Form 10-K American Electric Techno For: Dec 31

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

 

For the fiscal year ended December 31, 2014

OR

For the transition period from                     to                    

Commission File No. 000-24575

 

AMERICAN ELECTRIC TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

 

 

1250 Wood Branch Park Drive, Suite 600, Houston TX 77079

(Address of principal executive offices)

(713) 644-8182

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.    Yes  ¨    No  x

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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (S. 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    Yes  x    No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Rule 12b-2 of the Exchange Act. (Check one):

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No   x

The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $33,870,000 based on the closing sale price on June 30, 2014 as reported by the NASDAQ Stock Market.

The number of shares of common stock outstanding on March 16, 2015 was 8,216,598.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

 

 

 

 

 

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FORWARD-LOOKING STATEMENTS

 

The Description of Business section and other parts of this Annual Report on Form 10-K (“Form 10-K”) contain forward-looking statements that involve risks and uncertainties. Many of the forward-looking statements are located in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any current or historical fact. Forward-looking statements can also be identified by words such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” and similar terms. Forward-looking statements are not guarantees of future performance and the Company’s actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in the subsection entitled “Risk Factors” under Part I, Item 1A of this Form 10-K. The Company assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law.

 

 

 

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PART I

 

Company Background and Corporate Structure

American Electric Technologies, Inc. (the “Company”, “AETI”, “our”, “us” or “we”) was incorporated on October 21, 1996 as a Florida corporation. On May 15, 2007, we completed a business combination (the “M&I Merger”) with M&I Electric Industries, Inc. (“M&I”), a Texas corporation, and changed our name to American Electric Technologies, Inc. Our principal executive offices are located at 1250 Wood Branch Park Drive, Suite 600, Houston Texas 77079 and our telephone number is 713-644-8182.

Our corporate structure currently consists of American Electric Technologies, Inc., which owns 100% of M&I Electric Industries, Inc., including its wholly-owned subsidiary, South Coast Electric Systems, LLC, M&I Electric Brazil Sistemas e Servicios em Energia LTDA (“M&I Brazil”), and American Access Technologies, Inc. (“AAT”). The operations of the AAT segment were sold on August 15, 2014 (except for its real estate) and its remaining assets are presented as “held for sale” and its results from operations are reported as discontinued operations. The Company reports financial data for two operating segments: the Technical Products and Services (“TP&S”) segment and the Electrical and Instrumentation Construction (“E&I”) segment. These two segments encompass the operations of M&I, and its interest in international joint ventures in China and Singapore

The Company is a leading provider of power delivery solutions to the global energy industry.

The principal markets that we serve include:

A key component of our Company’s strategy is our international focus. We have three primary models for conducting our international business. First, where local market conditions dictate, we have expanded internationally by forming joint venture operations with local partners in key markets such as China and Singapore, where we can partner with the primary end-customer in that market, or there are local content requirements or a competitive advantage using local manufacturing. Second, in Brazil, we have exited our joint venture and formed a wholly-owned subsidiary to serve this expanding market. Third, we sell through foreign sales agents that we have appointed. Many of those international partners also provide local service and support for our products in those overseas markets.

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Our business strategy is to grow through organic growth in our current key energy markets, expand our solution set to our current markets, continue our international expansion, and accelerate those efforts with acquisitions, while at the same time increasing earnings and cash flow per share to enhance overall stockholder value.

The Company is uniquely positioned to be the “turn-key” supplier for power delivery projects for our customers, where we are able to offer custom-designed power distribution and power conversion systems, power services, and electrical and instrumentation construction, all from one company.

The Company reports financial data for two operating segments: the Technical Products and Services (“TP&S”) segment and the Electrical Instrumentation Construction (“E&I”) segment; which together encompass the operations of M&I, including its wholly-owned subsidiaries, South Coast Electric Systems, LLC and M&I Brazil and M&I’s interest in international joint ventures’ operations in China and Singapore.

Technical Products and Services

Our Technical Products and Services (“TP&S”) business has provided sophisticated custom-designed power distribution, power conversion, automation and control systems for the energy industry since 1946. Our products are used to safely distribute and control the flow of electricity from the source of the power being generated (e.g. a diesel generator or the utility grid) to whatever mechanical device needs to use the electricity (drilling machinery, motors, other process equipment, etc.) at low and medium voltages.

Our power distribution products include low and medium voltage switchgear that provide power distribution and protection for electrical systems from electrical faults. Our products include traditional low voltage and medium voltage switchgear, as well as a variety of arc-managed and arc-resistant switchgear to increase end-user safety in case of an arc-flash explosion. Our products are suitable for both ANSI (“American National Standards Institute”) and IEC (“International Electrotechnical Commission”) markets. Other power distribution products in our solution set include low voltage and medium voltage motor control centers, bus ducts, fuse and switch products, and other related power distribution equipment. We also bundle 3^rd party products per our customer specifications including items such as battery backup power systems and transformers.

Our power conversion solutions include Analog, Digital SCR (“silicon controlled rectifier”) and Alternating Current Variable Frequency Drive (“AC VFD”) systems, that are used to adjust the speed and torque of an electric motor to match various user applications, primarily in the land and offshore drilling and marine vessel markets.

Our automation and control solutions are Programmable Logic Controllers (“PLC”) based systems designed for the management and control of power in a user’s application. Our DrillAssist™ for land and offshore drilling are control systems that enable the management of an entire drilling rig’s operations. DrillAssist™ includes auto-drill capabilities and a driller’s chair and cabin where the drilling rig operator manages the rig. DrillAssist and our Vessel Management System are based on technology from our March 2012 acquisition of the assets of Amnor Technologies, Inc.

Our packaged solutions include Power Distribution Centers (“PDC”), SCR houses, Drillers Cabins, and other packaged electrical buildings that incorporate our power distribution and power conversion products for land or offshore deployment.

We have the technical expertise to provide these solutions in compliance with a number of applicable industry standards such as NEMA (“National Electrical Manufacturers Association”) and ANSI or IEC equipment to meet ABS (“American Bureau of Shipping”), USCG (“United States Coast Guard”), Lloyd’s Register, a provider of marine certification services, and Det Norske Veritas (a leading certification body/registrar for management systems certification services) standards.

Our power distribution and control products are generally custom-designed to our customers’ specific requirements, and we do not maintain an inventory of such products.

Our technical services group provides services to commission and maintain our customers’ electrical power conversion and controls systems. We also provide low and medium voltage start-up/commissioning, preventative maintenance, emergency call out services, and breaker and switchgear refurbishment services.

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Technical Products and Services net sales:

 

Foreign Joint Ventures

We use foreign joint ventures to drive growth in the key international markets of China and South East Asia. We believe our foreign joint ventures provide a prudent way to diversify and reduce the risk of international expansion, capitalize on the strengths and the relationships of our foreign joint venture partners with potential customers, and achieve competitive advantages. Our interests in foreign joint ventures are accounted for under the equity method of accounting. Sales made to the foreign joint ventures are made with terms and conditions similar to those of our other customers.

China. In March 2006, M&I Electric entered into a joint venture agreement with Baoji Oilfield Machinery Co., Ltd., (“BOMCO”), a wholly-owned subsidiary of the China National Petroleum Corporation, and AA Energies, Inc. of Houston, Texas, which markets oilfield equipment, to form BOMAY Electric Industries Co., Ltd. (“BOMAY”), as an equity joint venture limited liability company organized in China. M&I is a 40% interest owner in BOMAY with 51% being owned by BOMCO and the remaining 9% owned by AA Energies, Inc. BOMAY manufactures power and control systems for land drilling rigs. M&I has invested 16 million Yuan (approximately $2 million) in this joint venture in which M&I provides technology and services to BOMAY. Each of the BOMAY investors may be required to guarantee the bank loans of BOMAY in proportion to their investment. No guarantees have been provided by AETI at this time.

Singapore. In 1994, the Company formed a joint venture in Singapore to provide sales, engineering, manufacturing and technical support for our products in Southeast Asia called M & I Electric Far East PTE Ltd. (“MIEFE”). The Company currently owns 41% of the joint venture with our joint venture partner, Sonepar, owning 51% and MIEFE’s general manager owning the remaining 8%.   In October 2013, Oakwell Distribution, including their interest in MIEFE, was acquired by Sonepar (private company) of France, who is now the owner of the controlling interest in MIEFE.

Brazil. During 2010, the Company entered into a joint venture agreement with Five Star Services, a Brazilian corporation, and formed AETI Alliance Group do Brazil Sistemas E Servicos Em Energia LTDA (“AAG”), a Brazilian Limited Liability Company, in which the Company held a 49% interest. AAG began operations mid-year 2010, and provides electrical products and services to the Brazilian energy industries. Effective April 30, 2014, the Company withdrew from this joint venture.

Investment in Foreign Joint Ventures:

 

 

During 2014 and 2013, the Company recognized approximately $522,000 and $267,000 respectively, for employee joint venture related expenses which are included in Foreign Joint Ventures Operation’s Related Expenses in the accompanying statements of operations.

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Electrical and Instrumentation Construction

The Electrical and Instrumentation Construction (“E&I”) segment provides a full range of electrical and instrumentation construction and installation services to the Company’s markets. The Company’s E&I construction business is primarily generated from the installation (“rig up”) of our power delivery solutions into our packaged power control systems. Applications include installation of switch-gear and other power distribution equipment, AC and DC motors, drives, motor controls, lighting systems and electrical cable. The remainder of the segment’s business includes new construction as well as electrical and instrumentation turn-arounds, maintenance and renovation projects.

Electrical and Instrumentation Construction net sales:

 

American Access Technologies

During the second quarter of 2014, the decision was made to sell the AAT business segment. The sale of all non-cash assets, excluding the real property, closed effective August 14, 2014. The real estate was leased to the buyer for a minimum of one year with an option to purchase. This real estate is reported as assets held for sale.  All AAT results are excluded from continuing operations and reflected as discontinued operations.

Segment Financial Data

Segment Information:

The table below represents segment results for the years ended December 31, 2014 and 2013 (in thousands), excluding the AAT segment:

 

International Sales

During 2014, approximately 9% of the Company’s consolidated revenue were systems sold or shipped into international markets, principally from the TP&S segment and M&I Brazil. Sales from the U.S are generally made in U.S. dollars and settled prior

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to shipment or are collateralized by irrevocable letters of credit.  M&I’s Brazil sales are generally made in Brazilian Reais and are settled on a progress payment basis.

Marketing

We market our Technical Products and Services and E&I construction in the United States through direct contact with potential customers by our internal sales organization consisting of 10 full-time sales and sales support employees. We also exhibit at a variety of industry trade shows each year. We have appointed several sales agents and distributors in the United States and in a number of foreign countries. M&I Brazil markets in Brazil and other South American countries.

Our business is generally obtained through a competitive bid process where the lowest bid from pre-qualified suppliers is awarded the project. Depending on the market segment, we either sell directly to the end user or owner, or sell to an Engineering, Procurement and Construction (“EPC”) firm.

Manufacturing

Manufacturing processes at our various facilities include machining, fabrication, wiring, subassembly, system assembly and final testing. We have invested in various automated and semi-automated equipment for the fabrication and machining of various parts and assemblies that we incorporate into our products. Our quality assurance program includes various quality control measures from inspection of raw material, purchased parts and assemblies through on-line inspection. We perform system design, assembly and testing in-house. Our manufacturing operations in Beaumont, Texas are ISO 9001:2008 certified.

Raw Materials and Suppliers

The principal raw materials for our products are copper, steel, aluminum and various manufactured electrical components. We obtain these products from a number of domestic and foreign suppliers. The market for most of the raw materials and parts we use is comprised of numerous participants and we believe that we can obtain each of the raw materials we require from more than one supplier. We do not have any long-term contractual arrangements with the suppliers of our raw materials.

Competition

Our products and services are sold in highly competitive markets. We compete in all of our segments and regions with a number of companies, some of which have financial and other resources comparable to or greater than us. Due to the demanding operating conditions in the energy sector and the high costs associated with project delays and equipment failure, we believe customers in this industry prefer suppliers with a track record of proven, reliable performance in their specific energy related project type. We seek to build strong long-term relationships with our customers by providing high-quality, efficient and reliable products and services, developing new products and services and responding promptly to our customers’ needs.

The principal competitive factors in our markets are product and service quality and reliability, lead time, price, technical expertise and reputation.

We believe our principal competitive strengths include the following:

Our power delivery, control and drive systems are custom-designed and are built to meet our customers’ specific requirements. We specialize in projects that are complex, require industry certification, have short lead times or other non-standard elements, such as systems that must be deployed in harsh environments or need to meet tight space or weight requirements. Our ability to provide custom-designed technical products, electrical and instrumentation construction services, and electrical startup and preventative maintenance services is unique, enabling us to provide customers total system responsibility for their electrical power control and distribution needs.

Our commitment to providing quality products and services, fair pricing, innovation and customer service is the foundation to the long-standing customer relationships that we enjoy with an attractive customer base. Since 1946, we have provided over 10,000 power delivery systems to many of the leading companies involved in oil and gas exploration, drilling, production, pipelines, shipbuilding, oil refineries, petrochemicals, power generation, and steel industries in the United States.

We are led by an experienced management team with a proven track record. We believe the experience of our management team provides us with an in-depth understanding of our customers’ needs and enhances our ability to deliver customer-driven solutions. We believe our management has fostered a culture of loyalty, resulting in high employee retention rates for our professional and technical employees.

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The company has multiple competitive advantages for our products:

We have identified our largest competitors, by product line as follows:

Power Distribution/Switchgear Systems—Powell Industries, Siemens, Eaton, GE, ABB and Volta.

Power Conversion/Drive Systems—Omron, National Oilwell Varco (NOV), ABB, and Siemens.

Power Services—Tidal Power, Coastal Power, Eaton, and Group Schneider.

Construction—Jefferson Electric, Golderest Electronics, Newtron Electrical Services, M&D Electric Co., and Triple “S” Industrial Corp.

Backlog

Backlog represents the dollar amount of net sales that we expect to realize in the future as a result of performing work under multi-month contracts. Backlog is not a measure defined by generally accepted accounting principles, and our methodology for determining backlog may not be comparable to the methodology used by other companies in determining their backlog. Backlog may not be indicative of future operating results. Not all of our potential net sales are recorded in backlog for a variety of reasons, including the fact that some contracts begin and end within a short-term period. Many contracts are subject to modification or termination by the customer. The termination or modification of any one or more sizeable contracts or the addition of other contracts may have a substantial and immediate effect on backlog. Our backlog does not include any backlog in place at our foreign joint ventures’ operations.

We generally include total expected net sales in backlog when a contract for a definitive amount of work is entered into. We generally expect our backlog to become net sales within a year from the signing of a contract. Backlog as of December 31, 2014 and 2013 totaled $ 26.5 million and $20 million, respectively.

Intellectual Property

We have a number of trademarks and trade names utilized with our products and services. While proprietary intellectual property is important to the Company, management believes the loss or expiration of any intellectual property right would not materially impact the Company or either of its segments.

Environmental Laws

We are subject to various federal, state, and local laws enacted for the protection of the environment. We believe we are in compliance with such laws. Our compliance has, to date, had no material effect on our capital expenditures, earnings, or competitive position.

Research and Development Costs

Total expenditures for research and development were $807,000 and $499,000 for the fiscal years ended December 31, 2014 and 2013. We incurred research costs to develop new products for our oil & gas markets including new power distribution, power conversion and automation and control products.

Employees

As of December 31, 2014, we had 332 employees. No employees are covered by a collective bargaining agreement, and we consider our relations with our employees to be satisfactory.

 

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You should carefully consider each of the following risks associated with an investment in our common stock and all of the other information in this 2014 Annual Report on Form 10-K. Our business may also be adversely affected by risks and uncertainties not presently known to us or that we currently believe to be immaterial. If any of the events contemplated by the following discussion of risks should occur, our business, prospects, financial condition and results of operations may suffer.

Customers in the oil and gas industry account for a significant portion of our sales. Reduced expenditures by customers in this industry are likely to reduce our net sales, profitability and cash flows.

Customers related to the oil and gas industry accounted for approximately 72% and 62% of our net sales in 2014 and 2013, respectively. The oil and gas industry is a cyclical commodity business, with product demand and prices based on numerous factors such as general economic conditions and local, regional and global events and conditions that affect supply, demand and profits. Demand for our products and services benefits from strong oil and gas markets. The recent decline in the price for oil will likely cause a decrease in demand for our products and services and result in a decline in our net sales, profit margins and cash flows.

Our products include complex systems for energy and industrial markets which are subject to operational and liability risks.

We are engaged in the manufacture and installation of complex power distribution and control systems for the energy and industrial markets. These systems are frequently complex and susceptible to unique engineering elements that are not tested in the actual operating environment until commissioned. As a result, we may incur unanticipated additional operating and warranty expenses that were not anticipated when the fixed-price contracts were estimated and executed resulting in reduced profit margins on such projects.

The industries in which we operate are highly competitive, which may result in a loss of market share or decrease in net sales or profit margin.

Our products and services are provided in a highly competitive environment and we are subject to competition from a number of similarly sized or larger businesses which may have greater financial and other resources than are available to us. Factors that affect competition include timely delivery of products and services, reputation, manufacturing capabilities, price, performance and dependability. Any failure to adapt to a changing competitive environment may result in a loss of market share and a decrease in net sales and profit margins.

We often utilize fixed-price contracts which could adversely affect our financial results.

We currently generate, and expect to continue to generate, a significant portion of our net sales under fixed-price contracts. We must estimate the costs of completing a particular project to bid for such fixed-price contracts. The cost of labor and materials, however, may vary from the costs we originally estimated. These variations, along with other risks inherent in performing fixed-price contracts, may result in actual costs and gross profits for a project differing from those we originally estimated and could result in reduced profitability and losses on projects. Depending upon the size of fixed-price contracts, variations from estimated contract costs can have a significant impact on our operating results for any fiscal quarter or year.

Our use of percentage-of-completion accounting could result in a reduction or elimination of previously reported profit.

A portion of our net sales is recognized on the percentage-of-completion method of accounting. The percentage-of-completion method of accounting practice we use results in recognizing contract net sales and earnings ratably over the contract term in proportion to our incurrence of contract costs. The earnings or losses recognized on individual contracts are based on estimates of contract net sales, costs and profitability. Contract losses are recognized in full when determined, and contract profit estimates are adjusted based on ongoing reviews of contract profitability. Actual collection of contract amounts or change orders could differ from estimated amounts and could result in a reduction or elimination of previously recognized earnings in future periods. In certain circumstances, it is possible that such adjustments could be significant.

We may not be able to fully realize the net sales value reported in our backlog.

Orders included in our backlog are represented by customer purchase orders and contracts. Backlog develops as a result of new business which represents the net sales value of new project commitments received by us during a given period. Backlog consists of projects which have either (1) not yet been started or (2) are in progress and are not yet complete. In the latter case, the net sales value reported in backlog is the remaining value associated with work that has not yet been completed. From time to time, projects that were recorded as new business are cancelled. In the event of a project cancellation, we may be reimbursed for certain costs but typically

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have no contractual right to the total net sales included in our backlog. In addition to being unable to recover certain direct costs, we may also incur additional costs resulting from underutilized assets if projects are cancelled.

We rely on a few key employees whose absence or loss could disrupt our operations or be adverse to our business.

Our continued success is dependent on the continuity of several key management, operating and technical personnel. The loss of these key employees would have a negative impact on our future growth and profitability. We have entered into written employment agreements with our Chief Executive Officer; Chief Financial Officer; and International Director, who is responsible for managing our BOMAY joint venture operations relationships and Brazil subsidiary.

Our results of operations and financial condition may be adversely impacted by global recession.

The consequences of a prolonged recession could include a lower level of economic activity and uncertainty regarding commodity and capital markets. The lack of a sustained economic recovery could have an adverse effect on our results of operations, cash flows or financial position.

Our failure to attract and retain qualified personnel could lead to a loss of net sales or profitability.

Our ability to provide high-quality products and services on a timely basis requires that we employ an adequate number of skilled personnel. Accordingly, our ability to increase our productivity and profitability will be limited by our ability to employ, train and retain skilled personnel necessary to meet our requirements. We cannot be certain that we will be able to maintain an adequate skilled labor force necessary to operate efficiently and to support our growth strategy or that our labor expenses will not increase as a result of a shortage in the supply of skilled personnel.

Natural disasters, terrorism, acts of war, international conflicts or other disruptions could harm our business and operations.

Natural disasters, acts or threats of war or terrorism, international conflicts, and the actions taken by the United States and other governments in response to such events could cause damage to or disrupt our business operations or those of our customers, any of which could have an adverse effect on our business.

We manufacture products and operate plants in Mississippi, Texas and Brazil. Operations in the U.S. were disrupted in 2008 due to Hurricanes Gustav and Ike and in 2005 due to Hurricanes Katrina and Rita. Although we did not suffer a material loss as a result of these disruptions due to our insurance coverage and advance preparations, it is not possible to predict future similar events or their consequences, any of which could decrease demand for our products, make it difficult or impossible for us to deliver products, or disrupt our supply chain.

We generate a significant portion of our net sales from international operations and are subject to the risks of doing business outside of the United States.

Approximately 9% of our net sales in 2014 were generated from projects and business operations outside of the United States, primarily provided to the oil and gas drilling and marine industries in the following countries: Mexico, Canada, United Arab Emirates, Singapore, Indonesia and Brazil. This percentage was approximately 16% in 2013. The oil and gas industry operates in both remote and potentially politically unstable locations, and numerous risks and uncertainties affect our non-United States operations. These risks and uncertainties include changes in political, economic and social environments, local labor conditions, changes in laws, regulations and policies of foreign governments, as well as United States laws affecting activities of United States companies abroad, including tax laws and enforcement of contract and intellectual property rights. In addition, the costs of providing our services can be adversely and/or unexpectedly impacted by the remoteness of the locations and other logistical factors.

We maintain a significant investment in a joint venture with a Chinese energy company. We may encounter unforeseen or unexpected operating, financial, political or cultural factors that could impact its business plans and the expected profitability from such investment. We will face risks if China loses normal trade relations with the United States and it may be adversely affected by the diplomatic and political relationships between the United States and China. As a result of the relatively weak Chinese legal system, in general, and the intellectual property regime, in particular, we may face additional risk with respect to the protection of our intellectual property in China. Changes in China’s political and economic policies could adversely affect our investment and business opportunities in China.

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The marketplace may not accept and utilize our newly developed products and services, the effect of which would prevent us from successfully commercializing our proposed products or services and may adversely affect our financial condition and results of operations.

Our ability to market and commercialize our new products and services depends on the acceptance of such products and services by the industry.

Joint Venture Limited Life Risk

The joint venture (“JV”), BOMAY was formed in 2006 in China. It was formed with a term of 12 years. The JV may be terminated earlier for valid business reasons including Force Majeure. In the event the JV is to be terminated either party may acquire the other parties’ interests and continue the operations of the JV. Additionally, the term of the JV may be extended upon agreement of all parties. In such case, the JV shall apply for the extension to the relevant Chinese authority six months before expiry of the venture. At this time, AETI has no indication that the JV will not be extended beyond 12 years.

Risk from Restricted U.S. Government Access to Audit Documents in China

The audit of BOMAY for the fiscal year ended December 31, 2014 was conducted in China by a Chinese audit firm not registered with the PCAOB under the direction of the Company’s independent auditor.  The Company’s independent auditor has directed additional procedures to comply with U.S. auditing standards.  

Under the laws of the United States, auditors of public companies are to undergo regular inspections by the PCAOB and to make all requested work papers available for the SEC and the PCAOB inspection. However, due to laws of the People’s Republic of China applicable to auditors, the SEC and the PCAOB are currently unable to conduct such inspections on work papers prepared in China without the approval of the Chinese government authorities.

As a result, the SEC or PCAOB may be unable to conduct inspections of the BOMAY audit work papers.  The Company’s stockholders may be deprived of the benefits of PCAOB inspections, and may lose confidence in our reported financial information and procedures and the quality of portions of our financial statements.

Joint Venture Centralized Government Risks

Since the centralized government of China controls most of the petroleum industry and related manufacturing through annual planning and budgets, the financial results realized by the Company’s joint venture BOMAY will reflect the government’s decisions on production levels for oil and gas equipment. The Company further understands that the value of BOMAY’s assets including inventory may not be fully realized if demand for these products is reduced significantly because of economic policy decisions or other organizational changes in the Chinese Petroleum industry.

Foreign Currency Transaction Risk

AETI maintains equity method investments in its Singapore and Chinese joint ventures, MIEFE and BOMAY, respectively. The functional currencies of the joint ventures are the Singapore Dollar and the Chinese Yuan, respectively. Investments are translated into United States Dollars at the exchange rate in effect at the end of each reporting period. The resulting translation adjustment is recorded as accumulated other comprehensive income, net of deferred taxes in AETI’s consolidated balance sheet. This item decreased from $983,000 at December 31, 2013 to $851,000 at December 31, 2014 due to the strength of the United States Dollar against the Brazilian Real and the withdrawal from the Brazil joint venture.

In M&I Brazil much of the business is conducted in Brazilian Reais and this has been determined to be the functional currency.  Deterioration of the Real to the U.S. Dollar will reduce U.S. Dollar earnings on contracts.

Other than the aforementioned items, we do not believe we are exposed to significant foreign currency exchange risk because most of our net sales and purchases are denominated in United States Dollars.

Commodity Price Risk

We are subject to market risk from fluctuating market prices of certain raw materials. While such materials are typically available from numerous suppliers, commodity raw materials are subject to price fluctuations. We endeavor to recoup any price

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increases from our customers on an individual contract basis to avoid operating margin erosion. Although historically we have not entered into any contracts to hedge commodity risk, we may do so in the future.

Commodity price changes can have a material impact on our prospective earnings and cash flows. Copper, steel and aluminum represent a significant element of our material cost. Significant increases in the prices of these materials could reduce our estimated operating margins if we are unable to recover such increases from customer net sales.

Interest Rates

Our market risk sensitive items do not subject us to material risk exposures. At December 31, 2014, the Company had $4.0 million of variable-rate debt outstanding under the facility. At this borrowing level, a hypothetical relative increase of 10% in interest rates would have had an insignificant, unfavorable impact on the Company’s pretax earnings and cash flows. The primary interest rate exposure on variable-rate debt is based on the 30 day LIBOR rate (0.15% at December 31, 2014) plus 3.0% per year. A term loan of $4 million was completed in March 2015 and paid down the revolving facility. This has similar exposure to 30 day LIBOR plus 3.50%. The revolving credit facility agreement is collateralized by trade accounts receivable, inventory, work-in-process and equipment. The new term loan is secured by a mortgage note on the Beaumont real estate.

 

None.

 

The following table describes the material facilities of AETI and its subsidiaries, including foreign joint ventures, as of December 31, 2014:

 

* AAT facility is currently leased to purchaser of AAT operations.

 

The Company becomes involved in various legal proceedings and claims in the normal course of business. In management’s opinion, the ultimate resolution of these matters is not expected to have a material effect on our consolidated financial position or results of operations.

 

Not applicable.

 

 

 

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PART II

 

The Company’s common stock trades on The NASDAQ Stock Market under the symbol “AETI”.

The following table sets forth quotations for the high and low sales prices for the Company’s common stock, as reported by NASDAQ, for the periods indicated below:

 

As of March 16, 2015, there were 50 shareholders of record of our common stock.  

The Company did not declare or pay cash dividends on common shares in either fiscal year 2014 or 2013. Dividends were paid on our Series A Convertible Preferred Stock. The Company anticipates that, for the foreseeable future, it will retain any earnings for use in the operation of its business. Our amended bank loan agreement prohibits the payment of cash dividends on our common stock.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

In conjunction with the issuance of common stock to employees upon conversion of vested restricted stock units under the 2007 Employee Stock Incentive Plan, between February 25, 2014 and March 12, 2014, the Company withheld 59,113 of such shares for employee withholding tax of $466,000 in accordance with the provisions of the Plan. These shares are reflected as treasury stock at December 31, 2014.

In conjunction with the termination of certain AAT employees in August, 2014 the Company issued shares of common stock to separating employees upon conversion of vested restricted stock units under the 2007 Employee Stock Incentive Plan. The Company withheld 2,664 of such shares for employee withholding tax of $17,000 in accordance with the Plan. These shares are reflected as treasury stock at December 31, 2014.

EQUITY COMPENSATION PLAN INFORMATION

The following table summarizes information about outstanding equity plans as of December 31, 2014. The table includes additional shares that may be issuable pursuant to the amendment to add an additional 600,000 shares to the 2007 Employee Stock Incentive Plan that was approved at the Annual Meeting in May 2014.

 

 

(1) Includes shares of common stock issuable upon vesting of outstanding restricted stock units (RSUs).

 

 

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The following table summarizes our consolidated financial data for continuing operations for the periods presented. This data excludes the results of the AAT segment, a discontinued operation. You should read the following selected consolidated financial data in conjunction with our consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this annual report. The information set forth below is not necessarily indicative of results of future operations. Amounts are in thousands of dollars except share and per share data.

 

CONTINUING OPERATIONS

 

**   Includes assets and liabilities held for sale.

*** Equals continuing operations income after taxes less preferred dividends.

 

The following discussion and analysis should be read in conjunction with the consolidated financial statements and accompanying notes appearing elsewhere in this Form 10-K. This discussion contains forward-looking statements, based on current expectations related to future events and AETI’s future financial performance that involves risks and uncertainties. AETI’s actual results may differ materially from those anticipated in these forward-looking statements as a result of many important factors, including those set forth in the section entitled “Risk Factors” in this Form 10-K.

Overview

Our corporate structure currently consists of American Electric Technologies, Inc., which owns 100% of  M&I Electric Industries, Inc., its wholly-owned subsidiary, South Coast Electric Systems, LLC, M&I Electric Brazil Sistemas e Servicios em Energia LTDA (“M&I Brazil”), and American Access Technologies, Inc. (“AAT”). The operations of the AAT segment were sold on August 15, 2014 (except for its real estate) and its remaining assets are presented as “held for sale” and its operations are reported as discontinued operations. The Company reports financial data for two operating segments: the Technical Products and Services (“TP&S”) segment and the Electrical and Instrumentation Construction (“E&I”) segment. These two segments encompass the operations of M&I, including its interest in international joint ventures in China and Singapore. After withdrawing from the AAG joint venture in Brazil effective April 30, 2014 we formed a wholly-owned subsidiary in Brazil in July, 2014.

The Company is a leading provider of power delivery solutions to the global energy industry.

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The principal markets that we serve include:

Oil & gas – the Company provides “turn-key” power delivery solutions for the upstream, midstream and downstream oil and natural gas sectors:

Upstream relates to the exploration and production of oil and natural gas. The Company serves customers in the land drilling, offshore drilling, land-based production, and offshore production segments of the market.

Midstream, which is primarily related to oil & gas transportation, including oil & gas pipelines and compression and pumping stations. The Company also has a strong customer base in natural gas fractionation (separation), cryo, natural gas to liquids, and other natural gas related-plants.

Downstream, which includes oil refining and petrochemical plants, as well as Liquefied Natural Gas (LNG) plants, export facilities, and storage facilities.

Power generation and distribution– the Company also provides “turn-key” power delivery solutions for the power generation and distribution sectors:

Distributed power generation includes on-site power generation, co-generation and independent power production customers.

