-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BJWBcVyzk7seUEQ54b+DqTq1CjdjnY2JM67LJ5hnoVpTDLGpaV3b3Ee0nBz6JVxy X1c/tv3O4Aafv9af0yPI+w== 0000893220-04-002545.txt : 20041122 0000893220-04-002545.hdr.sgml : 20041122 20041122171719 ACCESSION NUMBER: 0000893220-04-002545 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 28 CONFORMED PERIOD OF REPORT: 20040930 FILED AS OF DATE: 20041122 DATE AS OF CHANGE: 20041122 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ESCALON MEDICAL CORP CENTRAL INDEX KEY: 0000862668 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 330272839 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-20127 FILM NUMBER: 041161578 BUSINESS ADDRESS: STREET 1: 351 EAST CONESTOGA ROAD STREET 2: PLZ LEVEL CITY: WAYNE STATE: PA ZIP: 19087 BUSINESS PHONE: 6106886830 MAIL ADDRESS: STREET 1: 351 EAST CONESTOGA ROAD CITY: WAYNE STATE: PA ZIP: 19087 FORMER COMPANY: FORMER CONFORMED NAME: INTELLIGENT SURGICAL LASERS INC DATE OF NAME CHANGE: 19930328 10-Q 1 w68886e10vq.txt FORM 10-Q FOR ESCALON MEDICAL CORP UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------- FORM 10-Q (X) Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 2004. ( ) Transitional report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transitional period from ________ to________ COMMISSION FILE NUMBER 0-20127 ------------------------------ ESCALON MEDICAL CORP. (Exact name of Registrant as specified in its charter) PENNSYLVANIA 33-0272839 (State or other jurisdiction of (I.R.S. Employer incorporation or organization Identification Number) 575 EAST SWEDESFORD ROAD, SUITE 100, WAYNE, PA 19087 (Address of principal executive offices, including zip code) (610) 688-6830 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for 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 is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] At November 8, 2004, 5,858,808 shares of common stock were outstanding. ESCALON MEDICAL CORP. FORM 10-Q QUARTERLY REPORT TABLE OF CONTENTS PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements 2 Condensed Consolidated Balance Sheet as of September 30, 2004 (Unaudited) and June 30, 2004 2 Condensed Consolidated Statement of Operations for the three-month periods ended September 30, 2004 and 2003 (Unaudited) 3 Condensed Consolidated Statement of Cash Flows for the three-month periods ended September 30, 2004 and 2003 (Unaudited) 4 Condensed Consolidated Statement of Shareholders' Equity for the three-month period ended September 30, 2004 (Unaudited) 5 Notes to Condensed Consolidated Financial Statements (Unaudited) 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 18 Item 3. Quantitative and Qualitative Disclosures About Market Risk 35 Item 4. Controls and Procedures 36 PART II. OTHER INFORMATION Item 1. Legal Proceedings 37 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 38 Item 5. Other Information 38 Item 6. Exhibits 38
1 ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ESCALON MEDICAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET
September 30, June 30, 2004 2004 ------------ ------------ ASSETS (Unaudited) Current assets: Cash and cash equivalents $ 5,862,212 $ 12,601,971 Accounts receivable, net 4,469,782 2,492,689 Inventory, net 4,633,113 1,781,592 Note receivable 150,000 150,000 Other current assets 1,186,054 539,508 ------------ ------------ Total current assets 16,301,161 17,565,760 ------------ ------------ Furniture and equipment, net 1,236,606 409,187 Goodwill 19,214,098 10,591,795 Trademarks and trade names, net 616,906 616,906 Patents, net 615,942 172,078 Other assets 154,459 101,389 ------------ ------------ Total assets $ 38,139,172 $ 29,457,115 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Line of credit $ 1,187,027 $ 250,000 Current portion of long-term debt 221,668 1,621,687 Accounts payable 1,798,502 499,242 Accrued expenses 3,910,326 1,229,498 ------------ ------------ Total current liabilities 7,117,523 3,600,427 Long-term debt, net of current portion 594,214 2,396,019 ------------ ------------ Total liabilities 7,711,737 5,996,446 Shareholders' equity: Preferred stock, $0.001 par value; 2,000,000 shares authorized; no shares issued Common stock, $0.001 par value; 35,000,000 shares authorized; 5,858,808 and 5,017,122 shares issued and outstanding at September 30, 2004 and June 30, 2004, respectively 5,860 5,018 Common stock warrants 1,601,346 1,601,346 Additional paid-in capital 63,270,984 56,438,903 Accumulated deficit (34,468,699) (34,584,598) Accumulated other comprehensive income 17,944 -- ------------ ------------ Total shareholders' equity 30,427,435 23,460,669 ------------ ------------ Total liabilities and shareholders' equity $ 38,139,172 $ 29,457,115 ============ ============
See notes to condensed consolidated financial statements 2 ESCALON MEDICAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
Three Months Ended September 30, ------------------------------- 2004 2003 ----------- ----------- Product revenue $ 4,636,457 $ 2,841,127 Other revenue 655,704 570,515 ----------- ----------- Revenues, net 5,292,161 3,411,642 ----------- ----------- Costs and expenses: Cost of goods sold 2,671,348 1,212,799 Research and development 315,762 207,130 Marketing, general and administrative 2,182,487 1,214,196 ----------- ----------- Total costs and expenses 5,169,597 2,634,125 ----------- ----------- Income from operations 122,564 777,517 ----------- ----------- Other income and expenses: Equity in Ocular Telehealth Management, LLC (29,201) -- Interest income 32,092 679 Interest expense 3,413 (118,559) ----------- ----------- Total other income and expenses 6,304 (117,880) ----------- ----------- Income before income taxes 128,868 659,637 Income taxes 12,969 36,481 ----------- ----------- Net income $ 115,899 $ 623,156 =========== =========== Basic net income per share $ 0.021 $ 0.185 =========== =========== Diluted net income per share $ 0.019 $ 0.154 =========== =========== Weighted average shares - basic 5,564,469 3,365,359 =========== =========== Weighted average shares - diluted 6,141,958 4,049,298 =========== ===========
See notes to condensed consolidated financial statements 3 ESCALON MEDICAL CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
Three Months Ended September 30, --------------------------------- 2004 2003 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 115,899 $ 623,156 Adjustments to reconcile net income to net cash (used in)/ provided by operating activities: Depreciation and amortization 91,885 64,377 Loss of Ocular Telehealth Management, LLC 29,201 -- Change in operating assets and liabilities: Accounts receivable, net (552,060) 295,361 Inventory, net (294,289) (72,715) Other current and long-term assets (306,952) (6,630) Accounts payable, accrued and other liabilities (1,018,470) (256,801) ------------ ------------ Net cash (used in)/provided by operating activities (1,934,786) 646,748 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of Drew, net of cash 295,373 -- Investment in Ocular Telehealth Management, LLC (130,000) -- ------------ Purchase of fixed assets (39,773) (15,685) ------------ ------------ Net cash (used in)/provided by investing activities 125,600 (15,685) CASH FLOWS FROM FINANCING ACTIVITIES: Line of credit repayment (669,269) (500,000) Principal payments on term loans (4,258,754) (365,233) ------------ ------------ Net cash provided by/(used in) financing activities (4,928,023) (865,233) ------------ ------------ Effect of exchange rate changes on cash & cash equivalents (2,551) -- Net decrease in cash and cash equivalents (6,739,760) (234,170) Cash and cash equivalents, beginning of period 12,601,971 298,390 ------------ ------------ Cash and cash equivalents, end of period $ 5,862,211 $ 64,220 ============ ============ SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION: Interest paid $ 208,019 $ 130,670 ============ ============ Income taxes $ 184,300 $ 92,000 ============ ============ SUPPLEMENTAL SCHEDULE OF NON-CASH INFORMATION: Accounts receivable 1,433,324 -- Inventory 2,562,848 -- Other current assets 577,140 -- Furniture and equipment 868,839 -- Patents 461,779 -- Other long-term assets 264,530 -- Line of credit 1,617,208 -- Current liabilities 4,548,746 -- Liability for shares reserved for future exchange 597,019 -- Long-term debt 767,165 -- Exchange of common stock 6,833,420 --
See notes to condensed consolidated financial statements 4 ESCALON MEDICAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004 (UNAUDITED)
Accumulated Common Stock Common Additional Other Total ------------------- Stock Paid-in Accumulated Comprehensive Shareholders' Shares Amount Warrants Capital Deficit Income Equity --------- ------ ---------- ----------- ------------ ------------ ------------- Balance at June 30, 2004 5,017,122 $5,018 $1,601,346 $56,438,903 $(34,584,598) $ -- $23,460,669 Acquisition of Drew 841,686 842 -- 6,832,081 -- -- 6,832,923 Foreign currency translation -- -- -- -- -- 17,944 17,944 Net income -- -- -- -- 115,899 -- 115,899 --------- ------ ---------- ----------- ------------ -------- ----------- Balance at September 30, 2004 5,858,808 $5,860 $1,601,346 $63,270,984 $(34,468,699) $ 17,944 $30,427,435 ========= ====== ========== =========== ============ ======== ===========
See notes to condensed consolidated financial statements 5 ESCALON MEDICAL CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The Company operates in the healthcare market, specializing in the development, manufacture and marketing of (1) ophthalmic medical devices and pharmaceuticals; (2) instrumentation and consumables for use in human and veterinary hematology; (3) instrumentation and consumables for the diagnosing and monitoring of diabetes; and (4) vascular access devices. The accompanying unaudited condensed consolidated financial statements include the accounts of Escalon Medical Corp. and its subsidiaries, collectively referred to as "Escalon" or the "Company." Additionally, the Company's investment in Ocular Telehealth Management, LLC ("OTM") is accounted for under the equity method. All intercompany accounts and transactions have been eliminated. The accompanying condensed consolidated financial statements are unaudited and are presented pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). Accordingly, these consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company's 2004 Annual Report on Form 10-K. In the opinion of management, the accompanying consolidated financial statements reflect all adjustments (which are of a normal recurring nature) necessary for a fair presentation of the financial position, results of operations and cash flows for interim periods presented. The results of operations are not necessarily indicative of the results that may be expected for the full year. 2. ACQUISITION OF DREW SCIENTIFIC GROUP, PLC On July 23, 2004, Escalon acquired approximately 67% of the outstanding ordinary shares of Drew Scientific Group Plc ("Drew"), a United Kingdom Company, pursuant to the Company's exchange offer for all of the outstanding ordinary shares of Drew, and since that date has acquired substantially all of the Drew shares. As of September 30, 2004, Escalon had acquired approximately 94% of their ordinary shares of Drew. During the remainder of fiscal 2005, Escalon expects to compel Drew shareholders to tender all of the remaining outstanding Drew shares pursuant to procedures under United Kingdom laws and regulations. The results of Drew's operations have been included in the consolidated financial statements since July 23, 2004, the date on which Escalon acquired approximately 67% of the outstanding ordinary shares of Drew. Drew is a diagnostics company specializing in the design, manufacture and distribution of analytical systems for laboratory testing worldwide. Drew is focused on providing instrumentation and consumables for the diagnosis and monitoring of medical disorders in the areas of diabetes, cardiovascular diseases and hematology. In addition, Drew supplies diagnostic systems that perform blood component tests. Escalon expects to operate Drew as a wholly owned separate business segment. The aggregate purchase price of Drew was $7,857,644, net of acquired cash of $295,373, consisting of direct acquisition costs of $722,578, consisting primarily of investment banking, legal and accounting fees that are directly related to the acquisition of Drew, and 900,000 shares of Escalon common stock valued at $7,430,439. The value of the 900,000 shares issued was based on the market price on the dates of consummation and merger. The remaining shares to be exchanged were recorded as a liability. 6 The following table summarizes the preliminary purchase price allocation of estimated fair values of assets acquired and liabilities assumed as of the date of acquisition. Escalon is in the process of obtaining additional data, identifying and valuing intangible assets acquired, obtaining third party appraisals of tangible and intangible assets, and valuing certain pre-acquisition legal contingencies. Therefore, the allocation of the purchase price is subject to future refinement, which is expected to be completed no later than June 30, 2005. Current assets $ 4,573,312 Furniture and equipment 868,839 Patents 461,779 Other long-term assets 264,530 Goodwill 8,622,303 ----------- Total assets acquired $14,790,763 ----------- Line of credit $ 1,617,208 Current liabilities 4,258,981 Long-term debt 1,056,930 ----------- Total liabilities assumed $ 6,933,119 ----------- Net assets acquired $ 7,857,644 ===========
The following pro forma results of operations information has been prepared to give effect to the purchase as if such transaction had occurred at the beginning of the periods being presented. The information presented is not necessarily indicative of results of future operations of the combined companies.
Three Months Ended September 30, -------------------------------- 2004 2003 ---------- ---------- Revenues $5,926,771 $7,231,653 Cost of goods sold 3,088,286 3,840,927 ---------- ---------- Gross profit 2,838,485 3,390,726 Operating expenses 2,810,440 2,960,326 Other expense 522 191,853 ---------- ---------- Net income before taxes 27,523 238,547 Provision for income taxes 12,969 12,481 ---------- ---------- Net income $ 14,554 $ 226,066 ========== ========== Basic net income per share $ 0.003 $ 0.067 ========== ========== Diluted net income per share $ 0.002 $ 0.056 ========== ========== Weighted average shares - basic 5,564,469 3,365,359 ========== ========== Weighted average shares - diluted 6,141,958 4,049,298 ========== ==========
7 3. STOCK-BASED COMPENSATION The Company reports stock-based compensation through the disclosure-only requirements of Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation," as amended by Statement of Financial Accounting Standards No. 148 ("SFAS 148"), "Accounting for Stock-Based Compensation - Transition and Disclosure - an Amendment to FASB No. 123." Compensation expense for options is measured using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). Under APB 25, because the exercise price of the Company's employee stock options is generally equal to the market price of the underlying stock on the date of grant, no compensation expense is recognized. SFAS 123 establishes an alternative method of expense recognition for stock-based compensation awards based on fair values. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS 123.
Three Months Ended September 30, ---------------------------------- 2004 2003 --------- ------------ Net Income, as reported $ 115,899 $ 623,156 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (284,671) (18,103) --------- ------------ Pro forma net income $(168,772) $ 605,053 ========= ============ Earnings per share: Basic - as reported $ 0.021 $ 0.185 ========= ============ Basic - pro forma $ (0.030) $ 0.180 ========= ============ Diluted - as reported $ 0.019 $ 0.154 ========= ============ Diluted - pro forma $ (0.030) $ 0.149 ========= ============
The Company has followed the guidelines of SFAS 123 to establish the valuation of its stock options. The fair value of these equity awards was estimated at the date of grant using the Black-Scholes option pricing method. For the purposes of pro forma disclosures, the estimated fair value of the equity awards is amortized to expense over the options' vesting period. For the purposes of applying SFAS No. 123, the estimated per share value of the options granted during the three-month period ended September 30, 2004 was between $4.92 and $5.06. The fair value was estimated using the following assumptions: dividend yield of 0.0%, volatility of 0.78; risk-free interest rate of 3.30%; and expected life of 10 years. The volatility assumption is based on volatility seen in the Company's stock over the last five years. This assumption was made according to the guidance of SFAS 123. There is no reason to believe that future volatility will compare with the historical volatility. Because the Company's stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in the opinion of management, the existing models do not necessarily provide a reliable single measure of the value of its options. 8 4. EARNINGS PER SHARE The Company follows Financial Accounting Standards Board Statement No. 128, "Earnings Per Share," in presenting basic and diluted earnings per share. The following table set forth the computation of basic and diluted earnings per share:
Three Months Ended September 30, -------------------------------- 2004 2003 ---------- ---------- Numerator: Numerator for basic and diluted earnings per share: Net income $ 115,899 $ 623,156 ---------- ---------- Denominator: Denominator for basic earnings per share - weighted average shares 5,564,469 3,365,359 Effect of dilutive securities: Stock options and warrants 519,175 683,939 Shares reserved for future exchange 58,314 -- ---------- ---------- Denominator for diluted earnings earnings per share - weighted average and assumed conversion 6,141,958 4,049,298 ---------- ---------- Basic earnings per share $ 0.021 $ 0.185 ========== ========== Diluted earnings per share $ 0.019 $ 0.154 ========== ==========
5. INVENTORY Inventory, stated at lower of cost (determined on a first-in, first-out basis) or market, consisted of the following:
September 30, June 30, 2004 2004 ----------- ----------- Raw materials $ 2,854,472 $ 1,132,331 Work in process 579,100 287,276 Finished goods 1,204,666 367,110 ----------- ----------- 4,638,238 1,786,717 Valuation allowance (5,125) (5,125) ----------- ----------- Total inventory $ 4,633,113 $ 1,781,592 =========== ===========
6. NOTE RECEIVABLE Escalon entered into an agreement with an individual who was involved in the development of a drug delivery system. The Company holds a note receivable from the individual in the amount of $150,000 that is due in May 2005. 9 7. INTANGIBLE ASSETS ACQUIRED LICENSE AND DISTRIBUTION RIGHTS In connection with the Company's acquisition of assets of Escalon Ophthalmics, Inc. ("EOI") in February 1996, a portion of the purchase price was allocated to certain license and distribution agreements. This cost allocation was based on an evaluation by management, with such costs being amortized over an eight-year period using the straight-line method. The value of these assets is reevaluated periodically to determine if the estimated lives continue to be appropriate. Accumulated amortization of license and distribution rights was $180,182 and $180,182 at September 30, 2004 and June 30, 2004, respectively. Amortization expense for the three-months ended September 30, 2004 and 2003 was $0 and $5,631, respectively. PATENTS It is the Company's practice to seek patent protection on processes and products in various countries. Patent application costs are capitalized and amortized over their estimated useful lives, not exceeding 17 years, on a straight-line basis from the date the related patents are issued. Costs associated with patents no longer being pursued are expensed. Accumulated patent amortization was $131,623 and $122,139 at September 30, 2004 and June 30, 2004, respectively. Amortization expense for the three-months ended September 30, 2004 and 2003 was $9,484 and $2,683, respectively. The aggregate amortization expense for each of the next five years for acquired license and distribution rights and patents is as follows:
Year Ending June 30, ---------- 2005 $ 65,567 2006 65,714 2007 60,515 2008 56,842 2009 54,307 -------- Total $302,945 ========
GOODWILL, TRADEMARKS AND TRADE NAMES Goodwill, trademarks and trade names represent intangible assets obtained from the EOI, Endologix, Inc. ("Endologix"), Sonomed and Drew acquisitions. Goodwill represents the excess of purchase price over the fair market value of net assets acquired. 10 The following table presents unamortized intangible assets by business unit as of September 30, 2004:
Adjusted Gross Gross Carrying Carrying Accumulated Net Carrying GOODWILL Amount Impairment Amount Amortization Value ----------- --------- ----------- ------------ ----------- Sonomed $10,547,488 $-- $10,547,488 $(1,021,938) $ 9,525,550 Drew 8,622,303 -- 8,622,303 -- 8,622,303 Vascular 1,149,813 -- 1,149,813 (208,595) 941,218 Medical/Trek 272,786 -- 272,786 (147,759) 125,027 ----------- ---- ----------- ----------- ----------- Total $20,592,390 $-- $20,592,390 $(1,378,292) $19,214,098 =========== ==== =========== =========== ===========
Adjusted Gross Gross Carrying Carrying Accumulated Net Carrying UNAMORTIZED INTANGIBLE ASSETS Amount Impairment Amount Amortization Value ----------- ---------- ------------ ------------ ------------ Sonomed $665,000 $-- $665,000 $(63,194) $601,806 Sonomed EMS 15,100 -- 15,100 -- 15,100 -------- ---- -------- -------- -------- Total $680,100 $-- $680,100 $(63,194) $616,906 ======== ==== ======== ======== ========
The following table presents unamortized intangible assets by business unit as of June 30, 2004:
Adjusted Gross Gross Carrying Carrying Accumulated Net Carrying GOODWILL Amount Impairment Amount Amortization Value ----------- --------- ----------- ------------ ----------- Sonomed $10,547,488 $-- $10,547,488 $(1,021,938) $ 9,525,550 Vascular 1,149,813 -- 1,149,813 (208,595) 941,218 Medical/Trek 272,786 -- 272,786 (147,759) 125,027 ----------- ---- ----------- ----------- ----------- Total $11,970,087 $-- $11,970,087 $(1,378,292) $10,591,795 =========== ==== =========== =========== ===========
Adjusted Gross Gross UNAMORTIZED INTANGIBLE Carrying Carrying Accumulated Net Carrying ASSETS Amount Impairment Amount Amortization Value ----------- ---------- ------------ ------------ ------------ Sonomed $ 665,000 $-- $ 665,000 $ (63,194) $ 601,806 Sonomed EMS 15,100 -- 15,100 -- 15,100 ----------- ---- ----------- ----------- ----------- Total $ 680,100 $-- $ 680,100 $ (63,194) $ 616,906 =========== ==== =========== =========== ===========
The following table presents amortized intangible assets by business unit as of September 30, 2004:
Adjusted AMORTIZED INTANGIBLE Gross Gross ASSETS Carrying Carrying Accumulated Net Carrying PATENTS Amount Impairment Amount Amortization Value ----------- --------- ----------- ------------ ----------- Drew $453,348 $-- $453,348 (6,802) $446,546 Vascular (pending issuance 36,916 -- 36,916 -- 36,916 Medical/Trek 257,301 -- 257,301 (124,821) 132,480 Sonomed EMS -- -- -- -- -- -------- --- -------- --------- -------- Total $747,565 $-- $747,565 $(131,623) $615,942 ======== === ======== ========= ========
11 The following table presents amortized intangible assets by business unit as of June 30, 2004:
Adjusted AMORTIZED INTANGIBLE Gross Gross ASSETS Carrying Carrying Accumulated Net Carrying PATENTS Amount Impairment Amount Amortization Value ----------- --------- ----------- ------------ ----------- Vascular (pending issuance) $ 36,916 $-- $ 36,916 -- $ 36,916 Medical/Trek 257,301 -- 257,301 (122,139) 135,162 Sonomed EMS -------- --- --------- --------- -------- Total $294,217 $-- $ 294,217 $(122,139) $172,078 ======== === ======== ========= ========
8. ACCRUED EXPENSES Accrued expenses consisted of the following:
September 30, June 30, 2004 2004 ---------- ---------- (unaudited) Accrued compensation $ 802,068 $ 908,568 Acquisition expense accruals 516,126 -- Severance accruals 721,029 -- Shares reserved for future exchange 597,019 -- Other accruals 1,274,084 320,930 ---------- ---------- Total $3,910,326 $1,229,498 ========== ==========
Accrued compensation as of September 30, 2004 primarily relates to payroll, bonus, vacation accruals and payroll tax liabilities. Acquisition expense accruals as of September 30, 2004 primarily relate to professional fees (attorneys, accountants and other consultants) accruals related directly to the acquisition of Drew. Severance accruals as of September 30, 2004 relate to certain former directors and officers of Drew who management had the intent to terminate as of the consummation date of the transaction. Shares reserved for future exchange as of September 30, 2004 relate to the remaining 58,314 shares that Escalon expects to issue to Drew shareholders who are compelled to exchange their Drew shares pursuant to procedures under United Kingdom laws and regulations. This liability has been valued using the market price of Escalon on the date Escalon could begin to compel Drew shareholders to tender all remaining shares. This liability will be reduced as the shareholders exchange the remaining shares. In addition to normal accruals, other accruals as of September 30, 2004 relate to the remaining lease payments on a facility that had been exited prior to the acquisition, accruals for litigation existing prior to the acquisition, franchise and ad valorem tax accruals, royalty accruals and other sundry operating expenses and accruals. 9. LINE OF CREDIT AND LONG-TERM DEBT On December 23, 2002, a lender acquired the Company's bank debt, which consisted of term debt of $5,850,000 and $1,475,000 outstanding on a $2,000,000 available line of credit. On February 13, 2003, the Company entered into an Amended Agreement with the lender. The primary amendments of the amended Loan Agreement were to reduce quarterly principal payments, extend the term of the repayments and to alter the covenants of the original bank agreement. On September 30, 2004, the Company paid off 12 and terminated both the remaining term debt and the outstanding balance on this line of credit. In November 2001, the Company issued the lender 60,000 warrants to purchase the Company's common stock at $3.66 per share in connection with this debt. The warrants will expire in November 2006. On January 21, 1999, the Company's Vascular subsidiary and Endologix entered into an Assets Sale and Purchase Agreement. Pursuant to this agreement, the Company acquired for cash the assets of Endologix's vascular access business in exchange for cash and also agreed to pay royalties to Endologix based on future sales of the vascular access business for a period of five years following the closing of the sale, with a guaranteed minimum royalty of $300,000 per year. On February 1, 2001, the parties amended the agreement to eliminate any future royalty payments to Endologix. Pursuant to this amendment, the Company paid $17,558 in cash to Endologix, delivered a short-term note in the amount of $64,884 that was satisfied in January 2002, a note in the amount of $717,558 payable in 11 quarterly installments that commenced on April 15, 2002, and the Company issued 50,000 shares of its common stock to Endologix. On September 30, 2004, the Company paid off the balance of the term debt. As of September 30, 2004, Drew had an overdraft line of credit with a United Kingdom financial institution. The amount available on the line is $651,344. The interest rate is 2.00% over the United Kingdom prime rate (4.75% at September 30, 2004). The line is secured by Drew's assets and is personally guaranteed by certain of Drew's current and former directors. The balance as of September 30, 2004 is $655,791. Drew also has long-term debt facilities through the Texas Mezzanine Fund and through Symbiotics, Inc. The Texas Mezzanine Fund term debt is payable in monthly installments of $14,200, which includes interest at a fixed rate of 8.00%. The note is due in April 2008 and is secured by certain assets of Drew. The outstanding balance at September 30, 2004 is $515,880. The Symbiotics, Inc. term debt, which originated from the acquisition of a product line from Symbiotics, Inc., is payable in monthly installments of $8,333 with interest at a fixed rate of 5.00%. The outstanding balance at September 30, 2004 is $300,002. Drew has a line of credit with a domestic financial institution secured by certain assets of Drew. The amount available on the line of credit is $2,000,000. Interest is at the federal prime rate plus 4.00% (8.75% at September 30, 2004). The outstanding balance as of September 30, 2004 was $531,236. The schedule below presents principal amortization for the next five years under each of the Company's loan agreements as of September 30, 2004:
Texas Twelve Months Ending Mezzanine Symbiotics Total - -------------------- -------- ---------- -------- 2005 $121,672 $ 99,996 $221,668 2006 143,721 99,996 243,717 2007 155,821 100,010 255,831 2008 94,666 -- 94,666 2009 -- -- -- -------- -------- -------- Total $515,880 $300,002 $815,882 ======== ======== ========
10. OTHER REVENUE Other revenue includes quarterly payments received from (1) Bausch & Lomb in connection with the sale of their Silicone Oil product line, (2) royalty payments received from IntraLase Corp. ("IntraLase")relating to the licensing of the Company's intellectual laser technology, and (3) royalty payments received from Bio-Rad Laboratories, Inc. ("Bio-Rad"). For the three-months ended September 30, 2004, and 2003, Silicone Oil revenue totaled $417,000 and $509,000, respectively, laser technology totaled $239,000 and $62,000, respectively, and the Bio-Rad 13 royalty was $0 for the period ended September 30, 2004. Accounts receivable at September 30, 2004 and June 30, 2004 related to other revenue was $417,000 and $459,000, respectively. BAUSCH & LOMB SILICONE OIL The agreement with Bausch & Lomb, which commenced on August 13, 2000, is structured so that the Company receives consideration from Bausch & Lomb based on its adjusted gross profit from its sales of Silicone Oil on a quarterly basis. The consideration is subject to a factor, which steps down through the termination date (August 2005) according to the following schedule: From 8/13/00 to 8/12/01 100% From 8/13/01 to 8/12/02 82% From 8/13/02 to 8/12/03 72% From 8/13/03 to 8/12/04 64% From 8/13/04 to 8/12/05 45%
INTRALASE: LICENSING OF LASER TECHNOLOGY The material terms of the license of the Company's laser patents to IntraLase, which expires in 2014, provide that the Company will receive a 2.5% royalty on product sales that are based on the licensed laser patents, subject to deductions for royalties payable to third parties up to a maximum of 50% of royalties otherwise due and payable to the Company, and a 1.5% royalty on product sales that are not based on the licensed laser patents. The Company receives a minimum annual license fee of $15,000 per year during the remaining term of the license. The minimum annual license fee is offset against the royalty payments. In addition, the Company owns 252,535 common shares of IntraLase pursuant to the license agreement. See also Note 11 Commitments and Contingencies. The license was dated October 23, 1997, was amended and restated in October 2000 and expires on the latest of the following events: - - The last to expire of the laser patents; - - Ten years from the effective date of the amended and restated agreement; - - The fifth anniversary date of the first commercial sale. The material termination provisions of the license of the laser technology are as follows: - - The Company has the right to terminate if IntraLase defaults in the payment of any royalty; - - The Company has the right to terminate if IntraLase makes any false report; - - The Company has the right to terminate if IntraLase defaults in the making of any required report; - - The commission of any material breach of any covenant or promise under the license agreement; or - - The termination of the license by IntraLase after 90 days notice (if IntraLase were to terminate, they would not be permitted to utilize the licensed technology necessary to manufacture their current products). 14 BIO-RAD ROYALTY The royalty received from Bio-Rad relates to a certain non-exclusive Eighth Amendment to OEM Agreement "OEM" Agreement) between the Company's Drew business and Bio-Rad, dated July 19, 1994. Bio-Rad pays a royalty based on sales of certain of Drew's products in certain specifically identified geographic regions. The material terms of the OEM Agreement which expires May 15, 2005 provide as follows: * Drew receives a royalty of 19.5 cents per test * The royalty payment are due 30 days after the end of the month * Royalty payments will be made depending on the volume of tests provided by Bio-Rad if less than 3,750 tests per month, Bio-Rad will calculate the number of tests used on a quarterly basis in arrears and pay Drew within 45 days of the end of the quarter. If more than 3,750 tests per month Bio-Rad will pay an estimated month royalty and within 45 days of the end of the quarter make final settlement upon actual number of tests per month. 11. COMMITMENTS AND CONTINGENCIES COMMITMENTS Escalon leases its manufacturing, research and corporate office facilities and certain equipment under non-cancelable operating lease arrangements. The Company has also entered into an agreement whereby the Company is obligated to purchase a contracted minimum amount of product from the other party to the agreement. The future minimum payments to be paid under these arrangements as of September 30, 2004 are as follows:
Lease Purchase Twelve Months Ending Obligations Commitments Total - -------------------- ---------- ----------- ---------- 2005 $ 773,154 $700,000 $1,473,154 2006 764,873 -- 764,873 2007 567,844 -- 567,844 2008 312,606 -- 312,606 2009 270,164 -- 270,164 Thereafter 583,381 -- 583,381 ---------- -------- ---------- Total $3,272,022 $700,000 $3,972,022 ========== ======== ==========
Rent expense charged to operations during the three months ended September 30, 2004 and 2003 was $141,191 and $86,424, respectively. CONTINGENCIES ROYALTY AGREEMENT: CLINICAL DIAGNOSTIC SOLUTIONS Drew and Clinical Diagnostic Solutions, Inc. ("CDS") entered into a Private Label/Manufacturing Agreement dated April 1, 2002 for the right to sell formulations or products of CDS including reagents, controls and calibrators ("CDS products") on a private label basis. The agreement term is 15 years and automatically renews year-to-year thereafter. Drew is obligated to pay CDS a royalty of 7.5% on all sales of CDS products produced from Drew's United Kingdom facility. The amount of royalties paid during the three months ended September 30, 2004 was $4,509. LEGAL PROCEEDINGS: INTRALASE On June 10, 2004, Escalon provided notice to Intralase of the Company's intention to terminate the license agreement with Intralase due to Intralase's failure to pay certain royalties that the Company believes are due under the license agreement. On June 21, 2004, Intralase sought a preliminary injunction and a temporary restraining order with the United States District Court for the Central District of California, Southern District against Escalon to prevent the termination of the license agreement with Intralase. The parties subsequently agreed to stipulate to the temporary restraining order to prevent a termination of the license agreement and, on July 6, 2004, as mutually agreed by Intralase and Escalon, the same district court entered a stipulation and order to delay the requested hearing on the preliminary injunction until November 1, 2004. The Company does not believe that this matter has had or is likely to have a material adverse effect on the Company's business, financial condition or future results of operations. 15 LEGAL PROCEEDINGS: DREW Escalon is aware of three lawsuits involving Drew. The first lawsuit involves the principal shareholders of an entity previously acquired by Drew for the collection of unpaid expenses. A counterclaim was filed for breach of intellectual property rights and for breach of the principal shareholders' covenants not to compete. This action was filed in the state courts of Connecticut. The second lawsuit was filed in the state court of Minnesota, but transferred to the Federal District Court of Minnesota. This action was brought by a distributor against an entity previously acquired by Drew claiming a breach of a marketing and distribution agreement. The parties have reached a tentative settlement of this matter. The third action involves a suit instituted in California in connection with a dispute from a customer claiming a refund for a product purchase. The Company does not believe that the resolution of these matters has had or is likely to have a material adverse effect on the Company's business, financial condition or future results of operations. OTHER LEGAL PROCEEDINGS Furthermore, Escalon, from time to time is involved in various legal proceedings and disputes that arise in the normal course of business. These matters have included intellectual property disputes, contract disputes, employment disputes and other matters. The Company does not believe that the resolution of any of these matters has had or is likely to have a material adverse effect on the Company's business, financial condition or results of operations. 16 12. SEGMENTAL INFORMATION During the three-month periods ended September 30, 2004 and 2003, the Company operations were classified into four principal reportable segments that provide different products or services. This represents a change from fiscal 2004. The Company acquired Drew on July 23, 2004, and subsequently, Drew has been added as an additional business segment. During the first quarter of fiscal 2005, management also changed the structure of its internal organization that caused Medical/Trek and EMI to be reported as one reportable segment. The corresponding interim period has been restated to present comparative information. Separate management of each segment is required because each business unit is subject to different marketing, production and technology strategies. SEGMENTAL STATEMENTS OF OPERATIONS (IN THOUSANDS) - THREE MONTHS ENDED SEPTEMBER 30,
Drew Sonomed Vascular Medical/Trek/EMI Total ---------------- -------------------- ------------------ ------------------ -------------------- 2004 2003 2004 2003 2004 2003 2004 2003 2004 2003 -------- ---- -------- -------- ------- ------- ------- ------- -------- -------- Product revenue $ 1,904 $-- $ 1,644 $ 1,705 $ 695 $ 734 $ 393 $ 402 $ 4,636 $ 2,841 Other revenue -- -- -- -- -- -- 656 571 656 571 -------- ---- -------- -------- ------- ------- ------- ------- -------- -------- Total revenue 1,904 -- 1,644 1,705 695 734 1,049 973 5,292 3,412 -------- ---- -------- -------- ------- ------- ------- ------- -------- -------- Costs and expenses: Cost of goods sold 1,251 -- 859 681 320 296 241 236 2,671 1,213 Operating expenses 937 -- 629 712 409 434 523 276 2,498 1,422 -------- ---- -------- -------- ------- ------- ------- ------- -------- -------- Total costs and expenses 2,188 -- 1,488 1,393 729 730 764 512 5,169 2,635 -------- ---- -------- -------- ------- ------- ------- ------- -------- -------- Income from operations (284) -- 156 312 (34) 4 285 461 123 777 Other income and expenses: Equity in OTM -- -- -- -- -- -- (29) -- (29) -- Interest income 4 -- -- -- -- -- 137 1 141 1 Interest expense (24) -- (81) (115) (1) (4) -- -- (106) (119) -------- ---- -------- -------- ------- ------- ------- ------- -------- -------- Total other income and expenses (20) -- (81) (115) (1) (4) 108 1 6 (118) -------- ---- -------- -------- ------- ------- ------- ------- -------- -------- Income before taxes (304) -- 75 197 (35) -- 393 462 129 659 Income taxes -- -- -- -- -- -- 13 36 13 36 -------- ---- -------- -------- ------- ------- ------- ------- -------- -------- Net income (loss) $ (304) $-- $ 75 $ 197 $ (35) $-- $ 380 $ 426 $ 116 $ 623 ======== ==== ======== ======== ======= ======= ======= ======= ======== ======== Depreciation and amortization $ 46 $-- $ 7 $ 6 $ 11 $ 11 $ 28 $ 48 $ 92 $ 65 Assets $ 15,128 $-- $ 12,844 $ 12,562 $ 2,226 $ 2,142 $ 7,941 $14,753 $ 38,139 $ 29,457 Expenditures for long-lived assets $ 2 $-- $ 19 $-- $ 7 $-- $ 11 $ 16 $ 39 $ 16
13. SHAREHOLDERS' EQUITY WARRANTS TO PURCHASE COMMON STOCK In connection with debt issued by a former lender to Escalon in November 2001, the Company issued the lender warrants to purchase 60,000 shares of the Company's common stock at $3.66 per share. The warrants are currently exercisable and will expire in November 2006. In connection with the private placement of Escalon's common stock in March 2004, the Company issued several accredited investors warrants to purchase 120,000 shares of the Company's common stock. The warrants are exercisable at $15.60 per share and expire in five years from the placement date. 17 EXCHANGE OFFER FOR DREW SCIENTIFIC GROUP, PLC During the three months ended September 30, 2004, the Company issued 841,686 shares of its common stock pursuant to its exchange offer for all of the outstanding shares of Drew, and had acquired approximately 94% of the outstanding shares of Drew as of that date. During the remainder of fiscal 2005, Escalon expects to compel Drew shareholders to tender all of the remaining outstanding Drew shares pursuant to procedures under United Kingdom laws and regulations. A total of 58,314 shares are reserved for future issuance in connection with this final exchange. 14. RELATED PARTY TRANSACTIONS Escalon and a member of the Company's Board of Directors are founding and equal members of Ocular Telehealth Management, LLC ("OTM"). OTM is a diagnostic telemedicine company providing remote examination, diagnosis and management of disorders affecting the human eye. OTM's initial solution focuses on the diagnosis of diabetic retinopathy by creating access and providing annual dilated retinal examinations for the diabetic population. OTM was founded to harness the latest advances in telecommunications, software and digital imaging in order to create greater access and a more successful disease management for populations that are susceptible to ocular disease. Through September 30, 2004, Escalon has invested $130,000 in OTM and has committed to invest an additional $126,000 through March 31, 2005. As of September 30, 2004, Escalon owned 50% of OTM. The members of OTM have agreed to review the operations of OTM after 24 months, at which time the members each have the right to sell their membership interest back to OTM at fair market value. The Company will provide administrative support functions to OTM. Through September 30, 2004, OTM had revenue of $115 and incurred expenses of $58,517. This investment is accounted for under the equity method of accounting and is included in other assets. Commencing in July 2004, a relative of a senior executive officer of Escalon began providing legal services to the Company in connection with various legal proceedings. Expenses incurred through this individual were $13,062 during the three-month period ended September 30, 2004. 15. SUBSEQUENT EVENT - INTRALASE INITIAL PUBLIC OFFERING In October 1997, Escalon licensed its intellectual laser properties to IntraLase in exchange for an equity interest of 252,535 shares of common stock (as adjusted for splits), as well as royalties on future product sales. On October 7, 2004, IntraLase announced the initial public offering of shares of its common stock at a price of $13.00 per share. The shares of common stock are restricted for a period of less than one year and may be sold after April 4, 2005 pursuant to a certain Fourth Amended Registration Rights Agreement between the Company and IntraLase. The shares have been classified as available-for-sale-securities. The Company has historically accounted for these shares at $0 basis because a readily determinable market value was not available. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS Certain statements contained in, or incorporated by reference in, the Quarterly Report on Form 10-Q, are forward-looking statements, made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, which provide current expectations or forecasts of future events. Such statements can be identified by the use of terminology such as "anticipate," "believe," "could," "estimate," "expect," "forecast," "intend," "may," "plan," "possible," "project," "should," "will" and similar words or expressions. The Company's forward-looking statements include certain information relating to general business strategy, growth strategies, financial results, liquidity, product development, the introduction of new products, the potential markets and uses for the Company's products, the Company's regulatory filings with the United States Food and Drug Administration (the "FDA"), acquisitions, the development of joint venture opportunities, the effect of competition on the structure of the markets in which the Company competes and defending the Company in litigation matters. One must carefully consider forward-looking 18 statements and understand that such statements involve a variety of risks and uncertainties, known and unknown, and may be affected by assumptions that fail to materialize as anticipated. Consequently, no forward-looking statement can be guaranteed, and actual results may vary materially. It is not possible to foresee or identify all factors affecting the Company's forward-looking statements, and one therefore should not consider the following list of such factors to be an exhaustive statement of all risks, uncertainties or potentially inaccurate assumptions. The Company undertakes no obligation to update any forward-looking statement. Although it is not possible to create a comprehensive list of all factors that may cause actual results to differ from the Company's forward-looking statements, the most important factors include without limitation, the following: THE COMPANY'S PRODUCTS ARE SUBJECT TO STRINGENT ONGOING REGULATION BY THE FDA AND SIMILAR HEALTH AUTHORITIES, AND IF THE FDA'S APPROVALS OR CLEARANCES OF THE COMPANY'S PRODUCTS ARE RESTRICTED OR REVOKED, THE COMPANY COULD FACE DELAYS THAT WOULD IMPAIR THE COMPANY'S ABILITY TO GENERATE FUNDS FROM OPERATIONS. The FDA and similar health authorities in foreign countries extensively regulate Escalon's activity. The Company must obtain either 510(K) clearances or pre-market approvals and new drug application approvals prior to marketing a product in the United States. Foreign regulation also requires that Escalon obtain other approvals from foreign government agencies prior to the sale of products in those countries. Also, Escalon may be required to obtain FDA approval before exporting a product or device that has not received FDA marketing clearance or approval. Escalon has received the necessary FDA approvals for all products that the Company currently markets. Any restrictions on or revocation of the FDA approvals and clearances that the Company has obtained, however, would prevent the continued marketing of the impacted products and other devices. The restrictions or revocations could result from the discovery of previously unknown problems with the product. Consequently, FDA revocation would impair the Company's ability to generate funds from operations. The FDA and comparable agencies in state and local jurisdictions and in foreign countries impose substantial requirements upon the manufacturing and marketing of pharmaceutical and medical device equipment and related disposables, including the obligation to adhere to the FDA's Good Manufacturing Practice regulations. Compliance with these regulations requires time-consuming detailed validation of manufacturing and quality control processes, FDA periodic inspections and other procedures. If the FDA finds any deficiencies in the validation processes, for example, the FDA may impose restrictions on marketing the specific products until such deficiencies are corrected. Escalon has received CE approval on several of the Company's products that allows the Company to sell the products in the countries comprising the European community. In addition to the CE mark, however, some foreign countries may require separate individual foreign regulatory clearances. Escalon cannot assure that the Company will be able to obtain regulatory clearances for other products in the United States or foreign markets. The process for obtaining regulatory clearances and approvals underlying clinical studies for any new products or devices and for multiple indications for existing products is lengthy and will require substantial commitments of Escalon's financial resources and Escalon's management's time and effort. Any delay in obtaining clearances or approvals or any changes in existing regulatory requirements would materially adversely affect the Company's business. Escalon's failure to comply with the applicable regulations would subject the Company to fines, delays or suspensions of approvals or clearances, seizures or recalls of products, operating restrictions, injunctions or civil or criminal penalties, which would adversely affect the Company's business, financial condition and results of operations. 19 FAILURE OF THE MARKET TO ACCEPT THE COMPANY'S PRODUCTS COULD ADVERSELY IMPACT THE COMPANY'S BUSINESS AND FINANCIAL CONDITION. The Company's business and financial condition will depend upon the market acceptance of the Company's products. The Company cannot assure that the Company's products will achieve market acceptance. Market acceptance depends upon a number of factors: - The price of the products; - The receipt of regulatory approvals for multiple indications; - The establishment and demonstration of the clinical safety and efficacy of the Company's products; and - The advantages of the Company's products over those marketed by the Company's competitors. Any failure to achieve significant market acceptance of the Company's products will have a material adverse effect on the Company's business. THE SUCCESS OF COMPETITIVE PRODUCTS COULD HAVE AN ADVERSE EFFECT ON THE COMPANY'S BUSINESS. The Company faces intense competition in the medical device and pharmaceutical markets, which are characterized by rapidly changing technology, short product life cycles, cyclical oversupply and rapid price erosion. Many of the Company's competitors have substantially greater financial, technical, marketing, distribution and other resources. The Company's strategy is to compete primarily on the basis on technological innovation, reliability, quality and price of the Company's products. Without timely introductions of new products and enhancements, the Company's products will become technologically obsolete over time, in which case the Company's revenues and operating results would suffer. The success of the Company's new product offerings will depend on several factors, including the Company's ability to: - Properly identify customer needs; - Innovate and develop new technologies, services and applications; - Establish adequate product distribution coverage; - Obtain and maintain required regulatory approvals from the FDA and other regulatory agencies; - Protect the Company's intellectual property; - Successfully commercialize new technologies in a timely manner; - Manufacture and deliver the Company's products in sufficient volumes on time; - Differentiate the Company's offerings from the offerings of the Company's competitors; - Price the Company's products competitively; - Anticipate competitors' announcements of new products, services or technological innovations; and - General market and economic conditions. 20 The Company cannot assure that the Company will be able to compete effectively in the competitive environments in which it operates. THE COMPANY'S PRODUCTS EMPLOY PROPRIETARY TECHNOLOGY, AND THIS TECHNOLOGY MAY INFRINGE ON THE INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES. The Company holds several United States and foreign patents for the Company's products. Other parties, however, hold patents relating to similar products and technologies. If patents held by others were adjudged valid and interpreted broadly in an adversarial proceeding, the court or agency could deem them to cover one or more aspects of the Company's products or procedures. Any claims for patent infringements or claims by the Company for patent enforcement would consume time, result in costly litigation, divert technical and management personnel or require the Company to develop non-infringing technology or enter into royalty or licensing agreements. The Company cannot be certain that the Company will not be subject to one or more claims for patent infringement, that the Company would prevail in any such action or that the Company's patents will afford protection against competitors with similar technology. If a court determines that any of the Company's products, infringes, directly or indirectly, on a patent in a particular market, the court may enjoin the Company from making, using or selling the product. Furthermore, the Company may be required to pay damages or obtain a royalty-bearing license, if available, on acceptable terms. THE COMPANY WILL NO LONGER RECEIVE REVENUE FROM THE SALE OF SILICONE OIL BY BAUSCH & LOMB SUBSEQUENT TO AUGUST 13, 2005. The Company realized 7.88% and 14.91% of its net revenue during the three-month periods ended September 30, 2004 and 2003, respectively, from Bausch & Lomb's sales of Silicone Oil. The Company is entitled to receive this revenue from Bausch & Lomb, in varying amounts, through August 2005. The agreement with Bausch & Lomb, which commenced on August 13, 2000, is structured such that the Company receives consideration from Bausch & Lomb based on its adjusted gross profit from its sales of Silicone Oil on a quarterly basis. The consideration is subject to a factor, which steps down according to the following schedule: From 8/13/00 to 8/12/01 100% From 8/13/01 to 8/12/02 82% From 8/13/02 to 8/12/03 72% From 8/13/03 to 8/12/04 64% From 8/13/04 to 8/12/05 45%
