.5% in 1998. The net loss for 2000 was $1.9 million, compared to net income of $19.4 million in 1999 and $21.4 million in 1998. FINANCIAL CONDITION At December 31, 2000, the Company had total assets of $577.5 million, compared to total assets of $500.9 million at December 31, 1999. The increase in assets reflects an increase in accounts receivable of $42.3 million, primarily attributable to the Company's increased sales volume in 2000. Deferred income taxes increased $8.0 million, reflecting future benefits for non-deductible charges in the current year, primarily accruals relating to legal charges. Investments in affiliated companies and long-term notes receivable increased $7.6 million and $7.5 million, respectively, from 1999 to 2000. Both increases were primarily attributable to the Company's investment in the Trinidad desalination project and a loan to the majority equity participant. Additional investments in affiliates relate to a joint venture formed with Toray Industries, Inc. and Mitsui & Co. (U.S.A.), Inc., called Toray Membrane America, Inc. (TMA), to manufacture and sell reverse osmosis membranes. Capital expenditures of $41.2 million were made during 2000 for "own and operate" facilities offset by disposals of fixed assets primarily related to the sale of manufacturing equipment to TMA. Working capital decreased to $85.4 million in 2000 compared to $94.3 million in 1999, and the Company's current ratio decreased to 1.5 in 2000 from 1.9 in 1999. Net cash used by operating activities was $5.3 million in 2000, compared to net cash provided by operating activities of $26.9 million in 1999. The decrease was the result of a net loss in 2000 and increased accounts receivable offset by increased accounts payable and accrued expenses. Accounts receivable increases are attributable to increased sales activities while the increase in accounts payable and accrued expenses are primarily attributable to litigation-related charges accrued late in 2000. Net cash provided by operating activities decreased by $18.9 million in 1999 compared to 1998, primarily due to a decrease in accounts payable and accrued expenses in 1999 from 1998. The relatively high level of accounts payable and accrued expenses at December 31, 1998 resulted from significant purchasing activity late in the year relating to certain large customer contracts. Net cash used by investing activities decreased by $32.5 million in 2000 over 1999. The decrease in 2000 over 1999 reflects lower capital expenditures, as well as the sale of manufacturing equipment to TMA. Net cash used by investing activities increased by $27.5 million in 1999 over 1998. This increase was due primarily to capital expenditures and acquisitions completed in 1999. The Company spent $8.5 million in 1999 in acquiring Ionics Life Sciences, Ionics Agar and Aqua Cool France. The capital expenditures of $61.5 million were generally made to expand the Company's bottled water operations and to expand or build additional manufacturing and "own and operate" facilities. Cash from operations, borrowings of current and long-term debt and proceeds from stock option exercises provided funds for these expenditures. The Company spent $4.5 million for several acquisitions in 2000, compared to $8.5 million in 1999. (See Note 15.) In 2000, net cash provided by financing activities was $53.2 million, a change of $27.1 million from the $26.1 million that was used by financing activities in 1999. The change resulted primarily from the higher level of short-term borrowings at December 31, 2000 from prior year-end. In 1999, net cash provided by financing activities increased $28.9 million as compared to 1998. This change resulted primarily from increased short and long-term borrowings in 1999. The Company maintains several domestic and foreign lines of credit. At December 31, 2000, the Company had domestic credit arrangements under which it could borrow up to a total of $75 million. During 2000, the Company's revolving credit agreement with its principal domestic lender, Fleet National Bank (the Bank), was amended and restated to increase available borrowings to $70 million. On March 1, 2001, this agreement was further amended to increase the amount available for borrowing to $80 million. In consideration of this increase, the Company gave the Bank a "springing lien," which would result in a perfected security interest in the assets of the Company and its domestic subsidiaries (other than real estate and motor vehicles) in the event that the Company (i) defaults under any of its covenants or obligations in the credit agreement, or (ii) fails to pay down outstanding borrowings under the credit agreement to $50 million by May 15, 2001. (See Note 8.) The Company has a second U.S. credit line of $5 million. Foreign lines of credit outstanding at December 31, 2000 were $3.0 million, excluding those for specific project financing. The Company also has several facilities to accommodate its foreign trade requirements. At December 31, 2000, the Company's controlled Barbados affiliate had outstanding borrowings of $9.2 million in connection with the financing of a Barbados desalination facility. (See Note 8.) Although the Company believes that its cash from operations, lines of credit and foreign trade facilities are adequate to meet its currently anticipated operational needs, the Company is currently investigating additional sources of financing to augment current funding sources in order to pursue large project development and to replace a portion of its domestic credit line. Significant expenditures in 2001 are anticipated to include investments in additional "own and operate" facilities and the continued expansion of all four business groups. Also during 2001, construction will continue on the Trinidad desalination facility owned by Desalination Company of Trinidad and Tobago Ltd. (Desalcott), in which the Company has a 40% equity interest. During 2000 and through the first quarter of 2001, the Company loaned $10 million to the 60% equity owner, Hafeez Karamath Engineering Services Ltd. (HKES), as the source of HKES' equity contribution, in addition to the $10 million contributed by the Company for its 40% equity interest. Desalcott entered into a "bridge loan" agreement with a Trinidad bank providing $60 million in construction financing. However, the bridge loan plus the $20 million equity provided to Desalcott will not provide sufficient funds to complete construction of the project. Although Desalcott has received proposals for long-term debt financing, there is no assurance that such financing will be obtained on terms acceptable to Desalcott, or prior to completion of construction. If permanent financing is not obtained prior to the completion of construction, Desalcott will be required to obtain additional funds to complete construction, and the Company has committed to lend to Desalcott up to $10 million under such circumstances. Inflationary increases in material and labor costs remained moderate during the last three years. The Company has been working to offset such cost increases by redesigning its equipment to reduce costs. To the extent permitted by the competitive environment, the Company has raised prices where appropriate. ACCOUNTING PRONOUNCEMENTS In June 1999, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133." SFAS No. 137 amends SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which was issued in June 1998. SFAS No. 137 defers the effective date of SFAS No. 133 to all fiscal years beginning after June 15, 2000. Accordingly, the Company adopted the provisions of SFAS No. 133 for the fiscal year 2001 which commenced on January 1, 2001. This Statement should not have a material effect on the Company's financial statements. In December 1999, the Securities and Exchange Commission released Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements. This bulletin summarizes certain views of the staff on applying generally accepted accounting principles to revenue recognition in financial statements. The staff believes that revenue is realized or realizable and earned when all of the following criteria are met: persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; the seller's price to the buyer is fixed or determinable; and collectibility is reasonably assured. The Company believes that its current revenue recognition policy complies with the Commission's guidelines. FORWARD-LOOKING INFORMATION Derivative Instruments The Company had no foreign exchange contracts outstanding at December 31, 2000. The Company has no other derivative financial instruments or other financial and commodity instruments for which fair value disclosure would be required under SFAS No. 119. The Company holds no investment securities that would require disclosure of market risk. Market Risk The Company's primary market risk exposures are in the areas of interest rate risk and foreign currency exchange rate risk. The Company's investment portfolio of cash equivalents is subject to interest rate fluctuations, but the Company believes this risk is not material due to the short-term nature of these investments. At December 31, 2000, the Company had $75.0 million of short-term debt and $10.9 million of long-term debt outstanding. The major portion of this debt has variable interest rates and, therefore, interest rate risk. However, a hypothetical increase of 10% in these interest rates for a one-year period would result in additional interest expense after taxes that would not be material in the aggregate. The Company's net foreign currency exchange loss was $0.8 million in 2000 compared to a gain of $11,000 in 1999. The Company's exposure to foreign currency exchange rate fluctuations is moderated by the fact that the operations of its international subsidiaries are primarily conducted in their respective local currencies. Also, in certain situations, the Company will consider entering into forward exchange contracts to mitigate the impact of foreign currency exchange fluctuations. Safe Harbor Statement under Private Securities Litigation Reform Act of 1995 The Company's future results of operations and certain statements contained in this report, including, without limitation, "Management's Discussion and Analysis of Results of Operations and Financial Condition," constitute forward-looking statements. Such statements are based on management's current views and assumptions and involve risks, uncertainties and other factors that could cause actual results to differ materially from management's current expectations. Among these factors are business conditions and the general economy; competitive factors, such as acceptance of new products and price pressures; risk of nonpayment of accounts receivable; risks associated with foreign operations; risks involved in litigation; regulations and laws affecting business in each of the Company's markets; market risk factors, as described above under "Derivative Instruments" and "Market Risk;" and other risks and uncertainties described from time to time in the Company's filings with the Securities and Exchange Commission. REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Ionics, Incorporated: In our opinion, the accompanying consolidated statements of operations and the related consolidated balance sheets, consolidated statements of cash flows, and consolidated statements of stockholders' equity, present fairly, in all material respects, the financial position of Ionics, Incorporated and its subsidiaries (the "Company"), at December 31, 2000 and December 31, 1999, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. 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 of these statements in accordance with auditing standards generally accepted in the United States of America which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. /s/PricewaterhouseCoopers LLP Boston, Massachusetts March 19, 2001
Consolidated Statements of Operations - ---------------------------------------------------------------------------------------------------------------------- For the years ended December 31 Amounts in Thousands, Except per Share Amounts 2000 1999 1998 - ---------------------------------------------------------------------------------------------------------- Revenues: Equipment Business Group $ 205,181 $ 140,655 $129,751 Ultrapure Water Group 132,236 93,562 111,349 Consumer Water Group 108,324 96,569 80,884 Instrument Business Group 28,810 27,431 29,342 - ---------------------------------------------------------------------------------------------------------- 474,551 358,217 351,326 ------------------------------------------------- Costs and expenses: Cost of sales of Equipment Business Group 164,556 101,744 92,826 Cost of sales of Ultrapure Water Group 106,498 70,636 87,039 Cost of sales of Consumer Water Group 66,327 54,052 45,261 Cost of sales of Instrument Business Group 12,794 11,500 11,716 Research and development 7,980 7,066 6,635 Selling, general and administrative 113,222 84,892 76,299 Impairment of long-lived assets 3,398 - - - ---------------------------------------------------------------------------------------------------------- 474,775 329,890 319,776 ------------------------------------------------- (Loss) income from operations (224) 28,327 31,550 Interest income 1,286 961 1,058 Interest expense (4,909) (668) (331) Equity income 1,623 1,111 606 - ---------------------------------------------------------------------------------------------------------- (Loss) income before income taxes and minority interest (2,224) 29,731 32,883 Benefit (provision) for income taxes 756 (9,522) (10,680) - ---------------------------------------------------------------------------------------------------------- (Loss) income before minority interest (1,468) 20,209 22,203 Minority interest expense 402 848 817 - ---------------------------------------------------------------------------------------------------------- Net (loss) income $ (1,870) $ 19,361 $ 21,386 ========================================================================================================== (Loss) earnings per basic share $ (0.12) $ 1.20 $ 1.33 ========================================================================================================== (Loss) earnings per diluted share $ (0.12) $ 1.18 $ 1.31 ========================================================================================================== Shares used in basic earnings per share calculations 16,243 16,148 16,077 Shares used in diluted earnings per share calculations 16,243 16,388 16,357
The accompanying notes are an integral part of these financial statements.