Renewable power generation includes biomass power generation, geothermal power generation and other renewable energy related businesses.

Power distribution includes utility distribution markets such as substations.

Marine and Industrial:

Marine includes vessels such as platform supply vessels (PSV), offshore supply vessels (OSV), tankers and other various work boats, typically up to 300 ft. in length.

Industrial, including non-oil & gas industrial markets such as steel, paper, heavy commercial, and other non-oil & gas applications.

A key component of our Company’s strategy is our international focus. We have three primary models for conducting our international business. First, we sell through foreign sales agents that we have appointed. Many of those international partners also provide local service and support for our products in those overseas markets. Second, where local market conditions dictate, we have expanded internationally by forming joint venture operations with local partners in key markets such as China and Singapore, where we can partner with the primary end-customer in that market, or there are local content requirements or a competitive advantage using local manufacturing. Third, in Brazil, we have exited our joint venture and formed a wholly-owned subsidiary to serve this expanding market.

Our business strategy is to grow through organic growth in our current key energy markets, expand our solution set to our current markets, continue our international expansion, and accelerate those efforts with acquisitions, while at the same time increasing earnings and cash flow per share to enhance overall stockholder value.

The Company is uniquely positioned to be the “turn-key” supplier for power delivery projects for our customers, where we are able to offer custom-designed power distribution and power conversion systems, power services, and electrical and instrumentation construction, all from one company.

The Company reports financial data for two operating segments: the Technical Products and Services (“TP&S”) segment and the Electrical Instrumentation Construction (“E&I”) segment; which together encompass the operations of M&I, including its wholly-owned subsidiaries, South Coast Electric Systems, LLC and M&I Brazil and M&I’s interest in international joint ventures’ operations in China and Singapore.

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Business Sectors Disclosures

Based on the increasing importance of the oil and gas sector for our business, management began capturing our financial results in three major market sectors in 2013. These sectors are: Oil and Gas; Power Generation and Distribution; and Marine and Other Industrial as discussed in Item 7. on page 17. This information is supplemental and provided to allow investors to follow our future trends in marketing to various customer groups.

 

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Non-U.S. GAAP Financial Measures

A non-U.S. GAAP financial measure is generally defined as one that purports to measure historical or future financial performance, financial position or cash flows, but excludes or includes amounts that would not be so adjusted in the most comparable GAAP measure. In this report, we define and use the non-U.S. GAAP financial measure EBITDA as set forth below.

EBITDA

Definition of EBITDA

We define EBITDA as follows:

Net income (loss) before:

Management’s Use of EBITDA

We use EBITDA to assess our overall financial and operating performance.  We believe this non-U.S. GAAP measure, as we have defined it, is helpful in identifying trends in our day-to-day performance because the items excluded have little or no significance on our day-to-day operations.  This measure provides an assessment of controllable expenses and affords management the ability to make decisions which are expected to facilitate meeting current financial goals as well as achieving optimal financial performance.  It provides an indicator for management to determine if adjustments to current spending decisions are needed.

EBITDA provides us with a measure of financial performance, independent of items that are beyond the control of management in the short-term, such as dividends required on preferred stock, depreciation and amortization, taxation and interest expense associated with our capital structure.  This metric measures our financial performance based on operational factors that management can impact in the short-term, namely the cost structure or expenses of the organization. EBITDA is one of the metrics used by senior management and the board of directors to review the financial performance of the business on a regular basis. EBITDA is also used by research analysts and investors to evaluate the performance and value of companies in our industry.

Limitations of EBITDA

EBITDA has limitations as an analytical tool.  It should not be viewed in isolation or as a substitute for U.S. GAAP measures of earnings.  Material limitations in making the adjustments to our earnings to calculate EBITDA, and using this non-U.S. GAAP financial measure as compared to U.S. GAAP net income (loss), include:

An investor or potential investor may find this item important in evaluating our performance, results of operations and financial position.  We use non-U.S. GAAP financial measures to supplement our U.S. GAAP results in order to provide a more complete understanding of the factors and trends affecting our business.

EBITDA is not an alternative to net income, income from operations or cash flows provided by or used in operations as calculated and presented in accordance with U.S. GAAP.  You should not rely on EBITDA as a substitute for any such U.S. GAAP financial measure.  We strongly urge you to review the reconciliation of EBITDA to U.S. GAAP net income (loss) attributable to common stockholders, along with our consolidated financial statements included herein.

We also strongly urge you to not rely on any single financial measure to evaluate our business.  In addition, because EBITDA is not a measure of financial performance under U.S. GAAP and is susceptible to varying calculations, the EBITDA measure, as presented in this report, may differ from and may not be comparable to similarly titled measures used by other companies.

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The table below shows the reconciliation of net income (loss) from continuing operations attributable to common stockholders to EBITDA for the years ended December 31, 2014 and 2013 (dollars in thousands):

 

Backlog

Backlog is another non-GAAP indicator management uses to measure the level of outstanding orders.

Effective in the second quarter, the Company changed its methodology for calculating backlog. While the change has no impact on orders that are not yet under construction, the Company believes the new method better reflects the amount of work remaining on orders under construction that extend beyond quarter end. Both methods will be shown through year-end 2014. Beginning in 2015, we will discontinue the reporting of the previous methodology.

 

 

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Foreign Joint Ventures:

Summary financial information of BOMAY, MIEFE and AAG in U.S. dollars was as follows at December 31, 2014 and 2013 (in thousands):

 

The Company’s investments in and advances to its foreign joint ventures’ operations were as follows as of December 31, 2014 and 2013:

 

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The Company accounts for its investments in foreign joint ventures’ operations using the equity method of accounting. Under the equity method, the Company’s share of the joint ventures’ operations’ earnings or loss is recognized in the consolidated statements of operations as equity income (loss) from foreign joint ventures’ operations. Joint venture income increases the carrying value of the joint ventures and joint venture losses reduce the carrying value. Dividends received from the joint ventures reduce the carrying value.

The equity income for the Company’s interest in the three joint ventures for 2014 and 2013 was: BOMAY $2,054 vs. $2,066, AAG $2 vs. $843 and MIEFE $138 vs. $115. These results reflect the relative size and activity in the three distinct markets of China, Brazil and Singapore. BOMAY’s results reflects the market for land rigs in China with increasing exports to international markets.

The 2014 AAG results reflect that the Company exited the AAG Joint Venture in April 2014.

Historically, the operating results of BOMAY have appeared almost seasonal as budgets were established for new years in March and the companies worked to complete production to meet targets. After annual targets were met in the second or third quarter, only minimal new production results were reported in the fourth quarter. Most of BOMAY’s production is for BOMCO for the Chinese National Petroleum Corporation for land drilling in China.

At December 31, 2014 there were inventories and work in progress at BOMAY of approximately $37 million compared to approximately $60 million at December 31, 2013. We expect much of this will be invoiced in 2015 after new budgets are established and products accepted. Additionally, new international orders will be completed and recognized. The 2015 level may approach recent years’ results. BOMAY has addressed downturns with reduced staff and other cost cutting measures.

Results of Operations

The table below summarizes our consolidated net sales and profitability for the years ended December 31, 2014, 2013 and 2012 (dollars in thousands):

CONTINUING OPERATIONS

 

Year ended December 31, 2014 compared to year ended December 31, 2013

Net Sales

Consolidated net sales decreased $2.0 million or 3%, to $57.3 million for the year ended December 31, 2014 as compared to 2013. The Company’s net sales decline from the comparative prior year period is due primarily to a $2.8 million reduction in the Electrical and Instrumentation Construction segment (E&I), partially offset by a $0.8 million increase in Technical Products and Service (TP&S) segment.

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Gross Profit

Consolidated gross profit for the year ended December 31, 2014 was $5.0 million compared $11.2 million for  the year ended December 31, 2013, a decrease of $6.2 million or 55%.  Gross profit as a percentage of net sales decreased to 9% in 2014,  from  19% in 2013.  Both the TP&S and E&I segments, The gross margin deterioration was primarily due to execution issues on large Power Distribution Center (PDC) projects and the manufacturing cost overruns on the introduction of new “Arc-Resistant” products in our TP&S segment.  

Technical Products and Service (See segment Financial Data on page 6)

Net sales from TP&S for the year ended December 31, 2014 was $50.0 million, an increase of $0.8 million or 2% compared to the year ended December 31, 2013.  Gross profit from the TP&S segment for the year ended December 31, 2014 was $4.1 million compared to $9.1 million for the year ended December 31, 2013, a decrease of $4.9 million or 55%.  The decrease is primarily due to cost overruns in the second half of the year on both the manufacturing start-up of large PDC projects and the Company’s new arc-resistant switchgear.  Additionally, the write-down of the Company’s remaining solar business assets and an increase in the Company’s warranty reserves on new products contributed to the decreased margins in the second half of the year.

Electrical and Instrumentation Construction (See segment Financial Data on page 6)

Net sales from Electrical and Instrumentation Construction (E&I) for the year ended December 31, 2014 was $7.3 million, a decrease of $2.8 million or 27.8% from the 2013 year, primarily due to lower overall construction sales caused by both a reduced sales focus on non-TP&S related construction projects and a reduction in the amount of time and materials based projects.

Gross profit from E&I was $0.9 million for the year ended December 31, 2014 compared to the year ended December 31, 2013, a decrease of $1.2 million or 59% from 2013.  The decrease is primarily due cost overruns on three large construction projects and the impact lower overall E&I revenue levels.  

Research and development costs

Research and development costs were $0.8 million for the year ended December 31, 2014 compared to $0.5 million for the year ended December 31, 2013.  This increase was primarily due to increased development of the Company’s Arc-Resistant products and ongoing development of the Company’s DrillAssist technology.

Selling and marketing expenses

Selling and marketing expenses were $2.5 million for the year ended December 31, 2014 compared to $2.2 million for the year ended December 31, 2013.  Selling and marketing expense, as a percentage of net sales, increased from 3.6% to 4.4% due to lower overall revenue levels and the onboarding during the year of new sales personnel.  

General and Administrative Expenses

General and administrative (G&A) expenses were $5.6 million for the year ended December 31, 2014 compared to $5.4 million for the year ended December 31, 2013.  G&A expenses increased to 9.7% of revenue in 2014 compared to 9% in 2013.  These increases were primarily due to higher professional and recruiting fees,  as well as a $0.3 million increase in costs related to the start-up of the Company’s wholly owned subsidiary in Brazil, offset by a reduction of $1.1 million in performance based incentive compensation expenses.

Net Equity Income from Foreign Joint Ventures

Net equity income from foreign joint ventures, net of related expenses, was $1.7 million for the year ended December 31, 2014 compared to $2.8 million for the year ended December 31, 2013.  This decrease was primarily due to in the Company’s withdrawal from its 49% investment in AETI Alliance Group do Brazil Sistemas E Servicos Em Energia LTDA (“AAG”) in April 2014 as well as increased foreign operations expenses related to the oversight of the Company’s investment in BOMAY.  

Other income (expense), net

Other income (expense), net were expenses of $0.2 million for the year ended December 31, 2014 compared to incomes of $50 thousands in the year ended December 31, 2013.  This change was primarily due to foreign exchange losses during 2014 and the gain on the sale of the Company’s Long Drive facility in 2013.

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Income Tax Provisions

The (benefit from) provision for income taxes for 2014 was $334,000 savings compared to expense of $713,000 in 2013. These amounts reflect the valuation allowance related to the Company’s net deferred tax assets related to its U.S. operation.  See Note 7 Income Taxes to the Consolidated Financial Statements included in this report for further details.  The 2014 and 2013 tax accruals represent U.S. taxes on the foreign joint ventures equity income less dividends and proceeds received. During 2014 the combined dividends and proceeds exceeded the equity incomes and a credit (savings) was recognized at 34%.  In 2013 the equity incomes exceeded the dividends and tax expenses was reflected at 34%.

LIQUIDITY AND CAPITAL RESOURCES

 

AETI’s long-term debt as of December 31, 2014 was $3.8 million on which payments were current.  

See Note 8 Notes Payable for discussion of recent financial activity.

Notes Payable

On November 12, 2014 the Company entered into an amendment with JP Morgan Chase Bank N.A (“Chase”) which extended the maturity of the facility to October 1, 2017. Additionally, the amendment modified the interest rate to LIBOR plus 3.00% per annum and the commitment fee to 0.4% per annum for the unused portion of the credit limit each quarter.  The amendment provided for the exclusion of up to $4.9 million of capital expenditures related to the Company’s Beaumont facility expansion from the fixed charge coverage ratio.  The amendment also waived the $1.00 net income requirement for the period ended September 30, 2014 and modified the requirement at December 31, 2014 to be calculated using only the most recent three month period.

The Company and Chase executed a Third Amendment to Credit Agreement, Amendment to Revolving Credit Note and Limited Waiver effective March 13, 2015.  See Note 8 Notes Payable for a complete discussion of this transaction.

The agreement is collateralized by the Company’s real estate in Beaumont, Texas, trade accounts receivable, equipment, inventories, work-in-progress and investments in foreign subsidiaries, and the Company’s U.S. subsidiaries are guarantors of the borrowing.

The Company has $4.0 million of borrowings outstanding under the JP Morgan Chase N.A. credit agreement at December 31, 2014 and $0.5 million at December 31, 2013. The Company had additional borrowing capacity of $3.2 million and $7.9 million at December 31, 2014 and December 31, 2013 respectively.

In conjunction with the facility expansion at Beaumont completed in June 2014, interest was capitalized at the 30 day LIBOR rate plus 3.25% per annum. Interest capitalized for the twelve months ending December 31, 2014 and 2013 was $18,000 and none respectively.

Sources and Use of Cash

We derive the majority of our operating cash inflow from receipts from the sale of goods and services and cash outflow is used for the procurement of materials and labor. Accordingly, cash flow is subject to market fluctuations and conditions. A substantial portion of our business, primarily construction and products, is characterized by long-term contracts. Most of our long-term contracts allow for several progress billings that provide us with cash receipts as costs are incurred throughout the project, rather than upon

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contract completion, thereby reducing working capital requirements. We also utilize borrowings under our revolving credit agreement, discussed in the preceding section, for our cash needs.

Operating Activities

During the twelve months ended December 31, 2014, the Company used cash flows in operations of $ 2.2 million as compared to generating $ 0.8 million for 2013. The cash from operating activities was negatively impacted by losses on continuing consolidated operations of $ 3.9 million offset by reduction in net working capital of $ 0.8 million compared to income of $ 5.3 million for the same period in 2013.

Investing Activities

During the twelve months ended December 31, 2014, the Company used $2.0 million in cash from investing activities compared to providing $0.3 million for the comparable period in 2013. This is mainly attributable to increased capital expenditures for our Beaumont plant expansion partially offset by dividends received from joint ventures, amounting to $2.5 million in 2014 and $1.3 million in 2013 respectively. Capital expenditures in 2014 totaled $4.9 million and $1.8 million in 2013 primarily Beaumont Plant expansion.

Financing Activities

During the twelve months ended December 31, 2014, the Company provided $2.8 million in cash from financing activities as compared to using $0.4 million in the comparable period in 2013. The drawdown of $3.5 million on the credit facility was partially offset by the purchase of treasury stock for $0.5 million and payment of preferred stock dividends of $0.3 million.

Cash Flow

We periodically evaluate our liquidity requirements, capital needs and availability of resources in view of debt requirements and operating cash needs. To meet our short and long-term liquidity requirements, we rely primarily on cash from operations. Beyond cash generated from operations, we have a credit facility with $3.2 million available at December 31, 2014 and $3.6 million of unrestricted cash at December 31, 2014. See Note 8 Notes Payable for recent financing discussion.

Operating Lease Commitments

The following is a schedule of future minimum rental payments required under operating leases that have initial or remaining non-cancelable lease terms in excess of one year as of December 31, 2014:

 

Contractual Obligations

Payments due under contractual obligations other than leases at December 31, 2014, are as follows:

 

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Interest is estimated based on the current rate of approximately 3.4%

Outlook for Fiscal 2015

AETI enters 2015 with a backlog of $26.5 million which is up from the prior year because of new orders from increased sales activity. In this environment of low oil prices orders may be delayed or cancelled.

We closely monitor our backlog and order activity and continue to adjust our cost structure and expenditures accordingly as conditions require.

The Company believes its existing working capital, new term loan and unused credit facility combined with operating earnings will be sufficient to meet its working capital needs for the next twelve months. The Company continues to review growth opportunities and depending on cash needs may raise cash in the form of debt, equity, or a combination of both.

Effects of Inflation

We experienced minimal increases in our material prices in 2014. The Company has been generally successful in recovering these increases from its customers in the form of increased prices. As a result, AETI has not experienced material margin erosion in 2014 due to inflationary pressures. Future inflationary pressures will likely be largely dependent on the worldwide demand for these basic materials which cannot be predicted at this time.

Commitments and Contingencies

On September 1, 1999, the Company created a group medical and hospitalization minimum premium insurance program. For the policy year ended August 2014 and the subsequent policy, the Company is liable for all claims each year up to $70,000 per insured, or $1.5 million in the aggregate. An outside insurance company insures any claims in excess of these amounts. The Company’s annual expense for this minimum premium insurance program totaled $1,165,000 and $879,000 during the years ended December 31, 2014 and 2013, respectively. Insurance reserves included in accrued payroll and benefits in the accompanying consolidated balance sheets were approximately $166,000 and $254,000 at December 31, 2014 and 2013, respectively.

Critical Accounting Policies and Estimates

We have adopted various critical accounting policies that govern the application of accounting principles generally accepted in the United States of America (“U.S. GAAP”) in the preparation of our consolidated financial statements. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Although these estimates are based on management’s knowledge of current events and actions it may undertake in the future, they may ultimately differ from actual results.

Certain accounting policies involve significant estimates and assumptions by us that have a material impact on our consolidated financial condition or operating performance. Management believes the following critical accounting policies reflect its most significant estimates and assumptions used in the preparation of our consolidated financial statements. We do not have off-balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons, also known as “special purpose entities”, nor do we have any “variable interest entities”.

Inventories – Inventories are stated at the lower of cost or market, with material value determined using an average cost method. Inventory costs for finished goods and work-in-process include direct material, direct labor, production overhead and outside services. TP&S and E&I indirect overhead is apportioned to work-in-process based on direct labor incurred.

Allowance for Obsolete and Slow-Moving Inventory – The Company regularly reviews the value of inventory on hand using specific aging categories, and records a provision for obsolete and slow-moving inventory based on historical usage and estimated future usage. As actual future demand or market conditions may vary from those projected, adjustments to our inventory reserve may be required.

Allowance for Doubtful Accounts – The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of customers to make required payments. The estimate is based on management’s assessment of the collectability of specific customer accounts and includes consideration for credit worthiness and financial condition of those specific customers. The Company also reviews historical experience with the customer, the general economic environment and the aging of receivables. The Company records an allowance to reduce receivables to the amount that is reasonably believed to be collectible. Based on this assessment, management believes the allowance for doubtful accounts is adequate.

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Revenue Recognition – The Company reports earnings from fixed-price and modified fixed-price long-term contracts on the percentage-of-completion method.  Earnings are accrued based on the ratio of costs incurred to total estimated costs. Costs include direct material, direct labor, and job related overhead. However, For TP&S, we have determined that labor incurred, rather than total costs incurred, provides an improved measure of percentage-of-completion. For contracts with anticipated losses, estimated losses are charged to operations in the period such losses are determined. A contract is considered complete when all costs, except insignificant items, have been incurred and the project has been accepted by the customer. Revenue from non-time and material jobs of a short-term nature (typically less than one month) is recognized on the completed-contract method after considering the attributes of such contracts. This method is used because these contracts are typically completed in a short period of time and the financial position and results of operations do not vary materially from those which would result from use of the percentage-of-completion method. The asset, “Work-in-process,” which is included in inventories, represents the cost of labor, material, and overhead on jobs accounted for under the completed-contract method. For contracts accounted for under the percentage-of-completion method, the asset, “Costs and estimated earnings in excess of billings on uncompleted contracts,” represents revenue recognized in excess of amounts billed and the liability, “Billings in excess of costs and estimated earnings on uncompleted contracts,” represents billings in excess of revenue recognized.

Foreign Currency Gains and Losses – Foreign currency translations are included as a separate component of comprehensive income. The Company has determined the local currency of foreign joint ventures to be the functional currency. In accordance with ASC 830, the assets and liabilities of the foreign equity investees and M&I Brazil, denominated in foreign currency, are translated into United States dollars at exchange rates in effect at the consolidated balance sheet date and net sales and expenses are translated at the average exchange rate for the period. Related translation adjustments are reported as comprehensive income, net of deferred income taxes, which is a separate component of stockholders’ equity, whereas gains and losses resulting from foreign currency transactions are included in results of operations.

Federal Income Taxes – The liability method is used in accounting for federal income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The realizability of deferred tax assets are evaluated annually and a valuation allowance is provided if it is more likely than not that the deferred tax assets will not give rise to future benefits in the Company’s tax returns.

Contingencies – The Company records an estimated loss from a loss contingency when information indicates that it is probable that an asset has been impaired or a liability has been incurred and the amount of loss can be reasonably estimated. Contingencies are often resolved over long time periods, are based on unique facts and circumstances, and are inherently uncertain. The Company regularly evaluates the current information that is available to determine whether such accruals should be adjusted or other disclosures related to contingencies are required. The Company is a party to a number of legal proceedings in the normal course of business for which appropriate provisions have been made if it is believed an ultimate loss is probable. The ultimate resolution of these matters, individually or in the aggregate, is not likely to have a material impact on the Company’s consolidated financial position or results of operations.

Equity Income from Foreign Joint Ventures’ Operations – The Company accounts for its investments in foreign joint ventures’ using the equity method. Under the equity method, the Company records its pro-rata share of foreign joint ventures’ income or losses and adjusts the basis of its investment accordingly. Dividends received from the joint ventures, if any, are recorded as reductions to the investment balance.

Carrying Value of Joint Venture Investments – The Company evaluates the carrying value of equity method investments as to whether an impairment adjustment may be necessary. In making this evaluation, a variety of quantitative and qualitative factors are considered including international, national and local economic, political and market conditions, industry trends and prospects, liquidity and capital resources and other pertinent factors.

Recently Issued Accounting Pronouncements

In January 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-01, Balance Sheet (Topic 210) – Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. ASU No. 2013-01 was issued to clarify that ordinary trade receivables and receivables are not within the scope of ASU No. 2011-11. ASU No. 2011-11 applies only to derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with specific criteria contained in the Codification or subject to a master netter arrangement or similar agreement. ASU No. 2013-01 is effective for annual periods beginning on or after January 1, 2013 and interim periods within those periods. The adoption of ASU No. 2013-01 did not have a significant impact on the Company’s consolidated financial position or results of operations.

In March 2013, the FASB issued ASU No. 2013-05, Foreign Currency Matters (Topic 830) – Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an

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Investment in a Foreign Entity. ASU No. 2013-05 provides guidance on releasing cumulative translation adjustments when a reporting entity ceases to have a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity. In addition, ASU No. 2013-05 provides guidance on the release of cumulative translation adjustments in partial sales of equity method investments and in step acquisition. ASU No. 2013-05 is effective on a prospective basis for annual periods beginning after December 15, 2013 and interim periods within those periods. The adoption of ASU No. 2013-05 did have a significant impact on the Company’s consolidated financial position or results of operations.

In April 2014, the FASB issued ASU No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. ASU No. 2014-08 changes the criteria for reporting discontinued operations while enhancing disclosures in this area. It also addresses sources of confusion and inconsistent application related to financial reporting of discontinued operations guidance in U.S. GAAP. Under ASU No. 2014-08, only disposals representing a strategic shift in operations should be presented as discontinued operations. Those strategic shifts should have a major effect on the organization’s operations and financial results. In addition, ASU No. 2014-08 requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued operations. The guidance also requires disclosure of pre-tax income attributable to a disposal of a significant part of an organization that does not qualify for discontinued operations reporting. ASU No. 2014-08 is effective in the first quarter of 2015 with early adoption permitted. Management is currently evaluating the future impact of ASU No. 2014-08 on the Company’s consolidated financial position, results of operations and disclosures.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required under existing U.S. GAAP. The standard is effective for annual periods beginning after December 15, 2016, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). We are currently evaluating the future impact of our pending adoption of ASU 2014-09 on our consolidated financial statements and have not yet determined the method with which we will adopt the standard in 2017.  

 

In June 2014, the FASB issued ASU No. 2014-12, Compensation – Stock Compensation (Topic 718): Accounting for Share Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. The amendments in this ASU require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718, Compensation – Stock Compensation, as it relates to awards with performance conditions that affect vesting to account for such awards. The performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The requisite service period ends when the employee can cease rendering service and shill be eligible to vest in the award if the performance target is achieved. The amendments in ASU No. 2014-12 are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015, with early adoption permitted. Management is currently evaluating the future impact of ASU No. 2014-12 on the Company’s consolidated financial position, results of operations and disclosures.

 

In November 2014, the FASB issued ASU No. 2014-17, Business Combinations (Topic 805): Pushdown Accounting a census of the FASB Emerging Issues Task Force. ASU No. 2014-17 provides that an acquired entity with an option to apply pushdown accounting in its separate financial statements upon occurrence of an event in which an acquirer obtains control of the acquired entity. An acquired entity may elect the option to apply pushdown accounting in the reporting period in which the change-in-control event occurs. An acquired entity should determine whether to elect to apply pushdown accounting for each individual change-in-control event in which an acquirer obtains control of the acquired entity. If pushdown accounting is not applied in the reporting period in which the change-in-control event occurs, an acquired entity will have the option to elect to apply pushdown accounting in a subsequent reporting period to the acquired entity’s most recent change-in-control event. An election to apply pushdown accounting in a reporting period after the reporting period in which the change-in-control event occurred should be considered a change in accounting principle. If pushdown accounting is applied to an individual change-in-control event, that election is irrevocable.  ASU No. 2014-17 is effective on November 15, 2014. After the effective date, an acquired entity can make an election to apply the guidance to future change-in-control events or to its most recent change-in-control event.

 

26

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In January 2015, the FASB issued ASU No. 2015-01, Income Statement – Extraordinary and Unusual Items (Subtopic 225-20): Simplified Income Statement Presentation by Eliminating the Concept of Extraordinary Items. This ASU eliminates from U.S. GAAP the concept of extraordinary items. Subtopic 225-20, Income statement – Extraordinary and Unusual Items, requires that an entity separately classify, present and disclose extraordinary events and transactions. Presently, an event or transaction is presumed to be ordinary and usual activity of the reporting entity unless evidence clearly supports its classification as an extraordinary item. If an event or transaction meets the criteria for extraordinary classification, an entity is required to segregate the extraordinary item from the results of ordinary operations and show the item separately in the income statement, net of tax, after income from continuing operations. The entity also is required to disclose applicable income taxes and either present or disclose earnings-per-share data applicable to the extraordinary item. ASU No. 2015-01 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The amendments of ASU No. 2015-01 can be applied prospectively or retrospectively to all prior periods presented in the financial statements. Early adoption is permitted. The adoption of ASU No. 2015-01 is not expected to have a significant impact on the Company’s consolidated financial position, results of operations or disclosures.

 

In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis, which is intended to improve targeted areas of consolidation guidance for legal entities such as limited partnerships, limited liability corporations, and securitization structures. ASU No. 2015-02 focuses on the consolidation evaluation for reporting organizations that are required to evaluate whether they should consolidate certain legal entities. In addition to reducing the number of consolidation models from four to two, the new standard simplifies the FASB Accounting Standards Codification ^TM and improves current GAAP by: (1) Placing more emphasis on risk of loss when determining a controlling financial interest. A reporting organization may no longer have to consolidate a legal entity in certain circumstances based solely on its fee arrangement, when certain criteria are met; (2) Reducing the frequency of the application of related-party guidance when determining a controlling financial interest in a variable interest entity; and (3) Changing consolidation conclusions for public and private companies in several industries that typically make use of limited partnerships or variable interest entities. ASU No. 2015-02 is effective for periods beginning after December 15, 2015. Management is currently evaluating the future impact of ASU No. 2015-02 on the Company’s consolidated financial position, results of operations and disclosures.

 

Interest Rates

Our variable interest rate items do not subject us to material risk exposures. Our revolving credit facility remains available through December 31, 2015. At December 31, 2014, the Company had $4.0 million of variable-rate debt outstanding. At this borrowing level, a hypothetical relative increase of 10% in interest rates would have had an insignificant, unfavorable impact on the Company’s pre-tax earnings and cash flows. The primary interest rate exposure on variable-rate debt is based on the 30 day LIBOR rate (0.15% at December 31, 2014) plus 3.25% per year. The agreement is collateralized by real estate, trade accounts receivable, equipment, inventory and work-in-process, and guaranteed by our operating subsidiaries. See Notes Payable on page 25.

Foreign Currency Transaction Risk

AETI maintains equity method investments in its Singapore and Chinese Yuan joint ventures, MIEFE and BOMAY respectively. The functional currencies of the joint ventures are the Singapore Dollar and the Chinese respectively. Investments are translated into United States Dollars at the exchange rate in effect at the end of each quarterly reporting period with associated income statements are translated at average period exchange rates. The M&I Brazil statements are translated into U.S. Dollars at period end rate for balance sheets and average period exchange rate for income statements. The resulting translation adjustments is recorded as accumulated other comprehensive income net of taxes in AETI’s consolidated balance sheets. In the current period this item decreased from $983,000 at December 31, 2013 to $813,000 at December 31, 2014 due principally to the strength of the United States Dollar against the Brazilian Real.

Other than the aforementioned items, we do not believe we are exposed to foreign currency exchange risk because most of our net sales and purchases are denominated in United States Dollars.

Commodity Price Risk

We are subject to market risk from fluctuating market prices of certain raw materials. While such materials are typically available from numerous suppliers, commodity raw materials are subject to price fluctuations. We endeavor to recoup these price increases from our customers on an individual contract basis to avoid operating margin erosion. Although historically we have not entered into any contracts to hedge commodity risk, we may do so in the future. Commodity price changes can have a material impact on our prospective earnings and cash flows. Copper, steel and aluminum represent a significant element of our material cost. Significant increases in the prices of these materials could reduce our estimated operating margins if we are unable to recover such increases from our customers.

27

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Reference is made to the Table of Contents on page F-2 of our Consolidated Financial Statements and Notes thereto contained herein.

 

None.

 

Disclosure controls and procedures

Under the direction of our Principal Executive Officer and Principal Financial Officer, we evaluated our disclosure controls and procedures as of December 31, 2014. Our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2014.

Management’s annual report on internal control over financial reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) under the Exchange Act. Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2014. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework. Our management has concluded that our internal control over financial reporting was effective as of December 31, 2014 based on these criteria. This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to section 404(c) of the Sarbanes-Oxley Act of 2002, as amended that permits the Company, as a smaller reporting company, to provide only management’s report in this annual report.

Changes in internal control over financial reporting

There were no changes in our internal controls over financial reporting that occurred during the quarter ended December 31, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

None.

 

 

 

28

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PART III

 

Directors

Information required by this Item is incorporated by reference to the information contained in the Proxy Statement for the 2015 Annual Meeting of Stockholders to be filed within 120 days after our December 31, 2014 fiscal year end.