The revenue associated with the sale of Silicone Oil by Bausch & Lomb has no associated expense and consequently provides a gross margin of 100%. Any significant reduction in this revenue can have a significant negative impact on gross margin. Any significant decrease in Silicone Oil revenue received by the Company would have an impact on the Company's financial position, results of operations and cash flows and the Company's stock price could be negatively impacted. LACK OF AVAILABILITY OF KEY SYSTEM COMPONENTS COULD RESULT IN DELAYS, INCREASED COSTS OR COSTLY REDESIGN OF THE COMPANY'S PRODUCTS. Although some of the parts and components used to manufacture the Company's products are available from multiple sources, the Company currently purchases most of the Company's components from single sources in an effort to obtain volume discounts. Lack of availability of any of these parts and components could result in production delays, increased costs, or costly redesign of the Company's products. Any loss of availability of an essential component could result in a material adverse change to Escalon's business, financial condition and results of operations. Some of the Company's suppliers are also subject to the FDA's Good Manufacturing Practice regulations. Failure of these suppliers to comply 21 with these regulations could result in the delay or limitation of the supply of parts or components to the Company, which would adversely affect the Company's financial condition and results of operations. THE COMPANY'S ABILITY TO MARKET OR SELL THE COMPANY'S PRODUCTS MAY BE ADVERSELY AFFECTED BY LIMITATIONS ON REIMBURSEMENTS BY GOVERNMENT PROGRAMS, PRIVATE INSURANCE PLANS AND OTHER THIRD PARTY PAYORS. The Company's customers bill various third party payors, including government programs and private insurance plans, for the health care services provided to their patients. Third party payors may reimburse the customer, usually at a fixed rate based on the procedure performed, or may deny reimbursement if they determine that the use of the Company's products was elective, unnecessary, inappropriate, not cost-effective, experimental or used for a non-approved indication. Third party payors may deny reimbursement notwithstanding FDA approval or clearance of a product and may challenge the prices charged for the medical products and services. The Company's ability to sell the Company's products on a profitable basis may be adversely impacted by denials of reimbursement or limitations on reimbursement, compared with reimbursement available for competitive products and procedures. New legislation that further reduces reimbursements under the capital cost pass-through system utilized in connection with the Medicare program could also adversely affect the marketing of the Company's products. FUTURE LEGISLATION OR CHANGES IN GOVERNMENT PROGRAMS MAY ADVERSELY AFFECT THE MARKET FOR THE COMPANY'S PRODUCTS. In the past several years, the federal government and Congress have made proposals to change aspects of the delivery and financing of health care services. The Company cannot predict what form any future legislations may take or its effect on the Company's business. Legislation that sets price limits and utilization controls may adversely affect the rate of growth of ophthalmic and vascular access product markets. If any future health care legislation were to adversely impact those markets, the Company's product marketing could also suffer, which would adversely impact the Company's business. THE COMPANY MAY BECOME INVOLVED IN PRODUCT LIABILITY LITIGATION, WHICH MAY SUBJECT THE COMPANY TO LIABILITY AND DIVERT MANAGEMENT ATTENTION. The testing and marketing of the Company's products for applications in ophthalmology and vascular access, the Company's pharmaceutical products and vascular access products entail and inherent risk of product liability, resulting in claims based upon injuries or alleged injuries associated with a defect in the products' performance. Some of these injuries may not become evident for a number of years. Although the Company is not currently involved in any product liability litigation, the Company may be party to litigation in the future as a result of an alleged claim. Litigation, regardless of the merits of the claim or outcome, could consume a great deal of the Company's time and money and would divert management time and attention away from the Company's core businesses. The Company maintains limited product liability insurance coverage of $1,000,000 per occurrence and $2,000,000 in the aggregate, with umbrella policy coverage of up to $5,000,000 in excess of such amounts. A successful product liability claim in excess of any insurance coverage may adversely impact the Company's financial condition and results of operations. The Company cannot assure you that product liability insurance coverage will continue to be available to the Company in the future on reasonable terms or at all. THE COMPANY'S INTERNATIONAL OPERATIONS COULD BE ADVERSELY IMPACTED BY CHANGES IN LAWS OR POLICIES OR FOREIGN GOVERNMENTAL AGENCIES AND SOCIAL AND ECONOMIC CONDITIONS IN THE COUNTRIES IN WHICH THE COMPANY OPERATES. The Company derives a portion of its revenues from sales outside the United States. Changes in the laws or policies of governmental agencies, as well as social and economic conditions, in the countries in which the Company operates could affect the Company's business in these countries and the Company's results of operations. Also, economic factors, including inflation and fluctuations in interest rates and foreign currency exchange rates, and competitive factors such as price competition, business combinations 22 of competitors or a decline in industry sales from continued economic weakness, both in the United States and other countries in which the Company conducts business, could adversely affect the Company's results of operations. THE COMPANY IS DEPENDENT ON ITS MANAGEMENT AND KEY PERSONNEL TO SUCCEED. The Company's principal executive officers and technical personnel have extensive experience with the Company's products, the Company's research and development efforts, the development of marketing and sales programs and the necessary support services to be provided to the Company's customers. Also, the Company competes with other companies, universities, research entities and other organizations to attract and retain qualified personnel. The loss of the services of any of the Company's executive officers or other technical personnel, or the Company's failure to attract and retain other skilled and experienced personnel, could have a material adverse effect on the Company's ability to maintain or expand its businesses. ANY ACQUISITIONS, STRATEGIC ALLIANCES, JOINT VENTURES AND DIVESTITURES THAT THE COMPANY EFFECTS COULD RESULT IN FINANCIAL RESULTS THAT DIFFER FROM MARKET EXPECTATIONS. In the normal course of business, the Company engages in discussions with third parties regarding possible acquisitions, strategic alliances, joint ventures and divestitures. As a result of any such transactions, the Company's financial results may differ from the investment community's expectations in a given quarter. In addition, acquisitions and alliances may require the Company to integrate a different company culture, management team and business infrastructure. The Company may have difficulty developing, manufacturing and marketing the products of a newly acquired company in a way that enhances the performance of the Company's combined businesses or product lines to realize the value from expected synergies. Depending on the size and complexity of an acquisition, the Company's successful integration of the entity depends on a variety of factors including the retention of key employees and the management of facilities and employees in separate geographical areas. These efforts require varying levels of management resources, which may divert the Company's attention from other business operations. The Company acquired Drew during the first quarter of fiscal 2005. Drew does not have a history of producing positive operating cash flows and, as a result, at the time of acquisition, was operating under financial constraints and was under-capitalized and is expected to negatively impact the Company's financial results in the short term. If the Company does not realize the expected benefits or synergies of such transactions, the Company's consolidated financial position, results of operations and stock price could be negatively impacted. THE MARKET PRICE OF THE COMPANY'S STOCK HAS HISTORICALLY BEEN VOLATILE, AND THE COMPANY HAS NOT PAID CASH DIVIDENDS. The volatility of the Company's common stock imposes a greater risk of capital losses on shareholders as compared to less volatile stocks. In addition, such volatility makes it difficult to ascribe a stable valuation to a shareholder's holdings of the Company's common stock. The following factors have and may continue to have a significant impact on the market price of the Company's common stock: - Announcements of technological innovations; - Changes in marketing, product pricing and sales strategies or new products by the Company's competitors; - Any acquisitions, strategic alliances, joint ventures and divestitures that the Company effects; - Changes in domestic or foreign governmental regulations or regulatory requirements; and - Developments or disputes relating to patent or proprietary rights and public concern as to the safety and efficacy of the procedures for which the Company's products are used. 23 Moreover, the possibility exists that the stock market, and in particular the securities of technology companies such as Escalon, could experience extreme price and volume fluctuations unrelated to operating performance. The Company has not paid any cash dividends on its common stock and does not anticipate paying any cash dividends in the foreseeable future. THE COMPANY'S RESULTS FLUCTUATE FROM QUARTER TO QUARTER The Company has experienced quarterly fluctuations in operating results and anticipates continued fluctuations in the future. A number of factors contribute to these fluctuations: - Acquisitions (such as Drew) and subsequent integration of the acquired company, - Changes in the mix of products sold; - The timing and expense of new product introductions by the Company or its competitors; - Fluctuations in royalty income; - Announcements of new strategic relationships by the Company or its competitors; - The cancellation or delays in the purchase of the Company's products; - The gain or loss of significant customers; - Fluctuations in customer demand for the Company's products; and - Competitive pressures on prices at which the Company can sell its products. The Company sets its spending levels in advance of each quarter based, in part, on the Company's expectations of product orders and shipments during that quarter. A shortfall in revenue, therefore, in any particular quarter as compared to the Company's plan could have a material adverse effect on the Company's results of operations and cash flows. Also, the Company's quarterly results could fluctuate due to general conditions in the healthcare industry or global economy generally, or market volatility unrelated to the Company's business and operating results. THE IMPACT OF TERRORISM OR ACTS OF WAR COULD HAVE A MATERIAL ADVERSE EFFECT ON THE COMPANY'S BUSINESS. Terrorist acts or acts of war, whether in the United States or abroad, could cause damage or disruption to the Company's operations, its suppliers, channels to market or customers, or could cause costs to increase, or create political or economic instability, any of which could have a material adverse effect on the Company's business. THE COMPANY'S CHARTER DOCUMENTS AND PENNSYLVANIA LAW MAY INHIBIT A TAKEOVER. Certain provisions of Pennsylvania law and our Bylaws could delay or impede the removal of incumbent directors and could make it more difficult for a third party to acquire, or could discourage a third party from attempting to acquire, control of the Company. These provisions could limit the price that certain investors might be willing to pay in the future for shares of the Company's common stock. The Company's Board of Directors is divided into three classes, with directors in each class elected for three-year terms. The bylaws impose various procedural and other requirements that could make it more difficult for shareholders to effect certain corporate actions. The Company's Board of Directors may issue shares of preferred stock without shareholder approval on such terms and conditions, and having such rights, privileges and preferences, as the Board may determine. The rights of the holders of common stock will be 24 subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. The Company has no current plans to issue any shares of preferred stock. The reader must carefully consider forward-looking statements and understand that such statements involve a variety of risks and uncertainties, known an unknown, and may be affected by inaccurate assumptions. It is not possible to foresee or identify all factors that may affect the Company's forward-looking statements, and the reader should not consider any list of such factors to be an exhaustive list of all risks, uncertainties or potentially inaccurate assumptions affecting such forward-looking statements. The Company cautions the reader to consider carefully these factors as well as the specific factors discussed with each specific forward-looking statement in this quarterly report and in the Company's other filings with the Securities and Exchange Commission. In some cases, these factors have affected, and in the future (together with other unknown factors) could affect the Company's ability to implement the Company's business strategy and may cause actual results to differ materially from those contemplated by such forward-looking statements. No assurance can be made that any expectation, estimate or projection contained in a forward-looking statement can be achieved. The Company also cautions the reader that forward-looking statements speak only as of the date made. The Company undertakes no obligation to update any forward-looking statement, but investors are advised to consult any further disclosures by the Company on this subject in the Company's filings with the Securities and Exchange Commission, especially on Forms 10-K, 10-Q and 8-K, in which the Company discusses in more detail various important factors that could cause actual results to differ from expected or historical results. The Company intends to take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 regarding the Company's forward-looking statements, and are including this sentence for the express purpose of enabling the Company to use the protections of the safe harbor with respect to all forward-looking statements. EXECUTIVE OVERVIEW - THREE-MONTH PERIOD ENDED SEPTEMBER 30, 2004 The following highlights are discussed in further detail within this Form 10-Q. The reader is encouraged to read this Form 10-Q in its entirety to gain a more complete understanding of factors affecting Company performance and financial condition. - On July 23, 2004, Escalon acquired approximately 67% of the outstanding ordinary shares of Drew pursuant to the Company's exchange offer for all of the outstanding ordinary shares of Drew, and since that date has acquired substantially all of the Drew shares. During the remainder of fiscal 2005, Escalon expects to compel Drew shareholders to tender all of the remaining outstanding Drew shares pursuant to procedures under United Kingdom laws and regulations. Drew's revenue during the period from July 24, 2004 through September 30, 2004 was $1,904,000 and Drew's operations resulted in a net loss of $304,000. Prior to acquisition, Drew's ability to obtain raw materials and components was severely restricted due to prolonged liquidity constraints. These constraints were pervasive through all of Drew's locations and affected all aspects of Drew's operations. Escalon's immediate operational priorities with respect to Drew have been to stabilize and increase Drew's revenue base and to infuse Drew with the working capital in the areas of manufacturing, sales and marketing and product development in order to remove the pre-acquisition liquidity constraints. - In connection with the acquisition of Drew, the Company issued 841,686 shares of its common stock during the three-month period ended September 30, 2004. As of September 30, 2004, 58,314 shares of the Company's common stock remain reserved for future exchange for Drew shares. - During the three-month period ended September 30, 2004, the Company paid off all of its term debt that existed prior to the acquisition of Drew as well as the outstanding line of credit that existed prior to the acquisition. The total pre-acquisition debt paid off during the three-month period ended September 30, 2004 was $4,268,000. - When Drew is excluded, product revenue decreased 3.84% during the three-month period ended September 30, 2004 as compared to the same period last fiscal year. The decrease is primarily related to the Sonomed business unit. The decrease in Sonomed product revenue was primarily caused by a decrease in demand for the Company's pachymeter product. 25 - Other revenue increased 14.93% during the three-month period ended September 30, 2004 as compared to the same period last fiscal year. The increase relates to an increase in royalty payments received from Intralase. During the three-month period ended September 30, 2004, 63.56% of the Company's other revenue was received from Bausch & Lomb in connection with the Silicone Oil product line. The Bausch & Lomb contract for this revenue expires in August 2005. - When Drew is excluded, cost of goods sold as a percentage of product revenue increased to 52.01% of product revenue during the three-month period ended September 30, 2004, as compared to 42.70% of product revenue, for the same period last fiscal year. The increase is primarily related to the Sonomed business unit. The primary factors affecting Sonomed were product mix, most notably the decrease in pachymeter sales, in addition to an increase in international sales, where the Company generally experiences lower price per unit on its products. - When Drew is excluded, operating expenses increased 9.87% during the three-month period ended September 30, 2004 as compared to the same period last fiscal year. The increase primarily relates to the Company's continuing efforts to strengthen its sales channels domestically and overseas as well as increases in administrative headcount. - Interest expense decreased during the three-month period ended September 30, 2004 as compared to the same period last fiscal year. The Company paid off several of its debt facilities to several entities in advance of their maturity dates. Additionally, the Company reversed accrued loan commitment fees pursuant to the satisfaction of the debt and release by the lender of those fees. The fees were originally accrued based on contractual terms. COMPANY OVERVIEW The following discussion should be read in conjunction with interim condensed consolidated financial statements and the notes thereto, which are set forth elsewhere in this report on Form 10-Q. The Company operates in the healthcare market, specializing in the development, manufacture, marketing and distribution of medical devices and pharmaceuticals in the areas of ophthalmology, diabetes, cardiovascular disease, hematology and vascular access. The Company and its products are subject to regulation and inspection by the FDA. The FDA requires extensive testing of new products prior to sale and has jurisdiction over the safety, efficacy and manufacturing of products, as well as product labeling and marketing. The Company's Internet address is www.escalonmed.com. In February 1996, the Company acquired substantially all of the assets and certain liabilities of EOI a developer and distributor of ophthalmic surgical products. Prior to this acquisition, the Company devoted substantially all of its resources to the research and development of ultrafast laser systems designed for the treatment of ophthalmic disorders. As a result of the EOI acquisition, Escalon changed its market focus and is no longer developing laser technology. In October 1997, the Company licensed its intellectual laser property to IntraLase, in return for an equity interest and future royalties on sales of products relating to the laser technology. IntraLase undertook the responsibility for funding and developing the laser technology through to commercialization. IntraLase began selling products related to the laser technology during fiscal 2002. The Company is in dispute with IntraLase over royalty payments owed to the Company. See Part II, Item 1. Legal Proceedings, for further information. IntraLase completed its initial public offering in October 2004. See the Notes to Condensed Consolidated Financial Statements for further information. To further diversify its product portfolio, in January 1999, the Company's Vascular subsidiary acquired the vascular access product line from Endologix, formerly Radiance Medical Systems, Inc. Vascular's products use Doppler technology to aid medical personnel in locating arteries and veins in difficult circumstances. Currently, this product line is concentrated in the cardiac catheterization market. In January 2000, the Company purchased Sonomed, a privately held manufacturer of ophthalmic ultrasound diagnostic equipment. 26 On July 23, 2004, Escalon acquired approximately 67% of the outstanding ordinary shares of Drew, a United Kingdom company, pursuant to the Company's exchange offer for all of the outstanding ordinary shares of Drew, and since that date has acquired substantially all of the Drew shares. During the remainder of fiscal 2005, Escalon expects to compel Drew shareholders to tender all of the remaining outstanding Drew shares pursuant to procedures under United Kingdom laws and regulations. Drew is a diagnostics company specializing in the design, manufacture and distribution of analytical systems for laboratory testing worldwide. Drew is focused on providing instrumentation and consumables for the diagnosis and monitoring of medical disorders in the areas of diabetes, cardiovascular diseases and hematology. In addition, Drew supplies diagnostic systems that perform blood component tests. CRITICAL ACCOUNTING POLICIES The preparation of financial statements requires management to make estimates and assumptions that affect amounts reported therein. The most significant of those involve the application of SFAS 142, discussed further in the Notes to the Condensed Consolidated Financial Statements included in this Form 10-Q. The financial statements are prepared in conformity with accounting principles generally accepted in the United States of America, and, as such, include amounts based on informed estimates and judgments of management. For example, estimates are used in determining valuation allowances for deferred income taxes, uncollectible receivables, obsolete inventory, sales returns and rebates and purchased intangible assets. Actual results achieved in the future could differ from current estimates. The Company used what it believes are reasonable assumptions and, where applicable, established valuation techniques in making its estimates. REVENUE RECOGNITION The Company recognizes revenue from the sale of its products at the time of shipment, when title and risk of loss transfer. The Company provides products to its distributors at agreed wholesale prices and to the balance of its customers at set retail prices. Distributors can receive discounts for accepting high volume shipments. The discounts are reflected immediately in the net invoice price, which is the basis for revenue recognition. No further material discounts are given. The Company's considerations for recognizing revenue upon shipment of product to a distributor are based on the following: - Persuasive evidence that an arrangement (purchase order and sales invoice) exists between a willing buyer (distributor) and the Company that outlines the terms of the sale (company information, quantity of goods, purchase price and payment terms). The buyer (distributor) does not have an immediate right of return. - Shipping terms are ex-factory shipping point. At this point the buyer (distributor) takes title to the goods and is responsible for all risks and rewards of ownership, including insuring the goods as necessary. - The Company's price to the buyer (distributor) is fixed and determinable as specifically outlined on the sales invoice. The sales arrangement does not have customer cancellation or termination clauses. - The buyer (distributor) places a purchase order with the Company; the terms of the sale are cash, COD or credit. Customer credit is determined based on the Company's policy and procedures related to the buyer's (distributor's) creditworthiness. Based on this determination, the Company believes that collectibility is reasonably assured. Escalon assesses collectibility based on creditworthiness of the customer and past transaction history. The Company performs ongoing credit evaluations of its customers and does not require collateral from its 27 customers. For many of Escalon's international customers, the Company requires an irrevocable letter of credit to be issued by the customer before the purchase order is accepted. VALUATION OF INTANGIBLE ASSETS Escalon annually evaluates for impairment its intangible assets and goodwill in accordance with SFAS 142, "Goodwill and Other Intangible Assets," or whatever events or changes in circumstances indicate that the carrying value may not be recoverable. These intangible assets include goodwill, trademarks and trade names. Factors the Company considers important that could trigger an impairment review include significant under-performance relative to historical or projected future operating results or significant negative industry or economic trends. If these criteria indicate that the value of the intangible asset may be impaired, an evaluation of the recoverability of the net carrying value of the asset is made. If this evaluation indicates that the intangible asset is not recoverable, the net carrying value of the related intangible asset will be reduced to fair value. Any such impairment charge could be significant and could have a material adverse effect on the Company's financial statements if and when an impairment charge is recorded. No impairment losses were recorded for goodwill, trademarks and trade names during any of the periods presented based on these evaluations. TAXES Estimates of taxable income of the various legal entities and jurisdictions are used in the tax rate calculation. Management uses judgment in estimating what the Company's income will be for the year. Since judgment is involved, there is risk that the tax rate may significantly increase or decrease in any period. In determining income (loss) for financial statement purposes, management must make certain estimates and judgments. These estimates and judgments occur in the calculation of certain tax liabilities and in the determination of the recoverability of certain of the deferred tax assets, which arise from temporary differences between the tax and financial statement recognition of revenue and expense. SFAS 109 also requires that the deferred tax assets be reduced by a valuation allowance, if based on the weight of available evidence, it is more likely than not that all or some portion of the recorded deferred tax assets will not be realized in future periods. In evaluating Escalon's ability to recover the Company's deferred tax assets, management considers all available positive and negative evidence including the Company's past operating results, the existence of cumulative losses and near-term forecasts of future taxable income. Management develops assumptions that require significant judgment about the near-term forecasts of future taxable income that is consistent with the plans and estimates management is using to manage the underlying businesses. Through September 30, 2004, Escalon has recorded a full valuation allowance against the Company's net operating losses due to the uncertainty of their realization as a result of the Company's earnings history, the number of years the Company's operating losses and tax credits can be carried forward, the existence of taxable temporary differences and near-term earnings expectations. The amount of the valuation allowance could decrease if facts and circumstances change that materially increase taxable income prior to the expiration of the loss carryforwards. Any reduction would reduce (increase) the income tax expense (benefit) in the period such determination is made by the Company. 28 THREE-MONTH PERIODS ENDED SEPTEMBER 30, 2004 AND 2003 The following table shows consolidated product revenue by business segment as well as identifying trends in business segment product revenues for the three-month periods ended September 30, 2004 and 2003.
Three-Month Periods Ended September 30, ------------------------------------------ 2004 2003 % Change -------- ------- --------- Product revenue: Drew $1,904 $ - 100.00% Sonomed 1,644 1,705 -3.58% Vascular 695 734 -5.31% Medical/Trek/EMI 393 402 -2.24% -------- ------- --------- $4,636 $2,841 63.18% ======== ======= =========
Product revenue increased $1,795,000, or 63.18%, to $4,636,000 during the three-month period ended September 30, 2004 as compared to the same period last fiscal year. The increase in revenue is attributed to the acquisition of Drew on July 23, 2004. If Drew is excluded, product revenue decreased $109,000, or 3.84%, to $2,732,000 during the three-month period ended September 30, 2004 as compared to the same period last fiscal year. In the Sonomed business unit, revenue decreased $61,000, or 3.58%, to $1,644,000 during the three-month period ended September 30, 2004 as compared to the same period last fiscal year. The decrease in Sonomed product revenue was primarily caused by a decrease in demand for the Company's pachymeter product. Unit sales of the pachymeter decreased by 90.99% as compared to the same period last fiscal year. The domestic market for pachymeters had previously expanded due to enhanced techniques in glaucoma screening performed by optometrists. Historically, the typical optometrist had not been a user of the pachymeter. Domestic demand for the Company's pachymeter returned to historic levels in the fourth quarter of fiscal 2004. Sales of Sonomed's new EZ-Scan product line have partially offset the aforementioned declines. In the Vascular business unit, revenue decreased $39,000, or 5.31%, to $695,000 during the three-month period ended September 30, 2004 as compared to the same period last fiscal year. The decrease in product revenues in the Vascular business unit was primarily the result of the Company providing relief from the contracted minimum monthly purchase requirements to several of its distributors. The Company provided this relief to prevent the distributors from becoming overstocked with the Company's product. In the Medical/Trek/EMI business unit, revenue decreased $9,000, or 2.24%, to $393,000 during the three-month period ended September 30, 2004. Please see the executive overview for further information regarding the operating results of Drew. Other revenue increased $85,000, or 14.93%, to $656,000 during the three-month period ended September 30, 2004 as compared to the same period last fiscal year. The increase relates to a $177,000 increase in royalty payments received from Intralase related to the licensing of the Company's intellectual laser technology. The royalty received from Bausch & Lomb in connection with their sales of Silicone Oil decreased $92,000. The Company's contract with Bausch & Lomb calls for annual step-downs in the calculation of Silicone Oil revenue to be received by the Company from 64% from August 13, 2003 to August 12, 2004 to 45% from August 13, 2004 to August 12, 2005. The step-downs occur during the first quarter of each fiscal year through the remainder of the contract, which ends in August 2005. For the three-month period ended September 30, 2004, the step-down caused a $176,000 decrease in Silicone Oil revenue that the Company would have otherwise received had the step-down not occurred. The offsetting $84,000 increase in Silicone Oil revenue is due to market demand for the product. The Company does not have any further knowledge as to what factors have affected Bausch & Lomb's sales of Silicone Oil. See the Notes to Consolidated Financial Statements for a description of the step-down provisions under the contract with Bausch & Lomb. 29 The following table presents consolidated cost of goods sold by reportable business segment and as a percentage of related segment product revenues for the three-month periods ended September 30, 2004 and 2003.
Three-Month Periods Ended September 30, --------------------------------------------- Cost of goods sold: 2004 2003 -------------------------- ----------------------------- Dollars % Dollars % ------- ----- ------- ------ (in thousands) (in thousands) Drew $1,251 65.70% $ -- 0.00% Sonomed 859 52.25% 681 39.94% Vascular 320 46.04% 296 40.33% Medical/Trek/EMI 242 61.58% 236 58.71% ------ ------ ----- ------ $2,672 57.64% $1,213 42.70% ====== ====== ====== ======
Cost of goods sold totaled $2,672,000, or 57.64% of product revenue, for the three-month period ended September 30, 2004 as compared to $1,213,000, or 42.70% of product revenue, for the same period last fiscal year. The increase in cost of goods sold is primarily attributed to the acquisition of Drew on July 23, 2004. If Drew is excluded, cost of goods sold increased $208,000, to $1,421,000, or 52.01% of product revenue during the three-month period ended September 30, 2004, as compared to $1,213,000, or 42.70% of product revenue, for the same period last fiscal year. Cost of goods sold in the Sonomed business unit totaled $859,000, or 52.25% of product revenue for the three-month period ended September 30, 2004 as compared to $681,000, or 39.94% of product revenue for the same period last fiscal year. The primary factors affecting the increase in cost of goods sold as a percentage of product revenue were product mix, most notably the decrease in pachymeter sales, in addition to an increase in international sales, where the Company generally experiences lower price per unit on its products. Cost of goods sold in the Vascular business totaled $320,000, or 46.04% of revenue, for the three-month period ended September 30, 2004 as compared to $296,000, or 40.33% of revenue for the same period last fiscal year. The Company experienced increases in overtime and temporary labor during the three-month period ended September 30, 2004 as compared to the same period last fiscal year. Cost of goods sold in the Medical/Trek/EMI business unit totaled $242,000, or 61.58%, during the three-month period ended September 30, 2004 as compared to $236,000, or 58.71% for the same period last fiscal year. Fluctuations in Medical/Trek/EMI cost of goods sold primarily emanates from product mix, which was primarily controlled by market demand. Please see the executive overview for further information regarding the operating results of Drew. The following table presents consolidated marketing, general and administrative expenses as well as identifying trends in business segment marketing, general and administrative expenses for the three-month periods ended September 30, 2004 and 2003.
Three-Month Periods Ended September 30, ------------------------------------------------- 2004 2003 % Change --------- --------- ---------- Marketing, general and administrative expenses: Drew $ 792 $ -- 100.00% Sonomed 324 259 25.10% Vascular 339 314 7.96% Medical/Trek/EMI 727 641 13.42% -------- ------- ------- $2,182 $1,214 79.74% ======== ======= ========
Marketing, general and administrative expenses increased $968,000, or 79.74%, to $2,182,000 during the three-month period ended September 30, 2004 as compared to the same period last fiscal year. The increase in marketing, general and 30 administrative expenses was primarily attributed to incremental expenditures due to the acquisition of Drew on July 23, 2004. If Drew is excluded, marketing, general and administrative expenses increased $176,000, or 14.50%, to $1,390,000 during the three-month period ended September 30, 2004 as compared to the same period last fiscal year. Marketing, general and administrative expenses in the Sonomed business unit increased $65,000, or 25.10%, to $324,000 as compared to the same period last fiscal year. Salaries and other personnel-related expenses increased $24,000 as a result of increased headcount. Consulting expenses increased $16,000 primarily due to increased marketing expenditures in the European market. Advertising expenses also increased $17,000. In the Vascular business unit, marketing, general and administrative expenses increased $25,000, or 7.96%, to $339,000 as compared to the same period last fiscal year. The Company agreed to pay royalties for a period of five years following the acquisition of the vascular access division of Endologix. That five-year period ended in December 2003. This resulted in a $60,000 decrease in royalty expense. Offsetting this decrease was an increase in consulting expense primarily due to increased marketing expenditures in the European market as well as a $22,000 increase in salaries and other personnel-related expenses as a result of increased headcount. In Medical/Trek/EMI, marketing, general and administrative expenses increased $86,000, or 13.42%, to $727,000 as compared to the same period last fiscal year. Salaries and other personnel-related expenses increased $42,000 due to increased headcount. Administrative travel-related expenses increased $36,000 primarily due to the Drew acquisition. Please see the executive overview for further information regarding the operating results of Drew. Research and development expenses increased $109,000, or 52.45%, to $316,000 during the three-month period ended September 30, 2004 as compared to the same period last fiscal year. The increase in research and development expenses was attributed to incremental expenditures due to the acquisition of Drew on July 23, 2004. Please see the executive overview for further information regarding the operating results of Drew. Escalon recognized a net loss of $29,201 related to its investment in OTM. The share of OTM's loss recognized by the Company is in direct proportion to the Company's ownership equity in OTM. OTM began operations during the three-month period ended September 30, 2004. See Related Party Transactions. Interest income was $32,000 and $1,000 for the three-month periods ended September 30, 2004 and 2003, respectively. The increase relates to increased average cash balances in the current fiscal year. Interest expense was $(3,000) and $119,000 for the three-month periods ended September 30, 2004 and 2003, respectively. The Company paid off several of its debt facilities to several entities in advance of their maturity dates. Additionally, the Company reversed accrued loan commitment fees pursuant to the satisfaction of the debt and release by the lender of said fees. The fees were originally accrued based on contractual terms. 31 LIQUIDITY AND CAPITAL RESOURCES Changes in Escalon's overall liquidity and capital resources from continuing operations during the three-month period ended September 30, 2004 are reflected in the following table:
September 30, June 30, (Dollars are in thousands) 2004 2004 -------------- ------------- Current assets $ 16,301 $ 17,566 Less: Current liabilities 7,712 3,600 -------------- ------------- Working capital $ 8,589 $ 13,966 Current ratio 2.1 to 1 4.9 to 1 - ------------------------------------------------------------------------------------------- Notes payable and current maturities $ 1,409 $ 1,872 Long-term debt 594 2,396 -------------- ------------- Total debt $ 2,003 $ 4,268 Total equity 30,427 23,461 -------------- ------------- Total capital $32,430 $ 27,729 Total debt to total capital 6.18% 15.39%
WORKING CAPITAL POSITION Working capital decreased $5,377,000 as of September 30, 2004 and the current ratio decreased to 2.1 to 1 when compared to June 30, 2004. The decrease in working capital was caused primarily by the pay-off of all of the Company's pre-acquisition debt. Accrued expenses, accounts payable and line of credit increased $2,681,000, $1,299,000 and $937,000, respectively. As of September 30, 2004, $2,348,000 of the accrued expenses relates to Drew, or is related to the acquisition of Drew, $1,106,000 of accounts payable relates to Drew and the entire $1,187,000 line of credit relates to Drew. CASH FLOWS USED IN OPERATING ACTIVITIES Cash flows from operating activities decreased by $2,582,000 for the three months ended September 30, 2004 as compared to the same period last fiscal year. Apart from year-over-year decreased net profitability of $507,000, the Company also put an additional $2,131,000 into working capital (related to purchase of inventory and payment of accounts payable for Drew) during the three-month period ended September 30, 2004 as compared to the same period last fiscal year. CASH FLOWS FROM INVESTING AND FINANCING ACTIVITIES Cash flows from investing activities relate to net cash received from the acquisition of Drew offset by the Company's $130,000 investment in OTM and the purchase of fixed assets. Any necessary capital expenditures have generally been funded out of cash from operations, and the Company is not aware of any factors that would cause historical capital expenditure levels not to be indicative of capital expenditures in the future and, accordingly, does not believe that it will have to commit material resources to capital investment for the foreseeable future. Cash flows used in financing activities were $4,928,000 during the three-month period ended September 30, 2004. The Company paid off all of the pre-acquisition term debt it had outstanding prior to the Drew acquisition as well as the line of credit it had outstanding prior to the acquisition. The outstanding balance of these debt facilities was a combined $4,268,000. 32 FORWARD-LOOKING STATEMENT ABOUT SIGNIFICANT ITEMS LIKELY TO AFFECT LIQUIDITY On July 23, 2004, Escalon acquired approximately 67% of the outstanding ordinary shares of Drew, pursuant to the Company's exchange offer for all of the outstanding ordinary shares of Drew, and since that date has acquired substantially all of the Drew shares. As of September 30, 2004, the Company has acquired approximately 94% of the outstanding ordinary shares of Drew. During the remainder of fiscal 2005, Escalon expects to compel Drew shareholders to tender all of the remaining outstanding Drew shares pursuant to procedures under United Kingdom laws and regulations. Drew does not have a history of producing positive operating cash flows and, as a result, at the time of acquisition, was operating under financial constraints and was under-capitalized. As of November 9, 2004, as Drew is not yet wholly owned, Escalon loaned $3,253,000 to Drew. The funds have been primarily used to procure components to build up inventory to support the manufacturing process as well as to pay off accounts payable of Drew. As Drew is integrated into the Company, management will be working to reverse the situation, while at the same time strengthening Drew's market position. Escalon anticipates that further working capital will be required by Drew. In October 1997, Escalon licensed its intellectual laser properties to IntraLase in exchange for an equity interest of 252,535 shares of common stock (as adjusted after splits), as well as royalties on future product sales. On October 7, 2004, IntraLase announced the initial public offering of shares of its common stock at a price of $13.00 per share. The shares of common stock are restricted for a period of less than one year and may be sold after April 4, 2005 pursuant to a certain Fourth Amended Registration Rights Agreement between the Company and IntraLase. The shares have been classified as available-for-sale-securities. The Company's net proceeds will be the market price of the shares, multiplied by the number of shares sold, less any broker commissions. As of November 9, 2004, IntraLase's common stock closed at $18.32 per share on the Nasdaq National Market. At that price, Escalon's shares of IntraLase were valued at $4,626,441. The Company cannot assure that it will be able to liquidate its shares of IntraLase at the current market price. Escalon realized 7.88% and 14.91% of its net revenue during the three-month period ended September 30, 2004 and 2003, respectively, from Bausch & Lomb's sale of Silicone Oil. Silicone Oil revenue is based on sales of the product by Bausch & Lomb multiplied by a contractual factor that reduces on an annual basis due to a contractual step-down provision. While the Company does not expect total Silicone Oil revenue to decline rapidly during the remainder of the contract, any such decrease would have an impact on the Company's financial position, results of operations and cash flows and the Company's stock price could be negatively impacted. The Company is entitled to receive this revenue from Bausch & Lomb, in varying amounts, through August 2005, when all revenues will cease. See the Notes to Consolidated Financial Statements for a description of the step-down provisions under the contract with Bausch & Lomb. The Company issued 120,000 common stock purchase warrants in connection with the private placement on March 17, 2004. The warrants are exercisable at $15.60 per share and expire in five years from the placement date. If all 120,000 warrants were to be exercised, it would provide gross proceeds to the Company of $1,872,000. Escalon cannot assure, however, that the warrant exercise price will be less than the market price of the Company's common stock or that even if the exercise price is less than the market price that any of the warrants will be exercised. These warrants are not currently in the money and will not be exercised, and the Company will not receive any proceeds as long as the exercise price is greater than the market price. See the Notes to Condensed Consolidated Financial Statements for a description of the private placement of the Company's common stock and common stock purchase warrants. Additionally, the Company issued 60,000 common stock purchase warrants in connection with the renegotiation of the Company's term debt in November 2001. The warrants are exercisable at $3.66 per share and expire in November 2006. If all 60,000 warrants were to be exercised, it would provide gross proceeds to the Company of $219,600. Escalon cannot assure, however, that the warrant exercise price will be less than the market price of the Company's common stock or that even if the exercise price is less than the market price that any of the warrants will be exercised. 33 BALANCE SHEET The components of the balance sheet of the Company were increased as of July 23, 2004 by the acquisition of Drew as follows: Cash $ 295,373 Accounts receivable 1,433,324 Inventory 2,562,848 Other current assets 577,140 Furniture and equipment 868,839 Goodwill 8,622,303 Patents 461,779 Other long-term assets 264,530 Line of credit 1,617,208 Current liabilities 4,548,746 Liability for shares reserved for future exchange 597,019 Long-term debt 767,165 Exchange of common stock 6,833,420
DEBT HISTORY On December 23, 2002, a lender acquired the Company's bank debt, which consisted of term debt of $5,850,000 and $1,475,000 outstanding on a $2,000,000 available line of credit. On February 13, 2003, the Company entered into an amended agreement with the lender. The primary amendments of the amended loan agreement were to reduce quarterly principal payments, extend the term of the repayments and to alter the covenants of the original bank agreement. On September 30, 2004, the Company paid off and terminated both the remaining term debt and the outstanding balance on this line of credit. In November 2001, the Company issued the lender 60,000 warrants to purchase the Company's common stock at $3.66 per share in connection with this debt. The warrants will expire in November 2006. On January 21, 1999, the Company's Vascular subsidiary and Endologix entered into an Assets Sale and Purchase Agreement. Pursuant to this agreement, the Company acquired for cash the assets of Endologix's vascular access business in exchange for cash and also agreed to pay royalties to Endologix based on future sales of the vascular access business for a period of five years following the closing of the sale, with a guaranteed minimum royalty of $300,000 per year. On February 1, 2001, the parties amended the agreement to eliminate any future royalty payments to Endologix. Pursuant to this amendment, the Company paid $17,558 in cash to Endologix, delivered a short-term note in the amount of $64,884 that was satisfied in January 2002, a note in the amount of $717,558 payable in 11 quarterly installments that commenced on April 15, 2002, and the Company issued 50,000 shares of its common stock to Endologix. On September 30, 2004, the Company paid off the balance of the term debt. As of September 30, 2004, Drew has an overdraft line of credit with a United Kingdom financial institution. The amount available on the line is $651,344. The interest rate is 2.00% over the United Kingdom prime rate (4.75% at September 30, 2004). The line is secured by Drew's assets and is personally guaranteed by certain of Drew's current and former directors. The balance as of September 30, 2004 is $655,791. Drew also has long-term debt facilities through the Texas Mezzanine Fund and through Symbiotics, Inc. The Texas Mezzanine Fund term debt is payable in monthly installments of $14,200, which includes interest at a fixed rate of 8.00%. The note is due in April 2008 and is secured by certain assets of Drew. The outstanding balance at September 30, 2004 is $515,880. The Symbiotics, Inc. term debt, which originated from the acquisition of a product line from Symbiotics, Inc., is payable in monthly installments of $8,333 with interest at a fixed rate of 5.00%. The outstanding balance at September 30, 34 2004 is $300,002. Drew has a line of credit with a U.S. financial institution secured by certain assets of Drew. The amount available on the line of credit is $2,000,000. Interest is at the prime rate plus 4.00% (8.75% as of September 30, 2004). The outstanding balance as of September 30, 2004 was $531,236. OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS Escalon was not a party to any off-balance sheet arrangements as of and for the three-month periods ending September 30, 2004 and 2003. The following table presents the Company's contractual obligations as of September 30, 2004:
Less than More than Total 1 Year 1-3 Years 3-5 Years 5 Years ---------- ----------- ----------- ------------ ------------ Long-term debt $ 815,882 $ 221,668 $ 499,548 $ 94,666 $ -- Line of credit 1,187,027 1,187,027 -- -- -- Operating lease agreements 3,272,022 773,154 1,332,717 582,770 583,381 OTM commitment 126,000 126,000 -- -- -- Purchase obligations 700,000 700,000 -- -- -- ---------- ----------- ----------- ------------ ------------ $6,100,931 $3,007,849 $1,832,265 $ 677,435 $ 583,381 ========== =========== =========== ============ ============
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The table below provides information about the Company's financial instruments, consisting primarily of debt obligations that are sensitive to changes in interest rates. For debt obligations, the table represents principal cash flows and related interest rates by expected maturity dates. Interest rates at September 30, 2004 are fixed at 8.00% on the Texas Mezzanine Fund term debt, fixed at 5.00% on the Symbiotics, Inc. term debt, 4.00% over the Federal prime rate (4.75% at September 30, 2004) on the U.S. line of credit and 2.00% over the United Kingdom prime rate (4.75% at September 30, 2004) on the overdraft line of credit. See the Notes to Condensed Consolidated Financial Statements for further information regarding the Company's debt obligations.
2004 2005 2006 Thereafter Total ------------ ---------- --------- ---------- ---------- Texas Mezzanine Fund Note $ 121,672 $ 143,721 $ 155,821 $ 94,666 $ 515,880 Interest rate 8.00% 8.00% 8.00% 8.00% Symbiotics, Inc. Note 99,996 99,996 100,010 -- 300,002 Interest rate 5.00% 5.00% 5.00% -- U.S. Line of Credit 531,236 -- -- -- 531,236 Interest rate 8.75% -- -- -- Overdraft Line of Credit 655,791 -- -- -- 655,791 Interest rate 6.75% -- -- -- ------------ ---------- --------- ---------- ---------- $ 1,408,695 $ 243,717 $ 255,832 $ 94,665 $2,002,909 ============ ========== ========== ========== ==========
EXCHANGE RATE RISK During the three-month periods ended September 30, 2004 and 2003, approximately 35.90% and 15.80%, respectively, of Escalon's consolidated net revenue was derived from international sales. Prior to the acquisition of Drew, the price of all product sold overseas was denominated in United States Dollars and consequently the Company incurred no exchange rate risk on revenue. However, a portion of Drew's product revenue is denominated in United Kingdom pounds. During the period from July 24 through September 30, 2004, Drew recorded $518,000 of product revenue denominated in United Kingdom Pounds. Additionally, Drew incurs a portion of its expenses denominated in United Kingdom Pounds. During the 35 period from July 24 through September 30, Drew incurred $632,000 of expense denominated in United Kingdom Pounds. The Company's Sonomed business unit incurs a portion of its marketing expenses in the European market that are transacted in Euros. These expenses totaled $41,000 and $27,000 for the three-month periods ended September 30, 2004 and 2003, respectively. The Company's Vascular business unit began incurring marketing expenses in the European market during the second quarter of fiscal 2004, the majority of which are transacted in Euros. These expenses were $45,000 for the three-month period ended September 30, 2004. The Company may begin to experience fluctuations, beneficial or adverse, in the valuation of the currencies in which the Company transacts its business, namely the United States Dollar, the United Kingdom Pound and the Euro. ITEM 4. CONTROLS AND PROCEDURES (A) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES The Company's management, with the participation of the Company's Chief Executive Officer and Senior Vice President of Finance, has evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rule 13a-15(e) and 15(d)-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on such evaluation, the Company's Chief Executive Officer and Senior Vice President of Finance have concluded that, as of the end of such period, the Company's disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act. (B) INTERNAL CONTROLS OVER FINANCIAL REPORTING There have been changes in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the Company's first fiscal quarter ended September 30, 2004 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. The Company's management notes that there have not been any changes in the Company's internal control over financial reporting in the Company's historical business; however, the Company's recent acquisition of Drew did cause a change in the Company's internal control as it relates to that business. The improvement of internal controls surrounding the acquired Drew business is a continuing focus of Company management. In connection with their review of the Company's September 30, 2004 interim financial statements the Company's independent registered public accounting firm identified certain material weaknesses and other deficiencies in our internal control related to the Drew business that was acquired during the quarter. The Public Company Accounting Oversight Board, Standard No. 2 states a material weakness is "a significant deficiency, or a combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected." The Company's independent registered public accounting firm identified the following material weaknesses in the Company's acquired Drew businesses related to: 1. the Company's financial reporting closing and review process; 2. inadequate documentation, untimely account reconciliations and account analysis of certain balance sheet accounts; and 3. untimely and inadequate communication of Escalon policies and procedures to personnel of newly acquired business. 36 In connection with the non-negotiated acquisition of Drew on July 23, 2004 and the related material control weaknesses discussed above, we have or expect to take the following actions: 1. The Company's in the process of remediating the specific material control weaknesses identified above, 2. shortly after the acquisition of Drew, Escalon began relocating and consolidating the financial accounting and reporting function of Drew to Dallas, Texas from the United Kingdom, 3. the accounting personnel in the United Kingdom have all been replaced with employees that will remain until the final transition of the financial and reporting function to Dallas, Texas, 4. we are currently undertaking a detailed review of the internal control requirements under the newly organized financial accounting and reporting function of Drew and will implement changes as deemed necessary, 5. we have instituted temporary controls that require the direct involvement of the Company's corporate financial management team and, accounting consultants that actively engaged in integrating Escalon policies and procedures with all of Drew's operating entities. 6. During the quarter an independent accounting firm performed an investigation on the Drew UK operations to determine if there had been any fraudulent activity related to cash receipts on disbursements. The accounting firm did not find any evidence of fraud. Our analysis is continuing and we will attempt to have it completed by the end of the current fiscal year. This additional work and testing may identify other deficiencies in our internal control over financial reporting for Drew. After completing our full analysis, we may conclude that any additional deficiencies rise to the level of significant deficiencies or material weaknesses in internal control over financial reporting. The Company has performed additional procedures to evaluate the extent to which the internal control weaknesses discussed above could have led to material misstatements in the Company's consolidated financial statements. Based on this evaluation, the Company do not believe that the control weaknesses and deficiencies noted above led to any material misstatements in the consolidated financial statements included in this report. A control system, no matter how well-designed and operated, cannot provide absolute assurance that the objectives of the control systems are met, and no evaluation of internal controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On June 10, 2004, Escalon provided notice to Intralase of the Company's intention to terminate the license agreement with Intralase due to Intralase's failure to pay certain royalties that the Company believes are due under the license agreement. On June 21, 2004, Intralase sought a preliminary injunction and a temporary restraining order with the United States District Court for the Central District of California, Southern District against Escalon to prevent the termination of the license agreement with Intralase. The parties subsequently agreed to stipulate to the temporary restraining order to prevent a termination of the license agreement and, on July 6, 2004, as mutually agreed by Intralase and Escalon, the same district court entered a stipulation and order to remove from the trial list the hearing on the preliminary injunction. The litigation will continue in accordance with the court order. The Company does not believe that this matter has had or is likely to have a material adverse effect on the Company's business, financial condition or future results of operations. Escalon is aware of three lawsuits involving Drew. The first lawsuit involves the principal shareholders of an entity previously acquired by Drew for the collection of unpaid expenses. A counterclaim was filed by Drew for breach of intellectual property rights and for breach of the principal 37 shareholders' covenants not to compete. This action was filed in the state courts of Connecticut. The second lawsuit was filed in the state court of Minnesota, but transferred to the Federal District Court of Minnesota. This action was brought by a distributor against an entity previously acquired by Drew claiming a breach of a marketing and distribution agreement. The parties have reached a tentative settlement of this matter. The third action involves a suit instituted in California in connection with a dispute from a customer claiming a refund for a product purchase. The Company does not believe that these matters have had or are likely to have a material adverse effect on the Company's business, financial condition or future results of operations. Escalon, from time to time is involved in various legal proceedings and disputes that arise in the normal course of business. These matters have included intellectual property disputes, contract disputes, employment disputes and other matters. The Company does not believe that the resolution of any of these matters have had or are likely to have a material adverse effect on the Company's business, financial condition or results of operations. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS On July 23, 2004, Escalon acquired approximately 67% of the outstanding ordinary shares of Drew, a United Kingdom company, pursuant to the Company's exchange offer for all of the outstanding ordinary shares of Drew, and since that date has acquired substantially all of the Drew shares. During the remainder of fiscal 2005, Escalon expects to compel Drew shareholders to tender all of the remaining outstanding Drew shares pursuant to procedures under United Kingdom laws and regulations. During the quarter ended September 30, 2004, the Company has issued 841,686 shares of its common stock and reserved 58,314 shares for future issuance pursuant to the exchange offer. The issuances of shares of Escalon common stock in the exchange offer for the acquisition of Drew were made in accordance with Rule 802 under the Securities Act of 1933, as an exchange offer for a class of securities of a foreign private issuer in which the conditions regarding the limitation on United States ownership of Drew, the equal treatment of any United States holders and Form CB filings were satisfied. The Company did not effect any repurchases of its common stock during the quarter ended September 30, 2004. ITEM 5. OTHER INFORMATION In October 1997, Escalon licensed its intellectual laser properties to IntraLase in exchange for an equity interest of 252,535 shares of common stock (as adjusted after splits), as well as royalties on future product sales. On October 7, 2004, IntraLase announced the initial public offering of shares of its common stock at a price of $13.00 per share. The shares of common stock are restricted for a period of less than one year an may be sold after April 4, 2005 pursuant to a certain Fourth Amended Registration Rights Agreement between the Company and IntraLase. The shares have been classified as available-for-sale-securities. The Company has historically accounted for these shares at $0 basis because a readily determinable market value was not available. The Company cannot assume that it will be able to Liquidate its shares of Intralase at the current market price. ITEM 6. EXHIBITS EXHIBITS Exhibit No. Exhibit ----------- ------- Exhibits 10.34 Nat West Multi Currency Overdraft Facility dated February 12, 2003 between Drew Scientific and Nat West.. 10.35 Security Agreement between Danam Acquisition Corp and Symbiotics Corporation dated August 31, 2002. 10.36 Secured Promissory Note between Danam Acquisition Corp and Symbiotics Corporation dated August 31, 2002. 10.37 Sixth Amendment to Amended and Restated Loan Agreement - Dated November 30, 2003 - between Drew Scientific, Inc. and Bank of America. 10.38 Eight Amended and Restated Revolving Promissory Note - Date November 30, 2003 - between Bank of America and Drew Scientific, Inc. 10.39 Ratification of Guaranty - November 30, 2003 - between Bank of America and Drew Scientific, Inc. 10.40 Ratification of Guaranty - November 30, 2003 - between CDC Acquisition Corp and Bank of America 10.41 Post Closing Agreement - Dated November 30, 2003 - between Drew Scientific, Inc. and Danam Electronics 10.42 Second Amendment to Intercreditor Agreement - Dated November 20, 2003 - between Texas Mezzanine and Bank of America 10.43 Loan Agreement - Dated June 1, 2000 - by the Bank of America and MWI, Inc d/b/a Danam Electronics 10.44 Guaranty - June 1, 2000 - borrower MWI, Inc d/b/a Danam Electronics to Bank of America - Grantor Jerry West 10.45 Guaranty - June 1, 2000 - borrower MWI, Inc d/b/a Danam Electronics to Bank of America - Grantor - Infolab Inc. 10.46 Revolving Promissory Note - June 1, 2000 - Bank of America and MWI, Inc d/b/a Danam Electronics 10.47 Intercreditor Agreement - June 1, 2000 - between Texas Community Bank and Trust, The Texas Mezzanine Fund, Inc. and Bank of America 10.48 Promissory Note - November 20, 2003 - between Drew Scientific, Inc. and Texas Mezzanine Fund, Inc. 10.49 Revenue Participation Agreement - - November 20, 2003 - between Drew Scientific, Inc. and Texas Mezzanine Fund, Inc. 10.50 Security Agreement - - November 20, 2003 - between Drew Scientific, Inc. and Texas Mezzanine Fund, Inc. 10.51 Loan Agreement - November 20, 2003 - between Drew Scientific, Inc. and Texas Mezzanine Fund, Inc 10.52 Guaranty Agreement - November 20, 2003 - between Drew Scientific, Inc. and Texas Mezzanine Fund, Inc. 10.53 Guaranty Agreement - November 20, 2003 - between Keith Raymond Drew Scientific, Inc. and Texas Mezzanine. 10.54 Subornation Agreement - November 20, 2003 - between Drew Scientific, Inc. and Texas Mezzanine Fund, Inc. 10.55 Post Closing Agreement - November 20, 2003 - between Drew Scientific, Inc., Drew Scientific, plc, Keith Drew. and Texas Mezzanine Fund, Inc. 10.56 First Amendment to Post Closing Agreement dated December 20, 2003 between Drew Scientific, Inc. Drew Scientific, plc, Keith Drew and Texas Mezzanine Fund, Inc. 31.1 Certificate of Chief Executive Officer under Rule 13a-14(a) 31.2 Certificate of Senior Vice President of Finance under Rule 13a-14(a) 32.1 Certificate of Chief Executive Officer under Section 1350 of Title 18 of the United States Code 32.2 Certificate of Senior Vice President of Finance under Section 1350 of Title 18 of the United States Code
* All the above Filed herewith. 38 SIGNATURES Pursuant to the requirements 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. ESCALON MEDICAL CORP. (Registrant) Date: November 22, 2004 By: /s/ Richard J. DePiano ----------------------- Richard J. DePiano Chairman and Chief Executive Officer Date: November 22, 2004 By: /s/ Harry M. Rimmer -------------------- Harry M. Rimmer Senior Vice President - Finance
