-----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, FMwIpoxE0pqEUnzBBStenS+cxki/RZ/wpGKabw+wQy2VIphOo5kis/z0HTiMopbo Fz3d31urvO2s/wneZANnXw== 0000912057-02-012712.txt : 20020415 0000912057-02-012712.hdr.sgml : 20020415 ACCESSION NUMBER: 0000912057-02-012712 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TETRA TECHNOLOGIES INC CENTRAL INDEX KEY: 0000844965 STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL INORGANIC CHEMICALS [2810] IRS NUMBER: 742148293 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-13455 FILM NUMBER: 02594939 BUSINESS ADDRESS: STREET 1: 25025 I-45N CITY: THE WOODLANDS STATE: TX ZIP: 77380 BUSINESS PHONE: 2813671983 MAIL ADDRESS: STREET 1: 25025 I-45 NORTH CITY: THE WOODLANDS STATE: TX ZIP: 77380 10-K 1 a2075175z10-k.txt FORM 10-K ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) /x/ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2001 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 No. 0-18335 TETRA Technologies, Inc. (Exact name of registrant as specified in its charter) Delaware 74-2148293 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 25025 I-45 North The Woodlands, Texas 77380 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (Registrant's Telephone Number, Including Area Code): (281) 367-1983 Securities Registered Pursuant to Section 12(b) of the Act: Common Stock, par value $0.01 per share New York Stock Exchange (Title of class) (Name of Exchange on Which Registered) Rights to purchase Series One New York Stock Exchange Junior Participating Preferred Stock (Name of Exchange on Which Registered) (Title of Class) Securities Registered Pursuant to Section 12(g) of the Act: NONE 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 / / 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. / / The aggregate market value of the common stock of TETRA Technologies, Inc. held by non-affiliates (based upon the March 18, 2002 closing sale price as reported by the New York Stock Exchange) ($26.01 per share) was approximately $353,994,201. For purposes of the preceding sentence only, all directors, executive officers and beneficial owners of 10% or more of the common stock are assumed to be "affiliates". Number of shares outstanding of each of the issuer's classes of common stock as of March 18, 2002 was 14,049,584 shares. Part III information is incorporated by reference from the registrant's proxy statement for its annual meeting of stockholders to be held May 23, 2002 to be filed with the Securities and Exchange Commission within 120 days of the end of the registrant's fiscal year. ================================================================================ TABLE OF CONTENTS PART I Item 1. Business................................................................ 1 Item 2. Properties.............................................................. 13 Item 3. Legal Proceedings....................................................... 14 Item 4. Submission of Matters to a Vote of Security Holders..................... 14 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters........................................... 14 Item 6. Selected Financial Data................................................. 15 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................. 16 Item 7A. Quantitative and Qualitative Disclosures About Market Risks............. 25 Item 8. Financial Statements and Supplementary Data............................. 25 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............................................. 25 PART III Item 10. Directors and Executive Officers of the Registrant...................... 26 Item 11. Executive Compensation.................................................. 26 Item 12. Security Ownership of Certain Beneficial Owners and Management.......... 26 Item 13. Certain Relationships and Related Transactions.......................... 26 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K......... 27
THIS ANNUAL REPORT ON FORM 10-K CONTAINS "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, INCLUDING, WITHOUT LIMITATION, STATEMENTS CONCERNING FUTURE SALES, EARNINGS, COSTS, EXPENSES, ACQUISITIONS OR CORPORATE COMBINATIONS, ASSET RECOVERIES, WORKING CAPITAL, CAPITAL EXPENDITURES, FINANCIAL CONDITION AND OTHER RESULTS OF OPERATIONS. SUCH STATEMENTS REFLECT THE COMPANY'S CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND FINANCIAL PERFORMANCE AND ARE SUBJECT TO CERTAIN RISKS, UNCERTAINTIES AND ASSUMPTIONS, INCLUDING THOSE DISCUSSED IN "ITEM 1. DESCRIPTION OF BUSINESS - CERTAIN BUSINESS RISKS." SHOULD ONE OR MORE OF THESE RISKS OR UNCERTAINTIES MATERIALIZE, OR SHOULD UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS MAY VARY MATERIALLY FROM THOSE ANTICIPATED, BELIEVED, ESTIMATED OR PROJECTED. PART I ITEM 1. BUSINESS. GENERAL TETRA Technologies, Inc. ("TETRA" or "the Company") is an oil and gas services company with an integrated calcium chloride and brominated products manufacturing operation that supplies feedstocks to energy markets, as well as other markets. The Company is comprised of three divisions - Fluids, Well Abandonment & Decommissioning and Testing & Services. The Company's Fluids Division manufactures and markets clear brine fluids to the oil and gas industry for use in well drilling, completion and workover operations in both domestic and international markets. The Division also markets the fluids and dry calcium chloride manufactured at its production facilities to a variety of markets outside the energy industry. The Company's Testing & Services Division provides production testing services to the Texas, Louisiana, Alabama, Mississippi, offshore Gulf of Mexico and Latin American markets. It also provides technology and services required for the separation and recycling of oily residuals generated from petroleum refining and exploration and production operations. The Well Abandonment & Decommissioning Division provides a complete package of services required for the abandonment of depleted oil and gas wells and the decommissioning of platforms, pipelines and other associated equipment. The Division services the onshore, inland waters and offshore markets of the Gulf of Mexico. The Division is also an oil and gas producer from wells acquired in connection with its well abandonment and decommissioning business. TETRA Technologies, Inc. was incorporated in Delaware in 1981. All references to the Company or TETRA include TETRA Technologies, Inc. and its subsidiaries. The Company's corporate headquarters are located at 25025 Interstate 45 North in The Woodlands, Texas. Its phone number is 281-367-1983 and its web site is accessed at www.tetratec.com. -1- PRODUCTS AND SERVICES FLUIDS DIVISION Liquid calcium chloride, sodium bromide, calcium bromide, zinc bromide and zinc calcium bromide produced by the Fluids Division are referred to as clear brine fluids (CBFs) in the oil and gas industry. CBFs are solids-free, clear salt solutions that, like conventional drilling "muds", have high specific gravities and are used as weighting fluids to control bottom-hole pressures during oil and gas completion and workover activities. The use of CBFs increases production by reducing the likelihood of damage to the wellbore and productive pay zone. CBFs are particularly important in offshore completion and workover operations due to the increased formation sensitivity, the significantly greater investment necessary to drill offshore, and the consequent higher cost of error. CBFs are distributed through the Company's Fluids Division and are also sold to other companies who service customers in the oil and gas industry. The Division provides basic and custom blended CBFs to domestic and international oil and gas well operators, based on the specific need of the customer and the proposed application of the product. The Division also provides these customers with a broad range of associated services, including on-site fluid filtration, handling and recycling, fluid engineering consultation, and fluid management. The Division also repurchases used CBFs from operators and recycles and reconditions these materials. The utilization of reconditioned CBFs reduces the net cost of the CBFs to the Company's customers and minimizes the need for disposal of contaminated fluids. The Company recycles and reconditions the CBFs through filtration, blending and the use of proprietary chemical processes, and then markets the reconditioned CBFs. The Division's fluid engineering and management personnel use proprietary technology to determine the proper blend for a particular application to maximize the effectiveness and life span of the CBFs. The specific volume, density, crystallization, temperature and chemical composition of the CBFs are modified by the Company to satisfy a customer's specific requirements. The Company's filtration services use a variety of techniques and equipment for the on-site removal of particulates from CBFs so that those CBFs can be recirculated back into the well. Filtration also enables recovery of a greater percentage of used CBFs for recycling. The PayZone-Registered Trademark- Drill-in Fluids systems use CBFs as the basis for this line of specialized drilling fluid systems, some of which are patented. These systems are used during drilling, completing, underreaming, reentry and workover operations through the sensitive pay zone of the well, to increase oil and gas recovery. The Division's patented Advanced Clean Up Technology (ACT -TM-) systems are designed to quickly and uniformly clean up drill-in fluids filtercake from the payzone to increase oil and gas production. The manufacturing group of the Fluids Division presently operates eight active production facilities that manufacture liquid and dry calcium chloride, sodium bromide, calcium bromide, zinc bromide and zinc calcium bromide for distribution primarily into energy markets. Liquid and dry calcium chloride are also sold into the water treatment, industrial, cement, food processing, dust control, ice melt and consumer products markets. Liquid sodium bromide is also sold into the industrial water treatment markets, where it is used as a biocide in recirculated cooling tower waters. Four of these facilities convert co-product hydrochloric acid from nearby sources into liquid and dry calcium chloride products. These operations are located near Lyondell's Lake Charles, Louisiana TDI plant; Resolution Performance Product's Norco, Louisiana epoxy resins plant; Vulcan's Wichita, Kansas chlorinated solvents plant; and DuPont's Parkersburg, West Virginia fluoromonomer plant. Some of these facilities consume feedstock acid from other sources as well. Dry calcium chloride is produced at the Company's Lake Charles plant. With production capacity of at least 100,000 tons of dry product per year, the Lake Charles plant can produce both 80% and 97% calcium chloride products. The Company also has two solar evaporation plants located in San Bernardino County, California, which produce liquid calcium chloride from underground brine reserves to supply markets in the Western United States. -2- The manufacturing group manufactures and distributes calcium bromide and zinc bromide from its West Memphis, Arkansas facility. The production process uses a low-cost hydrobromic acid or bromine along with various zinc sources to manufacture its products. This facility also uses proprietary technologies to recondition and upgrade used CBFs repurchased from the Company's customers. The group also has a facility at Dow's Ludington, Michigan chemical plant that converts a crude bromine stream from Dow's calcium/magnesium chemicals operation into purified bromine and liquid calcium bromide or liquid sodium bromide. The Company also owns a plant in Magnolia, Arkansas that is designed to produce calcium bromide. Approximately 33,000 gross acres of bromine-containing brine reserves are under lease by the Company in the vicinity of the plant to support its production. The plant is not currently in operation, and the Company continues to evaluate its strategy related to these assets and their development. TESTING & SERVICES DIVISION The production testing group of the Testing & Services Division provides flow-back pressure and volume testing of oil and gas wells, predominantly in the Texas, Louisiana, Alabama, Mississippi, offshore Gulf of Mexico, Mexico and Venezuela markets. The Company believes this group to be the leading provider of these services in the Western Hemisphere. These services facilitate the sophisticated evaluation techniques needed for reservoir management and optimization of well work-over programs. In 2000, the Company acquired certain assets of Southern Well Testing, Inc. and Key Energy Services, Inc., which significantly increased its equipment capacity in production testing, slickline, liquid mud facilities and pipe testing assets. In September 2001, the Company expanded its testing capabilities in the offshore Gulf of Mexico market as well as improving its onshore presence through the acquisition of the assets of Production Well Testers. The Division's Production Testing group maintains the largest fleet of high pressure production testing equipment in the South Texas area, with operations in Victoria, Alice, Edinburg and Laredo, Texas, as well as Reynosa, Mexico. The division also has operations in Conroe and Palestine Texas, Lafayette Louisiana and Maturin, Venezuela. The process services group of the Testing & Services Division applies a variety of technologies to separate oily residuals, mixtures of hydrocarbons, water and solids, into their components. The group provides its oil recovery and residuals separation and recycling services to the petroleum refining market primarily in the United States. This group utilizes various liquid/solid separation technologies, including a proprietary high temperature thermal desorption and recovery technology and hydrocyclones, centrifuges and filter presses. Oil is recycled for productive use, water is recycled or disposed of and organic solids are recycled. Inorganic solids are treated to become inert, non-hazardous materials. The Division typically builds, owns and operates fixed systems that are located on its customer's sites, providing these services under long-term contracts. Through the Company's international fluids operations, this Division has developed an exploration and production application for its technology. Utilizing its existing technology, the Division is able to remove oily contaminants from liquid and solid residuals generated in offshore drilling and production. The Division acquired its first international contract in 2000 and subsequently constructed a processing facility in Kristiansund, Norway. -3- WELL ABANDONMENT & DECOMMISSIONING DIVISION The Well Abandonment & Decommissioning Division provides a complete package of services required for the abandonment of depleted oil and gas wells and the decommissioning of platforms and other associated equipment onshore and in inland waters in Texas and Louisiana and offshore in the Gulf of Mexico. The Company first entered this business in 1994 in an effort to expand the services offered to its customers and to capitalize on existing personnel, equipment and facilities along the Louisiana and Texas Gulf Coast. The business was expanded significantly in 1996 with two acquisitions that provided penetration into the Texas onshore markets and the inland waters markets off Texas and Louisiana. The Division added wireline services to its mix in 1997 with an additional acquisition. The Division has service facilities which are located in Belle Chase, Houma and Lafayette, Louisiana and Bryan, Midland and Victoria, Texas. In providing its well abandonment and decommissioning services, the Company operates onshore rigs, barge-mounted rigs, a platform rig, a heavy lift barge and offshore rigless packages. The Division's integrated package of services includes the full complement of operations required to plug wells, salvage tubulars and decommission well head equipment, pipelines and platforms. Its wireline operations provide pressure transient testing, reservoir evaluation, well performance evaluation, cased hole and memory production logging, perforating, bridge plug and packer service and pipe recovery to major oil companies operating in the Gulf of Mexico. In the fourth quarter of 2000, the Company increased its capacity to service its markets through the acquisition of the assets of Cross Offshore Corporation, Ocean Salvage Corporation and Cross Marine LLC. This purchase approximately doubled the number of offshore rigless well abandonment packages owned by the Company and increased the number of inland packages as well. The Company also acquired the heavy lift barge, Southern Hercules, with a 500-ton lift capacity (upgradable to 800 tons) which further expands the Company's turnkey capabilities in decommissioning inland water and offshore pipelines and platforms. The Company formed Maritech Resources, Inc. in 1999 as a new component of the Well Abandonment & Decommissioning Division to own, manage and exploit producing oil and gas properties purchased in conjunction with its well abandonment business. Federal regulations generally require leasees to plug and abandon wells and decommission the platforms, pipelines and other equipment located on the lease within one year after the lease terminates. Frequently the costs of abandonment and decommissioning exceed the value of the producing wells with regard to a particular lease. The Division's strategy is to provide the oil and gas companies with alternative ways of managing their well abandonment obligations, while effectively base-loading well abandonment and decommissioning work for the Well Abandonment & Decommission Division. The Division structures creative alternatives to relieve E&P companies of the burden of managing these obligations and the end-of-life properties that are associated with them. This may include purchasing an interest in the remaining productive wells and operating those properties in exchange for assuming the well abandonment obligations associated with such properties. The Company believes that this Division's strategy is being perceived by the operators of these properties as a cost effective method of satisfying their abandonment and decommissioning obligations, which in turn provides for increased demand for the Division's services and equipment. -4- SOURCES OF RAW MATERIALS The Fluids Division manufactures calcium chloride, sodium bromide, calcium bromide, zinc bromide and zinc calcium bromide for distribution to its oil and gas customers. The Division also purchases calcium bromide and sodium bromide from two domestic and one foreign manufacturer, and it recycles calcium and zinc bromide CBFs repurchased from its oil and gas customers. Some of the Division's primary sources of raw materials are low-cost chemical co-product streams obtained from chemical manufacturers. At the Norco, Louisiana; Wichita, Kansas; Lake Charles, Louisiana; and Parkersburg, West Virginia calcium chloride production plants, the principal raw material is co-product hydrochloric acid produced by other chemical companies. The Company has written agreements with those chemical companies regarding the supply of hydrochloric acid but believes that there are numerous alternative sources of supply as well. The Company produces calcium chloride at its two plants in San Bernardino County, California from underground brine reserves. These brines are deemed adequate to supply the Company's foreseeable need for calcium chloride in that market area. Substantial quantities of limestone are also consumed when converting hydrochloric acid into calcium chloride. The Company uses a proprietary process that permits the use of less expensive limestone, while maintaining end-use product quality. The Company purchases limestone from several different sources. Hydrochloric acid and limestone are in abundant supply. The Company also purchases calcium chloride from a domestic producer under a long-term supply agreement. To produce calcium bromide, zinc bromide and zinc calcium bromide at its West Memphis, Arkansas facility, the Company uses hydrobromic acid, bromine and various sources of zinc raw materials. The Company has one internal and several external sources of bromine and several external sources of co-product hydrobromic acid. The Company uses proprietary and patented processes that permit the use of cost advantaged raw materials, while maintaining high product quality. There are multiple sources of zinc that the Company can use in the production of zinc bromide. The Company has an agreement with the Dow Chemical Company to purchase crude bromine to feed its bromine derivatives plant in Ludington, Michigan. This plant produces purified bromine for use at the West Memphis facility as well as liquid calcium bromide and sodium bromide for resale. The Company also owns a calcium bromide manufacturing plant near Magnolia, Arkansas, that was constructed in 1985 and has a production capacity of 100 million pounds of calcium bromide per year. This plant was acquired in 1988 and is not in operation. The Company currently has approximately 33,000 gross acres of bromine-containing brine reserves under lease in the vicinity of this plant. While this plant is designed to produce calcium bromide, it could be modified to produce elemental bromine or select bromine compounds. The Company believes it has sufficient brine reserves under lease to operate a world-scale bromine facility for 25 to 30 years. Development of the brine field, construction of necessary pipelines and reconfiguration of the plant would take several years and require a substantial additional capital investment. The Company has a long-term supply agreement with a foreign producer of calcium bromide as well. This agreement, coupled with production of bromine and sodium and calcium bromide from the new Ludington, Michigan plant and calcium bromide, zinc bromide and zinc calcium bromide from the West Memphis, Arkansas facility, affords the Company additional flexibility, beyond the development of the Magnolia, Arkansas plant, for the secure supply of its required bromine derivatives. -5- MARKET OVERVIEW AND COMPETITION FLUIDS DIVISION The Fluids Division markets and sells CBFs, drilling and completion fluids systems, and related products and services to major oil and gas exploration and production areas worldwide. Current foreign areas of market presence include the North Sea, Mexico, South America, the Far East and West Africa. The Division's principal competitors in the sale of CBFs to the oil and gas industry are Baroid Corporation, a subsidiary of Halliburton, Inc., M.I. LLC, a joint venture of Smith International Inc. and Schlumberger Limited, and OSCA, Inc., which has entered into an agreement to be acquired by B.J. Services. This market is highly competitive and competition is based primarily on service, availability and price. Although all competitors provide fluid handling, filtration and recycling services, the Company believes that its historical focus on providing these and other value-added services to its customers has enabled it to compete successfully with all companies. Major customers of the Fluids Division include Shell Oil, ChevronTexaco, Amerada Hess, BP, El Paso Energy, Kerr-McGee Corp., Apache, Anadarko, Newfield Exploration and Conoco USA. Non-energy markets for the Company's liquid and dry calcium chloride products include industrial, municipal, mining, janitorial and consumer markets for snow and ice melt products, dust control, cement curing, and road stabilization markets, and certain agricultural and food industry businesses. Most of these markets are highly competitive. The Company's major competitors in the dry calcium chloride market include Dow Chemical Company and General Chemical Company. The Company sells sodium bromide into the industrial water treatment markets as a biocide under the BioRid-TM- trade name. TESTING & SERVICES DIVISION The Division's production testing group provides its services primarily to the natural gas segment of the oil and gas industry. Using typical completion techniques, sand, water and other abrasive materials will normally accompany the initial production of natural gas, usually under very high pressures. The Company provides the equipment and qualified personnel to remove these impediments to production and to pressure test wells and wellhead equipment. The market is highly competitive and competition is based on availability of equipment and qualified personnel, as well as price, quality of service and safety record. The Company believes its equipment maintenance program and operating procedures give it a competitive advantage in the marketplace. Market competition is dominated by numerous small, individually owned operators such as Fesco and Parchman, and to a lesser extent by Schlumberger, Halliburton and other integrated service companies. The Company's customers include Conoco U.S.A., Shell Oil, El Paso Energy, ChevronTexaco, Devon, Newfield, other large independent gas producers, PEMEX (the national oil company of Mexico) and PDVSA (the national oil company of Venezuela). The Division's process services group currently provides oily residuals processing to U.S. refineries concentrated in Texas and Louisiana. Although U.S. refineries have alternative technologies and disposal systems available to them, the Company feels its competitive edge lies in its ability to apply its various liquid/solid separation technologies to provide the most efficient processing alternative at competitive prices. The group currently has major processing facilities at the following refineries: ExxonMobil - Baytown, Texas and Baton Rouge, Louisiana; Premcor and Motiva - Port Arthur, Texas; Phillips - Borger, Texas; Lyondell-Citgo - Houston, Texas; and Citgo - Lake Charles, Louisiana. Major competitors in this market include Scaltech, Midwestern Centrifuge Systems and Phillips Services. The Company believes that new refinery regulations permitting the processing of oily residuals from other refineries will provide the group with expanded market opportunities in the U.S. In 2001, the Company signed a contract with Hovensa and constructed a processing facility in St. Croix, U.S. Virgin Islands. The plant commenced processing in 2002. -6- The Process Services group entered the international energy market in 2000 by applying its technology to process oily residuals generated from offshore exploration and production in the Norwegian sector of the North Sea. The Division has a contract with Renovasson Nord A/S (RN) to process drilling fluids and drill cuttings at the group's central processing facility in Kristiansund, Norway. RN has contracts with major exploration and production operators working offshore Norway to process their oily residuals. Using its technologies, the group believes it is able to provide more cost-effective alternatives to the customer's waste disposal needs. Major competitors in this market include Soilcare, Slovagen Industries and Franzefoss Gjennvinning. Environmental regulations are a major marketplace driver in this business. Markets such as the North Sea, which have stringent zero discharge regulations, afford the greatest growth opportunities for the Company. WELL ABANDONMENT & DECOMMISSIONING DIVISION Demand for the services of The Well Abandonment and Decommissioning Division is predominately driven by government regulations that dictate when a well must be plugged. Current regulations generally require wells to be plugged, offshore platforms removed and remediation of the seabed at the well site to its original state within twelve months after the lease expires. As a result of past drilling activity, depletion of wells and various exceptions generally offered to exploration and production companies in the past that have delayed the plug and abandonment obligation, the number of wells requiring plugging has grown steadily. The Company believes there to be a substantial number of wells offshore in the Gulf of Mexico and in the inland waters, and onshore Texas and Louisiana that require well abandonment and decommissioning work. Critical factors required to participate in these markets include: the proper equipment to meet diverse market conditions; qualified, experienced personnel; technical expertise to address varying downhole conditions; the financial strength to ensure all abandonment and decommissioning obligations are satisfied and a comprehensive safety and environmental program. The Company believes its integrated service package satisfies these market requirements, allowing it to successfully compete. The Division markets its services to major oil and gas companies, independent operators, and state governmental agencies. Major customers include ChevronTexaco, ExxonMobil, Shell Oil, BP, Total Fina Elf, Conoco U.S.A., Apache, Anadarko, Newfield Exploration, El Paso, the Louisiana Conservation Commission and the Railroad Commission of the State of Texas. These services are performed onshore in Texas and Louisiana, Gulf Coast inland waterways and the Gulf of Mexico. The Company's principal competitors in the offshore and inland waters markets include Superior Energy Services, Inc., Cal Dive International, Inc., Horizon Offshore and Global Industries. This market is highly competitive and competition is based primarily on service, equipment availability and price. The Division believes its focus on core competency in well abandonment and decommissioning operations has allowed it to better provide the complete portfolio of equipment, experience and administration required to manage its customer's needs. OTHER BUSINESS MATTERS MARKETING AND DISTRIBUTION The Fluids Division markets its domestic products and services through its distribution facilities located principally in the Gulf Coast region of the United States. These facilities are in close proximity to both product supplies and customer concentrations. Since transportation costs can represent a large percentage of the total delivered cost of chemical products, particularly liquid chemicals, the Division believes that its strategic locations make it one of the lowest cost suppliers of liquid calcium chloride and other CBFs in the Southern United States and California. International markets that are served include the U.K. and Norwegian sectors of the North Sea, Mexico, Venezuela, Brazil, West Africa and the Far East. -7- The non oilfield liquid and dry calcium chloride products are marketed through the Division's sales offices and sales agents in California, Missouri, Florida, Texas and Wyoming, as well as through a network of distributors located throughout the Midwest, West, Northeast, Southeast and Southwest. To service these markets, the Division has over two dozen distribution facilities strategically located to provide efficient, low-cost product availability. BACKLOG The Company generally provides its products and services within seven days of receipt of an order. Consequently, the level of backlog is not indicative of the Company's sales activity. On December 31, 2001, the Company had an estimated backlog of work of $73.9 million, of which approximately $14.8 million is expected to be billed during 2002. EMPLOYEES As of December 31, 2001, the Company had 1,452 employees. None of the Company's U.S. employees are presently covered by a collective bargaining agreement, other than the employees of the Company's Lake Charles, Louisiana calcium chloride production facility who are represented by the Paper, Allied Industrial, Chemical and Energy Workers International union. The Company believes that its relations with its employees are good. PATENTS, PROPRIETARY TECHNOLOGY AND TRADEMARKS As of December 31, 2001, the Company owned or licensed 21 issued U.S. patents, had two patents pending in the U.S., one issued foreign patent and eight foreign patents pending. The foreign patents and patent applications are primarily foreign counterparts to U.S. patents or patent applications. The issued patents expire at various times through 2018. The Company has elected to maintain certain other internally developed technologies, know-how and inventions as trade secrets. While the Company believes that the protection of its patents and trade secrets is important to its competitive positions in its businesses, the Company does not believe any one patent or trade secret is essential to the success of the Company. It is the practice of the Company to enter into confidentiality agreements with key employees, consultants and third parties to whom the Company discloses its confidential and proprietary information. There can be no assurance, however, that these measures will prevent the unauthorized disclosure or use of the Company's trade secrets and expertise or that others may not independently develop similar trade secrets or expertise. Management of the Company believes, however, that it would require a substantial period of time, and substantial resources, to develop similar know-how or technology independently. As a policy, the Company uses all possible legal means to protect its patents, trade secrets and other proprietary information. The Company sells various products and services under a variety of trade marks and service marks, some of which are registered in the U.S. or certain foreign countries. -8- SAFETY, HEALTH AND ENVIRONMENTAL AFFAIRS REGULATIONS Various environmental protection laws and regulations have been enacted and amended during the past three decades in response to public concerns over the environment. The operations of the Company and its customers are subject to the various evolving environmental laws and corresponding regulations, which are enforced by the US Environmental Protection Agency, the MMS and various other federal, state and local environmental authorities. Similar laws and regulations designed to protect the health and safety of the Company's employees and visitors to its facilities are enforced by the US Occupational Safety and Health Administration and other state and local agencies and authorities. The Company must comply with the requirements of environmental laws and regulations applicable to its operations, including the Federal Water Pollution Control Act of 1972, the Resource Conservation and Recovery Act of 1976 (RCRA), the Clean Air Act of 1977, the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA), the Superfund Amendments and Reauthorization Act of 1986 (SARA), the Federal Insecticide, Fungicide, and Rodenticide Act of 1947 (FIFRA), Hazardous Materials Transportation Act of 1975, and Pollution Prevention Act of 1990. The Company is also subject to the applicable environmental and health and safety rules and regulations of the local, state and federal agencies in those foreign countries in which it operates. Many state and local agencies have imposed environmental laws and regulations with stricter standards than their federal counterparts. The Company believes that it is in compliance with all material environmental regulations. At the Company's Lake Charles, West Memphis, Parkersburg and San Bernardino County production plants, the Company holds various permits regulating air emissions, wastewater and storm water discharges, disposal of certain hazardous and non-hazardous wastes, and wetlands preservation. The Company believes that its manufacturing plants and other facilities are in general compliance with all applicable environmental and health and safety laws and regulations. Since its inception, the Company has not had a history of any significant fines or claims in connection with environmental or health and safety matters. However, risks of substantial costs and liabilities are inherent in certain plant operations and certain products produced at the Company's plants and there can be no assurance that significant costs and liabilities will not be incurred in the future. Changes in the environmental and health and safety regulations could subject the Company's handling, manufacture, use, reuse, or disposal of materials at plants to stricter scrutiny. The Company cannot predict the extent to which its operations may be affected by future regulatory and enforcement policies. Tighter MMS regulations regarding well abandonment and platform decommissioning could benefit the Company's Well Abandonment & Decommissioning Division. CERTAIN BUSINESS RISKS The Company identifies the following important risk factors, which could affect the Company's actual results and cause actual results to differ materially from any such results that might be projected, forecasted, estimated or budgeted by the Company in this report. MARKETS The Company's operations are materially dependent on the levels of oil and gas well drilling, completion, workover and abandonment activity, both in the United States and internationally. Such activity levels are affected both by short-term and long-term trends in oil and gas prices and supply and demand balance, among other factors. In recent years, oil and gas prices and, therefore, the levels of well drilling, completion and workover activity, have been volatile. Worldwide military, political and economic events, including initiatives by the Organization of Petroleum Exporting Countries, have contributed to, and are likely to continue to contribute to, price volatility. Also, a prolonged slow down of the U.S. and/or world economy may contribute to an eventual downward trend in the demand and correspondingly the price of oil and natural gas. Any prolonged reduction in oil and gas prices may depress the levels of well drilling, completion and workover activity and result in a corresponding decline in the demand for the Company's products and services and, therefore, have a material adverse effect on the Company's revenues and profitability. -9- COMPETITION The Company encounters and expects to continue to encounter intense competition in the sale of its products and services. The Company competes with numerous companies in its oil and gas and chemical operations. Many of the Company's competitors have substantially greater financial and other related resources than the Company. To the extent competitors offer comparable products or services at lower prices, or higher quality and more cost-effective products or services, the Company's business could be materially and adversely affected. SUPPLY OF RAW MATERIALS The Company sells a variety of CBFs, including brominated CBFs such as calcium bromide, zinc bromide and sodium bromide, and other brominated products, some of which are manufactured by the Company and some of which are purchased from third parties. The Company also sells calcium chloride, as a CBF and in other forms and for other applications. Sales of calcium chloride and brominated products contribute significantly to the Company's revenues. In its manufacture of calcium chloride, the Company uses hydrochloric acid and other raw materials purchased from third parties. In its manufacture of brominated products, the Company uses bromine, hydrobromic acid and other raw materials, including various forms of zinc, that are purchased from third parties. The Company acquires brominated products from a variety of third party suppliers. If the Company was unable to acquire the brominated products, sulfuric, hydrobromic or hydrochloric acid, zinc or any other raw material supplies for a prolonged period, the Company's business could be materially and adversely affected. CERTAIN CREDIT RISKS RELATED TO OIL AND GAS PROPERTIES The Company's Maritech Resources, Inc. subsidiary purchases interests in certain end-of-life producing oil and gas properties in the U.S. Gulf Coast Region (including the Gulf of Mexico) in association with the operations of the Company's Well Abandonment & Decommissioning Division. As the owner of these interests, Maritech is liable for the proper abandonment and decommissioning of the wells, platforms, pipelines and associated equipment located on these properties. TETRA has guaranteed a portion of the abandonment and decommissioning liabilities of Maritech, which can be material in amount. When it purchases these properties, Maritech is compensated for assuming these abandonment liabilities, in the form of cash, oil and gas reserves, by the former owner agreeing to pay Maritech in the future, or by other means. When this compensation is in the form of an agreement to pay in the future, Maritech and TETRA are subject to the risk that the former owner(s) will be unable to make these future payments. Maritech and TETRA attempt to minimize this risk by analyzing the creditworthiness of the former owner(s) and others who may be legally obligated to pay in the event the former owner(s) are unable to do so, and obtaining guarantees, bonds, letters of credit or other forms of security when they are deemed necessary. In addition, if Maritech acquires less than 100% of the working interest in a property, its co-owners are responsible for the payment of their portion of the associated abandonment liabilities, although if the co-owners do not pay their portions, Maritech may be liable for the defaulted amount as well. If any required payment is not made by a former owner or a co-owner and any security is not sufficient to cover the required payment, TETRA could suffer material losses. -10- POTENTIAL LIABILITY FOR ENVIRONMENTAL OPERATIONS: ENVIRONMENTAL REGULATION The Company's operations are subject to extensive and evolving Federal, state and local laws and regulatory requirements, including permits, relating to environmental affairs, health and safety, waste management and the manufacture, storage, handling, transportation, use and sale of chemical products. Governmental authorities have the power to enforce compliance with these regulations and permits, and violators are subject to civil and criminal penalties, including civil fines, injunctions or both. Third parties may also have the right to pursue legal actions to enforce compliance. It is possible that increasingly strict environmental laws, regulations and enforcement policies could result in substantial costs and liabilities to the Company and could subject the Company's handling, manufacture, use, reuse, or disposal of substances or pollutants to scrutiny. The Company's business exposes it to risks such as the potential for harmful substances escaping into the environment and causing damages or injuries, which could be substantial. Although the Company maintains general liability insurance, this insurance is subject to coverage limits and generally excludes coverage for losses or liabilities relating to environmental damage or pollution. The Company maintains environmental liability insurance covering named locations and environmental risks associated with contract services for oil and gas operations, refinery waste treatment operations and for its oil and gas production properties. The extent of this coverage is consistent with the Company's other insurance programs. The Company could be materially and adversely affected by an enforcement proceeding or a claim that was not covered or was only partially covered by insurance. In addition to increasing the Company's risk of environmental liability, the promulgation of stricter environmental laws, regulations and enforcement policies has accelerated the growth of some of the markets served by the Company. Decreased regulation and enforcement could materially and adversely affect the demand for the types of systems offered by the Company's Process Services and Well Abandonment & Decommissioning operations and, therefore, materially and adversely affect the Company's business. RISKS RELATED TO ACQUISITIONS AND INTERNAL GROWTH The Company's aggressive growth strategy includes both internal growth and growth by acquisitions. Acquisitions require significant financial and management resources both at the time of the transaction and during the process of integrating the newly acquired business into the Company's operations. Internal growth requires both financial and management resources as well as hiring additional personnel. The Company's operating results could be adversely affected if it is unable to successfully integrate such new companies into its operations or is unable to hire adequate personnel. Future acquisitions by the Company could also result in issuances of equity securities or the rights associated with the equity securities, which could potentially dilute earnings per share. In addition, future acquisitions could result in the incurrence of additional debt or contingent liabilities and amortization expenses related to goodwill and other intangible assets. These factors could adversely affect the Company's future operating results and financial position. WEATHER RELATED FACTORS Demand for the Company's products and services are subject to seasonal fluctuation due in part to weather conditions, which cannot be predicted. The Company's operating results may vary from quarter to quarter depending on weather conditions in applicable areas in the United States and in international regions. RISKS RELATED TO GROSS MARGIN The Company's operating results in general, and gross margin in particular, are functions of the product mix sold in any period. Other factors, such as unit volumes, heightened price competition, changes in sales and distribution channels, shortages in raw materials due to timely supplies or ability to obtain items at reasonable prices, and availability of skilled labor, may also continue to affect the cost of sales and the fluctuation of gross margin in future periods. -11- PATENT AND TRADE SECRET PROTECTION The Company owns numerous patents, patent applications and unpatented trade secret technologies in the U.S. and certain foreign countries. There can be no assurance that the steps taken by the Company to protect its proprietary rights will be adequate to deter misappropriation of its proprietary rights. In addition, independent third parties may develop competitive or superior technologies. DEPENDENCE ON PERSONNEL The Company's success depends upon the continued contributions of its personnel, many of whom would be difficult to replace. The success of the Company will depend on the ability of the Company to attract and retain skilled employees. Changes in personnel, therefore, could adversely affect operating results. THE FOREGOING REVIEW OF FACTORS PURSUANT TO THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 SHOULD NOT BE CONSTRUED AS EXHAUSTIVE. IN ADDITION TO THE FOREGOING, THE COMPANY WISHES TO REFER READERS TO THE COMPANY'S FUTURE PRESS RELEASES AND FILINGS AND REPORTS WITH THE SECURITIES AND EXCHANGE COMMISSION FOR FURTHER INFORMATION ON THE COMPANY'S BUSINESS AND OPERATIONS AND RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE CONTAINED IN FORWARD-LOOKING STATEMENTS, SUCH AS THIS REPORT. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY RELEASE THE RESULT OF ANY REVISIONS TO ANY SUCH FORWARD-LOOKING STATEMENTS WHICH MAY BE MADE TO REFLECT THE EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS. -12- ITEM 2. PROPERTIES. The following table sets forth certain information concerning facilities leased or owned by the Company as of December 31, 2001. The Company believes its facilities are adequate for its present needs.
DESCRIPTION LOCATION APPROXIMATE SQUARE FOOTAGE(1) ----------- -------- --------------------------- Distribution facilities............................. Texas - twelve locations 1,262,700 Louisiana - seven locations 732,200 Laurel, Mississippi 30,000 Venezuela 110,000 Mexico - various locations 95,000 United Kingdom - various locations 92,000 Brazil 30,000 Ivory Coast 30,000 Nigeria 28,000 Norway - various locations 25,000 Angola 20,000 Cameroon 15,000 Fluids chemical plant production facilities......... San Bernardino County, CA two locations 29 Square Miles(2) Lake Charles, Louisiana 751,500 West Memphis, Arkansas 697,800 Magnolia, Arkansas 120,000 Parkersburg, West Virginia 106,300 Norco, Louisiana 85,200 Orlando, Florida 35,800 Wichita, Kansas 19,500 Ludington, Michigan 10,000 Process Services facilities......................... Texas - six locations 81,125 Louisiana - two locations 31,260 Norway 25,000 St. Croix, Virgin Islands 33,500 The Woodlands, Texas 16,000 Technical Center.................................... The Woodlands, Texas 26,000 Corporate Headquarters.............................. The Woodlands, Texas 55,000
- ---------- (1) Includes real property and buildings unless otherwise noted. (2) Includes solar evaporation ponds. -13- ITEM 3. LEGAL PROCEEDINGS. The Company is a named defendant in numerous lawsuits and a respondent in certain other governmental proceedings arising in the ordinary course of business. While the outcome of such lawsuits and other proceedings cannot be predicted with certainty, management does not expect these matters to have a material adverse impact on the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of security holders of the Company, through solicitation of proxies or otherwise, during the fourth quarter of the year ended December 31, 2001. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. PRICE RANGE OF COMMON STOCK The Common Stock is traded on the New York Stock Exchange under the symbol "TTI". As of March 25, 2002 there were approximately 2,719 holders of record of the Common Stock. The following table sets forth the high and low closing sale prices of the Common Stock for each calendar quarter in the two years ended December 31, 2001, as reported by the New York Stock Exchange. Over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
HIGH LOW -------- -------- 2001 First Quarter...................... $ 24.09 $ 13.69 Second Quarter..................... 29.25 18.85 Third Quarter...................... 25.60 16.73 Fourth Quarter..................... 22.90 14.75 2000 First Quarter...................... $ 13.44 $ 7.00 Second Quarter..................... 14.94 11.25 Third Quarter...................... 16.94 12.56 Fourth Quarter..................... 16.50 12.56
DIVIDEND POLICY The Company has never paid cash dividends on its Common Stock. The Company currently intends to retain earnings to finance the growth and development of its business and does not anticipate paying cash dividends in the foreseeable future. Any payment of cash dividends in the future will depend upon the financial condition, capital requirements and earnings of the Company as well as other factors the Board of Directors may deem relevant. The Company declared a dividend of one Preferred Stock Purchase Right per share of Common Stock to holders of record at the close of business on Novembers 6, 1998. See Note R to the financial statements attached hereto for a description of such Rights. -14- ITEM 6. SELECTED FINANCIAL DATA.
