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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark one)
[X] Annual Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended December 31, 1999, or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ______ to ______.
Commission File No. 0-13401
PHOENIX MEDICAL TECHNOLOGY, INC.
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(exact name of Registrant as specified in its charter)
Delaware 31-092-9195
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(State or other jurisdic- (I.R.S. Employer
tion of incorporation Identification No.)
or organization)
181 Route 521 West,
P.O. Box 346
Andrews, South Carolina 29510
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(Address of principal executive offices) (Zip Code)
(843) 221-5100
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(Registrant's telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, without par value
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Title of Class
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [ ]
Trading in the Registrant's Common Stock has been very limited since 1991. The
Registrant's Commom Stock has been listed sporadically in
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the National Quotation Bureau's "Pink Sheets" and, since November 17, 1998, has
been quoted on the OTC Bulletin Board. Based on a per share price of $.4375, the
average of bid and ask prices of the Common Stock on March 18, 2000, the
aggregate market value of shares of the Common Stock held by non-affiliates was
$776,184.
The Registrant's revenues for the fiscal year ended December 31, 1999 were
$13,138,306.
Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes [X] No [ ]
The number of issued and outstanding shares of the issuer's no par value Common
Stock, its only outstanding class of Common Stock, as of March 15, 2000 was
2,459,621.
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
Items incorporated by reference: None
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
The Registrant was organized as an Ohio corporation under the name
"Phoenix Glove Company" in March 1978 and commenced vinyl glove manufacturing
operations on a limited basis in February 1979. In January 1984 the Registrant
reincorporated as a Delaware corporation and changed its name to Phoenix Medical
Technology, Inc. All references in this Report to the "Registrant" are to
Phoenix Medical Technology, Inc. and its predecessor unless otherwise indicated
by the context.
The Registrant primarily manufactures and markets single use gloves for
use in various applications where clean, protective handcovers are important,
such as the medical market, beauty and barber shops, food processing,
electronics and computer assembly, photo finishing and janitorial services. The
Registrant manufactures vinyl, nitrile and latex gloves.
During 1999 five of the Registrant's six glovemaking machines operated.
Not all five machines operated continually, but four machines generally operated
24 hours per day on a five-day a week basis. The Registrant's vinyl and
latex/nitrile glove manufacturing machines operated at approximately 70% and 67%
of their five-day capacity, respectively, in 1999.
The Registrant markets its products primarily to medical and industrial
supply companies. These supply companies frequently resell the Registrant's
products under their private labels. The Registrant has focused on serving these
supply companies as an independent product source and generally does not make
direct sales to end users.
On December 22, 1997, the Registrant entered into an Option Agreement
with London International Group, Inc. ("LIG"), pursuant to which LIG purchased,
at an option purchase price of $500,000, an option to purchase substantially all
of the Registrant's assets and assume certain stated liabilities for a cash
purchase price of $6,821,708, subject to adjustments as defined in the
agreement. This option expired on April 28, 1999. In addition, the Registrant
and LIG entered into a Loan and Security Agreement, a Research and Development
Agreement and a Supply Agreement. The Option Agreement and release of the option
purchase price to the Registrant were approved by the Registrant's stockholders
at a Special Meeting of Stockholders held on April 28, 1998. In conjunction with
the approval, on April 29, 1998, the Registrant's received the $500,000 Option
Payment which was deferred until the Option expired on April 28, 1999.
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The Research and Development Agreement and Loan Agreement together
provided for a $750,000 term loan facility for the Registrant to use for joint
research and development activities. None of the costs of these research and
development efforts have been borne directly by the Registrant's customers.
On May 31, 1999, the Registrant signed a Second Option Agreement to
extend for an additional nine months the option held by LIG to purchase
substantially all of the assets and assume certain liabilities of the
Registrant. The Registrant received $150,000 as payment for the extension of the
Option. The option extension permits the parties to continue the joint research
and development efforts which began on April 28, 1998, the commencement date of
LIG's initial one-year option.
Under the terms of the revised option, the purchase price to be paid
by LIG for the assets of the Registrant was reduced from $6,821,708 to
$6,071,708 (subject to certain adjustments), in addition to the assumption by
LIG of certain liabilities of the Registrant. This reduction reflects
adjustments which would have been required to be made to the purchase price
under the terms of the original one-year option. LIG continues to provide the
Registrant with a $750,000 credit facility to finance capital expenditures and
capital improvements related to the research and development. In addition, LIG
continues to purchase nitrile gloves from the Registrant under a revised supply
agreement.
The Second Option Agreement and related proposals were approved by the
Registrant's stockholders at a special meeting of stockholders held on August
17, 1999. Pursuant to the Second Option Agreement, LIG's option will expire on
May 18, 2000.
In addition, on March 30, 1998, NationsBank (now Bank of America)
exercised its warrant to purchase 496,058 shares of the Registrant's Common
Stock exercisable at a price of $0.03125 per share. This was recorded as a
reduction of the Registrant's note payable with NationsBank.
MEDICAL MARKET
Initially the Registrant sold only vinyl gloves to the medical market,
but began selling latex gloves also in 1989. Because of changes in the market,
the Registrant elected to discontinue vinyl gloves sales to the medical market
in March 1993. In 1999, 42% of the Registrant's latex glove sales were to the
medical market. None of the Registrant's nitrile glove sales were to the medical
market. The Registrant currently has an application before the FDA for approval
of its 510(k) premarket notification to sell its nitrile gloves into the medical
market.
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In the medical market, the Registrant sells its products to agencies of
the Federal Government under a Federal Supply Schedule contract, to medical
supply companies, and to industrial supply companies which also distribute
medical examination gloves. The Registrant serves its distributors as an
independent product source without making direct sales to their customers. The
Registrant's major competitors generally sell their products directly to end
users.
NON-MEDICAL MARKET
The non-medical glove market is comprised of industries in which clean,
protective handcovers are important for employee health and safety or to protect
the integrity of the manufacturing process. For example, the Registrant sells
its vinyl, latex and nitrile gloves to distributors that supply beauty and
barber shops, safety supply companies, food processors, photo finishing
businesses, janitorial supply companies and the electronics and computer
assembly and service industries.
Since 1983, the Registrant has been increasing its marketing efforts in
the sale of vinyl gloves to the non-medical market, which is more fragmented and
somewhat less price competitive than the medical market and presents
opportunities for more favorable margins. The Registrant's ability to compete in
the non-medical market is enhanced by its willingness to provide products under
private labels for independent distributors, to develop custom products and
packaging to meet requirements of distributors and their customers, and to fill
orders on a prompt basis.
DESCRIPTION OF PRODUCTS
Vinyl, nitrile and latex gloves are single use protective handcovers
which are generally worn once and discarded. They are ambidextrous (the same
glove fits either hand). The gloves range in size from small to extra-large and
are manufactured in different lengths and thickness to meet user needs.
The gloves are used in applications in which hand-contour, tactile
sensitivity, flexibility, strength and a reduction of the risk of contamination
and disease transfer are important. The Registrant's vinyl, nitrile and latex
glove lines include lightly powdered and powder-free gloves.
The Registrant has pending an application to the Food and Drug
Administration ("FDA") for approval to market a new line of antimicrobial vinyl
gloves which incorporate the antimicrobial substance MicrOban(R) into the glove.
The FDA approval is necessary to enable the Registrant to market these
antimicrobal gloves to the food industry. The Registrant has an exclusive
license in the United States and Canada for the use of MicrOban(R) in its
gloves.
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The Registrant's application has been pending since December 1991 and is still
active. The Registrant filed requested substantiating technical data with the
FDA during March of 1996. Additional technical data was filed with the FDA in
November 1996. The FDA and Environmental Protection Agency ("EPA") in 1998
determined that the EPA has final determination over food additive petitions.
During late September 1999, final determination was transferred back to the FDA.
The Registrant and its counsel have met with the FDA in a effort to avoid
further delays in the approval process, but cannot speculate as to when or if
such approval will be received.
For many applications either nitrile, latex or vinyl gloves may be
used. Latex and nitrile gloves stretch and are deemed more appropriate for use
with small instruments or other applications where a tight fit is important.
Nitrile gloves are more resistant to certain chemicals than either latex or
vinyl gloves. Vinyl gloves are appropriate in applications where maximum
retention of the user's feel is important and a snug fit is not important. Latex
gloves have historically been more expensive than vinyl gloves. However, during
1990, latex glove prices declined substantially to the point where latex glove
prices were less than or equal to vinyl glove prices. This price relationship
continued through 1999. Nitrile gloves are more expensive than either vinyl or
latex gloves.
The Registrant offers its gloves in a variety of packaging depending
upon the intended end use. Gloves are sold in dispenser packs, resealable bags
and heat sealed pouches. Dispenser packs contain up to 100 gloves and are
similar to facial tissue boxes. Dispenser packs for medical uses are generally
sold to medical supply companies which market them under private labels.
Dispenser packs which are not resold under a customer's private label are
marketed under the Registrant's name when sold for medical uses, and under the
tradenames Sup-pli Line, ColorLine or ToughLine when sold for non-medical uses.
Vinyl gloves accounted for 65.3%, 59.3% and 59.8% of the Registrant's
total sales in 1999, 1998 and 1997, respectively. Latex gloves accounted for
20.0% 23.2% and 35.4% of the Registrants total sales in 1999, 1998 and 1997,
respectively. Nitrile gloves accounted for 14.5% and 17.3% of the Registrant's
total sales in 1999 and 1998 respectively. In 1997, their introductory year,
nitrile gloves accounted for 3.4% of total sales.
MANUFACTURING OPERATIONS
Vinyl gloves are manufactured on long, integrated, continuous process
machines on which hand-shaped molds are dipped into liquid vinyl, then cured
under controlled heat and finally stripped from
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the molds. Vinyl glove manufacturing requires control in the formulation of
liquid vinyl as well as in the dipping, molding and curing of the gloves at
specified temperatures.
The Registrant currently has five vinyl glove machines with a total
capacity to produce 1,100,000 gloves per day. Only four of these machines
operated in 1999. During 1999, the vinyl glove machines operated at 70% of
capacity. Since 1989, because of an oversupply of vinyl gloves, the Registrant
has manufactured gloves on a five-day a week schedule with frequent periods of
time when one or more of the Registrant's machines was not operating. One of the
Registrant's vinyl glove machines will require upfitting at a cost of more than
$200,000 to make it operational. The Registrant has no immediate plans to incur
the capital expenditures necessary to upfit this machine.
Latex and nitrile glove manufacturing is similar to that of vinyl
gloves. The primary difference between the two processes is that latex and
nitrile gloves go through a multiple dip process while vinyl gloves go through a
single dip process. The Registrant's latex glove machine has a total capacity of
1,400,000 gloves per week. During 1999 the latex/nitrile glove machine operated
at approximately 67% of its five-day a week capacity.
The Registrant places great emphasis upon controlling the quality of
its products. Quality control procedures include the testing of statistical
samples of products every 30 minutes to assure conformance to certain
specifications.
The Registrant believes that its manufacturing equipment generally
incorporates state-of-the-art process technology, but is not automated.
MARKETING AND DISTRIBUTION
The Registrant conducts its sales and marketing activities using a
combination of direct sales representatives and manufacturer's representatives.
Both groups report to and take direction from a director of sales. The
Registrant's export sales, which accounted for approximately 17% of total sales
in 1999, are the responsibility of the Registrant's Director of Sales with the
assistance of the Registrant's President. Industrial, safety and laboratory
supply distributors are the Registrant's major customers.
The major portion of the Registrant's products are shipped within 30
days after being ordered; the remainder of its orders are placed from three to
nine months in advance of the requested delivery date. Advance orders are not
considered firm until the customer issues a release for shipment, so backlog is
not necessarily indicative of the Registrant's level of business
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activity. The Registrant's backlog at the end of 1999, 1998 and 1997 was
$244,000, $220,000 and $304,000 respectively. The 1999 backlog reflects a 5 day
service level, the norm for the industry. The backlog figures are based on firm
orders to be filled over the subsequent four weeks.
MAJOR CUSTOMERS
The Registrant's five largest customers, including LIG, accounted for
approximately 35.7% of sales in 1999. No customer, other than LIG, individually
accounted for 10% or more of sales in 1999.
RAW MATERIALS
The primary raw materials used in the manufacturing of vinyl gloves are
PVC resin (a granular polymer) and plasticizer, both of which are petrochemicals
and in adequate supply from several sources. The primary raw material for latex
gloves is natural rubber latex, which is available in adequate supply from a
number of sources. The primary raw material for nitrile gloves is nitrile
polymer which is available in adequate supply from a number of sources.
COMPETITION
The principal manufacturer of vinyl gloves sold in the United States is
MAXXIM. Other major United States manufacturers of vinyl gloves include The Oak
Rubber Company and the Registrant. The leading manufacturers of latex
examination gloves include Tillotson Corporation and Safeskin Corporation. The
leading United States manufacturers of nitrile unsupported disposable gloves are
Tillotson Corp. and Ansell-Edmont Industrial, Inc. The Registrant's competitors
are generally larger and have greater financial resources that the Registrant.
The Registrant also faces competition from foreign manufacturers. In
addition, certain of the United States manufacturers have foreign manufacturing
plants. These manufacturing plants are generally located in countries with costs
substantially below those in the United States.
The principal competitive factors relating to the Registrant's products
are price, quality and delivery. The Registrant believes that favorable
competitive factors include its ability to supply a broad line of latex, nitrile
and vinyl gloves and to respond to customers' needs for prompt delivery.
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LICENSES AND TRADEMARKS
The Registrant has license agreements with Microban Products Company
for the use of Microban(R) and Microban(R) Extended Polymer Film in single use
gloves. These agreements give the Registrant an exclusive license in the United
States and Canada for the use of such materials in single use gloves and a
non-exclusive license for the sale of such gloves in the rest of the world. The
licenses are contingent on the Registrant making purchases from or payments to
Microban Products Company of up to $3,000 per month, once the Registrant has
received FDA approval to market the products. FDA approval to market gloves with
MicrOban(R) has been applied for but not yet granted. The licenses were renewed
in October 1999 and are renewable for additional two-year periods at the
Registrant's option. The licenses may be terminated by the Registrant on 120
days notice.
PATENTS. The Registrant has three U.S. Patents for its antimicrobial vinyl,
polyethylene and polyurethane gloves (Patents 5,725,867, 5,993,839, and
5,906,823), and is registering its patents in certain foreign countries.
EMPLOYEES
As of December 31, 1999, the Registrant employed 228 persons, of whom
191 were hourly employees engaged in production, 28 were engaged in supervision,
technical and clerical functions and 9 were executive or administrative. one
employee is part time; all other employees are full time.
The Registrant's hourly production employees are represented by the
Union of Needletraders, Industrial and Textile Employees ("UNITE"). In March
1997 the Registrant entered into a new agreement with UNITE which has been
extended from March 2000 to June 2000. The Registrant considers its present
relationship with its employees to be good.
GOVERNMENT REGULATION
The Registrant is subject in the manufacture, testing and marketing of
certain of its products to mandatory procedures and safety standards which are
administered by the United States Food and Drug Administration ("FDA"). The FDA
regulates the Registrant as to the quality and safety of its products and the
practices by which they are manufactured and sold. The FDA's regulations for
patient examination gloves apply to any gloves sold as examination gloves. The
FDA also regulates the introduction of new products, makes periodic inspections
of manufacturing processes to confirm that such processes meet FDA standards,
and receives, investigates and resolves any complaints against the Registrant.
The Registrant believes that all of its medical gloves are manufactured in
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compliance with the FDA's manufacturing standards which are called "Good
Manufacturing Practices." The Registrant's most recent FDA inspection found no
deficiencies.
The Registrant is subject to various regulations relating to the
maintenance of safe working conditions and manufacturing practices. The
Registrant believes it is currently in compliance with all such regulations.
ENVIRONMENTAL REGULATION
The Registrant's manufacturing process involves the use of one
regulated chemical - zinc. Waste water from the Registrant's latex glove
operations is collected in leach pools and zinc is precipitated out of the waste
water. Zinc is then collected in wetcake and disposed of by a hazardous waste
disposal contractor. The waste water is disposed of in the Town of Andrews'
water system. The Town of Andrews has not yet imposed enforceable limitations on
the Registrant's zinc discharges and it is unclear at this time when such
limitations will be imposed and what, if any, capital expenditures will be
required in order for the Registrant to comply with any such limitations.
During a Phase II environmental audit of the Registrant's properties
in 1993, an area of approximately 750 to 1,000 square feet was identified as
contaminated by a petroleum product. Corrective action is currently in process.
Recent testing by Integrated Science and Technology ("ISC"), an EPA-approved
contractor, concluded that the impacted ground water is not migrating and no
potentially completed exposure pathways exist at this time. As a result, ISC has
indicated to the Registrant that the exposure does not pose a threat to human
health or the environment and recommends the site be closed. Quarterly testing
will be continued through the year 2000 at an estimated annual cost of $10,700.
ITEM 2. DESCRIPTION OF PROPERTY
The Registrant's executive offices, manufacturing operations and
warehouse are housed in an approximately 150,000 square foot building owned by
the Registrant and located on a 96 acre site one mile west of Andrews, South
Carolina. At December 31, 1999 such properties were subject to a mortgage with a
principal balance of $1,426,143. The building was constructed in phases from
1978 through 1988 specifically for use by the Registrant. In 1988, the
Registrant approximately doubled the size of its manufacturing and warehouse
space. The Registrant's main plant is constructed of brick and metal siding and
is designed for expansion without interruption to production. The Registrant
believes the building is adequately covered by insurance. The Federal tax basis
for the
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buildings is $527,020. For Federal income tax purposes, the Registrant takes
depreciation on the building using the straight line method and an assumed
useful life of 39 years.
The Registrant's vinyl and latex/nitrile glove manufacturing facilities
operated at approximately 70% and 67% respectively of its twenty-four hour,
five-day a week capacity in 1999 versus 63% and 80% respectively in 1998.
ITEM 3. LEGAL PROCEEDINGS
The Registrant has been named in litigation and notified of potential
litigation involving alleged injuries sustained in connection with latex-related
allergies. The Registrant has been named as a defendant in a lawsuit styled
Thomas D. Mazer, M.D. v. Baxter Healthcare Corp., et al., Docket No. 97-6879,
filed in the United States District Court for the District of Minnesota on
September 12, 1997. In addition, the Registrant was named as a defendant in
Clark v. Safeskin Corporation, et al., a lawsuit filed in the U.S. District
Court for the Northern District of Georgia, Rome Division, File No.
4:96-CV-0308-HLM, on August 19, 1998. Plaintiffs in these law suits allege that
they have suffered injury as a result of an allergic reaction to protein found
in latex gloves. The Plaintiffs seek damages for their injuries and have named
as defendants a number of distributors and manufacturers of latex gloves,
including the Registrant. These lawsuits have been assigned to a multi-district
panel which is currently hearing both cases in the United states District court
for the Eastern District of Pennsylvania under Docket No. MDL-1148. Also, the
Registrant was named as a defendant in a latex-related allergy case styled
Mackell v. Baxter Healthcare Corp.,, et al., filed in the Court of Common Pleas,
Philadelphia County, Pennsylvania. On August 13, 1999, the Registrant was named
in a latex-related allergy case styled Collins-Clarke v. Becton Dickinson & Co.,
et al. filed in the Circuit Court of Cook County, Illinois, Docket No. 98
L015009. On August 19, 1999 the Registrant was named defendant in a
latex-related personal injury and wrongful death, product liability and medical
negligence case styled Brinson v. Baxter International, Inc. et al., filed in
the Superior Court of California, Santa Clara County, File No. CV784020. On
September 20, 1999, the Company was named as a defendant in a latex-related
allergy case styled D'Avonzo V. Johnson & Johnson Medical et al. through a third
amended complaint. This case which bears Docket No. 98 L 4192 is pending in Cook
County, Illinois. The Company has also been named as a defendant in a
latex-allergy case styled Lynch v. Tillotson Healthcare Corp, et al. filed in
Superior Court in Sullivan County New Hampshire on October 19, 1999.
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At this time the Registrant is unable to make any evaluation of the
likelihood of an unfavorable potential loss, or to estimate the range of any
potential loss, since discovery in the suits is ongoing.
Management of the Registrant intends to vigorously contest the lawsuits
referenced in the above claims and any other suits alleging latex-related
allergy injuries, or indemnity and/or contribution claims derived from such
alleged injuries, which may be brought against it. At this time, the Registrant
believes there is no direct evidence that any of the plaintiffs either used or
were ever exposed to latex-containing products produced, sold or supplied by
Registrant in such amount and with such frequency and duration so as to cause or
contribute to the alleged injuries. St. Paul Companies and CIGNA, the
Registrant's insurance carriers, are presently providing a defense for the
Registrant in each of these matters.
In addition, the Registrant is involved in other legal proceedings and
claims arising in the ordinary course of business. In the opinion of management,
the outcome of such legal proceedings and claims will not materially affect the
Registrant's financial position.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Trading in the Registrant's Common Stock has been very limited since
1991. The Registrant's Common Stock has been listed sporadically in the National
Quotation Bureau's "Pink Sheets" and, since November 17, 1998, has been quoted
on the OTC Bulletin Board. High and low closing bid prices, as reported on the
OTC Bulletin Board, for each quarter since November 17, 1998 were as follows:
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
4th Quarter 1998 $1.50 $0.50
lst Quarter 1999 $0.75 $0.38
2nd Quarter 1999 $0.63 $0.13
3rd Quarter 1999 $0.50 $0.16
4th Quarter 1999 $0.44 $0.19
</TABLE>
These quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission, and may not represent actual transactions.
High and low bid information for the Registrant's Common Stock is not
available for periods prior to November 17, 1998.
The Registrant has not paid cash dividends. Because of the Registrant's
financial condition, the Registrant does not expect to pay dividends in the
foreseeable future.
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As of March 15, 2000, there were 748 shareholders of record.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
On May 31, 1999, the Registrant and London International Group, Inc.
("LIG") executed a Second Option Agreement (the "Second Option Agreement")
pursuant to which LIG purchased from the Registrant, at an option purchase
price of $150,000, an option, exercisable for a period of nine months, to
purchase substantially all of the assets of the Registrant. The Second Option
Agreement extends the option previously held by LIG which expired on April 28,
1999. on June 11, 1999, the Second Option Agreement was amended to allow the
Registrant until September 15, 1999 to satisfy certain conditions to LIG's
obligations under the Second Option Agreement, including obtaining stockholder
approval. The Second Option Agreement was approved by the stockholders at a
special meeting of stockholders held on August 17, 1999. Pursuant to the Second
Option Agreement, LIG's option will expire on May 18, 2000, and the Registrant
is unable to predict the likelihood of LIG exercising the option.
Under the terms of the revised option, the purchase price to be paid
by LIG for the assets of the Registrant is reduced from $6,821,708 to
$6,071,708 (subject to certain adjustments), in addition to the assumption by
LIG of certain liabilities of the Registrant. This reduction reflects
adjustments which would have been required to be made to the purchase price
under the terms of the original one-year option. LIG will continue to provide
the Registrant with a $750,000 credit facility to finance capital expenditures
and capital improvements related to the research and development. In addition,
LIG will continue to purchase nitrile gloves from the Registrant under a
revised supply agreement and the parties will continue their joint research and
development efforts related to the autostripping technology under a revised
research and development agreement.
