September 7, 2016

 

 

 

EnviroStar, Inc.

290 NE 68th Street

Miami, Florida 33138

Attention: Henry Nahmad, President

 

Dear Mr. Nahmad,

 

This letter is to confirm that WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank")
has agreed to provide the credit facilities described below to EnviroStar, Inc.,
a Delaware corporation ("Borrower”), subject to all of the terms and conditions
contained herein.

 

LINE OF CREDIT:

 

Line of Credit. A revolving line of credit under which Bank will make advances
to Borrower from time to time up to and including the date which is five (5)
years from the closing of the Line of Credit (the “Line of Credit Maturity
Date”), not to exceed at any time the maximum principal amount of $15,000,000.00
("Line of Credit"), the proceeds of which shall be used to finance Borrower’s
working capital requirements and certain approved acquisitions.

 

Limitation on Borrowings. Outstanding borrowings under the Line of Credit, to a
maximum of the principal amount set forth above, shall not at any time exceed
the lesser of (i) $15,000,000, or (ii) the amount available as calculated under
the Asset Coverage Ratio. All of the foregoing shall be determined by Bank upon
receipt and review of all collateral reports and other additional documents as
Bank may from time to time reasonably require.

 

TERM LOAN:

 

Term Loan. A term loan in the principal amount of $5,000,000 ("Term Loan"), the
proceeds of which shall be used to finance the acquisition of substantially all
of the assets of Western State Design, Inc.

 

Repayment. Principal and interest on the Term Loan shall be repaid monthly in
installments of $59,523.81 each, based on an 84-month straight-line principal
amortization schedule, with a final installment consisting of all remaining
unpaid principal and accrued interest due and payable in full on the date which
is five (5) years from the closing of the Term Loan (the “Term Loan Maturity
Date”).

 

Prepayment. Borrower may prepay principal on the Term Loan at any time, in any
amount and without penalty, subject to any early breakage or termination fees
set forth in any interest rate swap or other swap transaction. All prepayments
shall be applied on the most remote principal installment or installments then
unpaid.

 

DD01003 [image_001.gif]

 

EnviroStar, Inc.

Page 2

 

 

INTEREST RATE PROTECTION:

 

To hedge the variable interest expense of the Term Loan, Borrower shall have the
option to acquire an interest rate swap or other swap transaction, provided that
the terms, conditions and provider of the swap are reasonably acceptable to Bank
and each party to the swap and each of Borrower’s credit support providers
satisfy all eligibility, suitability and other requirements under the Commodity
Exchange Act and CFTC regulations.

 

Any swap with Bank shall be secured and guaranteed by the same collateral and
Guarantors securing and guaranteeing the credit facility.

 

Since the current level of our swap rates may be important to Borrower in
selecting Bank as provider of the credit facility, a hedge using a 5-year
interest rate swap would have a Bank fixed rate of 4.16% hedging LIBOR,
inclusive of a 0% floor, as the floating rate index together with the loan
spread set forth herein.  Client may also choose not to hedge the 0% floor and
in this case the rate is 4.03%. The above is indicative only and is based on
market conditions existing as of approximately 8:50am eastern time on September
7, 2016. An actual swap rate may be higher or lower depending on market
conditions at the time a swap is entered into.

 

Nothing herein is a recommendation, solicitation, commitment or offer for any
swap, and Borrower acknowledges that Bank may be unable under the Commodity
Exchange Act and regulations thereunder to recommend or offer Borrower a swap
unless Bank determines the swap would be suitable and certain other requirements
are satisfied, including onboarding documentation and swap trading relationship
documentation. Express wording in swap transactions is required to place a 0%
floor on LIBOR or other floating benchmark rate of the swap transaction, and no
such 0% floor is included in an interest rate swap or other swap transaction
unless mutually agreed between the parties as reflected in the swap
confirmation. Before executing any closing documents for a credit facility,
Borrower and its credit support providers should review and understand Bank’s
“Disclosure of Material Information for Swaps” and accompanying documents
available at: www.wellsfargo.com/swapdisclosures, including the risks and
potential costs of locking in a fixed rate under an interest rate swap.