 

The information required by this Item is incorporated by reference to our Proxy Statement for the 2015 Annual Meeting of Stockholders.

 

The additional information required by this Item is incorporated by reference to our Proxy Statement for the 2015 Annual Meeting of Stockholders.

 

The information required by this item is incorporated by reference to the “Director Independence” and “Certain Relationships and Related Transactions” sections of our Proxy Statement for the 2015 Annual Meeting of Stockholders.

 

The information required by this Item is incorporated by reference to our Proxy Statement for the 2015 Annual Meeting of Stockholders.

PART IV

 

(a) The following documents are filed as part of this report:

1. Consolidated Financial Statements and Report of Independent Registered Public Accounting Firm

See Index on page F-2.

2. Financial Statement Schedules

All financial statement schedules have been omitted, since the required information is not applicable or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the Consolidated Financial Statements and Notes thereto.

3. Exhibits

A list of exhibits filed or furnished with this report on Form 10-K (or incorporated by reference to exhibits previously filed or furnished by us) is provided in the Exhibit Index immediately following the signature pages of this report. We will furnish copies of exhibits for a reasonable fee (covering the expense of furnishing copies) upon request. Stockholders may request exhibit copies by contacting: Rachel Acree, Assistant Corporate Secretary, American Electric Technologies, Inc., 1250 Wood Branch Park Drive, Suite 600, Houston, Texas 77079.

 

 

 

29

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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.

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

 

 

29

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EXHIBIT INDEX

 

30

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31

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AMERICAN ELECTRIC TECHNOLOGIES, INC.

AND SUBSIDIARIES

Consolidated Financial Statements

With Report of Independent Registered Public Accounting Firm

December 31, 2014 and 2013

 

 

 

F-1

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American Electric Technologies, Inc. and Subsidiaries

Consolidated Financial Statements

December 31, 2014 and 2013

Table of Contents

 

 

 

 

F-2

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders

American Electric Technologies, Inc. and Subsidiaries:

We have audited the accompanying consolidated balance sheets of American Electric Technologies, Inc. and Subsidiaries (the “Company”) as of December 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2014 and 2013, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

We were not engaged to examine management’s assertion about the effectiveness of the Company’s internal control over financial reporting as of December 31, 2014 and, accordingly, we do not express an opinion thereon.

/s/ Ham, Langston & Brezina, L.L.P.

Houston, Texas

March 30, 2015

 

 

 

F-3

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American Electric Technologies, Inc. and Subsidiaries

Consolidated Balance Sheets

(in thousands, except share and per share data)

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

 

F-4

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American Electric Technologies, Inc. and Subsidiaries

Consolidated Statements of Operations

(in thousands, except share and per share data)

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

 

F-5

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American Electric Technologies, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(in thousands)

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

 

F-6

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American Electric Technologies, Inc. and Subsidiaries

Consolidated Statements of Stockholders’ Equity

(in thousands, except share data)

 

 

 

 

 

F-7

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American Electric Technologies, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands)

 

 

The accompanying notes are an integral part of the consolidated financial statement.

 

 

 

F-8

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American Electric Technologies, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

American Electric Technologies, Inc. (“AETI” or the “Company”) is the surviving financial reporting entity from a reverse acquisition of an 80% interest in American Access Technologies, Inc. by the shareholders of M&I Electric Industries, Inc.(“M&I”) on May 17, 2007. Immediately upon the completion of the reverse acquisition, American Access Technologies, Inc. changed its name to American Electric Technologies, Inc. AETI is a Florida corporation and M&I, AETI’s wholly-owned subsidiary is a Texas corporation. M&I has a wholly-owned subsidiary, South Coast Electric Systems, LLC (“SC”), a Mississippi based company, and joint venture interests in China and Singapore. On January 1, 2008, AETI established a wholly- owned subsidiary through which it conducted its American Access Technology segment’s business. On August 14, 2014 AETI sold the AAT business except for the real estate. AAT’s operations are reported as discontinued in all periods.

In 2014 the Company formed a wholly-owned subsidiary in Brazil. The Company has U.S. facilities and sales offices in Texas, Mississippi and Florida; and Brazil facilities and sales offices in Macaé and Rio; and foreign joint ventures’ operations that have facilities in Singapore and Xian, China. The Company owns the Beaumont, Texas facilities, comprised of 9 acres and 118,000 square feet, the Mississippi facility, comprised of 3 acres and 11,000 square feet and the Florida facility, comprised of a 67,500 square foot manufacturing facility situated on 9.7 acres of land. In Brazil we lease facilities in Rio and Macaé.

American Electric Technologies, Inc. is comprised of two segments: Technical Products and Services (“TP&S) and Electrical and Instrumentation Construction (“E&I”). The TP&S segment designs, manufactures, markets and provides products designed to distribute the flow of electricity and protect electrical equipment such as motors, transformers and cables, and also provides variable speed drives to both AC (“alternating current”) and DC (“direct current”) motors. Products offered by this segment include low and medium voltage switchgear, generator control and distribution switchgear, motor control centers, powerhouses, bus duct, variable frequency AC drives, variable speed DC drives, program logic control (“PLC”) based automation systems, human machine interface (“HMI”) and specialty panels. The products are built for application voltages from 480 volts to 40,000 volts and are used in a wide variety of industries, including renewable energy. Services provided by TP&S include electrical equipment retrofits, upgrades, startups, testing and troubleshooting of substations, switchgear, drives and control systems.

The E&I segment provides a full range of electrical and instrumentation construction and installation services to both land and marine based markets of the oil and gas industry and other commercial and industrial markets. The E&I segment provides services on both a fixed-price and a time-and-materials basis. The segment’s services include electrical and instrumentation turnarounds, maintenance, renovation and new construction. Applications include installation of switchgear, AC and DC motors, drives, motor controls, lighting systems, high voltage cable, and data centers. Marine based oil and gas services include complete electrical system rig-ups, modifications, start-ups and testing for vessels, drilling rigs, and production modules. These services can be manufactured and installed utilizing NEMA and ANSI or IEC equipment to meet ABS, USCG, Lloyd’s Register, a provider of marine certification services, and DNV standards.

M&I’s wholly-owned subsidiary, SC, is a Delaware Limited Liability Company organized on February 20, 2003. With the exception of electrical contracting, it is engaged in the same lines of business as M&I, but it participates in different market segments. After withdrawing from the AAG joint venture in Brazil effective April 30, 2014 we formed a wholly-owned subsidiary in Brazil in July 2014. The newly formed Brazil company, M&I Brazil, is owned 20% by AETI and 80% by M&I.  

M&I has foreign joint ventures’ interests in M&I Electric Far East PTE Ltd. (“MIEFE”) and BOMAY Electrical Industries Company, Ltd. (“BOMAY”). MIEFE is a Singapore company that provides sales, manufacturing and technical support internationally. BOMAY provides electrical systems primarily for land and marine based drilling rigs in China. These ventures are accounted for using the equity method of accounting.

 

Principles of Consolidation  

The accompanying consolidated financial statements include the accounts of AETI and its wholly-owned subsidiaries, M&I and AAT (which is reported as discontinued operations), and M&I’s wholly-owned subsidiary SC and the wholly-owned subsidiary M&I Brazil. Significant intercompany accounts and transactions are eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of

F-9

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net sales and expenses during the reporting period. Actual results could differ from those estimates. The most significant estimates made by management include:

Financial Instruments

The Company includes fair value information in the notes to the consolidated financial statements when the fair value of its financial instruments is different from the book value. When the book value approximates fair value, no additional disclosure is made, which is the case for financial instruments outstanding as of December 31, 2014 and 2013. The Company assumes the book value of those financial instruments that are classified as current approximates fair value because of the short maturity of these instruments. For non-current financial instruments, the Company uses quoted market prices or, to the extent that there are no available quoted market prices, market prices for similar instruments.

Cash and Cash Equivalents

Cash equivalents consist of liquid investments with original maturities of three months or less. Cash balances routinely exceed FDIC limits however all cash is maintained in JP Morgan Chase and believed to be secure.

Accounts Receivable and Provision for Bad Debts

The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The estimate is based on management’s assessment of the collectability of specific customer accounts and includes consideration for credit worthiness and financial condition of those specific customers. The Company also reviews historical experience with the customer, the general economic environment and the aging of its receivables. The Company records an allowance to reduce receivables to the amount it reasonably believes to be collectible. Based on this assessment, management believes the allowance for doubtful accounts is adequate.

Inventories

Inventories are stated at the lower of cost or market, with material value determined using an average cost method. Inventory costs for work-in-process include direct material, direct labor, production overhead and outside services. TP&S and E&I indirect overhead is apportioned to work-in-process based on direct labor incurred.

Property, Plant and Equipment

Property, plant and equipment are stated at cost. Expenditures for repairs and maintenance are expensed as incurred while renewals and betterments are capitalized. Depreciation is calculated on the straight-line basis over the estimated useful lives of the assets after giving effect to salvage values.

Long-lived assets

If events or circumstances indicate the carrying amount of an asset may not be recoverable, management tests long-lived assets for impairment. If the estimated future cash flows are projected to be less than the carrying amount, an impairment write-down (representing the carrying amount of the long-lived asset which exceeds the present value of estimated expected future cash flows) would be recorded as a period expense. Events that would trigger an impairment test include the following:

F-10

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Based on management’s reviews during each of the years ended December 31, 2014 and 2013, there were no events or circumstances that caused management to believe that impairments were necessary.

Other Assets

 

Amortization expense related to intangible assets held by the Company for the year ended December 31, 2014 was approximately $108,000 and was approximately $108,000 in 2013. Estimated amortization expense for the next five years is as follows:

 

On March 8, 2012, the Company acquired certain technology from Amnor Technologies, Inc. for cash of $100,000 plus 44,000 shares of the Company’s common stock valued at $4.95 per share (the closing price on that date). One fourth of the shares were issued initially with the balance to be issued one third annually on the anniversaries over the subsequent 3 years. The purchase price was valued at $322,000 (including $4,000 of transaction costs) at March 8, 2012 and is recorded as an intangible asset and included in other assets in the consolidated balance sheet. This cost is being amortized over its estimated useful life of 3 years. Amortization expense of $108,000 and $108,000 was recognized annually during the years ended December 31, 2014 and 2013 and is included in general and administrative expenses in the consolidated statements of operations.

The technology provides automation and control system technologies for land and offshore drilling monitoring and control (auto-driller); marine automation including ballast control and tank monitoring and machinery plant control and monitoring systems; IP-based CCTV systems; and military vessel security and safety systems, all proven in multiple installations.

During 2014 we acquired arc-resistant technology and capitalized the cost of $218,000. We will evaluate the remaining value regularly and expense any reduction in value.  

Income Taxes

The Company uses the asset and liability method to account for income taxes. Under this method of accounting for income taxes, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using the enacted tax rates and laws that will be in effect when the differences are expected to be reported to the taxing authority. The Company also records any financial statement recognition and disclosure requirements for uncertain tax positions taken or expected to be taken in its tax return. Financial statement recognition of the tax position is dependent on an assessment of a 50% or greater likelihood that the tax position will be sustained upon examination, based on the technical merits of the position. Any interest and penalties related to uncertain tax positions are recorded as interest expense in the accompanying consolidated statements of operations.

Foreign Currency Gains and Losses

Foreign currency translations are included as a separate component of comprehensive income. We have determined the local currency of our foreign joint ventures’ operations and M&I Brazil to be the functional currency. In accordance with ASC 830, the assets and liabilities of our foreign equity investees, denominated in foreign currency, are translated into U.S. dollars at exchange rates in effect at the consolidated balance sheet date; net sales and expenses are translated at the average exchange rate for the period. Related translation adjustments are reported as other comprehensive income, net of taxes, which is a separate

F-11

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component of stockholders’ equity, whereas gains and losses resulting from foreign currency transactions are included in results of operations.

Net Sales Recognition

The Company reports earnings from fixed-price and modified fixed-price long-term contracts on the percentage-of-completion method. Earnings are accrued based on the ratio of costs incurred to total estimated costs. However, for TP&S, we have determined that labor incurred provides an improved measure of percentage-of-completion. Costs include direct material, direct labor, and job related overhead. Losses expected to be incurred on contracts are charged to operations in the period such losses are determined. A contract is considered complete when all costs except insignificant items have been incurred and the facility has been accepted by the customer. Net sales from non-time and material jobs of a short-term nature (typically less than one month) are recognized on the completed-contract method after considering the attributes of such contracts. This method is used because these contracts are typically completed in a short period of time and the financial position and results of operations do not vary materially from those which would result from use of the percentage-of-completion method.

The Company records net sales from its field and technical service and repair operations on a completed service basis after customer acknowledgement that the service has been completed and accepted. Approximately 8% of the Company’s consolidated net sales are recorded on this basis. In addition, the Company sells certain purchased parts and products. These net sales are recorded when the product is shipped and title passes to the customer. Approximately 3% of the Company’s consolidated net sales are recorded on this basis.

The asset, “Work-in-process,” which is included in inventories, represents the cost of labor, material, and overhead in excess of amounts billed on jobs accounted for under the completed-contract method. For contracts accounted for under the percentage-of-completion method, the asset, “Costs and estimated earnings in excess of billing on uncompleted contracts,” represents net sales recognized in excess of amounts billed and the liability, “Billings in excess of costs and estimated earnings on uncompleted contracts,” represents billings in excess of net sales recognized. Any billed net sale that has not been collected is reported as accounts receivable. The timing of when we bill our customers is generally dependent upon advance billing terms or completion of certain phases of the work.

On occasion, the Company enters into long-term contracts that include services performed by more than one operating segment particularly TP&S contracts which include electrical and instrumentation construction services performed by our E&I segment. The Company segments net sales, costs and gross profit related to these contracts if they meet the contract segmenting criteria in ASC 605-35, including that the terms and scope of the project clearly call for separate elements, the separate elements are often bid or negotiated by the Company separately and the total economic returns and risks of the separate elements are similar to the economic returns and risks of the overall contract. For segmented contracts, the Company recognizes net sales as if they were separate contracts over the performance periods of the individual elements.

Contract net sales recognition inherently involves estimation, including the contemplated level of effort to accomplish the tasks under the contract, the cost of the effort, and an ongoing assessment of progress toward completing the contract. From time to time, as part of the normal management processes, facts develop that requires revisions to estimated total cost or net sales expected. The cumulative impact of any revisions to estimates and the full impact of anticipated losses on contracts are recognized in the period in which they become known.

Shipping and Handling Fees and Costs

Shipping and handling fees, if billed to customers, are included in net sales. Shipping and handling costs associated with inbound freight are expensed as incurred. Shipping and handling costs associated with outbound freight are classified as cost of sales.

Concentration of Market Risk and Geographic Operations

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of trade accounts receivable. The Company’s market risk is dependent primarily on the strength of the oil and gas and energy related industries. The Company grants credit to customers and generally does not require security except in the case of certain international contracts. Procedures are in effect to monitor the credit worthiness of its customers. During 2013, one customer accounted for approximately 17% of net sales and 9% of net accounts receivable trade. During 2014, one customer accounted for approximately 12% of net sales and 4% of net accounts receivable trade.

The Company sells its products and services in domestic and international markets; however, significant portions of the Company’s sales are concentrated with customers located in the Gulf Coast region of the United States. The Gulf Coast region accounts for approximately 7% of the Company’s net sales during the year ended December 31, 2014 and 9% during 2013.

F-12

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Reclassification

Certain items are reclassified in the 2013 consolidated financial statements to conform to the 2014 presentation.

Recently Issued Accounting Pronouncements

In January 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-01, Balance Sheet (Topic 210) – Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. ASU No. 2013-01 was issued to clarify that ordinary trade receivables and receivables are not within the scope of ASU No. 2011-11. ASU No. 2011-11 applies only to derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with specific criteria contained in the Codification or subject to a master netter arrangement or similar agreement. ASU No. 2013-01 is effective for annual periods beginning on or after January 1, 2013 and interim periods within those periods. The adoption of ASU No. 2013-01 did not have a significant impact on the Company’s consolidated financial position or results of operations.

In March 2013, the FASB issued ASU No. 2013-05, Foreign Currency Matters (Topic 830) – Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity. ASU No. 2013-05 provides guidance on releasing cumulative translation adjustments when a reporting entity ceases to have a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity. In addition, ASU No. 2013-05 provides guidance on the release of cumulative translation adjustments in partial sales of equity method investments and in step acquisition. ASU No. 2013-05 is effective on a prospective basis for annual periods beginning after December 15, 2013 and interim periods within those periods. The adoption of ASU No. 2013-05 did have a significant impact on the Company’s consolidated financial position or results of operations.

In April 2014, the FASB issued ASU No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. ASU No. 2014-08 changes the criteria for reporting discontinued operations while enhancing disclosures in this area. It also addresses sources of confusion and inconsistent application related to financial reporting of discontinued operations guidance in U.S. GAAP. Under ASU No. 2014-08, only disposals representing a strategic shift in operations should be presented as discontinued operations. Those strategic shifts should have a major effect on the organization’s operations and financial results. In addition, ASU No. 2014-08 requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued operations. The guidance also requires disclosure of pre-tax income attributable to a disposal of a significant part of an organization that does not qualify for discontinued operations reporting. ASU No. 2014-08 is effective in the first quarter of 2015 with early adoption permitted. Management is currently evaluating the future impact of ASU No. 2014-08 on the Company’s consolidated financial position, results of operations and disclosures.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required under existing U.S. GAAP. The standard is effective for annual periods beginning after December 15, 2016, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). We are currently evaluating the future impact of our pending adoption of ASU 2014-09 on our consolidated financial statements and have not yet determined the method with which we will adopt the standard in 2017.

In June 2014, the FASB issued ASU No. 2014-12, Compensation – Stock Compensation (Topic 718): Accounting for Share Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. The amendments in this ASU require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718, Compensation – Stock Compensation, as it relates to awards with performance conditions that affect vesting to account for such awards. The performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The requisite service period ends when the employee can cease rendering service and shill be eligible to vest in the award if the performance target is achieved.

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The amendments in ASU No. 2014-12 are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015, with early adoption permitted. Management is currently evaluating the future impact of ASU No. 2014-12 on the Company’s consolidated financial position, results of operations and disclosures.

 

In November 2014, the FASB issued ASU No. 2014-17, Business Combinations (Topic 805): Pushdown Accounting a census of the FASB Emerging Issues Task Force. ASU No. 2014-17 provides that an acquired entity with an option to apply pushdown accounting in its separate financial statements upon occurrence of an event in which an acquirer obtains control of the acquired entity. An acquired entity may elect the option to apply pushdown accounting in the reporting period in which the change-in-control event occurs. An acquired entity should determine whether to elect to apply pushdown accounting for each individual change-in-control event in which an acquirer obtains control of the acquired entity. If pushdown accounting is not applied in the reporting period in which the change-in-control event occurs, an acquired entity will have the option to elect to apply pushdown accounting in a subsequent reporting period to the acquired entity’s most recent change-in-control event. An election to apply pushdown accounting in a reporting period after the reporting period in which the change-in-control event occurred should be considered a change in accounting principle. If pushdown accounting is applied to an individual change-in-control event, that election is irrevocable.  ASU No. 2014-17 is effective on November 15, 2014. After the effective date, an acquired entity can make an election to apply the guidance to future change-in-control events or to its most recent change-in-control event.

 

In January 2015, the FASB issued ASU No. 2015-01, Income Statement – Extraordinary and Unusual Items (Subtopic 225-20): Simplified Income Statement Presentation by Eliminating the Concept of Extraordinary Items. This ASU eliminates from U.S. GAAP the concept of extraordinary items. Subtopic 225-20, Income statement – Extraordinary and Unusual Items, requires that an entity separately classify, present and disclose extraordinary events and transactions. Presently, an event or transaction is presumed to be ordinary and usual activity of the reporting entity unless evidence clearly supports its classification as an extraordinary item. If an event or transaction meets the criteria for extraordinary classification, an entity is required to segregate the extraordinary item from the results of ordinary operations and show the item separately in the income statement, net of tax, after income from continuing operations. The entity also is required to disclose applicable income taxes and either present or disclose earnings-per-share data applicable to the extraordinary item. ASU No. 2015-01 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The amendments of ASU No. 2015-01 can be applied prospectively or retrospectively to all prior periods presented in the financial statements. Early adoption is permitted. The adoption of ASU No. 2015-01 is not expected to have a significant impact on the Company’s consolidated financial position, results of operations or disclosures.

 

In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis, which is intended to improve targeted areas of consolidation guidance for legal entities such as limited partnerships, limited liability corporations, and securitization structures. ASU No. 2015-02 focuses on the consolidation evaluation for reporting organizations that are required to evaluate whether they should consolidate certain legal entities. In addition to reducing the number of consolidation models from four to two, the new standard simplifies the FASB Accounting Standards Codification ^TM and improves current GAAP by: (1) Placing more emphasis on risk of loss when determining a controlling financial interest. A reporting organization may no longer have to consolidate a legal entity in certain circumstances based solely on its fee arrangement, when certain criteria are met; (2) Reducing the frequency of the application of related-party guidance when determining a controlling financial interest in a variable interest entity; and (3) Changing consolidation conclusions for public and private companies in several industries that typically make use of limited partnerships or variable interest entities. ASU No. 2015-02 is effective for periods beginning after December 15, 2015. Management is currently evaluating the future impact of ASU No. 2015-02 on the Company’s consolidated financial position, results of operations and disclosures.

 

 

 

Inventories consisted of the following at December 31, 2014 and 2013.

 

 

 

 

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Contracts in progress at December 31, 2014 and 2013 consisted of the following:

 

Costs, estimated earnings, and related billing on uncompleted contracts consisted of the following at December 31, 2014 and 2013:

 

                                                                                                                                                                                                                                                                                                                                    

Property, plant and equipment consisted of the following at December 31, 2014, and 2013:

 

During the years ended December 31, 2014 and 2013, depreciation charged to operations amounted to $563,000 and $390,000 respectively. Of these amounts, $428,000 and $228,000 was charged to cost of sales while $135,000 and $162,000 was charged to selling, general and administrative expenses for the years ended December 31, 2014 and 2013, respectively.

On October 9, 2013, the Company sold the property and improvements at 6410 Long Drive, Houston, Texas. The proceeds were received in cash and resulted in a gain of $128,000 included in other income in the accompanying consolidated statements of operations. The facility was leased by the Company until March 14, 2014 when it relocated to its new leased facilities discussed in Note 9.

 

The Company has a foreign joint venture agreement and holds a 40% interest in a Chinese company, BOMAY, which builds electrical systems for sale in China. The majority partner in this foreign joint venture is a subsidiary of a major Chinese oil company. M&I made an initial investment of $1.0 million in 2006 and made an additional $1.0 million investment in 2007. The Company’s equity in the income of the foreign joint venture was $2.1 million and $2.1 million for the years ended December 31, 2014 and 2013, respectively. Sales made to the foreign joint venture were $130,000 and $325,000 for the years

F-15

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ended December 31, 2014 and 2013, respectively. Accounts receivable from BOMAY were $82,000 and $119,000 at December 31, 2014 and 2013.

The Company owns a 41% interest in MIEFE which provides additional sales and technical support in Asia. The Company’s equity in the income of the foreign joint venture was $138,000 and $115,000 for the years ended December 31, 2014 and 2013, respectively. Sales made to the foreign joint venture were $14,000 and $225,000 for the years ended December 31, 2014 and 2013, respectively. Accounts receivable from MIEFE was $2,000 and $0 at December 31, 2014 and 2013, respectively.

In April 2014 the Company withdrew from the AAG joint venture. The Company received a note from the joint venture
payable over 12 months. At December the outstanding note was valued at $201,000 and does not bear interest.

The Company’s equity in income of the foreign joint ventures before our foreign operations expenses, totaled $2.2 million and $3.0 million for the years ended December 31, 2014 and 2013, respectively.

During 2014 and 2013, the Company also recognized approximately $522,000 and $267,000, respectively, for employee related expenses directly attributable to the foreign joint ventures.

Sales to foreign joint ventures’ operations are made on an arm’s length basis and intercompany profits, if any, are eliminated in consolidation.

Summary financial information of BOMAY, MIEFE and AAG in U.S. dollars was as follows at December 31, 2014 and 2013:

 

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The Company’s investments in and advances to its foreign joint ventures’ operations were as follows as of December 31, 2014 and 2013:

 

The Company accounts for its investments in foreign joint ventures’ operations using the equity method of accounting. Under the equity method, the Company’s share of the joint ventures’ operations’ earnings or loss is recognized in the consolidated statements of operations as equity income (loss) from foreign joint ventures’ operations. Joint venture income increases the carrying value of the joint ventures and joint venture losses reduce the carrying value. Dividends received from the joint ventures reduce the carrying value. Each reporting period, the Company evaluates the carrying value of these equity method investments as to whether an impairment adjustment may be necessary. In making this evaluation, a variety of quantitative and qualitative factors are considered including national and local economic, political and market conditions, industry trends and prospects, liquidity and capital resources and other pertinent factors. Based on this evaluation for this reporting period, the Company does not believe an impairment adjustment is necessary.

 

 

 

The components of income (loss) before income taxes and dividends on preferred stock for the years ended December 31, 2014 and 2013 were as follows:

 

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The components of the provision (benefit) for income taxes by taxing authority for the years ended December 31, 2014 and 2013 were as follows:

 

Significant components of the Company’s deferred federal income taxes were as follows:

 

The provision for income taxes for the year ended December 31, 2014 was primarily a non-cash savings of $0.3 million and reflect deferred taxes associated with the Company’s foreign joint ventures. The Company’s deferred tax assets are primarily related to net operating loss carry forwards.  These net operating losses include losses generated by American Access Technologies. Inc. (“AAT”), prior to the Company’s merger in 2007, additional net operating losses, and foreign tax credit carry forwards. A valuation allowance was established at December 31, 2014 and 2013 due to uncertainty regarding future realization of deferred tax assets.   Our total valuation allowance as of December 31, 2014 and 2013 is $7.8 million and $5.4 million, respectively.  

The Company has federal net operating loss carry forwards of approximately $7.4 million which include $7.4 million acquired from AAT that are subject to the utilization limitation under Section 382 of the Internal Revenue Code. The Company has state net operating losses of $11 million.  These tax loss carry forwards are available to offset future taxable income and expire if unused during the federal tax year ending December 31, 2019 through 2031.

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The Company’s 2008 U.S. federal income tax return was examined by the Internal Revenue Service (“IRS”). In the fourth quarter 2011, the IRS concluded its audit which adjusted the annual net operating loss carry forward limitation under Sec. 382 related to AAT’s pre-acquisition net operating loss carry forwards to $299,000 per year through 2027.  The Company has adopted the provisions of ASC Topic 740-10 “Income Taxes” to assess tax benefits claimed on a tax return should be recorded in the financial statements.  The Company has assessed all open tax years and has recorded no uncertain tax positions related to the open tax years.  

The difference between the effective income tax rate reflected in the provision for income taxes and the amounts, which would be determined by applying the statutory income tax rate of 34%, is summarized as follows:

 

The Company files income tax returns in the United States Federal jurisdiction and various state jurisdictions.

 

The components of notes payable at December 31, 2014 and 2013 are as follows:

 

Revolving Credit Agreement

On November 30, 2013, the Company entered into a $10.0 million Amended and Restated Credit Agreement with JPMorgan Chase Bank, N.A. (Chase).  The agreement replaced in its entirety the Company’s prior credit agreement, as amended, originally entered into with JPMorgan Chase Bank, N.A. in October of 2007

 

The 2013 agreement had a maturity date of October 1, 2015.   Under the agreement, the credit facility’s interest rate is LIBOR plus 3.25% per annum and a commitment fee of 0.3% per annum is charged on the unused portion of the credit limit each quarter.

 

The 2013 agreement provides for usual and customary covenants and restrictions  including that the borrower must maintain a fixed charge coverage ratio of no less than 1.25 to 1.00, and will not permit the ratio of consolidated total liabilities to consolidated net worth to exceed 1.00.   Additionally, the borrower will not permit, at the end of each calendar quarter, for its net income for the most recently ended six month period to be less than $1.00. Effective June 30, 2014 the Company and Chase amended the 2013 credit agreement to exclude the impact of the AAT discontinued operations and anticipated sale of that segment from the calculation of the net income covenant.  On November 12, 2014 the Company entered into an amendment with Chase which extended the maturity of the facility to October 2017. Additionally the amendment modified the interest rate to LIBOR plus 3.00 % per annum and the commitment fee to 0.4% per annum for the unused portion of the credit limit each quarter. The amendment provided for the exclusion of up to $4.9 million of capital expenditures related to the Company’s Beaumont facility expansion from the fixed charge coverage ratio.  The amendment also waived the $1.00 net income requirement for the period ended September 30, 2014 and modified the requirement at December 31, 2014 to be calculated using only the most recent three month period.  

 

The Company had $4.0 million of borrowings outstanding under the JPMorgan Chase N.A. credit agreement at December 31, 2014 and $0.5 million at December 31, 2013.  The company had additional borrowing capacity of $3.2 million and $7.9 million at December 31, 2014 and December 31, 2013 respectively.  

F-19

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New Financings

 

In March 2015, the Company and Chase executed the Third Amendment to Credit Agreement, Amendment to Revolving Credit Note and Limited Waiver. The amendment established the Revolving Credit Maturity Date as December 31, 2015. It established an available amount of not less than $1,500,000 and up to the lesser of the Borrowing Base and the Commitment of $4,000,000. The $4,000,000 outstanding under the current Revolving Credit was repaid from the new Term Loan for $4,000,000 upon the effective date of the Third Amendment. The new Term Loan is secured by a mortgage on the Beaumont, Texas Facility. The Term Loan accrues interest at the adjusted LIBOR Rate plus a margin of 3.50%.

The maturity date of the term loan is March 31, 2020. The loan requires payment of principal on the last day of each calendar quarter totaling $222,222 in 2015. This amount would have reduced our working capital and resulted in a current ratio of 2.07 at December 31, 2014.

 

Additionally trade accounts receivable, equipment, inventories, and work-in-process, and investments in foreign subsidiaries secure the financings and the Company’s U.S. subsidiaries are guarantors of the borrowings under the new revolving credit facility.

  

 

New Corporate Office Lease

In late December 2013 the Company executed a new lease for office space at 1250 Wood Branch Park Drive, Houston, Texas. The lease covers approximately 13,000 square feet.

The term of the lease is 64 months and commenced upon completion of tenant improvements, which were completed in March 2014.

The Company leases equipment (principally trucks and forklifts) under operating lease agreements that expire at various dates to 2016. Rental expense relating to operating leases and other short-term leases for the years ended December 31, 2014 and 2013, amounted to approximately $0.4 million and $0.3 million, respectively.

The following is a schedule of future lease payments:

 

 

 

 

Employee Stock Purchase Plan

The Company issued 3,640 and 4,697 shares of Company stock during 2014 and 2013, respectively, in connection with an Employee Stock Purchase (“ESPP”) Plan that commenced in April 2008.