Since the effective date of the Second Option Agreement, the
Registrant has further developed the autostripping of powdered and powder-free
vinyl gloves to include conveying, laying flat and counting gloves. The single
unit installed is in the qualification stage of development prior to
reproduction. In conjunction with LIG, the Registrant has successfully produced
100% nitrile gloves to complement the line of nitrile/neoprene gloves which
were produced and sold prior to the Second Option Agreement. Representatives of
LIG and the Registrant have met on several occasions, both for operational
demonstrations at the Registrant's
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plant and for strategic management discussions. While the Registrant believes
that the joint research and development efforts have been successful thus far,
there can be no assurances that LIG will exercise its option to purchase the
assets of the Registrant.
OPERATIONS
Sales for 1999 were $13,138,000, 14.6% less than sales in 1998. In
1999, 17% of total sales, or $2,233,000 were made to or through LIG, as
compared with 11.3%, or $1,734,000 during 1998. Of the total sales to LIG in
1999, $771,000 or 34.5%, were sales to the Registrant's European customers
other than LIG, which sales were made through LIG Europe in accordance with a
Distributorship Agreement between LIG and the Registrant. Sales to LIG in 1999
were 15.7% below similar sales in 1998. Sales to LIG in 1999 included
$1,106,000 of nitrile gloves under the Research and Development and Supply
Agreements between LIG and the Registrant. Sales pursuant to these agreements
in 1998 were $1,345,000, 17.8% greater than in 1999. Natural rubber latex glove
sales in 1999 were $2,626,000, 20% of total sales, compared with $3,570,000,
23.2% of total sales in 1998. Of the $944,000 decline in latex glove sales in
1999, seventy percent of the decline came during the second half of 1999, after
certain U.S. Government agencies made the decision to substantially decrease or
eliminate the use of natural rubber latex gloves. The Registrant, along with
other glove manufacturers, has been named in litigation involving alleged
injuries sustained in connection with natural rubber latex allergies. Although
there was a 5.4% increase in 4th quarter 1999 sales of natural rubber latex
gloves compared with 3rd quarter 1999 sales, the Registrant projects a 25%
decline in sales of natural rubber latex gloves during 2000 as compared with
sales in the full year 1999. vinyl glove sales were $8,578,000 in 1999, 65.3%
of all glove sales, and 6% less than vinyl glove sales in 1998. Nitrile glove
sales, 14.5% of total glove sales, were $1,904,000 in 1999 as compared with
$2,659,000 in 1998, a decrease of 28.4% in 1999. Of the decrease, $240,000 or
31.8% was due to lower purchases by LIG under the Research and Development and
Supply Agreements. The balance of the decrease was lost commercial sales,
which, the Registrant believes, is due to lower cost off-shore manufactured
products which are gaining market share over U.S. manufacturers.
Cost of goods sold, as a percentage of net sales, was 89.3% in 1999
versus 88.6% in 1998. Raw material costs, which had declined somewhat during
1998 and 1997, increased substantially during the second half of 1999. These
cost increases have continued during January and February of 2000. Natural gas
costs also escalated during the latter half of 1999 and have shown no signs of
abatement during the early months of 2000. Other related manufacturing costs
have remained substantially unchanged from 1998 costs.
12
<PAGE> 15
Selling and Administrative ("S&A") expenses decreased $153,000 or 8.8%
in 1999 as compared to 1998. As a percentage of total sales, S&A expense was
12% in 1999 as compared with 11% in 1998. Selling expense was $409,000 in 1999,
down from $575,000 in 1998. The reduction resulted mainly from lower sales
commissions to independent manufacturers' representatives as a greater portion
of total sales were by the registrant's employee sales force. Administrative
expense was $1,173,000 in 1999 and $1,159,000 in 1998. There were no remarkable
changes in any administrative expense category.
In 1999, the Registrant incurred a net loss of $516,000 as compared
with a net loss of $608,000 for 1998. The 1999 results include $222,000 of loan
processing charges related to refinancing the Registrant's bank credit
facility, expenses of $101,000 related to the LIG Second Option Agreement and
income of $508,000 from the first LIG Option Agreement which expired in 1999.
The 1998 results included $28,000 of expenses related to the LIG Option
Agreement. Excluding extraordinary gains and losses, the Registrant experienced
losses of $701,000 in 1999 and $580,000 in 1998. During 1999, loss from
operations was $178,875, as compared with income from operations of $21,394 in
1998.
LIQUIDITY AND CAPITAL RESOURCES
During the year 1999, the Registrant's operations provided $256,000 of
cash compared with $19,000 of cash provided by operations in the year 1998.
Necessary capital expenditures used $122,000 of cash during 1999, as compared
with $64,000 used in 1998. In addition, $571,000 of capital expenditures were
made and funded under the Loan and Security Agreement between the Registrant
and LIG. The sum of inventories, accounts receivable and prepayments decreased
by $707,000 in 1999, compared with an increase of $215,000 in 1998. Receivables
at year end 1999 were 10.5% of net sales and at year end 1998 were 13.1% of net
sales. Accounts payable, accrued expenses and other liabilities increased by
$73,000 in 1999, compared with an increase of $102,000 in 1998. Trade accounts
payable were 4.6% of net sales at year end 1999 versus 5.2% at year end 1998.
At December 31, 1999, the Registrant's borrowing against its
$6,000,000 credit facility with LaSalle Business Credit ("LCBI") was
$3,493,657, including $1,895,072 against the $3,800,000 LBCI revolving loan.
Total bank debt at December 31, 1999 was $4,919,800 compared with $5,068,502 at
year end 1998.
At December 31, 1999, the Registrant was not in compliance with
several financial covenants in its credit agreements with Carolina First Bank
but the violations have been waived by the bank. Due to financial accounting
rules changes relating to the
13
<PAGE> 16
classification of long-term debt where the debt contains a subjective
acceleration clause and a lock box arrangement, the Registrant was not in
compliance with the Carolina First Bank financial covenants related to working
capital and the current ratio and the report of Arthur Andersen LLP on the
financial statements for the year end December 31, 1999 contains explanatory
language which raises doubt about the Registrant's ability to continue as a
going concern, the financial covenants require an unqualified accountant's
report. The Registrant's revolving loan with LBCI is classified as current
debt. In addition, the Registrant was not in compliance with the Carolina First
financial covenants related to net worth and the leverage ratio.
Management believes the LBCI credit facility will, along with cash
from operations, provide adequate working capital to support continuing
operations. The corrective actions taken by management late in August 1999
substantially curtailed the use of cash from operations and further cash
savings were effected in the fourth quarter. Management anticipates that sales
may increase in both the first and second quarters of 2000. Contributing to
this positive outlook is the fact that the Registrant's major market segment,
the semiconductor industry, is projecting 21% growth in year 2000 as compared
with 1999. As further discussed below under the heading "Cautionary Statement
as to Forward-Looking Information," the preceding statements as to the
Registrant's outlook for future sales and working capital needs are being
provided in reliance upon the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, and actual results may differ from
such outlook based on numerous factors.
YEAR 2000
During 1998 and 1999, and the Registrant evaluated, tested and
monitored its computer systems for Year 2000 compliance. The Registrant made
limited modifications to existing software during this period. To date, the
Year 2000 issue has posed no significant operational or financial reporting
problems for the Registrant's computer systems as so modified.
CAUTIONARY STATEMENT AS TO FORWARD-LOOKING INFORMATION
Statements contained in this report as to the Registrant's outlook for
sales, operations, capital expenditures and other amounts, budgeted amounts and
other projections of future financial or economic performance of the
Registrant, and statements of the Registrant's plans and objectives for the
future are "forward-looking" statements, and are being provided in reliance
upon the "safe harbor" provisions of the Private Securities Litigation Reform
Act of 1995. Important factors that could cause actual results or events to
differ materially from those projected, estimated, assumed or anticipated in
any such
14
<PAGE> 17
forward-looking statements include without limitation: general economic
conditions in the Registrant's markets, including inflation, recession,
interest rates and other economic factors, especially in the United States and
other areas of the world where the Registrant markets its products; any loss of
the services of the Registrant's key management personnel; increased
competition in the United States and abroad, both from existing competitors and
from any new interests in the business; changes in the cost and availability of
raw materials; changes in governmental regulations applicable to the
Registrant's business; the failure to obtain any required governmental
approvals; casualty to or disruption of the Registrant's production facilities
and equipment; delays or disruptions in the shipment of the Registrant's
products and raw materials; disruption of operations due to strikes or other
unrests; and other factors that generally affect the business of manufacturing
companies with international operations.
15
<PAGE> 18
ARTHUR ANDERSEN
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
Phoenix Medical Technology, Inc.:
We have audited the accompanying balance sheets of Phoenix Medical Technology,
Inc., (a Delaware corporation) as of December 31, 1999 and 1998, and the
related statements of operations, shareholders' (deficit) investment and cash
flows for each of the three years in the period ended December 31,1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Phoenix Medical Technology,
Inc. as of December 31, 1999 and 1998, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1999, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 5 to the
financial statements, the Company has experienced significant losses from
operations in the prior three fiscal years and those losses have continued
subsequent to the year ended December 31, 1999. These matters, among others,
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 5. The accompanying financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset carrying
amounts or the amounts and classification of liabilities that might result
should the Company be unable to continue as a going concern.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The accompanying Schedule 11 is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audits of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/s/ Arthur Andersen LLP
Columbia, South Carolina
March 17, 2000
<PAGE> 19
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
BALANCE SHEETS
Phoenix Medical Technology, Inc.
<TABLE>
<CAPTION>
DECEMBER 31, 1999 1998
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash ....................................................................... $ 750 $ 8,916
Accounts receivable (net of allowance for doubtful
accounts of $20,000 in 1999 and 1998) ...................................... 1,374,950 2,009,866
Inventories (Note 2) ....................................................... 1,682,685 1,768,519
Prepayments and other (Note 13) ............................................ 123,186 176,995
- -----------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS ....................................................... 3,181,571 3,964,296
- -----------------------------------------------------------------------------------------------------------------------
OPERATING PROPERTY, PLANT AND EQUIPMENT:
Land ....................................................................... 175,000 175,000
Buildings and improvements ................................................. 4,565,149 4,565,149
Machinery and equipment .................................................... 7,503,735 7,068,347
Construction in progress ................................................... 29,618 94,974
- -----------------------------------------------------------------------------------------------------------------------
12,273,502 11,903,470
Less-accumulated depreciation .............................................. (8,780,038) (8,530,237)
- -----------------------------------------------------------------------------------------------------------------------
Net operating property, plant and equipment ................................ 3,493,464 3,373,233
- -----------------------------------------------------------------------------------------------------------------------
NONOPERATING EQUIPMENT, NET (NOTE 3) ....................................... 902,851 584,102
OTHER ASSETS ............................................................... 299,631 326,727
- -----------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS ............................................................... $ 7,877,517 $ 8,248,358
=======================================================================================================================
LIABILITIES AND SHAREHOLDERS' INVESTMENT
CURRENT LIABILITIES
Revolving line of credit (Note 7) .......................................... $ 1,895,072 $ 3,064,105
Accounts payable and accrued expenses (Note 6) ............................. 1,895,309 1,656,428
Current portion of long term debt (Note 7) ................................. 543,671 638,500
Deferred option payment (Note 13) .......................................... 151,308 508,054
- -----------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES .................................................. 4,485,360 5,867,087
- -----------------------------------------------------------------------------------------------------------------------
LONG TERM DEBT (Note 7) .................................................... 3,231,045 1,537,896
OTHER LIABILITIES (Note 6 and 13) .......................................... 485,107 651,409
- -----------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES .......................................................... $ 8,201,512 8,056,392
- -----------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' (DEFICIT) INVESTMENT:
Common stock - stated value $.10; shares authorized,
5,000,000 in 1999 and 1998; shares issued and
outstanding, 2,459,621 in 1999 and 1998 .................................... 245,962 245,962
Paid-in capital ............................................................ 8,425,582 8,425,582
Deficit .................................................................... (8,995,539) (8,479,578)
- -----------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' (DEFICIT) INVESTMENT ................................... (323,995) 191,966
- -----------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS, INVESTMENT ............................. $ 7,877,517 $ 8,248,358
=======================================================================================================================
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
16
<PAGE> 20
STATEMENTS OF OPERATIONS
Phoenix Medical Technology, Inc.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales ........................................ $ 13,138,306 $ 15,387,115 $ 13,836,522
- ----------------------------------------------------------------------------------------------------------------
Operating expenses:
Cost of goods sold .............................. (11,736,007) (13,631,947) (12,743,556)
Selling and administrative expenses ............. (1,581,174) (1,733,774) (1,689,556)
- ----------------------------------------------------------------------------------------------------------------
Total operating expenses ........................ (13,317,181) (15,365,721) (14,433,112)
- ----------------------------------------------------------------------------------------------------------------
(Loss) income from operations .................... (178,875) 21,394 (596,590)
Other income (expense):
Interest income ................................. 44,892 3,513 39,771
Interest expense ................................ (567,312) (604,849) (567,379)
Option Agreement income (Note 13) ............... 508,054 -0- -0-
Option Agreement expense (Note 13) .............. (100,654) (27,581) (93,247)
Loan processing fee expense ..................... (222,066) -0- -0-
- ----------------------------------------------------------------------------------------------------------------
Net loss ......................................... $ (515,961) $ (607,523) $ (1,217,445)
================================================================================================================
Basic loss per common share ...................... $ (0.21) $ (0.26) $ (0.62)
Diluted loss per common share .................... $ (0.21) $ (0.26) $ (0.62)
================================================================================================================
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
17
<PAGE> 21
STATEMENTS OF 1 (DEFICIT) INVESTMENT
Phoenix Medical Technology, Inc.
For the years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
COMMON STOCK
------------------------ TOTAL
PAID-IN RETAINED SHAREHOLDERS'
SHARES AMOUNT CAPITAL WARRANT DEFICIT (DEFICIT) INVESTMENT
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 1,963,563 $196,356 $7,224,503 $ 1,235,184 $(7,872,055) $ 783,988
Net Loss .............. -0- -0- -0- -0- (607,523) (607,523)
Exercise of Warrants... 496,058 49,606 1,201,079 (1,235,184) -0- 15,501
- -----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 2,459,621 $245,962 $8,425,582 -0- $(8,479,578) $ 191,966
Net Loss .............. -0- -0- -0- -0- $ (515,961) (515,961)
- -----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 2,459,621 $245,962 $8,425,582 -0- $(8,995,539) $(323,995)
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
18
<PAGE> 22
STATEMENTS OF CASH FLOWS
Phoenix Medical Technology, Inc.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ..................................................... $ (515,961) $ (607,523) $(1,217,445)
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities:
Depreciation and amortization ................................ 323,109 350,303 450,655
Loss on nonoperating equipment ................................ -0- -0- 138,757
Deferral of Option Agreement, net (Note 13) ................... (289,164) 407,400 -0
Decrease in loan processing fees (Note 2) ..................... 222,066 -0- -0
Changes in assets and liabilities:
Decrease (increase) in accounts receivable, net .............. 634,916 (187,344) 3,877
Decrease (increase) in inventories ........................... 85,834 10,986 (223,387)
(Increase) decrease in prepayments and other .................. (13,773) (38,618) 38,937
Increase in other assets ...................................... (263,646) (18,750) (15,000)
Increase in accounts payable, accrued expenses,
and other liabilities ........................................ 72,579 102,160 164,016
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities ...... 255,960 18,614 (659,590)
- ---------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of property, plant and equipment, net ............... (693,413) (243,565) (125,893)
- ---------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities ................... (693,413) (243,565) (125,893)
- ---------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
(Repayments on) borrowings under
revolving loan agreement, net ................................ (1,169,033) 292,336 1,032,465
Borrowings on (reductions of) long term debt .................. 1,020,332 (268,705) (262,907)
Increase in LIG equipment debt ................................ 577,988 172,000 -0-
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities ................. 429,287 195,631 769,558
- ---------------------------------------------------------------------------------------------------------------------
Net decrease in cash .......................................... (8,166) (29,320) (15,925)
Cash at beginning of year ..................................... 8,916 38,236 54,161
- ---------------------------------------------------------------------------------------------------------------------
Cash at end of year ........................................... 750 $ 8,916 $ 38,236
=====================================================================================================================
Supplemental disclosures of cash flow information and
non-cash items:
Cash paid during the year for interest ........................ $ 586,507 $ 588,116 $ 555,044
Cash paid during the year for reorganization items:
Unsecured creditors .................................. 703 703 2,810
Deferred property taxes .............................. 116,846 59,819 28,630
Cash paid during the year for Option Agreement ........... 39,726 169,719 1,763
Exercise of warrants - reduction of debt (Note 7) ........ -0- 15,501 -0-
=====================================================================================================================
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
19
<PAGE> 23
NOTES TO FINANCIAL STATEMENTS
Phoenix Medical Technology, Inc.
December 31, 1999, 1998, and 1997
NOTE 1 - ORGANIZATION AND GENERAL
Phoenix Medical Technology, Inc. (a Delaware Corporation), hereinafter
referred to as the Company, manufactures, markets and distributes a range of
single use vinyl, latex and nitrile gloves for use in various applications
where clean, protective handcovers are important. The Company's gloves are
primarily used for healthcare services, beauty and barber shop services, food
processing, electronics and computer manufacturing and assembly, photo
finishing and janitorial services. The Company markets its products to medical
and industrial supply companies and generally does not make direct sales to end
users. (See Note 5 for discussion regarding continuity of operations and
realization of assets.)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Inventories - Inventories are stated at the lower of cost or market.
Cost is determined for substantially all inventories using the first-in,
first-out ("FIFO") method of inventory accounting. Inventory costs include
materials, direct labor and factory overhead. Inventories consist of the
following:
<TABLE>
<CAPTION>
December 31,
--------------------------------
1999 1998
--------------------------------
<S> <C> <C>
Raw materials and supplies ..... $ 370,678 $ 403,504
Finished goods ................. 1,312,007 1,365,015
---------- ----------
$1,682,685 $1,768,519
========== ==========
</TABLE>
Property, Plant and Equipment - All property, plant and equipment are
stated at cost. Interest capitalized during construction periods is included in
plant and equipment and depreciated over the life of the asset. No interest was
capitalized during 1999, 1998 or 1997. Plant and equipment are depreciated
using the straight-line method over the following estimated useful lives:
<TABLE>
<CAPTION>
<S> <C>
Buildings and improvements ................ 20-33 years
Machinery and equipment ................... 3-9 years
</TABLE>
Other Assets - The Company capitalized certain costs related to the
refinancing of debt (see Note 7). Loan costs are amortized on a straight-line
basis over the term of the related loans.
Income Taxes - The Company accounts for income taxes in accordance
with the provisions of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" (SFAS
20
<PAGE> 24
109). This Standard requires recognition of deferred tax liabilities and assets
for the expected future tax consequences of events that have been included in
the financial statements or tax returns. Under this method, deferred tax
liabilities and assets are determined based upon the difference between the
financial statement and tax bases of assets and liabilities using enacted tax
rates.
Fair Values of Balance Sheet Financial Instruments - The carrying
amount reported in the accompanying Balance Sheets for cash, accrued expenses
and short-term debt approximate fair value because of the immediate or
short-term maturity of these financial instruments. The carrying amounts
reported for long-term debt approximates fair value because the underlying
instruments are variable rate notes that reprice frequently. The fair values of
long-term other liabilities are estimated by discounting future cash flows
using borrowing rates currently available to the Company for unsecured
obligations with similar terms and maturities. At December 31, 1999, the
estimated fair value of the Company's long-term other liabilities approximates
$535,000.
Revenue Recognition - The Company recognizes revenue upon shipment of
products to customers.
Use of Estimates - The preparation of the financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements. Estimates also affect the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from these estimates.
Adoption of SFAS No. 128 - In 1997, the Company adopted SFAS No. 128,
"Earnings per Share," effective December 15, 1997. In 1998 and 1999, diluted
earnings per share is equal to basic earnings per share since the Company has
recorded a loss from continuing operations for both years.
Adoption of SFAS No. 131 - In 1998, the Company adopted SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," which
establishes standards for disclosures about products and services, geographic
areas, and major customers. The Company considers its current products to
comprise one reportable segment.
Adoption of SFAS No. 133 and 137 - In 1998, the Company adopted SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." This
Statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, (collectively referred to as derivatives) and for hedging
activities. This
21
<PAGE> 25
statement was originally scheduled to become effective for all fiscal quarters
of fiscal years beginning after June 15, 1999. In 1999, the FASB issued SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of FASB No. 133." SFAS No. 137 deferred the effective date of
FASB No. 133 until after June 15, 2000. The adoption of the statement is not
expected to have a significant effect on the Company's financial condition or
results of operations.
NOTE 3 - NONOPERATING EQUIPMENT
The Company accounts for their long-lived assets in accordance with
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to be Disposed of."
At December 31, 1999, nonoperating equipment consisted of a vinyl
auto-glove stripper machine with a net book value of approximately $903,000.
During fiscal 1999, using proceeds from the capital expenditure term loan from
LIG (See Note 7) and the Company's own funds, the Company invested approximately
$319,000 in the auto-glove stripper in an effort to make it fully operational.
To be fully operational and income producing, this machine will require an
additional $570,000 investment.
During 1997, the Company recorded a $139,000 impairment loss to
write-off the remaining net book value of the co-poly machine which was not
operational.
NOTE 4 - BANKRUPTCY PROCEEDINGS
In August 1991, the Company filed a petition for relief under Chapter
11 of the United States Bankruptcy Code. Under Chapter 11, certain claims
against the Company in existence prior to the filing of the petitions for relief
under the federal bankruptcy laws were stayed while the Company continued
business operations as a Debtor-in-possession. On October 21, 1993, the Company
filed a Plan of Reorganization (the Plan) with the Bankruptcy Court. The Plan
was confirmed by the Court on February 7, 1994.
The Company accounted for all transactions related to the
reorganization proceedings in accordance with Statement of Position 90-7,
"Financial Reporting by Entities in Reorganization Under the Bankruptcy Code"
issued by the American Institute of Certified Public Accountants in November
1990. Certain expenses, primarily professional fees, resulting from the
reorganization proceedings, are reported separately in the 1994 statement of
operations as reorganization items.
As of December 31, 1999, the following obligations are outstanding
related to the Company's bankruptcy proceedings:
22
<PAGE> 26
Unsecured Claims - Unsecured creditors who were owed a total of
$1,475,715 in prepetition accounts payable and accrued liabilities have been
paid a pro rata portion of $11,200, plus interest at the prime rate, on the
fifteenth day of each quarter for twenty quarters. In addition, if the Company
has net income after debt principal and interest payments in the fifth fiscal
year after Confirmation, unsecured creditors will be paid a pro rata portion of
$300,000 beginning March 31 of the sixth year after Confirmation. If sufficient
net income is not generated in the fifth year after Confirmation to pay the
$300,000 in full, pro rata payments shall be made on March 31 of each year
following the year in which the Company has had net income, until the $300,000
is paid in full. The total of both forms of payment, as allowed by the Plan, is
$524,000. Therefore, the amount of debt forgiven under the Plan for unsecured
claims is $951,715. However, the Company made a $4,000 payment on a priority
claim which had been forgiven by the Plan. The adjusted debt forgiveness is
$947,715, which is included in the gain on debt discharge reported in the 1994
Statement of Operations.
During fiscal 1996, the Company offered its unsecured creditors an
option to receive payment of the remaining portion of allowed claims in a single
payment. This option required the unsecured creditors to release their
bankruptcy claims against the Company including their right to receive future
payments of the pro rata portion of $300,000 discussed above. In fiscal 1996,
the Company recognized a $272,096 gain on debt discharge resulting from the
release by certain of its unsecured creditors of their unsecured bankruptcy
claims against the Company. These payments are now complete.
