-----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, D2upLS+wxPKm9xclSFVbwPnPSDKFEl8EH68jGz0HsfH5BBCFezTQUdni1MA16f3I Z1kF1VytxVIyHJJCw2exeQ== 0000950170-98-000587.txt : 19980401 0000950170-98-000587.hdr.sgml : 19980401 ACCESSION NUMBER: 0000950170-98-000587 CONFORMED SUBMISSION TYPE: 10KSB40 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MANSUR INDUSTRIES INC CENTRAL INDEX KEY: 0000934851 STANDARD INDUSTRIAL CLASSIFICATION: MISC INDUSTRIAL & COMMERCIAL MACHINERY & EQUIPMENT [3590] IRS NUMBER: 650226813 STATE OF INCORPORATION: FL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB40 SEC ACT: SEC FILE NUMBER: 000-21325 FILM NUMBER: 98583871 BUSINESS ADDRESS: STREET 1: 8305 NW 27TH STREET STREET 2: SUITE 107 CITY: MIAMI STATE: FL ZIP: 33122 BUSINESS PHONE: 3055938015 MAIL ADDRESS: STREET 1: 8305 NW 27TH STREET STREET 2: SUITE 107 CITY: MIAMI STATE: FL ZIP: 33122 10KSB40 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 COMMISSION FILE NO. 000-21325 MANSUR INDUSTRIES INC. (Exact name of Small Business Issuer as Specified in its Charter) --------------- FLORIDA 65-0226813 (State or Other Jurisdiction (I.R.S. Employer of Incorporation or Organization) Identification No.) 8305 N.W. 27TH STREET SUITE 107 MIAMI, FLORIDA 33122 (305) 593-8015 (Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant's Principal Executive Offices) --------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE EXCHANGE ACT: None. SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE EXCHANGE ACT: Common Stock, $.001 par value Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in PART III of this Form 10-KSB or any amendment to this Form 10-KSB [X]. State the issuer's revenues for its most recent fiscal year: $7,244,427. The aggregate market value of the Registrant's Common Stock held by non-affiliates as of March 25, 1998 was $51,614,878 computed by reference to the closing bid price of the Common Stock as reported on the NASDAQ SmallCap Market on such date. As of March 25, 1998, there were 4,601,309 shares of the Registrant's Common Stock issued and outstanding. DOCUMENTS INCOPORATED BY REFERENCE: The information required by Part III, Items 9-12, is incorporated by reference from the Registrant's definitive proxy statement (to be filed within 120 days after the end of the Registrant's fiscal year). ================================================================================ ITEM 1. DESCRIPTION OF BUSINESS. GENERAL Mansur Industries Inc., together with its wholly owned subsidiary SystemOne/registered trademark/ Technologies Inc. (collectively, the "Company"), designs, manufactures and sells a full line of patented, self-contained, recycling industrial parts washers for use in the automotive, aviation, marine and general industrial repair markets. The Company has been awarded eight patents for its products, which incorporate innovative, proprietary resource recovery and waste minimization technologies to distill contaminated solvent and yield pure solvent and a by-product comparable to used motor oil. While the Company intends to exploit its current full line of industrial washers, and to continue research and development of new products, it has initially focused its attention on its General Parts Washer, marketed as SystemOne/registered trademark/ (the "SystemOne/registered trademark/ Washer"). The SystemOne/registered trademark/ Washer integrates a distillation and recovery process which allows the solvent to be used, treated and re-used on demand, without requiring off-site processing. During the year ended December 31, 1997, the Company sold 2,986 SystemOne/registered trademark/ Washers, an increase of 2,699 units compared to 1996, and recorded revenues of approximately $7.2 million, an increase of approximately $6.5 million compared to 1996. The Company commenced the sale of SystemOne/registered trademark/ Washers in July 1996. Based on financial and trade journal reports, the Company believes that domestic expenditures in connection with industrial parts cleaning machines exceed $1.0 billion annually, including costs of equipment, personnel, materials, storage and transportation. Industrial parts cleaning machines typically remove lubrication oils from tools and parts through the use of mineral spirits solvent that becomes progressively more contaminated and less effective in the cleaning process. Eventually, the solvent becomes saturated with oil, sludge and other contaminants, and is frequently classified as a hazardous waste under federal and state regulations. Under the most common current practice, the contaminated solvent must be stored until pick-up, when pure solvent is delivered and the contaminated solvent is transported to regional refining facilities. This delivery and off-site recycling program is typically scheduled on four to sixteen week cycles. In contrast, the distillation process used in the Company's SystemOne/registered trademark/ Washer removes all the contaminants from the solvent within the cleaning unit itself, minimizing the volume of waste by-product and providing pure solvent to the customer on demand, eliminating the need for the costly and potentially dangerous storage and transportation of hazardous waste. Moreover, the small amount of waste by-product yielded in the distillation process used in the SystemOne/registered trademark/ Washer can typically be recycled or disposed of together with the customer's used motor oil, which is generally not classified as hazardous waste. Industrial parts cleaning machines are used by automotive, aviation and maritime service, repair and rebuilding facilities, gas stations, transmission shops, parts remanufacturers, machine shops, and general manufacturing operations of every size and category requiring parts cleaning. Based on these factors, the Company believes that its product line presents an attractive and economical alternative to users of parts cleaning machines. The Company believes that the response of users to its products has been favorable because the products increase worker productivity as a result of enhanced cleaning solution utilization, facilitate efficient and economical compliance with environmental regulations, minimize waste disposal requirements, and reduce insurance costs. Purchasers of the Company's SystemOne/registered trademark/ Washer include Waste Management, Florida Detroit Diesel, Greenwich Air Services, Miami-Dade, Orange, Broward, and Palm Beach Counties, Florida, Cummins Southeast Power, Houston Lighting & Power, Republic Industries, South Florida Caterpillar dealers, and a number of automobile dealerships. RECENT DEVELOPMENTS To date, substantially all of the Company's sales of SystemOne/registered trademark/ Washers were made to or through First Recovery, an affiliate of Ashland, Inc., which has acted as the Company's exclusive distributor in designated 2 metropolitan markets since August 1996. Primarily all of the sales of the Company's SystemOne/registered trademark/ Washers to First Recovery were made during a period in which the Commission Sales Representation Agreement (the "Representation Agreement") was in effect between the parties. The Company selected First Recovery as its SystemOne/registered trademark/ distributor because it and its affiliates, including the Valvoline Oil Company, maintain an extensive distribution network including numerous national accounts with significant requirements for parts washing equipment, and manufacture and distribute one of the principal mineral spirits solvents used in parts washers. In November 1997, in an effort to enhance long-term profitability, preserve strategic opportunities, maximize value for its shareholders and generally reduce its dependence on First Recovery, the Company announced plans to develop a direct marketing and distribution organization for its SystemOne/registered trademark/ product line. Primarily as a result of this strategic decision, the Company experienced a material reduction in revenues and unit sales and a material increase in operating expenses during the fourth quarter of 1997, while ramping up its direct marketing and distribution capabilities. For the year ended December 31, 1997, the Company incurred a net loss of approximately $1.2 million compared to a net loss of approximately $2.5 million for the year ended December 31, 1996. The Company anticipates that reductions in revenues and increases in operating expenses will continue until such time as the Company completes the ramping up of direct marketing and distribution capabilities. No assurance can be given, however, that the Company's efforts in establishing direct marketing and distribution capabilities will be completed, or if completed, will be successful. In the event the Company is not successful in its direct marketing and distribution efforts, the Company's business and future prospects could be adversely affected. In December 1997, the Company entered into a Purchase and Distribution Agreement with First Recovery (the "Purchase and Distribution Agreement"), which agreement replaced the Representation Agreement and extended the exclusive distribution relationship of the parties in a limited territory through June 1998. Although the Company intends to continue to evaluate and discuss a long-term distribution agreement or other strategic alliance with First Recovery or other strategic partner, the Company's immediate focus is on the completion of the development of its direct marketing and distribution organization. There can be no assurance that the Company will have any continuing relationship with First Recovery after the expiration of the Purchase and Distribution Agreement in June 1998. In February 1998, the Company consummated a private placement (the "Private Placement") of $17.0 million in principal amount of 8 1/4% Subordinated Convertible Notes due 2003 (the "Notes"). Interest on the Notes is payable semi-annually and during the first two years is payable through the Company's issuance of additional Notes and thereafter, at the election of the Company, is payable either in cash or through the issuance of additional Notes. The Notes are convertible by the holders thereof into shares of the Company's common stock, $.001 par value (the "Common Stock"), at a conversion price equal to $17.00 per share (the "Conversion Price") and automatically convert into shares of Common Stock after February 23, 1999, if the closing price of the Common Stock, as reported on the Nasdaq SmallCap Market (as defined herein), exceeds 175% of the Conversion Price for a period of twenty consecutive trading days, including the twenty trading days immediately preceding February 23, 1999. The Company may redeem the Notes after February 23, 2001 under certain circumstances. The Company has used and will continue to use the proceeds of the Private Placement to expand manufacturing operations, accelerate the development of its direct marketing and distribution organization, and for working capital and general corporate purposes. INDUSTRY OVERVIEW AND COMPETITION Industrial parts cleaning machines are used by automotive, aviation and maritime service, repair and rebuilding facilities, gas stations, transmission shops, parts remanufacturers, machine shops, and general manufacturing operations of every size and category requiring parts cleaning. Based on financial and trade journal reports, the Company believes that in 1997 businesses in the United States incurred more than $1 billion in expenses to clean industrial parts using chemical cleaning techniques. 3 The industrial parts cleaning industry is highly competitive and dominated by Safety-Kleen Corp. ("Safety-Kleen"), which has substantially greater financial and other resources than the Company. Safety-Kleen services the parts cleaning industry through a "closed-loop" recycling system in which contaminated solvent is removed for recycling and fresh solvent is delivered on a periodic basis. The Company believes that Safety-Kleen services a significant portion of the parts washing machines currently in use and that no other competitor accounts for more than 5% of the parts washer market in the United States. There can be no assurance that Safety-Kleen will not develop or acquire technology comparable to the Company's that would allow Safety-Kleen to provide an on-site recycling service. To the best of the Company's knowledge, no other company is currently commercially marketing a recycling parts washer with comparable characteristics. See "--Patents, Trademarks and Proprietary Technology." The Company believes that certain of its target customers have attempted to enhance the capabilities of their existing industrial parts washers by acquiring stand alone machines capable of distilling solvent. Although there is a wide variety and types of such machinery currently available to the public, the Company believes its fully integrated SystemOne/registered trademark/ Washer provides superior on demand service at a lower cost. The Company believes that the SystemOne/registered trademark/ Washer compares favorably with products of its competitors on the basis of, among other things: (i) delivery of pure solvent on demand without frequent solvent replacement; (ii) lower overall cost; (iii) reduced time and cost associated with documenting compliance with applicable environmental and other laws; (iv) reduced safety and environmental risks associated with competitive machines and services; (v) customer service; and (vi) difficulty in handling the regulated substances used and/or generated by competitive machines. STRATEGY The Company's strategy is to continue its focus on the manufacture, marketing and sale of its SystemOne/registered trademark/ Washer. This product has achieved fairly rapid market penetration in its initial target areas because of its technological, economic and environmental advantages over competitive equipment. The Company has commenced the marketing of certain of its other products and is continuing its research and development programs. As a result of the Company's arrangements with First Recovery, the Company began the penetration of the industrial parts cleaning market and the distribution of its SystemOne/registered trademark/ Washer through First Recovery in 21 metropolitan areas, 18 of which were open as of December 31, 1997. To date, the Company has sold 2,719 SystemOne/registered trademark/ Washers under agreements with First Recovery, substantially all of which were purchased by First Recovery for sale to third parties. The Company has begun and intends to continue, its penetration of the industrial parts cleaning market through its own direct marketing and distribution efforts. To date, the Company has opened twelve support centers in connection with its ramping up of direct marketing and distribution capabilities and intends to open up to 20 additional support centers in connection with such efforts. The Company's immediate priority is to capitalize on the opportunities it has identified for the sale of its industrial parts washers. Its long-range goals are to develop multiple product lines that utilize its resource recovery and waste minimization technologies and to expand its sales of all product lines in new markets. The Company intends to focus on the following initiatives: /bullet/ ACCELERATE PRODUCT SALES THROUGH DIRECT MARKETING. The Company intends to continue the penetration of the industrial parts cleaning market through its own direct marketing and distribution efforts and anticipates that it will be able to maximize market share through aggressive factory direct pricing and increased operating profits, although there is no assurance in this regard. 4 /bullet/ EVALUATE LONG-TERM RELATIONSHIP WITH FIRST RECOVERY. In light of the expiration of the Purchase and Distribution Agreement in June 1998, the Company intends to evaluate and discuss a long-term distribution agreement or other strategic alliance with First Recovery. In addition to providing for minimum annual purchases, as in the case of the Purchase and Distribution Agreement, a long-term agreement would be likely to confer on the Company the benefits of First Recovery's established broad distribution capabilities and access to national accounts and marketing expertise. In any such agreement, the Company intends to retain control over its products and their utilization by coordinating its marketing efforts and consumer support programs with First Recovery and providing high quality service through its network of regional support centers. /bullet/ COMMERCIALIZE ADDITIONAL PARTS WASHING EQUIPMENT. The Company expects to broaden its industrial parts cleaning product line with aqueous based washers, an alternative to mineral spirits solvent based washers; immersion washers, which clean complex parts; power spray washers, which accommodate large or bulky parts; and spray gun washers, for use in paint thinner recovery. The Company has obtained patent protection and developed prototypes and/or commenced limited sales of each of these products. /bullet/ EXPAND TO INTERNATIONAL MARKETS. The Company believes that significant opportunities exist for international sales of the SystemOne/registered trademark/ product line. After domestic operations have been established, the Company intends to explore distribution arrangements in other markets through licensing and/or strategic alliances. /bullet/ EXPAND PRODUCT LINE. Through its ongoing research and development initiatives, the Company has identified a number of potential applications of its core technologies, including commercial applications in the printing and dry cleaning industries, water purification, medical waste treatment, and consumer applications. The Company believes that these applications could be developed without significant additional research expense, by utilizing the research that resulted in the commercialization of the SystemOne/registered trademark/ Washer. PRODUCTS The Company's product line includes a variety of self-contained recycling industrial cleaning and washing equipment, all of which incorporate proprietary waste minimization technology with respect to which the Company has obtained or applied for patent protection. The Company expects that all the products listed below will be available for commercial exploitation at various times prior to December 31, 2000. All of the Company's products utilize technology that (i) provides continuously recycled cleaning solution during the cleaning process, (ii) eliminates the necessity for continual replacement and disposal of contaminated cleaning solution and residues and (iii) facilitates practical and cost effective compliance with current environmental laws and regulations. SYSTEMONE/registered trademark/ WASHER. The SystemOne/registered trademark/ Washer is the first of the Company's products to be available in commercial quantities. During 1997, the Company manufactured and sold an aggregate of 2,986 SystemOne/registered trademark/ Washers, substantially all of which were purchased by First Recovery for sale to third parties. The SystemOne/registered trademark/ Washer provides users with pure mineral spirit solvent for parts and tools cleaning purposes, utilizing a low-temperature vacuum distillation process to recycle the used solvent within the SystemOne/registered trademark/ Washer on demand, so that the solvent may be reused without any need for off-site processing. The SystemOne/registered trademark/ Washer minimizes the volume of waste by-product and eliminates the need for storage and disposal of the hazardous waste solvent. The Company's SystemOne/registered trademark/ Washer consists of one or two washing sinks mounted at standing level on top of a metal cabinet; a hinged lid on top of the washing sink to minimize evaporation of solvent; a five gallon primary solvent holding tank; a distillation unit which contains a residue reservoir; and a 30-gallon secondary 5 solvent holding tank. The SystemOne/registered trademark/ Washer utilizes a manually operated hose and scrubber which directs the flow of solvent to the part being cleaned. The distillation unit separates the solvent from the contaminants that accumulate in the solvent by heating the solvent solution in a vacuum to a temperature at which the solvent, but not the residue, vaporizes; and then cooling the solvent vapor so that the vapor condenses and is converted back into a liquid. The distilled solvent is channeled to the secondary solvent holding tank for future use. Accordingly, the solvent may be repeatedly used, distilled and reused without need for off-site distillation or processing. The residue is collected and held in the residue reservoir until final disposal. The Company believes that substantially all of its target customers currently have established systems for the handling, transportation, recycling and disposal of used oil. In those instances in which the residue may not be recycled as used oil, the residue, but not the distilled solvent, shall be periodically picked up, recycled and/or disposed of by a third party. The Company has also developed, and obtained patent protection with respect to, a general parts washer which utilizes an aqueous based cleaning solution. The markets for SystemOne/registered trademark/ Washers are automotive, aviation and maritime service, repair and rebuilding facilities, gas stations, transmission shops, parts remanufacturers, machine shops, and general manufacturing operations of every size and category requiring small parts cleaning. The SystemOne/registered trademark/ Washer requires service approximately four times a year for replacement of solvent lost to evaporation or spillage. The service may be performed by the Company, the owner or a third party service provider contracted by the customer. OTHER PRODUCTS The Company has developed a number of products that utilize the Company's core recycling, waste minimization and resource recovery technologies. These products include: MULTIPROCESS POWER SPRAY WASHER, which is currently manufactured and marketed on a limited basis. The Power Spray Washer integrates three processes in one self-contained machine; a power spray wash process, a recycling/reclamation process and a thermal oxidation process. The Power Spray Washer is able to accommodate large and bulky parts or units that are too large for the SystemOne/registered trademark/ Washer. The target market for power spray washers consists of automotive, aviation and maritime maintenance, repair and rebuilding facilities, parts remanufacturers, machine shops, transmission shops, and all facets of general manufacturing requiring maintenance and repair of mechanical equipment. SYSTEMONE/registered trademark/ BRAKE WASHER, which is currently manufactured and marketed on a full-scale basis, is a mobile telescoping mini-parts washer designed specifically for the automotive brake industry to meet Occupational Safety and Health Act standards for the containment of airborne asbestos particles during auto brake repair operations. As an auxiliary unit to the SystemOne/registered trademark/ Washer, the SystemOne/registered trademark/ Brake Washer may be placed directly under the automobile being serviced and provides clean solvent on demand to the user by utilizing the SystemOne/registered trademark/ Washer to distill the contaminated solvents. As of December 31, 1997, the Company had sold 243 SystemOne/registered trademark/ Brake Washers. SYSTEMONE/registered trademark/ SPRAY GUN WASHER, which is scheduled for commercial introduction in 1998, incorporates the Company's recycling/reclamation capabilities for paint thinner recovery. The target market for spray gun washers consists of automotive, aviation and maritime paint shops and all general manufacturing operations that utilize paint. The Company anticipates that the auto paint industry will represent a substantial market. The MultiProcess Spray Gun Washer facilitates compliance with rigorous environmental disposal regulations for the paint industry. 