Consolidated Balance Sheets - --------------------------------------------------------------------------------------------- For the years ended December 31 - --------------------------------------------------------------------------------------------- Dollars in Thousands, Except Share Amounts 2000 1999 - --------------------------------------------------------------------------------------------- Assets Current assets: Cash and cash equivalents $ 25,497 $ 13,169 Short-term investments 1,105 195 Notes receivable, current 4,741 5,374 Accounts receivable 162,711 120,407 Receivables from affiliated companies 792 1,231 Inventories 34,701 33,880 Other current assets 16,443 14,816 Deferred income taxes 12,749 4,730 - --------------------------------------------------------------------------------------------- Total current assets 258,739 193,802 - --------------------------------------------------------------------------------------------- Notes receivable, long-term 17,502 10,027 Investments in affiliated companies 18,310 10,752 Property, plant and equipment, net 222,843 227,250 Other assets 60,072 59,075 - --------------------------------------------------------------------------------------------- Total assets $ 577,466 $ 500,906 ============================================================================================= Liabilities and Stockholders' Equity Current liabilities: Notes payable and current portion of long-term debt $ 75,045 $ 25,514 Accounts payable 56,014 41,867 Other current liabilities 42,304 32,094 - --------------------------------------------------------------------------------------------- Total current liabilities 173,363 99,475 - --------------------------------------------------------------------------------------------- Long-term debt and notes payable 10,911 8,351 Deferred income taxes 30,334 26,803 Other liabilities 5,997 4,425 Commitments and contingencies Stockholders' equity: Common stock, par value $1, authorized shares: 55,000,000 in 2000 and 1999; issued and outstanding: 16,369,029 in 2000 and 16,201,483 in 1999. 16,369 16,201 Additional paid-in capital 162,114 159,288 Retained earnings 197,616 199,304 Accumulated other comprehensive income (19,238) (12,905) Unearned compensation - (36) - --------------------------------------------------------------------------------------------- Total stockholders' equity 356,861 361,852 - --------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 577,466 $ 500,906 ============================================================================================= The accompanying notes are an integral part of these financial statements.
Consolidated Statements of Cash Flows - --------------------------------------------------------------------------------------------------------------------- For the years ended December 31 - --------------------------------------------------------------------------------------------------------------------- Dollars in Thousands 2000 1999 1998 - --------------------------------------------------------------------------------------------------------------------- Operating activities: Net (loss) income $ (1,870) $19,361 $21,386 Adjustments to reconcile net (loss) income to net cash (used) provided by operating activities: Depreciation and amortization 30,948 26,464 25,519 Amortization of intangibles 2,847 2,333 1,695 Impairment of long-lived assets 3,398 - - Provision for losses on accounts and notes receivable 5,204 2,643 1,319 Deferred income tax (benefit) provision (2,092) 3,723 2,478 Compensation expense on restricted stock awards 36 108 108 Changes in assets and liabilities, net of effects of businesses acquired: Notes receivable (7,913) (3,539) (168) Accounts receivable (48,579) (11,405) (14,695) Inventories (1,240) (2,081) (2,773) Deferred income taxes and other current assets (8,924) (11,566) (1,461) Investments in affiliates (7,695) (4,232) (2,815) Accounts payable and accrued expenses 22,758 (1,640) 20,267 Income taxes 6,913 5,234 (218) Other 878 1,502 (4,851) - --------------------------------------------------------------------------------------------------------------------- Net cash (used) provided by operating activities (5,331) 26,905 45,791 ---------------------------------------------- Investing activities: Additions to property, plant and equipment (41,211) (61,515) (42,196) Disposals of property, plant and equipment 11,464 2,177 1,882 Sale and maturity of short-term investments - 164 137 Purchase of short-term investments (931) - - Acquisitions, net of cash acquired (4,491) (8,513) - - --------------------------------------------------------------------------------------------------------------------- Net cash used by investing activities (35,169) (67,687) (40,177) ---------------------------------------------- Financing activities: Principal payments on current debt (97,891) (10,393) (15,339) Proceeds from borrowings of current debt 145,508 28,762 9,716 Principal payments on long-term debt (2,827) (756) (8) Proceeds from borrowings of long-term debt 5,666 7,093 419 Proceeds from stock option plans 2,734 1,424 2,447 - --------------------------------------------------------------------------------------------------------------------- Net cash provided (used) by financing activities 53,190 26,130 (2,765) ---------------------------------------------- Effect of exchange rate changes on cash (362) (949) 134 ---------------------------------------------- Net change in cash and cash equivalents 12,328 (15,601) 2,983 Cash and cash equivalents at end of prior year 13,169 28,770 25,787 - --------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of current year $ 25,497 $13,169 $28,770 =====================================================================================================================
The accompanying notes are an integral part of these financial statements.