39 EX-10.34 2 w68886exv10w34.txt OVERDRAFT FACILITY DATED FEB. 12, 2003 Exhibit 10.34 THIS IS AN IMPORTANT LETTER WHICH SETS OUT THE TERMS AND CONDITIONS OF YOUR GROUP OVERDRAFT FACILITY. PLEASE NOTE THAT OVERDRAFTS ARE REPAYABLE ON DEMAND. WE RECOMMEND THAT YOU TAKE INDEPENDENT LEGAL ADVICE IF YOU HAVE ANY DOUBTS REGARDING THE TERMS AND CONDITIONS OF THE FACILITY. [NATWEST LOGO] SLS MANCHESTER ADDRESS: 11 St James's Square Date: 2/12/03 Manchester M2 6FU TELEPHONE: 0161 242 3943 PRIVATE & CONFIDENTIAL Drew Scientific Distribution Limited, Company Number 3933012 Drew Scientific Limited, Company Number 1351145 Sowerby Woods Industrial Estate Park Road Barrow-in-Furness Cumbria LA14 4QR Dear Sirs MULTI-CURRENCY OVERDRAFT FACILITY ACCOUNT HOLDING BRANCH/OFFICE: Barrow-in-Furness Branch (sorting code 01 00 61) I write to advise the terms and conditions upon which the Bank is willing to make available to you a multi-currency overdraft facility for the purpose of your business. 1. DEFINITIONS In this letter the following expressions shall have the following meanings:- "BANK" means National Westminster Bank Plc and its successors and assigns; "EURO" means the single currency adopted or to be adopted by participating member states under the Treaty establishing the European Union; "FACILITY" means the multi-currency overdraft facility made available or to be made available on the terms and conditions set out in this letter; "FACILITY ACCOUNTS" means the Sterling Current Accounts, the Foreign Currency Current Account and the Foreign Currency Creditor Account; "FACILITY LIMIT" means L360,000; "FOREIGN CURRENCY" means any non-Sterling currency (including the euro) which is freely convertible into Sterling and readily available in the London Interbank Market; "FOREIGN CURRENCY CREDITOR ACCOUNT" means the account denominated in United States Dollars referenced 140-01-6648738 in name of Drew Scientific Limited on which the Facility is made available; "FOREIGN CURRENCY CURRENT ACCOUNTS" means:- (i) the current account denominated in euros referenced 550-00-6809375 in name of Drew Scientific Limited (ii) the current account denominated in United States Dollars referenced 140-00-6393713 and in name of Drew Scientific Limited on which the Facility is made available; National Westminster Bank Plc Registered Number 929027 England Registered Office: 135 Bishopsgate, London EC2M 3UR Agency agreements exist between members of The Royal Bank of Scotland Group "GROSS LIMIT" means L1,000,000; "STERLING" and the sign "L" means the lawful currency of the United Kingdom; "STERLING CURRENT ACCOUNTS" means the current accounts denominated in Sterling on which the Facility is made available, as follows:- account number 61023876 in name of Drew Scientific Distribution Limited account number 60925701 in name of Drew Scientific Limited "UNITED STATES DOLLARS" and "US$" mean the lawful currency of the United States of America. 2 CREDITOR ACCOUNTS 2.1 The Foreign Currency Creditor Account should remain in credit at all times and the Bank may decline to pay a cheque (or allow any other payment or withdrawal) which could result in a cleared debtor balance. If the Bank does pay a cheque (or allows any other payment or withdrawal) resulting in a cleared debtor balance it will not mean that a borrowing facility has been established or that the Bank will agree to pay any other cheque (or allow any other payment or withdrawal) which would have the same effect. 3 OVERDRAFT LIMIT(S) AND UTILISATION 3.1 The Facility may be utilised by overdrawing the Facility Accounts, subject to clause 2.1, up to the Facility Limit. The Facility Limit must not at any time be exceeded. 3.2 In addition, the aggregate of the cleared debtor balances on the Facility Accounts must not at any time exceed the Gross Limit. 3.3 For the purpose of calculating utilisation of the Facility:- (a) any cleared credit balances on the Sterling Current Accounts will be netted against any cleared debit balances on the Sterling Current Accounts; then (b) any credit balances on the Foreign Currency Current Accounts and the Foreign Currency Creditor Account will be netted against any debit balances on the Foreign Currency Current Accounts in the same Foreign Currency; then (c) the Sterling equivalent of the net balances on the Foreign Currency Current Accounts and the Foreign Currency Creditor account shall be calculated by reference to the prevailing market rate of exchange; and then (d) the Sterling equivalent of the net balances on the Foreign Currency Current Accounts and the Foreign Currency Creditor Account will be netted against (or aggregated with) the net balance on the Sterling Current Accounts. 3.4 The Bank may decline to pay a cheque (or allow any other payment or withdrawal) from a Facility Account (whether in credit or debit) which would result in either the Facility Limit or the Gross Limit being exceeded. This may mean that one of you may not be able to draw on a credit balance on a Facility Account in your name as a result of a debit balance on another Facility Account. It is your responsibility to liaise with each other to ensure that these arrangements do not have an adverse effect on the operations of each Facility Account. 3.5 If the Bank does pay a cheque (or allows any other payment or withdrawal) resulting in either the Facility Limit or the Gross Limit being exceeded it will not mean that the relevant limit has changed or that the Bank will agree to pay any other cheque (or allow any other payment or withdrawal) which would have that effect. 3.6 The Bank may disregard any uncleared credits for the purposes of calculating the utilisation of the Facility (and any interest payable) and compliance with the Gross Limit. If however the Bank does pay a cheque (or allows any other payment or withdrawal) against uncleared credits this does not mean that it is bound to do so at other times. 4 PRECONDITIONS 4.1 The Bank will not be obliged to make the Facility available until the following conditions have been met:- (a) any security required in terms of Clause 9 of this letter has been valued and completed to the Bank's satisfaction; and (b) you have accepted the Facility on the terms and conditions set out in this letter by returning the duplicate of this letter with the acknowledgement duly signed, within 28 days of the date of this letter. 5 AVAILABILITY 5.1 The Facility is repayable upon demand in accordance with normal banking practice. 5.2 Without prejudice to its overall right to call for repayment on demand, it is the Bank's present intention that the Facility will be available until 31st October 2004. The Facility will be reviewed on that date but may be extended by mutual agreement. 5.3 The Bank will always give notification of its intention to place a restriction on your ability to make drawings on the Facility. 5.4 You may at any time advise us in writing that the Facility is no longer required. 6 SET OFF. RETENTION AND APPROPRIATION 6.1 In addition to any other rights to which it may be entitled, including rights under any guarantee or security, the Bank may retain, set off or appropriate any credit balances (whether current or not yet due) either on the Facility Accounts or any other accounts any of you may have with the Bank against any debit balances on the Facility Accounts, liabilities of any of you under any guarantees granted by any of you in connection with the Facility, or any other obligations any of you may owe to the Bank whether present, future, actual or contingent. 6.2 The Bank may exercise any of these rights without prior notice both before and after demand and in so doing may, where required, convert between currencies at the prevailing market rate of exchange. 7 INTEREST STERLING CURRENT ACCOUNTS 7.1 Interest on the Sterling Current Accounts will be charged by the Bank as follows:- (a) on that part of the aggregate of the cleared debtor balances on the Sterling Current Accounts equal to the aggregate of the cleared creditor balances on the Sterling Current Accounts, at 0% per annum; and (b) on that part of the aggregate of the cleared debtor balances on the Sterling Current Accounts in excess of the aggregate of the cleared creditor balances on the Sterling Current Accounts at 2% per annum over the Bank's Sterling Base Rate. 7.2 The Bank's Sterling Base Rate as at 1st December 2003 was 3.75% per annum. Changes to the Bank's Sterling Base Rate may be made at any time and with immediate effect, such changes being advised by way of press notice. 7.3 Such interest will be calculated both before and after demand, decree or judgment on a daily basis and a year of 365 days and debited by the Bank to Sterling Current Account number 60925701 quarterly on the final business day of March, June, September and December (or such other dates as the Bank may advise from time to time). FOREIGN CURRENCY CURRENT ACCOUNTS 7.4 Interest on any debtor balances on the Foreign Currency Current Accounts will be charged at 2% per annum over the Bank's relevant Currency Lending Rate. The Bank's Currency Lending Rates are variable and will therefore change from time to time. 7.5 Such interest will be calculated separately for each Foreign Currency Current Account both before and after demand, judgment or decree on a daily basis and a year of 360 days (or such other period as reflects market convention in the relevant currency) and shall be debited to the respective Foreign Currency Current Accounts quarterly on the first business day of March, June, September and December. 8 COSTS 8.1 An arrangement fee of L3600 is payable and will be debited to Sterling Current Account 60925701 following receipt by the Bank of your acceptance of the terms and conditions of the Facility as set out in this letter or following your first utilisation of the Facility, whichever is the earlier. You will also be jointly and severally responsible for paying any costs incurred by the Bank in connection with the Facility whether as a result of any of you breaking the terms of the Facility or not. These costs will include (but not be limited to) costs of taking and discharging any security; taking steps, including court action, to obtain payment; enforcing and/or preserving the Bank's rights under any security held for the Facility; tracing any of you if any of you change address without notice and communicating with any of you if any of you break the terms of the Facility. If such costs remain unpaid then they may be debited by the Bank to any of the Facility Accounts. 9 SECURITY 9.1 The Facility will be secured by the following:- (a) the existing available security held by the Bank as follows:- (i) Debentures by, and an Unlimited Inter Company Composite Guarantee between, Drew Scientific Distribution Limited, Drew Scientific Limited, Drew Scientific Group plc and Counting Technology Limited (ii) a Guarantee for L100,000 by Keith Raymond Drew supported by: (a) a Charge of Deposit in respect of monies held with the Bank in account number 61054879 (iii) a Guarantee for L10,000 by Andrew Charles Kenney supported by: (a) a Charge of Deposit in respect of monies held with the Bank in account number 61054895 (iv) a Guarantee for L10,000 by David Jonathan Blain supported by: (a) a Charge of Deposit in respect of monies held with the Bank in account number 78039525 (v) a Guarantee for L100,000 by Michael John Sipple-Asher (vi) a Guarantee for L140,000 by James Conor Maxwell supported by: (a) a Charge of Deposit in respect of monies held with the Bank in account number 61054917 (vii) a Guarantee for L50,000 by Christopher John Madden supported by: (a) a Charge of Deposit in respect of monies held with the Bank in account number 61055417 (b) new security required by the Bank for the Facility as follows:- (i) a Charge of Deposit in respect of monies held with Coutts & Co in account number to be advised in the name of M J Sipple-Asher to support the Guarantee detailed in clause 8.1(a)(v) (c) all further available security which the Bank may in future obtain. 9.2 All security will require to be granted in the Bank's preferred form. The value of the security will be reviewed regularly and, without prejudice to its overriding right to call for repayment on demand, the Bank may seek additional security if there is a significant drop in the value of the security held. 10 FINANCIAL INFORMATION 10.1 To enable the Bank to monitor the Facility each of you will provide:- (a) as soon as they become available but in any event within 270 days after the end of the respective financial year, your audited financial statements for that year; (b) as soon as they become available but in any event no later than 30 days after the end of the accounting period to which they relate, and in a format acceptable to the Bank, the monthly management accounts of Drew Scientific Group plc incorporating balance sheet and profit and loss account; (c) promptly, all notices or other documents sent to your shareholders and/or your creditors; and (d) promptly, such further information regarding your financial condition and operations as the Bank may reasonably request (including audited financial statements where not already supplied). 11 MISCELLANEOUS 11.1 The Bank may debit any of the Facility Accounts in accordance with the terms of Clauses 7 and 8 of this letter even if it results in the Facility Limit or the Gross Limit being exceeded. 11.2 These terms and conditions will not be affected in any way by any of the Facility Accounts being allocated another account number/reference by the Bank or being transferred to another branch, office or department of the Bank. 11.3 The Bank may change any of these terms and conditions by giving at least 30 days' written notice to you. 11.4 In the event of the Bank demanding repayment of the Facility in terms of Clause 5 of this letter:- (a) subject to Sub-Clause 11.4(c) below, you will require to repay any debtor balances on the Foreign Currency Current Accounts in immediately available funds of the relevant Foreign Currency (or such other funds as my for the time being be customary for the settlement of international banking transactions in such Foreign Currency); (b) all payments under the Facility will require to be made without set off or counterclaim and free and clear of any deduction, whether of present or future taxes, stamp duty or other charges unless you are required by law to make such payment subject to any deduction or withholding in which case the relevant payment will require to be increased to the extent necessary to ensure that the Bank receives a sum equal to the sum which it would have received had you not been required to make such a deduction or withholding; (c) the Bank reserves the right, at any time after the serving of demand, to convert all or any balances on the Foreign Currency Current Accounts and the Foreign Currency Creditor Account (together with any accrued interest and unpaid costs, charges, fees and expenses denominated in Foreign Currency) to Sterling at the prevailing market rate of exchange and pass a corresponding debit against any Sterling Current Account. 11.5 Unless otherwise agreed, requests for new Facility Accounts must be submitted to the Bank at least 5 business days in advance (in the case of Foreign Currency Current Accounts and Foreign Currency Creditor Accounts, using the relevant application form required by the Bank). 11.6 The Bank's agreement to the addition/removal of Facility Accounts to/from the facility may be subject to these terms and conditions being suitably amended to the Bank's satisfaction. Please indicate acceptance of the above terms and conditions by arranging for the acknowledgement on the duplicate of this letter to be signed and returned to me. The Bank will not be obliged to provide the Facility until the acknowledgement on the duplicate of this letter has been returned duly signed. The Bank may, at its option, treat any usage of the Facility as acceptance (without amendment) of the terms and conditions of this letter. Please do not hesitate to contact me if you require clarification of any of the above terms and conditions. Yours faithfully For and on behalf of National Westminster Bank Plc /s/ A. Bruce - ------------------------ Andrew Bruce Senior Corporate Manager Having decided that the proposed Facility is appropriate and in their interests, the undernoted signatories hereby accept the Facility on the above terms and conditions. For and on behalf of Drew Scientific Distribution Limited Signature/s Date/s --------------------------------------- ----------------- --------------------------------------- ----------------- For and on behalf of Drew Scientific Limited Signature/s Date/s --------------------------------------- ----------------- --------------------------------------- ----------------- 1186460/FACorp/KC/NWSLSM EX-10.35 3 w68886exv10w35.txt SECURITY AGREEMENT DATED AUGUST 31,2002 Exhibit 10.35 SECURITY AGREEMENT This Security Agreement (this "Agreement"), dated as of August 31, 2002, is made by and between Danam Acquisition Corp., a Delaware corporation ("Debtor") and Synbiotics Corporation, a California corporation (the "Secured Party"), the holder of a Secured Promissory Note in the original principal amount of $500,000.00 (the "Note"). RECITALS A. Debtor has executed and delivered the Note in the aggregate principal amount of $500,000.00 and payable to the order of the Secured Party. B. In connection with the Note, Debtor desires to grant a security interest in certain collateral to the Secured Party as set forth herein. AGREEMENT NOW, THEREFORE, in consideration of the above recitals and the mutual covenants hereinafter set forth, the parties hereby agree as follows: SECTION 1 Definitions; Interpretation. (a) All capitalized terms used in this Agreement and not otherwise defined herein shall have the meanings assigned to them in the Note. (b) As used in this Agreement, the following terms shall have the following meanings: "Collateral" has the meaning set forth in Section 2. "Documents" means this Agreement, the Note and all other certificates, documents, agreements and instruments delivered to the Secured Party under the Note or in connection with the Obligations. "Event of Default" has the meaning set forth in Section 8. "Lien" means any mortgage, deed of trust, pledge, security interest, assignment, deposit arrangement, charge or encumbrance, lien, or other type of preferential arrangement. "Note" has the meaning set forth in the preamble above, as it may be amended, modified, renewed, extended or replaced from time to time. "Obligations" means the indebtedness, liabilities and other obligations of Debtor to the Secured Party under or in connection with the Note or any of the other Documents, including, without limitation, all unpaid principal of the Note, all interest accrued thereon, all fees and all other amounts payable by Debtor to the Secured Party thereunder or in connection therewith, whether now existing or hereafter arising, and whether due or to become due, absolute or contingent, liquidated or unliquidated, determined or undetermined. "Permitted Lien" means (i) Liens (A) upon or in any property (and proceeds thereof) acquired or held by Debtor or any of its subsidiaries to secure the purchase price of such property or indebtedness incurred solely for the purpose of financing the acquisition of such property, or (B) existing on such property at the time of its acquisition, provided that the Lien is confined solely to the property (and proceeds thereof) so acquired and improvements thereon; (ii) Liens on assets of Persons which become subsidiaries of Debtor after the date hereof, provided that such Liens existed at the time the respective Persons became subsidiaries of Debtor and were not created in anticipation thereof; and (iii) other Liens which arise in the ordinary course of business and do not materially impair Debtor's ownership or use of the Collateral or the value thereof. "Person" means an individual, corporation, partnership, joint venture, trust, unincorporated organization, governmental agency or authority, or any other entity of whatever nature. "UCC" means the Uniform Commercial Code as the same may, from time to time, be in effect in the State of New York. (c) Where applicable and except as otherwise defined herein, terms used in this Agreement shall have the meanings assigned to them in the UCC. (d) In this Agreement, (i) the meaning of defined terms shall be equally applicable to both the singular and plural forms of the terms defined; and (ii) the captions and headings are for convenience of reference only and shall not affect the construction of this Agreement. SECTION 2 Security Interest. (a) As security for the payment and performance of the Obligations, Debtor hereby grants to the Secured Party a security interest in all of Debtor's right, title and interest in, to and under all of its personal property, wherever located and whether now existing or owned or hereafter acquired or arising, including all accounts, chattel paper, commercial tort claims, deposit accounts, documents, equipment (including all fixtures), general intangibles, instruments, inventory, investment property, letter-of-credit rights, money and all products, proceeds and supporting obligations of any and all of the foregoing (collectively, the "Collateral"). Notwithstanding the foregoing, except for fixtures (as provided in Section 9-313 of the UCC), such grant of a security interest shall not extend to, and the term "Collateral" shall not include, any asset which would be real property under the law of the jurisdiction in which it is located (b) Anything herein to the contrary notwithstanding, (i) Debtor shall remain liable under any contracts, agreements and other documents included in the Collateral, to the extent set forth therein, to perform all of its duties and obligations thereunder to the same extent as if this Agreement had not been executed, (ii) the exercise by the Secured Party of any of the rights hereunder shall not release Debtor from any of its duties or obligations under such contracts, agreements and other documents included in the Collateral, and (iii) the Secured Party -2- shall not have any obligation or liability under any contracts, agreements and other documents included in the Collateral by reason of this Agreement, nor shall the Secured Party be obligated to perform any of the obligations or duties of Debtor thereunder or to take any action to collect or enforce any such contract, agreement or other document included in the Collateral hereunder. (c) This Agreement shall create a continuing security interest in the Collateral which shall remain in effect until terminated in accordance with Section 19 hereof. SECTION 3 Financing Statements, Etc. Debtor shall execute and deliver to the Secured Party concurrently with the execution of this Agreement, and Debtor hereby authorizes the Secured Party to file (with or without Debtor's signature), at any time and from time to time thereafter, all financing statements, assignments, amendments, continuation financing statements, termination statements, account control agreements, and other documents and instruments, in form reasonably satisfactory to the Secured Party, and take all other action, as the Secured Party may reasonably request, to perfect and continue perfected, maintain the priority of or provide notice of the security interest of the Secured Party in the Collateral and to accomplish the purposes of this Agreement. Debtor will cooperate with the Secured Party in obtaining control (as defined in the UCC) of Collateral consisting of deposit accounts, investment property, letter of credit rights and electronic chatter paper. Debtor will join with the Secured Party in notifying any third party who has possession of any Collateral of the Secured Party's security interest therein and obtaining an acknowledgment from the third party that it is holding the Collateral for the benefit of the Secured Party. Debtor will not create any chattel paper without placing a legend on the chattel paper acceptable to the Secured Party indicating that the Secured Party has a security interest in the chattel paper. SECTION 4 Representations and Warranties. Debtor represents and warrants to the Secured Party that: (a) Debtor is duly organized, validly existing and in good standing under the law of the jurisdiction of its organization and has all requisite power and authority to execute, deliver and perform its obligations under this Agreement. (b) The execution, delivery and performance by Debtor of this Agreement have been duly authorized by all necessary action of Debtor, and this Agreement constitutes the legal, valid and binding obligation of Debtor, enforceable against Debtor in accordance with its terms. (c) No authorization, consent, approval, license, exemption of, or filing or registration with, any governmental authority or agency, or approval or consent of any other Person which has not been obtained, is required for the due execution, delivery or performance by Debtor of this Agreement, except for any filings necessary to perfect any Liens on any Collateral. (d) Debtor's chief executive office and principal place of business (as of the date of this Agreement) is located at the address set forth in Schedule 1; Debtor's jurisdiction of organization is set forth in Schedule 1; Debtor's exact legal name is as set forth in the first -3- paragraph of this Agreement; and all other locations where Debtor conducts business or Collateral is kept (as of the date of this Agreement) are set forth in Schedule 1. (e) Debtor has rights in or the power to transfer the Collateral, and Debtor is the sole and complete owner of the Collateral, free from any Lien other than Permitted Liens. (f) No control agreements exist with respect to any Collateral. SECTION 5 Covenants. So long as any of the Obligations remain unsatisfied, Debtor agrees that: (a) Debtor shall appear in and defend any action, suit or proceeding which may affect to a material extent its title to, or right or interest in, or the Secured Party's right or interest in, the Collateral, and shall do and perform all reasonable acts that may be necessary and appropriate to maintain, preserve and protect the Collateral. (b) Debtor shall comply in all material respects with all laws, regulations and ordinances, and all policies of insurance, relating in a material way to the possession, operation, maintenance and control of the Collateral. (c) Debtor shall give prompt written notice to the Secured Party (and in any event not later than 30 days following any change described below in this subsection) of: (i) any change in the location of Debtor's chief executive office or principal place of business; (ii) any change in the locations set forth in Schedule 1; (iii) any change in its name; (iv) any changes in its identity or structure in any manner which might make any financing statement filed hereunder incorrect or misleading; (v) any change in its registration as an organization (or any new such registration); or (vi) any change in its jurisdiction of organization; provided that Debtor shall not locate any Collateral outside of the United States nor shall Debtor change its jurisdiction of organization to a jurisdiction outside of the United States. (d) Debtor shall carry and maintain in full force and effect, at its own expense and with financially sound and reputable insurance companies, insurance with respect to the Collateral in such amounts, with such deductibles and covering such risks as is customarily carried by companies engaged in the same or similar businesses and owning similar properties in the localities where Debtor operates. Upon the request of the Secured Party, Debtor shall furnish to the Secured Party from time to time with full information as to the insurance carried by it and, if so requested, copies of all such insurance policies. Debtor shall also furnish to the Secured Party from time to time upon the request of Secured Party a certificate of Debtor's insurance broker or other insurance specialist stating that all premiums then due on the policies relating to insurance on the Collateral have been paid and that such policies are in full force and effect. (e) Debtor shall keep separate, accurate and complete books and records with respect to the Collateral, disclosing the Secured Party's security interest hereunder. (f) Debtor shall not surrender or lose possession of, sell, lease, rent, or otherwise dispose of or transfer any of the Collateral (other than Collateral subject to a Permitted Lien) or any right or interest therein, except in the ordinary course of business or unless such Collateral is replaced by comparable Collateral of similar value; provided that no such -4- disposition or transfer of Collateral consisting of investment property or instruments shall be permitted while any Event of Default exists. (g) Debtor shall keep the Collateral free of all Liens except Permitted Liens. (h) Debtor shall pay and discharge all taxes, fees, assessments and governmental charges or levies imposed upon it with respect to the Collateral prior to the date on which penalties attach thereto, except to the extent such taxes, fees, assessments or governmental charges or levies are being contested in good faith by appropriate proceedings. (i) Debtor shall maintain and preserve its legal existence, its rights to transact business and all other material rights, franchises and privileges necessary or desirable in the normal course of its business and operations and the ownership of the Collateral, except in connection with any transactions expressly permitted by the Note or any other Document. (j) Upon the request of the Secured Party, Debtor shall (except with respect to Collateral subject to a Permitted Lien) (i) immediately deliver to the Secured Party, or an agent designated by it, appropriately endorsed or accompanied by appropriate instruments of transfer or assignment, all documents and instruments, all certificated securities with respect to any investment property, all letters of credit and all accounts and other rights to payment at any time evidenced by promissory notes, trade acceptances or other instruments, (ii) cause any securities intermediaries to show on their books that the Secured Party are the entitlement holders with respect to any investment property, and/or obtain account control agreements in favor of the Secured Party from such securities intermediaries, in form and substance satisfactory to the Secured Party, with respect to any investment property, as requested by the Secured Party, and (iii) provide such notice, obtain such acknowledgments and take all such other action, with respect to any chattel paper, documents and letter-of credit rights, as the Secured Party shall reasonably specify. SECTION 6 Collection of Accounts. Until the Secured Party exercise its rights hereunder to collect the accounts and other rights to payment, Debtor shall endeavor in the first instance diligently to collect all amounts due or to become due on or with respect to the accounts and other rights to payment. At the request of the Secured Party, upon the occurrence and during the continuance of any Event of Default, all remittances received by Debtor (other than with respect to Collateral subject to a Permitted Lien) shall be held in trust for the Secured Party and, in accordance with the Secured Party's instructions, remitted to the Secured Party or deposited into account(s) of the Secured Party in the form received (with any necessary endorsements or instruments of assignment or transfer). At the request of the Secured Party, upon and after the occurrence of any Event of Default, the Secured Party shall be entitled to (other than with respect to Collateral subject to a Permitted Lien) receive all distributions and payments of any nature with respect to any investment property or instruments, and all such distributions or payments received by the Debtor shall be held in trust for the Secured Party and, in accordance with the Secured Party's instructions, remitted to the Secured Party or deposited into account(s) with the Secured Party in the form received (with any necessary endorsements or instruments of assignment or transfer). Following the occurrence of an Event of Default any such distributions and payments with respect to any investment property held in any securities account (other than with respect to Collateral subject to a Permitted Lien) shall be held and retained in such -5- securities account, in each case as part of the Collateral hereunder. Additionally, the Secured Party shall have the right (other than with respect to Collateral subject to a Permitted Lien), upon the occurrence of an Event of Default, following prior written notice to the Debtor, to vote and to give consents, ratifications and waivers with respect to any investment property and instruments, and to exercise all rights of conversion, exchange, subscription or any other rights, privileges or options pertaining thereto, as if the Secured Party were the absolute owner thereof; provided that the Secured Party shall have no duty to exercise any of the foregoing rights afforded to it and shall not be responsible to the Debtor or any other Person for any failure to do so or delay in doing so. SECTION 7 Authorization; Secured Party Appointed Attorney-in-Fact. The Secured Party shall have the right to, in the name of Debtor, or in the name of the Secured Party or otherwise, upon notice to but without the requirement of assent by Debtor, and Debtor hereby constitutes and appoints the Secured Party (and any of the Secured Party's officers, employees or agents designated by the Secured Party) as Debtor's true and lawful attorney-in-fact, with full power and authority to: (i) sign and file any of the financing statements and other documents and instruments which must be executed or filed to perfect or continue perfected, maintain the priority of or provide notice of the Secured Party's security interest in the Collateral (including any notices to or agreements with any securities intermediary); (ii) assert, adjust, sue for, compromise or release any claims under any policies of insurance; (iii) give notices of control, default or exclusivity (or similar notices) under any account control agreement or similar agreement with respect to exercising control over deposit accounts or securities accounts; and (iv) execute any and all such other documents and instruments, and do any and all acts and things for and on behalf of Debtor, which the Secured Party may deem reasonably necessary or advisable to maintain, protect, realize upon and preserve the Collateral and the Secured Party's security interest therein and to accomplish the purposes of this Agreement. The Secured Party agrees that, except upon and during the continuance of an Event of Default, it shall not exercise the power of attorney, or any rights granted to the Secured Party, pursuant to clauses (ii), (iii) and (iv). The foregoing power of attorney is coupled with an interest and irrevocable so long as the Obligations have not been paid and performed in full. Debtor hereby ratifies, to the extent permitted by law, all that the Secured Party shall lawfully and in good faith do or cause to be done by virtue of and in compliance with this Section 7. SECTION 8 Events of Default. Any of the following events which shall occur and be continuing shall constitute an "Event of Default": (a) Debtor shall fail to pay when due any amount of principal of or interest on the Note or other amount payable hereunder or under the Note or any other Document or in respect of the Obligations. (b) Any representation or warranty by Debtor in this Agreement shall prove to have been incorrect in any material respect when made or deemed made. (c) Debtor shall fail to perform or observe in any material respect any other term, covenant or agreement contained in this Agreement, the Note or any other Document on its part to be performed or observed and any such failure shall remain unremedied for a period of 45 days from the occurrence thereof. -6- (d) An order of relief under any bankruptcy, reorganization or insolvency laws has been entered against Debtor by a court having jurisdiction or Debtor admits in writing its inability to pay its debts generally as they become due, files a petition for relief under any bankruptcy, reorganization or insolvency laws, consents to the filing of a bankruptcy proceeding against it or the appointment of a receiver for itself or for all or substantially all of its property, or a petition in bankruptcy is filed against it or it makes an assignment for the benefit of its creditors. (e) Debtor shall (i) liquidate, wind up or dissolve (or suffer any liquidation, wind-up or dissolution), except to the extent expressly permitted by the Note, (ii) suspend its operations other than in the ordinary course of business, or (iii) take any action to authorize any of the actions or events set forth above in this subsection (e). (f) Any levy upon, seizure or attachment of any of the Collateral which shall not have been rescinded or withdrawn. (g) Any loss, theft or substantial damage to, or destruction of, any material portion of the Collateral (unless within 30 days after the occurrence of any such event, Debtor furnishes to the Secured Party evidence reasonably satisfactory to the Secured Party that the amount of any such loss, theft, damage to or destruction of the Collateral is fully insured under policies naming the Secured Party (or with respect to Collateral subject to a Permitted Lien, the lienholder thereof) as an additional named insured or loss payee). SECTION 9 Remedies. (a) Upon the occurrence and continuance of any Event of Default, the Secured Party may declare any of the Obligations to be immediately due and payable and shall have, in addition to all other rights and remedies granted to it in this Agreement, the Note or any other Document, all rights and remedies of the Secured Party under the UCC and other applicable laws. Without limiting the generality of the foregoing, (i) the Secured Party may peaceably and without notice enter any premises of Debtor, take possession of any the Collateral, remove or dispose of all or part of the Collateral on any premises of the Debtor or elsewhere, or, in the case of equipment, render it nonfunctional, and otherwise collect, receive, appropriate and realize upon all or any part of the Collateral, and demand, give receipt for, settle, renew, extend, exchange, compromise, adjust, or sue for all or any part of the Collateral, as the Secured Party may determine; (ii) the Secured Party may require the Debtor to assemble all or any part of the Collateral and make it available to the Secured Party at any place and time designated by the Secured Party; (iii) the Secured Party may secure the appointment of a receiver of the Collateral or any part thereof (to the extent and in the manner provided by applicable law); (iv) the Secured Party may sell, resell, lease, use, assign, license, sublicense, transfer or otherwise dispose of any or all of the Collateral in its then condition or following any commercially reasonable preparation or processing (utilizing in connection therewith any of Debtor's assets, without charge or liability to the Secured Party therefor) at public or private sale, by one or more contracts, in one or more parcels, at the same or different times, for cash or credit, or for future delivery without assumption of any credit risk, all as the Secured Party deems advisable; provided, however, that Debtor shall be credited with the net proceeds of sale only when such proceeds are finally collected by the Secured Party. The Secured Party shall have the right upon -7- any such public sale, and, to the extent permitted by law, upon any such private sale, to purchase the whole or any part of the Collateral so sold, free of any right or equity of redemption, which right or equity of redemption Debtor hereby releases, to the extent permitted by law. The Secured Party shall give Debtor such notice of any private or public sales as may be required by the UCC or other applicable law. (b) For the purpose of enabling the Secured Party to exercise its rights and remedies under this Section 9 or otherwise in connection with this Agreement, Debtor hereby grants to the Secured Party an irrevocable, non-exclusive and assignable license (exercisable without payment or royalty or other compensation to Debtor) to use, license or sublicense any intellectual property Collateral. (c) The Secured Party shall not have any obligation to clean up or otherwise prepare the Collateral for sale. The Secured Party has not obligation to attempt to satisfy the Obligations by collecting them from any other Person liable for them, and the Secured Party may release, modify or waive any Collateral provided by any other Person to secure any of the Obligations, all without affecting the Secured Party's rights against Debtor. Debtor waives any right it may have to require the Secured Party to pursue any third Person for any of the Obligations. The Secured Party may comply with any applicable state or federal law requirements in connection with a disposition of the Collateral and compliance will not be considered adversely to affect the commercial reasonableness of any sale of the Collateral. The Secured Party may sell the Collateral without giving any warranties as to the Collateral. The Secured Party may specifically disclaim any warranties of title or the like. This procedure will not be considered adversely to affect the commercial reasonableness of any sale of the Collateral. If the Secured Party sells any of the Collateral upon credit, Debtor will be credited only with payments actually made by the purchaser, received by the Secured Party and applied to the indebtedness of the purchaser. In the event the purchaser fails to pay for the Collateral, the Secured Party may resell the Collateral and Debtor shall be credited with the proceeds of the sale. (d) To the extent Debtor uses the proceeds of any of the Obligations to purchase Collateral, Debtor's repayment of the Obligations shall apply on a "first-in, first-out" basis so that the portion of the Obligations used to purchase a particular item of Collateral shall be paid in the chronological order the Debtor purchased the Collateral. (e) The cash proceeds actually received from the sale or other disposition or collection of Collateral, and any other amounts received in respect of the Collateral the application of which is not otherwise provided for herein, shall be applied first, to the payment of the reasonable costs and expenses of the Secured Party in exercising or enforcing its rights hereunder and in collecting or attempting to collect any of the Collateral, and to the payment of all other amounts payable to the Secured Party pursuant to Section 13 hereof; and second, to the payment of the Obligations. Any surplus thereof which exists after payment and performance in full of the Obligations shall be promptly paid over to Debtor or otherwise disposed of in accordance with the UCC or other applicable law. Debtor shall remain liable to the Secured Party for any deficiency which exists after any sale or other disposition or collection of Collateral. -8- SECTION 10 Certain Waivers. Debtor waives, to the fullest extent permitted by law, (i) any right of redemption with respect to the Collateral, whether before or after sale hereunder, and all rights, if any, of marshalling of the Collateral or other collateral or security for the Obligations; (ii) any right to require the Secured Party (A) to proceed against any Person, (B) to exhaust any other collateral or security for any of the Obligations, or (C) to make or give any presentments, demands for performance, notices of nonperformance, protests, notices of protests or notices of dishonor in connection with any of the Collateral; and (iii) all claims, damages, and demands against the Secured Party arising out of the repossession, retention, sale or application of the proceeds of any sale of the Collateral, other than claims for violations of law and willful misconduct. SECTION 11 Notices. All notices or other communications hereunder shall be in writing (including by facsimile transmission or by email) and mailed, sent or delivered to the respective parties hereto at or to their respective addresses or facsimile numbers set forth below their names on the signature pages hereof, or at or to such other address or facsimile number as shall be designated by any party in a written notice to the other parties hereto. All such notices and other communications shall be deemed to be delivered when a record (within the meaning of the UCC) has been (i) delivered by hand; (ii) sent by mail upon the earlier of the date of receipt or five business days after deposit in the mail, first class (or air mail as to communications sent to or from the United States) or (iii) sent by facsimile transmission. SECTION 12 No Waiver; Cumulative Remedies. No failure on the part of the Secured Party to exercise, and no delay in exercising, any right, remedy, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, remedy, power or privilege preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights and remedies under this Agreement are cumulative and not exclusive of any rights, remedies, powers and privileges that may otherwise be available to the Secured Party. SECTION 13 Costs and Expenses. (a) Debtor agrees to pay on demand. All reasonable costs and expenses of the Secured Party, and the reasonable fees and disbursements of the Secured Party, in connection with the enforcement or attempted enforcement of, and preservation of any rights or interests under, this Agreement and the Note, including in any out-of-court workout or other refinancing or restructuring or in any bankruptcy case, and the protection, sale or collection of, or other realization upon, any of the Collateral, including all expenses of taking, collecting, holding, sorting, handling, preparing for sale, selling, or the like, and other such expenses of sales and collections of Collateral, in addition to, and not limited by, this subsection (a)(i). (b) Any amounts payable to the Secured Party under this Section 13 or otherwise under this Agreement if not paid upon demand shall bear interest from the date of such demand until paid in full, at the rate of interest set forth in the Note. SECTION 14 Binding Effect. This Agreement shall be binding upon, inure to the benefit of and be enforceable by Debtor, the Secured Party and their respective successors and assigns and shall bind any Person who becomes bound as a debtor to this Agreement. Debtor -9- may not assign, transfer, hypothecate or otherwise convey its rights, benefits, obligations or duties hereunder without the prior express written consent of the Secured Party. Any such purported assignment, transfer, hypothecation or other conveyance by Debtor without the prior express written consent of the Secured Party shall be null and void and of no force or effect. Debtor acknowledges and agrees that in connection with an assignment of, or grant of a participation in, the Obligations the Secured Party may assign, or grant participations in, all or a portion of its rights and obligations hereunder. Upon any assignment of the Secured Party's rights hereunder, such assignee shall have, to the extent of such assignment, all rights of the Secured Party hereunder. Debtor agrees that, upon any such assignment, such assignee may enforce directly, without joinder of the Secured Party, the rights of the Secured Party set forth in this Agreement. Any such assignee shall be entitled to enforce the Secured Party's rights and remedies under this Agreement to the same extent as if it were the original secured party named herein. SECTION 15 Governing Law. This Agreement shall be governed by, and construed in accordance with, the law of the State of New York, except as required by mandatory provisions of law and to the extent the validity or perfection of the security interests hereunder, or the remedies hereunder, in respect of any Collateral are governed by the law of a jurisdiction other than New York. SECTION 16 Entire Agreement; Amendment. This Agreement together with the Note contains the entire agreement of the parties with respect to the subject matter hereof and shall not be amended except by the written agreement of the parties. SECTION 17 Severability. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under all applicable laws and regulations. If, however, any provision of this Agreement shall be prohibited by or invalid under any such law or regulation in any jurisdiction, it shall, as to such jurisdiction, be deemed modified to conform to the minimum requirements of such law or regulation, or, if for any reason it is not deemed so modified, it shall be ineffective and invalid only to the extent of such prohibition or invalidity without affecting the remaining provisions of this Agreement, or the validity or effectiveness of such provision in any other jurisdiction. SECTION 18 Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute but one and the same agreement. SECTION 19 Termination. Upon payment and performance in full of all Obligations, the security interest created under this Agreement shall terminate and the Secured Party shall promptly execute and deliver to Debtor such documents and instruments reasonably requested by Debtor as shall be necessary to evidence termination of all security interests given by Debtor to the Secured Party hereunder. SECTION 20 Conflicts. In the event of any conflict or inconsistency between this Agreement or the Note, the terms of this Agreement shall control. -10- [REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] -11- IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement, as of the date first above written. DEBTOR: DANAM ACQUISITION CORP. By: ----------------------------------- Title: c/o Drew Scientific Group PLC Park Road, Barrow In Furness Cumbria LA14 4QR United Kingdom Attn: Michael J. Sipple-Asher Fax: 011 44 1229 432096 SECURED PARTY: SYNBIOTICS CORPORATION By: -------------------------------- Its: ------------------------------- 11011 Via Frontera San Diego, CA 92127 Attn: Michael K. Green Fax: (858) 451-5719 [SIGNATURE PAGE TO SECURITY AGREEMENT] SCHEDULE 1 to the Security Agreement 1. JURISDICTION OF ORGANIZATION Delaware 2. CHIEF EXECUTIVE OFFICE AND PRINCIPAL PLACE OF BUSINESS 178 Christian Street Oxford, Connecticut 06478 [OTHERS, IF ANY, TO BE PROVIDED BY DREW] 3. OTHER LOCATIONS WHERE DEBTOR CONDUCTS BUSINESS OR COLLATERAL IS KEPT [TO BE PROVIDED BY DREW] Schedule 2-1 EX-10.36 4 w68886exv10w36.txt SECURED PROMISSORY NOTE DATED AUGUST 31,2002 Exhibit 10.36 SECURED PROMISSORY NOTE $500,000 San Diego, California August 31, 2002 FOR VALUE RECEIVED, the undersigned, Danam Acquisition Corp., a Delaware corporation ("Maker"), having its principal place of business located at 178 Christian Street, Oxford, CT 06478, hereby promises to pay to Synbiotics Corporation, a California corporation ("Holder"), having its principal place of business located at 11011 Via Frontera, San Diego, California 92127, the sum of Five Hundred Thousand Dollars ($500,000), as hereinafter provided. This Secured Promissory Note is issued pursuant to that certain Asset Purchase Agreement (the "Purchase Agreement"), of even date herewith, among Maker, Holder and Drew Scientific Group PLC and is subject to all rights of offset as set forth in Section 6.2 of the Purchase Agreement. The outstanding principal amount of this Secured Promissory Note (this "Secured Promissory Note") shall be payable in sixty (60) equal monthly installments of Eight Thousand Three Hundred Thirty-Three Dollars and Thirty-Three Cents ($8,333.33), payable on the last day of each calendar month commencing on September 30, 2002 and ending on August 31, 2007, at which later time the entire principal amount of this Secured Promissory Note then outstanding together with any outstanding accrued and unpaid interest thereon shall be due and payable. Maker hereby also promises to pay interest on the unpaid principal amount hereof in like money, payable monthly commencing on September 1, 2002 and ending with the final payment of principal due hereunder from the date hereof until payment of the principal amount hereof has been made in full, at a fixed rate of five percent (5%) per annum as set forth on Schedule A attached hereto. Interest shall be computed on the basis of a year of 365 or 366 days, as the case may be, and actual days elapsed. Principal of this Secured Promissory Note and accrued but unpaid interest thereon is payable in lawful money of the United States of America, in cash, by bank or certified check or by wire transfer of immediately available funds to the Holder at the address set forth below or, in the case of a wire transfer, to the account designated by Holder set forth below. For Checks: Comerica Bank - California 9920 La Cinega Blvd., Suite 623 Inglewood, California 90301 Attention: Thomas G. Kinzel, Vice President For Wire Transfers: Comerica Bank - California Wire Transfer Corporate Service Center 2015 Manhattan Beach Blvd. Redondo Beach, California 90278-1205 ABA No. #122201444 Account No. #2505100529 Attention: Tom Kinzel; X5760 Reference: Synbiotics Corporation Loan #00708054423; Note #6 This Secured Promissory Note shall be secured by such of Maker's assets as described in the Security Agreement of even date herewith between Maker and Holder (the "Security Agreement"), and filings reflecting such security interests shall be filed with the appropriate authorities according to the Security Agreement. Drew Scientific Group PLC, a company organized under the laws of England and Wales ("Guarantor"), which indirectly owns one hundred percent (100%) of the issued and outstanding capital stock of Maker, has guaranteed payment of this Secured Promissory Note pursuant to that certain Guaranty of even date herewith executed by Guarantor (the "Guaranty"). If any payment required hereunder shall become due on a Saturday, Sunday or legal holiday under the laws of the State of California, the State of Massachusetts or the United Kingdom or any other day on which banking institutions in the City of San Diego, the City of Boston or the City of London are obligated or authorized by law or executive order to close, such payment shall be made on the next succeeding business day. If (i) Maker fails to make complete payment of any payment due hereunder on any date on which such payment is due, (ii) an order of relief under any bankruptcy, reorganization or insolvency laws has been entered against Maker by a court having jurisdiction, or (iii) Maker admits in writing its inability to pay its debts generally as they become due, files a petition for relief under any bankruptcy, reorganization or insolvency laws, consents to the filing of a bankruptcy proceeding against it or the appointment of a receiver for itself or for all or substantially all of its property, a petition in bankruptcy is filed against it or it makes an assignment for the benefit of its creditors, then, in any such event, Holder, at its option, may exercise any of its rights and remedies set forth in the Security Agreement and may accelerate this Secured Promissory Note and without notice to Maker declare the entire unpaid principal amount of this Secured Promissory Note to be immediately due and payable, whereupon the entire principal amount shall become and be forthwith due and payable, without presentment, due diligence, demand, protest or notice of any kind. This Secured Promissory Note may be prepaid in whole or in part, without premium or penalty, at any time, but with interest accrued to the date of prepayment. Any prepayment of this Secured Promissory Note in part shall be applied to the installments of principal payable hereunder in the order of maturity thereof. No delay or omission of Holder in exercising any right or remedy hereunder shall constitute a waiver of any such right or remedy. Acceptance by Holder of any payment after demand therefor shall not be deemed a waiver of such demand. A waiver on one occasion shall not operate as a bar to or waiver of any such right or remedy on any future occasion. Maker, regardless of the time, order or place signing, waives presentment for payment, demand, notice of nonpayment, notice of dishonor, protest of any dishonor, notice of protest and protest of this Secured Promissory Note, and Maker agrees that its liability hereunder shall not be in any manner affected by any indulgences, extension of time, renewal, waiver or modification granted by Holder; and Maker consents to every extension of time, renewal, waiver or modification that may be granted by Holder with respect to the payment or other provisions of this Secured Promissory Note. Maker agrees to pay all reasonable expenses of the Holder of this Secured Promissory Note in connection with the collection and enforcement of this Secured Promissory Note, including court costs and reasonable attorneys' fees and disbursements. This instrument shall be governed by and construed in accordance with the internal laws of the State of New York, without regard to its conflicts of laws principles. Maker hereby agrees that all actions or proceedings arising in connection with this Secured Promissory Note shall be initiated and tried exclusively in the courts located in the County of San Diego, State of California. The aforementioned choice of venue is intended to be mandatory and not permissive in nature, thereby precluding the possibility of litigation between Maker and Holder with respect to or arising out of this Secured Promissory Note in any jurisdiction other than that specified in this paragraph. Maker waives any right it may have to assert the doctrine of forum non conveniens or similar doctrine or to object to venue with respect to any proceeding brought in accordance with this paragraph, and stipulates that the courts located in the County of San Diego, State of California, shall have in personam jurisdiction and venue over Maker for the purposes of litigating any dispute, controversy or proceeding arising out of or related to this Secured Promissory Note. Maker hereby authorizes and accepts service of process sufficient for personal jurisdiction in any action against it as contemplated by this paragraph by registered or certified mail, return receipt requested, postage prepaid, to its address for the giving of notices as set forth in the first paragraph of this Secured Promissory Note. Any final judgment rendered against Maker in any action or proceeding shall be conclusive as to the subject of such final judgment and may be enforced in other jurisdictions in any manner provided by law. None of the obligations of Maker under this Secured Promissory Note, including, without limitation, Maker's obligation to pay the indebtedness evidenced hereby nor any part thereof, may be assigned (whether by operation of law or otherwise) by Maker without the express prior written consent of Holder, and consent to any proposed assignment shall not constitute consent to any subsequent proposed assignment. Any attempted assignment in contravention hereof shall be null and void and of no force or effect. Holder shall have the right to freely assign this Secured Promissory Note and the right to receive the principal amount hereof and any and all accrued and unpaid interest thereon upon written notice to Maker and without seeking or obtaining any consent or approval of Maker; provided, however, that any such assignment shall be of this Secured Promissory Note in its entirety. The obligations and rights contained herein shall be binding on and inure to the benefit of any permitted assigns, successors, heirs, representatives, agents and other successors in interest. Executed as an instrument under the laws of the State of New York as of the date first above written. DANAM ACQUISITION CORP. By: ___________________________ Name: Title: SCHEDULE A See attached. 08/16/2002 Page 1 - -------------------------------------------------------------------------------- Drew Loan - -------------------------------------------------------------------------------- Compound Period......................: Monthly Nominal Annual Rate..................: 5.000 % Effective Annual Rate................: 5.116 % Periodic Rate........................: 0.4167 % Daily Rate...........................: 0.01370% CASH FLOW DATA
- -------------------------------------------------------------------------------- Event Start Date Amount Number Period End Date - -------------------------------------------------------------------------------- 1 Loan 08/31/2000 500,000.00 1 2 Payment 09/30/2002 8,333.33 60 Monthly 08/31/2007
Fixed Payment (+ Interest) AMORTIZATION SCHEDULE -- Normal Amortization
Date Payment Interest Principal Balance - -------------------------------------------------------------------------------- Loan 08/31/2002 500,000.00 1 09/30/2002 10,416.66 2,083.33 8,333.33 491,666.67 2 10/31/2002 10,381.94 2,048.61 8,333.33 483,333.34 3 11/30/2002 10,347.22 2,013.89 8,333.33 475,000.01 4 12/31/2002 10,312.50 1,979.17 8,333.33 466,666.68 2002 Totals 41,458.32 8,125.00 33,333.32 5 01/31/2003 10,277.77 1,944.44 8,333.33 458,333.35 6 02/28/2003 10,243.05 1,909.72 8,333.33 450,000.02 7 03/31/2003 10,208.33 1,875.00 8,333.33 441,666,69 8 04/30/2003 10,173.61 1,840.28 8,333.33 433,333.35 9 05/31/2003 10,138.89 1,805.56 8,333.33 425,000.03 10 06/30/2003 10,104.16 1,770.83 8,333.33 416,666.70 11 07/31/2003 10,069.44 1,736.11 8,333.33 408,333.37 12 08/31/2003 10,034.72 1,701.39 8,333.33 400,000.04 13 09/30/2003 10,000.00 1,666.67 8,333.33 391,666.71 14 10/31/2003 9,965.27 1,631.94 8,333.33 383,333.38 15 11/30/2003 9,930.55 1,597.22 8,333.33 375,000.05 16 12/31/2003 9,895.83 1,562.50 8,333.33 366,666.72 2003 Totals 121,041.62 21,041.66 99,999.96 17 01/31/2004 9,861.11 1,527.78 8,333.33 358,333.39 18 02/29/2004 9,826.39 1,493.06 8,333.33 350,000.06 19 03/31/2004 9,791.66 1,458.33 8,333.33 341,666.73 20 04/30/2004 9,756.94 1,423.61 8,333.33 333,333.40 21 05/31/2004 9,722.22 1,388.89 8,333.33 325,000.07 22 06/30/2004 9,687.50 1,354.17 8,333.33 316,666.74 23 07/31/2004 9,652.77 1,319.44 8,333.33 308,333.41 24 08/31/2004 9,618.05 1,284.72 8,333.33 300,000.08 25 09/30/2004 9,583.33 1,250.00 8,333.33 291,666.75 26 10/31/2004 9,548.61 1,215.28 8,333.33 283,333.42
08/16/2002 Page 2 - -------------------------------------------------------------------------------- Drew Loan - -------------------------------------------------------------------------------- Date Payment Interest Principal Balance - --------------- ----------- ---------- ---------- ---------- 27 11/30/2004 9,513.89 1,180.56 8,333.33 275,000.09 28 12/31/2004 9,479.16 1,145.83 8,333.33 266,666.76 2004 Totals 116,041.63 16,041.67 99,999.96 29 01/31/2005 9,444.44 1,111.11 8,333.33 258,333.43 30 02/28/2005 9,409.72 1,076.39 8,333.33 250,000.10 31 03/31/2005 9,375.00 1,041.67 8,333.33 241,666.77 32 04/30/2005 9,340.27 1,006.94 8,333.33 233,333.44 33 05/31/2005 9,305.55 972.22 8,333.33 225,000.11 34 06/30/2005 9,270.83 937.50 8,333.33 216,666.78 35 07/31/2005 9,236.11 902.78 8,333.33 208,333.45 36 08/31/2005 9,201.39 868.06 8,333.33 200,000.12 37 09/30/2005 9,166.66 833.33 8,333.33 191,666.79 38 10/31/2005 9,131.94 798.61 8,333.33 183,333.46 39 11/30/2005 9,097.22 763.89 8,333.33 175,000.13 40 12/31/2005 9,062.50 729.17 8,333.33 166,666.80 2005 Totals 111,041.63 11,041.67 99,999.96 41 01/31/2006 9,027.78 694.45 8,333.33 158,333.47 42 02/28/2006 8,993.05 659.72 8,333.33 150,000.14 43 03/31/2006 8,958.33 625.00 8,333.33 141,666.81 44 04/30/2006 8,923.61 590.28 8,333.33 133,333.48 45 05/31/2006 8,888.89 555.56 8,333.33 125,000.15 46 06/30/2006 8,854.16 520.83 8,333.33 116,666.82 47 07/31/2006 8,819.44 486.11 8,333.33 108,333.49 48 08/31/2006 8,784.72 451.39 8,333.33 100,000.16 49 09/30/2006 8,750.00 416.67 8,333.33 91,666.83 50 10/31/2006 8,715.28 381.95 8,333.33 83,333.50 51 11/30/2006 8,680.55 347.22 8,333.33 75,000.17 52 12/31/2006 8,645.83 312.50 8,333.33 66,666.84 2006 Totals 106,041.64 6,041.68 99,999.96 53 01/31/2007 8,611.11 277.78 8,333.33 58,333.51 54 02/28/2007 8,576.39 243.06 8,333.33 50,000.18 55 03/31/2007 8,541.66 208.33 8,333.33 41,666.85 56 04/30/2007 8,506.94 173.61 8,333.33 33,333.52 57 05/31/2007 8,472.22 138.89 8,333.33 25,000.19 58 06/30/2007 8,437.50 104.17 8,333.33 16,666.86 59 07/31/2007 8,402.78 69.45 8,333.33 8,333.53 60 08/31/2007 8,368.05 34.52 8,333.53 0.00 2007 Totals 67,916.65 1,249.81 66,666.84 Grand Totals 563,541.49 63,541.49 500,000.00