6 MULTIPROCESS IMMERSION WASHER, which is scheduled for commercial introduction in 1998 integrates an immersion wash process, a recycling/reclamation process and a thermal oxidation process in one self-contained machine. The MultiProcess Immersion Washer is designed to clean complex parts containing substantial integral and highly inaccessible passages requiring a total immersion washing. The primary target market for immersion washers consists of radiator rebuilding shops, as well as automotive, aviation and maritime maintenance, repair and rebuilding facilities, parts remanufacturers, machine shops, transmission shops, and all facets of general manufacturing requiring maintenance and repair of mechanical equipment. MINIDISPOSER, which is scheduled for commercial introduction in 1999 is a portable mini-thermal oxidizer developed as a practical and efficient means for the disposal of contaminants by thermal oxidation within a unit measuring only one cubic foot. The MiniDisposer will be marketed both as optional equipment with the SystemOne/registered trademark/ Washer and as a stand alone mini-thermal oxidizer. The Company believes that the size and scope of the market for the MiniDisposer is substantial and diversified and includes industrial, commercial and consumer applications that generate small contaminant waste by-products. The Company is exploring potential markets in medical, restaurant and other commercial and consumer applications. MANUFACTURING AND SUPPLY OF RAW MATERIALS In February 1997, the Company entered into a lease with respect to a 44,000 square foot facility located in Miami, Florida which, following the installation of manufacturing machinery and equipment in a custom-designed production line, became the Company's primary manufacturing and research facility in the fourth quarter of 1997. All of the Company's manufacturing operations, including design, fabrication, painting and assembly are performed at this facility. Annual manufacturing capacity of SystemOne/registered trademark/ Washers at its new facility is approximately 25,000 units as compared to 2,500 units at the Company's previous manufacturing facility. The SystemOne/registered trademark/ Washer is an assembly of raw materials and components all of which the Company believes are readily obtainable in the United States. The Company does not believe that it is dependent upon any of its respective current suppliers to obtain the raw materials and components necessary to assemble and manufacture SystemOne/registered trademark/ Washers. The Company currently procures raw materials and components for its SystemOne/registered trademark/ Washers from approximately 40 sources. The Company manufactures its other products in amounts required for testing, test marketing and/or commercial production in its manufacturing facilities. MARKETING, SALES AND CUSTOMER SERVICE Commencing in December 1995, the Company placed an aggregate of 47 SystemOne/registered trademark/ Washers in 38 automotive dealerships, municipal and private fleet maintenance facilities, repair facilities and other users of parts cleaning equipment in South Florida. This test program was conducted primarily to create awareness of its products and to enable the Company to gauge the potential demand. In January 1997, following a four-month test program with First Recovery, the Company and First Recovery entered into the Representation Agreement pursuant to which First Recovery served as the Company's exclusive distributor of the SystemOne/registered trademark/ Washers in 21 metropolitan areas. The Representation Agreement replaced the Company's original limited pilot program with First Recovery covering the Dallas and Houston, Texas markets. In December 1997, prior to the expiration of the Representation Agreement, the Company and First Recovery entered into the Purchase and Distribution Agreement, effectively terminating and superseding the Representation Agreement. Notwithstanding the existence of the Representation Agreement, the Company and First Recovery had been operating under terms similar to those contained in the Purchase and Distribution Agreement during the majority of 1997. 7 Pursuant to the Purchase and Distribution Agreement, First Recovery was granted the exclusive right to purchase SystemOne/registered trademark/ Washers from the Company and market and distribute such products through sale or lease in a territory consisting of 21 major metropolitan markets throughout the United States and to national customers operating in more than one state and in more than fifteen locations. Within the State of Florida, during the term of the Purchase and Distribution Agreement, First Recovery may solicit trial placements of SystemOne/registered trademark/ Washers on behalf of the Company as a commissioned sales agent only. Pursuant to the Purchase and Distribution Agreement, First Recovery purchased, net ninety days, 400 SystemOne/registered trademark/ Washers and 243 SystemOne/registered trademark/ Brake Washers during December 1997 and agreed to purchase, net ninety days, a minimum of 600 SystemOne/registered trademark/ Washers during the first quarter of 1998. In an effort to enhance long-term profitability, preserve strategic opportunities and maximize value for its shareholders, in November 1997, the Company announced plans to develop a direct marketing and distribution organization for its SystemOne/registered trademark/ product line. The Company is currently in the process of ramping up its direct marketing and distribution capabilities and expects that the investment in its direct distribution infrastructure will result in a long-term operating strategy that maximizes market share through aggressive factory direct pricing and increased operating profits. No assurance can be given that the Company's efforts in establishing direct marketing and distribution capabilities will be completed, or if completed, will be successful. Through December 31, 1997, the Company had sold 3,273 SystemOne/registered trademark/ Washers, 2,655 units of which were purchased by First Recovery for sale to third parties. To assist in the marketing and support of sales to First Recovery under the Purchase and Distribution Agreement, as well as under the Representation Agreement, as of December 31, 1997, the Company agreed to establish 21 support centers throughout First Recovery's exclusive distribution territory, 18 of which were open as of December 31, 1997. The Company intends to continue to generate consumer awareness of its SystemOne/registered trademark/ Washer through the efforts of its marketing staff, general advertisements in trade publications, and participation in trade conventions. PATENTS, TRADEMARKS AND PROPRIETARY TECHNOLOGY The Company has been awarded eight United States patents, seven of which relate to its SystemOne/registered trademark/ Washer, Power Spray Washer, Spray Gun Washer, Immersion Washer and MiniDisposer (thermal oxidizer) and one relates to a System and Method of Vapor Recovery in Industrial Washing Equipment was allowed by the U.S. Patent Office in October, 1997 and is expected to issue in May, 1998. The Company intends to apply for additional patents as appropriate. The Company's patents have terms commencing September 1994 and continue through September 2014. The Company has secured three patents with respect to the SystemOne/registered trademark/ Washer. The Company currently has four additional patents pending relating to vapor recovery systems, machinery and processes using SystemOne/registered trademark/ technology. The Company also holds patents in Mexico and Japan relating to its SystemOne/registered trademark/ technology and has applied for international patents in Canada, Japan, Europe and Mexico. The Company believes that patent protection is important to its business. There can be no assurance as to the breadth or degree of protection which existing or future patents, if any, may afford the Company, that any patent applications will result in issued patents, that patents will not be circumvented or invalidated or that the Company's competitors will not commence marketing self-contained washers with similar technology. In the event the Company products or processes infringe patents or proprietary rights of others, the Company may be required to modify the design of its products or obtain a license. The Company has received a federal trademark registration with respect to the mark "SystemOne" and design. The Company also relies on trade secrets and proprietary know-how and employs various methods to protect the concepts, ideas and documentation of its proprietary information. However, such methods may not 8 afford complete protection and there can be no assurance that others will not independently develop such know-how or obtain access to the Company's know-how, concepts, ideas and documentation. Although the Company has and expects to have confidentiality agreements with its employees, suppliers and appropriate vendors, there can be no assurance that such arrangements will adequately protect the Company's trade secrets. Since the Company believes that its proprietary information is important to its business, failure to protect such information could have a material adverse effect on the Company. DIRECT SALES FINANCING The Company makes its SystemOne/registered trademark/ Washers available to the public through a third party leasing program. The Company is party to an agreement (the "Product Financing Agreement") with First Sierra Inc., formerly known as Oakmont Financial Services, Inc. ("First Sierra"), pursuant to which First Sierra provides third party leasing services. Pursuant to the Product Financing Agreement, the Company provides First Sierra with certain information, including credit information, with respect to each proposed lessee. First Sierra may reject a lease application if, in its sole discretion, the proposed transaction does not comply with First Sierra's then applicable criteria. If First Sierra elects to provide lease financing, First Sierra purchases the SystemOne/registered trademark/ Washer in the manner and for an amount agreed to by the Company and First Sierra from time to time, upon First Sierra's receipt of required documentation. The Product Financing Agreement provides that, upon the customer's satisfaction of all of its lease payment obligations to First Sierra, the Company may, at its option, repurchase the subject equipment from First Sierra at a cash purchase price equal to the fair market value of the subject equipment plus applicable sales tax. The Product Financing Agreement states that the fair market value of a SystemOne/registered trademark/ Washer shall be determined by the mutual agreement of the Company and First Sierra or, if such an agreement is not reached, by an appraiser selected by mutual agreement of the Company and First Sierra. Under the Product Financing Agreement, the Company has agreed, for a fee, to utilize a reasonable and non-discriminatory approach to assist First Sierra in reselling any SystemOne/registered trademark/ Washers with respect to which a customer has failed to discharge its payment obligations to First Sierra. The Product Financing Agreement provides that First Sierra does not have recourse against the Company for a customer's failure to discharge its obligations to First Sierra unless the Company has breached and failed to cure certain warranties made to First Sierra. The Product Financing Agreement has a term of one year, which automatically renews for successive one-year terms. Under the Product Financing Agreement, either the Company or First Sierra may terminate the agreement with or without cause upon 60 days notice, without affecting the rights and obligations of either party with respect to previous sales. In addition, if First Sierra declines any five lease applications within a 30-day period, which lease applications are accepted and funded by a third party on terms declined by First Sierra, the Company may, upon 10 days notice, terminate the Product Financing Agreement. The Company and First Sierra are currently negotiating certain modifications to the Product Financing Agreement. RESEARCH AND DEVELOPMENT During the years ended December 31, 1996 and 1997, the Company expended $684,000 and $415,000, respectively, in connection with research and development activities. The Company plans to continue to focus significant resources on the development of additional products utilizing the Company's core recycling technologies. The Company recognizes that the industrial parts cleaning industry may be entering a phase of rapid technological change and progress and the Company will seek to retain what the Company perceives as its technological superiority over its competitors' products. Accordingly the Company intends to continue to seek means of refining and improving its SystemOne/registered trademark/ Washer. In order to keep 9 pace with the rate of technological change, the Company also intends to devote considerable resources in time, personnel and funds on research and development for future products. The Company recognizes that many of its competitors have far greater financial and personnel resources than the Company which may be devoted to research and development, and can provide no assurance that it will maintain a technological advantage over its competitors. Additionally, there can be no assurance that the Company will ever develop any new products capable of commercialization, the Company intends to continue its programs to develop new products, some of which may utilize the Company's patented products and processes. GOVERNMENT REGULATION The Company believes that federal and state laws and regulations have been instrumental in shaping the industrial parts washing industry. Federal and state regulations dictate and restrict to varying degrees what types of cleaning solvents may be utilized, how a solvent may be stored and utilized, and the manner in which contaminated solvents may be generated, handled, transported, recycled and disposed of. Although the federal and state laws and regulations discussed below regulate the behavior of the Company's customers, and not the Company, the Company believes that customer demand for its SystemOne/registered trademark/ Washer is partially a function of the legal environment in which the Company's customers conduct business. The Company's SystemOne/registered trademark/ Washer was designed to help minimize the cost of complying with existing federal and state environmental laws and regulations. Any changes, relaxation or repeal of the federal or state laws and regulations which have shaped the industrial parts washing industry may significantly affect demand for the Company's products and the Company's competitive position. REGULATION OF SOLVENT TYPES. Federal and state regulations have restricted the types of solvents that may be utilized in industrial parts cleaning machines. Prior to December 1995, methyl chloroform was a widely used cleaning solvent. The Clean Air Act of 1990 mandated the elimination of methyl chloroform by December 1995. REGULATION OF HANDLING AND USE OF SOLVENTS. Stoddard solvents, more commonly known as mineral spirits and solvent naphtha, are the cleaning solvents typically used in the industrial parts washers of the Company's closest competitors. The Company intends to use mineral spirits with a minimum of 140 degrees Fahrenheit ignitable limits in its SystemOne/registered trademark/ Washer. Such mineral spirits do not exhibit the ignitability characteristic for liquid hazardous wastes as defined in the Resource Conservation and Recovery Act of 1976, as amended (the "RCRA")., and the implementing regulations of that statute adopted by the United States Environmental Protection Agency (the "EPA"). Certain machines of the Company's competitors use mineral spirits with lower ignitable limits, which may, after use, render such mineral spirits subject to regulation as a hazardous waste. The Company believes that the ability to recycle the mineral spirits used in its SystemOne/registered trademark/ Washer provides an economic benefit to the Company's customers by allowing them to avoid the expenses and potential liability associated with the disposal of such solvent as a hazardous waste. See "Government Regulation--Regulation of Generation, Transportation, Treatment, Storage and Disposal of Contaminated Solvents." Federal, state and many local governments have adopted regulations governing the handling, transportation and disposal of such solvents. On the federal level, under the Hazardous Materials Transportation Act ("HMTA"), the United States Department of Transportation has promulgated requirements for the packaging, labeling and transportation of mineral spirits in excess of specified quantities. The Company does not intend to transport mineral spirits in quantities that would trigger compliance with HMTA requirements. Relative to the handling and disposal of mineral spirits, many states and local governments have established programs requiring the assessment and remediation of hazardous materials that have been improperly discharged into the environment. Liability under such programs is possible for unauthorized release of mineral spirits in violation of applicable standards. 10 Civil penalties and administrative costs may also be imposed for such violations. REGULATION OF GENERATION, TRANSPORTATION, TREATMENT, STORAGE AND DISPOSAL OF CONTAMINATED SOLVENTS. The generation, transportation, treatment, storage and disposal of contaminated solvents is regulated by the federal and state governments. At the federal level, the RCRA authorized the EPA to develop specific rules and regulations governing the generation, transportation, treatment, storage and disposal of hazardous wastes as defined by the EPA. The EPA's definition of hazardous waste appears under Chapter 40 CFR Part 261. The Company believes that none of the residue by-products, the used solvent before distillation or the solvent recycled in a SystemOne/registered trademark/ Washer used in accordance with its intended purpose and instructions is subject to regulation as a "hazardous waste." In contrast, the Company believes that the mixture of solvent and contaminants which is periodically recovered from the machines of many of its competitors is subject to regulation as "hazardous waste." The Company believes that the ability to recycle and dispose of its residue by-product as used oil rather than as a hazardous waste is economically attractive to the Company's customers for a number of reasons. The Company believes that substantially all of its target customers currently have established systems for the handling, transportation, recycling and/or disposal of used oil. Accordingly, the classification of the residue as used oil would enable the Company's customers to: (i) dispose of or recycle the residue at no significant additional cost; and (ii) avoid certain costs associated with establishing and disposing of wastes in compliance with a hazardous waste disposal system. Even if the residue by-product was required to be handled, transported, recycled and/or disposed of as a hazardous waste, the fact that the SystemOne/registered trademark/ Washer effects a substantial reduction in the volume of waste product requiring disposal would still serve to minimize disposal costs. The RCRA establishes the basic framework for federal regulation of hazardous waste. The RCRA governs the generation, transportation, treatment, storage, and disposal of hazardous waste. In contrast to the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), which is discussed below, RCRA is designed to anticipate and prevent harm to human health and the environment, rather than to respond to the release of hazardous wastes. RCRA requires that facilities that generate, treat, store or dispose of hazardous wastes comply with certain operating and permitting standards. RCRA provides standards for permitting, maintenance and operation of facilities handling hazardous wastes, including requirements for testing and maintenance of equipment, contingency plans and emergency procedures, secondary containment, recordkeeping and reporting to government agencies. The recordkeeping and reporting requirements of RCRA are significant. Before transportation and disposal of hazardous wastes off-site, generators of such waste must package and label their shipments consistent with detailed regulations and prepare a manifest to be filed with the appropriate governmental agency identifying the material and stating its destination. The transporter must deliver the hazardous waste in accordance with the manifest and to a facility with an appropriate RCRA permit (a "TSD Facility"). Failure to comply with the manifesting requirements may result in the imposition of civil and/or criminal penalties. Many states and local governments have adopted regulatory programs which parallel the RCRA regulatory system, many of which programs are in certain ways more restrictive and burdensome than the RCRA system. With regard to regulation of "used oil", the EPA ruled in 1992 that used oil is not a hazardous waste under RCRA. Like the RCRA regulations pertaining to hazardous wastes, the EPA's used oil regulations provide standards for permitting, the maintenance and operation of used oil facilities, including requirements for testing and maintenance of equipment, contingency plans and emergency procedures, secondary containment, recordkeeping and reporting. However, there are some material differences between RCRA's regulation of hazardous waste and used oil. In contrast to hazardous wastes, used oil need not be processed solely at sites with treatment, storage and disposal permits. In addition, the generators of used oil are not required to file a shipping manifest with government agencies with respect to each shipment of used oil. Many state and local governments have adopted regulatory programs which parallel the EPA's program for regulating used oil, many of which 11 programs are in certain ways more restrictive or burdensome than the EPA's program. For instance, certain state and local governments continue to regulate used oil as a hazardous waste. CERCLA, as amended by the Superfund Amendments and Reauthorization Act of 1986 ("SARA"), sets forth national policy and procedures for containing and removing releases of hazardous substances, and identifying and remediating sites contaminated with hazardous substances. CERCLA created an $8.5 billion fund (the "Superfund"), financed from taxes on petroleum and various chemicals, to be administered by the EPA to fund cleanup of hazardous waste sites. SARA significantly expanded the scope of hazardous waste cleanup and imposed more stringent cleanup requirements. The Superfund's most notable objective, however, is to provide criteria and financial assistance for site cleanups and to impose liability on parties responsible for such contamination--namely, owners and operators of vessels or facilities from which such releases occur, and persons who generated, transported, or arranged for the transportation of hazardous substances to a facility from which a release or threatened release occurs. Most states, including Florida, have created programs similar to Superfund. These state programs are principally designed to help finance the state's share of remediation costs of sites under the federal Superfund and to finance cleanups at state sites that are not considered a priority for remediation under the federal program. The CERCLA definition of hazardous substances provides a major exception for petroleum, including used oil if recycled. However, liability under CERCLA is possible if petroleum products are released that contain hazardous substances as additives or that are tainted with hazardous substances during their use and disposal. The Company believes that the demand for its SystemOne/registered trademark/ Washer is enhanced as a result of certain federal and state environmental laws and regulations. Although the demand for industrial parts cleaning machines and services may be substantial in certain international markets, the level of demand for the Company's SystemOne/registered trademark/ Washer may not be substantial in certain countries as a result of permissive regulatory systems which allow the use of less environmentally stringent cleaning and waste disposal methods. PRODUCT LIABILITY AND INSURANCE The Company is subject to potential product liability risks which are inherent in the design and use of industrial parts cleaning machines. The Company has implemented strict quality control measures and currently maintains product liability insurance with respect to such potential liabilities. EMPLOYEES At December 31, 1997, the Company had 66 employees, of which 5 were in corporate management, 2 were in research and development, 3 were in sales and marketing, 29 were in manufacturing, 5 were in administration and 22 were in field support. In connection with the Company's development of direct marketing and distribution capabilities, the Company had hired 18 direct salespersons as of March 31, 1998. ITEM 2. PROPERTIES. The Company maintains its corporate headquarters and, commencing in December 1997, its manufacturing and research and development facilities in a new 44,000 square foot building located in Miami, Florida. The initial term of the lease for this facility commenced on August 1, 1997 and expires September 30, 2002. This lease provides for a renewal term of five years and is exercisable at the Company's option upon six months prior written notice. The Company's annual lease payments under this lease are approximately $288,600, subject to an annual 4.5% increase, which amount does not include the Company's obligation to pay all utilities charges and the Company's proportionate share of the facilities maintenance and operating expenses. The Company has the right to cancel this lease upon three months prior written notice, subject to certain conditions. The Company has also been granted a right of first refusal with respect to vacant space adjoining these facilities. 12 Pursuant to this right of first refusal, the landlord is required to provide the Company with written notice of any adjacent space which becomes vacant during the initial or extended term of the lease. Prior to moving into its new facilities, the Company maintained its corporate headquarters, research and development laboratory and manufacturing facilities in a 10,000 square foot building located in Miami, Florida pursuant to a lease expiring on December 31, 1998. The annual lease payments under such lease were approximately $61,000. In early 1997, the Company exercised its option to terminate the lease without penalty and notified the landlord of such intention. To date, the Company has opened 21 support centers in support of its agreements with First Recovery and 12 support centers in connection with the ramping up of its direct marketing and distribution efforts. The Company intends to open up to an additional 20 support centers in connection with its direct marketing and distribution efforts. Such support centers, which are typically leased on an annual basis, average approximately 1,500 square feet and require average annual rental payments of approximately $10,000. ITEM 3. LEGAL PROCEEDINGS. The Company is not presently involved in any legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of the Company's security holders during the fourth quarter of 1997. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock has traded in the Nasdaq SmallCap Market ("Nasdaq") under the symbol "MANS" since September 27, 1996. The following table sets forth, for the periods indicated, the high and low closing bid quotations for the Common Stock as reported by Nasdaq. The Nasdaq quotations represent quotations between dealers without adjustment for retail markups, markdowns or commissions and may not necessarily represent actual transactions.