Consolidated Statements of Stockholders' Equity Accumulated Additional Other Total Common Stock Paid-In Retained Comprehensive Unearned Stockholders' Dollars in Thousands Shares Par Value Capital Earnings Income Compensation Equity - ------------------------------------------------------------------------------------------------------------------------------------ Balance December 31, 1997 16,001,285 $16,001 $154,479 $158,557 $(9,126) $(252) $319,659 Comprehensive income: Net income - - - 21,386 - - 21,386 Translation adjustments, net of tax of $(619) - - - - 1,237 - 1,237 --------- Total comprehensive income 22,623 -------- Stock options exercised 115,364 116 2,331 - - - 2,447 Tax benefit of stock option activity - - 761 - - - 761 Amortization of unearned compensation - - - - - 108 108 - ------------------------------------------------------------------------------------------------------------------------------- Balance December 31, 1998 16,116,649 16,117 157,571 179,943 (7,889) (144) 345,598 Comprehensive income: Net income - - - 19,361 - - 19,361 Translation adjustments, net of tax of $2,497 - - - - (5,016) - (5,016) --------- Total comprehensive income 14,345 -------- Stock options exercised 82,033 82 1,258 - - - 1,340 Tax benefit of stock option activity - - 377 - - - 377 Shares issued to directors 2,801 2 82 - - - 84 Amortization of unearned compensation - - - - - 108 108 - ------------------------------------------------------------------------------------------------------------------------------- Balance December 31, 1999 16,201,483 16,201 159,288 199,304 (12,905) (36) 361,852 Comprehensive income: Net loss - - - (1,870) - - (1,870) Translation adjustments, net of tax of $2,227 - - - - (6,333) - (6,333) ------- Total comprehensive loss (8,203) ------- Stock options exercised 163,200 164 2,570 - - - 2,734 Tax benefit of stock option activity - - 156 - - - 156 Shares issued to directors 4,346 4 100 - - - 104 Restricted stock shares issued 17,937 18 - - - - 18 Restricted stock shares forfeited (17,937) (18) - - - - (18) Adjustment of equity ownership - - - 182 - - 182 Amortization of unearned compensation - - - - - 36 36 - ------------------------------------------------------------------------------------------------------------------------------- Balance December 31, 2000 16,369,029 $16,369 $162,114 $197,616 $(19,238) $ - $356,861 ===============================================================================================================================
The accompanying notes are an integral part of these financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Significant Accounting Policies Nature of Operations The Company is involved worldwide in the manufacture and sale of membranes, equipment for the purification, concentration, treatment and analysis of water and wastewater, in the supply of purified water, food and chemical products, and in the sale of bottled water and home water purifiers. Principal markets include the United States, Europe and Asia, as well as other international markets. Basis of Presentation Certain prior year amounts have been reclassified to conform to the current year presentation with no impact on net income. Principles of Consolidation The consolidated financial statements include the accounts of the Company, its wholly and majority-owned subsidiaries and controlled affiliates. All significant intercompany accounts and transactions have been eliminated. Investments in affiliated companies, representing non-controlling ownership interests, are accounted for under the equity method. Revenue Recognition Product revenues are recorded upon shipment, and service revenues are recorded as the services are performed. Interest revenues on consumer water equipment loans are recognized over the life of the loans. Interest earned on customer notes receivable, totaling $1,728,000, $1,686,000 and $1,470,000 in 2000, 1999 and 1998, respectively, is included in revenues. Most equipment leases to customers are accounted for as operating leases. Therefore, rental revenues are recognized over the life of the lease, and the cost of the equipment is depreciated over its useful life. Some leases are accounted for as sales-type leases wherein the present value of the lease revenues and costs are recognized at the time of shipment of the product. Revenues from large contracts are recognized using the percentage of completion method of accounting in the proportion that costs incurred bear to total estimated costs at completion. Losses, if any, are provided for in the period in which the loss is determined. In December 1999, the Securities and Exchange Commission released Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements. This bulletin summarizes certain views of the staff on applying generally accepted accounting principles to revenue recognition in financial statements. The staff believes that revenue is realized or realizable and earned when all of the following criteria are met: persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; the seller's price to the buyer is fixed or determinable; and collectibility is reasonably assured. The Company believes that its current revenue recognition policy complies with the Commission's guidelines. Cash Equivalents Short-term investments with a maturity of 90 days or less from the date of acquisition are classified as cash equivalents. Investments Management determines the appropriate classification of its investment in debt securities at the time of purchase. Debt securities which the Company has the ability and positive intent to hold to maturity are classified accordingly and carried at cost. The Company is not involved in activities classified as the trading of investments. Notes Receivable Notes receivable have been reported at their estimated realizable value. The allowance for uncollectible notes receivable totaled $186,000 and $213,000 at December 31, 2000 and 1999, respectively. Inventories Inventories are carried at the lower of cost or market, principally on the first-in, first-out basis. Property, Plant and Equipment Property, plant and equipment is recorded at cost. When an asset is retired or sold, any resulting gain or loss is included in the results of operations. Interest capitalized as property, plant and equipment amounted to $320,000, $957,000 and $616,000 in 2000, 1999 and 1998, respectively. In general, depreciation is computed on a straight-line basis over the expected lives of the assets, as follows: Classification Depreciation Lives - -------------------------------------------------------------------------------- Buildings and improvements 10 - 40 years Machinery and equipment, including supply equipment 3 - 25 years Other 3 - 12 years In certain situations the units of production method is utilized in order to achieve a more appropriate matching of revenues and expenses. The Company's policy is to depreciate processing plants, other than leased equipment, over the shorter of their useful lives or the term of the corresponding supply contracts. Asset Impairment The Company evaluates its long-lived assets for impairment whenever events or changes in circumstances indicate that the book value of the asset may not be recoverable. (See Note 6.) Goodwill Goodwill is included in other assets and represents the unamortized difference between acquisition cost and the fair value of net assets acquired in the purchase of various entities. Goodwill is amortized on a straight-line basis over its estimated useful life, which generally is a period ranging from 10 to 40 years. The Company evaluates its goodwill for impairment whenever events or changes in circumstances indicate that the book value of the asset may not be recoverable. (See Note 6.) Foreign Exchange Assets and liabilities of foreign affiliates and subsidiaries are translated at year-end exchange rates, and the related statements of operations are translated at average exchange rates during the year. Translation gains and losses are accumulated net of income tax as a separate component of stockholders' equity. Some transactions of the Company and its subsidiaries are made in currencies different from their own. Gains and losses from these transactions are included in income as they occur. Net foreign currency transaction (losses)/gains included in income before income taxes and minority interest totaled $(782,000), $11,000 and $(28,000) for 2000, 1999 and 1998, respectively. Income Taxes Income tax expense is based on pretax financial accounting income. Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax basis of assets and liabilities and their reported amounts using enacted rates in effect for the year in which the differences are expected to reverse. Earnings Per Share Basic earnings per share is computed based on the weighted-average number of shares outstanding. Diluted earnings per share is computed based on the weighted-average number of common shares outstanding while giving effect to all potentially dilutive common shares that were outstanding during the period. Use of Estimates The preparation of financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Derivative Instruments and Hedging Activities In June 1999, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133." SFAS No. 137 amends SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which was issued in June 1998. SFAS No. 137 defers the effective date of SFAS No. 133 to all fiscal years beginning after June 15, 2000. Accordingly, the Company will adopt the provisions of SFAS No. 133 for the fiscal year 2001 which commenced on January 1, 2001. This Statement should not have a material effect on the Company's financial statements. Note 2. Consolidated Balance Sheet Details Dollars in Thousands 2000 1999 - ------------------------------------------------------------------------- Raw materials $ 21,061 $ 20,216 Work in process 8,264 8,913 Finished goods 5,376 4,751 - ------------------------------------------------------------------------- Inventories $ 34,701 $ 33,880 ========================================================================= Land $ 8,738 $ 8,352 Buildings 48,773 44,858 Machinery and equipment 312,138 299,303 Other, including furniture, fixtures and vehicles 48,470 49,119 - ------------------------------------------------------------------------- 418,119 401,632 Accumulated depreciation (195,276) (174,382) - ------------------------------------------------------------------------- Property, plant and equipment, net $222,843 $227,250 ========================================================================= Goodwill $ 64,829 $ 62,631 Accumulated amortization (12,650) (9,164) Other 7,893 5,608 - ------------------------------------------------------------------------- Other assets $ 60,072 $ 59,075 ========================================================================= Customer deposits $ 4,883 $ 2,671 Accrued