 

If Borrower would like information about swaps or hedging with Bank, we can
refer you to our swap specialists.

 

INTEREST/FEES:

 

Interest. The outstanding principal balance of the Line of Credit shall bear
interest at the rate of One Month LIBOR plus 2.25% and the outstanding principal
balance of the Term Loan shall bear interest at the rate of One Month LIBOR plus
2.85%.

 

Commitment Fee. Borrower shall pay to Bank a non-refundable commitment fee in
connection with the Line of Credit equal to $37,500, and a non-refundable
commitment fee in connection with the Term Loan equal to $25,000, which fees
shall be due and payable in full on the date of the closing of the Line of
Credit and the Term Loan, respectively.

 

 

EnviroStar, Inc.

Page 3

 

 

COLLATERAL:

 

As security for all indebtedness and other obligations of Borrower to Bank
described herein, Borrower shall grant to Bank security interests of first
priority in all assets of Borrower and its Subsidiaries, except as may be
approved by Bank. The Line of Credit and the Term Loan shall be cross-defaulted
and cross-collateralized.

 

Borrower shall pay to Bank immediately upon demand the full amount of all
charges, costs and expenses (to include fees paid to third parties and all
allocated costs of Bank personnel), expended or incurred by Bank in connection
with any of the foregoing security, including without limitation, filing fees
and costs of appraisals and audits.

 

GUARANTIES:

 

The payment and performance of all indebtedness and other obligations of
Borrower to Bank under the Term Loan and the Line of Credit shall be guaranteed
jointly and severally by Borrower’s wholly-owned Subsidiaries, including, but
not limited to, Steiner-Atlantic Corp., Dryclean USA Corp., and Western State
Design, Inc. (each, a “Guarantor”). All newly formed, created and/or acquired
Subsidiaries formed, created or acquired after the closing of the credit
facilities shall promptly execute joinders to the Guaranty provided to Bank in
form acceptable to Bank.

 

SUBORDINATION OF DEBT:

 

All indebtedness of Borrower to its shareholders, subsidiaries and affiliates
shall be subordinated in right of repayment to all indebtedness of Borrower to
Bank. The foregoing shall not include Borrower’s obligations related to
regularly scheduled lease or rental obligations to its shareholders pursuant to
bona fide written leases (copies of which have been provided to Bank), ordinary
compensation to its shareholders (which compensation does not constitute
indebtedness), share issuances to its shareholders, post-closing adjustments to
the purchase price owed to Western State Design, Inc. in the asset purchase
agreement, and buyer and seller indemnifications under the asset purchase
agreement.

 

CONDITIONS PRECEDENT:

 

Prior to Bank's extension to Borrower of any credit contemplated by this letter,
all of the following shall have occurred:

 

Field Exam. Bank shall have completed a Field Exam prior to the closing of the
Line of Credit and the Term Loan satisfactory to Bank, which Field Exam shall be
at Borrower’s expense. The initial Field Exam, and any other Field Exams
required during the term of the Line of Credit, shall be capped at $12,500 each.

 

 

EnviroStar, Inc.

Page 4

 

 

Investment Requirement. Prior to the closing of the Line of Credit and the Term
Loan, Borrower shall have raised a minimum of $6 million in cash, via a Private
Investment in Public Equity (PIPE). A minimum of $6 million of the PIPE funds
raised must be applied towards the cash portion ($18 million) of the total $28
million purchase price set for the acquisition of Western State Design, Inc.

 

Review of Due Diligence and Contracts. Bank shall have completed satisfactory
review of due diligence required by Bank including, without limitation, (i) the
Borrower’s due diligence, relating to the pending acquisition of Western State
Design, Inc and (ii) Borrower’s two largest contracts outlined on their most
recent backlog report.