Restricted Stock Units

During 2014 and 2013, the Board of Directors approved the grants of approximately 160,000 and 234,525 restricted stock units (“RSU”s) to members of management and key employees as part of the 2007 Employee Stock Incentive Plan. In May 2010, the stockholders of the Company approved amendments to the 2007 Employee Stock Incentive Plan to increase the number of shares available for issuance under the plan from 300,000 shares to 800,000 shares of stock. In June 2012 the stockholders approved an increase from 800,000 to 1,100,000 shares of stock available under the plan. In May 2014 the stock holders increased the share available under the plan from 1,100,000 to 1,700,000. The number of RSUs awarded is generally subject to the substantial achievement of budgeted performance and other metrics in the year granted. The RSUs do not have voting rights of the common stock, and the shares of common stock underlying the RSUs are not considered issued and outstanding until

F-20

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actually vested and issued. In general, the awards convert to common stock on a one to one basis in 25% increments over four years from the grant date subject to a continuing employment obligation.

The following table summarizes the activity for unvested restricted stock units for the years ended December 31, 2014 and 2013:

 

Compensation expense of approximately $676,000 and $767,000 was recorded in general administrative expense, selling and indirect operating expense for the years ended December 31, 2014 and 2013, respectively, to reflect the fair value of the original RSU’s granted or anticipated to be granted less forfeitures, amortized over the portion of the vesting period occurring during the period. The fair value of the RSUs was based on the closing price of our common stock as reported on the NASDAQ Stock Market (“NASDAQ”) on the grant date. Based upon the fair value on the grant date of the number of shares awarded or expected to be awarded, it is anticipated that approximately $0.8 million of additional compensation cost will be recognized in future periods through 2017. The weighted average period over which this additional compensation cost will be expensed is 2 years.

During February 2015, the Board of Directors approved the grants of approximately 217,000 RSUs in conjunction with the Plan, of which, approximately 45,000 units are subject to 2015 fiscal performance measures.

Stock Options

The Company recognizes compensation expense related to stock options in accordance with ASC 718 and has measured the share-based compensation expense for stock options granted during the year ended December 31, 2008 based upon the estimated fair value of the award on the date of grant and recognizes the compensation expense over the award’s requisite service period. The weighted average fair values were calculated using the Black Scholes-Merton option pricing model. There were no options issued in 2014 or 2013.

Details of stock option activity during the years ended December 31, 2014 and 2013 follows:

 

No stock options were outstanding as of December 31, 2014.

 

Compensation expense of approximately none and $20,000 was recorded in the years ended December 31, 2014 and 2013, respectively, which is included in general and administrative expenses in the consolidated statements of operations. As of December 31, 2014, there was no unrecognized compensation cost related to stock option awards.

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Board of Directors Compensation

Directors who are not employees of the Company and who do not have a compensatory agreement providing for service as a director of the Company receive a retainer fee payable quarterly. Eligible directors may elect to defer 50% to 100% of their retainer fee, which may be used to acquire common stock of the Company at the fair market value on the date the retainer fee would otherwise be paid, acquire stock units equivalent to the fair market value of the Company’s common stock on the date the retainer fee would otherwise be paid, or be paid in cash. During the years ended December 31, 2014 and 2013, directors of the Company elected to defer retainer fees to acquire approximately 18,800 and 5,000, respectively, stock units. Compensation expense of approximately $130,000 and $32,000 was recorded in the years ended December 31, 2014 and 2013 respectively, which is included in general and administrative expenses in the consolidated statements of operations.

 

On April 13, 2012, the Company signed a securities purchase agreement (the “Securities Purchase Agreement”) with a private investor for the sale (the “Preferred Stock Financing”) of 1,000,000 shares of the Company’s Series A Convertible Preferred Stock (the “Series A Convertible Preferred Stock”) at $5.00 per share and 325,000 warrants to purchase shares of the Company’s common stock expiring in May 2020. The Series A Convertible Preferred Stock shares are initially convertible into 1,000,000 shares of the Company’s common stock at a conversion price of $5.00 per share. The warrants were issued in two tranches with 125,000 of such warrants at an initial exercise price of $6.00 per share and 200,000 of such warrants at an initial exercise price of $7.00 per share. On May 2, 2012, the Company completed the issuance of the Series A Convertible Preferred Stock and warrants.

On April 30, 2012, the Company filed an Articles of Amendment to its Articles of Incorporation designating 1,000,000 shares of the Company’s authorized preferred stock as Series A Convertible Preferred Stock. The Company also entered into a Registration Rights Agreement and Investor Rights Agreement with the private investor.

The Series A Convertible Preferred Stock ranks senior to all other equity instruments of the Company, including the Company’s common stock. The Series A Convertible Preferred Stock accrues cumulative dividends at a rate of 6% per annum, whether or not dividends have been declared by the Board of Directors and whether or not there are profits, surplus or other funds available for the payment of such dividends. The Company may pay such dividends in shares of the Company’s common stock based on the then current market price of the common stock. At any time following a material default by the Company, as defined in the Securities Purchase Agreement, or April 30, 2017, the holders of a majority of the outstanding shares of the Series A Convertible Preferred Stock may require the Company to redeem the Series A Convertible Preferred Stock at a redemption price equal to the lessor of (i) the liquidation preference per share (initially $5.00 per share, subject to adjustments for certain future equity transactions defined in the Securities Purchase Agreement) and (ii) the fair market value of the Series A Convertible Preferred Stock per share, as determined in good faith by the Company’s Board of Directors. The redemption price, plus any accrued and unpaid dividends, shall be payable in 36 equal monthly installments plus interest at an annual rate of 6%.

The preferred stock and warrants were issued for a total of $5.0 million. This amount was allocated to the preferred stock and warrants based on their relative fair values. The fair value of the warrants was calculated using the Black Scholes-Merton pricing model using the following weighted average assumptions:

 

Based on these calculations and the actual consideration, the warrants were valued at $840,000 and the Series A Convertible Preferred Stock was valued at $4,160,000.

The initial values allocated to the warrants were recognized as a discount on the Series A Convertible Preferred Stock, with a corresponding charge to additional paid-in capital. The discount related to the warrants is accreted to retained earnings through the scheduled redemption date of the mandatorily redeemable Series A Convertible Preferred Stock. Discount accretion for the year 2014 totaled $45,000 and $42,000 in 2013.

 

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The employees of the Company are eligible to participate in a 401(k) plan sponsored by the Company. The plan is a defined contribution 401(k) Savings and Profit Sharing Plan (the “Plan”) that covers all full-time employees who meet certain age and service requirements. Employees may contribute up to 20% of their annual gross pay through salary deferrals. The Company may provide discretionary contributions to the Plan as determined by the Board of Directors. For the years ended December 31, 2014 the Company contributed none to the plan and $201,000 in 2013.

The Company maintains an “Executive Performance” bonus plan, which covers approximately 60 key employees. Under the plan, the participants receive a percentage of a bonus pool based primarily on pre-tax income in relation to budget. The Board of Directors approves the Executive Performance plan at the beginning of each year. During the years ended December 31, 2014 and 2013, the Company recorded approximately $121,000 and $813,000 under the plan, respectively, all of which was included in accrued payroll and benefits expenses as of the respective year end.

 

During 2014 and 2013, the Company received legal advice on various Company matters from a law firm related to a director of the Company. The Company incurred expenses totaling approximately $50,000 and $89,000 related to these services during 2014 and 2013, respectively, which is included in general and administrative expenses in the accompanying consolidated statements of operations. As of December 31, 2014 and 2013, there were no overdue outstanding amounts owed to this law firm for services provided.

In August 2009, the Company entered into an employment agreement (amended in 2012 and 2013) with the Executive Chairman of the Board of Directors (“Executive Chairman”), whereby the Company compensated the Executive Chairman $130,000 and $130,000 during 2014 and 2013, respectively. Under the terms of the agreement, the Executive Chairman will assist in international joint venture relations and operations, technical developments, manufacturing and transformative business development projects and other special projects assigned by the Company. In November 2013, the Company amended the agreement to extend the term through 2015 with annual compensation of $130,000 and $130,000 for 2014 and 2015. In addition, the amendment included a bonus equal to 1% of the amount reported by the Company as equity income from foreign joint ventures’ operations in the consolidated statements of operations. During 2014 and 2013, the Company paid compensation of $130,000 and $157,570, respectively, under the terms of the agreement, which is included in general and administrative expenses in the accompanying consolidated statements of operations.

 

The Company follows the guidance prescribed by ASC Topic 280, Segment Reporting, which governs the way the Company reports information about its operating segments.

Management has organized the Company around its products and services and has two reportable segments: Technical Products and Services (“TP&S”) and Electrical and Instrumentation Construction (“E&I”). TP&S develops, manufactures, provides and markets switchgear and variable speed drives. The service component of this segment includes retrofitting equipment upgrades, startups, testing and troubleshooting electrical substations, switchgear, drives and control systems. Equity income from foreign joint ventures and joint venture management related expenses are reported in the section net equity income (loss) from foreign operations. The E&I segment installs electrical equipment for the energy, water, industrial, marine and commercial markets.

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The table below represents segment results for continuing operations for the years ended December 31, 2014, and 2013.

 

The Company’s management does not separately review and analyze its assets on a segment basis for TP&S and E&I, and all assets for the segments are recorded within the corporate segment’s records. Corporate and other unallocated general and administrative expenses include compensation costs and other expenses that cannot be meaningfully associated with the individual segments.

 

The following table reflects the quarterly information for continuing operations for the applicable time periods.

 

 

 

 

On September 1, 1999, the Company created a group medical and hospitalization minimum premium insurance program. For the policy year ended August 2015, the Company is liable for all claims each year up to $70,000 per insured, or $1.5 million in the aggregate. An outside insurance company insures any claims in excess of these amounts. The Company’s expense for this minimum premium insurance totaled $1,165,000 and $879,000 during the years ended December 31, 2014 and 2013. Insurance reserves included in accrued payroll and benefits in the accompanying consolidated balance sheets were approximately $166,000 and $254,000 at December 31, 2014 and 2013.

 

                                            

 

Basic earnings (loss) per common share is based on the weighted average number of common shares outstanding for the year ended December 31, 2014 and 2013. Diluted earnings (loss) per common share is based on the weighted average number of

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common shares outstanding, plus the incremental shares that would have been outstanding upon the assumed exercise of all potentially dilutive stock options and other units subject to anti-dilution limitations.

The following table sets forth the computation of basic and diluted earnings (loss) per common share (in thousands, except share and per share data):

 

*No units or shares are considered when losses cause the effect to be anti-dilutive.

**Net income (loss) represents net income (loss) from continuing operations less the dividends on redeemable convertible preferred stock.

 

 

         

 

 

During the first quarter of 2014, the management and the Board of Directors of AETI initiated a process to evaluate the possible sale of the AAT segment as well as other alternatives. The segment is comprised entirely of the American Access Technologies, Inc. operations in Florida. During the second quarter, the decision was made to sell the AAT business. Based on the expected value of the assets and liabilities for sale and the costs associated with the sale, an impairment loss of approximately $2.3 million after tax was recorded in the second quarter in discontinued operations results along with the $84,000 operating loss for the second quarter and $268,000 operating loss in the first quarter for AAT. AAT results are considered discontinued operations and its assets and associated liabilities are carried as assets and liabilities held for sale. Therefore, its results are presented below continuing operating results as discontinued operations. Future periods will continue to report AAT results as discontinued in all comparative periods.  The sale of all non-cash assets excluding the real property closed effective August 14, 2014. Prior to the closing AAT incurred an operating loss of $21,000 in the third quarter. The real estate was leased to the buyer for a minimum of one year with an option to purchase and remains in assets held for sale.  

The following tables summarize the AAT assets and liabilities held for sale, the operating results for AAT and its impairment charge, and AAT’s summary cash flow components:

American Access Technologies, Inc.

Assets and Liabilities held for sale

(in thousands)  

 

 

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American Access Technologies, Inc.

Condensed Statements of Operations

Unaudited

(in thousands)

 

 

 

American Access Technologies, Inc.

Condensed Statements of Cash Flow Components

Unaudited

(in thousands)

 

* Includes sale proceeds of $2.3 million.

Cash is not included in assets held for sale and is included in the consolidated balance sheets in cash.

 

 

F-26

 

Exhibit 10.3

AMERICAN ELECTRIC TECHNOLOGIES, INC.

2007 EMPLOYEE STOCK INCENTIVE PLAN

(as amended May 14, 2014)

1. Purposes.

The 2007 EMPLOYEE STOCK INCENTIVE PLAN (the “Plan”) of American Electric Technologies, Inc. (the “Company”) is an element of the Company’s compensation program which is intended to enable to Company to attract, retain, motivate, reward and remunerate qualified personnel, encourage Participants to exert maximum efforts towards the Company’s success, focus on the long-term growth of stockholder value as well as promote a closer identity of interest between Participants and stockholders of the Company. By thus encouraging Participants and promoting their continued association with the Company, the Plan is expected to benefit the Company and its stockholders.

2. Shares Subject to the Plan.

The total number of shares of Common Stock of the Company that may be issued under the Plan shall be 1,700,000 shares, subject to adjustment as provided in Section 11 hereunder. The Company shall at all times while the Plan is in force reserve such number of shares of Common Stock as will be sufficient to satisfy the requirement of outstanding awards granted under the Plan, except as otherwise provided below. In the event any award granted under the Plan shall expire or terminate, in whole or in part, for any reason without the issuance of all the shares subject to that award the unissued shares subject thereto shall again be available for the granting of awards under the Plan. In the event any shares issued under the Plan are returned to the Company in accordance with the Plan such shares shall again be available for the granting of awards under the Plan. If the Option Price of any Option granted under the Plan or the tax withholding requirements with respect to any award under the Plan are satisfied by tendering shares or Options to the Company, or if any Stock Appreciation Right is exercised, only the net number of shares issued shall be deemed issued for purposes of determining the maximum number of shares available for issuance under the Plan.

3. Awards Available Under the Plan.

The Company may award Nonqualified Stock Options, Incentive Stock Options, Stock Appreciation Rights, Restricted Stock, Restricted Stock Units, Performance Shares, Performance Units and Stock-Based Awards to eligible persons under this Plan.

In a given fiscal year, the maximum number of shares that can be subject to an award granted under the Plan to a single person shall be limited to 200,000 shares, as may be adjusted pursuant to Section 11. The aforesaid limitation is intended to comply with Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”). To the extent any provision of the Plan or action by the Board of Directors or Committee, as hereinafter defined, fails to comply with Section 162(m), it shall be deemed null and void to the extent required by statute and to the extent deemed advisable by the Board of Directors and/or such Committee.

4. Eligibility for Awards Under the Plan.

Awards under the Plan may be granted to persons who are employees (including employees who are also directors and officers), independent contractors and consultants of the Company or of a subsidiary or parent of the Company (the “Participants”), provided, however, that Incentive Stock Options may only be granted to persons who are employees of the Company or of a “subsidiary” or “parent” of the Company, as defined within Section 424 of the Code.

5. Administration of the Plan.

(a) The Plan shall be administered by a Compensation Committee of the Board of Directors of the Company (the “Committee”) comprised of at least two outside directors (as described under Rule 16b-3, promulgated under

the Securities Exchange Act of 1934 (the “1934 Act”), and in accordance with the requirement of Section 162(m) of the Code, appointed by the Board of Directors of the Company. In the event such Committee is not comprised of said outside directors, any award granted hereunder shall not be deemed automatically null and void, except as otherwise provided below. Within the limits of the express provisions of the Plan, the Committee shall have the authority, in its discretion, to determine the individuals to whom, and the time or times at which, awards shall be granted, the character of such and the number of shares of Common Stock to be subject to each award, and to interpret the Plan, to prescribe, amend and rescind rules and regulations relating to the Plan, to determine the terms and provisions of agreements that may be entered into in connection with awards (which need not be identical), and to make all other determinations and take all other actions necessary or advisable for the administration of the Plan. In making such determinations, the

 

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Committee may take into account the nature of the services rendered by such individuals, their present and potential contributions to the Company’s success, and such other factors as the Committee, in its discretion, shall deem relevant. The Committee’s determinations on the matters referred to in this Section shall be conclusive.

(b) Notwithstanding anything contained herein to the contrary, the Committee shall have the exclusive right to grant awards to persons subject to Section 16 of the 1934 Act and set forth the terms and conditions thereof. With respect to persons subject to Section 16 of the 1934 Act, transactions under the Plan are intended to comply with all applicable conditions of Rule 16b-3, as amended from time to time (and its successor provisions, if any), under the 1934 Act. To the extent any provision of the Plan or action by the Board of Directors or Committee fails to so comply, it shall be deemed null and void to the extent required by law and to the extent deemed advisable by the Board of Directors and/or such Committee.

6. Stock Options.

The Committee may award Incentive Stock Options (“ISOs”) (as defined in Section 422(b) of the Code) and Non-Qualified Stock Options (“NQSOs”), not intended to qualify under Section 422(b) of the Code (ISOs and NQSOs hereinafter collectively the “Options”) under the Plan. An ISO or an NQSO enables the participant to purchase from the Company, at any time during a specified exercise period, a specified number of shares Company Common Stock at a specified price (the “Option Price”). Options may be granted to Participants in such number and on such terms as shall be determined by the Committee in its discretion, subject to the following:

(a) No Options may be granted more than ten (10) years after the Effective Date of the Plan.

(b) Each Option grant shall be evidenced by an Award Agreement that shall specify the Option Price, the duration of the Option, the number of Shares to which the Option pertains, the conditions on which an Option shall become vested and exercisable, the method of exercise of an Option and such other provisions as the Committee shall determine. The Award Agreement also shall specify whether the Option is intended to be an ISO or a NQSO.

(c) The Option Price for each grant of an Option under the Plan shall be determined by the Committee and shall be specified in the Award Agreement but in no event shall the Option Price be less than the fair market value of the Company’s Common Stock on the date of grant. For all purposes under the Plan, the fair market value of a share of the Company’s Common Stock on a particular date shall be equal to the NASDAQ official closing price on that date or if no sales are reported on that date, on the last preceding date on which the official closing price of shares are so reported. If the stock is traded over the counter at the time a determination of its fair market value is required to be made hereunder, its fair market value shall be deemed to be equal to the average between the reported high and low prices of Stock on the most recent date on which the shares were publicly traded. In the event the Company’s Common Stock is not publicly traded at the time a determination of its value is required to be made hereunder, the determination of its fair market value shall be made by the Committee in such manner as it deems appropriate. If an ISO is granted to an individual who, immediately before the ISO is to be granted, owns directly or through attribution) more than 10% of the total combined voting power of all classes of capital stock of the Company or a subsidiary or parent of the Company, the Option Price of the shares of Common Stock subject to such ISO shall not be less than 110% of the fair market value per share of the shares of Common Stock at the time such ISO is granted.

(d) Each Option granted under the Plan shall expire and not be exercisable after ten (10) years from the date of grant or at such earlier time as the Committee shall determine at the time of grant, provided, however, if an ISO is granted to any individual who, immediately before the ISO is granted, owns (directly or through attribution) more than 10% of the total combined voting power of all classes of capital stock of the Company or of a subsidiary or parent of the Company, such ISO shall by its terms expire and shall not be exercisable after the expiration of five (5) years from the date of its grant.

(e) Options granted under the Plan shall be exercisable at such times and on the occurrence of such events, and be subject to such terms and conditions, as the Committee shall in each instance set forth in the Award Agreement, which need not be the same for each grant or for each Participant.

(f) The Option Price on exercise of any Option shall be payable to the Company in full either: (i) in cash or its equivalent; (ii) by tendering (either by actual delivery or attestation) previously acquired Shares having an aggregate fair market value at the time of exercise equal to the total Option Price; (iii) by tendering unexercised Options having a fair market value at the time of exercise equal to the Option Price; (iv) by a combination of (i), (ii) and (iii); or (v) any other method approved or accepted by the Committee in its sole discretion subject to such rules and regulations as the Committee may establish. For all purposes under the Plan, the fair market value of an Option on a particular date shall be equal to the excess of the fair market value of the Company’s Common Stock on such date over the Option Price of such Option on such date.

 

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(g) The Committee may impose such restrictions on any Shares acquired under the exercise of an Option granted under the Plan as it may deem advisable, including, without limitation, requiring the Participant to hold the Shares acquired for a specified period of time, or restrictions under applicable laws or under the requirements of any stock exchange or market on which such Shares are listed and/or traded.

(h) Each Participant’s Award Agreement shall set forth the extent to which the Participant shall have the right to exercise the Option following termination of the Participant’s employment with the Company. Such provisions shall be determined in the sole discretion of the Committee, shall be included in the Award Agreement entered into with each Participant, need not be uniform among all Options issued under the Plan, and may reflect distinctions based on the reasons for termination.

(i) No ISO granted under this Plan may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution. Further, all ISOs granted to a Participant shall be exercisable during his or her lifetime only by such Participant. Except as otherwise provided in a Participant’s Award Agreement at the time of grant, or thereafter by the Committee, NQSOs granted under the Plan may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution. Further, except as otherwise provided in a Participant’s Award Agreement at the time of grant or thereafter by the Committee, all NQSOs granted to a Participant under the Plan shall be exercisable during the Participant’s lifetime only by such Participant.

(j) The holder of an Option shall have none of the rights of a stockholder with respect to the shares of Common Stock covered by such holder’s Option until such shares of Common Stock shall be issued to such holder upon the exercise of the Option.

(k) All Options granted under the Plan shall not be transferable otherwise than by will or the laws of descent and distribution, and any Option granted under the Plan may be exercised during the lifetime of the holder thereof only by the holder. No Option granted under the Plan shall be subject to execution, attachment or other process.

(l) Options granted under the Plan shall be exercisable at such times and on the occurrence of such events, and be subject to such restrictions and conditions, as the Committee shall in each instance approve, which need not be the same for each grant or for each Participant.

(m) The aggregate fair market value of the shares of Common Stock with respect to which ISOs granted under the Plan are exercisable for the first time during any calendar year and under incentive stock options qualifying as such in accordance with Section 422 of the Code granted under any other incentive

stock option plan maintained by the Company or its parent or subsidiary corporations, shall not exceed $100,000. Any grant of Options in excess of such amount shall be deemed a grant of a NQSO. In addition, and notwithstanding anything contained herein to the contrary, in the event an ISO granted hereunder does not, for any reason, at the time of grant or during the term of the ISO satisfy all of the conditions under the Code with respect to being deemed an ISO, then said ISO shall be deemed a NQSO, but only to the extent, if applicable, said ISO exceeds any such conditions, and any said determination that said ISO is deemed an NQSO shall not be deemed the grant of a new Option hereunder.

7. Stock Appreciation Rights.

The Committee may award Stock Appreciation Rights (“SAR”) under the Plan. SARs may be granted to Participants in such number and on such terms as shall be determined by the Committee in its discretion, subject to the following:

(a) Each SAR grant shall be evidenced by an Award Agreement that shall specify the Grant Price, which shall not be less than the fair market value of the Company’s Common Stock on the date of grant, the duration of the SAR, the number of Shares to which the SAR pertains, the conditions on which an SAR shall become vested and exercisable, the method of exercise of an SAR and any such other provisions as the Committee shall determine.

(b) No SAR shall be exercisable later than the tenth (10th) anniversary of the date of its grant.

(c) On the exercise of an SAR, a participant shall be entitled to receive payment from the Company in an amount determined by multiplying the excess of the fair market value of a share of Company Common Stock on the date of exercise over the Grant Price by the number of such shares with respect to which the SAR is exercised. The payment on SAR exercise shall be in Company Common Stock of equivalent value based on the fair market value on the date of exercise of the SAR.

(d) Each Award Agreement shall set forth the extent to which the Participant shall have the right to exercise the SAR following termination of the Participant’s employment with the Company. Such provisions shall be determined in the sole discretion of the Committee, shall be included in the Award Agreement, need not be uniform among all SARs issued under the Plan, and may reflect distinctions based on the reasons for termination.

(e) Except as otherwise provided in a Participant’s Award Agreement at the time of grant or thereafter by the Committee, an SAR granted under this Plan may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other

 

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than by will or by the laws of descent and distribution. Further, except as otherwise provided in a Participant’s Award Agreement at the time of grant or thereafter by the Committee, all SARs granted to a Participant under this Plan shall be exercisable during his or her lifetime only by such Participant.

(f) Subject to the other provisions of this Plan, the Committee may impose such other conditions and/or restrictions on any Shares received on exercise of an SAR granted under the Plan as it may deem advisable. This includes, but is not limited to, requiring the Participant to hold the Shares received on exercise of an SAR for a specified period of time.

8. Restricted Stock and Restricted Stock Units.

Restricted Stock and Restricted Stock Units may be granted to Participants in such number and on such terms as shall be determined by the Committee in its discretion, subject to the following:

(a) Each Restricted Stock and Restricted Stock Unit award shall be evidenced by an Award Agreement that shall specify the restrictions applicable to the award, the number of shares of Restricted Stock or the number of Restricted Stock Units granted, and such other provisions as the Committee shall determine.

(b) Except as otherwise provided in the Plan or the Award Agreement, the Shares of Restricted Stock or Restricted Stock Units granted may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated until the termination of the restrictions specified in the Award Agreement (and in the case of

Restricted Stock Units until the date of delivery of the shares related to the award). All rights with respect to the Restricted Stock and Restricted Stock Units granted to a Participant under this Plan shall be available during his or her lifetime only to such Participant, except as otherwise provided in the Award Agreement at the time of grant or thereafter by the Committee.

(c) Shares of Restricted Stock covered by each Restricted Stock Award shall become freely transferable by the Participant after all conditions and restrictions applicable to such award have been satisfied or lapse.

(d) When Restricted Stock Units become payable, a Participant having received the grant of such units shall be entitled to receive payment from the Company in shares of equivalent value based on the fair market value as defined in the Award Agreement at the time of grant.

(e) Each Award Agreement shall set forth the extent to which the Participant shall have the right to retain Restricted Stock and Restricted Stock Units following termination of the Participant’s employment with the Company. These provisions shall be determined in the sole discretion of the Committee, shall be included in the Award Agreement entered into with each Participant, need not be uniform among all awards of Restricted Stock and Restricted Stock Units issued under this Plan, and may reflect distinctions based on the reasons for termination.

9. Performance Shares and Performance Units.

Performance Shares and Performance Units may be granted to Participants in such number and on such terms as shall be determined by the Committee in its discretion, subject to the following:

(a) Each Performance Share shall have an initial value equal to the fair market value of Company Common Stock on the date of grant. Each Performance Unit shall have an initial value that is established by the Committee at the time of grant which shall in no event be less than the fair market value of Company Common Stock on the date of grant. The Committee shall set performance criteria for a specified period following the grant (the “Performance Period”) which, depending on the extent to which such performance criteria are met in such Performance Period, will determine, in the manner set forth in the Award Agreement, the value and/or number of each Performance Share or Performance Unit that will be paid to the Participant. Such performance criteria shall be based on one or more of the following on a consolidated basis or for specified subsidiaries, divisions, affiliates or other business units of the Company: (i) the attainment of certain target levels of, or a specified percentage increase in, revenues, income before income taxes and extraordinary items, net income, earnings before income tax, earnings before interest, taxes, depreciation and amortization, or a combination of any or all of the foregoing; (ii) the attainment of certain target levels of, or a percentage increase in, after-tax or pre-tax profits including, without limitation, that attributable to continuing and/or other operations; (iii) the attainment of certain target levels of, or a specified increase in, operational cash flow; (iv) the achievement of a certain level of, reduction of, or other specified objectives with regard to limiting the level of increase in, all or a portion of, the Company’s bank debt or other long—term or short—term public or private debt or other similar financial obligations of the Company, which may be calculated net of such cash balances and/or other offsets and adjustments as may be established by the Committee; (v) the attainment of a specified percentage increase in earnings per share or earnings per share from continuing operations; (vi) the attainment of certain target levels of, or a specified increase in return on capital employed or return on invested capital; (vii) the attainment of certain target levels of, or a percentage increase in, after-tax or pre-tax return on stockholders’ equity; (viii) the attainment of certain target levels of, or a specified increase in, economic value added targets based on a cash flow return on investment formula; (ix) the attainment of certain target levels in

 

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the fair market value of the shares of the Company’s common stock; (x) the growth in the value of an investment in the Company’s Common Stock assuming the reinvestment of dividends; and (xi) reducing costs of the Company, as evidenced by meeting or reducing budgeted expenses established by the Company. For purposes of item (i) above, extraordinary items shall mean all items of gain, loss or expense for the fiscal year determined to be extraordinary or unusual in nature or infrequent in occurrence or related to a corporate transaction (including, without limitation, a disposition or acquisition) or related to a change in accounting principle, all as determined in accordance with standards established by Opinion No. 30 of the Accounting Principles Board.

(b) Subject to the terms of the Plan, after the applicable Performance Period has ended, the holder of Performance Shares and Performance Units shall be entitled to receive payout in Company Common Stock based on the value and number of Performance Shares and Performance Units determined as a function of the extent to which the corresponding performance criteria have been achieved. Despite the foregoing, the Award Agreement may require the Participant to hold the shares received for a specified period of time after issuance.

(c) Payment of earned Performance Shares and Performance Units shall be as set forth in the Award Agreement. Earned Performance Shares and Performance Units shall be paid in Company Common Stock equal to the value of the earned Performance Shares and Performance Units at the close of the applicable Performance Period. Any shares may be granted subject to such restrictions deemed appropriate by the Committee.

(d) Each Award Agreement shall set forth the extent to which the Participant shall have the right to retain Performance Shares and Performance Units following termination of the Participant’s employment with the Company. Such provisions shall be determined in the sole discretion of the Committee, shall be included in the Award Agreement entered into with each Participant, need not be uniform among all Awards of Performance Shares and Performance Units issued under the Plan, and may reflect distinctions based on the reasons for termination.

(e) Except as otherwise provided in a Participant’s Award Agreement, Performance Shares and Performance Units may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution.

10. Stock-Based Awards.

Stock-Based Awards may be granted in such number and on such terms as shall be determined by the Committee in its discretion in satisfaction of such obligations, past services and other valid consideration, or in lieu of, or in addition to, any cash compensation due to a Participant, subject to the following:

(a) Each Stock-Based Award shall be evidenced by an Award Agreement that shall specify the (i) the number of shares of Company Common Stock subject to such award or a formula for determining such number; (ii) the purchase price of the shares, if any, and the means of payment for the shares; (iii) such terms and conditions on the grant, issuance, vesting and forfeiture of the shares; and (iv) such further terms and conditions, in each case not inconsistent with the Plan.

(b) Each Award Agreement shall set forth the extent to which the Participant shall have the right to receive Stock-Based Awards following termination of the Participant’s employment with the Company. Such provisions shall be determined in the sole discretion of the Committee, shall be included in the applicable Award Agreement, need not be uniform among all Awards of Stock-Based Awards issued under this Plan, and may reflect distinctions based on the reasons for termination.

(c) Except as otherwise provided in a Participant’s Award Agreement, Stock-Based Awards may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution.