commissions 2,002 2,362 Accrued expenses 35,419 27,061 - ------------------------------------------------------------------------- Other current liabilities $ 42,304 $ 32,094 ========================================================================= Note 3. Supplemental Schedule of Cash Flow Information Dollars in Thousands 2000 1999 1998 - ------------------------------------------------------------------------- Cash payments for interest and income taxes: Interest $ 4,662 $ 1,740 $ 685 Taxes $ 6,974 $ 7,534 $ 8,481 Note 4. Accounts Receivable Dollars in Thousands 2000 1999 - -------------------------------------------------------------- Billed receivables $112,065 $ 80,647 Unbilled receivables 55,710 43,167 Allowance for doubtful accounts (5,064) (3,407) - --------------------------------------------------------------- Accounts receivable $162,711 $120,407 ============================================================== Unbilled receivables represent the excess of revenues recognized on percentage of completion contracts over amounts billed. These amounts will become billable as the Company achieves contractual milestones. Substantially all of the unbilled amounts at December 31, 2000 are expected to be billed during 2001. Billed receivables include retainage amounts of $6,007,000 and $1,416,000 at December 31, 2000 and 1999, respectively. Substantially all of the retainage amounts are collectible within one year. Note 5. Investments in Affiliated Companies The Company's investments in the following foreign affiliates are accounted for under the equity method. The principal business activities of these foreign affiliates involve the production, sale and distribution of bottled or treated water and the sale of equipment and replacement parts. Ownership Affiliate Percentage - ------------------------------------------------------------------------------- Aqua Cool Kuwait - Kuwait 49% Aqua Cool Saudi Arabia - Saudi Arabia 40% Aqua Design Ltd. - Cayman Islands 39% Desalination Company of Trinidad and Tobago Ltd. - Trinidad 40% Grupo Empresarial de Mejoramiento Ambiental, S. de R.L. de C.V. - Mexico 20% Jalal-Ionics, Ltd. - Bahrain 40% Mega a.s. - Czech Republic 20% Toray Membrane America, Inc. - MA 43% Watlington Waterworks, Ltd. - Bermuda 26% Yuasa-Ionics Co., Ltd. - Japan 50% The Company's percentage ownership interest in a foreign affiliate may vary from its interest in the earnings of such affiliate. Activity in investments in affiliated companies: Dollars in Thousands 2000 1999 1998 - ---------------------------------------------------------------------------- Investments at end of prior year $ 10,752 $ 7,057 $3,983 Equity in earnings 1,623 1,111 606 Distributions received (2,092) (475) (396) Cumulative translation adjustments (172) (540) 172 Reclassification of Agrinord S.r.l. resulting from change in ownership interest (see Note 15) (1,389) - - Reclassification of Watlington Waterworks from other assets resulting from change in ownership interest - - 1,208 Additional investments 9,588 3,599 1,484 - ---------------------------------------------------------------------------- Investments at end of current year $ 18,310 $10,752 $7,057 ============================================================================ At December 31, 2000, the Company's equity in the total assets and in the total liabilities of its foreign affiliates was $31,922,000 and $13,612,000, respectively. The Company's equity in the 2000 total revenues of these affiliates was $12,599,000. Note 6. Impairment of Long-Lived Assets In accordance with Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," the Company evaluates its long-lived assets for impairment whenever events or changes in circumstances indicate that the book value of the asset may not be recoverable. During the fourth quarter of 2000, the Company wrote down approximately $3.4 million of impaired long-lived assets. The write-down primarily included approximately $2.0 million of bleach-manufacturing equipment and $0.8 million of goodwill associated with an acquisition made in 1996. The $2.0 million write-down of bleach-manufacturing equipment is attributable to the Company's decision in the fourth quarter of 2000 to abandon plans to commence bleach-manufacturing operations in Elkton, Maryland. The $0.8 million impairment of goodwill was indicated by the operating record of the related business unit. In both cases, the Company recognized impairment when the future undiscounted cash flows of the assets were estimated to be insufficient to recover its related carrying value. Note 7. Commitments and Contingencies Litigation The Company is involved in the normal course of its business in various litigation matters, some of which are in the pre-trial discovery stages. The Company believes generally that it has meritorious defenses and that none of the pending matters will have an outcome material to the financial condition or results of operations of the Company. The Company was notified in 1992 that it is a potentially responsible party (PRP) at a Superfund site, Solvent Recovery Services of New England in Southington, Connecticut (the "SRS Site"). Ionics' share of assessments to date for site work totals approximately $65,000. The United States Environmental Protection Agency ("EPA") has delayed issuing a decision regarding clean-up methods and costs. While it is too soon to predict the scope and cost of the final remedy that the EPA will select, based upon the large number of PRPs identified, the Company's small volumetric ranking (approximately 0.5%) and the identities of the larger PRPs, the Company believes that its liability in this matter will not have a material effect on the Company's financial position or results of operations. By letter dated March 29, 2000, the Company and other PRPs for the SRS Site were notified that they may also have potential liability with respect to the Angelillo Property Superfund Site, also in Southington, Connecticut (the "Angelillo Site"), because hazardous materials were allegedly shipped from the SRS Site to the Angelillo Site. It is too early to determine what liability, if any, the Company may incur arising out of the EPA's claim with respect to the Angelillo Site. On March 27, 1998, the Company was served with a summons and complaint in connection with a lawsuit now captioned United States Filter Corporation, U.S. Filter/Ionpure, Inc., IP Holding Company, Millipore Corporation and Millipore Investment Holdings Limited v. Ionics, Incorporated, filed in the U.S. District Court, District of Massachusetts (Boston). Plaintiffs allege that the Company is infringing a certain reissue patent, which was issued on March 10, 1998, by making, selling, offering to sell and using the Company's electrodeionization (EDI) systems within the United States. On June 10, 1999, the Company was served by the plaintiffs in the pending suit with a second summons and complaint alleging infringement of six EDI-related patents issued earlier than the reissue patent which is the subject of the first lawsuit. The Company has been vigorously defending plaintiffs' infringement claims in these lawsuits, and believes that it has valid defenses to such claims. Trial has been scheduled in the first case, and the second case is still in the discovery stages. On October 14, 2000, the Company was served with a summons and complaint in connection with a lawsuit captioned United States Filter Corporation and U.S. Filter/Ionpure, Inc. v. Ionics, Incorporated, filed in the U.S. District Court, District of Massachusetts (Boston). Plaintiffs allege infringement of a U.S. patent involving a certain aspect of reverse osmosis technology. This case is in the pre-discovery stage. The Company is engaged in settlement discussions with United States Filter Corporation with respect to all pending patent infringement litigation matters, although there is no assurance that settlement will be achieved. The Company established a reserve in the fourth quarter of 2000 that it believes will be sufficient to cover future charges in connection with the resolution of the litigation. Other The Company has a 40% equity interest in the Desalination Company of Trinidad and Tobago Ltd. (Desalcott) which owns the Trinidad desalination facility currently under construction. During 2000 and through the first quarter of 2001, the Company loaned $10 million to the 60% equity owner, Hafeez Karamath Engineering Services Ltd. (HKES), as the source of HKES' equity contribution, in addition to the $10 million contributed by the Company for its 40% equity interest. Desalcott entered into a "bridge loan" agreement with a Trinidad bank providing $60 million in construction financing. However, the bridge loan plus the $20 million equity provided to Desalcott will not provide sufficient funds to complete construction of the project. Although Desalcott has received proposals for long-term debt financing, there is no assurance that such financing will be obtained on terms acceptable to Desalcott, or prior to completion of construction. If permanent financing is not obtained prior to completion of construction, Desalcott will be required to obtain additional funds to complete construction, and the Company has committed to lend to Desalcott up to $10 million under such circumstances. Note 8. Long-Term Debt and Notes Payable Dollars in Thousands 2000 1999 - ------------------------------------------------------------------------ Borrowings outstanding $85,956 $33,865 Less installments due within one year 75,045 25,514 - ------------------------------------------------------------------------ Long-term debt and notes payable $10,911 $ 8,351 ======================================================================== Maturities of borrowings outstanding for the five years ending December 31, 2001 through 2005 are approximately $75,045,000, $1,336,000, $1,182,000, $1,210,000 and $1,251,000, respectively. At December 31, 2000, the Company had domestic credit arrangements under which it could borrow up to a total of $75 million. During 2000, the Company's revolving credit agreement with its principal domestic lender, Fleet National Bank (the Bank), was amended and restated to increase available borrowings to $70 million. On March 1, 2001, this agreement was further amended to increase the amount available for borrowing to $80 million. In consideration of this increase, the Company gave the Bank a "springing lien," which would result in a perfected security interest in the assets of the Company and its domestic subsidiaries (other than real estate and motor vehicles) in the event that the Company (i) defaults under any of its covenants or obligations in the credit agreement, or (ii) fails to pay down outstanding borrowings under the credit agreement to $50 million by May 15, 2001. The credit agreement does not permit the Company to pay cash dividends. Borrowings from