Deferred Compensation - Post-petition deferred compensation owed to two
officers of the Company in the amount of $170,000 (see Note 6) was to be paid in
cash over a 48 month period beginning in the thirteenth month after confirmation
of the Plan. The debt refinancing discussed at Note 7 modified the terms of
repayment. Under separate agreements with NationsBank and The CIT Group/Credit
Finance (CIT), the two officers have agreed to waive their right to receive
payment of all or any portion of their deferred compensation of $170,000 until
such time as all obligations of the Company to NationsBank and CIT have been
repaid. As of December 31, 1999, both of the agreements with NationsBank and CIT
have been repaid, therefore a portion of the deferred compensation has been
reclassified to current liabilities.
Pre- and Post-Petition Property Taxes - The payment terms for pre- and
post-petition property taxes were modified in conjunction with the debt
refinancing discussed at Note 7. The agreement between the Company and
Williamsburg County, South Carolina requires interest payments at the rate of 7%
on the unpaid balance
23
<PAGE> 27
and 84 monthly principal payments beginning April 1, 1997. At December 31, 1998,
the Company was delinquent on 6 monthly payments to Williamsburg County,
totaling approximately $55,000, including principal and interest. As of December
31, 1999, the Company has paid the delinquent amount and is current through
year-end.
NOTE 5 - CONTINUITY OF OPERATIONS AND REALIZATION OF ASSETS
The accompanying financial statements have been prepared on the basis
of accounting principles applicable to a going concern and presumes the
realization of assets and the settlement of liabilities in the ordinary course
of business. As discussed in Note 4, the Company received approval of the
reorganization plan from the Bankruptcy Court in 1994. As discussed in Note 7,
the Company completed the refinancing of the NationsBank debt in 1995.
The Company has continued to incur substantial operating losses that
raise substantial doubt about its ability to continue as a going concern. As
such, the Company's ability to realize its assets in the ordinary course of
business is dependent upon many factors, the most significant of which is the
exercise by LIG of the Second Option to buy the Company by the Option date, May
18, 2000. The Company continues to work with LIG under the joint Research and
Development Agreement and cooperate with LIG under the terms of the Second
Option Agreement.
Other significant factors include:
- - Management's strategic plan should LIG choose not to exercise their
option.
- - The Company's ability to compete effectively in the non-medical vinyl
and nitrile glove markets
- - Successful marketing of the Company's patented antimicrobial vinyl
gloves.
- - Successful defense of any litigation resulting from alleged injuries
arising from latex-related allergies (see Note 14)
- - Maintaining compliance with loan covenants (or obtaining sufficient
waivers for any loan covenant violations)
Management's plans to address the above matters include:
- - Continuing to fulfill the expectations outlined by LIG as necessary to
encourage LIG to exercise the Second Option by May 18, 2000.
- - Securing additional funding with more favorable terms and interest
rates.
24
<PAGE> 28
- - Successful introduction of the medical nitrile glove in fiscal 2000.
- - Additional capital investment to complete full automation of auto-glove
stripper for powder-free vinyl gloves.
- - Continuing efforts to increase sales of the Company's existing
non-medical vinyl glove products through the conversion of major
semiconductor chip manufacturers from competitors to the Company
- - Introduction of the antimicrobial vinyl glove product for food handling
in Europe and cleanroom applications elsewhere.
- - Continuing to develop the medical nitrile glove with R&D assistance
provided by LIG
- - Vigorously defending any litigation resulting from alleged injuries
arising from latex-related allergies
- - Monitoring compliance with existing loan covenants and obtaining
sufficient waivers for any loan covenant violations
25
<PAGE> 29
NOTE 6 - ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES
Accounts payable, accrued expenses and other liabilities consisted of
the following at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
December 31,
---------------------------------
1999 1998
---------------------------------
<S> <C> <C>
Accounts payable ............................................................ $ 602,970 $ 798,630
Accrued compensation and
payroll taxes ............................................................. 250,597 288,803
Accrued property taxes ...................................................... 189,303 233,727
Deferred compensation, current .............................................. 63,750 -0-
Other current liabilities ................................................... 788,689 335,268
---------- ----------
Total accounts payable and
accrued expenses .......................................................... $1,895,309 $1,656,428
========== ==========
Accounts payable, long term ................................................. 27,904 27,904
Accrued property taxes ...................................................... 320,953 405,931
Deferred compensation,
long term ................................................................. 106,250 170,000
Other long term liabilities ................................................. 30,000 47,574
---------- ----------
Total other liabilities ................................................... $ 485,107 $ 651,409
========== ==========
</TABLE>
NOTE 7 - DEBT
On March 29, 1995, the Company completed a refinancing of the
NationsBank debt by replacing such debt with debt facilities provided by
Carolina First Bank and The CIT Group/Credit Finance. The Company used the net
proceeds of the Carolina First loan and the initial funding of the CIT facility
to settle its indebtedness with NationsBank. Pursuant to such settlement, the
Company also issued a note recorded in the amount of $248,959 to NationsBank and
a warrant to purchase up to 496,058 shares of the Company's Common Stock
exercisable at a price of $0.03125 per share. The warrants were exercisable
within two to ten years from March 27, 1995, the date of the loan agreement, and
were valued at $1,235,184. The Company reported in the 1995 Statement of
Operations, a gain on debt discharge of $4,618,842 related to the debt forgiven.
On March 30, 1998, NationsBank exercised its warrant to purchase 496,058 shares
of the Registrant's Common Stock exercisable at a price of $0.03125 per share
which was recorded as a reduction of the Company's note payable with
NationsBank. The remainder of this note payable, $72,679, was paid in full
during 1999.
In June, 1999, the Company negotiated a $6,000,000 credit facility with
LaSalle Business Credit, Inc., which includes a term loan for equipment of
$1,700,000, a $3,800,000 revolving loan on eligible inventories and accounts
receivable and a $500,000
26
<PAGE> 30
capital expenditure loan which expires in 2006. The credit facility bears an
interest rate of prime plus 2.0% (10.5% at December 31, 1999) and an interest
rate of prime plus 2.25% for the term loan and capital expenditure loan (10.75%
at December 31, 1999). This credit also contains a $250,000 Letter of Credit
facility.
Summarized below is the Company's debt at December 31, 1999 and 1998
and the terms of the debt. Substantially all assets are pledged as collateral
against the loans.
<TABLE>
<CAPTION>
December 31,
---------------------------------
1999 1998
---------- ------------
<S> <C> <C>
Revolving loan payable to bank, interest
accrues at prime plus 2.0% (10.5%
at December 31, 1999) with scheduled maturity in 2000,
secured by certain assets of the Company ....................................... 1,895,072 -0-
Term loan payable to bank, due in 84 scheduled monthly installments of
$20,238 plus interest at prime plus 2.25% (10.75% at December 31, 1999)
with scheduled maturity in 2006, secured by certain
assets of the Company .......................................................... 1,598,585 -0-
Term loan payable to bank, due in scheduled monthly installments of $20,184,
including interest at prime plus 2.0% (10.5% at December
31, 1999) with scheduled maturity in 2010, secured by the
Company's real property and fixtures ........................................... 1,426,143 1,519,217
Revolving line of credit payable to bank, repaid in 1999 ................................. -0- 3,064,105
Term loan payable to bank, repaid in 1999 ................................................ -0- 412,500
Term note payable to bank, repaid in 1999 ................................................ -0- 72,679
LIG capital expenditure term loan, interest accrues at prime plus 2%, due in 30
scheduled monthly payments, commencing May 31, 2000 (Note 13) if Second
Option is not exercised ........................................................ 749,988 172,000
---------- ------------
Total debt ............................................................................... 5,669,788 5,240,501
---------- ------------
Less - current portion ................................................................... 2,438,743 3,702,605
---------- ------------
$3,231,045 $ 1,537,896
========== ============
</TABLE>
Maturities of long term debt are as follows:
27
<PAGE> 31
2000 $2,438,743
2001 651,487
2002 613,385
2003 376,623
2004 391,305
Thereafter 1,198,245
==========
The Company had outstanding borrowings of $1,895,072 under its
revolving loan as of December 31, 1999. The Company had approximately $2,044,000
available under the revolving line. Commitment fees are .5% of the unused
portion of the revolving loan. Borrowings under this arrangement are secured by
liens on receivables and inventory. Pursuant to the revolving credit facility,
the Company can borrow an amount equal to the lesser of (a) the sum of up to 85%
of the face amount of Eligible Accounts plus the lesser of up to 60% of the
value of Eligible Inventory calculated on the basis of the lower of cost or
market value on a first-in, first-out basis and $1,500,000 or (b) $3,800,000.
Borrowings under the Company's revolving loan averaged $2,384,000
in 1999 and $2,610,000 during 1998. Maximum borrowings were $3,062,000 in 1999
and $3,064,000 in 1998. The weighted average interest rate for such borrowings
was 11.4% in 1999 and 12.6% in 1998.
The Company's loan agreements contain certain financial covenants
and ratio requirements such as minimum current ratio, minimum working capital,
maximum leverage, minimum net worth, minimum interest coverage, minimum debt
service coverage and minimum EBITDA as defined. The Company is also restricted
to maximum annual capital expenditures. As of December 31, 1999, the Company
was in compliance with or had obtained appropriate waivers for all covenants of
the loan agreements.
NOTE 8 - INCOME TAXES
The components of deferred taxes as of December 31, 1999 and 1998
were as follows:
28
<PAGE> 32
<TABLE>
<CAPTION>
December 31
---------------------------------------
1999 1998
---------------------------------------
<S> <C> <C>
Deferred tax assets:
Net loss carryforwards $ 2,620,000 $ 2,394,000
General business credit
carryforwards 316,000 387,000
Other liabilities and reserves 138,000 146,000
Valuation allowance (2,753,000) (2,591,000)
----------- -----------
Total deferred tax assets 321,000 336,000
----------- -----------
Deferred tax liabilities:
Basis difference in operating property,
plant and equipment 321,000 336,000
----------- -----------
Net deferred taxes -0- -0-
----------- -----------
</TABLE>
The valuation allowances of $2,753,000 and $2,591,000 as of December
31, 1999 and 1998 respectively were established because in the Company's
assessment, it is uncertain whether the deferred tax assets will be realized.
As of December 31, 1999, the Company has net operating loss
carryforwards of approximately $6,895,000 for tax purposes and general business
credits of approximately $316,000 available through 2018 and 2003, respectively,
to reduce future income taxes payable by the Company.
The effective tax rate varied from the federal statutory rate because
no deferred tax assets applicable to the net operating losses have been
recorded.
The effective tax rate varied from the federal statutory rate because
of the following:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Federal statutory rate (34)% (34)% (34)%
Losses carried forward
for future years 34 34 34
---- ---- ----
-- -- --
==== ==== ====
</TABLE>
NOTE 9 - MAJOR CUSTOMERS, CONCENTRATION OF CREDIT RISK AND RELATED PARTY
TRANSACTIONS
The Company manufactures and distributes its products principally to
medical, contamination control and industrial supply companies or government
agencies. Substantially all of the Company's accounts receivable are due from
companies in the above lines of business. The Company performs periodic credit
evaluations of its customers' financial conditions and establishes
29
<PAGE> 33
an allowance for doubtful accounts based upon factors surrounding the credit
risk of specific customers, historical trends and other information. The Company
recognizes revenue when goods are shipped and the resulting receivables are
generally due within 30 days.
Sales to the Company's five largest customers were approximately 36% in
1999, 30% in 1998 and 28% in 1997. In 1999, 17% of total sales were made to or
through LIG. The Company extends credit to its customers, most of which are in
the safety supply, medical supply and contamination control industries, or are
government agencies. Export sales, primarily to customers in Asia, Canada,
Europe and Mexico, were approximately 17% in 1999, and 14.5% in 1998 and 10% in
1997, including export sales to LIG under the Research and Development
Agreement.
The Company entered into non-competition and consulting agreements
with two of its officers. In the event of their termination, they will be
required to not compete and to provide up to 60 days consulting services per
year for two years (can be extended to a third year at the option of the
Company). Annual expenses under these agreements will equal each officer's final
annual compensation at the time of termination.
Total annual compensation, net of amount forgiven, related to the
officers was $196,200 in 1999, $202,000 in 1998 and $202,000 in 1997. These
officers have forgiven $91,800 of such compensation in 1999, $86,400 in 1998 and
$86,400 in 1997. These officers have no present or future rights to the forgiven
compensation.
NOTE 10 - RETIREMENT PLAN
Effective July 1, 1988, the Company adopted the Phoenix Medical
Technology, Inc. Savings Plan (the "Savings Plan") to provide employees with a
source of income after retirement. The Savings Plan includes 401(k) salary
reduction provisions. The Company's contributions are at the discretion of the
Board of Directors, subject to certain limitations, and may be made in the form
of Company common stock. Contribution expense under the Savings Plan was
approximately $6,300 in 1999, $6,300 in 1998 and $5,300 in 1997.
NOTE 11 - STOCK OPTIONS
Prior to January 1, 1996, the Company accounted for its stock option
plan in accordance with the provisions of Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. As such, compensation expense was recorded on the date of grant
only if the current market price of the underlying stock exceeded the exercise
price.
30
<PAGE> 34
On January 1, 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation," which permits companies to recognize as expense over
the vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS No. 123 also allows companies to continue to apply
the provisions of APB Opinion No. 25 and provide pro forma net earnings (loss)
and pro forma earnings (loss) per share disclosures for employee stock option
grants made in 1995 and future years as if the fair-value based method defined
in SFAS No. 123 had been applied. The Company has elected to continue to apply
the provisions of APB Opinion No. 25 and provide the pro forma disclosure
provisions of SFAS No. 123. The adoption of SFAS No. 123 did not have a material
impact on the Company's financial position.
In March 1984, the Board of Directors adopted an incentive stock option
plan for management and key employees. The plan authorizes up to 50,000 shares
to be available for options to be granted by a committee of the Board. Options
will be exercisable within two to ten years from the dates of grant and at not
less than fair market value of the stock at the dates the options are granted.
During 1997, management terminated this plan and options for the purchase of
35,000 shares expired.
In April 1988, the Company's shareholders approved a new incentive
stock option plan for management and key employees. The plan authorizes up to
50,000 shares to be available for options to be granted by a committee of the
Board of Directors. Options will be exercisable within six months to ten years
from the dates of grant at not less than the fair market value of the stock at
the dates the options are granted. As of December 31, 1999, options to purchase
15,000 shares were outstanding under this plan.
In April 1989, the Company's shareholders approved a new non-qualified
stock option plan for non-employee directors. The 1989 plan authorizes up to
28,000 shares to be available for issuance upon the exercise of options granted
under the 1989 plan. Under the 1989 plan, each eligible director was granted an
option for 1,000 shares of the Company's common stock on May 1, 1989, 1990, 1991
and 1992. The shares granted are exercisable within six months to ten years from
the dates of the grants. In April 1989 and May 1990, options for the purchase of
7,000 shares of common stock were granted by the Board of Directors. In May 1991
and 1992, the Board of Directors granted options for the purchase of 3,000
shares of common stock in accordance with the 1989 stock option plan. As of
December 31, 1999, options to purchase 6,000 shares were outstanding under this
plan.
Transactions under the Option Plans are as follows:
31
<PAGE> 35
<TABLE>
<CAPTION>
Number of Option Price
Shares Per Share
---------- ---------------
<S> <C> <C>
Outstanding 12/31/96 and 12/31/95 ................ 76,450 $0.06 to $15.00
Granted .......................................... -0- N/A
Expired .......................................... (35,000) $ 8.06
Outstanding 12/31/98 and 12/31/97 ................ 41,450 $0.06 to $15.00
Granted .......................................... -0- N/A
Expired .......................................... (20,450) $0.06 to $15.00
Outstanding 12/31/99 ............................. 21,000 $0.06 to $ 3.38
</TABLE>
As of December 31, 1999, 78,000 shares have been reserved for issuance
under the option plans discussed above.
The Company applied APB opinion No. 25 in accounting for its stock
options and, accordingly, no compensation expense has been recognized for stock
options in the accompanying financial statements. Had the Company determined
compensation cost based on the fair value at the grant date for its stock
options under SFAS No. 123, the company's net earnings (loss) would have been
adjusted to the pro forma amounts indicated below (in thousands):
<TABLE>
<CAPTION>
1999 1998
------- --------
<S> <C> <C>
Net (loss) earnings-
As reported ................. $ (516) $ (608)
Pro forma ................... (516) $ (608)
Basic (loss) earnings per share-
As reported ................. $ (0.21) $ (0.26)
Pro forma ................... (0.21) (0.26)
Diluted (loss) earnings per share-
As reported ................. $ (0.21) $ (0.26)
Pro forma ................... (0.21) $ (0.26)
</TABLE>
Pro forma net (loss) earnings reflect only options granted since 1995.
Therefore, the full impact of calculating compensation expense for stock
options under SFAS No. 123 is not reflected in the pro forma net (loss)
earnings amounts presented above because compensation expense is reflected
over the options' vesting period of five years and compensation expense for
options granted prior to January 1, 1995, is not considered.
NOTE 12 - SALE OF ASSETS
On March 22, 1996, the Company sold to Microtek Medical, Inc.
("Microtek"), all of the Company's machinery, equipment and related tangible
property (including inventory and work-in-process) and all of its proprietary
information and all other property and rights related to the Company's
manufacture and sale of adhesive skin drapes and scrub-and-prep products. The
purchase price consisted of $1,175,000 in cash and Microtek's undertaking to
make contingent payments for twelve years of 11.5% of its sales
32
<PAGE> 36
of patented incise drapes and 3% of its sales of other products in the Company's
product line incorporating the patented process, with a maximum of $1,825,000 of
all contingent payments and a maximum total purchase price of $3,000,000. The
Company's sales of items produced by the assets sold to Microtek accounted for
4% of their total sales in 1995. This sale resulted in a gain of approximately
$760,000 in 1996. Contingent payments were $5,100 in 1999 and $1,500 in 1998.
NOTE 13 - POSSIBLE SALE OF THE COMPANY
On September 15, 1997, the Company announced that it had entered into a
letter of intent with London International Group, Inc. ("LIG") with respect to
LIG's intent to purchase an option to acquire substantially all of the assets of
the Company and other related transactions. LIG is a U.K. corporation and a
leading manufacturer of personal protective products utilizing thin-film barrier
technology, including Marigold(R) Industrial Gloves.
In the Letter of Intent, LIG agreed to pay $500,000 as consideration
for an option to purchase substantially all of the Company's assets and assume
certain stated liabilities, for a $6,821,708 cash purchase price, subject to
adjustment as defined in the Agreement for a period of one year from the date of
the definitive Option Agreement with LIG. On December 22, 1997, the Company
entered into a definitive Option Agreement with LIG, which, in addition to the
transactions stated above, included a Loan and Security Agreement, a Research
and Development Agreement and a Supply Agreement. This Agreement was subject to
approval of the Company's stockholders. On April 28, 1998, the Company's
stockholders approved the Option Agreement with LIG.
In conjunction with the approval on April 29, 1998, the Company
received the $500,000 Option Payment which was deferred until the Option expired
on April 28, 1999. When the Option expired, the Company recorded the option
payment as revenue and expensed the related $100,654 that had also been
deferred.
On May 31, 1999, the Company signed a Second Option Agreement extending
the option held by LIG. In this Second Option Agreement, LIG agreed to pay
$150,000 as consideration for the extension of the first option to purchase
substantially all of the Company's assets and assume certain stated liabilities
for a period of nine months from the effective date of the Second Option
Agreement with LIG. The Second Option expires on May 18, 2000. Under the terms
of the Second Option, the purchase price to be paid LIG for the assets of the
Company was reduced from $6,821,708 to $6,071,708 (subject to certain
adjustments). This reduction reflects adjustments which would have been required
to be made to the purchase price under the terms of the original one-year
option. LIG agreed to continue to finance the acquisition of
33
<PAGE> 37
certain capital equipment and certain other capital improvements for the Company
in an amount up to $750,000 and to continue to participate in the joint
development of technology for the manufacture of the Company's nitrile glove
products. As of December 31, 1999 and 1998, the Company had received
approximately $750,000 and $172,000 under this financing arrangement (See notes
3 and 7) . In addition, LIG will continue to purchase nitrile gloves from the
Company under a revised supply agreement. Also, as part of this revised supply
agreement, LIG agreed to advance the Company approximately $350,000 which has
been included in other liabilities.
On August 17, 1999, the Company's stockholders approved the Second
Option Agreement and related supplemental agreements. In conjunction with the
approval, the Company received the $150,000 which will be deferred until the
Second Option is exercised or expires on May 18, 2000. The Company incurred
$33,000 of expenses related to the Second Option during 1999. All of these
expenses have been deferred as of December 31, 1999 and will be expensed when
the option is exercised or expires.
NOTE 14 - COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company has been named as a defendant in approximately seven
lawsuits and notified of other potential lawsuits in association with alleged
injuries sustained in connection with latex-related allergies. Management of the
Company intends to vigorously contest the claims and any other suits alleging
latex-related allergy injuries, or indemnity and/or contribution claims derived
from such alleged injuries, which may be brought against it. At this time
management is unable to make an evaluation of the likelihood of an unfavorable
potential loss, or to estimate the range of any such loss. The Company maintains
product liability coverage, and in the opinion of management, this coverage
would be adequate to cover any potential losses related to these potential
claims. However, there is no guarantee that the Company will be fully covered
for potential claims.
In addition, the Company is involved in other legal proceedings and
claims arising in the ordinary course of business. In the opinion of management,
the outcome of such legal proceedings and claims will not materially affect the
Company's financial position.
ENVIRONMENTAL MATTERS
During a Phase II environmental audit of the Company's properties in
1993, an area of approximately 750 to 1,000 square feet was identified as
contaminated by a petroleum product.
34
<PAGE> 38
Corrective action is currently in process. During fiscal 1998, testing by an
EPA-approved contractor concluded that the impacted ground water is not
migrating and no potentially completed exposure pathways exist at this time. The
contractor indicated that the exposure does not pose a threat to human health or
the environment and recommends the site be closed. 1999 expenditures were $2,700
and the Company anticipates a $10,700 expenditure during 2000.
The Company believes it is otherwise in compliance with all
environmental regulations and does not expect that any sums it may have to pay
in connection with the above environmental matters would have a material effect
on the Company's financial position.
REGULATION
The Company is subject to (a) governmental regulations and periodic
inspection of its facilities by the United States Food and Drug Administration,
(b) various federal, state and local laws and regulations regarding the
protection of the environment, (c) manufacturers' product liability for which
the Company currently maintains liability insurance and (d) adherence to the
patent and other intellectual property rights of others.
PURCHASE COMMITMENTS
At December 31, 1999, the Company had a contractual commitment to
purchase material from a supplier at a specified price. This commitment is to
purchase latex through April 2000 at a total approximate cost of $119,000.
35
<PAGE> 39
SCHEDULE II
PHOENIX MEDICAL TECHNOLOGY, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
- ----------------------------------------------------------------------------------------------------------------
Additions Deductions-
Balance at Charged Write-offs, Balance at
Beginning to Costs and net of End of
Description of Period Expenses Recoveries Period
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended December 31,
1997:
Allowance for doubtful
accounts $ 20,000 $ 5,551 $ (5,551) $20,000
======== ======== ======== =======
Year ended December 31,
1998
Allowance for doubtful
accounts $ 20,000 $ 13,503 $(13,503) $20,000
======== ======== ======== =======
Year ended December 31,
1999
Allowance for doubtful
accounts $ 20,000 $ 28,567 $(28,567) $20,000
======== ======== ======== =======
</TABLE>
S-1
<PAGE> 40
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The Registrant's Board of Directors is divided into three classes, with
one class of directors elected at each annual meeting of shareholders for a
three-year term (or until their successors are elected and qualify). Set forth
below is information with respect to each director and executive officer of the
Registrant, including their business experience for at least the last five
years.