HIGH BID PRICE LOW BID PRICE -------------- ------------- 1997 ---- First Quarter............................... $16.00 $7.6875 Second Quarter.............................. $27.375 $13.125 Third Quarter............................... $27.00 $19.25 Fourth Quarter ............................. $24.25 $14.00 1996 ---- Third Quarter (from September 27, 1996).... $9.25 $8.125 Fourth Quarter............................. $8.625 $7.00
As of March 25, 1998, there were 55 holders of record of the Company's Common Stock. The Company believes that there are in excess of 500 beneficial owners of the Common Stock. On March 25, 1998, the closing bid price of the Common Stock was $20.75 per share. To date, the Company has not declared or paid any dividends on its Common Stock. Pursuant to the Notes, the Company may not declare or pay any dividends or make any other distributions, except dividends or distributions payable in equity securities. The payment of dividends, if any, is within the discretion of the Board of Directors and will depend upon the Company's earnings, its capital requirements and financial condition, contractual restrictions and other relevant factors. The Board does not intend to declare any dividends in the foreseeable future, but instead intends to retain future earnings, if any, for use in the Company's business operations. In February 1998, the Company consummated the Private Placement of $17.0 million of Notes generating net proceeds of approximately $15.7 million. To date, the Company has used and will continue to use the proceeds from the Private Placement to expand manufacturing operations, accelerate development of the Company's direct marketing and distribution organization, establish additional regional support and service centers and for working capital and general corporate purposes. The Private Placement was made pursuant to the exemption from registration afforded by Section 4(2) of the Securities Act of 1933, as amended, and Rule 506 promulgated thereunder. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the Financial Statements, including the notes thereto, contained elsewhere in this report. THE FOLLOWING, AS WELL AS THE DESCRIPTION UNDER PART I "BUSINESS" CONTAINS CERTAIN "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"), WHICH REPRESENTS THE COMPANY'S EXPECTATIONS OR BELIEFS, INCLUDING, BUT NOT LIMITED TO, STATEMENTS CONCERNING (I) TRENDS AFFECTING THE COMPANY'S FINANCIAL CONDITION OR RESULTS OF OPERATIONS; (II) THE COMPANY'S CONTINUED GROWTH AND OPERATING STRATEGY; AND (III) TRENDS IN GOVERNMENTAL REGULATION. FOR THIS PURPOSE, ANY STATEMENTS CONTAINED HEREIN ARE NOT STATEMENTS OF HISTORICAL FACT MAY BE DEEMED TO BE FORWARD-LOOKING STATEMENTS. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, WORDS SUCH AS "MAY," "WILL," "EXPECT," "BELIEVE," "ANTICIPATE," "INTEND," "COULD," "ESTIMATE" OR "CONTINUE" OR THE NEGATIVE OR OTHER VARIATIONS THEREOF OR COMPARABLE TERMINOLOGY ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. THESE STATEMENTS BY THEIR NATURE INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES, CERTAIN OF WHICH ARE BEYOND THE COMPANY'S CONTROL. READERS ARE CAUTIONED THAT ANY SUCH FORWARD LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE, AND THAT ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS. THE ACCOMPANYING INFORMATION CONTAINED HEREIN INCLUDING WITHOUT LIMITATION THE INFORMATION SET FORTH UNDER THE HEADINGS "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," AND "BUSINESS," IDENTIFIES IMPORTANT FACTORS THAT COULD CAUSE SUCH DIFFERENCES. GENERAL The Company was incorporated in November 1990 and, as a development stage company, devoted substantially all of its resources to research and development programs related to its full line of self contained, recycling industrial parts washers until June 1996. The Company commenced its planned principal operations in July 1996. The Company has only recently begun to generate significant revenue from product sales and has only had one quarter of profitability. Inasmuch as the Company's operating expenses have increased and can be expected to continue to increase significantly in connection with the Company's rapid expansion, development of a direct marketing and distribution organization for its SystemOne/registered trademark/ product line, establishment of additional regional technological support centers and a service fleet, development of new products through the application of the Company's core technologies and the purchase of raw materials, the Company anticipates that negative operating cash flow will continue until such time, if ever, as the Company is able to generate sufficient revenues to offset its operating costs and the costs of continued expansion and development. In October 1996, the Company consummated an underwritten initial public offering (the "IPO") of 1,100,000 shares of its Common Stock for aggregate net proceeds of $6,034,660. The net proceeds have been used for the development, sales and marketing of the Company's products, establishment of regional technological 14 support and service centers and a service fleet, development of manufacturing facilities and for working capital and general corporate purposes. In February 1998, the Company consummated the Private Placement of $17.0 million of Notes generating net proceeds of approximately $15.7 million. To date, the Company has used and will continue to use the proceeds from the Private Placement to expand manufacturing operations, accelerate development of the Company's direct marketing and distribution organization, establish additional regional support and service centers and for working capital and general corporate purposes. Under the Company's Product Financing Arrangement, the Company recognizes revenue from the sale of parts washers at the time the equipment is delivered by the Company. In general, the revenue recognized approximates the discounted present value of the payment stream related to the underlying lease. RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996 The Company commenced the sale of its products in July 1996 and had no revenues prior to June 30, 1996. Accordingly, comparisons between results in 1996 and 1997 may not be meaningful. Revenues increased by $6,508,682 to $7,244,427 during 1997 compared to $735,745 during 1996 primarily due to increased sales of SystemOne/registered trademark/ Washers during 1997. The Company sold 2,986 SystemOne/registered trademark/ Washers during 1997, an increase of 2,699 units compared to 287 units sold during 1996. Cost of goods sold increased by $4,079,524 to $4,660,785 during 1997 compared to $581,261 during 1996 primarily due to increased sales of SystemOne/registered trademark/ Washers. As a percentage of net sales, cost of goods sold represented 64.3% and 79.0% for the years ended December 31, 1997 and 1996, respectively. Selling, general and administrative expenses during 1997 were $3,461,246, an increase of $1,790,863 compared to selling, general and administrative expenses of $1,670,383 during 1996. The increase in selling, general and administrative expenses was primarily the result of the hiring of additional personnel in connection with the Company's establishment of 23 support centers, ramping up of direct marketing and distribution capabilities and the leasing of additional manufacturing capacity in order to support the Company's increased production. During 1997, the Company's research and development expenses decreased by $269,039, or 39.3%, from $684,467 during 1996 to $415,428 in 1997. The decrease was primarily the result of the Company's completion of its prototype testing program during 1996 and increased focus on the manufacturing and distribution of SystemOne/registered trademark/ Washers during 1997. The Company recognized net interest income of $104,108 during 1997, an increase of $57,763 compared to interest income of $46,345 during 1996. The increase in interest income was primarily due to the investment for a full year of the remaining proceeds from the Company's IPO. For the year ended December 31, 1996, the Company paid dividends on redeemable preferred stock of $147,000. The Company also incurred an exchange expense of $344,631 in connection with the conversion during June 1996 of all outstanding shares of preferred stock. No preferred stock was issued and outstanding during 1997. As a result of the foregoing, the Company incurred net losses of $1,188,924 and $2,498,652 for 1997 and 1996, respectively. The Company's net losses to common shares for 1997 and 1996 were $1,188,924 and $2,645,652, respectively. 15 LIQUIDITY AND CAPITAL RESOURCES At December 31, 1997, the Company had net working capital of $4,203,213 and cash and cash equivalents aggregating $2,243,172 compared to net working capital of $6,089,346 and cash and cash equivalents of $5,320,608 at December 31, 1996. The Company's primary sources of working capital are the net proceeds from the Company's Private Placement of Notes consummated in February 1998 and IPO consummated in October 1996, a receivables factoring arrangement entered into in November 1997 and its lease financing arrangement with First Sierra. In February 1998, the Company consummated the Private Placement of Notes generating net proceeds approximately $15.7 million. Interest on the Notes is payable semi-annually through the Company's issuance of additional Notes during the first two years and thereafter, at the election of the Company, either in cash or through the issuance of additional Notes. The Notes are convertible by the holders thereof into shares of Common Stock at a Conversion Price of $17.00 per share. The Notes automatically convert into shares of Common Stock after February 23, 1999, if the closing price of the Common Stock, as reported on the Nasdaq SmallCap Market, exceeds 175% of the Conversion Price for a period of twenty consecutive trading days, including the twenty trading days immediately preceding to February 23, 1999. The Company may redeem the Notes after February, 2001, under certain circumstances. The Company has used and will continue to use the proceeds of the Private Placement to expand manufacturing operations, accelerate the development of its direct marketing and distribution organization, and for working capital and general corporate purposes. In November 1997, the Company entered into an agreement with a third party providing for the factoring of the Company's accounts receivable (the "Factoring Agreement"). Pursuant to the Factoring Agreement, the Company effectively assigned all eligible receivables due from First Recovery to the third party for a period of six months. The Company may borrow up to 70% of all eligible receivables. In connection with this factoring relationship, the Company is required to pay a semi-annual commission in an amount equal to the greater of .5% of all factored receivables or $12,000. Any borrowings by the Company against eligible accounts receivable bear interest at a per annum rate equal to the greater of 9% or prime plus 1%. During the year ended December 31, 1997, the Company factored $4,785,285 of receivables from First Recovery of which the Company borrowed and repaid $1,000,000 prior to December 31, 1997. The Company paid $25,510 in interest and commissions relating to this agreement during 1997. The Company's cash and cash equivalents balance decreased by $3,077,436, or 57.8%, from $5,320,608 as of December 31, 1996 to $2,243,172 as of December 31, 1977, primarily as a result of net cash used to fund operating activities. Substantially all of such cash and cash equivalents represent proceeds from the IPO. Since the Company commenced the sale of its products, the Company has experienced negative cash flow from operations. During 1997, this negative cash flow was primarily a result of extending 90-day payment terms on sales to First Recovery and increases in inventory in order to meet anticipated sales volume on demand. On December 31, 1997, the Company's accounts receivable had increased to $1,006,000, or 76.5%, from approximately $570,000 on December 31, 1996. During 1997, the Company's inventories increased to approximately $1,824,000 from approximately $617,000 in order to meet anticipated increased sales volume. The Company's material financial commitments relate principally to its obligations to make lease payments pursuant to certain real property and equipment leases (currently approximately $75,162 per month), and installment payments for manufacturing equipment (currently approximately $17,132 per month). The Company anticipates that its material commitments will increase significantly over the next 12 months in connection with the Company's continued expansion and development of direct marketing and distribution capabilities. In 1997, the Company developed a plan to deal with the Year 2000 issue and will begin upgrading its computer systems to be Year 2000 compliant. The plan provides for the upgrade efforts to be completed by the end of 1998. The year 2000 issue is the result of computer programs being writen using two digits rather than four to define the applicable year. The total cost of the project is estimated to be approximately $36,000 and is being funded through operating cash flows. The Company will expense all costs associated with these system changes as the costs are incurred. As of December 31, 1997 $0 had been expensed. Capital requirements relating to the implementation of the Company's business plan have been and will continue to be significant. The Company believes that its ability to generate cash from operations is dependent upon, among other things, increased demand for its products and services and the successful development of direct 16 marketing and distribution capabilities. In order to reduce certain of the Company's up-front capital requirements associated with manufacturing operations as well as service center and service fleet development, the Company leases and intends to continue to lease rather than purchase, to the extent possible, equipment and vehicles. There can be no assurance that the Company will have sufficient capital resources to permit the Company to continue implementation of its business plan. As of December 31, 1997, the Company's accumulated deficit totaled $5,918,790. Since its inception, the Company has financed its operations through a number of stock and debt issuances and conversions. The Company believes, based on currently proposed plans and assumptions relating to its operations, that the proceeds from the Private Placement and the Company's existing financing arrangements, together with cash flow from operations will be sufficient to satisfy its cash requirements for a period of at least 12 months. In the event that the Company's plans change, its assumptions change or prove to be inaccurate or the proceeds from the Private Placement or available financing arrangements prove to be insufficient to fund the Company's rapid expansion and development efforts, the Company would be required to seek additional sources of financing. There can be no assurance that any additional financing will be available to the Company on acceptable terms, or at all. If adequate funds are not available, the Company's business operations could be materially adversely affected. ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The Financial Statements of the Company required by Form 10-KSB are attached hereto following Part III of this report commencing on page F-1. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT. Incorporated by reference from the Company's definitive proxy statement to be filed within 120 days after the end of the Registrant's fiscal year. ITEM 10. EXECUTIVE COMPENSATION. Incorporated by reference from the Company's definitive proxy statement to be filed within 120 days after the end of the Registrant's fiscal year. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Incorporated by reference from the Company's definitive proxy statement to be filed within 120 days after the end of the Registrant's fiscal year. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. 17 Incorporated by reference from the Company's definitive proxy statement to be filed within 120 days after the end of the Registrant's fiscal year. ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (A) EXHIBITS EXHIBIT DESCRIPTION 3.1 Restated Articles of Incorporation of Registrant(1) 3.2 Bylaws of Registrant, as amended(1) 4.1 Certificate for Shares of Common Stock, par value $.001(1) 4.3 Representatives' Warrant Agreement between the Registrant and the Underwriter(1) 10.1 Registrant's Executive Incentive Plan(1) 10.2 Master Lease and Distribution Agreement, effective August 1, 1996, among the Registrant, The Valvoline Company and First Recovery(1) 10.3 Form of Indemnification Agreement between the Registrant and each of its director and executive officers(1) 10.4 Employment Agreement between Pierre G. Mansur and the Registrant dated September 1, 1995(1) 10.5 Employment Agreement between Paul I. Mansur and the Registrant dated September 1, 1995(1) 10.6 Employment Agreement between the Company and Charles W. Profilet, dated as of November 27, 1995(1) 10.7 Vendor Lease Plan Agreement between the Registrant and Oakmont Financial Services, dated as of May 28, 1996(1) 10.8 A Manufacture Agreement between the Registrant and EMJAC Industries, Inc., dated as of May 7, 1996(1) 10.9 Lease Agreement, dated October 29, 1994, between Registrant and Marvin L. Duncan(1) 10.10 Security Agreement between the Registrant and The CIT Group/Equipment Financing, Inc. for one (1) TRUMPF TC 200 CNC Punching Machine, Serial No. 070080 with tolling package, dated as of October 25, 1995(1) 10.11 Term Life Insurance Policy for Pierce G. Mansur with the Equitable Life Assurance Society of the United States, dated as of November 9, 1994(1) 10.12 Term Life Insurance Policy for Paul I. Mansur with the Equitable Life Assurance Society of the United States, dated as of May 24, 1996(1) 10.13 United States Patent No. 5,277,208 for Multi-Process Power Spray Washer Apparatus dated January 11, 1994(1) 10.14 United States Patent No. 5,349,974 for SystemOne(TM) Washer dated September 27, 1994(1) 10.15 United States Patent Application No. 08/394,290 for Improved SystemOne(TM) Washer allowed April 2, 1996(1) 10.16 United States Patent No. 5,388,601 for Spray Gun Washer dated February 14, 1995(1) 10.17 United States Patent No. 5,518,013 for Immersion Washer dated May 21, 1996(1) 10.18 United States Patent Applications NO. 08/364,785 for apparatus for disposal of refuse by thermal oxidation allowed June 26, 1996(1) 10.19 Short Term Note, dated as of September 9, 1996, between Maria G. Jackson and the Registrant in the principal amount of $100,000(1) 10.20 Short Term Note, dated as of September 9, 1996, between First Malro and the Registrant in the principal amount of $250,000(1) 10.21 Short Term Note, dated as of September 9, 1996, between Martin E. Samy and the Registrant in the principal amount of $50,000(1) 10.22 Short Term Note, dated as of September 9, 1996, between Crestwell Corporation and the Registrant in the principal amount of $100,000(1) 18 10.23 Employment Agreement, dated as of July 31, 1996, between Richard P. Smith and the Registrant (1) 10.24 Lease, dated as of September 1, 1996 between Y.F.G., Inc. and the Registrant (1) 10.25 Lease, dated as of September 15, 1996 between Business Enterprises of Pinellas Limited and the Registrant (1) 10.26 United States Patent No. 5,549,128 for improved general parts washer dated August 27, 1996(1) 10.27 United States Patent No. 5,579,704 for apparatus for disposing of refuse by thermal oxidation dated December 31, 1996 (1) 10.28 United States Patent Application for floor washing apparatus dated December 3, 1996 (1) 10.29 United States Patent Application for system and method of vapor recovery in industrial washing equipment dated December 19, 1996 (1) 10.30 United States Patent Application for a process for integrated recycling of cleaning solution in industrial washing equipment dated February 26, 1997 (1). 10.31 Commission Sales Representative Agreement, dated January 16, 1997, among the Valvoline Oil Company, Ecogard, Inc. and the Registrant (2) 10.32 United States Patent Officer Notice of Allowance (3) 10.33 Intertek Testing Services Listing, Labeling, and Follow-up Service Agreement (3) 10.34 United States Patent Office Notice of Allowance (4) 10.35 Factoring Agreement between the Registrant and Capital Factors, Inc. ("Capital") dated November 26, 1997 10.36 Security Agreement Supplement between the Registrant and Capital 10.37 License Agreement between the Registrant and Capital dated November 26, 1997. 10.38 Purchase and Distribution Agreement between First Recovery and SystemOne Technologies, Inc. 27.1 Financial Data Schedule (1) Incorporated by reference to the exhibit of the same number filed with the Company's Registration Statement on Form S-1 (No. 333-08657). (2) Incorporated by reference to the Company's Current Report on Form 8-K dated January 22, 1997. (3) Incorporated by reference to the Company's Quarterly Report on Form 10-QSB for the Quarterly Period Ended June 30, 1997. (4) Incorporated by reference to the Company's Quarterly Report on Form 10-QSB for the Quarterly Period Ended September 30, 1997. (B) REPORTS OF FORM 8-K None. 19 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MANSUR INDUSTRIES INC. Dated: March 31, 1998 By: /s/ PAUL I. MANSUR ----------------------------- Chief Executive Officer (Principal Executive Officer) Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in capacities and on the dates indicated.
SIGNATURES TITLE DATE ---------- ----- ---- /S/ PIERRE G. MANSUR Chairman of the Board and President; March 31, 1998 - -------------------- Pierre G. Mansur Director /S/ PAUL I. MANSUR Chief Executive Officer; Principal March 31, 1998 - -------------------- Paul I. Mansur Executive Officer; Director /S/ RICHARD P. SMITH Chief Financial Officer; Principal Financial March 31, 1998 - -------------------- Richard P. Smith Accounting Officer - -------------------- Director March 31, 1998 Elias F. Mansur /S/ DR. JAN HEDBERG Director March 31, 1998 - -------------------- Dr. Jan Hedberg /S/ JOSEPH E. JACK Director March 31, 1998 - -------------------- Joseph E. Jack
20 INDEX TO FINANCIAL STATEMENTS PAGE Independent Auditors' Report F-2 Balance Sheets as of December 31, 1997 and 1996 F-3 Statements of Operations for the years ended December 31, 1997 and 1996 F-4 Statements of Stockholders' Equity for the years ended December 31, 1997 and 1996 F-5 Statement of Cash Flows for the years ended December 31, 1997 and 1996 F-6 Notes to Financial Statements F-7 INDEPENDENT AUDITORS' REPORT The Board of Directors Mansur Industries Inc.: We have audited the accompanying balance sheets of Mansur Industries Inc. (the "Company") as of December 31, 1997 and 1996, and the related statements of operations, stockholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Mansur Industries Inc. as of December 31, 1997 and 1996 and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. /S/ KPMG PEAT MARWICK LLP - ------------------------- KPMG Peat Marwick LLP Miami, Florida February 28, 1998 F-2 MANSUR INDUSTRIES INC. BALANCE SHEETS December 31, 1997 and 1996
ASSETS 1997 1996 ------ ---- ---- Current assets: Cash and cash equivalents $ 2,243,172 5,320,608 Accounts receivable 1,006,227 569,926 Inventory, net 1,824,181 617,465 Other assets 213,452 29,700 ---------- ---------- Total current assets 5,287,032 6,537,699 Intangible assets, net 71,894 46,166 Property and equipment, net 1,354,993 373,513 Other assets 74,269 - ---------- ---------- Total assets $ 6,788,188 6,957,378 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current liabilities: Accounts payable and accrued expenses 758,872 297,747 Deferred revenue 169,913 95,160 Interest payable 2,156 - Current installments of obligations under capital leases 152,878 55,446 ---------- ---------- Total current liabilities 1,083,819 448,353 Obligations under capital leases, excluding current installments 502,700 118,432 ---------- ---------- Total liabilities 1,586,519 566,785 ---------- ---------- Stockholders' equity: Common stock, $0.001 par value. Authorized 25,000,000 shares, issued and outstanding 4,601,309 in 1997 and 1996 4,601 4,601 Additional paid-in capital 11,115,858 11,115,858 Accumulated deficit (5,918,790) (4,729,866) ---------- ---------- Total stockholders' equity 5,201,669 6,390,593 ---------- ---------- Total liabilities and stockholders' equity $ 6,788,188 6,957,378 ========== ==========
See accompanying notes to financial statements. F-3 MANSUR INDUSTRIES INC. STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
1997 1996 ---- ---- Revenue $ 7,244,427 735,745 Costs of goods sold (4,660,786) (581,261) --------- --------- Gross profit 2,583,641 154,484 --------- --------- Operating expenses: Selling, general and administrative 3,461,245 1,670,383 Research and development 415,428 684,467 --------- --------- Total operating expenses 3,876,673 2,354,850 --------- --------- Loss from operations (1,293,032) (2,200,366) Interest expense (46,008) (41,432) Interest income 150,116 87,777 Exchange expense on redeemable preferred stock - (344,631) --------- --------- Net loss (1,188,924) (2,498,652) Dividends on redeemable preferred stock - (147,000) --------- --------- Net loss to common shares $ (1,188,924) (2,645,652) ========= ========= Basic and diluted net loss per common share $ (0.26) (0.78) ==== ==== Weighted average shares outstanding 4,601,309 3,378,008 ========= =========
See accompanying notes to financial statements. F-4 MANSUR INDUSTRIES INC. STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
COMMON STOCK -------------------------------------- PREFERRED STOCK ADDITIONAL -------------------------- PAID-IN SHARES AMOUNT SHARES PAR CAPITAL ------ ------ ------ --- ------- Balance at December 31, 1995 490,000 $ 2,573,863 2,673,129 $2,673 $438,132 Issuance of common stock in exchange for services rendered - - 30,000 30 104,970 Conversion of note payable into common stock - - 20,000 20 99,980 Accrued dividends on preferred stock - 147,000 - - (147,000) Exchange of preferred stock and accrued dividends to common stock (490,000) (2,720,863) 628,180 628 3,064,866 Issuance of common stock resulting from initial public offering including conversion of notes payable to common stock, net of costs - - 1,150,000 1,150 6,896,910 Issuance of common stock for underwriter overallotment, net of costs - - 100,000 100 658,000 Net loss - - - - - ------- ------------ --------- ----- ---------- Balance at December 31, 1996 - - 4,601,309 4,601 11,115,858 Net loss - - - - - ------- ------------ --------- ----- ---------- Balance at December 31, 1997 - $ - 4,601,309 $4,601 $11,115,858 ======= ============ ========= ===== ==========
TOTAL STOCKHOLDERS' ACCUMULATED EQUITY DEFICIT (DEFICIT) ------- --------- Balance at December 31, 1995 $(2,231,214) $(1,790,409) Issuance of common stock in exchange for services rendered - 105,000 Conversion of note payable into common stock - 100,000 Accrued dividends on preferred stock - (147,000) Exchange of preferred stock and accrued dividends to common stock - 3,065,494 Issuance of common stock resulting from initial public offering including conversion of notes payable to common stock, net of costs - 6,898,060 Issuance of common stock for underwriter overallotment, net of costs - 658,100 Net loss (2,498,652) (2,498,652) ---------- ---------- Balance at December 31, 1996 (4,729,866) 6,390,593 Net loss (1,188,924) (1,188,924) ---------- ---------- Balance at December 31, 1997 $(5,918,790) $ 5,201,669 ========== ==========
See accompanying notes to financial statements. F-5 MANSUR INDUSTRIES INC. STATEMENTS OF CASH FLOWS For the years ended December 31, 1997 and 1996