the Bank under the credit agreement as amended bear interest at 0.25% above the prime rate or from 1% to 2.25% above the London Interbank Offered Rate (LIBOR), at the Company's option (the precise interest rate depends on the Company's leverage ratio). At December 31, 2000, the prime rate was 9.5% and LIBOR was 6.48%. The Company had outstanding borrowings of $65,000,000 and $14,500,000 against its domestic lines of credit at December 31, 2000 and 1999, respectively. Under foreign lines of credit, excluding those related to specific project financing, the Company can borrow an aggregate of approximately $11.9 million at interest rates of LIBOR plus 1/2% (6.98% at December 31, 2000), at the lending bank's Base Cost of Funds plus 1 3/4% (7.0% at December 31, 2000) or at lending rates of 7.3% and 8.0%. The Company had outstanding borrowings of $3.0 million and $6.4 million against these lines of credit at December 31, 2000 and 1999, respectively. The Company has arranged lines of credit totaling $10.0 million for its controlled affiliate in Barbados to provide project financing for a desalination plant at LIBOR plus 2.0% (8.69% at December 31, 2000) for its $6.4 million line, at a fixed rate of 8.0% for its $2.7 million line and at a fixed rate of 8.75% for its $0.9 million line. These lines of credit are payable in equal quarterly installments over a ten-year period beginning in 2000. The controlled affiliate had outstanding borrowings of $9.2 million and $7.2 million against these lines of credit at December 31, 2000 and 1999, respectively. The Company utilizes other short-term bank loans to finance working capital requirements for certain business units. The Company's various loan and note agreements contain certain financial covenants relating to working capital, cash flow, capital expenditures and consolidated tangible net worth. The weighted-average interest rate on all borrowings at December 31, 2000 and 1999 was 8% and 7%, respectively. Although the Company believes that its cash from operations, lines of credit and foreign trade facilities are adequate to meet its currently anticipated operational needs, the Company is currently investigating additional sources of financing to augment current funding sources in order to pursue large project development and to replace a portion of its domestic credit line. Note 9. Income Taxes The components of domestic and foreign income before income taxes and minority interest were as follows: Dollars in Thousands 2000 1999 1998 - ---------------------------------------------------------------------------- U.S. $(16,974) $15,317 $21,468 Non-U.S. 14,750 14,414 11,415 - ---------------------------------------------------------------------------- (Loss) income before income taxes and minority interest $ (2,224) $29,731 $32,883 ============================================================================ The provision for income taxes consisted of the following: Dollars in Thousands 2000 1999 1998 - -------------------------------------------------------------------------- Federal $ 3,264 $(1,353) $ (4,925) Foreign (5,304) (3,814) (2,386) State 704 (632) (891) - --------------------------------------------------------------------------- Current provision (1,336) (5,799) (8,202) - --------------------------------------------------------------------------- Federal 555 (4,176) (2,317) Foreign 1,546 318 116 State (9) 135 (277) - --------------------------------------------------------------------------- Deferred benefit (provision) 2,092 (3,723) (2,478) - --------------------------------------------------------------------------- Benefit (provision) for income taxes $ 756 $(9,522) $(10,680) =========================================================================== Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. At December 31, 2000, the tax effects of the temporary differences were: Deferred Deferred Tax Dollars in Thousands Tax Assets Liabilities - ---------------------------------------------------------------------------- Depreciation $ - $20,253 Goodwill amortization - 1,189 Inventory valuation 1,654 - Bad debt reserves 1,130 - Legal 1,842 - Accrued commissions 488 - Profit on sales to foreign subsidiaries 862 - Insurance accruals 745 - U.S. tax on unrepatriated earnings - 7,535 Alternative minimum tax 2,307 - Foreign withholding taxes on undistributed earnings - 1,684 Foreign deferred liabilities, net - 3,305 Tax effect of currency translation loss 7,013 - Net operating loss carryforwards 5,642 - Miscellaneous 3,512 4,715 - ---------------------------------------------------------------------------- 25,195 38,681 Valuation allowance for deferred tax assets (1,800) - - ---------------------------------------------------------------------------- Deferred income taxes $23,395 $38,681 ============================================================================ The United States statutory corporate tax rate is reconciled to the Company's effective tax rate as follows: 2000 1999 1998 - ---------------------------------------------------------------------------- U.S. Federal statutory rate 34.0% 35.0% 35.0% Foreign Sales Corporation (33.9) (2.1) (2.1) Goodwill 34.3 1.0 0.4 State income taxes, net of federal tax benefit (20.5) 1.7 2.3 Foreign income taxed at different rates 7.2 (3.8) (3.0) Non-deductible charges 13.9 0.4 0.3 Other, net (1.0) (0.2) (0.4) - ----------------------------------------------------------------------------- Effective tax rate 34.0% 32.0% 32.5% ============================================================================= At December 31, 2000, the Company had unused tax loss carryforward benefits of $5,642,000. Domestic tax loss carryforwards of $5,158,000 include $3,912,000 which expire in fiscal years 2004 to 2009 and $1,246,000 which expires in 2020. Foreign tax loss carryforwards of $484,000 expire beginning in 2005. Because certain provisions of the tax law may limit the utilization of these benefits, the Company has established $1,800,000 as a valuation allowance at December 31, 2000 and 1999. In the event this valuation allowance is no longer considered necessary, the valuation allowance will reduce the related entity's goodwill. The remaining unreserved portion is considered to be realizable. $2,112,000 of the net unused tax loss carryforward benefit of $3,842,000 has been included in other assets at December 31, 2000. The Company has elected not to provide tax on certain undistributed earnings of its foreign subsidiaries which it considers to be permanently reinvested. The cumulative amount of such unprovided taxes was approximately $6,426,000, $5,065,000 and $3,932,000 as of December 31, 2000, 1999 and 1998, respectively. Note 10. Stockholders' Equity The Company adopted the disclosure-only provision of SFAS No. 123, "Accounting for Stock-Based Compensation," in 1996. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants in 2000, 1999 and 1998: expected volatility of 37.4% in 2000, 30.5% in 1999 and 27.3% in 1998; weighted-average, risk-free interest rates of 6.25%, 5.27% and 5.41% in 2000, 1999 and 1998, respectively; and expected lives of five years. No dividends are assumed. The weighted-average fair value of options granted during 2000, 1999 and 1998 was $9.65, $11.07 and $10.43, respectively. At December 31, 2000, the Company had the stock-based compensation plans described below. The Company applies Accounting Principles Board Opinion 25 in accounting for its plans. Accordingly, any difference between the option price and the fair market value of the stock at the date of grant is charged to operations over the expected period of benefit to the Company. Had compensation cost for the Company's plans been determined based on the fair value of the options at the grant dates for awards under those plans consistent with the method of SFAS No. 123, the Company's net income and earnings per share would have been adjusted. On a pro forma basis, net loss as reported for 2000 of $1.9 million would have been $4.9 million, net income as reported for 1999 of $19.4 million would have been $16.6 million and 1998 net income of $21.4 million would have been $19.3 million. Diluted earnings per share as reported for 2000 of $(0.12) would have been $(0.30), 1999 diluted earnings per share of $1.18 would have been $1.01 and 1998 diluted earnings per share of $1.31 would have been $1.18. Basic earnings per share as reported for 2000 of $(0.12) would have been $(0.30), 1999 basic earnings per share of $1.20 would have been $1.03 and 1998 basic earnings per share of $1.33 would have been $1.20. The effects of applying SFAS No. 123 in this pro forma disclosure are not indicative of future awards, which are anticipated. SFAS No. 123 does not apply to awards prior to 1995. Under the 1979 Stock Option Plan (the "1979 Plan"), stock options (only non-qualified stock options after February 1989) were granted to officers and other key employees of the Company. Options granted under the 1979 Plan are immediately exercisable, are subject to repurchase rights that lapse generally over a five-year period, and have a term of ten years and one day. Effective May 8, 1997, the 1979 Plan was replaced by the 1997 Stock Incentive Plan (the "1997 Plan"), and no additional options will be granted under the 1979 Plan. At December 31, 2000 and 1999, respectively, no shares were reserved for issuance of additional options under the 1979 Plan. Under the 1997 Plan, incentive stock options, non-qualified stock options, and long-term performance awards may be awarded to officers and other key employees as well as to consultants. The 1997 Plan contains an automatic addition provision under which a number of shares equal to two percent (2%) of the Company's outstanding stock were added to the 1997 Plan at the end of each of the four fiscal year-ends of the Company following adoption of the 1997 Plan, commencing December 31, 1997 and ending December 31, 2000. At December 31, 2000 and 1999, there were 527,256 and 835,950 shares, respectively, reserved for issuance of additional options under the 1997 Plan after giving effect to the automatic addition provision. Options granted under the 1997 Plan vest over a five-year period and have a term of ten years. Under the 1986 Stock Option Plan for Non-Employee Directors (the "1986 Plan"), options are granted automatically at a price not less than the fair market value of the stock at the date of grant. The options become fully exercisable after a six-month period, are exercisable only during certain "window" periods, and have a term of ten years and one day. As of December 31, 2000 and 1999, 36,000 and 54,000 shares, respectively, were reserved for issuance of additional options under the 1986 Plan. The Company has adopted a restricted stock plan (the "1994 Plan") under which shares of common stock may be granted to officers and other key employees of the Company. Restrictions