DIRECTOR ELECTED APRIL 22, 1988:
Edward W. Gallaher, Sr. Director since 1978. President of the
Registrant since its organization in 1978, Treasurer since 1981 and Chief
Executive Officer since 1987. He is 67.
DIRECTOR ELECTED APRIL 21, 1989:
Grover C. Mixon. Director since 1978. Executive Vice President and
Chief Operating Officer of the Registrant since 1988. Senior Vice President of
the Registrant from 1985 to 1988. Vice President-Operations of the Registrant
1978 to 1985. He is 56.
DIRECTORS ELECTED APRIL 20, 1990:
Harold H. Heath. Director since 1979. Owner/Operator of the Big Valley
Ranch in the State of Washington since 1981. He is 77.
William T. Sena. Director since 1980. Chairman of Sena, Weller, Rohs, &
Williams, Inc., an investment advisory firm, since 1977. He is 63.
Effective as of April 20, 1999, Byron M. Layman resigned as a member of
the Board of Directors of the Corporation.
The Registrant's Bylaws provide for a range in the number of directors,
with the provision that, until otherwise determined by the Board of Directors,
the number of directors shall be fixed at four. There has not been an annual
meeting of the Registrant's shareholders since April 20, 1990. The Board of
Directors did not meet during 1999, but conferred several times by telephone and
exchanged correspondence.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
36
<PAGE> 41
To the Registrant's knowledge, based solely on a review of the copies
of such reports furnished to the Registrant and written representations that no
other reports were required, during the fiscal year ended December 31, 1999, all
Section 16(a) filing requirements applicable to its executive officers,
directors and greater than 10% beneficial shareholders were complied with.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth all cash compensation paid to or for the
account of the Registrant's Chief Executive Officer. The annual salary and bonus
of only the chief executive officer exceeded $100,000 during the fiscal year
ended December 31, 1999. Grover C. Mixon, the Registrant's Executive Vice
President and Chief Operating Officer, has an annual salary of $133,000
established by the Board of Directors. However Mr. Mixon forgave $39,900 of such
salary for the fiscal year ended December 31, 1999 and has no present or future
right to such forgiven salary.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Name and Principal Edward W. Gallaher, Sr., President
Position Treasurer, Chief Executive Officer
and Director
Other Annual All Other
Compensation Compensation
Year Salary($) Bonus($) ($) ($)(l)
<S> <C> <C> <C> <C>
1999 $103,100(2) 0 (3) $1,000
1998 $108,500(2) 0 (3) $1,000
1997 $108,500(2) 0 (3) $ 924
</TABLE>
(1) Amount of vested and unvested Registrant contributions under the
Registrant's Savings Plan, a 401(k) Plan.
(2) Does not include $51,900, $46,500 and $46,500 in 1999, 1998 and 1997,
respectively, of annual salary forgiven by Mr. Gallaher. Mr. Gallaher
has no present or future right to such amount; however, Mr. Gallaher's
annual salary as established by the Board of Directors remains
$155,000.
(3) Mr. Gallaher did not receive personal benefits during the listed years
in excess of 10% of annual salary and bonus.
All of the Registrant's stock options owned by Mr. Gallaher expired
during the fiscal year ended December 31, 1999.
EMPLOYMENT AGREEMENTS
In March 1984, the Registrant entered into a non-competition and
consulting agreement with Mr. Gallaher. Under this agreement, after the Mr.
Gallaher's termination, he will be required to not
37
<PAGE> 42
compete with the Registrant and to provide up to 60 days consulting services per
year for two years. Annual payments under this agreement will equal Mr.
Gallaher's final annual compensation at the time of termination. The current
annual salary of Mr. Gallaher, as established by the Board of Directors, is
$155,000. However, Mr. Gallaher forgave $51,900, of such salary for the fiscal
year ended December 31, 1999 and has no present or future right to such forgiven
amount.
DIRECTORS' FEES
The Directors of the Registrant who are not employees are traditionally
paid an annual fee of $3,000 plus $500 for each Board meeting attended and each
Committee meeting attended which is not held on the same day as a Board meeting.
The Chairman of the Board traditionally receives an annual fee of $5,000, in
lieu of the $3,000 fee paid to non-employee Directors. Each Chairman of a
Committee who is not an employee traditionally receives an additional $1,000. No
fees were paid to the Directors during 1999 due to the severe financial
condition of the Registrant.
ITEM 11. SECURITY OF OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of March 15,
2000, with respect to the beneficial ownership of the Registrant's Common Stock
by (i) each person known by the Registrant to be the beneficial owner of more
than 5% of such outstanding shares, (ii) each director of the Registrant, (iii)
the named executive officers and (iv) all directors and officers of the
Registrant as a group:
38
<PAGE> 43
<TABLE>
<CAPTION>
Number of Shares Percentage
and Nature of of Shares
Name and Address Beneficial Ownership(l) Outstanding
- ---------------- ----------------------- -----------
<S> <C> <C>
Harold H. Heath 8,000(2) (3)
Big Valley Ranch
18883 Hwy. 20
Winthrop WA 98862
William T. Sena 20,400(2) (3)
300 Main Street
Cincinnati OH 45202
Edward W. Gallaher, Sr. 103,495(4) 4.2%
Route 521 West
P.O. Box 346
Andrews SC 29510
Grover C. Mixon 63,534(5) 2.6%
Route 521 West
P.O. Box 346
Andrews SC 29510
BankAmerica Corporation 496,058(6) 20.2%
901 West Trade St, 4 FL.
Charlotte NC 28255
All Officers and
Directors of the
Registrant as a Group 195,429 7.9%
(7)
</TABLE>
- ------------------
(1) All shares are owned directly and with sole voting and dispositive
power except as otherwise noted.
(2) Includes 3,000 shares subject to options which are currently
exercisable or exercisable within 60 days.
(3) Less than 1%.
(4) Includes 15,550 shares held by Mr. Gallaher's wife.
(5) Includes 500 shares held by Mr. Mixon's wife.
(6) Share information for BankAmerica obtained from a Schedule 13G filed
with the SEC by BankAmerica on February 3, 1999.
(7) Based on shares outstanding and shares subject to options held by the
officers and directors which are currently exercisable or exercisable
within 60 days.
ITEM 13. EXHIBITS, LISTS, AND REPORTS ON FORM 8-K
(a) Exhibits
SEE INDEX TO EXHIBITS.
39
<PAGE> 44
(b) REPORTS ON FORM 8-K
The Registrant did not file any Reports on Form 8-K during the quarter
ended December 31, 1999.
ITEMS 4, 8 AND 12 ARE INAPPLICABLE AND ARE OMITTED.
40
<PAGE> 45
SIGNATURES
In accordance with Sections 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
PHOENIX MEDICAL TECHNOLOGY, INC.
Dated: March 27, 2000 By:/s/ Edward W. Gallaher, Sr.
----------------------- -------------------------------
Edward W. Gallaher, Sr.
President
In accordance with Exchange Act, this Report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the dates indicated:
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/s/Edward W. Gallaher, Sr. President, Treasurer 3/27 2000
- ---------------------------------- and Director (Principal -------
Edward W. Gallaher, Sr. Executive and Financial officer)
/s/ Grover C. Mixon Executive Vice President 3/27 2000
- ---------------------------------- and Director (Principal -------
Grover C. Mixon Operating officer)
/s/ Harold H. Heath Director 3/27 2000
- ---------------------------------- -------
Harold H. Heath
/s/ William T. Sena Director 3/27 2000
- ---------------------------------- -------
William T. Sena
/s/ Delores P. Williams Controller (Principal 3/27 2000
- ---------------------------------- Accounting Officer) -------
Delores P. Williams
</TABLE>
41
<PAGE> 46
For the fiscal year ended Commission File Number
December 31, 1999 0-13401
INDEX TO EXHIBITS
LOCATED AT
MANUALLY
NUMBERED PAGE
<TABLE>
<CAPTION>
(2) PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LIQUIDATION OR
SUCCESSION
<S> <C>
2.1 Plan of Reorganization, confirmed February 7, 1994, U.S.
Bankruptcy Court for the District of South Carolina, Columbia
Division, was filed as an Exhibit to the Registrant's Form
10-QSB for the quarter ended October 3, 1993. *
2.2 Option Agreement, dated as of December 22, 1997, by and
between the Registrant and London International Group, Inc.,
was filed as an Exhibit to the Registrant's Form 8-K dated
January 6, 1998. *
2.3 Second Option Agreement, dated as of May 31, 1999, by and
between the Registrant and London International Group, Inc.,
was filed as an Exhibit to the Registrant's Form 8-K dated
June 1, 1999. *
<CAPTION>
(3) ARTICLES OF INCORPORATION AND BY-LAWS:
3.1 Certificate of Incorporation of Phoenix Medical Technology,
Inc., as amended, was filed as an Exhibit to the Registrant's
Registration Statement on Form S-1 (Reg. No. 2-90708). *
</TABLE>
42
<PAGE> 47
<TABLE>
<S> <C>
3.2 Certificate of Amendment to the Certificate of Incorporation
was filed as an Exhibit to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1988. *
3.3 By-Laws of Phoenix Medical Technology, Inc., as amended on
April 22, 1988 and April 23, 1999 (filed herewith). 46
<CAPTION>
4) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING
INDENTURES:
<S> <C>
4.1 Loan Agreement dated March 27, 1995 between the Registrant
and Carolina First Bank was filed as an Exhibit to the
Registrant's Form 8-K dated March 29, 1995.
4.2 Loan and Security Agreement dated June 21, 1999 between the
Registrant and LaSalle Business Credit, Inc. (filed herewith) 60
4.3 Modification Agreement dated August 6, 1999 between the
Registrant and LaSalle Business Credit, Inc. (filed herewith) 96
4.4 Second Modification Agreement dated November 15, 1999
between the Registrant and LaSalle Business Credit, Inc.
(filed herewith) 103
<CAPTION>
(10) MATERIAL CONTRACTS:
<S> <C>
10.1 Form of Consulting and Noncompetition Agreements, dated March
23, 1984, between the Registrant and Edward W. Gallaher, Sr.
and Grover C. Mixon was filed as an Exhibit to the
Registrant's Registration Statement on Form No. S-1 (Reg. No.
2-90708). *(1)
10.2 Deferred Compensation Plan was filed as an Exhibit to the
Registrant's Registration Statement on Form S-1 (Reg. No.
2-90708). *(1)
</TABLE>
43
<PAGE> 48
<TABLE>
<S> <C>
10.3 Registrant's Savings Plan Qualified Under Section 401(K) of
the Internal Revenue Code, as adopted by the Board of
Directors in July, 1998, was filed as an Exhibit to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1988. *(1)
10.4 1988 Stock Option Plan for Officers and Other Key Employees
of the Registrant, as approved at the Annual Meeting of
Stockholders on April 22, 1988, was filed as an Exhibit to
the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1988. *(1)
10.5 1989 Nonqualified Stock Option Plan for Non-Employee
Directors, as approved at the Annual Meeting of Stockholders
on April 21, 1989 was filed as an Exhibit to the Registrant's
Annual Report on Form 10-K for the year ended December 31,
1989. *(1)
10.6 Second Research and Development Agreement dated as of May 31,
1999 between the Registrant and London International Group,
Inc. was filed as Annex B to the Registrant's Proxy
Statement dated July 9, 1999. *
10.7 Second Loan and Security Agreement dated as of May 31, 1999
between the Registrant and London International Group, Inc.
was filed as Annex C to the Registrant's Proxy Statement
dated July 9, 1999. *
10.8 Second Agreement for the purchase and Sale of Goods dated as
of May 31, 1999 between the Registrant and London
International Group, Inc. was flied as Annex D to the
Registrant's Proxy Statement dated July 9, 1999. *
</TABLE>
44
<PAGE> 49
<TABLE>
<S> <C>
27 Financial Data Schedule (filed in
electronic format only) N/A
</TABLE>
- -----------------------------
"*" Indicates that the exhibit is incorporated by reference into this
Annual Report on Form 10-KSB from the referenced previous filing with
the Commission.
(1) Management contract or compensatory plan required to be filed as an
exhibit.
45
<PAGE> 1
EXHIBIT 3.3
BY-LAWS
-of-
PHOENIX MEDICAL TECHNOLOGY, INC.
ARTICLE 1
Offices; Agent
Section 1. Principal Office; Registered Agent. Until changed in the
manner specified by law, the principal office of the Corporation and the
Corporation's registered agent shall be as set forth in the Corporation's
Certificate of Incorporation as the same may be amended from time to time
(hereinafter referred to as the "Certificate of Incorporation").
Section 2. Other Offices. The Corporation may also have offices at such
other places both within and without the State of Delaware as from time to time
the Board of Directors may determine or the business of the Corporation may
require.
ARTICLE II
Meetings of Stockholders
Section 1. Annual Meeting. The annual meeting of stockholders of the
Corporation for the purpose of electing directors and transacting such other
business as may properly come before the meeting shall be held on the last
Monday of April of each year or on such other date as may be determined by the
Board of Directors.
Section 2. Special Meetings. Special meetings of stockholders or of any
class of stockholders may be called only by the Board of Directors pursuant to a
resolution adopted by a majority of the then authorized number of directors.
Section 3. Place of Meetings. Meetings of stockholders shall be held at
the principal office of the Corporation unless the Board of Directors determines
that a meeting shall be held at some other place within or without the State of
Delaware and causes the notice thereof to so state.
Section 4. Notice of Meetings. Unless waived by him, a written notice
of each annual or special meeting, stating the place, date, and hour of the
meeting, and in the case of a special meeting, the purpose or purposes for which
the meeting is called, shall be personally delivered or mailed postage
<PAGE> 2
prepaid to each stockholder of record entitled to vote at such meeting, not more
than sixty days nor less than ten days before such meeting. If mailed, such
notice shall be addressed to the stockholder at his address as it appears upon
the records of the Corporation. Unless otherwise required by law, notice of
adjournment of a meeting need not be given if the time and place to which it is
adjourned are announced at such meeting.
Notice of any meeting of stockholders or class thereof, whether
required by law, the Certificate of Incorporation, or these By-Laws, may be
waived in writing by any stockholder entitled to such notice, either before or
after the holding of such meeting. The attendance of any stockholder at any
meeting without protesting, prior to or at the commencement of the meeting, the
lack of proper notice shall constitute a waiver by him of notice of such
meeting.
Section 5. Quorum. Unless a greater proportion is required by law, the
Certificate of Incorporation, or these By-Laws, and subject to the right of any
class of shares to vote as a class, at any meeting of stockholders (i) the
holders of shares constituting a majority of the shares entitled to vote, if
present in person or by proxy, shall constitute a quorum for all purposes; and
(ii) if a quorum is present, all questions and business which shall come before
the meeting shall be determined by the vote of a majority of the shares present
in person or by proxy and entitled to vote on the subject matter.
At any meeting, whether a quorum is present or not, the holders of a
majority of the shares present in person or by proxy and entitled to vote may
adjourn the meeting to another time or place. At any such adjourned meeting at
which a quorum is present, any business may be transacted which might have been
transacted at the meeting as originally notified or held.
Section 6. Proxies. Each stockholder entitled to vote at a meeting of
stockholders may authorize another person or persons to act for him by proxy.
The instrument appointing a proxy shall be in writing and subscribed by the
person making the appointment. The person so appointed need not be a
stockholder. A vote in accordance with the terms of a proxy shall be valid
notwithstanding the previous death or incapacity of the principal or revocation
of the appointment unless notice in writing of such death, incapacity, or
revocation shall have been given to the Corporation before a vote is taken. The
presence of a stockholder at a meeting shall not operate to revoke a proxy
unless and until notice of such revocation is given to the Corporation in
writing or in open meeting.
-2-
<PAGE> 3
ARTICLE III
Directors
Section 1. Number and Classification. The number of directors of the
Corporation shall be not less than six nor more than fifteen. Within such
minimum and maximum limitations, the authorized number of directors shall be
fixed from time to time by the Board of Directors pursuant to a resolution
adopted by a majority of the then authorized number of directors. Until
otherwise determined by the Board of Directors, the number of directors shall be
fixed at nine.
The Board of Directors shall be divided into three classes, with the
term of office of one class expiring each year. The terms and classes of the
persons who are to serve as directors until the first annual meeting of
stockholders or until their successors are duly elected and qualified shall be
as specified in Section 2 of this Article III. Thereafter, the number of
directors in each class shall be determined by the Board of Directors.
Section 2. Term of Office. The persons who are to serve as directors
until the first annual meeting of stockholders or until their successors are
duly elected and qualified shall be initially classified as follows: the first
class of directors shall consist of Harold H. Heath, Byron M. Layman and William
T. Sena, or their successors chosen pursuant to Section 4 of this Article III;
the second class of directors shall consist of Edward W. Gallaher, Sr., Ralph E.
Heyman and John J. Sullivan or their successors chosen pursuant to Section 4 of
this Article III; and the third class of directors shall consist of William E.
LeMay, Grover C. Mixon and Arthur Parsons, or their successors chosen pursuant
to Section 4 of this Article III. At the 1984 Annual Meeting of Stockholders or
special meeting in lieu thereof (the "1984 Meeting"), the term of office of the
first class of directors shall expire; at the first annual meeting after the
1984 Meeting, the term of office of the second class shall expire; and at the
second annual meeting after the 1984 Meeting, the term of office of the third
class shall expire. At each annual meeting of stockholders following such
initial classification and election, directors elected to succeed those
directors whose terms expire shall be elected for a term of office to expire at
the third succeeding annual meeting of stockholders after their election.
Each director shall hold office until the expiration of the term for
which he is elected and until his successor has been elected and qualified or
until his earlier resignation or removal. No reduction in the number of
directors or change in the size of any class shall shorten the term of any
incumbent director.
-3-
<PAGE> 4
Section 3. Qualifications of Directors. Directors of the Corporation
need not be stockholders of the Corporation.
Section 4. Newly Created Directorships and Vacancies. Newly created
directorships resulting from any increase in the authorized number of directors
or any vacancies in the Board of Directors resulting from the death,
resignation, retirement, disqualification, removal from office, or other cause
may be filled by a majority vote of the directors then in office, though less
than a quorum, and any director so chosen shall hold office until the next
election of the class for which such director shall have been chosen and until
his successor shall be elected and qualified.
Section 5. Removal. Any director or the entire Board of Directors may
be removed from office at any time, but only for cause and only by the
affirmative vote of the holders of a majority of the shares of the Corporation
then entitled to vote at an election of directors.
ARTICLE IV
Powers and Meetings of the Board of Directors
Section 1. Powers of the Board. Except as otherwise provided by law or
the Certificate of Incorporation, the business and affairs of the Corporation
shall be managed by or under the direction of the Board of Directors.
Section 2. Meetings of the Board. An annual meeting of the Board of
Directors shall be held immediately following the adjournment of each annual
meeting of stockholders, and notice of such meeting need not be given.
The Board of Directors may, by resolution, provide for other meetings
of the Board. Meetings of the Board of Directors may also be held at any time
upon the call of the Chairman of the Board, the President, or any three members
of the Board.
Meetings of the Board of Directors may be held at any place either
within or without the State of Delaware. Written notice of the time and place of
each meeting of the Board of Directors other than the annual meeting shall be
given by mailing the same to each director at his last-known address at least
three days prior to the date of said meeting, or such notice may be personally
delivered or telegraphed to each
-4-
<PAGE> 5
director not less than twenty-four hours before the meeting. Notices need not
specify the purposes of the meeting. Notice of any meeting of directors may be
waived in writing by any director, either before or after the holding of such
meeting. The attendance of any director at any meeting without protesting, prior
to or at the commencement of the meeting, the lack of proper notice shall
constitute a waiver by him of notice of such meeting. Notice of adjournment of a
meeting need not be given if the time and place to which it is adjourned are
announced at such meeting.
Section 3. Quorum. A majority of the then authorized number of
directors shall constitute a quorum for the transaction of business, provided
that whenever less than a quorum is present at any time or place appointed for a
meeting of the Board, a majority of those present may adjourn the meeting from
time to time without notice, other than by announcement at the meeting, until a
quorum shall be present. The vote of a majority of the directors present at a
meeting at which a quorum is present shall be the act of the Board of Directors
unless the act of a greater number is required by the Certificate of
Incorporation or these By-Laws.
Section 4. Action by Directors Without a Meeting. Any action required
or permitted to be taken at any meeting of the directors may be taken without a
meeting if all directors consent thereto in writing and the writing or writings
are filed with or entered upon the records of the Corporation.
Section 5. Action by Communications Equipment. Directors may
participate in a meeting of the Board or any committee of directors appointed by
the Board as hereinafter provided by means of conference telephone or other
communications equipment if all persons participating can hear each other.
Participation in a meeting pursuant to this Section shall constitute presence at
such meeting.
ARTICLE V
Committees
The Board of Directors may, by resolution passed by a majority of the
then authorized number of directors, designate one or more committees, each
committee to consist of three or more of the directors of the Corporation. The
Board may designate one or more directors as alternate members of any committee
who may replace any absent or disqualified member at any meeting of the
committee. To the extent provided in the resolution of the Board of Directors
establishing any such committee and except as otherwise prohibited by law, any
committee of the Board may exercise all the powers and authority
-5-
<PAGE> 6
of the Board of Directors in the management of the business and affairs of the
Corporation other than the power or authority to declare a dividend or to
authorize the issuance of stock.
Each such committee shall serve at the pleasure of the Board of
Directors and shall be subject to the control and direction of the Board of
Directors.
An act or authorization of an act by any such committee within the
authority delegated to it by the resolution establishing it shall be as
effective for all purposes as the act or authorization of the Board of
Directors.
Any such committee may act by a majority of its members at a meeting or
by a writing or writings signed by all of its members and filed with or entered
upon the records of the Corporation.
The Board of Directors may likewise appoint other members of any
committee who are not members of the Board of Directors; provided, however, that
any such individual shall act only in an advisory capacity and shall have no
vote upon any matter of business before the committee.
ARTICLE VI
Officers
Section 1. Officers. The officers of the Corporation shall be a
President, a Secretary, and a Treasurer, and such other officers (including,
without limitation, a Chairman of the Board and one or more Vice Presidents) and
assistant officers as the Board of Directors from time to time may determine.
Any two or more offices may be held by one person, except the offices of
President and Vice President.
Section 2. Election and Term of Office. Each officer of the Corporation
shall be elected by the Board of Directors and shall hold office until the
annual meeting of the Board of Directors following his election and until his
successor is elected and qualified or until his earlier resignation or removal.
The Board of Directors may remove any officer at any time, with or without
cause. The Board of Directors may fill any vacancy in any office occurring from
whatever cause.
-6-
<PAGE> 7
ARTICLE VII
Duties of Officers
Section 1. Chairman of the Board. The Chairman of the Board shall
preside at all meetings of the Board of Directors and Shareholders. The
authority of the Chairman of the Board to execute certificates for shares,
contracts, deeds, notes, mortgages, bonds, other obligations, and other papers
in the name of the Corporation shall be coordinate with like authority of the
President. The Chairman of the Board shall perform such other and further duties
as may from time to time be required of him by the Board of Directors
including, without limitation thereto, the duties of the Chief Executive
Officer.