YEAR ENDED DECEMBER 31, ------------------------------------------------------------------ 2001 2000 1999 1998 1997 ---------- ----------- ------------ ----------- ---------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) INCOME STATEMENT DATA Revenues $ 303,438 $ 224,505 $ 178,062 $ 211,728 $ 196,999 Gross Profit 85,234 53,693 38,966 56,110 59,702 Operating Income (Loss) 40,798 16,124 (5,289)(1) 20,661 27,613 (2) Interest Expense (2,491) (4,187) (5,238) (5,257) (1,288) Interest Income 402 441 371 148 273 Other Income (Expense) net (440) 31 65 (239) 1,009 Net Income, before discontinued operations and cumulative effect of accounting change 23,873 7,737 14,329(3) 9,322 16,654 Net Income (Loss) 23,873 (6,722) 10,232 9,322 16,654 EBITDA(4) 59,325 31,861 16,417(5) 34,765 41,970 Net Income per share, before discontinued operations and cumulative effect of accounting change $ 1.71 $ 0.57 $ 1.06 $ 0.69 $ 1.25 Average Shares 13,995 13,616 13,524 13,561 13,297 Net Income per diluted share, before discontinued operations and cumulative effect of accounting change $ 1.61 $ 0.57 $ 1.06 $ 0.67 $ 1.17 Average Diluted Shares 14,837 13,616 13,576 13,994 14,189
(1) Includes special charge of $4,745 and restructuring charge of $2,320 (2) Includes unusual charges of $3,000 (3) Includes gain on the sale of administration building of $6,731 and gain on sale of business of $29,629. (4) EBITDA is earnings before interest, taxes, depreciation and amortization, adjusted to eliminate the effects of special charges and restructuring of $7,065 in 1999 and $3,000 in 1997. (5) Excludes gain on the sale of administration building of $6,731 and gain on sale of business of $29,629.
YEAR ENDED DECEMBER 31, ------------------------------------------------------------------ 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- (IN THOUSANDS) BALANCE SHEET DATA Working capital $ 69,456 $ 64,293 $ 60,311 $ 75,894 $ 59,905 Total assets 309,809 278,940 284,510 305,285 255,986 Long-term liabilities 75,268 81,395 92,806 126,447 89,724 Stockholders' equity 167,650 143,754 149,421 139,322 129,580
The above selected financial data has been restated to reflect the discontinued operations of TETRA Micronutrients, Inc. -15- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. RESULTS OF OPERATIONS The following table presents, for the periods indicated, the percentage relationship which certain items in the Company's statement of operations bear to revenues, and the percentage increase or decrease in the dollar amount of such items. The following data should be read in conjunction with the Consolidated Financial Statements and the associated Notes contained elsewhere in this document.
PERCENTAGE OF REVENUES PERIOD-TO- YEAR ENDED DECEMBER 31, PERIOD CHANGE ---------------------------- --------------------- 2001 2000 VS VS 2001 2000 1999 2000 1999 ---- ----- ---- ----- ---- Revenues....................................... 100.0% 100.0% 100.0% 35.2% 26.1% Cost of revenues............................... 71.9 76.1 78.1 27.7 22.8 Gross profit................................... 28.1 23.9 21.9 58.7 37.8 General & administrative expenses.............. 14.6 16.7 20.9 18.3 1.0 Special and restructuring charges.............. - - 4.0 - (100.0) Operating income............................... 13.4 7.2 (3.0) 153 404.9 Gain of sale of building and TPT business...... - - 20.4 - (100.0) Interest expense............................... 0.8 1.9 2.9 (40.5) (20.1) Interest income................................ 0.1 0.2 0.2 (8.8) 18.9 Other income (expense), net.................... 0.1 - - (1,519.4) (52.3) Income before income taxes, discontinued operations and cumulative effect of accounting change............................ 12.6 5.5 14.8 208.4 (52.8) Income before discontinued operations and cumulative effect of accounting change ..... 7.9 3.4 8.0 208.6 (46.0) Discontinued operations, net of tax............ - (6.4) 0.9 (100) (958.1) Cumulative effect of accounting change, net of tax................................ - - 3.2 - 100.0 Net income..................................... 7.9 (3.0) 5.7 455.1 (165.7) EBITDA......................................... 19.5 14.2 9.2 455.1 (165.7)
BUSINESS ENVIRONMENT Demand for the Company's products and services depends primarily on activity in the oil and gas exploration and production industry in the Gulf of Mexico, Texas, Louisiana, upper Gulf Coast, and in selected international markets. This activity can be significantly affected by the level of industry capital expenditures for the exploration and production of oil and gas reserves, and the plugging and decommissioning of abandoned oil and gas properties. These expenditures are influenced strongly by oil company expectations about the supply and demand for crude oil and natural gas products and by the energy price environment that results from supply and demand imbalances. Throughout the first part of 2001, increased spending by large oil and gas companies contributed to higher levels of worldwide drilling activity, especially gas drilling in the United States. General business conditions in the United States began to decline during the second quarter. The events of September 11 accelerated the economic slowdown which in turn adversely impacted the energy industry, particularly in the United States. Reduced demand for aviation fuel, weakened demand for industrial and residential natural gas and increasing natural gas storage levels together with one of the warmest winters on record resulted in significant decreases in North American oil and natural gas drilling. -16- The Company anticipates oil and gas drilling activity in the U.S. will continue to languish into the second quarter of 2002 due to the slow global economy and an unseasonably warm winter contributing to reduced demand for natural gas. The Company then expects activity to begin recovering in the second half of the year. Over the longer-term, the Company believes that with the current trends of: - deeper gas drilling with more complex completions, - faster reservoir depletion, - stricter enforcement of environmental and abandonment regulations, - advancing age of offshore platforms, and - increasing future demand for natural gas, there will continue to be growth opportunities for the Company's products and services. The Gulf of Mexico and international oil and gas rig counts are leading indicators of the fluids business. Natural gas prices and gas drilling in North and South America are key indicators for the production testing business. 2001 began with 161 rigs running in the Gulf of Mexico, increasing to a high of 176 in February, and closing the year at 119; while the international rig count started the year at 705 rigs and increased to 752 by December 31, 2001. U.S. drilling activity during the first half of 2001, particularly for gas, was very strong, posting significant increases over the same period in 2000. U.S. gas drilling increased 44% during this period, while gas prices improved 30%. However, in the latter stages of 2001, activity declined as the impact of a slowing economy took hold. Natural gas prices fell from a $10.00/MCF high at the beginning of 2001 to approximately $2.00/MCF at year end. Likewise, the U.S. natural gas rig count started the year at 862 rigs, peaked at 1,068 in mid-year, and closed the year at 748 rigs. The Fluids Division manufactures and distributes completion fluids and provides filtration and associated engineering services to exploration and production companies worldwide. The Division's products and services are consumed in the completion of a successful well or the workover of a currently producing well and can also be used under certain drilling conditions. The Company is vertically integrated into the production of its calcium chloride and brominated completion fluids, making it a relatively low-cost supplier of a number of these products. The Division's major markets include inland water and offshore Gulf of Mexico, the North Sea, Mexico, South America and offshore West Africa. Strong natural gas and crude oil drilling activity during the first half of 2001 contributed to increased demand for the products and services of the Division, resulting in increased product volume, asset utilization and allowing the Company to provide its products and services at improved prices over 2000. As demand tailed off toward the end of 2001, volumes decreased, but pricing remained relatively constant thereby bolstering the profit margin percentage. The outlook for world oil and gas demand is highly uncertain due to the slowdown in the global economy as well as the U.S. economy. The Company expects that recent declines in U.S. rig counts combined with the economic uncertainties in the U.S. will result in a short-term decline in revenues and operating profits in this Division. The Company believes that its current market position as a major supplier of fluids, combined with the price increases implemented during 2001, should provide some offset to the anticipated reduced operating activity. Expectations are that industry demand will return in the second half of 2002, providing increasing demand for the Company's products and services. The Testing & Services Division's principal operations include flow-back pressure, volume testing and separation of impurities in gas wells. The markets primarily served are Texas, Louisiana, Mississippi, Alabama, offshore Gulf of Mexico, Mexico and Venezuela. While testing is performed periodically during a well's life, the most extensive use of the Company's equipment and services is immediately following completion of a well. In an effort to minimize the market cyclicality, the Company has initiated a strategy to place a portion of its asset fleet under favorable working arrangements with major domestic oil and gas operators and to diversify into international markets. It has also expanded its offshore Gulf of Mexico operations with the acquisition of Production Well Testers, Inc. in September, 2001. The Company benefited from this strategy in 2001 in that revenues remained strong throughout the year, despite the drop in rigs. -17- Natural gas prices have risen to the mid $3.00 per MMBTU level as of late March, 2002. The stabilization of the price at this level, or higher levels, will lead to increased drilling activity depending upon gas supply and demand and storage considerations. The Company expects the current dip in demand to unfavorably impact its business but believes the above mentioned strategies should partially mitigate that impact. In addition, the business climate created by the current market conditions, generally provides increased acquisition opportunities for the Company, allowing the Company to further consolidate its market position while increasing its revenue base. The Well Abandonment & Decommissioning Division is in the business of well plug and abandonment, platform decommissioning and removal, pipeline abandonment and site clearance for oil and gas companies. Their services are marketed primarily in the Gulf Coast region of the U.S. including onshore, inland waters and offshore. The Division also includes Maritech Resources, Inc. (Maritech), a company formed in 1999 to own, manage and exploit the producing oil and gas properties acquired in conjunction with its well abandonment business. The Division's strategy is to provide the oil and gas companies with alternative ways of managing their well abandonment obligations, while effectively base-loading well abandonment and decommissioning work for the Division. The Division structures creative alternatives to relieve the E&P companies of the burden of managing these obligations and the end-of-life properties that are associated with them. This may include purchasing an ownership interest of the mature production wells in exchange for assuming various well abandonment obligations associated with such properties. In some transactions, cash may be received by the Company to balance the economics. The Company's decommissioning liability is recorded at the fair value cost to dismantle, relocate and dispose of the Company's offshore production platforms, gathering systems, wells and related equipment. Costs are based on prevailing market conditions. Oil and gas producing assets are recorded at the future estimated decommissioning costs less any considerations received. These costs are included in the full cost pool and are depleted on a unit of production basis upon the depletion of the oil and gas producing assets. Maritech seeks to purchase producing natural gas and oil properties that are generally in the later stages of their economic life. Assumption of future abandonment liability is a significant consideration with respect to the offshore producing properties purchased to date. Although higher natural gas prices tend to reduce the number of mature properties available to be acquired by Maritech, these higher prices typically contribute to improved operating results for Maritech, which was generally the case in the first half of 2001. In contrast, lower natural gas prices typically contribute to lower operating results for Maritech and a general increase in the number of mature properties available for abandonment. The services provided consist of platform decommissioning, removal and abandonment and well plugging and abandonment. Platform decommissioning and well abandonment operations are driven by regulations, which offers a partial hedge against fluctuations in the commodity price of natural gas. In particular, MMS regulations require removal of platforms and remediation of the seabed at the well site to its original state within twelve months after lease expiration. Other factors influencing this business include seasonal weather patterns, which typically result in weaker first quarter operations, tighter environmental statutes and stricter enforcement of abandonment regulations by regulatory agencies. The Company contracts and manages, on a day-rate or turnkey basis, all aspects of the decommissioning and abandonment of fields of all sizes. As a result of the improving acquisition environment in the latter half of 2001, Maritech purchased in December producing properties from Pogo Producing Company in exchange for assuming related well abandonment and decommissioning liabilities. In September 2001 Maritech purchased several offshore properties from Seneca Resources Corporation and Range Energy Ventures Corporation. Although the properties received had no future economic value at the time of conveyance and therefore were not recorded on the Company's balance sheet, Maritech assumed all the well abandonment and decommissioning liabilities associated with the transferred properties. The agreement stipulates that Maritech will be paid on a turnkey basis by the sellers for the future well abandonment and decommissioning work performed, as the work is performed. The Company estimates this contract will generate approximately $24.3 million in revenues to the Company in future years, while relieving the sellers of the burden of managing these end-of-life properties. -18- 2001 COMPARED TO 2000 REVENUES - Revenues for the year ended December 31, 2001 were $303.4 million, up $78.9 million or 35.2% from the prior year of $224.5 million. All divisions of the Company experienced significant growth during the year. The Fluids Division reported revenues of $141.3 million, an increase of $22.5 million or 19% over the prior year. This Division benefited from improved overall year-to-year oil and gas completion and workover activity in the Gulf of Mexico, improved pricing, and a tightening fluids supply market. In addition, the international fluids business increased by 48% with improved activity coming from the U.K. markets. The Well Abandonment & Decommissioning Division experienced significant growth in 2001 with reported revenues of $98.5 million, up $38.1 million or 63%. With the addition of significant amounts of capital equipment in the past two years combined with significant improvements in equipment utilization, the Division reported record revenues in 2001. Inland water and offshore activity increased 57% with improved utilization and rates. Revenues from the decommissioning business have increased substantially with the addition of heavy lift equipment to the Division's product offerings. The land plug and abandonment and wireline business also realized significant year-over-year growth through improved utilization and rates. In addition, revenues of the Division's exploitation company, Maritech Resources, Inc., have grown as a result of oil and gas production purchased or developed in conjunction with our expanding well abandonment and decommissioning business and higher natural gas prices in the first half of the year. Revenues of the Testing & Services Division were $65.7 million, an increase of $19.3 million or 42%. Revenue increases in this Division are the result of improved market conditions driven by strong natural gas drilling, additional equipment employed and improved pricing. Domestic production testing revenues were up 120% with a full year's utilization of the assets acquired in the 2000 swap with Key Energy and improved pricing. In addition, international revenues, principally from Mexico, also increased. GROSS PROFIT - Gross profit for the year was $85.2 million compared to $53.7 million in the prior year, an increase of $31.5 million or 59%. The increase is due to the $78.9 million increase in revenues for the year combined with a 420 basis point improvement in margin percentages to 28.1%. The Fluids Division dollar margins improved 40% during the year, reflecting improved pricing in domestic markets. The Division's gross profit percentage increased by 360 basis points to 25.2%. The Well Abandonment & Decommissioning Division realized a 147% growth in dollar margins year-to-year while improving their gross profit percentage by 820 basis points to 24.3%. These gains were the result of improved equipment utilization in the onshore rigs, offshore rigless packages, wireline units and inland water rigs. Higher day rates and improved service mix to higher margin offshore work also significantly impacted margin improvements. Gross profits from the Division's oil and gas exploitation company, Maritech, comprise approximately 5% of the Company's total margin. Maritech's dollar margins improved 165% while their gross profit percentage increased by 1,700 basis points as a result of the spike in natural gas pricing during the first half of the year. The Testing & Services Division dollar margins increased by 38% with their margin percentage remaining approximately flat at 39%. Improved gas drilling activity in the Gulf of Mexico stimulated increased utilization and improved pricing. The Division also benefited from having available for service those assets acquired in the 2000 asset swap with Key Energy and, to a lesser extent, the assets acquired from Production Well Testers in September, 2001. GENERAL AND ADMINISTRATIVE EXPENSES - General and administrative expenses were $44.4 million in 2001 compared to $37.6 million in 2000, an increase of $6.8 million or 18.1%. G&A expense as a percentage of revenues decreased from 16.7% in 2000 to 14.6% in 2001. Expenses in the Well Abandonment & Decommissioning Division increased due to the added infrastructure necessary to support the Division's growth. Expenses in the domestic production testing operation also increased as a result of expansion and acquisitions. Finally, the Company's record earnings performance during the year resulted in increased expenditures under the Company's incentive compensation program. INTEREST EXPENSE AND TAXES - Net interest expense for the year was $2.5 million compared to $4.2 million in the prior year. Reduced long-term debt balances resulted in this decrease. The provision for income taxes was $14.4 million in 2001, an increase of $9.7 million as a result of improved earnings during the year. The effective tax rate for the year was 37.6%, relatively unchanged from 2000. NET INCOME - Net income for the year was $23.9 million compared to a net loss of $6.7 million (which includes a $14.5 million loss on the disposal of discontinued operations) in the prior year. Net income per diluted share was $1.61 in 2001 on 14,837,000 average diluted shares outstanding compared to a loss of $0.49 per share on 13,616,000 average diluted shares outstanding in 2000. -19- 2000 COMPARED TO 1999 REVENUES - Revenues for the year ended December 31, 2000 were $224.5 million compared to $178.1 million in 1999, an increase of $46.4 million or 26%. Improved revenues reflected the overall improvement in the energy industry, particularly the Gulf of Mexico markets. Fluid Division revenues improved 8% to $118.9 million. Well Abandonment & Decommissioning revenues increased 67% to $60.4 million due to significantly improved equipment utilization rates and revenues generated from natural gas producing properties. Testing & Services Division revenues increased 55% to $46.4 million due to increased production testing activity in South Texas and Mexico and the addition of process services operations in Norway. GROSS PROFIT - Gross profits for the year were $53.7 million compared to $39 million in 1999, an increase of $14.7 million or 38%. Gross profit percentage increased from 22% to 24%. Gross profits in both the Well Abandonment & Decommissioning and Testing & Services Divisions improved significantly as a result of substantial improvements in equipment utilization. Gross profit from natural gas producing properties also contributed to the year-over-year improvement. GENERAL AND ADMINISTRATIVE EXPENSES - General and administrative expenses were $37.6 million in 2000 compared to $37.2 million in 1999. G&A expenses as a percentage of revenues decreased from 20.9% in 1999 to 16.7% in 2000. In March 1999, the Company recorded a $4.7 million special charge relating to the impairment of various plant assets predominantly in the Fluids Division. During the fourth quarter of 1999, the Company initiated a strategic restructuring program to refocus its efforts in the energy services business. This program concentrated the Company's efforts on developing its oil and gas services business and selling or consolidating non-core chemical operations. The Company disposed of its micronutrients business, as well as several smaller chemicals-related operations. Additionally, the Company has implemented plans to exit certain product lines and businesses, which are not core to its new strategic direction. The remaining chemicals business will consist of a commodity products based operations, which significantly supports the energy service markets. The Company also embarked on an aggressive program to reorganize its overhead structure to reduce costs and improve operating efficiencies in support of the energy services operations. As a result of this change in strategy, the Company recorded a $2.3 million, pretax, restructuring charge in the fourth quarter of 1999. The following table details the activity in the restructuring during the twelve months ended December 31, 2000 (amounts in thousands).
12/31/99 12/31/00 LIABILITY CASH LIABILITY BALANCE PAYMENTS BALANCE --------- ---------- --------- Involuntary termination costs............. $ 1,170 $ 877 $ 293 Contractual costs......................... 760 - 760 Exit costs................................ 390 273 117 --------- ---------- -------- $ 2,320 $ 1,150 $ 1,170 ========= ========== ========
Involuntary termination costs consist of severance costs associated with the termination of six management-level employees associated with the Company's restructuring. Contractual costs include obligations triggered in two chemicals product lines when the Company decided to exit these businesses. The remaining exit costs are additional liabilities realized by exiting certain portions of the specialty chemicals business. Of the total restructuring charge at December 31, 2000, approximately $0.9 million is associated with the Fluids Division, and $0.3 million with corporate administrative activities. The majority of these costs are expected to be paid within the next 12 months and will be funded using cash flow from operations. INTEREST EXPENSE - Interest expense decreased during the period, compared to the prior year, due to decreased long-term debt over the past twelve months. Proceeds from the sales of a portion of the micronutrient business in 2000 and the Process Technologies business in 1999 were used to reduce long-term debt. -20- OTHER INCOME - In March 1999, the Company sold its corporate headquarters building, realizing a gain of approximately $6.7 million. The Company subsequently signed a ten-year lease agreement for space within the building. During the second quarter of 1999, the Company sold its Process Technologies business for a $29.6 million gain. NET INCOME - Income before discontinued operations and the cumulative effect of accounting change was $7.7 million in 2000 and $14.3 million in 1999. Net income per diluted share before discontinued operations and the cumulative effect of accounting change was $0.57 in 2000 based on 13,616,000 average diluted shares outstanding and $1.06 in 1999 based on 13,576,000 average diluted shares outstanding. DISCONTINUED OPERATIONS - In conjunction with the Company's strategic restructuring program, the Company developed a plan in October 2000 to exit its micronutrients business, which produces zinc and manganese products for the agricultural markets. The plan provided for the sale of the stock of TETRA's wholly owned Mexican subsidiary, Industrias Sulfamex, S.A. de C.V., a producer and distributor of manganese sulfate, and all the manganese inventory held by the Company's U.S. operations. It also provided for the sale of all inventories and the sale or shutdown of the plant and equipment associated with its zinc sulfate business. In December 2000, the Company sold all of its U.S. and foreign manganese sulfate assets for $15.4 million in cash and wrote down its investment in the remaining zinc sulfate micronutrients assets to their estimated net realizable value. The Company has accounted for the micronutrients business as a discontinued operation and has restated prior period financial statements accordingly. The estimated loss on the disposal of the discontinued operations of $14.5 million (net of income tax benefit of $5.4 million) represents the estimated loss on the disposal of the assets of the micronutrients business and a provision of $0.2 million for anticipated losses during the disposition period from October 1, 2000 to September 30, 2001. Revenues from discontinued operations were $30.6 million in 2000 compared to $37.2 million in 1999. Net income from discontinued operations was $0.01 million in 2000 and $1.7 million in 1999. In April 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-5, REPORTING THE COSTS OF START-UP ACTIVITIES (SOP 98-5), which requires that costs related to start-up activities be expensed as incurred. Prior to 1999, the Company capitalized those costs incurred in connection with opening a new production facility. The Company adopted the provisions of the SOP 98-5 in its financial statements for the year ended December 31, 1999. The effect of adoption of SOP 98-5 was to record a charge for the cumulative effect of an accounting change of $5.8 million ($0.43 per share), net of taxes of $3.9 million, to expense costs that had been previously capitalized prior to 1999. Net loss for the year 2000 was $6.7 million (which includes a $14.5 million loss on the disposal of discontinued operations) compared to income of $10.2 million in the prior year. Net loss per diluted share was $0.49 in 2000 on 13,616,000 average diluted shares outstanding and net income of $0.75 in 1999 on 13,576,000 average diluted shares outstanding. LIQUIDITY AND CAPITAL RESOURCES Over the past three years, the Company has funded its operating activities from internally generated cash flow, even during periods of weak industry demand as in 1999. During this three-year period, the Company generated approximately $93 million of cash flow from operations which it used to fund the purchase of approximately $57 million of capital equipment and $14 million in acquisitions. Over the same period, total outstanding debt was reduced from $111.3 million at December 31, 1998 to $41.9 million at December 31, 2001. This reduction of $69.4 million was funded through cash generated from operations and cash generated from the restructuring of the Company and disposal of non-core assets. During this period, working capital increased from $60.3 million in 1999 to $64.3 million in 2000 to $69.5 million in 2001. -21- OPERATING ACTIVITIES - Net cash provided by operating activities was $58.1 million in 2001 compared to $22.6 million in 2000, an increase of $35.5 million. A significant portion of this increase is due to the increased earnings reported in 2001 and an increase in year-end accruals associated with salaries and benefits, taxes and Well Abandonment & Decommissioning activities. Also contributing to the improvement was the increase in depreciation and depletion and the increase in deferred tax expense, both the results of added capital investments over the past several years. Accounts receivables increased during the year, reflecting the Company's revenue growth, although the increase was less than that of 2000 due to a substantial improvement in revenues late in 2000 compared to the same period of 1999. Inventories increased in 2001, consuming approximately $3.6 million, reflecting the weakening market conditions toward the end of 2001 in the fluids business. By comparison, inventories were reduced in 2000 due to an inventory reduction program implemented by the Company and improved market demand. Finally, the Company generated approximately $8.0 million through the liquidation of working capital associated with its discontinued micronutrients business. INVESTING ACTIVITIES - Capital expenditures for the year ended December 31, 2001 were $28.3 million. Approximately $4.5 million was invested in the Fluids Division for the procurement of plant production equipment and filtration and blending equipment. The Well Abandonment & Decommissioning Division invested approximately $12.6 million of cash during the year to expand and upgrade its fleet in support of its inland waters and offshore abandonment operations. The Company also invested in additional equipment to enhance its decommissioning and salvage business, which included significant refurbishment of its heavy lift barge, the Southern Hercules. Approximately $10.6 million was invested in the Testing & Services Division, a significant portion of which went to expand the production testing equipment fleet. The Company also invested additional capital in its process services operations to enhance its oily residual separation business. The remaining funds were used to support general corporate activities. Major investing activities of the Company in 2001 included business acquisitions totaling $7.6 million and the purchase of additional end-of-life oil and gas properties. During the third quarter of 2001, the Company acquired the assets of Production Well Testers, Inc. (PWT) for approximately $4.9 million in cash. PWT provides production testing services to offshore Gulf of Mexico markets as well as onshore Gulf Coast markets. The business has been integrated with TETRA's Testing & Services Division as part of its production testing operations, enhancing the Division's production testing presence in Louisiana and expanding operations into the Mississippi and Alabama markets. The Company acquired the assets of Lee Chemical during the fourth quarter of 2001 for approximately $2.7 million in cash. Lee is a producer and distributor of liquid calcium chloride in the U.S. West Coast markets. Also in the fourth quarter, the Company's Well Abandonment & Decommissioning Division purchased oil and gas producing properties in exchange for the assumption of approximately $4.5 million of decommissioning liabilities related to the properties and other considerations. As part of that transaction, the Company received approximately $1.7 million of cash to satisfy other working interest owners' future well abandonment obligations. This cash is reported as restricted cash on the Company's balance sheet. The oil and gas producing assets were recorded at the future estimated costs to abandon and decommission the properties. In the second quarter of 2000, the Company completed an asset exchange of its trucking operations for certain assets of Key Energy Services. The assets acquired included production testing equipment which complemented and expanded the Company's existing testing fleet. The Company accounted for the exchange of interest as a non-monetary transaction whereby the basis in the exchanged assets became the new basis in the assets received. No gain or loss was recognized as a result of the exchange. During the fourth quarter of 2000, the Company expanded its Well Abandonment & Decommissioning capacity through the acquisition of the assets of Cross Offshore Corporation, Ocean Salvage Corporation and Cross Marine LLC. The Company paid approximately $6.2 million in cash plus additional future consideration contingent upon future net earnings. The assets purchased complement the Company's current well abandonment, platform decommissioning and heavy lift operations in the Gulf Coast inland waters and offshore markets. This transaction approximately doubled the offshore rigless well abandonment packages and increased the number of inland water well abandonment packages the Company can provide. It also gave the Company heavy lift capabilities with the acquisition of the Southern Hercules, a 500 ton capacity heavy lift barge. -22- Also in the fourth quarter of 2000, the Company purchased, in two separate transactions, oil and gas producing properties in exchange for the assumption of approximately $9.6 million in decommissioning liability. Oil and gas producing assets were recorded at the future estimated decommissioning costs less cash received of $1.3 million. FINANCING ACTIVITIES - To fund its capital and working capital requirements, the Company uses cash flow as well as its general purpose, secured, prime rate/LIBOR-based revolving line of credit with a bank syndicate led by Bank of America. In December 2001, the Company amended its line of credit to an $80 million line, that may be expanded to $110 million during the first year, at the Company's discretion. This agreement matures in December 2004, carries no amortization, and is secured by accounts receivable and inventories. The agreement permits the Company to execute up to $20 million of capital leases and $50 million of unsecured senior notes, and there are no limitations or restrictions on operating leases or unsecured non-recourse financing. TETRA's credit facility is subject to common financial ratio covenants. These include, among others, a funded debt-to-EBITDA ratio, a fixed charge coverage ratio, a tangible net worth minimum, an asset coverage ratio, and dollar limits on the total amount of capital expenditures and acquisitions the Company may undertake in any given year. The Company pays a commitment fee on unused portions of the line and a LIBOR-based interest rate which decreases or increases as the Company's funded debt-to-EBITDA ratio (as defined in the Credit Agreement) improves or deteriorates. The Company is not required to maintain compensating balances. The covenants also included certain restrictions on the Company for the sale of assets. As of December 31, 2001, the Company has $3.5 million in letters of credit and $41.0 million in long-term debt outstanding against an $80 million line of credit, leaving a net availability of $35.5 million, expandable to $65.5 million by December 2002. The Company believes this new credit facility will meet its foreseeable capital and working capital requirements through December 2004. In September 1997, the Company entered into two interest rate swap agreements, each with a nominal amount of $20 million, which were effective January 2, 1998 and expire on January 2, 2003. The interest rate swap agreements provide for the Company to pay interest at a fixed rate of approximately 6.4% (annual rate) every three months, beginning April 2, 1998 and requires the issuer to pay the Company on a floating rate based on LIBOR. The swap transactions can be canceled by the Company through payment of a cancellation fee, which is based upon prevailing market conditions and remaining life of the agreement. The estimated fair value of the swap transactions at December 31, 2001 was $1.3 million, net of taxes, below the carrying value. In November 2001, the Company announced that its Board of Directors had authorized the repurchase of up to $10 million of its common stock. The Company feels that its stock is significantly undervalued in relation to its peer group, financial position and future growth prospects and, consequently, is a sound investment of its capital dollars. During the year the Company repurchased 228,400 shares of its stock at a cost of $3.9 million. Finally, the Company received $4.1 million during 2001 from the exercising of stock options by employees. In addition to the aforementioned revolving credit facility, the Company funds its short term liquidity requirements from cash generated by operations, as well as from other traditional financing arrangements, such as leasing with institutional leasing companies and vendor financing. The Company's debt is not currently rated and the Company's ability to access its revolving credit line is largely unaffected by fluctuations in its stock price. However, the Company must comply with certain financial ratio covenants in the credit agreement. Significant deterioration of these ratios could result in default under the credit agreement and, if not remedied, could result in termination of the agreement and acceleration of the outstanding balance under the facility. The Company's ability to comply with these financial covenants centers largely upon its ability to generate adequate earnings before interest, taxes, depreciation and amortization (EBITDA). Historically, the Company's financial performance and EBITDA levels have been more than adequate to meet these covenants, and the Company expects this trend to continue. Over the past three years, the Company's EBITDA has increased from $16.4 million in 1999 to $31.9 million in 2000 and $59.3 million in 2001, with the 1999 earnings reflecting a severe downturn in the oil and gas industry. During that same period, the Company's debt decreased from over $111 million to $41.9 million. The Company believes its principal sources of liquidity, cash flow from operations, revolving credit facility and traditional financing arrangements are adequate to meet its current and anticipated capital and operating requirements through at least December 2004. -23- The table below recaps the Company's contractual cash obligations as of December 31, 2001:
PAYMENTS DUE ---------------------------------------------------------------------------- Total 2002 2003 2004 2005 2006 Thereafter ----- ---- ---- ---- ---- ---- ---------- (In Thousands) Long-term Debt $ 41,000 $ - $ - $ 41,000 $ - $ - $ - Capital Lease Obligations 1,043 494 283 217 49 - - Operating Leases 17,739 4,580 4,054 2,510 1,640 1,566 3,389 Decommissioning Liability (1) 14,269 4,638 1,216 2,443 4,908 1,064 - --------- --------- ------- ---------- ------- -------- ---------- Total Contractual Cash Obligations $ 74,051 $ 9,712 $ 5,553 $ 46,170 $ 6,597 $ 2,630 $ 3,389 ========= ========= ======= ========== ======= ======== ==========