08/16/2002 Page 3 - -------------------------------------------------------------------------------- Drew Loan - -------------------------------------------------------------------------------- Last interest amount decreased by 0.20 due to rounding. EX-10.37 5 w68886exv10w37.txt SIXTH AMENDMENT TO LOAN AGREEMENT DATED NOVEMBER 30, 2003 Exhibit 10.37 SIXTH AMENDMENT TO AMENDED AND RESTATED LOAN AGREEMENT (EX-IM BANK-GUARANTEED LINE OF CREDIT) This is the Sixth Amendment to Amended and Restated Loan Agreement (Ex-Im Bank-Guaranteed Line of Credit) effective as of November 30, 2003 (this "AMENDMENT") and entered into between DREW SCIENTIFIC, INC. a Texas corporation d/b/a Danam Electronics and f/k/a MWI, Inc. (the "BORROWER") and BANK OF AMERICA, N.A. (the "BANK"). BACKGROUND A. The Borrower and the Bank entered into a certain Revolving Loan Agreement (Ex-Im Bank-Guaranteed Line of Credit) dated as of June 1, 2000, as amended by the certain First Amendment to Loan Agreement (Ex-Im Bank-Guaranteed Line of Credit) dated as of April 3, 2001, as amended by the certain Second Amendment to Loan Agreement (Ex-Im Bank-Guaranteed Line of Credit) dated as of June 30, 2001, as amended and restated effective on September 30, 2001 by the certain Amended and Restated Loan Agreement (Ex-Im Bank-Guaranteed Line of Credit), as further amended by the certain First Amendment to Amended and Restated Loan Agreement (Ex-Im Bank-Guaranteed Line of Credit) dated as of January 7, 2002, as further amended by the certain Second Amendment to Amended and Restated Loan Agreement (Ex-Im Bank-Guaranteed Line of Credit) dated as of July 8, 2002, as further amended by that certain Third Amendment to Amended and Restated Loan Agreement (Ex-Im Bank-Guaranteed Line of Credit) dated as of September 5, 2002 but effective August 30, 2002, as further amended by the certain Fourth Amendment to Amended and Restated Loan Agreement (Ex-Im Bank-Guaranteed Line of Credit) dated as of October 2, 2002 but effective as of September 30, 2002, and as further amended by that certain Fifth Amendment to Amended and Restated Loan Agreement (Ex-Im Bank-Guaranteed Line of Credit) effective as of September 30, 2003 (collectively, the "ORIGINAL LOAN AGREEMENT"). The Original Loan Agreement as amended by this Amendment shall be referred to herein as the "LOAN AGREEMENT." B. The Borrower has executed in favor of the Bank a certain Seventh Amended and Restated Revolving Promissory Note in the principal amount of $2,000,000.00 effective on September 30, 2003 (the "NOTE"). C. The Borrower was formerly known as "MWI, Inc." and has changed its name to Drew Scientific, Inc., pursuant to Articles of Amendment adopted effective October 1, 2002. D. The Borrower has requested that the Bank extend the maturity date of the Note and make certain other changes, and the Bank has agreed to do so upon the terms and conditions set forth herein. AGREEMENT Now, therefore, in consideration of the premises and the mutual agreements contained herein, the parties agree to amend the Loan Agreement on the following terms and conditions: SECTION 1. DEFINITIONS. All terms used herein as defined terms that are not defined herein shall have the meanings ascribed to them in the Loan Agreement, unless the context specifically requires otherwise. SECTION 2. AMENDMENTS TO ORIGINAL LOAN AGREEMENT. The following amendments are hereby made to the Original Loan Agreement: 1 (A) The definition of the "Availability Period" in Section 1.1 of the Original Loan Agreement is hereby amended and restated in its entirety to read as follows: "AVAILABILITY PERIOD means the period commencing on the date of this Agreement and ending on May 31, 2004." (B) The definition of the "Note" in Section 1.1 of the Original Loan Agreement is hereby and amended and restated in its entirety to read as follows: "NOTE means the Eighth Amended and Restated Revolving Promissory Note effective on November 30, 2003 by the Borrower in favor of the Bank in the amount of $2,000,000.00 evidencing the line of credit established hereby." (C) Subsection (c) of Section 2.2 of the Original Loan Agreement is hereby amended and restated in its entirety to read as follows: "(c) Advances under the line of credit will bear interest at a rate per annum equal to the Prime Rate plus 400 basis points." (D) Section 6.11 of the Original Loan Agreement is hereby amended and restated in its entirety to read as follows: "6.11 Collection of Export-Related Accounts Receivable: Payments. (a) Until the Bank notifies the Borrower to the contrary, the Borrower shall make collection of all Export-Related Accounts Receivable and other Collateral for the Bank, shall receive all payments as the Bank's trustee, and shall immediately deliver all payments in their original form duly endorsed in blank into a Payment Account established for the account of the Borrower at a clearing bank acceptable to the Bank, subject to a Cash Collateral Account Agreement. On or prior to the date hereof, the Borrower shall establish a lock-box service for collections of Export-Related Accounts Receivable at a Clearing Bank acceptable to the Bank and subject to a Blocked Account Agreement and other documentation acceptable to the Bank. The Borrower shall instruct all Export-Related Accounts Receivable account debtors to make all payments directly to the address established for such service. If, notwithstanding such instructions, the Borrower receives any proceeds of Export-Related Accounts Receivable, it shall receive such payments as the Bank's trustee, and shall immediately deliver such payments to the Bank in their original form duly endorsed in blank or deposit them into a Payment Account, as the Bank may direct. All collections received in any lock-box or Payment Account or directly by the Borrower or the Bank, and all funds in any Payment Account or other account to which such collections are deposited shall be subject to the Bank's sole control and withdrawals by the Borrower shall not be permitted. The Bank or the Bank's designee may, at any time after the occurrence of an Event of Default, notify Export-Related Accounts Receivable account debtors that the Export-Related Accounts Receivable have been assigned to the Bank and of the Bank's security interest therein, and may collect them directly and charge the collection costs and expenses to the revolving line of credit established by this Agreement and the Note. So long as an Event of Default has occurred and is continuing, the Borrower, at the Bank's request, shall execute and deliver to the Bank such documents as the Bank shall require to grant the Bank access to any post office box in which collections of Export-Related Accounts Receivable are received. 2 (b) If sales of Export-Related Inventory are made or services are rendered for cash, the Borrower shall immediately deliver to the Bank or deposit into a Payment Account the cash which the Borrower receives. (c) All payments including immediately available funds received by the Bank at a bank account designated by it, will be the Bank's sole property for its benefit. (d) In the event the Borrower repays all of the Borrower's obligations to the Bank upon the termination of this Agreement or upon acceleration of such obligations, other than through the Bank's receipt of payments on account of the Export-Related Accounts Receivable or proceeds of the other Collateral, such payment will be credited (conditioned upon final collection) to the Borrower's Loan Account upon the Bank's receipt of immediately available funds. (e) For purposes of this Section 6.11, the term "Payment Account" means account number 4774606503 established by the Borrower with the Bank. SECTION 3. CONDITIONS PRECEDENT. This Amendment shall become effective upon (a) the execution and delivery of (i) this Amendment by the Borrower and the Bank; (ii) the Note by the Borrower, (iii) the ratification of guaranty by Drew Scientific Group, PLC, (iv) the ratification of guaranty by CDC Acquisition Corp., and (v) the Second Amendment to Intercreditor Agreement by Vertex Financial Corporation, The Texas Mezzanine Fund, Inc., Borrower and Bank; (b) payment of (i) Ex-Im Bank guarantee fee of $20,000.00, and (iii) the reasonable fees and costs of Bank's counsel; and (c) all proceedings required to be taken by the Borrower in connection the transactions contemplated by this Amendment having been taken in form and substance satisfactory to the Bank and its counsel, and the Bank having received all such counterpart originals of this Amendment executed by all parties listed on the signature page(s) and originals, certified or other copies of such other documents as the Bank may reasonably request. SECTION 4. REAFFIRMATION. Except as modified hereby, all of terms, covenants and conditions of the Loan Agreement are ratified, reaffirmed and confirmed and shall continue in full force and effect as therein written. In addition, all representations and warranties made in the Loan Agreement are true and correct in all material respects as of the date hereof and are hereby reaffirmed. Nothing hereunder is intended, or shall be construed, to be a novation or an accord and satisfaction of any other obligation or liability of the Borrower to the Bank. SECTION 5. REPRESENTATIONS AND WARRANTIES: NO DEFAULT. The Borrower represents and warrants to, and agrees with the Bank, that this Amendment has been duly authorized by all necessary corporate action on the part of the Borrower, has been duly executed by a duly authorized officer of the Borrower and constitutes the valid and binding obligation of the Borrower, enforceable against the Borrower in accordance with the terms hereof. The Borrower hereby certifies that the representations and warranties contained in the Original Loan Agreement continue to be true and correct and that after giving effect to this Amendment no Event of Default and no event has occurred that with notice, lapse of time, or both would become an Event of Default. SECTION 6. BINDING EFFECT. This Amendment shall be binding upon the Borrower and the Bank and their respective successors and assigns, and shall inure to the benefit of the Borrower and the Bank and their respective successors and assigns. 3 SECTION 7. COUNTERPARTS. This Amendment may be executed in any number of counterparts and by the different parties on separate counterparts. Each such counterpart shall be deemed to be an original, but all such counterparts shall together constitute one and the same agreement. SECTION 8. AMENDMENT AND WAIVER. No amendment of this Amendment, and no waiver of any one or more of the provisions hereof shall be effective unless set forth in a writing and signed by the parties hereto. SECTION 9. GOVERNING LAW. This Amendment shall be governed by and construed in accordance with the internal laws of the State of Texas without reference to conflict of law principles. SECTION 10. SEVERABILITY. Any provision of this Amendment this is held to be inoperative, unenforceable, voidable or invalid in any jurisdiction shall, as to that jurisdiction, be ineffective, unenforceable, void or invalid without affecting the remaining provisions in that or any other jurisdiction, and to this end, the provisions of this Amendment are declared to be severable. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered by their proper and duly authorized officers as of the date first above written. BORROWER: BANK: DREW SCIENTIFIC, INC./d/b/a DANAM BANK OF AMERICA, N.A. ELECTRONICS By: /s/ Keith Raymond Drew By: /s/ John Clarke ------------------------------------ ----------------------- Keith Raymond Drew John Clarke President and Chief Executive Officer Title: VP and By: /s/ James B. Acock ---------------------------------- James B. Acock Treasurer, Secretary and Chief Financial Officer 4 EX-10.38 6 w68886exv10w38.txt EIGHTH AMENDED PROMISSORY DATED NOVEMBER 30,2003 Exhibit 10.38 EIGHTH AMENDED AND RESTATED REVOLVING PROMISSORY NOTE (Exim Bank-Guaranteed Line of Credit) Facility Amount: Effective Date: November 30, 2003 U.S. $2,000,000.00 Dallas, Texas Bank: Borrower: BANK OF AMERICA, N.A. DREW SCIENTIFIC, INC./d/b/a DANAM ELECTRONICS Commercial Banking Group 901 Main Street, 7th Floor 4230 Shilling Way TX1-492-07-01 Dallas, Texas 75237 Dallas, Texas 75202 Dallas County Dallas County This Eighth Amended and Restated Revolving Promissory Note effective as of November 30, 2003(this "NOTE") is an amendment and restatement of that certain Seventh Amended and Restated Revolving Promissory Note dated effective as of September 30, 2003 in the principal amount of $2,000,000 by Borrower in favor of Bank (the "ORIGINAL NOTE"). This Note represents an extension of the maturity date of the Original Note. The Borrower was formerly known as "MWI, Inc." and has changed its name to Drew Scientific, Inc., pursuant to Articles of Amendment adopted effective October 1, 2002. FOR VALUE RECEIVED, the undersigned Borrower unconditionally (and jointly and severally, if more than one) promises to pay to the order of Bank, its successors and assigns, without setoff, at its offices indicated at the beginning of this Note, or at such other place as may be designated by Bank, the principal amount of Two Million and No/100 Dollars ($2,000,000.00), or so much thereof as may be advanced from time to time in immediately available funds, together with interest computed daily on the outstanding principal balance hereof, at an interest rate, and in accordance with the payment schedule, set forth in that certain Amended and Restated Loan Agreement (Ex-Im Bank- Guaranteed Line of Credit) dated effective September 30, 2001 by and between Bank and Borrower, as amended by that certain First Amendment to Amended and Restated Loan Agreement dated as of January 7, 2002, as further amended by that certain Second Amendment to Amended and Restated Loan Agreement dated as of July 8, 2002 (but effective on June 30, 2002) and as further amended by that certain Third Amendment to Amended and Restated Loan Agreement (Ex-Im Bank Guaranteed Line of Credit) effective on August 30, 2002, as further amended by that certain Fourth Amendment to Amended and Restated Loan Agreement (Ex-Im Bank Guaranteed Line of Credit) effective on September 30, 2002, and as further amended by the certain Fifth Amendment to Amended and Restated Loan Agreement (Ex-Im Bank-Guaranteed Line of Credit) effective as of September 30, 2003, and as further amended by that certain Sixth Amendment to Amended and Restated Loan Agreement (Ex-Im Bank-Guaranteed Line of Credit) effective as of November 30, 2003 (collectively, the "LOAN AGREEMENT"). 1. MATURITY DATE; PAYMENT SCHEDULE; MANDATORY PRINCIPAL PAYMENT. Principal shall be paid in full in a single payment on May 31, 2004. Interest thereon shall be paid monthly, commencing on December 1, 2003 and continuing on the same day of each successive month thereafter, with a final payment of all unpaid interest on the last day of the Availability Period (as defined in the Loan Agreement). In addition to the principal payment schedule set forth above, each advance hereunder shall be due and payable on the earlier of the following: (i) immediately upon Borrower's receipt of payment from an account debtor against the corresponding account receivable, (ii) 180 days after the making of such advance or (iii) the last day of the Availability Period. Total or partial prepayments may be made at any time. If Borrower is in default under this Note or the Loan Agreement, Bank may demand payment of the balance outstanding under this Note in full immediately. All payments received hereunder shall be applied in the order set forth in the Loan Agreement. 2. REVOLVING FEATURE. Borrower may borrow, repay and reborrow hereunder at any time, up to a maximum aggregate amount outstanding at any one time equal to the Maximum Amount (as defined in the Loan Agreement), provided that Borrower is not in default under any provision of this Note or the Loan Agreement, and provided that the borrowings hereunder do not exceed any borrowing base or other limitation on borrowings by Borrower. Bank shall incur no liability for its refusal to advance funds based upon its determination that any conditions of such further advances have not been met. Bank records of the amounts borrowed from time to time shall be conclusive proof thereof. In addition, Bank may refuse to make additional advances or reduce the amount of advances available as provided in the Loan Agreement. 3. SUBJECT TO LOAN AGREEMENT. This Note shall be governed by the Loan Agreement, and all provisions regarding advances, interest, prepayment, late payments, events of default, remedies and governing law are set forth in the Loan Agreement. 4. COMMERCIAL PURPOSES. BORROWER REPRESENTS TO BANK THAT THE PROCEEDS OF THIS LOAN ARE TO BE USED PRIMARILY FOR BUSINESS, COMMERCIAL OR AGRICULTURAL PURPOSES. BORROWER ACKNOWLEDGES HAVING READ AND UNDERSTOOD, AND AGREES TO BE BOUND BY, ALL TERMS AND CONDITIONS OF THIS NOTE AND HEREBY EXECUTES THIS NOTE UNDER SEAL AS OF THE DATE HERE ABOVE WRITTEN. 5. NOTICE OF FINAL AGREEMENT. THIS WRITTEN PROMISSORY NOTE 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. 6. JUDICIAL PROCEEDINGS; WAIVERS. BORROWER AND BANK ACKNOWLEDGE AND AGREE THAT (a) ANY SUIT, ACTION OR PROCEEDING, WHETHER CLAIM OR COUNTERCLAIM, BROUGHT OR INSTITUTED BY BORROWER OR BANK OR ANY SUCCESSOR OR ASSIGN OF BORROWER OR BANK, ON OR WITH RESPECT TO THIS AGREEMENT, ANY OF THE OTHER LOAN DOCUMENTS, THE COLLATERAL OR THE DEALINGS OF THE PARTIES WITH RESPECT HERETO OR THERETO SHALL BE TRIED ONLY BY A COURT AND NOT BY A JURY, AND EACH PARTY WAIVES THE RIGHT TO TRIAL BY JURY; (b) EACH WAIVES ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER, IN ANY SUCH SUIT, ACTION OR PROCEEDING, ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES OR ANY DAMAGES OTHER THAN, OR IN ADDITION TO, ACTUAL DAMAGES; AND (c) THIS SECTION IS A SPECIFIC AND MATERIAL ASPECT OF THIS NOTE, AND BANK WOULD NOT EXTEND CREDIT IF THE WAIVERS SET FORTH IN THIS SECTION WERE NOT A PART OF THIS NOTE. EFFECTIVE DATE: NOVEMBER 30, 2003 EXECUTION DATE: DECEMBER 5, 2003 2 DREW SCIENTIFIC, INC./d/b/a DANAM ELECTRONICS By:/s/ Keith Raymond Drew -------------------------------- Keith Raymond Drew President and Chief Executive Officer and By:/s/ James B. Acock ------------------------------ Print Name: James B. Acock Title: Treasurer, Secretary and Chief Financial Officer Receipt of delivery of this Note is hereby acknowledged by: Bank of America, N.A. By:/s/ John Clarke -------------------------- John Clarke Title: VP EX-10.39 7 w68886exv10w39.txt RATIFICATION OF GUARANTY DATED NOVEMBER 30,2003 Exhibit 10.39 RATIFICATION OF GUARANTY (Exim Bank-Guaranteed Line of Credit) THIS RATIFICATION OF GUARANTY (the "RATIFICATION") is effective on November 30, 2003, by DREW SCIENTIFIC GROUP PLC ("GUARANTOR"), in favor of BANK OF AMERICA, N.A. (the "LENDER"). RECITALS A. Guarantor has executed a Guaranty dated April 3, 2001 (the "GUARANTY") in favor of Lender in connection with a Loan Agreement (Exim Bank-Guaranteed Line of Credit) dated as of June 1, 2000 as amended by a First Amendment to Loan Agreement dated as of April 3, 2001, as amended by a Second Amendment to Loan Agreement (Exim Bank- Guaranteed Line of Credit) dated as of June 30, 2001 between Drew Scientific, Inc., d/b/a Danam Electronics, formerly known as MWI, Inc. d/b/a Danam Electronics ("BORROWER") and Lender (collectively, the "ORIGINAL LOAN AGREEMENT"). The Original Loan Agreement was amended and restated by that certain Amended and Restated Loan Agreement (Ex-Im Bank Guaranteed Line of Credit) effective as of September 30, 2001 by and between Borrower and Lender, as further amended by that certain First Amendment to Amended and Restated Loan Agreement (Ex-Im Bank Guaranteed Line of Credit) effective on January 7, 2002 between Borrower and Lender, as further amended by that certain Second Amendment to Amended and Restated Loan Agreement (Ex-Im Bank Guaranteed Line of Credit) dated as of July 8, 2002 (but effective on June 30, 2002), as further amended by that certain Third Amendment to Amended and Restated Loan Agreement (Ex-Im Bank Guaranteed Line of Credit) dated as of September 5, 2002 (but effective on August 30, 2002) and further amended by that certain Fourth Amendment to Amended and Restated Loan Agreement (Ex-Im Bank Guaranteed Line of Credit) dated as of October 2, 2002 (but effective on September 30, 2002), and as further amended by that certain Fifth Amendment to Amended and Restated Loan Agreement (Ex-Im Bank-Guaranteed Line of Credit) dated as of September 30, 2003 (collectively, the "AMENDED AND RESTATED LOAN AGREEMENT"). Borrower executed a Seventh Amended and Restated Revolving Promissory Note dated effective on September 30, 2003 made payable to the order of Lender in the original principal amount of $2,000,000.00 (the "ORIGINAL NOTE"). B. Borrower has requested that Lender amend the Amended and Restated Loan Agreement and the Original Note to extend the maturity date of the Original Note from November 30, 2003 to May 31, 2004 and to modify certain other terms thereof. Lender is willing to make such changes subject to Guarantor giving Lender the representations, assurances and other agreements hereinafter set forth. C. Lender and Borrower shall execute (i) a Sixth Amendment to Amended and Restated Loan Agreement (the "SIXTH AMENDMENT"); and (ii) a Eighth Amended and Restated Revolving Promissory Note (the "EIGHTH AMENDED NOTE"). Guarantor and CDC Acquisition Corp shall ratify their respective guaranties of the Note. AGREEMENT NOW, THEREFORE, for Ten Dollars ($10.00) and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and because Guarantor will benefit from some of the changes to the Amended and Restated Loan Agreement, Guarantor does hereby agree as follows: 1. The Recitals hereinabove contained are true and correct and are made a part hereof. 2. Guarantor acknowledges receipt of the Sixth Amendment and agrees, ratifies and confirms that the Guaranty remains in full force and effect with respect to (a) the Original Loan Agreement as amended and restated by the Amended and Restated Loan Agreement as amended by the Sixth Amendment and (b) the Eighth Amended Note. 3. Guarantor represents and warrants unto Lender that (i) the Guaranty and all other documents executed by Guarantor in connection therewith are valid and binding obligations of Guarantor, enforceable in accordance with their terms; (ii) the Eighth Amended Note shall continue to be guaranteed by the Guarantor pursuant to the Guaranty; (iii) all of the terms, covenants, conditions, representations, warranties and agreements contained in the Guaranty are hereby ratified and confirmed in all respects; and (iii) no oral representations, statements, or inducements have been made by Lender with respect to the Eighth Amended Note, the Sixth Amendment, this Ratification or the Guaranty. IN WITNESS WHEREOF, the Guarantor has caused this Ratification to be executed as of the day and year first above written. GUARANTOR: DREW SCIENTIFIC GROUP PLC BY: /s/ K.R. Drew ---------------------------- Name: K.R. Drew Title: DIRECTOR EFFECTIVE: November 30, 2003 EXECUTED this 8th day of December, 2003. STATE OF Texas COUNTY OF Dallas The foregoing was executed and acknowledged before me this 8th day of December 2003 by Keith Drew, as Director of Drew Scientific Group PLC Such person is personally known to me or produced _________ as identification and did/did not take an oath. [SEAL] Katherine A Chavez Notary Public, State of Texas Print Name: Katherine A Chavez My Commission expires: 11-12-2006 Commission No:___________________ 2 EX-10.40 8 w68886exv10w40.txt RATIFICATION OF GUARANTY DATED NOVEMBER 30,2003 Exhibit 10.40 RATIFICATION OF GUARANTY (Exim Bank-Guaranteed Line of Credit) THIS RATIFICATION OF GUARANTY (the "RATIFICATION") is effective on November 30, 2003, by CDC ACQUISITION CORP. ("GUARANTOR"), in favor of BANK OF AMERICA, N.A. (the "LENDER"). RECITALS A. Guarantor has executed a Guaranty dated April 3, 2001 (the "GUARANTY") in favor of Lender in connection with a Loan Agreement (Exim Bank-Guaranteed Line of Credit) dated as of June 1, 2000 as amended by a First Amendment to Loan Agreement dated as of April 3, 2001, as amended by a Second Amendment to Loan Agreement (Exim Bank- Guaranteed Line of Credit) dated as of June 30, 2001 between Drew Scientific, Inc., d/b/a Danam Electronics, formerly known as MWI, Inc. d/b/a Danam Electronics ("BORROWER") and Lender (collectively, the "ORIGINAL LOAN AGREEMENT"). The Original Loan Agreement was amended and restated by that certain Amended and Restated Loan Agreement (Ex-Im Bank Guaranteed Line of Credit) effective as of September 30, 2001 by and between Borrower and Lender, as further amended by that certain First Amendment to Amended and Restated Loan Agreement (Ex-Im Bank Guaranteed Line of Credit) effective on January 7, 2002 between Borrower and Lender, as further amended by that certain Second Amendment to Amended and Restated Loan Agreement (Ex-Im Bank Guaranteed Line of Credit) dated as of July 8, 2002 (but effective on June 30, 2002), as further amended by that certain Third Amendment to Amended and Restated Loan Agreement (Ex-Im Bank Guaranteed Line of Credit) dated as of September 5, 2002 (but effective on August 30, 2002) and further amended by that certain Fourth Amendment to Amended and Restated Loan Agreement (Ex-Im Bank Guaranteed Line of Credit) dated as of October 2, 2002 (but effective on September 30, 2002), and as further amended by that certain Fifth Amendment to Amended and Restated Loan Agreement (Ex-Im Bank-Guaranteed Line of Credit) dated as of September 30, 2003 (collectively, the "AMENDED AND RESTATED LOAN AGREEMENT"). Borrower executed a Seventh Amended and Restated Revolving Promissory Note dated effective on September 30, 2003 made payable to the order of Lender in the original principal amount of $2,000,000.00 (the "ORIGINAL NOTE"). B. Borrower has requested that Lender amend the Amended and Restated Loan Agreement and the Original Note to extend the maturity date of the Original Note from November 30, 2003 to May 31, 2004 and to modify certain other terms thereof. Lender is willing to make such changes subject to Guarantor giving Lender the representations, assurances and other agreements hereinafter set forth. C. Lender and Borrower shall execute (i) a Sixth Amendment to Amended and Restated Loan Agreement (the "SIXTH AMENDMENT"); and (ii) a Eighth Amended and Restated Revolving Promissory Note (the "EIGHTH AMENDED NOTE"). Guarantor and Drew Scientific Group PLC shall ratify their respective guaranties of the Note. AGREEMENT NOW, THEREFORE, for Ten Dollars ($10.00) and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and because Guarantor will benefit from some of the changes to the Amended and Restated Loan Agreement, Guarantor does hereby agree as follows: 1. The Recitals hereinabove contained are true and correct and are made a part hereof. 2. Guarantor acknowledges receipt of the Sixth Amendment and agrees, ratifies and confirms that the Guaranty remains in full force and effect with respect to (a) the Original Loan Agreement as amended and restated by the Amended and Restated Loan Agreement as amended by the Sixth Amendment and (b) the Eighth Amended Note. 3. Guarantor represents and warrants unto Lender that (i) the Guaranty and all other documents executed by Guarantor in connection therewith are valid and binding obligations of Guarantor, enforceable in accordance with their terms; (ii) the Eighth Amended Note shall continue to be guaranteed by the Guarantor pursuant to the Guaranty; (iii) all of the terms, covenants, conditions, representations, warranties and agreements contained in the Guaranty are hereby ratified and confirmed in all respects; and (iii) no oral representations, statements, or inducements have been made by Lender with respect to the Eighth Amended Note, the Sixth Amendment, this Ratification or the Guaranty. IN WITNESS WHEREOF, the Guarantor has caused this Ratification to be executed as of the day and year first above written. GUARANTOR: CDC ACQUISITION CORP. BY: /s/ K. R. Drew ---------------------- Name: K. R. Drew Title: Director EFFECTIVE: November 30, 2003 EXECUTED this 8th day of December, 2003. STATE OF Texas COUNTY OF Dallas The foregoing was executed and acknowledged before me this 8th day of December, 2003 by Keith Drew, as Director of CDC Acquisition Corp. Such person is personally known to me or produced _____________ as identification and did/did not take an oath. [SEAL] Katherine A Chavez Notary Public State of Texas Print Name: Katherine A Chavez My Commission expires: 11-12-2006 Commission No:_____________________ 2 EX-10.41 9 w68886exv10w41.txt POST CLOSING AGREEMENT DATED NOVEMBER 30,2003 Exhibit 10.41 POST-CLOSING AGREEMENT This Post-Closing Agreement (the "Agreement") is executed effective as of November 30, 2003, by and between DREW SCIENTIFIC, INC., a Texas corporation d/b/a Danam Electronics and f/k/a MWI, Inc. (collectively the "Borrower") and BANK OF AMERICA, N.A., a national banking association ("Lender"). WITNESSETH: RECITATIONS: 1. The Borrower and Lender have as of this day entered into certain transactions in connection with the modification and renewal of an Ex-Im Bank-guaranteed revolving line of credit extended by the Lender to the Borrower in a maximum principal amount of $2,000,000.00 (the "Loan"). 2. There presently exists an over-advance to the Borrower under the Loan due to an over-reliance on inventory under the borrowing base. 3. The Lender has agreed to enter into the transactions with the Borrower regarding the Loan, provided that the Borrower agrees to make the following payments to the Lender within a time certain following the closing of the transactions, in accordance with the following terms and conditions. NOW, THEREFORE, in consideration of the promises, agreements and covenants contained herein, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. RECITATIONS. The foregoing recitations are true and correct and are incorporated herein by this reference. 2. ACKNOWLEDGEMENT REGARDING POST-CLOSING ITEMS. The Borrower acknowledges and agrees that it shall comply with the following obligations (the "Post-Closing Items"): (a) The Borrower acknowledges and agrees that the Borrower shall make the following payments to the Lender at the following times hereinafter set forth in connection with the Loan (pursuant to Section 2.4(a) of the Loan's loan agreement to bring the total amount outstanding under the Loan into compliance with Section 2.1 of the Loan's loan agreement):
PAYMENT REQUIRED BY THE BORROWER TO THE LENDER: DUE DATE: - --------------------------------------- --------- $50,000.00 on or before December 31, 2003 $50,000.00 on or before January 30, 2004 Any remaining over-advance, as determined by on or before February the Bank, relative to the borrowing base 27, 2004 under the Loan.
By: /s/ James B. Acock ---------------------------------------- James B. Acock Treasurer, Secretary and Chief Financial Officer EX-10.42 10 w68886exv10w42.txt SECOND AMENDMENT TO INTERCREDITOR AGREEMENT Exhibit 10.42 SECOND AMENDMENT TO INTERCREDITOR AGREEMENT This is the Second Amendment to Intercreditor Agreement dated as of November 20, 2003 (this "AMENDMENT") and entered into between VERTEX FINANCIAL CORPORATION ("VERTEX"), THE TEXAS MEZZANINE FUND, INC. ("TEXAS MEZZANINE") and BANK OF AMERICA, N.A. ("BANK OF AMERICA"). Vertex, Texas Mezzanine and Bank are sometimes herein referred to individually as a "PARTY" and collectively as "PARTIES". BACKGROUND A. Vertex has purchased certain accounts receivable (the "VERTEX FACILITY") from MWI, INC. d/b/a Danam Electronics and n/k/a Drew Scientific, Inc. (the "DEBTOR") which has an address at 4230 Shilling Way, Dallas, Texas 75237 and pursuant to a security agreement obtained a security interest in certain property of the Debtor described on Exhibit A attached hereto and by this reference made a part hereof ("VERTEX'S COLLATERAL"). B. Texas Mezzanine has made a loan to the Debtor in the principal amount of $558,000 (the "TEXAS MEZZANINE FACILITY"), and pursuant to a security agreement has obtained a security interest in certain property of the Debtor described on Exhibit B attached hereto and by this reference made a part hereof ("TEXAS MEZZANINE'S COLLATERAL"). C. Bank of America has established a revolving credit facility for the Debtor in the amount of $2,000,000.00 (the "BANK OF AMERICA FACILITY"), and pursuant to a security agreement has obtained a security interest in certain property of the Debtor described on Exhibit C attached hereto and by this reference made a part hereof ("BANK OF AMERICA'S COLLATERAL"). D. Vertex, Texas Mezzanine and Bank of America entered into that certain Intercreditor Agreement dated as of March 7, 2002 (the "ORIGINAL INTERCREDITOR AGREEMENT"), which Intercreditor Agreement sets forth the agreement of the Parties with respect to the priority of their respective security interests in the Assets (as defined in the Intercreditor Agreement). E. Vertex, Texas Mezzanine and Bank of America entered into that certain First Amendment to Intercreditor Agreement dated as of October_________, 2002 (the "FIRST AMENDMENT"), to amend the Original Intercreditor Agreement. The Original Intercreditor Agreement as amended by the First Amendment shall hereinafter be referred to as the "Intercreditor Agreement." F. The Borrower has requested that Bank of America make certain changes to the Intercreditor Agreement in order to increase the amount of Permitted Indebtedness (as defined in the Intercreditor Agreement) of the Texas Mezzanine Facility from $500,000 to $750,000, and Bank of America is willing to do so provided that this Agreement is entered into but not otherwise. AGREEMENT Now, therefore, in consideration of the premises and the mutual agreements contained herein, the parties agree to amend the Intercreditor Agreement on the following terms and conditions: SECTION 1. DEFINITIONS. All terms used herein as defined terms that are not defined herein shall have the meanings ascribed to them in the Intercreditor Agreement, unless the context specifically requires otherwise. SECTION 2. AMENDMENTS TO INTERCREDITOR AGREEMENT. The following amendments are hereby made to the Intercreditor Agreement: The definition of "PERMITTED INDEBTEDNESS" contained within Paragraph 5 of the Intercreditor Agreement is hereby amended and restated in its entirety to read as follows: ""PERMITTED INDEBTEDNESS" shall mean (a) with respect to the Vertex Facility, $800,000.00 plus Default Expenses, (b) with respect to the Texas Mezzanine Facility, $750,000.00 plus Default Expenses, and (c) with respect to the Bank of America Facility, $2,000,000.00 plus Default Expenses." SECTION 3. CONDITIONS PRECEDENT. This Amendment shall become effective upon the execution and delivery of this Amendment by Vertex, Texas Mezzanine and Bank of America. SECTION 4. REAFFIRMATION. Except as modified hereby, all of the terms, covenants and conditions of the Intercreditor Agreement are ratified, reaffirmed, and confirmed and shall continue in full force and effect as therein written. In addition, all representations and warranties made in the Intercreditor Agreement are true and correct in all material respects as of the date hereof and are hereby reaffirmed. SECTION 5. REPRESENTATIONS AND WARRANTIES: NO DEFAULT. Each Party represent and warrant to, and agrees with all other Parties, that this Amendment has been duly authorized by all necessary company action on the part of the respective Parties, has been duly executed by a duly authorized officer of the respective Parties and constitutes the valid and binding obligation of the respective Parties, enforceable against the respective Parties in accordance with the terms hereof. Each Party hereby certifies that its representations and warranties contained in the Intercreditor Agreement continue to be true and correct. SECTION 6. BINDING EFFECT. This Amendment shall be binding upon Vertex, Texas Mezzanine and Bank of America and their respective successors and assigns, and shall inure to the benefit of Vertex, Texas Mezzanine and Bank of America and their respective successors and assigns. SECTION 7. COUNTERPARTS. This Amendment may be executed in any number of counterparts and by the different parties on separate counterparts. Each such counterpart shall be deemed to be an original, but all such counterparts shall together constitute one and the same agreement. SECTION 8. AMENDMENT AND WAIVER. No amendment of this Amendment, and no waiver of any one or more of the provisions hereof shall be effective unless set forth in a writing and signed by the parties hereto. SECTION 9. GOVERNING LAW. This Amendment shall be governed by and construed in accordance with the internal laws of the State of Texas without reference to conflict of law principles. 2 SECTION 10. SEVERABILITY. Any provision of this Amendment that is held to be inoperative, unenforceable, voidable or invalid in any jurisdiction shall, as to that jurisdiction, be ineffective, unenforceable, void or invalid without affecting the remaining provisions in that or any other jurisdiction, and to this end the provisions of this Amendment are declared to be severable. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered by their proper and duly authorized officers as of the date first above written. BANK OF AMERICA, N. A. VERTEX FINANCIAL CORPORATION By: /s/ Richard Weisheit By: /s/ Debra Wilson -------------------- -------------------------- Name: Richard Weisheit Name: DEBRA WILSON Title: VP Title: SR. VICE PRESIDENT THE TEXAS MEZZANINE-FUND, INC. By: /s/ Theresa Lee -------------------------- Name: Theresa Lee Title: VP DEBTOR'S ACKNOWLEDGMENT AND CONSENT The undersigned Debtor hereby acknowledges and agrees to the foregoing Second Amendment To Intercreditor Agreement. Debtor agrees to be bound by the terms and provisions thereof as they relate to the relative rights of the Parties with respect to each other. However, nothing therein shall be deemed to amend, modify, supersede or otherwise alter the terms of the respective agreements between the Debtor and each Party (the "FINANCING DOCUMENTS"), and in the event of any inconsistency or conflict between the terms of the Financing Documents and the Intercreditor Agreement (as amended by the Second Amendment to Intercreditor Agreement), the Financing Documents shall govern as between the Debtor and each Party. The Debtor agrees that each Party holding collateral may serve as bailee for the other Parties and each Party is hereby authorized to turn such collateral over to such other Parties. Debtor further agrees that the Intercreditor Agreement (as amended by the Second Amendment To Intercreditor Agreement) is solely for the benefit of the Parties and shall not give the Debtor, its successors and assigns, or any other person, any rights vis-a-vis either Party. DREW SCIENTIFIC, INC. (f/k/a MWI, Inc.) By: /s/ K.R. Drew -------------- Name: K.R. DREW Title: PRESIDENT 3 EX-10.43 11 w68886exv10w43.txt LOAN AGREEMENT DATED JUNE 1,2000 Exhibit 10.43 LOAN AGREEMENT (EXIM BANK-GUARANTEED LINE OF CREDIT) This Loan Agreement (this "Agreement") dated as of June 1, 2000 is between BANK OF AMERICA, N.A. (the "Bank") and MWI, INC., D/B/A DANAM ELECTRONICS (the "Borrower"). 1. DEFINITIONS 1.1 Defined Terms. In addition to the terms which are defined elsewhere in this Agreement, the following terms have the meanings indicated for the purposes of this Agreement: "Availability Period" means the period commencing on the date of this Agreement and ending on June 30,2001. "Borrower Agreement" means that certain Borrower Agreement entered into between Bank and Borrower with reference to this credit transaction under the Export-Import Bank of the United States Working Capital Guarantee Program. "Eligible Accounts Receivable" means all of the Borrower's accounts that are (i) due from AVL of Austria, (ii) supported by irrevocable letters of credit in favor of the Borrower or (iii) due from a foreign buyer that is specifically approved by Eximbank and the Bank, in their sole and absolute discretion; provided, however, that "Eligible Accounts Receivable" shall not include any account that is not covered by the Eximbank Guaranty, any account that is not permitted to be included in the Export-Related Borrowing Base pursuant to the Borrower Agreement or any account that the Bank may from time to time deem to be ineligible. "Eligible Inventory" means all of the Borrower's inventory that is permitted to be included in the Export-Related Borrowing Base pursuant to the Borrower Agreement; provided, that "Eligible Inventory" shall not include any inventory that (i) is not covered by the Eximbank Guaranty or (ii) that the Bank may from time to time deem to be ineligible. "Eximbank" means the Export-Import Bank of the United States. "Eximbank Guaranty" means that certain Working Capital Guaranty Agreement issued by Eximbank in favor of Bank in support of ninety percent (90%) of Borrower's obligations under this Agreement. "Export-Related Borrowing Base" means, at the date of determination thereof, the sum of the following: (a) 90% of the Eligible Accounts Receivable; and (b) 75% of the Eligible Inventory. "Maximum Amount" means the amount of Two Million U.S. Dollars ($2,000,000.00). "Note" means the Promissory Note dated of the date herewith by the Borrower in favor of the Bank in the amount of $2,000,000 evidencing the line of credit established hereby. "Prime Rate" means the rate of interest publicly announced from time to time by the Bank as its Prime Rate. The Prime Rate is set by the Bank based on various factors, including the Bank's costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans. The Bank may price loans to its customers at, above, or below the Prime Rate. Any change in the Prime Rate shall take effect at the opening of business on the day specified in the public announcement of a change in the Bank's Prime Rate. "Termination Date" means the last day of the Availability Period 1.2 Terms Defined in Borrower Agreement. Capitalized terms not otherwise defined herein shall have the meanings given to them in the Borrower Agreement. 2. LINE OF CREDIT: AMOUNT AND TERMS 2.1 Line of Credit Amount. (a) During the Availability Period, the Bank will provide a line of credit to the Borrower. This is a revolving line of credit providing for cash advances and Standby Letters of Credit. During the Availability Period, the Borrower may repay principal amounts and reborrow them. (b) The following limitations will apply to the line of credit: (i) The outstanding principal balance of advances under the line of credit plus the outstanding amounts of any Letters of Credit, including amounts drawn on Letters of Credit and not yet reimbursed, may not exceed the Maximum Amount. (ii) The outstanding principal balance of advances under the line of credit plus the outstanding amounts of any Letters of Credit, including amounts drawn on Letters of Credit and not yet reimbursed, may not exceed at any one time the Export-Related Borrowing Base. 2.2 Advances under the Line of Credit. 2 (a) The Borrower will repay in full all principal and any unpaid interest or other charges outstanding under this line of credit no later than the last day of the Availability Period. (b) The Borrower will pay interest on July 1, 2000, and then monthly thereafter on the same day of the month until payment in full of any principal outstanding under this line of credit. (c) Advances under the line of credit will bear interest at a rate per annum equal to the PRIME Rate plus 1.00 percentage point. 2.3 Letters of Credit. The Borrower may request the Bank to issue Standby Letters of Credit subject to the following requirements: (a) Each Letter of Credit shall expire on or before 365 days after the date such Letter of Credit is issued. It is provided, however, that no Standby Letter of Credit shall expire later than the Termination Date, unless the Bank and EximBank otherwise agree. (b) The amount of Letters of Credit outstanding at any one time (including amounts drawn on Letters of Credit and not yet reimbursed) may not exceed One Million Dollars ($1,000,000.00). (c) The Borrower agrees: (i) to pay the Bank, on demand, all amounts paid by the Bank under or in respect of a Letter of Credit issued for the Borrower's account. At the option of the Bank, any sum drawn under a Letter of Credit may be added to the principal amount outstanding under this Agreement. The amount will bear interest and be due as described elsewhere in this Agreement. (ii) if there is a default under this Agreement, to immediately prepay and make the Bank whole for any outstanding Letters of Credit. (iii) that the issuance of any Letter of Credit and any amendment to a Letter of Credit is subject to the Bank's written approval and must be in form and content satisfactory to the Bank and in favor of a beneficiary acceptable to the Bank. (iv) to sign the Bank's form Application and Agreement for Standby Letter of Credit. (v) to pay any standard issuance and/or other fees that the Bank notifies the Borrower will be charged for issuing and processing Letters of Credit for the Borrower. 3 (vi) to allow the Bank to automatically charge its checking account for applicable fees, discounts, and other charges. 2.4 Mandatory Payment: Additional Collateral. If at any time and for any reason the total amount of credit outstanding under this Agreement exceeds the limitations set forth in the Borrower Agreement or in Paragraph 2.1 of this Agreement, the Borrower shall, upon the Bank's election and demand, (a) pay to the Bank the amount of the excess; or (b) deliver to the Bank additional Collateral of a type and in an amount satisfactory to the Bank and Eximbank. Payments under this Paragraph may be applied to the obligations of the Borrower to the Bank in the order and manner as the Bank in its discretion may determine. Payments to be applied to outstanding Letters of Credit and drafts accepted under Letters of Credit may, at the Bank's option, be used to prepay, or held as cash collateral to secure, the Borrower's obligations to the Bank with respect thereto. 2.5 Mandatory Prepayment. Advances under the line of credit shall be subject to mandatory prepayment as provided in Section 1 of the Note. 3. [INTENTIONALLY OMITTED] 4. FEES AND EXPENSES 4.1 Fees. (a) Eximbank Fees. The Borrower agrees to pay an Eximbank guaranty fee in the amount of Thirty Thousand Dollars ($30,000.00), payable at closing. In addition, the Borrower agrees to pay the Eximbank application fee in the amount of One Hundred Dollars ($ 100.00) on or before the date of this Agreement. (b) Waiver Fee. If the Bank, at its discretion, agrees to waive or amend any terms of this Agreement, the Borrower will, at the Bank's option, pay the Bank a fee for each waiver or amendment in an amount advised by the Bank at the time the Borrower requests the waiver or amendment. Nothing in this paragraph shall imply that the Bank is obligated to agree to any waiver or amendment requested by the Borrower. The Bank may impose additional requirements as a condition to any waiver or amendment. (c) Unused Commitment Fee. The Borrower agrees to pay a fee on any difference between the Maximum Amount and the amount of credit it actually uses, determined by the weighted average credit outstanding during the specified period. The fee will be calculated at .25% per year. The calculation of credit outstanding shall include the undrawn amount of Letters of Credit. This fee is due on September 1, 2000, and on the first day of each December, March, and June thereafter until the expiration of the Availability Period. 4 (d) Late Fee. To the extent permitted by law, the Borrower agrees to pay a late fee in an amount not to exceed four percent (4%) of any installment that is more than fifteen (15) days late. The imposition and payment of a late fee shall not constitute a waiver of the Bank's rights with respect to the default. (e) Fee for Late Financial Statements. Borrower acknowledges and agrees that Bank's ability to monitor and evaluate the status of the Loan is dependent upon Borrower timely providing financial information required herein. In addition to all other rights and remedies Bank has, should Borrower fail to timely provide the financial information, including declaring the loan to be in default, Bank may charge Borrower a late fee of up to 10 basis points (.10%) of the outstanding principal balance or committed loan amount, whichever is greater, not to be less than $500.00. The charging and/or payment of the fee is not a waiver of the Borrower's continuing obligation to provide the required financial information 4.2 Expenses. The Borrower agrees to immediately repay the Bank for all reasonable costs and expenses incurred by the Bank in connection with this Agreement, including, but not limited to, filing, recording and search fees. 4.3 Reimbursement Costs. (a) The Borrower agrees to reimburse the Bank for any reasonable expenses it incurs in the preparation of this Agreement and any agreement or instrument required by this Agreement. Expenses include, but are not limited to, reasonable attorneys' fees, including any allocated costs of the Bank's in-house counsel. (b) The Borrower agrees to reimburse the Bank for the cost of periodic audits and appraisals of the collateral securing this Agreement, at such intervals as the Bank or Eximbank may reasonably require. The audits and appraisals may be performed by employees of the Bank or by independent appraisers. 5. COLLATERAL 5.1 Personal Property. The Borrower's obligations to the Bank under this Agreement will be secured by personal property the Borrower now owns or will own in the future as listed below. The collateral is further defined in security agreement(s) executed by the Borrower. In addition, any other personal property collateral (the "Additional Collateral") securing any other present or future obligations of the Borrower to the Bank which are not guaranteed under the Eximbank Guaranty (the "Non-Eximbank Indebtedness") shall also secure Borrower's obligations under this Agreement; provided, however, that the Additional Collateral shall be applied first to the satisfaction of the Non-Eximbank Indebtedness and the balance, if any, to the Borrower's obligations under this Agreement. (a) Inventory. (b) Accounts. 5 (c) General Intangibles. (d) Equipment. (e) All other assets. 6. DISBURSEMENTS, PAYMENTS AND COSTS 6.1 Disbursements and Payments. (a) Each payment by the Borrower will be made at the Bank's banking center (or other location) selected by the Bank from time to time; and will be made in immediately available funds, or such other type of funds selected by the Bank. (b) Each disbursement by the Bank and each payment by the Borrower will be evidenced by records kept by the Bank. In addition, the Bank may, at its discretion, require the Borrower to sign one or more promissory notes. 6.2 Telefax Authorization. (a) The Bank may honor telefax instructions for advances or repayments given, or purported to be given, by any one of the individuals authorized to sign loan agreements on behalf of the Borrower, or any other individual designated by any one of such authorized signers. (b) Advances will be deposited in and repayments will be withdrawn from the Borrower's account number 4774606493, or such other of the Borrower's accounts with the Bank as designated in writing by the Borrower. (c) The Borrower will indemnify and hold the Bank harmless from all liability, loss, and costs in connection with any act resulting from telephone or telefax instructions the Bank reasonably believes are made by any individual authorized by the Borrower to give such instructions. This paragraph will survive this Agreement's termination, and will benefit the Bank and its officers, employees, and agents. 6.3 Direct Debit. (a) The Borrower agrees that interest and principal payments and any fees will be deducted automatically on the due date from the Borrower's account number 4774606493, or such other of the Borrower's accounts with the Bank as designated in writing by the Borrower. (b) The Borrower will maintain sufficient funds in the account on the dates the Bank enters debits authorized by this Agreement. If there are insufficient funds 6 in the account on the date the Bank enters any debit authorized by this Agreement, the Bank may reverse the debit. 6.4 Banking Days. Unless otherwise provided in this Agreement, a banking day is a day other than a Saturday, Sunday or other day on which commercial banks are authorized to close, or are in fact closed, in the state where the Bank's lending office is located, and, if such day relates to amounts bearing interest at an offshore rate (if any), means any such day on which dealings in dollar deposits are conducted among banks in the offshore dollar interbank market. All payments and disbursements which would be due on a day which is not a banking day will be due on the next banking day. All payments received on a day which is not a banking day will be applied to the credit on the next banking day. 6.5 Taxes. (a) If any payments to the Bank under this Agreement are made from outside the United States, the Borrower will not deduct any foreign taxes from any payments it makes to the Bank. If any such taxes are imposed on any payments made by the Borrower (including payments under this paragraph), the Borrower will pay the taxes and will also pay to the Bank, at the time interest is paid, any additional amount which the Bank specifies as necessary to preserve the after-tax yield the Bank would have received if such taxes had not been imposed. The Borrower will confirm that it has paid the taxes by giving the Bank official tax receipts (or notarized copies) within 30 days after the due date. (b) Payments made by the Borrower to the Bank will be made without deduction of United States withholding or similar taxes. If the Borrower is required to pay U.S. withholding taxes, the Borrower will pay such taxes in addition to the amounts due to the Bank under this Agreement. If the Borrower fails to make such tax payments when due, the Borrower indemnifies the Bank against any liability for such taxes, as well as for any related interest, expenses, additions to tax, or penalties asserted against or suffered by the Bank with respect to such taxes. 6.6 Additional Costs. The Borrower will pay the Bank, on demand, for the Bank's costs or losses arising from any statute or regulation, or any request or requirement of a regulatory agency which is applicable to all national banks or a class of all national banks. The costs and losses will be allocated to the loan in a manner determined by the Bank, using any reasonable method. The costs include the following: (a) any reserve or deposit requirements; and (b) any capital requirements relating to the Bank's assets and commitments for credit. 6.7 Interest Calculation. Except as otherwise stated in this Agreement, all interest and fees, if any, will be computed on the basis of a 360-day year and the actual number of days elapsed. This results in more interest or a higher fee than if a 365-day year is used. 7 Installments of principal which are not paid when due under this Agreement shall continue to bear interest until paid. 6.8 Default Rate. Upon the occurrence of any default under this Agreement, principal amounts outstanding under this Agreement will, at the option of the Bank, bear interest at a rate which is up to the maximum rate allowed by law. This will not constitute a waiver of any default. 6.9 Interest Compounding. At the Bank's sole option in each instance, any interest, fees, costs or disbursements which are not paid when due under this Agreement shall bear interest from the due date at the Default Rate set forth above. This may result in compounding of interest. 6.10 Payments in Kind. The Bank, at its option, may require the Borrower to deliver to the Bank in kind any payments collected by the Borrower with respect to Export Orders financed under this Agreement, together with a schedule of the amount so collected and delivered to the Bank. Such payments shall be delivered through a lockbox, blocked account, or similar arrangement acceptable to the Bank and shall be credited to interest, principal, and other sums owed to the Bank under this Agreement in the order and proportion determined by the Bank in its sole discretion. All such credits will be conditioned upon collection and any returned items may, at the Bank's option, be charged to the Borrower. 7. CONDITIONS 7.1 Conditions to First Extension of Credit. The Bank must receive the following items, in form and content acceptable to the Bank, before it is required to extend any credit to the Borrower under this Agreement: (a) Evidence that the execution, delivery and performance by the Borrower and each guarantor of this Agreement and any instrument or agreement required under this Agreement have been duly authorized. (b) A copy of the certified resolutions of the Board of Directors of the Borrower authorizing the Borrower to borrow under this Agreement and to execute, deliver and perform its obligations hereunder and under all other loan documents. (c) The Borrower Agreement, signed by the Borrower. (d) The Eximbank Guaranty. (e) A completed application in a form acceptable to the Bank and Eximbank. (f) Signed original security agreements which the Bank requires. 8 (g) Financing statements and fixture filings (and any collateral in which the Bank requires a possessory security interest), together with evidence that the security interests and liens in favor of the Bank are valid, enforceable, and prior to all others' rights and interests, except those the Bank consents to in writing. (h) For any personal property collateral located on real property which is subject to a mortgage or deed of trust or which is not owned by the Borrower, a subordination or consent to removal from the owner of the real property and the holder of any mortgage or deed of trust. (i) Evidence of insurance coverage, as required in the "Covenants" section of this Agreement. (j) Guaranty signed by Jerry West and a guaranty signed by the president of Infolab on its behalf. (k) Evidence of good standing for the Borrower from its state of formation and from any other state in which the Borrower is required to qualify to conduct its business. (1) Payment of the Eximbank guaranty fee, the Eximbank application fee, as required by the paragraphs entitled "Fees" and "Expenses", and payment of all accrued and unpaid expenses incurred by the .Bank as required by the paragraph entitled "Reimbursement Costs." (m) Intercreditor Agreement signed by Texas Community Bank and Trust, N.A. and The Texas Mezzanine Fund reflecting an agreement on priority of security interests with the Bank having a first and prior security interest in export-related accounts and inventory and at least a third priority security interest in all other assets of the Borrower taken as collateral for the line of credit. (n) Letter from Exim Bank waiving failure of Borrower to comply with certain financial tests. (o) Any other items required by Eximbank in connection with the Eximbank Guaranty or which the Bank may reasonably require. 7.2 Conditions to Each Extension of Credit. Before each extension of credit, including the first, the Borrower shall deliver the following to the Bank: (a) A summary of the Export Orders being financed with the extension of credit, and, if requested by the Bank, copies of such Export Orders. (b) If requested by the Bank, a Borrowing Base Certificate which shall be current within five (5) banking days of the date of the request. 9 8. REPRESENTATIONS AND WARRANTIES When the Borrower signs this Agreement, and until the Bank is repaid in full, the Borrower makes the following representations and warranties. Each request for an extension of credit constitutes a renewal of these representations and warranties as of the date of the request: 8.1 Organization of Borrower. The Borrower is a corporation duly formed and existing under the laws of the state where organized. 8.2 Authorization. This Agreement, and any instrument or agreement required hereunder, are within the Borrower's powers, have been duly authorized, and do not conflict with any of its organizational papers. 8.3 Enforceable Agreement. This Agreement is a legal, valid and binding agreement of the Borrower, enforceable against the Borrower in accordance with its terms, and any instrument or agreement required hereunder, when executed and delivered, will be similarly legal, valid, binding and enforceable. 8.4 Good Standing. In each state in which the Borrower does business, it is properly licensed, in good standing, and, where required, in compliance with fictitious name statutes. 8.5 No Conflicts. This Agreement does not conflict with any law, agreement, or obligation by which the Borrower is bound. 8.6 Financial Information. All financial and other information that has been or will be supplied to the Bank is sufficiently complete to give the Bank accurate knowledge of the Borrower's (and any guarantor's) financial condition, including all material contingent liabilities. Since the date of the most recent financial statement provided to the Bank, there has been no material adverse change in the business condition (financial or otherwise), operations, properties or prospects of the Borrower (or any guarantor). 8.7 Lawsuits. There is no lawsuit, tax claim or other dispute pending or threatened against the Borrower which, if lost, would impair the Borrower's financial condition or ability to repay the loan, except as have been disclosed in writing to the Bank. 8.8 Collateral. All Collateral required in this Agreement is owned by the grantor of the security interest free of any title defects or any liens or interests of others. 8.9 Permits, Franchises. The Borrower possesses all permits, memberships, franchises, contracts and licenses required and all trademark rights, trade name rights, patent rights and fictitious name rights necessary to enable it to conduct the business in which it is now engaged. 10 8.10 Other Obligations. The Borrower is not in default on any obligation for borrowed money, any purchase money obligation or any other material lease, commitment, contract, instrument or obligation. 8.11 Income Tax Matters. The Borrower has no knowledge of any pending assessments or adjustments of its income tax for any year. 8.12 No tax Avoidance Plan. The Borrower's obtaining of credit from the Bank under this Agreement does not have as a principal purpose the avoidance of U.S. withholding taxes. 8.13 No Event of Default. There is no event which is, or with notice or lapse of time or both would be, a default under this Agreement. 8.14 Insurance. The Borrower has obtained, and maintained in effect, the insurance coverage required in the "Covenants" section of this Agreement. 8.15 ERISA Plans. (a) Each Plan (other than a multiemployer plan) is in compliance in all material respects with the applicable provisions of ERISA, the Code and other federal or state law. Each Plan has received a favorable determination letter from the IRS and to the best knowledge of the Borrower, nothing has occurred which would cause the loss of such qualification. The Borrower has fulfilled its obligations, if any, under the minimum funding standards of ERISA and the Code with respect to each Plan, and has not incurred any liability with respect to any Plan under Title IV of ERISA. (b) There are no claims, lawsuits or actions (including by any governmental authority), and there has been no prohibited transaction or violation of the fiduciary responsibility rules, with respect to any Plan which has resulted or could reasonably be expected to result in a material adverse effect. (c) With respect to any Plan subject to Title IV of ERISA: (i) No reportable event has occurred under Section 4043(c) of ERISA for which the PBGC requires 30-day notice. (ii) No action by the Borrower or any ERISA Affiliate to terminate or withdraw from any Plan has been taken and no notice of intent to terminate a Plan has been filed under Section 4041 of ERISA. (iii) No termination proceeding has been commenced with respect to a Plan under Section 4042 of ERISA, and no event has occurred or condition exists which might constitute grounds for the commencement of such a proceeding. 11 (d) The following terms have the meanings indicated for purposes of this Agreement: (i) "Code" means the Internal Revenue Code of 1986, as amended from time to time. (ii) "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time. (iii) "ERISA Affiliate" means any trade or business (whether or not incorporated) under common control with the Borrower within the meaning of Section 414(b) or (c) of the Code. (iv) "PBGC" means the Pension Benefit Guaranty Corporation. (v) "Plan" means a pension, profit-sharing, or stock bonus plan intended to qualify under Section 401 (a) of the Code, maintained or contributed to by the Borrower or any ERISA Affiliate, including any multiemployer plan within the meaning of Section 4001 (a)(3) of ERISA. 8.16 [INTENTIONALLY OMITTED] 8.17 Location of Borrower. The Borrower's place of business (or, if the Borrower has more than one place of business, its chief executive office) is located at the address listed on the signature page of this Agreement. 8.18 Environmental Matters. The Borrower (a) is not in violation of any health, safety, or environmental law or regulation regarding hazardous substances and (b) is not the subject of any claim, proceeding, notice, or other communication regarding hazardous substances. "Hazardous substances" means any substance, material or waste that is or becomes designated or regulated as "toxic," "hazardous," "pollutant," or "contaminant" or a similar designation or regulation under any federal, state or local law (whether under common law, statute, regulation or otherwise) or judicial or administrative interpretation of such, including without limitation petroleum or natural gas. 8.19 Compliance with Laws. No consent or approval of any public authority or other third party is required as a condition to the validity of any Loan Document, and Borrower is in compliance with all laws and regulatory requirements to which it is subject. 