 

Loan Documents. Borrower shall have executed, or caused to be executed by any
Guarantor or other party required hereby, and delivered to Bank, any and all
promissory notes, contracts, instruments and other documents, including without
limitation a comprehensive loan agreement, required by Bank to evidence Bank's
extension of credit pursuant to the terms and conditions of this letter, all of
which shall be in form and substance satisfactory to Bank and shall include, in
addition to the terms and conditions of this letter, customary representations,
warranties, conditions, covenants, events of default and other provisions.

 

Financial Condition. There shall have been no material adverse change, as
determined by Bank, in the financial condition or business of Borrower or any of
its Subsidiaries, nor any material decline, as determined by Bank, in the market
value of any collateral required hereunder or a substantial or material portion
of the assets of Borrower or any such Subsidiary or each Guarantor.

 

Insurance. Borrower shall have delivered to Bank evidence of insurance coverage
on all Borrower's property, in form, substance, amounts, covering risks and
issued by companies satisfactory to Bank, and where required by Bank, with loss
payable endorsements in favor of Bank.

 

COVENANTS:

 

The loan agreement required by Bank shall include such covenants as Bank may
require, which may include, without limitation, (a) customary covenants
obligating Borrower, and any Guarantor or other party as required by Bank, to:
provide financial statements; preserve and maintain its facilities; maintain
insurance; pay taxes and other indebtedness when due; notify Bank of litigation;
and maintain Borrower's financial condition at levels and in accordance with
standards acceptable to Bank; and (b) covenants restricting the ability of
Borrower, or any such Guarantor or other party, to: invest in fixed assets;
incur lease obligations; borrow from others; create or permit liens on assets;
merge; change the nature of Borrower's business; sell a substantial part of
Borrower's assets; make loans or investments; pay dividends or redeem stock; or
guaranty debts of others.

 

The loan agreement will include language to allow Bank to file against each
individual government contract in accordance with the terms of the Assignment of
Claims Act of 1940,

 

EnviroStar, Inc.

Page 5

 

 

following and during the continuance of an Event of Default under the terms of
the loan agreement. In addition, Borrower shall provide executed “Notice of
Assignment of Accounts” instruments from each government contract party under a
contract to which it is a party as a condition to closing, provided however,
that with respect to government contracts to which Western State Design, Inc.,
Borrower, Guarantor and/or their subsidiaries is a party, Borrower will obtain
such Notice of Assignment of Accounts from the applicable government contract
party promptly after such party has approved the assignment of such contract to
Borrower; provided, however, so long as such contracts otherwise satisfy the
eligibility requirements set forth in the loan agreement, such contracts of
Western State Design, Inc., Borrower, Guarantor and/or their subsidiaries will
be considered Eligible Government Account Receivables for the calculation of the
Asset Coverage Ratio for a period of 120 days from the closing of the
acquisition of Western State Design, Inc., notwithstanding Bank has not received
such Notices of Assignment of Accounts and such contracts have not yet been
assigned to Borrower.

 

Without limiting the covenants which Bank may require in the loan agreement with
Borrower, Bank has determined that such document will include Borrower's
agreement:

 

Financial Statements. To provide to Bank all of the following, in form and
detail satisfactory to Bank:

 

ØAnnual contract waterfall report for contracts longer than one year.

ØReport to Bank of newly acquired entities; Bank will add newly acquired
entities as Guarantors to the Loan Agreement.

ØNot later than 90 days after and as of each fiscal year end, an audited
financial statement of Borrower, prepared by a CPA reasonably acceptable to Bank
to include balance sheet, income statement and cash flow statement.

ØNot later than 45 days after and as of each fiscal quarter end, a company
prepared financial statement of Borrower, prepared by Borrower, to include
balance sheet, income statement and cash flow statement.

ØNot later than 45 days after and as of each fiscal quarter end, Accounts
Receivable Aging Report, Work in Process, Backlog Report, Inventory Report, and
Accounts Payable Aging.

ØNot later than 30 days after the close each fiscal year end the Borrower shall
submit an annual financial projection/budget to the Bank.