Section 2. President. The President shall have general supervision,
administration and direction of all the Corporation's affairs, subject to the
direction of the Board of Directors. He shall preside at all meetings of
shareholders and directors and sign all certificates for shares, contracts,
notes, deeds, mortgages, bonds, other obligations, or other papers requiring his
signature, and he shall perform such other and further duties as may from time
to time be required of him by the Board of Directors.
Section 3. Vice-President. The Vice-Presidents, in the order designated
by the Board of Directors, shall perform all duties of the President, in case of
his absence or disability, together with such other duties as the Board of
Directors may from time to time prescribe. The authority of the Vice-Presidents
to execute certificates for shares, contracts, deeds, notes, mortgages, bonds,
other obligations and other papers in the name of the Corporation shall be
coordinate with like authority of the President.
Section 4. Secretary. The Secretary shall keep minutes of all the
proceedings of the shareholders and Board of Directors, and shall make proper
record of the same, which shall be attested by him; sign all certificates for
shares, contracts, deeds, notes, mortgages, bonds, other obligations, and other
papers executed by the Corporation requiring his signature; give notice of
meetings of shareholders and directors; keep such books as may be required by
the Board of Directors and perform such other and further duties as may from
time to time be required of him by the Board of Directors.
Section 5. Treasurer. The Treasurer shall have general supervision of
all finances. He shall receive and have in charge all money, bills, notes,
deeds, leases, mortgages, insurance policies and similar property belonging to
the Corporation, and shall do with the same as may from time to
-7-
<PAGE> 8
time be required by the Board of Directors. He shall cause to be kept adequate
and correct accounts of the business transactions of the Corporation, including
accounts of its assets, liabilities, receipts, disbursements, gains, losses,
stated capital, and shares, together with such other accounts as may be
required, and, on the expiration of his term of office shall turn over to his
successor or to the Board of Directors all property, books, papers and money of
the Corporation in his hands. He shall also perform such other duties as may be
assigned to him by the Board of Directors.
Section 6. Assistant Officers. Assistant officers shall act as
assistants to and under the direction of their superior officers, and shall be
vested with all the powers and be required to perform any of the duties of their
superior officers in their absence, and they shall perform such other and
further duties as may from time to time be required of them by the Board of
Directors.
ARTICLE VIII
Indemnification of Directors and Officers
The Corporation shall indemnify any person who served or serves as a
director or officer of the Corporation and any director or officer of the
Corporation who served or serves at the request of the Corporation as a
director, officer, employee, or agent of another corporation, partnership, joint
venture, trust, or other enterprise, against any and all losses, liabilities,
damages, and expenses, including attorneys' fees, judgments, fines, and amounts
paid in settlement, incurred by such person, in connection with any claim,
action, suit, or proceeding, whether civil, criminal, administrative, or
investigative, including any action by or in the right of the Corporation, by
reason of any act or omission to act as such director, officer, employee, or
agent, to the full extent permitted by Delaware law including, without
limitation, the provisions of Section 145 of the General Corporation Law of
Delaware.
The indemnification provided by this Article VIII shall not be deemed
exclusive of any other rights to which any person seeking indemnification may be
entitled under these By-Laws or any agreement, vote of stockholders or
disinterested directors, or otherwise, both as to action in such person's
official capacity and as to action in another capacity while holding such
office, and shall continue as to a person who has ceased to be a director or
officer of the Corporation and shall inure to the benefit of the heirs,
executors, and administrators of such a person.
-8-
<PAGE> 9
ARTICLE IX
Certificates For Shares of Stock
Section 1. The interest of each stockholder in the Corporation
shall be evidenced by a certificate or certificates for shares in such form as
the Board of Directors from time to time may prescribe. The shares of the
Corporation shall be transferable on the books of the Corporation by the holder
thereof in person or by his attorney, upon surrender for cancellation of a
certificate or certificates for the same number of shares, with an assignment
and power of transfer endorsed thereon or attached thereto, duly executed, and
with such proof of the authenticity of the signature as the Corporation or its
agent may reasonably require.
Section 2. Certificates for shares of stock shall be signed by
the Chairman of the Board, the President, or a Vice President, and by the
Secretary or Treasurer or an Assistant Secretary or an Assistant Treasurer of
the Corporation and shall be countersigned and registered in such manner, if
any, as the Board of Directors may prescribe. Any or all signatures on the
certificate may be a facsimile. In case any officer, transfer agent, or
registrar who has signed or whose facsimile signature has been placed upon a
certificate shall cease to be such officer, transfer agent, or registrar before
such certificate is issued, it may be issued by the Corporation with the same
effect as if he were such officer, transfer agent, or registrar at the date of
issue.
Section 3. No certificate for shares of stock shall be delivered
in place of any certificate alleged to have been lost, stolen, or destroyed,
except upon production of such evidence of such loss, theft, or destruction, and
upon delivery to the Corporation of a bond of indemnity in such amount, upon
such terms, and secured by such surety, as the Board of Directors in its
discretion may require.
ARTICLE X
Seal
The seal of the Corporation shall be circular with the name of the
Corporation and the word "DELAWARE" surrounding the word "SEAL." Failure to
affix the corporate seal shall not affect the validity of any instrument.
-9-
<PAGE> 10
ARTICLE XI
Amendments
These By-Laws may be amended or repealed only in the manner provided in
the Corporation's Certificate of Incorporation.
-10-
<PAGE> 11
PHOENIX MEDICAL TECHNOLOGY, INC.
Article VIII of the By-Laws of Phoenix Medical
Technology, Inc., as Amended, Approved at the Annual Meeting
of Stockholders on April 22, 1988
ARTICLE VIII
Indemnification of Directors and Officers
The Corporation shall indemnify any person who served or serves as a
director or officer of the Corporation and any director or officer of the.
Corporation who served or serves at the request of the Corporation as a
director, officer, employee, or agent of another corporation, partnership, joint
venture, trust, or other enterprise, against any and all losses, liabilities,
damages, expense including attorneys' fees, judgments, fines, and amounts paid
in settlement, incurred by such person, in connection with any claim, action,
suit, or proceeding, whether civil, criminal, administrative, or investigative,
including any action by or in the right of the Corporation, by reason of any act
or omission to act as such director, officer, employee, or agent, to the full
extent permitted by Delaware law including, without limitation, the provisions
of Section 145 of the General Corporation Law of Delaware.
The right to indemnification conferred in this Article VIII shall be a
contract right and shall include the right to be paid by the Corporation the
expenses incurred in defending any such claim, action, suit or proceeding in
advance of its final disposition; provided, however, that if the Delaware
General Corporation Law so requires, such payment shall be made only upon
delivery to the Corporation of an undertaking, by or on behalf of such director
or officer, to repay all amounts so advanced if it shall ultimately be
determined that such director or officer is not entitled to be indemnified under
this Article or otherwise.
The indemnification provided by this Article VIII shall not be deemed
exclusive of any other rights to which any person seeking indemnification may be
entitled under these By-Laws or any agreement, vote of stockholders or
disinterested directors, or otherwise, both as to action in such person's
official capacity and as to action in another such person's official capacity
and as to action in another capacity while holding such office, and shall
continue as to a person who has ceased to be a director or officer of the
Corporation and shall inure to the benefit of the heirs, executors, and
administrators of such a person.
<PAGE> 12
PHOENIX MEDICAL TECHNOLOGY, INC.
UNANIMOUS WRITTEN CONSENT OF THE
BOARD OF DIRECTORS TO ACTION WITHOUT A MEETING
The undersigned, being all of the members of the Board of Directors of
Phoenix Medical Technology, Inc., a Delaware corporation (the "Corporation"),
do hereby waive any and all requirements for the holding of a meeting or
meetings of the Board of Directors of the Corporation and do hereby unanimously
take the following actions and adopt the following preambles and resolutions,
pursuant to Section 141(f) of the General Corporation Law of the State of
Delaware, by signing our written consent hereto:
1. Resignation of Byron M. Layman from Board of Directors.
WHEREAS, effective as of April 20, 1999, after more than 20 years of
distinguished service as a director of the Corporation and its predecessor,
Byron M. Layman has resigned as a member of the Board of Directors of the
Corporation and has tendered such resignation to the Corporation.
NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors accepts
and confirms Mr. Layman's resignation from the Board; and
FURTHER RESOLVED, that the members of the Board of Directors of the
Corporation do hereby express our heartfelt gratitude and deepest appreciation
to Mr. Layman for his exemplary service and invaluable leadership to the
Corporation and thank him for the thoughtfulness, loyalty and effectiveness
which characterized his 20 years of service on the Board.
2. Amendment of Bylaws; Number of Directors.
WHEREAS, following the resignation of Byron Layman from the Board of
Directors, it is in the best interests of the Corporation to amend the Bylaws
of the Corporation to allow for a Board of Directors with fewer members.
NOW, THEREFORE, BE IT RESOLVED, that the first sentence of Article
III, Section I of the Corporation's Bylaws be amended to read as follows:
The number of directors of the Corporation shall not be less
than three nor more than fifteen.
FURTHER RESOLVED, that, pursuant to Article III, Section I of the
Corporation's Bylaws, as amended, the number of directors of the Corporation be
fixed at four, until such number of directors be changed by further resolution
of the Board of Directors.
<PAGE> 13
And we do hereby consent that the actions set forth in the foregoing
preambles and resolutions shall have the same force and effect as though
unanimously adopted at a duly called and convened meeting of the Board of
Directors of the Corporation, effective as of the date hereof, and direct that
a copy hereof be filed with the minutes of the proceedings of the Board of
Directors of the Corporation.
* * *
2
<PAGE> 14
This document is dated and effective as of the 23rd day of April, 1999.
/s/Edward W. Gallaher, Sr.
-----------------------------
Edward W. Gallaher, Sr.
/s/ Grover C. Mixon
-----------------------------
Grover C. Mixon
/s/ Harold H. Heath
-----------------------------
Harold H. Heath
/s/ William T. Sena
-----------------------------
William T. Sena
3
<PAGE> 1
EXHIBIT 4.2
LOAN AND SECURITY AGREEMENT
THIS LOAN AND SECURITY AGREEMENT ("Agreement") is made as of this 21st
day of June, 1999, by and among LASALLE BUSINESS CREDIT, INC., a Delaware
corporation ("LaSalle"), with its principal office at 135 South LaSalle Street,
Chicago, Illinois 60603, and PHOENIX MEDICAL TECHNOLOGY, INC., a Delaware
corporation ("Borrower"), with its principal office at Highway 521 West,
Andrews, South Carolina 29510.
WITNESSETH:
WHEREAS, from time to time Borrower may request LaSalle to make loans
and advances to and extend certain credit accommodations to Borrower, and the
parties wish to provide for the terms and conditions upon which such loans,
advances and credit accommodations shall be made.
NOW, THEREFORE, in consideration of any loans, advances and credit
accommodations (including any loans by renewal or extension) hereafter made to
Borrower by LaSalle, and for other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged by Borrower, the parties agree
as follows:
1. DEFINITIONS.
(a) General Definitions.
"Account," "Account Debtor," "Chattel Paper," "Documents,"
"Equipment," "General Intangibles," "Goods," "Instruments," "Investment
Property," and "Inventory," shall have the respective meanings assigned to such
terms, as of the date of this Agreement, in the Maryland Uniform Commercial
Code.
"Affiliate" shall mean any Person directly or indirectly
controlling, controlled by or under common control with Borrower; provided it is
understood and agreed that based on the agreements existing as of the date of
this Agreement, LIG is not at this time an Affiliate of the Borrower.
"Benefit Plan" shall mean an employee pension benefit plan of
any Borrower or an ERISA Affiliate, as defined in Section 3(2) of ERISA, which
is subject to Title IV of ERISA, each of which is specified on SCHEDULE 13(v)
attached hereto.
"Borrowing Base" shall have the meaning specified in paragraph
2(b)(i) hereof.
"Business Day" shall mean any day other than a Saturday,
Sunday, or such other day as banks in Chicago, Illinois are authorized or
required to be closed for business.
"Capital Expenditure Advance" shall mean an advance by LaSalle
to or for the benefit of the Borrower under the Capital Expenditure Loan.
"Capital Expenditure Loan" shall have the meaning specified in
paragraph 4 hereof.
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"Capital Expenditure Loan Note" shall mean the promissory note
in the maximum principal amount of the Capital Expenditure Loan executed by
Borrower to the order of LaSalle, dated as of the Closing Date.
"Capital Expenditures" shall mean, with respect to any period,
the aggregate of all expenditures (whether paid in cash or accrued as
liabilities and including expenditures for capitalized lease obligations) by
Borrower during such period that are required by GAAP to be included in or
reflected by the property, plant or equipment or similar fixed asset accounts
(or in intangible accounts subject to amortization) in the balance sheet of
Borrower.
"Change of Control" shall mean if the current shareholders of
Borrower shall cease to directly or indirectly, of record or beneficially, own
or control in the aggregate at least fifty percent (50%) of the voting shares of
Borrower free and clear of all liens and security interests.
"Closing Agenda" shall have the meaning specified in paragraph
15(a)(i) hereof.
"Closing Date" shall mean the date first stated above.
"Collateral" shall mean all of the personal property of
Borrower described in paragraph 7 hereof, all of the real property of Borrower
described in the Mortgages and all other real or personal property of any
Obligor or any other Person now or hereafter pledged to LaSalle to secure,
either directly or indirectly, repayment of any of the Liabilities.
"Debt Service Coverage Ratio" shall mean, with respect to any
period, the ratio of: (i) net income after taxes for such period (excluding any
after-tax gains or losses on the sale of assets (other than the sale of
Inventory in the ordinary course of business) and excluding other after-tax
extraordinary gains or losses), plus deferred taxes, plus depreciation and
amortization deducted in determining net income for such period, minus Capital
Expenditures for such period not financed, minus any cash dividends paid or
accrued and cash withdrawals paid or accrued to shareholders or other Affiliates
for such period which were not calculated in determining net income after taxes,
and plus the after-tax increase in LIFO reserves or minus the after tax decrease
in LIFO reserves; to (ii) current principal maturities of long term debt and
capitalized leases paid or scheduled to be paid during such period, plus any
prepayments on indebtedness owed to any Person (except trade payables and
revolving loans) and paid during such period.
"Default" shall mean any event, condition or default which
with the giving of notice, the lapse of time or both would be an Event of
Default.
"Dilution" shall mean, with respect to any period, the
percentage obtained by dividing: (i) the sum of non-cash credits against
Accounts of Borrower for such period, plus pending or probable, but not yet
applied, non-cash credits against Accounts of Borrower for such period, as
determined by LaSalle; by (ii) gross invoiced sales of Borrower for such period.
"EBITDA" shall mean, with respect to any period, net income
after taxes for such period (excluding any after-tax gains or losses on the sale
of assets and excluding other after-tax extraordinary gains or losses) plus
interest expense, income tax expense, depreciation and amortization for such
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<PAGE> 3
period, less gains and losses attributable to any fixed asset sales made during
such period, plus or minus any other non-cash charges or gains which have been
subtracted or added in calculating net income after taxes for such period.
"Eligible Account" shall mean an Account owing to Borrower
which is acceptable to LaSalle in its reasonable discretion for lending
purposes. LaSalle shall, in general, consider an Account to be an Eligible
Account if it meets, and so long as it continues to meet, the requirements set
forth below. In the event LaSalle changes any of the requirements set forth
below, LaSalle shall notify the Borrower of such change in writing.
(i) it is genuine and in all respects is what it purports
to be;
(ii) it is owned by Borrower and Borrower has the right to
subject it to a security interest in favor of LaSalle;
(iii) it arises from: (A) the performance of services by
Borrower and such services have been fully performed and acknowledged and
accepted by the Account Debtor thereunder; or (B) the sale of Goods by Borrower,
and such Goods have been completed in accordance with the Account Debtor's
specifications (if any) and delivered to and accepted by the Account Debtor,
such Account Debtor has not refused to accept and has not returned or offered to
return any of the Goods, or has not refused to accept any of the services, which
are the subject of such Account, and Borrower has possession of, or has
delivered to LaSalle at LaSalle's request, shipping and delivery receipts
evidencing delivery of such Goods;
(iv) it is evidenced by an invoice rendered to the Account
Debtor thereunder, is due and payable within thirty (30) days after the stated
invoice date thereof and does not remain unpaid more than ninety (90) days past
the stated invoice date thereof; provided, however, that if more than
twenty-five percent (25%) of the aggregate dollar amount of invoices owing by a
particular Account Debtor remain unpaid for more than ninety (90) days past the
respective invoice dates thereof, then all Accounts owing to Borrower by that
Account Debtor shall be deemed ineligible;
(v) it is not subject to any prior assignment, claim,
lien, security interest or encumbrance whatsoever, other than Permitted Liens;
(vi) it is a valid, legally enforceable and unconditional
obligation of the Account Debtor thereunder, and is not subject to setoff,
counterclaim, credit, allowance or adjustment by such Account Debtor, or to any
claim by such Account Debtor denying liability thereunder in whole or in part;
(vii) it does not arise out of a contract or order which
fails in any material respect to comply with the requirements of applicable law;
(viii) the Account Debtor thereunder is not a director,
officer, employee or agent of Borrower, or a Subsidiary, Parent or Affiliate of
Borrower;
(ix) in the event LaSalle has notified Borrower in writing
that Borrower should comply with the Assignment of Claims Act of 1940, as
amended, it is not an Account with respect to
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<PAGE> 4
which the Account Debtor is the United States of America or any department,
agency or instrumentality thereof, unless Borrower assigns its right to payment
of such Account to LaSalle pursuant to, and in full compliance with, the
Assignment of Claims Act of 1940, as amended;
(x) it is not an Account with respect to which the
Account Debtor is located in a state which requires Borrower, as a precondition
to commencing or maintaining an action in the courts of that state, either to:
(A) receive a certificate of authority to do business and be in good standing in
such state; or (B) file a notice of business activities report or similar report
with such state's taxing authority, unless (x) Borrower has taken one of the
actions described in clauses (A) or (B), (y) the failure to take one of the
actions described in either clause (A) or (B) may be cured retroactively by
Borrower at its election, or (z) Borrower has proven, to LaSalle's reasonable
satisfaction, that it is exempt from any such requirements under any such
state's laws;
(xi) it is an Account which arises out of a sale made in
the ordinary course of Borrower's business;
(xii) the Account Debtor is a resident or citizen of, and
is located within, the United States of America or Canada or the Account Debtor
is not a resident or citizen of either such country but the Account is fully
secured by either (a) an irrevocable letter of credit acceptable to and assigned
to LaSalle, or (b) export credit insurance issued on a policy acceptable to
LaSalle by an insurer acceptable to LaSalle;
(xiii) it is not an Account with respect to which the
Account Debtor's obligation to pay is conditional upon the Account Debtor's
approval of the Goods or services or is otherwise subject to any repurchase
obligation or return right, as with sales made on a bill-and-hold, guaranteed
sale, sale on approval, sale or return or consignment basis;
(xiv) it is not an Account: (A) with respect to which any
representation or warranty contained in this Agreement is untrue; or (B) which
violates any of the covenants of Borrower contained in this Agreement;
(xv) it is not an Account which, when added to a
particular Account Debtor's other indebtedness to Borrower, exceeds the lesser
of ten percent (10%) (or in the case of the LIG Group, on a combined basis,
twenty-seven and one-half percent (27 1/2%), and in the case of Fisher
Scientific International, Inc., twenty percent (20%)) of the aggregate of
Borrower's Accounts or a credit limit determined by LaSalle in its reasonable
credit judgment for that Account Debtor, provided, however, that Accounts
excluded from Eligible Accounts solely by reason of this paragraph 1(a)(xv)
shall be Eligible Accounts to the extent of such credit limit; and/or
(xvi) it is not an Account with respect to which the
prospect of payment or performance by the Account Debtor is or will be impaired,
as determined by LaSalle in its reasonable discretion.
"Eligible Capital Expenditure" shall mean a capital asset to
be used in the Borrower's business which LaSalle, in its reasonable credit
judgement based upon such information as LaSalle may request from Borrower, has
determined to be eligible for an advance under the Capital Expenditure Loan.
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<PAGE> 5
"Eligible Inventory" shall mean Inventory of Borrower which is
acceptable to LaSalle in its reasonable discretion. Without limiting LaSalle's
discretion, LaSalle shall, in general, consider Inventory to be Eligible
Inventory if it meets, and so long as it continues to meet, the requirements set
forth below. In the event LaSalle changes any of the requirements set forth
below, LaSalle shall notify the Borrower of such change in writing.
(i) it is owned by Borrower and Borrower has the right to
subject it to a security interest in favor of LaSalle;
(ii) it is located on the premises listed on Exhibit A and
is not in transit;
(iii) it is not subject to any prior assignment, claim,
lien, security interest or encumbrance whatsoever, other than Permitted Liens;
(iv) it is not work in process and is held for sale or
furnishing under contracts of service, it is (except as LaSalle may otherwise
consent in writing) new and unused and free from defects which would, in
LaSalle's reasonable determination, affect its market value;
(v) it is not stored with a bailee, consignee,
warehouseman, processor or similar party unless LaSalle has given its prior
written approval (which such approval shall not be unreasonably delayed,
withheld or conditioned) and Borrower has caused any such bailee, consignee,
warehouseman, processor or similar party to issue and deliver to LaSalle, in
form and substance acceptable to LaSalle, such UCC financing statements,
warehouse receipts, waivers and other documents as LaSalle shall require;
(vi) LaSalle has determined in accordance with LaSalle's
customary business practices that such Inventory is not unacceptable due to age,
type, category or quantity (e.g., it may not be special mixes, propane gas,
packaging supplies or slow moving); and
(vii) it is not Inventory: (A) with respect to which any of
the representations and warranties contained in this Agreement are untrue; or
(B) which violates any of the covenants of Borrower contained in this Agreement.
"Environmental Laws" shall mean all federal, state, district,
local and foreign laws, rules, regulations, ordinances, and consent decrees
relating to health, safety, hazardous substances, pollution and environmental
matters, as now or at any time hereafter in effect, applicable to Borrower's
business or facilities owned or operated by Borrower, including laws relating to
emissions, discharges, releases or threatened releases of pollutants,
contamination, chemicals, or hazardous, toxic or dangerous substances, materials
or wastes into the environment (including, without limitation, ambient air,
surface water, ground water, land surface or subsurface strata) or otherwise
relating to the generation, manufacture, processing, distribution, use,
treatment, storage, disposal, transport or handling of Hazardous Materials.
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"ERISA" shall mean the Employee Retirement Income Security Act
of 1974, as amended, and all references to sections thereof shall include such
sections and any predecessor and successor provisions thereto.
"ERISA Affiliate" shall mean any member of a controlled group
of entities as determined under Section 414(b), (c), (m), or (o) of the IRC, of
which the Borrowers are a member.
"Event of Default" shall have the meaning specified in
paragraph 16 hereof.
"Excess Availability" shall mean, as of any date of
determination by LaSalle, the excess, if any, of: (i) the Borrowing Base; over
(ii) the outstanding Revolving Loans as of the close of business on such date.
For purposes of calculating Borrower's Excess Availability, all of Borrower's
trade payables and outstanding debt, other than the Liabilities hereunder, which
remain unpaid beyond the Borrower's normal and beyond customary payment trends
shall, on the date of the determination of Excess Availability, be deemed to
have been paid by Borrower with proceeds of a hypothetical advance under the
Revolving Loans which hypothetical advance shall be added to the actual
outstanding principal amount of the Revolving Loans.
"Exhibit A" shall mean the exhibit entitled "Exhibit A -
Business and Collateral Locations" which is attached hereto and made a part
hereof.
"Exhibit B" shall mean the exhibit entitled Exhibit B -
Officer's Certificate, which is attached hereto and made a part hereof.