(1) Decommissioning liabilities must be satisfied within twelve months after an oil and gas property's lease has expired. Lease expiration occurs six months after the last producing well on the lease ceases production. The Company has estimated the timing of these payments based upon anticipated lease expiration dates, which are subject to many changing variables that can influence the ultimate timing of these cash flows. Other commercial commitments of the Company as of December 31, 2001 include letters of credit of $3.5 million, of which $2.1 million will expire within one year and $1.4 million within two years. CRITICAL ACCOUNTING POLICIES AND ESTIMATES In preparing the financial statements, the Company makes assumptions, estimates and judgements that affect the amounts reported. The Company periodically evaluates its estimates and judgements related to bad debts; impairments of long-lived assets, including goodwill and decommissioning liability. Note B to the Consolidated Financial Statements contains the accounting policies governing each of these matters. The Company's estimates are based on historical experience and on future expectations that are believed to be reasonable; the combination of these factors forms the basis for making judgements about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results are likely to differ from the Company's current estimates and those differences may be material. Reserves for bad debts are determined on a specific identification basis when the Company believes that the required payment of specific amounts owed to it is not probable. A significant portion of the Company's revenues come from oil and gas E&P companies. This activity can be significantly affected by the level of industry capital expenditures for the exploration and production of oil and gas reserves and the plugging and decommissioning of abandoned oil and gas properties. These expenditures are influenced strongly by oil company expectations about the supply and demand for crude oil and natural gas products and by the energy price environment that results from supply and demand imbalances. If, due to these circumstances, the customers are unable to repay these receivables, additional allowance may be required. The determination of impairment on long-lived assets, including goodwill, is conducted periodically when indicators of impairment are present. If such indicators were present, the determination of the amount of impairment is based on the Company's judgements as to the future operating cash flows to be generated from these assets throughout their estimated useful lives. The oil and gas industry is cyclical and the Company's estimates of the period over which future cash flows will be generated, as well as the predictability of these cash flows, can have significant impact on the carrying value of these assets and, in periods of prolonged down cycles may result in impairment charges. The Company's decommissioning liability is recorded at the fair value cost to dismantle, relocate and dispose of the Company's offshore production platforms, gathering systems, wells and related equipment. In estimating the decommissioning liabilities, the Company performs detailed estimating procedures, analysis and engineering studies. These costs are included in the full cost pool of the oil and gas properties acquired less any cash considerations received, and are amortized on a unit-of-production basis upon the depletion of the oil and gas producing assets. The Company performs impairment tests on these full cost pool assets when indicators of impairment are present. Additionally, the Company reviews the adequacy of its decommissioning liability whenever indicators suggest that the estimated cash flows underlying the liability have changed materially. The timing and amounts of these cash flows are subject to changes in the energy industry environment and may result in additional liabilities recorded, which in turn would increase the Company's full cost pool. -24- ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company is subject to market risk exposure related to changes in interest rates on the floating rate portion of its credit facility. These instruments carry interest at an agreed-upon percentage rate spread above LIBOR. At December 31, 2001, the Company had $41.0 million outstanding under its credit facility, of which $40 million was subject to an interest rate swap and $1.0 million was subject to a floating rate based on LIBOR plus 1.25%. The interest rate swap agreements provide the Company with a 6.4% fixed interest rate which mitigates a portion of the Company's risk against increases in interest rates. Based on this balance, an immediate change of one percent in the interest rate would cause a change in interest expense of approximately $10,000 on an annual basis. The Company has no financial instruments subject to foreign currency fluctuation or commodity price risks at December 31, 2001. FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities," requires companies to record derivatives on the balance sheet as assets and liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives are accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. The Company has adopted this accounting standard, as required, on January 1, 2001. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The financial statements of the Company and its subsidiaries required to be included in this Item 8 are set forth in Item 14 of this Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. There is no disclosure required by Item 304 of Regulation S-K in this report. -25- PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information required by this Item as to the directors and executive officers of the Company is hereby incorporated by reference from the information appearing under the captions "Election of Directors", "Information about Continuing Directors", "Executive Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's definitive proxy statement which involves the election of directors and is to be filed with the Securities and Exchange Commission ("Commission") pursuant to the Securities Exchange Act of 1934 as amended (the "Exchange Act") within 120 days of the end of the Company's fiscal year on December 31, 2001. ITEM 11. EXECUTIVE COMPENSATION. The information required by this Item as to the management of the Company is hereby incorporated by reference from the information appearing under the captions "Director Compensation" and "Executive Compensation" in the Company's definitive proxy statement which involves the election of directors and is to be filed with the Commission pursuant to the Exchange Act within 120 days of the end of the Company's fiscal year on December 31, 2001. Notwithstanding the foregoing, in accordance with the instructions to Item 402 of Regulation S-K, the information contained in the Company's proxy statement under the sub-heading "Management and Compensation Committee Report" and "Performance Graph" shall not be deemed to be filed as part of or incorporated by reference into this Form 10-K. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by this Item as to the ownership by management and others of securities of the Company is hereby incorporated by reference from the information appearing under the caption "Beneficial Stock Ownership of Certain Stockholders and Management" in the Company's definitive proxy statement which involves the election of directors and is to be filed with the Commission pursuant to the Exchange Act within 120 days of the end of the Company's fiscal year on December 31, 2001. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by this Item as to certain business relationships and transactions with management and other related parties of the company is hereby incorporated by reference to such information appearing under the caption "Management and Compensation Committee Interlocks and Insider Participation" in the Company's definitive proxy statement which involves the election of directors and is to be filed with the Commission pursuant to the Exchange Act within 120 days of the end of the Company's fiscal year on December 31, 2001. -26- PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) List of documents filed as part of this Report 1. Financial Statements of the Company
PAGE ---- Report of Independent Auditors F-1 Consolidated Balance Sheets at December 31, 2001 and 2000 F-2 Consolidated Statements of Operations for the years F-4 ended December 31, 2001, 2000, and 1999 Consolidated Statements of Stockholders' Equity for the years ended December 31, 2001, 2000, and 1999 F-5 Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000, and 1999 F-6 Notes to Consolidated Financial Statements F-7
2. Financial Statement Schedule
SCHEDULE DESCRIPTION PAGE -------- ----------- ---- II Valuation and Qualifying Accounts S-1
All other schedules are omitted as they are not required, or are not applicable, or the required information is included in the financial statements or notes thereto. -27- 3. List of Exhibits 3.1 (i)Restated Certificate of Incorporation (filed as an exhibit to the Company's Registration Statement on Form S-1 (33-33586) and incorporated herein by reference). 3.1 (ii)Certificate of Designation of Series One Junior Participating Preferred Stock of the Company dated October 27, 1998 (filed as an exhibit to the Company's Registration Statement on Form 8-A filed on October 27, 1998 (the "1998 Form 8-A") and incorporated herein by reference). 3.2 Bylaws, as amended (filed as an exhibit to the Company's Registration Statement on Form S-1 (33-33586) and incorporated herein by reference). 4.1 Rights Agreement dated as of October 26, 1998 between the Company and Computershare Investor Services LLC (as successor in interest to Harris Trust & Savings Bank), as Rights Agent (filed as an exhibit to the 1998 Form 8-A and incorporated herein by reference). 10.1 Long-term Supply Agreement with Bromine Compounds Ltd. (filed as an exhibit to the Company's Form 10-K for the year ended December 31, 1996 and incorporated herein by reference; certain portions of this exhibit have been omitted pursuant to a confidential treatment request filed with the Securities and Exchange Commission). 10.2 Agreement dated November 28, 1994 between Olin Corporation and TETRA-Chlor, Inc. (filed as an exhibit to the Company's Form 10-K for the year ended December 31, 1994 and incorporated herein by reference; certain portions of this exhibit have been omitted pursuant to a confidential treatment request filed with the Securities and Exchange Commission). 10.3 Sales Agreement with Albemarle Corporation (filed as an exhibit to the Company's Form 10-Q for the three months ended June 30, 1997 and incorporated herein by reference; certain portions of this exhibit have been omitted pursuant to a confidential treatment request filed with the Securities and Exchange Commission). 10.4 1990 Stock Option Plan, as amended through January 5, 2001 (filed as an exhibit to the Company's Form 10-K for the year ended December 31, 2000 and incorporated herein by reference). 10.5 Director Stock Option Plan (filed as an exhibit to the Company's Form 10-K for the year ended December 31, 2000 and incorporated herein by reference). 10.6 1998 Director Stock Option Plan (filed as an exhibit to the Company's Form 10-K for the year ended December 31, 2000 and incorporated herein by reference). 10.7* Amended and Restated Credit Agreement dated as of December 14, 2001 with Bank of America, N.A. 10.8* Letter of Agreement with Gary C. Hanna, dated March, 2002 21* Subsidiaries of the Company 23* Consent of Ernst & Young, LLP - ---------- * Filed with this report (b) Form 8-K: None. -28- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, TETRA Technologies, Inc. has duly caused this report to be signed in its behalf by the undersigned, thereunto duly authorized. TETRA TECHNOLOGIES, INC. Date: March 26, 2002 BY: /s/ Geoffrey M. Hertel ------------------------------------------ Geoffrey M. Hertel, President & CEO Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: SIGNATURE TITLE DATE --------- ----- ----- /s/J. Taft Symonds Chairman of March 26, 2002 - ------------------------- the Board of Directors J. Taft Symonds /s/Geoffrey M. Hertel President and Director March 26, 2002 - ------------------------- (Chief Executive Officer) Geoffrey M. Hertel /s/Joseph M. Abell Senior Vice President March 26, 2002 - ------------------------- (Chief Financial Officer) Joseph M. Abell /s/Bruce A. Cobb Vice President, Finance March 26, 2002 - ------------------------- (Principal Accounting Officer) Bruce A. Cobb /s/Hoyt Ammidon, Jr. Director March 26, 2002 - ------------------------- Hoyt Ammidon, Jr. /s/Paul D. Coombs Director March 26, 2002 - ------------------------- (Chief Operating Officer) Paul D. Coombs /s/Ralph S. Cunningham Director March 26, 2002 - ------------------------- Ralph S. Cunningham /s/Tom H. Delimitros Director March 26, 2002 - ------------------------- Tom H. Delimitros /s/Allen T. Mcinnes Director March 26, 2002 - ------------------------- Allen T. McInnes /s/Kenneth P. Mitchell Director March 26, 2002 - ------------------------- Kenneth P. Mitchell -29- REPORT OF INDEPENDENT AUDITORS Board of Directors and Stockholders TETRA Technologies, Inc. We have audited the accompanying consolidated balance sheets of TETRA Technologies, Inc. and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2001. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of TETRA Technologies, Inc. and subsidiaries at December 31, 2001 and 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. ERNST & YOUNG LLP Houston, Texas February 20, 2002 F-1 TETRA TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
DECEMBER 31, -------------------------------- 2001 2000 --------------- ------------ ASSETS Current Assets: Cash and cash equivalents $ 13,115 $ 6,594 Restricted cash 1,726 - Trade accounts receivable, net of allowances for doubtful accounts of $1,768 in 2001 and $930 in 2000 72,688 63,730 Inventories 37,969 34,141 Deferred tax assets 5,846 9,828 Prepaid expenses and other current assets 5,003 3,791 --------------- ------------ Total current assets 136,347 118,084 Property, Plants and Equipment: Land and building 12,361 9,924 Machinery and equipment 142,731 120,029 Automobiles and trucks 10,659 7,924 Chemical plants 36,120 36,223 O&G producing assets 14,399 7,475 Construction in progress 11,036 10,410 --------------- ------------ 227,306 191,985 Less accumulated depreciation and depletion (80,333) (66,480) --------------- ------------ Net property, plant and equipment 146,973 125,505 Other Assets: Cost in excess of net assets acquired, net of accumulated amortization of $3,540 in 2001 and $2,967 in 2000 19,613 20,189 Other, net of accumulated amortization of $4,221 in 2001 and $3,762 in 2000 5,238 5,406 Net assets of discontinued operations 1,638 9,756 --------------- ------------ Total other assets 26,489 35,351 --------------- ------------ $ 309,809 $ 278,940 =============== ============
See Notes to Consolidated Financial Statements F-2 TETRA TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
DECEMBER 31, ----------------------------------- 2001 2000 ---- ---- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Trade accounts payable $ 35,937 $ 28,082 Accrued expenses 30,526 18,754 Current portions of all long-term debt and capital lease obligations 428 6,955 -------------- --------------- Total current liabilities 66,891 53,791 Long-Term debt, less current portion 41,000 50,166 Capital Lease Obligations, less current portion 473 444 Deferred Income Taxes 22,732 20,966 Decommissioning liabilities 9,631 7,899 Other liabilities 1,432 1,920 Commitments and Contingencies Stockholders' Equity: Common stock, par value $0.01 per share 40,000,000 shares authorized, with 13,912,722 shares issued and outstanding in 2001 and 13,719,607 shares issued and outstanding in 2000 142 138 Additional paid-in capital 84,912 79,587 Treasury stock, at cost, 322,400 shares in 2001 and 94,000 shares in 2000 (4,986) (1,107) Accumulated other comprehensive income (2,328) (901) Retained earnings 89,910 66,037 -------------- --------------- Total stockholders' equity 167,650 143,754 -------------- --------------- $ 309,809 $ 278,940 ============== ===============
See Notes to Consolidated Financial Statements F-3 TETRA TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31, ----------------------------------------------- 2001 2000 1999 ------------- ------------- ------------- Revenues: Product sales $ 149,736 $ 120,321 $ 103,790 Services 153,702 104,184 74,272 ------------- ------------- ------------- Total revenues 303,438 224,505 178,062 Cost of revenues: Cost of product sales 103,107 95,216 86,211 Cost of services 115,097 75,596 52,885 ------------- ------------- ------------- Total cost of revenues 218,204 170,812 139,096 ------------- ------------- ------------- Gross profit 85,234 53,693 38,966 General and administrative expense 44,436 37,569 37,190 Special charge - - 4,745 Restructuring charge - - 2,320 ------------- ------------- ------------- Operating income 40,798 16,124 (5,289) Gain on sale of administration building - - 6,731 Gain on sale of business - - 29,629 Interest expense (2,491) (4,187) (5,238) Interest income 402 441 371 Other income (expense) (440) 31 65 ------------- ------------- ------------- Income before taxes, discontinued operations and cumulative effect of accounting change 38,269 12,409 26,269 Provision for income taxes 14,396 4,672 11,940 ------------- ------------- ------------- Income before discontinued operations and cumulative effect of accounting change 23,873 7,737 14,329 Discontinued operations: Income from discontinued operations, net of tax benefits of - $7 in 2000 and $2,066 in 1999 10 1,685 Estimated loss on disposal of discontinued operations, net of tax benefits of $5,374 in 2000 - (14,469) - ------------- ------------- ------------- Income (loss) from discontinued operations - (14,459) 1,685 ------------- ------------- ------------- Income (loss) before cumulative effect of accounting change 23,873 (6,722) 16,014 Cumulative effect of accounting change, net of tax benefit - - (5,782) ------------- ------------- ------------- Net income (loss) $ 23,873 $ (6,722) $ 10,232 ============= ============= ============= Net income per share before discontinued operations and cumulative effect of accounting change $ 1.71 $ 0.57 $ 1.06 Income (loss) per share from discontinued operations - - 0.12 Estimated loss per share on disposal of discontinued operations - (1.06) - Cumulative effect per share of accounting change - - (0.43) ------------- ------------- ------------- Net income (loss) per share $ 1.71 $ (0.49) $ 0.76 ============= ============= ============= Average shares 13,995 13,616 13,524 ============= ============= ============= Net income per diluted share before discontinued operations and cumulative effect of accounting change $ 1.61 $ 0.57 $ 1.06 Income (loss) per share from discontinued operations - - 0.12 Estimated loss per share on disposal of discontinued operations - (1.06) - Cumulative effect per share of accounting change - - (0.43) ------------- ------------- ------------- Net income (loss) per diluted share $ 1.61 $ (0.49) $ 0.75 ============= ============= ============= Average diluted shares 14,837 13,616 13,576 ============= ============= =============
See Notes to Consolidated Financial Statements F-4 TETRA TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS)
ACCUMULATED ADDITIONAL OTHER TOTAL COMMON PAID-IN TREASURY RETAINED COMPREHENSIVE STOCKHOLDERS' STOCK CAPITAL STOCK EARNINGS INCOME EQUITY -------- ---------- ---------- ---------- ---------------- --------------- Balance at December 31, 1998 136 77,923 (1,168) 62,527 (96) 139,322 Net income for 1999 10,232 10,232 Translation adjustment (259) (259) -------------- Comprehensive Income 9,973 Exercise of common stock options 65 65 Issuance of treasury stock 61 61 -------- ---------- ---------- ---------- ---------------- --------------- Balance at December 31, 1999 136 77,988 (1,107) 72,759 (355) 149,421 Net income for 2000 (6,722) (6,722) Translation adjustment (546) (546) --------------- Comprehensive income (7,268) Exercise of common stock options 2 1,599 1,601 -------- ---------- ---------- ---------- ---------------- --------------- Balance at December 31, 2000 138 79,587 (1,107) 66,037 (901) 143,754 Net income for 2001 23,873 23,873 Translation adjustment (157) (157) Cumulative change in the fair market value of derivatives (1,270) (1,270) -------------- Comprehensive income (1,427) Exercise of common stock options 4 4,098 4,102 Purchase of treasury stock (3,879) (3,879) Tax benefit upon exercise of certain non-qualified and incentive options 1,227 1,227 -------- ---------- ---------- ---------- ---------------- --------------- Balance at December 31, 2001 $ 142 $ 84,912 $ (4,986) $ 89,910 $ (2,328) $ 167,650 ======== ========== ========== ========== ================ ===============
See Notes to Consolidated Financial Statements F-5 TETRA TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, ---------------------------------------------- 2001 2000 1999 ---------- ---------------- -------------- Operating activities: Net income (loss) $ 23,873 $ (6,722) $ 10,232 Adjustments to reconcile net income to net cash provided by operating activities : Depreciation, depletion and amortization 18,565 15,265 14,205 Provision for deferred income taxes 6,511 1,679 6,312 Provision for doubtful accounts 1,187 655 1,366 Amortization of gain on leaseback (312) (202) - Loss from the disposal of discontinued operation, net of tax - 14,469 - Gain on sale of property, plant and equipment (159) (29) (9) Restructuring charge - - 2,320 Special charges - - 4,745 Gain on the sale of business - - (29,629) Gain on the sale of the administration building - - (6,731) Cumulative effect of accounting change, net of tax - - 5,782 Changes in operating assets and liabilities, net of assets acquired: Trade accounts receivable (9,878) (18,514) 748 Costs and estimated earnings in excess of billings on incomplete contracts - - (986) Inventories (3,628) 10,473 2,895 Prepaid expenses and other current assets (1,479) (344) (271) Trade accounts payable and accrued expenses 14,967 3,686 1,695 Discontinued operations - noncash charges and working capital changes 7,987 2,231 (1,309) Other 464 - 483 ---------- ---------------- -------------- Net cash provided by operating activities 58,098 22,647 11,848 ---------- ---------------- -------------- Investing Activities: Purchases of property, plant and equipment (28,340) (15,992) (12,407) Business combinations, net of cash acquired (7,630) (6,587) - Proceeds from sale of business - 15,414 38,825 Change in restricted cash (1,726) 2,000 (2,000) Decrease (increase) in other assets 144 1,261 (723) Investing activities of discontinued operations - (222) (10,836) Proceeds from sale of property, plants and equipment 1,416 511 10,662 ---------- ---------------- -------------- Net cash (used) provided by investing activities (36,136) (3,615) 23,521 ---------- ---------------- -------------- Financing activities: Proceeds from long-term debt and capital lease obligations 15,592 39,233 25,615 Proceeds from leaseback sale - 1,074 - Principal payments on long-term debt and capital lease obligations (31,256) (58,432) (59,670) Repurchase of common stock (3,879) - 61 Proceeds from sale of common stock and exercised stock options 4,102 1,599 65 ---------- ---------------- -------------- Net cash provided by financing activities (15,441) (16,526) (33,929) ---------- ---------------- -------------- Increase in cash and cash equivalents 6,521 2,506 1,440 Cash & cash equivalents at beginning of period 6,594 4,088 2,648 ---------- ---------------- -------------- Cash & cash equivalents at end of period $ 13,115 $ 6,594 $ 4,088 ========== ================ ============== Supplemental cash flow information: Capital lease obligations incurred $ 591 $ 233 $ 1,179 Capital lease obligations paid 555 1,397 1,465 Interest paid 3,161 7,163 8,358 Taxes paid 5,631 1,389 2,600
See Notes to Consolidated Financial Statements F-6 TETRA TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 NOTE A -- ORGANIZATION AND OPERATIONS OF THE COMPANY TETRA Technologies, Inc. ("TETRA" or "the Company") is an oil and gas services company with an integrated calcium chloride and brominated products manufacturing operation that supplies feedstocks to energy markets, as well as other markets. The Company is comprised of three divisions - Fluids, Well Abandonment & Decommissioning and Testing & Services. The Company's Fluids Division manufactures and markets clear brine fluids to the oil and gas industry for use in well drilling, completion and workover operations in both domestic and international markets. The Division also markets the fluids and dry calcium chloride manufactured at its production facilities to a variety of markets outside the energy industry. The Well Abandonment & Decommissioning Division provides a comprehensive range of services required for the abandonment of depleted oil and gas wells, and the decommissioning of platforms, pipelines and other associated equipment. The Division services the onshore, inland waters and offshore markets of the Gulf of Mexico. The Division is also an oil and gas producer from wells acquired in connection with its well abandonment and decommissioning business. The Company's Testing & Services Division provides production testing services to the Texas, Louisiana, offshore Gulf of Mexico and Latin American markets. It also provides the technology and services required for separation and recycling of oily residuals generated from petroleum refining and exploration and production operations. TETRA Technologies, Inc. was incorporated in Delaware in 1981. All references to the Company or TETRA include TETRA Technologies, Inc. and its subsidiaries. The Company's corporate headquarters are located at 25025 Interstate 45 North in The Woodlands, Texas. Its phone number is (281) 367-1983, and its website may be accessed at www.tetratec.com. F-7 NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. CASH EQUIVALENTS The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. INVENTORIES Inventories are stated at the lower of cost or market value and consist primarily of finished goods. Cost is determined using the weighted average method. FINANCIAL INSTRUMENTS The fair value of the Company's financial instruments, which include cash, accounts receivables, short-term borrowings and long-term debt, approximates their carrying amounts. Financial instruments that subject the Company to concentrations of credit risk consist principally of trade receivables with companies in the energy industry. The Company's policy is to evaluate, prior to shipment, each customer's financial condition and determine the amount of open credit to be extended. The Company generally requires appropriate, additional collateral as security for credit amounts in excess of approved limits. The Company's customers consist primarily of major, well-established oil and gas producers and independents. PROPERTY, PLANT AND EQUIPMENT Property, plant, and equipment are stated at the cost of assets acquired. Expenditures that increase the useful lives of assets are capitalized. The cost of repairs and maintenance are charged to operations as incurred. For financial reporting purposes, the Company provides for depreciation using the straight-line method over the estimated useful lives of assets which are as follows: Buildings 25 years Machinery and equipment 3 - 5 and 10 years Automobiles and trucks 4 years Chemical plants 15 years Certain production equipment and properties are depreciated and depleted based on operating hours or units of production, subject to a minimum amount, because depreciation and depletion occur primarily through use rather than through elapsed time. Depreciation and depletion expense for the years ended December 31, 2001, 2000 and 1999 was $17.5 million, $13.5 million and $13.1 million, respectively. For income tax purposes, the Company provides for depreciation using accelerated methods. Interest capitalized for the years ended December 31, 2001, 2000 and 1999 was $0.5 million, $0.3 million and $0.07 million, respectively. F-8 The Company's Maritech Resources, Inc. subsidiary has interests in oil and gas properties that are located offshore in the Gulf of Mexico or in inland waters adjacent thereto. The Company follows the full cost method of accounting for its investment in natural gas and oil properties. Under the full cost method, all the costs associated with acquiring, developing and producing the Company's oil and gas properties are capitalized. Maritech's offshore property purchases are recorded at the value exchanged at closing combined with an estimate of its proportionate share of the decommissioning liability assumed in the purchase, based upon its working interest ownership percentage. In estimating the decommissioning liabilities associated with these offshore property acquisitions, the Company performs detailed estimating procedures, analysis and engineering studies. All capitalized costs are depleted on a unit-of-production basis based on the estimated remaining equivalent proved oil and gas reserves. Oil and gas producing assets were depleted at an average rate of $1.27 per MCF and $1.60 per MCF for the years ended December 31, 2001 and 2000, respectively. Properties are periodically assessed for impairment in value, with any impairment charged to expense. DECOMMISSIONING LIABILITY The decommissioning liability recorded is the fair value cost to dismantle, relocate and dispose of the Company's offshore production platforms, gathering systems, wells and related equipment. These costs are used to value the full cost pool of the oil and gas properties and are depleted on a unit of production basis upon the depletion of the oil and gas producing assets. The Company utilizes the services of its Well Abandonment & Decommissioning group, when possible, to perform the work to satisfy these liabilities. In connection with 2000 and 2001 offshore property additions, the Company assumed net abandonment liabilities estimated at approximately $9.6 million and $4.5 million, respectively. ADVERTISING The Company expenses costs of advertising as incurred. Advertising expense for continuing operations for the years ended December 31, 2001, 2000 and 1999 was $1.3 million, $3.0 million and $3.1 million, respectively. INTANGIBLE ASSETS Patents and licenses are stated on the basis of cost and are amortized on a straight-line basis over the estimated useful lives, generally ranging from 14 to 20 years. Goodwill is amortized on a straight-line basis over its estimated life of 20 - 40 years. On an annual basis, the Company estimates the future estimated discounted cash flows of the business to which goodwill relates in order to determine that the carrying value of the goodwill had not been impaired. LONG-LIVED ASSETS Impairment losses are recognized when indicators of impairment are present and the estimated undiscounted cash flows are not sufficient to recover the asset's carrying cost. Assets held for disposal are recorded at the lower of carrying value or estimated fair value less costs to sell. INCOME TAXES The Company computes income tax expense using the liability method. Under this method, deferred tax liabilities or assets are determined based on differences between financial reporting and tax bases of assets and liabilities and are then measured using tax rates and laws that are in effect at year end. ENVIRONMENTAL LIABILITIES Environmental expenditures which result in additions to property and equipment are capitalized, while other environmental expenditures are expensed. Environmental remediation liabilities are recorded on an undiscounted basis when environmental assessments or cleanups are probable and the costs can be reasonably estimated. These costs are adjusted as further information develops or circumstances change. F-9 STOCK COMPENSATION The Company accounts for stock-based compensation using the intrinsic value method. Compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock. Note L to the Consolidated Financial Statements contains a summary of the pro forma effects to reported net income and earnings per share as if the Company had elected to recognize the compensation cost based on the fair value of the options granted at the grant date. INCOME PER COMMON SHARE Basic earnings per share excludes any dilutive effects of options. Diluted earnings per share includes the dilutive effect of stock options, which is computed using the treasury stock method during the periods such options were outstanding. A reconciliation of the common shares used in the computations of income per common and common equivalent shares is presented in Note O to the Consolidated Financial Statements. FOREIGN CURRENCY TRANSLATION The U.S. dollar is the designated functional currency for all of the Company's foreign operations, except for those in the United Kingdom, Norway and Brazil where the British Pound, the Norwegian Kroner and the Brazilian Real, respectively, are the functional currency. The cumulative translation effects of translating balance sheet accounts from the functional currencies into the U.S. dollar at current exchange rates are included as a separate component of shareholders' equity. 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 disclose 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. RECLASSIFICATIONS Certain previously reported financial information has been reclassified to conform to the current year's presentation. REVENUE RECOGNITION Revenues are recognized when finished products are shipped to unaffiliated customers or services have been rendered with appropriate provisions for uncollectable accounts. The Company recognizes oil and gas revenue from its interests in producing wells as oil and natural gas is produced and sold from those wells. Oil and natural gas sold is not significantly different from the Company's share of production. DERIVATIVE FINANCIAL INSTRUMENTS The Company manages its exposure to variable interest rate financing arrangements by entering into interest rate contracts, which provide for the Company to pay a fixed rate of interest and receive a variable rate of interest over the term of the contracts. The differential to be paid or received as a result of the changes in the prevailing interest rates are accrued and recognized as adjustments of interest expense related to the debt. The net amount receivable or payable under the interest rate contracts are included in other assets or liabilities. F-10 START-UP COSTS In April 1998, the American Institute of Certified Public Accounts issued Statement of Position 98-5, REPORTING THE COSTS OF START-UP ACTIVITIES ("SOP 98-5"), which requires that costs related to start-up activities be expensed as incurred. Prior to 1999, the Company capitalized those costs incurred in connection with opening a new production facility. The Company adopted the provisions of the SOP 98-5 in its financial statements for the year ended December 31, 1999. The effect of adoption of SOP 98-5 was to record a charge in 1999 for the cumulative effect of an accounting change of $5.8 million ($0.43 per share), net of taxes of $3.9 million, to expense costs that had been previously capitalized prior to 1999. Had SOP 98-5 been adopted as of January 1, 1998, the reported net income and earnings per share for 1998 would not have materially changed. NEW ACCOUNTING PRONOUNCEMENTS In July 2001, the FASB issued Statement of Financial Accounting Standards No. 141, Business Combinations, which supersedes Accounting Principles Board (APB) Opinion No. 16, Business Combinations. SFAS 141 eliminates the pooling-of-interests method of accounting for business combinations and modifies the application of the purchase accounting method. The elimination of the pooling-of-interests method is effective for transactions initiated after June 30, 2001. The remaining provisions of SFAS 141 will be effective for transactions, accounted for using the purchase method, that are completed after June 30, 2001. In July 2001, the FASB also issued Statement of Financial Accounting Standards No. 142, Goodwill and Intangible Assets, which supersedes APB Opinion No. 17, Intangible Assets. SFAS 142 eliminates the current requirement to amortize goodwill and indefinite-lived intangible assets, addresses the amortization of intangible assets with a defined life and addresses the impairment testing and recognition for goodwill and intangible assets. SFAS 142 will apply to goodwill and intangible assets as of the Statement's effective date. SFAS 142 is effective for the year ended December 31, 2002. The Company believes adoption of this standard will not have a material effect on its financial position and results of operations. In July 2001, the FASB released SFAS No. 143, "Accounting for Asset Retirement Obligations," which is required to be adopted by the Company no later than January 1, 2003. SFAS No. 143 addresses the financial accounting and reporting for obligations and retirement costs related to the retirement of tangible long-lived assets. The Company currently records the retirement obligations associated with the oil and gas properties it has acquired and is currently reviewing the provisions of SFAS No. 143 to determine the Standard's impact on other operations of the Company, if any, and on its financial statements upon adoption. In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which is effective for the Company beginning January 1, 2002. SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and the accounting and reporting provisions relating to the disposal of a segment of a business of Accounting Principles Board Opinion No. 30. The Company does not anticipate that the adoption of SFAS No. 144 will have a material impact on its financial position or results of operations. F-11 NOTE C -- DISCONTINUED OPERATIONS The Company developed a plan in October 2000 to exit its micronutrients business, which produced zinc and manganese products for agricultural markets. The plan provided for the sale of the stock of TETRA's wholly owned Mexican subsidiary, Industrias Sulfamex, S.A. de C.V., a producer and distributor of manganese sulfate, and all the manganese inventory held by the Company's U.S. operations. It also provided for the sale of all inventories, plant and equipment associated with its U.S. zinc sulfate business. In December 2000, the Company sold all of its U.S. and foreign manganese sulfate assets for $15.4 million in cash. Effective September 30, 2001, the Company sold the remainder of its micronutrients business, except for the Cheyenne, Wyoming facility, which was closed and held for sale at December 31, 2001. The Company has accounted for the micronutrients business as a discontinued operation and has restated prior period financial statements accordingly. The estimated loss on the disposal of the discontinued operations of $14.5 million (net of income tax benefit of $5.4 million) represents the estimated loss on the disposal of the assets of the micronutrients business which was recognized in 2000. The Company also made a provision of $0.2 million for expected losses during the disposition period from October 1, 2000 to September 30, 2001. Summary operating results of discontinued operations are as follows:
2001 2000 1999 ---------- ---------- ---------- (IN THOUSANDS) Revenues........................... $ 17,268 $ 30,553 $ 37,239 Income (loss) before taxes......... - 17 (381) Provision for taxes................ - 7 (2,066) Net income (loss) from Discontinued operations......... $ - $ 10 $ 1,685
Assets and liabilities of the micronutrients business disposed of consist of the following at December 31:
2001 2000 ---------- ---------- (IN THOUSANDS) Accounts receivable................ $ 773 $ 5,437 Inventory.......................... 456 4,462 Property, plant and equipment...... 1,219 1,874 Other assets....................... 23 41 ---------- ---------- Total assets.................... 2,471 11,814 Current liabilities................ 321 2,058 Other liabilities.................. 512 - ---------- ---------- Net assets...................... $ 1,638 $ 9,756 ========== ==========
The net assets to be disposed of are carried at their expected net realizable values and have been separately classified in the accompanying balance sheet at December 31, 2001. During the period from January 1, 2001 to September 30, 2001 and for the years ended December 31, 2000 and 1999, the loss from discontinued operations, net of taxes, included an allocation of interest expense of $0.4 million, $1.4 million and $2.0 million, respectively. For the period from the measurement date through the expected divestiture date, the loss from discontinued operations included an allocation of interest expense of $0.9 million. Interest expense allocated to the discontinued operations was based upon borrowings directly attributed to those operations. F-12 NOTE D -- RESTRUCTURING AND SPECIAL CHARGES During the fourth quarter of 1999, the Company initiated a strategic restructuring program to refocus its efforts in the energy services business. This program concentrated the Company's efforts on developing its oil and gas services business and selling or consolidating non-core chemical operations. To achieve this strategy, the Company sold its micronutrients business, as well as several smaller chemicals-related operations. Additionally, the Company implemented plans to exit certain product lines and businesses which were not core to its new strategic direction. The remaining chemicals business is a commodity products based operation, which significantly supports the energy service markets. The Company also embarked on an aggressive program to reorganize its overhead structure to reduce costs and improve operating efficiencies in support of the energy services operations. As a result of this change in strategy, the Company recorded a $2.3 million, pretax, restructuring charge in the fourth quarter of 1999. The following table details the activity during the twelve months ended December 31, 2001.