ØCovenant Compliance Certificate to be provided along with each financial
statement, certified as true and correct by person with appropriate Borrower
authority.

 

Financial Performance Covenants:

 

Financial Performance Covenants, to be tested quarterly and calculated on a
rolling four quarter basis, to include the following:

 

Fixed Charge Coverage Ratio (FCCR). Minimum of 1.25 to 1.00. FCCR shall be
defined as: the sum of Net Profit After Tax, Depreciation, Amortization,
Interest Expense (including any interest permitted to be paid on Shareholder
Debt), +/-Net Distributions; divided by the sum of interest expense, current
portion of long term debt (including any principal payments permitted to be paid
on Shareholder Debt), and capitalized lease payments.

 

 

EnviroStar, Inc.

Page 6

 

 

Asset Coverage Ratio. Minimum of 1.00 to 1.00, compliance to be measured
quarterly, unless utilization under the Line of Credit exceeds 50% whereby the
Asset Coverage Ratio will be measured monthly. The Asset Coverage Ratio shall be
defined as: the ratio of (a) the sum of (i) ninety percent (90%) of Eligible
Government Account Receivables, plus (ii) eighty-five percent (85%) of Eligible
Commercial Accounts Receivables, plus (iii) the sum of (A) up to sixty percent
(60%) of Eligible Equipment Inventory, plus (B) up to forty percent (40%) of
Eligible Parts Inventory divided by (C) the outstanding principal balance of the
Revolving Line of Credit. Advance rates outlined within the Asset Coverage Ratio
to be limited to the maximum amount as determined in the required Pre-Loan Field
Examination. For purposes of calculating the Asset Coverage Ratio upon the
acquisition of Western State Design, Inc., such ratio shall be determined by a
pro-forma balance sheet provided by Borrower prior to the closing of the
acquisition of Western State Design, Inc., so long as the closing of the Line of
Credit occurs within three (3) business days from the closing of such
acquisition. Bank acknowledges that the accounts of Western State Design, Inc.
shall not be deemed ineligible for a period of 120 days from closing of the
acquisition of Western State Design, Inc., even though Bank has not received the
Notices of Assignment of Accounts with respect to its government contracts.

 

Ineligible Accounts Receivable may include, without limitation among other
customary ineligible Accounts, Accounts more than 120 days past due date,
Cross-Aging more than 90 days past due date, Concentration Caps, Pre-billings,
Foreign Accounts, Affiliate/Employee/Intracompany Accounts, Contra Accounts,
Bonded Receivables, Retentions, Accounts in Litigation, bankruptcy,
receivership, dispute or with a collection agency.

 

Senior Leverage Ratio. Maximum of 2.50 to 1.00. Senor Leverage Ratio shall be
defined as: Total Funded Senior Secured Debt divided by Earnings Before Interest
Taxes Deprecation Amortization (EBITDA), where Funded Senior Secured Debt is
defined as the outstanding principal balance of all Senior Secured Debt. EBITDA
shall exclude one-time charges related to the acquisition of Western State
Design, Inc. and shall exclude reasonable one-time charges for other
acquisitions permitted by Bank, in accordance with the terms of the Loan
Documents.

 

Total Leverage Ratio. Maximum of 3.50 to 1.00. Total Leverage Ratio shall be
defined as: Total Funded Senior Secured Debt plus Subordinated Shareholder Debt
divided by Earnings Before Interest Taxes Depreciation Amortization (EBITDA),
where Total Funded Senior Secured Debt plus Subordinated Debt is defined as the
outstanding principal balance of all Senior Secured Debt plus Subordinated Debt.
EBITDA shall exclude one-time charges related to the acquisition of Western
State Design, Inc. and shall exclude reasonable one-time charges related to
other acquisitions approved by Bank in accordance with the terms of the Loan
Documents. All Shareholder Debt must be fully subordinated to the Bank’s Debt.

 

Profitability. No quarterly loss is permitted. This provision shall exclude
one-time expenses related to the acquisition of Western States Design, Inc., and
such other reasonable one-time expenses related to other acquisitions approved
by Bank in accordance with the terms of the Loan Documents.

