-----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, CEvm+H27yJn7UUpH+snwBhRkEyvONa93FhBHVWfZijzo1V/qxdS1TrnYs8Kv05xY tX5nsB0/Cp9KfrPAXa7ARg== 0000928054-02-000011.txt : 20020416 0000928054-02-000011.hdr.sgml : 20020416 ACCESSION NUMBER: 0000928054-02-000011 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020415 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FLOTEK INDUSTRIES INC/CN/ CENTRAL INDEX KEY: 0000928054 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-INDUSTRIAL MACHINERY & EQUIPMENT [5084] IRS NUMBER: 770709256 FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 001-13270 FILM NUMBER: 02611222 BUSINESS ADDRESS: STREET 1: 7030 EMPIRE CENTRAL DRIVE CITY: HOUSTON STATE: TX ZIP: 77040 BUSINESS PHONE: 7138499911 MAIL ADDRESS: STREET 1: 7030 EMPIRE CENTRAL DRIVE CITY: HOUSTON STATE: TX ZIP: 77040 10KSB 1 fltk10k01.txt FLOTEK FORM 10KSB FOR 2001 ================================================================================ U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB For Annual and Transition Reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (Mark One) [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the fiscal year ended December 31, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 1-13270 FLOTEK INDUSTRIES, INC. (Exact name of registrant as specified in its charter) Delaware 77-0709256 (State or other jurisdiction (I.R.S. Employer Identification Number) of incorporation) 7030 Empire Central Drive 77040 (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code: (713) 849-9911 Securities registered pursuant to Section 12(b) of the Exchange Act: (none) Securities registered pursuant to Section 12(g) of the Exchange Act: Common Stock, $0.0001 par value (Title of Class) Check whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ] Revenues for the Company's 2001 fiscal year were $12,561,499. The aggregate market value of the common stock held by non-affiliates of the Registrant was approximately $8,593,000 on April 12, 2002 based upon the closing sale price of common stock on such date of $1.75 per share on the OTC Bulletin Board. As of April 12, 2002, the Registrant had 4,910,812 shares of common stock issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Proxy Statement for its 2002 annual meeting of shareholders, to be filed within 120 days of year end, have been incorporated by reference into Part III of this Form 10-KSB. Transitional small business disclosure format: Yes ( ) No ( X ) ================================================================================ TABLE OF CONTENTS PART I Item 1. Description of Business...........................................3 Item 2. Description of Properties.........................................7 Item 3. Legal Proceedings.................................................7 Item 4. Submission of Matters to a Vote of Security Holders...............7 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters .....................................8 Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations.........................................9 Item 7. Financial Statements.............................................16 Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...............33 PART III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16 (a) of the Exchange Act ..............33 Item 10. Executive Compensation...........................................33 Item 11. Security Ownership of Certain Beneficial Owners and Management...33 Item 12. Certain Relationships and Related Transactions...................33 Item 13. Exhibits and Reports On Form 8-K.................................33 SIGNATURES....................................................................35 2 PART I Item 1. Description of Business Business Flotek Industries, Inc. and subsidiaries (the "Company" or "Flotek") was originally incorporated under the laws of the Province of British Columbia on May 17, 1985. On October 23, 2001, the shareholders of the Company approved a change in its corporate domicile to Delaware and a reverse stock split of 120 to 1. On October 31, 2001, the Company completed a reverse merger ("the Merger") with Chemical & Equipment Specialties, Inc. ("CESI"). CESI is treated as the acquirer for accounting purposes. In connection with the Merger, the Company adopted a calendar year end, which had been the prior reporting basis of CESI. The business of Flotek prior to the Merger consisted of the Downhole Equipment segment, as described below. CESI's business was comprised of the Specialty Chemical and Equipment Manufacturing segments. Flotek is headquartered in Houston, Texas and its common shares are traded on the OTC Bulletin Board market. Effective November 5, 2001, in connection with the Merger, the Company began trading with a new stock ticker symbol, "FLTK", to reflect its change in status from a foreign-domiciled corporation to a Delaware corporation. The Company's product lines are divided into three segments within the oilfield service industry: o The Specialty Chemicals segment develops, manufactures, packages and sells chemicals used in oil and gas well cementing, stimulation and production. o The Equipment Manufacturing segment designs and manufactures specialized cementing and stimulation equipment, including heavy vehicles used for pressure pumping, blending and bulk material transport. This segment also designs, constructs and manages automated bulk material handling and loading facilities for other oilfield service companies. o The Downhole Equipment segment manufactures and markets the Petrovalve line of downhole pump components and the Turbeco line of casing centralizers. Specialty Chemicals Stimulation of oil and gas wells is comprised of hydraulic fracturing of sandstone reservoirs and acidizing of carbonate reservoirs. In the Specialty Chemicals segment, the Company has a full spectrum of cementing, acidizing and fracturing chemicals and fracturing additives and also markets certain specialty production chemicals. The Company has a fully-equipped laboratory facility in Oklahoma which is used to design and test new chemical formulations and enhance existing products, often in partnership with our customers. The laboratory also provides quality assurance to our manufacturing operations and expert technical support to our customers on existing product lines. The customer base for this division is primarily oil and gas well pumping service companies, including both major and independent oilfield service companies. The segment manufactures and packages its products in Oklahoma and has sales and warehousing locations in Oklahoma and Texas. The Company also works through sales representatives and agents in Canada, Mexico, South America, the Middle East and Far East. Business in this segment is highly competitive. The Company attempts to distinguish itself through the strength of its innovative and proprietary products, dedication to product quality and superior customer service. Equipment Manufacturing In the Equipment Manufacturing segment, the Company designs, manufactures and rebuilds cement mixing units, hydraulic fracturing blenders, acid pump vehicles and state of the art control units. It also manufactures and rebuilds nitrogen equipment units that are used for foam fracturing, coiled tubing cleanup operations and industrial cleaning. The Company relies on suppliers for the development and/or delivery of several major components such as diesel engines, heat exchange units, pumps and compression equipment. These units typically require several months to complete and deliver. Manufacturing operations are based in Duncan, Oklahoma. The Company also designs, constructs and manages automated bulk material handling and loading facilities for other oilfield service companies, either as the general contractor on these projects or as consulting engineers. Our client's bulk facilities handle such oilfield products as sand and other proppant materials for well fracturing operations, dry cement and additives for oil and gas well cementing, and other supplies and materials used in oilfield operations. The customer base for this segment consists of major and large independent oilfield service companies which specialize in cementing, pressure pumping and fracturing and our products are sold both in both domestic and international markets. 3 Downhole Equipment The Company's Downhole Equipment segment manufactures and sells two primary product lines, the Petrovalve line of downhole pump valves and the Turbeco line of vaned centralizers used in cementing operations. Both product lines use patented and/or proprietary product designs to achieve greater efficiency and effectiveness than competing products. The Petrovalve line of downhole pump valves was originally designed in the mid-1980's and has undergone significant improvements in recent years. The Petrovalve product line provides longer and more reliable downhole pump performance than the traditional ball and seat valves which are the predominant product in the industry. Additionally, our valves have been demonstrated to provide more efficient flow characteristics and can increase our customer's production volumes in many circumstances. The new "Gas Breaker" technology allows us to provide a solution to gas lock problems often encountered on wells with lower flow rates or high gas ratios. The Company outsources manufacturing of most of the machined valve components, but assembles and performs final quality assurance on all valves in Houston. The Turbeco line of fixed vane centralizers are used in oil and gas well cementing programs to increase the effectiveness of such operations. Our primary products include the Cementing Turbulator, which Flotek acquired and began distributing in 1994. The main purpose of this tool is to assure the pipe is properly centered in the well bore and to improve displacement of cement to obtain an effective bond with the formation. The Company was one of the first companies to distribute spiral-vaned cementing turbulators. The Turbulator has gained widespread acceptance through its ability to improve oil and gas well cementing programs and is effective in deep, directional and horizontal well applications. New products that have been introduced in this segment are the Integral Pump Centralizer, the Eccentric Turbulator (jointly patented with Marathon Oil), and the Turbolock Centralizer. Recently, the Company completed design and testing of its proprietary Pressure-Actuated Casing ("C-PAC") Centralizer. This pressure-actuated tool is designed to accommodate "slim-hole" deviated well completion programs. The C-PAC Centralizer is an integral part of the casing and does not activate until it is in its final position in the well, thus reducing drag during insertion of the casing in the well bore. It can also be used in smaller well bore diameters which would prevent the use of traditional fixed centralizers. Once in place, the vanes are pressure-activated to expand and centralize the casing to maximize the integrity of the cementing process. Patent applications are pending and marketing efforts are in progress. The Company's competition in the Petrovalve product line is comprised of rod pump manufacturers and pump maintenance and service shops using the industry standard API ball and seat product, as well as other proprietary valve products. In the cementing centralizer market, the Company competes with both large, diversified oilfield service companies and smaller independent competitors. Competition is high and is expected to continue for the foreseeable future. The Company's customers in the Downhole Equipment segment are primarily oil and gas exploration and production companies, including major oil companies, which are involved in the drilling and cementing of oil wells and own producing oil and gas wells. The Company's active customer base is distributed among major oil companies and smaller independent operators. The Company's marketing area is focused in the Gulf of Mexico region, although the Company has a significant customer base in Venezuela for its Petrovalve products and is continuing to expand its market both internationally and domestically. 4 Product Demand and Marketing The demand for the Company's products and services is generally correlated to the level of oil and gas drilling activity, both in the United States and internationally. Drilling activity, in turn, is generally dependent on the price levels of oil and gas. Certain of the Company's products, particularly the Petrovalve line of downhole pump valves and certain of its specialty chemicals, are more closely related to the production of oil and gas and demand for these products is less dependent on drilling activity. We market our products primarily through direct sales to our customers by company managers and sales employees. We generally have established customer relationships which provide for repeat sales. As a result of the significant consolidation which has occurred in the industry over the past 15 years, our sales have tended to be concentrated in larger customer relationships. Two customers accounted for 17.1% and 14.2%, respectively, of our consolidated revenues for the year ended December 31, 2001. Both of these customers were in the Specialty Chemicals segment of our business and they collectively accounted for 53.7% of the revenues in this segment. Government Regulation, Operating Risks and Insurance We are subject to federal, state and local environmental and occupational safety and health laws and regulations in the United States and other countries in which we do business. The Company has endeavored to fully comply with these requirements and is not aware of any material instances of noncompliance. However, these requirements are complex and assuring compliance is often difficult. The enforcement of these laws and regulations may become more stringent in the future and could have a material impact on our costs of operations. Non-compliance could also subject us to material liabilities, such as government fines, third-party lawsuits or even the suspension of operations. Many of the products within our specialty chemicals segment are considered hazardous or flammable. The majority of such products are reasonably stable and generally require only ordinary care in handling and transportation. However, we do have risks in handling the materials in this segment and if a leak or spill occurs in connection with our operations, we could incur material costs to remediate any resulting contamination. In addition, our Company's products are used for the exploration and production of oil and natural gas. Such operations are subject to hazards inherent in the oil and gas industry, such as fires, explosions, blowouts and oil spills, which can cause personal injury or loss of life, damage to or destruction of property, equipment, the environment and marine life, and suspension of operations. Litigation arising from an occurrence at a location where the Company's products or services are used or provided could in the future result in the Company being named as a defendant in lawsuits asserting potentially significant claims. The Company maintains insurance coverage that it believes to be reasonable and customary in the industry against these hazards. The Company does not have any significant legal actions pending or to its knowledge, threatened against it, nor have there been any significant losses of this nature in the past. However, there can be no assurance that such a claim might not be asserted against the Company in the future and in that event, the consequences of such a claim could be material to the operating results or financial position of the Company. Research and Development and Intellectual Property The Company is actively involved in developing proprietary products to expand its existing product lines and in developing new technologies. The Company has followed a policy of seeking patent protection both within and outside the United States for products and methods that appear to have commercial significance and qualify for patent protection. The decision to seek patent protection considers whether such protection can be obtained on a cost-effective basis and is likely to be effective in protecting the commercial interests of the Company. The Company believes that its patents and trademarks, together with its trade secrets and proprietary design, manufacturing and operational expertise, are reasonably adequate to protect its intellectual property and provide for the continued operation of its business. However, the Company's competitors may attempt to circumvent these patent protections or develop new technologies which compete with the Company's products. 5 International Operations Substantially all of the Company's revenues and operations are currently conducted within the United States. However, the Company has been expanding its international sales efforts and expects international sales to increase in the future. There are no current plans to locate any production operations or maintain any significant amounts of inventory outside the U.S., but these plans are subject to change in the future based on management's assessment of business opportunities. One of the Company's product lines, Petrovalve downhole pumps, is currently sold into markets in South America, particularly Venezuela. This product line was part of the prior operations of Flotek Industries, Inc. and the South American revenues included in the accompanying financial statements for the period subsequent to the Merger are not material. However, on a pro forma combined basis, South American revenues in this segment amounted to approximately $1,556,000, or 9.7% of pro forma consolidated revenues for the year ended December 31, 2001. As discussed in Note 11 of the Notes to Consolidated Financial Statements, we have recently experienced difficulties in collecting accounts receivable from these sales on a timely basis due to political instability and a work stoppage by the employees of the national oil company of Venezuela. At December 31, 2001, we had approximately $828,000 in accounts receivable from a customer in Venezuela, which is now past due and which has not been collected as of the date this Form 10-KSB was filed. International sales involve additional business and credit risks inherent in doing business in countries with legal and political policies different from those in the United States. Those risks can include war, boycotts, legal and political changes, and fluctuations in currency exchange rates. Although it is impossible to predict the probability of such occurrences or their effect on the Company, management believes that these risks are outweighed by the commercial opportunities of developing sales markets outside the United States. Employees As of December 31, 2001, the Company employed approximately 90 full-time employees. None of the Company's employees are covered by collective bargaining agreements. The Company believes that its relationship with its employees is satisfactory. Risk Factors The Company faces various business risks specific to its industry, product lines, financial resources and competitive position, as well as general economic and financial risks. The following risk factors, among others, may cause the Company's operating results and/or financial position to be adversely affected: o The Company is dependent on the oil and gas industry, and activity levels in the industry are volatile. o Oil and gas prices are volatile and have a direct impact on the spending levels of our customers. o The oilfield service industry is highly competitive and we must compete with many companies possessing greater financial resources and better established market positions. o The introduction of new products and technologies by competitors may adversely affect the demand for our products and services. o The Company's debt service obligations may limit our ability to fund operations and capital spending or provide for future growth. o The Company may not be able to successfully manage its growth. o Changes in political conditions, governmental regulations, economic and financial market conditions, unexpected litigation and other uncertainties may have an adverse effect on our operations. 6 Item 2. Description of Properties The following table sets forth certain information with respect to the Company's principal properties:
Facility Size Location (Sq. Feet) Tenure Utilization - ---------------------------- --------------- --------------- ------------------------------------ Houston, Texas................ 9,000 Leased Corporate Office and Warehouse Duncan, Oklahoma.............. 50,000 Leased Equipment Manufacturing Duncan, Oklahoma.............. 4,000 Owned Distribution for Specialty Chemicals Duncan, Oklahoma.............. 750 Leased Administrative Offices Marlow, Oklahoma.............. 15,500 Owned Manufacturing Specialty Chemicals Mason, Texas.................. 10,000 Owned Manufacturing Downhole Equipment Midland, Texas................ 3,500 Leased Distribution for Specialty Chemicals Lafayette, Louisiana.......... 5,000 Leased Warehouse for Downhole Equipment Edmonton, Alberta............. 500 Leased Warehouse for Downhole Equipment
The Company considers its facilities to be in good condition and suitable for the conduct of its business. All of our facilities are subject to mortgages or security agreements as described in the Notes to the Consolidated Financial Statements. Item 3. Legal Proceedings There are presently no pending lawsuits against the Company. Item 4. Submission of Matters to a Vote of Security Holders Prior to the Merger, the Company held a Special Meeting of Stockholders on October 23, 2001 to consider and vote upon a change in the Company's jurisdiction of incorporation from Alberta, Canada to Delaware. There were 1,446,829 shares eligible to vote at the meeting, adjusted for the reverse stock split. The resolution was approved with 934,627 shares voted in favor and 448 shares voted against or abstaining. The resolution was subsequently submitted to the Court of Queen's Bench of Alberta for final approval of the Court, which was received on October 30, 2001. In connection with this change in jurisdiction, one share of common stock of the new Flotek (Delaware) was issued for each 120 outstanding common shares of the old Flotek (Alberta), accomplishing a reverse stock split of 120 to 1. The Company redeemed fractional shares for cash. The reverse stock split was given effect at the opening of trading on November 5, 2001. Also on that date, the Company began trading with a new stock ticker symbol, "FLTK", to reflect its change in status from a foreign-domiciled corporation to a Delaware corporation. 7 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The Company's common stock is traded on the OTC Bulletin Board under the symbol "FLTK". The following table sets forth, on a per share basis for the periods indicated, the high and low sales prices reported by the OTC Bulletin Board, as adjusted for the 120 to 1 reverse stock split which was given effect on November 5, 2001. High Low 2001 Fourth quarter ended December 31, 2001...................... $ 10.00 $ 2.00 Third quarter ended September 30, 2001...................... $ 12.00 $ 5.40 Second quarter ended June 30, 2001.......................... $ 10.80 $ 4.20 First quarter ended March 31, 2001.......................... $ 6.00 $ 3.60 2000 Fourth quarter ended December 31, 2000..................... .$ 8.40 $ 3.60 Third quarter ended September 30, 2000...................... $ 12.00 $ 5.40 Second quarter ended June 30, 2000.......................... $ 26.40 $ 10.80 First quarter ended March 31, 2000.......................... $ 31.20 $ 6.00 As of April 12, 2002, the closing stock price, as quoted on the OTC Bulletin Board, was $1.75. As of April 12, 2002 there were 4,910,812 common shares outstanding held by approximately 200 holders of record and an estimated 1,000 beneficial holders. Dividend Policy The Company has never paid cash dividends on its common stock. The Company intends to retain future earnings, if any, to meet its working capital requirements and to finance the future operations of its business. Therefore, the Company does not plan to declare or pay cash dividends to holders of its common stock in the foreseeable future. In addition, certain of the Company's credit agreements contain provisions that limit the Company's ability to pay cash dividends on its common stock. Recent Issuance of Unregistered Securities In connection with the Merger with CESI on October 31, 2001, the Company issued 2,994,480 shares of common stock and assumed employee stock options and contingent share issuance obligations totaling 117,523 shares. Additional disclosure related to the issuance of these shares is included in Note 2 of the Notes to Consolidated Financial Statements. Prior to the Merger on October 31, 2001, Flotek issued 578,479 shares of common stock, adjusted for the 120 to 1 reverse stock split, in exchange for cash proceeds of $2,082,524, in connection with the exercise of warrants which were outstanding as of February 28, 2001, the date of Flotek's prior Annual Report on Form 10-KSB. Also in connection with the Merger, all of the outstanding preferred shares of Flotek were converted to 747,857 shares of common stock. These share issuances are not reported in the accompanying consolidated financial statements as they occurred prior to the Merger. The foregoing issuances of common stock were made in reliance upon the exemption from registration set forth in Section 4(2) of the Securities Act of 1933 for transactions not involving a public offering. No underwriters were engaged in connection with the foregoing sale of securities. The sales were made without general solicitation or advertising. Each purchaser was an "accredited investor" or a sophisticated investor with access to all relevant information necessary to evaluate the investment who represented to the Company that the sales were being acquired for investment. 8 Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations Business Overview Flotek was established in 1985 and is currently traded on the OTC Bulletin Board market. On October 31, 2001, the Company completed the Merger with CESI. The Merger has been accounted for as a reverse acquisition using the purchase method of accounting. In the Merger, the shareholders of the acquired company, CESI, received the majority of the voting interests in the surviving consolidated company. Accordingly, CESI was deemed to be the acquiring company for financial reporting purposes and the historical financial statements of the Company are the historical financial statements of CESI. All of the assets and liabilities of Flotek were recorded at fair value on October 31, 2001, the date of the Merger, and the operations of Flotek have been reflected in the operations of the combined company only for periods subsequent to the date of the Merger. CESI was incorporated on June 27, 2000 to acquire businesses in the specialty chemical and equipment manufacturing segments of the oilfield service industry. It had no revenues or operations prior to the acquisitions of Esses, Inc., Plainsman Technology, Inc., Neal's Technology, Inc., and Padko International, Inc. in January 2001. It subsequently acquired Material Translogistics, Inc. in June 2001. These five companies are referred to collectively as the "CESI Acquired Businesses". The Company's product lines are divided into three segments within the oilfield service industry: o The Specialty Chemicals segment develops, manufactures, packages and sells chemicals used in oil and gas well cementing, stimulation and production. o The Equipment Manufacturing segment designs and manufactures specialized cementing and stimulation equipment, including heavy vehicles used for pressure pumping, blending and bulk material transport. This segment also designs, constructs and manages automated bulk material handling and loading facilities for other oilfield service companies. o The Downhole Equipment segment manufactures and markets the Petrovalve line of downhole pump components and the Turbeco line of casing centralizers. Our businesses serve the oil and gas industry. All of our businesses are affected by changes in the worldwide demand for and price of oil and natural gas. The majority of our products are dependent on the level of exploration and development activity and the completion phase of oil and gas well drilling. Other products and services, such as our Petrovalve downhole pump products and certain of our specialty chemicals are more closely tied to the production of oil and gas and are less dependent on drilling activity. The oil and gas industry has been subject to significant volatility in recent years due to changes in the demand, supply and pricing of oil and natural gas. The rig count increased steadily during most of 2000 and the first half of 2001. The U.S. rig count, as measured by Baker Hughes Incorporated, began 2000 at around 800 active rigs and ended the year with a 38% increase to approximately 1,100 active rigs. The rig count continued to increase during 2001 and reached a peak of almost 1,300 in July 2001. During the third quarter of 2001, the demand for oil and natural gas began to weaken in response to slowing growth in worldwide economies. This resulted in a slowdown in North American drilling rig activity, with a steady decline in the rig count during the second half of 2001 until it had reached a level of just under 900 active rigs at December 31, 2001. Subsequent to the end of 2001, the rig count has dropped further, with around 750 active rigs working at the end of March 2002. Natural gas prices have declined from a near record high of almost $10.00 per Mcf in early 2001 to recent lows of below $2.50 per Mcf. Crude oil prices experienced a similar decline in 2001, from $30.00 per barrel at the beginning of the year to below $20.00 at the end. However, prices for both commodities have recovered 20-30% from their lows subsequent to December 31, 2001. Our businesses were affected by this decline in drilling activity in the second half of 2001, with the effects most pronounced in the fourth quarter of 2001. Many industry observers expect drilling activity levels to increase in 2002 based on higher oil and gas prices and an expected rebound in overall economic activity. However, we face a challenging industry environment in the near term and there can be no assurance that these expected improvements will occur. 9 The following is a discussion of our results of operations on both an historical and an unaudited pro forma combined basis for the last two years. This discussion should be read in conjunction with our consolidated financial statements and notes thereto that are included in Item 7 of this filing. Due to the limited operating history of CESI prior to January 2001, the discussion of comparative results of operations will focus primarily on the unaudited pro forma combined information. The unaudited pro forma combined statements of operations and related pro forma segment information give effect to the acquisition of the CESI Acquired Businesses by CESI and the Merger between Flotek and CESI. The basis of presentation for the unaudited pro forma combined statement of operations for the year ended December 31, 2000, together with the pro forma adjustments thereto and the separate historical financial statements of the CESI Acquired Businesses, are presented in the Company's Form 8-K/A which was filed with the Commission on January 16, 2002 and the information presented herein should be read in conjunction with the information in that filing. The basis of presentation and pro forma adjustments for the statement of operations for the year ended December 31, 2001 and the supporting pro forma segment information for each of the years ended December 31, 2001 and 2000 are included as Exhibits 99.1 and 99.2 to this filing and should be read in conjunction with the information in those exhibits. The unaudited pro forma combined results of operations presented herein do not purport to represent what the Company's results of operations actually would have been had such events occurred at the beginning of the periods presented, as assumed, or to project the Company's results of operations for any future period or the future results of any of the acquired businesses. They are presented to allow for a more informative discussion and comparative analysis of the Company's performance. The Company is also subject to various Risk Factors as discussed in Item 1 of this filing, and the following discussion should be read in light of those factors, which could have a material effect on our business in the future. Results of Operations
Pro Forma Combined Historical (Unaudited) --------------------------- --------------------------- Years ended December 31, 2001 2000 (a) 2001 2000 ----------- ----------- ----------- ----------- Revenues................................ $12,561,499 $ - $15,982,449 $11,685,020 Cost of revenues........................ 9,078,121 - 10,778,063 6,130,315 ----------- ----------- ----------- ----------- Gross margin......................... 3,483,378 - 5,204,386 5,554,705 ----------- ----------- ----------- ----------- Gross margin %....................... 27.7% - 32.6% 47.5% Selling, general and administrative..... 3,767,873 153,462 5,306,193 3,628,983 Depreciation and amortization........... 744,305 15,933 853,061 774,001 Research and development................ 34,938 - 109,650 21,079 ----------- ----------- ----------- ----------- Total expenses....................... 4,547,116 169,395 6,268,904 4,424,063 ----------- ----------- ----------- ----------- Operating income (loss).............. (1,063,738) (169,395) (1,064,518) 1,130,642 ----------- ----------- ----------- ----------- Operating income (loss) %............ (8.5)% - (6.7)% 9.7% Interest expense........................ (415,431) - (457,391) (564,862) Interest income......................... 43,819 - 43,819 50,454 Other, net.............................. 27,415 10,665 35,050 54,933 ----------- ----------- ----------- ----------- Other income (expense), net......... (344,197) 10,665 (378,522) (459,475) ----------- ----------- ----------- ----------- Pre-tax income (loss)............... $(1,407,935) $ (158,730) $(1,443,040) $ 671,167 =========== =========== =========== =========== Pre-tax income (loss) %............. (11.2)% - (9.0)% 5.7% (a) for the period from June 27, 2000 (date of incorporation) through December 31, 2000
10 Total revenues on an unaudited pro forma combined basis increased by $4.3 million, or 36.8%, in 2001 compared to 2000. While all three of our segments achieved higher revenues in 2001 compared to the prior year, the majority of the increase in revenues is attributable to the Equipment Manufacturing segment, which increased by $3.1 million. See discussion of the results of this segment below. On an aggregate basis, the gross margin as a percentage of revenues dropped significantly from 47.5% in 2000 to 32.6% in 2001. While we experienced a slight decline in the gross margin percentages in both the Specialty Chemicals and Downhole Equipment segments, the vast majority of this decline is attributable to the poor results of the Equipment Manufacturing segment discussed below. Selling, general and administrative ("SG&A") costs represent the costs of selling, operations and overhead expenses not directly attributable to products sold or services rendered. The revenues from services are less than 10% of consolidated revenues and the direct costs of providing these services are included in cost of revenues. SG&A amounted to 33.2% of unaudited pro forma combined revenues in 2001, an increase of 2.1% of revenues from the level of 31.1% in 2000. The costs of administration increased as a result of the Merger and the increased size and complexity of the Company, and our selling and operations costs increased based on higher activity levels. However, our revenues also increased significantly, so the increase in SG&A as a percentage of revenues was reduced. Interest expense on an unaudited pro forma combined basis decreased $107.5 thousand from 2000 to 2001. While the average amount outstanding under the Company's credit agreements was higher in 2001 as a result of the financing of capital expenditures and increased working capital needs during the year, interest rates were significantly lower in 2001 and the decline in rates more than offset the additional interest expense associated with higher debt levels. The majority of the Company's indebtedness carries a variable interest rate tied to the prime rate and is adjusted on a quarterly basis. Unaudited Pro Forma Combined Results by Segment: Specialty Chemicals The following table presents the operating results of our Specialty Chemicals segment on an unaudited pro forma combined basis for 2001 and 2000: Years ended December 31, -------------------------------- 2001 2000 -------------- -------------- Revenues..................... $7,329,596 $6,607,998 Gross margin................. $3,032,815 $2,828,606 Gross margin %............... 41.4% 42.8% Operating income............. $1,113,588 $1,165,268 Operating margin............. 15.2% 17.6% Specialty Chemical revenues increased $721.6 thousand, or 10.9%, in the current year from 2000 levels. Sales in this segment are heavily dependent on drilling activity and the increase in revenue is primarily attributable to higher drilling activity, on average, in 2001 versus 2000. Average product pricing levels in this segment did not change materially from 2000 to 2001. The gross margin percentage in this segment declined slightly from 42.8% in 2000 to 41.4% in 2001. In certain cases, in order to achieve increased sales levels, we sold our products at a slightly lower gross margin. Despite the slight decline in our gross margin percentage, we realized an overall increase of $204.2 thousand, or 7.2%, in total gross margin in this segment. 11 Operating income fell $51.7 thousand, or 4.4%, in the current year from 2000 levels, primarily as a result of increased selling, general, and administrative expenses associated with integrating the companies in this segment after their acquisition by CESI. In addition, there was a small increase in depreciation expense from capital expenditures to expand one of the facilities in this segment. The above issues, together with the slight decrease in the gross margin percentage, combined to result in a decrease in overall operating margin percentage in this segment from 17.6% in 2000 to 15.2% in 2001. Equipment Manufacturing The following table presents the operating results of our Equipment Manufacturing segment on an unaudited pro forma combined basis for 2001 and 2000: Years ended December 31, -------------------------------- 2001 2000 -------------- -------------- Revenues..................... $ 5,233,039 $2,095,614 Gross margin................. $412,983 $1,138,975 Gross margin %............... 7.9% 54.4% Operating income............. $(1,177,139) $ $311,142 Operating margin............. (22.5)% 14.8% Equipment Manufacturing revenues increased $3.1 million, or 150%, in 2001 over 2000 levels. This increase primarily resulted from the significant expansion of capacity in 2001 which was undertaken by the management of CESI in response to perceived market opportunities. In the second quarter of 2001, the Company more than doubled the number of bays in its Duncan, Oklahoma manufacturing facility, from 5 to 11. Unfortunately, the management of this segment was not able to effectively manage the increase in business and the expansion, combined with operational problems and delays in getting major components from suppliers, resulted in significant cost overruns and operating losses. The gross margin dropped dramatically from 2000 to 2001 and, when combined with overhead costs and indirect costs of manufacturing in this segment, resulted in a significant loss for the year of approximately $1.2 million. Subsequent to the Merger, the Company replaced the management of this segment and focused significant efforts and financial resources on improving the performance of this segment, including the implementation of improved operating procedures, better accounting controls and proper documentation of work processes. The Company also initiated cost reduction measures in response to lower revenue levels and reduced sales expectations. While significant improvements have been made, based on preliminary financial results in early 2002 this segment continued to operate at a loss, although the magnitude of that loss has been reduced. The outlook for the equipment manufacturing operations in this segment is uncertain. Orders for new equipment to be manufactured slowed significantly in the second half of the year. Management is continuing to solicit new orders and in the event it does not secure sufficient new orders, the Company is prepared to take appropriate action to limit its financial exposure from further losses in this segment. The outlook for other operations within this segment, consisting of the design, construction and management of bulk material handling and loading facilities, is much more positive. These operations accounted for approximately $1.0 million in pro forma revenues, or slightly less than 20% of unaudited pro forma combined revenues in this segment and generated a positive operating margin of approximately $58 thousand during 2001. Based on the current work in progress and outstanding bids in response to requests for quotations, management believes that the revenues and operating margin attributable to these operations will increase significantly over 2001. However, there can be no assurance that the Equipment Manufacturing segment as a whole will be profitable. As more fully discussed in Note 1 of the Notes to Consolidated Financial Statements, there is approximately $1.3 million of net goodwill attributable to this segment, all or some portion of which may be subject to an impairment charge based on new accounting requirements which take effect during 2002. 12 Downhole Equipment The following table presents the operating results of our Downhole Equipment segment on an unaudited pro forma combined basis for 2001 and 2000: Years ended December 31, -------------------------------- 2001 2000 -------------- -------------- Revenues..................... $3,419,814 $2,981,408 Gross margin................. $1,758,588 $1,587,124 Gross margin %............... 51.4% 53.2% Operating income............. $367,537 $430,347 Operating margin............. 10.7% 14.4% Downhole Equipment revenues increased $438.4 thousand, or 14.7%, in 2001 compared to 2000 levels. This incremental revenue is primarily due to increased sales volumes, which resulted from improved sales efforts and increased market penetration of our Petrovalve product line in South American sales markets, primarily Venezuela. Net product pricing in 2001 did not change materially from the levels in 2000. The gross margin percentage in this segment decreased slightly from 53.2% in 2000 to 51.4% in 2001. In connection with the Merger, the Company recorded $87.4 thousand in inventory reserves to reflect additional impaired, excess or obsolete inventory. With the exception of this charge, our cost of manufacturing the products sold in this segment did not increase significantly. The total gross margin increased by $171.5 thousand, or 10.8% from the prior year. Operating income in 2001 fell $62.8 thousand, or 14.6%, from 2000, primarily as a result of increased research and development expenditures incurred to develop new products, including the C-PAC pressure actuated centralizer. The operating margin declined from 14.4% in 2000 to 10.7% in 2001 as a result of the lower gross margin percentage and increased research and development spending in this segment. Liquidity and Capital Resources In 2001, the Company sustained a loss from operations of $1.4 million and had negative cash flow from operations of approximately $1.1 million. These losses resulted primarily from the poor operating results in the Equipment Manufacturing segment. As discussed above, management has taken and will continue to take appropriate steps to improve performance and attempt to limit the losses in this segment. Cash and cash equivalents decreased $1.1 million from 2000 to 2001. Prior to January 2001, CESI had not commenced operations and the cash on hand of $1.3 million at December 31, 2000 was the result of sales of common stock to investors for cash, reduced by certain start-up expenses. This cash was specifically intended for the acquisition of the CESI Acquired Businesses in January 2001. In order to complete the acquisition of the CESI Acquired Businesses, CESI raised an additional $4.1 million of cash through sales of common stock to investors and borrowed $2.7 million from a bank. These funds were used to fund payments totaling $7.2 million to the sellers of the businesses. CESI also assumed or incurred an additional $2.2 million in debt in connection with the acquisitions. Subsequent to the acquisitions, but prior to the Merger, CESI incurred an additional $1.0 million of debt to finance capital expenditures and fund working capital needs. 13 At the time of the Merger with CESI, Flotek had cash on hand of approximately $1.2 million, which represented the unexpended balance of the proceeds from the exercise of warrants by the shareholders of Flotek prior to the Merger. The majority of this cash was used after the Merger to fund the remaining capital expenditures and working capital needs of the combined company and the Company ended the year with a cash balance of approximately $240,000. Capital expenditures paid in cash were $1.4 million. In addition, the Company incurred additional capital expenditures of $0.9 million which had not been paid in cash as of December 31, 2001. Of the total $2.3 million in capital expenditures incurred, we used $0.6 million to expand facilities and add equipment in the Specialty Chemicals segment, $1.6 million to significantly expand facilities and manufacturing capacity in the Equipment Manufacturing segment, and $0.1 million for vehicles and other equipment in the Downhole Equipment segment. As of December 31, 2001, net working capital was approximately $284,000, resulting in a current ratio of 1.05 to 1. The accounts payable balance at December 31, 2001 of $2.23 million included a substantial amount of past due vendor invoices, most of which related to the Equipment Manufacturing segment. Subsequent to the end of the year (as discussed in Note 12 of the Notes to Consolidated Financial Statements), the Company secured an additional $1.6 million of short-term borrowing capacity from its primary lending bank, subject to a borrowing base limitation of 50% of eligible accounts receivable and inventory balances. The funding from this expanded line of credit has generally allowed the Company to bring its vendor accounts to current status. As disclosed in Note 11 of the Notes to Consolidated Financial Statements, at December 31, 2001, the Company had approximately $828,000 of accounts receivable from a customer in Venezuela which had not been paid within the customary payment terms as a result of political instability and a work stoppage by the employees of the national oil company. This amount had not been collected as of the date this Form 10-KSB was filed. This amount is currently not included in eligible accounts receivable for purposes of calculating the borrowing base under our lines of credit. The Company has an established long-term relationship with this customer and believes that it will ultimately collect the balance due, but it cannot predict the timing of such payment. The Company has not provided a reserve for doubtful accounts associated with this balance. Also subsequent to December 31, 2001 (see Note 12 of the Notes to Consolidated Financial Statements), the Company entered into a sale and leaseback transaction regarding its commitment to complete the purchase of its Equipment Manufacturing facility in Duncan, Oklahoma. This transaction resulted in net cash proceeds to the Company of approximately $761,000 and the Company entered into an agreement to lease back the facility over ten years. This transaction will be recorded as a capital lease. The Company has estimated minimum debt service obligations in 2002 of $1.8 million. This amount includes the estimated minimum principal and interest payments on the new credit agreements and capital lease obligations incurred subsequent to December 31, 2001. With the exception of the construction of the bulk material transload facility in Raceland, Louisiana disclosed in Note 12 of the Notes to Consolidated Financial Statements, which is expected to be substantially financed by a new credit agreement in the amount of $854,350, the Company does not expect to have any major requirements for capital expenditures in 2002. The Company believes its operations are capable of generating sufficient cash flow to meet its debt service obligations and working capital needs during the year ended December 31, 2002. However, we face a challenging near-term industry environment and there are many factors involved in executing our business strategy which are beyond our control. Accordingly, investors are advised that the Company faces significant financial risks in the next year as we attempt to meet these challenges. 14 Forward-Looking Statements Except for the historical information contained herein, the discussion in this Form 10-KSB includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. The words "anticipate", "believe", "expect", "plan", "intend", "project", "forecast", "could" and similar expressions are intended to identify forward-looking statements. All statements other than statements of historical facts included in this Form 10-KSB regarding the Company's financial position, business strategy, budgets and plans and objectives of management for future operations are forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially from those in the forward-looking statements for various reasons including the effect of competition, the level of petroleum industry exploration and production expenditures, world economic conditions, prices of, and the demand for crude oil and natural gas, weather, the legislative environment in the United States and other countries, adverse changes in the capital and equity markets, and other risk factors identified herein. 15 Item 7. Financial Statements
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Public Accountants.........................................................................17 Consolidated Balance Sheets as of December 31, 2001 and 2000.....................................................18 Consolidated Statements of Operations for the Year Ended December 31, 2001 and for the Period from June 27, 2000 (Date of Incorporation) through December 31, 2000......................................................19 Consolidated Statements of Changes in Stockholders' Equity for the Year Ended December 31, 2001 and for the Period from June 27, 2000 (Date of Incorporation) through December 31, 2000...20 Consolidated Statements of Cash Flows for the Year Ended December 31, 2001 and for the Period from June 27, 2000 (Date of Incorporation) through December 31, 2000......................................................21 Notes to Consolidated Financial Statements.......................................................................23
16 INDEPENDENT AUDITORS' REPORT The Board of Directors Flotek Industries, Inc. Houston, Texas We have audited the accompanying consolidated balance sheets of Flotek Industries, Inc. and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of operations, stockholders' equity, and cash flows for the year ended December 31, 2001 and the period from June 27, 2000 (date of incorporation) through December 31, 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Flotek Industries, Inc. and subsidiaries as of December 31, 2001 and 2000, and the consolidated results of its operations and its cash flows for the year ended December 31, 2001 and the period from June 27, 2000 (date of incorporation) through December 31, 2000, in conformity with generally accepted accounting principles. WEINSTEIN SPIRA & COMPANY, P.C. Houston, Texas March 18, 2002 17 FLOTEK INDUSTRIES, INC. CONSOLIDATED BALANCE SHEETS December 31, 2001 and 2000
2001 2000 ----------- ---------- ASSETS Current assets: Cash and cash equivalents........................................... $ 240,438 $ 1,293,142 Accounts receivable, less reserve of $208,333 in 2001............... 2,189,566 - Inventories and work in progress.................................... 3,704,153 - Other current assets................................................ 24,735 - ----------- ----------- Total current assets........................................... 6,158,892 1,293,142 ----------- ----------- Property and equipment, net............................................ 3,671,939 100,988 Goodwill, net.......................................................... 13,111,840 - Patents, net........................................................... 191,333 - Other assets........................................................... 87,253 95,459 ----------- ----------- Total assets.................................................. $23,221,257 $ 1,489,589 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable................................................... $ 2,225,219 $ 80,469 Accrued liabilities................................................ 722,910 20,069 Amounts due to related parties..................................... 132,855 164,410 Notes payable...................................................... 1,282,966 - Current portion of long-term debt.................................. 876,737 - Capital lease obligations.......................................... 633,894 - ----------- ----------- Total current liabilities..................................... 5,874,581 264,948 ----------- ----------- Long-term debt........................................................ 3,339,970 - ----------- ----------- Stockholders' equity: Preferred stock, $.0001 par value, 100,000 shares authorized, no shares issued................................................. - - Common stock, $.0001 par value, 20,000,000 shares authorized, 4,850,696 and 1,425,665 shares issued and outstanding for 2001 and 2000, respectively........................................ 485 143 Additional paid-in capital........................................ 15,572,886 1,383,228 Accumulated deficit............................................... (1,566,665) (158,730) ----------- ----------- Total stockholders' equity.................................... 14,006,706 1,224,641 ----------- ----------- Total liabilities and stockholders' equity.................... $23,221,257 $ 1,489,589 =========== =========== The accompanying notes are an integral part of these financial statements.