11. Adjustment Upon Changes in Capitalization.

(a) In the event that the outstanding shares of Company Common Stock are hereafter changed by reason of recapitalization, reclassification, stock split, combination or exchange of shares of Common Stock or the like, or by the issuance of dividends payable in shares of Common Stock, an appropriate adjustment shall be made by the Committee, in the aggregate number of shares of Common Stock available under the Plan, in the number of shares of Common Stock issuable upon exercise of outstanding Options and SARs and the Option Price per share and the provisions of other outstanding awards. In the event of any consolidation or merger of the Company with or into another company, or the conveyance of all or substantially all of the assets of the Company to another company, each then outstanding Option, SAR or other award under the Plan shall thereafter entitle the holder thereof to such number of shares of Common Stock or other securities or property to which a holder of shares of Common Stock of the Company would have been entitled to upon such consolidation, merger or conveyance; and in any such case appropriate adjustment, as determined by the Committee shall be made as set forth above

 

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with respect to any future changes in the capitalization of the Company or its successor entity. In the event of the dissolution or liquidation of the Company, all outstanding Options and SARs under the Plan will automatically terminate, unless otherwise provided by the Board of Directors of the Company or any authorized committee thereof.

(b) Any adjustment in the number of shares of Common Stock shall apply proportionately to only the unexercised portion of the Options and SAR’s granted hereunder. If fractions of shares of Common Stock would result from any such adjustment, the adjustment shall be revised to the next higher whole number of shares of Common Stock.

12. Further Conditions of Issuance.

(a) Unless the shares of Common Stock issuable pursuant to an award under the Plan have been registered under the Securities Act of 1933, as amended, prior to the exercise of any Option or SAR or issuance pursuant to an award, a participant must represent in writing to the Company that such shares of Common Stock are being acquired for investment purposes only and not with a view towards the further resale or distribution thereof, and must supply to the Company such other documentation as may be required by the Company, unless in the opinion of counsel to the Company such representation, agreement or documentation is not necessary to comply with said Act.

(b) The Company shall not be obligated to deliver any shares of Common Stock until they have been listed on each securities exchange on which the shares of Common Stock may then be listed or until there has been qualification under or compliance with such state or federal laws, rules or regulations as the Company may deem applicable. The Company shall use reasonable efforts to obtain such listing, qualification and compliance.

(c) The Committee may make such provisions and take such steps as it may deem necessary or appropriate for the withholding of any taxes by the Company that is required by any law or regulation of any governmental authority, whether federal, state or local, domestic or foreign, in connection with any award under the Plan including, but not limited to, withholding the amount due from any such person’s wages or compensation due such person. With the consent of the Committee, the participant may authorize the Company to withhold a sufficient number of the shares of Common Stock otherwise issuable to the participant as payment of his or her obligation with respect to the withholding taxes (such shares to be valued on the basis of the fair market value of the shares on the date of the event giving rise to such tax withholding obligation).

13. Termination, Modification and Amendment.

(a) The Plan (but not Options and awards previously granted under the Plan) shall terminate ten (10) years from the earliest of the date of its adoption by the Board of Directors, or the date the Plan is approved by the stockholders of the Company, or such date of termination, as hereinafter provided, and no award shall be granted after termination of the Plan.

(b) The Plan may from time to time be terminated, modified or amended by the affirmative vote of the holders of a majority of the outstanding shares of capital stock of the Company voting as a single class, and entitled to vote thereon, present, or represented, and entitled to vote at a meeting duly held in accordance with the applicable laws of the state or other jurisdiction in which the Company is incorporated.

(c) The Plan may be amended, suspended, or terminated at any time or from time to time by the Committee, provided that (i) no such amendment or modification may, without written consent of the participant, alter or impair any rights or obligations under any outstanding awards under the Plan; and (ii) no amendment will be effective unless approved by the affirmative vote of the holders of a majority of shares of the Company present, or represented, and entitled to vote at a meeting of stockholders of the Company duly held within twelve months of the date of adoption where such amendment will: (i) increase the total number of shares reserved for the issuance under the Plan (other than for adjustments required to be made under Section 9 herein); (ii) materially change the standards of eligibility under the Plan; (iii) materially increase the benefits which may accrue to

Participants under the Plan; or (iv) result in the adoption of a new plan or require the approval of the stockholders under any applicable tax, regulatory or stock market requirement.

(d) No termination, modification or amendment of the Plan may adversely affect the rights under any outstanding Option, SAR or other award without the consent of the individual to whom such award shall have been previously granted.

14. Effective Date of the Plan.

The Plan shall become effective (the “Effective Date”) upon adoption by the Board of Directors of the Company. The Plan shall be subject to approval by the affirmative vote of the holders of a majority of the outstanding shares of capital stock of the Company entitled to vote thereon, present, or represented, and entitled to vote at a meeting duly held in accordance with the applicable laws of

 

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the state or other jurisdiction in which the Company is incorporated, within one year after adoption of the Plan by the Board of Directors. No shares may be issued under the Plan until such stockholder approval is obtained. Any Options, SARs or other awards issued pursuant to the Plan are issued subject to such stockholder approval.

15. Not a Contract of Employment.

Nothing contained in the Plan or in any award agreement executed pursuant hereto shall be deemed to confer upon any individual to whom an award is or may be granted hereunder any right to remain in the employ of the Company or of a subsidiary or parent of the Company or in any way limit the right of the Company, or of any parent or subsidiary thereof, to terminate the employment of any employee, or to terminate any other relationship with a participant, including that of independent contractor or consultant. Notwithstanding anything contained herein to the contrary, and except as otherwise provided at the time of grant, all references hereunder to termination of employment shall with respect to consultants and independent contractors mean the termination of retention of their services with or for the Company or of a subsidiary or parent of the Company.

16. Other Compensation Plans.

This Plan shall serve as the successor to the Company’s 2004 Employee Stock Incentive Plan and 2000 Employee Stock Option Plan (the “Predecessor Plans”), and no further grants shall be made under the Predecessor Plans from and after the Effective Date of this Plan. The adoption of the Plan shall not affect any other stock option plan, incentive plan or any other compensation plan in effect for the Company, nor shall the Plan preclude the Company from establishing any other form of stock option plan, incentive plan or any other compensation plan.

 

 

Exhibit 10.15

Summary of Non-Employee Director Compensation effective for 2015*

Directors, other than the Preferred Director, who are not employees of the Company or any of its subsidiaries and who do not have a compensatory agreement providing for service as a director of the Company or any of its subsidiaries will receive the following compensation for 2015:

 

The Company pays each director’s reasonable travel, lodging, meals and other expenses connected with their Board service.

 

 

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“Swap Obligation” means, with respect to any Guarantor, any obligation to pay or perform under any agreement, contract or transaction that constitutes a “swap” within the meaning of section 1a(47) of the Commodity Exchange Act.

(b) Section 1.01 of the Credit Agreement is hereby amended to restate the definition of “Security Documents” as follows:

“Security Documents” means the Security Agreements, the Pledge Agreements, the Mortgages and each other security document delivered in accordance with applicable law to grant a valid, perfected security interest in any property and all UCC or other financing statements or instruments of perfection required by this Agreement or any security agreement to be filed with respect to the security interests in property and fixtures created pursuant to the Security Documents and any other document or instrument utilized to pledge as collateral for the Obligations any property of whatever kind or nature.

(c) Section 1.01 of the Credit Agreement is hereby amended to add the following new phrase at the end of the definition of “Obligations”:

“; provided that the “Obligations” shall specifically exclude the Excluded Swap Obligations.”

3. Amendment to Section 3.01 of the Credit Agreement.  Section 3.01 of the Credit Agreement is hereby amended to restate clause (c) thereof in its entirety as follows:

“(c) as of the Effective Date, is duly qualified and licensed to conduct business and is in good standing in each jurisdiction listed in Schedule 3.01.”

4. Amendment to Section 5.03.  Section 5.03 of the Credit Agreement is hereby amended to add the following new phrase to the end of said Section:

“; provided that the foregoing shall not prohibit any transaction permitted under this Agreement.”

5. Amendment to Section 5.10 of the Credit Agreement.  Section 5.10 of the Credit Agreement is hereby amended and restated in its entirety as follows:

“Section 5.10. Maintenance of Deposit Relationship.  The Borrower will, and will cause each of its Domestic Subsidiaries to, maintain the Lender as the Borrower’s and each of its Domestic Subsidiary’s primary depository and treasury management services provider for its operational, business deposit accounts.”

6. Amendment to Section 5.11 of the Credit Agreement.  Section 5.11 of the Credit Agreement is hereby amended and restated in its entirety as follows:

“Section 5.11 Required Guarantors; New Subsidiaries; Additional Guarantees and Security Documents.  The Borrower will at all times cause all of its Domestic Subsidiaries to be Guarantors.  Within thirty (30) days after the Borrower acquires or creates a new Subsidiary, the Borrower shall notify the Lender and (a) to the extent such Subsidiary is a Domestic Subsidiary, the Borrower shall cause such new Subsidiary to execute a Security Agreement and a Guarantee Agreement and deliver to the Lender the documents and reports described in clauses (c) and (i) of Section 4.01 with respect to such new Subsidiary and such other documents relating to such new Subsidiary as the Lender may reasonably require in order to comply with the requirements of this Section and (b) to the extent such Subsidiary is a Foreign Subsidiary, the Borrower shall, or shall cause its Domestic Subsidiary to, execute a Pledge Agreement in respect of the Equity Interests of such Foreign Subsidiary (or an addendum to its existing Pledge Agreement in form and substance satisfactory to the Lender) and deliver to the Lender such other documents relating to such new Subsidiary as the Lender may reasonably requires in order to comply with the requirements of this Section.”

7. Amendment to Section 6.01 of the Credit Agreement.

(a) Section 6.01 of the Credit Agreement is hereby amended to delete the word “Subsidiary” from clause (c) thereof and insert the word “Guarantor” in its place.

(b) Section 6.01 of the Credit Agreement is hereby amended to delete the word “and” at the end clause (d) thereof, delete the period at the end of clause (e) thereof and insert a semicolon and the word “and” in its place and add the following new clause (f) at the end of said Section 6.01:

“(f) Indebtedness of Foreign Subsidiaries in an aggregate principal amount not to exceed $500,000 at any time outstanding.”

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8. Amendment to Section 6.02 of the Credit Agreement.  Section 6.02 of the Credit Agreement is hereby amended to delete the first instance of the phrase “any of its Subsidiaries” and insert the phrase “any Guarantor” in its place.

9. Amendment to Section 6.03 of the Credit Agreement.  Section 6.03 of the Credit Agreement is hereby amended to add the following new proviso to the end of clause (a) thereof:

“provided that, after consummation of the American Access Sale, the Borrower may dissolve American Access Technologies, Inc. in accordance with applicable Law;”

10. Amendment to Section 6.04 of the Credit Agreement.  Section 6.04 of the Credit Agreement is hereby amended to delete the word “and” at the end of clause (h) thereof, delete the period at the end of clause (i) thereof and insert a semicolon and the word “and” in its place and add the following new clause (j) to the end of said Section 6.04:

“(j) Investments by the Borrower in Foreign Subsidiaries in an aggregate amount for all such Investments not to exceed $1,000,000 during the term of this Agreement.”

11. Amendment to Section 6.05 of the Credit Agreement.  Section 6.05 of the Credit Agreement is hereby amended to delete the word “and” immediately after clause (b) thereof and insert a comma in its place, insert a comma immediately after clause (c) thereof and add the following new clauses (d) and (e) at the end of said Section 6.05:

“(d) the disposal by M&I of its 49% interest in AAG (AETI Alliance Group do Brazil Sistemas E Servicos Em Energia LTDA) and (e) the American Access Sale.”

12. Amendment to Section 6.10 of the Credit Agreement.  Section 6.10 of the Credit Agreement is hereby amended to delete the phrase “any of its Subsidiaries” and insert the phrase “any Guarantor” in its place.

13. Amendment to Article 6.14 of the Credit Agreement.  Section 6.14 of the Credit Agreement is hereby amended to add the following new sentence at the end of said Section:

“For purposes of calculating net income as of the end of the calendar quarter ending June 30, 2014, as of the end of the calendar quarter ending September 30, 2014 and as of the end of the calendar quarter ending December 31, 2014, the effects of the American Access Sale and the impairment related thereto shall be disregarded.”

14. Amendment to Section 8.01 of the Credit Agreement.  Section 8.01 of the Credit Agreement is hereby amended to restate clause (i) of paragraph (a) thereof in its entirety as follows:

“(i) if to the Borrower:

American Electric Technologies, Inc.

1250 Wood Branch Park Drive

Houston, Texas  77079

Attention:  Andrew Puhala

Facsimile No.:  713-644-7805”.

15. Amendment to Exhibit 1.01E of the Credit Agreement.  Exhibit 1.01E of the Credit Agreement is hereby amended to add the following new phrase to the end of the definition of “Indebtedness” set forth in Section 1(d) thereof:

“; provided that the “Indebtedness” shall specifically exclude the Excluded Swap Obligations (as defined in the Loan Agreement).”

16. Amendment to Credit Agreement.  The Credit Agreement is hereby amended to add Exhibit 1.01F thereto in the form attached hereto.

17. Amendment to Security Agreements.  Each Security Agreement is hereby amended to add the following new phrase to the end of the definition of “Indebtedness” set forth in Section 1(d) thereof:

“; provided that the “Indebtedness” shall specifically exclude the Excluded Swap Obligations (as defined in the Loan Agreement).”

18. Release of American Access.  Upon evidence satisfactory to the Lender that the American Access Sale has been consummated on terms and conditions substantially similar to those disclosed to the Lender prior to the date hereof, the Lender (a) consents to release the Liens on the assets of American Access granted pursuant to the Security Agreement to which American Access is a party and (b) agrees to execute and deliver a release to the Borrower in the form attached hereto as Exhibit A (the “Release”).  In order to facilitate the closing of the American Access Sale, the Lender agrees to deliver the executed Release to such

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Person as may be designated by the Borrower to be held by such Person in escrow pending confirmation satisfactory to the Lender that all other conditions to the American Access Sale have been satisfied.

19. Conditions to Effectiveness.  This Amendment shall be effective as of the date first above written upon satisfaction of the following conditions precedent:

(a) no Default or Event of Default shall exist;

(b) the Lender shall have received counterparts of this Amendment duly executed by the Borrower and each Guarantor;

(c) the Lender shall have received a counterpart of a Pledge Agreement, in the form attached hereto as Exhibit 1.01F, duly executed by M&I, together with any documents required to be delivered in connection therewith;

(d) the Lender shall have received payment of all fees and reasonable, out of pocket expenses (including the reasonable fees and disbursements of Andrews Kurth LLP) due in connection with this Amendment; and

(e) the Lender shall have received such other consents, approvals or documents as the Lender may reasonably request.

20. Ratification.  The Borrower and each of the Guarantors hereby ratify all of their respective Obligations under the Credit Agreement and each of the Loan Documents to which it is a party, and agrees and acknowledges that the Credit Agreement and each of the Loan Documents to which it is a party are and shall continue to be in full force and effect as amended and modified by this Amendment.  Nothing in this Amendment extinguishes, novates or releases any right, claim, lien, security interest or entitlement of the Lender created by or contained in any of such documents nor is the Borrower or any Guarantor released from any covenant, warranty or obligation created by or contained herein or therein.

21. Representations and Warranties.  The Borrower and each Guarantor hereby represent and warrant to the Lender that (a) this Amendment has been duly executed and delivered on behalf of Borrower and each of the Guarantors, (b) this Amendment constitutes a valid and legally binding agreement enforceable against the Borrower and each of the Guarantors in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium or other laws affecting creditors’ rights generally and subject to general principles of equity, regardless of whether considered in a proceeding in equity or at law, (c) the representations and warranties made by it in the Credit Agreement and the other Loan Documents are true and correct on and as of the date hereof as though made as of the date hereof, except for such representations and warranties as are by their express terms limited to a specific date, in which case such representations and warranties were true and correct in all material respects as of such specific date, (d) no Default or Event of Default exists under the Credit Agreement or under any Loan Document and (e) the execution, delivery and performance of this Amendment has been duly authorized by the Borrower and each of the Guarantors.

22. Release and Indemnity.

(a) The Borrower and each Guarantor hereby release and forever discharge the Lender and each affiliate thereof and each of their respective employees, officers, directors, trustees, agents, attorneys, successors, assigns or other representatives from any and all claims, demands, damages, actions, cross-actions, causes of action, costs and expenses (including legal expenses), of any kind or nature whatsoever, whether based on law or equity, which any of said parties has held or may now own or hold, whether known or unknown, for or because of any matter or thing done, omitted or suffered to be done on or before the actual date upon which this Amendment is signed by any of such parties (i) arising directly or indirectly out of the Loan Documents, or any other documents, instruments or any other transactions relating thereto and/or (ii) relating directly or indirectly to all transactions by and between the Borrower, the Guarantors or their representatives and the Lender or any of its directors, officers, agents, employees, attorneys or other representatives.  Such release, waiver, acquittal and discharge shall and does include, without limitation, any claims of usury, fraud, duress, misrepresentation, lender liability, control, exercise of remedies and all similar items and claims, which may, or could be, asserted by the Borrower or any Guarantor including any such caused by the actions or negligence of the indemnified party (other than its gross negligence or willful misconduct).

(b) The Borrower and each Guarantor hereby ratify the indemnification provisions contained in the Loan Documents, including, without limitation, Section 8.03 of the Credit Agreement, and agree that this Amendment and losses, claims, damages and expenses related thereto shall be covered by such indemnities.

23. Counterparts.  This Amendment may be signed in any number of counterparts, which may be delivered in original, facsimile or other electronic form (i.e., “PDF”) each of which shall be construed as an original, but all of which together shall constitute one and the same instrument.

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24. Governing Law.  This Amendment shall be construed, and the rights of the parties hereto determined, in accordance with and governed by the law of the State of Texas.

25. Final Agreement of the Parties.  THIS AMENDMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.  THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES IN RELATION TO MATTERS DESCRIBED HEREIN.

[Signature Pages Follow]

 

 

 

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IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers thereunto duly authorized as of the date first above written.

 

 

 

 

 

Signature Page to First Amendment to Credit Agreement

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Signature Page to First Amendment to Credit Agreement

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ANNEX A

FORM OF RELEASE

RELEASE

THIS RELEASE, dated August ___, 2014, is made by JPMORGAN CHASE BANK, N.A. (the “Lender”) pursuant to that certain Amended and Restated Credit Agreement dated as of November 30, 2013 (as amended, supplemented or otherwise modified from time to time, the “Credit Agreement”; capitalized terms used herein and not otherwise defined herein have the meanings set forth in the Credit Agreement) by and between American Electric Technologies, Inc. a Florida corporation (the “Borrower”) and the Lender, for the benefit of AMERICAN ACCESS TECHNOLOGIES, INC., a Florida corporation (“American Access”).

WHEREAS, American Access executed in favor of the Lender a Security Agreement dated as of June 30, 2008 (as amended, the “Security Agreement”), pursuant to which American Access granted Liens in certain of its personal property (collectively, the “American Access Property”) to secure the Indebtedness, as defined in the Security Agreement;

WHEREAS, the Borrower has entered into an agreement to sell all of the assets of American Access and, in connection therewith, has requested that the Liens granted by it pursuant to the Security Agreement be released in their entirety; and

WHEREAS, the Lender has agreed to release such liabilities, obligations and Liens;

NOW THEREFORE, in consideration of TEN AND NO/100 DOLLARS and other good and valuable consideration the receipt and sufficiency of which is hereby acknowledged, the Lender hereby releases the American Access Property from the Liens of the Security Agreement and the other Loan Documents.

This Release is a partial release only and does not release or discharge the Borrower or any Guarantor of its liabilities and obligations under the Credit Agreement or any other Loan Document or release any property from the Liens of the Security Documents and the other Loan Documents other than the American Access Property.

Upon the written request (and at the sole cost and expense of) the Borrower, the Lender shall promptly execute and deliver to the Borrower such UCC termination statements and such other documentation as the Borrower may reasonably request to effect the release of the Liens on the American Access Property.

This Release shall be governed by the laws of the State of Texas.

 

 

Annex A

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EXECUTED to be effective as of the date first above written.

 

 

 

 

Annex A

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EXHIBIT 1.01F

FORM OF

PLEDGE AGREEMENT

PLEDGE AGREEMENT

THIS PLEDGE AGREEMENT (“Agreement”) is made as of _________________, 20__, by _______________________________, a ________________ (“Debtor”), whose place of business and chief executive office, as applicable, are located at 1250 Wood Branch Park Drive, Houston, Texas 77079, and whose organizational identification number is ____________, in favor of JPMORGAN CHASE BANK, N.A., a national association (“Secured Party”), whose address is 712 Main Street, Houston, Harris 77002. Debtor hereby agrees with Secured Party as follows:

1. Definitions

.  As used in this Agreement, the following terms shall have the meanings indicated below:

(a) “Code” shall mean the Texas Business and Commerce Code as in effect in the State of Texas on the date of this Agreement or as it may hereafter be amended from time to time. All terms defined in the Code and used herein and not otherwise defined herein are used herein as therein defined.

(b) “Collateral” shall mean all of the personal property of Debtor as set forth below (as indicated), wherever located, and now owned or hereafter acquired:

All “investment property” consisting of each of the Equity Interests (whether such Equity Interests are “general intangibles” or “securities” under the Code) of Foreign Subsidiaries identified on Annex I hereto and all additional Equity Interests issued from time to time by any of the issuers of the Equity Interests identified on Annex I hereto, and the certificates or other instruments representing any of the foregoing and any interest of Debtor in the entries on the books of any securities intermediary pertaining thereto (the “Pledged Shares”), and all dividends, distributions, returns of capital, cash, warrants, options, rights, instruments, rights to vote or manage the business of such issuer pursuant to organizational document governing the rights and obligations of the stockholders, members or other owners thereof and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the Pledged Shares; provided that, the Collateral shall specifically exclude the right, title and interest of Debtor in any assets or property to the extent, but only to the extent, that such property or asset constitutes more than sixty-five percent (65%) of the voting Equity Interests of any Foreign Subsidiary.

The term Collateral, as used herein, shall also include all PRODUCTS and PROCEEDS of all of the foregoing (including without limitation, insurance payable by reason of loss or damage to the foregoing property) and any property, securities, guaranties or monies of Debtor which may at any time come into the possession of Secured Party.  The designation of proceeds does not authorize Debtor to sell, transfer or otherwise convey any of the foregoing property except finished goods intended for sale in the ordinary course of Debtor’s business or as otherwise provided herein.

(c) “Equity Interests” has the meaning given such term in the Loan Agreement.

(d) “Event of Default” has the meaning given such term in the Loan Agreement.

(e) “Foreign Subsidiary” has the meaning given such term in the Loan Agreement.

(f) “Indebtedness” shall mean (i) all indebtedness, obligations and liabilities of Debtor to Secured Party of any kind or character, now existing or hereafter arising, whether direct, indirect, related, unrelated, fixed, contingent, liquidated, unliquidated, joint, several or joint and several, and regardless of whether such indebtedness, obligations and liabilities may, prior to their acquisition by Secured Party, be or have been payable to or in favor of a third party and subsequently acquired by Secured Party (it being contemplated that Secured Party may make such acquisitions from third parties), including without limitation all indebtedness, obligations and liabilities of Debtor to Secured Party now existing or hereafter arising by note, draft, acceptance, guaranty, endorsement, letter of credit, assignment, purchase, overdraft, discount, swap contract, indemnity agreement or otherwise, including, without limitation, that certain promissory note of even date with the Loan Agreement executed by American Electric Technologies, Inc. (“Borrower”) payable to the order of Secured Party in the principal amount of $10,000,000, (ii) all accrued but unpaid interest on any of the indebtedness described in (i) above, (iii) all obligations of Debtor to Secured Party under any documents evidencing, guaranteeing, securing, governing and/or pertaining to all or any part of the indebtedness described in (i) and (ii) above, (iv) all costs and expenses incurred by Secured Party in connection with the

Exhibit 1.01F

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collection and administration of all or any part of the indebtedness and obligations described in (i), (ii) and (iii) above or the protection or preservation of, or realization upon, the collateral securing all or any part of such indebtedness and obligations, including without limitation all reasonable attorneys’ fees, and (v) all renewals, extensions, modifications and rearrangements of the indebtedness and obligations described in (i), (ii), (iii) and (iv) above; provided that the “Indebtedness” shall specifically exclude the Excluded Swap Obligations (as defined in the Loan Agreement).

(g) “Loan Agreement” means the Amended and Restated Credit Agreement dated as of November 30, 2013, between Borrower and Secured Party, as amended, supplemented or restated from time to time, and the terms defined therein and not otherwise defined herein being used herein as therein defined.

(h) “Loan Documents” has the meaning given such term in the Loan Agreement.

(i) “Person” has the meaning given such term in the Loan Agreement.

(j) “Other Obligated Party” shall mean any party other than Debtor, including, without limitation, Debtor, who secures, guarantees and/or is otherwise obligated to pay all or any portion of the Indebtedness.

All words and phrases used herein which are expressly defined in Section 1.201 or Chapter 9 of the Code shall have the meaning provided for therein. Other words and phrases defined elsewhere in the Code shall have the meaning specified therein except to the extent such meaning is inconsistent with a definition in Section 1.201 or Chapter 9 of the Code.

2. Security Interest

.  As security for the Indebtedness Debtor for value received hereby pledges and grants to Secured Party a continuing security interest in the Collateral.

3. Representations and Warranties

.  In addition to any representations and warranties of Debtor set forth in the Loan Documents, which are incorporated herein by this reference, Debtor hereby represents and warrants the following to Secured Party:

(a) Accuracy of Information.  All information heretofore, herein or hereafter supplied to Secured Party by or on behalf of Debtor with respect to the Collateral is true and correct. The exact legal name, organizational identification number of Debtor are correctly shown in the first paragraph hereof.

(b) Ownership and Liens.  Debtor has good and marketable title to the Collateral free and clear of all liens, security interests, encumbrances or adverse claims, except for the security interest created by this Agreement and liens or security interests permitted in the Loan Agreement. No dispute, right of setoff, counterclaim or defense exists with respect to all or any part of the Collateral. Debtor has not executed any other security agreement currently affecting the Collateral and no effective financing statement or other instrument similar in effect covering all or any part of the Collateral is on file in any recording office except as may have been executed or filed in favor of Secured Party.

(c) No Conflicts or Consents.  Neither the ownership, the intended use of the Collateral by Debtor, the grant of the security interest by Debtor to Secured Party herein nor the exercise by Secured Party of its rights or remedies hereunder, will (i) conflict with any provision of (A) any domestic or foreign law, statute, rule or regulation, (B) the articles or certificate of incorporation, charter or bylaws of Debtor, or (C) any agreement, judgment, license, order or permit applicable to or binding upon Debtor, or (ii) result in or require the creation of any lien, charge or encumbrance upon any assets or properties of Debtor or of any person except as may be expressly contemplated in the Loan Documents. Except as expressly contemplated in the Loan Documents, no consent, approval, authorization or order of, and no notice to or filing with, any court, governmental authority or third party is required in connection with the grant by Debtor of the security interest herein or the exercise by Secured Party of its rights and remedies hereunder.

(d) Security Interest.  Debtor has and will have at all times full right, power and authority to grant a security interest in the Collateral to Secured Party in the manner provided herein, free and clear of any lien, security interest or other charge or encumbrance. This Agreement creates a legal, valid and binding security interest in favor of Secured Party in the Collateral securing the Indebtedness. To the extent permitted in the Code, possession by Secured Party of all certificates, instruments and cash constituting Collateral from time to time and/or the filing of the financing statements delivered prior hereto and/or concurrently herewith by Debtor to Secured Party will perfect and establish the first priority of Secured Party’s security interest hereunder in the Collateral.

Exhibit 1.01F

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(e) Location/Identity.  Debtor’s principal residence or place of business and chief executive office (as those terms are used in the Code), as the case may be, is located at the address set forth on the first page hereof. Except as specified elsewhere herein, all Collateral and records concerning the Collateral shall be kept at such address and such other addresses as may be listed on any schedule attached hereto. Debtor’s organizational structure, state of organization, and organizational number (the “Organizational Information”) are as set forth on the first page hereof. Except as specified herein or as permitted in the Loan Agreement, the Organizational Information shall not change.

(f) Solvency of Debtor.  As of the date hereof, and after giving effect to this Agreement and the completion of all other transactions contemplated by Debtor at the time of the execution of this Agreement, (i) Debtor is and will be solvent, (ii) the fair saleable value of Debtor’s assets exceeds and will continue to exceed Debtor’s liabilities (both fixed and contingent), (iii) Debtor is paying and will continue to be able to pay its debts as they mature, and (iv) if Debtor is not an individual, Debtor has and will have sufficient capital to carry on Debtor’s businesses and all businesses in which Debtor is about to engage.

(g) Equity Interests.  All shares of capital stock identified on Annex I hereto as being beneficially owned by Debtor have been duly authorized and validly issued, are fully paid and non-assessable and are not subject to any option to purchase or similar right of any Person.  Except as permitted by the Loan Agreement, Debtor is not and will not become a party to or otherwise bound by any agreement, other than the Loan Documents, which restricts in any manner the rights of any present or future holder of any such Equity Interests with respect thereto.

(h) Delivery of Certificated Collateral.  All certificates, agreements or instruments representing or evidencing the Collateral in existence on the date hereof have been delivered to Secured Party in suitable form for transfer by delivery or accompanied by duly executed instruments of transfer or assignment in blank, and Secured Party has a perfected first priority security interest therein.

(i) Perfection of Uncertificated Collateral.  With respect to any uncertificated security included in the Collateral that is in existence on the date hereof, Debtor has caused the security interests granted to Secured Party under this Agreement the  to be recorded on the equityholder register or on the books of the issuer of such uncertificated security and cause such issuer to execute and deliver to Secured Party an acknowledgement of such security interests pursuant to which the issuer agrees to comply with instructions originated Secured Party without further consent by Debtor, and Secured Party has a perfected security interest therein.

4. Affirmative Covenants

.  In addition to all covenants and agreements set forth in the Loan Documents, which are incorporated herein by this reference, Debtor will comply with the covenants contained in this Section 4 at all times during the period of time this Agreement is effective unless Secured Party shall otherwise consent in writing.

(a) Ownership and Liens.  Debtor will maintain good and marketable title to all Collateral free and clear of all liens, security interests, encumbrances or adverse claims, except for the security interest created by this Agreement and the security interests and other encumbrances expressly permitted herein or by the other Loan Documents. Debtor will not permit any dispute, right of setoff, counterclaim or defense to exist with respect to all or any part of the Collateral. Debtor will cause any financing statement or other security instrument with respect to the Collateral to be terminated, except as may exist or as may have been filed in favor of Secured Party. Debtor hereby irrevocably appoints Secured Party as Debtor’s attorney-in-fact, such power of attorney being coupled with an interest, with full authority in the place and stead of Debtor and in the name of Debtor or otherwise, for the purpose of terminating any financing statements currently filed with respect to the Collateral. Debtor will defend at its expense Secured Party’s right, title and security interest in and to the Collateral against the claims of any third party.

(b) Further Assurances.  Debtor will from time to time at its expense promptly execute and deliver all further instruments and documents and take all further action necessary or appropriate or that Secured Party may request in order (i) to perfect and protect the security interest created or purported to be created hereby and the first priority of such security interest, (ii) to enable Secured Party to exercise and enforce its rights and remedies hereunder in respect of the Collateral, and (iii) to otherwise effect the purposes of this Agreement, including without limitation: (A) executing (if requested) and filing such financing or continuation statements, or amendments thereto; and (B) furnishing to Secured Party from time to time statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral, all in reasonable detail satisfactory to Secured Party.