1997 1996 ---- ---- Cash flows from operating activities: Net loss $ (1,188,924) (2,498,652) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 96,927 48,172 Stock issued for services - 105,000 Interest expense on notes payable converted to common stock - 9,000 Changes in operating assets and liabilities: Accounts receivable (436,301) (569,926) Inventory (1,206,716) (423,627) Other assets (258,022) (11,410) Intangible assets (25,977) (46,166) Accounts payable and accrued expenses 463,280 78,270 Deferred revenue 74,753 95,160 ----------- ---------- Net cash used in operating activities (2,480,980) (3,214,179) --------- --------- Cash flows from investing activities: Purchase of property and equipment, net (1,078,156) (97,277) --------- ---------- Net cash used in investing activities (1,078,156) (97,277) --------- ---------- Cash flows from financing activities: Proceeds from capital lease obligations 539,366 - Repayment of capital lease obligations (57,666) - Proceeds from notes payable and line of credit - 1,512,500 Repayment of notes payable - (176,110) Proceeds from issuance of common stock - 6,034,660 Exchange expense on preferred stock exchanged for common stock - 344,631 ----------- ---------- Net cash provided by financing activities 481,700 7,715,681 ----------- ---------- Net (decrease) increase in cash and cash equivalents (3,077,436) 4,404,225 Cash and cash equivalents, beginning of year 5,320,608 916,383 ----------- ---------- Cash and cash equivalents, end of year $ 2,243,172 5,320,608 =========== ========== Supplemental cash flow disclosure: Interest paid $ 46,008 41,432 =========== ==========
Supplemental disclosures of noncash investing and financing activities: During 1996, the Company exchanged 490,000 shares of preferred stock in the amount of $2,374,596 plus related accrued dividends of $346,267 for 628,180 shares of common stock. In connection with this transaction, the Company recorded an exchange expense of 12 percent in the amount of $344,631 [note 7(a)]. See accompanying notes to financial statements. F-6 MANSUR INDUSTRIES INC. NOTES TO FINANCIAL STATEMENTS December 31, 1997 and 1996 (1) THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Mansur Industries Inc. (the "Company") is primarily engaged in research and development, marketing, and production of industrial parts cleaning equipment for use in automotive, marine, aviation and general manufacturing industries. The Company's focus is on the design, development and manufacture of industrial cleaning equipment which incorporates continuous recycling and recovery technologies for solvents and solutions, thereby reducing the need to replace and dispose of contaminated solvents and solutions. (A) OPERATIONS AND LIQUIDITY The Company was incorporated in November 1990 and, as a development stage company, devoted substantially all of its resources to research and development programs related to its full line of self contained, recycling industrial parts washers until June 1996. The Company commenced its planned principal operations in July 1996. The Company has only recently begun to generate significant revenue from product sales. As indicated in the accompanying financial statements as of December 31, 1997 and 1996, the Company's accumulated deficit totaled $5,918,790 and $4,729,866, respectively. In October 1996, the Company consummated an underwritten initial public offering (the "IPO") of 1,100,000 shares of its Common Stock for aggregate net proceeds of $6,034,660. The net proceeds have been used for the development, sales and marketing of the Company's products, establishment of regional technological support and service centers and a service fleet, development of manufacturing facilities and for working capital and general corporate purposes. In February 1998, the Company consummated a private placement (the "Private Placement") of $17.0 million of subordinated convertible notes (the "Notes") generating net proceeds of approximately $15.7 million (see Note 5). The Company has used and will continue to use the proceeds from the Private Placement to expand manufacturing operations, accelerate development of the Company's direct marketing and distribution capabilities, establish additional regional support and service centers and for working capital and general corporate purposes. Since November 1990, the Company has financed its operations through a number of stock and debt issuances and conversions. The Company believes, based on currently proposed plans and assumptions relating to its operations, that the proceeds from the Private Placement and the Company's existing financing arrangements, together with cash flows from operations will be sufficient to satisfy its cash requirements for a period of at least 12 months. In the event that the Company's plans change, its assumptions change or prove to be inaccurate or the proceeds from the Private Placement or available financing arrangments prove to be insufficient to fund the Company's rapid expansion and development efforts, the Company would be required to seek additional sources of financing. There can be no assurance that any additional financing will be available to the Company on acceptable terms, or at all. If adequate funds are not available, the Company's business operations could be materially adversely affected. (B) REVENUE RECOGNITION Under the Product-Financing Agreement (note 10), the Company recognizes revenue from the sale of industrial parts cleaning equipment at the time that the equipment is delivered by the Company. Revenue recognized is recorded based on the approximate present value of the payment stream related to the underlying lease. F-7 MANSUR INDUSTRIES INC. NOTES TO FINANCIAL STATEMENTS Under the Marketing Agreements (note 11), the Company recognizes revenue upon shipment of the industrial parts cleaning equipment from the Company's manufacturing facility. (C) DEFERRED REVENUE A portion of the sales price that represents shipping and handling fees for sales that are made to First Recovery pursuant to the Marketing Agreements (note 11), are deferred until the unit is sold by First Recovery to the end user. In addition, a portion of sales that is made for a five-year solvent replenishment program is deferred and recognized over the five-year period. (D) CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash on hand, demand deposits, and short-term investments with original maturities of three months or less. (E) INVENTORY, NET Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method for all inventories. Inventory consists of the following at December 31, 1997 and 1996: 1997 1996 ---- ---- Raw materials $ 872,871 355,690 Work in progress and finished goods 1,015,048 261,775 --------- ------- 1,887,919 617,465 Less allowance for obsolete inventories 63,738 - --------- ------- $ 1,824,181 617,465 ========= ======= (F) PROPERTY AND EQUIPMENT, NET Property and equipment are stated at cost, less accumulated depreciation. Property and equipment under capital leases are stated at the present value of minimum lease payments. Depreciation is calculated using the straight-line method over the shorter of the lease term or the estimated useful life of the respective assets. Property and equipment held under capital leases and leasehold improvements are amortized using the straight-line method over the shorter of the lease term or estimated useful life of the asset. (G) INTANGIBLE ASSETS, NET Intangible assets, net, consist of patents, patent applications and rights that are stated at acquisition cost. Amortization is recorded using the straight-line method over the legal lives of the patents, generally for a period ranging up to 17 years. The carrying value of intangible assets is periodically reviewed by the Company and impairments are recognized when the expected future cash flows from operations derived from intangible assets is less than their carrying value. At December 31, 1997 and 1996, F-8 MANSUR INDUSTRIES INC. NOTES TO FINANCIAL STATEMENTS intangible assets, net include accumulated amortization of approximately $500 and $-0-, respectively. (H) FINANCIAL INSTRUMENTS In assessing the fair value of financial instruments, at December 31, 1997 and 1996, the Company has used a variety of methods and assumptions, which were based on estimates of market conditions and risks existing at that time. The carrying amount of obligations under capital leases approximates fair value at December 31, 1997 and 1996, respectively. For certain instruments, including accounts payable and accrued expenses, and current installments of obligations under capital leases, the carrying amount approximates fair value due to their short maturity. (I) RESEARCH AND DEVELOPMENT Research and development expenses consist primarily of costs incurred in connection with engineering activities related to the development of industrial parts cleaning machinery and are expensed as incurred. (J) INCOME TAXES Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (K) NET LOSS PER COMMON SHARE For the years ended December 31, 1997 and 1996, net loss per common share is computed based on weighted-average number of common shares outstanding of 4,601,309 and 3,378,008, respectively. Common stock equivalents are excluded from the net loss per common share in periods in which they have an anti-dilutive effect. For the years ended December 31, 1997 and 1996, common stock equivalents were excluded from the net loss per common share computation because of the anti-dilutive effect. In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings Per Share," which specifies the computation, presentation and disclosure requirements for earnings per share ("EPS"). It replaces the presentation of primary and fully diluted EPS with basic and diluted EPS. Basic EPS excludes all dilution and is based upon the weighted-average number of common shares outstanding during the year. Diluted EPS, reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted into common stock. The Company F-9 MANSUR INDUSTRIES INC. NOTES TO FINANCIAL STATEMENTS has adopted the provisions of SFAS 128 which is effective for periods ending after December 15, 1997. The Company has restated, as appropriate, all previously reported, per share amounts, to conform to the new presentation. (L) USE OF ESTIMATES Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. (M) STOCK-BASED COMPENSATION Prior to January 1, 1996, the Company accounted for its stock option plan in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. On January 1, 1996, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123. (N) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF The Company adopted the provisions of Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," on January 1, 1996. This Statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset of future net cash flows expected to be generated by the asset. If such an asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are reported at the lower of the carrying amount of fair value less costs to sell. Adoption of this statement did not have a material impact on the Company's financial position, results of operations, or liquidity. (O) PRODUCT WARRANTY OBLIGATIONS AND PRODUCT LIABILITY The Company provides a five-year warranty on its products from the date of delivery. The Company warrants that its products during the warranty period will be free of material defects and if properly used in accordance with the operator manual, it will not generate hazardous waste under current interpretations of applicable federal and state regulations. Estimated future warranty obligations related to units sold are F-10 MANSUR INDUSTRIES INC. NOTES TO FINANCIAL STATEMENTS accrued for by charges to operations in the period in which the related revenue is recognized. (P) RISKS AND UNCERTAINTIES During 1997, substantially all of the Company's revenue was derived from sales made directly to First Recovery pursuant to the Commission Sales Representation Agreement ("Representation Agreement") and the Purchase and Distribution Agreement (the "Purchase and Distribution Agreement") (note 11). Sales made directly to First Recovery pursuant to the Marketing Agreements (note 11) amounted to approximately 91 percent and 0 percent of sales in 1997 and 1996, respectively. Amounts due from sales made directly to First Recovery pursuant to the Marketing Agreements (note 11) amounted to approximately 98 percent and 0 percent of total accounts receivable at December 31, 1997 and 1996, respectively. Although the Company intends to continue to evaluate and discuss a long-term distribution agreement or other strategic alliance with First Recovery , no assurance can be given that the Company and First Recovery will enter into such an agreement or that First Recovery will continue to purchase the Company's products at current levels. Additionally, there can be no assurance that the Company will have any continuing relationship with First Recovery after the expiration of the Purchase and Distribution Agreement in June 1998. If the Company does not enter into a new agreement with First Recovery or if the Purchase and Distribution Agreement is terminated, the Company's business and future prospects could be adversely affected. In November 1997, the Company began development of direct marketing and distribution capabilities of its industrial parts washers. No assurance can be given, however, that the Company's efforts in estabilishing direct marketing and distribution capabilities will be completed, or if completed, will be successful. In the event the Company is not successful in its direct marketing and distribution efforts, the Company's business and future prospects could be adversely affected. (Q) NEW ACCOUNTING DEVELOPMENTS In February 1997, FASB issued Statement of Financial Accounting Standards No. 129, "Disclosure of Information About Capital Structure" which establishes standards for disclosing information about an entity's capital structures. This statement is effective for financial statements for periods ending after December 15, 1997. Adoption of this statement did not have a material impact on the Company. In June 1997, FASB issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" which establishes standards for reporting and display of comprehensive income and its components (revenue, expenses, gains, and losses) in a full set of general-purpose financial statements. This statement requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. This statement is effective for fiscal years beginning after December 15, 1997. F-11 MANSUR INDUSTRIES INC. NOTES TO FINANCIAL STATEMENTS (2) PROPERTY AND EQUIPMENT, NET Property and equipment, net as of December 31, 1997 and 1996 consists of the following: 1997 1996 Useful life ---- ---- ----------- Furniture and equipment $ 226,079 90,711 5 years Machinery and equipment 978,728 380,582 10 years Leasehold improvements 172,979 10,852 5 years Construction in progress 182,516 - --------- -------- $ 1,560,302 482,145 Less accumulated depreciation 205,309 108,632 --------- ------- $ 1,354,993 373,513 ========= ======= Depreciation expense for the years ended December 31, 1997 and 1996\ amounted to $96,927 and $48,172, respectively. (3) DUE TO OFFICERS/SHAREHOLDERS The balance in due to officers/shareholders at December 31, 1995 consisted of notes payable in the amounts of $100,000 and $150,000 to a shareholder and the chief executive officer, respectively. During the second quarter of 1996, the note due to the shareholder was converted into 20,000 shares of the Company's common stock at a conversion rate of five dollars per share. The note payable to the chief executive officer was paid off in its entirety in May 1996. In June 1996 and September 1996, the Company issued cumulative convertible redeemable notes payable, with interest of 4 percent per annum until September 30, 1996 and 12 percent thereafter, in the aggregate amount of $1,512,500, of which $303,750 was due to certain directors of the Company. These notes were automatically converted into 150,000 shares of common stock simultaneously with the IPO of the Company. (4) LEASE AGREEMENTS The Company leases operating facilities and equipment under fixed rent operating leases. The facilities have lease terms ranging from nine months to five years. In February 1997, the Company entered into a lease obligation on a 30,000 square foot facility for its new corporate headquarters. The lease obligation was amended in August 1997 to include an additional 14,000 square feet, bringing the total facility to 44,000 square feet. The initial term of the lease for this facility commences on August 1, 1997 and expires on September 30, 2002. This lease provides for a renewal term of five years and is exercisable at the Company's option upon six months prior written notice. The Company's annual lease payments under this lease are approximately $288,600 subject to an annual increase of 4.5 percent, which does not include utilities and the Company's proportionate share of the facility's maintenance and operating expenses. Total rent expense for the years ended December 31, 1997 and 1996 amounted to $541,426 and $85,327, respectively. F-12 MANSUR INDUSTRIES INC. NOTES TO FINANCIAL STATEMENTS The Company is obliged under various capital leases for certain machinery and equipment that expire at various dates during the next five years. At December 31, 1997 and 1996, the gross amount of property and equipment and related accumulated amortization recorded under capital leases consists of the following: 1997 1996 ---- ---- Machinery and equipment $ 832,519 304,984 Less accumulated amortization 112,663 69,516 ------- -------- $ 719,856 235,468 ======= ======= Amortization of assets held under capital leases is included with depreciation expense. Future minimum lease payments under noncancelable operating leases (with initial or remaining lease terms in excess of one year) and future minimum capital lease payments as of December 31, 1997 are: Year ending Capital Operating December 31, leases leases 1998 $ 205,583 435,699 1999 182,824 402,856 2000 136,674 336,895 2001 136,674 348,359 2002 130,563 273,026 ------- ---------- Total minimum lease payments $ 792,318 1,796,835 ========= Less amount representing interest (at rates ranging from 6.35% to 12.5%) 136,740 Present value of net minimum capital lease payments 655,578 Less current installments of obligations under capital leases 152,878 ------- Obligations under capital leases, excluding current installments $ 502,700 ======= (5) SUBORDINATED CONVERTIBLE NOTES In February 1998, the Company consummated the Private Placement of $17.0 million in principal amount of 8.25 percent subordinated convertible notes due 2003 (the "Notes"). Interest on the Notes is payable semi-annually and during the first two years is payable through the Company's issuance of additional Notes and thereafter, at the election of the Company, is payable either in cash or through the issuance of additional Notes. The Notes are convertible by the holders thereof into shares of the Company's common stock, $.001 par value (the "Common Stock"), at a conversion price equal to $17.00 per share (the "Conversion Price") and automatically convert into shares of Common Stock after February 23, 1999, if the closing price of the Common Stock, as reported, in the SmallCap Market of the National Association of Securities Dealers Automated Quotation System, exceeds 175 percent of the Conversion Price for a period of 20 consecutive trading days, including the 20 trading days immediately preceding February 23, 1999. The Company may redeem the Notes at any time after 36 months from their date of issuance at a price equal to (i) 104 percent of the principal amount plus accrued interest if such redemption occurs after thirty-six months but prior to 48 months; or (ii) 102 percent of the principal amount plus accrued interest if such redemption occurs after 48 months. F-13 MANSUR INDUSTRIES INC. NOTES TO FINANCIAL STATEMENTS (6) INCOME TAXES There is no current or deferred tax expense for the years ended December 31, 1997 and 1996. The actual income tax expense differs from the "expected" income tax effect (computed by applying the U.S. federal corporate tax rate of 34 percent to earnings before income taxes) for the years ended December 31, 1997 and 1996 as follows:
1997 1996 ---- ---- Computed "expected" income tax benefit $ (404,234) (849,542) State income tax benefit, net of U.S. federal income tax benefit (72,843) (88,266) Change in valuation allowance 755,117 915,000 Income taxes from prior years (283,137) 19,550 Other 5,097 3,258 -------- -------- Income tax expense $ - - ======== ========
At December 31, 1997 and 1996, the Company had deferred tax assets with full valuation allowances. Temporary differences between financial statement carrying amounts and tax basis of assets and liabilities that give rise to significant portions of the deferred tax assets and liabilities as of December 31, 1997 and 1996 are as follows:
1997 1996 ---- ---- Deferred tax assets: Net operating loss $ 1,471,776 603,224 Deferred revenue 63,938 - Warranty 35,586 - Start-up costs 266,800 348,892 Research and development 267,106 343,422 Patent 456,713 495,583 Capital loss - 5,372 -------------- --------- Total gross deferred tax assets 2,561,919 1,796,493 Less valuation allowance 2,510,117 1,755,000 --------- --------- Net deferred tax asset 51,802 41,493 ----------- ----------- Deferred tax liabilities: Depreciation 51,802 41,493 ----------- ----------- Total gross deferred tax liabilities 51,802 41,493 ----------- ----------- Deferred tax assets, net $ - - ----------- -----------
(Continued) F-14 MANSUR INDUSTRIES INC. NOTES TO FINANCIAL STATEMENTS The valuation allowance for deferred tax assets as of January 1, 1997, was $1,755,000. The change in the total valuation allowance for the year ended December 31, 1997, was an increase of $755,117, resulting from assessment of the future taxable income of the Company and the realizability of the deferred tax assets. The net operating losses of the Company will expire in varying amounts through the year 2013. In addition, if certain substantial changes in ownership should occur there would be an annual limitation of the amount of tax attribute carry forwards which can be utilized in the future. (7) REDEEMABLE PREFERRED STOCK (A) SERIES A PREFERRED STOCK In April 1995, the Company issued 490,000 shares of 12 percent cumulative convertible redeemable preferred stock (the "Series A") as part of a second private placement within the meaning of Rule 144 of the Securities Act of 1933 (the "Act") at an offering price of $5 per share. The issuance raised $1,950,000 in cash and converted an existing $500,000 unsecured convertible promissory note into Series A shares. The Series A were convertible into common stock, one for one, at any time during the first 18 months following the issuance of the stock at the option of the shareholder. All then outstanding shares of Series A were to be redeemed no later than June 30, 1996. Dividends were payable at the time of conversion or redemption. On April 27, 1996, the board of directors of the Company approved an offer to exchange all of the Series A plus the aggregate amount of dividends accrued through June 30, 1996 in the amount of $346,267 for 628,180 shares of common stock. In June 1996, 100 percent of the Series A shareholders accepted the Company's offer to exchange all of their preferred shares together with their dividends. As such, included in the accompanying statements of operations for the year ended December 31, 1996 is an amount of $344,631 relating to the expense recognized by the Company in connection with this exchange. (8) STOCKHOLDERS' EQUITY (A) CONVERTIBLE NOTE PAYABLE In May 1996, the Company converted a $100,000 note payable into 20,000 shares of common stock at a price of $5 per share pursuant to an amendment to the note signed in January 1996. (B) COMMON STOCK As discussed in note 1, on October 2, 1996, the Company consummated an IPO whereby it made available to the public 1,100,000 shares of its common stock at a public offering price of $7.50 per share. The Company received proceeds of approximately $6 million, net of underwriting discounts and other direct IPO costs. In addition, notes payable in the amount of $500,000 were converted into common stock in connection with the IPO. In connection with the IPO, the Company agreed to sell to the underwriters, for nominal consideration, warrants to purchase from the Company 100,000 shares of common stock at a price of $9.00 per share. The warrants are initially exercisable for a period of four years commencing one year after September 27, 1996. As of December 31, 1997 the underwriters have not exercised their warrants. (Continued) F-15 MANSUR INDUSTRIES INC. NOTES TO FINANCIAL STATEMENTS (C) STOCK-BASED COMPENSATION In 1996, the Company adopted an executive incentive compensation plan (the "Plan") pursuant to which the Company's board of directors may grant stock options, stock appreciation rights, restricted stock, deferred stock, other stock related awards and performance or annual incentive awards that may be settled in cash, stock or other property to officers and key employees. The Plan authorizes grants of options to purchase up to 375,000 shares of authorized but unissued common stock. Stock options are granted with an exercise price equal to the stock's fair market value at the date of grant. All stock options have seven-year terms and vest and become fully exercisable after three years from the date of grant. At December 31, 1997, there were 261,820 additional shares available for grant under the Plan. The per share weighted-average fair value of stock options granted during 1997 and 1996 was $4.21 and $2.86 on the date of grant using the Black Scholes option-pricing model with the following weighted-average assumptions: 1997-expected dividend yield -0- percent, risk-free interest rate of 5.57 percent, expected life of seven years and a volatility rate ranging from 52 to 76 percent; 1996-expected dividend yield -0- percent, risk-free interest rate of 6.85 percent, expected life of seven years and a volatility rate of approximately 53 percent. The Company applies Accounting Principles Board Opinion No. 25 in accounting for its Plan and, accordingly, no compensation cost has been recognized for its stock options in the financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net loss would have been reduced to the pro forma amounts indicated below:
1997 1996 ---- ---- Net loss As reported $ 1,188,924 2,645,652 Pro forma 1,633,852 2,650,790 Net loss per common share As reported $ 0.26 0.78 Pro forma 0.36 0.78
Pro forma net loss reflects only options granted since December 31, 1995. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net loss amounts presented above because compensation cost is reflected over the options' vesting period of three years and compensation cost for options' granted prior to January 1, 1996 is not considered. (Continued) F-16 MANSUR INDUSTRIES INC. NOTES TO FINANCIAL STATEMENTS Stock-option activity during the period indicated is as follows:
WEIGHTED- NUMBER OF AVERAGE SHARES EXERCISE PRICE ------ -------------- Balance at December 31, 1995 - $ - Granted 15,000 7.71 Exercised - - Forfeited - - Expired - - ----------- Balance at December 31, 1996 15,000 7.71 Granted 99,180 13.34 Exercised - - Forfeited (1,000) 0.13 Expired - - ------------ Balance at December 31, 1997 113,180 $ 12.59 ============