18
FLOTEK INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS For the Year Ended December 31, 2001 and the Period from June 27, 2000 (Date of Incorporation) through December 31, 2000 2001 2000 ----------- ---------- Revenues...................................................... $12,561,499 $ - Cost of revenues.............................................. 9,078,121 - ----------- ---------- Gross margin.................................................. 3,483,378 - ----------- ---------- Expenses: Selling, general and administrative....................... 3,767,873 153,462 Depreciation and amortization............................. 744,305 15,933 Research and development.................................. 34,938 - ----------- ---------- Total expenses......................................... 4,547,116 $ 169,395 ----------- ---------- Loss from operations.......................................... (1,063,738) (169,395) Other income (expense): Interest expense.......................................... (415,431) - Interest income........................................... 43,819 10,665 Other, net................................................ 27,415 - ----------- ---------- Total other income (expense)........................... (344,197) 10,665 ----------- ---------- Net loss...................................................... $(1,407,935) $ (158,730) =========== ========== Basic and diluted net loss per common share................... $ (0.44) $ (0.27) ===== ===== Weighted average number of shares outstanding................. 3,175,449 596,526 =========== ==========
The accompanying notes are an integral part of these financial statements. 19
FLOTEK INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY For the Year Ended December 31, 2001 and the Period from June 27, 2000 (Date of Incorporation) through December 31, 2000 Additional Common Stock Paid-in Accumulated Shares Capital Deficit Total -------------------- ----------- ----------- ----------- Common stock issued for cash............ 1,425,665 $143 $ 1,383,228 $ - $ 1,383,371 Net loss................................ - - - (158,730) (158,730) ---------- ---- ----------- ----------- ------------ Balance at December 31, 2000............ 1,425,665 143 1,383,228 (158,730) 1,224,641 Common stock issued in acquisitions..... 2,326,312 232 10,077,768 - 10,078,000 Common stock issued for cash............ 1,098,719 110 4,111,890 - 4,112,000 Net loss................................ - - - 1,407,935) (1,407,935) ---------- ---- ----------- ---------------- ------------ Balance at December 31, 2001............ 4,850,696 $485 $15,572,886 $(1,566,665) $ 14,006,706 ========== ==== =========== =========== ============
The accompanying notes are an integral part of these financial statements. 20
FLOTEK INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS For the Year Ended December 31, 2001 and the Period from June 27, 2000 (Date of Incorporation) through December 31, 2000 2001 2000 ----------- ---------- Cash flows from operating activities: Net loss.................................................. $(1,407,935) $ (158,730) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization......................... 744,305 15,933 Imputed interest expense.............................. 43,095 - Allowance for doubtful accounts....................... 216,302 - Gain on sale of assets................................ (20,435) - (Increase) decrease in: - Accounts receivable................................. (382,766) - Inventories and work in progress.................... (1,439,324) - Other current assets................................ (15,655) - Accounts payable and accrued liabilities............ 1,177,823 100,538 ----------- ---------- Net cash used in operating activities.............. (1,084,590) (42,259) ----------- ---------- Cash flows from investing activities: Acquisition of subsidiaries, net.......................... (6,066,493) - Capital expenditures...................................... (1,411,460) (116,921) Proceeds from sales of assets............................. 246,536 - Deposits and other........................................ (77,864) (95,459) ----------- ---------- Net cash used in investing activities.............. (7,309,281) (212,380) ----------- ---------- Cash flows from financing activities: Issuance of stock for cash................................ 4,112,000 1,383,371 Proceeds from borrowings.................................. 3,737,316 - Repayments of indebtedness................................ (325,755) - Proceeds from (payments to) related parties............... (152,394) 164,410 Principal payments on capital leases...................... (30,000) - ----------- ---------- Net cash provided by financing activities.............. 7,341,167 1,547,781 ----------- ---------- Net increase (decrease) in cash and cash equivalents........... (1,052,704) 1,293,142 Cash and cash equivalents at beginning of year................. 1,293,142 - ----------- ---------- Cash and cash equivalents at end of year....................... $ 240,438 $1,293,142 =========== ========== The accompanying notes are an integral part of these financial statements.
21
FLOTEK INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS For the Year Ended December 31, 2001 and the Period from June 27, 2000 (Date of Incorporation) through December 31, 2000 (Continued) 2001 2000 ----------- -------- Supplemental schedule of noncash investing and financing activities: Land and building acquired under capital lease................ $ 630,794 $ - =========== == Capital expenditures incurred but not paid at year end......... $ 275,000 $ - =========== == Supplemental disclosures of cash flow information: Acquisition of subsidiaries: Assets (liabilities) acquired: Cash....................................................... $ 1,433,381 $ - Accounts receivable........................................ 2,023,102 - Inventories and work in progress........................... 2,264,829 - Other current assets....................................... 9,080 - Property and equipment..................................... 1,637,897 - Marketable securities...................................... 204,573 - Patents.................................................... 192,541 - Goodwill................................................... 13,394,420 - Other assets............................................... 21,770 - Debt....................................................... (808,951) - Accounts payable and accrued liabilities................... (1,394,768) - ----------- - 18,977,874 - Common stock issued......................................... (10,078,000) - Promissory notes issued..................................... (1,400,000) - Transaction costs paid in cash.............................. (312,274) - ----------- - Net cash paid to sellers.................................. $ 7,187,600 $ - =========== == Cash paid for interest........................................ $ 415,431 $ - =========== ==
The accompanying notes are an integral part of these financial statements. 22 FLOTEK INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Organization and Summary of Significant Accounting Policies Flotek Industries, Inc. and subsidiaries (the "Company" or "Flotek") was originally incorporated under the laws of the Province of British Columbia on May 17, 1985. On October 23, 2001, the Company moved its corporate domicile to Delaware and completed a reverse stock split of 120 to 1. On October 31, 2001, the Company completed a merger ("the Merger") with Chemical & Equipment Specialties, Inc. ("CESI"). The Merger has been accounted for as a reverse acquisition using the purchase method of accounting. In the Merger, the shareholders of the acquired company, CESI, received the majority of the voting interests in the surviving consolidated company. Accordingly, CESI was deemed to be the acquiring company for financial reporting purposes and the historical financial statements of the Company are the historical financial statements of CESI. All of the assets and liabilities of Flotek were recorded at fair value on the date of the Merger, and the operations of Flotek have been reflected in the operations of the combined company only for periods subsequent to the date of the Merger. The Company's product lines are divided into three segments within the oilfield service industry: o The Specialty Chemicals segment develops, manufactures, packages and sells chemicals used in oil and gas well cementing, stimulation and production. o The Equipment Manufacturing segment designs and manufactures specialized cementing and stimulation equipment, including heavy vehicles used for pressure pumping, blending and bulk material transport. This segment also designs, constructs and manages automated bulk material handling and loading facilities for other oilfield service companies. o The Downhole Equipment segment manufactures and markets the Petrovalve line of downhole pump components and the Turbeco line of casing centralizers. Principles of Consolidation The consolidated financial statements consist of Flotek Industries, Inc. and its subsidiaries, all of which are wholly owned. All significant intercompany transactions and balances have been eliminated in consolidation. Revenue Recognition The Specialty Chemical and Downhole Equipment segments recognize revenues when products have been delivered and all significant risks and rewards of ownership have passed to customers. Accounts receivable are recorded at that time. Earnings are charged with a provision for doubtful accounts based on a current review of collectibility of accounts. Accounts deemed uncollectible are applied against the allowance for doubtful accounts. Deposits and other funds received in advance of delivery are deferred until the transfer of ownership is complete. The Equipment Manufacturing segment recognizes revenues from manufacturing and construction contracts under the percentage-of-completion method of accounting, generally in the ratio of costs incurred to total estimated costs of completion. Contract costs include all direct labor and material costs and those indirect costs related to manufacturing and construction operations. General and administrative costs are charged to expense as incurred. Changes in job performance and estimated profitability, including those arising from contract bonus or penalty provisions and final contract settlements, may result in revisions to costs and income and are recognized in the period in which such revisions appear probable. All known or anticipated losses on contracts are recognized in full when such amounts become apparent. 23 Customers are invoiced under the terms of manufacturing or construction contracts and accounts receivable are recorded at that time. Revenues recognized in excess of customer billings are reflected in current assets as work in progress. Deposits and billings in excess of revenues on specific contracts are recognized as a current liability. Cash and Cash Equivalents The Company considers all short-term investments with an original maturity of three months or less to be cash equivalents. As of December 31, 2001, the Company had deposits in excess of federally insured limits. Inventories and Work in Progress Inventories consist of raw materials, finished goods and parts and materials used in manufacturing and construction operations. Finished goods inventories include raw materials, direct labor and production overhead. Inventories are carried at the lower of cost or market using the average cost method. The Company maintains a reserve for impaired or obsolete inventory, which is reviewed for adequacy on a periodic basis. Work in progress consists of percentage of completion revenues recognized in excess of customer billings. The components of inventories and work in progress at December 31, 2001 were as follows: Raw materials................................... $ 496,332 Finished goods.................................. 1,856,011 Manufacturing parts and materials............... 708,036 Work in progress................................ 1,000,799 Inventory reserve............................... (357,025) --------- $3,704,153 ========== Property and Equipment Property and equipment are stated at cost. The cost of ordinary maintenance and repairs is charged to operations, while replacements and major improvements are capitalized. Depreciation is provided at rates considered sufficient to amortize the cost of the assets using the straight-line method over the following estimated useful lives: Buildings and improvements............ 20 years Machinery and equipment............... 5 years Furniture and fixtures................ 5 years Transportation equipment.............. 3 years Computer equipment.................... 3 years 24 The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Goodwill Goodwill represents the excess of cost over the fair value of net assets of companies acquired in business combinations accounted for using the purchase method. Goodwill acquired in business combinations prior to June 30, 2001 has been amortized using the straight-line method over an estimated useful life of 20 years. In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS No. 142 requires that goodwill no longer be amortized but instead be reviewed periodically for possible impairment. The Company will adopt SFAS No. 142 effective January 1, 2002 and will no longer amortize goodwill. The goodwill amortization expense during the year ended December 31, 2001, was $378,040. Under SFAS 142, the Company must complete its initial assessment of goodwill for possible impairment no later than December 31, 2002. This impairment test is required to be performed for each reporting segment. As of December 31, 2001, the Company had net goodwill of approximately $1.3 million attributable to its Equipment Manufacturing segment. This segment experienced a significant operating loss during the year ended December 31, 2001 and may be subject to impairment under SFAS 142. However, the Company has not implemented SFAS 142 and has not reached a final determination of any potential impairment of goodwill at this time. Additionally, while the other segments of the Company were profitable during the year ended December 31, 2001, the Company will also assess the goodwill associated with these segments for potential impairment under SFAS 142. Income Taxes Income taxes are computed under the liability method based upon rates prevailing at the end of the period. The Company provides deferred income tax assets and liabilities for the expected future tax consequences attributable to differences between the financial statement carrying amounts and the respective tax basis of assets and liabilities. These deferred assets and liabilities are based on enacted tax rates and laws that will be in effect when the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to amounts which are more likely than not to be realized. Loss Per Share Loss per common share is calculated by dividing net loss attributable to common shareholders by the weighted average number of common shares outstanding. Dilutive loss per share is calculated by dividing net loss attributable to common shareholders by the weighted average number of common shares and dilutive potential common shares outstanding. There were no potentially dilutive common shares as of December 31, 2001 or 2000. 25 Stock-Based Compensation The Company measures compensation expense for its stock-based employee compensation plans using the intrinsic method, as prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. Accordingly, compensation cost for stock options is measured as the excess, if any, of the fair market value of the Company's stock at the date of the grant over the amount the employee must pay to acquire the stock, and is recognized over the related vesting period. The Company provides supplemental disclosure of the effect on net income and earnings per share as if the provisions of SFAS No. 123, Accounting for Stock-Based Compensation, had been applied in measuring compensation expense. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and certain assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Note 2 - Acquisitions Effective January 1, 2001, the Company acquired four entities in purchase transactions in exchange for payment of the following consideration:
Promissory Common Total Company Cash Notes Stock Consideration -------- ---------- ---------- ---------- ---------- Esses, Inc. ..................... $4,000,000 $1,000,000 $1,000,000 $6,000,000 Plainsman Technology, Inc.......... 1,850,000 - 250,000 2,100,000 Neal's Technology, Inc............. 500,000 400,000 100,000 1,000,000 Padko International, Inc........... 237,600 - 250,000 487,600 ---------- ---------- ---------- ---------- $6,587,600 $1,400,000 $1,600,000 $9,587,600 ========= ========= ========= =========
In June 2001, the Company acquired Material Translogistics, Inc. ("MTI") in exchange for 52,232 shares of common stock valued at $200,000 and $600,000 of cash. The shareholders of MTI can also receive up to 52,232 additional common shares, contingent upon the execution of certain future contracts. The Company did not purchase any tangible assets, nor did it assume any liabilities of MTI. The common stock in all of the above transactions was valued at $3.83 per share, consistent with recent cash transactions. The Company incurred approximately $169,000 in transaction costs associated with the above transactions. The transactions resulted in approximately $7,765,000 of goodwill. On October 31, 2001, the Company completed the Merger with CESI. The business combination has been accounted for as a reverse acquisition under the purchase method of accounting. In connection with the Merger, the CESI shareholders as a group received 2,994,480 common shares and the assumption of employee stock options to purchase 65,291 common shares and contingent share issuance obligations related to MTI of 52,232 common shares. The retained ownership of the Flotek shareholders as a group amounted to 1,856,216 shares of common stock and the combined company assumed Flotek employee stock options to purchase 101,499 common shares and warrants to purchase 51,076 shares of common stock. Simultaneously with the closing of the Merger, all preferred shares of Flotek previously outstanding, including accrued dividends, were converted to common stock at the rate of $3.24 per share. 26 Subsequent to August 15, 2001, the date the Merger agreement was signed, and prior to the closing of the Merger, Flotek warrants to purchase 536,141 shares of common stock at $3.60 per share were exercised, resulting in cash proceeds to Flotek of $1,930,106. The warrant proceeds are not reflected in these financial statements as they occurred prior to the Merger. For purposes of the reverse acquisition, the value of the stock issued to the Flotek shareholders as a group was $8,278,000, which together with merger costs of approximately $385,000, gave rise to approximately $5,725,000 of goodwill. The following unaudited pro forma information reflects the combined results of operations for the years ended December 31, 2001 and 2000 as if all of the acquisitions discussed above had been completed on January 1, 2000 (amounts in $000's, except per share amounts): 2001 2000 Revenues................................ $15,982 $11,685 Net income (loss)....................... $(1,443) $ 389 Basic income (loss) per share........... $ (0.30) $ 0.08 Diluted income (loss) per share......... $ (0.30) $ 0.08 The pro forma information is not necessarily indicative of operating results that would have occurred if the acquisition had been consummated as of January 1, 2000, nor is it necessarily indicative of future operating results. The results of operations of acquired companies are included in these consolidated financial statements only for periods subsequent to the date of acquisition. Note 3 - Property and Equipment At December 31, 2001 and 2000, property and equipment were comprised of the following:
December 31, 2001 December 31, 2000 ------------------ ----------------- Land.................................. $ 145,000 $ - Buildings and leasehold improvements.. 2,114,878 36,325 Machinery and equipment............... 1,128,894 - Furniture and fixtures................ 135,937 1,411 Transportation........................ 456,794 70,000 Computer equipment.................... 77,436 9,185 ------ ------- Total property and equipment...... 4,058,939 116,921 Less accumulated depreciation........ 387,000 15,933 ------- ------- Net property and equipment....... $3,671,939 $100,988 ========= =======
Note 4 - Capital Lease Obligation Effective March 2001, the Company entered into a lease and purchase agreement with a third party for the purchase of land and buildings. The agreement had a one-year term and provided for lease payments of $3,000 per month, with the final purchase price of $639,000 due on March 1, 2002. As of December 31, 2001, the capital lease obligation was recorded at the net present value of $633,894. See Note 12 for discussion of the disposition of this obligation subsequent to year end. 27 Note 5 - Notes Payable
Notes payable at December 31, 2001, consisted of the following: Revolving line of credit, secured by accounts receivable and inventory, bearing interest at the prime rate plus 1.25%, due in May 2002, with maximum borrowings of $1,414,020....................................... $1,252,966 Other notes payable...................................................... 30,000 ---------- Total notes payable.................................................... $1,282,966 ==========
The revolving line of credit is limited to a borrowing base amount calculated as 60% of eligible accounts receivable and inventory. Note 6 - Long-Term Debt
Long-term debt at December 31, 2001, consisted of the following: Notes payable to shareholders of acquired businesses, unsecured, bearing interest at 9% payable quarterly, due in five annual installments of $200,000 each beginning January 2002................................... $1,000,000 Note payable to bank, bearing interest at the prime rate plus 1%, payable in monthly installments of $39,715 including interest, due in January 2008................................................................... 2,439,532 Notes payable to Duncan Area Economic Development Foundation, unsecured, with interest at 6%, payable in monthly installments of $1,934 including interest, due in May 2006.............................................. 87,620 Note payable to bank, bearing interest at the prime rate plus 1%, payable in monthly installments of $14,829 including interest, due in September 2004................................................................... 464,538 Mortgage note on property, bearing interest at 10%, payable in monthly installments of $1,451 including interest, with a final payment of $111,228 due in December 2002.......................................... 115,877 Secured vehicle and other equipment loans................................ 109,140 ---------- Total............................................................. 4,216,707 Less current maturities........................................... 876,737 ---------- Long-term debt................................................ $3,339,970 ==========
The revolving line of credit and bank notes payable are owed to the Company's primary lending bank and are secured by substantially all of the assets of the Company. They have also been personally guaranteed by an officer of the Company. 28 The following is a schedule of future maturities of long-term debt: Years ending December 31, --------------- 2002........... $ 876,737 2003........... 773,758 2004........... 767,919 2005........... 646,786 2006........... 656,845 Thereafter..... 494,662 ---------- $4,216,707 ========== Note 7 - Stock Options and Warrants The Company and its predecessors have issued non-qualified employee stock options to employees, officers, directors and consultants from time to time as approved by the Board of Directors. The exercise price has been equal to the fair market value at the date of grant. The shares covered by the option agreements are not registered with the Securities and Exchange Commission. The following table presents stock options issued and outstanding during the period:
Range of Exercise Weighted Prices Average ------------------ Exercise Shares Low High Price -------- ----- ------ ----- Balance at December 31, 2000........ - $ - $ - $ - Options granted..................... 65,291 3.83 3.83 3.83 Flotek options assumed (a).......... 101,499 3.60 12.96 5.80 Options exercised................... - - - - Options cancelled................... - - - - ------- ----- ----- ----- Balance at December 31, 2001........ 166,790 $3.60 $12.96 $5.03 ======= ==== ===== ==== Exercisable at December 31, 2001.... 153,179 $3.60 $12.96 $5.09 ======= ==== ===== ====
(a) The exercise price for 22,332 of these stock option shares is denominated in Canadian dollars at amounts ranging from C$18.00 to C$20.40. The high and low prices in the above table represent the U.S. dollar equivalent exercise prices based on exchange rates in effect at December 31, 2001. The weighted average contractual life remaining on outstanding stock options was approximately 2.5 years at December 31, 2001. Had stock-based compensation cost been determined under the fair value method pursuant to SFAS 123 for options granted during the year ended December 31, 2001, the net loss for the period would have increased by approximately $12,000. The impact on basic and diluted loss per share would have been immaterial. The weighted average fair value of the options granted during the period was $0.36 per share, based on the Black-Scholes option pricing model using the contractual life of two years, a risk free interest rate of 5.0% and zero expected volatility, since there was no public market for the stock of CESI on the date of grant. Prior to the Merger, Flotek had outstanding warrants to purchase 51,076 shares of common stock at an exercise price of $14.40 per share, which expire in October 2006. These warrants were assumed by the combined company. The expiration date of these warrants can be accelerated in the event that the closing price of the common stock of the Company is in excess of $21.60 for a period of 60 consecutive trading days. 29 Note 8 - Federal Income Tax A reconciliation of the statutory federal income tax rate to the effective income tax rate is as follows: December 31, December 31, 2001 2000 ----------- ----------- Federal income tax (benefit) at 34%..... $ (478,696) $ (53,968) Nondeductible items..................... 4,833 1,132 Other................................... (108,137) (164) Change in valuation allowance........... 582,000 53,000 ----------- ----------- $ - $ - =========== =========== The components of deferred taxes are as follows: Allowance for doubtful accounts..... $ 71,000 $ - Inventory reserves.................. 121,000 - Net operating loss carryforward..... 440,000 50,000 Book depreciation in excess of tax.. 3,000 3,000 ----------- ----------- 635,000 53,000 ----------- ----------- Valuation allowance.................... (635,000) (53,000) ----------- ----------- $ - $ - =========== =========== At December 31, 2001, the Company had estimated net operating loss carryforwards which may be available to offset future taxable income of approximately $1.3 million, expiring in 2021. In addition, Flotek Industries, Inc. had substantial tax loss carryforwards which arose prior to the Merger. Under federal tax law, the amount and availability of Flotek's loss carryforwards, as well as those of the combined company, are subject to complex tax regulations and restrictive tests. The utilization of such carryforwards can be severely limited or effectively lost upon certain changes in ownership, such as the Merger. In addition, under generally accepted accounting principles, the benefit of any utilization of Flotek's tax loss carryforwards would be recorded as a reduction of goodwill and would not affect net income. The utilization of any of these net operating loss carryforwards is dependent on the future profitability of the Company. Accordingly, no assurance can be given regarding the ultimate realization of such loss carryforwards. An allowance has been recorded to fully offset the net deferred tax asset. 30 Note 9 - Related Party Transactions The Company had amounts due to officers and directors, representing advances made to the Company and unreimbursed business expenses totaling $132,855 and $164,410 at December 31, 2001 and 2000, respectively. The amount at December 31, 2001 includes a $120,839 cash advance made to the Company which bears interest at 10% and is due upon demand. Note 10 - Operating Leases The Company has entered into operating leases for office space, vehicles and equipment. Future minimum lease payments under these leases are as follows: Years ending December 31, ---------------------- 2002.......... $114,938 2003.......... 90,763 2004.......... 75,242 2005.......... 3,902 -------- $284,845 ======== Total rent expense under these operating leases totaled approximately $40,000 during the year ended December 31, 2001. Note 11 - Segment Information The Company has three reportable segments, as follows: o The Specialty Chemicals segment develops, manufactures, packages and sells chemicals used in oil and gas well cementing, stimulation and production. o The Equipment Manufacturing segment designs and manufactures specialized cementing and stimulation equipment, including heavy vehicles used for pressure pumping, blending and bulk material transport. This segment also designs, constructs and manages automated bulk material handling and loading facilities for other oilfield service companies. o The Downhole Equipment segment manufactures and markets the Petrovalve line of downhole pump components and the Turbeco line of casing centralizers. The Company's reportable segments are strategic business units that offer different products and services. Each business segment requires different technology and marketing strategies and is managed independently. The accounting policies used in each of the segments are the same as those described in the significant accounting policies. The Company evaluates the performance of its operating segments based on operating income, net of depreciation expense and goodwill amortization, but excluding other income and unusual charges. Intersegment sales and transfers are not material. Essentially all of the Company's revenues are derived from the oil and gas industry. This concentration of customers in one industry increases the credit and business risks of the Company, particularly given the volatility of activity levels in the industry. The majority of the Company's sales are to major or large independent oilfield service companies with established credit histories and actual credit losses have been within the Company's expectations. Two customers accounted for 17.1% and 14.2%, respectively, of consolidated revenues for the year ended December 31, 2001. Both of these customers were in the Specialty Chemicals segment of our business and they collectively accounted for 53.7% of the revenues in this segment. 31 The Company operates primarily in the United States. The Company derived less than 10% of its revenues from international customers during the year ended December 31, 2001, but expects to increase the level of these sales in the future. International customers can pose additional credit risks to the Company. As of December 31, 2001, the Company had approximately $828,000 in accounts receivable from a customer located in Venezuela. The majority of these sales were recorded prior to the Merger. As a result of political instability in Venezuela and a work stoppage by the employees of the national oil company, the Company has experienced significant delays in receiving payment for these sales. The Company has an established long-term relationship with this customer and has continued to ship products to this customer subsequent to December 31, 2001. The Company expects that these accounts receivable will ultimately be paid, but cannot predict the timing of such payment. The Company has not provided a reserve for doubtful accounts associated with this balance. The following table presents the revenues, operating income, total assets and other information for each reportable segment as of and for the year ended December 31, 2001:
Specialty Equipment Downhole Corporate Chemicals Manufacturing Equipment and Other Total --------- ------------- --------- --------- -------- Net sales to external customers....... $ 7,330 $ 4,884 $ 348 $ - $ 12,562 Income (loss) from operations......... $ 1,114 $(1,171) $ (133) $ (874) $ (1,064) Depreciation and amortization......... $ 500 $ 149 $ 5 $ 90 $ 744 Total assets.......................... $ 9,266 $ 5,024 $ 8,199 $ 732 $ 23,221 Goodwill, net......................... $ 6,130 $ 1,257 $ 5,725 $ - $ 13,112 Capital expenditures.................. $ 605 $ 1,577 $ 127 $ 8 $ 2,317
Note 12 - Subsequent Events (Unaudited) On January 4, 2002, the Company entered into a credit agreement with its primary lending bank to finance the construction of bulk material transload facility in Raceland, Louisiana. The loan agreement provides for maximum financing of $854,350, which is expected to fund the majority of the total construction costs for the project. On January 7, 2002, the Company entered into an additional line of credit arrangement with its primary lending bank. The new line of credit adds $1,608,100 of availability to its short-term borrowing arrangements which are secured by accounts receivable and inventory. The new line of credit has a borrowing base limitation of 50% of eligible accounts receivable and inventory. It has a maturity date of January 7, 2003. On February 19, 2002, the Company acquired 100% of the common stock of IBS 2000, Inc. ("IBS"), a Denver-based company engaged in the development and manufacturing of environmentally neutral chemicals for the oil industry. IBS is in the development stage and has had limited operating history. The Company paid $100,000 in cash and issued 34,000 shares of common stock to acquire IBS. On February 28, 2002, the Company sold its rights and obligation to purchase the land and buildings covered by the capital lease obligation discussed in Note 5, together with capital improvements to the property totaling approximately $750,000, to Oklahoma Facilities, LLC ("Facilities"). An officer of the Company has a minority investment interest in and is an officer of Facilities. The total consideration at closing was $1,400,000, with net cash proceeds to the Company of $761,000. The transaction is not expected to generate any significant gain or loss. The Company simultaneously entered into a lease agreement with Facilities under which it is obligated to pay average rent of $18,000 per month for a fixed term of ten years. The Company has the right to buy the property at any time during the first two years of the lease for a fixed price of $1,400,000. The Company also has the option to purchase the building for a fixed price of $420,000 at the end of the ten year lease term. The transaction will be recorded as a capital lease. 32 Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. PART III Items 9 to 12 Inclusive. These items have been omitted in accordance with the general instructions to Form 10-KSB Annual Report. The Registrant intends to file with the Securities and Exchange Commission prior to April 30, 2002, pursuant to Regulation 14A, a definitive proxy statement that will involve the election of directors. The information required by these items will be included in such proxy statement and are incorporated herein by reference. Item 13. Exhibits and Reports on Form 8-K (a) Exhibits: Index to Exhibits
Exhibit Number Description of Exhibit - ------------- ---------------------------------------------------------------------------------- 3.1* Articles of Incorporation of Flotek Industries, Inc. (incorporated by reference to Appendix E of the Company's Definitive Proxy Statement filed with the Commission on September 27, 2001) 3.2* By-laws of Flotek Industries, Inc. (incorporated by reference to Appendix F of the Company's Definitive Proxy Statement filed with the Commission on September 27, 2001) 4.1* Registration Right Agreement, effective as of April 30, 2000, signed in August 2000 (incorporated by reference to Exhibit 4.3 of the Company's Form 10-QSB for the quarter ended August 31, 2000) 10.1* Agreement and Plan of Reorganization by and between Flotek Industries, Inc. and Chemical & Equipment Specialties, Inc. (incorporated by reference to the Company's Form 8-K filed with the Commission on October 12, 2001) 10.2 Business Loan Agreement and Promissory Note, with related Commercial Security Agreement and Commercial Guaranty Agreement, all dated January 23, 2001, in the original principal amount of $2,709,980 10.3 Business Loan Agreement and Promissory Note dated May 30, 2001 in the original principal amount of $1,414,020 10.4 Promissory Note dated January 23, 2001 in favor of John Todd Sanner in the principal amount of $500,000 issued in connection with the acquisition of Esses, Inc. by CESI 10.5 Promissory Note dated January 23, 2001 in favor of Earl E. Schott in the principal amount of $500,000 issued in connection with the acquisition of Esses, Inc. by CESI 21.1 List of Subsidiaries 27.0 Financial Data Schedule 99.1 Unaudited Pro Forma Combined Statement of Operations of Flotek Industries, Inc. for the year ended December 31, 2001, including the basis of presentation and pro forma adjustments 99.2 Unaudited Pro Forma Combined Statements of Operations by Segment for the years ended December 31, 2001 and 2000, including the basis of presentation for those statements.