Exhibit 1.01F

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(c) Inspection of Collateral.  Debtor will keep adequate records concerning the Collateral and will permit Secured Party and all representatives and agents appointed by Secured Party to inspect any of the Collateral and the books and records of or relating to the Collateral at any time during normal business hours, to make and take away photocopies, photographs and printouts thereof and to write down and record any such information.

(d) Payment of Taxes.  Debtor (i) will timely pay all property and other taxes, assessments and governmental charges or levies imposed upon the Collateral or any part thereof, (ii) will timely pay all lawful claims which, if unpaid, might become a lien or charge upon the Collateral or any part thereof, and (iii) will maintain appropriate accruals and reserves for all such liabilities in a timely fashion in accordance with generally accepted accounting principles. Debtor may, however, delay paying or discharging any such taxes, assessments, charges, claims or liabilities so long as the validity thereof is contested in good faith by proper proceedings and provided Debtor has set aside on Debtor’s books adequate reserves therefor; provided, however, Debtor understands and agrees that in the event of any such delay in payment or discharge and upon Secured Party’s written request, Debtor will establish with Secured Party an escrow acceptable to Secured Party adequate to cover the payment of such taxes, assessments and governmental charges with interest, costs and penalties and a reasonable additional sum to cover possible costs, interest and penalties (which escrow shall be returned to Debtor upon payment of such taxes, assessments, governmental charges, interests, costs and penalties or disbursed in accordance with the resolution of the contest to the claimant) or furnish Secured Party with an indemnity bond secured by a deposit in cash or other security acceptable to Secured Party. Notwithstanding any other provision contained in this Subsection, Secured Party may at its discretion exercise its rights under Subsection 6(c) at any time to pay such taxes, assessments, governmental charges, interest, costs and penalties.

(e) Perfection of Additional Collateral.  Debtor shall:

(i) upon the acquisition of any certificated securities representing Collateral which are to be physically possessed by Debtor, promptly delivery to Secured Party all such certificated securities, endorsed or accompanied by instruments of transfer or assignment in such form and substance as Secured Party may reasonably request; and

(ii) upon the acquisition of any uncertificated securities included in the Collateral, cause the security interests in favor of Secured Party to be recorded on the equityholder register or the books of the issuer of such uncertificated securities and cause such issuer to execute and deliver to Secured Party an acknowledgement of the Secured Party’s security interests pursuant to which the issuer agrees to comply with instructions originated by Secured Party without further consent by Debtor,

(f) Special Provisions Relating to Collateral.  Debtor shall not take any action that would result in (i) the revocation of any election to treat any Collateral as certificated securities, and (ii) an election to treat as certificated securities any Collateral that constitutes uncertificated securities.  So long as Secured has not exercised remedies with respect to the Collateral under this Agreement or any other Loan Document upon the occurrence and during the continuation of an Event of Default, Debtor shall have the right to exercise all voting and other rights, title and interest with respect to the Collateral and to receive all income, gains, profits, dividends and other distributions from the Collateral whether non-cash dividends, cash, options, warrants, stock splits, reclassifications, rights, instruments or other investment property or other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such rights and interests; provided that no vote shall be cast, right exercised or other action taken which would be adverse to the rights and remedies of Secured Party hereunder and under the other Loan Documents or which would otherwise conflict with any provision of the Loan Documents.  In furtherance of the right of Secured Party to exercise voting rights during the continuance of an Event of Default, Debtor shall execute and deliver to the Administrative Agent a proxy or other instrument in a form acceptable to the Administrative Agent with respect to each item of Collateral owned by it.  Debtor not shall grant a proxy that would conflict with any proxy granted to Secured Party pursuant to the preceding sentence so long as the security interest granted pursuant to this Agreement remains in effect.

5. Negative Covenants

.  Debtor will comply with the covenants contained in this Section 5 at all times during the period of time this Agreement is effective, unless Secured Party shall otherwise consent in writing.

(a) Impairment of Security Interest.  Debtor will not take or fail to take any action which would in any manner impair the value or enforceability of Secured Party’s security interest in any Collateral.

(b) Financing Statement Filings.  Without limiting Secured Party’s rights under this Agreement, Debtor authorizes Secured Party to file financing statements and amendments thereto under the provisions of the Code as amended from time to time. Any such financing statements or amendments may describe the Collateral in the same manner as described herein or may

Exhibit 1.01F

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contain an indication or description of collateral that describes such property in any other manner as Secured Party may determine, in its sole discretion, is necessary, advisable or prudent to ensure the perfection of the security interest in the Collateral granted to Secured Party herein.

6. Rights of Secured Party

.  Secured Party shall have the rights contained in this Section 6 at all times during the period of time this Agreement is effective.

(a) Additional Financing Statements Filings.  Debtor hereby authorizes Secured Party to file one or more financing or continuation statements, and amendments thereto, relating to the Collateral. Debtor further agrees that a carbon, photographic or other reproduction of this Agreement or any financing statement describing any Collateral is sufficient as a financing statement and may be filed in any jurisdiction Secured Party may deem appropriate.

(b) Power of Attorney.  Debtor hereby irrevocably appoints Secured Party as Debtor’s attorney-in-fact, such power of attorney being coupled with an interest, with full authority in the place and stead of Debtor and in the name of Debtor or otherwise, after the occurrence of an Event of Default, to take any action and to execute any instrument which Secured Party may deem necessary or appropriate to accomplish the purposes of this Agreement, including without limitation: (i) receive, endorse and collateral all checks made payable to Debtor representing any dividend, payment or other distribution in respect of the Collateral or any part thereof and give full discharge for the same, (ii) to file any claims or take any action or institute any proceedings in connection therewith which Secured Party may deem to be necessary or advisable, (iii) to pay, settle or compromise all bills and claims which may be or become liens or security interests against any or all of the Collateral, or any part thereof, unless a bond or other security satisfactory to Secured Party has been provided, and (iv) upon foreclosure, to do any and every act which Debtor may do on its behalf with respect to the Collateral or any part thereof and to exercise any or all of Debtor’s rights and remedies under any or all of the Collateral.

(c) Performance by Secured Party.  If Debtor fails to perform any agreement or obligation provided herein, Secured Party may itself perform, or cause performance of, such agreement or obligation, and the expenses of Secured Party incurred in connection therewith shall be a part of the Indebtedness, secured by the Collateral and payable by Debtor on demand.

7. Events of Default

.  Debtor shall be in default under this Agreement upon the occurrence of an Event of Default.

8. Remedies and Related Rights

.  If an Event of Default shall have occurred, and without limiting any other rights and remedies provided herein, under any of the other Loan Documents or otherwise available to Secured Party, Secured Party may exercise one or more of the rights and remedies provided in this Section.

(a) Remedies.  Secured Party may from time to time at its discretion, without limitation and without notice except as expressly provided in any of the Loan Documents:

(i) exercise in respect of the Collateral all the rights and remedies of a secured party under the Code (whether or not the Code applies to the affected Collateral);

(ii) require Debtor to, and Debtor hereby agrees that it will at its expense and upon request of Secured Party, assemble the Collateral as directed by Secured Party and make it available to Secured Party at a place to be designated by Secured Party which is reasonably convenient to both parties;

(iii) reduce its claim to judgment or foreclose or otherwise enforce, in whole or in part, the security interest granted hereunder by any available judicial procedure;

(iv) sell or otherwise dispose of, at its office, on the premises of Debtor or elsewhere, the Collateral, as a unit or in parcels, by public or private proceedings, and by way of one or more contracts (it being agreed that the sale or other disposition of any part of the Collateral shall not exhaust Secured Party’s power of sale, but sales or other dispositions may be made from time to time until all of the Collateral has been sold or disposed of or until the Indebtedness has been paid and performed in full), and at any such sale or other disposition it shall not be necessary to exhibit any of the Collateral;

Exhibit 1.01F

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(v) buy the Collateral, or any portion thereof, at any public sale;

(vi) buy the Collateral, or any portion thereof, at any private sale if the Collateral is of a type customarily sold in a recognized market or is of a type which is the subject of widely distributed standard price quotations;

(vii) apply for the appointment of a receiver for the Collateral, and Debtor hereby consents to any such appointment;

(viii) without any obligation to do so, in its name or in the name of Debtor or otherwise, demand, sue for, collect or receive any money or property at any time payable or receivable on account of or in exchange for any of the Collateral;

(ix) endorse, assign or otherwise transfer to or to register in the name of Secured Party or any of its nominees or endorse for negotiation any or all of the Collateral, without any indication that such Collateral is subject to the security interests hereunder, and to exchange certificates representing or evidencing Collateral for certificates of smaller or larger denominations;

(x) vote or exercise any and all of Debtor’s rights or powers incident to its ownership of the Collateral, including any rights or powers to manage or control the Foreign Subsidiaries (and Debtor agreed to take all such action as may be appropriate to give effect to such right);

(xi) exercise such additional rights, powers, privileges and remedies to which a secured party is entitled under the laws in effect in any jurisdiction where any rights, powers, privileges and remedies hereunder may be asserted; and

(xii) at its option, retain the Collateral in satisfaction of the Indebtedness whenever the circumstances are such that Secured Party is entitled to do so under the Code or otherwise, to the full extent permitted by the Code, Secured Party shall be permitted to elect whether such retention shall be in full or partial satisfaction of the Indebtedness.

In the event Secured Party shall elect to sell the Collateral, Secured Party may sell the Collateral without giving any warranties as and shall be permitted to specifically disclaim any warranties of title or the like. Further, if Secured Party sells any of the Collateral on credit, Debtor will be credited only with payments actually made by the purchaser, received by Secured Party and applied to the Indebtedness. In the event the purchaser fails to pay for the Collateral, Secured Party may resell the Collateral and Debtor shall be credited with the proceeds of the sale. Debtor agrees that in the event Debtor or any Other Obligated Party is entitled to receive any notice under the Code, as it exists in the state governing any such notice, of the sale or other disposition of any Collateral, reasonable notice shall be deemed given when such notice is deposited in a depository receptacle under the care and custody of the United States Postal Service, postage prepaid, at such party’s address set forth on the first page hereof, ten (10) days prior to the date of any public sale, or after which a private sale, of any of such Collateral is to be held. Secured Party shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. Secured Party may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned.

Debtor recognizes that, by reason of certain prohibitions contained in the Securities Act of 1933, as amended, and applicable state securities laws, Secured Party may be compelled, subject to the notice provision provided for in the foregoing paragraph, with respect to any sale of all or any part of the Collateral constituting a security (as such term is defined in the Securities Act of 1933), to limit purchasers to those who will agree, among other things, to acquire the Collateral for their own account, for investment and not with a view to the distribution or resale thereof.  Debtor acknowledges that (i) any such private sale may be at prices and on terms less favorable to Secured Party than those obtainable through a public sale without such restrictions, and agrees that any such private sale shall not be deemed commercially unreasonable based on such circumstances and (ii) Secured Party shall have no obligation to engage in public sales and no obligation to delay the sale of any Collateral for the period of time necessary to permit Debtor or the issuer thereof to register it for public sale.

(b) Application of Proceeds.  If any Event of Default shall have occurred, Secured Party may at its discretion apply or use any cash held by Secured Party as Collateral, and any cash proceeds received by Secured Party in respect of any sale or other disposition of, collection from, or other realization upon, all or any part of the Collateral as follows in such order and manner as Secured Party may elect:

(i) to the repayment or reimbursement of the reasonable costs and expenses (including, without limitation, reasonable attorneys’ fees and expenses) incurred by Secured Party in connection with (A) the administration of the Loan Documents, (B) the custody, preservation, use or operation of, or the sale of, collection from, or other realization upon, the Collateral, and (C) the exercise or enforcement of any of the rights and remedies of Secured Party hereunder;

Exhibit 1.01F

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(ii) to the payment or other satisfaction of any liens and other encumbrances upon the Collateral;

(iii) to the satisfaction of the Indebtedness;

(iv) by holding such cash and proceeds as Collateral;

(v) to the payment of any other amounts required by applicable law (including without limitation, Section 9.615(a)(3) of the Code or any other applicable statutory provision); and

(vi) by delivery to Debtor or any other party lawfully entitled to receive such cash or proceeds whether by direction of a court of competent jurisdiction or otherwise.

(c) Deficiency.  In the event that the proceeds of any sale of, collection from, or other realization upon, all or any part of the Collateral by Secured Party are insufficient to pay all amounts to which Secured Party is legally entitled, Debtor and any party who guaranteed or is otherwise obligated to pay all or any portion of the Indebtedness shall be liable for the deficiency, together with interest thereon as provided in the Loan Documents, to the full extent permitted by the Code.

(d) Non-Judicial Remedies.  In granting to Secured Party the power to enforce its rights hereunder without prior judicial process or judicial hearing, Debtor expressly waives, renounces and knowingly relinquishes any legal right which might otherwise require Secured Party to enforce its rights by judicial process. Debtor recognizes and concedes that non-judicial remedies are consistent with the usage of trade, are responsive to commercial necessity and are the result of a bargain at arm’s length. Nothing herein is intended to prevent Secured Party or Debtor from resorting to judicial process at either party’s option.

(e) Other Recourse.  Debtor waives any right to require Secured Party to proceed against any third party, exhaust any Collateral or other security for the Indebtedness, or to have any Other Obligated Party joined with Debtor in any suit arising out of the Indebtedness or any of the Loan Documents, or pursue any other remedy available to Secured Party. Debtor further waives any and all notice of acceptance of this Agreement and of the creation, modification, rearrangement, renewal or extension of the Indebtedness. Debtor further waives any defense arising by reason of any disability or other defense of any Other Obligated Party or by reason of the cessation from any cause whatsoever of the liability of any Other Obligated Party. Until all of the Indebtedness shall have been paid in full, Debtor shall have no right of subrogation and Debtor waives the right to enforce any remedy which Secured Party has or may hereafter have against any Other Obligated Party, and waives any benefit of and any right to participate in any other security whatsoever now or hereafter held by Secured Party. Debtor authorizes Secured Party, and without notice or demand and without any reservation of rights against Debtor and without affecting Debtor’s liability hereunder or on the Indebtedness to (i) take or hold any other property of any type from any third party as security for the Indebtedness, and exchange, enforce, waive and release any or all of such other property, (ii) apply such other property and direct the order or manner of sale thereof as Secured Party may in its discretion determine, (iii) renew, extend, accelerate, modify, compromise, settle or release the obligations of any Other Obligated Party in respect to any or all of the Indebtedness or other security for the Indebtedness, (iv) waive, enforce or modify any of the provisions of any of the Loan Documents executed by any Other Obligated Party, and (v) release or substitute any Other Obligated Party.

9. Indemnity

.  As provided in the Code, Debtor hereby indemnifies and agrees to hold harmless Secured Party, and its officers, directors, employees, agents and representatives (each an “Indemnified Person”) from and against any and all liabilities, obligations, claims, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature (collectively, the “Claims”) which may be imposed on, incurred by, or asserted against, any Indemnified Person arising in connection with the Loan Documents, the Indebtedness or the Collateral (including without limitation, the enforcement of the Loan Documents and the defense of any Indemnified Person’s actions and/or inactions in connection with the Loan Documents). The indemnification provided for in this Section shall survive the termination of this Agreement and shall extend and continue to benefit each individual or entity who is or has at any time been an Indemnified Person hereunder.

10. Miscellaneous

(a) Waiver by Secured Party.  Secured Party may waive any Event of Default without waiving any other prior or subsequent Event of Default. Secured Party may remedy any default without waiving the Event of Default remedied. Neither the failure by Secured Party to exercise, nor the delay by Secured Party in exercising, any right or remedy upon any Event of Default shall be construed as a waiver of such Event of Default or as a waiver of the right to exercise any such right or remedy at a later date. No single or partial exercise by Secured Party of any right or remedy hereunder shall exhaust the same or shall preclude any other or further exercise thereof, and every such right or remedy hereunder may be exercised at any time. No

Exhibit 1.01F

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waiver of any provision hereof or consent to any departure by Debtor therefrom shall be effective unless the same shall be in writing and signed by Secured Party and then such waiver or consent shall be effective only in the specific instances, for the purpose for which given and to the extent therein specified. No notice to or demand on Debtor in any case shall of itself entitle Debtor to any other or further notice or demand in similar or other circumstances.

(b) Notices.  Any notice or communication required or permitted hereunder shall be given as provided Section 8.01 of the Loan Agreement.

(c) Entire Agreement.  This Agreement and the other Loan Agreement, as applicable, contain the entire agreement of Secured Party and Debtor with respect to the Collateral. If the parties hereto are parties to any prior agreement, either written or oral, relating to the Collateral, the terms of this Agreement shall amend and supersede the terms of such prior agreements as to transactions on or after the effective date of this Agreement, but all security agreements, financing statements, guaranties, other contracts and notices for the benefit of Secured Party shall continue in full force and effect to secure the Indebtedness unless Secured Party specifically releases its rights thereunder by separate release.

(d) Amendment.  No amendment or waiver of any provision of this Agreement nor consent to any departure by Debtor therefrom shall in any event be effective unless the same shall be in writing and signed by Secured Party, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given.

(e) Actions by Secured Party.  The lien, security interest and other security rights of Secured Party hereunder shall not be impaired by (i) any renewal, extension, increase or modification with respect to the Indebtedness, (ii) any surrender, compromise, release, renewal, extension, exchange or substitution which Secured Party may grant with respect to the Collateral, or (iii) any release or indulgence granted to any endorser, guarantor or surety of the Indebtedness. The taking of additional security by Secured Party shall not release or impair the lien, security interest or other security rights of Secured Party hereunder or affect the obligations of Debtor hereunder.

(f) GOVERNING LAW.  THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS AND APPLICABLE FEDERAL LAWS, EXCEPT TO THE EXTENT PERFECTION AND THE EFFECT OF PERFECTION OR NON-PERFECTION OF THE SECURITY INTEREST GRANTED HEREUNDER, IN RESPECT OF ANY PARTICULAR COLLATERAL, ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF TEXAS.

(g) Venue.  This Agreement has been entered into in the county in Texas where Secured Party’s address for notice purposes is located, and it shall be performable for all purposes in such county. Courts within the State of Texas shall have jurisdiction over any and all disputes arising under or pertaining to this Agreement and venue for any such disputes shall be in the county or judicial district where this Agreement has been executed and delivered.

(h) Severability.  If any provision of this Agreement is held by a court of competent jurisdiction to be illegal, invalid or unenforceable under present or future laws, such provision shall be fully severable, shall not impair or invalidate the remainder of this Agreement and the effect thereof shall be confined to the provision held to be illegal, invalid or unenforceable.

(i) Binding Effect and Assignment.  This Agreement (i) creates a continuing security interest in the Collateral and the terms, provisions, covenants and conditions hereof, (ii) shall be binding upon Debtor and the successors and assigns of Debtor and (iii) shall inure to the benefit of Secured Party and all transferees, credit participants, successors, assignees and endorsees of Secured Party. Without limiting the generality of the foregoing, Secured Party may pledge, assign or otherwise transfer the Indebtedness and its rights under this Agreement and any of the other Loan Documents to any other party. Debtor’s rights and obligations hereunder may not be assigned or otherwise transferred without the prior written consent of Secured Party.

(j) Cumulative Rights.  All rights and remedies of Secured Party hereunder are cumulative of each other and of every other right or remedy which Secured Party may otherwise have at law or in equity or under any of the other Loan Documents, and the exercise of one or more of such rights or remedies shall not prejudice or impair the concurrent or subsequent exercise of any other rights or remedies. Further, except as specifically noted as a waiver herein, no provision of this Agreement is intended by the parties to this Agreement to waive any rights, benefits or protection afforded to Secured Party under the Code.

(k) Gender, Enforceability.  Within this Agreement, words of any gender shall be held and construed to include any other gender and words in the singular number shall be held and construed to include the plural and words in the plural number shall be held and construed to include the singular, unless the context otherwise requires. A determination that any provision of this Agreement is unenforceable or invalid shall not affect the enforceability or validity of any other provision and any determination

Exhibit 1.01F

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that the application of any provision of this Agreement to any person or circumstance is illegal or unenforceable shall not affect the enforceability or validity of such provision as it may apply to any other persons or circumstances.

(l) Loan Document.  This Agreement is a Loan Document, as defined in the Loan Agreement, and is subject to the provisions of the Loan Agreement governing Loan Documents. Debtor hereby ratifies, confirms and approves the Loan Agreement and the other Loan Documents and, in particular, any provisions thereof which relate to Debtor.

(m) Counterparts; Fax.  This Agreement may be separately executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to constitute one and the same agreement. This Agreement may be validly executed and delivered by facsimile or other electronic transmission.

(n) Descriptive Headings.  The headings in this Agreement are for convenience only and shall in no way enlarge, limit or define the scope or meaning of the various and several provisions hereof.

(o) NO ORAL AGREEMENTS.  THIS WRITTEN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.

[Signature page follows]

 

 

Exhibit 1.01F

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EXECUTED as of the date first written above.

 

 

 

 

 

Exhibit 1.01F

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ANNEX I

EQUITY INTERESTS

 

 

 

 

 

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PLEDGE AGREEMENT

THIS PLEDGE AGREEMENT (“Agreement”) is made as of June 30, 2014, by M&I ELECTRIC INDUSTRIES, INC., a Texas corporation (“Debtor”), whose place of business and chief executive office, as applicable, are located at 1250 Wood Branch Park Drive, Houston, Texas 77079, and whose organizational identification number is 0019421500, in favor of JPMORGAN CHASE BANK, N.A., a national association (“Secured Party”), whose address is 712 Main Street, Houston, Harris 77002. Debtor hereby agrees with Secured Party as follows:

11. Definitions

.  As used in this Agreement, the following terms shall have the meanings indicated below:

(a) “Code” shall mean the Texas Business and Commerce Code as in effect in the State of Texas on the date of this Agreement or as it may hereafter be amended from time to time. All terms defined in the Code and used herein and not otherwise defined herein are used herein as therein defined.

(b) “Collateral” shall mean all of the personal property of Debtor as set forth below (as indicated), wherever located, and now owned or hereafter acquired:

All “investment property” consisting of each of the Equity Interests (whether such Equity Interests are “general intangibles” or “securities” under the Code) of Foreign Subsidiaries identified on Annex I hereto and all additional Equity Interests issued from time to time by any of the issuers of the Equity Interests identified on Annex I hereto, and the certificates or other instruments representing any of the foregoing and any interest of Debtor in the entries on the books of any securities intermediary pertaining thereto (the “Pledged Shares”), and all dividends, distributions, returns of capital, cash, warrants, options, rights, instruments, rights to vote or manage the business of such issuer pursuant to organizational document governing the rights and obligations of the stockholders, members or other owners thereof and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the Pledged Shares; provided that, the Collateral shall specifically exclude the right, title and interest of Debtor in any assets or property to the extent, but only to the extent, that such property or asset constitutes more than sixty-five percent (65%) of the voting Equity Interests of any Foreign Subsidiary.

The term Collateral, as used herein, shall also include all PRODUCTS and PROCEEDS of all of the foregoing (including without limitation, insurance payable by reason of loss or damage to the foregoing property) and any property, securities, guaranties or monies of Debtor which may at any time come into the possession of Secured Party.  The designation of proceeds does not authorize Debtor to sell, transfer or otherwise convey any of the foregoing property except finished goods intended for sale in the ordinary course of Debtor’s business or as otherwise provided herein.

(c) “Equity Interests” has the meaning given such term in the Loan Agreement.

(d) “Event of Default” has the meaning given such term in the Loan Agreement.

(e) “Foreign Subsidiary” has the meaning given such term in the Loan Agreement.

(f) “Indebtedness” shall mean (i) all indebtedness, obligations and liabilities of Debtor to Secured Party of any kind or character, now existing or hereafter arising, whether direct, indirect, related, unrelated, fixed, contingent, liquidated, unliquidated, joint, several or joint and several, and regardless of whether such indebtedness, obligations and liabilities may, prior to their acquisition by Secured Party, be or have been payable to or in favor of a third party and subsequently acquired by Secured Party (it being contemplated that Secured Party may make such acquisitions from third parties), including without limitation all indebtedness, obligations and liabilities of Debtor to Secured Party now existing or hereafter arising by note, draft, acceptance, guaranty, endorsement, letter of credit, assignment, purchase, overdraft, discount, swap contract, indemnity agreement or otherwise, including, without limitation, that certain promissory note of even date with the Loan Agreement executed by American Electric Technologies, Inc. (“Borrower”) payable to the order of Secured Party in the principal amount of $10,000,000, (ii) all accrued but unpaid interest on any of the indebtedness described in (i) above, (iii) all obligations of Debtor to Secured Party under any documents evidencing, guaranteeing, securing, governing and/or pertaining to all or any part of the indebtedness described in (i) and (ii) above, (iv) all costs and expenses incurred by Secured Party in connection with the collection and administration of all or any part of the indebtedness and obligations described in (i), (ii) and (iii) above or the protection or preservation of, or realization upon, the collateral securing all or any part of such indebtedness and obligations, including without limitation all reasonable attorneys’ fees, and (v) all renewals, extensions, modifications and rearrangements of the indebtedness and obligations described in (i), (ii), (iii) and (iv) above; provided that the “Indebtedness” shall specifically exclude the Excluded Swap Obligations (as defined in the Loan Agreement).

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(g) “Loan Agreement” means the Amended and Restated Credit Agreement dated as of November 30, 2013, between Borrower and Secured Party, as amended, supplemented or restated from time to time, and the terms defined therein and not otherwise defined herein being used herein as therein defined.

(h) “Loan Documents” has the meaning given such term in the Loan Agreement.

(i) “Person” has the meaning given such term in the Loan Agreement.

(j) “Other Obligated Party” shall mean any party other than Debtor, including, without limitation, Debtor, who secures, guarantees and/or is otherwise obligated to pay all or any portion of the Indebtedness.

All words and phrases used herein which are expressly defined in Section 1.201 or Chapter 9 of the Code shall have the meaning provided for therein. Other words and phrases defined elsewhere in the Code shall have the meaning specified therein except to the extent such meaning is inconsistent with a definition in Section 1.201 or Chapter 9 of the Code.

12. Security Interest

.  As security for the Indebtedness Debtor for value received hereby pledges and grants to Secured Party a continuing security interest in the Collateral.

13. Representations and Warranties

.  In addition to any representations and warranties of Debtor set forth in the Loan Documents, which are incorporated herein by this reference, Debtor hereby represents and warrants the following to Secured Party:

(a) Accuracy of Information.  All information heretofore, herein or hereafter supplied to Secured Party by or on behalf of Debtor with respect to the Collateral is true and correct. The exact legal name, organizational identification number of Debtor are correctly shown in the first paragraph hereof.

(b) Ownership and Liens.  Debtor has good and marketable title to the Collateral free and clear of all liens, security interests, encumbrances or adverse claims, except for the security interest created by this Agreement and liens or security interests permitted in the Loan Agreement. No dispute, right of setoff, counterclaim or defense exists with respect to all or any part of the Collateral. Debtor has not executed any other security agreement currently affecting the Collateral and no effective financing statement or other instrument similar in effect covering all or any part of the Collateral is on file in any recording office except as may have been executed or filed in favor of Secured Party.

(c) No Conflicts or Consents.  Neither the ownership, the intended use of the Collateral by Debtor, the grant of the security interest by Debtor to Secured Party herein nor the exercise by Secured Party of its rights or remedies hereunder, will (i) conflict with any provision of (A) any domestic or foreign law, statute, rule or regulation, (B) the articles or certificate of incorporation, charter or bylaws of Debtor, or (C) any agreement, judgment, license, order or permit applicable to or binding upon Debtor, or (ii) result in or require the creation of any lien, charge or encumbrance upon any assets or properties of Debtor or of any person except as may be expressly contemplated in the Loan Documents. Except as expressly contemplated in the Loan Documents, no consent, approval, authorization or order of, and no notice to or filing with, any court, governmental authority or third party is required in connection with the grant by Debtor of the security interest herein or the exercise by Secured Party of its rights and remedies hereunder.

(d) Security Interest.  Debtor has and will have at all times full right, power and authority to grant a security interest in the Collateral to Secured Party in the manner provided herein, free and clear of any lien, security interest or other charge or encumbrance. This Agreement creates a legal, valid and binding security interest in favor of Secured Party in the Collateral securing the Indebtedness. To the extent permitted in the Code, possession by Secured Party of all certificates, instruments and cash constituting Collateral from time to time and/or the filing of the financing statements delivered prior hereto and/or concurrently herewith by Debtor to Secured Party will perfect and establish the first priority of Secured Party’s security interest hereunder in the Collateral.

(e) Location/Identity.  Debtor’s principal residence or place of business and chief executive office (as those terms are used in the Code), as the case may be, is located at the address set forth on the first page hereof. Except as specified elsewhere herein, all Collateral and records concerning the Collateral shall be kept at such address and such other addresses as may be listed on any schedule attached hereto. Debtor’s organizational structure, state of organization, and organizational number (the

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“Organizational Information”) are as set forth on the first page hereof. Except as specified herein or as permitted in the Loan Agreement, the Organizational Information shall not change.

(f) Solvency of Debtor.  As of the date hereof, and after giving effect to this Agreement and the completion of all other transactions contemplated by Debtor at the time of the execution of this Agreement, (i) Debtor is and will be solvent, (ii) the fair saleable value of Debtor’s assets exceeds and will continue to exceed Debtor’s liabilities (both fixed and contingent), (iii) Debtor is paying and will continue to be able to pay its debts as they mature, and (iv) if Debtor is not an individual, Debtor has and will have sufficient capital to carry on Debtor’s businesses and all businesses in which Debtor is about to engage.

(g) Equity Interests.  All shares of capital stock identified on Annex I hereto as being beneficially owned by Debtor have been duly authorized and validly issued, are fully paid and non-assessable and are not subject to any option to purchase or similar right of any Person.  Except as permitted by the Loan Agreement, Debtor is not and will not become a party to or otherwise bound by any agreement, other than the Loan Documents, which restricts in any manner the rights of any present or future holder of any such Equity Interests with respect thereto.

(h) Delivery of Certificated Collateral.  All certificates, agreements or instruments representing or evidencing the Collateral in existence on the date hereof have been delivered to Secured Party in suitable form for transfer by delivery or accompanied by duly executed instruments of transfer or assignment in blank, and Secured Party has a perfected first priority security interest therein.

(i) Perfection of Uncertificated Collateral.  With respect to any uncertificated security included in the Collateral that is in existence on the date hereof, Debtor has caused the security interests granted to Secured Party under this Agreement the  to be recorded on the equityholder register or on the books of the issuer of such uncertificated security and cause such issuer to execute and deliver to Secured Party an acknowledgement of such security interests pursuant to which the issuer agrees to comply with instructions originated Secured Party without further consent by Debtor, and Secured Party has a perfected security interest therein.

14. Affirmative Covenants

.  In addition to all covenants and agreements set forth in the Loan Documents, which are incorporated herein by this reference, Debtor will comply with the covenants contained in this Section 4 at all times during the period of time this Agreement is effective unless Secured Party shall otherwise consent in writing.