At December 31, 1997, the range of exercise prices and weighted-average remaining contractual life of outstanding options was $7.50 - $15.86 and 6.2 years, respectively. At December 31, 1997 and 1996, the number of options exercisable was -0- and 5,000, respectively, and the weighted-average exercise price of those options was $-0- and $7.71, respectively. (9) COMMITMENTS (A) EMPLOYMENT AGREEMENT On September 1, 1993, the Company entered into an employment agreement with the president of the Company. Under the terms of this agreement, the Company agreed to pay the president a salary of $66,000 per annum for two years from the date of the agreement. In September 1995, this agreement was renewed for an additional two years. In December 1996, the Company amended the employment agreement pursuant to a board of directors meeting held December 1996 to provide for an annual salary of $120,000. In September 1997, this agreement was renewed for an additional year. In September 1995, the Company entered into a two year employment agreement with the chief executive officer of the Company which provided for an annual base salary of $48,000 and discretionary bonuses, based on performance, as determined by the compensation committee of the board of directors. In December 1996, the Company amended the employment agreement pursuant to a board of directors meeting held December 1996 to provide for an annual salary of $120,000. In September 1997, this agreement was renewed for an additional year. (Continued) F-17 MANSUR INDUSTRIES INC. NOTES TO FINANCIAL STATEMENTS (B) SUPPLY AGREEMENT On May 7, 1996, the Company entered into an agreement (the "Supply Agreement") with a supplier (the "Supplier") pursuant to which the Supplier agreed to supply to the Company with a stipulated number of machine units per year at established prices and in accordance with a delivery schedule. During the fourth quarter of 1996, the Company terminated the Supply Agreement. In accordance with the termination of the Supply Agreement the parties entered into a mutual release agreement pursuant to which the Company agreed to pay $139,673 to the Supplier for amounts outstanding under the Supply Agreement, inclusive of a $50,000 advance. (10) PRODUCT-FINANCING AGREEMENT In May 1996, the Company entered into an agreement (the "Product-Financing Agreement") with a leasing company which agrees to purchase machines produced by the Company and subsequently lease these machines to customers with terms ranging between 12 and 60 months. The Company markets the machines and provides the leasing company with credit information on potential customers which the leasing company may either accept or reject. The Product-Financing Agreement states that the leasing company does not have recourse against the Company for customer failures to discharge their obligations to the leasing company unless the Company has breached and failed to cure certain warranties. Under the Product-Financing Agreement, the Company, in some instances, has agreed to provide periodic service for the machines and replace solvent used in the machines. Revenue from providing such services is deferred and recognized over the lease term of the machine. In addition, upon the leasing company's request, the Company agrees to assist the leasing company in remarketing any repossessed or surrendered equipment for a fee. At the end of each customer lease, the Company has the option to purchase the machine from the leasing company at its fair market value. (11) MARKETING AGREEMENTS In January 1997, the Company and First Recovery entered into the Representation Agreement pursuant to which First Recovery served as the Company's exclusive distributor of the industrial parts washers in a territory comprising certain markets throughout the United States. In December 1997, prior to the expiration of the Representation Agreement, the Company and First Recovery entered into the Purchase and Distribution Agreement, effectively, terminating and superseding the Representation Agreement. Collectively, these agreements are referred to as the Marketing Agreements. Notwithstanding the existence of the Representation Agreement, the Company and First Recovery had been operating under terms similar to those contained in the Purchase and Distribution Agreement during the majority of 1997. The Purchase and Distribution Agreement has a term of seven months and either party may terminate the Purchase and Distribution Agreement at any time, with cause, upon 30-60 days prior written notice. During 1997, substantially all of the Company's revenues were derived from sales made directly to First Recovery. Pursuant to the terms of the Purchase and Distribution Agreement, First Recovery has a minimum purchase commitment that must be fulfilled. (12) FACTORING AGREEMENT In November 1997, the Company entered into an agreement with a third party providing for the factoring of the Company's accounts receivable (the "Factoring Agreement"). Pursuant to the Factoring Agreement, the Company effectively assigned all eligible accounts receivable due from First Recovery to the third party for a period of six months. The Company may borrow up to 70 percent of all eligible accounts receivable. In connection with this factoring relationship, the Company is required to pay a semi-annual commission in an amount equal to the greater of 0.5 percent of all factored receivables or $12,000. Any borrowings by the Company against eligible accounts receivable bear interest at a per annum rate equal to the greater of 9 percent or prime plus 1 percent. During the year ended December 31, 1997, the Company factored $4,785,285 of receivables from First Recovery of which the Company borrowed and repaid $1,000,000 prior to December 31, 1997. The Company paid $25,510 in interest and commissions relating to this agreement during 1997. F-18 EXHIBIT INDEX EXHIBIT DESCRIPTION - ------- ----------- 10.35 Factoring Agreement between the Registrant SystemOne Technologies Inc. and Capital Factors, Inc. 10.36 Security Agreement Supplement between the Registrant and Capital Factors, Inc. 10.37 License Agreement between the Registrant and Capital Factors, Inc. 10.29 Purchase and Distribution Agreement between First Recovery and SystemOne Technologies Inc. 27.1 Financial Data Schedule EX-10.35 2 EXHIBIT 10.35 The parties hereto have entered into a separate License Agreement under certain Intellectual Property as defined in the License Agreement which allows Licensee to do any and all things with respect to any inventory obtained as a result of any liens or security interests granted hereunder as if Licensee were the owner of all Intellectual Property covering such inventory. CAPITAL FACTORS, INC. FACTORING AGREEMENT Date: November 26, 1997 From: Mansur Industries, Inc. 8305 NW 27th Street, Suite 107 Miami, FL 33122 and: Systemone Technologies, Inc. 8305 NW 27th Street, Suite 107 Miami, FL 33122 To: Capital Factors, Inc. 120 E. Palmetto Park Road, 5th Floor Boca Raton, FL 33432 Gentlemen: Upon your written acceptance, to be noted at the foot of this Agreement, the following will state the terms and conditions under which you are to act as our sole factor: 1. APPOINTMENT AND SALE OF ACCOUNTS: We hereby appoint you our sole factor, and hereby sell and assign to you, making you absolute owner thereof, all of our accounts due from Ecogard, Inc. and such other accounts as you may agree to purchase from us from time to time, contract rights, notes, bills, acceptances and all other obligations to us (hereinafter referred to as "Receivables") for the payment of money, in cash or in kind, together with all proceeds thereof, all security and guarantees therefor, and all of our rights to the goods and property represented thereby. You shall have all the rights of an unpaid seller or provider of the goods or services, the sale or rendering of which gives rise to each Receivable, including the rights of stoppage in transit, reclamation and replevin. Upon each sale of goods or rendering of services, we shall execute and deliver to you such confirmatory assignments of our Receivables as you may require, in form and manner satisfactory to you, together with copies of invoices, all shipping or delivery receipts, and such other proof of sale and delivery or performance as you may, at any time or from time to time, require to effect collection of our Receivables. We shall make appropriate notations upon our books and records indicating the sale and assignment of our Receivables to you. All invoices or other statements to our customers concerning Receivables shall clearly state, in language satisfactory to you, that each such Receivable has been sold and assigned to you and is payable to you and to you only. Copies of Receivables sold and assigned to you shall also bear this language. During the term of this Agreement, we agree not to sell, negotiate, pledge, assign or grant any security interest in any or all of our Receivables to anyone other than you. If we are or become engaged in finishing or improving goods, we agree, notwithstanding any credit approval you may have given on the customer(s) involved, to assert promptly, at our expense and upon your demand, any lien rights provided by law on goods in our possession. We will remit to you the proceeds of sale of such goods to satisfy the amounts owed to you by the owner of the goods. It is understood that your credit approval is limited to the net amount of the customer's obligation after the sale and disposition of such goods. 2. ADDITIONAL COLLATERAL: In addition to Receivables and all proceeds thereof, we also assign to you all right, title and interest, and grant to you a security interest in, the following collateral to secure all of our present and future obligations and indebtedness to you: (1) all deposit, savings, passbook or like accounts maintained at any bank, savings and loan or similar institution; and (2) the proceeds of any tax refund due or to become due to us by the state or federal government. 3. CREDIT RISK: You will assume the credit risk only on Receivables for which you have given credit approval in writing ("Credit Approvals"). In the absence of such written Credit Approval from you, the Receivable is at our risk. If we ship merchandise or provide services based on a verbal approval, we acknowledge our responsibility to ensure that such approval is received by us in writing in a timely manner. We acknowledge that Credit Approvals may be withdrawn, either orally or in writing, in your discretion at any time if, in your opinion, a customer's credit standing becomes impaired before actual delivery of merchandise or rendering of services. Credit Approvals shall be limited to the specific terms and amounts indicated, and, notwithstanding any information subsequently provided to us by you, such credit approvals are automatically rescinded and withdrawn if the terms of sale vary from the terms approved by you, or if the terms of sale are changed by us Page 2 of 9 without your written Credit Approval on the new terms, or if the Receivable is not assigned to you promptly (within five days) after creation. We further acknowledge that if we ship merchandise or provide services to a customer who has outstanding Receivables from us, and such customer's credit line and/or outstanding Credit Approvals have been withdrawn by you, and the Receivables created thereby, whether or not they are sold and assigned to you, exceed ten percent (10%) of the amount outstanding on your books, that any credit approvals applying to those Receivables outstanding on your books are cancelled and all outstanding Receivables from that customer are at our risk. If a customer, after receiving and accepting delivery of goods or services (subject to all warranties herein) for which you have given written Credit Approval, fails to pay a Receivable when due, and such nonpayment is due solely to financial inability to pay, you shall bear any loss thereon. If nonpayment is due to any other reason, however, you shall not be responsible. Specifically, you shall not be responsible for any nonpayment of a Receivable: (a) because of the assertion of any claim or dispute by a customer for any reason whatsoever, including, without limitation, disputes as to price, terms of sale, delivery, quantity, quality, or other, or the exercise of any counterclaim or offset (whether or not such claim, counterclaim or offset relates to the specific Receivable); (b) where nonpayment is a consequence of enemy attack, civil commotion, strikes, lockouts, the act or restraint of public authorities, acts of God or force majeure; or (c) if any representation or warranty made by us to you in respect of such Receivable has been breached. The assertion of a dispute by a customer shall have the effect of negating any Credit Approval on the affected Receivable(s) and such Receivable(s) shall be at our risk until paid or otherwise cleared from your books. With regard to sales without Credit Approval or in excess of any Credit Approval as to any given customer, we agree that any payments or credits applying to any Receivables owing by such customer will be applied: FIRST, to any Credit-Approved Receivables outstanding on your books; second, to any Client Risk Receivables outstanding on your books; and, THIRD, to any Receivables outstanding on our books. This order of payment applies regardless of the respective dates the sales occurred and regardless of any notations on payment items. If you fail to collect a Receivable for which you have given Credit Approval within 120 days of its maturity, and your failure to collect such Receivable is due solely to the customer's financial inability to pay, you shall pay to us the net amount of such Receivable then owing on the Wednesday next following the week during which said 120 days expired. Any Receivable for freight, samples, or miscellaneous sales (including, without limitation, the sale of merchandise and/or in quantities not regularly sold by us) is always assigned to you at our risk, notwithstanding any written credit approval from you. You shall have no liability of any kind for declining or refusing to give, or for withdrawing, revoking, or modifying, any Credit Approval pursuant to the terms of this Agreement, or for exercising or failing to exercise any rights or remedies you may have under this Agreement or otherwise. In the event you decline to give your Credit Approval on any order received by us from a customer, and in advising us of such decline you furnish us with information as to the credit standing of the customer, such information shall be deemed to have been requested of you by us and your advice containing such information is recognized as a privileged communication. We agree that such information shall not be given to our customer or to our salesman. If necessary, we shall merely advise our customer that credit has been declined on the account and that any questions should be directed to you. 4. CLIENT RISK RECEIVABLES: Any sale of goods or rendering of services by us for which we have not received written Credit Approval, or for which Credit Approval has been withdrawn or revoked, shall be known as a "Client Risk Receivable." Any Client Risk Receivable(s) assigned to and purchased by you are with recourse to us and at our sole credit risk. You shall have the right to charge back to our account the amount of such Client Risk Receivable(s) at any time and from time to time, either before or after maturity. We agree to pay you on demand the full amount thereof, and, failing to do so, we agree to pay all expenses incurred by you up to the date of such payment in attempting to collect or enforce payment of such Receivable(s). However, in no event shall you have any credit risk on the first $ 0 of any Receivable, notwithstanding the fact that such Receivable has been credit approved by you. For purposes of determining your credit risk hereunder, the Receivable balance due you from any given customer shall be calculated as the aggregate amount owed by that customer less any credits to which such customer may be entitled, and is not to be construed to mean individual invoices owed by that customer. 5. PURCHASE PRICE: (a) The purchase price you shall pay to us for each Receivable shall equal the Net Invoice Amount thereof less your factoring commission, as specified below. As used herein, the term "Net Invoice Amount" means the gross invoice amount of the Receivable, less returns (whenever made), all selling discounts (at your option calculated on shortest terms) made available or extended to our customer, whether taken or not, and credits or deductions of any kind allowed or granted to or taken by the customer at any time. Unless specifically shown on the invoice sold and assigned to you, no discount, credit, allowance, or deduction with respect to any Receivable shall be granted, or approved, by us to any customer without your prior written consent. Page 3 of 9 (b) The purchase price (as computed above), less (i) any reasonable reserves or credit balance that you, in your sole discretion, determine to hold, (ii) monies remitted, paid, or otherwise advanced by you to us or for our account (including any amounts which you may be obligated to pay in the future), and (iii) any other charges to our account provided for by this Agreement, shall be payable by you to us on the date of collection. Monies shall be deemed to have been collected on the date of receipt thereof by you plus THREE (3) business days for clearing. (c) You shall be entitled to withhold a reserve of sums otherwise due us, and may revise the amount of such reserve at any time and from time to time if you deem it necessary to do so in order to protect your interests. Furthermore, at your request, we shall maintain a credit balance ("credit balance" or "reserve" shall be defined for purposes of this subparagraph 5(c) as credit for amounts due us and not a "cash balance") with you in such amount as you determine to be commensurate with the volume and character of the business conducted by us and sufficient to protect you against all possible returns, claims of our customers, indebtedness owing by us to you, or any other contingencies. We shall pay you any debit balance in our account on demand. (d) In your sole discretion, in accordance with the terms of this Agreement, you may from time to time advance to us, against the purchase price of Receivables purchased by you hereunder, sums up to SEVENTY PERCENT (70%) of the aggregate purchase price of Receivables outstanding at the time any such advance is made, less: (1) Any such Receivables that are in dispute; (2) Any such Receivables that are not credit approved; and (3) Any fees, actual or estimated, that are chargeable to our reserve account. Unless otherwise specified in any promissory note, or loan or other agreement, executed in connection with such advance, any such advance shall be payable on demand and shall bear interest at the rate set forth in subparagraph (e) below from the date such advance is made until the date you would otherwise be obligated hereunder to pay the purchase price of the Receivable(s) against which such advance was made. (e) Interest upon the daily net balance of any monies remitted, paid, advanced or otherwise charged to us or for our account before the payment date (including any advance made pursuant to subparagraph 5(d) above), and interest applicable to the charges or to the expenses referred to in this Agreement, shall be charged to our reserve account as of the last day of each month at a rate the greater of nine percent (9%) per anum or ONE PERCENT (1%) above the Prime Rate. The Prime Rate shall mean, at any time, the rate of interest quoted in the Wall Street Journal, Money Rates Section as the "Prime Rate" (currently defined as the base rate on corporate loans posted by at least 75% of the nation's thirty (30) largest banks). In the event that the Wall Street Journal quotes more than one rate, or a range of rates as the Prime Rate, then the Prime Rate shall mean the highest of the quoted rates. In the event that the Wall Street Journal ceases to publish a Prime Rate, then the Prime Rate shall be the average of the three largest U.S. money center commercial banks, as determined by Capital Factors, Inc. If, during any month, our reserve account or credit balance, subject to the terms and conditions of this Agreement, shall be in a net credit balance (i.e., the reserve or credit balance exceeds outstanding Receivables), then you agree to credit our reserve account as of the last day of each month with interest at a rate equal to THREE PERCENT (3%) below the Prime Rate. All such interest, whether charged or credited to our reserve account, shall be computed for the actual number of days elapsed on the basis of year consisting of 360 days. Any adjustment in your interest rate, whether downward or upward, will become effective on the first day of the month following the month in which the prime rate of interest is reduced or increased. HOWEVER, in no event shall the rate of interest agreed to or charged to us hereunder exceed the maximum rate of interest permitted to be agreed to or charged to us under applicable law. IT IS THE INTENTION OF THE PARTIES HERETO NOT TO MAKE ANY AGREEMENT VIOLATIVE OF THE LAWS OF THE STATE OF FLORIDA OR THE UNITED STATES RELATING TO USURY. IN NO EVENT, THEREFORE, SHALL ANY INTEREST DUE HEREUNDER BE AT A RATE IN EXCESS OF THE HIGHEST LAWFUL RATE, i.e., IN NO EVENT SHALL YOU CHARGE OR SHALL WE BE REQUIRED TO PAY ANY INTEREST THAT, TOGETHER WITH ANY OTHER CHARGES HEREUNDER THAT MAY BE DEEMED TO BE IN THE NATURE OF INTEREST, HOWEVER COMPUTED, EXCEEDS THE MAXIMUM LAWFUL RATE OF INTEREST ALLOWABLE UNDER THE LAWS OF THE STATE OF FLORIDA AND/OR OF THE UNITED STATES. SHOULD ANY PROVISION OF THIS AGREEMENT OR ANY OTHER AGREEMENT BETWEEN US BE CONSTRUED TO REQUIRE THE PAYMENT OF INTEREST THAT EXCEEDS SUCH MAXIMUM LAWFUL RATE, ANY SUCH EXCESS SHALL BE AND IS EXPRESSLY HEREBY WAIVED BY YOU. SHOULD ANY EXCESS INTEREST IN FACT BE PAID, SUCH EXCESS SHALL BE DEEMED TO BE A PAYMENT OF THE PRINCIPAL AMOUNT OF OUTSTANDING INDEBTEDNESS OWING BY US TO YOU AND SHALL BE APPLIED TO SUCH PRINCIPAL. 6. FACTORING COMMISSIONS. Page 4 of 9 (a) For your services hereunder, we shall pay and you shall be entitled to receive a factoring commission equal to ONE-HALF PERCENT (.5%) of the gross Invoice Amount of each Receivable, which commission shall be due and payable to you on the date such Receivable arises. Factoring commissions shall be chargeable to our account with you. You shall be entitled to receive a surcharge equal to ONE PERCENT (1%) of the gross Invoice Amount of all Receivables arising out of our sales to Debtors-In-Possession. The minimum factoring commission on each invoice or credit memo shall be $0. (b) Your commission, specified in paragraph 6(a) above, is based upon our maximum selling terms of NINETY (90) days, and no more extended terms or additional dating will be granted by us to any customer without your prior written approval. If and when such extended terms or additional dating are given to our customers, your commission with respect to the Receivables represented thereby shall be increased by twenty-five percent (25%) for each 30 days, or portion thereof, of extended or additional dating. (c) The minimum aggregate factoring commissions payable under this Agreement for each contract period hereof shall be TWELVE THOUSAND DOLLARS ($12,000.00), which shall be payable at the rate of TWO THOUSAND DOLLARS ($2,000.00) per month. To the extent of any deficiency (after giving effect to commissions payable under the foregoing subparagraphs), the difference between the minimum and the amount already charged shall be chargeable to our account with you. 7. STATEMENT OF ACCOUNT: Once each month you shall render a statement (Client Ledger) to us with respect to the Receivables purchased by you during the previous month, any advances made by you, collections received by you, and charges made to our account under this Agreement. Our account shall be charged with all discounts (at your option, calculated on shortest terms) made available to customers on assigned Receivables, all returns, allowances, deductions and credits, and your reasonable expenses, including, without limitation, postage on invoices, bank wire fees, filing fees, UCC search and similar charges. We will also be charged with interest at the rate specified in paragraph 5(e) above, with respect both to Receivables as to which a credit is issued after the payment date applicable thereto, and any Receivables collected or charged back after such credit, or to the date of collection or chargeback, as the case may be. A discount, credit or allowance after issuance or granting may be claimed solely by the customer. Each statement, report, or accounting rendered or issued by you to us shall be deemed accepted by us and shall be conclusive and binding upon us, unless within thirty (30) days after the date thereof we notify you to the contrary by registered or certified mail, setting forth with specificity the reasons why we believe such statement, report, or accounting is incorrect and what we believe to be the correct amount thereof. Moreover, if we fail to receive a monthly statement, we shall likewise be obligated to notify you in the same manner as if we fail to accept the statement, and our failure to do so shall relieve you of any responsibility or liability arising out of our not receiving such monthly statement. 8. REPRESENTATIONS AND WARRANTIES: We hereby represent and warrant to you that: (i) each Receivable is a bona fide existing obligation created by a customer's express order for, and the actual sale and physical delivery of, or legal passage of title to, goods or the rendering of services to customers in the ordinary course of business, which goods, prior to sale, we owned free and clear of any liens or encumbrances, and which Receivable is then unconditionally owing to us without dispute, defense, offset, or counterclaim; (ii) the customers, which are not affiliated with us, have received and have accepted the goods or services, and the invoices therefor, without dispute, offset, or claim of any kind as to price, terms, quality, quantity, delay in shipment, offsets, counterclaims, contra accounts or any other defense of any other kind and character; (iii) the Receivables will not be subject to discounts, deductions, allowances, offsets, counterclaims or other contra items, nor to any other special terms of payment that are not shown on the face of the invoice thereof; (iv) the Receivables will not represent delivery of merchandise upon "consignment," "guaranteed sale," "sale or return," "payment on reorder," or similar terms; and (v) the Receivables will not represent "pack, bill and hold" transactions unless we have furnished you with a copy of our customer's purchase order soon after its receipt, and you have obtained such customer's agreement to grant you a security interest in the merchandise and pay for such merchandise at maturity of our invoice irrespective of whether or not we have received instructions to deliver the same; (vi) we are solvent; (vii) we have full right and authority to sell or assign to you, and to grant to you a security interest in, our Receivables; (viii) we have not granted and will not hereafter grant to any other person a security interest in, or grant to any other person any right to purchase, our Receivables, or, without your prior written consent, grant to any other person a security interest in any of our inventory at any time during the term of this Agreement and until all security interests or purchases granted hereunder have been terminated; (ix) we have paid all taxes which have become due and payable and there are no judgements, assessments, or liens filed against us or any of our property, real or personal. Page 5 of 9 9. SECURITY: As collateral security for any and all of our (and our parent's subsidiaries' and affiliates') indebtedness and obligations to you (and to your parent, subsidiaries and affiliates), whether matured or unmatured, absolute or contingent, now existing or hereafter arising (including under indemnity or reimbursement agreements or by subrogation), and however acquired by you, whether arising directly between us or acquired by you by assignment, whether relating to this Agreement or independent hereof, including all obligations incurred by us to any other person factored or financed by you (collectively, the "Obligations"), we do hereby grant to you a security interest in all of our accounts, contract rights, computer software, programs, stored data, aging schedules, customer lists, and general intangibles and any of the royalties and other fees which become due for the use of any patents, trademarks, or copyrights, whether or not otherwise specifically assigned to you in this Agreement, now existing or hereafter acquired, and in the proceeds and products thereof, any security and guarantees therefor, in the goods and property represented thereby, in all of our books and records relating to the forgoing, and in all reserves, credit balances, sums of money at any time to our credit with you, and any of our property at any time in your possession. We hereby irrevocably authorize and direct you to charge at any time to our account any Obligations, and to pay any Obligations owing by us to your parent, subsidiaries or affiliates, by so charging our account. We agree to execute financing statements and any and all other instruments and documents that may now or hereafter be provided for by the Uniform Commercial Code or other law applicable thereto reflecting security interests granted to you hereunder. We hereby appoint you as our attorney-in-fact and authorize you to sign such financing statements on our behalf as debtor or to file such financing statements without our signature, signed only by you as secured party. We shall be liable for, and you may charge our account with, all reasonable costs and expenses of filing such financing statements (including any filing or recording taxes), making lien searches, and any attorney's fees and expenses that may be incurred by you in perfecting, protecting, preserving, or enforcing your security interests and rights hereunder. 