* Previously filed 33 (b) Reports on Form 8-K: o Current Report on Form 8-K filed with the Securities and Exchange Commission on October 12, 2001. This Form 8-K reported the Company had entered into an Agreement and Plan of Reorganization with CESI, dated August 15, 2001, pursuant to which shares of the common stock of the Company would be issued to the shareholders of CESI in connection with the merger of CESI with a newly formed subsidiary of the Company. No financial statements were filed in connection with this report. o Current Report on Form 8-K filed with the Securities and Exchange Commission on November 14, 2001. This Form 8-K reported the Company had completed the closing of its previously announced merger with CESI. This Form 8-K also discussed a special shareholders' meeting held on October 23, 2001 to consider and vote upon a change in the Company's jurisdiction of incorporation from Alberta, Canada to Delaware. No financial statements were filed in connection with this report. o Current Report on Form 8-K/A filed with the Securities and Exchange Commission on January 16, 2002. This Amendment No. 1 to Current Report on Form 8-K filed on November 14, 2001 included the financial statements of CESI and the separate financial statements of its recently acquired subsidiaries, Esses, Inc., Plainsman Technology, Inc., Neal's Technology, Inc., Padko International, Inc. and Material Translogistics, Inc. In addition, this report included unaudited pro forma combined financial statements related to the merger of the Company with CESI. 34 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. FLOTEK INDUSTRIES, INC. By: /s/ Jerry D. Dumas, Sr. ------------------------------------ Jerry D. Dumas, Sr. Chairman and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Date Signature Title(s) April 15, 2002 /s/ Jerry D. Dumas, Sr. Chairman and Chief Executive Officer -------------------------------------- Jerry D. Dumas, Sr. April 15, 2002 /s/ Glenn S. Penny President, Chief Technical Officer and Director -------------------------------------- Glenn S. Penny April 15, 2002 /s/ Randall D. Keys Chief Financial Officer -------------------------------------- Randall D. Keys April 15, 2002 /s/ Robert S. Beall Director -------------------------------------- Robert S. Beall April 15, 2002 /s/ John W. Chisholm Director -------------------------------------- John W. Chisholm April 15, 2002 /s/ Richard L. Johnson, II Vice President and Director -------------------------------------- Richard L. Johnson, II April 15, 2002 /s/ Roger K. Padgham Vice President and Director -------------------------------------- Roger K. Padgham April 15, 2002 /s/ Gary M. Pittman Director -------------------------------------- Gary M. Pittman April 15, 2002 /s/ Barry E. Stewart Director -------------------------------------- Barry E. Stewart April 15, 2002 /s/ Willaim R. Ziegler Director -------------------------------------- William R. Ziegler
35 EX-10 3 bla102.txt BUSINESS LOAN AGREEMENT Exhibit 10.2 BUSINESS LOAN AGREEMENT THIS BUSINESS LOAN AGREEMENT dated this 23rd day of January, 2001, by and between CHEMICAL AND EQUIPMENT SPECIALTIES, INC. ("CESI"), an Ok1ahoma corporation, 3109 Stagestand, Duncan, Oklahoma 73533, PADKO INTERNATIONAL INCORPORATED, an Oklahoma corporation ("Padko"), 15 North 9th, Duncan. Oklahoma. 73533, NEAL'S TECHNOLOGY, INC., an Oklahoma corporation ("Neal's"), 2515 South 42nd, Duncan, Oklahoma, 73533, PLAINSMAN TECHNOLOGY, INC., an Oklahoma corporation ("Plainsman"), P. O. Box 557, Marlow, Oklahoma, 73055, and ESSES, INC., an Oklahoma corporation ("Esses"), 301 Industrial Drive, Duncan, Oklahoma, 73533, individually, collectively and interchangeably referred to herein as "Borrower" (whether one or more, see Section 8.20 below), and LEGACY BANK, Legacy Bank Duncan North Branch, Post Office Box 1109, 2024 N. Highway 81, Duncan, Ok1ahoma 73534-1109, hereinafter referred to as "Lender", and GLENN S. PENNY, 3109 Stagestand, Duncan, Oklahoma 73533, hereinafter referred to as "Guarantor" (whether one or more). Borrower understands and agrees that: (A) in granting, renewing, or extending any Loan, Lender is relying upon Borrower's representations, warranties, and agreements as set forth in this Agreement, and (B) all such Loans shall be and remain subject to the terms and conditions of this Agreement. WITNESSETH BACKGROUND CESI has entered into agreements to purchase certain stock as a part of interdependent steps of a series of transaction intended to qualify under Section 351 of the Internal Revenue Code of 1986, as amended (the "Code"), pursuant to which CESI is acquiring the stock of Padko, Esses, Neal's and Plainsman as a result of which Padko, Esses, Neal's and Plainsman will become wholly owned subsidiaries of CESI. In addition, CESI has entered into agreements to purchase certain assets of Esses and Neal's. As a part and parcel of the purchase agreements Plainsman, Esses and Neal's are required to payoff indebtedness which they owe to certain financial institutions. Borrower has requested Lender to loan to Borrower certain sums and lender is willing to do so upon the terms and conditions hereinafter set forth. Borrower understands and agrees that: (A) in granting, renewing, or extending any Loan, Lender is relying upon Borrower's representations, warranties, and agreements as set forth in this Agreement, and (B) all such Loans shall be and remain subject to the terms and conditions of this Agreement. ARTICLE I. THE LOAN AND ACCOUNTS RECEIVABLE PURCHASE Section 1.01. Term Loan. Lender agrees on the terms and conditions hereinafter set forth, to make a loan to Borrower on the date of this Agreement in the principal sum of Two Million Seven Hundred Nine Thousand Nine Hundred Eighty and no/100 Dollars ($2,709,980.00). Section 1.02. Interest and Late Charge. (a) Variable Interest Rate. The interest rate on the Note Is subject to change from time to time based on changes in an independent index which is the minimum prime lending rate for large U. S. Money Center Commercial banks as published in the Money Rate Section of the Wall Street Journal (the "Index"). The index is not necessarily the lowest rate charged by Lender on its loans. If the Index becomes unavailable during the term of the Loan, Lender may designate a substitute index after notice to Borrower. Lender will tell Borrower the current Index rate upon Borrower's request. The Interest rate change will not occur more often than each quarter. Borrower understands that Lender may make loans based on other rates as well. The Index currently is 9.000% per annum. The Interest rate to be applied to the unpaid principal balance of the Note will be at a rate of 1.000 percentage point over the Index, resulting in an initial rate of 10.000% per annum. Under no circumstances will the interest rate on the Note be more than the maximum rate allowed by applicable law. Whenever increases occur in the interest rate, Lender, at its option, may do one or more of the following: (a) Increase Borrower's payments to insure Borrower's loan will payoff by its original final maturity date, (b) Increase Borrower's payments to cover accruing interest, (c) Increase the number of Borrower's payments, and (d) continue Borrower's payments at the same amount and Increase Borrower's final payment. The annual interest rate is computed on a 365/360 basis; that is, by applying the ratio of the annual interest rate over a year of 360 days, multiplied by the outstanding principal balance, multiplied by the actual number of days the principal balance is outstanding. (b) Interest After Default. Upon default, including failure to pay upon the maturity date, lender, at lender's option, may, if permitted under applicable law, increase the variable interest rate on the Note to 15.000% per annum. The interest rate will not exceed the maximum rate permitted by applicable law. (c) Late Charge. If a payment on the Note is eleven (11) days or more late, Borrower will be charged 2.000% of the unpaid portion of the regularly scheduled payment or $20.00, whichever is greater. Section 1.03. Term Note. Borrower's obligation to repay the Loan shall be evidenced by Borrower's promissory Note (the "Note", which term shall include all renewals, extensions and deferrals): (a) Note. In substantially the form of "Exhibit A" hereto, with blanks appropriately filled in, and payable to the order of Lender, which Note shall be dated the date of this Agreement, and the principal of the Note in the amount of $2,709,980.00 shall be repaid in eighty-four (84) consecutive monthly installments, the first eighty-three (83) consecutive monthly installments shall be in the amount of $45,179.48, which amount shall include principal and accrued interest, with the first installment being due on the 23rd day of February, 2001, with subsequent installments on the 23rd day of each month thereafter, with the entire principal balance, plus accrued interest, being due and payable on the 23rd day of January, 2008 (the "maturity date"). Section 1.04. Prepayments. Borrower agrees that all loan fees and other prepaid finance charges are earned fully as of the date of the Loan and will not be subject to refund upon early payment (whether voluntary or as a result of default), except as otherwise required by law. If the Loan is prepaid in whole or in part, said prepayment shall include accrued interest to the date of such prepayment, and in addition, each prepayment shall include the following additional amounts: (a) 5% of the amount prepaid during the first Loan year; (b) 4% of the amount prepaid during the second loan year; (c) 3% of the amount prepaid during the third Loan year; (d) 2% of the amount prepaid during the fourth Loan year; (e) 1% of the amount prepaid during the fifth loan year. Provided, however, that there shall be a prepayment charge of 1 % of the amount of the outstanding principal balance in the event that the Borrower shall pay and satisfy in full the indebtedness and provide satisfactory evidence to Lender that the source of the funds for the prepayment was the sale of securities of Borrower and not from debt. Partial prepayments will not, unless agreed by Lender in writing, relieve Borrower of Borrower's obligation to continue to make payments under the payment schedule set out in the Note. Rather, partial prepayments will reduce the principal balance due and may result in Borrower's making fewer payments. Borrower agrees not to send Lender payments marked "paid in full", "without recourse" or similar language. If Borrower sends such a payment, Lender may accept it without losing any of Lender's rights under the Loan, and Borrower will remain obligated to pay any further amount owed to Lender. All written communications concerning disputed amounts, including any check or other payment instrument that indicates that the payment constitutes "payment in full" of the amount owed or that is tendered with other conditions or limitations or as full satisfaction of a disputed amount must be mailed or delivered to: Legacy Bank, Legacy Bank Duncan North Branch, P. O. Box 1109, 2024 N. Highway 81, Duncan, OK 73534-1109. Section 1.05. Method of Payment. Borrower shall make each payment under this Agreement and under the Notes not later than 3:00 o'clock P.M., Oklahoma time, on the date when due, in lawful money of the United States, to Lender at Lender's Office (Legacy Bank, Legacy Bank Duncan North Branch, P. O. Box 1109, 2024 N. Highway 81, Duncan, OK 73534-1109) in immediately available funds. Borrower hereby authorizes Lender, if, and to the extent payment is not made when due under this Agreement, and under the Note, to charge from time to time against any account of Borrower with Lender any amount so due. Whenever any payment to be made under this Agreement or under the Notes shall be stated to be due on Saturday, Sunday or public holiday, or the equivalent for banks generally under the laws of the State of Oklahoma, such payment shall be made on the next succeeding business day, and such extension of time shall in such case be included in the computation of payment of interest. Unless otherwise agreed or required by applicable law, payments will be applied first to any unpaid collection costs and any late charges, then to any unpaid interest, and any remaining amount to principal. Section 1.06. Use of Proceeds. The proceeds of the Loan hereunder shall be used by Borrower: (a) For CESI to purchase all of the outstanding common stock of Plainsman. (b) For CESI to purchase customer lists, business records, work force, intellectual property, know how of the Esses and Neal's. (c) For CESI to purchase all of the outstanding common stock of Padko. (d) To pay and satisfy in full Loans of Neal's with Lender. (e) To pay and satisfy in full a loan of Esses with BancFirst. (f) To pay and satisfy in full a loan of Plainsman to First National Bank, Marlow, Oklahoma. (g) To pay for capital expenditures, origination fees, pay for attorney fees and closing costs of Borrower. Borrower will not, directly or indirectly, use any part of such proceeds for the purpose of purchasing or carrying any margin stock within the meaning of Regulation U of the Board of Governors of the Federal Reserve System, or to extend credit to others for the purpose of purchasing or carrying any such margin stock. 1.07. Accounts Receivable Purchase. At Closing, Borrower and Lender will enter into an Account Receivable Purchase Agreement, in substantially the form of "Exhibit B" hereto, with blanks appropriately filled in ("Accounts Receivable Purchase Agreement"), wherein Borrower will assign and sell to Lender certain of Borrower's Accounts Receivable in accordance with the terms and conditions of the Accounts Receivable Purchase Agreement. ARTICLE II. CONDITIONS PRECEDENT Section 2.01. Condition Precedent to Loan. The obligation of Lender to make the Loan to Borrower and to fund the initial Advance and any subsequent Advance hereunder is subject to the conditions precedent that Lender shall have received on or before the day of the initial Advance, each of the following, in form and substance satisfactory to Lender and Lender's counsel unless waived in writing by lender: (a) The Note duly executed by Borrower. (b) Security Agreement. A Security Agreement, in substantially the form of "Exhibit C" hereto attached, with blanks appropriately filled in ("Security Agreement"), granting Lender a first, paramount and superior lien on Accounts, Chattel Paper, Commercial Tort Claims, Commingled Goods, Deposit Accounts, Documents of Title, Fixtures, General Intangibles (including, without limitation, the property set out in Schedule 1), Instruments, Goods, Investment Property, Inventory, Equipment, Letter of Credit Rights, Money, Payment Intangibles, Software, Accessions, Products and Proceeds (including, without limitation, the property set out in Schedule 2 attached thereto) whether now owned or hereafter acquired, together with duly executed Lien Entry Forms ("LEFs")and Certificate of Title, Application for a new Certificate of Title and Manufacturer's Certificate of Origin, whichever is applicable on all vehicles owned by Borrower, and financing statements ("Financing Statements"), duly executed in substantially the form of "Exhibit D" and "Exhibit E", respectively, hereto, with blanks appropriately filled in. (c) Plainsman Mortgage. A mortgage duly executed and acknowledged by Plainsman, in substantially the form of "Exhibit F" with blanks appropriately filled in, granting to Lender a first, paramount and superior mortgage lien and security interest in the property set out in Schedule 3 attached hereto and made a part hereof ("Plainsman Mortgage"). (d) Esses Mortgage. A mortgage duly executed and acknowledged by Esses, in substantially the form of "Exhibit G" with blanks appropriately filled in, granting to Lender a first, paramount and superior mortgage lien and security interest in the property set out in Schedule 4 attached hereto and made a part hereof ("Esses Mortgage"). (e) Guaranty. A Commercial Guaranty duly executed by Guarantor in the substantially the form of "Exhibit H", with blanks appropriately filled in ("Guaranty"). (f) Pledge Agreement. A Security Agreement from CESI, pledging to Lender all of the issued and outstanding stock of Plainsman, Esses, Neal's and Padko to Lender, in substantially the form of "Exhibit I" hereto, together with Stock Powers duly endorsed in blank ("Pledge Agreement"). Said pledge shall grant to Lender a first, paramount and superior lien on all of the issued and outstanding common stock of Plainsman, Esses, Neal's and Padko as well as all treasury stock which has not been cancelled and restored to the status of authorized by unissued stock. (g) Life Insurance and Assignment of Life Insurance Policy. As soon as practical, but in any event within six (6) months from the date of this Agreement, obtain life insurance in form and with insurance companies acceptable to Lender on the life of Glenn S. Penny in the amount of Two Million and no/100 Dollars ($2,000,000.00), and deliver to Lender a duly executed Assignment of life Insurance Policy as collateral, assigning to Lender said life insurance policy, in substantially the form of "Exhibit J" hereto, with blanks appropriately filled in ("Assignment of Life Insurance Policy"). Borrower shall obtain and maintain said life insurance on the life of Guarantor during the term of the Loan and Lender, at lender's option, may apply the proceeds of any insurance policy to the unpaid balances of any Loan. (h) Subordination Agreement. Subordination Agreement, duly executed and acknowledged by all of Stockholders of Neal's and Esses, subordinating their indebtedness, lien and security interest to the indebtedness of the Loan and the liens, mortgages and security interest to Lender securing the same, in substantially the form of "Exhibit K" hereto, with blanks appropriately filled in ("Subordination Agreement"). (i) Evidence of Insurance. Evidence of Insurance as required below. (j) Corporate Resolution to Borrow/Grant Collateral. Duly executed Corporate Resolution to Borrow/Grant Collateral of each Borrower, authorizing the execution, delivery and performance of this Agreement and the Related Documents to which Borrower is a party, and of the Documents to be delivered pursuant to this Agreement in the form of "Exhibit L" hereto, with blanks appropriately filled in ("Corporate Resolution to Borrow/Grant Collateral"). Said Corporate Resolution to Borrow/Grant Collateral shall contain a provision wherein each Borrower has cancelled and restored to the status of authorized but unissued all treasury stock of each of the Borrower, if any. (k) Verification of Registration and Good Standing. A duly executed Verification of Registration and Good Standing of Borrower, and each of them, in the form of "Exhibit M" hereto, with blanks appropriately filled in ("Verification of Registration and Good Standing"). (l) Certificate. The following statement shall be true and lender shall have received a certificate ("Certificate") in the form of "Exhibit N" hereto attached, with blanks appropriately filled in and documents and signatures appropriately attached, signed by a duly authorized officers of Borrower, and each of them, dated the date of this Agreement stating that: (i) The representations and warranties contained in this Agreement, in the Related Documents, and in any document or certificate delivered to Lender hereunder, are correct on and as of the date of this Agreement; and, (ii) No default or event of default has occurred and is continuing or would result from the Loan. (m) Agreement to Provide Insurance. A duly executed Agreement to Provide Insurance by each Borrower in the form of 'Exhibit O' hereto attached with blanks appropriately filled in ('Agreement to Provide Insurance'). (n) Related Documents. All approvals, opinions, resolutions, authorizations, instruments or documents as Lender, or Lenders counsel, may require. (o) Origination Fee. The origination fee of $26.800.00. (p) Lender's Attorney Fees. All attorney fees which Lender incurs for the preparation of this Agreement and the Related Documents and closing of the transaction contemplated by this Agreement. Section 2.02. Additional Conditions Precedent. The Obligation of Lender to make the initial advance and each subsequent advance under this Agreement shall be subject to the fulfillment to Lenders satisfaction of all of the conditions set forth in this Agreement and in the Related Documents: (a) At the time of execution of this Agreement and at the time of each advance, no Event of Default shall have occurred and be continuing and no events shall have occurred and be continuing that with giving of notice or passage of time would be an Event of Default. (b) The representations and warranties set forth in this Agreement, in the Related Documents and in any document or certificate delivered to Lender hereunder are true and correct. (c) Borrower shall have paid all fees, charges and other expenses which are then due and payable as specified in this Agreement and in any Related Documents. (d) No litigation, including without limitation, governmental proceeding, shall be pending or known to be threatened against Borrower and Guarantor except as specifically disclosed n Schedule 5 attached. (e) At the time of the execution of this Agreement and at the time of funding all actions, proceedings, instruments and documents required to carry out the transaction contemplated by this Agreement or incident thereto shall be approved by lender and Lender's counsel. ARTICLE III. REPRESENTATIONS AND WARRANTIES Borrower, and each of them, and Guarantor represent and warrant to Lender: Section 3.01. Corporation in Good Standing and Due Qualification. Borrower, and each of them, is a corporation duly incorporated, validly existing, and in good standing under the laws of the State of Oklahoma; has the corporate power and authority to own its assets and to transact the business in which it is now engaged or proposed to be engaged in. Borrower, and each of them, is duly authorized to transact business in all other states in which Borrower, and each of them, is doing business, having obtained all necessary filings, governmental licenses and approvals for each state in which Borrower is doing business. Specifically, Borrower is, and at all times shall be, duly qualified as a foreign corporation in all states in which the failure to so qualify would have a material adverse effect on its business or financial condition. Borrower has the full power and authority to own its properties and to transact business in which it is presently engaged or presently proposes to engage. Borrower, and each of them, maintain an office as set out in the caption hereof, Unless Borrower has designated otherwise in writing, the principle office is the office at which each Borrower keeps its books and records including its records concerning the Collateral. Borrower, and each of them, will notify Lender of any change in the location of any principle office. Borrower, and each of them shall do all things necessary to preserve and to keep in full force and effect its existence, rights and privileges, and shall comply with all regulations, rules, ordinances, statutes, orders and decrees of any governmental or quasi-governmental authority or court applicable to Borrower and Borrower's business activities. Notwithstanding the above and foregoing representation, upon thirty (30) days written notice to Lender: (a) Padko, Plainsman, Esses or Neal's may be merged in to CESI (b) CESI may acquire all of the assets of and/or all of the issued and outstanding stock in Albin's Enterprises, Inc. ("Albin's"); (c) Albin's may be merged into CESI Provided, Borrower and Guarantor will make, execute and deliver to Lender such promissory notes, mortgages, deeds of trust, security agreements, assignments, financing statements, instruments, documents and other documents as Lender or its attorneys may reasonably request to evidence and secure the Loan and to perfect all Security Interests and will pay any and all costs of Lender, including reasonable attorney fees in connection therewith. Section 3.02. Corporate Power and Authority. The execution, delivery and performance of the terms, covenants and provisions in this Agreement, in the Related Documents and in any document or certificate delivered to Lender hereunder by Borrower, and each of them, have been duly authorized by all necessary corporate action, and do not and will not: (a) require any consent or approval of the Stockholders of any such corporation; (b) contravene any corporation's Certificate of Incorporation or By-Laws including all amendments thereto as of the date hereof: (c) violate any provisions of any law, rule, regulation, order, writ, judgment, injunction, decree, determination or award presently in effect, have an applicability to such corporation; (d) result in a breach of or constitute a default under any indenture or loan or other credit agreement, or any other agreement, lease or instrument to which such corporation is a party, or by which it, or its properties, may be bound or affected; (e) result in, or require the creation or imposition of any lien, upon or with respect to any of the properties now owned or hereafter acquired by such corporation: and, (f) cause Borrower, or any of them, to be in default under any such law, rule, regulation, order, writ, judgment, injunction, decree, determination or award, or any such indenture, agreement, lease or instrument. Section 3.03. Legally Enforceable Agreement. This Agreement is, and each of the Related Documents, when delivered under this Agreement, will be, legal, valid and binding obligations of Borrower, and each of them, or Guarantor, as the case may be, enforceable against Borrower, and each of them, or Guarantor, as the case may be, in accordance with their respective terms. Section 3.04. Other Agreements. Neither Borrower nor Guarantor is a party to any Indenture, loan or credit agreement, or to any lease or other agreement or instrument, or subject to any charter or corporate restriction which could have a material adverse effect on the business, properties, assets, operations or conditions, financial or otherwise, of Borrower or Guarantor, or the ability of Borrower or Guarantor to carry out its obligations under this Agreement or the Related Documents to which they are a party. Neither Borrower nor Guarantor is in default in any respect in the performance, observation or fulfillment of any of the obligations, covenants or conditions contained in any agreement or instrument material to its business to which it is a party, EXCEPT as herein set out. Section 3.05. Litigation and Claims. No litigation, claim, investigation. administrative proceeding or similar action (including those for unpaid taxes) against Borrower is pending or threatened, and no other event has occurred which may materially adversely affect Borrower's financial condition or properties, other than litigation, claims, or other events, if any, that have been disclosed to and acknowledged by Lender in writing. Section 3.06. No Default on Outstanding Judgments or Orders. Borrower and Guarantor have satisfied all judgments, and neither Borrower, nor Guarantor, is in default with respect to any judgment, writ, injunction, decree, rule or regulation of any court, arbitrator or federal, state, municipal or other governmental authority, commission, board, bureau, agency or instrumentality, domestic or foreign. Section 3.07. Lien Priority. Unless otherwise previously disclosed to lender in writing, Borrower has not entered into or granted any Security Agreements, or permitted the filing or attachment of any Security Interests on or affecting any of the Collateral directly or indirectly securing repayment of Borrower's Loan and Note, that would be prior or that may in any way be superior to Lender's Security Interests and rights in and to such Collateral. Section 3.08. Operation of Business. Borrower possesses all licenses, permits, franchises, patents, copyrights, trademarks and trade names and the rights thereto to conduct the respective business substantially as now conducted and as presently proposed to be conducted, and Borrower is not in violation of any valid legal rights of others with respect to any of the foregoing. Section 3.09. Taxes. To the best of Borrower's knowledge, all of Borrower's tax returns and reports that are or were required to be filed, have been filed, and all taxes, assessments and other governmental charges have been paid in full, except those presently being or to be contested by Borrower in good faith in the ordinary course of business and for which adequate reserves have been provided. Section 3.10. Debt. Borrower and Guarantor have furnished to Lender a complete and correct list of all the credit arrangements, indentures, purchase agreements and guaranties, leases and other investments, agreements and arrangements presently in effect providing for or relating to the extension of credit (including agreements and arrangements for the issuance of letters of credit or for acceptance financing) in respect of which Borrower and Guarantor is in any manner directly or incontentionally obligated; the maximum agreed to be given as security therefor are correctly described and indicated in such document. Section 3.11. Assumed Business Names. Borrower, and each of them, has filed or recorded all documents or filings required by law relating to all assumed business names or trade names used by each Borrower. Excluding the name of Borrower, the following is a complete list of all assumed business names or trade names under which Borrower, and each of them, does Business: NONE. Section 3.12. Financial Information. Each of Borrower's financial statements supplied to Lender truly and completely disclosed Borrower's financial condition as of the date of the statement, and there has been no material adverse change in Borrower's financial condition subsequent to the date of the most recent financial statement supplied to Lender. Each Borrower has no material contingent obligations except as disclosed in such financial statements. Section 3.13. Properties. Except as contemplated by this Agreement or as previously disclosed in Borrower's financial statements or in writing to Lender and as accepted by Lender, and except for property tax liens for taxes not presently due and payable, each Borrower owns and has good title to all of Borrower's properties free and clear of all Security Interests, and has not executed any security documents or financing statements relating to such properties. All of Borrower's properties are titled in each Borrower's legal name, and each Borrower has not used, or filed a financing statement under, any other name for at least the last five (5) years. Section 3.14. Authorization. Borrower's execution, delivery, and performance of this Agreement and all the Related Documents have been duly authorized by all necessary action by Borrower and do not conflict with, result in a violation of, or constitute a default under (1) any provision of Borrower's articles of incorporation or organization, or bylaws, or any agreement or other instrument binding upon Borrower or (2) any law, governmental regulation, court decree, or order applicable to Borrower or to Borrower's properties. Section 3.15. Hazardous Substances. Borrower represent and warrants that: (a) Borrower has complied with and will comply with all Federal, state and local laws, regulations and orders applicable to any Collateral and relating to air, water (including surface and groundwater) and land pollution, and the storage, disposal, use, generation, manufacture, treatment, disposal, release or threatened release of any Hazardous Substance of hazardous or toxic materials. (b) Borrower has no knowledge of, or reason to believe that there has been (i) any breach or violation of any Environmental Laws applicable to the Collateral; (ii) any use, generation, manufacture, storage, treatment, disposal, release or threatened release of any Hazardous Substance on, under, about or from the Collateral which would violate any Federal, state and local laws, regulations and orders by any prior owners or occupants of any of the Collateral; or (iii) any actual or threatened litigation or claims of any kind by any person relating to such matters, (c) Borrower and any tenant, contractor, agent or other authorized user of any of the Collateral shall comply with all Federal, state and local laws, regulations and orders applicable to any Collateral and relating to air, water (including surface and groundwater) and land pollution, and the storage, disposal, use, generation, manufacture, treatment, disposal, release or threatened release of any Hazardous Substance of hazardous or toxic materials. Borrower authorizes Lender and its agents to enter upon the Collateral to make such inspections and tests as Lender may deem appropriate to determine compliance of the Collateral with this section of the Agreement. Any inspections or tests made by lender shall be at Borrower's expense and for Lender's purposes only and shall not be construed to create any responsibility or liability on the part of Lender to Borrower or to any other person. Borrower hereby (i) releases and waives any future claims against Lender for indemnity or contribution in the event Borrower becomes liable for cleanup or other costs under any such laws, and (ii) agrees to indemnity and hold harmless Lender against any and all claims, losses, liabilities, damages, penalties, and expenses which Lender may directly or indirectly sustain or suffer resulting from a breach of this section of the Agreement or as a consequence of any use, generation, manufacture, storage, disposal, release or threatened release of a hazardous waste or substance on the Collateral. The provisions of this section of the Agreement, including the obligation to indemnity, shall survive the payment of the indebtedness and the termination, expiration or satisfaction of this Agreement and shall not be affected by Lender's acquisition of any interest in any of the Collateral, whether by foreclosure or otherwise. ARTICLE IV. AFFIRMATIVE COVENANTS So long as the Loan shall remain unpaid, Guarantor and Borrower, and each of them will: Section 4.01. Maintenance of Existence. Except as may be specifically set out in Section 3.01 above, preserve and maintain, and cause each Borrower to preserve and maintain, its corporate existence and good standing in the jurisdiction of its incorporation. Section 4.02. Financial Records. Maintain its books and records in accordance with GAAP, applied on a consistent basis, and permit Lender to examine and audit each Borrower's books and records at all reasonable times. Section 4.03. Maintenance of Properties. Maintain, keep and preserve, and cause each Borrower to maintain, keep and preserve, all of its properties (tangible and intangible) necessary or useful in the proper conduct of its business in good working order and condition, ordinary wear and tear excepted. Section 4.04. Conduct of Business. Continue, and cause each Borrower to continue, to engage in an efficient and economical manner in a business of the same general type as now conducted by it on the date of this Agreement. Section 4.05. Insurance. Maintain fire and other risk insurance, public liability insurance, and such other insurance as Lender may require with respect to each Borrower's properties and operations, in form, amounts, coverages and with insurance companies acceptable to Lender. Borrower, upon request of Lender, will deliver to Lender from time to time the policies or certificates of insurance in form satisfactory to Lender, including stipulations that coverages will not be cancelled or diminished without at lest ten (10) days prior written notice to Lender, Each insurance policy also shall include an endorsement providing that coverage in favor of Lender will not be impaired in any way by any act, omission or default of Borrower or any other person. In connection with all policies covering assets in which Lender holds or is offered a security interest for the loan, Borrower will provide Lender with such lender's loss payable or other endorsements as Lender may require. Section 4.06. Compliance with Governmental Requirements. Comply with all laws, ordinances, and regulations, now or hereafter in effect, of all governmental authorities applicable to the conduct of Borrower's properties, businesses and operations, and to the use or occupancy of the Collateral, including without limitation, the Americans With Disabilities Act, where applicable. Borrower may contest in good faith any such law, ordinance, or regulation and withhold compliance during any proceeding, including appropriate appeals, so long as Borrower has notified lender in writing prior to doing so and so long as, in lender's sole opinion, Lender's interests in the Collateral are not jeopardized. Lender may require Borrower to post adequate security or a surety bond, reasonably satisfactory to Lender, to protect Lender's Interest. Section 4.07. Inspection. Permit employees or agents of Lender at any reasonable time to inspect any and all Collateral for the loan or loans and Borrower's other properties and to examine or audit Borrower's books, accounts, and records and to make copies and memoranda of Borrower's books, accounts, and records. If Borrower now or at any time hereafter maintains any records (including without limitation computer generated records and computer software programs for the generation of such records) in the possession of a third party, Borrower, upon request of Lender, shall notify such party to permit Lender free access to such records at all reasonable times and to provide Lender with copies of any records it may request, all at Borrower's expense. Section 4.08. Reporting Requirements. Furnish to Lender: (a) Monthly Financial Statements. As soon as available and in any event within fifteen (15)days after the end of each month in each fiscal year of each Borrower, balance sheets of Borrower as of the end of such month, statements of income and retained earnings of Borrower for the period commencing at the end of the previous fiscal year and ending with the end of such month, all in reasonable detail and all prepared in accordance with GAAP consistently applied and certified by the chief financial officer of Borrower (subject to year-end adjustments). As soon as available after the end of each fiscal year, but in no event later than thirty (30) days after the end of each fiscal year, Borrower's balance sheet and income statement for the year ended, prepared by Borrower. (b) Notices of Claims and Litigation. Promptly inform Lender in writing of (1) all material adverse changes in Borrower's financial condition, and (2) all existing and all threatened litigation, claims, investigations, administrative proceedings or similar actions affecting Borrower or any Guarantor which could materially affect the financial condition of Borrower or the financial condition of any Guarantor. (c) Notice of Defaults and Events of Default. As soon as possible and in any event within fifteen (15) days after the occurrence of each Default or Event of Default, a written notice setting forth the details of such Default or Event of Default and the action which is proposed to be taken by Borrower with respect thereto. (d) Reports to Other Creditors. Promptly after the furnishing thereof, copies of any statement or report furnished to any other party pursuant to the terms of any indenture, loan or credit or similar agreement and not otherwise required to be furnished to Lender pursuant to any other clause of this Section 4.08. (e) Tax Returns. As soon as available after the applicable filing date for the tax reporting period ended, Federal and other governmental tax returns, prepared by a tax professional reasonably satisfactory to Lender. (f) Insurance Reports. Upon request of Lender, reports on each existing insurance policy showing such information as Lender may reasonably request, including without limitation the following: (i) the name of the insurer; (ii) the risks insured; (iii) the amount of the policy; (iv) the properties insured; (v) the then current property values on the basis of which Insurance has been obtained, and the manner of determining those values; and (vi) the expiration date of the policy. In addition, upon request of Lender (however not more often than annually). Borrower will have an independent appraiser satisfactory to lender determine, as applicable, the actual cash value or replacement cost of any Collateral. The cost of such appraisal shall be paid by Borrower. (g) Compliance Certificates. Unless waived in writing by Lender, provide lender at least annually, with a certificate executed by Borrower's chief financial officer, or other officer or person acceptable to Lender, certifying that the representations and warranties set forth in this Agreement are true and correct as of the date of the certificate and further certifying that, as of the date of the certificate, no Event of Default exists under this Agreement. (h) Additional Information. Furnish such additional information and statements, as Lender may request from time to time. All financial reports required to be provided under this Agreement shall be prepared in accordance with GAAP, applied on a consistent basis, and certified by Borrower as being true and correct. Section 4.09. Guaranties. Prior to disbursement of any Loan proceeds, furnish executed guaranties of the Loan in favor of Lender, executed by Guarantor named below, on Lender's forms, and in the amount and under the conditions set forth in those guaranties. Name of Guarantor: Glenn S. Penny Amount: Unlimited Section 4.10. Other Agreements. Comply with all terms and conditions of all other agreements, whether now or hereafter existing, between Borrower and any other party and notify lender immediately in writing of any default in connection with any other such agreements. Section 4.11. Loan Proceeds: Use all Loan proceeds solely for Borrower's business operations, unless contrary by Lender in writing. Section 4.12. Taxes, charges and Liens. 