on the sale of such common stock typically lapse over a five-year vesting period. In 2000, 17,937 shares were granted under the restricted stock plan to an executive officer. The executive officer subsequently terminated his employment with the Company in 2000, and the restricted stock was forfeited pursuant to the 1994 Plan. No shares were issued under the 1994 Plan in 1999 or 1998. As of December 31, 2000, a total of 280,178 shares remain reserved for issuance. On August 19, 1998, the Company adopted the 1998 Non-Employee Directors' Fee Plan ("Fee Plan"). The Fee Plan permits non-employee directors to elect to receive payment of their annual retainer fee in cash or in common stock. The valuation of the common stock is based on the last reported sales price of the common stock on the New York Stock Exchange on the trading date next preceding the date of the Board meeting at which payment will be made. Annual retainer fees are paid in two equal installments during the year. A total of 92,853 shares were reserved for issuance under the Fee Plan as of December 31, 2000. The Company reserved 91,200 shares for options granted in 1990 to certain non-employees in exchange for a previously granted option to purchase 50% of the shares of a Spanish subsidiary of the Company which was merged with Ionics Iberica, S.A. in 1992. During 1995, an additional 30,000 options were granted to the same persons in connection with an increase in production capacity and projected increases in the sale of water under a long-term water sale agreement between Ionics Iberica, S.A. and the local water utility. The fair value of these options is being charged to operations over the 10-year vesting period. During 2000, the original 91,200 options were exercised. A summary of the status of the Company's stock option plans as of December 31, 2000, 1999 and 1998 and changes during the years ending on those dates is presented below:
2000 1999 1998 - ------------------------------------------------------------------ ------------------- ------------------ Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Options in Thousands Options Price Options Price Options Price - ------------------------------------------------------------------ ------------------- ------------------ Outstanding at end of prior year 2,734 $30.04 2,796 $29.70 2,035 $29.31 Granted 941 22.28 80 30.27 956 29.81 Exercised (163) 16.74 (82) 16.31 (115) 21.25 Canceled (286) 30.70 (60) 33.25 (80) 33.48 - ---------------------------------------------------------------------------------------------------------------- Outstanding at end of current year 3,226 $28.38 2,734 $30.04 2,796 $29.70 Options exercisable at year-end 1,835 $30.86 1,918 $30.29 1,814 $29.89
The following table summarizes the information about stock options outstanding at December 31, 2000:
Options in Thousands Options Outstanding Options Exercisable Weighted- Average Weighted Weighted- Number Remaining Average Number Average Range of Outstanding Contract Exercise Exercisable Exercise Exercise Prices at 12/31/00 Years Price at 12/31/00 Price $19.75-$26.50 1,667 6.1 $22.09 842 $22.13 $27.00-$29.88 903 7.5 29.33 353 29.31 $30.00-$33.81 29 8.0 32.54 21 33.28 $42.38-$48.25 627 5.8 43.52 619 43.54 - ----------------------------------------------------------------------------------------------------------- $19.75-$48.25 3,226 6.4 $28.38 1,835 $30.86
The Company has a Section 401(k) stock savings plan under which 150,000 shares have been registered with the Securities and Exchange Commission for purchase on behalf of employees. Shares are normally acquired for the plan in the open market. Through December 31, 2000, no shares had been issued under the plan. The Company has adopted a Renewed Stockholder Rights Plan designed to protect stockholders against abusive takeover tactics. Each share of common stock now carries one right. Each right entitles the holder to purchase from the Company one share of common stock (or in certain circumstances, to receive cash, property or other securities of the Company) at a purchase price of $175 subject to adjustment. In certain circumstances, rights become exercisable for common stock (or a combination of cash, property or other securities of the Company) worth twice the exercise price of the right. The rights are not exercisable until the occurrence of certain events as defined in the Renewed Stockholder Rights Plan. The rights may be redeemed by the Company at $.01 per right at any time unless certain events occur. Unless redeemed earlier, the rights, which have no voting power, expire on August 19, 2007. Note 11. Earnings Per Share Calculations (EPS)
Dollars in Thousands, Except Per Share Amounts For the Year Ended 2000 For the Year Ended 1999 For the Year Ended 1998 - -------------------------------------------------------- ----------------------- ----------------------- Net Per Share Net Per Share Net Per Share Loss Shares Amount Income Shares Amount Income Shares Amount - ----------------------------------------------------------- -------------------------- -------------------------- Basic EPS (Loss) income available to common stockholders $ (1,870) 16,243 $(0.12) $19,361 16,148 $1.20 $21,386 16,077 $1.33 Effect of dilutive stock options - - - - 240 (0.02) - 280 (0.02) - ---------------------------------------------------------------------------------------------------------------------------- Diluted EPS $ (1,870) 16,243 $(0.12) $19,361 16,388 $1.18 $21,386 16,357 $1.31 ===========================================================================================================================
The effect of dilutive stock options excludes those stock options for which the impact would have been antidilutive based on the exercise price of the options. The number of options that were antidilutive at December 31, 2000, 1999 and 1998 were 1,649,000, 1,661,000, and 729,000, respectively. The number of options that were antidilutive at December 31, 2000 include 175,000 shares whose dilutive effect was included as a result of the Company's net loss. Note 12. Operating Leases The Company leases equipment, primarily for industrial water purification and bottled water coolers, to customers through operating leases. The original cost of this equipment was $116,152,000 and $118,495,000 at December 31, 2000 and 1999, respectively. The accumulated depreciation for such equipment was $53,497,000 and $46,964,000 at December 31, 2000 and 1999, respectively. At December 31, 2000, future minimum rentals receivable under noncancelable operating leases in the years 2001 through 2005 and later were approximately $24,187,000, $20,800,000, $19,290,000, $16,313,000, $17,591,000 and $102,557,000, respectively. The Company leases facilities and personal property under various operating leases. Future minimum payments due under lease arrangements are as follows: $4,845,000 in 2001, $3,363,000 in 2002, $2,950,000 in 2003, $2,359,000 in 2004 and $1,815,000 in 2005. Rent expense under these leases was approximately $5,695,000, $4,368,000 and $4,428,000 for 2000, 1999 and 1998, respectively. Note 13. Profit-Sharing and Pension Plans The Company has a contributory profit-sharing plan (defined contribution plan) which covers employees of the Company who are members of the Fabricated Products group of the Bridgeville Division. Company contributions to the defined contribution plan are made from the group's pretax profits, may vary from 8% to 15% of participants' compensation, and are allocated to participants' accounts in proportion to each participant's respective compensation. Company contributions were $300,000, $281,000 and $254,000 in 2000, 1999 and 1998, respectively. The Company also has a contributory defined benefit pension plan for its other domestic employees. Benefits are based on years of service and the employee's average compensation. The Company's funding policy is to contribute annually an amount that can be deducted for federal income tax purposes. The plan's assets are comprised of money market funds, equity funds, short-term bonds and intermediate-term bonds. The following table sets forth the defined benefit plan's funded status and amounts recognized in the Company's balance sheets at December 31, 2000 and 1999: Dollars in Thousands 2000 1999 - ------------------------------------------------------------------------------ Change in Benefit Obligation Benefit obligation as of prior year-end $14,464 $15,296 Service cost 1,055 1,239 Interest cost 1,107 1,186 Assumption changes 1,932 (4,444) Actuarial (gain) loss (792) 2,097 Expenses paid (115) (105) Benefits paid (1,852) (805) - ------------------------------------------------------------------------------- Projected benefit obligation as of year-end $15,799 $14,464 ============================================================================== Change in Plan Assets Fair value of plan assets as of prior year-end $16,258 $14,145 Actual return on plan assets 632 (178) Employer contributions - 3,201 Expenses paid (115) (105) Benefits paid (1,852) (805) - ------------------------------------------------------------------------------- Fair value of plan assets as of year-end $14,923 $16,258 ============================================================================== Funded Status Funded status as of year-end $ (876) $ 1,794 Unrecognized transition asset (150) (203) Unrecognized prior service cost 375 412 Unrecognized net actuarial loss 2,824 870 - ------------------------------------------------------------------------------ Prepaid benefit cost as of year-end $ 2,173 $ 2,873 ============================================================================== The expense of the defined benefit plan was as follows: Dollars in Thousands 2000 1999 1998 - -------------------------------------------------------------------------- Components of Net Periodic Benefit Cost Service cost $1,055 $1,239 $1,347 Interest cost 1,107 1,186 987 Expected return on plan assets (1,445) (1,376) (1,153) Amortization of transition asset (53) (53) (53) Amortization of prior service cost 37 37 37 Recognized net actuarial loss - 155 1 - -------------------------------------------------------------------------- Net periodic benefit cost $ 701 $1,188 $1,166 ========================================================================== The Company determined the defined benefit plan's funded status and amounts recognized in the Company's balance sheet and the expense of the defined benefit plan using the following assumptions: expected return on plan assets of 9.0% at December 31, 2000, 1999 and 1998; rate of compensation increase of 5.0% at December 31, 2000 and 4.75% at December 31, 1999 and 1998; and a discount rate of 7.50%, 8.25% and 6.75% at December 31, 2000, 1999 and 1998, respectively. The Ionics Section 401(k) Stock Savings Plan is available to substantially all U.S. employees of the Company. Employees may