(IN THOUSANDS) ---------------------------------------------------- DECEMBER 31, 2000 DECEMBER 31, 2001 ----------------- ----------------- CASH LIABILITY CASH LIABILITY PAYMENTS BALANCE PAYMENTS BALANCE --------- ------------ --------- ----------- Involuntary termination costs...... $ 877 $ 293 $ 293 $ - Contractual costs.................. - 760 400 360 Exit costs......................... 273 117 117 - --------- ------------ --------- ----------- $ 1,150 $ 1,170 $ 810 $ 360 ========= ============ ========= ===========
Involuntary termination costs consist of severance costs associated with the termination of six management-level employees associated with the Company's restructuring. Contractual costs include obligations triggered in two chemicals product lines when the Company decided to exit these businesses. The remaining exit costs are additional liabilities realized by exiting certain portions of the specialty chemicals business. In March 1999, the Company was verbally notified of the early termination of a significant liquid calcium chloride contract. The Company was subsequently notified in writing. Under the terms of the contract, the Company is required to terminate its operations at that location and vacate the facility within two years from the date of written notification. The Company is also required to remove all of its equipment and fixtures, at its own cost. As a result of the early termination of the contract, the Company recorded a first quarter impairment of these Fluids Division assets of approximately $1.4 million. Also during the first quarter of 1999, the Company recorded the impairment of other plant assets in the Fluids Division. The old calcium chloride dry plant in Lake Charles, Louisiana, was dismantled, resulting in an impairment charge of approximately $1.8 million. The assets related to the old zinc bromide production unit at the West Memphis, Arkansas, bromine plant, which had a carrying value of approximately $0.4 million, were taken out of service in the first quarter of 1999. The abandoned assets of both plant facilities were written off in the first quarter of 1999. Finally, the Company recognized the impairment of certain micronutrients' assets totaling approximately $1.1 million. These assets were deemed impaired with the acquisition of the WyZinCo Company and the CoZinCo assets and were written off during the first quarter. F-13 NOTE E -- ACQUISITIONS AND DISPOSITIONS During the third quarter of 2001, the Company acquired certain assets of Production Well Testers, Inc. (PWT) for approximately $4.9 million in cash. PWT provides production testing services to offshore Gulf of Mexico markets as well as onshore gulf coast markets. The business was integrated with TETRA's Testing Division as part of its production testing operations, enhancing the Company's presence in Louisiana and expanding operations into the Mississippi and Alabama markets and the Gulf of Mexico. The Company acquired the assets of Lee Chemical during the fourth quarter of 2001 for approximately $2.7 million in cash. Lee is a producer and distributor of liquid calcium chloride in the West Coast markets, and was integrated into our Fluids Division. Also in the fourth quarter, the Company's Well Abandonment & Decommissioning Division purchased approximately $4.9 million of oil and gas producing properties in exchange for the assumption of the decommissioning liabilities related to the properties and other considerations. As part of that transaction, the Company received approximately $1.7 million of cash to satisfy other working interest owners' future well abandonment obligations for these properties. The oil and gas producing assets were recorded at the future estimated fair value to abandon and decommission the property. In the second quarter of 2000, the Company completed an asset exchange of its trucking operations for certain assets of Key Energy Services. The Company accounted for the exchange of interest as a non-monetary transaction whereby the basis in the exchanged assets became the new basis in the assets received. No gain or loss was recognized as a result of the exchange. During the fourth quarter of 2000, the Company expanded its Well Abandonment & Decommissioning capacity through the acquisition of the assets of Cross Offshore Corporation, Ocean Salvage Corporation and Cross Marine LLC. The Company paid approximately $6.2 million in cash plus additional future consideration contingent upon future net earnings. The assets purchased complement the Company's current well abandonment, platform decommissioning and heavy lift operations in the Gulf Coast inland waters and offshore markets. This transaction approximately doubled the offshore rigless well abandonment packages and increased the number of inland water well abandonment packages the Company can provide. It also gave the Company heavy lift capabilities with the acquisition of the Southern Hercules, a 500 ton capacity heavy lift barge. Also in the fourth quarter of 2000, the Company purchased in two separate transactions, oil and gas producing properties in exchange for the assumption of their decommissioning liability. The effective date of the initial transaction was June 1, 2000. Oil and gas producing assets were recorded at the future estimated decommissioning costs, less cash received of $1.3 million. In 1999, the Company acquired WyZinCo, Inc., CoZinCo Sales, Inc. and certain assets of CoZinCo, Inc. for approximately $11.7 million in cash and notes. The acquisition was funded primarily through the Company's credit facility. The excess of purchase price over the fair value of assets acquired was approximately $8.3 million. Also in 1999, the Company sold its Process Technologies business for $38.8 million. The sale, which was effective May 1, 1999, generated a pretax gain of $29.6 million. The proceeds were used to reduce long-term bank debt. This business had sales of $4.1 million in 1999, $15.6 million in 1998 and $11.4 million in 1997. The Company also sold in 1999 its corporate headquarters building, realizing a pretax gain of approximately $6.7 million. The Company subsequently signed a ten-year lease agreement for space within the building. All acquisitions by the Company have been accounted for as purchases, with operations of the companies and businesses acquired included in the accompanying consolidated financial statements from their respective dates of acquisition. The purchase price has been allocated to the acquired assets and liabilities based on a preliminary determination of their respective fair values. The excess of the purchase price over the fair value of the net assets acquired is included in goodwill and amortized over periods which do not exceed forty years. Pro forma information for these acquisitions has not been presented as such amounts are not material. F-14 NOTE F -- LEASES The Company leases some of its automobiles and trucks, transportation equipment, office space, and machinery and equipment. The automobile and truck leases, which are for three and five years and expire at various dates through 2003, are classified as capital leases. The machinery and equipment leases, which vary from three to five year terms and expire at various dates through 2006, are also classified as capital leases. The office leases, which vary from one to ten year terms that expire at various dates through 2009 and are renewable for three and five year periods at similar terms, are classified as operating leases. Transportation equipment leases expire at various dates through 2007 and are classified as operating leases. The automobile and truck leases, office leases, and machinery and equipment leases require the Company to pay all maintenance and insurance costs. Property, plant, and equipment includes the following amounts for leases that have been capitalized:
DECEMBER 31, ----------- (IN THOUSANDS) 2001 2000 ---- ---- Automobiles and trucks........................... $ 4,030 $ 3,736 Less accumulated amortization.................... 3,140 (2,756) --------- ---------- $ 890 $ 980 ========= ========== Machinery and equipment.......................... 100 108 Less accumulated amortization.................... (67) (43) --------- ---------- $ 33 $ 65 ========= ==========
Amortization of these assets is computed using the straight-line method over the terms of the leases and is included in depreciation and amortization expense. Future minimum lease payments by year and in the aggregate, under capital leases and noncancellable operating leases with terms of one year or more consist of the following at December 31, 2001:
CAPITAL OPERATING LEASES LEASES ------ ------ (IN THOUSANDS) 2002........................................... $ 494 $ 4,580 2003........................................... 283 4,054 2004........................................... 217 2,510 2005........................................... 49 1,640 2006........................................... - 1,566 After 2006..................................... - 3,389 --------- ---------- Total minimum lease payments................... 1,043 $ 17,739 Amount representing interest................... (142) ========== --------- Present value of net minimum lease payments.... 901 Less current portion........................... (428) --------- Total long-term portion................... $ 473 =========
Rental expense for all operating leases was $8.1 million, $6.5 million and $5.4 million in 2001, 2000 and 1999, respectively. F-15 NOTE G -- INCOME TAXES The income tax provision attributable to continuing operations for years ended December 31, 2001, 2000 and 1999 consisted of the following:
YEAR ENDED DECEMBER 31, ----------------------- (IN THOUSANDS) 2001 2000 1999 ---- ---- ---- CURRENT Federal................................... $ 5,234 $ 1,261 $ 3,967 State..................................... 477 117 261 Foreign................................... 2,174 1,615 1,400 -------- -------- -------- 7,885 2,993 5,628 DEFERRED Federal................................... 5,772 1,528 5,909 State..................................... 454 151 403 Foreign................................... 285 - - -------- -------- -------- 6,511 1,679 6,312 Total tax provision....................... $ 14,396 $ 4,672 $ 11,940 ======== ======== ========
A reconciliation of the provision for income taxes attributable to continuing operations computed by applying the federal statutory rate for the years ended December 31, 2001, 2000 and 1999 to income before income taxes and the reported income taxes is as follows:
2001 2000 1999 ---- ---- ---- (IN THOUSANDS) Income tax provision computed at statutory federal income tax rates...................... $ 13,394 $ 4,219 $ 9,194 State income taxes (net of federal benefit)...... 605 177 432 Nondeductible expenses........................... 435 372 612 Impact of international operations............... 10 304 1,290 Other............................................ (48) (400) 412 -------- -------- -------- Total tax provision.............................. $ 14,396 $ 4,672 $ 11,940 ======== ======== ========
Income before taxes, discontinued operations and cumulative effect of accounting change includes the following components:
2001 2000 1999 ---- ---- ---- (IN THOUSANDS) Domestic............................ $ 32,888 $ 11,022 $ 24,983 International....................... 5,381 1,387 1,286 -------- -------- -------- Total ......................... $ 38,269 $ 12,409 $ 26,269 ======== ======== ========
F-16 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. Significant components of the Company's deferred tax assets and liabilities as of December 31, 2001 and 2000 are as follows:
Deferred Tax Assets: 2001 2000 ---- ---- (IN THOUSANDS) Tax inventory over book...................... $ 1,679 $ 899 Allowance for doubtful accounts.............. 700 383 Accruals ................................... 7,912 5,016 Foreign tax credit carryforward.............. 492 1,131 Restructuring charge......................... 135 386 All other ................................... 942 730 -------- -------- Total deferred tax assets................ 11,860 8,545 Valuation reserve............................ - (227) -------- -------- Net deferred tax assets.................. $ 11,860 $ 8,318 ======== ========
Deferred Tax Liabilities: 2001 2000 ---- ---- (IN THOUSANDS) Excess book over tax basis in PP&E........... $ 26,659 $ 17,129 Goodwill amortization........................ 1,534 1,979 Accounts receivable mark-to-market........... - 248 All other ................................... 553 100 -------- -------- Total deferred tax liability................. 28,746 19,456 -------- -------- Net deferred tax liability................... $ 16,886 $ 11,138 ======== ========
During 2001, the Company disposed of certain assets that eliminated the need for a valuation allowance recorded as of December 31, 2000. NOTE H -- ACCRUED LIABILITIES Accrued liabilities are detailed as follows:
YEAR ENDED DECEMBER 31, ----------------------- 2001 2000 ---- ---- (IN THOUSANDS) Commissions, royalties and rebates........................ $ 173 $ 743 Compensation and employee benefits........................ 8,358 6,148 Interest expense payable.................................. 2,457 163 Oil & Gas producing liabilities........................... 3,755 573 Other accrued liabilities................................. 4,316 2,390 Decommissioning liability................................. 4,638 1,266 Plant operating costs..................................... 410 631 Professional fees......................................... 711 766 Restructuring charges..................................... 360 1,170 Taxes payable............................................. 4,308 4,203 Transportation and distribution costs..................... 1,040 701 -------- -------- $ 30,526 $ 18,754 ======== ========
F-17 NOTE I -- LONG-TERM DEBT AND OTHER BORROWINGS Long-term debt consists of the following:
DECEMBER 31, ------------ (IN THOUSANDS) 2001 2000 ---- ---- General purpose revolving line-of-credit for $80 million with interest at LIBOR plus 1.00% - 2.00%. Borrowings as of 12/31/01 accrued interest at LIBOR plus 1.25%................................................. $ 41,000 $ - General purpose revolving line-of-credit for $100 million with interest at LIBOR plus 0.75 - 2.75%................................................... - 56,700 ---------- ---------- 41,000 56,700 Less current portion............................................................. - (6,534) ---------- ---------- Total long-term debt.......................................................... $ 41,000 $ 50,166 ========== ==========
Scheduled maturities for the next three years and thereafter as of December 31, 2001 are as follows (in thousands): 2002................................................ $ - 2003................................................ - 2004................................................ 41,000 --------- $ 41,000 =========
In December 2001, the Company amended its revolving line of credit to an $80 million line that may be expanded to $110 million during the first year, at the Company's discretion. This agreement matures in December 2004 and is secured by accounts receivable, inventories, and guarantees and pledges of stock of the Company's subsidiaries. TETRA's credit facility is subject to common financial ratio covenants. These include, among others, a debt-to-EBITDA ratio, a fixed charge coverage ratio, a tangible net worth minimum and dollar limits on the total amount of capital expenditures and acquisitions the Company may undertake in any given year. The Company pays a commitment fee on unused portions of the line and a LIBOR-based interest rate which decreases or increases as the financial ratios improve or deteriorate. The Company is not required to maintain compensating balances. The covenants also include certain restrictions on the sale of assets. As of December 31, 2001, the Company has $3.5 million in letters of credit and $41.0 million in long-term debt outstanding against an $80 million line of credit, leaving a net availability of $35.5 million. The Company believes this new credit facility will meet all its capital and working capital requirements through December 2004. In September 1997, the Company entered into two interest rate swap agreements, each with a nominal amount of $20 million, which are effective January 2, 1998 and expire on January 2, 2003. The interest rate swap agreements provide for the Company to pay interest at a fixed rate of approximately 6.4% (annual rate) every three months, beginning April 2, 1998 and requires the issuer to pay the Company on a floating rate based on LIBOR. The swap transactions can be canceled by the Company through payment of a cancellation fee, which is based upon prevailing market conditions and remaining life of the agreement. The estimated fair value of the swap transactions at December 31, 2001 was $1.3 million, net of taxes, below the carrying value. NOTE J - COMMITMENTS AND CONTINGENCIES The Company and its subsidiaries are named defendants in several lawsuits and respondents in certain governmental proceedings arising in the ordinary course of business. While the outcome of lawsuits or other proceedings against the Company cannot be predicted with certainty, management does not expect these matters to have a material adverse impact on the financial statements. F-18 NOTE K -- CAPITAL STOCK The Company's Restated Certificate of Incorporation authorizes the Company to issue 40,000,000 shares of common stock, par value $.01 per share, and 5,000,000 shares of preferred stock, no par value. The voting, dividend and liquidation rights of the holders of common stock are subject to the rights of the holders of preferred stock. The holders of common stock are entitled to one vote for each share held. There is no cumulative voting. Dividends may be declared and paid on common stock as determined by the Board of Directors, subject to any preferential dividend rights of any then outstanding preferred stock. The Board of Directors of the Company is empowered, without approval of the stockholders, to cause shares of preferred stock to be issued in one or more series and to establish the number of shares to be included in each such series and the rights, powers, preferences and limitations of each series. Because the Board of Directors has the power to establish the preferences and rights of each series, it may afford the holders of any series of preferred stock preferences, powers and rights, voting or otherwise, senior to the rights of holders of common stock. The issuance of the preferred stock could have the effect of delaying or preventing a change in control of the Company. The Board of Directors has no present plans to issue any of the preferred stock. Upon dissolution or liquidation of the Company, whether voluntary or involuntary, holders of common stock will be entitled to receive all assets of the Company available for distribution to its stockholders, subject to any preferential rights of any then outstanding preferred stock. NOTE L -- STOCK OPTION PLANS The Company has various stock option plans which provide for the granting of options for the purchase of the Company's common stock and other performance-based awards to executive officers, key employees, non executive officers, consultants and directors of the Company. Incentive stock options can vest over a period of up to five years and are exercisable for periods up to ten years. The TETRA Technologies, Inc. 1990 Stock Option Plan (the "1990 Plan") was initially adopted in 1985 and subsequently amended to change the name and the number and type of options that could be granted as well as the time period for granting stock options. The Company has granted performance stock options under the 1990 Plan to certain executive officers. These granted options have an exercise price of $25.00 per share and vest in full in no less than five years, subject to earlier vesting as follows: fifty percent of each such option vests immediately if the market value per share of the Company's common stock is equal to or greater than $37.50 for a period of at least 20 consecutive trading days; and the remaining fifty percent vests immediately if the market value per share is equal to or greater than $50.00 for a period of at least 20 consecutive trading days. These options are immediately exercisable upon vesting; provided, however, that no more than 100,000 shares of Common Stock may be exercised by any individual after vesting in any 90 day period, except in the event of death, incapacity or termination of employment of the holder or the occurrence of a Corporation Change. Such options must be exercised within three years of vesting or they expire. At December 31, 2001, 950,000 shares of common stock have been reserved for grants of such performance options under the 1990 Plan, of which 175,000 were available for future grants. In 1993, the Company adopted the TETRA Technologies, Inc. Director Stock Option Plan (the "Directors' Plan"). The purpose of the Directors' Plan is to enable the Company to attract and retain qualified individuals who are not employees of the Company to serve as directors. In 1996, the Directors' Plan was amended to increase the number of shares issuable under automatic grants thereunder. In 1998, the Company adopted the TETRA Technologies, Inc. 1998 Director Stock Option Plan (the "1998 Directors' Plan"). The purpose of the 1998 Directors' Plan is to enable the Company to attract and retain qualified individuals to serve as directors of the Company and to align their interests more closely with the Company's interests. The 1998 Directors' Plan is funded with treasury stock of the Company. F-19 The Company also has a plan designed to award incentive stock options to non-executive employees and consultants who are key to the performance of the Company. At December 31, 2001, 750,000 shares of common stock have been registered and are reserved for grants, of which 300,000 are available for future grants. The following is a summary of stock option activity for the years ended December 31, 1999, 2000 and 2001:
SHARES WEIGHTED AVERAGE UNDER OPTION OPTION PRICE (000'S) PER SHARE ------------ ---------------- Outstanding at December 31, 1998...................... 2,377 $ 14.28 Options granted................................... 144 10.02 Options canceled.................................. (283) 14.55 Options exercised................................. (13) 7.59 ------ Outstanding at December 31, 1999...................... 2,225 13.96 Options granted................................... 582 8.81 Options canceled.................................. (189) 9.40 Options exercised................................. (191) 9.99 ------ Outstanding at December 31, 2000...................... 2,427 13.40 Options granted................................... 669 21.83 Options canceled.................................. (27) 14.17 Options exercised................................. (422) 8.82 ------ Outstanding at December 31, 2001...................... 2,647 16.27 ======
(In thousands, except per share amounts)
2001 2000 1999 ---- ---- ---- 1990 TETRA TECHNOLOGIES, INC. EMPLOYEE PLAN (AS AMENDED) Maximum number of shares authorized for issuance........ 3,950 3,950 3,950 Shares reserved for future grants....................... 396 740 1,030 Shares exercisable at year end.......................... 880 883 948 Weighted average exercise price of shares exercisable at year end............................. $ 10.84 $ 10.20 $ 9.58 DIRECTOR STOCK OPTION PLANS Maximum number of shares authorized for issuance........ 175 175 175 Shares reserved for future grants....................... 55 79 86 Shares exercisable at year end.......................... 54 64 57 Weighted average exercise price of shares exercisable at year end............................. $ 11.99 $ 8.92 $ 10.10 ALL OTHER PLANS Maximum number of shares authorized for issuance........ 952 702 785 Shares reserved for future grants....................... 300 317 418 Shares exercisable at year end.......................... 318 342 269 Weighted average exercise price of shares exercisable at year end............................. $ 10.18 $ 10.09 $ 10.35
F-20
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ---------------------------------------------------- ---------------------------- WEIGHTED AVERAGE WEIGHTED RANGE OF REMAINING AVERAGE WEIGHTED AVERAGE EXERCISE PRICE SHARES CONTRACTED LIFE EXERCISE PRICE SHARES EXERCISE PRICE ---------------- ------------ --------------- --------------- --------- ---------------- $ 6.88 to $9.80 594 5.7 $ 7.88 377 $ 8.01 $10.19 to $16.75 920 7.4 11.51 817 11.36 $16.88 to $25.00 1,133 7.2 24.53 58 19.48 ------------ -------- 2,647 7.0 $ 16.27 1,252 $ 10.72 ============ =========
Assuming that TETRA had accounted for its stock-based compensation using the alternative fair value method of accounting under FAS No. 123 and amortized the fair value to expense over the options' vesting periods, net income and earnings per share would have been as follows (in thousands except per share amounts):
YEAR ENDED DECEMBER 31, ------------------------------------- (IN THOUSANDS) 2001 2000 1999 -------- --------- ---------- Net (loss) income - as reported............................ $ 23,873 $ (6,722) $ 10,232 Net (loss) income - pro forma.............................. 21,300 (9,022) 8,144 Net (loss) income per share - as reported.................. 1.71 (0.49) 0.75 Net (loss) income per share - pro forma.................... 1.52 (0.66) 0.60 Net (loss) income per diluted share - as reported.......... 1.61 (0.49) 0.64 Net (loss) income per diluted share - pro forma............ $ 1.44 $ (0.66) $ 0.60
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; expected stock price volatility 47%, expected life of options 5.0 to 6.0 years, risk-free interest rate 5.0% to 6.0% and no expected dividend yield. The weighted average fair value of options granted during 2001, 2000 and 1999 was $7.81, $3.91 and $3.69 per share, respectively. NOTE M -- 401(K) PLAN The Company has a 401(k) profit sharing and savings plan (the "Plan") that covers substantially all employees and entitles them to contribute up to 22% of their annual compensation, subject to maximum limitations imposed by the Internal Revenue Code. The Company matches 50% of each employee's contribution up to 6% of annual compensation, subject to certain limitations as outlined in the Plan. In addition, the Company can make discretionary contributions which are allocable to participants in accordance with the Plan. F-21 NOTE N -- DERIVATIVES The Company has adopted Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities as amended by SFAS No. 137 and SFAS No. 138. These statements require the Company to recognize all derivative instruments on the balance sheet at fair value and establish criteria for designation and effectiveness of hedging relationships. A fair value hedge requires that the effective portion of the change in the fair value of a derivative instrument be offset against the change in the fair value of the underlying assets, liability or firm commitment being hedged through earnings. A cash flow hedge requires that the effective portion of the change in the fair value of a derivative instrument be recognized in Other Comprehensive Income (OCI), a component of the Shareholders' Equity, and then be reclassified into earnings in the period or periods during which the hedged transaction affects earnings. Any ineffective portion of a derivative instrument's change in fair value is immediately recognized in earnings. The Company uses interest rate swap agreements to decrease the volatility of future cash flows associated with interest payments on its variable rate debt. The Company's swap agreements, in effect, provide a fixed interest rate of 6.4% on its credit facility through 2002. The nominal principle values of these agreements are substantially equal to the outstanding long-term debt balances. Differences between amount paid and amounts received under the contracts are recognized in interest expense. The Company will also hedge a portion of its gas production to decrease the volatility associated with variable market pricing. The Company believes that its swap agreements are "highly effective cash flow hedges", as defined by the Standards, in managing the volatility of future cash flows associated with interest payments on its variable rate debt. The effective portion of the derivative's gain or loss (i.e., that portion of the derivative's gain or loss that offsets the corresponding change in the cash flows of the hedged transaction) is initially reported as a component of "accumulated other comprehensive income (loss)" and will be subsequently reclassified into earnings when the hedged exposure affects earnings (i.e., when interest expense on the debt is accrued). The "ineffective" portion of the derivative's gain or loss is recognized in earnings immediately. In 2001, the Company recognized a decrease in the aggregate fair market value of its swap agreements, resulting from the general decline in interest rates that occurred during the period. The decrease in the aggregate fair market value of the agreements of $1.3 million (net of an income tax benefit of $0.8 million) is reflected under the caption "accumulated other comprehensive loss" in the balance sheet. NOTE O -- INCOME PER SHARE The following is a reconciliation of the common shares outstanding with the number of shares used in the computation of income per common and common equivalent share:
YEAR ENDED DECEMBER 31, ---------------------- (IN THOUSANDS) 2001 2000 1999 ---- ---- ---- Number of weighted average common shares outstanding ...... 13,995 13,616 13,524 Assumed exercise of stock options.......................... 842 - 52 --------- ---------- -------- Average diluted shares outstanding......................... 14,837 13,616 13,576 ========= ========== ========
F-22 NOTE P -- INDUSTRY SEGMENTS AND GEOGRAPHIC INFORMATION The Company manages its operations through three divisions: Fluids, Well Abandonment & Decommissioning and Testing & Services. The Company's Fluids Division manufactures and markets clear brine fluids to the oil and gas industry for use in well drilling, completion and workover operations in both domestic and international markets. The division also markets the liquid and dry calcium chloride manufactured at its production facilities to a variety of markets outside the energy industry. The Well Abandonment & Decommissioning Division provides a complete package of services required for the abandonment of depleted oil and gas wells and decommissioning of platforms, pipelines and other associated equipment. The division services the onshore, inland waters and offshore markets of the Gulf of Mexico. The Division is also an oil and gas producer from wells acquired in its well abandonment and decommissioning business. The Company's Testing & Services Division provides production testing services to the Texas, Louisiana and Latin American markets. It also provides the technology and services required for separation and recycling of oily residuals generated from petroleum refining and offshore exploration and production. The Company generally evaluates performance and allocates resources based on profit or loss from operations before income taxes and non-recurring charges. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. Transfers between segments, as well as geographic areas, are priced at the estimated fair value of the products or services as negotiated between the operating units. Others include corporate expenses, nonrecurring charges and elimination of intersegment revenues. F-23 Summarized financial information concerning the business segments from continuing operations as follows:
WELL ABANDON. TESTING FLUIDS & DECOMM. & SERVICES OTHER CONSOLIDATED ------------ ------------ ----------- ----------- ---------------- (In Thousands) 2001 SEGMENT DETAIL Revenues from external customers Products $ 125,165 $ 15,722 $ 8,849 $ - $ 149,736 Services and rentals 14,531 82,306 56,865 - 153,702 Intersegmented revenues 1,631 492 13 (2,136) - ------------ ------------ ----------- ----------- ---------------- Total revenues 141,327 98,520 65,727 (2,136) 303,438 ============ ============ =========== =========== ================= Depreciation and amortization 6,105 6,896 5,059 505 18,565 Interest expense 9 - - 2,482 2,491 Income (loss) before taxes and discontinued operations 21,105 16,178 18,206 (17,220) 38,269 Total assets 128,581 96,893 67,308 17,027(3) 309,809 Capital expenditures 4,539 12,575 10,587 639 28,340 2000 SEGMENT DETAIL Revenues from external customers Products 100,632 11,740 7,949 - 120,321 Services and rentals 17,066 48,672 38,446 - 104,184 Intersegmented revenues 1,173 - - (1,173) - ------------ ------------ ----------- ----------- ---------------- Total revenues 118,871 60,412 46,395 (1,173) 224,505 ============ ============ =========== =========== ================= Depreciation and amortization 6,651 4,253 3,779 582 15,265 Interest expense 8 - - 4,179 4,187 Income (loss) before taxes and discontinued operations 10,233 4,565 10,166 (12,555) 12,409 Total assets 123,673 75,965 55,922 23,380(3) 278,940 Capital expenditures 4,810 2,448 8,611 123 15,992 1999 SEGMENT DETAIL Revenues from external customers Products 89,133 4,753 9,904 - 103,790 Services and rentals 18,730 31,452 19,962 4,128(2) 74,272 Intersegmented revenues 1,729 - - (1,729) - ------------ ------------ ----------- ----------- ---------------- Total revenues 109,592 36,205 29,866 2,399 178,062 ============ ============ =========== =========== ================= Depreciation and amortization 7,088 3,093 3,261 763 14,205 Interest expense 12 - 35 5,191 5,238 Income (loss) before taxes, discontinued operations and cumulative effect of accounting change 7,380 (626) 2,254 17,261(1) 26,269 Total assets 129,878 57,700 42,792 54,140(3) 284,510 Capital expenditures 4,428 1,576 5,993 410 12,407
- ---------- (1) Includes gain on the sale of administration building of $6,731, gain on the sale of the TPT business of $29,629, special charges of $4,745 and a restructuring charge of $2,320. (2) Revenues from the TETRA Process Technologies business, which was sold in 1999. (3) Includes net assets of discontinued operations. F-24 Summarized financial information concerning the geographic areas in which the Company operated at December 31, 2001, 2000 and 1999 are presented below:
2001 2000 1999 ----------- ------------ ------------- (IN THOUSANDS) Revenues from external customers: U.S............................ $ 254,649 $ 190,709 $ 143,192 Europe and Africa...................... 30,619 17,813 21,011 Other.................................. 18,170 15,983 13,859 ----------- ------------ ------------- Total........................... 303,438 224,505 178,062 Transfer between geographic areas: U.S................................. 658 208 596 Europe and Africa...................... - - - Other.................................. - - - Eliminations........................... (658) (208) (596) ----------- ------------ ------------- Total Revenues..................... 303,438 224,505 178,062 =========== ============ ============= Identifiable Assets: U.S............................. 270,239 248,023 217,260 Europe and Africa...................... 27,455 17,436 18,779 Other.................................. 25,564 26,498 23,209 Eliminations........................... (13,449)(1) (13,017)(1) (25,262)(1) ----------- ------------ ------------- Total.............................. $ 309,809 $ 278,940 $284,510 =========== ============ =============
- ---------- (1) Includes net assets of discontinued operations. In 2001, 2000 and 1999, no customer accounted for more than 10% of consolidated revenues. F-25 NOTE Q -- QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Summarized quarterly financial data from continuing operations for 2001 and 2000 are as follows:
THREE MONTHS ENDED 2001 --------------------------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 ------------- ------------ ------------- -------------- Total Revenue $ 72,597 $ 81,578 $ 77,376 $ 71,887 Gross Profit 18,952 23,092 22,688 20,502 Net Income 5,140 6,742 6,850 5,141 Net income per share $ 0.37 $ 0.48 $ 0.49 $ 0.37 ============= ============ ============= ============== Net income per diluted share $ 0.35 $ 0.45 $ 0.46 $ 0.35 ============= ============ ============= ==============
THREE MONTHS ENDED 2000 --------------------------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 ------------- ------------ ------------- -------------- Total Revenue $ 50,909 $ 56,117 $ 54,077 $ 63,402 Gross Profit 11,258 13,312 13,308 15,815 Net income before discontinued operations 661 1,639 2,092 3,345 Income (loss) from discontinued operations, net of tax 25 79 (94) - Estimated loss on disposal of discontinued operations, net of tax - - - (14,469) ------------- ------------ ------------- -------------- Net Income (loss) 686 1,718 1,998 (11,124) ============= ============ ============= ============== Net income per share before discontinued operations $ 0.05 $ 0.12 $0.15 $ 0.24 Income (loss) per share from discontinued operations - 0.01 (0.01) - Estimated loss per share on disposal of discontinued operations - - - (1.05) ------------- ------------ ------------- -------------- Net income (loss) per share $ 0.05 $ 0.13 $ 0.14 $ (0.81) ============= ============ ============= ============== Net income per diluted share before discontinued operations $ 0.05 $ 0.12 $ 0.15 $ 0.24 Income (loss) per share from discontinued operations - 0.01 (0.01) - Estimated loss per share on disposal of discontinued operations - - - (1.05) ------------- ------------ ------------- -------------- Net income per diluted share $ 0.05 $ 0.13 $ 0.14 $ (0.81) ============= ============ ============= ==============
F-26 NOTE R - SHAREHOLDERS RIGHTS PLAN On October 27, 1998, the Board of Directors adopted a stockholder rights plan (the "Rights Plan") designed to assure that all of the Company's shareholders receive fair and equal treatment in the event of any proposed takeover of the Company. The Rights Plan helps to guard against partial tender offers, open market accumulations and other abusive tactics to gain control of the Company without paying an adequate and fair price in any takeover attempt. The Rights are not presently exercisable and are not represented by separate certificates. The Company is currently not aware of any effort of any kind to acquire control of the Company. Terms of the Rights Plan provide for a dividend distribution of one Preferred Stock Purchase Right for each outstanding share of Common Stock to holders of record subsequent to the close of business on November 6, 1998. The Rights Plan would be triggered if an acquiring party accumulates or initiates a tender offer to purchase 20% or more of the Company's Common Stock and would entitle holders of the Rights to purchase either the Company's stock or shares in an acquiring entity at half of market value. Each Right entitles the holder thereof to purchase 1/100 of a share of Series One Junior Participating Preferred Stock for $50.00 per share, subject to adjustment. The Company would generally be entitled to redeem the Rights at $.01 per Right at any time until the tenth day following the time the Rights become exercisable. The Rights will expire on November 6, 2008. For a more detailed description of the Rights Plan, refer to the Company's Form 8-K filed with the Securities and Exchange Commission on October 28, 1998. F-27 TETRA TECHNOLOGIES, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS) ADDITIONS
CHARGED BALANCE AT CHARGED TO OTHER BALANCE AT BEGINNING TO COSTS ACCOUNTS- DEDUCTIONS END OF PERIOD AND EXPENSES DESCRIBE DESCRIBE OF PERIOD ------------- -------------- ----------- ---------- ------------ Year ended December 31, 1999: Allowance for doubtful accounts $ 810 $ 1,365 $ (95)(2)$ (320)(1)$ 1,760 ============= ============== =========== ========== ============ Inventory reserves $ 213 $ 460 $ (283) $ - $ 390 ============= ============== =========== ========== ============ Year ended December 31, 2000: Allowance for doubtful accounts $ 1,760 $ 655 $ - $ (1,487)(1)$ 928 ============= ============== =========== ========== ============ Inventory reserves $ 390 $ - $ (57) $ - $ 333 ============= ============== =========== ========== ============ Year ended December 31, 2001: Allowance for doubtful accounts $ 928 $ 1,187 $ 41 $ (388)(1)$ 1,768 ============= ============== =========== ========== ============ Inventory reserves $ 333 $ 31 $ 698 $ (70) $ 992 ============= ============== =========== ========== ============
- ---------- (1) Uncollectible accounts written off, net of recoveries. (2) Sale of business S-1 EX-10.7 3 a2075175zex-10_7.txt EXHIBIT 10-7 Exhibit 10.7 EXECUTION COPY SECOND AMENDED AND RESTATED CREDIT AGREEMENT Among TETRA TECHNOLOGIES, INC. as Borrower, THE FINANCIAL INSTITUTIONS NAMED IN THIS CREDIT AGREEMENT as Banks, BANK OF AMERICA, N.A., as Administrative Agent for the Banks and BANK ONE, NA, as Syndication Agent $80,000,000 December 14, 2001 Arranged by: BANC OF AMERICA SECURITIES, L.L.C. TABLE OF CONTENTS
PAGE ARTICLE 1. DEFINITIONS AND ACCOUNTING TERMS........................1 1.1 Certain Defined Terms.......................................1 1.2 Computation of Time Periods................................16 1.3 Accounting Terms; Preparation of Financials................16 1.4 Types......................................................16 1.5 Interpretation.............................................16 ARTICLE 2. CREDIT FACILITIES......................................17 2.1 Revolving Credit Loan Facility.............................17 2.2 Swingline Facility.........................................19 2.3 Letter of Credit Facility..................................20 2.4 Fees.......................................................23 2.5 Interest...................................................24 2.6 Breakage Costs.............................................26 2.7 Increased Costs............................................27 2.8 Illegality.................................................28 2.9 Market Failure.............................................28 2.10 Advancing and Payments Generally; Computations.............28 2.11 Taxes......................................................31 2.12 Increase of Revolving Credit Commitments...................32 ARTICLE 3. CONDITIONS PRECEDENT...................................33 3.1 Conditions Precedent to Amendment and Restatement..........33 3.2 Conditions Precedent to Each Extension of Credit...........33 ARTICLE 4. REPRESENTATIONS AND WARRANTIES.........................33 4.1 Organization...............................................33 4.2 Authorization..............................................34 4.3 Enforceability.............................................34 4.4 Absence of Conflicts and Approvals.........................34 4.5 Investment Companies.......................................34 4.6 Public Utilities...........................................34 4.7 Financial Condition........................................34
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PAGE 4.8 Condition of Assets........................................35 4.9 Litigation.................................................35 4.10 Subsidiaries and Affiliates................................35 4.11 Laws and Regulations.......................................35 4.12 Environmental Compliance...................................35 4.13 ERISA......................................................36 4.14 Taxes......................................................36 4.15 True and Complete Disclosure...............................36 ARTICLE 5. COVENANTS..............................................36 5.1 Organization; Maintenance of Properties....................37 5.2 Reporting..................................................37 5.3 Inspection.................................................38 5.4 Use of Proceeds............................................39 5.5 Financial Covenants........................................39 5.6 Debt.......................................................40 5.7 Liens......................................................40 5.8 Other Obligations..........................................40 5.9 Corporate Transactions.....................................40 5.10 Distributions..............................................42 5.11 Transactions with Affiliates...............................42 5.12 Insurance..................................................42 5.13 Investments................................................42 5.14 Lines of Business; Distribution............................42 5.15 Compliance with Laws.......................................42 5.16 Environmental Compliance...................................43 5.17 ERISA Compliance...........................................43 5.18 Payment of Certain Claims..................................43 5.19 Subsidiaries...............................................43 5.20 Further Assurances.........................................44 5.21 Management.................................................44
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PAGE 5.22 Foreign Subsidiaries.......................................44 ARTICLE 6. DEFAULT AND REMEDIES...................................44 6.1 Events of Default..........................................44 6.2 Termination of Commitments.................................46 6.3 Acceleration of Credit Obligations.........................46 6.4 Cash Collateralization of Letters of Credit................46 6.5 Default Interest...........................................46 6.6 Right of Setoff............................................46 0 6.7 Actions Under Credit Documents.............................47 6.8 Remedies Cumulative........................................47 6.9 Application of Payments....................................47 ARTICLE 7. THE AGENT AND ISSUING BANK.............................48 7.1 Authorization and Action...................................48 7.2 Reliance, Etc..............................................48 7.3 Affiliates.................................................49 7.4 Bank Credit Decision.......................................49 7.5 Expenses...................................................49 7.6 Indemnification............................................49 7.7 Successor Agent and Issuing Bank...........................50 7.8 Other Agents; Lead Managers................................50 ARTICLE 8. ARTICLE 8. MISCELLANEOUS...............................50 8.1 Expenses...................................................50 8.2 Indemnification............................................51 8.3 Modifications, Waivers, and Consents.......................51 8.4 Survival of Agreements.....................................52 8.5 Assignment and Participation...............................52 8.6 Notice.....................................................54 8.7 Choice of Law..............................................54 8.8 Forum Selection............................................54 8.9 Service of Process.........................................54
-iii- TABLE OF CONTENTS (Continued)
PAGE 8.10 Waiver of Jury Trial.......................................55 8.11 Counterparts...............................................55 8.12 Confidentiality............................................55 8.13 No Further Agreements......................................55