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. Section 4.13. Performance. Perform and comply, in a timely manner, with all terms, conditions, and provisions set forth in this Agreement, in the Related Documents, and in all other instruments and agreements between Borrower and Lender. Borrower shall notify Lender immediately in writing of any default in connection with any agreement. Section 4.14. Operations. Maintain executive and management personnel with substantially the same qualifications and experience as the present executive and management personnel; provide written notice to lender of any change in executive and management personnel; conduct its business affairs in a reasonable and prudent manner. Section 4.15. Environmental Studies. Promptly conduct and complete, at Borrower's expense, upon demand from lender after receipt of any notice, summons, lien, citation, directive, letter or other communication from any governmental agency or instrumentality concerning any intentional or unintentional action or omission on Borrower's part in connection with any environmental activity, all such investigations, studies, samplings and testings as may be requested by lender or any governmental authority relative to any substance, or any waste or by-product of any substance defined as toxic or a hazardous substance under applicable federal, state, or local law, rule, regulation, order or directive, at or affecting any property or any facility owned, leased or used by Borrower. Section 4.16. Environmental Compliance and Reports. Comply in all respects with any and all Environmental Laws; and furnish to Lender promptly and in any event within thirty (30) days after receipt thereof a copy of any notice, summons, lien, citation, directive, letter or other communication from any governmental agency or instrumentality concerning any intentional or unintentional action or omission on Borrower's part in connection with any environmental activity whether or not there is damage to the environment and/or other natural resources. Section 4.17, Maintenance of Bank Accounts. As a further means of enabling Lender to be fully cognizant of the financial condition of each Borrower, Borrower agrees to maintain all deposit accounts with Lender during the term of this Agreement. Section 4,18. Life Insurance. As set forth in Section 2.01 (g),obtain and maintain life insurance in form and with insurance companies acceptable to Lender on Glenn S. Penny in the amount indicated in Section 2.01 above, and at Lender's option, cause such insurance policy or policies to be pledged, made payable to, or assigned to Lender on Lender's forms. Lender, at Lender's option, may apply the proceeds of any insurance policy to the unpaid balances of any Loan. ARTICLE V. NEGATIVE COVENANTS So long as the Loan shall remain unpaid, Guarantor and each Borrower will not, without the prior written consent of Lender: Section 5.01. Indebtedness and Liens. (a) Create, incur or assume indebtedness for borrowed money, including capital leases except: (i) trade debt incurred in the normal course of business, (ii) indebtedness to Lender contemplated by this Agreement, (iii) CESI promissory notes to Dan R. Neal, John Todd Sanner and Earl E, Schott in connection with CESI's acquisition of Neal's and Esses, and (iv) CESI promissory notes to the stockholders of Albin's in connection with the acquisition of Albin's as set forth in Section 3.01 above, (v) Guaranty of Guarantor to First Bank & Trust Co, Duncan, Oklahoma on the purchase of real property used by Albin's, (b) Sell, transfer, mortgage, assign, pledge, lease, grant a security interest in, or encumber any of Borrower's assets (except as allowed as Permitted Liens), or (c) Sell with recourse any of Borrower's accounts, except to Lender. Section 5.02. Continuity of Operations. (a) Engage in any business activities substantially different than those in which Borrower is presently engaged. (b) Except as may be specifically set out in Section 3.01 above, cease operations, liquidate, merge, transfer, acquire or consolidate with any other entity, change its name, dissolve or transfer or sell Collateral out of the ordinary course of business, or (c) Except actions required of Borrower under employment agreements, executed copies of which Borrower has delivered to Lender herewith, pay any dividends on Borrower's stock (other than dividends payable in its stock), provided, however that notwithstanding the foregoing, but only so long as no Event of Default has occurred and is continuing or would result from the payment of dividends, if Borrower is a 'Subchapter S Corporation' (as defined in the Internal Revenue Code of 1986, as amended), Borrower may pay cash dividends on its stock to its shareholders from time to time in amounts necessary to enable the shareholders to pay income taxes and make estimated income tax payments to satisfy their liabilities under federal and state law which arise solely from their status as Shareholders of a Subchapter S Corporation because of their ownership of shares of Borrower's stock, or purchase or retire any of Borrower's outstanding shares or alter or amend Borrower's capital structure. Section 5.03. Loans, Acquisitions and Guaranties. (a) Loan, invest in or advance money or assets. (b) Except as may be specifically set out in Section 3.01 above, purchase, create or acquire any interest in any other enterprise or entity, or (c) Incur any obligation as surety, endorser or guarantor other than in the ordinary course of business. ARTICLE VI. EVENTS OF DEFAULT Section 6.01. Event of Default. Each of the following shall constitute events of default ("Event of Default") under the Agreement: (a) Payment Default. Any Borrower fails to make any payment when due under the Loan. (b) False Statements. Any warranty, representation or statement made or furnished to Lender by Borrower or on Borrower's behalf under this Agreement, the Note, or the Related Documents is false or misleading in any material respect, either now or at the time made or furnished or becomes false or misleading at any time thereafter. (c) Other Defaults. Any Borrower falls to comply with or to perform any other term, obligation, covenant or condition contained in this Agreement or in any of the Related Documents or to comply with or to perform any term, obligation, covenant or condition contained in any other agreement between Lender and Borrower. (d) Default in Favor of Third Parties. Any Borrower or any Grantor defaults under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower's or any Grantor's property or Borrower's or any Grantor's ability to repay the Loan or perform their respective obligations under this Agreement or any of the Related Documents. (e) Insolvency. The dissolution or termination of the existence as a going business of any Borrower, the insolvency of any Borrower, the appointment of a receiver for any part of Borrower's property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against any Borrower. (f) Creditor or Forfeiture Proceedings. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of any Borrower or by any governmental agency against any collateral securing the Loan, this includes a garnishment of any of Borrower's accounts, including deposit accounts, with Lender. However, this Event of Default shall not apply if there is a good faith dispute by Borrower as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture proceeding and if Borrower gives Lender written notice of the creditor or forfeiture proceeding and deposits with Lender monies or a surety bond for the creditor or forfeiture proceeding, in an amount determined by Lender, in its sole discretion, as being an adequate reserve or bond for the dispute. (g) Defective Collateralization. This Agreement or any of the Related Documents ceases to be in full force and effect (including failure of any collateral document to create a valid and perfected security interest or lien) at any time and for any reason. (h) Events Affecting Guarantor. Any of the preceding events occurs with respect to any Guarantor of any of the indebtedness or any Guarantor dies or becomes incompetent, or revokes or disputes the validity of, or liability under, any Guaranty of the indebtedness. In the event of a death, Lender, at its option, may, but shall not be required to, permit Guarantor's estate to assume unconditionally the obligations arising under the guaranty in a manner satisfactory to Lender, and, in doing so, cure any Event of Default. (i) Chance in Ownership. Any change in ownership of twenty-five percent (25%) or more of the common stock of any Borrower, except for issuance of additional stock in CESI in connection with the purchase of Albin's as set forth in section 3.01 above after notice to Lender and the execution and delivery by Borrower of any additional loan payments. (j) Adverse Change. A material adverse change occurs in the consolidated financial condition of Borrower, or Lender believes the prospect of payment or performance of the Loan is impaired. Section 6.02. Right to Cure. If any default, other than a default on indebtedness, is curable and if Borrower or Grantor, as the case may be, has not been given a notice of a similar default within the preceding twelve (12) months, it may be cured (and no Event of Default will have occurred) if Borrower or Grantor, as the case may be, after receiving written notice from Lender demanding cure of such default (a) cure the default within thirty (30) days: or (b) if the cure requires more than thirty (30) days, immediately initiate steps which Lender deems in Lender's sole discretion to be sufficient to cure the default and thereafter continue and complete all reasonable and necessary steps sufficient to produce compliance as soon as reasonably practical. Section 6.03. Cessation of Advances. If Lender has made any commitment to make any Loan to Borrower, whether under this Agreement or under any other agreement, Lender shall have no obligation to make Loan Advances or to disburse Loan proceeds if: (A) Borrower or any Guarantor is in default under the terms of this Agreement or any of the Related Documents or any other agreement that Borrower or any Guarantor has with Lender: (B) Borrower or any Guarantor dies, becomes incompetent or becomes insolvent files a petition in bankruptcy or similar proceedings, or is adjudged a bankrupt; (c) there occurs a materiel adverse change in Borrower's financial condition, in the financial condition of any Guarantor, or in the value of any Collateral securing any Loan; or (D) any Guarantor seeks, claims or otherwise attempts to limit, modify or revoke such Guarantor's guaranty of the Loan or any other loan with Lender. Section 6.04. Right of Setoff. To the extent permitted by applicable law, Lender reserves a right of setoff in all Borrower's accounts with Lender (whether checking, savings, or some other account). This includes all accounts Borrower holds jointly with someone else and all accounts Borrower may open in the future. However, this does not include any IRA or Keogh accounts, or any trust accounts for which setoff would be prohibited by law. Borrower authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on the indebtedness against any and all such accounts, and, at lender's option, to administratively freeze all such accounts to allow lender to protect Lander's charge and setoff rights provided in this paragraph. Section 6.05. Effect of an Event of Default. If any Event of Default shall occur, except where otherwise provided in this Agreement or the Related Documents, all commitments and obligations of lender under this Agreement or the Related Documents or any other agreement immediately will terminate (including any obligation to make further Loan Advances or disbursements), and, at Lender's option, all indebtedness immediately will become due and payable, all without notice of any kind to Borrower, except that in the case of an Event of Default of the type described in the "Insolvency" subsection above, such acceleration shall be automatic and not optional. Section 6.06. Selective Enforcement. In the event Lender shall elect to selectively and successively enforce Lender's rights under any one or more of the Related Documents, which action shall not be deemed a waiver or discharge of any other lien or encumbrance securing payment of the indebtedness. The acceptance by Lender at any time, and from time to time, of partial payments on the indebtedness shall not be deemed to be a waiver of any default then existing. No waiver by Lender of any default shall be deemed to be a waiver of such other then existing or subsequent default. Section 6.07. Cumulative Rights. All rights and remedies available to Lender under this Agreement or under any provision of the Related Documents shall be cumulative of and in addition to all other rights and remedies granted to Lender, at law or in equity. ARTICLE VII. DEFINITIONS The following capitalized words and terns shall have the following meanings when used in this Agreement. Unless specifically stated to the contrary, all references to dollar amounts shall mean amounts in lawful money of the United States of America. Words and terns used in the singular shall include the plural, and the plural shall include the singular, as the context may require. Words and terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code. Accounting words and terms not otherwise defined in this Agreement shall have the meanings assigned to them in accordance with generally accepted accounting principles as in effect on the date of this Agreement: Section 7.01. Advance. The word "Advance" means a disbursement of Loan funds made, or to be made, to Borrower or on Borrower's behalf on a line of credit or multiple advance basis under the terms and conditions of this Agreement. Section 7.02. Agreement The word "Agreement" means this Business Loan Agreement, as this Business Loan Agreement may be amended or modified from time to time, together with all exhibits and schedules attached to this Business Loan Agreement from time to time. Section 7.03. Borrower. The word "Borrower" means Chemical and Equipment Specialties, Inc. ("CESI"}. Padko International, Incorporated ("Padko"), Esses, Inc. ("Esses"), Neal's Technology, Inc. ("Neal's") and Plainsman Technology, Inc.("Plainsman"), and all other persons and entities signing the Note in whatever capacity. Section 7.04. Collateral. The word "Collateral" means all property and assets granted as collateral security for a Loan, whether real or personal property, whether granted directly or indirectly, whether granted now or in the future, and whether granted in the form of a security interest, mortgage, collateral mortgage, deed of trust, assignment, pledge, crop pledge, chatte1 mortgage, collateral chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien, charge, lien or tide retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever, whether created by law, contract, or otherwise. Section 7.05. Environmental laws. The words "Environmental Laws" mean any and all state, federal and local statutes, regulations and ordinances relating to the protection of human health or the environment, including without limitation the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, 42 U.S.C. Section 9601, et seq. ("CERCLA"), the Superfund Amendments and Reauthorization Act of 1986, Pub. L. No. 99-499 ("SARA"), the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., or other applicable state or federal laws, rules, or regulations adopted pursuant thereto. Section 7.06. Event of Default. The words "Event of Default" mean any of the events of default set forth in this Agreement in the default section of this Agreement. Section 7.07. GAAP. The word "GAAP" means generally accepted accounting principles. Section 7.08. Grantor. The word "Grantor" means each and all of the persons or entities granting a Security Interest in any Collateral for the Loan, including without limitation all Borrowers granting such a Security Interest. Section 7.09. Guarantor. The word "Guarantor" means Glenn S. Penny and any guarantor, surety, or accommodation party of any or all of the loan. Section 7.10. Guaranty. The word "Guaranty" means the guaranty from Guarantor to Lender, including without limitation a guaranty of all or part of the Note. Section 7.11. Hazardous Substances. The words "Hazardous Substances" mean materials that, because of their quantity, concentration or physical, chemical or infectious characteristics, may cause or pose a present or potential hazard to human health or the environment when improperly used, treated, stored, disposed of, generated, manufactured, transported or otherwise handled. The words "Hazardous Substances" are used in their very broadest sense and include without limitation any and all hazardous or toxic substances, materials or waste as defined by or listed under the Environmental laws. The term "Hazardous Substances" also includes, without limitation, petroleum and petroleum by-products or any fraction thereof and asbestos. Section 7.12. Indebtedness. The word "Indebtedness" means the indebtedness evidenced by the Note or Related Documents, including all principal and interest together with all other indebtedness and costs and expenses for which Borrower is responsible under this Agreement or under any of the Related Documents. Section 7.13. Lender. The word "Lender" means Legacy Bank. Its successors and assigns. Section 7.14. Loan. The word "Loan" means the Loan described in Article I and any and all loans and financial accommodations from Lender to Borrower whether now or hereafter existing, and however evidenced, including without limitation those loans and financial accommodations described herein or described on any exhibit or schedule attached to this Agreement from time to time. Section 7.15. Note. The word "Note" means the Note described in Section 1.03, together with all renewals of, extensions of, modifications of, refinancings of, consolidations of, and substitutions for the note or credit agreement. Section 7.16. Permitted liens. The words "Permitted Liens" mean (a) liens and security interests securing indebtedness owed by Borrower to Lender: (b) liens for taxes, assessments, or similar charges either not yet due or being contested in good faith; (c) liens of materialmen, mechanics, warehousemen, or carriers, or other like liens arising in the ordinary course of business and securing obligations which are not yet delinquent; (d) purchase money liens or purchase money security interests upon or in any property acquired or held by Borrower in the ordinary course of business to secure indebtedness outstanding on the date of this Agreement or permitted to be incurred under the paragraph of this Agreement titled "Indebtedness and Liens", (e) liens and security interests which, as of the date of this Agreement, have been disclosed to and approved by Lender in writing; and (f) those liens and security interests which in the aggregate constitute an immaterial and insignificant monetary amount with respect to the net value of Borrower's assets. Section 7.17. Related Documents. The words "Related Documents" mean the documents set forth in Section 2.01 and all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, security deeds, collateral mortgages, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the loan. Section 7.18. Security Agreement, The words "Security Agreement" mean and include without limitation any agreements, promises, covenants, arrangements, understandings or other agreements, whether created by law, contract, or otherwise, evidencing, governing, representing, or creating a Security Interest. Section 7.19. Security Interest. The words "Security Interest" mean, without limitation, any and all types of collateral security, present and future, whether in the form of a lien, charge, encumbrance, mortgage, deed of trust, security deed, assignment, pledge, crop pledge, chattel mortgage, collateral chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever whether created by law, contract, or otherwise. ARTICLE VIII. MISCELLANEOUS Section 8.01. Construction. The provisions of this Agreement shall be in addition to those of loan document held by Lender, all of which shall be construed as complementary to each other. Nothing herein contained shall prevent lender from enforcing any or all Related Documents in accordance with their respective terms. Section 8.02. Further Assurance. From time to time, Borrower and Guarantor will make, execute and deliver to Lender such promissory notes, mortgages, deeds of trust, security agreements, assignments, financing statements, instruments, documents and other agreements as Lender or its attorneys may reasonably request to evidence and secure the Loan and to perfect all Security interests. Section 8.03. No Waiver by Lender. Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender's right otherwise to demand strict compliance with that provision or any other provision of this Agreement. No prior waiver by Lender, nor any course of dealing between Lender and Borrower, or between Lender and any Grantor, shall constitute a waiver of any of Lender's rights or of any of Borrower's or any Grantors obligations as to any future transactions. Whenever the consent of Lender is required under this Agreement, the granting of such consent by Lender in any instance shall not constitute continuing consent to subsequent instances where such consent is required and in all cases such consent may be granted or withheld in the sole discretion of Lender. Section 8.04. Attorneys' Fees; Expenses. Borrower agrees to pay upon demand all of Lender's costs and expenses, including Lender's reasonable attorneys' fees and Lender's legal expenses, incurred in connection with the enforcement of this Agreement. Lender may hire or pay someone else to help enforce this Agreement, and Borrower shall pay the costs and expenses of such enforcement. Costs and expenses include Lender's attorneys' fees and legal expenses whether or not there is a lawsuit, including attorneys' fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Borrower also shall pay all court costs and such additional fees as may be directed by the court. Section 8.05. Notices. To the extent permitted by applicable law, any notice required to be given under this Agreement shall be given in writing, and shall be effective when actually delivered, when actually received by telefacsimile (unless otherwise required by law), when deposited with a nationally recognized overnight courier, or, if mailed, when deposited in the United States mail, as first class, certified or registered mail postage prepaid. directed to the addresses shown near the beginning of this Agreement. Any party may change its address for notices under this Agreement by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party's address. For notice purposes, Borrower and Guarantor agree to keep Lender informed at all times of their current addresses. To the extent permitted by applicable law, if there is more than one Borrower, any notice given by Lender to any Borrower is deemed to be notice given to all Borrowers. Section 8.06. Notification by Borrower. Borrower and Guarantor will notify Lender immediately if any of them become aware of the occurrence of any Event of Default or of any fact, condition or event that only with the giving of notice or passage of time, or both, could become an Event of Default, or of the failure of Borrower to Observe any of its respective undertakings hereunder. Section 8.07. Survival of Representations and Warranties. Borrower and Guarantor understand and agree that in making the Loan, Lender is relying on all representations, warranties, and covenants made by Borrower and Guarantor in this Agreement or in any certificate or other instrument delivered by Borrower to Lender under this Agreement or the Related Documents. Borrower and Guarantor further agree that regardless of any investigation made by Lender, all such representations, warranties and covenants will survive the making of the Loan and delivery to Lender of the Related Documents, shall be continuing in nature, and shall remain in full force and effect until such time as Borrower's indebtedness shall be paid in full, or until this Agreement shall be terminated in the manner provided above, whichever is the last to occur. Section 8.08. Successors and Assigns. All covenants and agreements contained by or on behalf of Borrower shall bind Borrower's successors and assigns and shall inure to the benefit of Lender and its successors and assigns. Borrower shall not, however, have the right to assign Borrowers rights under this Agreement or any interest therein, without the prior written consent of Lender. Section 8.09. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all of which together shall constitute but one and the same instrument. Section 8.10. Amendments. This Agreement, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Agreement. All prior and contemporaneous representations and discussions concerning such matters either are included in this document or do not constitute an aspect of the agreement of the parties. Except as may be specifically set forth in this Agreement, no conditions precedent or subsequent, of any kind whatsoever, exist with respect to Borrower's obligations under this Agreement. No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment. Section 8.11. Right of Setoff. To the extent permitted by applicable law, lender reserves a right of setoff in all Borrower's accounts with lender (whether checking, savings, or some other account). This includes all accounts Borrower holds jointly with someone else and all accounts Borrower may open in the future. However, this does not include any IRA or Keogh accounts, or any trust accounts for which setoff would be prohibited by law. Borrower authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on the indebtedness against any and all such accounts, and, at Lender's option, to administratively freeze all such accounts to allow Lender to protect lender's charge and setoff rights provided in this paragraph. Section 8.12. Governing Law. This Agreement will be governed by, construed and enforced in accordance with federal law and the laws of the State of Oklahoma. This Agreement has been accepted by Lender in the State of Oklahoma. Section 8.13. Severability. If a court of competent jurisdiction finds any provision of this Agreement to be illegal, invalid, or unenforceable as to any circumstance, that finding shall not make the offending provision illegal, invalid, or unenforceable as to any other circumstance. If feasible, the offending provision shall be considered modified so that it becomes legal, valid and enforceable. If the offending provision cannot be so modified, it shall be considered deleted from this Agreement. Unless otherwise required by law, the illegality, invalidity, or unenforceability of any provision of this Agreement shall not affect the legality, validity or enforceability of any other provision of this Agreement. Section 8.14. Caption Headings. Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Agreement. Section 8.15. Consent to loan Participation. Borrower agrees and consents to lender's sale or transfer, whether now or later, of one or more participation interests in the loan to one or more purchasers whether related or unrelated to Lender. Lender may provide, without any limitation whatsoever, to anyone or more purchasers, or potential purchasers, any information or knowledge Lender may have about Borrower or about any other matter relating to the loan, and Borrower hereby waives any rights to privacy Borrower may have with respect to such matters. Borrower additionally waives any and all notices of sale of participation interests, as well as all notices of any repurchase of such participation interests. Borrower also agrees that the purchasers of any such participation interests will be considered as the absolute owners of such interests in the loan and will have all the rights granted under the participation agreement or agreements governing the sale of such participation interests. Borrower further waives all rights of offset or counterclaim that it may have now or later against Lender or against any purchaser of such a participation interest and unconditionally agrees that either Lender or such purchaser may enforce Borrower's obligation under the loan irrespective of the failure or insolvency of any holder of any interest in the loan. Borrower further agrees that the purchaser of any such participation interests may enforce its interests irrespective of any personal claims or defenses that Borrower may have against lender. Section 8.16. Lender's Expenditures. If any action or proceeding is commenced that would materially affect Lender's interest in the Collateral or if Borrower fails to comply with any provision of this Agreement or any Related Documents, including but not limited to Borrower's failure to discharge or pay when due any amounts Borrower is required to discharge or pay under this Agreement or any Related Documents, lender on Borrower's behalf may (but shall not be obligated to) take any action that Lender deems appropriate, including but not limited to discharging or paying all taxes, liens, security interests, encumbrances and other claims, at any time levied or placed on any Collateral and paying all costs for insuring, maintaining and preserving any Collateral. All such expenditures incurred or paid by Lender for such purposes will then bear interest at the rate charged under the Note including any default interest rate, from the date incurred or paid by Lender to the date of repayment by Borrower. All such expenses will become a part of the indebtedness and, at Lender's option, will (A) be payable on demand; (B) be added to the balance of the Note and be apportioned among and be payable with any installment payments to become due during either (1) the term of any applicable insurance policy: or (2) the remaining term of the Note: or (c) be treated as a balloon payment which will be due and payable at the Note's maturity. If Lender is required by law to give Borrower notice before or after Lender makes an expenditure, Borrower agrees that notice sent by regular mail at least five (5) days before the expenditure is made or notice delivered two (2) days before the expenditure is made is sufficient, and that notice within sixty (60) days after the expenditure is made is reasonable. Section 8.17. Binding Effect. This Agreement, the Note, all Security Agreements (if any), and all Related Documents are binding upon the signers thereof, as well as upon their successors, representatives and assigns, and are legally enforceable in accordance with their respective terms. Section 8.18. Time is of the Essence. Time is of the essence in the performance of this Agreement. Section 8.19. Cessation of Advances. If Lender has made any commitment to make any Loan to Borrower, whether under this Agreement or under any other agreement, Lender shall have no obligation to make Loan Advances or to disburse Loan proceeds if: (a) Borrower or any Guarantor is in default under the terms of this Agreement or any of the Related Documents or any other agreement that Borrower or any Guarantor has with Lender; (b) Borrower or any Guarantor dies, becomes incompetent or becomes insolvent, files a petition in bankruptcy or similar proceedings, or is adjudged a bankrupt; (c) there occurs a material adverse change in Borrower'sfinancial condition, in the financial condition of any Guarantor, or in the value of any Collateral securing any Loan; or (d) any Guarantor seeks, claims or otherwise attempts to limit, modify or revoke such Guarantor's guaranty of the loan or any other loan with Lender. Section 8.20. Multiple Borrower's: This Agreement has been executed by multiple obligors who are referred to in this Agreement individually, collectively and interchangeably as "Borrower". Unless specifically stated to the contrary, the word "Borrower" as used in this Agreement, including without limitation all representations, warranties and covenants, shall include all Borrowers. Borrower understands and agrees that, with or without notice to any one Borrower, lender may (A) make one or more additional secured or unsecured loans or otherwise extend additional credit with respect to any other Borrower; (B) with respect to any other Borrower alter, compromise, renew, extend, accelerate, or otherwise change one or more times the time for payment or other terms of any indebtedness, including increases and decreases of the rate of interest on the indebtedness; (C) exchange, enforce, waive, subordinate, fail or decide not to perfect, and release any security, with or without the substitution of new collateral: (D) release, substitute, agree not to sue, or deal with any one or more of Borrower's or any other Borrower's sureties, endorsers, or other guarantors on any terns or in any manner Borrower may choose; (E) determine how, when and what application of payments and credits shall be made on any indebtedness; (F) apply such security and direct the order or manner of sale of any Collateral, including without limitation, any non-judicial sale permitted by the terms of the controlling security agreement or deed of trust, as Lender in its discretion may determine; (G) sell, transfer, assign or grant participations in all or any part of the Loan; (H) exercise or refrain from exercising any rights against Borrower or others, or otherwise act or refrain from acting; (I) settle or compromise any indebtedness; and (J) subordinate the payment of all or any part of any of Borrower's indebtedness to Lender to the payment of any liabilities which may be due Lender or others. Section 8.21. Term. This Agreement shall be effective as of January 23, 2001, and shall continue in full force and effect until such time as all of Borrower's Loans in favor of Lender have been paid in full, including principal, interest, costs, expenses, attorneys' fees, and other fees and charges, or until such time as the parties may agree in writing to terminate this Agreement. Section 8.22. Schedules and Exhibits. Any and all exhibits are hereby expressly incorporated by reference as though fully set forth at that point verbatim. All terms and provisions as defined or set forth herein and in Schedule are hereby incorporated into and made a part of this Agreement. Any term used herein which is not defined shall have the meanings ascribed to such terms, as of the date of this Agreement, by the Uniform Commercial Code as enacted and amended, to the extent the same are defined therein. BORROWER AND GUARANTOR ACKNOWLEDGE HAVING READ ALL THE PROVISIONS OF THIS BUSINESS LOAN AGREEMENT AND AGREE TO ITS TERMS. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. CHEMICAL AND EQUIPMENT SPECIALTIES, INC., an Oklahoma corporation By /s/ Glenn S. Penny, President By /s/ Tom D. Morton, Chief Financial Officer Address: 3109 Stagestand Duncan, Oklahoma 73533 LEGACY BANK By /s/ Authorized Signer Address: Legacy Bank Duncan North Branch Post Office Box 1109 2024 N. Highway 81 Duncan, Oklahoma 73534-1109 EX-10 4 pn102b.txt PROMISSORY NOTE DATED 01/23/01 PROMISSORY NOTE Borrower: Padko International, Incorporated (TIN: 73-1443489); Chemical and Equipment Specialties, Inc. (TIN: 73-1591850); Neal's Technology, Inc. (TIN: 73-1512452); Plainsman Technology, Inc. (TIN: 73-1218459); and Esses, Inc. (TIN: 73-1386155), 15 North 9th, Duncan, OK 73533. Lender: Legacy Bank, Legacy Bank Duncan North, PO Box 1109, 2024 N. Hwy 81, Duncan, OK 73534-1109. Principal Amount: $2,709,980.00; Initial Rate: 10.000%; Date of Notice: January 23, 2001. PROMISE TO PAY. Padko International, Incorporated; Chemical and Equipment Specialties, Inc.; Neal's Technology, Inc.; Plainsman Technology, Inc.; and Esses, Inc. ("Borrower") jointly and severally promise to pay to Legacy Bank or order, in lawful money United States of America, the principal amount of Two Million Seven Hundred Nine Thousand Nine Hundred Eighty & no/100 Dollars ($2,709,980.00), together with Interest on the unpaid principal balance from January 23, 2001, until paid in full. PAYMENT. Subject to any payment changes resulting from changes in the Index, Borrower will pay this loan in 84 payments of $45,179.48 each payment. Borrower's first payment is due February 23, 2001, and all subsequent payments are due on the same day of each month after that. Borrower's final payment will be due on January 23, 2008, and will be for all principal and all accrued interest not yet paid. Payments include principal and interest. Unless otherwise agreed or required by applicable law, payments will be applied first to any unpaid collection costs and any late charges, then to any unpaid interest, and any remaining amount to principal. The annual interest rate for this Note is computed on a 365/360 basis; that is, by applying the ratio of the annual interest rate over a year of 360 days, multiplied by the outstanding principal balance, multiplied by the actual number of days the principal balance is outstanding. Borrower will pay Lender at Lender's address shown above or at such other place as Lender may designate in writing. VARIABLE INTEREST RATE. The interest rate on this Note is subject to change from time to time based on changes in an independent index which is the minimum prime lending rate for large U.S. Money Center Commercial banks as published in the Money Rate Section of the Wall Street Journal (the "Index"). The Index is not necessarily the lowest rate charged by Lender on its loans. If the Index becomes unavailable during the term of this loan, Lender may designate a substitute index after notice to Borrower. Lender will tell Borrower the current index rate upon Borrower's request. The interest rate change will not occur more often than each quarter. Borrower understands that Lender may make loans based on other rates as well. The Index currently is 9.000% per annum. The interest rate to be applied to the unpaid principal balance of this Note will be at a rate of 1.000 percentage point over the Index, resulting in an initial rate of 10.000% per annum. NOTICE: Under no circumstances will the interest rate on this Note be more than the maximum rate allowed by applicable law. Whenever increases occur in the interest rate, Lender, at its option, may do one or more of the following: (A) increase Borrower's payments to ensure Borrower's loan will pay off by its original final maturity date, (B) increase Borrower's payments to cover accruing interest, (C) increase the number of Borrower's payments, and (D) continue Borrower's payments at the same amount and increase Borrower's final payment. PREPAYMENT. Borrower agrees that all loan fees and other prepaid finance charges are earned fully as of the date of the loan and will not be subject to refund upon early prepayment (whether voluntary or as a result of default), except as otherwise required by law. If this Note is prepaid in whole or in part, said prepayment shall include accrued interest to the date of such prepayment, and in addition, each prepayment shall include the following additional amounts: (a) 5% of the amount prepaid during the first Loan year; (b) 4% of the amount prepaid during the second Loan year; (c) 3% of the amount prepaid during the third Loan year; (d) 2% of the amount prepaid during the fourth Loan year; (e) 1% of the amount prepaid during the fifth Loan year. Provided, however, that there shall be a prepayment charge of 1% of the amount of the outstanding principal balance in the event that the Borrower shall pay and satisfy in full the indebtedness and provide satisfactory evidence to Lender that the source of the funds for the prepayment was the sale of securities of Borrower and not from debt. Except for the foregoing, Borrower may pay without penalty all or a portion of the amount owed earlier than it is due. Early payments will not, unless agreed to by Lender in writing, relieve Borrower of Borrower's obligation to continue to make payments under the payment schedule. Rather, early payments will reduce the principal balance due and may result in Borrower's making fewer payments. Borrower agrees not to send Lender payments marked "paid in full", "without recourse", or similar language. If Borrower sends such a payment, Lender may accept it without losing any of Lender's rights under this Note, and Borrower will remain obligated to pay any further amount owed to Lender. All written communications concerning disputed amounts, including any check or other payment instrument that indicates that the payment constitutes "payment in full" of the amount owed or that is tendered with other conditions or limitations or as full satisfaction of a disputed amount must be mailed or delivered to: Legacy Bank, Legacy Bank Duncan North Branch, PO Box 1109, 2024 N. Hwy 81, Duncan, OK 73534-1109. LATE CHARGE. If a payment is 11 days or more late, Borrower will be charged 2.000% of the unpaid portion of the regularly scheduled payment or $20.00, whichever is greater. INTEREST AFTER DEFAULT. Upon default, including failure to pay upon final maturity, Lender, at its option, may, if permitted under applicable law, increase the variable interest rate on this Note to 15.000% per annum. The interest rate will not exceed the maximum rate permitted by applicable law. DEFAULT. Each of the following shall constitute an event of default ("Event of Default") under this Note: Payment Default. Borrower falls to make any payment when due under this Note. Other Defaults. Borrower falls to comply with or to perform any other term, obligation, covenant or condition contained in this Note, the Business Loan Agreement or in any of the related documents or to comply with or to perform any term, obligation, covenant or condition contained in any other agreement between Lender and Borrower. Default in Favor of Third Parties. Borrower or any Grantor defaults under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower's property or Borrower's ability to repay this Note or perform Borrower's obligations under this Note or any of the related documents. False Statements. Any warranty, representation or statement made or furnished to Lender by Borrower or on Borrower's behalf under this Note or the related documents is false or misleading in any material respect, either now or at the time made or furnished or becomes false or misleading at any time thereafter. Insolvency. The dissolution or termination of Borrower's existence as a going business, the insolvency of Borrower, the appointment of a receiver for any part of Borrower's property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Borrower. Creditor or Forfeiture Proceedings. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Borrower or by any governmental agency against any collateral securing the loan. This includes a garnishment of any of Borrower's accounts, including deposit accounts, with Lender. However, this Event of Default shall not apply if there is a good faith dispute by Borrower as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture proceeding and if Borrower gives Lender written notice of the creditor or forfeiture proceeding and deposits with Lender monies or a surety bond for the creditor or forfeiture proceeding, in an amount determined by Lender, in its sole discretion, as being an adequate reserve or bond for the dispute. Events Affecting Guarantor. Any of the preceding events occurs with respect to any Guarantor of any of the indebtedness or any Guarantor dies or becomes incompetent, or revokes or disputes the validity of, or liability under any guaranty of the indebtedness evidenced by this Note. In the event of a death, Lender, at its option, may, but shall not be required to, permit the Guarantor's estate to assume unconditionally the obligations arising under the guaranty in a manner satisfactory to Lender, and, in doing so, cure any Event of Default. Adverse Change. A material adverse change occurs in Borrower's financial condition, or Lender believes the prospect of payment or performance of this Note is impaired. Cure Provisions. If any default, other than a default in payment, is curable and if Borrower has not been given a notice of a breach of the same provision of this Note within the preceding twelve (12) months, it may be cured (and no event of default will have occurred) if Borrower, after receiving written notice from Lender demanding cure of such default: (1) cures the default within thirty (30) days; or (2) if the cure requires more than thirty (30) days, immediately initiates steps which Lender deems in Lender's sole discretion to be sufficient to cure the default and thereafter continues and completes all reasonable and necessary steps sufficient to produce compliance as soon as reasonably practical. LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal balance on this Note and all accrued unpaid interest immediately due, and then Borrower will pay that amount. ATTORNEYS' FEES' EXPENSES. Lender may hire or pay someone to help collect this Note if Borrower does not pay. Borrower will pay Lender that amount. This includes, subject to any limits under applicable law, Lender's reasonable attorneys' fees and legal expenses, whether or not there is a lawsuit, including without limitation all attorneys' fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), and appeals. If not prohibited by applicable law, Borrower also will pay any court costs, in addition to all other sums provided by law. GOVERNING LAW. This Note will be governed by, construed and enforced in accordance with federal law and the laws of the State of Oklahoma. This Note has been accepted by Lender in the State of Oklahoma. DISHONORED ITEM FEE. Borrower will pay a fee 10 Lender of $20.00 if Borrower makes a payment on Borrower's loan and the check or other payment order including any preauthorized charge with which Borrower pays is later dishonored. RIGHT OF SETOFF. To the extent permitted by applicable law, Lender reserves a right of setoff in all Borrower's accounts with Lender (whether checking, savings, or some other account). This includes all accounts Borrower holds jointly with someone else and all accounts Borrower may open in the future. However, this does not include any IRA or Keogh accounts, or any trust accounts for which setoff would be prohibited by law. Borrower authorizes Lender, to the extent permitted by law, to charge or setoff all sums owing on the indebtedness against any and all such accounts, and, at Lender's option, to administratively freeze all such accounts to allow Lender to protect Lender's charge and setoff rights provided in this paragraph. COLLATERAL. Borrower acknowledges this Note is secured by, in addition to any other collateral, a Mortgage of even date herewith from Plainsman Technology, Inc. covering property in Stephens County, a Pledge Agreement covering all of the issued and outstanding stock of Padko International, Incorporated; Neal's Technology, Inc.; Plainsman Technology, Inc.; and Esses, Inc., a Security Agreement covering all of the personal property of Borrower whether now owned or hereinafter acquired, all the terms and conditions of which are hereby incorporated and made a part of this Note. SUCCESSOR INTERESTS. The terms of this Note shall be binding upon Borrower, and upon Borrower's heirs, personal representatives, successors and assigns, and shall inure to the benefit of Lender and its successors and assigns. GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its rights or remedies under this Note without losing them. Each Borrower understands and agrees that, with or without notice to Borrower, Lender may with respect to any other Borrower (a) make one or more additional secured or unsecured loans or otherwise extend additional credit; (b) alter, compromise, renew, extend, accelerate, or otherwise change one or more times the time for payment or other terms any indebtedness, including increases and decreases of the rate of interest in the indebtedness; (c) exchange, enforce, waive, subordinate, fail or decide not to perfect, and release any security, with or without the substitution of new collateral; (d) apply such security and direct the order or manner of sale thereof, including without limitation, any non-judicial sale permitted by the terms of the controlling security agreements, as Lender in its discretion may determine; (e) release, substitute, agree not to sue, or deal with any one or more of Borrower's sureties, endorsers, or other guarantors on any terms or in any manner Lender may choose; and (f) determine how, when and what application of payments and credits shall be made on any other indebtedness owing by such other Borrower, Borrower and any other person who signs, guarantees or endorses this Note, to the extent allowed by law, waive presentment, demand for payment, and notice of dishonor. Upon any change in the terms on this Note, and unless otherwise expressly stated in writing, no party who sign this Note whether as maker, guarantor, accommodation maker or endorser, shall be released from liability. All such parties agree that Lender may renew or extend (repeatedly and for any length of time) this loan or release any party or guarantor or collateral; or impair, fail to realize upon or perfect Lender's security interest in the collateral; and take any other action deemed necessary by Lender without the consent or notice to anyone. All such parties also agree that Lender may modify this loan without the consent of or notice to anyone other than the party with whom the modification is made. The obligations under this Note are joint and several. PRIOR TO SIGNING THIS NOTE, EACH BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. EACH BORROWER AGREES TO THE TERMS OF THE NOTE. BORROWER ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THIS PROMISSORY NOTE. BORROWER: PADKO INTERNATIONAL, INCORPORATED By: Glenn S. Penny, President of Padko International, Incorporated By: Tom D. Morton, Chief Financial Officer of Padko International, Incorporated CHEMICAL AND EQUIPMENT SPECIALTIES, INC. By: Glenn S. Penny, President of Chemical and Equipment Specialties, Inc. By: Tom D. Morton, Chief Financial Officer of Chemical and Equipment Specialties, Inc. NEAL'S TECHNOLOGY, INC. By: Glenn S. Penny, President of Neal's Technology, Inc. By: Tom D. Morton, Chief Financial Officer of Neal's Technology, Inc. PLAINSMAN TECHNOLOGY, INC. By: Glenn S. Penny, President of Plainsman Technology, Inc. By: Tom D. Morton, Chief Financial Officer of Plainsman Technology, Inc. ESSES, INC. By: Glenn S. Penny, President of Esses, Inc. By: Tom D. Morton, Chief Financial Officer of Esses, Inc. EX-10 5 csa102c.txt COMMERCIAL SECURITY AGREEMENT COMMERCIAL SECURITY AGREEMENT Borrower: Chemical and Equipment Specialties, Inc. (TIN: 73-1591850); Neal's Technology, Inc. (TIN: 73-1512452); Plainsman Technology, Inc. (TIN: 73-1218459); Padko International, Inc. (TIN: 73-1443489); and Esses, Inc. (TIN: 73-1386155) PO Box 1006 Duncan, OK 73534. Grantor: Chemical and Equipment Specialties, Inc. (TIN: 73-1591850); Neal's Technology, Inc. (TIN: 73-1512452); Esses, Inc.; (TIN: 73-1386155); Plainsman Technology, Inc. (TIN: 73-1218459); and Padko, International, Incorporated (TIN: 73-1443489) PO Box 1006 Duncan, OK 73534. Lender: Legacy Bank, Legacy Bank Duncan North Branch, PO Box 1109, 2024 N. Hwy 81, Duncan, OK 73534-1109. THIS COMMERCIAL SECURITY AGREEMENT dated January 23, 2001, is made and executed among Chemical and Equipment Specialties, Inc.; Neal's Technology, Inc.; Esses, Inc.; Plainsman Technology, Inc.; and Padko International, Incorporated ("Grantor"); Chemical and Equipment Specialties, Inc.; Neal's Technology, Inc.; Plainsman Technology, Inc.; Padko International, Inc.; and Esses, Inc. ("Borrower"); and Legacy Bank ("Lender"). Borrower, Lender and GLENN S. PENNY, 3109 Stagestand, Duncan, Oklahoma 73533, hereinafter referred to as "Guarantor" have entered into a Business Loan Agreement ("Business Loan Agreement") of even date herewith whereby Lender agreed to make a loan to Borrower evidenced by the Note according to the terms and conditions of the Business Loan Agreement, Lender has required as a condition to making the loan to Borrower as provided in the Business Loan Agreement that Borrower execute and deliver to Lender this Agreement, granting to Lender a Security Interest in the Collateral for the repayment of the indebtedness pursuant to the Business Loan Agreement. Reference to the Business Loan Agreement is hereby made for all purposes. GRANT OF SECURITY INTEREST. For valuable consideration, Grantor grants to Lender a security interest in the Collateral to secure the indebtedness and agrees that Lender shall have the rights stated in this Agreement with respect to the Collateral, in addition to all other rights which Lender may have by law. COLLATERAL DESCRIPTION. The word "Collateral" as used in this Agreement means the following described property, whether now owned or hereafter acquired, whether now existing or hereafter arising, and wherever located, in which Grantor is giving to Lender a security interest for the payment of the indebtedness and performance of all other obligations under the Note and this Agreement: All Inventory, Chattel Paper, Electronic Chattel Paper, Commercial Tort Claims, Commingled Goods, Deposit Accounts, Documents of Title, Fixtures, Accounts, Equipment, General Intangibles (including without limitation, the property set out in Schedule 1 attached hereto and incorporated herein by reference), Instruments, Goods, Investment Property, Letter of Credit Rights, Money, Payment Intangibles, Software and Equipment (including, without limitation, the property set out in Schedule 2 attached hereto and incorporated herein by reference). In addition, the word "Collateral" also includes all the following, whether now owned or hereafter acquired, whether now existing or hereafter arising, and wherever located: (A) All accessions, attachments, accessories, tools, parts, supplies, replacements and additions to any of the collateral described herein, whether added now or later. (B) All products and produce of any of the property described in this Collateral section. (C) All accounts, general intangibles, instruments, rents, monies, payments, and all other rights, arising out of a sale, lease, or other disposition of any of the property described in this Collateral section. (D) All proceeds (including insurance proceeds) from the sale, destruction, loss, or other disposition of any of the property described in this Collateral section, and sums due from a third party who has damaged or destroyed the Collateral or from that party's insurer, whether due to judgment, settlement or other process. (E) All records and data relating to any of the property described in this Collateral section, whether in the form of a writing, photograph, microfilm, microfiche, or electronic media, together with all of Grantor's right, title, and interest in and to all computer software required to utilize, create, maintain, and process any such records or data on electronic media. Despite any other provision of this Agreement, Lender is not granted, and will not have, a nonpurchase money security interest in household goods, to the extent such a security interest would be prohibited by applicable law. In addition, if because of the type of any Property, Lender is required to give a notice of the right to cancel under Truth in Lending for the indebtedness, then Lender will not have a security interest in such Collateral unless and until such a notice is given. Some or all of the Collateral may be located on the following described real estate: See Schedule 3 and 4 attached hereto and incorporated herein by reference. CROSS-COLLATERALIZATION. In addition to the Note, this Agreement secures all obligations, debts and liabilities, plus interest thereon, of Borrower to Lender, or anyone or more of them, as well as all claims by Lender against Borrower or anyone or more of them, owed to Lender, whether of a like nature to the Note Indebtedness or not, whether arising from a loan or a purchased obligation, whether incurred for a consumer or a business purpose, whether now existing or hereafter arising, whether related or unrelated to the purpose of the Note, whether voluntary or otherwise, whether due or not due, direct or indirect, absolute or contingent, liquidated or unliquidated and whether Borrower may be liable individually or jointly with others, whether obligated as guarantor, surety, accommodation party or otherwise, and whether recovery upon such amounts may be or hereafter may become barred by any statute of limitations, and whether the obligation to repay such amounts may be or hereafter may become otherwise unenforceable. BORROWER'S WAIVERS AND RESPONSIBILITIES. Except as otherwise required under this Agreement or by applicable law, (A) Borrower agrees that Lender need not tell Borrower about any action or inaction Lender takes in connection with this Agreement; (B) Borrower assumes the responsibility for being and keeping informed about the Collateral; and (C) Borrower waives any defenses that may arise because of any action or inaction of Lender, including without limitation any failure of Lender to realize upon the Collateral or any delay by Lender in realizing upon the Collateral; and Borrower agrees to remain liable under the Note no matter what action Lender takes or fails to take under this Agreement. GRANTOR'S REPRESENTATIONS AND WARRANTIES. Grantor warrants that: (A) this Agreement is executed at Borrower's request and not at the request of Lender; (B) Grantor has the full right, power and authority to enter into this Agreement and to pledge the Collateral to Lender; (C) Grantor has established adequate means of obtaining from Borrower on a continuing basis information about Borrower's financial condition; and (D) Lender has made no representation to Grantor about Borrower or Borrower's creditworthiness. GRANTOR'S WAIVERS. Grantor waives all requirements of presentment, protest, demand, and notice of dishonor or non-payment to Borrower or Grantor, or any other party to the indebtedness or the Collateral. Lender may do any of the following with respect to any obligation of any Borrower, without first obtaining the consent of Grantor: (A) grant any extension of time for any payment, (B) grant any renewal, (C) permit any modification of payment terms or other terms, or (D) exchange or release any Collateral or other security. No such act or failure to act shall affect Lender's rights against Grantor or the Collateral. RIGHT OF SETOFF. To the extent permitted by applicable law, Lender reserves a right of setoff in all Grantor's accounts with Lender (whether checking, savings, or some other account). This includes all accounts Grantor holds jointly with someone else and all accounts Grantor may open in the future. However, this does not include any IRA or Keogh accounts, or any trust accounts for which setoff would be prohibited by law. Grantor authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on the indebtedness against any and all such accounts, and, at Lender's option, to administratively freeze all such accounts to allow Lender to protect Lender's charge and setoff rights provided in this paragraph, GRANTOR'S REPRESENTATIONS AND WARRANTIES WITH RESPECT TO THE COLLATERAL. With respect to the Collateral, Grantor represents and promises to Lender that: Perfection of Security Interest. Grantor agrees to execute financing statements and to take whatever other actions are requested by Lender to perfect and continue Lender's security interest in the Collateral. Upon request of Lender, Grantor will deliver to Lender any and all of the documents evidencing or constituting the Collateral, and Grantor will note Lender's interest upon any and all chattel paper if not delivered to Lender for possession by Lender. This is a continuing Security Agreement and will continue in effect even though all or any part of the indebtedness is paid in full and even though for a period of time Borrower may not be indebted to Lender. Notices to Lender. Grantor will promptly notify Lender in writing at Lender's address shown above (or such other addresses as Lender may designate from time to time) prior to any (1) change in Grantor's name; (2) change in Grantor's assumed business name(s); (3) change in the management of any corporation Grantor; (4) change in the authorized signer(s); (5) change in Grantor's principal office address; (6) conversion of Grantor to a new or different type of business entity; or (7) change in any other aspect of Grantor that directly or indirectly relates to any agreements between Grantor and Lender. No change in Grantor's name will take effect until after Lender has been notified. No Violation. The execution and delivery of this Agreement will not violate any law or agreement governing Grantor or to which Grantor is a party, and its certificate or articles of incorporation and bylaws do not prohibit any term or condition of this Agreement. Enforceability of Collateral. To the extent the Collateral consists of accounts, chattel paper, or general intangibles, as defined by the Uniform Commercial Code, the Collateral is enforceable in accordance with its terms, is genuine, and fully complies with all applicable laws and regulations concerning form, content and manner of preparation and execution, and all persons appearing to be obligated on the Collateral have authority and capacity to contract and are in fact obligated as they appear to be on the Collateral. At the time any Account becomes subject to a security interest in favor of Lender, the Account shall be a good and valid account representing an undisputed, bona fide indebtedness incurred by the account debtor, for merchandise held subject to delivery instructions or previously shipped or delivered pursuant to a contract of sale, or for services previously performed by Grantor with or for the account debtor. So long as this Agreement remains in effect, Grantor shall not, without Lender's prior written consent, compromise, settle, adjust, or extend payment under or with regard to any such Accounts. There shall be no setoffs or counterclaims against any of the Collateral, and no agreement shall have been made under which any deductions or discounts may be claimed concerning the Collateral except those disclosed to Lender in writing. Location of the Collateral. Except in the ordinary course of Grantor's business, Grantor agrees to keep the Collateral (or to the extent the Collateral consists of intangible property such as accounts or general intangibles, the records concerning the Collateral) at Grantor's address shown above or at such other locations as are acceptable to Lender. Upon Lender's request, Grantor will deliver to lender in form satisfactory to Lender a schedule of real properties and Collateral locations relating to Grantor's operations, including without limitation the following: (1) all real property Grantor owns or is purchasing; (2) all real property Grantor is renting or leasing; (3) all storage facilities Grantor owns, rents, leases, or uses; and (4) all other properties where Collateral is or may be located. Removal of the Collateral. Except in the ordinary course of Grantor's business, including the sales of inventory, Grantor shall not remove the Collateral from its existing location without Lender's prior written consent. To the extent that the Collateral consists of vehicles, or other titled property, Grantor shall not take or permit any action which would require application for certificates of title for the vehicles outside the State of Oklahoma, without Lender's prior written consent. Grantor shall, whenever requested, advise Lender of the exact location of the Collateral. Transactions Involving Collateral. Except for inventory sold or accounts collected in the ordinary course of Grantor's business, or as otherwise provided for in this Agreement, Grantor shall not sell, offer to sell, or otherwise transfer or dispose of the Collateral. While Grantor is not in default under this Agreement, Grantor may sell inventory, but only in the ordinary course of its business and only to buyers who qualify as a buyer in the ordinary course of business. A sale in the ordinary course of Grantor's business does not include a transfer in partial or total satisfaction of a debt or any bulk sale. Grantor shall not pledge, mortgage, encumber or otherwise permit the Collateral to be subject to any lien, security interest, encumbrance, or charge, other than the security interest provided for in this Agreement, without the prior written consent of Lender. This includes security interests even if junior in right to the security interests granted under this Agreement. Unless waived by Lender, all proceeds from any disposition of the Collateral (for whatever reason) shall be held in trust for Lender and shall not be commingled with any other funds; provided however. this requirement shall not constitute consent by Lender to any sale or other disposition. Upon receipt, Grantor shall immediately deliver any such proceeds to Lender. Title. Grantor represents and warrants to Lender that Grantor holds good and marketable title to the Collateral, free and clear of all liens and encumbrances except for the lien of this Agreement. No financing statement covering any of the Collateral is on file in any public office other than those which reflect the security interest created by this Agreement or to which Lender has specifically consented. Grantor shall defend Lender's rights in the Collateral against the claims and demands of all other persons. Repairs and Maintenance. Grantor agrees to keep and maintain, and to cause others to keep and maintain, the Collateral in good order, repair and condition at all times while this Agreement remains in effect. Grantor further agrees to pay when due all claims for work done on, or services rendered or material furnished in connection with the Collateral so that no lien or encumbrance may ever attach to or be filed against the Collateral. Inspection of Collateral. Lender and Lender's designated representatives and agents shall have the right at all reasonable times to examine and inspect the Collateral wherever located. Taxes, Assessments and Liens. Grantor will pay when due all taxes, assessments and liens upon the Collateral, its use or operation, upon this Agreement, upon any promissory note or notes evidencing the indebtedness, or upon any of the other Related Documents. Grantor may withhold any such payment or may elect to contest any lien if Grantor is in good faith conducting an appropriate proceeding to contest the obligation to pay and so long as Lender's interest in the Collateral is not jeopardized in Lender's sole opinion. If the Collateral is subjected to a lien which is not discharged within fifteen (15) days, Grantor shall deposit with Lender cash, a sufficient corporate surety bond or other security satisfactory to Lender in an amount adequate to provide for the discharge of the lien plus any interest, costs, attorneys' fees or other charges that could accrue as a result of foreclosure or sale of the Collateral. In any contest Grantor shall defend itself and Lender and shall satisfy any final adverse judgment before enforcement against the Collateral. Grantor shall name Lender as an additional obligee under any surety bond furnished in the contest proceedings. Grantor further agrees to furnish Lender with evidence that such taxes, assessments, and governmental and other charges have been paid in full and in a timely manner. Grantor may withhold any such payment or may elect to contest any lien if Grantor is in good faith conducting an appropriate proceeding to contest the obligation to pay and so long as Lender's interest in the Collateral is not jeopardized. Compliance with Governmental Requirements. Grantor shall comply promptly with all laws, ordinances, rules and regulations of all governmental authorities, now or hereafter in effect, applicable to the ownership, production, disposition, or use of the Collateral. Grantor may contest in good faith any such law, ordinance or regulation and withhold compliance during any proceeding, including appropriate appeals, so long as Lender's interest in the Collateral, in Lender's opinion, is not jeopardized. Hazardous Substances. Grantor represents and warrants that the Collateral never has been, and never will be so long as this Agreement remains a lien on the Collateral, used in violation of any Environmental Laws. Grantor and any tenant, contractor, agent or other authorized user of any of the Collateral shall comply with all federal, state and local laws, regulations and orders applicable to any Collateral and relating to air, water (including surface and groundwater) and land pollution, and the storage, disposal, use, generation, manufacture, treatment, disposal, release or threatened release of any Hazardous Substance of hazardous or toxic materials. Grantor hereby (1) releases and waives any future claims against Lender for indemnity or contribution in the event Grantor becomes liable for cleanup or other costs under any Environmental Laws, and (2) agrees to indemnify and hold harmless Lender against any and all claims and losses resulting from a breach of this provision of this Agreement. This obligation to indemnify shall survive the payment of the indebtedness and the satisfaction of this Agreement. Maintenance of Casualty Insurance. Grantor shall procure and maintain all risks insurance, including without limitation fire, theft and liability coverage together with such other insurance as Lender may require with respect to the Collateral, in form, amounts, coverages and basis reasonably acceptable to Lender and issued by a company or companies reasonably acceptable to Lender. Grantor, upon request of Lender, will deliver to Lender from time to time the policies or certificates of insurance in form satisfactory to Lender, including stipulations that coverages will not be cancelled or diminished without at least ten (10) days' prior written notice to Lender and not including any disclaimer of the insurer's liability for failure to give such a notice. Each insurance policy also shall include an endorsement providing that coverage in favor of Lender will not be impaired in any way by any act, omission or default of Grantor or any other person. In connection with all policies covering assets in which Lender holds or is offered a security interest, Grantor will provide Lender with such loss payable or other endorsements as Lender may require. If Grantor at any time fails to obtain or maintain any insurance as required under this Agreement, Lender may (but shall not be obligated to) obtain such insurance as Lender deems appropriate, including if Lender so chooses "single interest insurance," which will cover only Lender's interest in the Collateral. Application of Insurance Proceeds. Grantor shall promptly notify Lender of any loss or damage to the Collateral. Lender may make proof of loss if Grantor fails to do so within fifteen (15) days of the casualty. All proceeds of any insurance on the Collateral, including accrued proceeds thereon, shall be held by Lender as part of the Collateral. If Lender consents to repair or replacement of the damaged or destroyed Collateral, Lender shall, upon satisfactory proof of expenditure, pay or reimburse Grantor from the proceeds for the reasonable cost of repair or restoration. If Lender does not consent to repair or replacement of the Collateral, Lender shall retain a sufficient amount of the proceeds to pay all of the indebtedness, and shall pay the balance to Grantor. Any proceeds which have not been disbursed within six (6) months after their receipt and which Grantor has not committed to the repair or restoration of the Collateral shall be used to prepay the indebtedness. Insurance Reserves. Lender may require Grantor to maintain with Lender reserves for payment of insurance premiums, which reserves shall be created by monthly payments from Grantor of a sum estimated by Lender to be sufficient to produce, at least fifteen (15) days before the premium due date, amounts at least equal to the insurance premiums to be paid. If fifteen (15) days before payment is due, the reserve funds are insufficient, Grantor shall upon demand pay any deficiency to Lender. The reserve funds shall be held by Lender as a general deposit and shall constitute a non-interest-bearing account which Lender may satisfy by payment of the insurance premiums required to be paid by Grantor as they become due. Lender does not hold the reserve funds in trust for Grantor, and Lender is not the agent of Grantor for payment of the insurance premiums required to be paid by Grantor. The responsibility for the payment of premiums shall remain Grantor's sole responsibility. Insurance Reports. Grantor, upon request of Lender, shall furnish to Lender reports on each existing policy of insurance showing such information as Lender may reasonably request including the following: (1) the name of the insurer; (2) the risks insured; (3) the amount of the policy; (4) the property insured; (5) the then current value on the basis of which Insurance has been obtained and the manner of determining that value; and (6) the expiration date of the policy. In addition, Grantor shall upon request by Lender (however not more often than annually) have an Independent appraiser satisfactory to Lender determine, as applicable, the cash value or replacement cost of the Collateral. GRANTOR'S RIGHT TO POSSESSION AND TO COLLECT ACCOUNTS. Until default and except as otherwise provided below with respect to accounts, Grantor may have possession of the tangible personal property and beneficial use of all the Collateral and may use it In any lawful manner not inconsistent with this Agreement or the Related Documents, provided that Grantor's right to possession and beneficial use shall not apply to any Collateral where possession of the Collateral by Lender is required by law to perfect Lender's security interest in such Collateral. Until otherwise notified by Lender, Grantor may collect any of the Collateral consisting of accounts. At any time end even though no Event of Default exists, Lender may exercise its rights to collect the accounts and to notify account debtors to make payments directly to Lender for application to the indebtedness. If Lender at any time has possession of any Collateral, whether before or after an Event of Default, Lender shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral if Lender takes such action for that purpose as Grantor shall request or as Lender, in Lender's sole discretion, shall deem appropriate under the circumstances, but failure to honor any request by Grantor shall not of itself be deemed to be a failure to exercise reasonable care. Lender shall not be required to take any steps necessary to preserve any rights in the Collateral against prior parties, nor to protect, preserve or maintain any security interest given to secure the indebtedness. LENDER'S EXPENDITURES. If any action or proceeding is commenced that would materially affect Lender's interest in the Collateral or if Grantor fails to comply with any provision of this Agreement or any Related Documents, including but not limited to Grantor's failure to discharge or pay when due any amounts Grantor is required to discharge or pay under this Agreement or any Related Documents, Lender on Grantor's behalf may (but shall not be obligated to) take any action that Lender deems appropriate, including but not limited to discharging or paying all taxes, liens, security interests, encumbrances and other claims, at any time levied or placed on the Collateral and paying all costs for insuring, maintaining and preserving the Collateral. All such expenditures incurred or paid by Lender for such purposes will then bear interest at the rate charged under the Note including any default interest rate, from the date incurred or paid by Lender to the date of repayment by Grantor. All such expenses will become a part of the indebtedness and, at Lender's option, will (A) be payable on demand; (B) be added to the balance of the Note and be apportioned among and be payable with any installment payments to become due during either (1) the term of any applicable insurance policy; or (2) the remaining term of the Note; or (C) be treated as a balloon payment which will be due and payable at the Note's maturity. The Agreement also will secure payment of these amounts. Such right shall be in addition to all other rights and remedies to which Lender may be entitled upon Default. If Lender is required by law to give Grantor notice before or after Lender makes an expenditure, Grantor agrees that notice sent by regular mail at least five (5) days before the expenditure is made or notice delivered two (2) days before the expenditure is made is sufficient, and that notice within sixty (60) days after the expenditure is made is reasonable. DEFAULT. Each of the following shall constitute an Event of Default under this Agreement: Payment Default. Borrower fails to make any payment when due under the indebtedness. Other Defaults. Borrower or Grantor fails to comply with or to perform any other term, obligation, covenant or condition contained in this Agreement or in any of the Related Documents or to comply with or to perform any term, obligation, covenant or condition contained in any other agreement between lender and Borrower or Grantor. Default In Favor of Third Parties. Should Borrower or any Grantor default under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower's property or Borrower's or any Grantor's ability to repay the indebtedness or perform their respective obligations under this Agreement or any of the Related Documents. False Statements. Any warranty, representation or statement made or furnished to Lender by Borrower or Grantor or on Borrower's or Grantor's behalf under this Agreement, the Note, or the Related Documents is false or misleading in any material respect, either now or at the time made or furnished or becomes false or misleading at any time thereafter. Defective Collateralization. This Agreement or any of the Related Documents ceases to be in full force and effect (including failure of any collateral document to create a valid and perfected security interest or lien) at any time and for any reason. Insolvency. The dissolution or termination of Borrower's or Grantor's existence as a going business except as may be specifically set out in Section 3.01 of the Business Loan Agreement, the insolvency of Borrower or Grantor, the appointment of a receiver for any part of Borrower's or Grantor's property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Borrower or Grantor. Creditor or Forfeiture Proceedings. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Borrower or Grantor or by any governmental agency against any collateral securing the indebtedness. This includes a garnishment of any of Borrower's or Grantor's accounts, including deposit accounts, with Lender. However, this Event of Default shall not apply if there is a good faith dispute by Borrower or Grantor as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture proceeding and if Borrower or Grantor gives Lender written notice of the creditor or forfeiture proceeding and deposits with Lender monies or a surety bond for the creditor or forfeiture proceeding, in an amount determined by Lender, in its sole discretion, as being an adequate reserve or bond for the dispute. Events Affecting Guarantor. Any of the preceding events occurs with respect to Guarantor of any of the indebtedness or Guarantor dies or becomes incompetent or revokes or disputes the validity of, or liability under, any Guaranty of the indebtedness. Adverse Change. A material adverse change occurs in Borrower's or Grantor's financial condition, or Lender believes the prospect of payment or performance of the indebtedness is impaired. Cure Provisions. If any default, other than a default in payment is curable and if Grantor has not been given a notice of a breach of the same provision of this Agreement within the preceding twelve (12) months, it may be cured (and no event of default will have occurred) if Grantor, after receiving written notice from Lender demanding cure of such default: (1) cures the default within thirty (30) days; or (2) if the cure requires more than thirty (30) days, immediately initiates steps which Lender deems in Lender's sole discretion to be sufficient to cure the default and thereafter continues and completes all reasonable and necessary steps sufficient to produce compliance as soon as reasonably practical. RIGHTS AND REMEDIES ON DEFAULT. If an Event of Default occurs under this Agreement, at any time thereafter, Lender shall have all the rights of a secured party under the Oklahoma Uniform Commercial Code. In addition and without limitation, Lender may exercise any one or more of the following rights and remedies: Accelerate Indebtedness. Lender may declare the entire indebtedness, including any prepayment penalty which Borrower would be required to pay, immediately due and payable, without notice of any kind to Borrower or Grantor. Assemble Collateral. Lender may require Grantor to deliver to Lender all or any portion of the Collateral and any and all certificates of title and other documents relating to the Collateral. Lender may require Grantor to assemble the Collateral and make it available to Lender at a place to be designated by Lender. Lender also shall have full power to enter upon the property of Grantor to take possession of and remove the Collateral. If the Collateral contains other goods not covered by this Agreement at the time of repossession, Grantor agrees Lender may take such other goods, provided that Lender makes reasonable efforts to return them to Grantor after repossession. Sell the Collateral. Lender shall have full power to sell, lease, transfer, or otherwise dispose of the Collateral. Unless the Collateral in whole or in part is perishable or threatens to decline speedily in value or is of a type customarily sold on a recognized market, Lender will give Grantor reasonable notice of the time and place of any public sale, or of the time after which any private sale or other disposition is to be made. Notwithstanding any other provision of this Agreement, any requirement of notice for this purpose shall be met if notice is mailed, postage prepaid, to the address of Grantor provided for in this Agreement at least ten (10) days before sale or other disposition or action. Lender shall be entitled to, and Grantor shall be liable for, all reasonable costs and expenditures incurred in realizing on Lender's security interest, including without limitation, all court costs, fees for sale, selling costs and reasonable attorneys' fees as set forth in the Note or in this Agreement. All such costs shall be secured by the security interest in the Collateral covered by this Agreement. In any action by Lender for the foreclosure of this Agreement, whether by judicial foreclosure or power of sale, Lender shall be entitled to the appointment of a receiver upon any failure of Grantor to comply with any term, obligation, covenant, or condition contained in this Agreement, the Note, or any Related Documents. Collect Revenues, Apply Accounts. Lender, either itself or through a receiver, may collect the payments, rents, income, and revenues from the Collateral. Lender may at any time in Lender's discretion transfer any Collateral into Lender's own name or that of Lender's nominee and receive the payments, rents, income, and revenues therefrom and hold the same as security for the indebtedness or apply it to payment of the indebtedness in such order of preference as Lender may determine. Insofar as the Collateral consists of accounts, general intangibles, insurance policies, instruments, chattel paper, choses in action, or similar property, Lender may demand, collect, receipt for, settle, compromise, adjust, sue for, foreclose, or realize on the Collateral as Lender may determine, whether or not indebtedness or Collateral is then due. For these purposes, Lender may, on behalf of and in the name of Grantor, receive, open and dispose of mail addressed to Grantor; change any address to which mail and payments are to be sent; and endorse notes, checks, drafts, money orders, documents of title, instruments and items pertaining to payment, shipment, or storage of any Collateral. To facilitate collection, Lender may notify account debtors and obligors on any Collateral to make payments directly to Lender. Obtain Deficiency. If Lender chooses to sell any or all of the Collateral, Lender may obtain a judgment against Borrower for any deficiency remaining on the indebtedness due to Lender after application of all amounts received from the exercise of the rights provided in this Agreement. Borrower shall be liable for a deficiency even if the transaction described in this subsection is a sale of accounts or chattel paper. Other Rights and Remedies. Lender shall have all the rights and remedies of a secured creditor under the provisions of the Uniform Commercial Code, as may be amended from time to time. In addition, Lender shall have and may exercise any or all other rights and remedies it may have available at law, in equity, or otherwise. Election of Remedies. Except as may be prohibited by applicable law, all of Lenders rights and remedies, whether evidenced by this Agreement, the Related Documents, or by any other writing, shall be cumulative and may be exercised singularly or concurrently. Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Grantor under this Agreement, after Grantor's failure to perform, shall not affect Lender's right to declare a default and exercise its remedies. MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Agreement: Amendments. This Agreement, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Agreement. All prior and contemporaneous representations and discussions concerning such matters either are included in this document or do not constitute an aspect of the agreement of the parties. Except as may be specifically set forth in this Agreement, no conditions precedent or subsequent, of any kind whatsoever, exist with respect to Grantor's obligations under this Agreement. No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment. Attorneys' Fees; Expenses. Grantor agrees to pay upon demand all of Lender's costs and expenses, including Lender's reasonable attorneys' fees and Lender's legal expenses, incurred in connection with the enforcement of this Agreement. Lender may hire or pay someone else to help enforce this Agreement, and Grantor shall pay the costs and expenses of such enforcement. Costs and expenses include Lender's attorneys' fees and legal expenses whether or not there is a lawsuit, including attorneys' fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Grantor also shall pay all court costs and such additional fees as may be directed by the court. Caption Headings. Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Agreement. Governing Law. This Agreement will be governed by, construed and enforced in accordance with federal law and the laws of the State of Oklahoma. This Agreement has been accepted by Lender in the State of Oklahoma. Joint and Several Liability. All obligations of Borrower and Grantor under this Agreement shall be joint and several, and all references to Grantor shall mean each and every Grantor, and all references to Borrower shall mean each and every Borrower. This means that each Borrower and Grantor signing below is responsible for all obligations in this Agreement. Where anyone or more of the parties is a corporation, partnership, limited liability company or similar entity, it is not necessary for Lender to inquire into the powers of any of the officers, directors, partners, members, or other agents acting or purporting to act on the entity's behalf, and any obligations made or created in reliance upon the professed exercise of such powers shall be guaranteed under this Agreement. No Waiver by Lender. Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender's right otherwise to demand strict compliance with that provision or any other provision of this Agreement. No prior waiver by Lender, nor any course of dealing between Lender and Grantor, shall constitute a waiver of any of Lender's rights or of any of Grantor's obligations as to any future transactions. Whenever the consent of Lender is required under this Agreement, the granting of such consent by Lender in any instance shall not constitute continuing consent to subsequent instances where such consent is required and in all cases such consent may be granted or withheld in the sole discretion of Lender. Notices. To the extent permitted by applicable law, any notice required to be given under this Agreement shall be given in writing, and shall be effective when actually delivered, when actually received by telefacsimile (unless otherwise required by law), when deposited with a nationally recognized overnight courier, or, if mailed, when deposited in the United States mail, as first class, certified or registered mail postage prepaid, directed to the addresses shown near the beginning of this Agreement. Any party may change its address for notices under this Agreement by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party's address. For notice purposes, Grantor agrees to keep Lender informed at all times of Grantor's current address. To the extent permitted by applicable law, if there is more than one Grantor, any notice given by Lender to any Grantor is deemed to be notice given to all Grantors. Power of Attorney. Grantor hereby appoints Lender as Grantor's irrevocable attorney-in-fact for the purpose of executing any documents necessary to perfect or to continue the security interest granted in this Agreement. Lender may at any time, and without further authorization from Grantor, file a carbon, photographic or other reproduction of any financing statement or of this Agreement for use as a financing statement. Grantor will reimburse Lender for all expenses for the perfection and the continuation or the perfection of Lender's security interest in the Collateral. Severability. If a court of competent jurisdiction finds any provision of this Agreement to be illegal, invalid, or unenforceable as to any person or circumstance, that finding shall not make the offending provision illegal, invalid, or unenforceable as to any other person or circumstance. If feasible, the offending provision shall be considered modified so that it becomes legal, valid and enforceable. If the offending provision cannot be so modified, it shall be considered deleted from this Agreement. Unless otherwise required by law, the illegality, invalidity, or unenforceability of any provision of this Agreement shall not affect the legality, validity or enforceability of any other provision of this Agreement. Successors and Assigns. Subject to any limitations stated in this Agreement on transfer of Grantor's interest, this Agreement shall be binding upon and inure to the benefit of the parties, their successors and assigns. If ownership of the Collateral becomes vested in a person other than Grantor, Lender, without notice to Grantor, may deal with Grantor's successors with reference to this Agreement and the indebtedness by way of forbearance or extension without releasing Grantor from the obligations of this Agreement or liability under the indebtedness. Survival of Representations and Warranties. All representations, warranties, and agreements made by Grantor in this Agreement shall survive the execution and delivery of this Agreement, shall be continuing in nature, and shall remain in full force and effect until such time as Borrower's indebtedness shall be paid in full. Time is of the Essence. Time is of the essence in the performance of this Agreement. Copies. A copy of this Commercial Security Agreement or of any financing statement prepared or filed in connection with this transaction is sufficient as a financing statement. DEFINITIONS. The following capitalized words and terms shall have the following meanings when used in this Agreement unless specifically stated to the contrary, all references to dollar amounts shall mean amounts in lawful money of the United States of America. Words and terms used in the singular shall include the plural, and the plural shall include the singular, as the context may require. Words and terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code: Account. The word "Account" means a trade account, account receivable, other receivable, or other right to payment for goods sold or services rendered owing to Grantor (or to a third party grantor acceptable to Lender). Agreement. The word "Agreement" means this Commercial Security Agreement, as this Commercial Security Agreement may be amended or modified from time to time, together with all exhibits and schedules attached to this Commercial Security Agreement from time to time. Borrower. The word "Borrower" means Chemical and Equipment Specialties, Inc.; Neal's Technology, Inc.; Plainsman Technology, Inc.; Padko International, Incorporated; and Esses, Inc., and all other persons and entities signing the Note in whatever capacity. Collateral. The word "Collateral" means all of Grantor's right, title and interest in and to all the Collateral as described in the Collateral Description section of this Agreement. Default. The word "Default" means the Default set forth in this Agreement in the section titled "Default". Environmental Laws. The words "Environmental Laws" mean any and all state, federal and local statutes, regulations and ordinances relating to the protection of human health or the environment, including without limitation the Comprehensive Environmental Response, Compensation, and liability Act of 1980, as amended, 42 U.S.C. Section 9601, et seq. ("CERCLA"), the Superfund Amendments and Reauthorization Act of 1986, Pub. L. No. 99-499 ("SARA"), the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., or other applicable state or federal laws, rules, or regulations adopted pursuant thereto. Event of Default. The words "Event of Default" mean any of the events of default set forth in this Agreement in the default section of this Agreement. Grantor. The word "Grantor" means Chemical and Equipment Specialties, Inc.; Neal's Technology, Inc.; Esses, Inc.; Plainsman Technology, Inc.; and Padko International, Incorporated. Guarantor. The word "Guarantor" means any guarantor, surety, or accommodation party of any or all of the indebtedness. Guaranty. The word "Guaranty" means the guaranty from Guarantor to Lender, including without limitation a guaranty of all or part of the Note. Hazardous Substances. The words "Hazardous Substances" mean materials that, because of their quantity, concentration or physical, chemical or infectious characteristics, may cause or pose a present or potential hazard to human health or the environment when improperly used, treated, stored, disposed of, generated, manufactured, transported or otherwise handled. The words "Hazardous Substances" are used in their very broadest sense and include without limitation any and all hazardous or toxic substances, materials or waste as defined by or listed under the Environmental Laws. The term "Hazardous Substances" also includes, without limitation, petroleum and petroleum by-products or any fraction thereof and asbestos. Indebtedness. The word "indebtedness" means the indebtedness evidenced by the Note or Related Documents, including all principal and interest together with an other indebtedness and costs and expenses for which Borrower is responsible under this Agreement or under any of the Related Documents. Lender. The word "Lender" means Legacy Bank, its successors and assigns. Note. The word "Note" means the Note executed by Borrower in the principal amount of $2,709,980.00 dated January 23, 2001, together with all renewals of, extensions of, modifications of, refinancings of, consolidations of, and substitutions for the note or credit agreement. Related Documents. The words "Related Documents" mean all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, security deeds, collateral mortgages, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the indebtedness. BORROWER AND GRANTOR HAVE READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS COMMERCIAL SECURITY AGREEMENT AND AGREE TO ITS TERMS. THIS AGREEMENT IS DATED January 23, 2001. GRANTOR: CHEMICAL AND EQUIPMENT SPECIALTIES, INC. By: Glenn S. Penny, President of Chemical and Equipment Specialties, Inc. By: Tom D. Morton, Chief Financial Officer of Chemical and Equipment Specialties, Inc. NEAL'S TECHNOLOGY, Inc. By: Glenn S. Penny, President of Neal's Technology, Inc. By: Tom D. Morton, Chief Financial Officer of Neal's Technology, Inc. ESSES, INC. By: Glenn S. Penny, President of Esses, Inc. By: Tom D. Morton, Chief Financial Officer of Esses, Inc. PLAINSMAN TECHNOLOGY, INC. By: Glenn S. Penny, President of Plainsman Technology, Inc. By: Tom D. Morton, Chief Financial Officer of Plainsman Technology, Inc. PADKO INTERNATIONAL, INC. By: Glenn S. Penny, President of Padko International, Inc. By: Tom D. Morton, Chief Financial Officer of Padko International, Inc. BORROWER: CHEMICAL AND EQUIPMENT SPECIALTIES, INC. By: Glenn S. Penny, President of Chemical and Equipment Specialties, Inc. By: Tom D. Morton, Chief Financial Officer of Chemical and Equipment Specialties, Inc. NEAL'S TECHNOLOGY, Inc. By: Glenn S. Penny, President of Neal's Technology, Inc. By: Tom D. Morton, Chief Financial Officer of Neal's Technology, Inc. PLAINSMAN TECHNOLOGY, INC. By: Glenn S. Penny, President of Plainsman Technology, Inc. By: Tom D. Morton, Chief Financial Officer of Plainsman Technology, Inc. PADKO INTERNATIONAL, INC. By: Glenn S. Penny, President of Padko International, Inc. By: Tom D. Morton, Chief Financial Officer of Padko International, Inc. ESSES, INC. By: Glenn S. Penny, President of Esses, Inc. By: Tom D. Morton, Chief Financial Officer of Esses, Inc. EX-10 6 csa102d.txt COMMERCIAL GUARANTY AGREEMENT - 01/23/01 COMMERCIAL GUARANTY Borrower: Padko International, Incorporated (TIN: 73-1443489); Chemical and Equipment Specialties, Inc. (TIN: 73-1591850); Neal's Technology, Inc. (TIN: 73-1512452); Plainsman Technology, Inc. (TIN: 73-1218459); and Esses, Inc. (TIN: 73-1386155) 15 North 9th Duncan, OK 73533 Guarantor: Glenn S. Penny 3109 Stagestand Rd Duncan, OK 73533 Lender: Legacy Bank Legacy Bank Duncan North Branch PO Box 1109 2024 N. Hwy 81 Duncan, OK 73534-1109 AMOUNT OF GUARANTY. The amount of this Guaranty is Unlimited. CONTINUING UNLIMITED GUARANTY. For good and valuable consideration, and for the purpose of enabling Padko International, Incorporated; Chemical and Equipment Specialties, Inc.; Neal's Technology, Inc.; Plainsman Technology, Inc.; and Esses, Inc. ("Borrower"), or either or any of them, to obtain or renew loans, credit or other financial accommodation from Legacy Bank ("Lender"), Glenn S. Penny ("Guarantor") absolutely and unconditionally (1) guarantees and promises to pay to Lender that Borrower will fully and promptly pay and discharge in legal tender of the United States of America all of the indebtedness (as that term is defined below); (2) agrees, without the Lender first having to proceed against Borrower or any other party liable or to liquidate any security or Collateral, to pay on demand all sums due and to become due to Lender from Borrower, and all losses, costs, attorney fees or expenses which may be suffered or incurred by Lender by reason of Borrower's default or the default of Guarantor; (3) agrees to be bound by and on demand to pay any deficiency established by a sale of Collateral held by Lender, with or without notice to the Guarantor; and (4) further agrees that liability hereunder will not be affected or impaired by any failure, neglect or omission by Lender to protect in any manner, the collection of the indebtedness or the Collateral given therefore, and regardless of whether the Lender fails or omits to seek a deficiency against Borrower. Under this Guaranty, the liability of Guarantor is unlimited and the obligations of Guarantor are continuing. INDEBTEDNESS GUARANTEED. The indebtedness guaranteed by this Guaranty includes any and all of Borrower's indebtedness to Lender and is used in the most comprehensive sense and means and includes any and all of Borrower's liabilities, obligations and debts to Lender, now existing or hereinafter incurred or created, including, without limitation, all loans, advances, interest, costs, debts, overdraft indebtedness, credit card indebtedness, lease obligations, other obligations, and liabilities of Borrower, or any of them, and any present or future judgments against Borrower, or any of them; and whether any such indebtedness is voluntarily or involuntarily incurred, due or not due, absolute or contingent, liquidated or unliquidated, determined or undetermined; whether Borrower may be liable individually or jointly with others, or primarily or secondarily, or as guarantor or surety; whether recovery on the indebtedness may be or may become barred or unenforceable against Borrower for any reason whatsoever; and whether the indebtedness arises from transactions which may be voidable on account of infancy, insanity, ultra vires, or otherwise. DURATION OF GUARANTY. This Guaranty will take effect when received by Lender without the necessity of any acceptance by Lender, or any notice to Guarantor or to Borrower, and will continue in full force until all indebtedness incurred or contracted before receipt by Lender of any notice of revocation shall have been fully and finally paid and satisfied and all of Guarantor's other obligations under this Guaranty shall have been performed in full. If Guarantor elects to revoke this Guaranty, Guarantor may only do so in writing. Guarantor's written notice of revocation must be mailed to Lender, by certified mail, at Lender's address listed above or such other place as Lender may designate in writing. Written revocation of this Guaranty will apply only to advances or new indebtedness created after actual receipt by Lender of Guarantor's written revocation. For this purpose and without limitation, the term "new indebtedness" does not include indebtedness which at the time of notice of revocation is contingent, unliquidated, undetermined or not due and which later becomes absolute, liquidated, determined or due. This Guaranty will continue to bind Guarantor for all indebtedness incurred by Borrower or committed by Lender prior to receipt of Guarantor's written notice of revocation, including any extensions, renewals, substitutions or modifications of the indebtedness. All renewals, extensions, substitutions, and modifications of the indebtedness granted after Guarantor's revocation, are contemplated under this Guaranty and, specifically will not be considered to be new indebtedness. This Guaranty shall bind Guarantor's estate as to indebtedness created both before and after Guarantor's death or incapacity, regardless of Lender's actual notice of Guarantor's death. Subject to the foregoing, Guarantor's executor or administrator or other legal representative may terminate this Guaranty in the same manner in which Guarantor might have terminated it and with the same effect. Release of any other guarantor or termination of any other guaranty of the indebtedness shall not affect the liability of Guarantor under this Guaranty. A revocation Lender receives from anyone or more Guarantors shall not affect the liability of any remaining Guarantors under this Guaranty. It is anticipated that fluctuations may occur in the aggregate amount of indebtedness covered by this Guaranty, and Guarantor specifically acknowledges and agrees that reductions in the amount of indebtedness, even to zero dollars ($0.00), prior to Guarantor's written revocation of this Guaranty shall not constitute a termination of this Guaranty. This Guaranty is binding upon Guarantor and Guarantor's heirs, successors and assigns so long as any of the guaranteed indebtedness remains unpaid and even though the indebtedness guaranteed may from time to time be zero dollars ($0.00). GUARANTOR'S AUTHORIZATION TO LENDER. Guarantor authorizes Lender, either before or after any revocation hereof, without notice or demand and without lessening Guarantor's liability under this Guaranty, from time to time: (A) prior to revocation as set forth above, to make one or more additional secured or unsecured loans to Borrower, to lease equipment or other goods to Borrower, or otherwise to extend additional credit to Borrower; (B) to alter, compromise, renew, extend, accelerate, or otherwise change one or more times the time for payment or other terms of the indebtedness or any part of the indebtedness, including increases and decreases of the rate of interest on the indebtedness; extensions may be repeated and may be for longer than the original loan term; (C) to take and hold security for the payment of this Guaranty or the indebtedness, and exchange, enforce, waive, subordinate, fail or decide not to perfect, and release any such security, with or without the substitution of new collateral; (D) to release, substitute, agree not to sue, or deal with anyone or more of Borrower's sureties, endorsers, or other guarantors on any terms or in any manner Lender may choose; (E) to determine how, when and what application of payments and credits shall be made on the indebtedness (F) to apply such security and direct the order or manner of sale thereof, including without limitation, any nonjudicial sale permitted by the terms of the controlling security agreement or deed of trust, as Lender in its discretion may determine; (G) to sell, transfer, assign or grant participations in all or any part of the indebtedness; (H) to assign or transfer this Guaranty in whole or in part; (I) to exercise or refrain from exercising any rights against Borrower or others, or otherwise act or refrain from acting; (J) to settle or compromise any indebtedness; and (K) to subordinate the payment of all or any part of any indebtedness of Borrower to Lender to the payment of any liabilities which maybe due Lender or others. GUARANTOR'S REPRESENTATIONS AND WARRANTIES. Guarantor represents and warrants to Lender that (A) no representations or agreements of any kind have been made to Guarantor which would limit or quality In any way the terms of this Guaranty; (B) this Guaranty is executed at Borrower's request and not at the request of Lender; (C) Guarantor has full power, right and authority to enter into this Guaranty; (D) the provisions of this Guaranty do not conflict with or result in a default under any agreement or other instrument binding upon Guarantor and do not result in a violation of any law, regulation, court decree or order applicable to Guarantor; (E) Guarantor has not and will not, without the prior written consent of Lender, sell, lease, assign, encumber, hypothecate, transfer, or otherwise dispose of all or substantially all of Guarantor's assets, or any interest therein; (F) upon Lender's request, Guarantor will provide to Lender financial and credit information in form acceptable to Lender, and all such financial information which currently has been, and all future financial information which will be provided to Lender is and will be true and correct in all material respects and fairly present Guarantor's financial condition as of the dates the financial information is, provided; (G) no material adverse change has occurred in Guarantor's financial condition since the date of the most recent financial statements provided to Lender and no event has occurred which may materially adversely affect Guarantor's financial condition; (H) no litigation, claim, investigation, administrative proceeding or similar action (including those for unpaid taxes) against Guarantor is pending or threatened; (I) Lender has made no representation to Guarantor as to the creditworthiness of Borrower; and (J) Guarantor has established adequate means of obtaining from Borrower on a continuing basis information regarding Borrower's financial condition. Guarantor agrees to keep adequately informed from such means of any facts, events, or circumstances which might in any way affect Guarantor's risks under this Guaranty, and Guarantor further agrees that, absent a request for information, Lender shall have no obligation to disclose to Guarantor any information or documents acquired by Lender in the course of its relationship with Borrower. GUARANTOR'S WAIVERS. Except as prohibited by applicable law, Guarantor waives any right to require Lender (A) to continue lending money or to extend other credit to Borrower; (B) to make any presentment, protest, demand, or notice of any kind, including notice of any nonpayment of the indebtedness or of any nonpayment related to any collateral, or notice of any action or nonaction on the part of Borrower, Lender, any surety, endorser, or other guarantor in connection with the indebtedness or in connection with the creation of new or additional loans or obligations; (C) to resort for payment or to proceed directly or at once against any person, including Borrower or any other guarantor; (D) to proceed directly against or exhaust any collateral held by Lender from Borrower, any other guarantor, or any other person; (E) to give notice of the terms, time, and place of any public or private sale of personal property security held by Lender from Borrower or to comply with any other applicable provisions of the Uniform Commercial Code; (F) to pursue any other remedy with Lender's power; or (G) to commit any act or omission of any kind, or at any time, with respect to any matter whatsoever. In addition to the waivers set forth above, if now or hereafter Borrower is or shall become insolvent and the indebtedness shall not at all times until paid be fully secured by collateral pledged by Borrower, Guarantor hereby forever waives and gives up in favor of Lender and Borrower, and Lender's and Borrower's respective successors, any claim or right to payment Guarantor may now have or hereafter have or acquire against Borrower, by subrogation or otherwise, so that at no time shall Guarantor be or become a "creditor" of Borrower within the meaning of 11 U.S.C. section 547(b), or any successor provision of the Federal bankruptcy laws. Guarantor also waives any and all rights or defenses arising by reason of (A) any "one action" or "anti-deficiency" law or any other law which may prevent Lender from bringing any action, including a claim for deficiency, against Guarantor, before or after Lender's commencement or completion of any foreclosure action, either judicially or by exercise of a power of sale; (B) any election of remedies by Lender which destroys or otherwise adversely affects Guarantor's subrogation rights or Guarantor's rights to proceed against Borrower for reimbursement, including without imitation, any loss of rights Guarantor may suffer by reason of any law limiting qualifying, or discharging the indebtedness; (C) any disability or other defense of Borrower, of any other guarantor, or of any other person, or by reason of the cessation of Borrower's liability from any cause whatsoever, other than payment in full in legal tender, of the indebtedness; (D) any right to claim discharge of the indebtedness on the basis of impairment of any collateral for the indebtedness; (E) any statute of limitations, if at any time any action or suit brought by Lender against Guarantor is commenced, there is outstanding indebtedness of Borrower to Lender which is not barred by any applicable statute of limitations; (F) any defense given to guarantors at law or in equity other than actual payment and performance of the indebtedness; or (G) by any failure, neglect, or omission by Lender to perfect in any manner the collection of the indebtedness or the security given therefor, including the failure or omission to seek a deficiency judgment against Borrower. If payment is made by Borrower, whether voluntarily or otherwise, or by any third party, on the indebtedness and thereafter Lender is forced to remit the amount of that payment to Borrower's trustee in bankruptcy or to any similar person under any federal or state bankruptcy law for the relief of debtors, the indebtedness shall be considered unpaid for the purpose of the enforcement of this Guaranty. Guarantor further waives and agrees not to assert or claim at any time any deductions to the amount guaranteed under this Guaranty for any claim of setoff, counterclaim, counter demand, recoupment or similar right, whether such claim, demand or right may be asserted by the Borrower, the Guarantor, or both. GUARANTOR'S UNDERSTANDING WITH RESPECT TO WAIVERS. Guarantor warrants and agrees that each of the waivers set forth above is made with Guarantor's full knowledge of its significance and consequences and that, under the circumstances, the waivers are reasonable and not contrary to public policy or law. If any such waiver is determined to be contrary to any applicable law or public policy, such waiver shall be effective only to the extent permitted by law or public policy. SUBORDINATION OF BORROWER'S DEBTS TO GUARANTOR. Guarantor agrees that the indebtedness of Borrower to Lender, whether now existing or hereafter created, shall be superior to any claim that Guarantor may now have or hereafter acquire against Borrower, whether or not Borrower becomes insolvent, except for claims by Guarantor of reasonable compensation under the employment agreement with Borrower, a copy of which Guarantor has delivered to Lender herewith. Guarantor hereby expressly subordinates any claim Guarantor may have against Borrower, upon any account whatsoever, to any claim that Lender may now or hereafter have against Borrower. In the event of insolvency and consequent liquidation of the assets of Borrower, through bankruptcy, by an assignment for the benefit of creditors, by voluntary liquidation, or otherwise, the assets of Borrower applicab1e to the payment of the claims of both Lender and Guarantor shall be paid to Lender and shall be first applied by Lender to the indebtedness of Borrower to Lender. Guarantor does hereby assign to Lender all claims which it may have or acquire against Borrower or against any assignee or trustee in bankruptcy of Borrower; provided however, that such assignment shall be effective only for the purpose of assuring to Lender full payment in legal tender of the indebtedness. If Lender so requests, any notes or credit agreements now or hereafter evidencing any debts or obligations of Borrower to Guarantor shall be marked with a legend that the same are subject to this Guaranty and shall be delivered to Lender. Guarantor agrees, and Lender is hereby authorized, in the name of Guarantor, from time to time to execute and file financing statements and continuation statements and to execute such other documents and to take such other actions as Lender deems necessary or appropriate to perfect, preserve and enforce its rights under this Guaranty. MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Guaranty: Amendments. This Guaranty, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Guaranty. All prior and contemporaneous representations and discussions concerning such matters either are included in this document or do not constitute an aspect of the agreement of the parties. Except as may be specifically set forth in this Guaranty, no conditions precedent or subsequent, of any kind whatsoever, exist with respect to Guarantor's obligations under this Guaranty. No alteration of or amendment to this Guaranty shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment. Attorneys' Fees; Expenses. Guarantor agrees to pay upon demand all of Lender's costs and expenses, including Lender's reasonable attorneys' fees and Lender's legal expenses, incurred in connection with the enforcement of this Guaranty. Lender may hire or pay someone else to help enforce this Guaranty, and Guarantor shall pay the costs and expenses of such enforcement. Costs and expenses include Lender's attorneys' fees and legal expenses whether or not there is a lawsuit, including attorneys' fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Guarantor also shall pay all court costs and such additional fees as may be directed by the court. Caption Headings. Caption headings in this Guaranty are for convenience purposes only and are not to be used to interpret or define the provisions of this Guaranty. Governing Law. This Guaranty will be governed by, construed and enforced in accordance with federal law and the laws of the State of Oklahoma. This Guaranty has been accepted by Lender in the State of Oklahoma. Integration. Guarantor further agrees that Guarantor has read and fully understands the terms of this Guaranty; Guarantor has had the opportunity to be advised by Guarantor's attorney with respect to this Guaranty; the Guaranty fully reflects Guarantor's Intentions and parol evidence is not required to interpret the terms of this Guaranty. Guarantor hereby indemnifies and holds Lender harmless from all losses, claims, damages, and costs (including Lender's attorneys' fees) suffered or incurred by Lender as a result of any breach by Guarantor of the warranties, representations and agreements of this paragraph. Interpretation. In all cases where there is more than one Borrower or Guarantor, then all words used in this Guaranty in the singular shall be deemed to have been used in the plural where the context and construction so require; and where there is more than one Borrower named in this Guaranty or when this Guaranty is executed by more than one Guarantor, the words "Borrower" and "Guarantor" respectively shall mean all and any one or more of them. The words "Guarantor", "Borrower", and "Lender" include the heirs, successors, assigns, and transferees of each of them. If a court finds that any provision of this Guaranty is not valid or should not be enforced, that fact by itself will not mean that the rest of this Guaranty will not be valid or enforced. Therefore, a court will enforce the rest of the provisions of this Guaranty even if a provision of this Guaranty may be found to be invalid or unenforceable. If any one or more of Borrower or Guarantor are corporations, partnerships, limited liability companies, or similar entities, it is not necessary for Lender to inquire into the powers of Borrower or Guarantor or of the officers, directors, partners, managers, or other agents acting or purporting to act on their behalf, and any Loan indebtedness made or created in reliance upon the professed exercise of such powers shall be guaranteed under this Guaranty. Notices. To the extent permitted by applicable law, any notice required to be given under this Guaranty shall be given in writing, and, except for revocation notices by Guarantor, shall be effective when actually delivered, when actually received by telefacsimile (unless otherwise required by law), when deposited with a nationally recognized overnight courier, or, if mailed, when deposited in the United States mail, as first class, certified or registered mail postage prepaid, directed to the addresses shown near the beginning of this Guaranty. All revocation notices by Guarantor shall be in writing end shall be effective upon delivery to Lender as provided in the section of this Guaranty entitled "DURATION OF GUARANTY". Any party may change its address for notices under this Guaranty by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party's address. For notice purposes, Guarantor agrees to keep Lender informed at a11 times of Guarantor's current address. To the extent permitted by applicable law, if there is more than one Guarantor, any notice given by Lender to any Guarantor is deemed to be notice given to all Guarantors. No Waiver by Lender. Lender shall not be deemed to have waived any rights under this Guaranty unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Guaranty shall not prejudice or constitute a waiver of Lender's right otherwise to demand strict compliance with that provision or any other provision of this Guaranty. No prior waiver by Lender, nor any course of dealing between Lender and Guarantor, shall constitute a waiver of any of Lender's rights or of any of Guarantor's obligations as to any future transactions. Whenever the consent of Lender is required under this Guaranty, the granting of such consent by Lender in any instance shall not constitute continuing consent to subsequent instances where such consent is required and in all cases such consent may be granted or withheld in the sole discretion of Lender. Successors and Assigns. Subject to any limitations stated in this Guaranty on transfer of Guarantor's Interest, this Guaranty shall be binding upon and inure to the benefit of the parties, their successors and assigns. DEFINITIONS. The following capitalized words and terms shall have the following meanings when used in this Guaranty. Unless specifically stated to the contrary, all references to dollar amounts shall mean amounts in lawful money of the United States of America. Words and terms used in the plural singular shall include the plural, and the plural shall include the singular, as the context may require. Words and terms not otherwise defined in this Guaranty shall have the meanings attributed to such terms in the Uniform Commercial Code: Borrower. The word "Borrower" means Padko International, Incorporated; Chemical and Equipment Specialties, Inc.; Neal's Technology, Inc.; Plainsman Technology, Inc.; and Esses, Inc., and all other persons and entities signing the Note in whatever capacity. Collateral. The word "Collateral" means all property and assets granted as collateral security for any indebtedness, whether real or personal property, whether granted directly or indirectly, whether granted now or in the future, and whether granted in the form of a security interest, mortgage, collateral mortgage, deed of trust, assignment, pledge, crop pledge, chattel mortgage, collateral chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien, charge, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever, whether created by law, contract, or otherwise. Guarantor. The word "Guarantor" means each and every person or entity signing this Guaranty, including without limitation Glenn S. Penny. Guaranty. The word "Guaranty" means the guaranty from Guarantor to Lender, including without limitation a guaranty of all or part of the Note. Indebtedness. The word "Indebtedness" means Borrower's Indebtedness to Lender as more particularly described in this Guaranty. Lender. The word "Lender" means Legacy Bank, its successors and assigns. Related Documents. The words "Related Documents" mean all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, security deeds, collateral mortgages, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the indebtedness. GUARANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS COMMERCIAL GUARANTY AND GUARANTOR AGREES TO ITS TERMS. THIS COMMERCIAL GUARANTY IS DATED JANUARY 23, 2001. Guarantor: /s/ Glenn S. Penny Glenn S. Penny 3109 Stagestand Duncan, Oklahoma 73533 EX-10 7 bla103a.txt BUSINESS LOAN AGREEMENT 05/30/01 Exhibit 10.3 BUSINESS LOAN AGREEMENT Principal: $1,414,020.00 Loan Date: May 30, 2001 Maturity: May 29, 2002; Borrower: Chemical end Equipment Specialties, Inc. (TIN: 73-1591850); Neal's Technology, Inc. (TIN: 73-1512452); Padko International, Inc. (TIN: 73-1443489); Plainsman Technology, Inc. (TIN: 73-1218459); and Esses, Inc. (TIN: 73-1386155), PO Box 1006, Duncan, OK 73534. Lender: Legacy Bank, Legacy Bank Duncan North Branch, PO Box 1109, 2024 N. Hwy 81, Duncan, OK 73534-1109. THIS BUSINESS LOAN AGREEMENT dated May 30, 2001, is made and executed between Chemical end Equipment Specialties, Inc.; Neal's Technology, Inc.; Padko International, Inc.; Plainsman Technology, Inc.; and Esses, Inc. ("Borrower") and Legacy Bank ("Lender") on the following terms and conditions. Borrower has received prior commercial loans from Lender or has applied to Lender for a commercial loan or loans or other financial accommodations, including those which may be described on any exhibit or schedule attached to this Agreement ("Loan"). Borrower understands and agrees that: (A) in granting, renewing, or extending any Loan, Lender is relying upon Borrower's representations, warranties, and agreements as set forth in this Agreement, and (B) all such Loans shall be and remain subject to the terms and conditions of this Agreement. TERM. This Agreement shall be effective as of May 30, 2001, and shall continue in full force and effect until such time as all or Borrower's Loans in favor of Lender have been paid in full, including principal, interest, costs, expenses, attorneys' fees, and other fees and charges, or until May 29, 2002. CONDITIONS PRECEDENT TO EACH ADVANCE. Lender's obligation to make the initial Advance and each subsequent Advance under this Agreement shall be subject to the fulfillment to Lender's satisfaction of all of the conditions set forth in this Agreement and in the Related Documents. Loan Documents. Borrower shall provide to Lender the following documents for the Loan: (1) the Note; (2) Security Agreements granting to Lender security interests in the Collateral; (3) financing statements perfecting Lender's Security Interests; (4) evidence of insurance as required below; (5) guaranties; (6) together with all such Related Documents as Lender may require for the Loan; all in form and substance satisfactory to Lender and Lender's counsel. Borrower's Authorization. Borrower shall have provided in form and substance satisfactory to Lender properly certified resolutions, duly authorizing the execution and delivery of this Agreement, the Note and the Related Documents. In addition, Borrower shall have provided such other resolutions, authorizations, documents and instruments as Lender or its counsel, may require. Payment of Fees end Expenses. Borrower shall have paid to Lender all fees, charges, and other expenses which are then due and payable as specified in this Agreement or any Related Document. Representations and Warranties. The representations and warranties set forth in this Agreement, in the Related Documents, and in any document or certificate delivered to Lender under this Agreement are true and correct. No Event of Default. There shall not exist at the time of any Advance a condition which would constitute an Event of Default under this Agreement or under any Related Document. MULTIPLE BORROWERS. This Agreement has been executed by multiple obligors who are referred to in this Agreement individually, collectively and interchangeably as "Borrower". Unless specifically stated to the contrary, the word "Borrower" as used in this Agreement, including without limitation all representations, warranties and covenants, shall include all Borrowers. Borrower understands and agrees that, with or without notice to any one Borrower, Lender may (A) make one or more additional secured or unsecured loans or otherwise extend additional credit with respect to any other Borrower; (B) with respect to any other Borrower alter, compromise, renew, extend, accelerate, or otherwise change one or more times the time for payment or other terms of any indebtedness, including increases and decreases of the rate of interest on the indebtedness; (C) exchange, enforce, waive, subordinate, fail or decide not to perfect, and release any security, with or without the substitution of new collateral; (D) release, substitute, agree not to sue, or deal with any one or more of Borrower's or any other Borrower's sureties, endorsers, or other guarantors on any terms or in any manner Borrower may choose; (E) determine how, when and what application of payments and credits shall be made on any indebtedness; (F) apply such security and direct the order or manner of sale of any Collateral, including without limitation, any non-Judicial sale permitted by the terms of the controlling security agreement or deed of trust, as Lender in its discretion may determine; (G) sell, transfer, assign or grant participations in all or any part of the Loan; (H) exercise or refrain from exercising any rights against Borrower or others, or otherwise act or refrain from acting; (I) settle or compromise any indebtedness; and (J) subordinate the payment of all or any part of any of Borrower's indebtedness to Lender to the payment of any liabilities which may be due Lender or others. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as of the date of this Agreement, as of the date of each disbursement of loan proceeds, as of the date of any renewal, extension or modification of any Loan, and at all times any indebtedness exists: Organization. Chemical and Equipment Specialties, Inc. is a corporation for profit which is, and at all times shall be, duly organized, validly existing, and in good standing under and by virtue of the laws of the Stare of Oklahoma. Chemical and Equipment Specialties, Inc. is duly authorized to transact business in all other states in which Chemical and Equipment Specialties, Inc. is doing business, having obtained all necessary filings, governmental licenses and approvals for each state in which Chemical and Equipment Specialties, Inc. is doing business. Specifically, Chemical and Equipment Specialties, Inc. is, and at all times shall be, duly qualified as a foreign corporation in all stales in which the failure to so qualify would have a material adverse effect on its business or financial condition. Chemical and Equipment Specialties, Inc. has the full power and authority to own its properties and to transact the business in which it is presently engaged or presently proposes to engage. Chemical and Equipment Specialties, Inc. maintains its principle office at 3109 Stagestand, Duncan, OK 73634. Unless Chemical and Equipment Specialties, Inc. has designated otherwise in writing, this is the principle office at which Chemical and Equipment Specialties, Inc. keeps its books and records including its records concerning the Collateral. Chemical and Equipment Specialties, Inc. will notify Lender of any change in the location of Chemical and Equipment Specialties, Inc.'s principle office. Chemical and Equipment Specialties, Inc. shall do all things necessary to preserve and to keep in full force and effect its existence, rights and privileges, and shall comply with all regulations, rules, ordinances, statutes, orders and decrees of any governmental or quasi-governmental authority or court applicable to Chemica1 and Equipment Specialties, Inc. and Chemical and Equipment Specialties, Inc.'s business activities. Neal's Technology, Inc. is a corporation for profit which is, and at all times shall be, duly organized, validly existing, and in good standing under and by virtue of the laws of the State of Oklahoma. Neal's Technology, Inc. is duly authorized to transact business in all other states in which Neal's Technology, Inc. is doing business, having obtained all necessary filings, governmental licenses and approvals for such state in which Neal's Technology, Inc. is doing business. Specifically, Neal's Technology, Inc. is, and at all times shall be, duly qualified as a foreign corporation in all stales in which the failure to so qualify would have a material adverse effect on its business or financial condition. Neal's Technology, Inc. has the full power and authority to own its properties and to transact the business in which it is presently engaged or presently proposes to engage. Neal's Technology, Inc. maintains its principle office at 2515 South 42nd, Duncan. OK 73533. Unless Neal's Technology, Inc. has designated otherwise in writing, this is the principle office at which Neal's Technology, Inc. keeps its books and records including its records concerning the Collateral. Neal's Technology, Inc. will notify Lender of any change in the location of Neal's Technology, Inc.'s principle office. Neal's Technology, Inc. shall do all things necessary to preserve and to keep in full force and effect its existence, rights and privileges, and shall comply with all regulations, rules, ordinances, statutes, orders and decrees of any governmental or quasi-governmental authority or court applicable to Neal's Technology, Inc. and Neal's Technology, Inc.'s business activities. Padko International, Inc. is a corporation for profit which is, and at all times shall be, duly organized, validly existing, and in good standing under and by virtue of the laws of the State of Oklahoma. Padko International, Inc. is duly authorized to transact business in all other states in which Padko International, Inc. is doing business, having obtained all necessary filings, governmental licenses and approvals for each state in which Padko International, Inc. is doing business. Specifically, Padko International, Inc. is and at all times shall be, duly qualified as a foreign corporation in all stales in which the failure to so qualify would have a material adverse effect on its business or financial condition. Padko International, Inc. has the full power and authority to own its properties and to transact the business in which it is presently engaged or presently proposes to engage. Padko International, Inc. maintains its principle office at 15 North 9th, Duncan, OK 73533. Unless Padko International, Inc. has designated otherwise in writing, this is the principle office at which Padko International, Inc. keeps its books and records including its records concerning the Collateral. Padko International, Inc. will notify Lender of any change in the location of Padko International, Inc.'s principle office. Padko International, Inc. shall do all things necessary to preserve and to keep in full force and effect its existence, rights and privileges, and shall comply with all regulations, rules, ordinances, statutes, orders and decrees of any governmental or quasi-governmental authority or court applicable to Padko International, Inc. and Padko International, Inc.'s business activities. Plainsman Technology, Inc. is a corporation for profit which is, and at all times shall be, duly organized, validly existing, and in good standing under and by virtue of the laws of the State of Oklahoma. Plainsman Technology, Inc. is duly authorized to transact business in all other states in which Plainsman Technology, Inc. is doing business, having obtained all necessary filings, governmental licenses and approvals for each state in which Plainsman Technology, Inc. is doing business. Specifically, Plainsman Technology, Inc. is, and at all times shall be, duly qualified as a foreign corporation in all states in which the failure to so qualify would have a material adverse effect on its business or financial condition. Plainsman Technology, Inc. has the full power and authority to own its properties and to transact the business in which it is presently engaged or presently proposes to engage. Plainsman Technology, Inc. maintains its principle office at PO Box 557, Marlow, OK 73055. Unless Plainsman Technology, Inc. has designated otherwise in writing, this is the principle office at which Plainsman Technology, Inc. keeps its books and records including its records concerning the Collateral. Plainsman Technology, Inc. will notify Lender of any change in the location of Plainsman Technology, Inc.'s principle office. Plainsman Technology, Inc. shall do all things necessary to preserve and to keep in full force and effect its existence, rights and privileges, and shall comply with all regulations, rules, ordinances, statutes, order and decrees of any governmental or quasi-governmental authority or court applicable to Plainsman Technology, Inc. and Plainsman Technology, Inc.'s business activities. Esses, Inc. is a corporation for profit which is, and at all times shall be, duly organized, validly existing, and in good standing under and by virtue of the laws of the State of Oklahoma. Esses, Inc. is duly authorized to transact business in all other states in which Esses, Inc. is doing business, having obtained all necessary filings, governmental licenses and approvals for each state in which Esses, Inc. is doing business. Specifically, Esses, Inc. is, and at all times shall be, duly qualified as a foreign corporation in all states in which the failure to so qualify would have a material adverse effect on its business or financial condition. Esses, Inc. has the full power and authority to own its properties and to transact the business in which it is presently engaged or presently proposes to engage. Esses, Inc. maintains its principle office at 301 Industrial Dr., Duncan, OK 73533. Unless Esses, Inc. has designated otherwise in writing, this is the principle office at which Esses, Inc. keeps its books and records including its records concerning the Collateral. Esses, Inc. will notify Lender of any change in the location of Esses, Inc.'s principle office. Esses, Inc. shall do all things necessary to preserve and to keep in full force and effect its existence, rights and privileges, and shall comply with all regulations, rules, ordinances, statutes, orders and decrees of any governmental or quasi-governmental authority of court applicable to Esses, Inc. and Esses, Inc.'s business activities. Assumed Business Names. Borrower has filed or recorded all documents or filings required by law relating to all assumed business names used by Borrower. Excluding the name of Borrower, the following is a complete list of all assumed business names under which Borrower does business: None. Authorization. Borrower's execution, delivery, and performance of this Agreement and all the Related Documents have been duly authorized by all necessary action by Borrower and do not conflict with, result in a violation of, or constitute a default under (1) any provision of Esses, Inc.'s Articles of Incorporation or organization, or bylaws, or any agreement or other instrument binding upon Borrower or (2) any law, governmental regulation, court decree, or order applicable to Borrower or to Borrower's property. Financial Information. Each of Borrower's financial statements supplied to Lender truly and completely disclosed Borrower's financial condition as of the date of the statement, and there has been no material adverse change in Borrower's financial condition subsequent to the date of the most recent financial statement supplied to Lender. Borrower has no material contingent obligations except as disclosed in such financial statements. Legal Effect. This Agreement constitutes, and any instrument or agreement Borrower is required to give under this Agreement when delivered will constitute legal, valid, and binding obligations of Borrower enforceable against Borrower in accordance with their respective terms. Properties. Except as contemplated by this Agreement or as previously disclosed in Borrower's financial statements or in writing to Lender and as accepted by Lender, and except for property tax liens for taxes not presently due and payable, Borrower owns and has good title to all of Borrower's properties free and clear of all Security Interests, and has not executed any security documents or financing statements relating to such properties. All of Borrower's properties are titled in Borrower's legal name, and Borrower has not used, or filed a financing statement under, any other name for at least the last five (5) years. Hazardous Substances. Except as disclosed to and acknowledged by Lender in writing, Borrower represents and warrants that: (1) During the period of Borrower's ownership of Borrower's Collateral, there has been no use, generation, manufacture, storage, treatment, disposal, release or threatened release of any Hazardous Substance by any person on, under, about or from any other Collateral. (2) Borrower has no knowledge of, or reason to believe that there has been (a) any breach or violation of any Environmental Laws; (b) any use, generation, manufacture, storage, treatment, disposal, release or threatened release of any Hazardous Substance on, under, about or from the Collateral by any prior owners or occupants of any of the Collateral; or (c) any actual or threatened litigation or claims of any kind by any person relating to such matters. (3) Neither Borrower nor any tenant, contractor, agent or other authorized user of any of the Collateral, shall use, generate, manufacture, store, treat, dispose of or release any Hazardous Substance on, under, about or from any of the Collateral; and any such activity shall be conducted in compliance with all applicable federal, state, and local laws, regulations, and ordinances, including without limitation all Environmental Laws. Borrower authorizes Lender and its agents to enter upon the Collateral to make such inspections and tests as Lender may deem appropriate to determine compliance of the Collateral with this section of the Agreement. Any inspections or tests made by Lender shall be at Borrower's expense and for Lender's purposes only and shall not be construed to create any responsibility or liability on the part of Lender to Borrower or to any other person. The representations and warranties contained herein are based on Borrower's due diligence in investigating the Collateral for hazardous waste and Hazardous Substances. Borrower hereby (1) releases and waives any future claims against Lender for indemnity or contribution in the event Borrower becomes liable for cleanup or other costs under any such laws, and (2) agrees to indemnify and hold harmless Lender against any and all claims, losses, liabilities, damages, penalties, and expenses which Lender may directly or indirectly sustain or suffer resulting from a breech of this section of the Agreement or as a consequence of any use, generation, manufacture, storage, disposal, release or threatened release of a hazardous waste or substance on the Collateral. The provisions of this section of the Agreement, including obligation to indemnify, shall survive the payment of the indebtedness and the termination, expiration or satisfaction of this Agreement and shall not be affected by Lender's acquisition of any interest in any of the Collateral, whether by foreclosure or otherwise. Litigation and Claims. No litigation, claim, investigation, administrative proceeding or similar action (including those for unpaid taxes) against Borrower is pending or threatened, and no other event has occurred which may materially adversely affect Borrower's financial condition or properties, other than litigation, claims, or other events, if any, that have been disclosed to and acknowledged by Lender in writing. Taxes. To the best of Borrower's knowledge, all of Borrower's tax returns and reports that are or were required to be filed, have been filed, and all taxes, assessments and other governmental charges have been paid in full, except those presently being or to be contested by Borrower in good faith in the ordinary course of business and for which adequate reserves have been provided. Lien Priority. Unless otherwise previously disclosed to Lender in writing, Borrower has not entered into or granted any Security Agreements, or permitted the filing or attachment of any Security Interests on or affecting any of the Collateral directly or indirectly securing repayment of Borrower's Loan and Note, that would be prior or that may in any way be superior to Lender's Security Interests and rights in and to such Collateral. Binding Effect. This Agreement, the Note, all Security Agreements (if any), and Related Documents are binding upon the signers thereof, as well as upon their successors, representatives and assigns, and are legally enforceable in accordance with the respective terms. AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, so long as this Agreement remains in effect, Borrower will: Notices of Claims and Litigation. Promptly inform Lender in writing of (1) all material adverse changes in Borrower's financial condition, and (2) all existing and all threatened litigation, claims, investigations, administrative proceedings or similar actions affecting Borrower or any Guarantor which could materially affect the financial condition of Borrower or the financial condition of any Guarantor. Financial Records. Maintain its books and records in accordance with GAAP, applied on a consistent basis, and permit Lender to examine and audit Borrower's books and records at all reasonable times. Financial Statements. Furnish Lender with the following: Annual Statements. As soon as available, but in no event later than thirty 30) days after the end of each fiscal year, Borrower's balance sheet and income statement for the year ended, prepared by Borrower. Interim Statements. As soon as available, but in no event later than thirty (30) days after the end of each month, Borrower's balance sheet and profit and loss statement for the period ended, prepared by Borrower. Tax Returns. As soon as available, but in no event later than thirty (30) days after the applicable filing date for the tax reporting period ended, Federal and other governmental tax returns, prepared by a certified public accountant satisfactory to Lender. Additional Requirements. Monthly account receivables aging and inventory balances provided on the 15th of the following month. All financial reports required to be provided under this Agreement shall be prepared in accordance with GAAP, applied on a consistent basis, and certified by Borrower as being true and correct. Additional Information. Furnish such additional information and statements, as Lender may request from time to time. Insurance. Maintain fire and other risk insurance, pubic liability insurance, and such other insurance as Lender may require with respect to Borrower's properties and operations, in form, amounts, coverages and with insurance companies acceptable to Lender. Borrower, upon request of Lender, will deliver to Lender from time to time the policies or certificates of insurance in form satisfactory to Lender, including stipulations that coverages will not be cancelled or diminished without at least ten (10) days prior written notice to Lender. Each insurance policy also shall include an endorsement providing that coverage in favor of Lender will not be impaired in any way by any act, omission or default of Borrower or any other person. In connection with all policies covering assets in which Lender holds or is offered a security interest for the Loans, Borrower will provide Lender with such Lender's loss payable or other endorsements as Lender may require. Insurance Reports. Furnish to Lender, upon request of Lender, reports on each existing insurance policy showing such information as Lender may reasonably request, including without limitation the following: (1) the name of the insurer; (2) the risks insured; (3) the amount of the policy; (4) the properties insured; (5) the then current property values on the basis of which insurance has been obtained, and the manner of determining those values; and (6) the expiration date of the policy. In addition, upon request of Lender (however not more often than annually), Borrower will have an independent appraiser satisfactory to Lender determine, as applicable, the actual cash value or replacement cost of any Collateral. The cost of such appraisal shall be paid by Borrower. Guaranties. Prior to disbursement of any Loan proceeds, furnish executed guaranties of the Loans in favor of Lender, executed by the guarantor named below, on Lender's forms, and in the amount and under the conditions set forth in those guaranties. Name of Guarantor, Glenn S. Penny; Amount, Unlimited Other Agreements. Comply with all terms and conditions of all other agreements, whether now or hereafter existing, between Borrower and any other party and notify Lender immediately in writing of any default in connection with any other such agreements. Loan Proceeds. Use all Loan proceeds solely for Borrower's business operations, unless specifically consented to the contrary by Lender in writing. Taxes, Charges and Liens. 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. Performance. Perform and comply, in a timely manner, with all terms, conditions, and provisions set forth in this Agreement, in the Related Documents, and in all other instruments and agreements between Borrower and Lender. Borrower shall notify Lender immediately in writing of any default in connection with agreement. Operations. Maintain executive and management personnel with substantially the same qualifications and experience as the present executive and management personnel; provide written notice to Lender of any change in executive and management personnel; conduct its business affairs in a reasonable and prudent manner. Environmental Studies. Promptly conduct and complete, at Borrower's expense, all such investigations, studies, samplings and testings as may be requested by Lender or any governmental authority relative to any substance, or any waste or by-product of any substance defined as toxic or a hazardous substance under applicable federal, state, or local law, rule, regulation, order or directive, at or affecting any property or any facility owned, leased or used by Borrower. Compliance with Governmental Requirements. Comply with all laws, ordinances, and regulations, now or hereafter in effect, of all governmental authorities applicable to the conduct of Borrower's properties, businesses and operations, and to the use or occupancy of the Collateral. Inducing without limitation, the Americans With Disabilities Act. Borrower may contest in good faith any such law, ordinance, or regulation and withhold compliance during any proceeding, including appropriate appeals, so long as Borrower has notified Lender in writing prior to doing so and so long as, in Lender's sole opinion, Lender's interests in the Collateral are not jeopardized. Lender may require Borrower to post adequate security or a surety bond, reasonably satisfactory to Lender, to protect Lender's interest. Inspection. Permit employees or agents of Lender at any reasonable time to inspect any and all Collateral for the Loan or Loans and Borrower's other properties and to examine or audit Borrower's books, accounts, and records and to make copies and memoranda of Borrower's books, accounts, and records. If Borrower now or at any time hereafter maintains any records (including without limitation computer generated records and computer software programs for the generation of such records) in the possession of a third party, Borrower, upon request of Lender, shall notify such party to permit Lender free access to such records at all reasonable times and to provide Lender with copies of any records it may request, all at Borrower's expense. Compliance Certificates. Unless waived in writing by Lender, provide Lender at least annually, with a certificate executed by Borrower's chief financial officer, or other officer or person acceptable to Lender, certifying that the representations and warranties set forth in this Agreement are true and correct as of the date of the certificate and further certifying that, as of the date of the certificate, no Event of Default exists under this Agreement. Environmental Compliance and Reports. Borrower shall comply in all respects with any and all Environmental Laws; not cause or permit to exist, as a result of an intentional or unintentional action or omission on Borrower's part or on the part of any third party, on property owned and/or occupied by Borrower, any environmental activity where damage may result to the environment, unless such environmental activity is pursuant to and in compliance with the conditions of a permit issued by the appropriate federal, state or local governmental authorities; shall furnish to Lender promptly and in any event within thirty (30) days after receipt thereof a copy of any notice, summons, lien, citation, directive, letter or other communication from any governmental agency or instrumentality concerning any intentional or unintentional action or omission on Borrower's part in connection with any environmental activity whether or not there is damage to the environment and/or other natural resources. Additional Assurances. Make, execute and deliver to Lender such promissory notes, mortgages, deeds of trust, security agreements, assignments, financing statements, instruments, documents and other agreements as Lender or its attorneys may reasonably request to evidence and secure the Loans and to perfect all Security Interests. RECOVERY OF ADDITIONAL COSTS. If the imposition of or any change in any law, rule, regulation or guideline, or the interpretation or application of any thereof by any court or administrative or governmental authority (including any request or policy not having the force of law) shall impose, modify or make applicable any taxes (except federal, state or local income or franchise taxes imposed on Lender), reserve requirements, capital adequacy requirements or other obligations which would (A) increase the cost to Lender for extending or maintaining the credit facilities to which this Agreement relates, (B) reduce the amounts payable to Lender under this Agreement or the Related Documents, or (c) reduce the rate of return on Lender's capital as a consequence of Lender's obligations with respect to the credit facilities to which this Agreement relates, then Borrower agrees to pay Lender such additional amounts as will compensate Lender therefore, within five (5) days and Lender's written demand for such payment, which demand shall be accompanied by an explanation of such imposition or charge and a calculation in reasonable detail of the additional amounts payable by Borrower, which explanation and calculations shall be conclusive in the absence of manifest error. LENDER'S EXPENDITURES. If any action or proceeding is commenced that would materially affect Lender's interest in the Collateral or if Borrower fails to comply with any provision of this Agreement or any Related Documents, including but not limited to Borrower's failure to discharge or pay when due any amounts Borrower is required to discharge or pay under this Agreement or any Related Documents, Lender on Borrower's behalf may (but shall not be obligated to) take any action that Lender deems appropriate, including but not limited to discharging or paying all taxes, liens, security interests, encumbrances and other claims, at any time levied or placed on any Collateral and paying all costs for insuring, maintaining and preserving any Collateral. All such expenditures incurred or paid by Lender for such purposes will then bear interest at the rate charged under the Note or at the highest rate authorized by law, from the date incurred or paid by Lender to the date of repayment by Borrower. All such expenses will become a part of the indebtedness and, at the Lender's option, will (A) be payable on demand; (B) be added to the balance of the Note and be apportioned among and be payable with any installment payments to become due during either (1) the term of any applicable insurance policy; or (2) the remaining term of the Note; or (C) be treated as a balloon payment which will be due and payable at the Note's maturity. If Lender is required by law to give Borrower notice before or after Lender makes an expenditure, Borrower agrees that notice sent by regular mail at least five (5) days before the expenditure or notice delivered two (2) days before the expenditure is made is sufficient, and that notice within sixty (60) days after the expenditure is made is reasonable. Negative Covenants. Borrower covenants and agrees with Lender that while this Agreement is in effect, Borrower shall not, without the prior written consent of Lender: Indebtedness and Liens. (1) Except for trade debt incurred in the normal course of business and indebtedness to Lender contemplated by this Agreement, create, incur or assume indebtedness for borrowed money, including capital leases, (2) sell, transfer, mortgage, assign, pledge, lease, grant a security interest in, or encumber any of Borrower's assets (except as allowed as Permitted Liens), or (3) sell with recourse any of Borrower's accounts, except to Lender. Additional Financial Restrictions. This revolving line of credit is limited to 60% of current account receivables (those less than 90 days old) plus 60% of the current inventory balance. This loan shall vary up and down depending on the monthly balances of the A/R and inventory. This loan shall not exceed $1,400,000. This note's interest rate may adjust up or down quarterly beginning three (3) months from the date of the note. Continuity of Operations. (1) Engage in any business activities substantially different than those in which Borrower is presently engaged, (2) cease operations, liquidate, merge, transfer, acquire or consolidate with any other entity, change its name, dissolve or transfer or sell Collateral out of the ordinary course of business, or (3) pay any dividends on Borrower's stock (other than dividends payable in its stock), provided, however that not withstanding the foregoing, but only so long as no Event of Default has occurred and is continuing or would result from the payment of dividends, if Borrower is a "Subchapter S Corporation" (as defined in the Internal Revenue Code of 1986, as amended), Borrower may pay cash dividends on its stock to its shareholders from time to time in amounts necessary to enable the shareholders to pay income taxes and made estimated income tax payments to satisfy their liabilities under federal and state law which arise solely from their status as Shareholders of a Subchapter S Corporation because of their ownership of shares of Borrower's stock or purchase or retire any of the Borrower's outstanding shares or alter or amend Borrower's capital structure. Loans, Acquisitions and Guaranties. (1) Loan, invest in or advance money or assets, (2) purchase, create or acquire any interest in any other enterprise or entity, or (3) incur any obligation as surety or guarantor other than in the ordinary course of business. CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to Borrower, whether under this Agreement or under any other agreement, Lender shall have no obligation to make Loan Advances or to disburse Loan proceeds if: (A) Borrower or any Guarantor is in default under the terms of this Agreement or any of the Related Documents or any other agreement that Borrower or any Guarantor has with Lender; (B) Borrower or any Guarantor dies, becomes incompetent or becomes insolvent, files a petition in bankruptcy or similar proceedings, or is adjudged a bankrupt; (C) there occurs a material adverse change in Borrower's financial condition, in the financial condition of any Guarantor, or in the value of any Collateral securing any Loan; or (D) any Guarantor seeks, claims or otherwise attempts to limit, modify or revoke such Guarantor's guaranty of the Loan or any other loan with Lender; or (E) Lender in good faith deems itself insecure, even though no Event of Default shall have occurred. RIGHT OF SETOFF. To the extent permitted by applicable law, Lender reserves a right of setoff in all Borrower's accounts with Lender (whether checking, savings, or some other account). This includes all accounts Borrower holds jointly with someone else and all accounts Borrower may open in the future. However, this does not include any IRA or Keogh accounts, or any trust accounts for which setoff would be prohibited by law. Borrower authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on the Indebtedness against any and all such accounts, and, at Lender's option, to administratively freeze all such accounts to allow Lender to protect Lender's charge and setoff rights provided in this paragraph. DEFAULT. Each of the following shall constitute an Event of Default under this Agreement: Payment Default. Borrower fails to make any payment when due under the Loan. Other Defaults. Borrower fails to comply with or to perform any other term, obligation, covenant or condition contained in this Agreement or in any of the Related Documents or to comply with or to perform any term, obligation, covenant or condition contained in any other agreement between Lender and Borrower. Default in Favor of Third Parties. Borrower or any Grantor defaults under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower's or any Grantor's properly or Borrower's or any Grantor's ability to repay the Loans or perform their respective obligations under this Agreement or any of the Related Documents. False Statements. Any warranty, representation or statement made or furnished to Lender by Borrower or on Borrower's behalf under this Agreement, the Note, or the Related Documents is false or misleading in any material respect, either now or at the time made or furnished or becomes false or misleading at any time thereafter. Insolvency. The dissolution or termination of Borrower's existence as a going business, the insolvency of Borrower, the appointment of a receiver for any pan of Borrower's property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Borrower. Defective Collateralization. This Agreement or any of the Related Documents ceases to be in full force and effect (including failure of any collateral document to create a valid and perfected security interest or lien) at any time and for any reason. Defective Collateralization. This Agreement or any of the related documents ceases to be in full force and effect (including failure of any collateral document to create a valid and perfected security interest or lien) or at any time and for any reason. Creditor or Forfeiture Proceedings. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Borrower or by any governmental agency against any collateral securing the Loan. This includes a garnishment of any of Borrower's accounts, including deposit accounts, with Lender. However, this Event of Default shall not apply if there is a good faith dispute by Borrower as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture proceeding and if Borrower gives Lender written notice of the creditor or forfeiture proceeding and deposits with Lender monies or a surety bond for the creditor or forfeiture proceeding, in an amount determined by Lender, in its sole discretion, as being an adequate reserve or bond for the dispute. Events Affecting Guarantor. Any of the preceding events occurs with respect to any Guarantor of any of the indebtedness or any Guarantor dies or becomes incompetent, or revokes or disputes the validity of, or liability under, any Guaranty of the Indebtedness. In the event of a death, Lender, at its option, may, but shall not be required to, permit the Guarantor's estate to assume unconditionally the obligations arising under the guaranty in a manner satisfactory to Lender, and, in doing so, cure any Event of Default. Change in Ownership. Any change in ownership of twenty-five percent (25%) or more of the common stock of Borrower. Adverse Change. A material adverse change occurs in Borrower's financial condition, or Lender believes the prospect of payment or performance of the Loan is impaired. Insecurity. Lender in good faith believes itself insecure. Right to Cure. If any default, other than a default on indebtedness, is curable and if Borrower or Grantor, as the case may be, has not been given a notice of a similar default within the preceding twelve (12) months, it may be cured (and no Event of Default will have occurred) if Borrower or Grantor, as the case may be, after receiving written notice from Lender demanding cure of such default: (1) cure the default within ten (10) days; or (2) if the cure requires more than ten (10) days, immediately initiate steps which Lender deems in Lender's sole discretion to be sufficient to cure the default and thereafter continue and complete all reasonable and necessary steps sufficient to produce compliance as soon as reasonably practical. EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except where otherwise provided in this Agreement or the Related Documents, all commitments and obligations or Lender under this Agreement or the Related Documents or any other agreement immediately will terminate (including any obligation to make further Loan Advances or disbursements), and, at Lender's option, all indebtedness immediately will become due and payable, all without notice of any kind to Borrower, except that in the case of an Event of Default of the type described in the "Insolvency" subsection above, such acceleration shall be automatic and not optional. In addition, Lender shall have all the rights and remedies provided in the Related Documents or available at law, in equity, or otherwise. Except as may be prohibited by applicable law, all of Lender's rights and remedies shall be cumulative and may be exercised singularly or concurrently. Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Borrower or of any Grantor shall not affect Lender's right to declare a default and to exercise its rights and remedies. MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Agreement: Amendments. This Agreement, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Agreement. All prior and contemporaneous representations and discussions concerning such matters either are Included in this document or do not constitute an aspect of the agreement of the parties. Except as may be specifically set forth in this Agreement, no conditions precedent or subsequent, of any kind whatsoever, exist with respect to Borrower's obligations under this Agreement. No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment. Attorney's Fees; Expenses. Borrower agrees to pay upon demand all of Lender's costs and expenses, including Lender's attorneys' fees and Lender's legal expenses, incurred in connection with the enforcement of this Agreement. Lender may hire or pay someone else to help enforce this Agreement, and Borrower shall pay the costs and expenses of such enforcement. Costs and expenses include Lender's attorneys' fees and legal expenses whether or not there is a lawsuit, including attorneys' fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Borrower also shall pay all court costs and such additional fees as may be directed by the court. Caption Headings. Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Agreement. Consent to Loan Participation. Borrower agrees and consents to Lender's sale or transfer, whether now or later, of one or more participation interests in the Loan to one or more purchasers, whether related or unrelated to Lender. Lender may provide, without any limitation whatsoever, to any one or more purchasers, or potential purchasers, any information or knowledge Lender may have about Borrower or about any other matter relating to the Loan, and Borrower hereby waives any rights to privacy Borrower may have with respect to such matters. Borrower additionally waives any and all notices of sale of participation interests, as well as all notices of any repurchase of such participation interests. Borrower also agrees that the purchasers of any such participation interests will be considered as the absolute owners of such interests in the Loan and will have all the rights granted under the participation agreement or agreements governing the sale of such participation interests. Borrower further waives all rights of offset or counterclaim that it may have now or later against Lender or against any purchaser of such a participation interest and unconditionally agrees that either Lender or such purchaser may enforce Borrower's obligation under the Loan irrespective of the failure or insolvency of any holder of any interest in the Loan. Borrower further agrees that the purchaser of any such participation interests may enforce its interests irrespective of any personal claims or defenses that Borrower may have against Lender. Governing Law. This Agreement will be governed by, construed and enforced in accordance with federal law and the laws of the State of Oklahoma. This Agreement has been accepted by Lender in the State of Oklahoma. Joint and Several Liability. All obligations of Borrower under this Agreement shall be joint and several, and all references to Borrower shall mean each and every Borrower. This means that each Borrower signing below is responsible for all obligations in this Agreement. Where anyone or more of the parties is a corporation, partnership, limited liability company or similar entity, it is not necessary for Lender to inquire into the powers of any of the officers, directors, partners, members, or other agents acting or purporting to act on the entity's behalf, and any obligations made or created in reliance upon the professed exercise of such powers shall be guaranteed under this Agreement. No Waiver by Lender. Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender's right otherwise to demand strict compliance with that provision or any other provision of this Agreement. No prior waiver by Lender, nor any course of dealing between Lender and Borrower, or between Lender and any Grantor, shall constitute a waiver of any of Lender's rights or of any of Borrower's or any Grantor's obligations as to any future transactions. Whenever the consent of Lender is required under this Agreement, the granting of such consent by Lender In any instance shall not constitute continuing consent to subsequent instances where such consent is required and in all cases such consent may be granted or withheld in the sole discretion of Lender. Notices. To the extent permitted by applicable law, any notice required to be given under this Agreement shall be given in writing, and shall be effective when actually delivered, when actually received by telefacsimile (unless otherwise required by law), when deposited with a nationally recognized overnight courier, or, if mailed, when deposited in the United States mail, as first class, certified or registered mail postage prepaid, directed to the addresses shown near the beginning of this Agreement. Any party may change its address for notices under this Agreement by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party's address. For notice purposes, Borrower agrees to keep Lender informed at all times of Borrower's current address. To the extent permitted by applicable law, if there is more than one Borrower, any notice given by Lender to any Borrower is deemed to be notice given to all Borrowers. Severability. If a court of competent jurisdiction finds any provision of this Agreement to be illegal, invalid, or unenforceable as to any person or circumstance, that finding shall not make the offending provision illegal, invalid, or unenforceable as to any other person or circumstance. If feasible, the offending provision shall be considered modified so that it becomes legal, valid and enforceable. If the offending provision cannot be so modified, it shall be considered deleted from this Agreement. Unless otherwise required by law, the illegality, invalidity, or unenforceability of any provision of this Agreement shall not affect the legality, validity or enforceability of any other provision of this Agreement. Subsidiaries and Affiliates of Borrower. To the extent the context of any provisions of this Agreement makes it appropriate, including without limitation any representation, warranty or covenant, the word "Borrower" as used in this Agreement shall include all of Borrower's subsidiaries and affiliates. Notwithstanding the foregoing however, under no circumstances shall this Agreement be construed to require Lender to make any Loan or other financial accommodation to any of Borrower's subsidiaries or affiliates. Successors and Assigns. All covenants and agreements contained by or on behalf of Borrower shall bind Borrower's successors and assigns and shall inure to the benefit of Lender and its successors and assigns. Borrower shall not, however, have the right to assign Borrower's rights under this Agreement or any interest therein, without the prior written consent of Lender. Survival of Representations and Warranties. Borrower understands and agrees that in extending Loan Advances, Lender is relying on all representations, warranties, and covenants made by Borrower in this Agreement or in any certificate or other instrument delivered by Borrower to Lender under this Agreement or the Related Documents. Borrower furl her agrees that regardless of any investigation made by Lender, all such representations, warranties and covenants will survive the extension of Loan Advances and delivery to Lender of the Related Documents, shall be continuing in nature, shall be deemed made and related by Borrower at the time each Loan Advance is made, and shall remain in full force and effect until such time as Borrower's Indebtedness shall be paid in full, or until this Agreement shall be terminated in the manner provided above, `whichever is the last to occur. Time is of the Essence. Time is of the essence in the performance of this Agreement. DEFINITIONS. The following capitalized words and terms shall have the following meanings when used in this Agreement. Unless specifically stated to the contrary, all references to dollar amounts shall mean amounts in lawful money of the United States of America. Words and terms used in the singular shall include the plural, and the plural shall include the singular, as the context may require. Words and terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code. Accounting words and terms not otherwise defined in this Agreement shall have the meanings assigned to them in accordance with generally accepted accounting principles as in effect on the date of this Agreement: Advance. The word "Advance" means a disbursement of Loan funds made, or to be made, to Borrower or on Borrower's behalf on a line of credit or multiple advance basis under the terms and conditions of this Agreement. Agreement. The word "Agreement" means this Business Loan Agreement, as this Business Loan Agreement may be amended or modified from time to time, together with all exhibits and schedules attached to this Business Loan Agreement from time to time. Borrower. The word "Borrower" means Chemical and Equipment Specialties, Inc.; Neal's Technology, Inc.; Padko International, Inc.; Plainsman Technology, Inc.; and Esses, Inc., and all other persons and entities signing the Note in whatever capacity. Collateral. The word "Collateral" means all property and assets granted as collateral security for a Loan, whether real or personal property, whether granted directly or indirectly, whether granted now or in the future, and whether granted in the form of a security interest, mortgage, collateral mortgage, deed of trust, assignment, pledge, crop pledge, chattel mortgage, collateral chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien, charge, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever, whether created by law, contract, or otherwise. Environmental Laws. The words "Environmental Laws" mean any and all state, federal and local statutes, regulations and ordinances relating to the protection of human health or the environment, including without limitation the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, 42 U.S.C. Section 9601, et seq. ("CERCLA"), the Superfund Amendments and Reauthorization Act of 1986, Pub. L. No. 99-499 ("SARA"), the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., or other applicable state or federal laws, rules, or regulations adopted pursuant thereto. Event of Default. The words "Event of Default" mean any of the events of default set forth in this Agreement in the default section of this Agreement. GAAP. The word "GAAP" means generally accepted accounting principles. Grantor. The word "Grantor" means each and all of the persons or entitles granting a Security Interest in any Collateral for the Loan, including without limitation all Borrowers granting such a Security Interest. Guarantor. The word "Guarantor" means any guarantor, surety, or accommodation party of any or all of the Loan. Guaranty. The word "Guaranty" means the guaranty from Guarantor to Lender, including without limitation a guaranty of all or part of the Note. Hazardous Substances. The words "Hazardous Substances" mean materials that, because of their quantity, concentration or physical, chemical or infectious characteristics, may cause or pose a present or potential hazard to human health or the environment when improperly used, treated, stored, disposed of, generated, manufactured, transported or otherwise handled. The words "Hazardous Substances" are used in their very broadest sense and include without limitation any and all hazardous or toxic substances, materials or waste as defined by or listed under the Environmental Laws. The term "Hazardous Substances" also includes, without limitation, petroleum and petroleum by-products or any fraction thereof and asbestos. Indebtedness. The word "Indebtedness" means the indebtedness evidenced by the Note or Related Documents, including all principal and interest together with all other indebtedness and costs and expenses for which Borrower is responsible under this Agreement or under any of the Related Documents. Lender. The word "Lender" means Legacy Bank, its successors and assigns. Loan. The word "Loan" means any and all loans and financial accommodations from Lender to Borrower whether now or hereafter existing, and however evidenced, including without limitation those loans and financial accommodations described herein or described on any exhibit or schedule attached to this Agreement from time to time. Note. The word "Note" means the Note executed by Borrower in the principal amount of $1,414,020.00 dated May 30, 2001, together with all renewals of, extensions of, modifications of, refinancings of, consolidations of, and substitutions for the note or credit agreement. Permitted Liens. The words "Permitted Liens" mean (1) liens and security interests securing indebtedness owed by Borrower to Lender; (2) liens for taxes, assessments, or similar charges either not yet due or being contested in good faith; (3) liens of materialmen, mechanics, warehousemen, or carriers, or other like liens arising in the ordinary course of business and securing obligations which are not yet delinquent; (4) purchase money liens or purchase money security interests upon or in any property acquired or