"Fiscal Year" shall mean with respect to Borrower, the twelve
(12) month accounting period of Borrower commencing January 1 of each calendar
year and ending December 31 of such calendar year.
"GAAP" shall mean generally accepted accounting principles and
policies in the United States as in effect from time to time.
"Hazardous Materials" shall mean any hazardous, toxic or
dangerous substance, materials and wastes, including, without limitation,
hydrocarbons (including naturally occurring or man-made petroleum and
hydrocarbons), flammable explosives, asbestos, urea formaldehyde insulation,
radioactive materials, biological substances, polychlorinated biphenyls,
pesticides, herbicides and any other kind and/or type of pollutants or
contaminants (including, without limitation, materials which include hazardous
constituents), sewage, sludge, industrial slag, solvents and/or any other
similar substances, materials, or wastes and including any other substances,
materials or wastes that are or become regulated under any Environmental Law
(including, without limitation, any that are or become classified as hazardous
or toxic under any Environmental Law).
"Indemnified Party" shall have the meaning specified in
paragraph 18 hereof.
"Kind" shall mean, with respect to any Loan, whether such Loan
is a Revolving Loan, a Term Loan, or a Capital Expenditure Loan.
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"LIFO" shall mean the Last-In, First-Out method of accounting
for Inventory as determined in accordance with GAAP.
"LIG" shall mean London International Group, Inc., a New
Jersey corporation.
"LIG Group" shall mean collectively LIG and all other Person's
directly or indirectly controlling, controlled by or under common control with
LIG.
"Liabilities" shall mean any and all obligations, liabilities
and indebtedness of Borrower to LaSalle or to any parent, affiliate or
subsidiary of LaSalle of any and every kind and nature, howsoever created,
arising or evidenced and howsoever owned, held or acquired, whether now or
hereafter existing, whether now due or to become due, whether primary,
secondary, direct, indirect, absolute, contingent or otherwise (including,
without limitation, obligations of performance), whether several, joint or joint
and several, and whether arising or existing under written or oral agreement or
by operation of law.
"Loan" or "Loans" shall mean any and all Revolving Loans, the
Capital Expenditure Loan, and the Term Loan made by LaSalle to Borrower pursuant
to paragraphs 2, 3, and 4 hereof and all other loans, advances and financial
accommodations made by LaSalle to or on behalf of Borrower hereunder.
"Lock Box" and "Blocked Account" shall have the meanings
specified in paragraph 10 hereof.
"Material Adverse Effect" shall mean with respect to any
event, act, condition or occurrence of whatever nature (including any adverse
determination in any litigation, arbitration or governmental investigation or
proceeding), whether singly or in conjunction with any other event or events,
act or acts, condition or conditions, occurrence or occurrences, whether or not
related, a material adverse change in, or a material adverse effect upon, any of
the business, property, assets, operations, condition (financial or otherwise)
or prospects of Borrower.
"Mortgage" shall mean each mortgage or deed of trust executed
by Borrower in favor of LaSalle to secure the Liabilities.
"Multiemployer Plan" shall mean a plan described in Section
4001(a)(3) of ERISA which covers employees of any Borrower or any ERISA
Affiliate.
"Note" shall mean the Revolving Note, the Term Note, or the
Capital Expenditure Loan Note.
"Obligor" shall mean Borrower and each Person who is or shall
become primarily or secondarily liable for any of the Liabilities; provided,
however, that such term shall not include any Account Debtor.
"Original Term" shall have the meaning specified in paragraph
12 hereof.
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"Other Agreements" shall mean all agreements, instruments and
documents including, without limitation, guaranties, mortgages, trust deeds,
pledges, powers of attorney, consents, assignments, contracts, notices, security
agreements, leases, financing statements and all other writings heretofore, now
or from time to time hereafter executed by or on behalf of Borrower or any other
Person and delivered to LaSalle or to any parent, affiliate or subsidiary of
LaSalle in connection with the Liabilities or the transactions contemplated
hereby.
"Parent" shall mean any Person now or at any time or times
hereafter owning or controlling (alone or with any other Person) at least a
majority of the issued and outstanding stock or other similar ownership interest
of Borrower or any Subsidiary.
"Permitted Liens" shall mean: (i) statutory liens of
landlords, carriers, warehousemen, mechanics, materialmen or suppliers incurred
in the ordinary course of business and securing amounts not yet due or declared
to be due by the claimant thereunder; (ii) liens or security interests in favor
of LaSalle; (iii) zoning restrictions and easements, rights of way, licenses,
covenants and other restrictions affecting the use of real property that do not
individually or in the aggregate have a Material Adverse Effect on Borrower's
ability to use such real property for its intended purpose in connection with
Borrower's business; (iv) liens securing the payment of taxes or other
governmental charges not yet delinquent or being contested in good faith and by
appropriate proceedings; (v) liens incurred or deposits made in the ordinary
course of Borrower's business in connection with capitalized leases or purchase
money security interests for purchase of, and applying only to, Equipment
included in the permitted borrowings under paragraph 13(q) or permitted as
Capital Expenditures under paragraph 14(m), the documents relating to such liens
to be in form and substance acceptable to LaSalle; (vi) liens securing
indebtedness owing by any Subsidiary to Borrower to the extent such indebtedness
is permitted under paragraph 14(k), or to any other Subsidiary of Borrower;
(vii) deposits to secure performance of bids, trade contracts, leases and
statutory obligations (to the extent not excepted elsewhere herein); (viii)
liens specifically permitted by LaSalle in writing as set forth on SCHEDULE 1(a)
attached hereto; (ix) lien on the Borrower's real property securing the Real
Estate Loan; (x) any lien arising out of the refinancing, extension, renewal or
refunding of any indebtedness secured by an lien permitted by any of the
foregoing subparagraphs (i) through (ix) inclusive; provided, that (a) such
indebtedness is not secured by any additional assets, and (b) the amount of such
indebtedness is not increased; (xi) pledges or deposits in connection with
worker's compensation, unemployment insurance and other social security
legislation; (xii) securities and other properties held at banks or financial
institutions to secure the payment or reimbursement under overdraft, acceptance
and other facilities; (xiii) rights of setoff, banker's lien and other similar
rights arising solely by operation of law; and (xiv) existing liens securing the
Subordinated Debt.
"Person" shall mean any individual, sole proprietorship,
partnership, limited liability company venture, trust, unincorporated
organization, association, corporation, institution, entity, party or foreign or
United States government (whether federal, state, county, city, municipal or
otherwise), including, without limitation, any instrumentality, division,
agency, body or department thereof.
"Prime Rate" shall mean the publicly announced prime rate of
LaSalle National Bank, Chicago, Illinois, in effect from time to time. The Prime
Rate is not intended to be the lowest or most favorable rate of LaSalle National
Bank in effect at any time.
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"Real Estate Loan" shall mean the Loan in the original
principal amount of One Million Seven Hundred Sixty Thousand Dollars
($1,760,000.00) from Carolina First Bank to the Borrower which is secured by the
land and building owned by the Borrower located approximately one mile west of
Andrews, South Carolina.
"Renewal Term" shall have the meaning specified in paragraph
12 hereof.
"Revolving Loans" shall have the meaning specified in
paragraph 2 hereof.
"Revolving Loan Commitment" shall mean the sum of Three
Million Eight Hundred Thousand Dollars ($3,800,000.00).
"Revolving Note" shall mean the promissory note in the
original principal amount of Three Million Eight Hundred Thousand Dollars
($3,800,000.00), executed by Borrower to the order of LaSalle, dated as of the
Closing Date.
"Subordinated Debt" shall mean collectively: (i) all of the
Borrower's now existing or hereafter arising liabilities and obligations to LIG;
and (ii) any other debt of the Borrower which is subordinated to the Liabilities
on terms and conditions acceptable to LaSalle.
"Subsidiary" shall mean any corporation or company of which
more than fifty percent (50%) of the outstanding capital stock having ordinary
voting power to elect a majority of the board of directors of such corporation
(irrespective of whether at the time stock of any other class of such
corporation shall have or might have voting power by reason of the happening of
any contingency) is at the time, directly or indirectly, owned by Borrower or by
any partnership or joint venture of which more than fifty percent (50%) of the
outstanding equity interests are at the time, directly or indirectly, owned by
Borrower.
"Tangible Net Worth" shall mean shareholders' equity
(including retained earnings) less the book value of all intangible assets,
determined by LaSalle on a consistent basis, plus the amount of any debt
subordinated to LaSalle on terms and conditions acceptable to LaSalle in its
sole judgment, all as determined in accordance with GAAP, consistently applied.
"Term Loan" shall have the meaning specified in paragraph 3
hereof.
"Term Note" shall mean the promissory note in the original
principal amount equal to the amount of the Term Loan, executed by Borrower to
the order of LaSalle and dated as of the Closing Date.
"Total Credit Facility" shall mean the sum of Six Million
Dollars ($6,000,000.00).
(b) Accounting Terms And Definitions. Unless otherwise
defined or specified herein, all accounting terms used in this Agreement shall
be construed in accordance with GAAP, applied on a basis consistent in all
material respects with the financial statements delivered by Borrower to LaSalle
on or before the Closing Date. All accounting determinations for purposes of
determining compliance with the financial covenants contained in paragraph 14(m)
shall be made in accordance with GAAP as
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in effect on the Closing Date and applied on a basis consistent in all material
respects with the audited financial statements delivered to LaSalle by Borrower
on or before the Closing Date. The financial statements required to be delivered
hereunder from and after the Closing Date, and all financial records, shall be
maintained in accordance with GAAP. If GAAP shall change from the basis used in
preparing the audited financial statements delivered to LaSalle by Borrower on
or before the Closing Date, the certificates required to be delivered pursuant
to paragraph 14( ) demonstrating compliance with the covenants contained herein
shall include, at the election of Borrower or upon the request of LaSalle,
calculations setting forth the adjustments necessary to demonstrate how Borrower
is in compliance with the financial covenants based upon GAAP as in effect on
the Closing Date.
2. REVOLVING LOANS. Subject to the terms and conditions
of this Agreement and the Other Agreements, during the Original Term and any
Renewal Term, absent the existence of an Event of Default:
(a) LaSalle shall make such revolving loans and advances
(the "Revolving Loans") to Borrower as Borrower shall from time to time request,
in accordance with the terms of paragraph 2(b) hereof. The aggregate unpaid
principal amount of all Revolving Loans outstanding at any one time made to
Borrower shall not exceed the lesser of: (i) the Borrowing Base; or (ii) the
Revolving Loan Commitment. All Revolving Loans shall be repaid in full upon the
earlier to occur of (A) the end of the Original Term or any Renewal Term, if
either LaSalle or Borrower elects to terminate this Agreement as of the end of
any such term and (B) the acceleration of the Liabilities pursuant to paragraph
17 of this Agreement. If at any time the outstanding principal balance of the
Revolving Loans made to Borrower exceeds: (1) the Borrowing Base; or (2) the
Revolving Loan Commitment, Borrower shall immediately, upon the request of
LaSalle, pay to LaSalle such amount as may be necessary to eliminate such
excess, and LaSalle shall apply such payment against the outstanding principal
balance of the Revolving Loans. In addition, if at any time the outstanding
principal balance of the Loans exceeds the Total Credit Facility, Borrower shall
immediately and without the necessity of a demand by LaSalle pay to LaSalle such
amount as may be necessary to eliminate such excess, and LaSalle shall apply
such payment against the outstanding principal balance of the Loans in such
order as LaSalle shall determine in its sole discretion. Borrower hereby
authorizes LaSalle to charge any of Borrower's accounts to make any payments of
principal or interest required by this Agreement. All Revolving Loans shall, in
LaSalle's sole discretion, be evidenced by one or more promissory notes in form
and substance satisfactory to LaSalle. However, if such Revolving Loans are not
so evidenced, such Revolving Loans may be evidenced solely by entries upon the
books and records maintained by LaSalle.
(b) LaSalle shall make Revolving Loans to Borrower up to
the lesser of the following amounts, the amount calculated pursuant to
subparagraph (i) below being the "Borrowing Base":
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(i) an amount equal to the sum of: (A) up to
eighty-five percent (85%) of the face amount of Eligible Accounts plus, (B) the
lesser of (x) up to sixty percent (60%) of the value of Eligible Inventory,
calculated on the basis of the lower of cost or market value on a first-in,
first-out basis, and (y) One Million Five Hundred Thousand Dollars
($1,500,000.00), in each case, less such reserves as LaSalle elects to establish
from time to time in the exercise of its reasonable discretion (to establish a
reserve, LaSalle shall provide written notice to Borrower of the amount of, and
reason for, such reserve) including, without limitation, a Dilution reserve if
Dilution exceeds five percent (5%); or
(ii) the Revolving Loan Commitment.
3. TERM LOAN.
(a) On the Closing Date, LaSalle shall make a term loan
to Borrower in the original principal amount of One Million Seven Hundred
Thousand Dollars ($1,700,000.00) (the "Term Loan"). Principal payable on account
of the Term Loan shall be payable in successive monthly installments: (i)
payable on the first day of each month, the first of which installments shall be
due and payable on the first day of the month immediately following the 30th day
after the Closing Date; and (ii) based on an amortization schedule consisting of
eighty-four (84) equal and level payments; provided, however, that the entire
unpaid principal balance of the Term Loan shall be due and payable in full upon
the expiration of the Original Term of this Agreement; and, provided further,
that in the event that the Original Term of this Agreement is initially or
subsequently renewed in accordance with paragraph 12 hereof, then Borrower shall
continue to make such equal and level monthly payments, with a final installment
equal to the unpaid principal balance and any other amounts outstanding due and
payable upon the expiration of the Renewal Term. Notwithstanding anything
hereinabove to the contrary, the entire unpaid principal balance of the Term
Loan, and any accrued and unpaid interest thereon, shall be immediately due and
payable upon the earlier to occur of: (i) the last day of the Original Term or
the last day of any Renewal Term, if either LaSalle or Borrower elects to
terminate this Agreement as of the end of any such Original or Renewal Term; and
(ii) the acceleration of the Liabilities pursuant to paragraph 17 of this
Agreement.
(b) If Borrower sells any Equipment, or if Borrower sells
any real property subject to a Mortgage or if any of the Collateral is damaged,
destroyed or taken by condemnation, Borrower shall pay to LaSalle, unless
otherwise specifically provided herein or otherwise agreed to by LaSalle, as and
when received by Borrower and as a mandatory prepayment of the Term Loan, to be
applied against the last maturing installments of principal thereof, in the
inverse order thereof (or, at LaSalle's option, such of the other Liabilities of
Borrower as LaSalle may elect), a sum equal to the proceeds received by Borrower
(minus the outstanding amount of any indebtedness secured by a Permitted Lien,
under paragraph (v) or (ix) of the definition of Permitted Lien, on such asset,
which is superior to LaSalle's lien, and also less the reasonable out-of-pocket
costs and expenses incurred in connection with such process) from: (i) such
sale; or (ii) such damage, destruction or condemnation; provided, however, that
without LaSalle's consent, unless and until an Event of Default has occurred and
is continuing:
(i) obsolete or worn out Equipment may be sold
or otherwise disposed of by Borrower and the proceeds thereof may be retained by
Borrower, so long as the fair market value of any such Equipment sold or
otherwise disposed of in any single transaction is less than Five Thousand
Dollars ($5,000.00), and the fair market value, in the aggregate, of all such
Equipment sold or otherwise
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disposed of by Borrower during any twelve-month period is less than Twenty
Thousand Dollars ($20,000.00); and
(ii) proceeds of Collateral arising from the
damage, destruction or condemnation thereof may be retained by Borrower and used
by Borrower to repair, restore or replace such Collateral, as the case may be,
so long as the fair market value of any such Collateral damaged, destroyed or
condemned in any single incident is less than Five Thousand Dollars ($5,000.00),
and the fair market value, in the aggregate, of all such Collateral owned by
Borrower and damaged, destroyed or condemned during any twelve-month period is
less than Twenty Thousand Dollars ($20,000.00).
4. CAPITAL EXPENDITURE LOAN. Subject to the terms and conditions
of this Agreement and the Other Agreements, absent the existence of an Event of
Default upon request by Borrower, LaSalle shall make one or more Capital
Expenditure Advances to Borrower for the acquisition of Eligible Capital
Expenditures in the maximum aggregate principal amount outstanding at any one
time of Five Hundred Thousand Dollars ($500,000.00) ("Capital Expenditure
Loan"). Principal payable on account of the Capital Expenditure Loan shall be
payable in accordance with the terms of the Capital Expenditure Loan Note.
Notwithstanding anything hereinabove to the contrary, the entire unpaid
principal balance of the Capital Expenditure Loan, and any accrued and unpaid
interest thereon, shall be immediately due and payable upon the earlier to occur
of (i) the last day of the Original Term or the last day of any Renewal Term, if
either LaSalle or Borrower elects to terminate this Agreement as of the end of
the Original or any Renewal Term, or (ii) the acceleration of the Obligations
pursuant to paragraph 17 of this Agreement. Capital Expenditure Advances shall
be made between the Closing Date and the date occurring six (6) months after the
Closing Date, for the acquisition of Eligible Capital Expenditures. Capital
Expenditure Advances shall be provided to Borrower upon the receipt by LaSalle
of a written request for such advance together with invoices to evidence the
cost of the capital asset for which the advance is being requested, and such
other information as LaSalle may request. Each Capital Expenditure Advance shall
be in a minimum amount of One Hundred Fifty Thousand Dollars ($150,000.00).
LaSalle shall have no obligation to advance to Borrower more than eighty percent
(80%) of the net invoice cost (less the value of all rebates, trade-ins, taxes,
labor and shipping and installation charges) of any Eligible Capital
Expenditure.
5. INTEREST, FEES AND CHARGES.
(a) Rates Of Interest. Interest accrued on all Loans
shall be due on the earliest of: (i) the first day of each month (for the
immediately preceding month), computed through the last calendar day of the
preceding month; (ii) the occurrence of an Event of Default in consequence of
which LaSalle elects to accelerate the maturity and payment of the Liabilities;
or (iii) termination of this Agreement pursuant to paragraph 12 hereof. interest
shall accrue on: (A) the unpaid principal balance of the Term Loan made to
Borrower outstanding at the end of each day at a fluctuating rate per annum
equal to one and three-quarters percent (1.75%) above the Prime Rate; (B) the
unpaid principal balance of the Capital Expenditure Loan made to Borrower
outstanding at the end of each day at a fluctuating rate per annum equal to one
and three-quarters percent (1.75%) above the Prime Rate; and (C) the principal
amount of the Revolving Loans made to Borrower outstanding at the end of each
day at a fluctuating rate per annum equal to one and one-half percent (1.5%)
above the Prime Rate. The rate of interest payable on the Loans shall increase
or decrease by an amount equal to any increase or decrease in the Prime Rate,
effective as of the opening of business on the day that any such change in the
Prime
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Rate occurs. Upon and after the occurrence of an Event of Default, and during
the continuation thereof, the principal amount of all Loans shall bear interest
on demand at a rate per annum equal to the rate of interest then in effect plus
two percent (2%).
(b) Computation Of Interest And Fees. Interest and
collection charges hereunder shall be calculated daily and shall be computed on
the actual number of days elapsed over a year consisting of three hundred and
sixty (360) days. For the purpose of computing interest hereunder, all items of
payment received by LaSalle shall be deemed applied by LaSalle on account of the
Liabilities (subject to final payment of such items) on the first Business Day
after receipt by LaSalle of good funds in LaSalle's account located in Chicago,
Illinois.
(c) Maximum Interest. It is the intent of the parties
that the rate of interest and the other charges to Borrower under this Agreement
shall be lawful; therefore, if for any reason the interest or other charges
payable under this Agreement are found by a court of competent jurisdiction, in
a final determination, to exceed the limit which LaSalle may lawfully charge
Borrower, then the obligation to pay interest and other charges shall
automatically be reduced to such limit and, if any amount in excess of such
limit shall have been paid, then such amount shall be refunded to Borrower.
(d) Closing Fee. Borrower shall pay to LaSalle a closing
fee of Sixty Thousand Dollars ($60,000.00), which shall be fully earned,
nonrefundable and due on the Closing Date.
(e) Unused Line Fee. Borrower shall pay to LaSalle at the
end of each month, in arrears, an Unused Line Fee equal to one-half of one
percent (.5%) per annum on the daily average amount by which the Revolving Loan
Commitment exceeds the outstanding principal balance of the Revolving Loans. The
Unused Line Fee shall accrue from the Closing Date until the last day of the
Original Term, and if applicable, from the first day to the last day of each
Renewal Term.
(f) Examination And Appraisal Fees. In addition to the
costs and expenses described in paragraph 14(n) hereof, Borrower shall pay to
LaSalle an examination fee of Seven Hundred Dollars ($700.00) for each
examination performed by or at LaSalle's direction of Borrower's books and
records and Collateral and such other matters as LaSalle shall deem appropriate
in its commercially reasonable judgment, each such fee to be paid upon the
completion of each such examination.
(g) Capital Adequacy Charge. If LaSalle shall have
determined that the adoption of any law, rule or regulation regarding capital
adequacy, or any change therein or in the interpretation or application thereof,
or compliance by LaSalle with any request or directive regarding capital
adequacy (whether or not having the force of law) from any central bank or
governmental authority enacted after the Closing Date, does or shall have the
effect of reducing the rate of return on LaSalle's capital as a consequence of
its obligations hereunder to a level below that which LaSalle could have
achieved but for such adoption, change or compliance (taking into consideration
LaSalle's policies with respect to capital adequacy) by a material amount, then
from time to time, after submission by LaSalle to Borrower of a written demand
therefor ("Capital Adequacy Demand") together with the certificate described
below, Borrower shall pay to LaSalle such additional amount or amounts ("Capital
Adequacy Charge") as will compensate LaSalle for such reduction, such Capital
Adequacy Demand to be made with reasonable promptness following such
determination. A certificate of LaSalle claiming entitlement to payment as set
forth above shall be conclusive in the absence of manifest error. Such
certificate shall
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<PAGE> 14
set forth the nature of the occurrence giving rise to such reduction, the amount
of the Capital Adequacy Charge to be paid to LaSalle, and the method by which
such amount was determined. In determining such amount, LaSalle may use any
reasonable averaging and attribution method, applied on a non-discriminatory
basis.
6. LOAN ADMINISTRATION.
(a) Loan Requests. A request for a Revolving Loan shall
be made or shall be deemed to be made, each in the following manner: (i)
Borrower shall give LaSalle same day notice, no later than 10:30 A.M. (Chicago
time) of such day, of its intention to borrow a Revolving Loan in which notice
Borrower shall specify the amount of the proposed borrowing and the proposed
borrowing date; provided, however, that no such request may be made at a time
when there exists a Default or an Event of Default; and (ii) the coming due of
any amount required to be paid under this Agreement or any Note, whether on
account of interest or for any other Liability, shall be deemed irrevocably to
be a request for a Revolving Loan on the due date thereof in the amount required
to pay such interest or other Liability. As an accommodation to Borrower,
LaSalle may permit telephone requests for Revolving Loans and electronic
transmittal of instructions, authorizations, agreements or reports to LaSalle by
Borrower. Unless Borrower specifically directs LaSalle in writing not to accept
or act upon telephonic or electronic communications from Borrower, LaSalle shall
have no liability to Borrower for any loss or damage suffered by Borrower as a
result of LaSalle's honoring of any requests, execution of any instructions,
authorizations or agreements or reliance on any reports communicated to it
telephonically or electronically and purporting to have been sent to LaSalle by
Borrower and LaSalle shall have no duty to verify the origin of any such
communication or the authority of the Person sending it. Each notice of
borrowing shall be irrevocable by and binding on Borrower.