10. TERM: This Agreement shall continue in full force and effect for a period of SIX (6) MONTHS from the date hereof and shall be deemed renewed from year to year thereafter unless we give you notice in writing, by registered or certified mail, not less than thirty (30) and not more than sixty (60) days prior to the expiration of the original term of this Agreement (or any renewal term thereof), of our intention to terminate this Agreement as of the end of such term. You may terminate this Agreement at any time upon thirty (30) days prior written notice to us. Further, termination of the Agreement shall not serve to terminate the separate License Agreement between the parties. Notwithstanding the foregoing, if we become insolvent or unable to meet our debts as they mature, fail, close, suspend, or go out of business, commit an act of bankruptcy, file or become the subject of a petition under the Bankruptcy Act or law permitting the appointment of a receiver, liquidator, conservator, or similar functionary, breach or become in default under this Agreement or any other agreement with you (or your parent, subsidiaries or affiliates), or any Obligation to you, or if there is a material change (by death or otherwise) in our principal stockholders or owners as a result of their sale or transfer of shares of capital stock, then, notwithstanding the foregoing, you shall have the right to terminate this Agreement at any time without notice; provided, however, that nothing contained in the foregoing shall prevent Mansur Industries issuance and sale of common stock or preferred stock or other securities convertible into common stock or require Mansur Industries to obtain consent of Capital Factors in connection with Mansur Industries' issuance and sale of common stock or preferred stock or other securities convertible into common stock. In the event you elect to terminate this Agreement, and your decision to do so is a result of a breach of this Agreement by us, then, notwithstanding any other provisions contained herein, you shall be entitled to charge our account, and we agree to pay to you, the monthly minimum factoring fee specified in paragraph 6(c) herein for the later of ninety (90) days from the effective date of termination or until any and all of our indebtedness to you pursuant to this Agreement shall have been paid in full. Your rights and our Obligations arising out of transactions having their inception prior to the termination date shall not be affected by any termination or notice thereof. Termination of this Agreement shall not terminate, extinguish, or remove any liens or security interests granted to you hereunder until we have fully paid and discharged any and all of our Obligations to you, and we shall continue to furnish to you confirmatory assignments and schedules of Receivables previously assigned to you and all proceeds in respect thereof. After the giving of any notice of termination hereunder, and until the full liquidation of our account, we shall not be entitled to receive any payments from you. From and after the effective date of termination, all amounts charged or chargeable to our account hereunder, and all our Obligations to you, shall become immediately due and payable without further notice or demand. 11. MISCELLANEOUS: (a) Any goods rejected or returned by any customer shall be your property held by us in trust for you separate and apart from any other goods, and, upon your demand and in accordance Page 6 of 9 with your instructions, shall forthwith be delivered to you or disposed of by us without charge to you, with the proceeds of such disposition to be remitted promptly to you. We shall promptly report to you, in writing, all disputes and claims made by our customers, the refusal of any services, and the rejection or return of or offer to return any goods, and we will promptly and diligently prosecute, defend or settle all such claims and disputes at our expense. WE AGREE TO PREPARE AND ASSIGN TO YOU ALL CREDIT MEMOS TO WHICH OUR CUSTOMERS HAVE BECOME ENTITLED SINCE THE DATE OF OUR LAST ASSIGNMENT, and our failure to do so entitles you to charge our account with any expenses incurred by you as a result. As absolute owner of each Receivable, you may, in your sole discretion, enforce, effect any compromise regarding settlement, or adjust any Receivable, in your name or ours, without affecting or limiting our obligations to you under this Agreement, whether or not any such Receivable shall have been charged back to us. You reserve the right at any time to charge back to our account the full amount of the Receivable(s) involved in any claim, dispute, rejection, or return asserted or made by our customers, and we agree to pay you upon demand the full amount thereof. The chargeback to our account of the amount of any such Receivable shall not be deemed a reassignment to us, and title thereto and to the proceeds thereof, all security and guarantees therefor, and our interest in the goods represented thereby shall remain in you. We shall indemnify you for, and hold you harmless against, any loss, liability, claim or expense of any kind arising from any claims of, or disputes with, our customers as to terms, price, quality, quantity, or otherwise, relating to any Receivable, including any claim for return or reimbursement of any payments therefor. We agree to notify you promptly when a customer asserts a dispute or claim of any kind, and upon your notice to us of a customer dispute or claim, we agree to contact the customer promptly to effect a resolution of such dispute or claim. (b) If any check, draft, note, acceptance, cash collection or payment in any form is received by us on any Receivable, WE SHALL IMMEDIATELY TRANSMIT AND DELIVER IT TO YOU IN THE FORM RECEIVED, and our failure to do so entitles you to charge our account with any expenses incurred by you as a result. Until our delivery of each such payment to you, it shall be held by us in trust for you. We agree that you, and any such person or entity as you may from time to time designate, shall have the right to sign and/or endorse our name on all remittances and all papers, bills of lading, receipts, instruments and documents relating to the Receivables and the transactions between us. You shall have the right to deposit any checks or other remittances received on Receivables regardless of notations or conditions placed thereon by our customers or deductions reflected thereby and to charge the amount of any such deduction to our account. (c) In the event a sales or excise tax is levied by State or Federal authorities, in such form that you are required to pay a tax on sales represented by any Receivable(s), we agree to reimburse you for the full amount of taxes payable and agree that all such amounts may be charged to our account. (d) We agree to keep proper books of record and accounts in accordance with sound and accepted accounting practices, which books shall at all times be open to inspection by you. You and such accountant or other agents as you may from time to time designate shall have the right, at our expense, to visit and inspect our properties, assets and books, and to discuss our affairs, finances and accounts with our officers and employees at such reasonable times as you may designate, and to make and take away copies of our records. We agree to do all things necessary or appropriate to permit you to fully exercise your rights under this Paragraph. We also agree to make available to you from time to time, upon your request, copies of financial statements prepared by an accountant acceptable to you. Unless specifically waived in writing, such financial statements are to be provided to you on a quarterly basis. (e) Your failure at any time to insist upon performance of any term or provision of this Agreement shall not be deemed a waiver of any right reserved to you, and the waiver of one provision shall not be deemed to be a waiver of any other provision. (f) This Agreement is our complete and final agreement, reflects our mutual understanding, supersedes any prior agreement or understanding between us, and may not be modified or amended orally. We acknowledge that, but for the promises and representations expressly contained in this Agreement, no other promise or representation of any kind has been made to us to induce us to execute this Agreement. Furthermore, we acknowledge that if any such promise or representation has been made, we have not relied upon it in deciding to enter into this Agreement. (g) This Agreement is deemed made in the State of Florida and shall be governed, interpreted, and construed in accordance with the laws of the State of Florida. No modification, amendment, waiver, or discharge of this Agreement shall be binding upon you unless in writing and signed by you. TRIAL BY JURY IS HEREBY WAIVED by us in any action, proceeding or counterclaim brought by either of us against the other on any matters whatsoever arising out of or in any way Page 7 of 9 connected with this Agreement, or the relations created hereby, whether for contract, tort, or otherwise, and we hereby consent to the jurisdiction of the courts of the State of Florida and of any Federal Court in such state for determination of any dispute as to any such matters. In connection therewith, we hereby waive personal service of any summons, complaint, or other process, and agree that service thereof may be made by registered or certified mail directed to us at our address set forth above or such other address of which we shall have previously notified you by registered or certified mail. In the event that you obtain counsel for the purpose of collecting any indebtedness due you from us or seeking to enforce any right you are entitled to under the factoring agreement, we agree to pay the reasonable attorneys' fees and expenses (including all such fees incurred at trial and the appellate levels) of your counsel. In addition, in the event you are sued by us or any other party for any claim or cause of action related to or arising under this Agreement or the factoring relationship, or you are required to defend any suit regarding any duty you are alleged to have breached, whether in the form of a contract duty, tort or otherwise, we agree that if you prevail at trial or on appeal we shall be obligated to reimburse you for all of the reasonable attorneys' fees you incur. We also agree that you may charge and/or set off against our account all such fees and expenses as such fees or expenses are incurred. Your books and records shall be admissible as prima facie evidence of the status of the accounts between us. This Agreement shall be binding upon and inure to the benefit of each of us and our respective heirs, executors, administrators, successors and assigns, but we may not assign this Agreement or any of our rights hereunder to any person without your prior written consent. (h) As used in this Agreement the terms "our", "we" and "us" or words of similar import shall mean and refer to each of Mansur, Inc. and Systemone Technologies, Inc., their successors and assigns, jointly and severally unless the context of this Agreement otherwise so states. (i) We agree and acknowledge that you and your authorized representatives are engaged in the provision of factoring services pursuant to this Agreement. By entering into this Agreement, we expressly acknowledge that we will not seek advice or counsel from you or any of your representatives with respect to the management and/or operation of our business, or any other entity affiliated or controlled by us, and if we deem such advice or counsel to have been offered, directly or indirectly, we will evaluate it and act or decline to act upon it based upon our own careful analysis and/or the advice or counsel of our own independent expert(s) or consultant(s). WE AGREE THAT WE WILL NOT SEEK OR ATTEMPT TO ESTABLISH A FIDUCIARY RELATIONSHIP BETWEEN YOU AND/OR YOUR REPRESENTATIVES AND OURSELVES, OR ANY OTHER ENTITY AFFILIATED OR CONTROLLED BY US. WE HEREBY EXPRESSLY WAIVE ANY RIGHT TO ASSERT, NOW OR IN THE FUTURE, THAT THERE WAS OR IS A FIDUCIARY RELATIONSHIP BETWEEN US IN ANY ACTION, PROCEEDING OR CLAIM FOR DAMAGES. MANSUR INDUSTRIES, INC. By: /S/ RICHARD P. SMITH ----------------------------- Richard P. Smith, Chief Financial Officer and SYSTEMONE TECHNOLOGIES, INC. By: /S/ RICHARD P. SMITH ------------------------------ Richard P. Smith, Chief Financial Officer The foregoing is acknowledged, accepted and agreed to: CAPITAL FACTORS, INC. By: /S/ JOHN W. KIEFER ---------------------- John W. Kiefer, President CORPORATE RESOLUTION Page 8 of 9 WHEREAS, the company will benefit from the services of a factor in connection with the handling of its accounts receivable; and WHEREAS, the Board has considered a proposed Factoring Agreement with CAPITAL FACTORS, INC., a Florida corporation, under which CAPITAL FACTORS, INC. would act as the Company's exclusive factor; NOW, THEREFORE, BE IT AND IT IS HEREBY RESOLVED THAT: The proposed Factoring Agreement is approved, and appropriate officers of the company are authorized and directed to execute and deliver a Factoring Agreement with CAPITAL FACTORS, INC. in the form or substantially the form outlined herein, and to do and perform all things contemplated herein on behalf of this company. As of the date of this Agreement, the following are the officers/employees authorized to act on behalf of the company: /S/ PIERRE G. MANSUR - ------------------------- Pierre G. Mansur, President /S/ PAUL I. MANSUR - ------------------------- Paul I. Mansur, C.E.O. /S/ RICHARD P. SMITH - ------------------------- Richard P. Smith, C.F.O. _________________________ IN WITNESS WHEREOF, the undersigned hereby certifies that the foregoing Resolution was duly adopted at a meeting of the Board of Directors held on November 24, 1997, at which a quorum was present, and that said Resolution has not been modified, amended, or rescinded and remains in full force and effect as of the date set forth below. MANSUR INDUSTRIES, INC. By: /S/ PAUL I. MANSUR ---------------------- Paul I. Mansur Its: C.E.O. ATTEST: /s/ PIERRE G. MANSUR (SEAL) - ---------------------- Secretary CORPORATE RESOLUTION Page 9 of 9 WHEREAS, the company will benefit from the services of a factor in connection with the handling of its accounts receivable; and WHEREAS, the Board has considered a proposed Factoring Agreement with CAPITAL FACTORS, INC., a Florida corporation, under which CAPITAL FACTORS, INC. would act as the Company's exclusive factor; NOW, THEREFORE, BE IT AND IT IS HEREBY RESOLVED THAT: The proposed Factoring Agreement is approved, and appropriate officers of the company are authorized and directed to execute and deliver a Factoring Agreement with CAPITAL FACTORS, INC. in the form or substantially the form outlined herein, and to do and perform all things contemplated herein on behalf of this company. As of the date of this Agreement, the following are the officers/employees authorized to act on behalf of the company: /S/ PIERRE G. MANSUR - ------------------------- Pierre G. Mansur, President /S/ PAUL I. MANSUR - ------------------------- Paul I. Mansur, C.E.O. /S/ RICHARD P. SMITH - ------------------------- Richard P. Smith, C.F.O. _________________________ IN WITNESS WHEREOF, the undersigned hereby certifies that the foregoing Resolution was duly adopted at a meeting of the Board of Directors held on November 26, 1997, at which a quorum was present, and that said Resolution has not been modified, amended, or rescinded and remains in full force and effect as of the date set forth below. MANSUR INDUSTRIES, INC. By: /S/ PAUL I. MANSUR ---------------------- Paul I. Mansur Its: C.E.O ATTEST: /s/ PIERRE G. MANSUR (SEAL) - ---------------------- Secretary EX-10.36 3 EXHIBIT 10.36 The parties hereto have entered into a separate License Agreement under certain Intellectual Property as defined in the License Agreement which allows Licensee to do any and all things with respect to any inventory obtained as a result of any liens or security interests granted hereunder as if Licensee were the owner of all Intellectual property covering such inventory. SECURITY AGREEMENT SUPPLEMENT - INVENTORY From: Mansur Industries, Inc. 8305 NW 27th Street, Suite 107 Miami, FL 33122 and Systemone Technologies, Inc. 8305 NW 27th Street, Suite 107 Miami, FL 33122 To: CAPITAL FACTORS, INC. 120 East Palmetto Park Rd, 5th Floor Boca Raton, Florida 33432 Gentlemen: This is a security agreement supplement to our underlying Factoring Agreement with you executed on the 26 day of November, 1997. It is hereby incorporated into said Factoring Agreement (hereinafter sometimes called "The Agreement"), and is a part thereof. Each of the terms defined in the Agreement, unless otherwise defined herein, shall have the same meaning when used herein. Where two or more entities have executed this agreement and the Agreement, the obligations of such entities shall be joint and several, and each representation, warranty, covenant and agreement set forth herein and in the Factoring Agreement and any other agreement entered into between the parties hereto shall be deemed to have been made jointly and/or severally by each such entity unless the context of this agreement otherwise so states. 1. In addition to your other security, we hereby pledge to you and grant you a continuing general lien on and security interest in all Inventory now and hereafter owned by us and all substitutions, additions and replacements thereof. The term "Inventory" means and includes all merchandise intended for sale by us and all raw materials, goods in process, finished goods, materials and supplies of every nature used or usable in connection with the manufacture, packing, shipping, advertising or sale of such merchandise. We warrant that all Inventory is and will be owned by us, free of all other liens, security interest and encumbrances, and that we are the owners of the Inventory at wholesale and are not a mercantile establishment selling at retail. All of such Inventory will be kept at our address shown above and in the event of any change in location, we will immediately notify you; but your lien and security interest will be maintained despite the location of the Inventory. We will, at our expense, defend the Inventory against any claims or demands adverse to your interest therein, and will promptly pay, when due, all claims, taxes or assessments levied against us on the Inventory. In the event we fail to pay such claims, taxes and assessments, or fail to keep the Inventory free from any other lien or security interest, you may make expenditures for such purposes and any amount so expended shall be secured hereby and will be repaid with interest on demand at the maximum rate allowable by law. 2. Your lien and security interest shall extend and attach to Inventory which is presently in existence and which is owned by us or in which we have an interest, and all Inventory which we purchase or in which we may acquire an interest at any time and from time to time in the future, whether such Inventory is in transit or in our constructive, actual or exclusive occupancy or possession or not, or held by us or others for your account and wherever the same may be located, including, but without limiting the generality of the foregoing, all Inventory which may be located on our premises or upon the premises of any carriers, forwarding agents, truckers, warehousemen, vendors, selling agents, finishers, converters or other third parties who may have possession of the collateral. 3. Your lien on the Inventory shall continue through all stages of manufacture and shall, without further act, attach to goods in process, to the finished goods, to the accounts receivable or other proceeds resulting from the sale or other disposition thereof and to all such Inventory as may be returned to us by customers. Forthwith and from time to time hereafter, -2- we shall provide you with one or more separate written statements, dated and signed by us, describing, designating, identifying and evaluating all Inventory now and hereafter owned by us, confirming your lien and security interest. Upon the sale, exchange or other disposition of the Inventory, the security interest and lien created and provided for herein shall without break in continuity and without further formality or act continue in and attach to the instruments for the payment of money, accounts, contract rights, documents of titles, shipping documents, chattel paper and all other cash and non-cash proceeds of such sale, exchange or disposition, including Inventory returned or rejected by customers or repossessed by either of us. As to any such sale, exchange or disposition, you shall have all of the rights of an unpaid seller, including stoppage in transit, replevin and reclamation. 4. The Inventory shall be additional security for all obligations to you under The Agreement as originally existing and as hereby and at any time heretofore or hereafter supplemented or amended as well as for all other loans and advances to us or for our account by you, whether now existing or hereafter arising, and for all commissions, obligations, indebtedness, interest charges and expenses chargeable to our account or due from us from time to time, however created and however arising, whether or not evidenced by notes or other instruments, including any and all obligations and indebtedness of any subsidiary or affiliate (including any parent company) of ours, and including officers of such, to you or your subsidiaries and affiliates (including any parent company) all hereinafter called the "Obligations". With respect to all Inventory as well as all accounts, Accounts Receivables, and other security, you shall be entitled to all of the rights and remedies set forth in The Agreement. 5. Upon our request, you may make Advances to us prior to our sale of Inventory, and if you so require, we will execute a note or notes or other instruments of indebtedness in form satisfactory to you evidencing any loans or advances to us. Any such Advances will be made at your sole discretion, will be charged by you to us and will bear interest payable in the manner and at the rate specified in The Agreement, unless such advance is evidenced by a note or an instrument of indebtedness, in which event the terms thereof shall be controlling. All such Advances shall be payable by us on demand (unless otherwise provided in a note or instrument of indebtedness) and recourse to the security therefor will not be required at any time. The amount of all such loans and advances and the relation thereof to the value of the Inventory will be determined by you alone. 6. We shall be obligated to maintain a ratio of N/A the amount of Inventory to the amount of the loan on Inventory at all times in acceptable Inventory valued at cost or market, whichever is lower, excluding all obsolete Inventory. 7. Except for sales made in the regular course of our business, we shall not sell, encumber or dispose of or permit the sale, encumbrance or disposal of any Inventory without your prior written consent. As sales are made in the regular course of business, we shall, in accordance with the provisions of The Agreement, immediately execute and deliver to you schedules and assignments of all Receivables created by us. Any collateral assigned to you under The Agreement or this supplement shall be additional security for the payment of all sums owing by us to you for loans or advances pursuant to this supplement. If sales are made for cash, we shall immediately deliver to you the identical checks, cash or other forms of payment which we receive. All payments received by you on account of cash sales of Inventory, as well as on account of Receivables, will be credited to our account in accordance with the provisions of The Agreement. 8. If any Inventory remains in the possession or control of any of our agents or processors, we shall notify such agents or processors of your lien, and upon request shall instruct them to hold all such Inventory for your account and subject to your instructions. We agree to maintain books and records pertaining to the Inventory in such detail, form and scope as you shall require, and we agree to notify you promptly of any change in our name, mailing address, principal place of business or location of the Inventory. We will also advise you promptly, in sufficient detail, of any substantial change relating to the type, quantity or quality of the Inventory, or any event which would have a material effect on the value of the Inventory or on the lien and security interest granted to you herein. A physical listing of all Inventory, wherever located, shall be taken by us whenever requested by you, and a copy of each such physical listing shall be supplied to you. You may examine and inspect the Inventory at any time. We will execute and deliver to you from time to time, upon demand, such supplemental agreements or documents relating to Inventory, or instruments of indebtedness, in order that the full intent and purpose of this agreement may be carried into effect. -3- 9. We warrant and represent that we have not and will not during the period that we are indebted to you for any loans, advances or Obligations, enter into any agreement of any kind, the effect of which will create any prior or superior rights, security interests or liens upon any of our assets in which you have a security interest in favor of any person, firm or corporation. 10. At our own expense, we shall keep the Inventory (whether or not in transit) continuously insured in amounts not less than its full insurable value by a reputable and highly rated insurance company or companies acceptable to you against loss or damage from fire, hazards included within the term "extended coverage", theft and such other risks as you may require, in such form and for such periods as shall be satisfactory to you. Each insurance policy shall provide, that loss and proceeds thereunder shall be payable to you as your interest may appear, and which policy shall provide at least ten (10) days' written notice of cancellation to you. We shall deliver to you on demand all such insurance policies or other evidence of compliance satisfactory to you and we shall renew each policy at our own expense and shall deliver satisfactory to you and we shall renew each policy at our own expense and shall deliver satisfactory evidence thereof to you not less than thirty (30) days before its expiration date. If we fail to do so, you may procure such insurance and the cost of such insurance shall be secured hereby and will be payable to you with interest on demand at the maximum rate allowable by law. You may act as attorney-in-fact for us in obtaining, adjusting, settling and cancelling such insurance and endorsing any instruments relating thereto, and in the event of loss or damage to the Inventory, your option to the Obligations (whether or not matured) or to the repair or replacement of the Inventory after receiving proof satisfactory to you of such repair or replacement. 