contribute from 1% to 12% of compensation subject to certain limits. The Company matches 50% of employee contributions allocated to the Company's common stock up to 6% of their salary. The Company recognized expense of $716,000, $735,000 and $778,000 in 2000, 1999 and 1998, respectively, under this plan. The Company does not provide post-retirement health care to its employees or any other significant post-retirement benefits other than those described above. Note 14. Financial Instruments Off-Balance-Sheet Risk The Company issues letters of credit and performance bonds as guarantees for various performance and bid obligations. Approximately $96.3 million and $72.9 million of these guarantees were outstanding at December 31, 2000 and 1999, respectively. Approximately 41% of the guarantees outstanding at December 31, 2000 are scheduled to expire in 2001. These instruments were executed with creditworthy institutions. The Company periodically enters into foreign exchange contracts to hedge certain operational and balance sheet exposures against changes in foreign currency exchange rates. Because the impact of movements in currency exchange rates on foreign exchange contracts offsets the related impact on the underlying items being hedged, these instruments do not subject the Company to risk that would not otherwise result from changes in currency exchange rates. The Company had no foreign exchange contracts outstanding at December 31, 2000 and 1999. Concentrations of Credit Risk Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash equivalents, investments, trade accounts receivable and notes receivable. The credit risk of cash equivalents and investments is low as the funds are primarily invested in U.S. money market investments and in Spanish Government securities. The Company's concentrations of credit risk with respect to trade accounts receivable and notes receivable is considered low. The Company's customer base is spread across many different industries and geographies, and the Company obtains guaranteed letters of credit for many of its foreign orders. Fair Value of Financial Instruments The carrying amounts of cash equivalents and investments closely approximate their fair values as these items have relatively short maturities and are highly liquid. Based on market information, the carrying amounts of notes receivable and debt approximate their fair values. Investments in Securities Realized gains and losses from the sale of debt and equity securities during fiscal 2000 and 1999 were not significant. Long-term investments, maturing in 2001, 2003, 2004 and 2005, which the Company intends to hold to maturity have been recorded at a net cost of $2,551,000 and $2,228,000 at December 31, 2000 and 1999, respectively. At December 31, 2000 and 1999, the Company also had short-term investments of $1,105,000 and $195,000, respectively, which the Company intends to hold to maturity. The cost of these investments approximates fair value. Note 15. Acquisitions 2000 Purchases Agrinord S.r.l. At the end of 1999, the Company owned a 50% interest in Agrinord S.r.l., an Italian company in the wastewater treatment business, and accounted for the investment using the equity method. In January 2000, the Company acquired an additional 25% interest in Agrinord S.r.l. for a total ownership interest of 75%. The original 50% interest was transferred out of investments in affiliates, and, together with the additional 25% interest, was accounted for under the purchase method with the results of Agrinord S.r.l. included from January 2000. The total cost of the investment was approximately $2 million, and goodwill of approximately $1.7 million is being amortized on a straight-line basis over a 20-year period. Pro forma results of operations have not been presented as the effect of this acquisition on the financial statements was not material. Miller Spring Water In January 2000, the Company acquired substantially all the assets of Miller Spring Water for approximately $1.6 million. The acquisition was accounted for under the purchase method with the results of Miller Spring Water included from January 1, 2000. Goodwill of approximately $1.2 million is being amortized on a straight-line basis over a 10-year period. Pro forma results of operations have not been presented as the effect of this acquisition on the financial statements was not material. Miller Spring Water is a domestic company in the five-gallon bottled water market. O'Viv Sarl In February 2000, the Company acquired a 100% interest in O'Viv Sarl for approximately $0.8 million. The acquisition was accounted for under the purchase method with the results of O'Viv Sarl included from February 2000. Goodwill of approximately $0.6 million is being amortized on a straight-line basis over a 10-year period. Pro forma results of operations have not been presented as the effect of this acquisition on the financial statements was not material. O'Viv Sarl is a French company in the five-gallon bottled water market. Coffee de Juan In March 2000, the Company acquired substantially all the assets of Coffee de Juan for approximately $1.3 million. The acquisition was accounted for under the purchase method with the results of Coffee de Juan included from March 2000. Goodwill of approximately $1.1 million is being amortized on a straight-line basis over a 10-year period. Pro forma results of operations have not been presented as the effect of this acquisition on the financial statements was not material. Coffee de Juan is a domestic company in the office coffee service business. Prior Years' Purchases M2 Innovative Solutions, Inc. In January 1999, the Company acquired a 100% interest in M2 Innovative Solutions, Inc. (now called Ionics Life Sciences, Inc.) for approximately $2.6 million. The acquisition was accounted for under the purchase method with the results of Ionics Life Sciences included from January 1, 1999. Goodwill of approximately $2.6 million is being amortized on a straight-line basis over 20 years. Pro forma results of operations have not been presented as the effect of this acquisition on the financial statements was not material. Ionics Life Sciences is a supplier of ultrapure water products and services, including validated pharmaceutical systems, to the life sciences industry. Aquarelle SA In January 1999, the Company acquired a 100% interest in Aquarelle SA (now called Aqua Cool France) for approximately $4.4 million. The acquisition was accounted for under the purchase method with the results of Aqua Cool France included from January 1, 1999. Goodwill of approximately $4 million is being amortized on a straight-line basis over a 20-year period. Pro forma results of operations have not been presented as the effect of this acquisition on the financial statements was not material. Aqua Cool France is a French company in the five-gallon bottled water market. Agar Technologies Process and Environmental Control, Ltd. In January 1999, the Company acquired a 100% interest in Agar Technologies Process and Environmental Control, Ltd. (now called Ionics Agar Environmental Ltd.) for approximately $1.5 million. The acquisition was accounted for under the purchase method with the results of Ionics Agar included from January 1, 1999. Goodwill of approximately $1.9 million is being amortized on a straight-line basis over 20 years. Pro forma results of operations have not been presented as the effect of this acquisition on the financial statements was not material. Ionics Agar is an Israeli company which produces instruments that monitor, detect and measure oil on water surfaces. Note 16. Segment Information In 1998, the Company adopted SFAS No. 131. At the end of 1998, the Company changed from three reportable segments to four reportable "business group" segments corresponding to a "business group" structure, summarized below, which was put into place in the latter part of 1998. Equipment Business Group - equipment, supply, "own and operate" and related services for seawater desalination, brackish water desalination, water and wastewater treatment and food and chemical processing, for municipalities and communities, and for the petrochemical, nuclear and electric utilities, pulp and paper, chemical processing and related industries. Ultrapure Water Group - equipment, supply, "own and operate" and related services for the production of ultrapure water for the semiconductor, power and pharmaceutical industries. Consumer Water Group - equipment and supply services for the consumer market including bottled water, over and under-the-sink point-of-use devices, carbon filtering media, point-of-entry systems for treating the entire home water supply, household bleach, and other cleaning products. Instrument Business Group - instruments for the analysis and on-line monitoring of certain constituents, impurities or contaminants in water or wastewater for industrial and municipal customers. The accounting policies of the four business group segments are the same as those described in "Significant Accounting Policies." The Company evaluates the performance of each business group segment and considers allocation of resources to it based on earnings before interest, taxes, and minority interest (EBIT), and the evaluation of EBIT with respect to capital employed. The business group structure reflects the segmentation of the product lines, services, and markets within defined areas of management responsibility. Four business group managers, one for each of the reportable segments, are directly accountable to, and maintain regular contact, with the Chief Executive Officer to discuss operating activities, financial results, forecasts and plans. The table on the following page summarizes the Company's operations by the four business group segments and "Corporate." Corporate includes legal and research and development expenses not allocated to the business groups and certain corporate administrative and insurance costs. Geographic Areas Revenues are reflected in the country from which the sales are made. Long-lived assets include all long-term assets except for notes receivable. No foreign country's revenues to unaffiliated customers or long-lived assets were material. Included in the United States segment are export sales of approximately 15%, 16% and 23% for 2000, 1999 and 1998, respectively. Including these U.S. export sales, the percentages of total revenues attributable to activities outside the U.S. were 42%, 44% and 47% in 2000, 1999 and 1998, respectively. Information about the Company's operations by geographic area follows: United Dollars in Thousands States International Total 2000 Revenue - unaffiliated customers $323,071 $151,480 $474,551 Long-lived assets 174,063 127,162 301,225 - ------------------------------------------------------------------------------ 1999 Revenue - unaffiliated customers $239,591 $118,626 $358,217 Long-lived assets 192,416 104,661 297,077 - ------------------------------------------------------------------------------ 1998 Revenue - unaffiliated customers $242,363 $108,963 $351,326 Long-lived assets 170,528 85,678 256,206 - ------------------------------------------------------------------------------