-iv- EXHIBITS Exhibit A - Form of Compliance Certificate Exhibit B - Form of Borrowing Request Exhibit C - Form of Continuation/Conversion Request Exhibit D-1 - Form of Revolving Credit Note Exhibit D-2 - Form of Swingline Note Exhibit E - Form of Assignment and Acceptance Exhibit F - Closing Documents List Exhibit G - Form of Joinder Agreement Exhibit H-1 - Form of New Bank Agreement Exhibit H-2 - Form of Revolving Credit Commitment Increase Agreement SCHEDULES Schedule I - Administrative Information Schedule II - Disclosures -v- SECOND AMENDED AND RESTATED CREDIT AGREEMENT This Second Amended and Restated Credit Agreement dated as of December 14, 2001 is among TETRA Technologies, Inc., a Delaware corporation, as Borrower, the financial institutions named herein, as Banks, Bank of America, N.A., as administrative agent ("Agent") for the Banks, and Bank One, NA, as Syndication Agent, and is arranged by Banc of America Securities, L.L.C., as Lead Arranger and Book Manager. INTRODUCTION A. The Borrower, the Banks and the Agent are parties to the First Amended and Restated Credit Agreement dated as of May 12, 2000, as amended by Amendment No. 1 dated as of June 21, 2000, Amendment No. 2 dated as of July 28, 2000, Amendment No. 3 and Consent dated as of November 3, 2000, and Amendment No. 4 and Consent dated as of December 31, 2000 (as amended, the "Existing Credit Agreement"). B. The parties to the Existing Credit Agreement desire to amend and restate the Existing Credit Agreement as herein set forth. C. To evidence the credit facility requested hereunder, the Borrower, the Agent and the Banks have agreed that this Agreement is an amendment and restatement of the Existing Credit Agreement, not a new or substitute credit agreement or novation of the Existing Credit Agreement. Now, therefore, the parties hereto agree as follows: ARTICLE 1. DEFINITIONS AND ACCOUNTING TERMS. 1.1 CERTAIN DEFINED TERMS. As used in this Agreement, the following terms shall have the following meanings (unless otherwise indicated, such meanings to be equally applicable to both the singular and plural forms of the terms defined): "ACCOUNT DEBTOR" means a Person who is obligated on a Receivable. "ACQUISITION" means the direct or indirect purchase or acquisition, whether in one or more related transactions, of all or substantially all of the capital stock of any Person or group of Persons or all or substantially all of the assets, liabilities, and business of any Person or group of Persons. "ADJUSTED CAPITAL EXPENDITURES" means, for each measurement period, $10,000,000. "ADJUSTED PRIME RATE" means, for any day, the fluctuating rate per annum of interest equal to the greater of (a) the Prime Rate in effect on such day and (b) the Federal Funds Rate in effect on such day plus 0.50%. "ADVANCE" means a Revolving Credit Advance or a Swingline Advance. "AFFILIATE" means, as to any Person, any other Person that, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, such Person or any Subsidiary of such Person. The term "control" (including the terms "controlled by" or "under common control with") means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through ownership, by contract, or otherwise. "AGENT" means Bank of America in its capacity as an administrative agent pursuant to Article 7 and any successor agent pursuant to Section 7.7. "AGENT FEE LETTER" means the confidential letter agreement dated as of September 27, 2001, among the Borrower, Bank of America, N.A. and Banc of America Securities LLC, regarding certain fees owed by the Borrower to Bank of America, N.A. and Banc of America Securities LLC, in connection with this Agreement. "AGREEMENT" means this Credit Agreement. "APPLICABLE LENDING OFFICE" means, with respect to each Bank and for any particular type of transaction, the office of such Bank set forth in SCHEDULE I to this Agreement (or in the applicable Assignment and Acceptance by which such Bank joined this Agreement) as its applicable lending office for such type of transaction or such other office of such Bank as such Bank may from time to time specify in writing to the Borrower and the Agent for such particular type of transaction. "APPLICABLE MARGIN" means, with respect to interest rates, letter of credit fees, commitment fees, and leverage fees and as of any date of its determination, an amount equal to the percentage amount per annum set forth in the table below opposite the applicable ratio of (i) the consolidated Funded Debt of the Borrower as of the end of the fiscal quarter then most recently ended to (ii) the EBITDA of the Borrower for the four fiscal quarters then most recently ended:
Debt to Applicable Margin Applicable Margin Ebitda Libor Tranches Prime Rate Tranches ------ -------------- ------------------- LESS THAN .75 1.00% 0.00% GREATER THAN OR EQUAL TO .75 but LESS THAN 1.00 1.125% 0.00% GREATER THAN OR EQUAL TO 1.00 but LESS THAN 1.50 1.375% 0.00% GREATER THAN OR EQUAL TO 1.50 but LESS THAN 2.00 1.625% 0.125% GREATER THAN OR EQUAL TO 2.00 but LESS THAN 2.25 1.750% 0.250% GREATER THAN OR EQUAL TO 2.25 2.00% 0.50% Debt to Applicable Margin Applicable Margin Ebitda Letter of Credit Fees Commitment Fees ------ --------------------- --------------- LESS THAN .75 1.00% 0.25% GREATER THAN OR EQUAL TO .75 but LESS THAN 1.00 1.125% 0.25% GREATER THAN OR EQUAL TO 1.00 but LESS THAN 1.50 1.375% 0.25% GREATER THAN OR EQUAL TO 1.50 but LESS THAN 2.00 1.625% 0.3125% GREATER THAN OR EQUAL TO 2.00 but LESS THAN 2.25 1.750% 0.3750% GREATER THAN OR EQUAL TO 2.25 2.00% 0.50%
Until the delivery of the December 31, 2001 financial statements to the Agent pursuant to Section 5.2(b), the Applicable Margin shall be: 1.250% for LIBOR Tranches, 0.00% for Prime Rate Tranches, 1.250% for Letter of Credit Fees, and 0.25% for Commitment. Thereafter, the Agent shall determine the Applicable Margin based upon the most recent financial statements dated as of the end of a fiscal quarter delivered to the Agent pursuant to Section 5.2(b). If such statements are delivered when required hereunder, any adjustment to the Applicable Margin shall -2- become effective on the date of delivery of such financial statements. Upon any change in the Applicable Margin, the Agent shall promptly notify the Borrower and the Banks of the new Applicable Margin. If such financial statements are not delivered when required hereunder, the Applicable Margin shall increase to the maximum percentage amount set forth in the table above from such 45th day until three days after such financial statements are received by the Agent; PROVIDED that such increase shall not limit the Agent's capacity to declare a default under this Agreement. "ASSET SALE" means any sale, lease, sale and leaseback, assignment, conveyance, transfer or other disposition of the assets or the capital stock of any Subsidiary (excluding the disposition of the capital stock of Tetra Micronutrients, Inc. or any of its assets or the capital stock of Damp Rid, Inc. or any of its assets) that yields gross proceeds to the Borrower or any of its Subsidiaries (valued at the initial principal amount thereof in the case of non-cash proceeds consisting of notes or other debt securities and valued at fair market value in the case of other non-cash proceeds) in excess of $5,000,000. "ASSIGNMENT AND ACCEPTANCE" means an Assignment and Acceptance in substantially the form of EXHIBIT E executed by an assignor Bank, an assignee Bank, and the Agent, in accordance with Section 8.5. "BANK OF AMERICA" means Bank of America, N.A., in its individual capacity. "BANKS" means the lenders listed as Banks on the signature pages of this Agreement and each Eligible Assignee that shall become a party to this Agreement pursuant to Section 8.5(b). "BORROWER" means TETRA Technologies, Inc., a Delaware corporation. "BORROWER ACCOUNT" means the principal operating account of Borrower with the Agent or any other account of Borrower with the Agent which is designated as Borrower's "Borrower Account" in writing by the Borrower to the Agent. "BORROWING" means any Revolving Credit Borrowing. "BORROWING REQUEST" means a Borrowing Request in substantially the form of EXHIBIT B executed by a Responsible Officer of the Borrower and delivered to the Agent. "BUSINESS DAY" means any Monday through Friday during which commercial banks are open for business in Houston, Texas, and Dallas, Texas, and, if the applicable Business Day relates to any LIBOR Tranche, on which dealings are carried on in the London interbank market. "CAPITAL EXPENDITURES" means, with respect to any Person and with respect to any period of its determination, the consolidated expenditures of such Person during such period that are required to be included in or are reflected by the consolidated property, plant, or equipment accounts of such Person, or any similar fixed asset or long term capitalized asset accounts of such Person, on the consolidated balance sheet of such Person in conformity with GAAP, PROVIDED, that Capital Expenditures shall not include expenditures deemed to occur in connection with Permitted Acquisitions. -3- "CAPITAL LEASES" means, with respect to any Person, any lease of any property by such Person which would, in accordance with GAAP, be required to be classified and accounted for as a capital lease on the balance sheet of such Person. "CHANGE OF CONTROL" means, with respect to the Borrower, the direct or indirect acquisition after the date hereof by any Person or related Persons constituting a group of (a) beneficial ownership of issued and outstanding shares of Voting Securities of the Borrower, the result of which acquisition is that such Person or such group possesses 30% or more of the combined voting power of all then-issued and outstanding Voting Securities of the Borrower, or (b) the power to elect, appoint, or cause the election or appointment of at least a majority of the members of the board of directors of the Borrower; provided, however, that the Borrower effects a reorganization pursuant to Section 251(g) of the Delaware General Corporate Law, whereby, among other things, its Voting Securities become owned by a holding company, such event shall not constitute a "Change of Control." "CLOSING DATE" means December 17, 2001. "CODE" means the Internal Revenue Code of 1986, as amended, or any successor statute. "COLLATERAL" means any property of the Credit Parties subject to a Lien in favor of the Agent securing the Credit Obligations. "COMMONLY CONTROLLED ENTITY" means, with respect to any Person, any other Person which is under common control with such Person within the meaning of Section 414 of the Code. "COMPLIANCE CERTIFICATE" means a compliance certificate executed by a Responsible Officer of the Borrower in substantially the form of EXHIBIT A. "CONTINUATION/CONVERSION REQUEST" means a Continuation/Conversion Request in substantially the form of EXHIBIT C executed by a Responsible Officer of the Borrower and delivered to the Agent. "CREDIT DOCUMENTS" means this Agreement, the Notes, the Agent Fee Letter, the Letter of Credit Documents, the Guaranty, the Security Documents, Derivative with a Bank or an Affiliate of a Bank, the Interest Hedge Agreements, and each other agreement, instrument, or document executed at any time in connection with this Agreement. "CREDIT OBLIGATIONS" means all principal, interest, fees, reimbursements, indemnifications, and other amounts now or hereafter owed by the Borrower to the Agent and the Banks (or with respect to Derivatives, including Interest Hedge Agreements, any Affiliates of the Banks) under this Agreement, the Notes, the Letter of Credit Documents, and the other Credit Documents and any increases, extensions, and rearrangements of those obligations under any amendments, supplements, and other modifications of the documents and agreements creating those obligations. "CREDIT PARTIES" means the Borrower and the Guarantors. -4- "DEBT" means, with respect to any Person, without duplication, (a) the Credit Obligations, (b) indebtedness of such Person for borrowed money, (c) obligations of such Person evidenced by bonds, debentures, notes, or other similar instruments, (d) obligations of such Person to pay the deferred purchase price of property or services (other than trade debt and normal operating liabilities incurred in the ordinary course of business), (e) obligations of such Person as lessee under Capital Leases, (f) obligations of such Person under or relating to letters of credit, guaranties, purchase agreements, or other creditor assurances assuring a creditor against loss in respect of indebtedness or obligations of others of the kinds referred to in clauses (b) through (e) of this definition, and (g) nonrecourse indebtedness or obligations of others of the kinds referred to in clauses (b) through (f) of this definition secured by any Lien on or in respect of any property of such Person. For the purposes of determining the amount of any Debt, the amount of any Debt described in clause (f) of the definition of Debt shall be valued at the maximum amount of the contingent liability thereunder and the amount of any Debt described in clause (g) that is not covered by clause (f) shall be valued at the lesser of the amount of the Debt secured or the book value of the property securing such Debt. "DEBT SERVICE" means, with respect to any Person and for any period of its determination, (a) the interest expense of such Person for such period, including interest expense allocable to Capital Leases, plus (b) the scheduled and required principal payments of Debt of such Person for such period, including scheduled principal payments allocable to Capital Leases and, with repect to the Borrower, excluding 15% of the principal of the Revolving Credit Loans referenced in subpart (a) of the definition of "Fixed Charges." "DEFAULT" means (a) an Event of Default or (b) any event or condition which with notice or lapse of time or both would, unless cured or waived, become an Event of Default. "DEFAULT RATE" means, with respect to any amount due hereunder, a per annum interest rate equal to (a) if such amount is either outstanding principal accruing interest based upon a rate established elsewhere in this Agreement or accrued but unpaid interest thereon, the sum of (i) the interest rate established elsewhere in this Agreement from time to time for such principal amount, including any applicable margin, plus (ii) 2.00% per annum or (b) in all other cases, the Adjusted Prime Rate in effect from time to time plus the Applicable Margin for Prime Rate Tranches in effect from time to time plus 2.00% per annum. "DERIVATIVES" means any swap, hedge, cap, collar, or similar arrangement providing for the exchange of risks related to foreign exchanges or price changes in any commodity, including money. "DIVIDEND PAYMENTS" means, with respect to any Person and for any period of its determination, any cash dividends or distributions paid by such Person on the common, preferred, or other capital stock or equity interest of such Person during such period plus any amounts paid by such Person for the purchase, redemption, retirement, or other acquisition of such Person's capital stock during such period. "DOLLARS OR $" means lawful money of the United States of America. -5- "EBITDA" means, with respect to any Person and for any period of its determination, the consolidated net income of such Person for such period (exclusive of any extraordinary gains), plus the consolidated interest expense, income taxes, and depreciation, depletion and amortization of such Person for such period. "ELIGIBLE ASSIGNEE" means, with respect to any assignment hereunder at the time of such assignment, any commercial bank organized under the laws of the United States or any of the countries parties to the Organization for Economic Cooperation and Development or any political subdivision of any thereof which has primary capital (or its equivalent) of not less than $250,000,000, and which is approved by the Agent and (provided that no Default or Event of Default exists) the Borrower, such approvals not to be unreasonably withheld. "ENVIRONMENTAL LAW" means all federal, state, and local laws, rules, regulations, ordinances, orders, decisions, agreements, and other requirements now or hereafter in effect relating to the pollution, destruction, loss, or injury of the environment, the presence of any contaminant in the environment, the protection, cleanup, remediation, or restoration of the environment, the creation, handling, transportation, use, or disposal of any waste product in the environment, exposure of Persons to any contaminant, waste, or hazardous substance in the environment, and the health and safety of employees in relation to their environment. "EQUITY ISSUANCE" means any issuance of equity securities (including any preferred equity securities) by the Borrower or any of its Subsidiaries other than (a) equity securities issued to the Borrower or one of its Subsidiaries; (b) equity securities issued pursuant to employee benefit or dividend reinvestment plans in the ordinary course of business; and (c) equity securities issued as consideration in connection with any investment by the Borrower or any of its Subsidiaries in any other Person pursuant to which such Person shall become a Subsidiary or shall be merged into or consolidated with the Borrower or any of its Subsidiaries. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "EVENT OF DEFAULT" has the meaning specified in Section 6.1. "EXISTING CREDIT AGREEMENT" has the meaning set forth in the introduction to this Agreement. "EXISTING LETTERS OF CREDIT" means the standby letters of credit issued by any Issuing Bank for the account of the Borrower prior to the date of this Agreement which are listed in the attached SCHEDULE II. "EXPIRATION DATE" means, with respect to any Letter of Credit, the date on which such Letter of Credit will expire or terminate in accordance with its terms. "FEDERAL FUNDS RATE" means, for any period, a fluctuating per annum interest rate equal for each day during such period to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day -6- which is a Business Day, the average of the quotations for any such day on such transactions received by the Agent from three Federal funds brokers of recognized standing selected by it. "FEDERAL RESERVE BOARD" means the Board of Governors of the Federal Reserve System or any of its successors. "FIXED CHARGES" means with respect to any Person and for any period of its determination, the sum of (a) 15% of the average daily outstanding balance of the Revolving Credit Loans and Swingline Advances for the quarter ending on the last day of such period PLUS (b) without duplication, the consolidated Debt Service of such Person for such period. "FUNDED DEBT" means, with respect to any Person, the Debt of such Person, limited, however, to the type of Debt described in subparts (a), (b), (c), (d) and (e) of the definition thereof and reimbursement obligations respecting letters of credit. "GAAP" means United States generally accepted accounting principles as in effect from time to time, applied on a basis consistent with the requirements of Section 1.3. "GUARANTOR" means (a) the Subsidiaries of the Borrower listed in SCHEDULE II that have executed the Guaranty, and (b) any future Subsidiaries of the Borrower that join the Guaranty pursuant to Section 5.19. "GUARANTY" means the Guaranty dated as of May 12, 2000, made on and after the date of this Agreement by certain Subsidiaries of the Borrower in favor of the Agent guaranteeing the Credit Obligations. "HAZARDOUS MATERIALS" means any substance or material identified as a hazardous substance pursuant to the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended and as now or hereafter in effect; any substance or material regulated as a hazardous waste pursuant to the Resource Conservation and Recovery Act of 1976, as amended and as now or hereafter in effect; and any substance or material designated as a hazardous substance or hazardous waste pursuant to any other Environmental Law. "HIGHEST LAWFUL RATE" means the maximum lawful interest rate, if any, that at any time or from time to time may be contracted for, charged, or received under the laws applicable to the relevant Bank which are presently in effect or, to the extent allowed by law, under such applicable laws which may hereafter be in effect and which allow a higher maximum nonusurious interest rate than applicable laws now allow. The "Highest Lawful Rate" under this Agreement shall be the indicated rate ceiling under Section 303,305(b) of the Texas Finance Code, any other lawful rate ceiling exceeds the rate ceiling so determined, and then the higher rate ceiling shall apply. "INTANGIBLE ASSETS" means, with respect to any Person and as of any date of its determination, the goodwill, patents, trade names, trade marks, copyrights, franchises, experimental expense, organization expense, unamortized debt discount and expense, the excess of cost of shares acquired over book value of related assets, and such other assets of such Person as are properly classified as "intangible assets" in accordance with generally accepted accounting principles, and booked on the balance sheet of such Person. -7- "INTEREST HEDGE AGREEMENTS" means any swap, hedge, cap, collar, or similar arrangement between the Borrower and any Bank (or any Affiliate of any Bank) providing for the exchange of risks related to price changes in the interest rate on the Advances under this Agreement. "INTEREST PERIOD" means, with respect to each LIBOR Tranche, the period commencing on the date of such LIBOR Tranche and ending on the last day of the period selected by the Borrower pursuant to the provisions below. The duration of each such Interest Period shall be one, two, three, or six months, in each case as the Borrower may select in the applicable Borrowing Request or Continuation/Conversion Request (unless there shall exist any Default or Event of Default, in which case the Borrower may only select one month Interest Periods); provided, however, that: (a) whenever the last day of any Interest Period would otherwise occur on a day other than a Business Day, the last day of such Interest Period shall be extended to occur on the next succeeding Business Day; provided that if such extension would cause the last day of such Interest Period to occur in the next following calendar month, the last day of such Interest Period shall occur on the next preceding Business Day; (b) any Interest Period which begins on the last Business Day of the calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of the calendar month in which it would have ended if there were a numerically corresponding day in such calendar month; and (c) the Borrower may not select an Interest Period for any LIBOR Tranche which ends after any date when outstanding principal amounts of any Revolving Credit Loan must be repaid unless, after giving effect to such selection, the aggregate outstanding principal amount of Prime Rate Tranches under such Revolving Credit Loan and LIBOR Tranches under such Revolving Credit Loan having Interest Periods which end on or before such repayment date shall be equal to or greater than the principal amount due and payable on such date (and therefore in no event shall any Interest Period for any LIBOR Tranche extend beyond the applicable maturity date). "INITIAL FINANCIAL STATEMENTS" means the financial statements of the Borrower referred to in Section 4.7(a). "INVENTORY" means and includes, as to any Person, all of such Person's then owned or existing and future acquired or arising (a) goods intended for sale or lease or for display or demonstration, (b) work in process, and (c) raw materials and other materials and supplies of every nature and description used or which might be used in connection with the manufacture, packing, shipping, advertising, selling, leasing or furnishing of goods or otherwise used or consumed in the conduct of business. "ISSUING BANK" means Bank of America, any Bank which agrees at the request of the Borrower to act as an issuer of a Letter of Credit hereunder, or any Bank acting as a successor issuing bank pursuant to Section 7.7. -8- "LETTER OF CREDIT" means any commercial or standby letter of credit issued by any Issuing Bank for the account of the Borrower pursuant to the terms of this Agreement, including the Existing Letters of Credit. "LETTER OF CREDIT APPLICATION" means an Issuing Bank's standard form letter of credit application for either a commercial or standby letter of credit, as the case may be, which has been executed by a Borrower and accepted by such Issuing Bank in connection with the issuance of a Letter of Credit. "LETTER OF CREDIT APPLICATION AMENDMENT" means an Issuing Bank's standard form application to amend a letter of credit for either a commercial or standby letter of credit, as the case may be, which has been executed by a Borrower and accepted by such Issuing Bank in connection with the increase or extension of a Letter of Credit. "LETTER OF CREDIT COLLATERAL ACCOUNT" means a special cash collateral account pledged to the Agent containing cash deposited pursuant to Section 6.4 to be maintained with the Agent in accordance with Section 2.3(f). "LETTER OF CREDIT DOCUMENTS" means all Letters of Credit, Letter of Credit Applications, Letter of Credit Application Amendments, and agreements, documents, and instruments entered into in connection with or relating thereto. "LETTER OF CREDIT EXPOSURE" means, as of any date of its determination, the aggregate outstanding undrawn amount of Letters of Credit plus the aggregate of the reimbursement obligations of the Borrower under the Letter of Credit Applications and this Agreement. "LETTER OF CREDIT SUBLIMIT" means $15,000,000. "LIBOR" means, for any LIBOR Tranche for any Interest Period therefor, the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) appearing on Telerate Page 3750 (or any successor page) as the London interbank offered rate for deposits in Dollars at approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period for a term comparable to such Interest Period. If for any reason such rate is not available, the term "LIBOR" shall mean, for any LIBOR Tranche for any Interest Period therefor, the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) appearing on Reuters Screen LIBO Page as the London interbank offered rate for deposits in Dollars at approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period for a term comparable to such Interest Period; provided, however, if more than one rate is specified on Reuters Screen LIBO Page, the applicable rate shall be the arithmetic mean of all such rates. "LIBOR TRANCHE" shall mean any Tranche which bears interest based upon the LIBOR, as determined in accordance with Section 2.5. "LIEN" means any mortgage, lien, pledge, charge, deed of trust, security interest, encumbrance, or other type of preferential arrangement to secure or provide for the payment of any obligation of any Person, whether arising by contract, operation of law, or otherwise (including any title retention for such purposes under any conditional sale agreement, any Capital Lease, or any other title transfer or retention agreement). -9- "MAJORITY BANKS" means, at any time, Banks holding more than 50% of the then aggregate Revolving Credit Commitments; provided that if the Revolving Credit Commitments have terminated, "Majority Banks" shall mean Banks having more than 50% of the aggregate unpaid principal amount of the Revolving Credit Advances and Letter of Credit Exposure at such time. "MANDATORY REVOLVING BORROWING" means a Revolving Credit Borrowing comprised of Prime Rate Tranche made to repay a Swingline Advance. "MATERIAL ADVERSE EFFECT" means any material and adverse change in or effect on (a) the consolidated assets, liabilities, financial condition, business, operations, affairs, or circumstances of the Borrower from those reflected in the most recent financial statements furnished by the Borrower pursuant to Section 5.2(a) or from the facts represented or warranted in this Agreement or any other Credit Document, or (b) the ability of the Borrower to carry out its business or to meet its obligations under the Notes, this Agreement, or any other Credit Document to which it is a party on a timely basis. "MEXICAN PLEDGE AGREEMENTS" means the Pledge Agreements dated as of August 31, 1997, as amended as of the date hereof, made by each of Tetra International, Inc., a Delaware corporation, TETRA Agricultural Products, Inc., a Texas corporation, now named TETRA Micronutrients, Inc. and the Borrower in favor of the Agent, pledging the stock of the Mexican Subsidiaries of such Pledgors as security for the Credit Obligations. "MINIMUM BORROWING AMOUNT" means, with respect to any Borrowing, $1,000,000. "MINIMUM BORROWING MULTIPLE" means $500,000. "MINIMUM TRANCHE AMOUNT" means, with respect to any Tranche, $1,000,000. "MINIMUM TRANCHE MULTIPLE" means $500,000. "NET CASH PROCEEDS" means: (a) with respect to any sale, transfer, or other disposition, including any Asset Sale, of any of the Property of any Credit Party (including the sale or transfer of stock or other equity interest by such Credit Party and property insurance proceeds), all cash and investments described in clauses (e) through (h) of the definition of Permitted Investments received by any Credit Party from such sale, transfer, or other disposition after, without duplication, (i) payment of, or provision for, all brokerage commissions, legal fees, accounting fees, and other reasonable out-of-pocket fees and expenses actually incurred; (ii) payment of, or provision for, taxes payable as a result of such disposition, (iii) payment of any outstanding obligations relating to such Property paid in connection with any such sale, transfer, or other disposition; and (iv) recording of the amount of reserves required in accordance with GAAP for indemnity or similar obligations of the Credit Parties directly related to such sale, transfer, or other disposition and (b) with respect to the issuance of any Equity Issuance, all cash received by the Borrower or any of its Subsidiaries from such Equity Issuance after payment of or deduction for -10- (i) all underwriter's or placement agent's discounts and fees and (ii) reasonable legal, accounting, and other fees and expenses of the Borrower or such Subsidiary incurred in connection with the issuance of any such securities. "NET WORTH" means, with respect to any Person and as of any date of its determination, the excess of (a) the assets of such Person over (b) the liabilities of such Person, and with respect to the Borrower, as recorded on the Borrower's balance sheet prepared in accordance with GAAP. "NEW BANK AGREEMENT" means an agreement entered into by an Eligible Assignee, the Borrower, and the Agent, substantially in the form of Exhibit H-1. "NOTE" means a Revolving Credit Note or a Swingline Note. "PBGC" means Pension Benefit Guaranty Corporation or its successor. "PERMITTED ACQUISITION" means an Acquisition made in compliance with Section 5.9. "PERMITTED DEBT" means all of the following Debt: (a) Debt outstanding under the Credit Documents; (b) Debt in the form of borrowed money set forth in the Initial Financial Statements and in SCHEDULE II hereto and any extensions, renewals, or replacements of the foregoing which do not increase the outstanding principal amount thereof at the time of such extension, renewal, or replacement; (c) Debt in the form of (i) purchase money indebtedness, including indebtedness incurred in connection with a Permitted Acquisition, and (ii) Capital Leases, in each case arising in the ordinary course of business and any extensions, renewals, or replacements of either of the foregoing; PROVIDED that such Debt does not exceed an aggregate outstanding amount equal to $20,000,000; (d) $50,000,000 of unsecured senior notes issued on terms acceptable to the Agent after the date hereof; (e) Debt assumed in connection with a Permitted Acquisition; and (f) Debt in the form of loans and advances made by the Borrower and Subsidiaries of the Borrower to Subsidiaries of the Borrower to the extent permitted by Section 5.13. If any Debt qualifies for more than one of the foregoing clauses, the Borrower may in its discretion allocate such Debt to any clause for which such Debt qualifies. "PERMITTED INVESTMENTS" means all of the following investments: -11- (a) advances to or investments in Subsidiaries of the Borrower that hold substantially all of their assets in the United States and are Guarantors, including such investments occurring in connection with Permitted Acquisitions; (b) Permitted Acquisitions; (c) investments in Persons (other than those described in clause (a) above) PROVIDED that the aggregate outstanding amount of all such investments at any time shall not exceed 15% of the Borrower's consolidated Net Worth as of the end of the fiscal quarter most recently ended, including, investments occurring in connection with Permitted Acquisitions; (d) investments set forth in SCHEDULE II hereto; (e) investments in the form of loans, guaranties, open accounts, and other extensions of trade credit in the ordinary course of business; (f) investments in commercial paper and bankers' acceptances maturing in twelve months or less from the date of issuance and which, at the time of acquisition are rated A-2 or better by Standard & Poor's Ratings Group, a division of McGraw-Hill, Inc., and P-2 or better by Moody's Investors Service, Inc; (g) investments in direct obligations of the United States, or investments in any Person which investments are guaranteed by the full faith and credit of the United States, in either case maturing in twelve months or less from the date of acquisition thereof; (h) investments in time deposits or certificates of deposit maturing within one year from the date such investment is made, issued by a bank or trust company organized under the laws of the United States or any state thereof having capital, surplus, and undivided profits aggregating at least $250,000,000 or a foreign branch thereof and whose long-term certificates of deposit are, at the time of acquisition thereof, rated A-2 by Standard & Poor's Ratings Group, a division of McGraw-Hill, Inc., or Prime-2 by Moody's Investors Service, Inc.; and (i) investments in money market funds holding only obligations of the types described in clauses (e)-(g) above and repurchase agreements having a term of less than one year that are fully collateralized by obligations of the type described in clauses (e)-(g) above provided that such repurchase agreements are entered into with banks or trust companies described in clause (g). In valuing any investments for the purpose of applying the limitations set forth in this Agreement, the amount of such investments shall be determined from the consolidated balance sheets of the Borrower. "PERMITTED LIENS" means all of the following Liens: (a) Liens securing the Credit Obligations; (b) Liens described in SCHEDULE II attached hereto provided that no such Lien is spread to cover any additional property or indebtedness; -12- (c) Liens covering Property other than accounts receivable or inventory (as such terms are defined in the Texas Uniform Commercial Code) of any Restricted Entity, securing purchase money debt permitted under clause (c) of the definition of Permitted Debt, including Liens on such Property acquired in connection with a Permitted Acquisition, provided that no such Lien is spread to cover any such Property not purchased or leased in connection with the incurrence of such Debt; and (d) Liens arising in the ordinary course of business which are not incurred in connection with the borrowing of money or the obtaining of advances or credit and which do not materially detract from the value of the assets of any Restricted Entity or materially interfere with the business of any Restricted Entity, including to the extent they meet the foregoing requirements, (i) Liens for taxes, assessments, or other governmental charges or levies; (ii) Liens in connection with worker's compensation, unemployment insurance, or other social security, old age pension, or public liability obligations; (iii) Liens in the form of legal or equitable encumbrances deemed to exist by reason of negative pledge covenants and other covenants or undertakings of like nature; (iv) Liens in the form of landlords', vendors', carriers', warehousemen's, repairmen's, mechanics', workmen's, materialmen's, construction, or other like Liens arising by operation of law in the ordinary course of business or incident to the construction or improvement of any property; and (v) Liens in the form of zoning restrictions, easements, licenses, and other restrictions on the use of real property or minor irregularities in title thereto which do not materially impair the use of such property in the operation of the business of any Restricted Entity or the value of such property. "PERMITTED SALE" has the meaning assigned to such term in Section 5.9(d) of this Agreement. "PERSON" means an individual, partnership, corporation (including a business trust), joint stock company, trust, unincorporated association, joint venture, or other entity, or a government or any political subdivision or agency thereof, or any trustee, receiver, custodian, or similar official. "PLAN" means any (a) employee medical benefit plan under Section 3(1) of ERISA, (b) employee pension benefit plan under Section 3(2) of ERISA, (c) multiemployer plan under Section 4001(a)(3) of ERISA, and (d) employee account benefit plan under Section 3(2) of ERISA. "PLEDGE AGREEMENTS" means the U.S. Pledge Agreements, the Mexican Pledge Agreements and the U.K. Pledge Agreements, together with any Pledge Agreements made by any Restricted Entity under Section 5.22 with respect to the stock of certain future Subsidiaries of the Restricted Entities which are not Guarantors. "PLEDGORS" means Tetra International Incorporated, a Delaware corporation, TETRA Micronutrients, Inc., a Delaware corporation, and the Borrower, together with any other Restricted Entity that executes a Pledge Agreement under Section 5.22. -13- "PRIME RATE" means, for any day, the fluctuating per annum interest rate in effect on such day equal to the rate of interest publicly announced by the Agent as its prime rate, whether or not the Borrower has notice thereof. "PRIME RATE TRANCHE" shall mean any Tranche which bears interest based upon the Adjusted Prime Rate, as determined in accordance with Section 2.5. "PROHIBITED TRANSACTION" means any transaction set forth in Section 406 of ERISA or Section 4975 of the Code. "PROPERTY" of any Person means any property or assets (whether real, personal, or mixed, tangible or intangible) of such Person. "RATABLE SHARE" OR "PRO RATA SHARE" means, at any time with respect to any Bank, either (a) the ratio (expressed as a percentage) of such Bank's Revolving Credit Commitments at such time to the aggregate Revolving Credit Commitments at such time or (b) if the Revolving Credit Commitments have been terminated, the ratio (expressed as a percentage) of such Bank's aggregate outstanding Advances and Letter of Credit Exposure at such time to the aggregate outstanding Advances and Letter of Credit Exposure of all the Banks at such time. "RECEIVABLES" means and includes, as to any Person, all of such Person's then owned or existing and future acquired or arising (a) accounts, (b) chattel paper (including, without limitation, installment sales contracts and personal property leases), (c) contract rights, (d) rights to the payment of money or other forms of consideration of any kind including, but not limited to, letters of credit and the right to receive payment thereunder, tax refunds, insurance proceeds, notes, drafts, instruments, documents, acceptances and all other debts, obligations and liabilities in whatever form from any Person and guaranties, security and Liens securing payment thereof, and (e) cash and non-cash proceeds of any of the foregoing. "RELATED PARTIES" means, with respect to any Person, such Person's stockholders, directors, officers, employees, agents, Affiliates, successors, and assigns, and their respective stockholders, directors, officers, employees, and agents, and, with respect to any Person that is an individual, such Person's family relations and heirs. "REPORTABLE EVENT" means any of the events set forth in Section 4043 of ERISA. "RESPONSIBLE OFFICER" means, with respect to any Person, such Person's Chief Executive Officer, President, Chief Financial Officer, Secretary, Treasurer, or any other officer of such Person designated by any of the foregoing in writing from time to time. "RESTRICTED ENTITIES" means the Borrower and each Subsidiary of the Borrower. "REVOLVING CREDIT ADVANCE" means an advance of principal made by a Bank under any Revolving Credit Borrowing. "REVOLVING CREDIT BORROWING" means any aggregate amount of principal advanced on the same day and pursuant to the same Borrowing Request under the revolving credit facility created in Section 2.1. -14- "REVOLVING CREDIT COMMITMENT" means, for any Bank, the amount set forth below such Bank's name on the signature pages of this Agreement as its Revolving Credit Commitment, or if such Bank has entered into any Assignment and Acceptance since the date of this Agreement, as set forth for such Bank as its Revolving Credit Commitment in the Register maintained by the Agent pursuant to Section 8.5(c), in each case, as such amount may be reduced pursuant to Section 2.1(b) or terminated pursuant to Section 6.2, or increased pursuant to Section 2.12. "REVOLVING CREDIT COMMITMENT INCREASE AGREEMENT" means an agreement entered into by a Bank, the Borrower, and the Agent, substantially in the form of Exhibit H-2. "REVOLVING CREDIT LOAN" means the aggregate outstanding principal amount of the Revolving Credit Borrowings. "REVOLVING CREDIT MATURITY DATE" means December 14, 2004. "REVOLVING CREDIT NOTE" means a promissory note of the Borrower payable to the order of a Bank, in substantially the form of EXHIBIT D-1, evidencing the indebtedness of the Borrower to such Bank resulting from Revolving Credit Advances made by such Bank to the Borrower. "SECURITY AGREEMENTS" means (a) the Amended and Restated Security Agreement dated as of December 14, 2001 made by the Borrower in favor of the Agent granting the Agent a security interest in certain personal property of the Borrower to secure the Credit Obligations; (b) the Amended and Restated Security Agreement dated as of December 14, 2001 made by the Borrower's domestic Subsidiaries in favor of the Agent granting the Agent a security interest in certain personal property of such Subsidiaries to secure the Credit Obligations; and (c) any other security agreement or similar instrument granting the Agent a security interest in the personal property of a Credit Party to secure the Credit Obligations. "SECURITY DOCUMENTS" means the Pledge Agreements, the Security Agreements and any other document creating, perfecting, publishing notice of, or consenting to Liens in favor of the Agent securing the Credit Obligations. "SUBSIDIARY" means, with respect to any Person, any other Person, a majority of whose outstanding Voting Securities (other than directors' qualifying shares) shall at any time be owned by such Person or one or more Subsidiaries of such person. "SWINGLINE ADVANCE" means an advance made available to the Borrower by the Swingline Bank pursuant to Section 2.2(c). "SWINGLINE BANK" means Bank of America or any other Bank as a successor Swingline Bank. "SWINGLINE COMMITMENT" means the obligation of the Swingline Bank to make Swingline Advances up to a maximum principal amount of $5,000,000.00 at any time outstanding. "SWINGLINE NOTE" means a promissory note in substantially the form of the attached EXHIBIT D-2 duly executed by the Borrower and payable to the order of the Swingline Bank evidencing the obligation of the Borrower to repay the Swingline Advances. -15- "SYNDICATION AGENT" means Bank One, NA. "TANGIBLE NET WORTH" means, with respect to any Person and as of any date of its determination, the Net Worth of such Person less the Intangible Assets of such Person. "TOTAL ACQUISITION CONSIDERATION" shall have the meaning set forth in Section 5.5(e). "TRANCHE" means any tranche of principal outstanding under a Revolving Credit Loan accruing interest on the same basis whether created in connection with new advances of principal under such Revolving Credit Loan or by the continuation or conversion of existing tranches of principal under such Revolving Credit Loan and shall include any Prime Rate Tranche and any LIBOR Tranche. "TYPE" has the meaning set forth in Section 1.4. "U.K. PLEDGE AGREEMENTS" means the Deeds of Charge Over Shares to be dated as of October 15, 1997, as amended as of the date hereof, made by each of TETRA International Incorporated, a Delaware corporation, and the Borrower in favor of the Agent, pledging the stock of the Subsidiaries of such Pledgors which are not Guarantors as security for the Credit Obligations. "U.S. PLEDGE AGREEMENTS" means (a) the Pledge Agreement dated as of May 12, 2000, as amended as of the date hereof, made by the Borrower pledging the equity interests of its domestic Subsidiaries as security for the Credit Obligations; (b) the Pledge Agreement dated as of May 12, 2000, amended as of the date hereof, made by certain domestic Subsidiaries of the Borrower, pledging the equity interests of their respective domestic Subsidiaries as security for the Credit Obligations; and (c) any other pledge agreement or similar instrument granting the Agent a security interest in the Borrower's domestic Subsidiaries to secure the Credit Obligations. "VOTING SECURITIES" means (a) with respect to any corporation, any capital stock of the corporation having general voting power under ordinary circumstances to elect directors of such corporation, (b) with respect to any partnership, any partnership interest having general voting power under ordinary circumstances to elect the general partner or other management of the partnership, and (c) with respect to any other Person, such ownership interests in such Person having general voting power under ordinary circumstances to elect the management of such Person, in each case irrespective of whether at the time any other class of stock, partnership interests, or other ownership interest might have special voting power or rights by reason of the happening of any contingency. 1.2 COMPUTATION OF TIME PERIODS. In this Agreement in the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including" and the words "to" and "until" each means "to but excluding." -16- 1.3 ACCOUNTING TERMS; PREPARATION OF FINANCIALS. (a) All accounting terms, definitions, ratios, and other tests described herein shall be construed in accordance with GAAP applied on a consistent basis with those applied in the preparation of the Initial Financial Statements, except as expressly set forth in this Agreement. (b) The Restricted Entities shall prepare their financial statements in accordance with GAAP applied on a consistent basis with those applied in the preparation of the Initial Financial Statements, unless otherwise approved in writing by the Agent. 1.4 TYPES. The "Type" of a Tranche refers to the determination whether such tranche is a LIBOR Tranche or a Prime Rate Tranche. 1.5 INTERPRETATION. Article, Section, Schedule, and Exhibit references are to this Agreement, unless otherwise specified. All references to instruments, documents, contracts, and agreements are references to such instruments, documents, contracts, and agreements as the same may be amended, supplemented, and otherwise modified from time to time, unless otherwise specified. The word "including" shall mean "including but not limited to." Whenever the Borrower has an obligation under this Agreement and the Credit Documents the expense of complying with that obligation shall be an expense of the Borrower unless otherwise specified. Whenever any determination is to be made by the Agent or any Bank, such determination shall be in such Person's sole discretion unless otherwise specified in this Agreement. If any provision in this Agreement and the Credit Documents is held to be illegal, invalid, not binding, or unenforceable, such provision shall be fully severable and this Agreement and the Credit Documents shall be construed and enforced as if such illegal, invalid, not binding, or unenforceable provision had never comprised a part of this Agreement and the Credit Documents, and the remaining provisions shall remain in full force and effect. This Agreement and the Credit Documents have been reviewed and negotiated by sophisticated parties with access to legal counsel and shall not be construed against the drafter. In the event of a conflict between this Agreement and any other Credit Documents, this Agreement shall control. ARTICLE 2. CREDIT FACILITIES. 