held by Borrower in the ordinary course of business to secure indebtedness outstanding on the date of this Agreement or permitted to be incurred under the paragraph of this Agreement titled "Indebtedness and Liens"; (5) liens and security interests which, as of the date of this Agreement, have been disclosed to and approved by the Lender in writing; and (6) those liens and security interests which in the aggregate constitute an immaterial and insignificant monetary amount with respect to the net value of Borrower's assets. Related Documents. The words "Related Documents" mean all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, security deeds, collateral mortgages, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the Loan. Security Agreement. The words "Security Agreement" mean and include without limitation any agreements, promises, covenants, arrangements, understandings or other agreements, whether created by law, contract, or otherwise, evidencing, governing, representing, or creating a Security Interest. Security Interest. The words "Security Interest" mean, without limitation, any and all types of collateral security, present and future, whether in the form of a lien, charge, encumbrance, mortgage, deed of trust, security deed, assignment, pledge, crop pledge, chattel mortgage, collateral chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever whether created by law, contract, or otherwise. BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS BUSINESS LOAN AGREEMENT AND BORROWER AGREES TO ITS TERMS. THIS BUSINESS LOAN AGREEMENT IS DATED MAY 30, 2001. BORROWER: CHEMICAL AND EQUIPMENT SPECIALTIES, INC. By: Glenn S. Penny, President of Chemical and Equipment Specialties, Inc. By: Tom D. Morton, Chief Financial Officer of Chemical and Equipment Specialties, Inc. NEAL'S TECHNOLOGY, INC. By: Glenn S. Penny, President of Neal's Technology, Inc. By: Tom D. Morton, Chief Financial Officer of Neal's Technology, Inc. PADKO INTERNATIONAL, INC. By: Glenn S. Penny, President of Padko International, Inc. By: Tom D. Morton, Chief Financial Officer of Padko International, Inc. PLAINSMAN TECHNOLOGY, INC. By: Glenn S. Penny, President of Plainsman Technology, Inc. By: Tom D. Morton, Chief Financial Officer of Plainsman Technology, Inc. ESSES, INC. By: Glenn S. Penny, President of Esses, Inc. By: Tom D. Morton, Chief Financial Officer of Esses, Inc. LENDER: LEGACY BANK By: Authorized Signer EX-10 8 pn103b.txt PROMISSORY NOTE - 05/31/01 PROMISSORY NOTE Borrower: Chemical and Equipment Specialties, Inc. (TIN: 73-1581850); Neal's Technology, Inc. (TIN: 73-1512452); Padko International, Inc. (TIN: 73-144348i); Plainsman Technology, Inc. (TIN: 73-121845i); and Esses, Inc. (TIN: 73-1386155) PO Box 1008 Duncan, OK 73534 Lender: Legacy Bank Legacy Bank Duncan North Branch PO Box 1101 2O24 N. Hwy 81 Duncan, OK 73534-1101 Principal Amount: $1,414,020.00 Initial Rate: 8.250% Date of Note: May 30, 2001. PROMISE TO PAY. Chemical and Equipment Specialties, Inc.; Neal's Technology, Inc.; Padko International, Inc.; Plainsman Technology, Inc.; and Esses, Inc. ("Borrower") jointly and severally promise to pay to Legacy Bank ("Lender"), or order, in lawful money of the United States of America, the principal amount of One Million Four Hundred Fourteen Thousand Twenty & 00/100 Dollars ($1,414,020.00) or so much as may be outstanding, together with interest on the unpaid outstanding principal balance of each advance. Interest shall be calculated from the date of each advance until repayment of each advance. PAYMENT. Borrower will pay this loan on demand. Payment in full is due immediately upon Lender's demand. If no demand is made, Borrower will pay this loan in one payment of all outstanding principal plus all accrued unpaid interest on May 29, 2002. In addition, Borrower will pay regular monthly payments of all accrued unpaid interest due as of each payment date, beginning June 30, 2001, with all subsequent interest payments to be due on the same day of each month after that. Unless otherwise agreed or required by applicable law, payments will be applied first to any unpaid collection costs and any late charges, then to any unpaid interest, and any remaining amount to principal. The annual interest rate for this Note is computed on a 365/360 basis that is, by applying the ratio of the annual interest rate over a year of 360 days, multiplied by the outstanding principal balance, multiplied by the actual number of days the principal balance is outstanding. Borrower will pay Lender at Lender's address shown above or at such other place as Lender may designate in writing. VARIABLE INTEREST RATE. The interest rate on this Note is subject to change from time to time based on changes in an Independent Index which is the minimum prime lending rate for large U.S. Money Center Commercial banks as published in the Money Rate Section of the Wall Street Journal (the "Index"). The Index is not necessarily the lowest rate charged by Lender on its loans. If the Index becomes unavailable during the term of this loan, Lender may designate a substitute Index after notice to Borrower. Lender will tell Borrower the current Index rate upon Borrower's request. The interest rate change will not occur more often than each quarter. Borrower understands that Lender may make loans based on other rates as well. The Index currently is 7.000% per annum. The interest rate to be applied to the unpaid principal balance of this Note will be at a rate of 1.250 percentage points over the Index, resulting in an initial rate of 8.250% per annum. NOTICE: Under no circumstances will the interest rate on this Note be more than the maximum rate allowed by applicable law. PREPAYMENT. Borrower agrees that all loan fees and other prepaid finance charges are earned fully as of the date of the loan and will not be subject to refund upon early payment (whether voluntary or as a result of default), except as otherwise required by law. Except for the foregoing, Borrower may pay without penalty all or a portion of the amount owed earlier than it is due. Early payments will not, unless agreed to by Lender in writing, relieve Borrower of Borrower's obligation to continue to make payments of accrued unpaid interest. Rather, early payments will reduce the principal balance due. Borrower agrees not to send Lender payments marked "paid in full", "without recourse", or similar language. If Borrower sends such a payment, Lender may accept it without losing any of Lender's rights under this Note, and Borrower will remain obligated to pay any further amount owed to Lender. All written communications concerning disputed amounts, including any check or other payment instrument that indicates that the payment constitutes "payment in full" of the amount owed or that is tendered with other conditions or limitations or as full satisfaction of a disputed amount must be mailed or delivered to: Legacy Bank, Legacy Bank Duncan North Branch, PO Box 1109, 2024 N. Hwy 81, Duncan, OK 73534-1109. LATE CHARGE. If a payment is 11 days or more late, Borrower will be charged 5.000% of the unpaid portion of the regularly scheduled payment or $20.00, whichever is greater. INTEREST AFTER DEFAULT. Upon default, including failure to pay upon final maturity, Lender, at its option, may, if permitted under applicable law, increase the variable interest rate on this Note to 21.000% per annum. The interest rate will not exceed the maximum rate permitted by applicable law. DEFAULT. Each of the following shall constitute an event of default ("Event of Default under this Note. Payment Default. Borrower fails to make any payment when due under this Note. Other Defaults. Borrower fails to comply with or to perform any other term, obligation, covenant or condition contained in this Note or in any of the related documents or to comply with or to perform any term, obligation, covenant or condition contained in any other agreement between Lender and Borrower. Default in Favor of Third Parties. Borrower or any Grantor defaults under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower's property or Borrower's ability to repay this Note or perform Borrower's obligations under this Note or any of the related documents. False Statements. Any warranty, representation or statement made or furnished to Lender by Borrower or on Borrower's behalf under this Note or the related documents is false or misleading in any material respect, either now or at the time made or furnished or becomes false or misleading at any time thereafter. Insolvency. The dissolution or termination of Borrower's existence as a going business, the insolvency of Borrower, the appointment of a receiver for any part of Borrower's property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Borrower. Creditor or Forfeiture Proceedings. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Borrower or by any governmental agency against any collateral securing the loan. This includes a garnishment of any of Borrower's accounts, inducing deposit accounts, with Lender. However, this Event of Default shall not apply if there is a good faith dispute by Borrower as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture proceeding and if Borrower gives Lender written notice of the creditor or forfeiture proceeding and deposits with Lender monies or a surety bond for the creditor or forfeiture proceeding, in an amount determined by Lender, in its sole discretion, as being an adequate reserve or bond for the dispute. Events Affecting Guarantor. Any of the preceding events occurs with respect to any Guarantor of any of the indebtedness or any Guarantor dies or becomes incompetent, or revokes or disputes the validity of, or liability under, any guaranty of the indebtedness evidenced by this Note. In the event of a death, Lender, at its option, may, but shall not be required to, permit the Guarantor's estate to assume unconditionally the obligations arising under the guaranty in a manner satisfactory to Lender, and, in doing so, cure any Event of Default. Change in Ownership. Any change in ownership of twenty-five percent (25%) or more of the common stock of Borrower. Adverse Change. A material adverse change occurs in Borrower's financial condition, or Lender believes the prospect of payment or performance of this Note is impaired. Insecurity. Lender in good faith believes itself insecure. Cure Provisions. If any default, other than a default in payment is curable and if Borrower has not been given a notice of a breach of the same provision of this Note within the preceding twelve (12) months, it may be cured (and no event of default would have occurred) if Borrower, after receiving written notice from Lender demanding cure of such default: (1) cures the default within ten (10) days; or (2) if the cure requires more than ten (10) days, immediately initiates steps which Lender deems in Lender's sole discretion to be sufficient to cure the default and thereafter continues and completes all reasonable and necessary steps sufficient to produce compliance as soon as reasonably practical. LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal balance on this Note and all accrued unpaid interest immediately due, and then Borrower will pay that amount. ATTORNEYS' FEES; EXPENSES. Lender may hire or pay someone else to help collect this Note if Borrower does not pay. Borrower will pay Lender that amount. This includes, subject to any amounts under applicable law, Lender's attorneys' fees and Lender's legal expenses, whether or not there is a lawsuit, including without limitation all attorneys' fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), and appeals. If not prohibited by applicable law, Borrower also will pay any court costs, in addition to all other sums provided by law. GOVERNING LAW. This Note will be governed by, construed and enforced in accordance with federal law and the laws of the State of Oklahoma. This Note has been accepted by Lender in the State of Oklahoma. DISHONORED ITEM FEE. Borrower will pay a fee to Lender of $20.00 if Borrower makes a payment on Borrower's loan and the check or other payment order including any preauthorized charge with which Borrower pays is later dishonored. RIGHT OF SETOFF. To the extent permitted by applicable law, Lender reserves a right of setoff in all Borrower's accounts with Lender (whether checking, savings, or some other account). This includes all accounts Borrower holds jointly with someone else and all accounts Borrower may open in the future. However, this does not include any IRA or Keogh accounts, or any trust accounts for which setoff would be prohibited by law. Borrower authorizes Lender to the extent permitted by applicable law, to charge or setoff all sums owing on the indebtedness against any and all such accounts, and, at Lender's option, to administratively freeze all such accounts to allow Lender to protect Lender's charge and setoff rights provided in this paragraph. COLLATERAL. Borrower acknowledges this Note is secured by, in addition to any other collateral, a security agreement dated January 23, 2001 and filed on January 30, 2001 in Oklahoma County and a security agreement dated May 30, 2001 and filed in Stephens and Oklahoma County and all terms and conditions are hereby incorporated and made a part of this note. LINE OF CREDIT. This Note evidences a revolving line of credit. Advances under this Note, as well as directions for payment from Borrower's accounts, may be requested orally or in writing by Borrower or by an authorized person. Lender may, but need not, require that all oral requests be confirmed in writing. Borrower agrees to be liable for all sums either: (A) advanced in accordance with the instructions of an authorized person or (B) credited to any of Borrower's accounts with Lender. The unpaid principal balance owing on this Note at any time may be evidenced by endorsements on this Note or by Lender's internal records, including daily computer print-outs. Lender will have no obligation to advance funds under this Note if: (A) Borrower or any guarantor is in default under the terms of this Note or any agreement that Borrower or any guarantor has with Lender, including any agreement made in connection with the signing of this Note; (B) Borrower or any guarantor ceases doing business or is insolvent; (C) any guarantor seeks, claims or otherwise attempts to limit, modify or revoke such guarantor's guarantee of this Note or any other loan with Lender; (D) Borrower has applied funds provided pursuant to this Note for purposes other than those authorized by Lender; or (E) Lender in good faith believes itself insecure. SUCCESSOR INTERESTS. The terms of this Note shall be binding upon Borrower, and upon Borrower's heirs, personal representatives, successors and assigns, and shall inure to the benefit of Lender and its successors and assigns. NOTIFY US OF INACCURATE INFORMATION WE REPORT TO CONSUMER REPORTING AGENCIES. Please notify us if we report any inaccurate information about your account(s) to a consumer reporting agency. Your written notice describing the specific inaccuracy(ies) should be sent to us at the following address: Credit Bureau Services, PO Box 1370, Buffalo, NY 14231-1370. GENERAL PROVISIONS. This Note is payable on demand. The inclusion of specific default provisions or rights of Lender shall not preclude Lender's right to declare payment of this Note on its demand. Lender may delay or forgo enforcing any of its rights or remedies under this Note without losing them, Each Borrower understands and agrees that, with or without notice to Borrower, Lender may with respect to any other Borrower (a) make one or more additional secured or unsecured loans or otherwise extend additional credit; (b) alter, compromise, renew, extend, accelerate, or otherwise change one or more times the time for payment or other terms any indebtedness, including increases and decreases of the rate of interest on the indebtedness; (c) exchange, enforce, waive, subordinate, fail or decide not to perfect, and release any security, with or without the substitution of new collateral; (d) apply such security and direct the order or manner of sale thereof, including without limitation, any non-judicial sale permitted by the terms of the controlling security agreements, as Lender in its discretion may determine; (e) release, substitute, agree not to sue, or deal with any one or more of Borrower's sureties. endorsers, or other guarantors on any terms or in any manner Lender may choose; and (f) determine how, when and what application of payments and credits shall be made on any other indebtedness owing by such other Borrower. Borrower and any other person who signs, guarantees or endorses this Note, to the extent allowed by law, waive presentment, demand for payment, and notice of dishonor. Upon any change in the terms of this Note, and unless otherwise expressly stated in writing, no party who signs this Note, whether as maker, guarantor, accommodation maker or endorser, shall be released from liability. All such parties agree that Lender may renew or extend (repeatedly and for any length of time) this loan or release any party or guarantor or collateral; or impair, fail to realize upon or perfect Lender's security interest in the collateral; and take any other action deemed necessary by Lender without the consent of or notice to anyone. All such parties also agree that Lender may modify this loan without the consent of or notice to anyone other than the party with whom the modification is made. The obligations under this Note are joint and several. PRIOR TO SIGNING THIS NOTE, EACH BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. EACH BORROWER AGREES TO THE TERMS OF THE NOTE. BORROWER ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THIS PROMISSORY NOTE. BORROWER: CHEMICAL AND EQUIPMENT SPECIALTIES, INC. By: Glenn S. Penny, President of Chemical and Equipment Specialties, Inc. By: Tom D. Morton, Chief Financial Officer of Chemical and Equipment Specialties, Inc. NEAL'S TECHNOLOGY, INC. By: Glenn S. Penny, President of Neal's Technology, Inc. By: Tom D. Morton, Chief Financial Officer of Neal's Technology, Inc. PADKO INTERNATIONAL, INC. By: Glenn S. Penny, President of Padko International, Inc. By: Tom D. Morton, Chief Financial Officer of Padko International, Inc. PLAINSMAN TECHNOLOGY, INC. By: Glenn S. Penny, President of Plainsman Technology, Inc. By: Tom D. Morton, Chief Financial Officer of Plainsman Technology, Inc. ESSES, INC. By: Glenn S. Penny, President of Esses, Inc. By: Tom D. Morton, Chief Financial Officer of Esses, Inc. EX-10 9 sanner104a.txt PROMISSORY NOTE - TODD SANNER Exhibit 10.4 PROMISSORY NOTE $500,000.00 Duncan, Oklahoma January 23, 2001 FOR VALUE RECEIVED, the undersigned, Chemical & Equipment, Specialties, Inc. ('Maker'), promises to pay to the order of John Todd Sanner ('Payee'), the principal sum of FIVE HUNDRED THOUSAND DOLLARS ($500,000.00), together with interest per annum at nine percent (9%), which principal sum and interest are due and payable in installments in lawful money of the United States as follows: (a) Interest. Interest on the unpaid balance of principal, from the date hereof until paid in full, shall be paid in quarterly installments on the last day of March, June, September and December of each year commencing on March 31, 2001, and ending on December 31, 2005 (b) Principal. Principal payments shall be made in four (4) annual installments of $100,000 each, payable on the 22nd day of January of each year, commencing on January 22, 2002, and ending on January 22, 2006. (c) Final Installment. A final installment representing the remaining principal amount plus any unpaid interest shall be due and payable on January 22, 2006. At the option of the holder, the unpaid balance of this note and all other obligations of Maker to the holder, whether direct or indirect, absolute or contingent, now existing or hereafter arising, shall become immediately due and payable without notice or demand upon the occurrence or existence of any of the following events or conditions: (a) Any payment required by this note or by any other note or obligation of Maker to holder or to others is not made when due and such non-payment is not cured by Maker within sixty (60) days of written notice of such non-payment given by the holder to Maker; (b) Maker defaults in performance of any covenant, obligation, warranty or provision contained in any agreement or in any instrument or document securing or relating to this note or any other note or obligation of Maker to holder or holders; (c) Any warranty, representation, financial information or statement made or furnished to Payee by or in behalf of Maker proves to have been false in any material respect when made or furnished; (d) Failure by Maker to pay any indebtedness at maturity, or the occurrence of any event which results in acceleration of the maturity of indebtedness of Maker to holder or to others under any promissory note, agreement or undertaking; (e) Death, dissolution, or termination of existence of any maker; (f) Upon the termination of any holder of this note who is employed by the Maker pursuant to a written employment contract if such termination is not for cause. For the purposes hereof, 'for cause' termination shall be for any of the following reasons: willfully misappropriating the property of Maker or committing any other act of dishonesty or breach of trust resulting in or intended to result directly or indirectly in gain to the Payee at the expense of Maker; engaging in personal misconduct which materially injures Maker; violating any law or regulation relating to the business of Maker which results in material injury to Maker; or failing to substantially perform his duties as an employee in a manner consistent with prudent business practices, in each case as determined in good faith by the board of directors of Maker; (g) Appointment of a receiver over any part of the property of any maker, the assignment of property by any maker for the benefit of creditors, or the commencement of any proceedings under any bankruptcy or insolvency laws by or against any party liable, directly or indirectly, hereunder; or (h) the making of any levy against or seizure, garnishment or attachment of any asset of Maker or any guarantor. No waiver of any payment or other right under this note or any related agreement shall operate as a waiver of any other payment or right. In the event a default occurs and this note is placed in the hands of an attorney for collection, or suit filed thereon, Maker agrees to pay, in addition to the unpaid principal and interest, attorney fees equal to 15% of the unpaid balance of principal and interest due hereon. This note and the obligations evidenced hereby are to be construed and governed by the laws of the State of Oklahoma. It is the intent of the holder and the Maker to conform strictly to the usury laws of the State of Oklahoma, and any interest on the principal sum hereof in excess of that allowed by such usury laws shall be subject to reduction to the maximum amount of interest allowed under such laws. If any interest in excess of the maximum amount of interest allowable by the usury laws is inadvertently paid to the holder, at any time, any such excess interest shall be refunded by the holder to the party or parties entitled to the same after receiving notice of payment of such excess interest. This note shall be subject to that certain Subordination Agreement executed by John Todd Sanner and Chemical & Equipment Specialties, Inc., an Oklahoma Corporation, on the 23rd day of January, 2001, addressed to Legacy Bank. The Maker, endorsers, sureties, guarantors, and all other persons who may become liable for all or any part of this obligation, severally waive presentment for payment, protest and notice of nonpayment. Such parties consent to any extension of time (whether one or more) of payment hereof, any renewal (whether one or more) hereof, and to any release of any party liable for payment of this obligation. Any such extension, renewal or release may be made without notice to any such party and without discharging such party's liability hereunder. This note has been executed with and pursuant to that certain Stock Purchase Agreement dated the 15th day of December, 2000, wherein Payee is one of the 'Sellers' and which provide in paragraph 8.1 thereof that Payee is to indemnify and hold Maker harmless in the event of and in respect to certain liability or claims. In the event of any occurrence of any of the liability or claims described therein, Maker may, at its option, offset any reimbursement which may be owed by Payee to Maker pursuant to said Stock Purchase Agreement against any payments which may be owed by Maker to Payee under this note. This note may be prepaid, in whole or in part, at any time, without penalty. Executed this 23rd day of January, 2001. Chemical & Equipment Specialties, Inc. /s/ Glenn Penny -------------------------------------- By: Glenn Penny, President MAKER EX-10 10 schott105a.txt PROMISSORY N- EARL SCHOTT Exhibit 10.5 PROMISSORY NOTE $500,000.00 Duncan, Oklahoma January 23, 2001 FOR VALUE RECEIVED, the undersigned, Chemical & Equipment, Specialties, Inc. ("Maker"), promises to pay to the order of Earl E. Schott ("Payee"), the principal sum of FIVE HUNDRED THOUSAND DOLLARS ($500,000.00), together with interest per annum at nine percent (9%), which principal sum and interest are due and payable in installments in lawful money of the United States as follows: (a) Interest. Interest on the unpaid balance of principal, from the date hereof until paid in full, shall be paid in quarterly installments on the last day of March, June, September and December of each year commencing on March 31, 2001, and ending on December 31, 2005 (b) Principal. Principal payments shall be made in four (4) annual installments of $100,000 each, payable on the 22nd day of January of each year, commencing on January 22, 2002, and ending on January 22, 2006. (c) Final Installment. A final installment representing the remaining principal amount plus any unpaid interest shall be due and payable on January 22, 2006. At the option of the holder, the unpaid balance of this note and all other obligations of Maker to the holder, whether direct or indirect, absolute or contingent, now existing or hereafter arising, shall become immediately due and payable without notice or demand upon the occurrence or existence of any of the following events or conditions: (a) Any payment required by this note or by any other note or obligation of Maker to holder or to others is not made when due and such non-payment is not cured by Maker within sixty (60) days of written notice of such non-payment given by the holder to Maker; (b) Maker defaults in performance of any covenant, obligation, warranty or provision contained in any agreement or in any instrument or document securing or relating to this note or any other note or obligation of Maker to holder or holders; (c) Any warranty, representation, financial information or statement made or furnished to Payee by or in behalf of Maker proves to have been false in any material respect when made or furnished; (d) Failure by Maker to pay any indebtedness at maturity, or the occurrence of any event which results in acceleration of the maturity of indebtedness of Maker to holder or to others under any promissory note, agreement or undertaking; (e) Death, dissolution, or termination of existence of any maker; (f) Upon the termination of any holder of this note who is employed by the Maker pursuant to a written employment contract if such termination is not for cause. For the purposes hereof, "for cause" termination shall be for any of the following reasons: willfully misappropriating the property of Maker or committing any other act of dishonesty or breach of trust resulting in or intended to result directly or indirectly in gain to the Payee at the expense of Maker; engaging in personal misconduct which materially injures Maker; violating any law or regulation relating to the business of Maker which results in material injury to Maker; or failing to substantially perform his duties as an employee in a manner consistent with prudent business practices, in each case as determined in good faith by the board of directors of Maker; (g) Appointment of a receiver over any part of the property of any maker, the assignment of property by any maker for the benefit of creditors, or the commencement of any proceedings under any bankruptcy or insolvency laws by or against any party liable, directly or indirectly, hereunder; or (h) the making of any levy against or seizure, garnishment or attachment of any asset of Maker or any guarantor. No waiver of any payment or other right under this note or any related agreement shall operate as a waiver of any other payment or right. In the event a default occurs and this note is placed in the hands of an attorney for collection, or suit filed thereon, Maker agrees to pay, in addition to the unpaid principal and interest, attorney fees equal to 15% of the unpaid balance of principal and interest due hereon. This note and the obligations evidenced hereby are to be construed and governed by the laws of the State of Oklahoma. It is the intent of the holder and the Maker to conform strictly to the usury laws of the State of Oklahoma, and any interest on the principal sum hereof in excess of that allowed by such usury laws shall be subject to reduction to the maximum amount of interest allowed under such laws. If any interest in excess of the maximum amount of interest allowable by the usury laws is inadvertently paid to the holder, at any time, any such excess interest shall be refunded by the holder to the party or parties entitled to the same after receiving notice of payment of such excess interest. This note shall be subject to that certain Subordination Agreement executed by Earl E. Schott and Chemical & Equipment Specialties, Inc., an Oklahoma Corporation, on the 23rd day of January, 2001, addressed to Legacy Bank. The Maker, endorsers, sureties, guarantors, and all other persons who may become liable for all or any part of this obligation, severally waive presentment for payment, protest and notice of nonpayment. Such parties consent to any extension of time (whether one or more) of payment hereof, any renewal (whether one or more) hereof, and to any release of any party liable for payment of this obligation. Any such extension, renewal or release may be made without notice to any such party and without discharging such party's liability hereunder. This note has been executed with and pursuant to that certain Stock Purchase Agreement dated the 15th day of December, 2000, wherein Payee is one of the "Sellers" and which provide in paragraph 8.1 thereof that Payee is to indemnify and hold Maker harmless in the event of and in respect to certain liability or claims. In the event of any occurrence of any of the liability or claims described therein, Maker may, at its option, offset any reimbursement which may be owed by Payee to Maker pursuant to said Stock Purchase Agreement against any payments which may be owed by Maker to Payee under this note. This note may be prepaid, in whole or in part, at any time, without penalty. Executed this 23rd day of January, 2001. Chemical & Equipment Specialties, Inc. /s/ Glenn Penny ----------------------------------- By: Glenn Penny, President MAKER EX-21 11 ex21subs.txt LIST OF SUBSIDIARIES Exhibit 21.1 Flotek Industries, Inc. List of Subsidiaries Chemical & Equipment Specialties, Inc. Oklahoma Corporation Esses, Inc. Oklahoma Corporation Plainsman Technology, Inc. Oklahoma Corporation Neal's Technology, Inc. Oklahoma Corporation Material Translogistics, Inc. Texas Corporation Padko International, Inc. Oklahoma Corporation Petrovalve International, Inc. Alberta Corporation Petrovalve, Inc. Delaware Corporation USA Petrovalve, Inc. Texas Corporation Turbeco, Inc. Texas Corporation Trinity Tool, Inc. Texas Corporation Petrovalve Int'l (Barbados) Inc. Barbados Corporation EX-99.3 12 ex991.txt PROFORMA STATEMENT OF OPERATIONS - EX. 99.1 Exhibit 99.1 Flotek Industries, Inc. Unaudited Pro Forma Combined Statement of Operations For the Year Ended December 31, 2001 Basis of Presentation Flotek Industries, Inc. (the "Company" or "Flotek") merged with Chemical & Equipment Specialties, Inc. ("CESI") on October 31, 2001 (the "Merger"). The Company accounted for the Merger as a "reverse" acquisition of Flotek Industries, Inc. by CESI in accordance with the purchase method of accounting. The purchase price was allocated first to the fair value of Flotek's assets acquired and liabilities assumed based on management's estimates of fair value, with the excess purchase price recorded to goodwill. Prior to the Merger, CESI acquired Material Translogistics, Inc. ("MTI") in June 2001. The unaudited pro forma combined statement of operations for the year ended December 31, 2001 gives effect to (1) the Merger and (2) the acquisition of MTI, as if they had occurred on January 1, 2001. In accordance with Statement of Financial Accounting Standards ("SFAS") No. 141, there have been no pro forma adjustments for amortization of goodwill attributable to the Merger as it was initiated after June 30, 2001 and amortization of goodwill is not required for business combinations initiated after that date. The unaudited pro forma combined financial statements presented herein do not purport to represent what the Company's results of operations actually would have been had such events occurred at the beginning of the periods presented, as assumed, or to project the Company's results of operations for any future period or the future results of any of the acquired businesses. The following unaudited pro forma combined statement of operations should be read in conjunction with the audited consolidated financial statements of the Company for the year ended December 31, 2001 included in the Company's Annual Report of Form 10-KSB for the year ended December 31, 2001.
Flotek Industries, Inc. Unaudited Pro Forma Combined Statement of Operations For the Year Ended December 31, 2001 Material Flotek Translogistics, Industries, Pro Forma Pro Forma As Reported Inc. (1) Inc. (2) Adjustments Combined ----------- ----------- ------------- ------------ ----------- Revenues.......................... $12,561,499 $ 349,107 $ 3,071,843 $ - $15,982,449 Cost of sales..................... 9,078,121 234,758 1,465,184 - 10,778,063 Selling, general and administrative................. 3,767,873 100,611 1,437,709 - 5,306,193 Depreciation and amortization..... 744,305 - 88,384 20,372 (a) 853,061 Research and development.......... 34,938 - 74,712 - 109,650 ----------- --------- ----------- ----------- ----------- Total expenses................. 13,625,237 335,369 3,065,989 20,372 17,046,967 Operating income (loss)........ (1,063,738) 13,738 5,854 (20,372) (1,064,518) Interest expense.................. (415,431) 872 (20,332) (22,500) (b) (457,391) Interest income................... 43,819 - - - 43,819 Other income (expense)............ 27,415 - 7,635 - 35,050 ----------- ----------- ----------- ----------- ----------- Pre-tax income (loss).......... (1,407,935) 14,610 (6,843) (42,872) (1,443,040) Income tax expense................ - - - - - ----------- ----------- ----------- ----------- ----------- Net income (loss)................ $(1,407,935) $ 14,610 $ (6,843) $ (42,872) $(1,443,040) =========== =========== =========== ============ =========== Basic and diluted pro forma net loss per share.................................................. $(0.30) ====== Shares used in computing pro forma loss per share............................................... 4,850,696 =========
1) Amounts for Material Translogistics, Inc. ("MTI") are for the six month period ended June 30, 2001 prior to the acquisition by CESI. No income tax expense was recorded for MTI as the earnings were taxable directly to the shareholder. 2) Amounts for Flotek Industries, Inc. are for the ten month period ended October 31, 2001. Amounts for the months of November and December 2001 are included in the consolidated statement of operations as reported. See accompanying basis of presentation and notes to unaudited pro forma combined financial statements. Flotek Industries, Inc. Notes to Unaudited Pro Forma Combined Statement of Operations For the Year Ended December 31, 2001 Unaudited pro forma combined statement of operations adjustments (a) Records additional goodwill amortization of $20,372 arising from the acquisition of MTI using an estimated life of 20 years. In accordance with SFAS No. 141, there was no pro forma adjustment to goodwill amortization expense relating to the Merger of CESI and Flotek, as the Merger was initiated after June 30, 2001 and amortization of goodwill is not required for business combinations initiated after that date. (b) Records additional interest expense of $22,500 associated with borrowings to finance the cash portion of the consideration paid by CESI to acquire MTI. EX-99.3 13 ex992.txt PROFORMA COMPARISON - EX. 99.2 Exhibit 99.2 Flotek Industries, Inc. Unaudited Pro Forma Combined Statements of Operations Supplementary Information on Operating Segments For the Years Ended December 31, 2001 and 2000 Basis of Presentation Flotek Industries, Inc. (the "Company" or "Flotek") merged with Chemical & Equipment Specialties, Inc. ("CESI") on October 31, 2001 (the "Merger"). The Company accounted for the Merger as a "reverse" acquisition of Flotek by CESI in accordance with the purchase method of accounting. The purchase price was allocated first to the fair value of Flotek's assets acquired and liabilities assumed based on management's estimates of fair value, with the excess purchase price recorded to goodwill. Prior to the Merger, the business of Flotek consisted of the Downhole Equipment segment, as described below. CESI was incorporated on June 27, 2000 to acquire businesses in the Specialty Chemical and Equipment Manufacturing segments of the oilfield service industry. It had no revenues or operations prior to the acquisitions of Esses, Inc., Plainsman Technology, Inc., Neal's Technology, Inc., and Padko International, Inc. in January 2001. It subsequently acquired Material Translogistics, Inc. in June 2001. These five companies are referred to as the "CESI Acquired Businesses." The unaudited pro forma combined statements of operations give effect to (1) the acquisition of the CESI Acquired Businesses by CESI and (2) the Merger, as if they had occurred on January 1, 2000. In accordance with Statement of Financial Accounting Standards ("SFAS") No. 141, there have been no pro forma adjustments for amortization of goodwill attributable to the Merger as it was initiated after June 30, 2001 and amortization of goodwill is not required for business combinations initiated after that date. The Company's product lines are divided into three segments within the oilfield service industry: o The Specialty Chemicals segment develops, manufactures, packages and sells chemicals used in oil and gas well cementing, stimulation and production. o The Equipment Manufacturing segment designs and manufactures specialized cementing and stimulation equipment, including heavy vehicles used for pressure pumping, blending and bulk material transport. This segment also designs, constructs and manages automated bulk material handling and loading facilities for other oilfield service companies. o The Downhole Equipment segment manufactures and markets the Petrovalve line of downhole pump components and the Turbeco line of casing centralizers. The supplementary information on operating segments has been consistently prepared using the accounting policies of the Company. The unaudited pro forma combined statements of operations and the supplementary information on operating segments presented herein do not purport to represent what the Company's results of operations actually would have been had such events occurred at the beginning of the periods presented, as assumed, or to project the Company's results of operations for any future period or the future results of any of the acquired businesses. The following unaudited pro forma combined statement of operations and supplementary operating segment data should be read in conjunction with the audited financial statements for the years ended December 31, 2001 and 2000, and the unaudited pro forma combined statement of operations for the year ended December 31, 2001 (Exhibit 99.1), both included in the Registrant's Annual Report on Form 10-KSB for the year ended December 31, 2001, and the financial statements and other information included in Item 7, Financial Statements and Exhibits, in the Registrant's Current Report on Form 8-K/A filed on January 16, 2002,
Flotek Industries, Inc. Unaudited Pro Forma Combined Statements of Operations Supplementary Information on Operating Segments For the Years Ended December 31, 2001 and 2000 For the Year Ended December 31, 2001 (Unaudited): Specialty Equipment Downhole Chemicals Manufacturing Equipment Corporate Total Revenues........................... $7,329,596 $5,233,039 $3,419,814 $ - $15,982,449 Cost of sales...................... 4,296,781 4,820,056 1,661,226 - 10,778,063 ---------- ---------- ---------- --------- ---------- Gross margin.................... 3,032,815 412,983 1,758,588 - 5,204,386 ---------- ---------- ---------- --------- ---------- Selling, general, and admin........ 1,418,903 1,391,978 1,227,100 1,268,212 5,306,193 Depreciation and amortization...... 500,324 169,623 82,822 100,292 853,061 Research and development........... - 28,521 81,129 - 109,650 ---------- ---------- ---------- --------- ---------- Total expenses.................. 1,919,227 1,590,122 1,391,051 1,368,504 6,268,904 ---------- ---------- ---------- --------- ---------- Operating income................ 1,113,588 (1,177,139) 367,537 (1,368,504) (1,064,518) ---------- ---------- ---------- --------- ---------- Interest expense................... (62,392) (73,273) (48,691) (273,035) (457,391) Interest income.................... 1,871 748 - 41,200 43,819 Other income (expense)............. 20,435 - 11,934 2,681 35,050 --------- ---------- --------- --------- ---------- Other income (expense).......... (40,086) (72,525) (36,757) (229,154) (378,522) --------- ---------- --------- --------- ---------- Pre-tax income.................. $1,073,502 $(1,249,664) $ 330,780 $(1,597,658) $(1,443,040) ========== ========== ========== ========== ===========
For the Year Ended December 31, 2000 (Unaudited):
Specialty Equipment Downhole Chemicals Manufacturing Equipment Corporate Total Revenues .......................... $ 6,607,998 $ 2,095,614 $ 2,981,408 $ - $11,685,020 Cost of sales ..................... 3,779,392 956,639 1,394,284 - 6,130,315 ----------- ----------- ----------- ----------- ----------- Gross margin ...................... 2,828,606 1,138,975 1,587,124 - 5,554,705 ----------- ----------- ----------- ----------- ----------- Selling, general, and admin ....... 1,173,233 657,306 1,052,270 746,174 3,628,983 Depreciation and amortization ..... 490,105 170,527 83,428 29,941 774,001 Research and development .......... - - 21,079 - 21,079 ----------- ----------- ----------- ----------- ----------- Total expenses 1,663,338 827,833 1,156,777 776,115 4,424,063 ----------- ----------- ----------- ----------- ----------- Operating income................ 1,165,268 311,142 430,347 (776,115) 1,130,642 ----------- ----------- ----------- ----------- ----------- Interest expense................... (31,060) (22,876) (42,829) (468,097) (564,862) Interest income.................... 44 752 - 49,658 50,454 Other income (expense)............. 2,443 - 37,553 14,937 54,933 ----------- ----------- ----------- ----------- ----------- Other income (expense).......... (28,573) (22,124) (5,276) (403,502) (459,475) ----------- ----------- ----------- ----------- ----------- Pre-tax income.................. $ 1,136,695 $ 289,018 $ 425,071 $(1,179,617) $ 671,167 =========== ========== =========== =========== ===========
See the accompanying basis of presentation -----END PRIVACY-ENHANCED MESSAGE-----