(a) Ownership and Liens.  Debtor will maintain good and marketable title to all Collateral free and clear of all liens, security interests, encumbrances or adverse claims, except for the security interest created by this Agreement and the security interests and other encumbrances expressly permitted herein or by the other Loan Documents. Debtor will not permit any dispute, right of setoff, counterclaim or defense to exist with respect to all or any part of the Collateral. Debtor will cause any financing statement or other security instrument with respect to the Collateral to be terminated, except as may exist or as may have been filed in favor of Secured Party. Debtor hereby irrevocably appoints Secured Party as Debtor’s attorney-in-fact, such power of attorney being coupled with an interest, with full authority in the place and stead of Debtor and in the name of Debtor or otherwise, for the purpose of terminating any financing statements currently filed with respect to the Collateral. Debtor will defend at its expense Secured Party’s right, title and security interest in and to the Collateral against the claims of any third party.

(b) Further Assurances.  Debtor will from time to time at its expense promptly execute and deliver all further instruments and documents and take all further action necessary or appropriate or that Secured Party may request in order (i) to perfect and protect the security interest created or purported to be created hereby and the first priority of such security interest, (ii) to enable Secured Party to exercise and enforce its rights and remedies hereunder in respect of the Collateral, and (iii) to otherwise effect the purposes of this Agreement, including without limitation: (A) executing (if requested) and filing such financing or continuation statements, or amendments thereto; and (B) furnishing to Secured Party from time to time statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral, all in reasonable detail satisfactory to Secured Party.

(c) Inspection of Collateral.  Debtor will keep adequate records concerning the Collateral and will permit Secured Party and all representatives and agents appointed by Secured Party to inspect any of the Collateral and the books and records of or relating to the Collateral at any time during normal business hours, to make and take away photocopies, photographs and printouts thereof and to write down and record any such information.

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(d) Payment of Taxes.  Debtor (i) will timely pay all property and other taxes, assessments and governmental charges or levies imposed upon the Collateral or any part thereof, (ii) will timely pay all lawful claims which, if unpaid, might become a lien or charge upon the Collateral or any part thereof, and (iii) will maintain appropriate accruals and reserves for all such liabilities in a timely fashion in accordance with generally accepted accounting principles. Debtor may, however, delay paying or discharging any such taxes, assessments, charges, claims or liabilities so long as the validity thereof is contested in good faith by proper proceedings and provided Debtor has set aside on Debtor’s books adequate reserves therefor; provided, however, Debtor understands and agrees that in the event of any such delay in payment or discharge and upon Secured Party’s written request, Debtor will establish with Secured Party an escrow acceptable to Secured Party adequate to cover the payment of such taxes, assessments and governmental charges with interest, costs and penalties and a reasonable additional sum to cover possible costs, interest and penalties (which escrow shall be returned to Debtor upon payment of such taxes, assessments, governmental charges, interests, costs and penalties or disbursed in accordance with the resolution of the contest to the claimant) or furnish Secured Party with an indemnity bond secured by a deposit in cash or other security acceptable to Secured Party. Notwithstanding any other provision contained in this Subsection, Secured Party may at its discretion exercise its rights under Subsection 6(c) at any time to pay such taxes, assessments, governmental charges, interest, costs and penalties.

(e) Perfection of Additional Collateral.  Debtor shall:

(i) upon the acquisition of any certificated securities representing Collateral which are to be physically possessed by Debtor, promptly delivery to Secured Party all such certificated securities, endorsed or accompanied by instruments of transfer or assignment in such form and substance as Secured Party may reasonably request; and

(ii) upon the acquisition of any uncertificated securities included in the Collateral, cause the security interests in favor of Secured Party to be recorded on the equityholder register or the books of the issuer of such uncertificated securities and cause such issuer to execute and deliver to Secured Party an acknowledgement of the Secured Party’s security interests pursuant to which the issuer agrees to comply with instructions originated by Secured Party without further consent by Debtor,

(f) Special Provisions Relating to Collateral.  Debtor shall not take any action that would result in (i) the revocation of any election to treat any Collateral as certificated securities, and (ii) an election to treat as certificated securities any Collateral that constitutes uncertificated securities.  So long as Secured has not exercised remedies with respect to the Collateral under this Agreement or any other Loan Document upon the occurrence and during the continuation of an Event of Default, Debtor shall have the right to exercise all voting and other rights, title and interest with respect to the Collateral and to receive all income, gains, profits, dividends and other distributions from the Collateral whether non-cash dividends, cash, options, warrants, stock splits, reclassifications, rights, instruments or other investment property or other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such rights and interests; provided that no vote shall be cast, right exercised or other action taken which would be adverse to the rights and remedies of Secured Party hereunder and under the other Loan Documents or which would otherwise conflict with any provision of the Loan Documents.  In furtherance of the right of Secured Party to exercise voting rights during the continuance of an Event of Default, Debtor shall execute and deliver to the Administrative Agent a proxy or other instrument in a form acceptable to the Administrative Agent with respect to each item of Collateral owned by it.  Debtor not shall grant a proxy that would conflict with any proxy granted to Secured Party pursuant to the preceding sentence so long as the security interest granted pursuant to this Agreement remains in effect.

15. Negative Covenants

.  Debtor will comply with the covenants contained in this Section 5 at all times during the period of time this Agreement is effective, unless Secured Party shall otherwise consent in writing.

(a) Impairment of Security Interest.  Debtor will not take or fail to take any action which would in any manner impair the value or enforceability of Secured Party’s security interest in any Collateral.

(b) Financing Statement Filings.  Without limiting Secured Party’s rights under this Agreement, Debtor authorizes Secured Party to file financing statements and amendments thereto under the provisions of the Code as amended from time to time. Any such financing statements or amendments may describe the Collateral in the same manner as described herein or may contain an indication or description of collateral that describes such property in any other manner as Secured Party may determine, in its sole discretion, is necessary, advisable or prudent to ensure the perfection of the security interest in the Collateral granted to Secured Party herein.

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16. Rights of Secured Party

.  Secured Party shall have the rights contained in this Section 6 at all times during the period of time this Agreement is effective.

(a) Additional Financing Statements Filings.  Debtor hereby authorizes Secured Party to file one or more financing or continuation statements, and amendments thereto, relating to the Collateral. Debtor further agrees that a carbon, photographic or other reproduction of this Agreement or any financing statement describing any Collateral is sufficient as a financing statement and may be filed in any jurisdiction Secured Party may deem appropriate.

(b) Power of Attorney.  Debtor hereby irrevocably appoints Secured Party as Debtor’s attorney-in-fact, such power of attorney being coupled with an interest, with full authority in the place and stead of Debtor and in the name of Debtor or otherwise, after the occurrence of an Event of Default, to take any action and to execute any instrument which Secured Party may deem necessary or appropriate to accomplish the purposes of this Agreement, including without limitation: (i) receive, endorse and collateral all checks made payable to Debtor representing any dividend, payment or other distribution in respect of the Collateral or any part thereof and give full discharge for the same, (ii) to file any claims or take any action or institute any proceedings in connection therewith which Secured Party may deem to be necessary or advisable, (iii) to pay, settle or compromise all bills and claims which may be or become liens or security interests against any or all of the Collateral, or any part thereof, unless a bond or other security satisfactory to Secured Party has been provided, and (iv) upon foreclosure, to do any and every act which Debtor may do on its behalf with respect to the Collateral or any part thereof and to exercise any or all of Debtor’s rights and remedies under any or all of the Collateral.

(c) Performance by Secured Party.  If Debtor fails to perform any agreement or obligation provided herein, Secured Party may itself perform, or cause performance of, such agreement or obligation, and the expenses of Secured Party incurred in connection therewith shall be a part of the Indebtedness, secured by the Collateral and payable by Debtor on demand.

17. Events of Default

.  Debtor shall be in default under this Agreement upon the occurrence of an Event of Default.

18. Remedies and Related Rights

.  If an Event of Default shall have occurred, and without limiting any other rights and remedies provided herein, under any of the other Loan Documents or otherwise available to Secured Party, Secured Party may exercise one or more of the rights and remedies provided in this Section.

(a) Remedies.  Secured Party may from time to time at its discretion, without limitation and without notice except as expressly provided in any of the Loan Documents:

(i) exercise in respect of the Collateral all the rights and remedies of a secured party under the Code (whether or not the Code applies to the affected Collateral);

(ii) require Debtor to, and Debtor hereby agrees that it will at its expense and upon request of Secured Party, assemble the Collateral as directed by Secured Party and make it available to Secured Party at a place to be designated by Secured Party which is reasonably convenient to both parties;

(iii) reduce its claim to judgment or foreclose or otherwise enforce, in whole or in part, the security interest granted hereunder by any available judicial procedure;

(iv) sell or otherwise dispose of, at its office, on the premises of Debtor or elsewhere, the Collateral, as a unit or in parcels, by public or private proceedings, and by way of one or more contracts (it being agreed that the sale or other disposition of any part of the Collateral shall not exhaust Secured Party’s power of sale, but sales or other dispositions may be made from time to time until all of the Collateral has been sold or disposed of or until the Indebtedness has been paid and performed in full), and at any such sale or other disposition it shall not be necessary to exhibit any of the Collateral;

(v) buy the Collateral, or any portion thereof, at any public sale;

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(vi) buy the Collateral, or any portion thereof, at any private sale if the Collateral is of a type customarily sold in a recognized market or is of a type which is the subject of widely distributed standard price quotations;

(vii) apply for the appointment of a receiver for the Collateral, and Debtor hereby consents to any such appointment;

(viii) without any obligation to do so, in its name or in the name of Debtor or otherwise, demand, sue for, collect or receive any money or property at any time payable or receivable on account of or in exchange for any of the Collateral;

(ix) endorse, assign or otherwise transfer to or to register in the name of Secured Party or any of its nominees or endorse for negotiation any or all of the Collateral, without any indication that such Collateral is subject to the security interests hereunder, and to exchange certificates representing or evidencing Collateral for certificates of smaller or larger denominations;

(x) vote or exercise any and all of Debtor’s rights or powers incident to its ownership of the Collateral, including any rights or powers to manage or control the Foreign Subsidiaries (and Debtor agreed to take all such action as may be appropriate to give effect to such right);

(xi) exercise such additional rights, powers, privileges and remedies to which a secured party is entitled under the laws in effect in any jurisdiction where any rights, powers, privileges and remedies hereunder may be asserted; and

(xii) at its option, retain the Collateral in satisfaction of the Indebtedness whenever the circumstances are such that Secured Party is entitled to do so under the Code or otherwise, to the full extent permitted by the Code, Secured Party shall be permitted to elect whether such retention shall be in full or partial satisfaction of the Indebtedness.

In the event Secured Party shall elect to sell the Collateral, Secured Party may sell the Collateral without giving any warranties as and shall be permitted to specifically disclaim any warranties of title or the like. Further, if Secured Party sells any of the Collateral on credit, Debtor will be credited only with payments actually made by the purchaser, received by Secured Party and applied to the Indebtedness. In the event the purchaser fails to pay for the Collateral, Secured Party may resell the Collateral and Debtor shall be credited with the proceeds of the sale. Debtor agrees that in the event Debtor or any Other Obligated Party is entitled to receive any notice under the Code, as it exists in the state governing any such notice, of the sale or other disposition of any Collateral, reasonable notice shall be deemed given when such notice is deposited in a depository receptacle under the care and custody of the United States Postal Service, postage prepaid, at such party’s address set forth on the first page hereof, ten (10) days prior to the date of any public sale, or after which a private sale, of any of such Collateral is to be held. Secured Party shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. Secured Party may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned.

Debtor recognizes that, by reason of certain prohibitions contained in the Securities Act of 1933, as amended, and applicable state securities laws, Secured Party may be compelled, subject to the notice provision provided for in the foregoing paragraph, with respect to any sale of all or any part of the Collateral constituting a security (as such term is defined in the Securities Act of 1933), to limit purchasers to those who will agree, among other things, to acquire the Collateral for their own account, for investment and not with a view to the distribution or resale thereof.  Debtor acknowledges that (i) any such private sale may be at prices and on terms less favorable to Secured Party than those obtainable through a public sale without such restrictions, and agrees that any such private sale shall not be deemed commercially unreasonable based on such circumstances and (ii) Secured Party shall have no obligation to engage in public sales and no obligation to delay the sale of any Collateral for the period of time necessary to permit Debtor or the issuer thereof to register it for public sale.

(b) Application of Proceeds.  If any Event of Default shall have occurred, Secured Party may at its discretion apply or use any cash held by Secured Party as Collateral, and any cash proceeds received by Secured Party in respect of any sale or other disposition of, collection from, or other realization upon, all or any part of the Collateral as follows in such order and manner as Secured Party may elect:

(i) to the repayment or reimbursement of the reasonable costs and expenses (including, without limitation, reasonable attorneys’ fees and expenses) incurred by Secured Party in connection with (A) the administration of the Loan Documents, (B) the custody, preservation, use or operation of, or the sale of, collection from, or other realization upon, the Collateral, and (C) the exercise or enforcement of any of the rights and remedies of Secured Party hereunder;

(ii) to the payment or other satisfaction of any liens and other encumbrances upon the Collateral;

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(iii) to the satisfaction of the Indebtedness;

(iv) by holding such cash and proceeds as Collateral;

(v) to the payment of any other amounts required by applicable law (including without limitation, Section 9.615(a)(3) of the Code or any other applicable statutory provision); and

(vi) by delivery to Debtor or any other party lawfully entitled to receive such cash or proceeds whether by direction of a court of competent jurisdiction or otherwise.

(c) Deficiency.  In the event that the proceeds of any sale of, collection from, or other realization upon, all or any part of the Collateral by Secured Party are insufficient to pay all amounts to which Secured Party is legally entitled, Debtor and any party who guaranteed or is otherwise obligated to pay all or any portion of the Indebtedness shall be liable for the deficiency, together with interest thereon as provided in the Loan Documents, to the full extent permitted by the Code.

(d) Non-Judicial Remedies.  In granting to Secured Party the power to enforce its rights hereunder without prior judicial process or judicial hearing, Debtor expressly waives, renounces and knowingly relinquishes any legal right which might otherwise require Secured Party to enforce its rights by judicial process. Debtor recognizes and concedes that non-judicial remedies are consistent with the usage of trade, are responsive to commercial necessity and are the result of a bargain at arm’s length. Nothing herein is intended to prevent Secured Party or Debtor from resorting to judicial process at either party’s option.

(e) Other Recourse.  Debtor waives any right to require Secured Party to proceed against any third party, exhaust any Collateral or other security for the Indebtedness, or to have any Other Obligated Party joined with Debtor in any suit arising out of the Indebtedness or any of the Loan Documents, or pursue any other remedy available to Secured Party. Debtor further waives any and all notice of acceptance of this Agreement and of the creation, modification, rearrangement, renewal or extension of the Indebtedness. Debtor further waives any defense arising by reason of any disability or other defense of any Other Obligated Party or by reason of the cessation from any cause whatsoever of the liability of any Other Obligated Party. Until all of the Indebtedness shall have been paid in full, Debtor shall have no right of subrogation and Debtor waives the right to enforce any remedy which Secured Party has or may hereafter have against any Other Obligated Party, and waives any benefit of and any right to participate in any other security whatsoever now or hereafter held by Secured Party. Debtor authorizes Secured Party, and without notice or demand and without any reservation of rights against Debtor and without affecting Debtor’s liability hereunder or on the Indebtedness to (i) take or hold any other property of any type from any third party as security for the Indebtedness, and exchange, enforce, waive and release any or all of such other property, (ii) apply such other property and direct the order or manner of sale thereof as Secured Party may in its discretion determine, (iii) renew, extend, accelerate, modify, compromise, settle or release the obligations of any Other Obligated Party in respect to any or all of the Indebtedness or other security for the Indebtedness, (iv) waive, enforce or modify any of the provisions of any of the Loan Documents executed by any Other Obligated Party, and (v) release or substitute any Other Obligated Party.

19. Indemnity

.  As provided in the Code, Debtor hereby indemnifies and agrees to hold harmless Secured Party, and its officers, directors, employees, agents and representatives (each an “Indemnified Person”) from and against any and all liabilities, obligations, claims, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature (collectively, the “Claims”) which may be imposed on, incurred by, or asserted against, any Indemnified Person arising in connection with the Loan Documents, the Indebtedness or the Collateral (including without limitation, the enforcement of the Loan Documents and the defense of any Indemnified Person’s actions and/or inactions in connection with the Loan Documents). The indemnification provided for in this Section shall survive the termination of this Agreement and shall extend and continue to benefit each individual or entity who is or has at any time been an Indemnified Person hereunder.

20. Miscellaneous

(a) Waiver by Secured Party.  Secured Party may waive any Event of Default without waiving any other prior or subsequent Event of Default. Secured Party may remedy any default without waiving the Event of Default remedied. Neither the failure by Secured Party to exercise, nor the delay by Secured Party in exercising, any right or remedy upon any Event of Default shall be construed as a waiver of such Event of Default or as a waiver of the right to exercise any such right or remedy at a later date. No single or partial exercise by Secured Party of any right or remedy hereunder shall exhaust the same or shall preclude any other or further exercise thereof, and every such right or remedy hereunder may be exercised at any time. No waiver of any provision hereof or consent to any departure by Debtor therefrom shall be effective unless the same shall be in writing and signed by Secured Party and then such waiver or consent shall be effective only in the specific instances, for the

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purpose for which given and to the extent therein specified. No notice to or demand on Debtor in any case shall of itself entitle Debtor to any other or further notice or demand in similar or other circumstances.

(b) Notices.  Any notice or communication required or permitted hereunder shall be given as provided Section 8.01 of the Loan Agreement.

(c) Entire Agreement.  This Agreement and the other Loan Agreement, as applicable, contain the entire agreement of Secured Party and Debtor with respect to the Collateral. If the parties hereto are parties to any prior agreement, either written or oral, relating to the Collateral, the terms of this Agreement shall amend and supersede the terms of such prior agreements as to transactions on or after the effective date of this Agreement, but all security agreements, financing statements, guaranties, other contracts and notices for the benefit of Secured Party shall continue in full force and effect to secure the Indebtedness unless Secured Party specifically releases its rights thereunder by separate release.

(d) Amendment.  No amendment or waiver of any provision of this Agreement nor consent to any departure by Debtor therefrom shall in any event be effective unless the same shall be in writing and signed by Secured Party, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given.

(e) Actions by Secured Party.  The lien, security interest and other security rights of Secured Party hereunder shall not be impaired by (i) any renewal, extension, increase or modification with respect to the Indebtedness, (ii) any surrender, compromise, release, renewal, extension, exchange or substitution which Secured Party may grant with respect to the Collateral, or (iii) any release or indulgence granted to any endorser, guarantor or surety of the Indebtedness. The taking of additional security by Secured Party shall not release or impair the lien, security interest or other security rights of Secured Party hereunder or affect the obligations of Debtor hereunder.

(f) GOVERNING LAW.  THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS AND APPLICABLE FEDERAL LAWS, EXCEPT TO THE EXTENT PERFECTION AND THE EFFECT OF PERFECTION OR NON-PERFECTION OF THE SECURITY INTEREST GRANTED HEREUNDER, IN RESPECT OF ANY PARTICULAR COLLATERAL, ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF TEXAS.

(g) Venue.  This Agreement has been entered into in the county in Texas where Secured Party’s address for notice purposes is located, and it shall be performable for all purposes in such county. Courts within the State of Texas shall have jurisdiction over any and all disputes arising under or pertaining to this Agreement and venue for any such disputes shall be in the county or judicial district where this Agreement has been executed and delivered.

(h) Severability.  If any provision of this Agreement is held by a court of competent jurisdiction to be illegal, invalid or unenforceable under present or future laws, such provision shall be fully severable, shall not impair or invalidate the remainder of this Agreement and the effect thereof shall be confined to the provision held to be illegal, invalid or unenforceable.

(i) Binding Effect and Assignment.  This Agreement (i) creates a continuing security interest in the Collateral and the terms, provisions, covenants and conditions hereof, (ii) shall be binding upon Debtor and the successors and assigns of Debtor and (iii) shall inure to the benefit of Secured Party and all transferees, credit participants, successors, assignees and endorsees of Secured Party. Without limiting the generality of the foregoing, Secured Party may pledge, assign or otherwise transfer the Indebtedness and its rights under this Agreement and any of the other Loan Documents to any other party. Debtor’s rights and obligations hereunder may not be assigned or otherwise transferred without the prior written consent of Secured Party.

(j) Cumulative Rights.  All rights and remedies of Secured Party hereunder are cumulative of each other and of every other right or remedy which Secured Party may otherwise have at law or in equity or under any of the other Loan Documents, and the exercise of one or more of such rights or remedies shall not prejudice or impair the concurrent or subsequent exercise of any other rights or remedies. Further, except as specifically noted as a waiver herein, no provision of this Agreement is intended by the parties to this Agreement to waive any rights, benefits or protection afforded to Secured Party under the Code.

(k) Gender, Enforceability.  Within this Agreement, words of any gender shall be held and construed to include any other gender and words in the singular number shall be held and construed to include the plural and words in the plural number shall be held and construed to include the singular, unless the context otherwise requires. A determination that any provision of this Agreement is unenforceable or invalid shall not affect the enforceability or validity of any other provision and any determination that the application of any provision of this Agreement to any person or circumstance is illegal or unenforceable shall not affect the enforceability or validity of such provision as it may apply to any other persons or circumstances.

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(l) Loan Document.  This Agreement is a Loan Document, as defined in the Loan Agreement, and is subject to the provisions of the Loan Agreement governing Loan Documents. Debtor hereby ratifies, confirms and approves the Loan Agreement and the other Loan Documents and, in particular, any provisions thereof which relate to Debtor.

(m) Counterparts; Fax.  This Agreement may be separately executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to constitute one and the same agreement. This Agreement may be validly executed and delivered by facsimile or other electronic transmission.

(n) Descriptive Headings.  The headings in this Agreement are for convenience only and shall in no way enlarge, limit or define the scope or meaning of the various and several provisions hereof.

(o) NO ORAL AGREEMENTS.  THIS WRITTEN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.

[Signature page follows]

 

 

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EXECUTED to be effective as of the date first written above.

 

 

 

 

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ANNEX I

EQUITY INTERESTS

 

 

 

 

Exhibit 10.17

SECOND AMENDMENT TO CREDIT AGREEMENT
AND LIMITED WAIVER

THIS SECOND AMENDMENT TO CREDIT AGREEMENT AND LIMITED WAIVER (this "Amendment"), effective as of the 12th day of November, 2014, is entered into by and among AMERICAN ELECTRIC TECHNOLOGIES, INC., a Florida corporation (the "Borrower"), the Guarantors party hereto (the "Guarantors") and JPMORGAN CHASE BANK, N.A. (the "Lender").

RECITALS

WHEREAS, the Borrower and the Lender entered into that certain Amended and Restated Credit Agreement dated as of November 30, 2013 (as amended, the "Credit Agreement"); and

WHEREAS, the Borrower has also requested that the Lender amend certain provisions of the Credit Agreement; and

WHEREAS, the Borrower has requested that the Lender waive compliance with Section 6.14 of the Credit Agreement for the calendar quarter ending September 30, 2014; and

WHEREAS, the Lender is willing to so amend and waive compliance with the Credit Agreement, in each case, subject to the terms and conditions contained in this Amendment;

NOW, THEREFORE, in consideration of the foregoing and the mutual covenants set forth in this Amendment, the Borrower, the Guarantors and the Lender agree as follows:

1. Defined Terms. Unless otherwise defined herein, capitalized terms used herein have the meanings assigned to them in the Credit Agreement.

2. Amendment to Section 1.01 of the Credit Agreement.

(a) Section 1.01 of the Credit Agreement is hereby amended to add the following new definition in proper alphabetical order:

"Second Amendment Effective Date" means November 12, 2014.

(b) Section 1.01 of the Credit Agreement is hereby amended to restate the definition of the following terms in their entirety as follows:

"Applicable Margin" means, (a) for any day from and after the Effective Date to but excluding the Second Amendment Effective Date, (i) with respect to any CBFR Loan, 1.00% per annum and (b) with respect to any Eurodollar Loan, 3.25% per annum and (b) for any day from and after the Second Amendment Effective Date, (i) with respect to any CBFR Loan, 0.25% per annum and (ii) with respect to any Eurodollar Loan, 3.00% per annum.

"Fixed Charge Coverage Ratio" means, as of the date of determination, the ratio of (a) the sum of (i) operating profit from the Borrower's Domestic Subsidiaries, plus (ii) depreciation, plus (iii) cash from foreign joint ventures, minus (iv) non-financed capital expenditures (other than costs incurred in connection with the expansion of the Beaumont Facility up to an amount equal to $4,900,000), all for the four quarter period then ended, to (b) the sum of (i) the current portion of long-term Indebtedness, plus (ii) interest expense, plus (iii) Taxes, plus (iv) Dividends, plus (v) payments in respect of Capital Lease Obligations, all for the same period.

"Maturity Date" means October 1, 2017.

3. Amendment to Section 2.15 of the Credit Agreement. The first sentence of Section 2.15 of the Credit Agreement is hereby amended and restated in its entirety as follows:

"The Borrower shall pay to the Lender a commitment fee, which shall accrue at a rate equal to (a) 0.30% on the daily amount of the unused Commitment during the period from and including the Effective Date to but excluding the Second Amendment Effective Date and (b) 0.40% on the daily amount of the unused Commitment during the period from and including the Second Amendment Effective Date to but excluding the date on which the Commitment terminates."

 

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4. Amendment to Section 6.04 of the Credit Agreement. Clause (j) of Section 6.04 of the Credit Agreement is hereby amended and restated in its entirety as follows:

"(j) Investments by the Borrower in Foreign Subsidiaries in an aggregate amount for all such Investments not to exceed $1,500,000 during the term of this Agreement."

5. Amendment to Section 6.14 of the Credit Agreement. Section 6.14 of the Credit Agreement is hereby amended and restated in its entirety as follows:

"Section 6.14 Net Profit. The Borrower will not permit, (a) as of the end of the calendar quarter ending December 31, 2014, its net income for the three month period most recently ending to be less than $1.00, and (b) as of the end of each calendar quarter thereafter, its net income for the six month period most recently ending to be less than $1.00."

6. Limited Waiver. Subject to the terms and conditions set forth herein, the Lender hereby waives compliance with Section 6.14 of the Credit Agreement for the calendar quarter ending September 30, 2014. The waiver set forth in this Section 6 (the "Waiver") is limited to the extent specifically set forth above, and no other terms, covenants or provisions of the Credit Agreement or any other Loan Document are intended to be affected hereby. The waiver is granted only with respect to compliance with Section 6.14 for the Credit Agreement for the calendar quarter ended September 30, 2014, and shall not apply to any violation of Section 6.14 of the Credit Agreement with respect to any calendar quarter other than the calendar quarter ended September 30, 2014, or to any actual or prospective default or violation of any other provision of the Credit Agreement or any other Loan Document.

7. Conditions to Effectiveness. This Amendment shall be effective as of the date first above written upon satisfaction of the following conditions precedent:

(a) no Default or Event of Default shall exist;

(b) the Lender shall have received counterparts of this Amendment duly executed by the Borrower and the Guarantors;

(c) the Lender shall have received payment of all fees and reasonable, out of pocket expenses (including the reasonable fees and disbursements of Andrews Kurth LLP) due in connection with this Amendment; and

(d) the Lender shall have received such other consents, approvals or documents as the Lender may reasonably request.

8. Ratification. The Borrower and the Guarantor hereby ratify all of their respective Obligations under the Credit Agreement and each of the Loan Documents to which it is a party, and agrees and acknowledges that the Credit Agreement and each of the Loan Documents to which it is a party are and shall continue to be in full force and effect as amended and modified by this Amendment. Except as expressly stated in Section 6 of this Amendment, nothing in this Amendment extinguishes, novates or releases any right, claim, lien, security interest or entitlement of the Lender created by or contained in any of such documents nor is the Borrower or any Guarantor released from any covenant, warranty or obligation created by or contained herein or therein.

9. Representations and Warranties. The Borrower and the Guarantor hereby represent and warrant to the Lender that (a) this Amendment has been duly executed and delivered on behalf of Borrower and the Guarantor, (b) this Amendment constitutes a valid and legally binding agreement enforceable against the Borrower and the Guarantor in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium or other laws affecting creditors' rights generally and subject to general principles of equity, regardless of whether considered in a proceeding in equity or at law, (c) the representations and warranties made by it in the Credit Agreement and the other Loan Documents are true and correct on and as of the date hereof as though made as of the date hereof, except for such representations and warranties as are by their express terms limited to a specific date, in which case such representations and warranties were true and correct in all material respects as of such specific date, (d) after giving effect to this Amendment, no Default or Event of Default exists under the Credit Agreement or under any Loan Document and (e) the execution, delivery and performance of this Amendment has been duly authorized by the Borrower and the Guarantor.

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10. Release and Indemnity.

(a) The Borrower and the Guarantor hereby release and forever discharge the Lender and each affiliate thereof and each of their respective employees, officers, directors, trustees, agents, attorneys, successors, assigns or other representatives from any and all claims, demands, damages, actions, cross-actions, causes of action, costs and expenses (including legal expenses), of any kind or nature whatsoever, whether based on law or equity, which any of said parties has held or may now own or hold, whether known or unknown, for or because of any matter or thing done, omitted or suffered to be done on or before the actual date upon which this Amendment is signed by any of such parties (i) arising directly or indirectly out of the Loan Documents, or any other documents, instruments or any other transactions relating thereto and/or (ii) relating directly or indirectly to all transactions by and between the Borrower, the Guarantor or their representatives and the Lender or any of its directors, officers, agents, employees, attorneys or other representatives. Such release, waiver, acquittal and discharge shall and does include, without limitation, any claims of usury, fraud, duress, misrepresentation, lender liability, control, exercise of remedies and all similar items and claims, which may, or could be, asserted by the Borrower or the Guarantor including any such caused by the actions or negligence of the indemnified party (other than its gross negligence or willful misconduct).

(b) The Borrower and the Guarantor hereby ratify the indemnification provisions contained in the Loan Documents, including, without limitation, Section 8.03 of the Credit Agreement, and agree that this Amendment and losses, claims, damages and expenses related thereto shall be covered by such indemnities.

11. Counterparts. This Amendment may be signed in any number of counterparts, which may be delivered in original, facsimile or other electronic form (i.e., "PDF") each of which shall be construed as an original, but all of which together shall constitute one and the same instrument.

12. Governing Law. This Amendment shall be construed, and the rights of the parties hereto determined, in accordance with and governed by the law of the State of Texas.

13. Final Agreement of the Parties. THIS AMENDMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES IN RELATION TO MATTERS DESCRIBED HEREIN.

[Signature Pages Follow]

 

 

 

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IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers thereunto duly authorized as of the date first above written.

 

 

 

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Signature Page to Second Amendment to Credit Agreement and Limited Waiver

Exhibit 10.18

THIRD AMENDMENT TO CREDIT AGREEMENT,
AMENDMENT TO REVOLVING CREDIT NOTE
AND LIMITED WAIVER

THIS THIRD AMENDMENT TO CREDIT AGREEMENT, AMENDMENT TO REVOLVING CREDIT NOTE AND LIMITED WAIVER (this “Amendment”), effective as of the        day of March, 2015, is entered into by and among AMERICAN ELECTRIC TECHNOLOGIES, INC., a Florida corporation (the “Borrower”), the Guarantors party hereto (the “Guarantors”) and JPMORGAN CHASE BANK, N.A. (the “Lender”).