2.1 REVOLVING CREDIT LOAN FACILITY. (a) REVOLVING CREDIT COMMITMENT. Each Bank severally agrees, on the terms and conditions set forth in this Agreement and for the purposes set forth in Section 5.4, to make Revolving Credit Advances to the Borrower at such Bank's ratable share of Revolving Credit Borrowings requested by the Borrower from time to time on any Business Day during the period from the date of this Agreement until the Revolving Credit Maturity Date provided that the outstanding principal amount of Revolving Credit Advances made by such Bank plus such Bank's ratable share of the Letter of Credit Exposure shall not exceed such Bank's Revolving Credit Commitment. Revolving Credit Borrowings must be made in an amount equal to or greater than the applicable Minimum Borrowing Amount and be made in multiples of the Minimum Borrowing Multiple. Within the limits expressed in this Agreement, the Borrower may from time to time borrow, prepay, and reborrow Revolving Credit Borrowings. The -17- indebtedness of the Borrower to the Banks resulting from the Revolving Credit Advances made by the Banks shall be evidenced by Revolving Credit Notes made by the Borrower. (b) REDUCTION OF COMMITMENTS. The Borrower shall have the right, upon at least 10 days' irrevocable written notice to the Agent, to terminate in whole or reduce the unused portion of the Revolving Credit Commitments (such reductions to be apportioned ratably among each Bank's Revolving Credit Commitment); PROVIDED that each partial reduction shall be in the aggregate amount of $5,000,000 or in integral multiples of $1,000,000 in excess thereof. Any such reduction of the Revolving Credit Commitments shall be irrevocable, and amounts by which the Revolving Credit Commitments are reduced hereunder shall not be available for Advances following such reduction. Upon reduction of the Revolving Credit Commitments under this paragraph, the commitment fee provided for in Section 2.4(b) shall thereafter be computed on the basis of the Revolving Credit Commitments, as so reduced. All Advances outstanding on the date of any reduction in the Revolving Credit Commitments are subject to prepayment in accordance with Section 2.1(d)(ii) below. (c) METHOD OF ADVANCING. Each Revolving Credit Borrowing shall be made pursuant to a Borrowing Request given by the Borrower to the Agent in writing or by telecopy not later than the time required pursuant to Section 2.5(a) to select the interest rate basis for the Revolving Credit Borrowing. Each Borrowing Request shall be fully completed and shall specify the information required therein, and shall be irrevocable and binding on the Borrower. (d) PREPAYMENT; MANDATORY COMMITMENT REDUCTION. (i) The Borrower may prepay the outstanding principal amount of the Revolving Credit Loan pursuant to written notice given by the Borrower to the Agent in writing or by telecopy not later than 11:00 a.m. (Dallas, Texas time) (A) on the third Business Day before the date of the proposed prepayment, in the case of the prepayment of any portion of the Revolving Credit Loan which is comprised of LIBOR Tranches, or (B) on the same Business Day of the proposed prepayment, in the case of the prepayment of any portion of the Revolving Credit Loan comprised solely of Prime Rate Tranches. Each such notice shall specify the principal amount and the Tranches of the Revolving Credit Loan which shall be prepaid, the date of the prepayment, and shall be irrevocable and binding on the Borrower. Prepayments of the Revolving Credit Loan shall be made in integral multiples of the Minimum Borrowing Multiple. If the prepayment would cause the aggregate outstanding principal amount of any LIBOR Tranche comprising the Revolving Credit Loan or the aggregate outstanding principal amount of all Prime Rate Tranches comprising the Revolving Credit Loan, to be less than the Minimum Tranche Amount, the prepayment must be in an amount equal to the entire outstanding principal amount of such LIBOR Tranche under the Revolving Credit Loan or the entire outstanding principal amount of all such Prime Rate Tranches under the Revolving Credit Loan, as the case may be. Upon receipt of any notice of prepayment, the Agent shall give prompt notice of the intended prepayment to the Banks. For each such notice given by the Borrower, the Borrower shall prepay the Revolving Credit Loan in the specified amount on the specified date as set forth in such notice. The Borrower shall have no right to prepay any principal amount of the Revolving Credit Loan except as provided in this Section 2.1(d)(i). -18- (ii) If the aggregate outstanding principal amount of the Revolving Credit Loan PLUS the Swingline Advances PLUS the Letter of Credit Exposure ever exceeds the Revolving Credit Commitment, the Borrower shall, to the extent of such excess, immediately (A) prepay to the Swingline Bank the outstanding Swingline Advances; (B) if the Swingline Advances have been repaid in full, prepay to the Agent for the ratable benefit of the Banks the outstanding principal of the Revolving Credit Loan; and (C) if the Revolving Credit Loan has been repaid in full, make deposits into the Letter of Credit Collateral Account to provide cash collateral for the Letter of Credit Exposure, such that such excess is eliminated. (iii) The Revolving Credit Commitments shall be permanently reduced by an amount equal to 50% of (A) the Net Cash Proceeds of any Asset Sale by the Borrower or any Subsidiary of the Borrower in excess of $5,000,000 per sale and (B) the Net Cash Proceeds from the issuance of Permitted Debt under clause (d) of the definition of Permitted Debt in excess of $15,000,000. (iv) Each prepayment of principal of any LIBOR Tranche under the Revolving Credit Loan pursuant to this Section 2.1(d) shall be accompanied by payment of all accrued but unpaid interest on the principal amount prepaid and any amounts required to be paid pursuant to Section 2.6 as a result of such prepayment. (e) REPAYMENT. The Borrower shall pay to the Agent for the ratable benefit of the Banks the aggregate outstanding principal amount of the Revolving Credit Loan on the Revolving Credit Maturity Date. 2.2 SWINGLINE FACILITY. (a) On the terms and conditions set forth in this Agreement, the Swingline Bank agrees to from time-to-time on any Business Day during the period from the Closing Date until the last Business Day occurring before the Revolving Credit Maturity Date, make Swingline Advances in Dollars under the Swingline Note to the Borrower (except that no Swingline Advance may mature after the Revolving Credit Maturity Date), bearing interest at the Adjusted Prime Rate plus the Applicable Margin, and in an aggregate principal amount outstanding at any time not to exceed the Swingline Commitment; provided that the sum of (A) the aggregate principal amount of outstanding Revolving Credit Advances plus (B) the aggregate principal amount of outstanding Swingline Advances plus (C) the Letter of Credit Exposure shall never exceed the aggregate Revolving Credit Commitments at such time; and provided further that no Swingline Advance shall be made by the Swingline Bank if the statements set forth in Section 3.2 are not true on the date of such Swingline Advance, it being agreed by the Borrower that the giving of the applicable Notice of Borrowing and the acceptance by the Borrower of the proceeds of such Swingline Advance shall constitute a representation and warranty by the Borrower that on the date of such Swingline Advance such statements are true. Subject to the other provisions hereof, the Borrower may from time-to-time borrow, prepay (in whole or in part) and reborrow Swingline Advances. (b) Except as provided in the following clause (c) below, each request for a Swingline Advance shall be made pursuant to telephone notice to the Swingline Bank given no later than -19- 1:00 p.m. (Dallas, Texas time) on the date of the proposed Swingline Advance, promptly confirmed by a completed and executed Notice of Borrowing telecopied to the Agent. Each Swingline Advance shall be in an aggregate amount not less than $100,000.00 and in integral multiples of $50,000.00 in excess thereof. The Swingline Bank will promptly make the Swingline Advance available to the Borrower at the Borrower's account with the Agent. (c) The Borrower shall repay the outstanding principal amount of and all accrued and unpaid interest on each Swingline Advance on the Revolving Credit Maturity Date, provided that the Borrower may at any time prepay the Swingline Advances by an amount not less than $100,000.00 and in integral multiples of $50,000.00, provided that the Borrower shall give notice to the Agent by 1:00 p.m. (Dallas, Texas time) on the date of such prepayment. The Borrower and the Banks agree that at any time the Agent may give each Bank having a Revolving Credit Commitment a notice of Mandatory Revolving Borrowing, and upon receipt of such notice, each Bank having a Revolving Credit Commitment shall pay to the Agent its pro rata Share of such Swingline Advance and such payment shall be deemed to be a Prime Rate Tranche made pursuant to such Bank's Revolving Credit Commitment, whether made before or after termination of the Revolving Credit Commitments, acceleration of the Revolving Credit Advances, or otherwise, and whether or not the conditions precedent in Section 3.2 have been satisfied at the time of such Mandatory Revolving Borrowing. The Agent shall give each Bank notice of such Mandatory Revolving Borrowing by 11:00 a.m. (Dallas, Texas time) on the date the Mandatory Revolving Borrowing is to be made. Each Bank having a Revolving Credit Commitment shall, regardless of whether the conditions in Section 3.2 have been met at the time of such Mandatory Revolving Borrowing and regardless of whether there exists any Default or Event of Default, make its Revolving Credit Advance available to the Agent for the account of the Swingline Bank in immediately available funds by 3:00 p.m. (Dallas, Texas time) on the date requested, and the Borrower hereby irrevocably instructs the Swingline Bank to apply the proceeds of such Mandatory Revolving Borrowing to the payment of the outstanding Swingline Advances. 2.3 LETTER OF CREDIT FACILITY. (a) COMMITMENT FOR LETTERS OF CREDIT. Each Issuing Bank shall, on the terms and conditions set forth in this Agreement and for the purposes set forth in Section 5.4, issue, increase, and extend Letters of Credit at the request of the Borrower from time to time on any Business Day during the period from the date of this Agreement until the Revolving Credit Maturity Date provided that (i) the Letter of Credit Exposure shall not exceed the Letter of Credit Sublimit and (ii) the aggregate outstanding principal amount of Revolving Credit Advances PLUS the aggregate outstanding principal amount of Swingline Advances PLUS the Letter of Credit Exposure shall not exceed the aggregate amount of the Revolving Credit Commitments. No Letter of Credit may have an Expiration Date later than 12 months after its issuance date, and each Letter of Credit which is self-extending beyond its Expiration Date must be cancelable upon at least 30 days notice given by the Issuing Bank for such Letters of Credit to the beneficiary of such Letter of Credit. No Letter of Credit may have an Expiration Date later than 12 months after the Revolving Credit Maturity Date unless approved by such Issuing Bank for such Letters of Credit, the Agent, and the Banks. Each Letter of Credit must be in form and substance acceptable to its Issuing Bank. The indebtedness of the Borrower to each Issuing Bank resulting -20- from Letters of Credit requested by the Borrower from such Issuing Bank shall be evidenced by the Letter of Credit Applications made by the Borrower. (b) REQUESTING LETTERS OF CREDIT. Each Letter of Credit shall be issued, increased, or extended pursuant to a Letter of Credit Application or Letter of Credit Application Amendment, as applicable, given by the Borrower to an Issuing Bank in writing or by telecopy promptly confirmed in writing, such Letter of Credit Application or Letter of Credit Application Amendment being given not later than 11:00 a.m. (Dallas, Texas time) on the third Business Day before the date of the proposed issuance, increase, or extension of the Letter of Credit. Each Letter of Credit Application or Letter of Credit Application Amendment shall be fully completed and shall specify the information required therein (including the proposed form of the Letter of Credit or change thereto), and shall be irrevocable and binding on the Borrower. Each Issuing Bank shall give prompt notice to the Agent of the Letter of Credit Application or Letter of Credit Application Amendment to which such Issuing Bank is a party, and the Issuing Bank shall promptly inform the Agent of the proposed Letter of Credit or change thereto. Subject to the satisfaction of all applicable conditions precedent, such Issuing Bank shall before close of business on the date requested by the Borrower for the issuance, increase, or extension of such Letter of Credit issue, increase, or extend such Letter of Credit to the specified beneficiary. Upon the date of the issuance, increase, or extension of a Letter of Credit, the Issuing Bank for such Letter of Credit shall be deemed to have sold to each other Bank and each other Bank shall be deemed to have purchased from such Issuing Bank a ratable participation in the related Letter of Credit. Each Issuing Bank shall notify the Agent of each Letter of Credit issued, increased, or extended by it and the date and amount of each Bank's participation in such Letter of Credit, and the Agent shall in turn notify the Banks. (c) REIMBURSEMENTS FOR LETTERS OF CREDIT. With respect to any Letter of Credit and in accordance with the related Letter of Credit Application, the Borrower agrees to pay to the Issuing Bank for such Letter of Credit on demand of such Issuing Bank any amount due to such Issuing Bank under such Letter of Credit Application (provided that fees due with respect to such Letter of Credit shall be payable as specified in Section 2.4(b)). If the Borrower does not pay upon demand of such Issuing Bank any amount due to such Issuing Bank under any Letter of Credit Application, in addition to any rights such Issuing Bank may have under such Letter of Credit Application, such Issuing Bank may upon written notice to the Agent request the satisfaction of such obligation by the making of a Revolving Credit Borrowing. Upon such request, the Borrower shall be deemed to have requested the making of a Revolving Credit Borrowing in the amount of such obligation and the transfer of the proceeds thereof to such Issuing Bank. Such Revolving Credit Borrowing shall be comprised of a Prime Rate Tranche. The Agent shall promptly forward notice of such Borrowing to the Borrower and the Banks, and each Bank shall, in accordance with the procedures of Section 2.10, other than limitations on the size of Revolving Credit Borrowings, and notwithstanding the failure of any conditions precedent, make available such Bank's ratable share of such Revolving Credit Borrowing to the Agent, and the Agent shall promptly deliver the proceeds thereof to such Issuing Bank for application to such Bank's share of the obligations under such Letter of Credit. The Borrower hereby unconditionally and irrevocably authorizes, empowers, and directs such Issuing Bank to make such requests for Revolving Credit Borrowings on behalf of the Borrower, and the Banks to make Revolving Credit Advances to the Agent for the benefit of such Issuing Bank in satisfaction of such obligations. The Agent and each Bank may record and otherwise treat the -21- making of such Revolving Credit Borrowings as the making of a Revolving Credit Borrowing to the Borrower under this Agreement as if requested by the Borrower. Nothing herein is intended to release the Borrower's obligations under any Letter of Credit Application, but only to provide an additional method of payment therefor. The making of any Revolving Credit Borrowing under this Section 2.3(c) shall not constitute a cure or waiver of any Default or Event of Default caused by the Borrower's failure to comply with the provisions of this Agreement or any Letter of Credit Application. (d) PREPAYMENTS OF LETTERS OF CREDIT. In the event that any Letters of Credit shall be outstanding according to their terms after the Revolving Credit Maturity Date, the Borrower shall pay to the Agent on the Revolving Credit Maturity Date an amount equal to the Letter of Credit Exposure allocable to such Letters of Credit to be held in the Letter of Credit Collateral Account and applied in accordance with paragraph (g) below. (e) OBLIGATIONS UNCONDITIONAL. The obligations of the Borrower and each Bank under this Agreement and the Letter of Credit Applications to reimburse an Issuing Bank for draws under Letters of Credit issued by such Issuing Bank and to make other payments due in respect of Letters of Credit shall be unconditional and irrevocable, and shall be paid strictly in accordance with the terms of this Agreement and the Letter of Credit Applications under all circumstances, including: (i) any lack of validity or enforceability of any Letter of Credit Document; (ii) any amendment, waiver, or consent to departure from any Letter of Credit Document; (iii) the existence of any claim, set-off, defense, or other right which the Borrower or any Bank may have at any time against any beneficiary or transferee of any Letter of Credit (or any Persons for whom any such beneficiary or any such transferee may be acting), such Issuing Bank, or any other person or entity, whether in connection with the transactions contemplated in this Agreement or any unrelated transaction; (iv) any statement or any other document presented under such Letter of Credit proving to be forged, fraudulent, invalid, or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; or (v) payment by such Issuing Bank under any Letter of Credit against presentation of a draft or certificate which does not comply with the terms of such Letter of Credit; provided, however, that nothing contained in this paragraph (d) shall be deemed to constitute a waiver of any remedies of the Borrower or any Bank in connection with the Letters of Credit or the Borrower's or such Bank's rights under paragraph (e) below. (f) LIABILITY OF ISSUING BANK. No Issuing Bank shall be liable or responsible for: (i) the use which may be made of any Letter of Credit or any acts or omissions of any beneficiary or transferee in connection therewith; (ii) the validity, sufficiency, or genuineness of documents related to Letters of Credit, or of any endorsement thereon, even if such documents should prove to be in any or all respects invalid, insufficient, fraudulent, or forged; (iii) payment by such Issuing Bank against presentation of documents which do not strictly comply with the terms of a Letter of Credit, including failure of any documents to bear any reference or adequate reference to the relevant Letter of Credit; or (iv) any other circumstances whatsoever in making or failing to make payment under any Letter of Credit (INCLUDING SUCH ISSUING BANK'S OWN NEGLIGENCE); except that such Issuing Bank shall be liable to the Borrower or any Bank to the extent of any direct, as opposed to consequential, damages suffered by the Borrower or such Bank which the Borrower or such Bank proves were caused by (A) such Issuing Bank's gross negligence or willful misconduct in determining whether documents presented under a Letter of -22- Credit comply with the terms of such Letter of Credit, (B) such Issuing Bank's willful failure to make or delay in making lawful payment under any Letter of Credit after the presentation to it of documentation strictly complying with the terms and conditions of such Letter of Credit, or (C) such Issuing Bank's negligence in the handling of money. (g) LETTER OF CREDIT COLLATERAL ACCOUNT. (i) If the Borrower is required to deposit funds in the Letter of Credit Collateral Account pursuant to Sections 2.1(d)(ii), 2.3(d) or 6.4, then the Borrower and the Agent shall establish the Letter of Credit Collateral Account and the Borrower shall execute any documents and agreements, including the Agent's standard form assignment of deposit accounts, that the Agent requests in connection therewith to establish the Letter of Credit Collateral Account and grant the Agent a first priority security interest in such account and the funds therein. The Borrower hereby pledges to the Agent and grants the Agent a security interest in the Letter of Credit Collateral Account, whenever established, all funds held in the Letter of Credit Collateral Account from time to time, and all proceeds thereof as security for the payment of the Obligations. (ii) So long as no Event of Default exists, (A) the Agent shall apply the funds held in the Letter of Credit Collateral Account only to the reimbursement of any reimbursement obligations and other obligations under Letter of Credit Documents, (B) the Agent shall release to the Borrower at the Borrower's written request funds held in the Letter of Credit Collateral Account in an amount up to but not exceeding the excess, if any (immediately prior to the release of any such funds), of the total amount of funds held in the Letter of Credit Collateral Account over the Letter of Credit Exposure, and (C) the Agent shall, at the unanimous written direction of the Banks in their sole discretion, at any time release to the Borrower any funds held in the Letter of Credit Collateral Account. During the existence of any Default or Event of Default, the Agent may apply any funds held in the Letter of Credit Collateral Account to any Credit Obligations in any order determined by the Agent, regardless of any Letter of Credit Exposure which may remain outstanding. (iii) Funds held in the Letter of Credit Collateral Account shall be invested in money market funds of the Agent or in another investment if mutually agreed upon by the Borrower and the Agent, but the Agent shall have no other obligation to make any other investment of the funds therein. The Agent shall exercise reasonable care in the custody and preservation of any funds held in the Letter of Credit Collateral Account and shall be deemed to have exercised such care if such funds are accorded treatment substantially equivalent to that which the Agent accords its own property, it being understood that the Agent shall not have any responsibility for taking any necessary steps to preserve rights against any parties with respect to any such funds. (h) EXISTING LETTERS OF CREDIT. Upon the date of the execution of this Agreement, the Issuing Bank for each Existing Letter of Credit shall be deemed to have sold to each other Bank and each other Bank shall be deemed to have purchased from such Issuing Bank a ratable participation in each Existing Letter of Credit, which shall thereafter be treated as a Letters of Credit under this Agreement for all purposes. Each Issuing Bank for each Existing Letter of -23- Credit shall arrange with the Agent and the Banks to prorate and ratably distribute to the Banks the fees, if any, previously paid in advance to such Issuing Bank with respect to such Existing Letters of Credit. 2.4 FEES. (a) COMMITMENT FEES. The Borrower shall pay to the Agent for the ratable benefit of the Banks a commitment fee in an amount equal to the product of (i) the Applicable Margin for commitment fees calculated for the preceding quarter multiplied by (ii) the average daily amount by which (x) the aggregate amount of the Revolving Credit Commitments exceeds (y) the outstanding principal amount of the Revolving Credit Loan plus the Letter of Credit Exposure. The commitment fee shall be due and payable quarterly in arrears on the last day of each calendar quarter commencing December 31, 2001 and on the Revolving Credit Maturity Date. (b) FEES FOR LETTERS OF CREDIT. The Borrower agrees to pay (i) to the Agent for the pro rata benefit of the Banks, a fee for each Letter of Credit equal to the Applicable Margin for Letters of Credit on the face amount of such Letter of Credit, with a minimum fee of $500, and (ii) to the Issuing Bank, a fee for each Letter of Credit of 0.125% per annum of the face amount of such Letter of Credit. Each such fee shall be calculated on a per annum basis in accordance with Section 2.10(g) and shall be based on the maximum amount available to be drawn from time to time under such Letter of Credit from the date of issuance of the Letter of Credit until its Expiration Date and shall be payable quarterly in arrears on the last day of each calendar quarter. (c) AGENT FEE LETTER. The Borrower shall pay to the parties specified therein the fees and other amounts payable under Agent Fee Letter and the letter dated September 27, 2001 between the Agent and the Borrower. 2.5 INTEREST. (a) ELECTION OF INTEREST RATE BASIS. The Borrower may select the interest rate basis for each Borrowing in accordance with the terms of this Section 2.5(a): (i) Under the Borrowing Request provided to the Agent in connection with the making of each Borrowing under the Revolving Credit Loan, the Borrower shall select the amount and the Type of the Tranches, and for each LIBOR Tranche selected, any permitted Interest Period for each such LIBOR Tranche, which will comprise such Borrowing, provided that (A) at no time shall there be more than eight separate LIBOR Tranches outstanding under the Revolving Credit Loan and (B) each Tranche must be in a principal amount equal to or greater than the Minimum Tranche Amount and be made in multiples of the Minimum Tranche Multiple. Such interest rate elections must be provided to the Agent in writing or by telecopy not later than 11:00 a.m. (Dallas, Texas time) (A) on the third Business Day before the date of any proposed Borrowing comprised of a LIBOR Tranche, or (B) on the same day of any proposed Borrowing comprised solely of a Prime Rate Tranche. The Agent shall promptly forward copies of such interest rate elections to the Banks. In the case of any Borrowing comprised of a LIBOR Tranche, upon determination by the Agent, the Agent shall promptly notify the Borrower and the Banks of the applicable interest rate for such Tranche. -24- (ii) With respect to any Tranche under the Revolving Credit Loan, the Borrower may continue or convert any portion of any LIBOR Tranche or Prime Rate Tranche to form new LIBOR Tranches or Prime Rate Tranches under the Revolving Credit Loan in accordance with this paragraph. Each such continuation or conversion shall be made pursuant to a Continuation/Conversion Request given by the Borrower to the Agent in writing or by telecopy not later than 11:00 a.m. (Dallas, Texas time) on the third Business Day before the date of the proposed continuation or conversion. Each Continuation/Conversion Request shall be fully completed and shall specify the information required therein, and shall be irrevocable and binding on the Borrower. The Agent shall promptly forward notice of the continuation or conversion to the Banks. In the case of any continuation or conversion into LIBOR Tranches, upon determination by the Agent, the Agent shall notify the Borrower and the Banks of the applicable interest rate. Continuations and conversions of Tranches shall be made in integral multiples of the Minimum Tranche Multiple. No continuation or conversion shall be permitted if such continuation or conversion would cause the aggregate outstanding principal amount of any LIBOR Tranche which would remain outstanding or the aggregate outstanding principal amount of all Prime Rate Tranches which would remain outstanding to be less than the Minimum Tranche Amount. At no time shall there be more than eight separate LIBOR Tranches outstanding under the Revolving Credit Loan. Any conversion of an existing LIBOR Tranche is subject to Section 2.5. Subject to the satisfaction of all applicable conditions precedent, the Agent and the Banks shall before close of business on the date requested by the Borrower for the continuation or conversion, make such continuation or conversion. (iii) At the end of the Interest Period for any LIBOR Tranche, if the Borrower has not continued or converted such LIBOR Tranche into new Tranches as provided for in paragraph (ii) above, the Borrower shall be deemed to have continued such LIBOR Tranche as a Prime Rate Tranche. Each Prime Rate Tranche shall continue as a Prime Rate Tranche unless the Borrower converts such Prime Rate Tranche as provided for in paragraph (ii) above. (b) LIBOR TRANCHES. Each LIBOR Tranche shall bear interest during its Interest Period at a per annum interest rate equal to the lesser of (i) the Highest Lawful Rate or (ii) the sum of the LIBOR for such Tranche plus the Applicable Margin for LIBOR Tranches in effect from time to time. The Borrower shall pay to the Agent for the ratable benefit of the Banks all accrued but unpaid interest on each LIBOR Tranche on the last day of the applicable Interest Period for such LIBOR Tranche (and with respect to LIBOR Tranches with Interest Periods of greater than three months, on the date which is three months after the first date of the Interest Period for such LIBOR Tranche), when required upon prepayment as specified elsewhere in this Agreement, on any date when any portion of any LIBOR Tranche is prepaid (but only to the extent of the portion of any such LIBOR Tranche is prepaid), and on the Revolving Credit Maturity Date. (c) PRIME RATE TRANCHES. Each Prime Rate Tranche shall bear interest at a per annum interest rate equal to the lesser of (i) the Highest Lawful Rate or (ii) the Adjusted Prime Rate in effect from time to time plus the Applicable Margin for Prime Rate Tranches in effect from time to time. The Borrower shall pay to the Agent for the ratable benefit of the Banks all accrued but -25- unpaid interest on outstanding Prime Rate Tranches on the last day of each calendar quarter, when required upon prepayment as specified elsewhere in this Agreement, on any date all Prime Rate Tranches are prepaid in full, and on the Revolving Credit Maturity Date. (d) USURY PROTECTION. (i) Nothing contained in this Agreement or the Notes shall require the Borrower to pay interest at a rate exceeding the Highest Lawful Rate. Each provision in the Credit Documents and any other agreement executed in connection herewith is expressly limited so that in no event whatsoever shall the amount paid thereunder, or otherwise paid, by the Borrower for the use, forbearance or detention of the money to be loaned under this Agreement, exceed that amount of money which would cause the effective rate of interest thereon to exceed the Highest Lawful Rate, and all amounts payable under the Credit Documents or any other agreement executed in connection herewith, or otherwise payable in connection therewith, shall be subject to reduction so that such amounts paid or payable for the use, forbearance or detention of money to be loaned under this Agreement shall not exceed that amount of money which would cause the effective rate of interest thereon to exceed the Highest Lawful Rate. (ii) If the amount of interest payable for the account of any Bank on any interest payment date in respect of the immediately preceding interest computation period, computed pursuant to this Section 2.5, would exceed the maximum amount permitted by applicable law to be charged by such Bank, the amount of interest payable for its account on such interest payment date shall be automatically reduced to such maximum permissible amount. (iii) If the amount of interest payable for the account of any Bank in respect of any interest computation period is reduced pursuant to clause (d)(ii) above and the amount of interest payable for its account in respect of any subsequent interest computation period, computed pursuant to this Section 2.5, would be less than the maximum amount permitted by applicable law to be charged by such Bank, then the amount of interest payable for its account in respect of such subsequent interest computation period shall be automatically increased to the maximum amount permitted by applicable law to be charged by such Bank; PROVIDED that at no time shall the aggregate amount by which interest paid for the account of any Bank has been increased pursuant to this clause (d)(iii) exceed the aggregate amount by which interest paid for its account has theretofore been reduced pursuant to clause (d)(ii) of this Section. (iv) In the event that maturity of the loans made hereunder is accelerated for any reason, or in the event of any required or permitted prepayment of such loans, then such consideration that constitutes interest payable for the account of any Bank shall never include more than the maximum amount permitted by applicable law to be charged by such Bank and excess interest, if any, payable for the account of such Bank pursuant to its Note, this Agreement or otherwise shall be canceled automatically as of the date of such acceleration or prepayment and, if theretofore paid, shall be credited on the loans made hereunder by such Bank (or, to the extent in excess of such loans, refunded by such Bank to the Borrower). -26- (v) It is further agreed that, without limitation of the foregoing, all calculations of the rate of interest contracted for, charged or received for the account of any Bank under the Note held by it, under this Agreement, under any other agreement executed in connection herewith or otherwise in connection with the loans made hereunder by or the Revolving Credit Commitment of such Bank for the purpose of determining whether such rate exceeds the Highest Lawful Rate, shall be made, to the extent permitted by applicable usury law (now or hereafter enacted), by amortizing, prorating and spreading in equal parts during the period of the full stated terms of the loans evidenced by such Note all interest at any time contracted for, charged or received by such Bank in connection therewith. 2.6 BREAKAGE COSTS. If (i) any payment of principal on or any conversion of any LIBOR Tranche is made on any date other than the last day of the Interest Period for such LIBOR Tranche, whether as a result of any voluntary or mandatory prepayment, any acceleration of maturity, or any other cause, (ii) any payment of principal on any LIBOR Tranche is not made when due, or (iii) any LIBOR Tranche is not borrowed, converted, or prepaid in accordance with the respective notice thereof provided by the Borrower to the Agent, whether as a result of any failure to meet any applicable conditions precedent for borrowing, conversion, or prepayment, the permitted cancellation of any request for borrowing, conversion, or prepayment, the failure of the Borrower to provide the respective notice of borrowing, conversion, or prepayment, or any other cause not specified above which is created by the Borrower, then the Borrower shall pay to each Bank upon demand any amounts required to compensate such Bank for any losses, costs, or expenses, including lost profits and administrative expenses, which are reasonably allocable to such action, including losses, costs, and expenses related to the liquidation or redeployment of funds acquired or designated by such Bank to fund or maintain such Bank's ratable share of such LIBOR Tranche or related to the reacquisition or redesignation of funds by such Bank to fund or maintain such Bank's ratable share of such LIBOR Tranche following any liquidation or redeployment of such funds caused by such action. A certificate as to the amount of such loss, cost, or expense detailing the calculation thereof and certifying that such Bank customarily charges such amounts to its other customers in similar circumstances submitted by such Bank to the Borrower shall be conclusive and binding for all purposes, absent manifest error. 2.7 INCREASED COSTS. (a) COST OF FUNDS. If due to either (i) any introduction of, change in, or change in the interpretation of any law or regulation after the date of this Agreement or (ii) compliance with any guideline or request applying to banks generally from any central bank or other governmental authority having appropriate jurisdiction (whether or not having the force of law) given after the date of this Agreement, there shall be any increase in the costs of any Bank allocable to (x) committing to make any Advance or obtaining funds for the making, funding, or maintaining of such Bank's ratable share of any LIBOR Tranche in the relevant interbank market or (y) committing to make Letters of Credit or issuing, funding, or maintaining Letters of Credit (including any increase in any applicable reserve requirement specified by the Federal Reserve Board, including those for emergency, marginal, supplemental, or other reserves), then the Borrower shall pay to such Bank upon demand any amounts required to compensate such Bank for such increased costs, such amounts being due and payable upon demand by such Bank. A certificate as to the cause and amount of such increased cost detailing the calculation of such cost -27- and certifying that such Bank customarily charges such amounts to its other customers in similar circumstances submitted by such Bank to the Borrower shall be conclusive and binding for all purposes, absent manifest error. Notwithstanding the foregoing, the Borrower shall not be obligated to pay any such amounts that accrued more than 90 days prior to delivery of such certificate to the Borrower. (b) CAPITAL ADEQUACY. If, due to either (i) any introduction of, change in, or change in the interpretation of any law or regulation after the date of this Agreement or (ii) compliance with any guideline or request applying to banks generally from any central bank or other governmental authority having appropriate jurisdiction (whether or not having the force of law) given after the date of this Agreement, there shall be any increase in the capital requirements of any Bank or its parent or holding company allocable to (x) committing to make Advances or making, funding, or maintaining Advances or (y) committing to make Letters of Credit or issuing, funding, or maintaining Letters of Credit, as such capital requirements are allocated by such Bank, then the Borrower shall pay to such Bank upon demand any amounts required to compensate such Bank or its parent or holding company for such increase in costs (including an amount equal to any reduction in the rate of return on assets or equity of such Bank or its parent or holding company), such amounts being due and payable upon demand by such Bank. A certificate as to the cause and amounts detailing the calculation of such amounts and certifying that such Bank customarily charges such amounts to its other customers in similar circumstances submitted by such Bank to the Borrower shall be conclusive and binding for all purposes, absent manifest error. Notwithstanding the foregoing, the Borrower shall not be obligated to pay any such amounts that accrued more than 90 days prior to delivery of such certificate to the Borrower. 2.8 ILLEGALITY. Notwithstanding any other provision in this Agreement, if it becomes unlawful for any Bank to obtain deposits or other funds for making or funding such Bank's ratable share of any LIBOR Tranche in the relevant interbank market, such Bank shall so notify the Borrower and the Agent and such Bank's commitment to create LIBOR Tranches shall be suspended until such condition has passed, all LIBOR Tranches applicable to such Bank shall be converted to Prime Rate Tranches as of the end of each applicable Interest Period or earlier if necessary, and all subsequent requests for LIBOR Tranches shall be deemed to be requests for Prime Rate Tranches with respect to such Bank. 2.9 MARKET FAILURE. Notwithstanding any other provision in this Agreement, if the Agent determines that: (a) quotations of interest rates for the relevant deposits referred to in the definition of "LIBOR" are not being provided in the relevant amounts, or maturities for purposes of determining the rate of interest referred to in the definition of "LIBOR" or (b) the relevant rates of interest referred to in the definition of "LIBOR" which are used as the basis to determine the rate of interest for LIBOR Tranches are not likely to adequately cover the cost to any Bank of making or maintaining such Bank's ratable share of any LIBOR Tranche, then if the Agent so notifies the Borrower, the commitment of the Banks to make any Borrowing comprised of LIBOR Tranches shall be suspended until such condition has passed, all LIBOR Tranches shall be converted to Prime Rate Tranches as of the end of each applicable Interest Period or earlier if necessary, and all subsequent requests for LIBOR Tranches shall be deemed to be requests for Prime Rate Tranches. -28- 2.10 ADVANCING AND PAYMENTS GENERALLY; COMPUTATIONS. (a) ADVANCING PROCEDURES. Time is of the essence in this Agreement and the Credit Documents. All advances hereunder shall be made in Dollars. Upon receipt of any Borrowing Request by the Agent, the Agent shall promptly forward notice of the Borrowing to the Banks. Subject to the satisfaction of the applicable conditions precedent, each Bank shall, before 1:00 p.m. (Dallas, Texas time) on the date of the requested Borrowing, make available from its Applicable Lending Office to the Agent at the Agent's Applicable Lending Office, in immediately available funds, such Bank's ratable share of such Borrowing. Subject to the satisfaction of all applicable conditions precedent, after receipt by the Agent of such funds, the Agent shall, by 4:00 p.m. (Dallas, Texas time) on the date requested for such Borrowing, make such Borrowing available to the Borrower in immediately available funds at any account of Borrower which is designated in writing by the Borrower to the Agent. (b) AGENT RELIANCE ON BANKS IN ADVANCING. Unless the Agent shall have received notice from a Bank before the date of any Borrowing that such Bank shall not make available to the Agent such Bank's ratable share of such Borrowing, the Agent may assume that such Bank has made its ratable share of such Borrowing available to the Agent on the date of such Borrowing in accordance with this Agreement and the Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If and to the extent that such Bank shall not have so made its ratable share of such Borrowing available to the Agent, such Bank agrees that it shall pay interest on such amount for each day from the date such amount is made available to the Borrower by the Agent until the date such amount is paid to the Agent by such Bank at the Federal Funds Rate in effect from time to time, provided that with respect to such Bank if such amount is not paid by such Bank by the end of the second day after the Agent makes such amount available to the Borrower, the interest rates specified above shall be increased by a per annum amount equal to 2.00% on the third day and shall remain at such increased rate thereafter. Interest on such amount shall be due and payable by such Bank upon demand by the Agent. If such Bank shall pay to the Agent such amount and interest as provided above, such amount so paid shall constitute such Bank's Advance as part of such Borrowing for all purposes of this Agreement even though not made on the same day as the other Advances comprising such Borrowing. In the event that such Bank has not repaid such amount by the end of the fifth day after such amount was made available to the Borrower, the Borrower agrees to repay to the Agent on demand such amount, together with interest on such amount for each day from the date such amount was made available to the Borrower until the date such amount is repaid to the Agent at the interest rate charged to the Borrower for such Borrowing under the terms of this Agreement. The failure of any Bank to make available its ratable share of any Borrowing shall not relieve any other Bank of its obligation, if any, to make available its ratable share of such Borrowing. No Bank shall be responsible for the failure of any other Bank to honor such other Bank's obligations hereunder, including any failure to make available any funds as part of any Borrowing; provided, however, that nothing herein shall prejudice any right or cause of action that the Borrower has against any Bank failing to so honor its obligations. (c) PAYMENT PROCEDURES. Time is of the essence in this Agreement and the Credit Documents. All payments hereunder shall be made in Dollars. The Borrower shall make each payment under this Agreement and under the Notes not later than 1:00 p.m. (Dallas, Texas time) on the day when due to the Agent at the Agent's Applicable Lending Office in immediately -29- available funds. All payments by the Borrower hereunder shall be made without any offset, abatement, withholding, deduction, counterclaim, or reduction. Upon receipt of payment from the Borrower of any principal, interest, or fees due to the Banks, the Agent shall promptly after receipt thereof distribute to the Banks their ratable share of such payments for the account of their respective Applicable Lending Offices. If and to the extent that the Agent shall not have so distributed to any Bank its ratable share of such payments, the Agent agrees that it shall pay interest on such amount for each day after the day when such amount is made available to the Agent by the Borrower until the date such amount is paid to such Bank by the Agent at the Federal Funds Rate in effect from time to time, provided that if such amount is not paid by the Agent by the end of the third day after the Borrower makes such amount available to the Agent, the interest rates specified above shall be increased by a per annum amount equal to 2.00% on the fourth day and shall remain at such increased rate thereafter. Interest on such amount shall be due and payable by the Agent upon demand by such Bank. Upon receipt of other amounts due solely to the Agent, such Issuing Bank, or a specific Bank, the Agent shall distribute such amounts to the appropriate party to be applied in accordance with the terms of this Agreement. (d) AGENT RELIANCE. Unless the Agent shall have received written notice from the Borrower prior to any date on which any payment is due to the Banks that the Borrower shall not make such payment in full, the Agent may assume that the Borrower has made such payment in full to the Agent on such date and the Agent may, in reliance upon such assumption, cause to be distributed to each Bank on such date an amount equal to the amount then due such Bank. If and to the extent the Borrower shall not have so made such payment in full to the Agent, each Bank shall repay to the Agent forthwith on demand such amount distributed to such Bank, together with interest thereon from the date such amount is distributed to such Bank until the date such Bank repays such amount to the Agent, at an interest rate equal to, the Federal Funds Rate in effect from time to time, provided that with respect to such Bank, if such amount is not repaid by such Bank by the end of the second day after the date of the Agent's demand, the interest rates specified above shall be increased by a per annum amount equal to 2.00% on the third day after the date of the Agent's demand and shall remain at such increased rate thereafter. (e) SHARING OF PAYMENTS. Each Bank agrees that if it should receive any payment (whether by voluntary payment, by realization upon security, by the exercise of the right of setoff or banker's lien, by counterclaim or cross action, by the enforcement of any right under the Credit Documents, or otherwise) in respect of any obligation of the Borrower to pay principal, interest, fees, or any other obligation incurred under the Credit Documents in a proportion greater than the total amount of such principal, interest, fees, or other obligation then owed and due by the Borrower to such Bank bears to the total amount of principal, interest, fees, or other obligation then owed and due by the Borrower to all of the Banks immediately prior to such receipt, then such Bank receiving such excess payment shall purchase for cash without recourse from the other Banks an interest in the obligations of the Borrower to such Banks in such amount as shall result in a participation by all of the Banks, in proportion with the Banks' respective pro rata shares, in the aggregate unpaid amount of principal, interest, fees, or any such other obligation, as the case may be, owed by the Borrower to all of the Banks; provided that if all or any portion of such excess payment is thereafter recovered from such Bank, such purchase shall be rescinded and the purchase price restored to the extent of such recovery, in proportion with the Banks' respective pro rata shares, but without interest. -30- (f) AUTHORITY TO CHARGE ACCOUNTS. The Agent, if and to the extent payment owed to the Agent or any Bank is not made when due, may charge from time to time against any account of the Borrower with the Agent any amount so due. The Agent agrees promptly to notify the Borrower after any such charge and application made by the Agent provided that the failure to give such notice shall not affect the validity of such charge and application. (g) INTEREST AND FEES. Unless expressly provided for in this Agreement, all computations of interest and fees shall be made on the basis of a 360 day year, in each case for the actual number of days (including the first day, but excluding the last day) occurring in the period for which such interest or fees are payable; provided, however, that if the use of a 360 day year would cause the interest contracted for, charged, or received hereunder to exceed the Highest Lawful Rate, such computations shall instead be made on the basis of a year of 365 or 366 days, as the case may be. Each determination by the Agent of an interest rate or fee shall be conclusive and binding for all purposes, absent manifest error. (h) PAYMENT DATES. Whenever any payment shall be stated to be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day and such extension of time shall in such case be included in the computation of interest or fees, as the case may be. If the time for payment for an amount payable is not specified in this Agreement or in any other Credit Document, the payment shall be due and payable on demand by the Agent or the applicable Bank. 2.11 TAXES. (a) NO DEDUCTION FOR CERTAIN TAXES. Any and all payments by the Borrower shall be made free and clear of and without deduction for any and all present or future taxes, levies, imposts, deductions, charges, or withholdings, and all liabilities with respect thereto, other than taxes imposed on the income of and franchise taxes imposed on the Agent, any Bank, or the Applicable Lending Office thereof by any jurisdiction in which any such entity is a citizen or resident or any political subdivision of such jurisdiction (all such nonexcluded taxes, levies, imposts, deductions, charges, withholdings, and liabilities being hereinafter referred to as "Taxes"). If the Borrower shall be required by law to deduct any Taxes from or in respect of any sum payable to the Agent, any Bank, or the Applicable Lending Office thereof, (i) the sum payable shall be increased as may be necessary so that, after making all required deductions (including deductions applicable to additional sums payable under this Section 2.11), such Person receives an amount equal to the sum it would have received had no such deductions been made; (ii) the Borrower shall make such deductions; and (iii) the Borrower shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law. (b) OTHER TAXES. The Borrower agrees to pay any present or future stamp or documentary taxes or any other excise or property taxes, charges, or similar levies which arise from any payment made or from the execution, delivery, or registration of, or otherwise with respect to, this Agreement or the other Credit Documents (other than those which become due as a result of any Bank joining this Agreement as a result of any Assignment and Acceptance, which shall be paid by the Bank which becomes a Bank hereunder as a result of such Assignment and Acceptance). -31- (c) FOREIGN BANK WITHHOLDING EXEMPTION. Each Bank and Issuing Bank that is not incorporated under the laws of the United States of America or a state thereof agrees that it will deliver to the Borrower and the Agent on the date of this Agreement or upon the effectiveness of any Assignment and Acceptance and from time to time thereafter if requested in writing by the Borrower (i) Internal Revenue Service Form W-8ECI, W-8BEN, W-8EXP, or W-8IMY as appropriate, or any successor form prescribed by the Internal Revenue Service, certifying that such Bank is entitled to benefits under an income tax treaty to which the United States is a party which exempts such Bank from withholding tax on payments of interest or certifying that the income receivable pursuant to this Agreement is effectively connected with the conduct of a trade or business in the United States, (ii) Internal Revenue Service Form W-9, as appropriate, or any successor form prescribed by the Internal Revenue Service, and (iii) any other form or certificate required by any taxing authority (including any certificate required by Sections 871(h) and 881(c) of the Internal Revenue Code), certifying that such Bank is entitled to an exemption from tax on payments pursuant to this Agreement or any of the other Credit Documents If an event (including without limitation any change in treaty, law or regulation) has occurred prior to the date on which any delivery required by the preceding sentence would otherwise be required which renders all such forms inapplicable or which would prevent any Bank from duly completing and delivering any such letter or form with respect to it and such Bank advises the Borrower and the Agent that it is not capable of receiving payments without any deduction or withholding of United States federal income tax, and, in the case of a Form W-9, establishing an exemption from United States backup withholding tax, such Bank shall not be required to deliver such letter or forms. The Borrower shall withhold tax at the rate and in the manner required by the laws of the United States with respect to payments made to a Bank failing to provide the requisite Internal Revenue Service forms in a timely manner. Each Bank which fails to provide to the Borrower in a timely manner such forms shall reimburse the Borrower upon demand for any penalties paid by the Borrower as a result of any failure of the Borrower to withhold the required amounts that are caused by such Bank's failure to provide the required forms in a timely manner. 