11. If we should default in the payment of any Obligation due to you hereunder or otherwise, or in the performance of any provision of The Agreement (including, without limitation, this supplement and any other supplements thereto), or if a petition under the Bankruptcy Act is filed by or against us, or action in receivership instituted, or if we make an assignment for benefit of creditors, suspend business or become insolvent, or if an attachment be levied or tax lien be filed against any of the Inventory, or if you deem yourself or your security insecure, then you may declare this agreement in default and all amounts owing under The Agreement (including, without limitation, this supplement and any other supplements thereto) and all other Obligations owing by us to you shall, without demand or notice, immediately become due and payable (notwithstanding that the maturity date or dates expressed in any evidence of such indebtedness may be otherwise) and you may foreclose your lien or security interest in the Inventory in any way permitted by law, and shall have, without limitation, the remedies of a secured party under the Florida Uniform Commercial Code or any other applicable law. You may thereupon enter our premises without legal process and without incurring liability to us remove the same to such place as you may deem advisable, or you may require us to assemble and make the Inventory available to you at a convenient place, or take and maintain possession on our premises and, with or without having the Inventory at the time or place of sale, you may sell or otherwise dispose of all or any part of the Inventory whether in its then condition or after further preparation or processing, either at public or private sale or at any broker's board, in lots or in bulk, for cash or for credit, at any time or place, in one or more sales, and upon such terms and conditions as you may elect. At any such sale you may be the purchaser. If any Inventory shall require rebuilding, repairing, maintenance, preparation, or is in process or other unfinished state, you shall have the right, at your option, to do such rebuilding, repairing, preparation, processing or completion of manufacturing, for the purpose of putting the Inventory in such saleable form as you shall deem appropriate. IF YOU USE LEGAL PROCESS, CONTRACTUAL OR OTHER REMEDY TO OBTAIN POSSESSION OF THE INVENTORY WE WAIVE ANY RIGHT TO ANY NOTICE OF HEARING AND/OR HEARING TO WHICH WE MIGHT OTHERWISE BE ENTITLED PRIOR TO RECOVERY OF THE INVENTORY. 12. In the event of any public or other sale of the Inventory, the proceeds from any sale shall first be applied to any costs and expenses in securing possession of the Inventory, storing, repairing and finishing for sale, and to any expenses in connection with the sale. The net proceeds will be applied toward the payment of any and all Obligations to you under The Agreement, this supplement or any other supplements thereto, and otherwise, including interest, attorney's fees, which we hereby expressly agree to pay in the event of any default hereunder and your referral to an attorney, and all other costs and expenses. Application of the net proceeds as to particular Obligations or as to principal or interest shall be in your absolute discretion. Any deficiency will be paid to you forthwith upon demand and any surplus will be paid to us if we are not indebted to you under any other Obligation. The -4- enumeration of the foregoing rights is not intended to be exhaustive and the exercise of any right shall not preclude the exercise of any other rights, all of which shall be cumulative. 13. To the extent that any of our obligations to you are now or hereafter secured by property other than the Inventory or by the guaranty, endorsement or property of any other person, firm or corporation, then you shall have the right to proceed against such other property, guarantor, or endorser upon our default in the payment of any obligation or in any of the terms, covenants or conditions contained herein, and you shall have the right in your sole discretion to determine which rights, security, liens, security interests or remedies you shall at any time pursue, relinquish, subordinate, modify or take any other action with respect thereto, without in any way modifying or affecting any of them or any of your rights hereunder. 14. Any notice to us shall be in writing and shall be deemed sufficiently made if delivered personally or if transmitted by postage pre-paid first class mail (airmail if international) or by telegraph or by telex with confirmed answerback, to the respective address appearing on the face of this agreement for such person (or, if none appears, to any address for such person then registered in your records). Any notice to you shall be directed to the attention of a vice-president or higher ranking officer of yours and shall be made in writing in the foregoing manner and shall be deemed sufficient when received by you at the following address: 120 East Palmetto Park Rd., Boca Raton, Florida 33432. Any party may change its address for notice by given written notice of the change in accordance with this paragraph. 15. As we are a corporation, partnership or other business entity, we hereby further represent and warrant to you that: (a) we are duly organized, validly existing and in good standing under the laws of the jurisdiction of our creation and are duly qualified or licensed to do business in those jurisdictions where the nature of our business requires us to be so qualified or licensed; (b) we have all requisite power and authority (corporate or otherwise) to conduct our business, to own our properties, to execute and deliver this agreement, and to perform our obligations under the same; (c) the execution, delivery and performance of this agreement have been duly authorized by all necessary actions (corporate or otherwise) and do not require the consent or approval of our stockholders (if a corporation) or of any other person whose consent has not been obtained; and (d) the execution, delivery and performance of this agreement does not had shall not conflict with any provision of our by-laws or articles of incorporation (if a corporation), partnership agreement (if a partnership) or trust agreement or other document pursuant to which we were created and exist, nor conflict with any other agreement by which we are bound. 16. The lien, rights and security interest granted to you hereunder are to continue in full force and effect, notwithstanding the termination of The Agreement or the fact that the principal account maintained in our name on your books may from time to time be temporarily in a credit position, until the final payment to you in full of all obligations and indebtedness due you by us, together with interest thereon, and your delay or omission to exercise any right shall not be deemed a waiver thereof or of any other right, unless such waiver be in writing. A waiver on one occasion shall not be construed as a bar to or waiver of any other rights or remedies on any future occasion. 17. This agreement, which is subject to modification only in writing, is supplementary to and is to be considered as part of the Agreement and shall take effect when dated, accepted and signed in Fort Lauderdale, Florida by one of your officers. This agreement shall be interpreted according to the laws of the state of Florida and shall inure to the benefit of an be binding upon the parties hereto, their successors and assigns. Very truly yours, Attest: MANSUR INDUSTRIES, INC. _________________________ By:/s/ PAUL I. MANSUR (Seal) ---------------------- Paul I. Mansur Its: Chief Executive Officer (Seal) On: November 26, 1997 and Attest: SYSTEMONE TECHNOLOGIES, INC. _________________________ By: /S/ PAUL I. MANSUR -------------------------- Paul I. Mansur Its: Chief Executive Officer Accepted at Boca Raton, Florida, on the 26 day of November, 1997. Attest: CAPITAL FACTORS, INC. _________________________ By: /S/ CHRISTOPHER CONSTABLE --------------------------- Christopher Constable Assistant Vice President On: November 26, 1997 EX-10.37 4 EXHIBIT 10.37 LICENSE AGREEMENT THIS AGREEMENT, effective November 26, 1997, is made by and between Mansur Industries, Inc. a Florida corporation with a place of business at 8305 Northwest 27th Street, Suite 107, Miami, Florida 33122 ("Licensor") and Capital Factors, Inc., a Florida corporation having a place of business at 120 East Palmetto Park Road, 5th Floor, Boca Raton, Florida, 33432 ("Licensee"). WITNESSETH: WHEREAS Licensor and Licensee have entered into a Factoring Agreement and Security Agreement Supplement - Inventory (as such documents may be modified, extended or amended from time to time) in connection with Licensor's manufacturing, marketing and selling of a line of self contained industrial parts washers that incorporate recycling and waste minimization technologies, tools, materials, parts and other instrumentalities, insofar as such machines, tools, parts, materials and other instrumentalities are involved in or incidental to the development, manufacturing, testing or repair of the self contained industrial parts washer ("Licensed Products"); WHEREAS The Licensed Products are covered by and the subject of certain inventions, developments and works of Licensor, whether or not covered by patent, trademark, copyright, technology/knowhow and/or trade secret, and any such patents, trademarks (whether or not 1 registered), copyright (whether or not registered), and applications therefor, including but not limited to those listed on Schedule "A" hereto (Intellectual Property); and WHEREAS pursuant to the Factoring Agreement and Security Agreement Supplement - Inventory between Licensor and Licensee, the parties hereto desire that Licensee shall have a security interest in the Licensed Products, and that Licensee shall have a full and all encompassing right and license to dispose of Licensed Products upon the exercise of its security interest in the Licensed Products. NOW, THEREFORE, the parties hereto hereby agree as follows: 1.0 GRANT OF LICENSES 1.01 GRANT. Licensor hereby grants to Licensee, subject to the provisions hereof and the Factoring Agreement, a non-exclusive, royalty free, irrevocable license under the Intellectual Property to make, have made, use, sell, reproduce, prepare of produce modifications or derivative works, distribute, display and/or otherwise dispose of the Licensed Products, including the ability to lease, license and transfer the Licensed Products which are or have been made by or for the Licensor. Notwithstanding the foregoing, Licensee shall not make, have made, use, sell, reproduce, prepare or produce modifications or derivative works, distribute, display and/or otherwise dispose of Licensed Products, including the ability to lease, license and transfer the Licensed Products until such a time as Licensor shall have defaulted under the Factoring 2 Agreement, which default shall continue for a period of thirty (30) days after Licensor's receipt of notice of such default. 1.02 SUB LICENSE RIGHT. The licenses granted herein include the ability to convey to any recipient of Licensed Products, directly or indirectly form Licensee, a license of the scope of the licenses granted to Licensee by Licensor herein. Further, the grant of each license hereunder includes the right to grant sublicenses within the scope of such license to Licensee's related companies for so long as they remain its related companies. Any such sublicense may be made effective retroactively, but not prior to the effective date hereof, nor prior to the sublicensee becoming a related company of Licensee. 1.03 ABILITY TO PROVIDE LICENSES (a) Licensor warrants that, upon execution hereof by it and as of the effective date hereof, there are not commitments or restrictions which limit the licenses and rights which are purported to be granted hereunder by Licensor. (b) Licensor intends to acquire the right to grant to the Licensee licenses under any Intellectual Property covering the Licensed Products made by the Licensor and its related companies' employees with use of its or its related companies' funds or other assets. Accordingly, Licensor hereby agrees to take steps which are reasonable under the circumstances so that Intellectual Property covering Licensed Products which are made solely by one or more 3 of its and/or its related companies' employees who are employed to do research, development and/or inventive work and for which substantially all the funding is provided by it and/or its related companies, are included among the Intellectual Property licensed by it hereunder. 2.0 TERM AND TERMINATION 2.01 The term of this Agreement shall be for a period commencing on the effective date hereof and shall terminate upon the earlier to occur of (i) the date on which amounts are due by Licensor to Licensee under the Factoring Agreement following the termination thereof, or (ii) the life of the Intellectual Property. 2.02 EFFECT OF BREACH. In the event of a breach of this Agreement by Licensor, Licensee may, in addition to any other remedies that it may have, terminate this Agreement by not less than twenty (20) days' prior to written notice to Licensor specifying such breaches, unless such breaches specified therein shall have been remedied within twenty (20) days following Licensor's notice of such breach, and except that in the event of termination, the rights and licenses granted herein shall survive as necessary to exhaust inventory of Licensed Products to which Licensee may have obtained rights to, including title rights, both legal and/or equitable. A breach under this Agreement shall be considered to be a breach under the Factoring Agreement and the Security Agreement Supplement, and shall give rise to termination of those agreements under the provisions set forth in those agreements between the parties. In the event Licensee breaches this 4 Agreement, Licensor may, in addition to other remedies, terminate this Agreement by not less than twenty (20) days writtennotice to Licensee, unless such breaches specified therein shall have been remedied within twenty (20) days following Licensee's notice of such breach. 3.0 MISCELLANEOUS PROVISIONS 3.01 REPRESENTATIONS AND WARRANTIES. Licensor hereby represents and warrants that it has all necessary rights and authority to grant the licenses described herein, and, to the best of Licensor's knowledge, that the Licensed Products do not infringe the Intellectual Property rights (including but not limited to patents, trademarks, copyright, and other similar rights) of third parties. 3.02 INDEMNIFICATION. Licensor will indemnify and defend the Licensee, its related companies and its sublicensees, at its expense, and pay all finally ordered costs, fines, attorney's fees, including paralegal's fees, through final appeals, and damages resulting from all proceedings or claims against Licensee its related companies, and its sublicensees who obtain the Licensed Products, for infringement by any Licensed Product, or as a result of any use therof, of patents (including utility models and registered designs), copyrights, trademarks or other similar Intellectual Property rights (including rights in trade secrets), now or hereafter existing in the United States or any other country in the world. Licensor shall immediately notify Licensee if Licensor is or becomes aware of any right of, or protection accorded to a third party as set forth 5 above, that might affect Licensor's ability to provide the licenses, including the right to exercise the licenses, under this Agreement. 3.03 INCORPORATION. This Agreement is incorporated by reference into and made a part of the Factoring Agreement and Security Agreement Supplement-Inventory between Licensor and Licensee, and is an attachment thereto. 3.04 DISCLAIMER. Neither party makes any representations, extends any warranties of any kind, assumes any responsibility of obligations whatever, or confers any right by implication, estoppel or otherwise, other than the rights and warranties herein expressly granted. 3.05 ASSIGNABILITY. Licensee shall have the right to assign this Agreement to such parties as Licensee may assign or have assigned its rights in inventory of Licensed Products optained under the provisions of the Factoring Agreement and Security Supplement-Inventory, without the Licensor's express written consent. Licensee shall not have the right to otherwise assign this Agreement without the Licensor's express written consent. Licensee shall not have the right to otherwise assign this Agreement without the Licensor's express written consent. Further, Licensor may not assign this Agreement or the certain Factoring Agreement and Security Agreement Supplement-Inventory into which this Agreement is expressly incorporated by reference and made a part thereof, without Licensee's express written consent. 6 3.06 ADDRESSES. Any notice or other communication hereunder shall be sufficiently given if sent by certified mail addressed to: in the case of Licensor; Paul Mansur Chief Executive Officer Mansur Industries, Inc. 8305 Northwest 27th Street, Suite 107 Miami, Florida 33122 and in the case of Licensee; Scott A. MacMillan Senior Vice President Capital Factors, Inc. 120 East Palmetto Park Road, 5th Floor Boca Raton, FL 33432 3.07 CHOICE OF LAW. The parties are familiar with the principles of Florida commerical law, and desire and agree that the law of Florida shall apply in any dispute arising with respect to this Agreement. 3.08 INTEGRATION. This Agreement sets forth the entire agreement and understanding between the parties as to the subject mattter hereof and merges all prior discussions between them. 7 Neither of the parties shall be bound by any warranties, understandings or representations with respect to such subject matter other than as expressly provided herein or any writing signed with or subject to execution hereof by an authorized representative of the parties to be bound thereby. 3.09 COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original but all of which shall constitute one agreement. 3.10 WAIVER OF JURY TRIAL. Trial by jury is hereby waived by the parties hereto in any action, proceeding or counterclaim brought by either party against the other party on any matters arising out of or in any way connected with this Agreement, or the relations created hereby, whether for contract, tort or otherwise, and both parties hereby consent to the jurisdiction of the Courts of the State of Florida and of any Federal Court in such state for determination of any dispute as to any such matters. 3.11 SEVERABILITY. If any provision of this Agreement is held by a court of competent jurisdiction to by contrary to law and invalid, the remaining provisions of this Agreement shall be considered to be severable and shall remain in full force and effect. 3.12 BINDING EFFECT. This Agreement shall be binding upon the parties hereto, their heirs, legal representatives, successors and assigns. 8 IN WITNESS WHEREOF, each of the parties has caused this Agreement to be executed in duplicate originals by its duly authorized representatives on the respective dates entered below. LICENSOR /S/ RICHARD SMITH - ------------------------------- Richard Smith Title: Chief Financial Officer Date: November 26, 1997 LICENSEE /S/ SCOTT MACMILLAN - ------------------------------- Scott MacMillan Title: Senior Vice President Date: December 1, 1997 THIS AGREEMENT DOES NOT BIND OR OBLIGATE EITHER PARTY IN ANY MANNER UNLESS DULY EXECUTED BY AUTHORIZED REPRESENTATIVES OF BOTH PARTIES. 9 SCHEDULE "A" LIST OF INTELLECTUAL PROPERTIES BY CATEGORY SystemOne/registered trademark/ Washer Power Spray Washer Immersion Washer 10 EX-10.38 5 EXHIBIT 10.38 PURCHASE AND DISTRIBUTION AGREEMENT THIS PURCHASE AND DISTRIBUTION AGREEMENT ("Agreement") is effective as of December 1, 1997 (the "Effective Date"), notwithstanding the actual date of execution, by and between FIRST RECOVERY, a division of ECOGARD, INC., a Delaware corporation, with offices located at 3499 Blazer Parkway, Lexington, Kentucky, 40509 (hereinafter Ecogard, Inc., including its First Recovery division, is referred to as "First Recovery"), and SYSTEMONE TECHNOLOGIES INC. (hereinafter referred to as "SystemOne"), a wholly owned subsidiary of MANSUR INDUSTRIES INC., a Florida corporation ("Mansur"), with offices located at 8305 N.W. 27th Street, Suite 107, Miami, Florida 33122. WHEREAS, SystemOne has available for supply various models of washer units and brake washers marketed under the trademark SystemOne/registered trademark/, more particularly defined as the "Equipment" below; WHEREAS, First Recovery desires to purchase and distribute the Equipment in certain defined territories, and SystemOne desires to sell the Equipment to First Recovery for such sales and distribution; WHEREAS, First Recovery, Mansur and The Valvoline Company, a division of Ashland Inc. ("Valvoline"), a Kentucky corporation, previously entered into a Master Lease and Distribution Agreement effective as of August 1, 1996 ("Initial Agreement") and a Commission Sales Representation Agreement effective as of January 14, 1997 (the "Second Agreement") for the purpose of evaluating the market for and performance of the Equipment and First Recovery's ability to market and distribute the Equipment; and WHEREAS, the Initial Agreement expired in accordance with its terms, the Second Agreement will expire in accordance with its terms on January 14, 1998, and the parties wish to terminate and supersede the Second Agreement as of the Effective Date hereof, in accordance with the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the foregoing premises, the mutual covenants, agreements and conditions hereinafter set forth and the mutual benefits to be derived therefrom, the sufficiency and adequacy of which are hereby acknowledged, First Recovery and SystemOne hereby agree as follows: 1. MINIMUM PURCHASE COMMITMENT; TERMS OF PURCHASES 1.1 During the term of this Agreement which commences on the Effective Date and terminates on June 30, 1998 (the "Term"), First Recovery shall purchase from SystemOne the washer units and brake washers identified in EXHIBIT A to this Agreement, attached hereto and incorporated herein by reference (the "Equipment"), in the following quantities and upon the following terms: PERIOD MINIMUM EQUIPMENT PURCHASES ------ --------------------------- 12/01/97 through 400 parts washer units plus 200 brake washers 12/31/97 payment net ninety (90) days 01/01/98 through 600 parts washer units plus brake washers as 03/31/98 ordered - payment net ninety (90) days Mansur Purchase and Distribution -Page 1 1.2 First Recovery shall purchase the Equipment from SystemOne by submitting written purchase orders to SystemOne, consistent with the quantities set forth in Section 1.1 hereof. SystemOne will accept such purchase orders and sell the Equipment to First Recovery. Each unit of Equipment purchased by First Recovery pursuant to Section 1.1 hereof shall be made available by SystemOne for pickup by First Recovery within five (5) business days of the date of SystemOne's receipt of First Recovery's purchase order F.O.B. SystemOne's manufacturing facility. With respect to purchase orders for Equipment in excess of the quantities set forth in Section 1.1 hereof, SystemOne may, at its option, determine to sell the equipment to the extent the Equipment is available, upon the following terms: (A) SystemOne shall notify First Recovery by both fax and telephone when any order is available for pickup at SystemOne's facility (this notice shall hereafter be referred to as the "Availability Notice"). (B) Upon receipt of an Availability Notice, First Recovery shall arrange for shipping and/or transportation of the Equipment from SystemOne's facility and pay all shipping, insurance and related costs. Risk of loss and title to the Equipment shall pass to First Recovery upon pickup of the Equipment by, or on behalf of, or for the account of First Recovery at SystemOne's manufacturing facility. (C) First Recovery shall use reasonable and good faith efforts to pick up or cause the pick up of the Equipment that is the subject of an Availability Notice within ten (10) business days of receipt of the Availability Notice; provided, however, that Equipment required to be purchased by First Recovery during the period December 1, 1997 through December 31, 1997 as set forth in Section 1.1 hereof, shall be picked up by First Recovery on or before December 31, 1997. First Recovery will cause the Equipment to be shipped to a Service Center (as hereinafter defined). (D) All Equipment purchased from SystemOne by First Recovery shall be factory filled with ProMax/registered trademark/ 2000 Solvent provided to SystemOne at no additional cost by First Recovery. (E) At the request of First Recovery, SystemOne shall handle, deliver and install units of Equipment purchased by First Recovery from SystemOne which have been sold or leased by First Recovery or required under First Recovery's "free trial program" within the First Recovery Territory. First Recovery agrees that it shall, from time to time, advise SystemOne of its free trial program Equipment requirements. As described in Section 1.3 below, a portion of the per unit handling fee to be paid by First Recovery set forth on EXHIBIT A hereto represents the cost of handling, delivering and installing such Equipment (the "Handling Fee"). As set forth on EXHIBIT A, the Handling Fee shall be adjusted based on the monthly volume of Equipment handled, delivered and installed by SystemOne. 1.3 During the Term, for each unit of Equipment purchased by First Recovery, First Recovery shall pay to SystemOne the Purchase Price as set forth on EXHIBIT A, which includes payment for (i) the purchase of the unit of Equipment; (ii) the labor involved in the initial factory fill of the Equipment with ProMax 2000 Solvent provided by First Recovery as set forth in Section 1.2(d); (iii) the handling, delivery and installation of Equipment, as set forth in Section 1.2(e); and (iv) warranty services for a period of five (5) years with respect to Equipment purchased during the term of this Agreement in accordance with SystemOne's standard warranty policy as set forth in EXHIBIT B, attached hereto and incorporated herein by reference. First Recovery shall pay SystemOne the Purchase Price for Equipment purchased within ninety (90) days of the date of SystemOne's invoice. Mansur Purchase and Distribution -Page 2 2. TERM/TERMINATION This Agreement shall terminate on June 30, 1998. Additionally, either party shall have the right to terminate this Agreement (i) five (5) days after any default in payment by the other party; (ii) at any time by giving thirty (30) days prior written notice to the other party if the other party has breached any of its material duties or obligations under this Agreement, other than a default in payment, provided that the non-defaulting party has requested the other in writing to immediately commence curing the default or breach and to either complete curing the same within twenty (20) business days or to pursue with due diligence the prompt curing of same if it cannot be cured within twenty (20) business days, and, if the same is not then cured, then the non-defaulting party may, without prejudice to any other right or remedy it may have, terminate this Agreement; or (iii) immediately by either party if the other party is finally adjudicated to be insolvent or bankrupt or a trustee or receiver in bankruptcy has been appointed for such party and not discharged within sixty (60) days. 3. TITLE, RISK OF LOSS Title and risk of loss to each unit of the Equipment purchased by First Recovery shall pass to First Recovery upon loading of the Equipment on First Recovery's designated transportation vehicle at SystemOne's manufacturing facility, as set forth in Section 1.2(b) and as provided in Section 1.2(c). As more fully set forth in Section 7.1 hereof, SystemOne shall maintain insurance coverage on, among other things, the Equipment owned by First Recovery which is to be handled, delivered and installed by SystemOne naming First Recovery as an additional insured and loss payee. 4. TERRITORY 4.1 Except as otherwise specifically provided herein, during the Term of this Agreement, (i) First Recovery shall have exclusive rights to purchase from SystemOne and market and distribute through sale or lease the Equipment only in the counties in which the cities identified in EXHIBIT C, attached hereto and incorporated herein by reference, are located (the "First Recovery Territory") and to National Account Customers (as hereinafter defined). First Recovery shall not market and/or distribute, through sale, lease or otherwise, the Equipment to non-National Account Customers outside the First Recovery Territory. 