8.20 Trading With the Enemy. Neither the execution of this Agreement nor the use of proceeds thereof violates the Trading With the Enemy Act of 1917, as amended, nor any of the foreign assets control regulations promulgated thereunder or under the International Emergency Economic Powers Act or the U.N, Participation Act of 1945. 12 9. COVENANTS The Borrower agrees, so long as credit is available under this Agreement and until the Bank is repaid in full: 9.1 Use of Proceeds. To use the proceeds of the line of credit only for the purposes permitted under Section 2.1 of the Borrower Agreement and not in violation of the Acts referred to in Section 8.20 above. 9.2 Compliance with Borrower Agreement. To comply with each of the terms, covenants and provisions of the Borrower Agreement. In the event of any conflict between any provision of this Agreement and a comparable provision in the Borrower Agreement, the Borrower shall comply with whichever provision is more restrictive or imposes a greater burden or obligation on the Borrower. 9.3 Financial Information. To provide the following financial information and statements in form and content acceptable to the Bank, and such additional information as requested by the Bank from time to time: (a) Within 120 days of the Borrower's fiscal year end, the Borrower's annual consolidated and consolidating financial statements, certified and dated by an authorized financial officer of the Borrower. These financial statements must be compiled by a Certified Public Accountant acceptable to the Bank and shall include income statement, balance sheet and cash flow statement. (b) Within 45 days of the end of each fiscal quarter the Borrower's quarterly consolidated and consolidating financial statements, certified and dated by an authorized financial officer of the Borrower. These financial statements may be Borrower prepared and shall include income statement, balance sheet and cash flow statement. (c) Promptly, upon sending or receipt, copies of any management letters and correspondence relating to management letters, sent or received by the Borrower to or from the Borrower's auditor. (d) Copies of the Borrower's federal income tax return (together with proof of payment of any tax due), within 30 days of filing, and, if requested by the Bank, copies of any extensions of the filing date. (e) Annual financial statements of Jerry West in form satisfactory to the Bank within 120 days of each calendar year end and such guarantor's federal income tax return within 30 days after the filing of such return. (f) With the submission of each of the financial statements required in 9.3(a) and (b) above, a compliance certificate of the Borrower signed by an authorized financial officer of the Borrower setting forth (i) the information and computations (in 13 sufficient detail) to establish that the Borrower is in compliance with all financial covenants at the end of the period covered by the financial statements then being furnished and (ii) whether there existed as of the date of such financial statements and whether there exists as of the date of the certificate, any default under Article 11 of this Agreement and, if any such default exists, specifying the nature thereof and the action the Borrower is taking and proposes to take with respect thereto. (g) Promptly upon receipt, copies of all notices, orders, or other communications regarding (i) any enforcement action by any governmental authority relating to health, safety, the environment, or any hazardous substances with regard to the Borrower's property, activities, or operations, or (ii) any claim against the Borrower regarding hazardous substances. (h) A Borrowing Base Certificate in the form of Exhibit 9.3(h) attached hereto setting forth the Borrowing Base as of the last day of each month, within 20 days after the end of each month, and, if requested by the Bank, copies of the Export Orders relating to Accounts Receivable and Inventory, to the extent included in the Borrowing Base. (i) An Accounts Receivable aging report detailing the terms of the amounts due from each Buyer as of the last day of each month, within 20 days after the end of each month. (j) A statement showing an aging of accounts payable, within 20 days after the end of each month. (k) An Inventory schedule within 20 days after the end of each month; the schedule must include a description of the Inventory, its location and cost, and such other information as the Bank may require. (l) A listing of the names and addresses of all Buyers obligated upon the Borrower's Accounts Receivable within 20 days after the end of each quarter. (m) Within 120 days of Infolab, Inc.'s fiscal year end, Infolab, Inc.'s annual consolidated and consolidating financial statements, certified and dated by an authorized financial officer of Infolab, Inc. These financial statements must be audited by a Certified Public Accountant acceptable to the Bank and shall include income statement, balance sheet and cash flow statement. (n) Within 45 days of the end of each fiscal semi-annual period, Infolab, Inc.'s semi-annual consolidated and consolidating financial statements, certified and dated by an authorized financial officer of Infolab, Inc.. These financial statements may be Borrower prepared and shall include income statement, balance sheet and cash flow statement. 14 (o) With the submission of each of the financial statements required in 9.3(m) and (n) above, a compliance certificate of Infolab, Inc. signed by an authorized financial officer of Infolab, Inc. setting forth (i) the information and computations (in sufficient detail) to establish that Infolab, Inc. is in compliance with all financial covenants at the end of the period covered by the financial statements then being furnished and (ii) whether there existed as of the date of such financial statements and whether there exists as of the date of the certificate, any default under this Agreement and, if any such default exists, specifying the nature thereof and the action Infolab, Inc. is taking and proposes to take with respect thereto. (p) Promptly upon the Bank's request, such other books, records, statements, lists of property and accounts, budgets, forecasts or reports as to the Borrower and as to each guarantor of the Borrower's obligations to the Bank as the Bank may request. 9.4 Other Debts. Not to have outstanding or incur any direct or contingent liabilities or lease obligations (other than those to the Bank), or become liable for the liabilities of others, without the Bank's written consent. This does not prohibit: (a) Acquiring goods, supplies, or merchandise on normal trade credit. (b) Endorsing negotiable instruments received in the usual course of business. (c) Obtaining surety bonds in the usual course of business. (d) Liabilities, lines of credit and leases in existence on the date of this Agreement described in Exhibit 9.4 attached hereto, or any renewal thereof, together with any replacement facility necessary to comply with Section 11.18 hereof. (e) Additional debts and lease obligations for the acquisition of fixed assets, in an aggregate amount not exceeding $25,000. 9.5 Other Liens. Not to create, assume, or allow any security interest or lien (including judicial liens) on property the Borrower now or later owns, except: (a) Liens and security interests in favor of the Bank. (b) Liens for taxes not yet due. (c) Liens outstanding on the date of this Agreement described in Exhibit 9.5 attached hereto. 9.6 Dividends. Not to declare or pay any dividends on any of its shares or otherwise make distributions, except an amount sufficient to cover shareholders' federal and 15 state income tax liability for the immediately preceding year arising as a direct result of the Borrower's reported income for such year. 9.7 Loans to Officers or Affiliates. Not to make any loans, advances or other extensions of credit (including extensions of credit in the nature of accounts receivable or notes receivable arising from the sale or lease of goods or services) to any of the Borrower's executives, officers, directors or shareholders (or any relatives of any of the foregoing), or to any affiliated entities (other than Infolab, Inc. 9.8 Loans and Investments. Not to have any existing, or make any new, loans or other extensions of credit to, or investments in, any individual or entity, or make any capital contributions or other transfers of assets to any individual or entity, except for: (a) additional capital investments in the Borrower's current subsidiaries. (b) extensions of credit in the nature of accounts receivable or notes receivable arising from the sale or lease of goods or services in the ordinary course of business to non-affiliated entities. (c) investments in U.S. treasury bills and other obligations of the federal government. 9.9 Change of Ownership. Not to cause, permit, or suffer any change, direct or indirect, in the Borrower's capital ownership. 9.10 Change of Management. Not to make any substantial change in its present executive or management personnel. 9.11 Notices to Bank. To promptly notify the Bank in writing of: (a) any lawsuit against the Borrower (or any guarantor). (b) any substantial dispute between the Borrower (or any guarantor) and any government authority. (c) any event of default under this Agreement, or any event which, with notice or lapse of time or both, would constitute an event of default. (d) any material adverse change in the Borrower's (or any guarantor's) business condition (financial or otherwise), operations, properties or prospects, or ability to repay the credit. (e) any change in the Borrower's name, legal structure, place of business or chief executive office. 16 (f) any actual or contingent liabilities of the Borrower (or any guarantor) in an amount greater than $25,000 not previously disclosed to the Bank in writing, and any contingent liabilities that are reasonably foreseeable. (g) Reserved. (h) the receipt of any notice or communication regarding (i) any threatened or pending investigation or enforcement action by any governmental authority or any other claim relating to health, safety, the environment, or any hazardous substances with regard to the Borrower's property, activities, or operations or (ii) any belief or suspicion of the Borrower that hazardous substances exist on or under the Borrower's real property. (i) any event of default under any agreement of the Borrower (or any guarantor) in connection with credit facility with any lender, or any event which, with notice or lapse of time or both, would constitute an event of default under any such facility. 9.12 Books and Records. To maintain adequate books and records. 9.13 Audits. To allow the Bank and its agents to inspect the Borrower's properties and examine, audit, and make copies of books and records at any reasonable time. If any of the Borrower's properties, books or records are in the possession of a third party, the Borrower authorizes that third party to permit the Bank or its agents to have access to perform inspections or audits and to respond to the Bank's requests for information concerning such properties, books and records. Semi-annual field audits by the Bank's Asset-Based Lending Division (and any audit after an Event of Default has occurred) shall be at the Borrower's expense. 9.14 Compliance with Laws. To comply with the laws (including any fictitious name statute), regulations, and orders of any government body with authority over the Borrower's business. 9.15 Preservation of Rights. To maintain and preserve all rights, privileges, and franchises the Borrower now has. 9.16 Maintenance of Properties. To make any repairs, renewals, or replacements to keep the Borrower's properties in good working condition. 9.17 Perfection of Liens. To help the Bank perfect and protect its security interests and liens, and reimburse it for related costs it incurs to protect its security interests and liens. 9.18 Cooperation. To take any action reasonably requested by the Bank to carry out the intent of this Agreement. 17 9.19 Insurance. (a) Insurance Covering Collateral. To maintain all risk property damage insurance policies covering the tangible property comprising the collateral. Each insurance policy must be in an amount acceptable to the Bank. The insurance must be issued by an insurance company acceptable to the Bank and must include a lender's loss payable endorsement in favor of the Bank in a form acceptable to the Bank. (b) General Business Insurance. To maintain insurance satisfactory to the Bank as to amount, nature and carrier covering property damage (including loss of use and occupancy) to any of the Borrower's properties, public liability insurance including coverage for contractual liability, product liability and workers' compensation, business interruption insurance and any other insurance which is usual for the Borrower's business. (c) Evidence of Insurance. Upon the request of the Bank, to deliver to the Bank a copy of each insurance policy, or, if permitted by the Bank, a certificate of insurance listing all insurance in force. (d) Export Credit Insurance. In the event the Borrower obtains any credit insurance with respect to Eligible Accounts Receivable, either such insurance shall be assigned to the Bank or the Bank shall be loss payee. 9.20 Additional Negative Covenants. Not to, without the Bank's written consent: (a) engage in any business activities substantially different from the Borrower's present business. (b) liquidate or dissolve the Borrower's business. (c) consumate any consolidation, merger, or other combination, or become a partner in a partnership, a member of a joint venture, or a member of a limited liability company. (d) sell, assign, lease, transfer or otherwise dispose of any assets for less than fair market value, or enter into any agreement to do so. (e) sell, assign, lease, transfer or otherwise dispose of any part of the Borrower's business or the Borrower's assets except in the ordinary course of the Borrower's business. (f) enter into any sale and leaseback agreement covering any of its fixed assets. (g) acquire or purchase a business or its assets. 18 (h) voluntarily suspend its business other than weekends, holidays and vacation periods not to exceed three consecutive weeks. 9.21 No Consumer Purpose. Not to use this loan for personal, family, or household purposes. The Bank may provide the Borrower (or any guarantor) with certain disclosures intended for loans made for personal, family, or household purposes. The fact that the Bank elects to make such disclosures shall not be deemed a determination by the Bank that the loan will be used for such purposes. 9.22 Bank as Principal Depository. To maintain the Bank as its principal depository bank, including for the maintenance of business, cash management, operating and administrative deposit accounts. 9.23 ERISA Plans. Promptly during each year, to pay and cause any subsidiaries to pay contributions adequate to meet at least the minimum funding standards under ERISA with respect to each and every Plan; file each annual report required to be filed pursuant to ERISA in connection with each Plan for each year; and notify the Bank within ten (10) days of the occurrence of any Reportable Event that might constitute grounds for termination of any capital Plan by the Pension Benefit Guaranty Corporation or for the appointment by the appropriate United States District Court of a trustee to administer any Plan. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time. Capitalized terms in this paragraph" shall have the meanings defined within ERISA. 9.24 Reserved. 9.25 Compliance with Environmental Requirements. With regard to the Borrower's property, activities, or operations, to comply with the recommendations of any qualified environmental engineer or orders or directions issued by any governmental authority relating to health, safety, the environment, or any hazardous substances including those orders or directives requiring the investigation, clean-up, or removal of hazardous substances. 9.26 Accounting Policies. To maintain accounting policies that comply with generally accepted accounting principles, to be applied consistently throughout the term of this Agreement. 9.27 Minimum Tangible Net Worth. To maintain, on a consolidated basis, tangible net worth equal to at least $1,150,000. 'Tangible Net Worth" means the gross book value of the Borrower's assets (excluding goodwill, patents, trademarks, trade names, organization expenses, unamortized debt discount and expense, capitalized or deferred research and development costs, deferred marketing expenses, deferred receivables, and other like intangibles, and monies due from officers, directors or employees. 10. [INTENTIONALLY OMITTED] 11. DEFAULT 19 If any of the following events occurs, the Bank may do one or more of the following: declare the Borrower in default, stop making any additional credit available to the Borrower, and require the Borrower to repay its entire debt immediately and without prior notice. If an event of default occurs under the paragraph entitled "Bankruptcy," below, with respect to the Borrower or any guarantor, then the entire debt outstanding under this Agreement will automatically be due immediately. 11.1 Failure to Pay. The Borrower fails to make a payment under this Agreement when due. 11.2 Lien Priority. The Bank fails to have an enforceable first lien (except for any prior liens to which the Bank has consented in writing) on or security interest in any property given as security for this Agreement (or any guaranty). 11.3 False Information. The Borrower (or any guarantor) has given the Bank false or misleading information or representations. 11.4 Death or Incompetency. Any guarantor dies or becomes legally incompetent. 11.5 Bankruptcy. The Borrower (or any guarantor) files a bankruptcy petition, a bankruptcy petition is filed against the Borrower (or any guarantor) or the Borrower (or any guarantor) makes a general assignment for the benefit of creditors. 11.6 Receivers. A receiver or similar official is appointed for a substantial portion of the Borrower's (or any guarantor's) business, or the business is terminated, or any guarantor is liquidated or dissolved. 11.7 Lawsuits. Any lawsuit or lawsuits are filed against the Borrower (or any guarantor); except for lawsuits in an aggregate amount within applicable insurance coverage, provided that the insurer has issued a letter of responsibility for payment up to the amount of insurance coverage. 11.8 Judgments. Any judgments or arbitration awards are entered against the Borrower (or any guarantor), or the Borrower (or any guarantor) enters into any settlement agreements with respect to any litigation or arbitration, in an aggregate amount in excess of any insurance coverage and for which the insurer has issued a letter of responsibility for payment up to the amount of insurance coverage. 11.9 Government Action. Any government authority takes action that the Bank believes materially adversely affects the Borrower's (or any guarantor's) financial condition or ability to repay. 11.10 Material Adverse Change. A material adverse change occurs, or is reasonably likely to occur, in the Borrower's (or any guarantor's) business condition (financial or otherwise), operations, properties or prospects, or ability to repay the credit. 20 11.11 Cross-default. Any default occurs under any agreement in connection with any credit the Borrower (or any guarantor) or any of the Borrower's related entities or affiliates has obtained from anyone else or which the Borrower (or any guarantor) or any of the Borrower's related entities or affiliates has guaranteed if the default (a) consists of failing to make a payment when due or breaching a financial covenant or (b) gives the other lender the right to accelerate the obligation. 11.12 Default under Related Documents. Any default occurs under any guaranty, subordination agreement, security agreement, deed of trust, mortgage, or other document required by or delivered in connection with this Agreement or any such document is no longer in effect. 11.13 Other Bank Agreements. The Borrower (or any guarantor) or any of the Borrower's related entities or affiliates fails to meet the conditions of, or fails to perform any obligation under any other agreement the Borrower (or any guarantor) or any of the Borrower's related entities or affiliates has with the Bank or any affiliate of the Bank. 11.14 ERISA Plans. Any one or more of the following events occurs with respect to a Plan of the Borrower subject to Title IV of ERISA, provided such event or events could reasonably be expected, in the judgment of the Bank, to subject the Borrower to any tax, penalty or liability (or any combination of the foregoing) which, in the aggregate, could have a material adverse effect on the financial condition of the Borrower: (a) A reportable event shall occur under Section 4043(c) of ERISA with respect to a Plan. (b) Any Plan termination (or commencement of proceedings to terminate a Plan) or the full or partial withdrawal from a Plan by the Borrower or any ERISA Affiliate. 11.15 [INTENTIONALLY OMITTED] 11.16 Breach Under Borrower Agreement. The Borrower breaches or defaults under any term, condition or provision of the Borrower Agreement. 11.17 Other Breach Under Agreement. The Borrower fails to meet the conditions of, or fails to perform any obligation under, any term of this Agreement not specifically referred to in this Article. This includes any failure or anticipated failure by the Borrower to comply with any financial covenants set forth in this Agreement, whether such failure is evidenced by financial statements delivered to the Bank or is otherwise known to the Borrower or the Bank. 11.18 Domestic Revolving Credit Facility. The Borrower fails to maintain a revolving credit facility in an amount of at least $750,000 with a financial institution for the financing of accounts and inventory that are not related to export from the United States. 21 12. ENFORCING THIS AGREEMENT; MISCELLANEOUS 12.1 GAAP. Except as otherwise stated in this Agreement, all financial information provided to the Bank and all financial covenants will be made under generally accepted accounting principles, consistently applied. 12.2 Governing Law. This Agreement is governed by Texas law. 12.3 Successors and Assigns. This Agreement is binding on the Borrower's and the Bank's successors and assignees. The Borrower agrees that it may not assign this Agreement without the Bank's prior consent. The Bank may sell participations in or assign this loan, and may exchange financial information about the Borrower with actual or potential participants or assignees. If a participation is sold or the loan is assigned, the purchaser will have the right of set-off against the Borrower. 12.4 Severability; Waivers. If any part of this Agreement is not enforceable, the rest of the Agreement may be enforced. The Bank retains all rights, even if it makes a loan after default. If the Bank waives a default, it may enforce a later default. Any consent or waiver under this Agreement must be in writing. 12.5 Administration Costs. The Borrower shall pay the Bank for all reasonable costs incurred by the Bank in connection with administering this Agreement. 12.6 Attorneys' Fees. The Borrower shall reimburse the Bank for any reasonable costs and attorneys' fees incurred by the Bank in connection with the enforcement or preservation of any rights or remedies under this Agreement and any other documents executed in connection with this Agreement, and in connection with any amendment, waiver, "workout" or restructuring under this Agreement. In the event of a lawsuit or arbitration proceeding, the prevailing party is entitled to recover costs and reasonable attorneys' fees incurred in connection with the lawsuit or arbitration proceeding, as determined by the court or arbitrator. In the event that any case is commenced by or against the Borrower under the Bankruptcy Code (Title 11, United States Code) or any similar or successor statute, the Bank is entitled to recover costs and reasonable attorneys' fees incurred by the Bank related to the preservation, protection, or enforcement of any rights of the Bank in such a case. As used in this paragraph, "attorneys' fees" includes the allocated costs of the Bank's in-house counsel. 12.7 [INTENTIONALLY OMITTED] 12.8 [INTENTIONALLY OMITTED] 12.9 Final Agreement. This Agreement, the Borrower Agreement, and any related security or other agreements required by this Agreement, collectively: (a) represent the sum of the understandings and agreements between the Bank and the Borrower concerning this credit; 22 (b) replace any prior oral or written agreements between the Bank and the Borrower concerning this credit; and (c) are intended by the Bank and the Borrower as the final, complete and exclusive statement of the terms agreed to by them. In the event of any conflict between this Agreement and any other agreements required by this Agreement, this Agreement will prevail; provided, however, that in the event of any conflict between any provision of this Agreement and a comparable provision in the Borrower Agreement, whichever provision is more restrictive or imposes a greater obligation on the Borrower shall prevail. 12.10 Disposition of Schedules Delivered by Borrower. The Bank shall be under no obligation to return any schedules, invoices, statements, budgets, forecasts, reports or other papers delivered by the Borrower and may destroy or otherwise dispose of such items as the Bank, in its discretion, deems appropriate. 12.11 Verification of Accounts Receivable. The Bank may at any time, either orally or in writing, request confirmation from any Buyer of the current amount and status of the Account Receivable upon which such Buyer is obligated. 12.12 Indemnification. The Borrower will indemnify and hold the Bank harmless from any loss, liability, damages, judgments, and costs of any kind relating to or arising directly or indirectly out of (a) this Agreement or any document required hereunder, (b) any credit extended or committed by the Bank to the Borrower hereunder, and (c) any litigation or proceeding related to or arising out of this Agreement, any such document, or any such credit. This indemnity includes but is not limited to attorneys' fees (including the allocated cost of in-house counsel). This indemnity extends to the Bank, its parent, subsidiaries and all of their directors, officers, employees, agents, successors, attorneys, and assigns. This indemnity will survive repayment of the Borrower's obligations to the Bank. All sums due to the Bank hereunder shall be obligations of the Borrower, due and payable immediately without demand. 12.13 Release of Information to Eximbank. The Borrower authorizes the Bank to release to Eximbank such information and records as Eximbank may from time to time request concerning matters relating to this Agreement and any other loans or extensions of credit provided by the Bank to the Borrower. 12.14 Notices. All notices required under this Agreement shall be personally delivered or sent by first class mail, postage prepaid, or by overnight courier, to the addresses on the signature page of this Agreement, or sent by facsimile to the fax numbers listed on the signature page, or to such other addresses as the Bank and the Borrower may specify from time to time in writing. Notices sent by first class mail shall be deemed delivered on the earlier of actual receipt or on the fourth business day after deposit in the U.S. mail. 23 12.15 Headings. Article and paragraph headings are for reference only and shall not affect the interpretation or meaning of any provisions of this Agreement. 12.16 Counterparts. This Agreement may be executed in as many counterparts as necessary or convenient, and by the different parties on separate counterparts each of which, when so executed, shall be deemed an original but all such counterparts shall constitute but one and the same agreement. 12.17 Commitment Expiration. The Bank's commitment to extend credit under this Agreement will expire on June 30, 2000, unless this Agreement and any documents required by this Agreement have been signed and returned to the Bank on or before that date. This Agreement is executed as of the date stated at the top of the first page. BANK OF AMERICA, N.A. MWI,INC., d/b/a Danam Electronics By: /s/ Richard H. Vitale By /s/ Jerry West --------------------------------- ---------------------------------- Richard H. Vitale Jerry West Assistant Vice President President Address where notices to Address where notices to the the Bank are to be sent: Borrower are to be sent: Commercial Banking Group 4230 Shilling Way 901 Main Street, 7th Floor Dallas, Texas 75237 TX1-492-07-01 Dallas, Texas 75202 24 EXHIBIT 9.3(h) FORM OF BORROWING BASE CERTIFICATE Exhibit 9.3(h) EXHIBIT 9.4 EXISTING INDEBTEDNESS $750,000 Line of Credit from Texas Community Bank & Trust, N.A. $500,000 Loan from The Texas Mezzanine Fund Exhibit 9.4 EXHIBIT 9.5 EXISTING LIENS Liens more particularly described in the UCC-1 financing statements attached hereto in favor of (a) Texas Community Bank and Trust, N.A. and (b) The Texas Mezzanine Fund. Exhibit 9.5 EX-10.44 12 w68886exv10w44.txt GUARANTY JUNE 1, 2000 BORROWER MWI. Exhibit 10.44 BORROWER: MWI,INC., d/b/a DANAM ELECTRONICS GUARANTOR: JERRY WEST GUARANTY (EXIM BANK-GUARANTEED LINE OF CREDIT) To: BANK OF AMERICA, N.A. 1. The Guaranty. For valuable consideration, the undersigned ("Guarantor") hereby unconditionally guarantees and promises to pay promptly to Bank of America, N.A., or order, in lawful money of the United States, any and all Indebtedness of MWI; Inc., d/b/a Danam Electronics ("Borrower") to Bank when due, whether at stated maturity, upon acceleration or otherwise, and at all times thereafter, subject to such limitations on Guarantor's liability as are set forth below. This Guaranty is cumulative and does not supersede any other outstanding guaranties, and the liability of Guarantor under this Guaranty is exclusive of Guarantor's liability under any other guaranties signed by Guarantor. If more than one individual or entity sign this Guaranty, their obligations under this Guaranty shall be joint and several. The liability of Guarantor under this Guaranty shall be limited to the Indebtedness under the Loan Documents, and shall not exceed at any one time the sum of (a) the principal amount of the Indebtedness under such Loan Documents plus (b) all interest, fees, indemnities (including, without limitation, hazardous waste indemnities), and other costs and expenses relating to or arising out of the Indebtedness under such Loan Documents. 2. Definitions. (a) "Borrower" shall mean the individual or the entity named in Paragraph 1 of this Guaranty and, if more than one, then any one or more of them. (b) "Guarantor" shall mean the individual or the entity signing this Guaranty and, if more than one, then any one or more of them. (c) "Indebtedness" shall mean any and all debts, liabilities, and obligations of Borrower to Bank, now or hereafter existing, whether voluntary or involuntary and however arising, whether direct or indirect or acquired by Bank by assignment, succession, or otherwise, whether due or not due, absolute or contingent, liquidated or unliquidated, determined or undetermined, held or to be held by Bank for its own account or as agent for another or others, whether Borrower may be liable individually or jointly with others, whether recovery upon such debts, liabilities, and obligations may be or hereafter become barred by any statute of limitations, and whether such debts, liabilities, and obligations may be or hereafter become otherwise unenforceable. (d) "Loan Documents" shall mean that certain Loan Agreement (Exim Bank-Guaranteed Line of Credit) dated June 1, 2000, between Borrower and Bank (the "Loan Agreement") and any promissory notes from Borrower in favor of Bank evidencing or relating to any of the Indebtedness, and deeds of trust, mortgages, security agreements, and other agreements, documents, and instruments executed by Borrower in connection with the Loan Agreement, as such Loan Agreement, promissory notes, and other agreements, documents, and instruments are now in effect and as hereafter amended, restated, renewed or superseded. 3. Obligations Independent. The obligations hereunder are independent of the obligations of Borrower or any other guarantor, and a separate action or actions may be brought and prosecuted against Guarantor whether action is brought against Borrower or any other guarantor or whether Borrower or any other guarantor be joined in any such action or actions. Anyone executing this Guaranty shall be bound by its terms without regard to execution by anyone else. 4. Rights of Bank. Guarantor authorizes Bank, without notice or demand and without affecting its liability hereunder, from time to time to: (a) renew, compromise, extend, accelerate, or otherwise change the time for payment, or otherwise change the terms, of the Indebtedness or any part thereof, including increase or decrease of the rate of interest thereon, or otherwise change the terms of any Loan Documents; (b) receive and hold security for the payment of this Guaranty or any Indebtedness and exchange, enforce, waive, release, fail to perfect, sell, or otherwise dispose of any such security; (c) apply such security and direct the order or manner of sale thereof as Bank in its discretion may determine; (d) permit the Indebtedness to exceed Guarantor's liability under this Guaranty, and apply any amounts received from any source, other than from Guarantor, to any unguaranteed portion of the Indebtedness; and (e) release or substitute any Guarantor or any one or more of any endorsers or other guarantors of any of the Indebtedness. 5. Guaranty to be Absolute. Guarantor agrees that until the Indebtedness has been paid in full and any commitments of Bank or facilities provided by Bank with respect to the Indebtedness have been terminated, Guarantor shall not be released by or because of the taking, or failure to take, any action that might in any manner or to any extent vary the risks of Guarantor under this Guaranty or that, but for this paragraph, might discharge or otherwise reduce, limit, or modify Guarantor's obligations under this Guaranty. Guarantor waives and surrenders any defense to any liability under this Guaranty based upon any such action, including but not limited to any action of Bank described in the immediately 2 preceding paragraph of this Guaranty. It is the express intent of Guarantor that Guarantor's obligations under this Guaranty are and shall be absolute and unconditional. 6. Guarantor's Waivers of Certain Rights and Certain Defenses. Guarantor waives: (a) any right to require Bank to proceed against Borrower, proceed against or exhaust any security for the Indebtedness, or pursue any other remedy in Bank's power whatsoever; (b) any defense arising by reason of any disability or other defense of Borrower, or the cessation from any cause whatsoever of the liability of Borrower; (c) any defense based on any claim that Guarantor's obligations exceed or are more burdensome than those of Borrower; and (d) the benefit of any statute of limitations affecting Guarantor's liability hereunder. No provision or waiver in this Guaranty shall be construed as limiting the generality of any other waiver contained in this Guaranty. 7. Waiver of Subrogation. Until the Indebtedness has been paid in full and any commitments of Bank or facilities provided by Bank with respect to the Indebtedness have been terminated, even though the Indebtedness may be in excess of Guarantor's liability hereunder, Guarantor waives any right of subrogation, reimbursement, indemnification, and contribution (contractual, statutory, or otherwise) including, without limitation, any claim or right of subrogation under the Bankruptcy Code (Title 11, United States Code) or any successor statute, arising from the existence or performance of this Guaranty, and Guarantor waives any right to enforce any remedy which Bank now has or may hereafter have against Borrower, and waives any benefit of, and any right to participate in, any security now or hereafter held by Bank. 8. Waiver of Notices. Guarantor waives all presentments, demands for performance, notices of nonperformance, protests, notices of protest, notices of dishonor, notices of intent to accelerate, notices of acceleration, notices of any suit or any other action against Borrower or any other person, any other notices to any party liable on any Loan Document (including Guarantor), notices of acceptance of this Guaranty, and notices of the existence, creation, or incurring of new or additional Indebtedness to which this Guaranty applies or any other Indebtedness of Borrower to Bank. 9. [INTENTIONALLY OMITTED] 10. Security. To secure all of Guarantor's obligations hereunder, Guarantor assigns and grants to Bank a security interest in all moneys, securities, and other property of Guarantor now or hereafter in the possession of Bank, all deposit accounts of Guarantor 3 maintained with Bank, and all proceeds thereof. Upon default or breach of any of Guarantor's obligations to Bank, Bank may apply any deposit account to reduce the Indebtedness, and may foreclose any collateral as provided in the Uniform Commercial Code and in any security agreements between Bank and Guarantor. 11. Subordination. Any obligations of Borrower to Guarantor, now or hereafter existing, including but not limited to any obligations to Guarantor as subrogee of Bank or resulting from Guarantor's performance under this Guaranty, are hereby subordinated to the Indebtedness. Such obligations of Borrower to Guarantor if Bank so requests shall be enforced and performance received by Guarantor as trustee for Bank, and the proceeds, thereof shall be paid over to Bank on account of the Indebtedness, but without reducing or affecting in any manner the liability of Guarantor under the other provisions of this Guaranty. Any security interest, lien, or other encumbrance that Guarantor may now or hereafter have on any property of Borrower is hereby subordinated to any security interest, lien, or other encumbrance that Bank may have on any such property. 12. Revocation of Guaranty. (a) This Guaranty may be revoked at any time by Guarantor in respect to future transactions, unless there is a continuing consideration as to such transactions which Guarantor does not renounce. Such revocation shall be effective upon actual receipt by Bank, at the address shown below or at such other address as may have been provided to Guarantor by Bank, of written notice of revocation. Revocation shall not affect any of Guarantor's obligations or Bank's rights with respect to transactions which precede Bank's receipt of such notice, regardless of whether or not the Indebtedness related to such transactions, before or after revocation, has been renewed, compromised, extended, accelerated, or otherwise changed as to any of its terms, including time for payment or increase or decrease of the rate of interest thereon, and regardless of any other act or omission of Bank authorized hereunder. Revocation by Guarantor shall not affect any obligations of any other guarantor. (b) In the event of the death of a Guarantor, the liability of the estate of the deceased Guarantor shall continue in full force and effect as to (i) the Indebtedness existing at the date of death, and any renewals or extensions thereof, and (ii) loans or advances made to or for the account of Borrower after the date of the death of the deceased Guarantor pursuant to a commitment made by Bank to Borrower prior to the date of such death. As to all surviving Guarantors, this Guaranty shall continue in full force and effect after the death of a Guarantor, not only as to the Indebtedness existing at that time, but also as to the Indebtedness thereafter incurred by Borrower to Bank. 13. Reinstatement of Guaranty. If this Guaranty is revoked, returned, or canceled, and subsequently any payment or transfer of any interest in property by Borrower to Bank is rescinded or must be returned by Bank to Borrower, this Guaranty 4 shall be reinstated with respect to any such payment or transfer, regardless of any such prior revocation, return, or cancellation. 14. Stay of Acceleration. In the event that acceleration of the time for payment of any of the Indebtedness is stayed upon the insolvency, bankruptcy, or reorganization of Borrower or otherwise, all such Indebtedness guaranteed by Guarantor shall nonetheless be payable by Guarantor immediately upon demand by Bank. 15. No Deductions. All payments by Guarantor hereunder shall be paid in full, without setoff or counterclaim or any deduction or withholding whatsoever, including, without limitation, for any and all present and future taxes. In the event that Guarantor or Bank is required by law to make any such deduction or withholding, Guarantor agrees to pay on behalf of Bank such amount directly to the appropriate person or entity, or if the Guarantor cannot legally comply with the foregoing, Guarantor shall pay to Bank such additional amounts as will result in the receipt by Bank of the full amount payable hereunder. Guarantor shall promptly provide Bank with evidence of payment of any such amount made on Bank's behalf. 16. Information Relating to Borrower. Guarantor acknowledges and agrees that it shall have the sole responsibility for, and has adequate means of, obtaining from Borrower such information concerning Borrower's financial condition or business operations as Guarantor may require, and that Bank has no duty, and Guarantor is not relying on Bank, at any time to disclose to Guarantor any information relating to the business operations or financial condition of Borrower. 17. Borrower's Authorization. Where Borrower is a corporation, partnership, or limited liability company, it is not necessary for Bank to inquire into the powers of Borrower or of the officers, directors, partners, members, managers, or agents acting or purporting to act on its behalf, and any Indebtedness made or created in reliance upon the professed exercise of such powers shall be guaranteed hereunder, subject to any limitations on Guarantor's liability set forth herein. 18. Information Relating to Guarantor. Guarantor authorizes Bank to verify or check any information given by Guarantor to Bank, check Guarantor's credit references, verify employment, and obtain credit reports. Guarantor acknowledges and agrees that the authorizations provided in this paragraph apply to any individual general partner of Guarantor and to Guarantor's spouse and any such general partner's spouse if Guarantor or such general partner is married and lives in a community property state. 19. Guarantor's Covenants. Until the Indebtedness guaranteed under this Guaranty has been paid in full and any commitments of Bank or facilities provided by Bank with respect to such Indebtedness have been terminated and each and every term, covenant, and condition of this Guaranty is fully performed, Guarantor agrees to comply with the financial reporting provisions applicable to Guarantor as set forth in Section 9.3 of the Loan Agreement. 5 20. Foreign Currency. (a) If any claim arising under or related to this Guaranty is reduced to judgment denominated in a currency (the "Judgment Currency") other than the currency or currencies in which the guaranteed Indebtedness is denominated (individually, an "Obligation Currency"), the judgment shall be for the equivalent in the Judgment Currency of the amount of the claim denominated in each Obligation Currency included in the judgment, determined as of the date of judgment. The equivalent of any Obligation Currency amount in any Judgment Currency shall be calculated at the spot rate for the purchase of the Obligation Currency with the Judgment Currency quoted by Bank in the place of Bank's choice at or about 8:00 a.m. on the date for determination specified above. Guarantor shall indemnify Bank and hold Bank harmless from and against all loss or damage resulting from any change in exchange rates between the date any claim is reduced to judgment and the date of payment thereof by Guarantor. (b) The obligations hereunder shall not be affected by any acts of any governmental authority affecting Borrower including, without limitation, any restrictions on the conversion of currency or repatriation or control of funds or any total or partial expropriation of Borrower's property, or by economic, political, regulatory, or other events in the countries where Borrower is located. (c) If (i) a maximum amount for which Guarantor is liable under this Guaranty with respect to the principal amount of the Indebtedness is expressed in U.S. Dollars in Paragraph 1 of this Guaranty and (ii) an increase occurs in the market value of any Obligation Currencies as compared to the U.S. Dollars before any payment by Guarantor of its obligations under this Guaranty, then such maximum amount for which Guarantor is liable shall be increased by an amount of U.S. Dollars sufficient to purchase on the day of such payment, whether before or after settlement or judgment, the amount of such Obligation Currencies owed to Bank. Such increased maximum amount shall be calculated using the exchange rate quotes described in sub paragraph (a) above. 21. Taxes. Guarantor represents and warrants that it is organized and resident in the United States of America. If Guarantor must make a payment under this Guaranty, Guarantor represents and warrants that it will make the payment from one of its U.S. resident offices to a U.S. office of Bank so that no withholding tax is imposed on the payment. If notwithstanding the foregoing, Guarantor makes a payment under this Guaranty to which withholding tax applies, then Guarantor shall pay any taxes (other than taxes on net income (a) imposed by the country or any subdivision of the country in which Bank's principal office or actual lending office is located and (b) measured by the United States taxable income Bank would have received if all payments under or in respect of this Guaranty were exempt from taxes levied by Guarantor's country) that are at any time imposed on any such payments under or in respect of this Guaranty including, but not limited to, payments made pursuant to this paragraph. Further, if such withholding tax is applicable, Guarantor shall also pay to Bank, on demand, all additional amounts that Bank 6 specifies as necessary to preserve the after-tax yield Bank would have received if such taxes had not been imposed. 22. Successors and Assigns. This Guaranty (a) binds Guarantor and Guarantor's executors, administrators, successors, and assigns, provided that Guarantor may not assign its rights or obligations under this Guaranty without the prior written consent of Bank, and (b) inures to the benefit of Bank and Bank's indorsees, successors, and assigns. Bank may, without notice to Guarantor and without affecting Guarantor's obligations hereunder, sell, assign, grant participations in, or otherwise transfer to any other person, firm, or corporation the Indebtedness and this Guaranty, in whole or in part. Guarantor agrees that Bank may disclose to any assignee or purchaser, or any prospective assignee or purchaser, of all or part of the Indebtedness any and all information in Bank's possession concerning Guarantor, this Guaranty, and any security for this Guaranty. 23. Costs and Expenses. Guarantor agrees to pay all reasonable attorneys' fees, including allocated costs of Bank's in-house counsel, and all other costs and expenses which may be incurred by Bank (a) in the enforcement of this Guaranty or (b) in the preservation, protection, or enforcement of any rights of Bank in any case commenced by or against Guarantor under the Bankruptcy Code (Title 11, United States Code) or any similar or successor statute. 24. Governing Law and Jurisdiction. This Guaranty shall be governed by and construed under the laws of the State of Texas. Guarantor irrevocably (a) submits to the non-exclusive jurisdiction of any United States Federal or State court sitting in the State of Texas in any action or proceeding arising out of or relating to this Guaranty and (b) waives to the fullest extent permitted by law any defense asserting an inconvenient forum in connection therewith. Service of process by Bank in connection with such action or proceeding shall be binding on Guarantor if sent to Guarantor by registered or certified mail at its address specified below. 25. Judicial Proceedings; Waivers. THE GUARANTOR AND THE BANK ACKNOWLEDGE AND AGREE THAT (a) ANY SUIT, ACTION OR PROCEEDING, WHETHER CLAIM OR COUNTERCLAIM, BROUGHT OR INSTITUTED BY THE GUARANTOR OR THE BANK OR ANY SUCCESSOR OR ASSIGN OF THE GUARANTOR OR THE BANK, ON OR WITH RESPECT TO THIS GUARANTY, OR THE DEALINGS OF THE PARTIES WITH RESPECT HERETO OR THERETO SHALL BE TRIED ONLY BY A COURT AND NOT BY A JURY AND EACH PARTY WAIVES THE RIGHT TO TRIAL BY JURY; (b) EACH WAIVES ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER, IN ANY SUCH SUIT, ACTION OR PROCEEDING, ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES OR ANY DAMAGES OTHER THAN, OR IN ADDITION TO, ACTUAL DAMAGES; AND (c) THIS SECTION IS A SPECIFIC AND MATERIAL ASPECT OF THIS GUARANTY, AND THE BANK WOULD NOT EXTEND CREDIT IF THE WAIVERS SET FORTH IN THIS SECTION WERE NOT A PART OF THIS GUARANTY! Executed this 1st day of June, 2000. 7 /s/ Jerry West -------------------------------- Jerry West Address: ________________________________ 8 STATE OF TEXAS COUNTY OF DALLAS The foregoing was executed and acknowledged before me this 1st day of June, 2000 by Jerry West. He/She is personally known to me or produced __________________________as identification and did/did not take an oath. /s/ Rebecca Ann West ----------------------------------- [SEAL] Print Name: Rebecca Ann West MY Commission Expires: 12/12/00 Commission No.: 00757678-6 Notary Public, State of Texas [NOTARY SEAL] 9 EX-10.45 13 w68886exv10w45.txt GUARANTY JUNE 1,2000 BORROWER MWI GRANTOR INFOLAB Exhibit 10.45 BORROWER: MWI,INC., d/b/a DANAM ELECTRONICS GUARANTOR: INFOLAB,INC. GUARANTY (EXIM BANK-GUARANTEED LINE OF CREDIT) To: BANK OF AMERICA, N.A. 1. The Guaranty. For valuable consideration, the undersigned ("Guarantor") hereby unconditionally guarantees and promises to pay promptly to Bank of America, N.A., or order, in lawful money of the United States, any and all Indebtedness of MWI, Inc., d/b/a Danam Electronics ("Borrower") to Bank when due, whether at stated maturity, upon acceleration or otherwise, and at all times thereafter, subject to such limitations on Guarantor's liability as are set forth below. This Guaranty is cumulative and does not supersede any other outstanding guaranties, and the liability of Guarantor under this Guaranty is exclusive of Guarantor's liability under any other guaranties signed by Guarantor, If more than one individual or entity sign this Guaranty, their obligations under this Guaranty shall be joint and several. The liability of Guarantor under this Guaranty shall be limited to the Indebtedness under the Loan Documents, and shall not exceed at any one time the sum of (a) the principal amount of the Indebtedness under such Loan Documents plus (b) all interest, fees, indemnities (including, without limitation, hazardous waste indemnities), and other costs and expenses relating to or arising out of the Indebtedness under such Loan Documents. 2. Definitions. (a) "Borrower" shall mean the individual or the entity named in Paragraph 1 of this Guaranty and, if more than one, then any one or more of them. (b) "Guarantor" shall mean the individual or the entity signing this Guaranty and, if more than one, then any one or more of them. (c) "Indebtedness" shall mean any and all debts, liabilities, and obligations of Borrower to Bank, now or hereafter existing, whether voluntary or involuntary and however arising, whether direct or indirect or acquired by Bank by assignment, succession, or otherwise, whether due or not due, absolute or contingent, liquidated or unliquidated, determined or undetermined, held or to be held by Bank for its own account or as agent for another or others, whether Borrower may be liable individually or jointly with others, whether recovery upon such debts, liabilities, and obligations may be or hereafter become barred by any statute of limitations, and whether such debts, liabilities, and obligations may be or hereafter become otherwise unenforceable. (d) "Loan Documents" shall mean that certain Loan Agreement (Exim Bank-Guaranteed Line of Credit) dated June 1, 2000, between Borrower and Bank (the "Loan Agreement") and any promissory notes from Borrower in favor of Bank evidencing or relating to any of the Indebtedness, and deeds of trust, mortgages, security agreements, and other agreements, documents, and instruments executed by Borrower in connection with the Loan Agreement, as such Loan Agreement, promissory notes, and other agreements, documents, and instruments are now in effect and as hereafter amended, restated, renewed or superseded. 3. Obligations Independent. The obligations hereunder are independent of the obligations of Borrower or any other guarantor, and a separate action or actions may be brought and prosecuted against Guarantor whether action is brought against Borrower or any other guarantor or whether Borrower or any other guarantor be joined in any such action or actions. Anyone executing this Guaranty shall be bound by its terms without regard to execution by anyone else. 4. Rights of Bank. Guarantor authorizes Bank, without notice or demand and without affecting its liability hereunder, from time to time to: (a) renew, compromise, extend, accelerate, or otherwise change the time for payment, or otherwise change the terms, of the Indebtedness or any part thereof, including increase or decrease of the rate of interest thereon, or otherwise change the terms of any Loan Documents; (b) receive and hold security for the payment of this Guaranty or any Indebtedness and exchange, enforce, waive, release, fail to perfect, sell, or otherwise dispose of any such security; (c) apply such security and direct the order or manner of sale thereof as Bank in its discretion may determine; (d) permit the Indebtedness to exceed Guarantor's liability under this Guaranty, and apply any amounts received from any source, other than from Guarantor, to any unguaranteed portion of the Indebtedness; and (e) release or substitute any Guarantor or any one or more of any endorsers or other guarantors of any of the Indebtedness. 5. Guaranty to be Absolute. Guarantor agrees that until the Indebtedness has been paid in full and any commitments of Bank or facilities provided by Bank with respect to the Indebtedness have been terminated, Guarantor shall not be released by or because of the taking, or failure to take, any action that might in any manner or to any extent vary the risks of Guarantor under this Guaranty or that, but for this paragraph, might discharge or otherwise reduce, limit, or modify Guarantor's obligations under this Guaranty. Guarantor waives and surrenders any defense to any liability under this Guaranty based upon any such action, including but not limited to any action of Bank described in the immediately preceding paragraph of this Guaranty. It is the express intent of Guarantor that Guarantor's obligations under this Guaranty are and shall be absolute and unconditional. 2 6. Guarantor's Waivers of Certain Rights and Certain Defenses. Guarantor waives: (a) any right to require Bank to proceed against Borrower, proceed against or exhaust any security for the Indebtedness, or pursue any other remedy in Bank's power whatsoever; (b) any defense arising by reason of any disability or other defense of Borrower, or the cessation from any cause whatsoever of the liability of Borrower; (c) any defense based on any claim that Guarantor's obligations exceed or are more burdensome than those of Borrower; and (d) the benefit of any statute of limitations affecting Guarantor's liability hereunder. No provision or waiver in this Guaranty shall be construed as limiting the generality of any other waiver contained in this Guaranty. 7. Waiver of Subrogation. Until the Indebtedness has been paid in full and any commitments of Bank or facilities provided by Bank with respect to the Indebtedness have been terminated, even though the Indebtedness may be in excess of Guarantor's liability hereunder, Guarantor waives any right of subrogation, reimbursement, indemnification, and contribution (contractual, statutory, or otherwise) including, without limitation, any claim or right of subrogation under the Bankruptcy Code (Title 11, United States Code) or any successor statute, arising from the existence or performance of this Guaranty, and Guarantor waives any right to enforce any remedy which Bank now has or may hereafter have against Borrower, and waives any benefit of, and any right to participate in, any security now or hereafter held by Bank. 8. Waiver of Notices. Guarantor waives all presentments, demands for performance, notices of nonperformance, protests, notices of protest, notices of dishonor, notices of intent to accelerate, notices of acceleration, notices of any suit or any other action against Borrower or any other person, any other notices to any party liable on any Loan Document (including Guarantor), notices of acceptance of this Guaranty, and notices of the existence, creation, or incurring of new or additional Indebtedness to which this Guaranty applies or any other Indebtedness of Borrower to Bank. 9. [INTENTIONALLY OMITTED] 10. Security. To secure all of Guarantor's obligations hereunder, Guarantor assigns and grants to Bank a security interest in all moneys, securities, and other property of Guarantor now or hereafter in the possession of Bank, all deposit accounts of Guarantor maintained with Bank, and all proceeds thereof. Upon default or breach of any of Guarantor's obligations to Bank, Bank may apply any deposit account to reduce the Indebtedness, and may foreclose any collateral as provided in the Uniform Commercial Code and in any security agreements between Bank and Guarantor. 3 11. Subordination. Any obligations of Borrower to Guarantor, now or hereafter existing, including but not limited to any obligations to Guarantor as subrogee of Bank or resulting from Guarantor's performance under this Guaranty, are hereby subordinated to the Indebtedness. Such obligations of Borrower to Guarantor if Bank so requests shall be enforced and performance received by Guarantor as trustee for Bank, and the proceeds thereof shall be paid over to Bank on account of the Indebtedness, but without reducing or affecting in any manner the liability of Guarantor under the other provisions of this Guaranty. Any security interest, lien, or other encumbrance that Guarantor may now or hereafter have on any property of Borrower is hereby subordinated to any security interest, lien, or other encumbrance that Bank may have on any such property. 12. Revocation of Guaranty. (a) This Guaranty may be revoked at any time by Guarantor in respect to future transactions, unless there is a continuing consideration as to such transactions which Guarantor does not renounce. Such revocation shall be effective upon actual receipt by Bank, at the address shown below or at such other address as may have been provided to Guarantor by Bank, of written notice of revocation. Revocation shall not affect any of Guarantor's obligations or Bank's rights with respect to transactions which precede Bank's receipt of such notice, regardless of whether or not the Indebtedness related to such transactions, before or after revocation, has been renewed, compromised, extended, accelerated, or otherwise changed as to any of its terms, including time for payment or increase or decrease of the rate of interest thereon, and regardless of any other act or omission of Bank authorized hereunder. Revocation by Guarantor shall not affect any obligations of any other guarantor. (b) In the event of the death of a Guarantor, the liability of the estate of the deceased Guarantor shall continue in full force and effect as to (i) the Indebtedness existing at the date of death, and any renewals or extensions thereof, and (ii) loans or advances made to or for the account of Borrower after the date of the death of the deceased Guarantor pursuant to a commitment made by Bank to Borrower prior to the date of such death. As to all surviving Guarantors, this Guaranty shall continue in full force and effect after the death of a Guarantor, not only as to the Indebtedness existing at that time, but also as to the Indebtedness thereafter incurred by Borrower to Bank. 13. Reinstatement of Guaranty. If this Guaranty is revoked, returned, or canceled, and subsequently any payment or transfer of any interest in property by Borrower to Bank is rescinded or must be returned by Bank to Borrower, this Guaranty shall be reinstated with respect to any such payment or transfer, regardless of any such prior revocation, return, or cancellation. 14. Stay of Acceleration. In the event that acceleration of the time for payment of any of the Indebtedness is stayed upon the insolvency, bankruptcy, or reorganization of Borrower or otherwise, all such Indebtedness guaranteed by Guarantor shall nonetheless be payable by Guarantor immediately upon demand by Bank. 4 15. No Deductions. All payments by Guarantor hereunder shall be paid in full, without setoff or counterclaim or any deduction or withholding whatsoever, including, without limitation, for any and all present and future taxes. In the event that Guarantor or Bank is required by law to make any such deduction or withholding, Guarantor agrees to pay on behalf of Bank such amount directly to the appropriate person or entity, or if the Guarantor cannot legally comply with the foregoing, Guarantor shall pay to Bank such additional amounts as will result in the receipt by Bank of the full amount payable hereunder. Guarantor shall promptly provide Bank with evidence of payment of any such amount made on Bank's behalf. 16. Information Relating to Borrower. Guarantor acknowledges and agrees that it shall have the sole responsibility for, and has adequate means of, obtaining from Borrower such information concerning Borrower's financial condition or business operations as Guarantor may require, and that Bank has no duty, and Guarantor is not relying on Bank, at any time to disclose to Guarantor any information relating to the business operations or financial condition of Borrower. 