 

Distributions. Distributions will be limited to a maximum of 35% of Net Income
and prohibited after the occurrence of an Event of Default.

 

 

EnviroStar, Inc.

Page 7

 

 

Future Acquisitions. To be limited to the total purchase price but not greater
than $5,000,000 in the aggregate in any calendar year, without Bank prior
approval, which shall not be unreasonably withheld or delayed, and provided also
that the Borrower demonstrates proforma compliance with all loan covenants prior
to borrowing for said acquisition(s).

 

Litigation. To promptly give notice in writing to Bank of any litigation pending
or threatened against Borrower.

 

Primary Deposit Relationship. Bank shall be the primary depository and treasury
management service provider of Borrower and its Subsidiaries.

 

ADDITIONAL TERMS AND PROVISIONS:

 

Whether or not any credit is extended to Borrower or a loan agreement or any
other documents are agreed to and executed, Borrower shall be liable for and
shall pay to Bank, immediately upon demand, the full amount of all payments,
advances, charges, costs and expenses, including reasonable attorneys' fees (to
include outside counsel fees and all allocated costs of Bank's in-house counsel)
expended or incurred by Bank in connection with the negotiation and/or
preparation of this letter, any such loan agreement, and any other contracts,
instruments and documents required hereunder or thereunder. Bank or a third
party law firm it choose shall prepare legal documents required to complete
these loans. The legal fees shall be capped at $7,500 in the event that comments
to the Loan Documents are limited to one major turn of comments.

 

This letter shall be governed by and construed in accordance with the laws of
the State of New York. Upon the demand of any party, any action, dispute, claim
or controversy of any kind, whether in contract or tort, statutory or common
law, legal or equitable, arising under or in any way pertaining to this letter
or any extensions of credit or other activities, transactions or obligations of
any kind related hereto, shall be resolved by binding arbitration administered
by the American Arbitration Association ("AAA") in accordance with the AAA
Commercial Arbitration Rules and the Federal Arbitration Act (Title 9 of the
United States Code), notwithstanding any conflicting choice of law provision
herein. Bank's current standard provision governing arbitration of disputes is
deemed incorporated herein as though set forth in full and shall be included in
full in the loan agreement and/or other contracts, instruments and documents
required hereby. Any party who fails or refuses to submit to arbitration
following a lawful demand by any other party shall bear all costs and expenses
incurred by such other party in compelling arbitration.

 

The commitment set forth herein is personal to Borrower and may not be
transferred or assigned without the prior written consent of Bank. Neither this
letter, nor any portions hereof, may be disclosed or exhibited to any person or
entity without the prior written consent of Bank.

 

Bank reserves the right to terminate this commitment at any time prior to
receipt by Bank of a copy of this letter executed below by Borrower.

 

 

EnviroStar, Inc.

Page 8

 

 

Your acknowledgment of this letter, together with deliver to the Bank of a
deposit in the amount of $25,000 (the “Deposit”) shall constitute acceptance of
the foregoing terms and conditions. Such Deposit shall be used to cover costs
and expenses incurred by the Bank (including fees and disbursements of outside
counsel). Any portion of the Deposit remaining at Closing shall be credited to
the Commitment Fees. Unless accepted or terminated, this commitment shall expire
on September 9, 2016. If the loan documentation required by Bank hereunder is
not completed and the credit contemplated hereunder has not been extended by
Bank to Borrower for any reason by October 30, 2016, then this commitment shall
expire on said date.

 

Sincerely,   WELLS FARGO BANK,   NATIONAL ASSOCIATION               By: /s/
Robert Lozano     Robert Lozano, Regional Vice President         By: /s/ Matthew
J. Rapport     Matthew J. Rapoport, Assistant Vice President                    
Acknowledged and accepted as of September 7, 2016.         EnviroStar, Inc., a
Delaware corporation         By: /s/ Henry Nahmad   Name: Henry Nahmad   Title:
Chief Executive Officer