RECITALS

WHEREAS, the Borrower and the Lender entered into that certain Amended and Restated Credit Agreement dated as of November 30, 2013 (as amended, the “Credit Agreement”); and

WHEREAS, the Borrower has requested that the Lender amend certain provisions of the Credit Agreement and agree to extend a term loan to the Borrower; and

WHEREAS, the Borrower has requested that the Lender waive compliance with Sections 6.12 and 6.14 of the Credit Agreement for the calendar quarter ending December 31, 2014; and

WHEREAS, the Lender is willing to amend the Credit Agreement, extend a term loan to the Borrower and waive compliance with the Credit Agreement, in each case, subject to the terms and conditions contained in this Amendment;

NOW, THEREFORE, in consideration of the foregoing and the mutual covenants set forth in this Amendment, the Borrower, the Guarantors and the Lender agree as follows:

1. Defined Terms.  Unless otherwise defined herein, capitalized terms used herein have the meanings assigned to them in the Credit Agreement.

2. Amendments to Credit Agreement.

(a) Section 1.01 of the Credit Agreement is hereby amended to add the following new definitions in proper alphabetical order:

“Consolidated EBITDA” means, for any period, Net Income for such period, plus, to the extent deducted from Net Income for such period, the sum of (a) interest expense for such period, (b) income tax expense for such period and (c) depreciation and amortization expense for such period, all calculated for the Borrower and its Domestic Subsidiaries on a Consolidated basis in accordance with GAAP.

“Revolving Loan” means a Loan made pursuant to Section 2.01(a).

“Term Loan” means the Loan made pursuant to Section 2.01(b).

“Term Loan Maturity Date” means February 28, 2020.

“Third Amendment” means that certain Third Amendment to Credit Agreement, Amendment to Revolving Credit Note and Limited Waiver dated as of the Third Amendment Effective Date, among the Borrower, the Guarantors and the Lender.

“Third Amendment Effective Date” means March      , 2015.

(b) Section 1.01 of the Credit Agreement is hereby amended to restate the definitions of the following terms in their entirety as follows:

“Applicable Margin” means (a) with respect to any CBFR Loan, 0.50% per annum, (b) with respect to any Eurodollar Loan (other than the Term Loan), 3.25% per annum and (c) with respect to the Term Loan, 3.50% per annum.

“Availability Period” means the period from and including the Effective Date to but excluding the earlier of the Revolving Credit Maturity Date and the date of termination of the Commitment.

“Available Amount” means (a) at any time during the period commencing on the Third Amendment Effective Date through and including March 31, 2015, $1,500,000, and (b) at any time thereafter, an amount equal to the greater of (i) $1,500,000 and (ii) the lesser of (x) the Commitment and (y) the Borrowing Base.

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“Borrowing Request” means a request by the Borrower for a Revolving Borrowing in accordance with Section 2.03(a), substantially in the form of Exhibit 1.01B hereto.

“CBFR”, when used in reference to any Revolving Loan or Revolving Borrowing, refers to whether such Loan, or the Loans comprising such Borrowing, are bearing interest at a rate determined by reference to the CB Floating Rate.

“Commitment” means the commitment of the Lender to make Revolving Loans and issue Letters of Credit hereunder in a maximum aggregate amount of $4,000,000, as such commitment may be reduced from time to time pursuant to the terms and provisions hereof.

“Fixed Charge Coverage Ratio” means, as of the date of determination, the ratio of (a) the sum of (i) operating profit from the Borrower’s Domestic Subsidiaries, plus (ii) depreciation, plus (iii) cash from foreign joint ventures, minus (iv) non-financed capital expenditures (other than costs incurred in connection with the expansion of the Beaumont Facility up to an amount equal to $4,900,000), all for the four quarter period then ended, to (b) the sum of (i) the current portion of long-term Indebtedness, plus (ii) interest expense, plus (iii) Taxes, plus (iv) Dividends, plus (v) payments in respect of Capital Lease Obligations, all for the same period; provided that (A) for the calendar quarter ending June 30, 2015, the Fixed Charge Coverage Ratio and each of the foregoing components shall be calculated for the two quarter period then ending and (B) for the calendar quarter ending September 30, 2015, the Fixed Charge Coverage Ratio and each of the foregoing components shall be calculated for the three quarter period then ending.

“Interest Payment Date” means (a) with respect to any Revolving Loan, the last Business Day of each calendar month and (b) with respect to the Term Loan, the last day of each calendar quarter.

“Mortgages” means that certain Deed of Trust, Security Agreement and Assignment of Rents dated as of the Third Amendment Effective Date, by M&I, in favor of Harve Truskett, as trustee for the Lender, covering the Beaumont Facility.

“Note” means, collectively, the promissory notes evidencing the Loans and described in Section 2.02(b).

“Revolving Credit Maturity Date” means December 31, 2015.

(c) Section 2.01 of the Credit Agreement is hereby amended and restated in its entirety as follows:

“Section 2.01 The Commitment; The Term Loan.

(a) The Commitment.  Subject to the terms and conditions set forth herein, the Lender agrees to make revolving loans to the Borrower from time to time during the Availability Period in an aggregate principal amount not to exceed at any time outstanding the Available Amount.  Within the foregoing limits and subject to the terms and conditions set forth herein, the Borrower may borrow, prepay and reborrow Revolving Loans.

(b) The Term Loan.  Subject to the terms and conditions set forth herein, the Lender agrees to make a term loan to the Borrower on the Third Amendment Effective Date in the principal amount of $4,000,000.  The Term Loan is not revolving in nature; amounts repaid or prepaid may not be reborrowed.”

(d) Section 2.02 of the Credit Agreement is hereby amended and restated in its entirety as follows:

“Section 2.02 Loans and Borrowings.

(a) Subject to Section 2.11, (i) each Revolving Borrowing shall be comprised entirely of CBFR Loans or Eurodollar Loans as the Borrower may request in accordance herewith and (ii) the Term Loan shall be comprised of a single Eurodollar Borrowing.

(b) The Revolving Loans shall be evidenced by a single revolving credit note, which shall be made by the Borrower in the principal amount of the Commitment, shall be substantially in the form attached hereto as Exhibit 2.02(b) with the blanks appropriately filled, shall be payable to the order of the Lender on the Revolving Credit Maturity Date and shall bear interest as provided in Section 2.10.  The Term Loan shall be evidenced by a single term note, which shall be made by the Borrower in the principal amount of $4,000,000, shall be in form and substance satisfactory to the Lender, shall be payable to the order of the Lender on the Term Loan Maturity Date and shall bear interest as provided in Section 2.10.

(c) At the commencement of each Interest Period for any Eurodollar Revolving Borrowing, such Borrowing shall be in an aggregate amount that is an integral multiple of $100,000 and not less than $500,000.  Revolving Borrowings of more than one Type may be outstanding at the same time; provided that there shall not at any time be more than a total of five Eurodollar Revolving Loans outstanding.

(d) Notwithstanding any other provision of this Agreement, the Borrower shall not be entitled to request, or to elect to convert or continue, any Borrowing if the Interest Period for such Borrowing would end after the Revolving Credit Maturity Date or Term Loan Maturity Date, as applicable.”

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(e) Section 2.03 of the Credit Agreement is hereby amended and restated in its entirety as follows:

“Section 2.03 Requests for Borrowings.

(a) Revolving Borrowings.  To request a Revolving Borrowing, the Borrower shall notify the Lender of such request by telephone (a) in the case of a Eurodollar Loan, not later than 11:00 a.m., Houston time, three Business Days before the date of the proposed Borrowing or (b) in the case of a CBFR Loan, not later than 10:00 a.m., Houston time, on the date of the proposed Borrowing.  Each such telephonic Borrowing Request shall be irrevocable and shall be confirmed promptly by hand or electronic delivery to the Lender of a written Borrowing Request signed by the Borrower.  Each such telephonic and written Borrowing Request shall specify the following information in compliance with Section 2.02:

(i) the aggregate amount of the requested Borrowing;

(ii) the date of such Borrowing, which shall be a Business Day;

(iii) whether such Borrowing is to be a CBFR Borrowing or a Eurodollar Borrowing; and

(iv) the location and number of the Borrower’s account to which funds are to be disbursed, which shall comply with the requirements of Section 2.04.

If no election as to the Type of Borrowing is specified, then the requested Borrowing shall be a CBFR Borrowing.

(b) Term Loan Borrowing.  The execution and delivery of the Third Amendment and the satisfaction of all conditions precedent pursuant to the terms thereof shall be deemed to constitute the Borrower’s request to borrow the Term Loan on the Third Amendment Effective Date.”

(f) Section 2.04 of the Credit Agreement is hereby amended and restated in its entirety as follows:

Section 2.04 Funding of Loans.  Subject to the provisions of Article IV, the Lender shall make the Revolving Loans available to an account of the Borrower maintained with the Lender and designated by the Borrower in the applicable Borrowing Request.  On the Third Amendment Effective Date, the Lender shall advance the Term Loan for the account of the Borrower and the Borrower hereby directs the Lender to apply the proceeds of the Term Loan to repay the Loans outstanding on the Third Amendment Effective Date.”

(g) Section 2.05 of the Credit Agreement is hereby amended to add the following new subsection (e) at the end of said Section:

“(e) The provisions of foregoing clauses (a) through (d) shall apply to Revolving Borrowings only.  With respect to the Term Loan Borrowing, at the end of each Interest Period applicable thereto, unless such Borrowing is repaid as provided herein, such Borrowing shall automatically continue for a successive Interest Period.”

(h) Section 2.06 of the Credit Agreement is hereby amended to restate the last sentence of subsection (b) thereof in its entirety as follows:

“A Letter of Credit shall be issued, amended, renewed or extended only if (and upon such issuance, amendment, renewal or extension of each Letter of Credit the Borrower shall be deemed to represent and warrant that), after giving effect to such issuance, amendment, renewal or extension (i) the LC Obligations shall not exceed the lesser of (A) $3,000,000 and (B) the Available Amount and (ii) the sum of the outstanding principal balance of the Revolving Loans plus the LC Obligations shall not exceed the Available Amount.”

(i) Section 2.06 of the Credit Agreement is hereby further amended to restate subsection (c) thereof in its entirety as follows:

“(c) Each Letter of Credit shall expire at or prior to the close of business on the earlier of (i) the date one year after the date of the issuance of such Letter of Credit (or, in the case of any renewal or extension thereof, one year after such renewal or extension) and (ii) the date that is five Business Days before the Revolving Credit Maturity Date.”

(j) Section 2.07 of the Credit Agreement is hereby amended to restate subsections (a) and (b) thereof in their entirety as follows:

“(a) Unless previously terminated, the Commitment shall terminate on the Revolving Credit Maturity Date.

(b) The Borrower may at any time terminate or from time to time reduce the Commitment without payment of any premium or penalty of any kind; provided that (i) each reduction of the Commitment shall be in an amount that is an integral multiple of $500,000 and (ii) the Borrower shall not terminate or reduce the Commitment if, after giving effect to any concurrent prepayment of the Revolving Loans in accordance with Section 2.09, the sum of the outstanding balance of the Revolving Loans plus the then outstanding LC Obligations would exceed the Available Amount.”

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(k) Section 2.08 of the Credit Agreement is hereby amended to restate subsection (a) thereof in its entirety as follows:

“(a) The Borrower hereby unconditionally promises to pay to the Lender (i) the then unpaid principal amount of each Revolving Loan on the Revolving Credit Maturity Date, (ii) the principal amount of the Term Loan in installments payable on the last day of each calendar quarter during the term hereof, commencing on March 31, 2015, with the first such installment being in the principal amount of $22,222.22, and each such installment thereafter being in the principal amount of $66,666.67 and (iii) the then unpaid principal amount of the Term Loan on the Term Loan Maturity Date.”

(l) Section 2.09 of the Credit Agreement is hereby amended to restate subsections (b) and (c) thereof in their entirety as follows:

“(b) In the event and on each occasion that the sum of the outstanding principal balance of the Revolving Loans and the LC Obligations exceeds the Available Amount, the Borrower shall immediately prepay Revolving Borrowings in an aggregate amount equal to such excess.

(c) In the case of any voluntary prepayment under Section 2.09(a), the Borrower shall notify the Lender by telephone (confirmed by electronic means) of any prepayment hereunder (i) in the case of prepayment of a Eurodollar Borrowing, not later than 11:00 a.m., Houston time, three Business Days before the date of prepayment or (ii) in the case of prepayment of a CBFR Borrowing, not later than 11:00 a.m., Houston time, one Business Day before the date of prepayment.  Each such notice shall be irrevocable and shall specify the prepayment date and the principal amount of each Borrowing or portion thereof to be prepaid.  Each partial prepayment of any Revolving Borrowing shall be in an amount that would be permitted in the case of an advance of a Revolving Borrowing of the same Type as provided in Section 2.02.  Each partial prepayment of the Term Loan shall be in an aggregate amount that is an integral multiple of $100,000 and not less than $500,000.  Each prepayment of a Revolving Borrowing shall be applied ratably to the Loans included in the prepaid Borrowing.  Each prepayment of the Term Loan shall be shall be applied in inverse order of maturity of scheduled principal payments thereunder (including the final payment on the Term Loan Maturity Date).  Prepayments shall be without premium or penalty of any kind and shall be accompanied by accrued interest to the extent required by Section 2.10 and by any amounts due pursuant to Section 2.13.”

(m) Section 2.10 of the Credit Agreement is hereby amended to restate subsection (d) thereof in its entirety as follows:

“(d) Accrued interest on each Loan shall be payable in arrears on each Interest Payment Date for such Loan and, in the case of the Revolving Loans, upon termination of the Commitment; provided that (i) interest accrued pursuant to paragraph (c) of this Section shall be payable on demand, (ii) in the event of any repayment or prepayment of any Loan (other than a prepayment of a CBFR Loan prior to the end of the Availability Period), accrued interest on the principal amount repaid or prepaid shall be payable on the date of such repayment or prepayment and (iii) in the event of any conversion of any Eurodollar Loan prior to the end of the current Interest Period thereof, accrued interest on such Loan shall be payable on the effective date of such conversion.”

(n) Section 2.11 of the Credit Agreement is hereby amended to add the word “and” and the following new clause (iii) at the end of said Section:

“(iii) the Term Loan shall accrue interest at the Adjusted LIBO Rate, plus the Applicable Margin.”

(o) Section 2.12 of the Credit Agreement is hereby amended to add the phrase “or liquidity” immediately after the phrase “capital requirements” in subsection (b) thereof.

(p) Section 3.16 of the Credit Agreement is hereby amended to restate the first sentence thereof in its entirety as follows:

“The proceeds of the Revolving Loans shall be used only for working capital and other general corporate purposes and the proceeds of the Term Loan shall be used only to repay outstanding Loans on the Third Amendment Effective Date.”

(q) Section 5.01 of the Credit Agreement is hereby amended to restate subsection (e) in its entirety as follows:

“(e) for each monthly period when, at any time, the aggregate outstanding Revolving Loans and LC Obligations during any such month are greater than $500,000, then, as soon as available, and in any event within 30 days after the end of each such calendar month, a Borrowing Base Report;”.

(r) Section 5.09 of the Credit Agreement is hereby amended to restate the first sentence thereof in its entirety as follows:

“The proceeds of the Loans will used only for the purposes set forth in Section 3.16.”

(s) Section 6.01 of the Credit Agreement is hereby amended to restate subsection (d) thereof in its entirety as follows:

“(d) intentionally deleted;”.

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(t) Section 6.02 of the Credit Agreement is hereby amended to restate subsection (f) thereof in its entirety as follows:

“(d) intentionally deleted;”.

(u) Section 6.12 of the Credit Agreement is hereby amended and restated in its entirety as follows:

“Section 6.12 Fixed Charge Coverage Ratio.  The Borrower will not permit, as of the end of any calendar quarter commencing with the calendar quarter ending June 30, 2015, the Fixed Charge Coverage Ratio to be less than 1.25 to 1.00.”

(v) Section 6.14 of the Credit Agreement is hereby amended and restated in its entirety as follows:

“Section 6.14 Net Profit.  The Borrower will not permit, (a) as of the end of the calendar quarter ending March 31, 2015, its net income for the three month period most recently ending to be less than $1.00, and (b) as of the end of each calendar quarter thereafter, its net income for the six month period most recently ending to be less than $1.00.”

(w) Article VI is hereby amended to add the following new Section at the end of said Article:

“Section 6.15 Minimum Consolidated EBITDA.  The Borrower will not permit Consolidated EBITDA for the three month period ending March 31, 2015 to be less than $200,000.”

(x) Schedule 1.01 of the Credit Agreement is hereby amended to restate Part 2 thereof in its entirety as follows:

“Intentionally deleted.”

(y) Exhibit 1.01A of the Credit Agreement is hereby amended to restate Exhibit A attached thereto in its entirety in the form attached hereto as Exhibit A.

3. Amendment to Note.  The Amended and Restated Revolving Credit Note dated November 30, 2013, executed by the Borrower in favor of the Lender (the “Revolving Credit Note”), is hereby amended (a) to delete the word “Loans” in the first paragraph thereof and substitute in its place the phrase “Revolving Loans” and (b) to delete the phrase “is the Note” in the second paragraph thereof and substitute in its place the phrase “one of the Notes”.

4. Limited Waiver.  Subject to the terms and conditions set forth herein, the Lender hereby waives compliance with Sections 6.12 and 6.14 of the Credit Agreement for the calendar quarter ending December 31, 2014.  The waivers set forth in this Section 6 (the “Waivers”) are limited to the extent specifically set forth above, and no other terms, covenants or provisions of the Credit Agreement or any other Loan Document are intended to be affected hereby. The Waivers are granted only with respect to compliance with Sections 6.12 and 6.14 of the Credit Agreement for the calendar quarter ended December 31, 2014, and shall not apply to any violation of Section 6.12 or 6.14 of the Credit Agreement with respect to any calendar quarter other than the calendar quarter ended December 31, 2014, or to any actual or prospective default or violation of any other provision of the Credit Agreement or any other Loan Document.

5. Acknowledgement by Borrower.  The Borrower acknowledges that the Lender has initiated a field examination and audit of the Borrower and its Subsidiaries and acknowledges that the results of such examination and audit may result in adjustments to the Borrowing Base and categories of eligibility thereof, in each case, as such adjustments are permitted to be made by the Lender from time to time as set forth in the Credit Agreement.  The Borrower agrees to execute an amendment to the Credit Agreement as may be reasonably requested by the Lender in order to evidence any such adjustments.

6. Conditions to Effectiveness.  This Amendment shall be effective as of the date first above written upon satisfaction of the following conditions precedent:

(a) no Default or Event of Default shall exist;

(b) the Lender shall have received counterparts of this Amendment, duly executed by Borrower and the Guarantors, and a term note in the original principal amount of $4,000,000 and otherwise in form and substance satisfactory to the Lender, duly executed by the Borrower;

(c) the Lender shall have received a deed of trust with respect to the Beaumont Facility, duly executed by M&I, in form and substance satisfactory to the Lender, and the same shall constitute a valid mortgage lien on the Beaumont Facility in favor of the Lender, free and clear of all Liens, other than Permitted Liens;

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(d) the Lender shall have received evidence of insurance coverage in respect of the Beaumont Facility, which coverage shall be satisfactory to the Administrative Agent in all respects and shall name the Administrative Agent as an additional insured and as a mortgagee/loss payee, as applicable;

(e) the Lender shall have received a favorable Phase I environmental report for the Beaumont Facility in form and substance satisfactory to the Lender in all respects;

(f) the Lender shall have received a binding commitment to issue a mortgagee’s policy of title insurance from Old Republic Title Company in favor of the Lender in form and substance, and in the amount of the term note described in clause (b) above, reasonably satisfactory to the Lender, insuring that the deed of trust described in clause (b) above creates a valid Lien, with the priority therein stated, on the estates covered thereby, except for Liens permitted under such deed of trust;

(g) the Lender shall have received an “as-built” survey of the Beaumont Facility in form and substance satisfactory to the Lender;

(h) the Lender shall have received an appraisal of the Beaumont Facility in form and substance satisfactory to the Lender;

(i) the Lender shall have a certification in form and substance satisfactory to the Lender that no part of the Beaumont Facility lies in a Special Floor Hazard Area or other flood hazard or flood plain area however designated, as determined in accordance with the criteria established by the Federal Insurance Administration or any other Governmental Authority having jurisdiction over the Beaumont Facility;

(j) evidence satisfactory to the Lender that all property taxes due and owing in respect of the Beaumont Facility have been paid in full;

(k) the Lender shall have received such documents and certificates as the Lender or its counsel may reasonably request relating to the organization, existence and good standing of the Borrower and the Guarantor, the authorization of the transactions contemplated hereby and any other legal matters relating to the Borrower, the Guarantor, this Amendment or the transaction contemplated hereby, all in form and substance satisfactory to the Lender and its counsel; and

(l) the Lender shall have received payment of all fees and reasonable, out of pocket expenses (including the reasonable fees and disbursements of Andrews Kurth LLP) due in connection with this Amendment; and

(m) the Lender shall have received such other consents, approvals or documents as the Lender may reasonably request.

7. Ratification.  The Borrower and the Guarantor hereby ratify all of their respective Obligations under the Credit Agreement and each of the Loan Documents to which it is a party, and agrees and acknowledges that the Credit Agreement and each of the Loan Documents to which it is a party are and shall continue to be in full force and effect as amended and modified by this Amendment.  Except as expressly stated in Section 4 of this Amendment, nothing in this Amendment extinguishes, novates or releases any right, claim, lien, security interest or entitlement of the Lender created by or contained in any of such documents nor is the Borrower or any Guarantor released from any covenant, warranty or obligation created by or contained herein or therein.

8. Representations and Warranties.  Each of the Borrower and the Guarantor hereby represents and warrants to the Lender that (a) this Amendment and each other Loan Document executed in connection herewith to which it is a party have been duly executed and delivered, (b) this Amendment and each other Loan Document executed in connection herewith to which it is a party constitute a valid and legally binding agreement enforceable against it in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium or other laws affecting creditors’ rights generally and subject to general principles of equity, regardless of whether considered in a proceeding in equity or at law, (c) the representations and warranties made by it in the Credit Agreement and the other Loan Documents are true and correct on and as of the date hereof as though made as of the date hereof, except for such representations and warranties as are by their express terms limited to a specific date, in which case such representations and warranties were true and correct in all material respects as of such specific date, (d) after giving effect to this Amendment, no Default or Event of Default exists under the Credit Agreement or under any Loan Document and (e) the execution, delivery and performance of this Amendment and each other Loan Document executed in connection herewith to which it is a party has been duly authorized by it.

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9. Release and Indemnity.

(a) The Borrower and the Guarantor hereby release and forever discharge the Lender and each affiliate thereof and each of their respective employees, officers, directors, trustees, agents, attorneys, successors, assigns or other representatives from any and all claims, demands, damages, actions, cross-actions, causes of action, costs and expenses (including legal expenses), of any kind or nature whatsoever, whether based on law or equity, which any of said parties has held or may now own or hold, whether known or unknown, for or because of any matter or thing done, omitted or suffered to be done on or before the actual date upon which this Amendment is signed by any of such parties (i) arising directly or indirectly out of the Loan Documents, or any other documents, instruments or any other transactions relating thereto and/or (ii) relating directly or indirectly to all transactions by and between the Borrower, the Guarantor or their representatives and the Lender or any of its directors, officers, agents, employees, attorneys or other representatives.  Such release, waiver, acquittal and discharge shall and does include, without limitation, any claims of usury, fraud, duress, misrepresentation, lender liability, control, exercise of remedies and all similar items and claims, which may, or could be, asserted by the Borrower or the Guarantor including any such caused by the actions or negligence of the indemnified party (other than its gross negligence or willful misconduct).

(b) The Borrower and the Guarantor hereby ratify the indemnification provisions contained in the Loan Documents, including, without limitation, Section 8.03 of the Credit Agreement, and agree that this Amendment and losses, claims, damages and expenses related thereto shall be covered by such indemnities.

10. Counterparts.  This Amendment may be signed in any number of counterparts, which may be delivered in original, facsimile or other electronic form (i.e., “PDF”) each of which shall be construed as an original, but all of which together shall constitute one and the same instrument.

11. Governing Law.  This Amendment shall be construed, and the rights of the parties hereto determined, in accordance with and governed by the law of the State of Texas.

12. Final Agreement of the Parties.  THIS AMENDMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.  THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES IN RELATION TO MATTERS DESCRIBED HEREIN.

[Signature Pages Follow]

 

 

 

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IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers thereunto duly authorized as of the date first above written.

 

 

Signature Page to Third Amendment to Credit Agreement and Limited Waiver

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Signature Page to Third Amendment to Credit Agreement and Limited Waiver

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EXHIBIT A

CALCULATION OF BORROWING BASE

 

Except for an amount of up to $500,000 in respect of foreign Eligible Accounts owed by Account Debtors that are Subsidiaries of Persons incorporated or organized under the laws of the United States and rated at least Baa3 by Moody’s or BBB- by S&P

Third Amendment to Credit Agreement and Limited Waiver

Exhibit A-1

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Third Amendment to Credit Agreement and Limited Waiver

Exhibit A-2

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TERM NOTE

 

FOR VALUE RECEIVED, the undersigned, AMERICAN ELECTRIC TECHNOLOGIES, INC., a Florida corporation (“Maker”), hereby promises to pay to the order of JPMORGAN CHASE BANK, N.A., a national association (“Payee”), at its office located at 712 Main Street, Houston, Harris 77002, or at such other place within Harris County, Texas as Payee may designate in writing to Maker, in lawful money of the United States of America the principal sum of FOUR MILLION AND 00/100 DOLLARS ($4,000,000.00), or the aggregate unpaid principal amount of the Term Loan made under this Note by Payee to Maker pursuant to the terms of the Loan Agreement (as hereinafter defined), together with interest on the unpaid principal balance thereof as set forth in the Loan Agreement, both principal and interest being payable as herein provided.

This Note has been executed and delivered pursuant to, and is subject to certain terms and conditions set forth in, the Amended and Restated Credit Agreement (said Agreement, as amended or otherwise modified from time to time, being the “Loan Agreement”, the terms defined therein and not otherwise defined herein being used herein as therein defined) dated as of November 30, 2013 and is one of the Notes referred to therein. Payments on this Note shall be made and applied as provided herein and in the Loan Agreement, and Payee shall be entitled to the benefits provided in the Loan Agreement. Reference is made to the Loan Agreement for the statement of any obligation of the Payee to advance funds hereunder and the Events of Default upon which the maturity of this Note may be accelerated.

Subject to the provisions of the Loan Agreement, Maker reserves the right to prepay this Note, in whole or in part, at any time, without penalty. All payments hereunder, whether designated as payments of principal or interest, shall be applied: first to unpaid and accrued interest; then to the discharge of any expenses or damages for which Payee may be entitled to receive reimbursement under the terms of this Note or under the terms of any document executed in connection herewith; and, lastly, to unpaid principal in the inverse order of maturity.  Unless changed in accordance with law, the applicable method of calculating the usury ceiling rate under Texas law shall be the indicated “weekly” ceiling rate in effect and applicable to the loan evidenced by this Note, as provided under Chapter 303 of the Texas Finance Code; provided, that Payee may also rely on alternate maximum rates of interest under other applicable laws if they are higher.

All co-signers and endorsers of this Note are to be regarded as principals as to their respective joint and several liability to any legal holder hereof and Maker, and each of the guarantors, sureties and endorsers, hereby expressly and severally waive grace, and all notices, demands, presentments for payment, notice of nonpayment, protest and notice of protest, notice of intent to accelerate, notice of acceleration of the indebtedness due hereunder, and diligence in collecting this Note or enforcing any security rights of Payee under any document securing this Note, and agree (i) that Payee or other legal holder of this Note may, at any time, and from time to time, on request of or by agreement with Maker, extend the date of maturity of all or any part hereof, without notifying or consulting with any Maker or principal hereof, who shall remain fully obligated for the payment hereof; (ii) that it will not be necessary for Payee or any holder hereof, in order to enforce payment of this Note, to first institute or exhaust its remedies against Maker or other party liable therefor or to enforce its rights against any security for this Note; and (iii) to any substitution, exchange or release of any security now or hereafter given for this Note or the release of any party primarily or secondarily liable hereon.

In the Event of Default hereunder or under any of the instruments securing payment hereof and this Note is placed in the hands of an attorney for collection (whether or not suit is filed), or if this Note is collected by suit or legal proceedings or through the probate court or bankruptcy proceedings, Maker agrees to pay the holder hereof the costs and reasonable attorney’s fees incurred in the collection hereof

As recited in Section 8.13 of the Loan Agreement, which Section is incorporated by reference herein, notwithstanding any provision herein to the contrary, Payee shall never be entitled to receive or collect interest hereunder, nor shall or may amounts received hereunder be credited to interest hereunder, so that Payee shall receive or be paid interest exceeding the Maximum Rate.

Payment of this Note is secured and guaranteed as described in one or more security agreements and guaranties referred to in the Loan Agreement.

 

 

Third Amendment to Credit Agreement and Limited Waiver

Exhibit A-3

Exhibit 10.37

Summary of Compensation For Named Executive Officers 2015*

In February 2015, the Compensation Committee of the Board of Directors established 2015 salary and target bonus applicable to our executive officers as follows:

 

 

 

Exhibit 21

Subsidiaries of Registrant

M&I Electric Industries, Inc., a Texas corporation

South Coast Electric Systems, LLC, a Mississippi limited liability company

American Access Technologies, Inc., a Florida corporation

M&I Electric Brazil Sistemas e Servicios em Energia LTDA, a Brazilian corporation

 

 

Exhibit 23.1

CONSENT OF HAM, LANGSTON & BREZINA, LLP

We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (File Nos. 333-183609, 333-167305, 333-149724 and 333-175303) of American Electric Technologies, Inc. (formerly American Access Technologies, Inc.) of our report dated March 30. 2015 with respect to our audit of the consolidated financial statements of American Electric Technologies, Inc. and Subsidiaries as of and for the years ended December 31, 2014 and 2013, which appears in this Annual Report on Form 10-K.

/s/ Ham, Langston & Brezina, LLP

Houston, Texas

March 30, 2015

 

Exhibit 31.1

CERTIFICATIONS

I, Charles M. Dauber, certify that:

Date: March 30, 2015

 

 

 

Exhibit 31.2

CERTIFICATIONS

I, Andrew L. Puhala, certify that:

Date: March 30, 2015

 

 

 

Exhibit 32.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Charles M. Dauber ,certify, pursuant to 18U.S.C.Section1350,as adopted pursuant to Section906 of the Sarbanes-Oxley Act of 2002, that the Annual Report of American Electric Technologies, Inc. on Form 10-K for the fiscal year ended December 31, 2014 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in such Form l0-K fairly presents in all material respects the financial condition and results of operations of American Electric Technologies, Inc.

 

I, Andrew L. Puhala, certify, pursuant to 18U.S.C.Section1350,as adopted pursuant to Section906 of the Sarbanes-Oxley Act of 2002, that the Annual Report of American Electric Technologies, Inc. on Form 10-K for the fiscal year ended December 31, 2014 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in such Form l0-K fairly presents in all material respects the financial condition and results of operations of American Electric Technologies, Inc.