17. Borrower's Authorization. Where Borrower is a corporation, partnership, or limited liability company, it is not necessary for Bank to inquire into the powers of Borrower or of the officers, directors, partners, members, managers, or agents acting or purporting to act on its behalf, and any Indebtedness made or created in reliance upon the professed exercise of such powers shall be guaranteed hereunder, subject to any limitations on Guarantor's liability set forth herein. 18. Information Relating to Guarantor. Guarantor authorizes Bank to verify or check any information given by Guarantor to Bank, check Guarantor's credit references, verify employment, and obtain credit reports. Guarantor acknowledges and agrees that the authorizations provided in this paragraph apply to any individual general partner of Guarantor and to Guarantor's spouse and any such general partner's spouse if Guarantor or such general partner is married and lives in a community property state. 19. Guarantor's Covenants. Until the Indebtedness guaranteed under this Guaranty has been paid in full and any commitments of Bank or facilities provided by Bank with respect to such Indebtedness have been terminated and each and every term, covenant, and condition of this Guaranty is fully performed, Guarantor agrees to comply with the financial reporting provisions applicable to Guarantor as set forth in Section 9.3 of the Loan Agreement. 20. Foreign Currency. (a) If any claim arising under or related to this Guaranty is reduced to judgment denominated in a currency (the "Judgment Currency") other than the currency or currencies in which the guaranteed Indebtedness is denominated (individually, an "Obligation Currency"), the judgment shall be for the equivalent in the Judgment Currency of the amount of the claim denominated in each Obligation Currency included in the judgment, determined as of the date of judgment. The equivalent of any Obligation Currency amount in any Judgment Currency shall be calculated at the spot rate for the 5 purchase of the Obligation Currency with the Judgment Currency quoted by Bank in the place of Bank's choice at or about 8:00 a.m. on the date for determination specified above. Guarantor shall indemnify Bank and hold Bank harmless from and against all loss or damage resulting from any change in exchange rates between the date any claim is reduced to judgment and the date of payment thereof by Guarantor. (b) The obligations hereunder shall not be affected by any acts of any governmental authority affecting Borrower including, without limitation, any restrictions on the conversion of currency or repatriation or control of funds or any total or partial expropriation of Borrower's property, or by economic, political, regulatory, or other events in the countries where Borrower is located. (c) If (i) a maximum amount for which Guarantor is liable under this Guaranty with respect to the principal amount of the Indebtedness is expressed in U.S. Dollars in Paragraph 1 of this Guaranty and (ii) an increase occurs in the market value of any Obligation Currencies as compared to the U.S. Dollars before any payment by Guarantor of its obligations under this Guaranty, then such maximum amount for which Guarantor is liable shall be increased by an amount of U.S. Dollars sufficient to purchase on the day of such payment, whether before or after settlement or judgment, the amount of such Obligation Currencies owed to Bank. Such increased maximum amount shall be calculated using the exchange rate quotes described in subparagraph (a) above. 21. Taxes. Guarantor represents and warrants that it is organized and resident in the United States of America. If Guarantor must make a payment under this Guaranty, Guarantor represents and warrants that it will make the payment from one of its U.S. resident offices to a U.S. office of Bank so that no withholding tax is imposed on the payment. If notwithstanding the foregoing, Guarantor makes a payment under this Guaranty to which withholding tax applies, then Guarantor shall pay any taxes (other than taxes on net income (a) imposed by the country or any subdivision of the country in which Bank's principal office or actual lending office is located and (b) measured by the United States taxable income Bank would have received if all payments under or in respect of this Guaranty were exempt from taxes levied by Guarantor's country) that are at any time imposed on any such payments under or in respect of this Guaranty including, but not limited to, payments made pursuant to this paragraph. Further, if such withholding tax is applicable. Guarantor shall also pay to Bank, on demand, all additional amounts that Bank specifies as necessary to preserve the after-tax yield Bank would have received if such taxes had not been imposed. 22. Successors and Assigns. This Guaranty (a) binds Guarantor and Guarantor's executors, administrators, successors, and assigns, provided that Guarantor may not assign its rights or obligations under this Guaranty without the prior written consent of Bank, and (b) inures to the benefit of Bank and Bank's indorsees, successors, and assigns. Bank may, without notice to Guarantor and without affecting Guarantor's obligations hereunder, sell, assign, grant participations in, or otherwise transfer to any other person, firm, or corporation the Indebtedness and this Guaranty, in whole or in part. Guarantor agrees that Bank may disclose to any assignee or purchaser, or any prospective assignee or purchaser, of all or part of the Indebtedness any and 6 all information in Bank's possession concerning Guarantor, this Guaranty, and any security for this Guaranty. 23. Costs and Expenses. Guarantor agrees to pay all reasonable attorneys' fees, including allocated costs of Bank's in-house counsel, and all other costs and expenses which may be incurred by Bank (a) in the enforcement of this Guaranty or (b) in the preservation, protection, or enforcement of any rights of Bank in any case commenced by or against Guarantor under the Bankruptcy Code (Title 11, United States Code) or any similar or successor statute. 24. Governing Law and Jurisdiction. This Guaranty shall be governed by and construed under the laws of the State of Texas. Guarantor irrevocably (a) submits to the non-exclusive jurisdiction of any United States Federal or State court sitting in the State of Texas in any action or proceeding arising out of or relating to this Guaranty and (b) waives to the fullest extent permitted by law any defense asserting an inconvenient forum in connection therewith. Service of process by Bank in connection with such action or proceeding shall be binding on Guarantor if sent to Guarantor by registered or certified mail at its address specified below. 25. Judicial Proceedings; Waivers. THE GUARANTOR AND THE BANK ACKNOWLEDGE AND AGREE THAT (a) ANY SUIT, ACTION OR PROCEEDING, WHETHER CLAIM OR COUNTERCLAIM, BROUGHT OR INSTITUTED BY THE GUARANTOR OR THE BANK OR ANY SUCCESSOR OR ASSIGN OF THE GUARANTOR OR THE BANK, ON OR WITH RESPECT TO THIS GUARANTY, OR THE DEALINGS OF THE PARTIES WITH RESPECT HERETO OR THERETO SHALL BE TRIED ONLY BY A COURT AND NOT BY A JURY AND EACH PARTY WAIVES THE RIGHT TO TRIAL BY JURY; (b) EACH WAIVES ANY RIGHT-IT MAY HAVE TO CLAIM OR RECOVER, IN ANY SUCH SUIT, ACTION OR PROCEEDING, ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES OR ANY DAMAGES OTHER THAN, OR IN ADDITION TO, ACTUAL DAMAGES; AND (c) THIS SECTION IS A SPECIFIC AND MATERIAL ASPECT OF THIS GUARANTY, AND THE BANK WOULD NOT EXTEND CREDIT IF THE WAIVERS SET FORTH. IN THIS SECTION WERE NOT A PART OF THIS GUARANTY. Executed, as of this 1st day of June, 2000. INFOLAB, INC. /s/ I. Dean Spradling ------------------------------ By: President Its: ------------------------- Address: --------------------- ------------------------------ ------------------------------ 7 STATE OF MISSISSIPPI COUNTY OF COAHOMA The foregoing was executed and acknowledged before me this 1st day of June, 2000 by Dean Spradling, the president of Infolab, Inc. the corporation named herein on behalf of such corporation as such corporation's voluntary act and deed. He is personally known to me. /s/ Randall M. Sewall ------------------------------------- Print Name: Randall M. Sewall My Commission Expires: Commission No.: --------------- ---------------------- Notary Public, State of texas Notary Public State of Mississippi At Large My Commission Expires: November 4, 2001 Notary Public, State of Mississippi Brooks & Garland, Inc. [NOTARY SEAL] 8 EX-10.46 14 w68886exv10w46.txt REVOLVING PROMISSORY NOTE JUNE 1, 2000 Exhibit 10.46 REVOLVING PROMISSORY NOTE Facility Amount: June 1,2000 U.S. $2,000,000.00 Dallas, Texas Bank: Borrower: BANK OF AMERICA, N.A. MWI, INC., d/b/a DANAM ELECTRONICS Commercial Banking Group 901 Main Street, 7th Floor 4230 Shilling Way TX1-492-07-01 Dallas, Texas 75237 Dallas, Texas 75202 Dallas County Dallas County FOR VALUE RECEIVED, the undersigned Borrower unconditionally (and jointly and severally, if more than one) promises to pay to the order of Bank, its successors and assigns, without setoff, at its offices indicated at the beginning of this Note, or at such other place as may be designated by Bank, the principal amount of Two Million and No/100 Dollars ($2,000,000.00), or so much thereof as may be advanced from time to time in immediately available funds, together with interest computed daily on the outstanding principal balance hereof, at an interest rate, and in accordance with the payment schedule, set forth in that certain Loan Agreement (Exim-Bank Guaranteed Line of Credit) of even date herewith by and between Bank and Borrower (the "Loan Agreement"). 1. MATURITY DATE; PAYMENT SCHEDULE; MANDATORY PRINCIPAL PAYMENT. Principal shall be paid in full in a single payment on the last day of the Availability Period (as defined in the Loan Agreement). Interest thereon shall be paid monthly, commencing on July 1,2000 and continuing on the same day of each successive month thereafter, with a final payment of all unpaid interest on the last day of the Availability Period. In addition to the principal payment schedule set forth above, each advance hereunder shall be due and payable on the earlier of the following: (i) immediately upon Borrower's receipt of payment from an account debtor against the corresponding account receivable, (ii) 180 days after the making of such advance or (iii) the last day of the Availability Period. Total or partial prepayments may be made at any time. If Borrower is in default under this Note or the Loan Agreement, Bank may demand payment of the balance outstanding under this Note in full immediately. All payments received hereunder shall be applied in the order set forth in the Loan Agreement. 2. REVOLVING FEATURE. Borrower may borrow, repay and reborrow hereunder at any time, up to a maximum aggregate amount outstanding at any one time equal to the Maximum Amount (as defined in the Loan Agreement), provided that Borrower is not in default under any provision of this Note or the Loan Agreement, and provided that the borrowings hereunder do not exceed any borrowing base or other limitation on borrowings by Borrower. Bank shall incur no liability for its refusal to advance funds based upon its determination that any conditions of such further advances have not been met. Bank records of the amounts borrowed from time to time shall be conclusive proof thereof. In addition, Bank may refuse to make additional advances or reduce the amount of advances available as provided in the Loan Agreement. 3. SUBJECT TO LOAN AGREEMENT. This Note shall be governed by the Loan Agreement, and all provisions regarding advances, interest, prepayment, late payments, events of default, remedies and governing law are set forth in the Loan Agreement. 4. COMMERCIAL PURPOSES. BORROWER REPRESENTS TO BANK THAT THE PROCEEDS OF THIS LOAN ARE TO BE USED PRIMARILY FOR BUSINESS, COMMERCIAL OR AGRICULTURAL PURPOSES. BORROWER ACKNOWLEDGES HAVING READ AND UNDERSTOOD, AND AGREES TO BE BOUND BY, ALL TERMS AND CONDITIONS OF THIS NOTE AND HEREBY EXECUTES THIS NOTE UNDER SEAL AS OF THE DATE HERE ABOVE WRITTEN. 5. NOTICE OF FINAL AGREEMENT. THIS WRITTEN PROMISSORY NOTE 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. 6. JUDICIAL PROCEEDINGS; WAIVERS. THE BORROWER AND THE BANK ACKNOWLEDGE AND AGREE THAT (a) ANY SUIT, ACTION OR PROCEEDING, WHETHER CLAIM OR COUNTERCLAIM, BROUGHT OR INSTITUTED BY THE BORROWER OR THE BANK OR ANY SUCCESSOR OR ASSIGN OF THE BORROWER OR THE BANK, ON OR WITH RESPECT TO THIS AGREEMENT, ANY OF THE OTHER LOAN DOCUMENTS, THE COLLATERAL OR THE DEALINGS OF THE PARTIES WITH RESPECT HERETO OR THERETO SHALL BE TRIED ONLY BY A COURT AND NOT BY A JURY, AND EACH PARTY WAIVES THE RIGHT TO TRIAL BY JURY; (b) EACH WAIVES ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER, IN ANY SUCH SUIT, ACTION OR PROCEEDING, ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES OR ANY DAMAGES OTHER THAN, OR IN ADDITION TO, ACTUAL DAMAGES; AND (c) THIS SECTION IS A SPECIFIC AND MATERIAL ASPECT OF THIS AGREEMENT, AND THE BANK WOULD NOT EXTEND CREDIT IF THE WAIVERS SET FORTH IN THIS SECTION WERE NOT A PART OF THIS AGREEMENT. EXECUTION DATE: June 1, 2000 MWI, INC., d/b/a DAUAM ELECTRONICS By: /s/ Jerry West ------------------------ Jerry West President Receipt of delivery of this Note is hereby acknowledged by: Bank of America, N.A. By: /s/ Richart Vitale --------------------------------- Name: RICHART VITALE Title: ASSISTANT VICE PRESIDENT 2 EX-10.47 15 w68886exv10w47.txt INTERCREDITOR AGREEMENT JUNE 1 , 2000 Exhibit 10.47 INTERCREDITOR AGREEMENT This Intercreditor Agreement (this "Agreement") is dated as of June 1, 2000, and is entered into by and among TEXAS COMMUNITY BANK AND TRUST, N.A. ("Texas Community"), THE TEXAS MEZZANINE FUND, INC. ("Texas Mezzanine") and BANK OF AMERICA, N.A. ("Bank of America") (Texas Community, Texas Mezzanine and Bank of America sometimes herein referred to individually as "Party" and collectively as "Parties"). A. Texas Community has established a revolving credit facility in the amount of $750,000.00 (the "Texas Community Facility") for MWI, INC., d/b/a DANAM ELECTRONICS (the "Debtor"), which has an address at 4230 Shilling Way, Dallas, Texas 75237 and pursuant to a security agreement has obtained a security interest in certain property of the Debtor described on Exhibit A ("Texas Community's Collateral"). B. Texas Mezzanine has made a loan to the Debtor in the original principal amount of $500,000 (the 'Texas Mezzanine Facility"), and pursuant to a security agreement has obtained a security interest in certain property of the Debtor described on Exhibit B ("Texas Mezzanine's Collateral"). C. Bank of America has established a revolving credit facility for the Debtor in the amount of $2,000,000 (the "Bank of America Facility"), and pursuant to a security agreement has obtained a security interest in certain property of the Debtor described on Exhibit C ("Bank of America's Collateral"). D. Each of Texas Community's Collateral, Texas Mezzanine's Collateral and Bank of America's Collateral may be the same as the collateral held by one or more of the other Parties hereto. E. Texas Community and Texas Mezzanine have entered into an Intercreditor Agreement dated or effective August 3, 1999 (the "Prior Intercreditor Agreement") pursuant to which Texas Community and Texas Mezzanine had established relative priorities in the Texas Community Collateral and the Texas Mezzanine Collateral. F. Texas Community, Texas Mezzanine and Bank of America would like to agree upon the priority of their respective security interests in the Texas Community Collateral, the Texas Mezzanine Collateral and the Bank of America Collateral (collectively, the "Assets"). In consideration of the premises and mutual covenants contained in this Agreement, the parties agree as follows: 1. Priorities. The Parties shall have the following priority in the Assets: (a) Texas Community Bank shall have the prior and superior lien on (i) those specific Assets consisting of Domestic Accounts (as defined in Section 5 below) and Domestic Inventory (as defined in Section 5 below) and (ii) those specific Assets in which Texas Community Bank has a valid and enforceable "purchase money 1 security interest" as defined in the UCC ("PMSI") in connection with advances made to the Debtor; provided, that such lien secures Permitted Indebtedness (as defined in Section 5 below). (b) Texas Mezzanine shall have the prior and superior lien on (i) those specific Assets consisting of equipment (as defined in the UCC, and hereinafter referred to as "Equipment") and (ii) those specific Assets in which Texas Mezzanine has a valid and enforceable PMSI in connection with advances made to the Debtor; provided, that such lien secures Permitted Indebtedness. (c) Bank of America shall have the prior and superior lien on (i) those specific Assets consisting of Export-Related Accounts (as defined in Section 5 below) and Export-Related Inventory (as defined in Section 5, below), (ii) those specific Assets in which Bank of America has a valid and enforceable PMSI in connection with advances made to the Debtor, and (iii) those specific Assets that are not described in (a) or (b) of this Section 1; provided, that such lien secures Permitted Indebtedness. (d) Texas Mezzanine shall have a second priority lien on the Domestic Accounts and the Domestic Inventory. (e) Texas Community shall have a second priority lien on Equipment. (f) Bank of America shall have a third priority lien on Domestic Accounts, Domestic Inventory and Equipment. (g) Neither Texas Community nor Texas Mezzanine shall have any lien on the Export-Related Accounts or the Export-Related Inventory. 2. Effectiveness of Priorities. The priorities set forth in this Agreement will be effective regardless of the order in which the parties respective security interests in the Assets were created or perfected; provided, that the priorities established in Section 1 shall not apply as to any Party whose lien (a) is not then perfected, (b) is a voidable preference under the U.S. Bankruptcy Code, 11 U.S.C. Section 101 et seq or (c) is held by a final order of a court of competent jurisdiction to be unenforceable. 3. Remedies Undisturbed. Except as provided in this Agreement, each party is entitled to pursue remedies arising from its respective security interests in the Property and may otherwise proceed in any manner permitted by any properly created and perfected security interest. 4. Notification of Default. Upon the occurrence of any monetary event of default under either the Texas Community Facility, the Texas Mezzanine Facility or the Bank of America Facility or upon the acceleration of any indebtedness under either of the aforementioned facilities, the Party under whose facility such event of default or acceleration has occurred, shall notify the other Parties in writing, specifically referencing this Agreement, specifying the type of default that has occurred and that the notifying Party has declared such an event of default or 2 otherwise accelerated or attempted to accelerate its respective facility or to exercise any other right or remedy at law or in equity against the Debtor; provided, that no Party shall be liable for monetary damages for any failure to so notify. The notice shall include a statement in the form of a certificate of an officer of the respective Party of the outstanding indebtedness owed to such Party. Each Party, in its sole discretion, also may assert any rights under applicable bankruptcy, insolvency, reorganization, receivership, liquidation or other similar proceedings. 5. Certain Definitions. "Domestic Accounts" shall mean all Accounts (as hereinafter defined) that are not Export-Related Accounts. "Domestic Inventory" shall mean all inventory that is not Export-Related Inventory. "Export-Related Accounts" shall mean Accounts and related general intangibles of the Debtor arising from the sale of finished goods or services that are intended for export from the United States. "Export-Related Inventory" shall mean inventory of the Debtor that is located in the United States that has been purchased, manufactured or otherwise acquired by the Debtor for resale pursuant to a written export order or contract for the purchase by a buyer of finished goods or services that are intended for export from the United States. "Permitted Indebtedness" shall mean (a) with respect to the Texas Community Facility, $750,000 plus Default Expenses, (b) with respect to the Texas Mezzanine Facility, $500,000 plus Default Expenses and (c) with respect to the Bank of America Facility, $2,000,000 plus Default Expenses. "Default Expenses" shall mean, with respect to each Party's facility, accrued and unpaid interest, plus the amount of any advances made by such Party pursuant to such Party's loan documents to pay taxes or insurance premiums, to prevent waste or to otherwise preserve the condition of the Assets in which such Party has a security interest, plus all reasonable costs and expenses (including court costs and reasonable attorneys' fees) incurred by such Party in connection with its facility. "Accounts" shall mean (a) accounts (as defined in the UCC), other receivables, book debts and other forms of obligations, whether arising out of goods sold or services rendered or from any other transaction, (b) rights in, to and under all purchase orders or receipts for goods and services, (c) rights to any goods represented or purported to be represented by any of the foregoing (including unpaid sellers' rights of rescission, replevin, reclamation and stoppage in transit and rights to returned, reclaimed or repossessed goods), (d) moneys due or to become due to the Debtor under all purchase orders and contracts for the sale of goods or the performance of services or both by the Debtor (whether or not yet earned by performance on the part of the Debtor), including the proceeds of the foregoing; (e) any notes, drafts, letters of credit, insurance proceeds or other instruments, documents and writings evidencing or supporting the foregoing and (f) all collateral security and guarantees of any kind given with respect to any of the foregoing. 6. Distribution of Proceeds. Any funds received from or on behalf of the Debtor by any Party through the foreclosure and liquidation of the Assets after an event of default shall have occurred shall be distributed according to the priorities established in Section 1 hereof. If an event of default has occurred and only one or two Parties have accelerated their respective loans, and the other Party (or Parties) has received the notice set forth in Section 4 above, the non-accelerating Party (or Parties) shall have ten (10) days after receipt of such notice in which to declare an event of default, accelerate its loans and join in any foreclosure and liquidation of the Assets. Absent such declaration, acceleration and joinder, the Party or Parties accelerating its loans shall proceed with whatever action it deems necessary or appropriate. Notwithstanding 3 anything in this Section 6 to the contrary, no Party shall have any duty beyond that prescribed in the Uniform Commercial Code as adopted in Texas (the "UCC"). 7. Accounting by Liquidating Party. Any distribution by the liquidating Party of the portion of the proceeds due to the other Party shall be accompanied by an accounting showing the Assets liquidated, the costs of preparing the Assets for sale, the costs of the sale, the net proceeds upon liquidation of the Assets, the amount retained by the liquidating Party and the amount distributed to the other Party or Parties. 8. No Notice of Extensions. Each Party waives notice of any and all extensions, renewals and/or modifications of Debtor's obligations to the other, and each Party may make loans or extend credit to Debtor from time to time at Debtor's request and without further authorization from or notice to any other Party; provided, in each case, that the aggregate amount of loans and credit accommodations in favor of Debtor by such Party does not exceed such Party's Permitted Indebtedness. No Party need inquire into the power or authority of Debtor, or its officers, directors or agents acting or purporting to act on its behalf. 9. Bankruptcy. In the event a voluntary or involuntary petition under any bankruptcy or insolvency law of the United States or any state is brought by or against Debtor, or other proceedings instituted for the reorganization, readjustment of debt, dissolution or liquidation of Debtor whether voluntary of involuntary, then each party to this Agreement will have any and all remedies available to it with respect to the relative priority of their respective security interest in the Property as set forth in this Agreement. 10. No Creation of Security Interest. The provisions of this Agreement will not be deemed to create a security interest in Assets where none would exist absent this Agreement. 11. Benefit: Binding Nature: Assignment. This Agreement is entered into solely for the benefit of Texas Community, Texas Mezzanine and Bank of America and their successors and assigns, and no other person or persons will have any right, benefit or priority interest under or because of the existence of this Agreement. This Agreement will be binding upon Texas Community, Texas Mezzanine and Bank of America and their successors and assigns. Each Party agrees that prior to any assignment, sale or transfer of any rights, claims or interests in or to the loan documents with respect to any Party's facility, such Party shall provide the assignee, purchaser or transferee with a copy of this Agreement and such Party shall deliver ten (10) days prior written notice to each other Party. Any such assignment shall be subject to this Agreement. 12. Notice. Any notice to be given under this Agreement shall be in writing and shall be delivered or mailed by Registered or Certified United States Mail postage prepaid or by any prepaid courier service and addressed to each Party as follows: If to Texas Community Texas Community Bank and Trust, N.A. 8235 Douglas Avenue, Suite 100 Dallas, Texas 75225 Attn: Mr. Wayne A. Spencer 4 If to Texas Mezzanine Texas Mezzanine Fund, Inc. 1402 Corinth Street, Suite 1150 Dallas, Texas 75215 If to Bank of America 901 Main Street, 7th Floor TX 1-492-07-01 Dallas, Texas 75202 Attn: Commercial Banking Group 13. Termination. This Agreement shall continue in full force and effect and shall be irrevocable by any party hereto until the earlier to occur of the following: a. The parties mutually agree in writing to terminate this Agreement; or b. All of the obligations owed by the Debtor to all of the parties hereto are fully paid and satisfied and the respective security interests have been terminated and released of record. 14. Waiver. No waiver of any of the provisions of this Agreement will be deemed to be made unless the same is specifically waived or released by a party in writing, notice of which is given to all other parties. 15. Representations and Warranties. The Parties hereto represent and warrant that the facts contained in the Recitals herein in regard to their own facility are true and correct. 16. Amendment. This Agreement may be amended or modified only by an agreement in writing signed by all parties hereto. 17. Governing Law. This Agreement will be governed by and construed in accordance with the laws of the State of Texas. Venue of any suit arising hereunder shall lie in state or federal courts located in Dallas County, Texas. 18. Costs. In the event any suit or action is instituted to enforce or interpret any provision of this Agreement, the prevailing party will be entitled to recover from the other contesting party or parties such sum as the court may determine as reasonable attorneys' fees and in addition, costs of suit or other sum provided by law. 19. Counterparts. This Agreement may be executed in any number of counterparts, all of which, taken together, shall constitute one and the same instrument, and any of the parties hereto may execute this Agreement by signing any such counterpart. 5 20. Supercedes Prior Agreements. This Agreement supercedes any prior agreement (whether oral or written) between any of the parties hereto with respect to the parties' respective priority in the Debtor's property, including (without limitation) the Prior Intercreditor Agreement. TEXAS COMMUNITY BANK AND TRUST, N.A. By: /s/ Wayne A. Spencer --------------------------------------- Name: Wayne A. Spencer Its: EVP THE TEXAS MEZZANINE FUND, INC. By: /s/ Theresa Lee --------------------------------------- Name: Theresa Lee Its: Vice President BANK OF AMERICA, N.A. By: /s/ Richard Vitale --------------------------------------- Name: Richard Vitale Its: Assistant Vice President 6 DEBTOR'S ACKNOWLEDGMENT AND CONSENT The undersigned Debtor hereby acknowledges and agrees to the foregoing Intercreditor Agreement. Debtor agrees to be bound by the terms and provisions thereof as they relate to the relative rights of the Parties with respect to each other. However, nothing therein shall be deemed to amend, modify, supersede or otherwise alter the terms of the respective agreements between the Debtor and each Party (the "Loan Agreement") and in the event of any inconsistency or conflict between the terms of the Loan Agreements and the Intercreditor Agreement, the Loan Agreements shall govern as between the Debtor and each Party. The Debtor agrees that each Party holding collateral may serve as bailee for the other Party and each Party is hereby authorized to turn such collateral over to such other Party. Debtor further agrees that the Intercreditor Agreement is solely for the benefit of the Parties and shall not give the Debtor, its successors and assigns, or any other person, any rights vis-a-vis either Party. MWI,INC. By: /s/ Jerry West ---------------------- Name : Jerry West Title: PRESIDENT 7 EXHIBIT A (TEXAS COMMUNITY'S COLLATERAL) 8 EXHIBIT B (TEXAS MEZZANINE'S COLLATERAL) 9 EXHIBIT C (BANK OF AMERICA'S COLLATERAL) EX-10.48 16 w68886exv10w48.txt PROMISSORY NOTE NOVEMBER 20,2003 Exhibit 10.48 PROMISSORY NOTE $558,000.00 NOVEMBER 20th, 2003 FOR VALUE RECEIVED, DREW SCIENTIFIC, INC., a Texas corporation ("Borrower"), promises to pay to the order of TEXAS MEZZANINE FUND INC. ("Lender"), located at 351 West Jefferson Blvd., Suite 800, Dallas, Texas 75208, or such other place as the holder of this Note may from time to time designate in writing, the principal sum of Five Hundred Fifty-Eight Thousand and No/100 Dollars ($558,000.00), or so much thereof as may be advanced in lawful money of the United States, with interest accruing on the unpaid principal balance from time to time remaining unpaid prior to maturity as follows: 1. Payments of Principal and Interest. The principal and interest of this Note shall be payable as follows: (a) Interest on the Note shall accrue at the rate of 8.0% per annum (the "Base Rate"), subject to adjustment as provided for in subparagraph l(b) below, and shall be calculated at a daily rate equal to 1/360th of the annual percentage rate which this Note bears, based on the actual number of days elapsed. (b) On July 1, 2005, and thereafter on June 1 of each succeeding year thereafter, the interest rate on the Note shall be adjusted to a rate equal to the lesser of (i) the greater of the Base Rate or the Prime Rate (as hereafter defined) plus 4.0% (the "Stated Rate"), or (ii) the Maximum Rate (as hereafter defined). The "Prime Rate" is the rate published by the Wall Street Journal as the prime rate. If the Stated Rate at any time exceeds the Maximum Rate, the actual rate of interest to accrue on the unpaid principal amount of the Note will be limited to the Maximum Rate, but any subsequent reductions in the Stated Rate due to reductions in the Prime Rate will not reduce the interest rate payable upon the unpaid principal amount of the Note below the Maximum Rate until the total amount of interest accrued on this Note equals the amount of interest which would have accrued if the Stated Rate had at all times been in effect. (c) Installments equal to the amount of all accrued interest only shall be due and payable monthly commencing on the 1st day of January, 2004, and on the 1st day of each consecutive month through and including June, 2004. (d) Installments of principal and interest in the amount of Fourteen Thousand Two Hundred and No/100 Dollars ($14,200.00) shall be due and payable monthly commencing on the 1st day of July, 2004, with a like installment due and payable on the first day of each succeeding month thereafter to maturity. All payments made as scheduled on this Note (i.e., after deducting all other charges and impositions prescribed elsewhere in this Note or in documents securing payment of this Note) shall be applied, to the extent thereof, first to accrued but unpaid interest and the balance to unpaid principal. 2. Maturity. This Note shall mature (i.e., all outstanding principal, together with all accrued interest which has not been paid, shall be due and payable in full) on June 1, 2008. 3. Prepayment. For the purposes of this paragraph 3, the term "prepayment" shall mean an event whereby the loan evidenced by this Note is voluntarily fully satisfied prior to the maturity date and shall not include any payment after default, any payment after the acceleration of this Note, any payment by any sale under court order, foreclosure, power of sale or deed in lieu of foreclosure, or any payment by sale or other method under any bankruptcy or insolvency proceedings, or any prepayment due to the receipt of insurance proceeds or condemnation awards. Borrower shall have the right to prepay all, but not part, of the unpaid principal balance of this Note provided the following conditions are satisfied: (a) Borrower is not in default under the terms of this Note, the Security Instrument (as defined below) or any other document evidencing, governing or securing the loan evidenced by this Note (collectively, the "Loan Documents"). INITIALED BY KRD PROMISSORY NOTE - Page 1 BORROWER _______________ (b) Borrower has notified Lender in writing of its election and commitment to prepay at least thirty (30) days prior to the date the prepayment will be made (the "Prepayment Date"), with such notice to specify the Prepayment Date and the total amount of all sums to be paid. (c) Borrower pays Lender a prepayment fee equal to: (i) Twenty Thousand and No/100 Dollars ($20,000.00) in the event prepayment occurs on or prior to March 31, 2005; (ii) Fifteen Thousand and No/100 Dollars ($15,000.00) in the event prepayment occurs during the period commencing on April 1, 2005 and ending March 31, 2006; and (iii) Ten Thousand and No/100 Dollars ($10,000.00) in the event prepayment occurs during the period commencing on April 1, 2006 and ending March 31, 2007. No prepayment fee shall be due in the event prepayment occurs on or after April 1, 2007. (d) Any prepayment of principal permitted hereunder shall be accompanied by payment of all unpaid accrued interest on this Note and all other sums then due and payable pursuant to this Note, the Security Instrument and any other Loan Document. (e) Borrower and Lender acknowledge and agree that if the unpaid principal balance of this Note is prepaid, then Lender shall receive the applicable prepayment fee as partial compensation for the cost to Lender of reinvesting the prepayment proceeds and for the loss to Lender of the contracted for return on the loan evidenced by this Note. Borrower and Lender further acknowledge and agree that the applicable prepayment fee is reasonable. 4. Partial Payment. If Lender at any time receives or accepts payment from or for the account of Borrower of less than the full amount when due on this Note, such receipt or acceptance shall, unless Lender expressly agrees otherwise in writing, be deemed a payment on account only, and shall not cure any default existing by reason of failure to pay the full amount when due, nor preclude the exercise of any remedy of Lender including, but not limited to, acceleration of any unmatured portion hereof, or foreclosure on any security. 5. Security Instrument. This Note is secured by, among other things, the provisions of a certain Security Agreement (the "Security Instrument") dated of even date herewith, executed by Borrower and covering the collateral more fully described in the Security Instrument. 6. Events of Default and Remedies. At the option of the holder of this Note, the entire unpaid principal balance of, and all accrued interest on, this Note shall immediately become due and payable upon the occurrence at any time of any one or more of the following (herein referred to as an "Event of Default"): (a) Borrower shall fail to pay the principal of or interest on this Note as and when the same becomes due and payable in accordance with the terms hereof, and such failure shall continue for a period of ten (10) days after receipt of written notice from Lender specifying such failure, provided, however, that Lender shall be obligated to give only one (1) such notice in any calendar year and, after the giving of such one notice, Lender shall be entitled to exercise its remedies upon any subsequent default occurring within such calendar year without any requirement of notice; or (b) Borrower or any other party shall fail to perform any other covenant, condition, obligation or agreement set forth in this Note, the Security Instrument or any other Loan Document, INITIALED BY KRD PROMISSORY NOTE - Page 2 BORROWER _______________ other than as set forth in paragraph 6(a) above, and such failure shall continue for a period of thirty (30) days after receipt of written notice from Lender specifying such failure; or (c) There shall occur any default or event of default specified in any Loan Document, other than as set forth in paragraphs 6(a) and 6(b) above. If an Event of Default shall occur, Lender may (i) declare the entire balance of this Note, principal and interest, immediately due and payable, (ii) exercise any rights under the Security Instrument or any other right contained in any other Loan Document, and (iii) exercise any other remedy provided by law or equity. No remedy referred to herein is intended to be exclusive, but each shall be cumulative, and the exercise or beginning of exercise by Lender of any one or more of such remedies should not preclude the simultaneous or later exercise of any or all of such remedies. Any failure of Lender to exercise any rights or remedies available to Lender if an Event of Default should occur shall not constitute a waiver of Lender's right to exercise such rights or remedies in the event of any subsequent Event of Default. 7. Past Due Interest and Late Charge. Lender may collect, to the extent not proscribed by applicable law, a late charge for any payment of principal, interest or any other sum due under the Loan Documents not made within ten (10) days after its due date, such late charge to be in an amount equal to five percent (5%) of the past due payment, provided that such late charge shall not, when computed together with all other interest to be paid on the indebtedness evidenced by this Note or indebtedness arising under any instrument securing the payment hereof, exceed the Maximum Rate (as defined below). In addition, at Lender's option, all past-due principal and, to the extent not proscribed by applicable law, all past-due interest, shall bear interest at the Maximum Rate or if applicable law shall not provide for a maximum nonusurious rate of interest, at a rate per annum equal to eighteen percent (18%). 8. Controlling Agreement. All agreements between Borrower and Lender, whether now existing or hereafter arising and whether written or oral, are hereby limited so that in no contingency or event whatsoever, whether by reason of demand or acceleration of the maturity hereof or otherwise, shall the interest contracted for, charged, received, paid or agreed to be paid to Lender exceed interest computed at the Maximum Rate (as defined below). If, from any circumstance whatsoever, interest would otherwise be payable to Lender in excess of interest computed at the Maximum Rate, the interest payable to Lender shall be reduced to interest computed at the Maximum Rate; and if from any circumstance Lender shall ever receive anything of value deemed interest by applicable law in excess of interest computed at the Maximum Rate, an amount equal to any excessive interest shall be applied to the reduction of the principal hereof and not to the payment of interest, or if such excessive interest exceeds the unpaid balance of principal hereof, such excess shall be refunded to the Borrower. All interest paid or agreed to be paid to Lender shall, to the extent permitted by applicable law, be amortized, prorated, allocated, and spread throughout the full period until payment in full of the principal (including the period of any renewal or extension hereof) so that the interest hereon for such full period shall not exceed interest computed at the Maximum Rate. This section shall control all agreements between Borrower and Lender. The term "Maximum Rate" shall mean the highest lawful rate of interest applicable to the loan transaction evidenced by this Note taking into account whichever of applicable federal law or Texas law permits the higher rate of interest, and after also taking into consideration all compensation deemed interest under applicable law. 9. Waiver. Except as expressly otherwise provided for herein, Borrower and all other parties now or hereafter liable or responsible for the payment of this Note, whether as endorser, guarantor, surety or otherwise, severally waive demand, presentment, presentment for payment, notice of intent to demand, notice of nonpayment, notice of dishonor, diligence in collecting, grace, notice (including notice of intent to accelerate and notice of acceleration) and protest and consent to all renewals and extensions that from time to time may be granted by the holder of this Note and to all partial payments herein, whether before or after maturity. Borrower hereby further agrees that no act or omission of Lender with reference to any property securing or intended to secure this Note, including but not limited to failure to file or perfect any lien or security interest, shall release the absolute obligation of Borrower and each such endorser, guarantor or surety to pay this Note as and when due. 10. Cumulative Rights. No delay on the part of Lender or other holder of this Note in the exercise of any power or right under this Note, under the Security Instrument, or under any other Loan Document, shall operate as a INITIALED BY KRD PROMISSORY NOTE - Page 3 BORROWER _______________ waiver thereof, nor shall a single or partial exercise of any power or right preclude other or further exercise thereof or exercise of any other power or right. Enforcement by Lender or other holder of this Note of any security for the payment hereof shall not constitute any election by it of remedies so as to preclude the exercise of any other remedy available to it. 11. Attorneys' Fees and Costs. If this Note or any installment or part hereof is not paid when due and the same is placed in the hands of an attorney for collection, or if this Note is collected by suit or through bankruptcy, probate or other proceedings, Borrower agrees to pay the reasonable attorneys' fees of the holder of this Note, together with all actual expenses of collection and litigation and costs of court incurred by the holder of this Note. 12. Notices. Any notice or demand required or to be given hereunder shall be in writing, and shall be deemed to have been given and received when deposited in a post office or official depository of the United States Postal Service, sent by certified mail, postage prepaid, return receipt requested, addressed as follows: If to Borrower: Drew Scientific, Inc. 4230 Shilling Way Dallas, Texas 75237 Attn: Keith Drew If to Lender: Texas Mezzanine Fund Inc. 351 West Jefferson Blvd., Suite 800 Dallas, Texas 75208 Attn: Theresa Lee The addresses set forth in this Note may be changed by any party by giving notice of such change to the other party in the manner provided herein for giving notice. 13. Severability. In case any of the provisions of this Note shall for any reason be held to be invalid, illegal or unenforceable, such invalidity, illegality or unenforceability shall not affect any other provision hereof and this Note shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein. 14. GOVERNING LAW. THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS AND THE LAWS OF THE UNITED STATES APPLICABLE TO TRANSACTIONS IN TEXAS. 15. JURISDICTION AND VENUE. ALL ACTS CONTEMPLATED BY THIS NOTE SHALL BE PERFORMABLE IN DALLAS COUNTY, TEXAS, AND ALL SUMS PAYABLE UNDER THIS NOTE SHALL BE PAYABLE IN DALLAS COUNTY, TEXAS. BORROWER HEREBY CONFIRMS AND AGREES THAT ALL LEGAL ACTIONS INVOLVING THE VALIDITY OR ENFORCEMENT OF THIS NOTE SHALL HAVE JURISDICTION AND VENUE IN DALLAS COUNTY, TEXAS. 16. Headings. The headings of the paragraphs of this Note are inserted for convenience only and shall not be deemed to constitute a part hereof. 17. Successors and Assigns. This Note and all of the covenants, promises and agreements contained herein shall be binding upon and shall inure to the benefit of Borrower and Lender and their respective executors, administrators, successors and assigns. 18. Modification, Renewal and Extension. This Note is executed and delivered by the Borrower in renewal and extension, but not in extinguishment, of the unpaid indebtedness evidenced by, and in modification of the terms of payment of, that certain Promissory Note dated August 3, 1999, in the stated principal amount of $500,000.00, executed by MWI, Inc. (now known as Borrower pursuant to those certain Articles of Amendment to the Articles of Incorporation INITIALED BY KRD PROMISSORY NOTE - Page 4 BORROWER _______________ of MWI, Inc. filed with the Texas secretary of State's Office on November 7, 2002) and payable to the order of the Lender. 19. FINAL AGREEMENT. THIS NOTE AND THE OTHER LOAN DOCUMENTS EXECUTED IN CONNECTION WITH THE DISBURSEMENT OF FUNDS EVIDENCED BY THIS NOTE, 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. DREW SCIENTIFIC, INC., a Texas corporation By: /s/ Keith Drew ---------------------- Name: Keith Drew Title: President PROMISSORY NOTE - Page 5 EX-10.49 17 w68886exv10w49.txt REVENUE PARTICIPATION AGREEMENT NOVEMBER 20, 2003 Exhibit 10.49 REVENUE PARTICIPATION AGREEMENT This Revenue Participation Agreement (this "Agreement") is executed as of the 20th day of November, 2003, by Drew Scientific, Inc. ("Company"), a Texas corporation, for the benefit of Texas Mezzanine Fund Inc. ("Institution"). RECITALS A. Company and Institution have entered into and executed that certain Loan Agreement of even date herewith (the "Loan Agreement") pursuant to which Institution has agreed to make a loan to Company in the stated principal amount of $558,000.00(the "Loan"), upon the terms and conditions set forth in the Loan Agreement. B. As part of the consideration for making the Loan, Company has agreed that Institution may participate in certain revenues generated by Company's business operations. AGREEMENTS NOW, THEREFORE, for and in consideration of the Loan and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Company and Institution hereby agree as follows: 1. Participation Interest. Company hereby grants and assigns to Institution one percent (1.0%) of Company's annual revenues in excess of $11,500,000.00 (the "Participation Interest"), commencing with annual revenues for Company's fiscal year commencing April 1, 2004. 2. Payment of Participation Interest. During the term of this Agreement, Company shall pay Institution the Participation Interest within one hundred fifty (150) days after the end of each fiscal year (commencing with Borrower's fiscal year ending March 31, 2005). 3. Financial Information regarding Revenues. The term "annual revenues" shall mean the revenues of the Company as reflected on the year-end audited financial statements of the Company. Such financial statements shall be in reasonable detail and prepared in accordance with generally accepted accounting principles, consistently applied, and certified by the general partner of the Company. Upon written request of Institution, Company shall provide to Institution financial statements, balance sheets and such other information as Institution deems necessary to periodically evaluate the financial condition of Company. The Company represents, and Institution acknowledges, that Company's achieving annual revenues in excess of $11,500,000.00 is highly uncertain and speculative. Company specifically disclaims that it has represented to Institution, or provided financial or other information to Institution that reflects the Company will generate revenues in excess of $11,500,000.00 for the year in which the Loan is made. Further, Company represents that it has not, and does not, guarantee to Institution that Company shall ever achieve $11,500,000.00 in annual revenues. Accordingly, Company and Institution acknowledge and agree that there is a substantial risk that Institution may never receive the Participation Interest in that Company's achieving annual revenues in excess of $11,500,000.00 is highly uncertain and speculative. 4. INTEREST. IT IS THE INTENT, UNDERSTANDING AND AGREEMENT OF COMPANY AND INSTITUTION THAT THE PARTICIPATION INTEREST DOES NOT CONSTITUTE, NOR SHALL IT BE CONSTRUED AS CONSTITUTING, INTEREST. TO THE GREATEST EXTENT PERMITTED BY LAW, COMPANY HEREBY WAIVES ANY AND ALL PRESENT AND FUTURE RIGHTS TO ASSERT REVENUE PARTICIPATION AGREEMENT - Page 1 ANY CLAIM, ACTION OR CAUSE OF ACTION RELATING TO USURY, WHETHER AT LAW, BY STATUTE OR IN EQUITY, UNDER STATE OR FEDERAL JURISDICTION, ARISING OUT OF, CONNECTED WITH OR RELATING TO THE PARTICIPATION INTEREST. FURTHER, AND TO THE GREATEST EXTENT PERMITTED BY LAW, COMPANY HEREBY FULLY AND COMPLETELY RELEASES AND DISCHARGES INSTITUTION OF AND FROM ANY AND ALL CLAIMS, LIABILITIES, DEMANDS, DAMAGES, DEBTS, ACTIONS AND CAUSES OF ACTION RELATING TO USURY, WHETHER AT LAW, BY STATUTE OR IN EQUITY, UNDER STATE OR FEDERAL JURISDICTION, WHICH COMPANY HAS OR MAY IN THE FUTURE CLAIM TO HAVE AGAINST INSTITUTION, ARISING OUT OF, CONNECTED WITH OR RELATING TO THE PARTICIPATION INTEREST. 5. Representations and Warranties of Company. Company hereby represents and warrants to Institution as follows: a. Company has the full right, power and authority to execute and deliver this Agreement and to carry out the obligations set forth herein, and further that no parties not expressly made a party to this Agreement are required to join in this Agreement on behalf of Company in order to make this Agreement valid, binding and enforceable against Company; b. the execution and delivery of this Agreement, the consummation of the transactions contemplated herein, and the compliance by Company with this Agreement will not conflict with, violate or result in a breach of or constitute (with due notice or lapse of time, or both) a default under, any law, judicial decision, statute, ruling, rule, regulation, permit, certificate or ordinance in any way applicable to Company; c. no bankruptcy or insolvency proceedings are pending or contemplated by, or to the best knowledge of Company, against Company; and d. all information, reports, papers and data given to Institution by or on behalf of Company are accurate, complete and correct in all material respects and do not omit any fact the inclusion of which is necessary to prevent the facts contained therein from being materially misleading. 6. Relationship of the Parties. No rights or benefits conferred upon Institution by its acceptance of this Agreement shall constitute or be deemed to constitute Institution a partner or joint venturer of or with Company. Consequently, in no event shall Institution be liable for any of the debts, liabilities or obligations of Company. 7. Further Assurances. Company agrees to execute such further instruments as may be, in the opinion of Institution, from time to time necessary or appropriate to fully carry out the purposes hereof and/or to correct any error that was caused by a unilateral mistake on the part of Institution, mutual mistake on the part of Institution and Company, clerical mistake, calculation error, computer malfunction, printing error or similar error. Company further agrees that Institution shall not be liable for any damages incurred by Company that are directly or indirectly caused by any such error. 8. Indemnification. Company shall indemnify, protect, defend and hold harmless Institution from and against any and all claims, demands, causes of action, losses, damages, liabilities, suits, costs and expenses, including, without limitation, attorneys' fees and court costs, asserted against or suffered or incurred by Institution by reason of, arising out of or in connection with (a) a breach or violation of any representation or warranty of Company set forth in this Agreement, (b) a misrepresentation or an inaccurate REVENUE PARTICIPATION AGREEMENT - Page 2 statement of fact made by Company in this Agreement, or (c) a default by Company in the performance of or failure of Company to perform any of its obligations or agreements set forth in this Agreement. 9. Controlling Agreement. All agreements between Company and Institution, whether now existing or hereafter arising and whether written or oral, are hereby limited so that in no contingency or event whatsoever, shall the interest contracted for, charged, received, paid or agreed to be paid to Institution exceed interest computed at the Maximum Rate (as defined below). If, from any circumstance whatsoever, sums deemed to be interest would otherwise be payable to Institution in excess of interest computed at the Maximum Rate, then such sums payable to Institution shall be reduced to interest computed at the Maximum Rate; and if from any circumstance Institution shall ever receive anything of value deemed interest by applicable law in excess of interest computed at the Maximum Rate, an amount equal to any excessive interest shall be applied to the reduction of the principal balance of the Loan and not to the payment of interest, or if such excessive interest exceeds the unpaid balance of principal of the Loan, such excess shall be refunded to the Company or other appropriate party. All interest paid or agreed to be paid to Institution shall, to the extent permitted by applicable law, be amortized, prorated, allocated, and spread throughout the full period until payment in full of the principal (including the period of any renewal or extension) so that the interest for such full period shall not exceed interest computed at the Maximum Rate. The term "Maximum Rate" shall mean the highest lawful rate of interest applicable to the Loan taking into account whichever of applicable federal law or Texas law permits the higher rate of interest, and after also taking into consideration all compensation deemed interest under applicable law. 10. Severability. If any provision of this Agreement is or may be held by a court of competent jurisdiction to be invalid, void, or unenforceable to any extent, the validity of the remaining parts, terms or provisions of this Agreement shall not be affected thereby, and such illegal or invalid part, terms, or provision shall be deemed not to be part of this Agreement. The remaining provisions shall nevertheless survive and continue in full force and effect without being invalidated in any way to the extent the remaining provisions further accomplish the goals and intents of this Agreement. 11. Modification. No provision of this Agreement may be modified, waived or terminated except by written instrument executed by the party against whom a modification, waiver or termination is sought to be enforced. 12. Termination. This Agreement shall terminate upon the maturity date of the Loan, or the prepayment of the Loan, whichever is earlier, PROVIDED, however, that in the event any payment(s) due and payable under this Agreement remain unpaid as of the date of the maturity or earlier prepayment of the Loan, then the obligation and liability of Company to pay such amounts shall continue until the amounts due under this Agreement are fully paid and satisfied. 13. Notices. Any notice, request or other communication required or permitted to be given hereunder shall be in writing and shall be deemed to have been given and received when deposited in a post office or official depository of the United States Postal Service, postage prepaid, certified or registered mail, return receipt requested, addressed to the respective parties as follows: If to the Company: Drew Scientific, Inc. 4230 Shilling Way Dallas, Texas 75237 Attn: Keith Drew REVENUE PARTICIPATION AGREEMENT - Page 3 If to Institution: Texas Mezzanine Fund Inc. 351 West Jefferson Blvd., Suite 800 Dallas, Texas 75208 Attn: Theresa Lee Each of the parties hereto shall be entitled to specify a different address by giving written notice to the other party hereto in accordance with this section. 13. Governing Law and Venue. This Agreement shall be governed by and construed accordance with the laws of the state of Texas and the laws of the United States pertaining to transactions in Texas. Venue in any action arising out of this Agreement shall lie in Dallas County, Texas. 14. Entire Agreement. This Agreement embodies and constitutes the final understanding and agreement between the parties hereto with respect to the transaction contemplated in this Agreement, and may not be contradicted by evidence of prior, contemporaneous or subsequent agreements, understandings, representation and statements, oral or written. There are no unwritten oral agreements between the parties hereto. COMPANY: DREW SCIENTIFIC, INC., a Texas corporation By: /s/ Keith Drew ------------------------- Name: Keith Drew Title: President INSTITUTION: TEXAS MEZZANINE FUND INC., a Texas corporation By: /s/ Theresa Lee ------------------------- Name: Theresa Lee Title: Vice-President REVENUE PARTICIPATION AGREEMENT - Page 4 EX-10.50 18 w68886exv10w50.txt SECURITY AGREEMENT NOVEMBER 20,2003 Exhibit 10.50 SECURITY AGREEMENT This SECURITY AGREEMENT (this "Agreement") is executed and entered into by and between TEXAS MEZZANINE FUND INC., a Texas corporation ("Secured Party"), and DREW SCIENTIFIC, INC., a Texas corporation ("Debtor"), as follows: WITNESSETH: WHEREAS, Debtor and Secured Party have executed that certain Loan Agreement of even date herewith (the "Loan Agreement") pursuant to the terms and provisions of which Secured Party has agreed to loan Debtor the sum of Five Hundred Fifty-Eight Thousand and No/100 Dollars ($558,000.00); WHEREAS, Debtor has executed a promissory note of even date herewith in the stated principal amount of $558,000.00 (the "Note") payable to the order of Secured Party pursuant to the terms and conditions contained therein; and WHEREAS, pursuant to the terms and provisions of the Note and the Loan Agreement, the parties hereto wish to secure payment and performance of Debtor's obligations under the Note and the Loan Agreement pursuant to the terms and provisions set forth hereinbelow. (The Note, the Loan Agreement and any of the other documents executed in connection with this loan may sometimes be collectively referred to herein as the "Loan Documents".) NOW, THEREFORE, in consideration of Ten and No/100 Dollars ($10.00) and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. Security for Indebtedness. As security for full and timely payment, performance and satisfaction of the Indebtedness (as defined below), Debtor hereby grants to Secured Party a security interest in the Collateral (as defined below). 2. Collateral. The term "Collateral" shall mean all of the following property Debtor now or later owns or has an interest in, wherever located: (a) All Accounts, Chattel Paper, contract rights, Documents, Instruments, Deposit Accounts and General Intangibles. (b) All Equipment and Fixtures. (c) All Inventory. (d) All Goods, Instruments, Documents, Investment Property, money or other property which are now or later in possession or control of Secured Party, or as to which Secured Party now or later controls possession. (e) All additions, accessions, attachments, replacements, substitutions, amendments, modifications, extensions, renewals, enlargements, products, Proceeds, income, interest, profits and distributions of or relating to the foregoing. (f) All books of account, customer lists and other Records relating in any way to the foregoing. All terms capitalized above shall have the meanings assigned to them in the Uniform Commercial Code of the State of Texas (the "Code"). 3. Indebtedness. As used herein, the term "Indebtedness" shall mean (a) all of Debtor's debts, liabilities, covenants, agreements, promises and obligations under the Note, the Loan Agreement, this Agreement and the other Loan SECURITY AGREEMENT - Page 1 Documents, together with any and all renewals, extensions, increases, rearrangements or modifications thereof, (b) all costs incurred by Secured Party to obtain, preserve, perfect and enforce this Agreement and the security interest in the Collateral, and maintain, preserve and collect the Collateral, including without limitation taxes, assessments, insurance premiums, reasonable attorneys' fees and legal expenses and expenses of sale, and (c) all future loans and advances made by Secured Party to Debtor and all other debts, obligations and liabilities of every kind and character of Debtor now or hereafter existing in favor of Secured Party, it being contemplated that Debtor may hereafter become indebted to Secured Party in further sum or sums. 4. Insurance. Debtor will, at its own expense, maintain insurance with respect to all Collateral in such amounts, against such risks, in such form and with such insurers, as shall be reasonably satisfactory to Secured Party from time to time. If requested by Secured Party, each policy for property damage insurance shall provide for all losses to be paid directly to Secured Parry. If requested by Secured Party, each policy of insurance maintained by Debtor shall (a) name Debtor and Secured Party as insured parties thereunder (without any representation or warranty by or obligation upon Secured Party) as their interests may appear, (b) contain the agreement by the insurer that any loss thereunder shall be payable to Secured Party notwithstanding any action, inaction or breach of representation or warranty by Debtor, (c) provide that there shall be no recourse against Secured Party for payment of premiums or other amounts with respect thereto, and (d) provide that at least thirty (30) days prior written notice of cancellation or of lapse shall be given to Secured Party by the insurer. Debtor will, if requested by Secured Party, deliver to Secured Party original or duplicate policies of such insurance and, as often as Secured Party may reasonably request, a report of a reputable insurance broker with respect to such insurance. Debtor will also, at the request of Secured Party, duly execute and deliver instruments of assignment of such insurance policies and cause the respective insurers to acknowledge notice of such assignment. All insurance payments in respect of loss of or damage to any Collateral shall be paid to Secured Party and applied as Secured Party in its sole discretion deems appropriate. 