(b) Disbursement. Borrower hereby irrevocably authorizes
LaSalle to disburse the proceeds of each Revolving Loan requested by Borrower,
or deemed to be requested by Borrower, as follows: (i) the proceeds of each
Revolving Loan requested under paragraph 6(a)(i) shall be disbursed by LaSalle
in lawful money of the United States of America in immediately available funds,
in the case of the initial borrowing, in accordance with the terms of the
written disbursement letter from Borrower, and in the case of each subsequent
borrowing, by wire transfer to such bank account as may be agreed upon by
Borrower and LaSalle from time to time, or elsewhere if pursuant to a written
direction from Borrower; and (ii) the proceeds of each Revolving Loan requested
under paragraph 6(a)(ii) shall be disbursed by LaSalle by way of direct payment
of the relevant interest or other Liability.
7. GRANT OF SECURITY INTEREST TO LASALLE. As security for the
payment of all Loans now or in the future made by LaSalle to Borrower hereunder
and for the payment or other satisfaction of all other Liabilities, Borrower
hereby assigns to LaSalle and grants to LaSalle a continuing security interest
in the following property of Borrower, whether now or hereafter owned, existing,
acquired or arising and wherever now or hereafter located: (a) all Accounts
(whether or not Eligible Accounts) and all Goods whose sale, lease or other
disposition by Borrower has given rise to Accounts and have been returned to or
repossessed or stopped in transit by Borrower; (b) all Chattel Paper,
Instruments, Investment Property, Documents and General Intangibles (including,
without limitation, all patents, patent applications, trademarks, trademark
applications, tradenames, trade secrets, goodwill, copyrights, registrations,
licenses, franchises, customer lists, tax refund claims, claims against carriers
and shippers, guarantee claims, contracts rights, security interests, security
deposits and any
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<PAGE> 15
rights to indemnification); (c) all Inventory; (d) all Goods (other than
Inventory) including, without limitation, Equipment, vehicles and fixtures; (e)
all deposits and cash and any other property of Borrower now or hereafter in the
possession, custody or control of LaSalle or any agent or any parent, affiliate
or subsidiary of LaSalle or any participant with LaSalle in the Loans for any
purpose (whether for safekeeping, deposit, collection, custody, pledge,
transmission or otherwise); and (f) all additions and accessions to,
substitutions for, and replacements, products and proceeds of the foregoing
property, including, without limitation, proceeds of all insurance policies
insuring the foregoing property, and all of Borrower's books and records
relating to any of the foregoing and to Borrower's business.
8. PRESERVATION OF COLLATERAL AND PERFECTION OF SECURITY
INTERESTS THEREIN. Borrower shall, at LaSalle's request, at any time and from
time to time, execute and deliver to LaSalle such financing statements,
documents and other agreements and instruments (and pay the cost of filing or
recording the same in all public offices deemed reasonably necessary or
desirable by LaSalle) and do such other acts and things as LaSalle may deem
necessary or desirable in order to establish and maintain a valid, attached and
perfected security interest in the Collateral in favor of LaSalle (free and
clear of all other liens, claims and rights of third parties whatsoever, whether
voluntarily or involuntarily created, except Permitted Liens) to secure payment
of the Liabilities, and in order to facilitate the collection of the Collateral.
Borrower irrevocably hereby makes, constitutes and appoints LaSalle (and all
Persons designated by LaSalle for that purpose) as Borrower's true and lawful
attorney and agent-in-fact to execute such financing statements, documents and
other agreements and instruments and do such other acts and things as may be
necessary to preserve and perfect LaSalle's security interest in the Collateral.
Borrower further agrees that a carbon, photographic, photostatic or other
reproduction of this Agreement or of a financing statement shall be sufficient
as a financing statement.
9. POSSESSION OF COLLATERAL AND RELATED MATTERS. Until an Event
of Default has occurred, Borrower shall have the right, except as otherwise
provided in this Agreement, in the ordinary course of Borrower's business, to:
(a) sell, lease or furnish under contracts of service any of Borrower's
Inventory normally held by Borrower for any such purpose; and (b) use and
consume any raw materials, work in process or other materials normally held by
Borrower for such purpose; provided, however, that a sale in the ordinary course
of business shall not include any transfer or sale in satisfaction, partial or
complete, of a debt owed by Borrower.
10. COLLECTIONS.
(a) Borrower shall direct all of its Account Debtors to
make all payments on the Accounts directly to a post office box ("Lock Box")
with a financial institution acceptable to, and in the name and under exclusive
control of, LaSalle. Borrower shall establish an account ("Blocked Account") in
LaSalle's name for the benefit of Borrower with a financial institution
acceptable to LaSalle, into which all payments received in the Lock Box shall be
deposited, and into which Borrower will immediately deposit all payments made
for Inventory or services sold or rendered by Borrower and received by Borrower
in the identical form in which such payments were made, whether by cash or
check. If Borrower, any Affiliate or Subsidiary of Borrower, or any shareholder,
officer, director, employee or agent of Borrower or any Affiliate or Subsidiary,
or any other Person acting for or in concert with Borrower shall receive any
monies, checks, notes, drafts or other payments relating to or as proceeds of
Accounts or other Collateral, Borrower and each such Person shall receive all
such items
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<PAGE> 16
in trust for, and as the sole and exclusive property of, LaSalle and,
immediately upon receipt thereof, shall remit the same (or cause the same to be
remitted) in kind to the Blocked Account. Each financial institution with which
a Lock Box and Blocked Account are established shall acknowledge and agree, in a
manner reasonably satisfactory to LaSalle, that the amounts on deposit in such
Lock Box and Blocked Account are the sole and exclusive property of LaSalle,
that such financial institution has no right to setoff against such Lock Box or
Blocked Account or against any other account maintained by such financial
institution into which the contents of such Blocked Account are transferred, and
that such financial institution shall wire, or otherwise transfer in immediately
available funds in a manner satisfactory to LaSalle, funds deposited in the
Blocked Account on a daily basis as such funds are collected. Borrower agrees
that all payments made to the Blocked Account established by Borrower or
otherwise received by LaSalle, whether in respect of the Accounts of Borrower or
as proceeds of other Collateral of Borrower or otherwise, will be applied on
account of the Liabilities of Borrower in accordance with the terms of this
Agreement. Borrower agrees to pay all reasonable fees, costs and expenses which
Borrower incurs in connection with opening and maintaining a Lock Box and
Blocked Account. All of such fees, costs and expenses which remain unpaid by
Borrower pursuant to any Lock Box or Blocked Account Agreement with Borrower, to
the extent same shall have been paid by LaSalle hereunder, shall constitute
Revolving Loans hereunder, shall be payable to LaSalle by Borrower upon demand,
and, until paid, shall bear interest at the highest rate then applicable to
Revolving Loans hereunder. All checks, drafts, instruments and other items of
payment or proceeds of Collateral delivered to LaSalle in kind shall be endorsed
by Borrower to LaSalle, and, if that endorsement of any such item shall not be
made for any reason, LaSalle is hereby irrevocably authorized to endorse the
same on Borrower's behalf. For the purpose of this paragraph, Borrower
irrevocably hereby makes, constitutes and appoints LaSalle (and all Persons
designated by LaSalle for that purpose) as Borrower's true and lawful attorney
and agent-in-fact: (i) to endorse Borrower's name upon said items of payment
and/or proceeds of Collateral of Borrower and upon any Chattel Paper, document,
instrument, invoice or similar document or agreement relating to any Account of
Borrower or goods pertaining thereto; (ii) to take control in any manner of any
item of payment or proceeds thereof; (iii) to have access to any lock box or
postal box into which any of Borrower's mail is deposited; and (iv) open and
process all mail addressed to Borrower and deposited therein; provided, however,
that LaSalle shall not exercise any such powers described in subparagraphs (i),
(ii) (except for routine Lock Box payments/proceeds) and (iv) unless and until
an Event of Default has occurred.
(b) LaSalle may, at any time and from time to time after
the occurrence and during the continuance of an Event of Default, whether before
or after notification to any Account Debtor and whether before or after the
maturity of any of the Liabilities: (i) enforce collection of any of Borrower's
Accounts or contract rights by suit or otherwise; (ii) exercise all of
Borrower's rights and remedies with respect to proceedings brought to collect
any Accounts; (iii) surrender, release or exchange all or any part of any
Accounts of Borrower, or compromise or extend or renew for any period (whether
or not longer than the original period) any indebtedness thereunder; (iv) sell
or assign any Account of Borrower upon such terms, for such amount and at such
time or times as LaSalle deems reasonably advisable; (v) prepare, file and sign
Borrower's name on any proof of claim in bankruptcy or other similar document
against any Account Debtor indebted on an Account of Borrower; and (vi) do all
other acts and things which are necessary, in LaSalle's reasonable discretion,
to fulfill Borrower's obligations under this Agreement and to allow LaSalle to
collect the Accounts. In addition to any other provision hereof, LaSalle may at
any time on or after the occurrence and during the continuance of an Event of
Default,
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<PAGE> 17
at Borrower's expense, notify any parties obligated on any of the Accounts of
Borrower to make payment directly to LaSalle of any amounts due or to become due
thereunder.
(c) For the purpose of determining Borrower's Borrowing
Base hereunder, LaSalle shall, upon receipt by LaSalle at its office in Chicago,
Illinois, of cash or other immediately available funds from collections of items
of payment and proceeds of any Collateral, apply the whole or any part of such
collections or proceeds against the Liabilities in such order as LaSalle shall
determine in its sole discretion.
(d) In its reasonable credit judgment, without waiving or
releasing any obligation, liability or duty of Borrower under this Agreement or
the Other Agreements or any Event of Default, at any time or times hereafter,
LaSalle may (but shall not be obligated to) pay, acquire or accept an assignment
of any security interest, lien, encumbrance or claim asserted by any Person in,
upon or against the Collateral. All sums paid by LaSalle in respect thereof and
all reasonable costs, fees and expenses (including, without limitation,
reasonable attorney fees for both inside and outside counsel, all court costs
and all other charges relating thereto) incurred by LaSalle shall constitute
Revolving Loans, payable by Borrower to LaSalle on demand and, until paid, shall
bear interest at the highest rate then applicable to Revolving Loans hereunder.
(e) Immediately upon Borrower's receipt of any portion of
the Collateral evidenced by an agreement, Instrument or Document including,
without limitation, any Chattel Paper, Borrower shall deliver the original
thereof to LaSalle together with an appropriate endorsement or other specific
evidence of assignment thereof to LaSalle (in form and substance acceptable to
LaSalle). If an endorsement or assignment of any such items shall not be made
for any reason, LaSalle is hereby irrevocably authorized, as Borrower's attorney
and agent-in-fact, to endorse or assign the same on Borrower's behalf.
(f) LaSalle shall render to Borrower each month a
statement of Borrower's account or accounts, as the case may be, which shall
constitute an account stated and shall be deemed to be correct and accepted by
and be binding upon Borrower unless LaSalle receives a written statement of
Borrower's exceptions thereto within thirty (30) days after such statement was
rendered to Borrower.
11. SCHEDULES AND REPORTS. Borrower shall furnish or cause to be
furnished to LaSalle the following:
(a) Daily Reports. Borrower shall provide LaSalle with an
executed daily loan report and certificate in LaSalle's then current form on
each day on which Borrower requests a Revolving Loan, and in any event at least
one each week, which shall be accompanied by copies of Borrower's sales journal,
cash receipts journal and credit memo journal for the relevant period. Such
report shall reflect the activity of Borrower with respect to Accounts for the
immediately preceding week, and shall be in a form and with such specificity as
is satisfactory to LaSalle and shall contain such additional information as
LaSalle may reasonably require concerning Accounts and Inventory included,
described or referred to in such report and any other documents in connection
therewith requested by LaSalle including, without limitation, but only if
specifically requested by LaSalle, copies of all invoices prepared in connection
with such Amounts.
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<PAGE> 18
(b) Monthly Financial Statements. As soon as practicable
and in any event within thirty (30) days following the end of each calendar
month: (1) statements of income and statements of cash flow of Borrower for each
such month and for the period from beginning of the then current Fiscal Year of
Borrower to the end of such month, (2) balance sheets of Borrower as of the end
of such month, and (3) with respect to such statements of income and balance
sheets, in comparative form, figures for the corresponding periods in the
preceding Fiscal Year of Borrower, all in reasonable detail and certified by the
chief financial officer of Borrower that such statements fairly present the
financial condition of Borrower in accordance with GAAP, subject to changes
resulting from normal year-end computations of Borrower's compliance with the
covenants set forth in this Agreement.
(c) Monthly Reports. In addition to any other reports, as
soon as practicable and in any event: (i) within fifteen (15) days after the end
of each month, (1) a detailed trial balance of Borrower's Accounts aged per
invoice date, in form and substance reasonably satisfactory to LaSalle
including, without limitation, the names and addresses of all Account Debtors of
Borrower, and (2) a summary and detail of accounts payable (such Accounts and
accounts payable divided into such time intervals as LaSalle may require in its
sole discretion), including a listing of any held checks; and (ii) within
fifteen (15) days after the end of each month, the general ledger inventory
account balance, a perpetual inventory report and LaSalle's standard form of
Inventory report then in effect or the form most recently requested from
Borrower by LaSalle, for Borrower by each category of Inventory, together with a
description of the monthly change in each category of Inventory.
(d) Annual Financial Statements. As soon as practicable
and in any event within ninety (90) days after the end of each Fiscal Year of
Borrower: (i) statements of income of Borrower for such Fiscal Year, and a
balance sheet of Borrower as of the end of such Fiscal Year; and (ii) statements
of cash flow of Borrower for such Fiscal Year, such statements to be presented
in accordance with GAAP and certified by independent certified public
accountants of recognized national standing selected by Borrower and
satisfactory to LaSalle, whose opinion shall be unqualified, in form and
substance reasonably satisfactory to LaSalle. Such financial statements shall
set forth in comparative form, corresponding figures for the period covered by
the preceding annual audit and as of the end of the preceding Fiscal Year of
Borrower.
(e) Annual Projections. As soon as practicable and in any
event within thirty (30) days of the commencement of each Fiscal Year of
Borrower, projected balance sheets, statements of income and cash flow for
Borrower, for each of the twelve (12) months during such Fiscal Year, which
shall include the assumptions used therein, together with appropriate supporting
details as reasonably requested by LaSalle.
(f) Accountant's Reports. As soon as practicable and in
any event within ten (10) days of delivery to Borrower, a copy of any letter
issued by Borrower's independent public accountants or other management
consultants with respect to Borrower's financial or accounting systems or
controls, including all so-called "management letters".
(g) Explanation Of Budgets And Projections. In
conjunction with the delivery of the annual presentation of projections or
budgets referred to in paragraph 11(e) above, a letter signed by the President
or a Vice President of Borrower and by the Treasurer or Chief Financial Officer
of Borrower, describing, comparing and analyzing, in reasonable detail, all
changes and developments between the
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<PAGE> 19
anticipated financial results included in such projections or budgets and the
historical financial statements of Borrower.
(h) SEC Reports. Within ten (10) days after delivery to
the Securities And Exchange Commission all quarterly and annual reports required
to be filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934.
(i) Other Information. With reasonable promptness, such
other business or financial data, reports, appraisals and projections as LaSalle
may reasonably request.
(j) Accompanying Certificates. All financial statements
delivered to LaSalle pursuant to the requirements of this paragraph (except
where otherwise expressly indicated) shall be prepared in accordance with GAAP
as provided in this Agreement. Together with each delivery of financial
statements required by paragraph 11(b) and (d) above, Borrower shall deliver to
LaSalle an officer's certificate in the form attached hereto as Exhibit B, which
shall include a calculation of financial covenants in the schedule attached to
such officer's certificate in form satisfactory to LaSalle.
12. TERMINATION.
(a) This Agreement shall be in effect from the date
hereof until June 21, 2002 ("Original Term") and shall automatically renew
itself from year to year thereafter (each such one year renewal being referred
to herein as a "Renewal Term") unless: (i) the due date of the Liabilities is
accelerated pursuant to paragraph 17 hereof; or (ii) Borrower elects or LaSalle
elects to terminate this Agreement at the end of the Original Term or at the end
of any Renewal Term by giving the other party written notice of such election at
least ninety (90) days prior to the end of the Original Term or the then current
Renewal Term, in which case Borrower shall pay all of the Liabilities under this
Agreement in full on the last day of such term. If one or more of the events
specified in subparagraphs (i) or (ii) occurs, this Agreement shall terminate on
the date thereafter that the Liabilities under this Agreement are paid in full;
provided, however, that the security interests and liens created under this
Agreement and the Other Agreements shall survive such termination until the date
upon which payment and satisfaction in full of the Liabilities under this
Agreement shall have occurred. At such time as Borrower has repaid all of the
Liabilities under this Agreement and this Agreement has terminated, (1) Borrower
shall deliver to LaSalle a release, in form and substance reasonably
satisfactory to LaSalle, of all obligations and liabilities of LaSalle and its
officers, directors, employees, agents, parents, subsidiaries and affiliates to
Borrower, and if Borrower is obtaining new financing from another lender,
Borrower shall deliver such lender's indemnification of LaSalle, in form and
substance satisfactory to LaSalle, for checks which LaSalle has credited to
Borrower's account, but which subsequently are dishonored for any reason, and
(2) upon Borrower's request, LaSalle shall deliver to Borrower a release in form
and substance reasonably satisfactory to Borrower.
(b) If, for any reason, this Agreement is terminated
prior to the end of the Original Term or any Renewal Term including, in the sole
discretion of LaSalle, if an effective termination results from Borrower
prepaying all or substantially all of the Liabilities under this Agreement,
Borrower agrees to pay to LaSalle, as a prepayment fee, in addition to the
payment of all other Liabilities under this Agreement owing by Borrower, an
amount equal to: (i) three percent (3%) of the Total Credit Facility if this
Agreement is terminated during the first year of the Original Term; (ii) two
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percent (2%) of the Total Credit Facility if this Agreement is terminated during
the second year of the Original Term; and (iii) one percent (1%) of the Total
Credit Facility if this Agreement is terminated during the third year of the
Original Term or any Renewal Term, except, if terminated at the end of the
Original Term or any Renewal Term pursuant to the terms set forth herein. In
light of the extreme difficulty of accurately calculating actual damages arising
out of any early termination, LaSalle and Borrower have agreed that the
prepayment fee provided for above is a reasonable estimate of actual damages
that would be incurred.
13. REPRESENTATIONS AND WARRANTIES. Borrower hereby makes the
following representations, warranties and covenants:
(a) the financial statements delivered or to be delivered
by Borrower to LaSalle at or prior to the date of this Agreement and at all
times subsequent thereto accurately reflect the financial condition of Borrower
in all material respects, and since the date of the Borrower's financial
statements delivered to LaSalle most recently prior to the date of this
Agreement, no event or condition has occurred which has had, or is reasonably
likely to have, a Material Adverse Effect;
(b) the office where Borrower keeps its books, records
and accounts (or copies thereof) concerning the Collateral, Borrower's principal
place of business and all of Borrower's other places of business, locations of
Collateral and post office boxes are as set forth in Exhibit A; Borrower shall
promptly (but in no event less than ten (10) days prior thereto) advise LaSalle
in writing of the proposed opening of any new place of business, the closing of
any existing place of business, any change in the location of Borrower's books,
records and accounts (or copies thereof) or the opening or closing of any post
office box of Borrower;
(c) the Collateral, including without limitation the
Equipment (except any part thereof which prior to the date of this Agreement
Borrower shall have advised LaSalle in writing consists of Collateral normally
used in more than one state) is and shall be kept, or, in the case of vehicles,
based, only at the addresses set forth on the first page of this Agreement or on
Exhibit A, and at other locations within the continental United States of which
LaSalle has been advised by Borrower in writing;
(d) Borrower shall immediately give written notice to
LaSalle of any use of any such Goods in any state other than a state in which
Borrower has previously advised LaSalle such Goods shall be used, and such Goods
shall not, unless LaSalle shall otherwise consent in writing, be used outside of
the continental United States;
(e) no security agreement, financing statement or
analogous instrument exists or shall exist with respect to any of the Collateral
other than any security agreement, financing statement or analogous instrument
evidencing Permitted Liens;
(f) each Account or item of Inventory which Borrower
shall, expressly or by implication, request LaSalle to classify as an Eligible
Account or as Eligible Inventory, respectively, shall, as of the time when such
request is made, conform in all respects to the requirements of such
classification as set forth in the respective definitions of Eligible Account
and Eligible Inventory and as otherwise reasonably established by LaSalle from
time to time (excluding ineligibility based on the exercise by LaSalle of its
discretion and ineligibility based on changes in requirements for which LaSalle
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<PAGE> 21
has not previously notified the Borrower), and Borrower shall promptly notify
LaSalle in writing if any such Eligible Account or Eligible Inventory shall
subsequently become ineligible;
(g) Borrower is and shall at all times during the
Original Term or any Renewal Term be the lawful owner of all Collateral now
purportedly owned or hereafter purportedly acquired by Borrower, free from all
liens, claims, security interests and encumbrances whatsoever, whether
voluntarily or involuntarily created and whether or not perfected, other than
the Permitted Liens;
(h) Borrower has the right and power and is duly
authorized and empowered to enter into, execute and deliver this Agreement and
the Other Agreements and perform its obligations hereunder and thereunder; to
the knowledge of the Borrower, the Borrower's execution, delivery and
performance of this Agreement and the Other Agreements does not and shall not
conflict with the provisions of any statute, regulation, ordinance or rule of
law, or any agreement, contract or other document which may now or hereafter be
binding on Borrower, and Borrower's execution, delivery and performance of this
Agreement and the Other Agreements shall not result in the imposition of any
lien or other encumbrance upon any of Borrower's property under any existing
indenture, mortgage, deed of trust, loan or credit agreement or other agreement
or instrument by which Borrower or any of its property may be bound or affected;
(i) except as otherwise disclosed on SCHEDULE 13(i),
there are no actions or proceedings which are pending or, to the best of
Borrower's knowledge, threatened against Borrower which are reasonably likely to
have a Material Adverse Effect and Borrower shall, promptly upon becoming aware
of any such pending or threatened action or proceeding, give written notice
thereof to LaSalle;
(j) Borrower has obtained all licenses, authorizations,
approvals and permits, the lack of which would have a Material Adverse Effect on
the operation of its business, and Borrower is and shall remain in compliance in
all material respects with all applicable federal, state, local and foreign
statutes, orders, regulations, rules and ordinances (including, without
limitation, Environmental Laws and statutes, orders, regulations, rules and
ordinances relating to taxes, employer and employee contributions and similar
items, securities, ERISA or employee health and safety), the failure to comply
with which would have a Material Adverse Effect on its business, property,
assets, operations or condition, financial or otherwise;
(k) all written information now, heretofore or hereafter
furnished by Borrower to LaSalle is and shall be true and correct in all
material respects as of the date with respect to which such information was or
is furnished (except for financial projections, which have been prepared in good
faith based upon reasonable assumptions);
(l) Borrower is not conducting, permitting or suffering
to be conducted, nor shall it conduct, permit or suffer to be conducted, any
activities pursuant to or in connection with which any of the Collateral is now,
or will (while any Liabilities remain outstanding) be owned by any Affiliate;
(m) except as disclosed on the Perfection Certificate
delivered to LaSalle, Borrower's name has always been as set forth on the first
page of this Agreement and Borrower uses no tradenames or division names in the
operation of its business, except as otherwise disclosed in writing to LaSalle;
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<PAGE> 22
Borrower shall notify LaSalle in writing within ten (10) days of the change of
its name or the use of any tradenames or division names not previously disclosed
to LaSalle in writing;
(n) except as set forth on Schedule 13(n), with respect
to Borrower's Equipment: (i) Borrower has good and indefeasible and merchantable
title to and ownership of all Equipment, including, without limitation, the
Equipment described or listed on the appraisal schedule of Equipment prepared by
Rosen Systems, Inc. and dated March 11, 1999, delivered to LaSalle prior to the
date of this Agreement; (ii) Borrower shall keep and maintain the Equipment in
good operating condition and repair and shall make all reasonably necessary
replacements thereof and renewals thereto so that the value and operating
efficiency thereof shall at all times be preserved and maintained, ordinary wear
and tear excepted; (iii) Borrower shall not permit any such items to become a
fixture to real estate or an accession to other personal property; (iv) from
time to time Borrower may sell, exchange or otherwise dispose of obsolete,
unused or worn out Equipment, but only to the extent provided in paragraph 3
(b)(i) hereof; and (v) Borrower, immediately on demand by LaSalle, shall deliver
to LaSalle (unless not readily obtainable, in which event, delivery shall be
made immediately upon obtaining the same) any and all evidence of ownership of,
including, without limitation, certificates of title and applications of title
to, any of the Equipment;
(o) this Agreement and the Other Agreements to which
Borrower is a party are the legal, valid and binding obligations of Borrower and
are enforceable against Borrower in accordance with their respective terms,
except to the extent that such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium and similar laws affecting
the rights of creditors generally;
(p) except as set forth on Schedule 13(p), Borrower is
solvent, is able to pay its debts as they become due and has capital sufficient
to carry on its business, now owns property having a value both at fair
valuation and at present fair saleable value greater than the amount required to
pay its debts, and will not be rendered insolvent by the execution and delivery
of this Agreement or any of the Other Agreements or by completion of the
transactions contemplated hereunder or thereunder;
(q) as of the date of this Agreement, Borrower is not
obligated, whether directly or indirectly, for any loans or other indebtedness
for borrowed money other than: (i) the Liabilities; (ii) indebtedness disclosed
to LaSalle on SCHEDULE 13 (q); (iii) unsecured indebtedness to trade creditors
arising in the ordinary course of Borrower's business; and (iv) unsecured
indebtedness arising from the endorsement of drafts and other instruments for
collection, in the ordinary course of Borrower's business.