4.2 In marketing and distributing the Equipment in the First Recovery Territory and to any National Account Customer First Recovery shall have the right to use third parties or agents that it, or its affiliate, The Valvoline Company, a division of Ashland Inc. ("Valvoline"), currently has a distribution or agency business relationship with to assist in the sales, marketing and distribution of the Equipment in accordance with the requirements of this Agreement, including but not limited to subdistributors. First Recovery shall not use any third parties or agents in connection with the sale, marketing and distribution of the Equipment that it or Valvoline does not have a distribution or agency relationship as of the date hereof without the prior written consent of SystemOne, which consent shall not be unreasonably withheld, conditioned or delayed. 4.3 With regard to the State of Florida ("Florida Territory"), during the Term SystemOne agrees that First Recovery may solicit trial placements of Equipment on behalf of SystemOne as a commissioned sales agent only, pursuant to which SystemOne will pay First Recovery a commission equal to ten percent (10%) of all completed sales or leases of Equipment with SystemOne customers with whom First Recovery solicited trial placements. Such solicitations by First Recovery shall be in accordance with procedures developed by and acceptable to SystemOne. Commission amounts due to First Recovery pursuant to this paragraph shall be paid Mansur Purchase and Distribution -Page 3 to First Recovery within sixty (60) days of the close of such sale or lease. First Recovery shall also have the right to transfer any Equipment purchased from SystemOne to Valvoline for use in its equipment loan program, provided that the total number of units of Equipment used by Valvoline in this manner in the Florida Territory during the Term shall not exceed three hundred (300) units. First Recovery shall have no power to bind SystemOne in any contractual relationship, assume any obligations, or make any warranties or representations on behalf of SystemOne; all proposals, pricing arrangements and all other aspects of any Equipment trial usage, sales or leases shall be made solely by SystemOne. Notwithstanding the foregoing, SystemOne shall have total freedom to sell, market, promote, and distribute the Equipment in the Florida Territory and First Recovery shall have no rights whatsoever with regard to the Florida Territory. 4.4 With respect to national customers, which means any customer that operates in more than one state and in more than fifteen (15) locations ("National Account Customers"), First Recovery may, during the Term hereof, on an exclusive basis, sell, market and distribute the Equipment, in accordance with the terms of this Agreement, provided that, prior to any sale of Equipment to any National Account Customer location located outside a one hundred twenty (120) mile radius from the nearest Service Center, the parties will mutually agree on the method of providing service center support for any Equipment acquired by such National Account Customer location. The foregoing shall not be deemed to require SystemOne to open or maintain any Service Center except as expressly provided herein. 4.5 First Recovery shall use reasonable efforts (utilizing its and Valvoline's marketing, distribution and management systems) to develop, promote and expand the market for, and sell the Equipment throughout the First Recovery Territory. Subject to the terms of this Agreement, including Section 9, First Recovery shall assume sole responsibility for all dealings between it and its customers or prospective customers, including all credit risks and risks regarding collection of receivables with respect to Equipment sold or leased by it to third parties, and for matters relating to the supply and composition of the ProMax 2000 solvent. 5. INSTALLATION, SERVICE AND MAINTENANCE OF EQUIPMENT 5.1 SystemOne plans to establish service centers and employ service technicians to install and service such Equipment (each, a "Service Center") in accordance with the schedule set forth in EXHIBIT D attached hereto and incorporated herein by reference. It is intended that at least one Service Center shall be located in a centralized location in each of the cities identified in EXHIBIT C so as to provide convenient and prompt service to Equipment owners or users. The Service Centers are intended to provide the following services: (i) install trial units of Equipment purchased by First Recovery for installation at First Recovery customer locations for evaluation of future purchase or lease of the Equipment; (ii) install Equipment purchased by First Recovery at First Recovery customer locations as reasonably requested by First Recovery; (iii) provide basic training to First Recovery purchasers/lessees of the Equipment on the proper care and use of the Equipment upon installation; (iv) perform standard warranty and maintenance service and repairs; and (v) provide temporary storage of the Equipment as set forth in Section 1.2(e). 6. PATENT/TRADEMARKS 6.1 SystemOne represents, warrants and covenants to First Recovery that, to its knowledge, the patents with respect to the Equipment are valid and current, and that it has received no notice, and is not aware, that the patents and related intellectual property infringe upon any rights of any third party. SystemOne shall defend, indemnify and hold harmless First Recovery, its parent, subsidiaries and affiliate corporations, and its and their officers, directors, employees and agents, Mansur Purchase and Distribution -Page 4 from and against any and all claims, liabilities, suits, proceedings, judgments, order, fines, penalties, damages, losses, costs and expenses, including reasonable attorneys' fees which it or they may hereafter incur, become responsible for or pay out as a result of circumstances which relate to the design of, patentability of, patent on, or intellectual property related to the Equipment. 6.2 Subject to the terms hereof and solely in connection with the performance of First Recovery's obligations under this Agreement, SystemOne grants to First Recovery, a revocable nonexclusive license ("Revocable License") to use the trademarks, trade names, trade dress and other designations of source or quality of SystemOne as identified on EXHIBIT E, attached hereto and incorporated herein by reference. Such Revocable License shall be strictly limited to First Recovery's activities in marketing and distributing the Equipment, either by sale or lease to its customers, and shall survive termination or expiration of this Agreement only to the extent that First Recovery is continuing to market and distribute Equipment purchased during the Term. First Recovery acknowledges that nothing in this Agreement gives it any right, title or interest in the technology, copyrights, trade secrets, patents, trademarks, tradenames, trade dress and other property rights related to the Equipment and designations of source of quality, other than the Revocable License set forth in this Section 6.2. SystemOne shall have the right to approve, prior to use by First Recovery, of all marketing, advertising and other related materials prepared by or for use by First Recovery. Additionally, any marketing or other material prepared by or for use by First Recovery utilizing the name "SystemOne" shall bear an appropriate mark indicating that SystemOne is a registered trademark of Mansur. 6.3 First Recovery shall not alter in any way the appearance of any of the units of Equipment and shall not remove, deface, alter or cover the SystemOne identification thereon, except that First Recovery can affix decals or other First Recovery information to the unit previously approved in writing by SystemOne. 6.4 During the Term, First Recovery, including its affiliates, employees, officers, contractors, or agents, agrees (i) not to decompile and/or reverse engineer the Equipment or any component thereof, (ii) not to directly or indirectly apply for or attempt to acquire any rights, patents or copyrights relating to the Equipment or any component thereof; and (iii) that none of them has any rights or interest with respect to the technology, copyrights, trade secrets and patents and other property rights relating to the Equipment, including all materials, combinations, processes, equipment, design concepts, documents, data and information incorporating, based upon, or derived from the foregoing. 7. INSURANCE 7.1 Without limiting, negating or reducing SystemOne's undertaking to indemnify, defend and hold harmless First Recovery as set forth in Section 9 of this Agreement, during the Term, SystemOne shall obtain and continue in full force and effect throughout the term of this Agreement the following insurance coverage: /bullet/ Worker's Compensation Statutory /bullet/ Employer's Liability $5,000,000 per occurrence /bullet/ Public Liability $5,000,000 per occurrence /bullet/ Contractual Liability $5,000,000 per occurrence /bullet/ General Liability, including $5,000,000 per occurrence products liability and completed operations Mansur Purchase and Distribution -Page 5 The required insurance coverage shall be maintained with insurance companies qualified to provide coverage where business in conducted pursuant to this Agreement. SystemOne shall provide First Recovery with thirty (30) days prior written notice of any change, modification or termination in or of the above insurance coverage. Upon request, SystemOne shall provide First Recovery with an insurance certificate evidencing the required coverage and naming First Recovery as an additional insured. In addition to the above, SystemOne shall maintain all risk property insurance coverage on the Equipment owned by First Recovery which is to be handled, delivered and installed by SystemOne pursuant to Section 1.2(e) hereof and shall provide First Recovery, upon request, with an insurance certificate evidencing such coverage and naming First Recovery as an additional insured and loss payee as their interests may appear. Notwithstanding the foregoing, after SystemOne has obtained the required insurance coverages, should the insurance premiums for such or similar coverage be increased by more than one hundred percent (100%), SystemOne shall not be obligated to maintain such insurance, provided that SystemOne has complied with the notice provisions of this Section. 8. REPRESENTATIONS, WARRANTIES AND COVENANTS 8.1 SystemOne represents, warrants and covenants to First Recovery, effective as of the date of this Agreement and again as of the date of each shipment of Equipment purchased by First Recovery as follows: (A) SystemOne's parent, Mansur, owns valid and current patents for and other intellectual property related to the Equipment and, to its knowledge, such property rights do not infringe on the intellectual property rights of any third party; (B) SystemOne is licensed to use and has the authority to license others to use the intellectual property associated with the Equipment; (C) SystemOne believes that Mansur will be entitled to seek enforcement of its patent against infringers on that patent, including, but not limited to, enforcement against any third party manufacturing identical or similar equipment; (D) that SystemOne has the requisite skills and facilities to fill requested orders for the Equipment in accordance with the terms of this Agreement; (E) that the Equipment purchased by First Recovery is materially free from defects and will conform to SystemOne's written performance criteria as set forth in EXHIBIT F, attached hereto and incorporated herein by reference, and will be covered by the manufacturer's standard warranties set forth in EXHIBIT B, attached hereto and incorporated herein by reference; (F) that the Equipment has received safety certification from Intertek Testing laboratories - ETL and C-ETL (Canada); and (G) that SystemOne shall comply with all federal, state and local laws, rules and regulations that may now or hereafter be applicable to SystemOne's obligations under this Agreement in manufacturing the Equipment. 8.2 First Recovery represents, warrants and covenants to SystemOne, effective as of the date of this Agreement and again as of the date of each purchase of Equipment from SystemOne as follows: Mansur Purchase and Distribution -Page 6 (A) that First Recovery has the requisite skills, facilities and personnel to market, promote and sell the Equipment in accordance with the terms and requirements of this Agreement; (B) that First Recovery is duly organized and validly existing under the laws of the State of Delaware, has all requisite power and authority to conduct its business as now and proposed to be conducted and to execute, deliver and perform it obligations under this Agreement; and that this Agreement has been duly authorized and when executed and delivered will represent a valid and binding obligation enforceable against First Recovery in accordance with its terms; (C) that First Recovery shall comply with all applicable federal, state and local laws, rules and regulations of the United States of America and of any state or political subdivision thereof and of any other governmental unit or agency that may now or hereafter be applicable to First Recovery's obligations under this Agreement; (D) that First Recovery shall notify SystemOne promptly upon becoming aware of any adverse information relating to the safety or effectiveness of the Equipment; 9. INDEMNIFICATION 9.1 SystemOne shall indemnify, defend and hold harmless First Recovery, its parent, subsidiaries and affiliates, and its and their officers, directors, shareholders, employees and agents, from and against any and all claims, liabilities, suits, proceedings, judgments, orders, fines, penalties, damages, losses, costs, and expenses, including but not limited to reasonable attorney fees and other expenses of litigation, which it may hereafter incur, become responsible for or pay out as a result of death or bodily injuries to any person, destruction or damage to any property or contamination of or adverse effects on the environment, arising out of or resulting from SystemOne's patents on or other intellectual property related to the Equipment, any defect in the design of the Equipment, or the performance of or the maintenance of the Equipment, any negligent act or omission of SystemOne, or any breach of any provision of this Agreement by SystemOne, except to the extent that such claims, liabilities, suits, proceedings, judgments, orders, fines, penalties, damages, losses, costs and expenses are caused by or result from the fault or negligence of First Recovery. Additionally, SystemOne shall indemnify First Recovery for any uninsured losses incurred by First Recovery as a result of damage, theft or loss of Equipment resulting from the negligence, acts or omissions of the employees, agents and/or contractors of SystemOne in connection with its handling, delivery and installation of Equipment. For purposes of this Section, the term "First Recovery" shall include First Recovery's affiliates, officers, directors, shareholders, employees, invitees, agents and contractors. 9.2 First Recovery shall indemnify, defend and hold harmless SystemOne, its parent, subsidiaries and affiliates, and its and their officers, directors, shareholders, employees and agents, from and against any and all claims, liabilities, suits, proceedings, judgments, orders, fines, penalties, damages, losses, costs, and expenses, including but not limited to reasonable attorney fees and other expenses of litigation, which it may hereafter incur, become responsible for or pay out as a result of any loss or damages it or they incur, death or bodily injuries to any person, destruction or any damage to any property or contamination of or adverse effect on the environment, arising out of or resulting from any negligent act or omission of First Recovery, or any breach of any provision of this Agreement by First Recovery, except to the extent that such claims, liabilities, suits, proceedings, judgments, orders, fines, penalties, damages, losses, costs and expenses are caused by or result from the fault or negligence of SystemOne. For purposes Mansur Purchase and Distribution -Page 7 of this Section, the term "SystemOne" shall include SystemOne's affiliates, officers, directors, shareholders, employees, invitees, agents and contractors. 10. INDEPENDENT CONTRACTOR Except for First Recovery's activities as a commissioned sales agent in the Florida Territory, the parties acknowledge and agree that the relationship hereby established between SystemOne and First Recovery is solely that of buyer and seller and that each party is and shall remain an independent contractor engaged in the operation of its own respective business and in the performance of its obligations under this Agreement. The provisions of this Agreement shall not be construed as authorizing or reserving to either party any right to exercise any control or direction over the operations, activities, employees and agents of the other in connection with this Agreement, it being understood and agreed that the entire control and direction of such operations, activities, employees and agents shall remain with such party. Neither party to this Agreement shall have the authority to employ any person as agent or employee for or on behalf of the other party to this Agreement for any purpose, and neither party to this Agreement, nor any person performing any duties under or engaging in any work at the request of such party, shall be deemed to be an employee or agent of the other party to this Agreement. Neither party has any authority to enter into any contract, assume any obligations, or make any warranties or representations on behalf of the other party. Nothing in this Agreement shall be construed to establish a partnership or joint venture relationship between the parties. 11. FORCE MAJEURE The performance or observance by either party of any obligations of such party under this Agreement, other than payment obligations, may be suspended by it, in whole or in part, in the event of any of the following that prevents such performance or observance: Act of God, war, riot, fire, explosion, accident, flood, sabotage, strike, lockout, injunction, inability to obtain fuel, power, raw materials, labor, containers or transportation facilities, breakage or failure of machinery or apparatus, national defense requirements, or any other cause (whether similar or dissimilar) beyond the reasonable control of such party; provided, however, that the party so prevented from complying with its obligations hereunder shall immediately notify in writing the other party thereof (stating the nature of the event, its anticipated duration and any action being taken to avoid or minimize its effect) and such party so prevented shall exercise diligence in an endeavor to remove or overcome the cause of such inability to comply. The suspension of performance shall be of no greater scope nor longer duration than is required, and in no event longer than sixty (60) days. 12. ASSIGNMENT This Agreement shall not be assigned nor can the performance of any duties be delegated by any party without the prior written consent of the other party, except that First Recovery may effect an assignment of this Agreement to a parent, subsidiary or affiliate corporation upon prior written notice to SystemOne, provided that the assignor's financial strength is equal to or greater than that of First Recovery's. 13. CHOICE OF LAW This Agreement, including matters of construction, validity and performance, shall be governed and construed in accordance with the laws of the State of New York without giving effect to its choice of law rules. Mansur Purchase and Distribution -Page 8 14. MISCELLANEOUS 14.1 This Agreement constitutes the full understanding of the parties, a complete allocation of risks between them and a complete and exclusive statement of the terms and conditions of their agreement; and all prior agreements, negotiations, dealings and understandings, whether written or oral, including the Initial Agreement and the Second Agreement, regarding the subject matter hereof, are superseded by this Agreement. Additionally, any terms and/or conditions contained in any purchase order, oral or written, or in SystemOne's standard warranty policy, a copy of which is set forth as Exhibit B attached hereto, inconsistent with any terms and/or conditions set forth herein shall be of no force and effect unless consented to in writing by the party to be charged. 14.2 No conditions, usage of trade, course of dealing or performance, understanding or agreement purporting to modify, vary, explain or supplement the terms or conditions of this Agreement shall be binding unless hereafter made in writing and signed by the party to be bound, and no modification shall be effected by the acknowledgment or acceptance of any forms containing terms or conditions at variances with or in addition to those set forth in this Agreement. 14.3 No waiver by either party with respect to any breach or default or of any right to remedy and no course of dealing or performance shall be deemed to constitute a continuing waiver of any other breach or default or of any other right or remedy, unless such waiver be expressed in writing signed by the party to be bound. 14.4 Section headings as to the contents of particular sections are for convenience only and are in no way to be construed as part of this Agreement or as a limitation of the scope of the particular sections to which they refer. 14.5 In the event any term or provision of this Agreement, or any portion thereof, or any application of any term or provision shall be invalid or unenforceable, the remainder of this Agreement or any other application of such term or provision shall not be affected thereby. 14.6 All rights conferred by this Agreement shall be binding upon, inure to the benefit of, and be enforceable against the respective successors and permitted assigns of the parties hereto. 14.7 All notices, requests, and approvals required or permitted under this Agreement shall be deemed validly given if in writing and addressed to the party for whom intended at the address of such party set forth below, and shall be effective upon the earlier to occur of personal delivery or three (3) business days following such notice, request or approval having been deposited in the U.S. mail, postage prepaid, certified or registered, return receipt required. 14.8 The parties agree that the terms and conditions of that certain Non-Circumvention and Non-Disclosure Agreement, dated as of July 20, 1995, and between Mansur and First Recovery, a copy of which is attached hereto as EXHIBIT G, shall be incorporated by reference herein. 14.9 This Agreement may be executed in identical duplicate copies. The parties agree to execute at least two identical original copies of this Agreement. Each identical counterpart shall be deemed an original, but all of which together shall constitute one and the same instrument. Mansur Purchase and Distribution -Page 9 IN WITNESS WHEREOF, First Recovery and SystemOne have caused their respective authorized representatives to execute this Purchase and Distribution Agreement effective as of the date first above written. WITNESS: ECOGARD, INC., INCLUDING THE FIRST RECOVERY DIVISION ____/s/__________________________ By: _________________________________ Its: WITNESS: SYSTEMONE TECHNOLOGIES INC. _______/s/_______________________ By: _________________________________ Its: Mansur Purchase and Distribution -Page10 THE CONFIDENTIAL PORTIONS OMITTED - --------------------------------- BELOW HAVE BEEN FILED SEPARATELY - -------------------------------- WITH THE SECURITIES AND EXCHANGE - -------------------------------- COMMISSION - ---------- * INDICATES PORTIONS OMITTED. EXHIBIT A to AGREEMENT BETWEEN FIRST RECOVERY, A DIVISION OF ECOGARD, INC. and SYSTEMONE TECHNOLOGIES INC. Dated as of December 1, 1997 I. EQUIPMENT PRICING -------------------- ********** ********** ********** Exhibit B [SystemOne Logo] MANUFACTURER'S WARRANTIES DEFECTS & PERFORMANCE All SystemOne/registered trademark/ products ("Equipment") are warranted by SystemOne/registered trademark/ Technologies, a division of Mansur Industries Inc. ("Manufacturer"), to be free of defects in materials and workmanship and to perform in accordance with the Manufacturer's specifications and operating manual ("Warranty") for five (5) years commencing on the date of delivery ("Warranty Period"). During the Warranty Period, the Manufacturer will repair or replace the Equipment with like Equipment, at its option, free of charge. SOLVENT SUPPLY PROGRAM A solvent supply program ("Supply Program") is available from the Manufacturer. Under the Supply Program, the Manufacturer shall provide Lessee with a total of thirty (30) gallons of 140/degree/ solvent per Equipment unit per year. The price specified under the Lease shall be guaranteed for the first year of the Lease term and thereafter adjusted for any changes in the Manufacturer's cost of solvent. Lessee agrees to pay Manufacturer for excess usage of solvent over thirty (30) gallons per Equipment unit per year at the current solvent price. Lessee may cancel the Supply Program anytime during the Lease term upon ninety (90) days notice to the Manufacturer provided Lessee uses only 140/degree/ solvent pursuant to the Manufacturer's operating manual and specifications. ENVIRONMENTAL ASSURANCE The Manufacturer warrants, under current interpretation of existing Federal and state regulations, that the Equipment does not generate hazardous waste provided (i) no hazardous materials or chemicals are added to or used with the Equipment and (ii) the Equipment is operated in accordance with the Manufacturer's operating manual. The Manufacturer has implemented a formal Environmental Assurance Program to test and document the classification of Equipment residue as NON haszardous. The Manufacturer, upon request from the customer, shall provide customers with thirty (30) days of delivery (excluding customers who currently are or become classified as Conditionally Exempt Small Quantity Generators upon conversion to SystemOne/registered trademark/) with a labratory analysis and test results, free of charge, documenting the non-hazardous status of Equipment residue. ------------------------ THE CONFIDENTIAL PORTIONS OMITTED - --------------------------------- BELOW HAVE BEEN FILED SEPARATELY - -------------------------------- WITH THE SECURITIES AND EXCHANGE - -------------------------------- COMMISSION - ---------- * INDICATES PORTIONS OMITTED. EXHIBIT C to AGREEMENT BETWEEN FIRST RECOVERY, A DIVISION OF ECOGARD, INC. and SYSTEMONE TECHNOLOGIES INC. Dated as of December 1, 1997 FIRST RECOVERY TERRITORY (which means each county in which each below-named city is located) ************ ************ ************ THE CONFIDENTIAL PORTIONS OMITTED - --------------------------------- BELOW HAVE BEEN FILED SEPARATELY - -------------------------------- WITH THE SECURITIES AND EXCHANGE - -------------------------------- COMMISSION - ---------- * INDICATES PORTIONS OMITTED. EXHIBIT D to AGREEMENT BETWEEN FIRST RECOVERY, A DIVISION OF ECOGARD, INC. and SYSTEMONE TECNOLOGIES INC. Dated as of December 1, 1997 ************ ************ ************ 10 Exhibit E Int. Cl.: 7 Prior U.S. Cls.: 13, 19, 21, 23, 31, 34 and 35 Reg. No. 2,024,010 UNITED STATES PATENT TRADEMARK OFFICE REGISTERED DEC. 17, 1996 TRADEMARK PRINCIPAL REGISTER [SYSTEMONE LOGO] MANSUR INDUSTRIES INC. (FLORIDA COR- OTHER CONTAMINANTS, IN CLASS 7 (U.S. PORATION) CLS. 13, 19, 21, 31, 34 AND 35). 8425 S.W. 129TH TERRACE FIRST USE 1-15-1996; IN COMMERCE MIAMI, FL 33156 1-15-1996. FOR: MACHINES FOR WASHING INDUS- SER. NO. 75-052,475, FILED 2-2-1996. TRIAL PARTS WITH A CLEANING SOLUTION TOM WELLINGTON, EXAMINING ATTOR- IN ORDER TO REMOVE GREASE, OIL AND NEY EX-27.1 6
5 12-MOS DEC-31-1997 JAN-1-1997 DEC-31-1997 2,243 0 1,006 0 1,824 5,287 1,560 205 6,788 1,084 0 0 0 5 5,197 6,788 7,244 7,244 4,661 8,122 415 0 46 (1,189) 0 (1,189) 0 0 0 (1,189) (.26) (.26)
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