Equipment Ultrapure Consumer Instrument Business Water Water Business Dollars in Thousands Group Group Group Group Corporate Total - ----------------------------------------------------------------------------------------------------------------------------------- 2000 Revenue - unaffiliated customers $205,181 $132,236 $108,324 $28,810 $ - $474,551 Inter-segment transfers 6,087 3,444 - 3,088 (12,619) - Income (loss) from operations 8,338 3,177 (1,541) 2,598 (12,796) (224) Equity income (loss) 976 (20) 667 - - 1,623 Earnings before interest, taxes and minority interest (EBIT) 9,314 3,157 (874) 2,598 (12,796) 1,399 Interest income - - - - - 1,286 Interest expense - - - - - (4,909) Loss before income taxes and minority interest - - - - - (2,224) Capital employed 152,319 144,174 164,819 34,126 (52,621) 442,817 Identifiable assets 250,241 138,321 163,281 18,454 (11,141) 559,156 Investments in affiliated companies 15,394 44 2,872 - - 18,310 Depreciation and amortization 11,688 7,595 13,270 1,098 144 33,795 Capital expenditures 8,924 12,800 17,034 766 1,687 41,211 =================================================================================================================================== 1999 Revenue - unaffiliated customers $140,655 $ 93,562 $ 96,569 $27,431$ - $358,217 Inter-segment transfers 2,214 593 - 1,926 (4,733) - Income from operations 14,507 3,842 10,869 2,148 (3,039) 28,327 Equity income 444 - 667 - - 1,111 Earnings before interest, taxes and minority interest (EBIT) 14,951 3,842 11,536 2,148 (3,039) 29,438 Interest income - - - - - 961 Interest expense - - - - - (668) Income before income taxes and minority interest - - - - - 29,731 Capital employed 177,506 106,190 140,697 30,124 (58,800) 395,717 Identifiable assets 209,798 111,128 153,069 17,657 (1,498) 490,154 Investments in affiliated companies 7,503 - 3,249 - - 10,752 Depreciation and amortization 9,889 6,532 11,088 931 357 28,797 Capital expenditures 28,327 14,213 17,059 1,389 527 61,515 =================================================================================================================================== 1998 Revenue - unaffiliated customers $129,751 $111,349 $ 80,884 $29,342$ - $351,326 Inter-segment transfers 3,916 437 - 1,673 (6,026) - Income from operations 11,129 7,668 10,686 5,408 (3,341) 31,550 Equity income 78 - 528 - - 606 Earnings before interest, taxes and minority interest (EBIT) 11,207 7,668 11,214 5,408 (3,341) 32,156 Interest income - - - - - 1,058 Interest expense - - - - - (331) Income before income taxes and minority interest - - - - - 32,883 Capital employed 158,189 88,715 122,382 26,879 (42,175) 353,990 Identifiable assets 178,197 102,292 135,880 12,587 16,110 445,066 Investments in affiliated companies 4,081 - 2,976 - - 7,057 Depreciation and amortization 10,554 6,117 9,751 524 268 27,214 Capital expenditures 13,625 14,536 12,429 1,310 296 42,196 ===================================================================================================================================
SELECTED FINANCIAL DATA Statement of Operations Data Dollars in Thousands, Except Per Share Amounts 2000 % 1999 % 1998 % 1997 % 1996 % - -------------------------------------------------------------------------------------------------------------------------------- Revenues $474,551 100.0 $358,217 100.0 $351,326 100.0 $352,469 100.0 $326,662 100.0 (Loss) income before income taxes and minority interest (2,224) (0.5) 29,731 8.3 32,883 9.4 43,222 12.3 39,556 12.1 Net (loss) income (1,870) (0.4) 19,361 5.4 21,386 6.1 28,329 8.0 26,503 8.1 (Loss) earnings per basic share (0.12) 1.20 1.33 1.78 1.71 (Loss) earnings per diluted share (0.12) 1.18 1.31 1.73 1.65
Balance Sheet Data Dollars in Thousands 2000 1999 1998 1997 1996 - --------------------------------------------------------------------------------------------- Current assets $258,739 $193,802 $187,093 $165,850 $144,422 Current liabilities 173,363 99,475 85,934 66,012 68,173 - --------------------------------------------------------------------------------------------- Working capital 85,376 94,327 101,159 99,838 76,249 Total assets 577,466 500,906 452,123 406,736 378,589 Long-term debt and notes payable 10,911 8,351 1,519 804 2,132 Stockholders' equity 356,861 361,852 345,598 319,659 292,217
Selected Quarterly Financial Data (Unaudited) Earnings Earnings (Loss) (Loss) Earnings Earnings Dollars in Thousands, Net Per Per Per Per Except Per Gross Income Basic Diluted Gross Net Basic Diluted Share Amounts Revenues Profit (Loss) Share Share Revenues Profit Income Share Share - ----------------------------------------------------------------------------------------------------------------------------------- 2000 1999 First Quarter $102,795 $ 30,546 $ 3,562 $0.22 $0.22 First Quarter $ 87,416 $ 29,164 $ 4,672 $0.29 $0.29 Second Quarter 102,804 32,687 4,215 0.26 0.26 Second Quarter 84,568 29,669 5,104 0.32 0.31 Third Quarter 124,886 33,938 2,926 0.18 0.18 Third Quarter 86,671 30,712 5,369 0.33 0.33 Fourth Quarter 144,066 27,205 (12,573) (0.77) (0.77) Fourth Quarter 99,562 30,740 4,216 0.26 0.26 - ----------------------------------------------------------------------------------------------------------------------------------- $474,551 $124,376 $ (1,870) $(0.12) $(0.12) $358,217 $120,285 $19,361 $1.20 $1.18 ===================================================================================================================================
Common Stock Price Range 2000 High Low 1999 High Low - ------------------------------------------------------------------------------- First Quarter $37 11/16 $24 1/2 First Quarter $35 3/4 $24 7/8 Second Quarter 30 5/8 20 5/8 Second Quarter 36 11/16 29 3/8 Third Quarter 34 1/16 20 13/16 Third Quarter 36 15/16 27 1/4 Fourth Quarter 29 7/16 18 3/16 Fourth Quarter 33 1/4 25 1/2 EX-21 3 0003.txt SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 IONICS, INCORPORATED SUBSIDIARIES OF THE REGISTRAN State or Other Name Jurisdiction of Incorporation ---- ------------------------------ Aqua Cool Enterprises, Inc Massachusetts Aqua Design, Inc.* California Aqua Cool France, S.A.+ France Elite Chemicals Pty. Ltd. Australia Favourable Trading Ltd. Ireland Fidelity Purewater, Inc. California Fidelity Water Systems, Inc. California Global Water Services, S.A.++ Panama Ionics Acapulco, S.A. Mexico Ionics Agar Environmental Ltd. Israel Ionics Asia-Pacific Pte. Ltd. Singapore Ionics (Bermuda) Ltd.* Bermuda Ionics Caribbean Investors Ltd. St. Lucia Ionics Constructors Trinidad Ltd. Trinidad and Tobago Ionics Enersave Engineering Sdn Bhd** Malaysia Ionics Foreign Sales Corporation Limited Jamaica Ionics France S.A. France Ionics Freshwater Ltd.+++ Barbados Ionics Iberica, S.A. Spain Ionics Italba, S.p.A.++++ Italy Ionics Korea Inc. Delaware Ionics Life Sciences, Inc. New Jersey Ionics Mega a.s.*** Czech Republic Ionics Nederland B.V. The Netherlands Ionics Taiwan, Inc. Taiwan Ionics Ultrapure Water Corporation California Ionics (U.K.) Limited United Kingdom Ionics Water Solutions Lda(degree) Portugal Ionics Watertec Pty. Ltd. Australia Resources Conservation Co. International Delaware Separation Technology, Inc.**** Minnesota Sievers Instruments, Inc. Colorado * The Registrant, either directly, through Aqua Design, Inc. or through Ionics (Bermuda) Ltd., wholly owns 13 subsidiary corporations incorporated in various Caribbean jurisdictions. These subsidiary corporations own and operate, or operate and maintain, desalination plants for the supply of potable water to resorts, hotels and municipalities. ** Registrant through Ionics Iberica, S.A. owns 55% of this entity. This entity has subsidiary operations in Malaysia and China. *** Registrant owns 80% of this entity. **** Owns a U.K. subsidiary, SeparaTech Limited. + This entity is wholly owned by Ionics France S.A. ++ This entity is wholly owned by Ionics (U.K.) Ltd. +++ Registrant owns 50% of this entity. ++++ This entity owns a 75% interest in Agrinord S.r.1., an Italian corporation in the waste treatment business. (degree) Registrant owns 51% of this entity. EX-23 4 0004.txt CONSENTS OF EXPERTS AND COUNSEL EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (File Nos. 333-29135, 333-05225, 33-54293, 33-41598, 33-5814, 33-14194, 2-64255, 2-72936, 2-82780, 33-2092, 33-59051, 33-54400, 333-39684) of Ionics, Incorporated of our reports dated March 19, 2001, relating to the consolidated financial statements which appear in Exhibit 13 in this Form 10-K and the financial statement schedule included herein. /s/PricewaterhouseCoopers LLP Boston, Massachusetts March 19, 2001 EX-24 5 0005.txt POWER OF ATTORNEY EXHIBIT 24 IONICS, INCORPORATED POWER OF ATTORNEY We, the undersigned officers and directors of Ionics, Incorporated (the "Company"), hereby severally constitute Arthur L. Goldstein and Stephen Korn, and each of them, to sign for us, and in our names in the capacities indicated below, the Annual Report on Form 10-K of the Company for the fiscal year ended December 31, 2000, and any and all amendments to such Annual Report, hereby ratifying and confirming our signatures as they may be signed by our attorneys to such Annual Report and any and all amendments thereto. Witness our hands on the respective dates set forth below.
Signature Title Date /s/Douglas R. Brown Director March 27, 2001 - ------------------------------- Douglas R. Brown /s/Stephen L. Brown Director March 27, 2001 - ------------------------------- Stephen L. Brown /s/William L. Brown Director March 27, 2001 - ------------------------------ William L. Brown /s/Arnaud de Vitry d'Avacourt Director March 27, 2001 - ----------------------------- Arnaud de Vitry d'Avaucourt /s/Kathleen F. Feldstein Director March 27, 2001 - ------------------------------- Kathleen F. Feldstein /s/Arthur L. Goldstein Chairman of the Board of Directors March 27, 2001 - ------------------------------- Arthur L. Goldstein Chief Executive Officer and President (Principal Executive Officer) /s/William E. Katz Director March 27, 2001 - ------------------------------- William E. Katz /s/William K. Reilly Director March 27, 2001 - ------------------------------- William K. Reilly Director John J. Shields /s/Carl S. Sloane Director March 27, 2001 - ---------------------------------- Carl S. Sloane /s/Daniel I. C. Wang Director March 27, 2001 - ------------------------------- Daniel I. C. Wang /s/Mark S. Wrighton Director March 27, 2001 - ------------------------------ Mark S. Wrighton /s/Allen S. Wyett Director March 27, 2001 - -------------------------------- Allen S. Wyett
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