5. Books and Records of Debtor. Debtor will maintain accurate books and records with respect to the Collateral. Said books and records will evidence the security interest of Secured Party in the Collateral (but Debtor's failure to do so shall never impair Secured Party's right hereunder) and will be kept at Debtor's mailing address as specified in this Agreement. 6. Distributions From Collateral. In the event Debtor shall become entitled to receive or shall receive, in connection with any of the Collateral, (a) any additions to or substitutions for any of the Collateral, or any rights to such additions to or substitutions, (b) any distribution payable in property or cash distributions, or (c) any distributions of any kind whatsoever, Debtor shall accept same as encumbered by the security interest created hereby; provided, however, in an Event of Default (as defined below), Debtor shall deliver all distributions of any kind whatsoever declared and paid on account of the Collateral to Secured Party. 7. Representations and Warranties. Debtor warrants and represents to Secured Party that (a) Debtor has power and authority to enter into this Agreement, and to pledge the Collateral for the purposes described herein, (b) Debtor will be the legal and beneficial owner of all of the Collateral, (c) except as set forth on Exhibit B attached hereto, all of the Collateral will be owned by Debtor free of any pledge, mortgage, lien, security interest or encumbrance of any kind, except for the security interest granted herein, (d) the execution and delivery by Debtor of this Agreement, and the performance of its terms, will not result in any violation or default under the terms of any agreement or instrument, or any law or governmental rule or regulation applicable to Debtor or the Collateral, (e) upon execution and delivery by Debtor of this Agreement, this Agreement shall create a valid security interest in the Collateral, and the proceeds thereof, subject to no prior security interest except as may set forth on Exhibit B, (f) 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, Debtor is and will be solvent, (g) except as disclosed in writing to Secured Party, Debtor is conducting Debtor's businesses in material compliance with all applicable federal, state and local laws, statutes, ordinances, rules, regulations, orders, determinations and court decisions, including without limitation, those pertaining to health or environmental matters, and (h) if any of the Collateral consists of Accounts, each Account is valid and enforceable without performance by Debtor and is not subject to any contra accounts, setoffs, defenses or counterclaims. SECURITY AGREEMENT - Page 2 8. Affirmative Covenants. Debtor covenants and agrees to: (a) from time to time promptly execute and deliver to Secured Party all such other assignments, certificates, supplemental writings and financing statements, and do all other acts or things, as the Secured Party may request in order more fully to evidence and perfect the security interest herein created or to effect the purposes of this Agreement; (b) punctually and properly perform all of the Debtor's covenants and duties under any Loan Documents; (c) promptly furnish Secured Party with any information or writings which Secured Party may request concerning the Collateral; (d) allow Secured Party to inspect all records of Debtor relating to the Collateral, and to make and take away copies of such records, at the Debtor's expense, at such reasonable times and as often as may be reasonably requested by Secured Party; (e) notify Secured Party of any change in the location of the Collateral, Debtor's principal place of business and mailing address prior to any such change, (f) promptly notify Secured Party of any change in any fact or circumstance warranted or represented by Debtor in this Agreement or in any other writings furnished by Debtor to Secured Party in connection with the Collateral; (g) promptly notify Secured Party of any claim, action or proceeding relating to the Collateral, or any part thereof or the security interest therein, and, at the request of Secured Party, appear in and defend, at Debtor's expense, any such action or proceedings; (h) promptly pay to Secured Party the amount of all court costs and attorneys' fees incurred by Secured Party hereunder; (i) fully perform all of Debtor's duties under and in connection with each transaction to which the Collateral relate, so that the amounts thereof shall actually become payable in their entirety to Debtor; (j) promptly collect and enforce payment of the Collateral; (k) maintain the Collateral in good repair, working order and condition; (1) pay, before delinquent, all taxes and other assessments lawfully levied against the Collateral; and (m) 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 by this Agreement and the other Loan Documents. 9. Performance by Secured Party. Should any covenant, duty or agreement of Debtor fail to be performed in accordance with its terms hereunder, Secured Party may perform or attempt to perform such covenant, duty or agreement on behalf of Debtor, and any amount expended by Secured Party in such performance or attempted performance shall become a part of the Indebtedness, and, at the request of Secured Party, Debtor agrees promptly to pay such amount to Secured Party at Secured Party's office set forth below, provided that Secured Party does not assume and shall never have any liability for the performance of any duties of Debtor under or in connection with the Collateral, or any part thereof, or under any transaction, agreement or contract out of which the Collateral, or any part thereof, may arise. If any lessee, obligor or account debtor of all or any part of the Collateral fails or refuses to make payment thereon when due, Secured Party is authorized, in its discretion, either in its own name or in the name of Debtor, to take such action as Secured Party shall deem reasonably appropriate for the collection of the Collateral and any proceeds thereof with respect to which a delinquency exists. Regardless of any other provision hereof, however, Secured Party shall never be liable for its failure to collect, or for its failure to exercise diligence in the collection of any of the Collateral or any proceeds thereof, nor shall it be under any duty whatsoever to anyone, except to account for the funds that it shall actually receive hereunder. 10. Negative Covenants. Debtor hereby covenants that, until such time as the Indebtedness has been fully paid, performed and satisfied, Debtor will not: (a) sell, convey, pawn or otherwise dispose of any of the Collateral or any interest therein other than in the ordinary course of business; (b) create, incur or permit to exist any pledge, mortgage, lien, charge, encumbrance or any security interest whatsoever in or with respect to any of the Collateral, or the proceeds thereof, other than the security interest created hereby and any encumbrance or security interest expressly permitted by this Agreement and the other Loan Documents; or (c) remove, or permit to be removed, Debtor's records concerning the Collateral from Debtor's mailing address as specified in this Agreement. Debtor covenants and agrees that Debtor will not use or permit the Collateral which are inventory or equipment to be used for any unlawful purpose or in any manner inconsistent with the provision or requirements of any policy of insurance thereon. 11. Indemnity. Debtor warrants to defend Secured Parry's right, title and security interest in and to the Collateral against the claims of any person or entity. Further, 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 which may be imposed on, incurred by, or asserted against, any Indemnified Person (whether or not caused by any Indemnified Person's sole, concurrent or contributory negligence) SECURITY AGREEMENT - Page 3 arising in connection with the Loan Documents 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). 12. Event of Default. As used herein, the term "Event of Default" shall mean the failure of timely payment and performance of any of the Indebtedness, or any "default" or "event of default" as defined in any of the Loan Documents. 13. Rights and Remedies. Upon the occurrence of an Event of Default, in addition to all other remedies available to Secured Party, Secured Party may, at Secured Party's option, without limitation and without notice except as expressly provided in any of the Loan Documents: (a) exercise in respect of the Collateral all the rights and remedies of a secured party under the Code; (b) proceed immediately to have any or all of the Collateral transferred to Secured Party's name, and Debtor hereby covenants that, in such event and upon Secured Party's request, Debtor will take such actions as are necessary to effectuate such transfer; (c) 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; (d) apply for the appointment of a receiver for the Collateral; (e) 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; or (f) proceed immediately to dispose of and realize upon the Collateral, or any part thereof, and in connection therewith, sell or otherwise dispose of and deliver the Collateral, or any part thereof, in one or more parcels at public or private sale or sales, or at any of Secured Party's offices or elsewhere, at such prices and on such terms as it may deem best, for cash or on credit, or for future delivery without assumption of any credit risk, with the right of Secured Party or any purchaser to purchase at any such sale either the whole or any part of the Collateral (in connection with any such sale or disposition, Secured Party need not give more than ten (10) calendar days notice of the time and place of any public sale or of the time after which a private sale may take place, which notice Debtor hereby acknowledges to be reasonable). Debtor does hereby expressly waive any right to any legal process of judicial hearing prior to such taking of possession by the Secured Party. Debtor understands that the right to prior notice and hearing is a valuable right and agrees to the waiver thereof as a part of the consideration for and as an inducement to the Secured Party to enter into the loan transaction. 14. Application of Proceeds. The proceeds of any disposition of all or any part of the Collateral may be applied by Secured Party in such order and manner as Secured Party, in its discretion, deems appropriate including, without limitation, the following order: (a) first, to the costs and expenses incurred in connection with the disposition of the Collateral or incidental thereto, including reasonable attorneys' fees and legal expenses; (b) second, at Secured Party's election, to the payment or other satisfaction of any liens and other encumbrances upon the Collateral; (c) third, to the satisfaction of the Indebtedness; (d) fourth, to the payment of any other amounts required by applicable law; and (e) fifth, to Debtor to the extent of any surplus remaining. Debtor shall remain liable for any deficiency, which it shall pay to Secured Party immediately upon demand. 15. Waiver by Debtor. Except as expressly otherwise provided for herein, Debtor hereby waives demand, presentment, presentment for payment, notice of intent to demand, notice of nonpayment, notice of dishonor, diligence in collecting, grace, notice (including notice of intent to accelerate and notice of acceleration), protest and notice of protest. Debtor hereby further agrees that no act or omission of Secured Party with reference to the Collateral, including but not limited to failure to file or perfect any lien or security interest, shall release Debtor from its obligations hereunder. 16. Custody of Collateral. Should any part of the Collateral which is Inventory or Equipment come into the possession of Secured Party, whether before or after default, Secured Party may use or operate the Collateral for the purpose of preserving it or its value, pursuant to the order of a court of appropriate jurisdiction, or in accordance with any other rights held by Secured Party in respect of the Collateral. Debtor covenants to promptly reimburse and pay to Secured Party, all costs (including the cost of any insurance and payment of taxes or other charges) incurred by Secured Party in connection with the custody, preservation, use or operation of the Collateral, and all such expenses, costs, taxes and other charges shall be a part of the Indebtedness. It is agreed, however, that the risk of accidental loss or damage to the Collateral is on Debtor, and Secured Party shall have no liability whatsoever for failure to obtain or maintain insurance or to determine whether any insurance ever in force is adequate as to amount or as to the risks insured. SECURITY AGREEMENT - Page 4 17. Collection of Proceeds. Debtor agrees that upon the request of Secured Party, Debtor shall establish and maintain at its sole expense, a non-interest bearing deposit account styled as designated by Secured Party, with a financial institution designated by Secured Party, into which Debtor shall deposit all payments received by Debtor with respect to the Collateral, and over which Secured Party shall have the exclusive authority to withdraw funds in the event of a default hereunder. Upon notice of default from Secured Party, each account debtor or other party obligated to Debtor is hereby authorized and directed by Debtor to make all payments due to Debtor directly to Secured Party, and Debtor agrees to notify and instruct all account debtors and other parties obligated to Debtor that all payments made to Debtor shall be remitted, for the credit of Debtor, to Secured Party. Upon the earlier of default or notice from Secured Party, Debtor covenants and agrees that: (a) all cash proceeds of the Collateral received by Debtor, whether in the form of cash, checks, or otherwise, shall be segregated from all other funds of Debtor and be held in trust for Secured Party, and each item of such proceeds, immediately upon receipt thereof by Debtor shall become part of the Collateral; and (b) Debtor shall have absolutely no dominion or control over any payment received in respect of the Collateral, or any part thereof, except to deliver such payment immediately to Secured Party properly endorsed, so that Secured Party may collect and apply the proceeds in accordance with the terms hereof. Secured Party is authorized and empowered, on behalf of Debtor, to endorse the name of Debtor upon any check, draft or other instrument payable to Debtor evidencing payment upon the Collateral, or any part thereof, and to receive and apply the proceeds therefrom in accordance with the terms hereof. Secured Party is expressly granted a limited power of attorney by Debtor for the purpose of endorsing Debtor's name as set forth hereinabove, such limited power of attorney being an irrevocable power of attorney coupled with an interest. 18. Delivery of Notices. Debtor agrees to promptly deliver to Secured Party a copy of all written notices received by Debtor with respect to the Collateral or the Indebtedness. 19. Termination Upon Performance. Upon full payment and performance of all of the Indebtedness and upon payment of all additional costs and expenses provided herein, this Agreement shall terminate. 20. Filing of Financing Statement. Debtor authorizes Secured Party to file in the name of and on behalf of Debtor all financing statements or other filings deemed necessary or desirable by Secured Party to evidence, perfect, or continue the security interests granted in this Agreement. 21. Parties Bound. This Agreement is binding upon and shall inure to the benefit of the parties hereto, and their heirs, administrators and assigns. 22. GOVERNING LAW AND VENUE. THIS AGREEMENT HAS BEEN ACCEPTED AND IS PERFORMABLE WITHIN DALLAS COUNTY, TEXAS, AND VENUE IN ANY ACTION ARISING OUT OF THIS AGREEMENT SHALL LIE IN DALLAS COUNTY, TEXAS. THIS AGREEMENT SHALL BE GOVERNED AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS AND FEDERAL LAWS APPLICABLE TO THE STATE OF TEXAS. 23. Transfer and Assignment. This Agreement and the security interest created hereby shall be transferable and assignable by Secured Party in whole or in part, at such times and upon such terms as it deems advisable and, upon any such transfer or assignment, the transferee or assignee shall succeed to all rights and powers of the Secured Party hereunder to the extent of any such transfer or assignment. 24. No Waiver by Secured Party. No waiver by Secured Party of any default shall be deemed to be a waiver of any other subsequent default, nor shall any such waiver by Secured Party be deemed to be a continuing waiver. No delay or omission by Secured Party in exercising any right or power hereunder, or under any of the other Loan Documents, shall impair any such right or power or be construed as a waiver thereof or any acquiescence therein, nor shall any single or partial exercise of any such right or power preclude other or further exercise thereof, or the exercise of any other right or power of Secured Party hereunder or under any of the Loan Documents. 25. Cumulative Rights. All rights and remedies of the 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 other SECURITY AGREEMENT - Page 5 contract or document for the enforcement of the security interest herein or the collection of the Indebtedness, and the exercise of one or more rights or remedies shall not prejudice or impair the concurrent or subsequent exercise of other rights or remedies provided in other instruments and agreements between Debtor and Secured Party, or as provided by law, including without limitation, the rights and remedies of a secured party under the Code. 26. Notice. Any notice or other communication required or permitted hereunder must be in writing and sent by U.S. Mail, registered or certified, return receipt requested. Notice given under the above-described manner shall be deemed to have been given and received when a registered or certified letter containing such notice, properly addressed, with postage prepaid, return receipt requested is deposited in the United States mail. Such notices shall be given to the parties hereto at the following addresses: If to Debtor: Drew Scientific, Inc. 4230 Shilling Way Dallas, Texas 75237 Attn: Keith Drew If to Secured Party: Texas Mezzanine Fund Inc. 351 West Jefferson Blvd., Suite 800 Dallas, Texas 75208 Attn: Theresa Lee Each of the parties hereto shall be entitled to specify a different address by giving written notice to the other party hereto in accordance with this Paragraph. 27. Modification. No term or condition of this Agreement shall be deemed to have been waived nor shall there be any estoppel to enforce any provision of this Agreement except by written instrument of the party charged with such waiver or estoppel. No amendment or modification of this Agreement shall be deemed effective unless and until executed in writing by both of the parties hereto. 28. Further Assurances. Debtor will execute, re-execute and/or initial any such document or instrument as may be requested by Secured Party in order to (a) correct any errors or omissions in this Agreement, whether such error or omission is due to the unilateral mistake of Secured Party, mutual mistake on the part of Secured Party and Debtor, clerical mistake, calculation error, computer malfunction, printing error or similar error, or (b) perfect or give further assurances of any of the rights, titles, liens or security interests granted or provided for in this Agreement. Debtor further agrees that Secured Party shall not be liable to Debtor for any damages incurred by Debtor that are directly or indirectly caused by any such mistake, error or omission. 29. Severability. All agreements and covenants contained herein are severable and in the event that any of them shall be held to be invalid by any court of competent jurisdiction, this Agreement shall be interpreted as if such invalid agreements or covenants were not contained herein. 30. Gender and Number. Where appropriate, the use of one gender shall be construed to include the others or any of them; and the singular number shall be construed to include the plural, and vice versa. 31. FINAL AGREEMENT. THIS WRITTEN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES WITH RESPECT TO THE SUBJECT MATTER HEREOF 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. SECURITY AGREEMENT - Page 6 EXECUTED this 20th day of November, 2003. SECURED PARTY: TEXAS MEZZANINE FUND INC., a Texas corporation By: /s/ Theresa Lee ----------------------- Name: Theresa Lee Title: Vice-President DEBTOR: DREW SCIENTIFIC, INC., a Texas corporation By: /s/ Keith Drew ----------------------- Name: Keith Drew Title: President SECURITY AGREEMENT - Page 7 Exhibit B Permitted Liens/Security Interests/Encumbrances 1. Financing Statement No. 99-156605 filed on August 3,1999 in the Office of the Secretary of State of the State of Texas, MWI, Inc. dba Danam Electronics, as debtor, Texas Mezzanine Fund, Inc., as secured party, covering all accounts, inventory and equipment, with security interest in (a) export related accounts and inventory subordinated to the security interest of Bank of America, N.A., and (b) domestic accounts and inventory subordinated to the security interest of Vertex Financial Corporation pursuant to Intercreditor Agreement by and among Texas Mezzanine Fund, Inc., Bank of America, N.A. and Vertex Financial Corporation dated March 7, 2002, as amended. 2. Financing Statement No. 00-520328 filed on June 12, 2000 in the Office of the Secretary of State of the State of Texas, MWI, Inc. dba Danam Electronics, as debtor, Bank of America, N.A., as secured party, covering all accounts, inventory and equipment, as amended by Financing Statements 02-00199789, 02-00210790, 02-00277004 and 02-00302353. 3. Financing Statement No. 0002038371 filed on December 5,2000 in the Office of the Secretary of State of the State of Connecticut, MWI, Inc. , as debtor, Associates Leasing, Inc., as secured party, covering one (1) Daewoo Mynx 500. 4. Financing Statement No. 02-0024567117 filed on April 1, 2002 in the Office of the Secretary of State of the State of Texas, MWI, Inc., as debtor, Vertex Financial Corporation, as secured party, covering all domestic accounts and inventory, as amended by Financing Statement No. 03-00121476. EX-10.51 19 w68886exv10w51.txt LOAN AGREEMENT NOVEMBER 20,2003 Exhibit 10.51 LOAN AGREEMENT This LOAN AGREEMENT (this "Agreement") is made and entered into by and between DREW SCIENTIFIC, INC., a Texas corporation ("Borrower"), and TEXAS MEZZANINE FUND INC., a Texas corporation ("Lender"). Borrower has applied to Lender for a loan in the principal amount of Five Hundred Fifty-Eight Thousand and No/100 Dollars ($558,000.00) (the "Loan"). In consideration of the mutual covenants and agreements herein contained, Lender and Borrower agree as follows: WITNESSETH: 1.00. Definitions The terms used in this Agreement shall have the following meanings: 1.01. Casualty Insurance Policies shall mean fire insurance, comprehensive property damage, public liability, worker's compensation, and other insurance deemed necessary or otherwise required by Lender. Each of the Casualty Insurance Policies shall name Lender as an additional insured and shall be specifically endorsed to provide for at least thirty (30) days prior written notice to Lender of cancellation or modification thereof. The insurance provisions of this Agreement are cumulative of any insurance provisions contained in the Security Instrument. 1.02. Collateral shall mean the Personal Property and the benefits payable pursuant to an assignment of Life Insurance Policy. 1.03. Governmental Authority shall mean any and all courts, boards, agencies, commissions, offices or authorities of any nature whatsoever for any governmental unit (federal, state, county, district, municipal, city or otherwise) whether now or hereafter in existence. 1.04. Guarantor shall mean, jointly and severally, Keith Raymond Drew and Drew Scientific Group, PLC. 1.05. Guaranty shall mean a guaranty agreement duly executed by the Guarantor, whereby the Guarantor, primarily and unconditionally, guarantees to Lender payment of the Loan and performance of Borrower's obligations under the Loan Documents. 1.06. Legal Requirements shall mean (a) any and all present and future judicial decisions, statutes, rulings, rules, regulations, permits, certificates or ordinances of any Governmental Authority in any way applicable to Borrower, any guarantor or the Collateral, including, but not limited to, those respecting the ownership, use, occupancy, possession, operation, maintenance, alteration, repair or reconstruction thereof, (b) Borrower's organizational documents, (c) any and all leases and other contracts (written or oral) of any nature to which Borrower or any guarantor may be bound, and (d) any and all restrictions, reservations, conditions, easements or other covenants or agreements of record affecting the Collateral. 1.07. Life Insurance Policy shall mean a life insurance policy upon Keith Raymond Drew, with an insurance company satisfactory to Lender, in an amount of not less that $558,000.00 for such policy. The Life Insurance Policy shall be specifically endorsed to provide at least thirty (30) days prior written notice to Lender of cancellation or modification thereof. 1.08. Loan Documents shall include this Agreement, the Note (including all renewals, extensions, modifications and rearrangements thereof), the Security Instrument and all other instruments contemplated to be executed pursuant to or in connection with the Loan. 1.09. Note shall mean that certain Promissory Note in the stated principal amount of $558,000.00, in the form and substance as prescribed by Lender, and all renewals, extensions and rearrangements thereof or substitutions LOAN AGREEMENT - Page 1 therefore, permitted by the Lender, duly executed by Borrower. The principal of and interest on the Note shall be due and payable in accordance with the terms and conditions set forth in the Note and in this Agreement. 1.10. Personal Property shall mean all of the following property Borrower now or later owns or has an interest in, wherever located: (a) All Accounts, Chattel Paper, contract rights, Documents, Instruments, Deposit Accounts and General Intangibles. (b) All Equipment and Fixtures. (c) All Inventory. (d) All Goods, Instruments, Documents, Investment Property, money or other property which are now or later in possession or control of Lender, or as to which Lender now or later controls possession. (e) All additions, accessions, attachments, replacements, substitutions, amendments, modifications, extensions, renewals, enlargements, products, Proceeds, income, interest, profits and distributions of or relating to the foregoing. (f) All books of account, customer lists and other Records relating in any way to the foregoing. All terms capitalized above shall have the meanings assigned to them in the Uniform Commercial Code of the State of Texas. 1.11. Security Agreement shall mean that certain Security Agreement covering the Personal Property and securing the Note and all other debts, obligations and liabilities of every kind and character of Borrower now or hereafter existing in favor of Lender, duly executed by Borrower and such others (if any) as shall be required to create a security interest in the Personal Property. 1.12. Security Instrument shall mean the Security Agreement. 2.00. LOAN COMMITMENT AND REPAYMENT. Subject to the terms and provisions of this Agreement: 2.01. Loan Commitment. Lender agrees to loan Borrower, and Borrower agrees to borrow from Lender, the amount of Five Hundred Fifty-Eight Thousand and No/100 Dollars ($558,000.00). Lender agrees to make the Loan to Borrower in advances subject to and in accordance with the terms and conditions of this Agreement. Lender's commitment to lend shall expire and terminate (a) on April 30, 2004; or (b) at Lender's option in the event of an Event of Default. The Loan is not revolving. An amount repaid may not be reborrowed. Interest on the sums advanced under the Loan shall accrue at the rate of 8.0% per annum (subject to annual adjustment as provided for in the Note) and shall be calculated at a daily rate equal to 1/360th of the annual percentage rate, based on the actual number of days elapsed. Borrower shall execute and deliver to Lender the Note to evidence Borrower's obligation to repay the Loan. 2.02. Security, Payment of the indebtedness evidenced by the Note and the other Loan Documents shall be secured by the Security Instrument and the liens, security interests and collateral assignments created or evidenced by the other Loan Documents and guaranteed by the Guarantor. 2.03. Required Documentation. Borrower and Lender agree that prior to any advance of Loan proceeds, Lender shall have received (a) the Note, the Security Instrument and all other Loan Documents appropriately executed by Borrower and all other proper parties, (b) a waiver of any landlord's lien upon any of the Personal Property, (c) an agreement with the holder of any lien or security interest on the Collateral (without hereby implying the consent of Lender to the existence or creation of a such lien or security interest) regarding the priority of liens and security interests on the Collateral, (d) a subordination agreement from Guarantors regarding the payment of any debts due by Borrower, LOAN AGREEMENT - Page 2 and (e) as part of the consideration for making the Loan, a revenue participation agreement granting Lender the right to participate in certain revenues generated by Borrower's business operations. 2.04. Conditions Precedent To Loan Advances. (a) At least five (5) business days before the requested date of an advance of Loan proceeds, Borrower shall deliver an Advance Request to Lender. Borrower shall be entitled to an advance only in an amount approved by Lender in accordance with the terms of this Agreement and the Loan Documents. An "Advance Request" means a properly completed and executed written application by Borrower to Lender, in a form approved by Lender, setting forth the amount of Loan proceeds desired, together with such schedules, affidavits, statements, invoices, bills, and other documents, certificates and information required by Lender. Lender shall make the requested advance to Borrower on a business day within five (5) business days after satisfaction of all applicable conditions of this Agreement and the Loan Documents. Lender's obligation to make any advances under this Agreement and the other Loan Documents shall be subject to the conditions precedent that, as of the date of such advance and after giving effect thereto (a) all representations and warranties made to Lender by Borrower and any of the guarantors in this Agreement and the other Loan Documents shall be true and correct, as of and as if made on the date of such advance, (b) no material adverse change in the financial condition of Borrower or any of the guarantors since the effective date of the most recent financial statements furnished to Lender by Borrower or any of the guarantors shall have occurred and be continuing, and (c) no event has occurred and is continuing, or would result from the requested advance, which with notice or lapse of time, or both, would constitute an Event of Default, Each Advance Request, and Borrower's acceptance of any advance, shall be deemed to ratify and confirm that all representations and warranties in the Loan Documents remain true and correct as of the date of the Advance Request and the advance, respectively. Advances may also be made, in addition to other methods contemplated herein, at Lender's option, by direct or joint check payment to any or all vendors or other persons entitled to payment for work or services performed or materials or goods furnished in connection with the Advance Request. (b) Borrower and Lender agree that the first advance of Loan proceeds hereunder shall consist of (i) the amounts necessary to renew and extend the unpaid indebtedness evidenced by that certain Promissory Note dated August 3,1999, in the stated principal amount of $500,000.00, executed by MWI, Inc. (now known as Borrower pursuant to those certain Articles of Amendment to the Articles of Incorporation of MWI, Inc. filed with the Texas secretary of State's Office on November 7, 2002) and payable to the order of the Lender, and (ii) an amount not to exceed $245,000.00. Borrower and Lender further agree that the second advance of Loan proceeds hereunder shall be in an amount not to exceed $100,000.00. Subsequent advances of Loan proceeds hereunder shall be made pursuant to Section 2.04(a) above. 3.00. REPRESENTATIONS AND WARRANTIES OF BORROWER. Borrower represents and warrants that: 3.01. Organization. Borrower is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Texas and all other states where it is doing business, and has all requisite power and authority to execute and deliver this Agreement and the other Loan Documents. 3.02. Due Execution of Loan Documents. This Agreement, the Note, the Security Instrument and the other Loan Documents have been or will be duly executed, issued and delivered by Borrower and constitute or, when executed and delivered to Lender, will constitute valid and legally binding obligations of Borrower, enforceable in accordance with their respective terms. 3.03. Consent Not Required. No consent of any person and no consent, license, approval or authorization of, or registration or declaration with, any governmental body, authority, bureau or agency is required in connection with the execution and delivery of this Agreement, the Note, the Security Instrument and the other Loan Documents to which Borrower is a party. LOAN AGREEMENT - Page 3 3.04. No Conflict. The execution and delivery of this Agreement, the Note, the Security Instrument and the other Loan Documents, the consummation of the transactions contemplated therein, and the compliance by Borrower with this Agreement, the Note, the Security Instrument and the other Loan Documents, will not conflict with, violate or result in a breach of or constitute (with due notice or lapse of time, or both) a default under, any Legal Requirement or result in the creation or imposition of any lien, charge or encumbrance of any nature whatsoever upon any of Borrower's or any of any guarantor's property other than the lien and security interest created by the Loan Documents. 3.05. No Pending or Threatened Litigation. There are no actions, suits or proceedings pending, or to the knowledge of Borrower, threatened against or affecting Borrower, any guarantor or the Collateral. 3.06. Financial Matters. Borrower is solvent, is not bankrupt and has no outstanding liens, suits, garnishments, bankruptcies or court actions which could render Borrower insolvent or bankrupt. There has not been filed by or against Borrower a petition in bankruptcy or a petition or answer seeking an assignment for the benefit of creditors, the appointment of a receiver, a trustee, custodian or liquidator with respect to Borrower or any substantial portion of Borrower's property, reorganization, arrangement, rearrangement, composition, extension, liquidation or dissolution or similar relief under the United States Bankruptcy Code or any state law. All reports, statements and other data or applications for credit supplied to Lender by or on behalf of Borrower or any guarantor prior to, contemporaneously with or subsequent to the execution of this Agreement are true and correct in all material respects and do not omit to state any fact or circumstance necessary to make the statements contained therein not misleading. Any and all financial statements and applications for credit have been prepared in accordance with generally accepted accounting practices consistently applied, and fully and accurately present the financial condition of the subject thereof as of the date thereof and no material adverse change has occurred in the financial condition reflected therein since the respective dates thereof. 3.07. No Existing Violation or Default. Borrower is not in violation of or in default with respect to any existing Legal Requirement, the payment of any indebtedness or the terms or provisions of any agreement or instrument evidencing or securing any such indebtedness. 3.08. No Verbal Agreements. Borrower has not made any verbal or written contract or arrangement of any kind, the occurrence, performance or recordation of which would give rise to a lien or security interest in the Collateral. 3.09. Taxes. Borrower has filed all federal, state and local tax reports and returns required by any law or regulation to be filed by it, including, without limitation, any and all payroll taxes, and has either duly paid all taxes, duties and charges indicated due on the basis of such returns and reports, or made adequate provision for the payment thereof, and the assessment of any material amount of additional taxes in excess of those paid and reported is not reasonably expected. 3.10. Compliance with Applicable Laws. The location, construction, occupancy, operation and use of the Collateral and the intended use thereof by Borrower comply with all applicable restrictive covenants, zoning ordinances and building codes, flood disaster laws, applicable health and environmental laws and regulations and all other applicable laws, statutes, ordinances, rules, regulations, orders, determinations and court decisions (all of the foregoing hereinafter sometimes collectively referred to as "Applicable Laws"). Borrower has obtained all requisite zoning, utility, building, health and operating permits from the applicable Governmental Authority. 3.11. Encumbrances. Borrower has good and marketable title to the Collateral. The Collateral is free and clear from all liens, security interests and encumbrances except the liens, security interests and encumbrances, if any, set forth on Exhibit "B" attached hereto and made a part hereof. 4.00. AFFIRMATIVE COVENANTS AND AGREEMENTS OF BORROWER. Until the Note and all other obligations and liabilities of Borrower under this Agreement and the other Loan Documents are fully paid and satisfied, Borrower covenants and agrees with Lender as follows: 4.01. Access to Records. Borrower shall maintain its books and records in accordance with generally accepted accounting principles, applied on a consistent basis, and permit Lender to visit its properties and installations LOAN AGREEMENT - Page 4 to examine, audit and make and take away copies or reproductions of Borrower's books and records, at all reasonable times. Further, Borrower shall furnish Lender with such additional information and statements, lists of assets and liabilities, tax returns, and other reports with respect to Borrower's financial condition and business operations as Lender may request from time to time. 4.02. Insurance. Borrower shall maintain and comply with all terms of the Casualty Insurance Policies and the Life Insurance Policy until the Loan is paid in full. Borrower shall furnish renewal policies or certificates thereof at least thirty (30) days prior to the expiration date of any policy. Borrower shall cause the premiums on the Casualty Insurance Policies and Life Insurance Policy to be paid as and when due, and shall deliver to Lender receipts evidencing payment thereof. 4.03. Proceedings Affecting Loan. Lender may (but shall not be obligated to) commence, appear in or defend any action or proceeding purporting to affect the Loan, the Collateral or the respective rights and obligations of Lender and Borrower pursuant to this Agreement. Lender may (but shall not be obligated to) pay all necessary expenses, including reasonable attorneys' fees and expenses, incurred in connection with such proceedings or actions, which Borrower agrees to repay to Lender upon demand. 4.04. Further Assurances. Borrower will execute, re-execute and/or initial any such document or instrument as may be requested by Lender in order to (a) correct any errors or omissions in the Loan Documents, whether such error or omission is due to the unilateral mistake of Lender, mutual mistake on the part of Lender and Borrower or any guarantor, clerical mistake, calculation error, computer malfunction, printing error or similar error, (b) carry out the intent of the Loan Documents, or (c) perfect or give further assurances of any of the rights, titles, liens or security interests granted or provided for in any of the Loan Documents. Borrower further agrees that Lender shall not be liable to Borrower for any damages incurred by Borrower that are directly or indirectly caused by any such mistake, error or omission. 4.05. Payment of Taxes. Borrower shall pay and discharge when due all of its indebtedness and obligations, including without limitation, all assessments, taxes; governmental charges, levies and liens, of every kind and nature, imposed upon Borrower or its properties, income, or profits, prior to the date on which penalties would attach, and all lawful claims that, if unpaid, might become a lien or charge upon any of Borrower's properties, income, or profits. Upon the request of Lender, Borrower shall furnish Lender with receipts of tax statements marked "Paid" to evidence the payment of all taxes levied on the Collateral on or before ten (10) days prior to the date such taxes become delinquent; provided that Borrower may in good faith, by appropriate proceedings, contest the validity, applicability, or amount of any asserted tax or assessment, and pending such contest Borrower shall not be deemed in default hereunder if Borrower shall diligently prosecute such contest in a manner not prejudicial to the rights, liens and security interests of Lender and Borrower takes such actions as Lender deems necessary to adequately provide for the payment of the asserted tax or assessment with interest, costs and penalties. Lender shall have the right (but shall have no obligation) to take, at any time, in its name or in the name of Borrower, such action as Lender may at any time determine to be necessary or advisable to cure any default or to protect the rights of Borrower or Lender thereunder. Lender shall incur no liability for any action so taken by it or on its behalf if such action shall prove to be inadequate or invalid. Borrower agrees that any expense (including, but not limited to, attorneys fees) incurred by Lender in connection with any such action shall become part of the indebtedness evidenced and secured by the Loan Documents. 4.06. Reporting Requirements. Borrower shall provide Lender: (a) As soon as possible and in any event within two (2) days after the occurrence of each Event of Default, as defined herein, or each event which, with the giving of notice or lapse of time or both, would constitute an Event of Default, continuing on the date of such statement, the written statement of a representative of Borrower satisfactory to Lender setting forth the details of such Event of Default or event and the action which Borrower proposes to take with respect thereto; (b) As soon as available, and in any event within forty-five (45) days after the end of each month (provided that Borrower shall have seventy-five (75) days after the last month of Borrower's fiscal year), LOAN AGREEMENT - Page 5 financial statements of Borrower prepared in accordance with generally accepted accounting principles, consistently applied, and including, but not limited to, a balance sheet and income statement of Borrower as of the end of such quarter, all in form and substance and in reasonable detail satisfactory to Lender; (c) Contemporaneously with each financial statement of Borrower required hereby, a certificate of the president or chief financial officer of Borrower that said financial statements are accurate and that there exists no Event of Default nor any condition, act or event which with the giving of notice or the passage of time or both would constitute an Event of Default; (d) As soon as available, and in any event within thirty (30) days of release, a copy of Borrower's annual audit; (e) As soon as available, and in any event within thirty (30) days of filing, copies of filed tax returns for the applicable taxing period; (f) Within forty-five (45) days after the end of each month, a current aging analysis of Borrower's accounts receivable and accounts payable, in form and substance satisfactory to Lender; (g) Within forty-five (45) days after the end of each month, a copy of Borrower's Borrowing Base Report and Compliance Certificate provided to Bank of America; (h) Notice of (i) any and all material adverse changes in Borrower's financial condition, (ii) all claims made against Borrower which could materially affect the financial condition of Borrower, and (iii) any change in the management (e.g., president, chief Financial officer, etc.) of Borrower; (i) Upon demand of Lender, evidence of payment of all assessments, taxes, charges, levies, liens and claims on or against Borrower's properties, income or profits, and authorize the appropriate governmental official to deliver to Lender at any time a written statement of any assessments, taxes, charges, levies, liens and claims against Borrower's properties, income or profits; and (j) Such other information respecting the business, properties or condition or the operations, financial or otherwise, of Borrower and/or any guarantor as Lender may from time to time request. 4.07. Compliance with Loan Documents. Borrower shall use the proceeds of the Loan for (a) working capital, and (b) to refinance Borrower's existing debts to Lender. Borrower shall perform and comply with all terms, conditions, and provisions set forth in this Loan Agreement and in all other instruments and agreements between Borrower and Lender, including without limitation, the other Loan Documents. 4.08. Conduct of Business. Borrower shall conduct its business in an orderly and efficient manner consistent with good business practices, and perform and comply with all Legal Requirements. 5.00. NEGATIVE COVENANTS. Until the Note and all other obligations and liabilities of Borrower under this Agreement and the other Loan Documents are fully paid and satisfied, Borrower will not, without the prior written consent of Lender: (a) make any material change in the nature of its business as carried on as of the date hereof; (b) liquidate, merge or consolidate with or into any other entity; (c) sell, transfer or otherwise dispose of any of its assets or properties, other than in the ordinary course of business; LOAN AGREEMENT - Page 6 (d) create, incur or assume any lien or encumbrance on any of its assets or properties, including without limitation, the Collateral, except as may be expressly permitted hereunder; (e) create, incur or assume any indebtedness for borrowed money or issue or assume any other note, debenture, bond or other evidences of indebtedness, or guarantee any such indebtedness or such evidences of indebtedness of others, other than (i) indebtedness to Lender, (ii) existing indebtedness as of the date hereof and disclosed in writing to Lender, (iii) trade debt incurred in the ordinary course of business, or (iv) purchase money financing; or (f) relocate its offices or conduct its primary business operations from a location other than at the address set forth for notices in section 8.05 below. (g) advance, pay, remit or distribute funds to any Affiliate (as hereinafter defined) of Borrower, except in the ordinary course of and pursuant to the reasonable requirements of Borrower's business and upon fair and reasonable terms no less favorable to Borrower than would be obtained in a comparable arm's-length transaction with a person or entity not an Affiliate of Borrower. As used herein, the term "Affiliate" means any individual or entity directly or indirectly controlling, controlled by, or under common control with, another individual or entity. 6.00. INDEMNITY. Borrower hereby agrees to indemnify, defend at its sole cost and expense and hold Lender and its successors and assigns harmless from and against and to reimburse Lender with respect to, any and all claims, demands, actions, causes of action, losses, damages, liabilities, costs and expenses (including without limitation attorney's fees and court costs) of any and every kind of character, known or unknown, fixed or contingent, asserted against or incurred by Lender at any time and from time to time by reason of or arising out of (a) the breach of any representation or warranty of Borrower set forth herein, (b) the failure of Borrower, in whole or in part, to perform any obligation required in any Loan Document to be performed by Borrower; and (c) the ownership, construction, occupancy, operation, use and maintenance of the Collateral. This indemnity applies, without limitation, to any violation of any applicable environmental law and any and all matters arising out of any act, omission, event or circumstance presently existing or hereafter arising (including without limitation the presence on the Collateral or release from the Collateral of hazardous substances or solid waste disposed of or otherwise released), regardless of whether the act, omission, event or circumstance constituted a violation of any applicable environmental law at the time of its existence or occurrence. 7.00. EVENTS OF DEFAULT AND REMEDIES. 7.01. Events of Default. The occurrence of any one or more of the following shall constitute an Event of Default hereunder: (a) The failure of Borrower to pay the principal of or interest on the Note as and when the same becomes due and payable in accordance with the terms of the Note, and such failure shall continue for a period of ten (10) days after receipt of written notice from Lender specifying such failure, provided, however, that Lender shall be obligated to give only one (1) such notice in a calendar year and, after the giving of such one notice, Lender shall be entitled to exercise its remedies upon any subsequent default occurring within such calendar year without any requirement of notice; (b) The failure of Borrower or any other party to perform any of the covenants, obligations or agreements contained in this Agreement, the Note, the Security Instrument or any of the other Loan Documents, other than as set forth in Subsection 7.01 (a) above, and such failure shall continue for a period of thirty (30) days after receipt of written notice from Lender specifying such failure; (c) The occurrence of a default or event of default under any of the Loan Documents other than as set forth in Subsections 7.01 (a) and (b) above; LOAN AGREEMENT - Page 7 (d) Any default in the payment or performance of any obligation, or any defined event of default, under the terms of any contract or instrument (other than any of the Loan Documents) pursuant to which Borrower or any general partner in Borrower has incurred any debt or other liability to any person or entity, including Lender. (e) Any representation contained herein or in any other Loan Document by Borrower or any guarantor is false or misleading in any material respect; (f) Any report, certificate, financial statement or other instrument furnished by or on behalf of Borrower or any guarantor any time is knowingly false and misleading in any material respect; (g) Any substantial damage to or destruction of the Collateral shall occur so that, in the opinion of Lender, it cannot be restored or rebuilt with available funds to a profitable condition within a reasonable period of time; (h) If Borrower or any guarantor is an entity, the liquidation, dissolution, merger, consolidation, forfeiture of the corporate charter or revocation or withdrawal of the certificate of authority of any such entity; (i) If Borrower or any guarantor (i) becomes insolvent, or makes a transfer in fraud of creditors, or makes an assignment for the benefit of creditors, or admits in writing its inability to pay its debts as they become due; (ii) generally is not paying its debts as such debts become due; (iii) has a receiver or custodian appointed for, or take possession of, all or substantially all of the assets of such party, either in a proceeding brought by such party or in a proceeding brought against such party and such appointment is not discharged or such possession is not terminated within thirty (30) days after the effective date thereof or such party consents to or acquiesces in such appointment or possession; (iv) files a petition for relief under the United States Bankruptcy Code or any other present or future federal or state insolvency, bankruptcy or similar laws (all of the foregoing hereinafter collectively called "Applicable Bankruptcy Law") or an involuntary petition for relief is filed against such party under any Applicable Bankruptcy Law and such involuntary petition is not dismissed within thirty (30) days after the filing thereof, or an order for relief naming such party is entered under any Applicable Bankruptcy Law, or any composition, rearrangement, extension, reorganization or other relief of debtors now or hereafter existing is requested or consented to by such party; (v) fails to have discharged within a period of thirty (30) days any attachment, sequestration or similar writ levied upon any property of such party; or (vi) fails to pay within thirty (30) days any final money judgment against such party; (j) The holder of any lien or security interest on the Collateral (without hereby implying the consent of Lender to the existence or creation of a such lien or security interest) declares a default thereunder or institutes foreclosure or other proceedings for the enforcement of its remedies thereunder; (k) If any lien granted under the Loan Documents becomes invalid, unenforceable, or is not, or ceases to be, a perfected lien in favor of Lender against any asset which it is intended to encumber; (l) If Borrower shall cease to conduct business or materially changes the nature of its business operations and activities as existing on the date hereof; (m) If there shall occur a material adverse change in the assets, liability, financial condition or business operation of Borrower or any guarantor. Nothing contained in this Agreement shall be construed to limit the events of default enumerated in any of the other Loan Documents and all such events of default shall be cumulative. 7.02. General Remedies of Lender. Upon the occurrence of any Event of Default, Lender shall have the right, at its option, without notice or demand upon Borrower or any other party (except as expressly provided for herein or by applicable law) to do the following: (a) declare the unpaid balance of the Loan (including all principal thereof and LOAN AGREEMENT - Page 8 all interest then accrued thereon) to be immediately due and payable; (b) cease further advances under the Loan; (c) enter and take possession of the Collateral to the exclusion of Borrower; and/or (d) enforce or avail itself of any and all remedies provided in any of the Loan Documents, at law or equity. 7.03. Waiver by Borrower. Borrower and all other parties liable for the indebtedness and obligations set forth in the Note and the Loan Documents, hereby expressly waive demand, notice of intent to demand, presentment for payment, notice of nonpayment, protest, notice of protest, grace, notice of dishonor, notice of intent to accelerate maturity, notice of acceleration of maturity, and diligence in collection. 7.04. Remedies Cumulative. All powers, rights and remedies of Lender set forth in this Agreement shall be cumulative and not exclusive of any other power, right or remedy available to Lender under this Agreement, the other Loan Documents or at law or in equity to enforce the performance or observance of the covenants and agreements contained in this Agreement and the other Loan Documents, and no delay or omission of Lender to exercise any power, right or remedy accruing to Lender shall impair any such power, right or remedy, or shall be construed to be a waiver of the right to exercise any such power, right or remedy. Every power, right and remedy of Lender set forth in this Agreement, the other Loan Documents or afforded by law may be exercised from time to time, and as often as may be deemed expedient, by Lender. 8.00. MISCELLANEOUS PROVISIONS. 8.01. Form and Execution of Documents. Each written instrument and Loan Document required by this Agreement or any of the other Loan Documents to be furnished to Lender shall be furnished to Lender in one or more copies as required by Lender and shall in all respects be in form and substance satisfactory to Lender and to its legal counsel. 8.02. Controlling Agreement. All agreements between Borrower and Lender, whether now existing or hereafter arising and whether written or oral, are hereby limited so that in no contingency or event whatsoever, whether by reason of demand or acceleration of the maturity or otherwise, shall the interest contracted for, charged, received, paid or agreed to be paid to Lender exceed interest computed at the Maximum Rate (as defined below). If, from any circumstance whatsoever, interest would otherwise be payable to Lender in excess of interest computed at the Maximum Rate, the interest payable to Lender shall be reduced to interest computed at the Maximum Rate; and if from any circumstance Lender shall ever receive anything of value deemed interest by applicable law in excess of interest computed at the Maximum Rate, an amount equal to any excessive interest shall be applied to the reduction of the principal balance of the Loan and not to the payment of interest, or if such excessive interest exceeds the unpaid balance of principal of the Loan, such excess shall be refunded to the Borrower. All interest paid or agreed to be paid to Lender shall, to the extent permitted by applicable law, be amortized, prorated, allocated, and spread throughout the full period until payment in full of the principal (including the period of any renewal or extension) so that the interest for such full period shall not exceed interest computed at the Maximum Rate. This section shall control all agreements between Borrower and Lender. The term "Maximum Rate" shall mean the highest lawful rate of interest applicable to the loan transaction evidenced by the Note taking into account whichever of applicable federal law or Texas law permits the higher rate of interest, and after also taking into consideration all compensation deemed interest under applicable law. 8.03. Severability. In the event any provision of this Agreement is declared or adjudged to be unenforceable or unlawful, then such unenforceable or unlawful provision shall be excised herefrom, and the remainder of this Agreement not so affected, together with all rights and remedies granted hereby, shall continue and remain in full force and effect as though such unlawful or unenforceable provision had never been contained therein. 8.04. No Waiver. No course of dealing between Lender and Borrower, nor any delay on the part of Lender in exercising any rights hereunder or under any of the other Loan Documents, nor any failure of Lender at any time to enforce any provision of this Agreement or any of the other Loan Documents, shall operate as a waiver of any rights of Lender, except to the extent, if any, expressly waived in writing by Lender. Lender shall have the right at any and all times, without any prior notice to any person, to enforce strict compliance with all of the provisions hereof and the other Loan Documents, notwithstanding any such prior course of dealing or forbearance. LOAN AGREEMENT - Page 9 8.05. Notices. Any notice, request or other communication required or permitted to be given hereunder shall be in writing and shall be deemed to have been given and received when deposited in a post office or official depository of the United States Postal Service, postage prepaid, certified or registered mail, return receipt requested, addressed to the respective parties as follows: If to the Borrower: Drew Scientific, Inc. 4230 Shilling Way Dallas, Texas 75237 Attn: Keith Drew If to the Lender: Texas Mezzanine Fund Inc. 351 West Jefferson Blvd., Suite 800 Dallas, Texas 75208 Attn: Theresa Lee Each of the parties hereto shall be entitled to specify a different address by giving written notice to the other party hereto in accordance with this section. 8.06. Counterparts. This Agreement may be executed simultaneously in any number of counterparts, each of which when so executed and delivered shall be an original, but such counterparts shall together constitute one and the same instrument. 8.07. Payment of Fees and Expenses. Borrower shall pay when due, and reimburse to Lender on demand, and indemnify Lender from, all out-of-pocket fees, costs, and expenses paid or incurred by Lender in connection with the negotiation, preparation and execution of this Agreement and the other Loan Documents (and any amendments, approvals, consents, waivers and releases requested, required, proposed or done from time to time), or in connection with the disbursement, administration or collection of the Loan or the enforcement of the obligations or the exercise of any right or remedy of Lender, including, but not limited to (a) fees and expenses of Lender's counsel; (b) survey costs; (c) title insurance charges; (d) title search or examination costs, including abstracts, abstractors' certificates and uniform commercial code searches; (e) escrow fees; and (f) filing and recording fees. Borrower's obligations under this Section shall survive the delivery of the Loan Documents, the making of advances, the payment in full of the obligations, the release or determination of the Loan Documents, the foreclosure of the Security Instrument or conveyance in lieu of foreclosure, any bankruptcy or other debtor relief proceeding, and any other event whatsoever. 8.08. Principles of Construction. In this Agreement, the singular number shall include the plural and vice versa. All pronouns shall include masculine, feminine and neuter gender, as appropriate, regardless of gender used. Titles of articles and sections are for convenience only and shall not limit the applicability of any provision. 8.09. GOVERNING LAW AND VENUE. THIS AGREEMENT, THE OTHER LOAN DOCUMENTS AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER AND THEREUNDER SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS AND APPLICABLE FEDERAL LAW. UNLESS OTHERWISE HEREIN PROVIDED, ALL PAYMENTS AND PERFORMANCES REQUIRED HEREUNDER SHALL BE PAID OR PERFORMED IN DALLAS COUNTY, TEXAS. VENUE OF ANY SUIT ARISING HEREUNDER SHALL LIE IN DALLAS COUNTY, TEXAS . 