2.12 INCREASE OF REVOLVING CREDIT COMMITMENTS. On or before December 14, 2002, if no Event of Default then exists, the Borrower shall have the right, without the consent of the Banks, to increase the aggregate amount of the Revolving Credit Commitments by adding to this Agreement one or more lenders that are Eligible Assignees (who shall, upon completion of the requirements stated in this Section 2.13 constitute Banks hereunder), or by allowing one or more Banks to increase their Revolving Credit Commitments hereunder, provided that (a) the sum of the current Revolving Credit Commitments plus such added Revolving Credit Commitments plus any increases in current Revolving Credit Commitments shall not be greater than $110,000,000, (b) no Bank's Revolving Credit Commitment shall be increased without the consent of such Bank, (c) no Person shall be added to this Agreement without its consent, and (d) on the effective date of any such increase or addition, there shall either be no Revolving Credit Loans outstanding or arrangements satisfactory to the Agent have been made to prepay all outstanding Revolving Credit Loans, together with accrued interest thereon and any amounts payable pursuant to Section 2.6. Any prepayment made by the Borrower in accordance with the preceding subparagraph (d) of this Section 2.12 may be made with the proceeds of an Advance made by all the Banks in connection with an increase in the Revolving Credit Commitments pursuant to this Section 2.12. There shall be no fee paid to any Bank not increasing its commitment in connection with an increase in the Revolving Credit Commitment under this -32- Section 2.12. The Borrower shall give the Agent five Business Days' notice of the Borrower's intention to increase any Revolving Credit Commitment or add a new lender pursuant to this Section 2.12. Such notice shall specify each new lender, if any, the changes in amounts of Revolving Credit Commitments that will result, the date on which such addition or change is to occur (which shall be a Business Day), and such other information as is reasonably requested by the Agent. Each new lender agreeing to be added to this Agreement, and each Bank agreeing to increase its Revolving Credit Commitment, shall execute and deliver to the Agent a New Bank Agreement in substantially the form of Exhibit H-1 or a Revolving Credit Commitment Increase Agreement in substantially the form of Exhibit H-2, pursuant to which it becomes a party hereto or increases its Revolving Credit Commitment, as the case may be. In addition, an authorized officer of the Borrower shall execute and deliver a Revolving Credit Note in the principal amount of the Revolving Credit Commitment of each new lender, or a replacement Revolving Credit Note in the principal amount of the increased Revolving Credit Commitment of each Bank agreeing to increase its Revolving Credit Commitment, as the case may be. Each such Revolving Credit Note shall be dated the effective date of the pertinent New Bank Agreement or Revolving Credit Commitment Increase Agreement, as the case may be, shall be properly completed, and shall otherwise be in substantially the form of Exhibit D-1. Upon execution and delivery to the Agent of the Revolving Credit Note and execution by the Agent of the relevant New Bank Agreement or Revolving Credit Commitment Increase Agreement, as the case may be, such new lender shall constitute a "Bank" hereunder with a Revolving Credit Commitment as specified therein, or such Bank's Revolving Credit Commitment shall increase as specified therein, as the case may be, and the Agent shall notify the Banks of such addition or increase. ARTICLE 3. CONDITIONS PRECEDENT. 3.1 CONDITIONS PRECEDENT TO AMENDMENT AND RESTATEMENT. This Agreement shall become effective and the Existing Credit Agreement shall be amended and restated as provided in this Agreement on the date the Agent sends notice to each Bank and the Borrower that the following conditions precedent have been met: (a) the Borrower shall have delivered or shall have caused to be delivered the documents and other items listed on EXHIBIT F, together with any other documents requested by the Agent to document the agreements and intent of the Credit Documents, each in form and with substance satisfactory to the Agent; (b) the Borrower shall have paid all fees and expenses due to the Banks under this Agreement, including Section 2.4 and any fees and expenses of counsel payable under Section 8.1; and (c) all interest, fees, expenses, and other amounts then due and payable under the Existing Credit Agreement shall have been paid to in full. 3.2 CONDITIONS PRECEDENT TO EACH EXTENSION OF CREDIT. The obligation of each Bank to make any extension of credit under this Agreement, including the making of any Advances, and the issuance, increase, or extension of any Letters of Credit, shall be subject to the further conditions precedent that on the date of such extension of credit: -33- (a) REPRESENTATIONS AND WARRANTIES. As of the date of the making of any extension of credit hereunder, the representations and warranties contained in each Credit Document shall be true and correct in all material respects as of such date (and the Borrower's request for the making of any extension of credit hereunder shall be deemed to be a restatement, representation, and additional warranty of the representations and warranties contained in each Credit Document as of such date); and (b) DEFAULT. As of the date of the making of any extension of credit hereunder, there shall exist no Default or Event of Default, and the making of the extension of credit would not cause or be reasonably expected to cause a Default or Event of Default. ARTICLE 4. REPRESENTATIONS AND WARRANTIES. The Borrower represents and warrants to the Agent and each Bank, and with each request for any extension of credit hereunder, including the making of any Advances, and the issuance, increase, or extension of any Letters of Credit, again represents and warrants to the Agent and each Bank, as follows: 4.1 ORGANIZATION. As of the date of this Agreement, each Restricted Entity (a) is duly organized, validly existing, and in good standing under the laws of such Person's respective jurisdiction of organization and (b) is duly licensed, qualified to do business, and in good standing in each jurisdiction in which such Person is organized, owns property, or conducts operations to the extent that any failure to be so licensed, qualified, or in good standing could reasonably be expected to cause a Material Adverse Effect. 4.2 AUTHORIZATION. The execution, delivery, and performance by each Credit Party of the Credit Documents to which such Credit Party is a party and the consummation of the transactions contemplated thereby (a) do not contravene the organizational documents of such Credit Party, (b) have been duly authorized by all necessary corporate or limited liability company action of each Credit Party, and (c) are within each Credit Party's corporate or limited liability company powers. 4.3 ENFORCEABILITY. Each Credit Document to which any Credit Party is a party has been duly executed and delivered by each Credit Party which is a party to such Credit Document and constitutes the legal, valid, and binding obligation of each such Credit Party, enforceable against each such Credit Party in accordance with such Credit Document's terms, except as limited by applicable bankruptcy, insolvency, reorganization, moratorium, or similar laws at the time in effect affecting the rights of creditors generally and subject to the availability of equitable remedies. 4.4 ABSENCE OF CONFLICTS AND APPROVALS. The execution, delivery, and performance by each Credit Party of the Credit Documents to which such Credit Party is a party and the consummation of the transactions contemplated thereby, (a) do not result in any violation or breach of any provisions of, or constitute a default under, any note, indenture, credit agreement, security agreement, credit support agreement, or other similar agreement to which such Credit Party is a party or any other material contract or agreement to which such Credit Party is a party, (b) do not violate any law or regulation binding on or affecting such Credit Party, (c) do not -34- require any authorization, approval, or other action by, or any notice to or filing with, any governmental authority, and (d) do not result in or require the creation or imposition of any Lien prohibited by this Agreement. 4.5 INVESTMENT COMPANIES. No Restricted Entity or Affiliate thereof is an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended. 4.6 PUBLIC UTILITIES. No Restricted Entity or Affiliate thereof is a "holding company," or a "subsidiary company" of a "holding company," or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company," within the meaning of the Public Utility Holding Company Act of 1935, as amended. No Restricted Entity or Affiliate thereof is a regulated public utility. 4.7 FINANCIAL CONDITION. (a) The Borrower has delivered to the Agent the annual audited consolidated financial statements of the Borrower dated as of December 31, 2000 ("Initial Financial Statements"), including therein the balance sheet of the Borrower as of such date and the statements of income, stockholders' equity, and cash flows for the Borrower for the fiscal year ending on such date. These financial statements are accurate and complete in all material respects and present fairly the financial condition of the Borrower as of such date in accordance with GAAP. (b) As of the date of the Initial Financial Statements, there were no material contingent obligations, liabilities for taxes, unusual forward or long-term commitments, or unrealized or anticipated losses of the Borrower or any of the Borrower's Subsidiaries, except as disclosed in the Initial Financial Statements, and adequate reserves for such items have been made in accordance with GAAP. Since the date of the Initial Financial Statements, no change has occurred in the condition, financial or otherwise, of the Borrower which would have a Material Adverse Effect. No Default exists. 4.8 CONDITION OF ASSETS. Each Restricted Entity has good and indefeasible title to substantially all of its owned property and valid leasehold rights in all of its leased property, as reflected in the financial statements most recently provided to the Agent, free and clear of all Liens except Permitted Liens. Each Restricted Entity possesses and has properly approved, recorded, and filed, where applicable, all permits, licenses, patents, patent rights or licenses, trademarks, trademark rights, trade names rights, and copyrights which are useful in the conduct of its business and which the failure to possess could reasonably be expected to cause a Material Adverse Effect. The material properties used or to be used in the continuing operations of each Restricted Entity are in good repair, working order, and condition, normal wear and tear excepted. The properties of each Restricted Entity have not been adversely affected as a result of any fire, explosion, earthquake, flood, drought, windstorm, accident, strike or other labor disturbance, embargo, requisition or taking of property or cancellation of contracts, permits, or concessions by a governmental authority, riot, activities of armed forces, or acts of God or of any public enemy in any manner which (after giving effect to any insurance proceeds) could reasonably be expected to have a Material Adverse Effect. -35- 4.9 LITIGATION. There are no actions, suits, or proceedings pending or, to the knowledge of any Restricted Entity, threatened against any Restricted Entity at law, in equity, or in admiralty, or by or before any governmental department, commission, board, bureau, agency, or instrumentality, domestic or foreign, or any arbitrator which could reasonably be expected to result in a judgment or liability not fully covered by insurance which would have a Material Adverse Effect. 4.10 SUBSIDIARIES AND AFFILIATES. As of the date of this Agreement, the Borrower has no Subsidiaries, except as disclosed in SCHEDULE II hereto. The Borrower has no Subsidiaries which have not been disclosed in writing to the Agent. 4.11 LAWS AND REGULATIONS. Each Restricted Entity has been and is in compliance with all federal, state, and local laws and regulations which are applicable to the operations and property of such Person and which the failure to comply could reasonably be expected to have a Material Adverse Effect. 4.12 ENVIRONMENTAL COMPLIANCE. Each Restricted Entity has been and is in compliance with all Environmental Laws and has obtained and is in compliance with all related permits necessary for the ownership and operation of any such Person's properties which the failure to be in compliance with could reasonably be expected to have a Material Adverse Effect. Each Restricted Entity has never received notice of and has never been investigated for any violation or alleged violation of any Environmental Law in connection with any such Person's presently or previously owned properties which threaten action or suggest liabilities which could reasonably be expected to have a Material Adverse Effect. Each Restricted Entity does not and has not created, handled, transported, used, or disposed of any Hazardous Materials on or about any such Person's properties (nor has any such Person's properties been used for those purposes), except in compliance with all Environmental Laws and related permits; has never been responsible for the release of any Hazardous Materials into the environment in connection with any such Person's operations and have not contaminated any properties with Hazardous Materials; and does not and has not owned any properties contaminated by any Hazardous Materials, in each case in any manner which could reasonably be expected to have a Material Adverse Effect. For the purposes of this Section 4.12, any losses covered by the Borrower's reserve for environmental losses set forth on its most recent consolidated balance sheet shall be excluded in determining whether any Material Adverse Effect has occurred. 4.13 ERISA. Each Restricted Entity is in compliance in all material respects with all provisions of ERISA. No Restricted Entity participates in or during the past five years has participated in any employee pension benefit plan covered by Title IV of ERISA or any multiemployer plan under Section 4001(a)(3) of ERISA. With respect to the Plans of the Restricted Entities, no material Reportable Event or Prohibited Transaction has occurred and exists. 4.14 TAXES. Each Restricted Entity has filed all United States federal, state, and local income tax returns and all other domestic and foreign tax returns which are required to be filed by such Person and has paid, or provided for the payment before the same became delinquent of, all taxes due pursuant to such returns or pursuant to any assessment received by the such Person. -36- The charges, accruals, and reserves on the books of the Restricted Entities in respect of taxes are adequate in accordance with GAAP. 4.15 TRUE AND COMPLETE DISCLOSURE. All factual information furnished by or on behalf of any Credit Party in writing to the Agent or any Bank in connection with the Credit Documents and the transactions contemplated thereby is true and accurate in all material respects on the date as of which such information was dated or certified and does not contain any untrue statement of material fact or omit to state any material fact necessary to make the statements contained therein not misleading. All projections, estimates, and pro forma financial information furnished by any Credit Party were prepared on the basis of assumptions, data, information, tests, or conditions believed to be reasonable at the time such projections, estimates, and pro forma financial information were furnished. ARTICLE 5. COVENANTS. Until the Agent and the Banks receive irrevocable payment of the Credit Obligations and have terminated this Agreement and each other Credit Document, the Borrower shall comply with and cause compliance with the following covenants: 5.1 ORGANIZATION; MAINTENANCE OF PROPERTIES. The Borrower shall cause each Restricted Entity to (a) maintain itself as an entity (i) duly organized, validly existing, and in good standing under the laws of each such Person's respective jurisdiction of organization and (ii) duly licensed, qualified to do business, and in good standing in each jurisdiction in which such Person is organized, owns property, or conducts operations and which requires such licensing or qualification and where failure to be so licensed, qualified, or in good standing could reasonably be expected to have a Material Adverse Effect, (b) maintain all franchises, licenses, rights, privileges, and intangible properties necessary in the conduct of its business, if any, (c) duly observe and conform to all material requirements of any governmental authorities relative to the conduct of its business or the operation of its Property, if such failure duly to observe and conform to said requirements would have a Material Adverse Effect or is likely to result in criminal prosecution; and (d) will at all times keep complete and accurate records of (i) Inventory on a basis consistent with past practices of the Borrower, itemizing and describing the kind, type and quantity of Inventory and the Borrower's cost therefor and current pricing information for such Inventory, and (ii) all other Collateral on a basis consistent with past practices of the Borrower. 5.2 REPORTING. The Borrower shall furnish to the Agent all of the following: (a) ANNUAL FINANCIAL REPORTS. As soon as available and in any event not later than 90 days after the end of each fiscal year of the Borrower, (i) a copy of the annual audit report for such fiscal year for the Borrower, including therein the consolidated balance sheets of the Borrower as of the end of such fiscal year and the consolidated statements of income, stockholders' equity, and cash flows for the Borrower for such fiscal year, setting forth the consolidated financial position and results of the Borrower for such fiscal year and certified, without any qualification or limit of the scope of the examination of matters relevant to the financial statements, by a nationally recognized certified public accounting firm, (ii) separately reported information regarding operating divisions and Subsidiaries of the Borrower that are not -37- Guarantors, including a statement of dividends received by the Borrower and the Guarantors from such non-guarantor Subsidiaries of the Borrower; and (iii) a completed Compliance Certificate duly certified by a Responsible Officer of the Borrower; (b) QUARTERLY FINANCIAL REPORTS. As soon as available and in any event not later than 45 days after the end of each fiscal quarter, (i) a copy of the internally prepared consolidated financial statements of the Borrower for such quarter and for the fiscal year to date period ending on the last day of such quarter, including therein the consolidated balance sheets of the Borrower as of the end of such month and the consolidated statements of income, and cash flows for such quarter and for such fiscal year to date period, setting forth the consolidated financial position and results of the Borrower for such quarter and fiscal year to date period, all in reasonable detail and duly certified by a Responsible Officer of the Borrower as having been prepared in accordance with generally accepted accounting principles, including those applicable to interim financial reports which permit normal year end adjustments and do not require complete financial notes; (ii) separately reported information regarding operating divisions and Subsidiaries of the Borrower that are not Guarantors, including a statement of dividends received by the Borrower and the Guarantors from such non-guarantor Subsidiaries of the Borrower; and (iii) a completed Compliance Certificate duly certified by a Responsible Officer of the Borrower; (c) SEC FILINGS. As soon as available and in any event not later than thirty days after the filing or delivery thereof, copies of all financial statements, reports, and proxy statements which the Borrower shall have sent to its stockholders generally and copies of all regular and periodic reports, if any, which any Restricted Entity shall have filed with the Securities and Exchange Commission; (d) DEFAULTS. Promptly, but in any event within five Business Days after the discovery thereof, a notice of any facts known to any Restricted Entity which constitute a Default, together with a statement of a Responsible Officer of the Borrower setting forth the details of such facts and the actions which the Borrower has taken and proposes to take with respect thereto; (e) LITIGATION; MATERIAL CONTINGENT LIABILITIES; MATERIAL AGREEMENT DEFAULTS. The Borrower shall provide to the Banks: (i) promptly after the commencement thereof, notice of all actions, suits, and proceedings before any court or governmental department, commission, board, bureau, agency, or instrumentality, domestic or foreign, affecting any Restricted Entity which, if determined adversely, could reasonably be expected to have a Material Adverse Effect; (ii) promptly after acquiring knowledge thereof, notice of any actual or potential material contingent liabilities, including without limitation any actual or potential material contingent liability in an amount which equals or exceeds $1,000,000; and (iii) promptly after obtaining knowledge thereof, notice of any breach by any Restricted Entity of any contract or agreement which breach could reasonably be expected to cause a Material Adverse Effect; -38- (f) MATERIAL ADVERSE EFFECTS. Prompt written notice of any condition or event of which any Restricted Entity has knowledge, which condition or event has resulted in or could reasonably be expected to have a Material Adverse Effect; and (g) OTHER INFORMATION. Such other information respecting the business operations or property of any Restricted Entity, financial or otherwise, or the Collateral as the Agent or the Banks may from time to time request in their reasonable discretion, including the items described above in this Section 5.2 at different times than specified above. 5.3 INSPECTION. The Borrower shall cause each Restricted Entity to permit the Agent and the Banks to visit and inspect any of the properties of such Restricted Entity, to examine all of such Person's books of account, records, reports, and other papers, to make copies and extracts therefrom, and to discuss their respective affairs, finances, and accounts with their respective officers, employees, and independent public accountants all at such reasonable times and as often as may be reasonably requested provided that the Borrower is given at least one Business Day advance notice thereof and reasonable opportunity to be present when independent public accountants or other third parties are contacted. 5.4 USE OF PROCEEDS. The proceeds of Advances and Letters of Credit shall be used by the Borrower only to refinance Borrower's existing indebtedness and for general corporate and working capital purposes, Capital Expenditures, Permitted Acquisitions, Permitted Investments, and other lawful corporate purposes. The Borrower shall not, directly or indirectly, use any part of such proceeds for any purpose which violates, or is inconsistent with, Regulations T, U, or X of the Board of Governors of the Federal Reserve System. 5.5 FINANCIAL COVENANTS. The Agent shall determine compliance with the following financial covenants based upon the most recent financial statements dated as of the end of a fiscal quarter delivered to the Agent pursuant to Section 5.2(b) (except when available at the time of testing the audited financial statements delivered pursuant to Section 5.2(a) shall be used): (a) FUNDED DEBT TO EBITDA RATIO. The Borrower shall not permit the ratio of (i) the consolidated Funded Debt of the Borrower as of the last day of each fiscal quarter to (ii) the consolidated EBITDA of the Borrower for the four quarters then ended (plus, without duplication, the consolidated EBITDA for such period of any Person or assets acquired by the Borrower by Acquisition during such period to the extent permitted or under Section 5.9 below), to be greater than 2.50 to 1.00; (b) FIXED CHARGE COVERAGE RATIO. As of the last day of each fiscal quarter of the Borrower beginning with the fiscal quarter ending September 30, 2001, the Borrower shall not permit the ratio of (i)(A) the consolidated EBITDA of the Borrower for the preceding four fiscal quarters then ended LESS (B) the consolidated cash taxes paid by the Borrower for such period LESS (C) the Adjusted Capital Expenditures for such period LESS (D) the consolidated Dividend Payments of the Borrower for such period to (ii) the consolidated Fixed Charges of the Borrower for such period, to be less than 1.25 to 1.00; (c) TANGIBLE NET WORTH MINIMUM. The Borrower shall not permit its consolidated Tangible Net Worth to be less than $125,578,000 plus an amount equal to the sum of (a) 50% of -39- the cumulative annual consolidated net earnings of the Borrower as of the end of each fiscal quarter ending December 31, 2001 during which the Borrower has positive net earnings (and therefore without reduction for any annual net losses), plus (b) 100% of the net proceeds of any sale or issuance of any equity securities of the Borrower (excluding any equity securities issued or imputed with respect to any employee stock option plan, and including any equity securities issued or transferred by the Borrower in connection with any Acquisition) since September 30, 2001, to the extent such sale or issuance increases the consolidated Tangible Net Worth of the Borrower; (d) MINIMUM ASSET COVERAGE RATIO. The Borrower shall not permit the ratio of (i) (A) 85% of its Receivables PLUS (B) 50% of its Inventory PLUS (C) 50% of its net property, plants, and equipment to (ii) total Funded Debt to be less than 1.25 to 1.00; and (e) CAPITAL AND ACQUISITION EXPENDITURES. The Borrower shall not permit the sum of (i) the aggregate consideration paid or incurred by all of the Restricted Entities in connection with all Permitted Acquisitions during any continuous four fiscal quarter period (including cash, indebtedness, assumed indebtedness, and transaction related contractual payments such as amounts payable under noncompete, consulting, and similar agreements, but excluding stock and preferred stock of the Borrower) (the "Total Acquisition Consideration") plus (ii) the aggregate amount of Capital Expenditures made by all of the Restricted Entities during such period to exceed $80,000,000. 5.6 DEBT. The Borrower shall not permit any Restricted Entity to: (a) create, assume, incur, suffer to exist, or in any manner become liable, directly, indirectly, or contingently in respect of, any Debt other than Permitted Debt; or (b) make any unscheduled payment of principal, interest, or other amounts owing with respect to any Debt of such Restricted Entity (other than the Credit Obligations), or otherwise make any payment of any such amounts prior to the date that such amounts become due and payable under the terms of the documents creating such Debt without the prior written consent of the Agent. 5.7 LIENS. The Borrower shall not permit any Restricted Entity to (a) create, assume, incur, or suffer to exist any Lien on any of its Property whether now owned or hereafter acquired, or assign any right to receive its income, except for Permitted Liens; or (b) enter into any agreement with any Person (other than the Agent and the Banks pursuant to this Agreement) restricting the capacity of the Borrower or any other Restricted Entity to create Liens in favor of the Agent and the Banks. 5.8 OTHER OBLIGATIONS. (a) The Borrower shall not permit any Restricted Entity to create, incur, assume, or suffer to exist any obligations in respect of unfunded vested benefits under any pension Plan or deferred compensation agreement; and (b) The Borrower shall not permit any Restricted Entity to create, incur, assume, or suffer to exist any obligations in respect of Derivatives, other than Derivatives used by any -40- Restricted Entity in such Restricted Entity's respective business operations in aggregate notional quantities not to exceed the reasonably anticipated consumption of such Restricted Entity of the underlying commodity for the relevant period, but no Derivatives which are speculative in nature. 5.9 CORPORATE TRANSACTIONS. The Borrower shall not and shall not permit any other Restricted Entity to (1) merge or consolidate with or be a party to a merger or consolidation with any other Person, (2) make any Acquisition, (3) assign, sell, lease, dispose of, or otherwise transfer any assets outside of the ordinary course of business, including wholesale sales of accounts receivable, or (4) enter into any binding agreement regarding any of the foregoing, provided however that: (a) any Restricted Entity organized under a jurisdiction of the United States may be merged or consolidated with the Borrower or any other Restricted Entity organized under a jurisdiction of the United States provided that, in any such merger or consolidation to which the Borrower is a party, the Borrower shall be the continuing or surviving corporation; (b) any Restricted Entity may make any Acquisition (by purchase or merger) provided that (i) the Restricted Entity is the acquiring or surviving entity (or the surviving entity becomes a Subsidiary of the Borrower in the transaction), (ii) the aggregate consideration paid or incurred by the Restricted Entity (in either case including cash, indebtedness, assumed indebtedness, and transaction related contractual payments such as amounts payable under noncompete, consulting, and similar agreements, but excluding stock and preferred stock of the Borrower) in connection with any Acquisition does not exceed (A) at any time when the most recently determined maximum ratio for Debt to EBITDA as measured by Section 5.5(a) plus, to the extent approved by the Agent, EBITDA for the acquired business, calculated on a pro forma basis after giving effect to the Acquisition is less than 1.50 to 1.00, $25,000,000, and (B) at any time when the most recently determined maximum ratio for Debt to EBITDA as measured by Section 5.5(a) plus, to the extent approved by the Agent, EBITDA for the acquired business, calculated on a pro forma basis after giving effect to the Acquisition is greater than or equal to 1.50 to 1.00, $15,000,000, (iii) the Acquisition would not cause an Event of Default under Section 5.5(e); PROVIDED, that if the Borrower provides the information specified below and obtains the approval of the Agent and the Majority Banks, any Acquisitions made by the Restricted Entities during the applicable period and so approved by the Agent and the Majority Banks shall be excluded from future calculations of the Total Acquisition Consideration, (iv) no Default or Event of Default exists and the Acquisition would not reasonably be expected to cause a Default or Event of Default, (v) the acquired assets are in substantially the same business as the Borrower or any of the Restricted Entities, and (vi) the transaction is not hostile, as reasonably determined by the Majority Banks; (c) any Restricted Entity organized under a jurisdiction of the United States may sell, lease, assign, transfer, or otherwise dispose of any or all of its assets (i) to the Borrower or (ii) to any other Restricted Entity organized under a jurisdiction of the United States; and (d) the Borrower and the other Restricted Entities may sell (i) the capital stock of Tetra Micronutrients, Inc. or any of its assets or the capital stock of Damp Rid, Inc. or any of its assets and (ii) Property (A) in the ordinary course of business, (B) in any fiscal year of the -41- Borrower in an amount not to exceed 10% of Tangible Net Worth as of the end of the prior fiscal year (excluding the sale of the capital stock of Tetra Micronutrients, Inc. and any of its assets or the capital stock of Damp Rid, Inc. or any of its assets), or (C) with the prior written consent of the Agent and the Majority Banks (any sale pursuant to the foregoing (d)(B) or (C) being a "Permitted Sale"). If the Borrower requests the approval of the Agent and the Majority Banks for any Acquisition pursuant to the provision in Section 5.9(b)(ii) above, the Borrower must provide the following information to the Agent for distribution to the Banks: (A) historical financial statements regarding the Acquisition, including at a minimum: (x) historical financial statements for the immediately preceding three fiscal years of the acquired assets, reviewed by an independent certified public accounting firm reasonably acceptable to the Agent, and (y) interim historical financial statements for the most recent fiscal quarter of the acquired assets, duly certified by a Responsible Officer of the Borrower as being, to the best of such Responsible Officer's knowledge after due inquiry, accurate and complete and having been prepared in accordance with generally accepted accounting principles, including those applicable to interim financial reports which permit normal year end adjustments and do not require complete financial notes; and (B) consolidated historical proforma financial statements for the Borrower for the most recently completed four fiscal quarters of the Borrower giving effect to the Acquisition, and the schedules and methods used to prepare such proforma financial statements; (C) consolidated proforma financial statements for the Borrower for the next four fiscal quarters of the Borrower giving effect to the Acquisition, and the schedules and methods used to prepare such proforma financial statements; and (D) such other information regarding the acquired assets as the Agent or the Majority Banks may reasonably request. 5.10 DISTRIBUTIONS. The Borrower shall not, if a Default has occurred or shall be caused hereby, (a) declare or pay any dividends; (b) purchase, redeem, retire, or otherwise acquire for value any of its capital stock now or hereafter outstanding; or make any distribution of assets to its stockholders as such, whether in cash, assets, or in obligations of it; (c) allocate or otherwise set apart any sum for the payment of any dividend or distribution on, or for the purchase, redemption, or retirement of, any shares of its capital stock; or (d) make any other distribution by reduction of capital or otherwise in respect of any shares of its capital stock. 5.11 TRANSACTIONS WITH AFFILIATES. The Borrower shall not and shall not permit any other Restricted Entity to enter into any transaction directly or indirectly with or for the benefit of an Affiliate except transactions with an Affiliate for funding of debt or equity or other advances, the leasing of property, the rendering or receipt of services, or the purchase or sale of inventory or other assets in the ordinary course of business if the monetary or business consideration arising from such a transaction would be substantially as advantageous to such Restricted Entity as the monetary or business consideration which such Restricted Entity would obtain in a comparable arm's length transaction. 5.12 INSURANCE. The Borrower shall cause each Restricted Entity to maintain insurance with responsible and reputable insurance companies or associations reasonably acceptable to the Agent in such amounts and covering such risks as are (a) usually carried by companies engaged in similar businesses and owning similar properties in the same general areas in which such Persons operate, or (b) reasonable under circumstances unique to the Borrower. The Borrower -42- shall deliver to the Agent certificates evidencing such policies or copies of such policies at the Agent's request following a reasonable period to obtain such certificates taking into account the jurisdiction where the insurance is maintained. 5.13 INVESTMENTS. The Borrower shall not and shall not permit any other Restricted Entity to make or hold any direct or indirect investment in any Person, including capital contributions to the Person, investments in the debt or equity securities of the Person, and loans, guaranties, trade credit, or other extensions of credit to the Person, except for Permitted Investments. 5.14 LINES OF BUSINESS; DISTRIBUTION. The Borrower and its Subsidiaries shall not change the character of their business, taken as a whole, as conducted on the date of this Agreement or engage in any type of business not reasonably related to such business as presently and normally conducted. 5.15 COMPLIANCE WITH LAWS. The Borrower shall and shall cause each Restricted Entity to comply with all federal, state, and local laws and regulations which are applicable to the operations and property of such Persons and which the failure to comply with could reasonably be expected to have a Material Adverse Effect. 5.16 ENVIRONMENTAL COMPLIANCE. The Borrower shall and shall cause each Restricted Entity to comply with all Environmental Laws and obtain and comply with all related permits necessary for the ownership and operation of any such Person's properties which the failure to comply with could reasonably be expected to have a Material Adverse Effect. The Borrower shall and shall cause each Restricted Entity to promptly disclose to the Banks any notice to or investigation of such Persons for any violation or alleged violation of any Environmental Law in connection with any such Person's presently or previously owned properties which represent liabilities which could reasonably be expected to have a Material Adverse Effect. The Borrower shall not and shall not permit any Restricted Entity to create, handle, transport, use, or dispose of any Hazardous Materials on or about any such Person's properties except in compliance with all Environmental Laws and related permits; release any Hazardous Materials into the environment in connection with any such Person's operations or contaminate any properties with Hazardous Materials; or own properties contaminated by any Hazardous Materials, in each case if such action could reasonably be expected to have a Material Adverse Effect. For the purposes of this Section 5.16, any losses covered by the Borrower's reserve for environmental losses set forth on its most recent consolidated balance sheet shall be excluded in determining whether any Material Adverse Effect has occurred. 5.17 ERISA COMPLIANCE. The Borrower shall and shall cause each Restricted Entity to (a) comply in all material respects with all applicable provisions of ERISA and prevent the occurrence of any Reportable Event or Prohibited Transaction with respect to, or the termination of, any of their respective Plans where the failure to do so could reasonably be expected to have a Material Adverse Effect and (b) not create or participate in any employee pension benefit plan covered by Title IV of ERISA or any multiemployer plan under Section 4001(a)(3) of ERISA. 5.18 PAYMENT OF CERTAIN CLAIMS. The Borrower shall and shall cause each Restricted Entity to pay and discharge, before the same shall become delinquent, (a) all taxes, assessments, -43- levies, and like charges imposed upon any such Person or upon any such Person's income, profits, or property by authorities having competent jurisdiction prior to the date on which penalties attach thereto except for tax payments being contested in good faith for which adequate reserves have been made and reported in accordance with GAAP and which could not reasonably be expected to have a Material Adverse Effect, (b) all lawful claims which are secured by or which, if unpaid, would by law become secured by a Lien upon any such Person's property, and (c) all trade payables and current operating liabilities, unless the same are less than 90 days past due or are being contested in good faith, have adequate reserves established and reported in accordance with GAAP, and could not reasonably be expected to have a Material Adverse Effect. 5.19 SUBSIDIARIES. Upon the formation or acquisition of any new wholly-owned Subsidiary or the conversion of an existing wholly-owned Subsidiary into another type of entity in each case which is organized under a jurisdiction of the United States, the Borrower shall cause (a) such Subsidiary to promptly execute and deliver to the Agent a Joinder Agreement in substantially the form of EXHIBIT G with such modifications thereto as the Agent may reasonably request for the purpose of joining such Subsidiary as a party to the Guaranty and providing to the Agent the rights of the Agent intended to be provided thereunder; (b) such Subsidiary to promptly execute and deliver to the Agent (i) a Security Agreement in the form of the Security Agreement executed by the Borrower's domestic Subsidiaries on the date of this Agreement; (ii) if such Subsidiary has any domestic Subsidiaries, a U.S. Pledge Agreement in the form of the U.S. Pledge Agreement executed by the Borrower's domestic Subsidiaries on the date of this Agreement granting an Acceptable Security Interest in the equity interests of such Subsidiary's domestic Subsidiaries; and (iii) any other security documents reasonably required under the terms of such Security Agreement or such U.S. Pledge Agreement; and (c) the owner of such Subsidiary's equity interests to grant an Acceptable Security Interest in such equity interests. In connection therewith, the Borrower shall provide corporate documentation and opinion letters reasonably satisfactory to the Agent reflecting the corporate status of such new Subsidiary of the Borrower and the enforceability of such agreements. 