8.10. FINAL AGREEMENT. THIS WRITTEN AGREEMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES WITH RESPECT TO THE MATTERS CONTAINED HEREIN 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. LOAN AGREEMENT - Page 10 EXECUTED this 20th day of November, 2003. LENDER: TEXAS MEZZANINE FUND INC., a Texas corporation By: /s/ Theresa Lee ------------------------ Name: Theresa Lee Title: Vice-President BORROWER: DREW SCIENTIFIC, INC., a Texas corporation By: /s/ Keith Drew ------------------------ Name: Keith Drew Title: President LOAN AGREEMENT - Page 11 Exhibit B Permitted Liens/Security Interests/Encumbrances 1. Financing Statement No. 99-156605 filed on August 3, 1999 in the Office of the Secretary of State of the State of Texas, MWI, Inc. dba Danam Electronics, as debtor, Texas Mezzanine Fund, Inc., as secured party, covering all accounts, inventory and equipment, with security interest in (a) export related accounts and inventory subordinated to the security interest of Bank of America, N.A., and (b) domestic accounts and inventory subordinated to the security interest of Vertex Financial Corporation pursuant to Intercreditor Agreement by and among Texas Mezzanine Fund, Inc., Bank of America, N.A. and Vertex financial Corporation dated March 7, 2002, as amended. 2. Financing Statement No. 00-520328 filed on June 12, 2000 in the Office of the Secretary of State of the State of Texas, MWI, Inc. dba Danam Electronics, as debtor, Bank of America, N.A., as secured party, covering all accounts, inventory and equipment, as amended by Financing Statements 02-00199789, 02-00210790, 02- 00277004 and 02-00302353. 3. Financing Statement No. 0002038371 filed on December 5,2000 in the Office of the Secretary of State of the State of Connecticut, MWI, Inc. , as debtor, Associates Leasing, Inc., as secured party, covering one (1) Daewoo Mynx 500. 4. Financing Statement No. 02-0024567117 filed on April 1, 2002 in the Office of the Secretary of State of the State of Texas, MWI, Inc., as debtor, Vertex Financial Corporation, as secured party, covering all domestic accounts and inventory, as amended by Financing Statement No. 03-00121476. EX-10.52 20 w68886exv10w52.txt GUARANTY AGREEMENT NOVEMBER 20,2003 Exhibit 10.52 GUARANTY AGREEMENT This GUARANTY AGREEMENT (this "Guaranty") is entered into by DREW SCIENTIFIC GROUP, PLC, a public limited company organized under the laws of England and Wales ("Guarantor") in favor of TEXAS MEZZANINE FUND INC., a Texas corporation ("Lender"). W I T N E S S E T H : WHEREAS, Drew Scientific, Inc., a Texas corporation ("Borrower"), desires to borrow from Lender an aggregate principal sum of Five Hundred Fifty-Eight Thousand and No/100 Dollars ($558,000.00) (the "Loan"); WHEREAS, the Loan is evidenced by a promissory note in the stated principal amount of Five Hundred Fifty-Eight Thousand and No/100 Dollars ($558,000.00) (the "Note") executed by Borrower in favor of Lender; WHEREAS, said Note is to be executed and delivered pursuant to the terms of a Loan Agreement dated of even date herewith between Borrower and Lender (the "Loan Agreement") (The Note, the Loan Agreement and any of the other documents executed in connection with the Loan are hereinafter collectively referred to as the "Loan Documents"); and WHEREAS, the Lender requires, as a condition precedent to funding the Loan, a guaranty in the form hereof be executed by the undersigned. NOW, THEREFORE, in consideration of the premises and to induce the Lender to enter into the Loan, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the undersigned hereby agrees as follows: 1. Guaranteed Indebtedness. Guarantor hereby guarantees to Lender and to every subsequent holder or holders of the Note that (a) the principal of and interest on, and attorneys' fees provided in the Note will be promptly paid when due in accordance with the provisions thereof, or, in the case of extension of time of payment, in whole or in part of the Note, all sums will be promptly paid when due in accordance with the terms of the extensions, (b) all covenants and agreements of the Borrower contained in the Loan Documents will be duly and promptly observed and performed, and (c) all additional amounts owing or which hereafter become owing by the Borrower under the terms of the Loan Documents will be promptly paid when due. 2. Guaranty of Payment and Performance; Waiver of Defenses. The obligations of the Guarantor shall be performable without demand of Lender. The obligations of the Guarantor hereunder shall not be affected by or dependent upon the genuineness, validity, regularity or enforceability of the Loan Documents or any other circumstance which might otherwise constitute a legal or equitable discharge of a surety or a guarantor. The Guarantor hereby (except as otherwise provided herein) waives diligence, presentment, demand or payment, protest, all notices (whether of nonpayment, dishonor, protest or otherwise) with respect to the Note, notice of acceptance of this Guaranty and of the incurring by the Borrower of any of the obligations hereinbefore mentioned, and all rights to require the Lender to (a) proceed against the Borrower, (b) proceed against or exhaust any collateral held by the Lender to secure the payment of the indebtedness guaranteed hereby, or (c) pursue any other remedy it may now or hereafter have against the Borrower or any other endorser, guarantor or surety. Guarantor waives all defenses given to sureties or guarantors at law or in equity other than the actual payment of the indebtedness guaranteed hereby and Guarantor waives all defenses based upon questions as to the validity, legality or enforceability of the Loan and/or the obligations in connection with the Loan and agrees that Guarantor shall be primarily liable hereunder. 3. Extensions or Modifications of Obligations. The Guarantor hereby agrees that, at any time or from time to time, without notice or the consent of the Guarantor, Lender may do any of the following acts without affecting the liability of the Guarantor: GUARANTY AGREEMENT - Page 1 (a) Extend the time for payment of the principal of or interest on the Note, or any part thereof, or renew the Note in whole or in part, or accept another note containing other or different provisions in substitution therefor; (b) Extend the time for, waive, renew, rearrange, modify or amend (whether material or otherwise), any of Borrower's covenants, agreements, duties or obligations contained in any of the Loan Documents; (c) Accelerate the maturity of the Note as provided therein or in the Loan Agreement or any and all other Loan Documents; (d) Modify, exchange, surrender, abandon or release any security for the Note; (e) Foreclose on any security for the Note in any manner authorized by law or the Loan Documents; (f) Waive any condition precedent to the making of any advance to Borrower required by the terms of any of the Loan Documents or make such advance notwithstanding the existence at the time of such advance of an Event of Default or potential default under any of the Loan Documents; or (g) Do any other act, or make any other agreement with the Borrower or any other party interested in property given as security for the Loan, or with any endorser, guarantor or surety who may be liable to pay the indebtedness guaranteed hereby in whole or in part, as Lender may deem necessary and appropriate. In the event of any extension or modification of any of the indebtedness or obligations of Borrower, this Guaranty shall also cover, and Guarantor hereby guarantees the timely payment and performance of the indebtedness and obligations of Borrower as so extended or modified. 4. Subordination. Any indebtedness of the Borrower now or hereafter held by the Guarantor is hereby subordinated to all indebtedness of the Borrower to the Lender guaranteed hereby and such indebtedness of the Borrower shall be collected, enforced, and received by the Guarantor as trustee for the Lender, but without reducing or affecting in any manner the liability of the Guarantor under the other provisions of this Guaranty. So long as any amount of the Loan remains outstanding and unpaid, Guarantor shall not be subrogated to any rights of Lender provided in the Loan Documents against Borrower or any property securing the Loan. 5. Costs and Attorneys' Fees. If this Guaranty shall be placed in the hands of an attorney for collection or should it be collected by legal proceedings or through any probate or bankruptcy court, the Guarantor agrees to pay to the Lender all costs, reasonable attorneys' and collection fees incurred in connection therewith. 6. Assignability and Successors. The Lender may assign its rights hereunder in whole or in part, and upon any such assignment all the terms and provisions of this Guaranty shall inure to the benefit of such assignee, to the extent so assigned. The terms used to designate any of the parties herein shall be deemed to include the heirs, legal representatives, successors and assigns of such parties; and the term "Lender" shall include, in addition to Texas Mezzanine Fund Inc., any lawful owner, holder or pledgee of any indebtedness guaranteed hereby. 7. Severability. The Lender is relying and is entitled to rely upon each and all of the provisions of this Guaranty; and accordingly, if any provision or provisions of this instrument should be held to be invalid or ineffective, then all other provisions shall continue in full force and effect to the same extent and in the same manner as though such invalid or unenforceable provision had never been contained herein. 8. Representations and Warranties. The Guarantor represents and warrants to the Lender that (a) this Guaranty is a legal, valid and binding obligation of Guarantor, enforceable against Guarantor in accordance with its terms; (b) the execution, delivery, and performance by Guarantor of this Guaranty does not and will not violate any authority having the force of law or any indenture, agreement, or other instrument to which Guarantor is a party or by which Guarantor or any of the properties or assets of Guarantor are or may be bound; (c) there are no actions, suits or proceedings pending, or to the knowledge of Guarantor, threatened against or affecting Guarantor or Borrower; (d) GUARANTY AGREEMENT - Page 2 Guarantor shall not, without the prior written consent of Lender, sell, lease, assign, encumber, transfer or otherwise dispose of all or a substantial or material part of Guarantor's assets other than in the ordinary course of Guarantor's business; (e) all balance sheets, earning statements and other financial data which have been furnished by Guarantor to Lender to induce it to enter into this Guaranty or the Loan (i) are true and correct in all material respects, having been prepared in accordance with generally accepted accounting practices applied on a consistent basis throughout the period covered thereby, (ii) fairly represent the financial condition of Guarantor and the results of Guarantor's operations for the periods for which the same are furnished, and (iii) since the date thereof, there has been no material adverse change in the financial condition of Guarantor; (f) all other information, reports and other papers and data furnished to Lender by or on behalf of Guarantor are or shall be at the time the same are so furnished, accurate and correct in all material respects and complete insofar as necessary to give Lender a true and accurate knowledge of the subject matter; and (g) Guarantor is solvent. 9. Further Assurances. Guarantor agrees to execute, re-execute and/or initial any such document or instrument as may be requested by Lender in order to (a) correct any errors or omissions in this Guaranty or any other Loan Document, whether such error or omission is due to the unilateral mistake of Lender, mutual mistake on the part of Lender and Borrower or Guarantor or any other guarantor, clerical mistake, calculation error, computer malfunction, printing error or similar error, or (b) give further assurances of any of the rights granted or provided for in this Guaranty. Guarantor further agrees that Lender shall not be liable to Guarantor for any damages incurred by Guarantor that are directly or indirectly caused by any such mistake, error or omission. 10. Financial Reports. Guarantor shall provide its annual audit to Lender within thirty (30) days of release. Guarantor shall also provide Lender with such other information respecting the business, properties or condition or the operations, financial or otherwise, of Guarantor, as Lender may from time to time reasonably request. 11. Rights Against Borrower or Collateral. The Guarantor agrees that Lender, in its discretion, may (a) bring suit against the Guarantor and any other endorser, guarantor, or surety of the Note jointly and severally or against any one or more of them, in either case with or without joinder of the Borrower, (b) compound or settle with the Borrower, the Guarantor or any other endorser, guarantor or surety for such consideration as the Lender may deem proper, (c) release the Borrower, the Guarantor or any other endorser, guarantor, or surety of the Note from liability thereunder, or (d) release or abandon any property securing the indebtedness hereby guaranteed or any part thereof or dispose of any such property in any manner and for any consideration deemed appropriate by Lender, and that no such action shall impair the rights of the Lender to collect the indebtedness hereby guaranteed from the Guarantor. Nothing contained in this paragraph, and no action by Lender permitted under this paragraph, shall in any way affect or impair the rights or obligations of the Guarantor with respect to any other guarantor, endorser or surety of the Note. 12. Benefit to Guarantor. The Guarantor acknowledges and warrants that he has derived or expects to derive financial and other advantage and benefit, directly or indirectly, from the Loan and each and every advance thereof and from each and every renewal, extension, amendment, increase, replacement, release of collateral or other relinquishment of legal rights made or granted or to be made or granted by Lender to Borrower. 13. Lawful Interest. All agreements between Guarantor and Lender, whether now existing or hereafter arising and whether written or oral, are hereby limited so that in no contingency or event whatsoever, whether by reason of demand or acceleration of the maturity or otherwise, shall the interest contracted for, charged, received, paid or agreed to be paid to Lender exceed interest computed at the Maximum Rate (as defined below). If, from any circumstance whatsoever, interest would otherwise be payable to Lender in excess of interest computed at the Maximum Rate, the interest payable to Lender shall be reduced to interest computed at the Maximum Rate; and if from any circumstance Lender shall ever receive anything of value deemed interest by applicable law in excess of interest computed at the Maximum Rate, an amount equal to any excessive interest shall be applied to the reduction of the principal balance of the Loan and not to the payment of interest, or if such excessive interest exceeds the unpaid balance of principal of the Loan, such excess shall be refunded. All interest paid or agreed to be paid to Lender shall, to the extent permitted by applicable law, be amortized, prorated, allocated, and spread throughout the full period until payment in full of the principal (including the period of any renewal or extension) so that the interest for such full period shall not exceed interest computed at the Maximum Rate. This section shall control all agreements between Guarantor and Lender. The GUARANTY AGREEMENT - Page 3 term "Maximum Rate" shall mean the highest lawful rate of interest applicable to the loan transaction evidenced by the Note taking into account whichever of applicable federal law or Texas law permits the higher rate of interest, and after also taking into consideration all compensation deemed interest under applicable law. 14. GOVERNING LAW AND VENUE. THIS GUARANTY AND ALL RIGHTS,OBLIGATIONS AND LIABILITIES ARISING HEREUNDER SHALL BE CONSTRUED ACCORDING TO THE LAWS OF THE STATE OF TEXAS. ALL OBLIGATIONS ARISING UNDER THIS GUARANTY SHALL BE PERFORMABLE IN DALLAS COUNTY, TEXAS. VENUE OF ANY SUIT ARISING HEREUNDER SHALL LIE IN DALLAS COUNTY, TEXAS. 15. Notice. Any notice required or permitted hereunder shall be in writing, and shall be deemed to have been given and received when deposited in a post office or official depository of the United States Postal Service, sent by certified mail, postage prepaid, return receipt requested, addressed as follows: Guarantor: Drew Scientific Group, PLC Park Road Barrow in Furness Cumbria LA14 4QR United Kingdom Attn: DAVID BLAIN Lender: Texas Mezzanine Fund Inc. 351 West Jefferson Blvd., Suite 800 Dallas, Texas 75208 Attn: Theresa Lee The addresses set forth in this Guaranty may be changed by any party by giving notice of such change to the other party in the manner provided herein for giving notice. 16. Number and Gender. In construing this Guaranty, the singular number shall include the plural and vice versa, and all pronouns shall include male, female and neuter gender, regardless of gender used. 17. FINAL AGREEMENT. THIS WRITTEN GUARANTY 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 WITNESS WHEREOF, this Guaranty has been duly executed by the undersigned this 20th day of November, 2003. DREW SCIENTIFIC GROUP, PLC, a public limited company organized under the laws of England and Wales By: /s/ K.R. Drew ------------------- Name: K.R. DREW Title: DIRECTOR GUARANTY AGREEMENT - Page 4 EX-10.53 21 w68886exv10w53.txt GUARANTY AGREEMENT NOVEMBER 20,2003 Exhibit 10.53 GUARANTY AGREEMENT This GUARANTY AGREEMENT (this "Guaranty") is entered into by KEITH RAYMOND DREW ("Guarantor") in favor of TEXAS MEZZANINE FUND INC., a Texas corporation ("Lender"). WITNESSETH: WHEREAS, Drew Scientific, Inc., a Texas corporation ("Borrower"), desires to borrow from Lender an aggregate principal sum of Five Hundred Fifty-Eight Thousand and No/100 Dollars ($558,000.00) (the "Loan"); WHEREAS, the Loan is evidenced by a promissory note in the stated principal amount of Five Hundred Fifty-Eight Thousand and No/100 Dollars ($558,000.00) (the "Note") executed by Borrower in favor of Lender; WHEREAS, said Note is to be executed and delivered pursuant to the terms of a Loan Agreement dated of even date herewith between Borrower and Lender (the "Loan Agreement") (The Note, the Loan Agreement and any of the other documents executed in connection with the Loan are hereinafter collectively referred to as the "Loan Documents"); and WHEREAS, the Lender requires, as a condition precedent to funding the Loan, a guaranty in the form hereof be executed by the undersigned. NOW, THEREFORE, in consideration of the premises and to induce the Lender to enter into the Loan, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the undersigned hereby agrees as follows: 1. Guaranteed Indebtedness. Guarantor hereby guarantees to Lender and to every subsequent holder or holders of the Note that (a) the principal of and interest on, and attorneys' fees provided in the Note will be promptly paid when due in accordance with the provisions thereof, or, in the case of extension of time of payment, in whole or in part of the Note, all sums will be promptly paid when due in accordance with the terms of the extensions, (b) all covenants and agreements of the Borrower contained in the Loan Documents will be duly and promptly observed and performed, and (c) all additional amounts owing or which hereafter become owing by the Borrower under the terms of the Loan Documents will be promptly paid when due. 2. Guaranty of Payment and Performance: Waiver of Defenses. The obligations of the Guarantor shall be performable without demand of Lender. The obligations of the Guarantor hereunder shall not be affected by or dependent upon the genuineness, validity, regularity or enforceability of the Loan Documents or any other circumstance which might otherwise constitute a legal or equitable discharge of a surety or a guarantor. The Guarantor hereby (except as otherwise provided herein) waives diligence, presentment, demand or payment, protest, all notices (whether of nonpayment, dishonor, protest or otherwise) with respect to the Note, notice of acceptance of this Guaranty and of the incurring by the Borrower of any of the obligations hereinbefore mentioned, and all rights to require the Lender to (a) proceed against the Borrower, (b) proceed against or exhaust any collateral held by the Lender to secure the payment of the indebtedness guaranteed hereby, or (c) pursue any other remedy it may now or hereafter have against the Borrower or any other endorser, guarantor or surety. Guarantor waives all defenses given to sureties or guarantors at law or in equity other than the actual payment of the indebtedness guaranteed hereby and Guarantor waives all defenses based upon questions as to the validity, legality or enforceability of the Loan and/or the obligations in connection with the Loan and agrees that Guarantor shall be primarily liable hereunder. 3. Extensions or Modifications of Obligations. The Guarantor hereby agrees that, at any time or from time to time, without notice or the consent of the Guarantor, Lender may do any of the following acts without affecting the liability of the Guarantor: (a) Extend the time for payment of the principal of or interest on the Note, or any part thereof, or renew the Note in whole or in part, or accept another note containing other or different provisions in substitution therefor; GUARANTY AGREEMENT - Page 1 (b) Extend the time for, waive, renew, rearrange, modify or amend (whether material or otherwise), any of Borrower's covenants, agreements, duties or obligations contained in any of the Loan Documents; (c) Accelerate the maturity of the Note as provided therein or in the Loan Agreement or any and all other Loan Documents; (d) Modify, exchange, surrender, abandon or release any security for the Note; (e) Foreclose on any security for the Note in any manner authorized by law or the Loan Documents; (f) Waive any condition precedent to the making of any advance to Borrower required by the terms of any of the Loan Documents or make such advance notwithstanding the existence at the time of such advance of an Event of Default or potential default under any of the Loan Documents; or (g) Do any other act, or make any other agreement with the Borrower or any other party interested in property given as security for the Loan, or with any endorser, guarantor or surety who may be liable to pay the indebtedness guaranteed hereby in whole or in part, as Lender may deem necessary and appropriate. In the event of any extension or modification of any of the indebtedness or obligations of Borrower, this Guaranty shall also cover, and Guarantor hereby guarantees the timely payment and performance of the indebtedness and obligations of Borrower as so extended or modified. 4. Subordination. Any indebtedness of the Borrower now or hereafter held by the Guarantor is hereby subordinated to all indebtedness of the Borrower to the Lender guaranteed hereby and such indebtedness of the Borrower shall be collected, enforced, and received by the Guarantor as trustee for the Lender, but without reducing or affecting in any manner the liability of the Guarantor under the other provisions of this Guaranty. So long as any amount of the Loan remains outstanding and unpaid, Guarantor shall not be subrogated to any rights of Lender provided in the Loan Documents against Borrower or any property securing the Loan. 5. Costs and Attorneys' Fees. If this Guaranty shall be placed in the hands of an attorney for collection or should it be collected by legal proceedings or through any probate or bankruptcy court, the Guarantor agrees to pay to the Lender all costs, reasonable attorneys' and collection fees incurred in connection therewith. 6. Assignability and Successors. The Lender may assign its rights hereunder in whole or in part, and upon any such assignment all the terms and provisions of this Guaranty shall inure to the benefit of such assignee, to the extent so assigned. The terms used to designate any of the parties herein shall be deemed to include the heirs, legal representatives, successors and assigns of such parties; and the term "Lender" shall include, in addition to Texas Mezzanine Fund Inc., any lawful owner, holder or pledgee of any indebtedness guaranteed hereby. 7. Severability. The Lender is relying and is entitled to rely upon each and all of the provisions of this Guaranty; and accordingly, if any provision or provisions of this instrument should be held to be invalid or ineffective, then all other provisions shall continue in full force and effect to the same extent and in the same manner as though such invalid or unenforceable provision had never been contained herein. 8. Representations and Warranties. The Guarantor represents and warrants to the Lender that (a) this Guaranty is a legal, valid and binding obligation of Guarantor, enforceable against Guarantor in accordance with its terms; (b) the execution, delivery, and performance by Guarantor of this Guaranty does not and will not violate any authority having the force of law or any indenture, agreement, or other instrument to which Guarantor is a party or by which Guarantor or any of the properties or assets of Guarantor are or may be bound; (c) there are no actions, suits or proceedings pending, or to the knowledge of Guarantor, threatened against or affecting Guarantor or Borrower; (d) Guarantor shall not, without the prior written consent of Lender, sell, lease, assign, encumber, transfer or otherwise dispose of all or a substantial or material part of Guarantor's assets other than in the ordinary course of Guarantor's business; (e) all balance sheets, earning statements and other financial data which have been furnished by Guarantor to GUARANTY AGREEMENT - Page 2 Lender to induce it to enter into this Guaranty or the Loan (i) are true and correct in all material respects, having been prepared in accordance with generally accepted accounting practices applied on a consistent basis throughout the period covered thereby, (ii) fairly represent the financial condition of Guarantor and the results of Guarantor's operations for the periods for which the same are furnished, and (iii) since the date thereof, there has been no material adverse change in the financial condition of Guarantor; (f) all other information, reports and other papers and data furnished to Lender by or on behalf of Guarantor are or shall be at the time the same are so furnished, accurate and correct in all material respects and complete insofar as necessary to give Lender a true and accurate knowledge of the subject matter; and (g) Guarantor is solvent. 9. Further Assurances. Guarantor agrees to execute, re-execute and/or initial any such document or instrument as may be requested by Lender in order to (a) correct any errors or omissions in this Guaranty or any other Loan Document, whether such error or omission is due to the unilateral mistake of Lender, mutual mistake on the part of Lender and Borrower or Guarantor or any other guarantor, clerical mistake, calculation error, computer malfunction, printing error or similar error, or (b) give further assurances of any of the rights granted or provided for in this Guaranty. Guarantor further agrees that Lender shall not be liable to Guarantor for any damages incurred by Guarantor that are directly or indirectly caused by any such mistake, error or omission. 10. Financial Reports. Within thirty (30) days of Lender's request, Guarantor shall provide to Lender current (i.e., within 90 days) financial statements (all in form and substance and in reasonable detail satisfactory to Lender), and copies of filed tax returns. Guarantor shall also provide Lender with such other information respecting the business, properties or condition or the operations, financial or otherwise, of Guarantor, as Lender may from time to time reasonably request. 11. Rights Against Borrower or Collateral. The Guarantor agrees that Lender, in its discretion, may (a) bring suit against the Guarantor and any other endorser, guarantor, or surety of the Note jointly and severally or against any one or more of them, in either case with or without joinder of the Borrower, (b) compound or settle with the Borrower, the Guarantor or any other endorser, guarantor or surety for such consideration as the Lender may deem proper, (c) release the Borrower, the Guarantor or any other endorser, guarantor, or surety of the Note from liability thereunder, or (d) release or abandon any property securing the indebtedness hereby guaranteed or any part thereof or dispose of any such property in any manner and for any consideration deemed appropriate by Lender, and that no such action shall impair the rights of the Lender to collect the indebtedness hereby guaranteed from the Guarantor. Nothing contained in this paragraph, and no action by Lender permitted under this paragraph, shall in any way affect or impair the rights or obligations of the Guarantor with respect to any other guarantor, endorser or surety of the Note. 12. Benefit to Guarantor. The Guarantor acknowledges and warrants that he has derived or expects to derive financial and other advantage and benefit, directly or indirectly, from the Loan and each and every advance thereof and from each and every renewal, extension, amendment, increase, replacement, release of collateral or other relinquishment of legal rights made or granted or to be made or granted by Lender to Borrower. 13. Lawful Interest. All agreements between Guarantor and Lender, whether now existing or hereafter arising and whether written or oral, are hereby limited so that in no contingency or event whatsoever, whether by reason of demand or acceleration of the maturity or otherwise, shall the interest contracted for, charged, received, paid or agreed to be paid to Lender exceed interest computed at the Maximum Rate (as defined below). If, from any circumstance whatsoever, interest would otherwise be payable to Lender in excess of interest computed at the Maximum Rate, the interest payable to Lender shall be reduced to interest computed at the Maximum Rate; and if from any circumstance Lender shall ever receive anything of value deemed interest by applicable law in excess of interest computed at the Maximum Rate, an amount equal to any excessive interest shall be applied to the reduction of the principal balance of the Loan and not to the payment of interest, or if such excessive interest exceeds the unpaid balance of principal of the Loan, such excess shall be refunded. All interest paid or agreed to be paid to Lender shall, to the extent permitted by applicable law, be amortized, prorated, allocated, and spread throughout the full period until payment in full of the principal (including the period of any renewal or extension) so that the interest for such full period shall not exceed interest computed at the Maximum Rate. This section shall control all agreements between Guarantor and Lender. The term "Maximum Rate" shall mean the highest lawful rate of interest applicable to the loan transaction evidenced by the GUARANTY AGREEMENT - Page 3 Note taking into account whichever of applicable federal law or Texas law permits the higher rate of interest, and after also taking into consideration all compensation deemed interest under applicable law. 14. GOVERNING LAW AND VENUE. THIS GUARANTY AND ALL RIGHTS, OBLIGATIONS AND LIABILITIES ARISING HEREUNDER SHALL BE CONSTRUED ACCORDING TO THE LAWS OF THE STATE OF TEXAS. ALL OBLIGATIONS ARISING UNDER THIS GUARANTY SHALL BE PERFORMABLE IN DALLAS COUNTY, TEXAS. VENUE OF ANY SUIT ARISING HEREUNDER SHALL LIE IN DALLAS COUNTY, TEXAS. 15. Notice. Any notice required or permitted hereunder shall be in writing, and shall be deemed to have been given and received when deposited in a post office or official depository of the United States Postal Service, sent by certified mail, postage prepaid, return receipt requested, addressed as follows: Guarantor: Keith Raymond Drew #2616 Camden Oasis Euless, Texas 76040 Lender: Texas Mezzanine Fund Inc. 351 West Jefferson Blvd., Suite 800 Dallas, Texas 75208 Attn: Theresa Lee The addresses set forth in this Guaranty may be changed by any party by giving notice of such change to the other party in the manner provided herein for giving notice. 16. Number and Gender. In construing this Guaranty, the singular number shall include the plural and vice versa, and all pronouns shall include male, female and neuter gender, regardless of gender used. 17. FINAL AGREEMENT. THIS WRITTEN GUARANTY 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 WITNESS WHEREOF, this Guaranty has been duly executed by the undersigned this 20th day of November, 2003. /s/ Keith Raymond Drew ------------------------ KEITH RAYMOND DREW GUARANTY AGREEMENT - Page 4 EX-10.54 22 w68886exv10w54.txt SUBORNATION AGREEMENT NOVEMBER 20,2003 Exhibit 10.54 SUBORDINATION AGREEMENT Dallas, Texas November 20th, 2003 WHEREAS, Drew Scientific, Inc., hereinafter called "Borrower", is indebted to Texas Mezzanine Fund Inc., hereinafter called "Lender", pursuant to, among other things, a certain Promissory Note in the stated principal amount of $558,000.00, dated of even date herewith, executed by Borrower and payable to the order of Lender; and WHEREAS, it is contemplated that Borrower may from time to time in the future become indebted to Lender for other and additional sums; WHEREAS, all debts and liabilities of Borrower to Lender, whether such debts or liabilities may now exist or are hereafter incurred or arise, and whether the obligation or liability of Borrower thereon be direct, contingent, primary, secondary, joint, several, joint and several, or otherwise, and irrespective of the manner in which, or other person or persons in whose favor such debts or liabilities may at their inception, have been, or may hereafter be created, or the manner in which they may have been or may hereafter be acquired by Lender, shall hereinafter be referred to as the "Indebtedness"; and WHEREAS, Borrower is likewise indebted to the undersigned, Drew Scientific Group, PLC ("Subordinated Creditor"), pursuant to, among other things, a certain Promissory Note in the stated principal amount of $3,112,629.04, dated November 18, 2003, executed by Borrower and payable to the order of Subordinated Creditor (the "Prior Indebtedness"). NOW, THEREFORE, for and in consideration of the mutual covenants and agreements contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Lender and the Subordinated Creditor hereby agree as follows: (1) Any and all indebtedness of the Borrower now or hereafter held by Subordinated Creditor, including, but not limited to, the Prior Indebtedness (all such indebtedness hereinafter referred to as the "Subordinated Debt"), is hereby subordinated to the Indebtedness. (2) Until such time as Lender notifies Subordinated Creditor that the Indebtedness is fully paid and satisfied, the Subordinated Creditor shall not be entitled to accept or retain any payments, remittances or disbursements on account of or pursuant to the Subordinated Debt. Any payments received by the Subordinated Creditor on account of or pursuant to the Subordinated Debt will be held in trust for the benefit of Lender and, upon demand from Lender, be immediately forwarded to Lender. (3) Should Borrower become involved in any receivership, bankruptcy, reorganization, arrangement, debtor's relief or other insolvency proceedings and the Subordinated Creditor receives payment upon the Prior Note, or if, for any other reason, the Subordinated Creditor should actually receive from any source whatever any payment upon the Prior Note, the Subordinated Creditor agrees to hold in trust for Lender all funds so received and agrees that she shall have absolutely no dominion over such funds except to pay them promptly to Lender, and the Subordinated Creditor covenants promptly to pay the same to Lender. The payments so received by Lender shall be applied by it in such order as it shall elect upon the Indebtedness. (4) In the event of receivership, bankruptcy, reorganization, arrangement, debtor's relief, or other insolvency proceedings, Lender shall have the right to prove its claim in any such proceedings, so as to establish its rights hereunder and receive directly from the receiver, trustee, or other court custodian, any amounts which would otherwise be payable upon the Prior Note. - 1 - (5) Should Lender receive, for application upon the Indebtedness, any such payment which would otherwise be payable to the Subordinated Creditor, and which, as between Borrower and the Subordinated Creditor, shall constitute a credit upon the Subordinated Debt, upon receipt by Lender of an amount sufficient to pay fully all of the Indebtedness, the Subordinated Creditor shall become subrogated to the rights of Lender to the extent that such payments have contributed toward the liquidation of the Indebtedness, and such subrogation shall be in respect of that proportion of the Lender's debt which would have been unpaid if Lender had not received the applicable payments. (6) Lender may, in its discretion at any time and from time to time, without further consent of or notice to the Subordinated Creditor, and with or without valuable consideration, release any person primarily or secondarily liable upon the Indebtedness, or may permit substitutions or withdrawals of any security or collateral at any time securing the payment of the Indebtedness, or release any such proper substitutions or withdrawals of any security or collateral at any time securing the payment of the Indebtedness, or release upon the Indebtedness, or alter, in such manner as Lender shall deem proper, the terms or any instrument evidencing or securing the Indebtedness, or any part thereof, without in any manner impairing its rights thereunder. It shall not be necessary for Lender, in order to enforce its rights hereunder, to institute suit or exhaust its remedies against any person obligated to pay the Indebtedness. All rights and privileges accorded Lender in this paragraph may be exercised after as well as before the receipt by Lender of a notice as provided in the succeeding Paragraph (7). (7) This agreement constitutes a continuing subordination; however, the Subordinated Creditor may give to an officer of Lender written notice that the Subordinated Creditor desires to terminate this agreement as to additional indebtedness hereafter incurred by Borrower to Lender, and is such event this agreement shall not constitute a subordination to the obligations of the Borrower to Lender for the additional indebtedness incurred after the receipt of such notice by Lender, but as to all other of the Indebtedness and all renewals or extensions of the same, or any part thereof, this agreement shall continue in full force and effect. (8) This instrument is cumulative of all other rights and remedies of Lender. No waiver by Lender of any right hereunder, with respect to a particular payment, shall effect or impair its rights to any matters thereafter occurring. (9) The Subordinated Creditor and Borrower agree to execute such further instruments as may be, in the opinion of Lender, from time to time necessary or appropriate to fully carry out the purposes hereof. (10) The Subordinated Creditor covenants that he will not assign the Subordinated Debt, or any part thereof, without making the rights and interests of the assignee subject in all respects to the terms of this instrument. (11) Any notice or notification required, permitted or contemplated hereunder shall be in writing, shall be addressed to the party to be notified at the address for notice set forth below or at such other address as each party may designate for itself from time to time by notice hereunder, and shall be deemed to have been validly served, given or delivered (a) when deposited in the United States mail, postage prepaid, registered or certified mail, return receipt requested, or (b) upon personal delivery. (12) This instrument is binding upon the Subordinated Creditor and Borrower and their respective heirs, executors, administrators, successors, and assigns shall inure to the benefit of Lender, its successors and assigns. - remainder of page intentionally blank - - 2 - EXECUTED this 20th day of November, 2003. SUBORDINATED CREDITOR: Address for Notice: Drew Scientific Group, PLC DREW SCIENTIFIC GROUP, PLC, Park Road a public limited company organized Barrow in Furness under the laws of England and Wales Cumbria LA14 4QR United Kingdom By: /s/ K.R. Drew Attn: DAVID BLAIN ------------------------------ Name: K.R. DREW Title: DIRECTOR LENDER: TEXAS MEZZANINE FUND INC., Address for Notice: a Texas corporation Texas Mezzanine Fund Inc. 351 West Jefferson Blvd., Suite 800 By: /s/ Theresa Lee Dallas, Texas 75208 ------------------------------ Attn.: Theresa Lee Name: Theresa Lee Title: Vice-President ACKNOWLEDGMENT AND AGREEMENT OF BORROWER The undersigned, as the "Borrower" defined in the foregoing instrument, hereby acknowledges, agrees and consents to the matters set forth therein. Borrower further acknowledges and agrees that this instrument does not confer any additional rights upon Borrower. DREW SCIENTIFIC, INC., a Texas corporation By: /s/ Keith Drew ------------------------------ Name: Keith Drew Title: President -3- EX-10.55 23 w68886exv10w55.txt POST CLOSING AGREEMENT NOVEMBER 20,2003 Exhibit 10.55 POST-CLOSING AGREEMENT This Post-Closing Agreement (this "Agreement") is entered into by and among Drew Scientific, Inc. ("Borrower"), a Texas corporation, Keith Raymond Drew ("Drew"), Drew Scientific Group, PLC ("Drew PLC") and Texas Mezzanine Fund Inc. ("Lender"), a Texas corporation. RECITALS A. Reference is made to that certain loan transaction in the stated principal amount of $558,000.00 (the "Loan") from Lender to Borrower as evidenced by, among other things, (i) that certain Loan Agreement of even date herewith between Borrower and Lender, and (ii) that certain Guaranty Agreement dated of even date herewith, executed by Drew for the benefit of Lender. The Loan Agreement and all documents and instruments executed in connection with the Loan are hereinafter collectively referred to as the "Loan Documents". B. Lender has required that (i) Drew pledge all shares of Drew PLC owned by Drew (the "Shares") to secure the obligations of Drew under the Guaranty Agreement, (ii) Lender receive a perfected first lien security interest in the Shares, and (iii) Lender receive a subordination of landlord's lien concerning the premises located at 4230 Shilling Way, Dallas, Texas, in the form attached hereto as Exhibit A (the "Landlord Waiver"). C. Drew has advised Lender that Drew will be unable to deliver immediate physical possession of the Shares to Lender in order to enable Lender to obtain a perfected first lien security interest in said Shares. Borrower has also advised Lender that it will be unable to deliver the Subordination to Lender by the anticipated closing date. Borrower has requested that Lender disburse the proceeds of the Loan to Borrower notwithstanding this circumstance. Subject to the terms and conditions more particularly described herein, Lender has agreed to disburse the proceeds of the Loan to Borrower. NOW, THEREFORE, for and in consideration of the covenants and agreements contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. Disbursement of the Loan. Lender hereby agrees to disburse the proceeds of the Loan in the manner set forth in the Loan Agreement. 2. Delivery of Shares. Drew shall deliver the Shares to Lender within thirty (30) days of the date hereof. DREW, DREW PLC (COLLECTIVELY, "GUARANTORS") AND BORROWER ACKNOWLEDGE AND AGREE THAT IN THE EVENT THE LENDER HAS NOT RECEIVED THE SHARES WITHIN THIRTY (30) DAYS OF THE DATE HEREOF, SUCH FAILURE TO DELIVER THE SHARES SHALL CONSTITUTE A DEFAULT UNDER THE LOAN AND LENDER MAY ELECT TO PURSUE ITS RIGHTS AND REMEDIES UNDER THE LOAN DOCUMENTS OR OTHERWISE EXISTING AT LAW OR IN EQUITY, INCLUDING, BUT NOT LIMITED TO, CEASING ANY FURTHER ADVANCES UNDER THE LOAN. 3. Delivery of the Landlord Waiver. Borrower shall deliver the Landlord Waiver to Lender within thirty (30) days of the date hereof. GUARANTORS AND BORROWER ACKNOWLEDGE AND AGREE THAT IN THE EVENT THE LENDER HAS NOT RECEIVED THE LANDLORD WAIVER WITHIN THIRTY (30) DAYS OF THE DATE HEREOF, SUCH FAILURE TO DELIVER THE LANDLORD WAIVER SHALL CONSTITUTE A DEFAULT UNDER THE LOAN AND LENDER MAY ELECT TO PURSUE ITS RIGHTS AND REMEDIES UNDER THE LOAN DOCUMENTS OR OTHERWISE EXISTING AT LAW OR IN EQUITY, INCLUDING, BUT NOT LIMITED TO, CEASING ANY FURTHER ADVANCES UNDER THE LOAN. 4. No Waiver. Borrower and Guarantors understand, acknowledge and agree that any disbursement of the proceeds the Loan by Lender shall not, is not intended to, nor shall it be construed as (a) a waiver of the obligation to deliver the Shares and the Landlord Waiver, or (b) a waiver of Lender's right to demand delivery of the Shares and the landlord Waiver. 5. Representations and Warranties of Drew. As a material inducement to Lender to disburse the proceeds of the Loan, Drew hereby represents and warrants to Lender the following: - 1 - a. Drew is the lawful owner of record of 3,178,984 shares of Drew PLC and has a beneficial interest in 1,400,000 shares of Drew PLC pursuant to Selbourne Limited. b. The Shares are duly authorized, validly issued and outstanding, fully paid and non-assessable. c. Drew owns the Shares free and clear of all security interests, liens, encumbrances and claims. d. There are no outstanding rights or options to acquire any of the Shares. e. There are no conditions or restrictions that prohibit the transfer of the Shares that have not been disclosed in writing to Lender. 6. Covenants of Drew. As a material inducement to Lender to disburse the proceeds of the Loan, Drew hereby covenants and agrees with Lender as follows: a. Drew shall diligently pursue the delivery of the Shares to Lender. b. Drew shall not sell, transfer, convey or assign the Shares to any party other than Lender. c. Drew shall not pledge, hypothecate or otherwise encumber the Shares for the benefit of any party other than Lender. . d. Drew shall take such actions with respect to Drew PLC as Lender deems reasonably necessary in order to evidence Lender's security interest in the Shares. 7. Clerical Error. In the event Lender at any time discovers that this Agreement or any document executed in connection herewith contains an error that was caused by a unilateral mistake on the part of Lender, mutual mistake on the part of Lender and Borrower and/or Guarantors, clerical mistake, calculation error, computer malfunction, printing error or similar error, Borrower and Guarantors respectively agree, upon notice from Lender, to re-execute any documents that are necessary to correct any such error(s). Borrower and Guarantors further agree that Lender shall not be liable to Borrower or Guarantors for any damages incurred by Borrower or Guarantors that are directly or indirectly caused by any such error. 8. Costs and Expenses. All costs, fees and expenses incurred by Lender in connection with the consummation of the transaction evidenced by this Agreement, including, without limitation, all recording costs, reasonable fees and expenses of Lender's counsel and any other costs and expenses referred to in this Agreement, shall be paid by Borrower. 9. Modification. This Agreement may not be modified or amended except by an agreement in writing signed by the parties hereto. The parties may waive any of the conditions contained herein or any of the obligations of the other parties hereunder, but any such waiver shall be effective only if in writing and signed by the party waiving such conditions or obligations. 10. Headings and General Application. The article, paragraph and subparagraph entitlements hereof are inserted for convenience of reference only and shall in no way affect, modify or define, or be used in construing, the text of such article, paragraph or subparagraph. If the text requires, words used in the singular shall be read as including the plural, and pronouns of any gender shall include all genders. 11. Severability. If any provision of this Agreement is or may be held by a court of competent jurisdiction to be invalid, void, or unenforceable to any extent, the validity of the remaining parts, terms or provisions of this Agreement shall not be affected thereby, and such illegal or invalid part, terms, or provision shall be deemed not to be part of this Agreement. The remaining provisions shall nevertheless survive and continue in full force and effect without - 2 - being invalidated in any way to the extent the remaining provisions further accomplish the goals and intents of this Agreement. 12. Binding Effect. This agreement shall be binding upon and insure to the benefit of the parties hereto and their respective heirs, legal representatives, successors and assigns. 13. Multiple Counterparts. This Agreement may be executed in an number of identical counterparts, each of which for all purposes is deemed an original, and all of which constitute collectively one agreement. 14. Governing Law and Venue. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas. Venue of any suit arising hereunder shall lie in Dallas County, Texas. 15. ENTIRE AGREEMENT. THIS AGREEMENT EMBODIES AND CONSTITUTES THE FINAL UNDERSTANDING AND AGREEMENT BETWEEN THE PARTIES HERETO WITH RESPECT TO THE MATTERS CONTEMPLATED IN THIS AGREEMENT, AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT AGREEMENTS, UNDERSTANDINGS, REPRESENTATION AND STATEMENTS, ORAL OR WRITTEN. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES HERETO. IN WITNESS WHEREOF, this Agreement is executed as of the 20th day of November, 2003. BORROWER: DREW SCIENTIFIC, INC., a Texas corporation By: /s/ Keith Drew -------------------------------------- Name: Keith Drew Title: President GUARANTORS: /s/ Keith Raymond Drew ------------------------------------------ KEITH RAYMOND DREW DREW SCIENTIFIC GROUP, PLC, a public limited company organized under the laws of England and Wales By: /s/ K.R. Drew -------------------------------------- Name: K.R. DREW Title: DIRECTOR LENDER: TEXAS MEZZANINE FUND INC., a Texas corporation BY: /s/ Theresa Lee -------------------------------------- Name: Theresa Lee Title: Vice-President -3- Exhibit A Ms. Theresa Lee Texas Mezzanine Fund Inc. 351 West Jefferson Blvd., Suite 800 Dallas, Texas 75208 Re: Commercial Lease Agreement (the "Lease") between Echometer Profit Sharing Trust, Jerry B. West and Rebecca Ann West (collectively, "Landlord"), as landlord, and Drew Scientific, Inc. ("Tenant"), a Texas corporation f/k/a MWI, Inc. d/b/a/ Danam Electronics, as tenant, relating to certain property located at 4230 Shilling Way, Dallas, Texas (the "Property") Pursuant to that certain Landlord's Subordination Agreement dated as of April 27, 1997, by and between Landlord and Tenant (the "Subordination Agreement"), a true and correct copy of which is attached hereto as Exhibit "A", Landlord has subordinated all of Landlord's right, title and interest in and to the Equipment (as defined in the Subordination Agreement) that may exist as a result of the Lease, to the right, title and interest of any lender in and to the Equipment. Landlord has been advised that Tenant has entered into a certain loan transaction with Texas Mezzanine Fund Inc. ("Lender") pursuant to which Tenant shall give as security for the payment of such indebtedness a security interest or other lien upon the Equipment. Accordingly: 1. The Lease is in full force and effect and Tenant is paying the full rent stipulated in the Lease with no offsets, defenses or claims. 2. The renewal term of the Lease will terminate on March 31, 2007. 3. Landlord specifically acknowledges and agrees that the Subordination Agreement has not been modified or terminated and agrees that any and all presently existing or future liens that may exist as a result of the lease or rental of the Property by Tenant from Landlord (including, without limitation, any contractual landlord's lien or any lien existing pursuant to the Texas Property Code or the Constitution of Texas), are and shall be subordinate, subject and inferior to any security interest or liens now or hereafter held by Lender upon any of the Equipment; 4. Landlord agrees to provide Lender with (a) written notice of a default under the Lease concurrently with or immediately after the occurrence of such default, and (b) written notice of the commencement of any action to enforce the provisions of the Lease concurrently with or immediately after the commencement of any such action; and 5. Landlord agrees that in the event Lender becomes entitled to possession of any of the Equipment, Lender shall have the right to enter the Property upon five (5) days written notice to Landlord in order to remove the Equipment during normal business hours. Landlord shall allow Lender such time as is reasonably necessary (and in no eventless than three (3) business days) to remove the Equipment from the Property, and any Equipment so removed shall be free of any liens or claims of Landlord. Lender shall not be liable for any rental whatsoever doing such period of removal. Landlord acknowledges, understands and agrees that Lender is relying upon, and is entitled to rely upon, the terms, conditions and representations set forth in the Subordination Agreement and this letter. ECHOMETER PROFIT SHARING TRUST /s/ Jerry B. West ---------------------------------- JERRY B. WEST By:________________________________ Name:______________________________ __________________________________ Title: Trustee REBECCA ANN WEST EX-10.56 24 w68886exv10w56.txt FIRST AMENDMENT TO POST CLOSING AGREEMENT Exhibit 10.56 FIRST AMENDMENT TO POST-CLOSING AGREEMENT This First Amendment to Post-Closing Agreement (this "First Amendment"), is executed on the respective dates set forth below effective as of December 20, 2003 (the "Effective Date"), and is entered into by and among Drew Scientific, Inc., Texas corporation ("Borrower "), Keith Drew, individually ("Drew"), Drew Scientific Group, PLC, a public limited company organized under the laws of England and Wales ("Drew PLC"), and Texas Mezzanine Fund Inc., a Texas corporation ("Lender") for the purpose of amending and modifying that certain Post-Closing Agreement executed as of November 20, 2003 (the "Original Agreement"). Borrower, Drew, Drew PLC and Lender are collectively referred to herein as the "Parties". All capitalized terms used in this First Amendment and not otherwise defined herein shall have the meanings assigned to such terms in the Original Agreement, unless the context specifically requires otherwise RECITALS A. Pursuant to Section 2 of the Original Agreement, Drew was required to deliver to Lender, on or prior to the Effective Date, all of the Shares owned by Drew; B. As of the Effective Date, Lender had received share certificates issued by Drew PLC to Drew evidencing ownership of 2,600,000 Shares; C. Since the Effective Date, Lender has received share certificates issued by Drew PLC to Drew evidencing ownership of an additional 573,984 Shares; D. Drew has determined that he does not control Selbourne Limited ("Selbourne"), either directly or indirectly, and cannot either (i) pledge or cause the pledge of the 1,400,000 shares of Drew PLC issued to Selbourne ("Selbourne Shares") or (ii) cause to be delivered to Lender certificates evidencing such shares; E. It has been determined that Paragraph 5a that the Original Agreement incorrectly slated the number of shares of Drew PLC of which Drew is the lawful owner as being 3,178,984 and that the correct number is 3,173,984; F. The Parties desire to correct the typographical error referenced in Recital D; and G. The Parties desire to clarify that (since Drew does not own such shares) the Selbourne Shares are not collateral for the Loan and that certificates evidencing such shares need not be delivered to Lender. AGREEMENT NOW THEREFORE, in consideration of the premises and the mutual agreements contained herein, the parties agree to amend the Original Agreement on the following terms and conditions: 1. Delivery of Shares. There is hereby added at the end of Paragraph 2 of the Original Agreement the following: Notwithstanding the foregoing, if certificates have not been issued by Drew PLC to evidence any portion of the Shares, failure to deliver such Shares shall not constitute a default under this Paragraph. 2. Shares Owned; Selbourne Shares. Section 5(a) of the Original Agreement is hereby amended to in its entirety to read: "Drew is the lawful owner of record of 3,173,984 shares of Drew PLC". 3. Representation and Warranty. Section 6 of the Original Agreement is hereby amended by adding a new Subsection 5.1 that reads as follows: Drew hereby represents and warrants that he has determined that he does not control Selbourne Limited ("Selbourne"), either directly or indirectly, and cannot either (i) pledge or cause the pledge of the 1,400,000 shares of Drew PLC issued to Selbourne ("Selbourne Shares") or (ii) cause to be delivered to Lender certificates evidencing such shares. 4. Limitation. Except as expressly modified and amended by this First Amendment, the terms, conditions and provisions of the Original Agreement shall remain in full force and effect in all respects. 5. Counterparts. The Parties may execute this First Amendment in any number of counterparts. Each such counterpart shall be deemed to be an original, but all such counterparts shall together constitute one and the same agreement. 6. Amendment And Waiver. No amendment of this First Amendment, and no waiver of any one or more of the provisions hereof shall be effective unless set forth in a writing and signed by the parties hereto. 7. Governing Law. This First Amendment shall be governed by and construed in accordance with the internal laws of the State of Texas without reference to conflict of law principles. 8. Severability. Any provision of this First Amendment that is held to be inoperative, unenforceable, voidable or invalid in any jurisdiction shall, as to that jurisdiction, be ineffective, unenforceable, void or invalid without affecting the remaining provisions in that or any other jurisdiction, and to this end the provisions of this First Amendment are declared to be severable. IN WITNESS WHEREOF, the parties hereto have executed this First Amendment effective as of the date first above written. BORROWER: DREW SCIENTIFIC, INC., a Texas corporation Mar 8 '04 By: /s/ K.R. DREW - ---------------- ------------------------- Date signed Name: K.R. DREW Title: President. DREW: Mar 8 '04 /s/ Keith Drew - ---------------- ----------------------------- Date signed Keith Drew, individually DREW PLC: DREW SCIENTIFIC GROUP, PLC a public limited company organized under the laws of England and Wales. Mar 8 '04 By: /s/ K.R. DREW - ---------------- ------------------------- Date signed Name: K.R. DREW Title: President LENDER: TEXAS MEZZANINE FUND, INC., a Texas corporation By: ------------------------------- Name: - ---------------------- ----------------------------- Date signed Title: ---------------------------- EX-31.1 25 w68886exv31w1.txt CERTIFICATE OF CEO UNDER RULE 13A-14(A) EXHIBIT 31.1 CERTIFICATION I, Richard J. DePiano, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Escalon Medical Corp. 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which the statements were made, not misleading with respect to the periods covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the period presented in this report. 4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. Disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and 5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the Audit Committee of the Registrant's Board of Directors (or persons performing the equivalent function): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls over financial reporting. Date: November 22, 2004 /s/ Richard J. DePiano ----------------- ----------------------------- Richard J. DePiano Chairman and Chief Executive Officer (Principal Executive Officer) EX-31.2 26 w68886exv31w2.txt CERTIFICATE OF SENIOR VICE PRESIDENT OF FINANCE RULE 13A-14(A) EXHIBIT 31.2 CERTIFICATION I, Harry M. Rimmer, certify that: 6. I have reviewed this quarterly report on Form 10-Q of Escalon Medical Corp. 7. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which the statements were made, not misleading with respect to the period covered by this report; 8. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report. 9. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. Disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and 10. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the Audit Committee of the Registrant's Board of Directors (or persons performing the equivalent function): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls over financial reporting. Date: November 22, 2004 /s/ Harry M. Rimmer ----------------- -------------------------------- Harry M. Rimmer Senior Vice President of Finance EX-32.1 27 w68886exv32w1.txt CERTIFICATE OF CEO UNDER SECTION 1350 EXHIBIT 32.1 STATEMENT OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 1350 OF TITLE 18 OF THE UNITED STATES CODE Pursuant to Section 1350 of Title 18 of the United States Code, I, Richard J. DePiano, the Chairman and Chief Executive Officer of Escalon Medical Corp. (the "Company"), hereby certify that, to the best of my knowledge: 1. The Company's Form 10-Q Quarterly Report for the period ended September 30, 2004 (the "Report") fully complies with the requirements of Section 13(a) of the Securities Act of 1934; and 2. The information contained in this quarterly report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: November 22, 2004 /s/ Richard J. DePiano ----------------- ------------------------------------ Richard J. DePiano Chairman and Chief Executive Officer A signed copy of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to Escalon Medical Corp. and will be retained by Escalon Medical Corp. and furnished to the Securities and Exchange Commission or its staff upon request. EX-32.2 28 w68886exv32w2.txt CERTIFICATE OF SENIOR VICE PRESIDENT OF FINANCE UNDER SECTION 1350 EXHIBIT 32.2 STATEMENT OF SENIOR VICE PRESIDENT - FINANCE PURSUANT TO SECTION 1350 OF TITLE 18 OF THE UNITED STATES CODE Pursuant to Section 1350 of Title 18 of the United States Code, I, Harry M. Rimmer, the Senior Vice President - Finance of Escalon Medical Corp. (the "Company"), hereby certify that, to the best of my knowledge: 3. The Company's Form 10-Q Quarterly Report for the period ended September 30, 2004 (the "Report") fully complies with the requirements of Section 13(a) of the Securities Act of 1934; and 4. The information contained in this quarterly report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: November 22, 2004 /s/ Harry M. Rimmer ----------------- ------------------------------- Harry M. Rimmer Senior Vice President - Finance A signed copy of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to Escalon Medical Corp. and will be retained by Escalon Medical Corp. and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----