5.20 FURTHER ASSURANCES. Each Restricted Entity shall promptly cure any defects in the creation and issuance of the Notes and the execution and delivery of the other Credit Documents, including this Agreement. When requested by the Agent, each Restricted Entity shall, at its own expense, promptly execute and deliver or cause to be executed and delivered to the Agent all such other and further documents, agreements, and instruments (a) to comply with or accomplish the covenants and agreements in the Credit Documents, or (b) to correct any omissions in the Credit Documents. 5.21 MANAGEMENT. The Borrower shall give the Agent written notification of any change in the management structure of the Borrower simultaneously with such change in management and disclosure to shareholders. 5.22 FOREIGN SUBSIDIARIES. The Borrower shall execute and deliver or cause the applicable Restricted Entity to execute and deliver to the Agent the Pledge Agreements, in form and substance reasonably satisfactory to the Agent and the Majority Banks, for the purpose of pledging a minimum of 60% (and a maximum of 65%) of the stock of the Subsidiaries of the Pledgor which are not organized under a jurisdiction of the United States as security for the -44- Credit Obligations; PROVIDED that the Borrower may elect not to provide Pledge Agreements with respect to the stock of such Subsidiaries whose assets constitute, in the aggregate, 5% or less of the consolidated assets of the Borrower. If at any time the aggregate assets of such Subsidiaries of the Restricted Entities whose stock is not pledged to the Agent exceeds 5% of the consolidated assets of the Borrower, the Borrower shall, within 30 days of the earlier of knowledge of such excess by the Borrower or notice from the Agent, provide Pledge Agreements with respect to additional foreign Subsidiaries sufficient to cure such excess to the reasonable satisfaction of the Agent. In connection with the foregoing, the Borrower shall provide corporate documentation and opinion letters reasonably satisfactory to the Agent reflecting the corporate status of such new foreign Subsidiary and the enforceability of such agreements under the law of the jurisdiction of organization of such new foreign Subsidiary. ARTICLE 6. DEFAULT AND REMEDIES. 6.1 EVENTS OF DEFAULT. The occurrence of any of the following events shall constitute an "Event of Default" under this Agreement and any other Credit Document: (a) PAYMENT FAILURE. The Borrower or any of it Subsidiaries (i) fails to pay when due any principal amounts due under this Agreement or any other Credit Document or (ii) fails to pay when due any interest, fees, reimbursements, indemnifications, or other amounts due under this Agreement or any other Credit Document and such failure has not been cured within five Business Days; (b) FALSE REPRESENTATION. Any representation or warranty made by the Borrower, any Credit Party, or any officer or partner thereof in this Agreement or in any other Credit Document is materially false or erroneous at the time it was made or deemed made; (c) BREACH OF COVENANT. (i) Any breach by the Borrower of any of the covenants contained in Sections 5.3, 5.5, 5.6, 5.7, 5.8, 5.9, 5.10, 5.11, 5.12, 5.13, or 5.14 of this Agreement, (ii) any breach by the Borrower of any of the covenants contained in Section 5.2(b) of this Agreement and such breach is not cured within 5 days following the earlier of knowledge of such breach by the Borrower or the receipt of written notice thereof from the Agent or any Bank, or (iii) any breach by the Borrower of any of the other covenants contained in this Agreement and such breach is not cured within 30 days following the earlier of knowledge of such breach by the Borrower or the receipt of written notice thereof from the Agent or any Bank; (d) GUARANTY. (i) The Guaranty shall at any time and for any reason cease to be in full force and effect or shall be contested by any party thereto, or any Guarantor shall deny it has any further liability or obligation thereunder, (ii) any breach by any Guarantor of any of the covenants contained in Section 1 of the Guaranty, or (iii) or any breach by any Guarantor of any other covenants contained in the Guaranty or any other Credit Document and such breach is not cured within 30 days following the earlier of knowledge of such breach by such Guarantor or the receipt of written notice thereof from the Agent or any Bank; (e) CROSS DEFAULT. (i) Any principal, interest, fees, or other amounts due on any Debt of any Restricted Entity is not paid when due, whether by scheduled maturity, required prepayment, acceleration, demand, or otherwise, and such failure is not cured within the -45- applicable grace period, if any, and the aggregate amount of all Debt of the Restricted Entities so in default exceeds $5,000,000; (ii) any other event shall occur or condition shall exist under any agreement or instrument relating to any Debt of any Restricted Entity the effect of which is to accelerate or to permit the acceleration of the maturity of any such Debt, whether or not any such Debt is actually accelerated, and the aggregate amount of all Debt of the Restricted Entities so in default exceeds 5,000,000; or (iii) any Debt of any Restricted Entity shall be declared to be due and payable, or required to be prepaid (other than by a regularly scheduled prepayment) prior to the stated maturity thereof, and the aggregate amount of all Debt of the Restricted Entities so accelerated exceeds $5,000,000; (f) BANKRUPTCY AND INSOLVENCY. (i) There shall have been filed against any Restricted Entity or any such Person's properties, without such Person's consent, any petition or other request for relief seeking an arrangement, receivership, reorganization, liquidation, or similar relief under bankruptcy or other laws for the relief of debtors and such request for relief (A) remains in effect for 60 or more days, whether or not consecutive, or (B) is approved by a final nonappealable order, or (ii) any such Person consents to or files any petition or other request for relief of the type described in clause (i) above seeking relief from creditors, makes any assignment for the benefit of creditors or other arrangement with creditors, or admits in writing such Person's inability to pay such Person's debts as they become due (Events of Default under clause (i) and (ii) collectively being referred to as "Bankruptcy Events of Default"); (g) ADVERSE JUDGMENT. A judgment which has a Material Adverse Effect, including without limitation any judgment in excess of $5,000,000 is rendered against the Borrower or any other Restricted Entity and such judgment is not discharged or stayed pending appeal within 45 days following its entry; (h) CHANGE OF CONTROL. There shall occur any Change of Control; or (i) SECURITY DOCUMENTS. Any Security Document shall at any time and for any reason cease to create the Lien on the property purported to be subject to such agreement in accordance with the terms of such agreement, or shall cease to be in full force and effect, or shall be contested by any party thereto. 6.2 TERMINATION OF COMMITMENTS. Upon the occurrence of any Bankruptcy Event of Default, all of the commitments of the Agent and the Banks hereunder shall terminate. During the existence of any Event of Default other than a Bankruptcy Event of Default, the Agent shall at the request of the Majority Banks declare by written notice to the Borrower all of the commitments of the Agent and the Banks hereunder terminated, whereupon the same shall immediately terminate. 6.3 ACCELERATION OF CREDIT OBLIGATIONS. Upon the occurrence of any Bankruptcy Event of Default, the aggregate outstanding principal amount of all loans made hereunder, all accrued interest thereon, and all other Credit Obligations shall immediately and automatically become due and payable. During the existence of any Event of Default other than a Bankruptcy Event of Default, the Agent shall at the request of the Majority Banks declare by written notice to the Borrower the aggregate outstanding principal amount of all loans made hereunder, all accrued interest thereon, and all other Credit Obligations to be immediately due and payable, -46- whereupon the same shall become immediately due and payable. In connection with the foregoing, except for the notice provided for above, the Borrower waives notice of intent to demand, demand, presentment for payment, notice of nonpayment, protest, notice of protest, grace, notice of dishonor, notice of intent to accelerate, notice of acceleration, and all other notices. 6.4 CASH COLLATERALIZATION OF LETTERS OF CREDIT. Upon the occurrence of any Bankruptcy Event of Default, the Borrower shall pay to the Agent an amount equal to the Letter of Credit Exposure allocable to the Letters of Credit requested by the Borrower to be held in the Letter of Credit Collateral Account for disposition in accordance with Section 2.3(g). During the existence of any Event of Default other than a Bankruptcy Event of Default, the Agent shall at the request of the Majority Banks require by written notice to the Borrower that the Borrower pay to the Agent an amount equal to the Letter of Credit Exposure allocable to the Letters of Credit requested by the Borrower to be held in the Letter of Credit Collateral Account for disposition in accordance with Section 2.3(f), whereupon the Borrower shall immediately pay to the Agent such amount. 6.5 DEFAULT INTEREST. If any Event of Default exists, the Agent shall at the request of the Majority Banks declare by written notice to the Borrower that the Credit Obligations specified in such notice shall bear interest beginning on the date specified in such notice until paid in full at the applicable Default Rate for such Credit Obligations, and the Borrower shall pay such interest to the Agent for the benefit of the Agent and the Banks, as applicable, upon demand. 6.6 RIGHT OF SETOFF. During the existence of an Event of Default, the Agent and each Bank is hereby authorized at any time, to the fullest extent permitted by law, to set off and apply any indebtedness owed by the Agent or such Bank to the Borrower against any and all of the obligations of the Borrower under this Agreement and the Credit Documents, irrespective of whether or not the Agent or such Bank shall have made any demand under this Agreement or the Credit Documents and although such obligations may be contingent and unmatured. The Agent and each Bank, as the case may be, agrees promptly to notify the Borrower after any such setoff and application made by such party provided that the failure to give such notice shall not affect the validity of such setoff and application. 6.7 ACTIONS UNDER CREDIT DOCUMENTS. Following an Event of Default, the Agent shall at the request of the Majority Banks take any and all actions permitted under the other Credit Documents, including the Guaranty and the Pledge Agreements. 6.8 REMEDIES CUMULATIVE. No right, power, or remedy conferred to the Agent or the Banks in this Agreement and the Credit Documents, or now or hereafter existing at law, in equity, by statute, or otherwise, shall be exclusive, and each such right, power, or remedy shall to the full extent permitted by law be cumulative and in addition to every other such right, power, or remedy. No course of dealing and no delay in exercising any right, power, or remedy conferred to the Agent or the Banks in this Agreement and the Credit Documents, or now or hereafter existing at law, in equity, by statute, or otherwise, shall operate as a waiver of or otherwise prejudice any such right, power, or remedy. -47- 6.9 APPLICATION OF PAYMENTS. Prior to any payment default upon any maturity date or any acceleration of the Credit Obligations, all payments made hereunder shall be applied to the Credit Obligations as directed by the Borrower, subject to the rules regarding the application of payments to certain Credit Obligations provided for hereunder and in the Credit Documents. Following any payment default upon any maturity date or any acceleration of the Credit Obligations, all payments and collections shall be applied to the Credit Obligations in the following order: First, to the payment of the costs, expenses, reimbursements (other than reimbursement obligations with respect to draws under Letters of Credit), and indemnifications of the Agent that are due and payable under the Credit Documents; Then, ratably to the payment of the costs, expenses, reimbursements (other than reimbursement obligations with respect to draws under Letters of Credit), and indemnifications of the Banks that are due and payable under the Credit Documents; Then, ratably to the payment of all accrued but unpaid interest and fees due and payable under the Credit Documents and obligations under Interest Hedge Agreements; Then, ratably to the payment of all outstanding principal and reimbursement obligations for draws under Letters of Credit due and payable under the Credit Documents; Then, ratably to the payment of any other amounts due and owing with respect to the Credit Obligations; and Finally, any surplus held by the Agent and remaining after payment in full of all the Credit Obligations and reserve for Credit Obligations not yet due and payable shall be promptly paid over to the Borrower or to whomever may be lawfully entitled to receive such surplus. All applications shall be distributed in accordance with Section 2.10(a). ARTICLE 7. THE AGENT AND ISSUING BANK 7.1 AUTHORIZATION AND ACTION. Each Bank hereby appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under this Agreement as are delegated to the Agent by the terms hereof and of the other Credit Documents, together with such powers as are reasonably incidental thereto. Statements under the Credit Documents that the Agent may take certain actions, without further qualification, means that the Agent may take such actions with or without the consent of the Banks or the Majority Banks, but where the Credit Documents expressly require the determination of the Banks or the Majority Banks, the Agent shall not take any such action without the prior written consent thereof. As to any matters not expressly provided for by this Agreement or any other Credit Document (including, without limitation, enforcement or collection of the Notes), the Agent shall not be required to exercise any discretion or take any action, but shall be required to act or to refrain from acting (and shall -48- be fully protected in so acting or refraining from acting) upon the written instructions of the Majority Banks, and such instructions shall be binding upon all Banks and all holders of Notes; provided, however, that the Agent shall not be required to take any action which exposes the Agent to personal liability or which is contrary to this Agreement, any other Credit Document, or applicable law. 7.2 RELIANCE, ETC. Neither the Agent, any Issuing Bank, nor any of their respective Related Parties (for the purposes of this Section 7.2, collectively, the "Indemnified Parties") shall be liable for any action taken or omitted to be taken by any Indemnified Party under or in connection with this Agreement or the other Credit Documents, INCLUDING ANY INDEMNIFIED PARTY'S OWN NEGLIGENCE, except for any Indemnified Party's gross negligence or willful misconduct. Without limitation of the generality of the foregoing, the Agent and any Issuing Bank: (a) may treat the payee of any Note as the holder thereof until the Agent receives written notice of the assignment or transfer thereof signed by such payee and in form satisfactory to the Agent; (b) may consult with legal counsel (including counsel for the Borrower), independent public accountants, and other experts selected by it and shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants, or experts; (c) makes no warranty or representation to any Bank and shall not be responsible to any Bank for any statements, warranties, or representations made in or in connection with this Agreement or the other Credit Documents; (d) shall not have any duty to ascertain or to inquire as to the performance or observance of any of the terms, covenants, or conditions of this Agreement or any other Credit Document on the part of the Credit Parties or to inspect the property (including the books and records) of the Credit Parties; (e) shall not be responsible to any Bank for the due execution, legality, validity, enforceability, genuineness, sufficiency, or value of this Agreement or any other Credit Document; and (f) shall incur no liability under or in respect of this Agreement or any other Credit Document by acting upon any notice, consent, certificate, or other instrument or writing (which may be by telecopier or telex) reasonably believed by it to be genuine and signed or sent by the proper party or parties. 7.3 AFFILIATES. With respect to its Revolving Credit Commitments, the Advances made by it, its interests in the Letters of Credit, and the Notes issued to it, the Agent and any Issuing Bank shall have the same rights and powers under this Agreement as any other Bank and may exercise the same as though it were not the Agent. The term "Bank" or "Banks" shall, unless otherwise expressly indicated, include the Agent and any Issuing Bank in their individual capacity. The Agent, any Issuing Bank, and their respective Affiliates may accept deposits from, lend money to, act as trustee under indentures of, and generally engage in any kind of business with, any Credit Party, and any Person who may do business with or own securities of any Credit Party, all as if the Agent were not an agent hereunder and such Issuing Bank were not the issuer of Letters of Credit hereunder and without any duty to account therefor to the Banks. 7.4 BANK CREDIT DECISION. Each Bank acknowledges that it has, independently and without reliance upon the Agent or any other Bank and based on the Initial Financial Statements and such other documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Bank also acknowledges that it shall, independently and without reliance upon the Agent or any other Bank and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement. -49- 7.5 EXPENSES. To the extent not paid by the Borrower, each Bank severally agrees to pay to the Agent and any Issuing Bank on demand such Bank's ratable share of the following: (a) all reasonable out-of-pocket costs and expenses of the Agent and such Issuing Bank in connection with the preparation, execution, delivery, administration, modification, and amendment of this Agreement and the other Credit Documents, including the reasonable fees and expenses of outside counsel for the Agent and such Issuing Bank with respect to advising the Agent and such Issuing Bank as to their respective rights and responsibilities under this Agreement and the Credit Documents, and (b) all out-of-pocket costs and expenses of the Agent and such Issuing Bank in connection with the preservation or enforcement of the rights of the Agent, such Issuing Bank, and the Banks under this Agreement and the other Credit Documents, whether through negotiations, legal proceedings, or otherwise, including fees and expenses of counsel for the Agent and such Issuing Bank. The provisions of this paragraph shall survive the repayment and termination of the credit provided for under this Agreement and any purported termination of this Agreement which does not expressly refer to this paragraph. 7.6 INDEMNIFICATION. To the extent not reimbursed by the Borrower, each Bank severally agrees to protect, defend, indemnify, and hold harmless the Agent, each Issuing Bank, and each of their respective Related Parties (for the purposes of this Section 7.6, collectively, the "Indemnified Parties"), from and against all demands, claims, actions, suits, damages, judgments, fines, penalties, liabilities, settlements, and out-of-pocket costs and expenses, including reasonable costs of attorneys and related costs of experts such as accountants (collectively, the "Indemnified Liabilities"), actually incurred by any Indemnified Party which are related to any litigation or proceeding relating to this Agreement, the Credit Documents, or the transactions contemplated thereunder, INCLUDING ANY INDEMNIFIED LIABILITIES CAUSED BY ANY INDEMNIFIED PARTY'S OWN NEGLIGENCE, but not Indemnified Liabilities which are a result of any Indemnified Party's gross negligence or willful misconduct. The provisions of this paragraph shall survive the repayment and termination of the credit provided for under this Agreement and any purported termination of this Agreement which does not expressly refer to this paragraph. 7.7 SUCCESSOR AGENT AND ISSUING BANK. The Agent or any Issuing Bank may resign at any time by giving written notice thereof to the Banks and the Borrower. Upon receipt of notice of any such resignation, the Majority Banks shall have the right to appoint a successor Agent or Issuing Bank with the consent of the Borrower, which consent shall not be unreasonably withheld. If no successor Agent or Issuing Bank shall have been so appointed by the Majority Banks with the consent of the Borrower, and shall have accepted such appointment, within 30 days after the retiring Agent's or Issuing Bank's giving of notice of, then the retiring Agent or Issuing Bank may, on behalf of the Banks and the Borrower, appoint a successor Agent or Issuing Bank, which shall be, in the case of a successor agent, a commercial bank organized under the laws of the United States of America or of any State thereof and having a combined capital and surplus of at least $500,000,000 and, in the case of an Issuing Bank, a Bank. Upon the acceptance of any appointment as Agent or Issuing Bank by a successor Agent or Issuing Bank, such successor Agent or Issuing Bank shall thereupon succeed to and become vested with all the rights, powers, privileges, and duties of the retiring Agent or Issuing Bank, and the retiring Agent or Issuing Bank shall be discharged from any duties and obligations under this Agreement and the other Credit Documents after such acceptance, except that the retiring Issuing Bank shall remain the Issuing Bank with respect to any Letters of Credit outstanding on the -50- effective date of its resignation and the provisions affecting the Issuing Bank with respect to such Letters of Credit shall inure to the benefit of the retiring Issuing Bank until the termination of all such Letters of Credit. After any Agent's or Issuing Bank's resignation hereunder as Agent or Issuing Bank, the provisions of this Article 7 shall inure to such Person's benefit as to any actions taken or omitted to be taken by such Person while such Person was Agent or Issuing Bank under this Agreement and the other Credit Documents. 7.8 OTHER AGENTS; LEAD MANAGERS. None of the Banks identified on facing page or signature pages of this Agreement as a Syndication Agent shall have any right, power, obligation, liability, responsibility or duty under this Agreement other than those applicable to all Banks as such. Without limiting the foregoing, none of the Banks so identified shall have or be deemed to have any fiduciary relationship with any Bank. Each Bank acknowledges that it has not relied, and will not rely, on any Banks so identified in deciding to enter into this Agreement or in taking or not taking action hereunder. ARTICLE 8. MISCELLANEOUS. 8.1 EXPENSES. The Borrower shall pay on demand of the applicable party specified herein (a) all reasonable out-of-pocket costs and expenses of the Agent and each Issuing Bank in connection with the preparation, execution, delivery, administration, modification, and amendment of this Agreement and the other Credit Documents, including the reasonable fees and expenses of outside counsel for the Agent and such Issuing Bank, but not for each Bank, and (b) all out-of-pocket costs and expenses of the Agent, such Issuing Bank, and each Bank in connection with the preservation or enforcement of their respective rights under this Agreement and the other Credit Documents following any Event of Default, whether through negotiations, legal proceedings, or otherwise, including fees and expenses of counsel for the Agent, such Issuing Bank, and each Bank. The provisions of this paragraph shall survive the repayment and termination of the credit provided for under this Agreement and any purported termination of this Agreement which does not expressly refer to this paragraph. 8.2 INDEMNIFICATION. (a) The Borrower agrees to protect, defend, indemnify, and hold harmless the Agent, each Issuing Bank, each Bank, and each of their respective Related Parties (for the purposes of this Section 8.2, collectively, the "Indemnified Parties"), from and against all demands, claims, actions, suits, damages, judgments, fines, penalties, liabilities, settlements, and out-of-pocket costs and expenses, including reasonable costs of attorneys and related costs of experts such as accountants (collectively, the "Indemnified Liabilities"), actually incurred by any Indemnified Party which are related to any litigation or proceeding relating to this Agreement, the Credit Documents, or the transactions contemplated thereunder, INCLUDING ANY INDEMNIFIED LIABILITIES CAUSED BY ANY INDEMNIFIED PARTY'S OWN NEGLIGENCE, but not Indemnified Liabilities which are a result of any Indemnified Party's gross negligence or willful misconduct. The provisions of this paragraph shall survive the repayment and termination of the credit provided for under this Agreement and any purported termination of this Agreement which does not expressly refer to this paragraph. -51- (b) Within a reasonable period of time after any Indemnified Party receives actual notice of the assertion of any claim or the commencement of any action, or any threatened claim or action, which is covered by this Section 8.2, such Indemnified Party shall, if indemnification with respect thereof is intended to be sought from the Borrower under this Section 8.2, notify the Borrower of such claim or action; provided that the failure to so notify the Borrower shall not relieve the Borrower from any liability which the Borrower may have to such Indemnified Party hereunder. If any such claim or action shall be brought or threatened against an Indemnified Party by a third party, the Borrower shall be entitled to participate in the defense thereof so long as no Event of Default exists. No consent order or settlement shall be entered into by an Indemnified Party with respect to any such third party claim or action prior to notification of and consultation with the Borrower, so long as no Event of Default exists; provided that the failure to so notify or consult with the Borrower shall not relieve the Borrower from any liability which the Borrower may have to such Indemnified Party hereunder. 8.3 MODIFICATIONS, WAIVERS, AND CONSENTS. No modification or waiver of any provision of this Agreement or the Notes, nor any consent required under this Agreement or the Notes, shall be effective unless the same shall be in writing and signed by the Agent and Majority Banks and the Borrower, and then such modification, waiver, or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, however, that no modification, waiver, or consent shall, unless in writing and signed by the Agent, all the Banks, and the Borrower do any of the following: (a) waive any of the conditions specified in Section 3.1 or 3.2, (b) increase the Revolving Credit Commitments of the Banks, (c) forgive or reduce the amount or rate of any principal, interest, fees, or other amounts payable under the Credit Documents, or postpone or extend the time for payment thereof, (d) release any Guaranty or any material amount of collateral securing the Credit Obligations, or (e) change the percentage of Banks required to take any action under this Agreement, the Notes, or the other Credit Documents, including any amendment of the definition of "Majority Banks" or of this Section 8.3; PROVIDED however that upon any Permitted Sale of Property constituting collateral securing the Credit Obligations, the liens securing such collateral shall be released by the Agent in accordance with Section 4.05 of the Security Agreements, without requirement for the consent of the Banks. Notwithstanding anything to the contrary in this Section 8.3, the Agent shall execute and deliver, on behalf of itself and the Banks, releases of all collateral other than (i) the capital stock of the Borrower's domestic Subsidiaries, (ii) 60% of the capital stock of the Borrower's foreign Subsidiaries, and (iii) the Borrower's Inventory, Receivables and related general intangibles. No modification, waiver, or consent shall, unless in writing and signed by the Agent or any Issuing Bank affect the rights or obligations of the Agent or such Issuing Bank, as the case may be, under the Credit Documents. The Agent shall not modify or waive or grant any consent under any other Credit Document if such action would be prohibited under this Section 8.3 with respect to the Credit Agreement or the Notes. 8.4 SURVIVAL OF AGREEMENTS. All representations, warranties, and covenants of the Borrower in this Agreement and the Credit Documents shall survive the execution of this Agreement and the Credit Documents and any other document or agreement. 8.5 ASSIGNMENT AND PARTICIPATION. This Agreement and the Credit Documents shall bind and inure to the benefit of the Borrower and their respective successors and assigns and the -52- Agent and the Banks and their respective successors and assigns. The Borrower may not assign its rights or delegate its duties under this Agreement or any Credit Document. (a) ASSIGNMENTS. Any Bank may assign to one or more banks or other entities all or any portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its Revolving Credit Commitments, the Advances owing to it, the Notes held by it, and the participation interest in the Letters of Credit owned by it); provided, however, that (i) each such assignment shall be of a constant, and not a varying, percentage of all of such Bank's rights and obligations under this Agreement, (ii) assignments of Revolving Credit Commitments shall be made in minimum amounts of $5,000,000 and be made in integral multiples of $1,000,000 and the assigning Bank, if it retains any Revolving Credit Commitments, shall maintain at least $5,000,000 in Revolving Credit Commitments, (iii) each such assignment shall be to an Eligible Assignee, (iv) the parties to each such assignment shall execute and deliver to the Agent, for its acceptance and recording in the Register, an Assignment and Acceptance, together with the Notes subject to such assignment, and (v) each Eligible Assignee (other than the Eligible Assignee of the Agent) shall pay to the Agent a $3,500 administrative fee. Upon such execution, delivery, acceptance and recording, from and after the effective date specified in each Assignment and Acceptance, which effective date shall be at least three Business Days after the execution thereof, (A) the assignee thereunder shall be a party hereto for all purposes and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance, have the rights and obligations of a Bank hereunder and (B) such Bank thereunder shall, to the extent that rights and obligations hereunder have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights and be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all or the remaining portion of such Bank's rights and obligations under this Agreement, such Bank shall cease to be a party hereto). (b) TERM OF ASSIGNMENTS. By executing and delivering an Assignment and Acceptance, the Bank thereunder and the assignee thereunder confirm to and agree with each other and the other parties hereto as follows: (i) other than as provided in such Assignment and Acceptance, such Bank makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency of value of this Agreement or any other instrument or document furnished pursuant hereto; (ii) such Bank makes no representation or warranty and assumes no responsibility with respect to the financial condition of any Credit Party or the performance or observance by any Credit Party of any of its obligations under this Agreement or any other instrument or document furnished pursuant hereto; (iii) such assignee confirms that it has received a copy of this Agreement, together with copies of the Initial Financial Statements and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (iv) such assignee shall, independently and without reliance upon the Agent, such Bank or any other Bank and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement; (v) such assignee appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under this Agreement as are delegated to the Agent by the terms hereof, together with such powers as are reasonably incidental thereto; and -53- (vi) such assignee agrees that it shall perform in accordance with their terms all of the obligations which by the terms of this Agreement are required to be performed by it as a Bank. (c) THE REGISTER. The Agent shall maintain at its address referred to in Section 8.6 a copy of each Assignment and Acceptance delivered to and accepted by it and a register for the recordation of the names and addresses of the Banks and the Revolving Credit Commitments of each Bank from time to time (the "Register"). The entries in the Register shall be conclusive and binding for all purposes, absent manifest error, and the Borrower, the Agent, each Issuing Bank, and the Banks may treat each Person whose name is recorded in the Register as a Bank hereunder for all purposes of this Agreement. The Register shall be available for inspection by the Borrower or any Bank at any reasonable time and from time to time upon reasonable prior notice. (d) PROCEDURES. Upon its receipt of an Assignment and Acceptance executed by a Bank and an Eligible Assignee, together with the Notes subject to such assignment, the Agent shall, if such Assignment and Acceptance has been completed in the appropriate form, (i) accept such Assignment and Acceptance, (ii) record the information contained therein in the Register, and (iii) give prompt notice thereof to the Borrower. Within five Business Days after its receipt of such notice, the Borrower shall execute and deliver to the Agent in exchange for the surrendered Notes a new Note to the order of such Eligible Assignee in an amount equal to the Revolving Credit Commitment assumed by it pursuant to such Assignment and Acceptance and, if such Bank has retained any Revolving Credit Commitment hereunder, a new Note to the order of such Bank in an amount equal to the Revolving Credit Commitment retained by it hereunder. Such new Notes shall be dated the effective date of such Assignment and Acceptance and shall be in the appropriate form. (e) PARTICIPATION. Each Bank may sell participations to one or more banks or other entities in or to all or a portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its Revolving Credit Commitments, the Advances owing to it, its participation interest in the Letters of Credit, and the Notes held by it); provided, however, that (i) such Bank's obligations under this Agreement (including, without limitation, its Revolving Credit Commitments to the Borrower hereunder) shall remain unchanged, (ii) such Bank shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) such Bank shall remain the holder of any such Notes for all purposes of this Agreement, (iv) the Borrower, the Agent, each Issuing Bank and the other Banks shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations under this Agreement, and (v) such Bank shall not require the participant's consent to any matter under this Agreement, except for change in the principal amount of the Notes, reductions in fees or interest, extending the applicable maturity date, or releasing any collateral or guarantor. The Borrower hereby agrees that participants shall have the same rights under Sections 2.6, 2.7, 2.8, 2.9, 2.11 and 8.2 as a Bank to the extent of their respective participation. 8.6 NOTICE. All notices and other communications under this Agreement and the Notes shall be in writing and mailed by certified mail (return receipt requested), telecopied, telexed, hand delivered, or delivered by a nationally recognized overnight courier, to the address for the appropriate party specified in SCHEDULE I or at such other address as shall be designated by such party in a written notice to the other parties. Mailed notices shall be effective when -54- received. Telecopied or telexed notices shall be effective when transmission is completed or confirmed by telex answerback. Delivered notices shall be effective when delivered by messenger or courier. Notwithstanding the foregoing, notices and communications to the Agent pursuant to Article 2 or 7 shall not be effective until received by the Agent. 8.7 CHOICE OF LAW. This Agreement and the Notes have been prepared, are being executed and delivered, and are intended to be performed in the State of Texas, and the substantive laws of the State of Texas and the applicable federal laws of the United States shall govern the validity, construction, enforcement, and interpretation of this Agreement and the Notes; provided however, Chapter 346 the Texas Finance Code does not apply to this Agreement or the Notes. Each Letter of Credit shall be governed by the Uniform Customs and Practice for Documentary Credits, International Chamber of Commerce Publication No. 500 (1993 version). 8.8 FORUM SELECTION. THE BORROWER IRREVOCABLY CONSENTS TO THE JURISDICTION OF THE COURTS OF THE STATE OF TEXAS AND OF ANY FEDERAL COURT LOCATED IN SUCH STATE IN CONNECTION WITH ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THE CREDIT DOCUMENTS OR ANY TRANSACTIONS RELATED THERETO. THE BORROWER AGREES AND SHALL NOT CONTEST THAT PROPER FORUM AND VENUE FOR ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THE CREDIT DOCUMENTS OR ANY TRANSACTIONS RELATING THERETO ARE IN THE COURTS OF THE STATE OF TEXAS IN HARRIS COUNTY, TEXAS, AND THE FEDERAL COURTS LOCATED IN HARRIS COUNTY, TEXAS. THE BORROWER IRREVOCABLY WAIVES ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE FOREGOING BASED UPON CLAIMS THAT THE FOREGOING COURTS ARE AN INCONVENIENT FORUM. 8.9 SERVICE OF PROCESS. IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THE CREDIT DOCUMENTS OR ANY TRANSACTIONS RELATING THERETO, THE BORROWER WAIVES PERSONAL SERVICE OF ANY SUMMONS, COMPLAINT, OR OTHER PROCESS OR NOTICE AND AGREES THAT SERVICE BY FIRST CLASS MAIL, RETURN RECEIPT REQUESTED, TO THE BORROWER AT ITS ADDRESS FOR NOTICES HEREUNDER, OR ANY OTHER FORM OF SERVICE PROVIDED FOR IN THE TEXAS CIVIL PRACTICE LAW AND RULES THEN IN EFFECT SHALL CONSTITUTE GOOD AND SUFFICIENT SERVICE UPON THE BORROWER. 8.10 WAIVER OF JURY TRIAL. THE BORROWER IRREVOCABLY WAIVES ANY RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THE CREDIT DOCUMENTS OR ANY TRANSACTIONS RELATING THERETO. 8.11 COUNTERPARTS. This Agreement may be executed in multiple counterparts which together shall constitute one and the same instrument. 8.12 CONFIDENTIALITY. Each Bank acknowledges that it shall receive information regarding the Borrower's business operations and financial condition which is not available to the public. Each Bank agrees to maintain the confidentiality of such nonpublic information -55- according to such Bank's standard practices for such nonpublic client information, but such policies including the sharing of such information with auditors, accountants, and legal advisors, and as required by law. Each Bank may share such information with potential participants and assigns of its interests under the Credit Documents if such transferees agree in writing to maintain the confidentiality of such information in the same manner. 8.13 NO FURTHER AGREEMENTS. THIS WRITTEN AGREEMENT AND THE CREDIT DOCUMENTS REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES. -56- EXECUTED as of the date first above written. BORROWER: TETRA TECHNOLOGIES, INC. By: /s/ Joseph M. Abell ------------------- Joseph M. Abell Senior Vice President and Chief Financial Officer -57- AGENT: BANK OF AMERICA, N.A., as Agent By: /s/ Suzanne M. Paul ------------------- Suzanne M. Paul Vice President -58- BANKS: BANK OF AMERICA, N.A. By: /s/ Gary Mingle --------------- Gary Mingle Senior Vice President Revolving Credit Commitment: $30,000,000.00 -59- BANK ONE, NA By: /s/ Mark Wayne -------------- Mark Wayne Vice President Revolving Credit Commitment: $30,000,000.00 -60- WELLS FARGO BANK TEXAS, NATIONAL ASSOCIATION By: /s/ Philip C. Lauinger III -------------------------- Philip C. Lauinger III Senior Relationship Manager Revolving Credit Commitment: $20,000,000.00 -61- REAFFIRMATION OF GUARANTY Each of the undersigned (each, a "Guarantor"), has executed the Guaranty dated as of May 12, 2000 ("Guaranty"), guaranteeing payment of the Borrower's obligations under the Credit Agreement and the Credit Documents and certain other amounts in accordance with the Guaranty. Each Guarantor has reviewed this Agreement, and hereby approves it. Each Guarantor represents and warrants that such Guarantor knows of no defenses to the enforcement of the Guaranty and that according to its terms the Guaranty will continue in full force and effect with respect to the Credit Documents, as amended, following the execution of this Agreement. The signature of this document does not indicate or establish a requirement that the Guaranty requires the respective Guarantor's approval of amendments and restatements to the Agreement, but has been furnished to the Agent as a courtesy at the Agent's request. On the foregoing terms, this Agreement is hereby approved: TETRA APPLIED TECHNOLOGIES, INC. TETRA INTERNATIONAL INCORPORATED TETRA MICRONUTRIENTS, INC. TETRA PROCESS SERVICES, L.C. TETRA THERMAL, INC. MARITECH RESOURCES, INC. SEAJAY INDUSTRIES, INC. AMERICAN MICROBIAL TECHNOLOGY, INC. DAMP RID, INC. By: /s/ Bass C. Wallace, Jr. ------------------------ Bass C. Wallace, Jr. Secretary TETRA INVESTMENT HOLDING CO., INC. By: /s/ Bruce A. Cobb ----------------- Bruce A. Cobb Treasurer T-PRODUCTION TESTING, LLC By: TETRA APPLIED TECHNOLOGIES, INC., its sole member By: /s/ Bass C. Wallace, Jr. ----------------------- Bass C. Wallace, Jr. Secretary TETRA REAL ESTATE, LLC By: TETRA TECHNOLOGIES, INC., its sole member By: /s/ Joseph M. Abell ------------------- Joseph M. Abell Senior Vice President and Chief Financial Officer TETRA REAL ESTATE, LP By: TETRA REAL ESTATE, LLC, its general partner By: TETRA TECHNOLOGIES, INC., its sole member By: /s/ Joseph M. Abell ------------------- Joseph M. Abell Senior Vice President and Chief Financial Officer -2- EX-10.8 4 a2075175zex-10_8.txt EXHIBIT 10-8 EXHIBIT 10.8 March 20, 2002 Gary C. Hanna 3773 Robinhood St. Houston, TX 77005 Dear Gary: The purpose of this letter is to set forth our agreement with regard to certain terms of your employment. As you know, you are an at-will employee of TETRA Technologies, Inc. We have agreed that you will receive, in addition to your annual base salary, a bonus based on the production revenues of TETRA's Maritech Resources, Inc. subsidiary from its sale of oil and gas, net of applicable royalties and production taxes. This bonus will be calculated and paid on a quarterly basis throughout the year. Furthermore, if the closing of any sale of a controlling interest in the capital stock of Maritech Resources, Inc. to a entity not affiliated with you occurs while you are employed by TETRA or within 30 days after any termination of such employment, TETRA will continue to pay you your then current salary for a period of two years thereafter. In addition, TETRA will also make a payment to you each calendar quarter during those two years equal to the average quarterly bonus paid to you over the four quarters prior to the termination of your employment. You will not receive any of this continued salary and bonus if (i) some or all of the assets of Maritech Resources, Inc. or some or all of the assets or the capital stock or other equity interests of TETRA Technologies, Inc. or any of its subsidiaries or affiliates (including without limitation TETRA Applied Technologies, L.P.) other than the capital stock of Maritech Resources, Inc. are sold or (ii) some or all of the shares of capital stock of Maritech Resources, Inc. are distributed to the shareholders of TETRA or contributed by TETRA to a joint venture. This letter agreement supercedes any and all prior agreements, representations and understandings between you and TETRA and any of its affiliates and subsidiaries, written or oral, other than the General Employment Agreement between you and TETRA. If you agree that this letter agreement accurately sets forth our agreement, please sign below and return it to me. Very truly yours, TETRA Technologies, Inc. /s/ Geoffrey M. Hertel Geoffrey M. Hertel President and Chief Executive Officer Agreed to and accepted this March 26, 2002 by: /s/ Gary C. Hanna - ----------------------------- Gary C. Hanna EX-21 5 a2075175zex-21.txt EXHIBIT 21 EXHIBIT 21 TETRA TECHNOLOGIES, INC. List of Subsidiaries or Other Related Entities Damp Rid, Inc. TETRA F.S.C. Limited(1) TETRA Micronutrients, Inc. SeaJay Industries, Inc. TETRA Agricultural Products de Mexico, S.A. de C.V.(2) TETRA International Incorporated TETRA de Mexico, S.A. de C.V. TETRA Technologies de Venezuela, S.A. TETRA Technologies do Brasil, Ltda. TETRA Technologies (U.K.) Limited TETRA Technologies de Mexico, S.A. de C.V. TETRA Technologies Nigeria Limited TETRA Technologies Australia Pty Ltd TETRA Thermal, Inc. TPS Holding Company, LLC TETRA Process Services, L.C. TETRA Applied Holding Company TETRA Applied LP, LLC TETRA Applied GP, LLC TETRA Applied Technologies, LP(3) T-Production Testing LLC Maritech Resources, Inc. TETRA Production Testing GP, LLC TETRA Production Testing Services, L.P.(4) TETRA Investment Holding Co., Inc. TETRA Real Estate, LLC TETRA Real Estate, L.P.(5) TETRA Financial Services, Inc. TETRA (U.K.) Limited - ---------- (1) TETRA Technologies, Inc. owns 33-1/3%; TETRA International Incorporated owns 33-1/3% and Damp Rid, Inc. owns 33-1/3%. (2) TETRA Micronutrients, Inc. owns 99.99% and TETRA Technologies, Inc. owns .01%. (3) TETRA Applied LP, LLC owns 99.9% and TETRA Applied GP, LLC owns .1%. (4) TETRA Applied Technologies, L.P. owns 99.9% and TETRA Production Testing GP, LLC owns .1%. (5) TETRA Investment Holding Co., Inc. owns 99.9% and TETRA Real Estate, LLC owns .1%. EX-23 6 a2075175zex-23.txt EXHIBIT 23 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the following Registration Statements previously filed by TETRA Technologies, Inc. of our report dated February 20, 2002, with respect to the consolidated financial statements and schedule of TETRA Technologies, Inc. included in the Annual Report (Form 10-K) for the year ended December 31, 2001: Form S-8 (No. 333-40509) 1996 Stock Option Plan for Non-Executive Employees and Consultants Form S-8 (No. 33-41337) 401(k) Retirement Plan Form S-8 (No. 33-35750) 1990 Stock Option Plan Form S-8 (No. 33-76804) 1993 Director Stock Option Plan Form S-8 (No. 33-76806) 1990 Stock Option Plan Form S-8 (No. 333-04284) 401(k) Retirement Plan Form S-8 (No. 333-09889) 1990 Stock Option Plan Form S-8 (No. 333-61988) 1990 Stock Option Plan, as amended, and TETRA Technologies, Inc. 1996 Stock Option Plan for Non-Executive Employees and Consultants Form S-8 (No. 333-84444) Non-Qualified Stock Option Houston, Texas March 26, 2002 -----END PRIVACY-ENHANCED MESSAGE-----