(r) Borrower does not own any margin securities, and none
of the proceeds of the Loans hereunder shall be used for the purpose of
purchasing or carrying any margin securities or for the purpose of reducing or
retiring any indebtedness which was originally incurred to purchase any margin
securities or for any other purpose not permitted by Regulation G or Regulation
U of the Board of Governors of the Federal Reserve System as in effect from time
to time;
(s) except as otherwise disclosed on SCHEDULE 13(s),
Borrower has no Parents, Subsidiaries or divisions, nor is Borrower engaged in
any joint venture or partnership with any other Person;
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<PAGE> 23
(t) Borrower is duly organized and in good standing in
its state of organization and Borrower is duly qualified and in good standing in
all states where the nature and extent of the business transacted by it or the
ownership of its assets makes such qualification necessary, except for such
other states in which the failure to so qualify would not have a Material
Adverse Effect;
(u) Borrower is not in default under any material
contract, lease or commitment to which it is a party or by which it is bound,
nor does Borrower know of any dispute regarding any contract, lease or
commitment which is material to the continued financial success and well-being
of Borrower;
(v) there are no controversies pending or, to the
knowledge of the Borrower, threatened between Borrower and any of its
employees, other than employee grievances arising in the ordinary course of
business which are not, in the aggregate, material to the continued financial
success and well-being of Borrower, and Borrower is in compliance in all
material respects with all federal and state laws respecting employment and
employment terms, conditions and practices, except where the failure to so
comply would not have a Material Adverse Effect;
(w) Borrower possesses, and shall continue to possess,
adequate licenses, patents, patent applications, copyrights, service marks,
trademarks, trademark applications, tradestyles and tradenames to continue to
conduct its business as heretofore conducted by it;
(x) except as set forth on SCHEDULE 13(x), no Benefit
Plan is in violation in any material respect of any of the provisions of ERISA
or any of the qualification requirements of Section 401(a) of the IRC within the
immediately preceding five (5) year period; no Prohibited Transaction or
Reportable Event has occurred with respect to any Benefit Plan has been the
subject of a waiver of the minimum funding standard under Section 412 of the
IRC, no Benefit Plan has experienced an accumulated funding deficiency under
Section 412 of the IRC, no lien has been imposed upon the such Borrower or any
ERISA Affiliate of such Borrower under Section 412(n) of the IRC, no Benefit
Plan has been amended in such a way that the security requirements of Section
401(a)(29) of the IRC apply; no notice of intent to terminate a Benefit Plan has
been distributed to affected parties or filed with the PBGC under Section 4041
of ERISA; the PBGC has not instituted proceedings to terminate, or appoint a
trustee to administer, a Benefit Plan and no event has occurred or condition
exists which might constitute grounds under Section 4042 of ERISA for the
termination of, or the appointment of a trustee to administer, any Benefit plan;
neither Borrower nor any ERISA Affiliate of Borrower would be liable for any
amount in the aggregate in excess of $5,000 pursuant to Sections 4062, 4063 or
4064 of ERISA if all Benefit Plans terminated as of the most recent valuation
dates of such Benefit Plans; neither Borrower nor any ERISA Affiliate of
borrower maintains any employee welfare benefit plan, as defined in Section 3(1)
of ERISA, which provides any benefits to an employee or the employee's
dependents with respect to claims incurred after the employee separates from
service other than is required by applicable law; and neither Borrower or any
ERISA Affiliate of Borrower has incurred or expects to incur any withdrawal
liability to any Multiemployer Plan;
(y) (i) except as set forth on Schedule 13(y), Borrower
has not generated, used, stored, treated, transported, manufactured, handled,
produced or disposed of any Hazardous Materials, on or off its premises (whether
or not owned by it) in any manner which at any time violates any
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<PAGE> 24
Environmental Law or any license, permit, certificate, approval or similar
authorization thereunder and the operations of the Borrower comply in all
material respects with all Environmental Laws and all licenses, permits,
certificates, approvals and similar authorizations thereunder;
(ii) except as set forth on Schedule 13(y), there
has been no investigation, proceeding, complaint, order, directive, claim,
citation or notice by any governmental authority or any other Person, nor is any
pending or to the best of the Borrower's knowledge threatened, and Borrower
shall immediately notify LaSalle upon becoming aware of any such investigation,
proceeding, complaint, order, directive, claim, citation or notice and take
prompt and appropriate actions to respond thereto, with respect to any
non-compliance with or violation of the requirements of any Environmental Law by
the Borrower or the release, spill or discharge, threatened or actual, of any
Hazardous Materials or the generation, use, storage, treatment, transportation,
manufacture, handling, production or disposal of any Hazardous Materials or any
other environmental, health or safety matter, which affects the Borrower or its
business, operations or assets or any properties at which the Borrower has
transported, stored, disposed of any Hazardous Materials;
(iii) except as set forth on Schedule 13(y),
Borrower has no material liability (contingent or otherwise) in connection with
a release, spill or discharge, threatened or actual, of any Hazardous Materials
or the generation, use, storage, treatment, transportation, manufacture,
handling, production or disposal of any Hazardous Materials; and
(iv) without limiting the generality of the
foregoing, Borrower shall, following the reasonable determination by LaSalle
that there is non-compliance, or any condition which requires any action by or
on behalf of Borrower in order to avoid any non-compliance, with any
Environmental Law, at Borrower's expense, cause an independent environmental
engineer acceptable to LaSalle and reasonably acceptable to the Borrower to
conduct such tests of the relevant site(s) as are appropriate and prepare and
deliver a report setting forth the result of such tests, a proposed plan for
remediation and an estimate of the costs thereof; and
(z) Borrower and its Subsidiaries have reviewed the areas
within their business and operations which could be adversely affected by, and
have developed or are developing a program to address on a timely basis, the
"Year 2000 Problem" (that is, the risk that computer applications used by
Borrower and its Subsidiaries may be unable to recognize and perform properly
date-sensitive functions involving certain dates prior to and any date on or
after December 31, 1999), and have made related appropriate inquiry of material
suppliers and vendors. Based on such review and program, Borrower believes that
the "Year 2000 Problem" will not have a Material Adverse Effect on Borrower.
From time to time, at the reasonable request of LaSalle, Borrower and its
Subsidiaries shall provide to LaSalle such updated information or documentation
as is requested regarding the status of their efforts to address the Year 2000
problem.
Borrower represents, warrants and covenants to LaSalle that all
representations, warranties and covenants of Borrower contained in this
Agreement (whether appearing in paragraphs 13 or 14 hereof or elsewhere) shall
be true at the time of Borrower's execution of this Agreement, shall survive the
execution, delivery and acceptance hereof by the parties hereto and the closing
of the transactions described herein or related hereto, shall remain true until
the repayment in full of all of the Liabilities and termination of this
Agreement, and, other than representations and warranties that relate solely to
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<PAGE> 25
an earlier date, shall be remade by Borrower at the time each Revolving Loan is
made and each Capital Expenditure Loan is issued pursuant to this Agreement.
14. COVENANTS. Until payment or satisfaction in full of all
Liabilities and termination of this Agreement, unless Borrower obtains LaSalle's
prior written consent waiving or modifying any of Borrower's covenants hereunder
in any specific instance, Borrower agrees as follows:
(a) Borrower shall at all times keep accurate and
complete books, records and accounts with respect to all of Borrower's business
activities, in accordance with sound accounting practices and generally accepted
accounting principles consistently applied, and shall keep such books, records
and accounts, and any copies thereof, only at the addresses indicated for such
purpose on Exhibit A;
(b) LaSalle, or any Persons designated by it, shall have
the right, at any reasonable time, in the exercise of its commercially
reasonable credit judgment, to call at Borrower's places of business at any
reasonable times, and, without hindrance or delay, to inspect the Collateral and
to inspect, audit, check and make extracts from Borrower's books, records,
journals, orders, receipts and any correspondence and other data relating to
Borrower's business, the Collateral or any transactions between the parties
hereto, and shall have the right to make such verification concerning Borrower's
business as LaSalle may consider reasonable under the circumstances. Borrower
shall furnish to LaSalle such information relevant to LaSalle's rights under
this Agreement as LaSalle shall at any time and from time to time reasonably
request. Borrower authorizes LaSalle to discuss the affairs, finances and
business of Borrower with any officers or directors of Borrower or any
Affiliate, or with those employees of Borrower with whom LaSalle has determined
in its commercially reasonable judgment to be necessary or desirable to
converse, and to discuss the financial condition of Borrower with Borrower's
independent public accountants. Any such discussions shall be without liability
to LaSalle or to such accountants. Borrower shall pay to or reimburse LaSalle
for all reasonable fees, costs, and out-of-pocket expenses incurred by LaSalle
in the exercise of its rights hereunder (in addition to the fees payable by
Borrower pursuant to paragraph 5(g) hereof in connection with LaSalle's
examination of Borrower's books and records and Collateral) and all of such
costs, fees and expenses shall constitute Revolving Loans hereunder, shall be
payable on demand and, until paid, shall bear interest at the highest rate then
applicable to Loans hereunder;
(c) (i) Borrower shall keep the Collateral properly
housed and shall keep the Collateral insured against such risks and in such
amounts as are customarily insured against by Persons engaged in businesses
similar to that of Borrower with such companies, in such amounts and under
policies in such form as shall be reasonably satisfactory to LaSalle. Originals
or certified copies of such policies of insurance have been, or within fifteen
(15) days after the Closing Date, shall be, delivered to LaSalle together with
evidence of payment of all premiums therefor, and shall contain an endorsement,
in form and substance acceptable to LaSalle, showing loss under such insurance
policies payable to LaSalle. Such endorsement, or an independent instrument
furnished to LaSalle, shall provide that the insurance company shall give
LaSalle at least thirty (30) days written notice before any such policy of
insurance is altered or canceled and that no act, whether willful or negligent,
or default of Borrower or any other Person shall affect the right of LaSalle to
recover under such policy of insurance in case of loss or damage. Borrower
hereby directs all insurers under such policies of insurance to pay all proceeds
payable thereunder directly to LaSalle. Borrower irrevocably, makes, constitutes
and
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appoints LaSalle (and all officers, employees or agents designated by LaSalle)
as Borrower's true and lawful attorney (and agent-in-fact) for the purpose of
making, settling and adjusting claims under such policies of insurance,
endorsing the name of Borrower on any check, draft, instrument or other item of
payment for the proceeds of such policies of insurance and making all
determinations and decisions with respect to such policies of insurance;
provided, however, that LaSalle shall exercise such rights only upon the
occurrence of an Event of Default;
(ii) Borrower shall maintain, at its expense,
such public liability and third party property damage insurance as is customary
for Persons engaged in businesses similar to that of Borrower with such
companies and in such amounts, with such deductibles and under policies in such
form as shall be reasonably satisfactory to LaSalle and originals or certified
copies of such policies have been, or within fifteen (15) days after the Closing
Date, shall be, delivered to LaSalle together with evidence of payment of all
premiums therefor; each such policy shall contain an endorsement showing LaSalle
as additional insured thereunder and providing that the insurance company shall
give LaSalle at least thirty (30) days written notice before any such policy
shall be altered or canceled; and
(iii) If Borrower at any time or times hereafter
shall fail to obtain or maintain any of the policies of insurance required above
or to pay any premium in whole or in part relating thereto, then LaSalle,
without waiving or releasing any obligation or default by Borrower hereunder,
may (but shall be under no obligation to) obtain and maintain such policies of
insurance and pay such premiums and take such other actions with respect thereto
as LaSalle deems advisable. All sums disbursed by LaSalle in connection with any
such actions, including, without limitation, court costs, expenses, other
charges relating thereto and reasonable attorneys' fees, shall constitute
Revolving Loans hereunder and, until paid, shall bear interest at the highest
rate then applicable to Revolving Loans hereunder;
(d) Borrower shall not use the Collateral, or any part
thereof, in any unlawful business or for any unlawful purpose or use or maintain
any of the Collateral in any manner that does or could result in material damage
to the environment or a violation of any applicable environmental laws, rules or
regulations; Borrower shall keep the Collateral in good condition, repair and
order, ordinary wear and tear excepted; Borrower shall not permit the
Collateral, or any part thereof, to be levied upon under execution, attachment,
distraint or other legal process; Borrower shall not sell, lease, grant a
security interest in or otherwise dispose of any of the Collateral except as
expressly permitted by this Agreement; and Borrower shall not secrete or abandon
any of the Collateral, or remove or permit removal of any of the Collateral from
any of the locations listed on Exhibit A or in any written notice to LaSalle
pursuant to paragraph 13(c) hereof, except for the removal of Inventory sold in
the ordinary course of Borrower's business as permitted herein;
(e) all monies and other property obtained by Borrower
from LaSalle pursuant to this Agreement will be used solely for business
purposes of Borrower;
(f) Borrower shall, at the request of LaSalle, indicate
on its records concerning the Collateral a notation, in form satisfactory to
LaSalle, of the security interest of LaSalle hereunder, and Borrower shall not
maintain duplicates or copies of such records at any address other than
Borrower's principal place of business set forth on the first page of this
Agreement; provided, however, that Borrower, in the ordinary course of its
business, may furnish copies of such records to its accountants,
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<PAGE> 27
attorneys and other agents or advisors as it may determine to be necessary or
desirable, in the exercise of its commercially reasonable judgment;
(g) except as specifically set forth on Schedule 14(g)
attached hereto, Borrower shall file all required tax returns and pay all of its
taxes when due, including, without limitation, taxes imposed by federal, state
or municipal agencies, and shall cause any liens for taxes to be promptly
released; provided, that Borrower shall have the right to contest the payment of
such taxes in good faith by appropriate proceedings so long as: (i) the amount
so contested is shown on Borrower's financial statements; (ii) the contesting of
any such payment does not give rise to a lien for taxes; (iii) upon the
occurrence of an Event of Default, Borrower keeps on deposit with LaSalle (such
deposit to be held without interest) an amount of money which, in the sole
judgment of LaSalle, is sufficient to pay such taxes and any interest or
penalties that may accrue thereon; and (iv) if Borrower fails to prosecute such
contest with reasonable diligence, LaSalle may apply the money so deposited in
payment of such taxes. If Borrower fails to pay any such taxes and in the
absence of any such contest by Borrower, LaSalle may (but shall be under no
obligation to) advance and pay any sums required to pay any such taxes and/or to
secure the release of any lien therefor, and any sums so advanced by LaSalle
shall constitute Revolving Loans hereunder, shall be payable by Borrower to
LaSalle on demand, and, until paid, shall bear interest at the highest rate then
applicable to Revolving Loans hereunder;
(h) Borrower shall not: (i) incur, create, assume or
suffer to exist any indebtedness other than (A) indebtedness arising under this
Agreement, (B) unsecured indebtedness owing in the ordinary course of business
to trade suppliers, (C) the Subordinated Debt, (D) the Real Estate Loan, and (E)
any other indebtedness described in paragraph 13(q)(ii) hereof; or (ii) assume,
guarantee or endorse, or otherwise become liable in connection with, the
obligations of any Person, except by endorsement of instruments for deposit or
collection or similar transactions in the ordinary course of business;
(i) Borrower shall not enter into any merger or
consolidation, or sell, lease or otherwise dispose of all or substantially all
of its assets; Borrower shall not create any new Subsidiary or Affiliate or
issue any shares of, or warrants or other rights to receive or purchase any
shares of, any class of its stock; Borrower shall not enter into any transaction
outside the ordinary course of Borrower's
(j) Borrower shall not: (i) declare or pay any dividend
or other distribution (whether in cash or in kind) on, purchase, redeem or
retire any shares of any class of its stock, or make any payment on account of,
or set apart assets for the repurchase, redemption, defeasance or retirement of,
any class of its stock; or (ii) make any optional payment or prepayment on or
redemption (including without limitation by making payments to a sinking fund or
analogous fund) or repurchase of any indebtedness for borrowed money other than
the indebtedness owed to LaSalle;
(k) Borrower shall not make any loans to, or investment
in, any Person, whether in cash, securities or other property of any kind, other
than investments that are direct obligations of the United States;
(l) Borrower shall not amend its organizational documents
or change its fiscal year;
(m) Borrower shall maintain and keep in full force and
effect each of the financial covenants set forth below until the termination of
this Agreement and the repayment of all Liabilities.
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<PAGE> 28
The calculation and determination of each such financial covenant, and all
accounting terms contained therein, shall be so calculated and construed in
accordance with GAAP, applied on a basis consistent with the financial
statements of Borrower delivered on or before the Closing Date:
(i) Consolidated Tangible Net Worth. Borrower
and its Subsidiaries, on a consolidated basis, shall maintain as of the
end of (A) each fiscal quarter between the Closing Date and December
30, 1999, a Tangible Net Worth of not less than Six Hundred Fifty
Thousand Dollars ($650,000.00), (B) the fiscal quarter ending December
31, 1999, a Tangible Net Worth of not less than Eight Hundred Thousand
Dollars ($800,000.00), and (C) each fiscal quarter commencing with
March 31, 2000 and continuing until this Agreement is terminated and
all of the Liabilities have been repaid, a Tangible Net Worth of not
less than One Million Dollars ($1,000,000.00);
(ii) Consolidated Interest Coverage Ratio.
Borrower and its Subsidiaries, on a consolidated basis, shall have, as
of the last day of (and for) (A) the three (3) month period ending
September 30, 1999, (B) the six (6) month period ending December 31,
1999, (C) the nine (9) month period ending March 31, 2000, and (D) the
twelve (12) month period ending on the last day of each fiscal quarter
commencing with the quarter ending June 30, 2000, a ratio of (1) EBITDA
for such period minus Capital Expenditures for such period not
financed, to (2) interest expense for such period of not less than 1.5
to 1.0;
(iii) Consolidated Debt Service Coverage Ratio.
Borrower and its Subsidiaries, on a consolidated basis, shall have: (A)
as of the last day of (and for) the three (3) month period ending
September 30, 1999, a Debt Service Coverage Ratio of not less than 1.0
to 1.0; and (B) as of the last day of (and for) (1) the six month
period ending December 31, 1999, (2) the nine month period ending March
31, 2000, and (3) the twelve month period ending on the last day of
each fiscal quarter commencing with the quarter ending June 30, 2000, a
Debt Service Coverage Ratio for such period of not less than 1.25 to
1.0; and
(iv) Consolidated Capital Expenditures. Borrower
and its Subsidiaries, on a consolidated basis, shall not: (A) make
Capital Expenditures, which are not financed by term loans or capital
leases of an aggregate amount of more than (1) Two Hundred Thousand
Dollars ($200,000.00) during the period between the Closing Date and
December 31, 1999, inclusive, or (2) Two Hundred Thousand Dollars
($200,000.00) during any fiscal year of the Borrower thereafter; or (B)
make any Capital Expenditures, which are financed by term loans (other
than the Capital Expenditure Loan) or capital leases, of an aggregate
amount of more than (a) Two Hundred Thousand Dollars ($200,000.00)
through the period between the Closing Date and December 31, 1999,
inclusive, or (b) One Hundred Thousand Dollars ($100,000.00) during any
fiscal year of the Borrower thereafter.
(n) Borrower shall reimburse LaSalle for all reasonable
costs and expenses including, without limitation, reasonable legal expenses and
reasonable attorneys' fees (both in-house and outside counsel), incurred by
LaSalle in connection with the documentation and consummation of this
transaction and any amendments or modifications of this Agreement or the Other
Agreements or other transactions between Borrower and LaSalle, including,
without limitation, Uniform Commercial Code and other public record searches,
lien filings, Federal Express or similar express or messenger delivery,
appraisal
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costs, surveys, title insurance and environmental audit or review costs, and in
seeking to collect, protect or enforce any rights in or to the Collateral or
incurred by LaSalle in seeking to collect any Liabilities and to administer and
enforce any of LaSalle's rights under this Agreement. Borrower shall also pay
all normal service charges with respect to accounts maintained by LaSalle for
the benefit of Borrower. All such costs, expenses and charges shall constitute
Revolving Loans hereunder, shall be payable by Borrower to LaSalle on demand,
and, until paid, shall bear interest at the highest rate then applicable to
Revolving Loans hereunder;
(o) Borrower shall not: (i) pay any management or
consulting fees to any Persons, or make any loan to any Person except travel
advances made to employees in the ordinary course of business and loans to
employees exceeding Twenty-Five Thousand Dollars ($25,000.00) to any single
Person and Fifty Thousand Dollars ($50,000.00) in the aggregate outstanding for
all Persons at any one time; provided, that no Event of Default shall have
occurred prior to, or would occur as a result of, any such payment; or (ii) pay
annual aggregate compensation, whether as salary, bonus or otherwise, to all
directors or officers of Borrower in excess of one hundred ten percent (110%) of
the aggregate compensation in effect on the date of this Agreement for the first
year and one hundred ten percent (110%) of the prior year's aggregate
compensation amount for subsequent years. The aggregate annual compensation
amount(s) shall be adjusted each year for the net addition or loss of directors
or officers;
(p) Borrower shall not enter into or be a party to, or
permit any Subsidiary to enter into or be a party to, any transaction with any
Affiliate of Borrower except in the ordinary course of business in a manner and
to an extent consistent with past practices of Borrower and necessary or
desirable for the prudent operation of its business, for fair consideration and
on terms no less favorable to Borrower or such Subsidiary as are available from
unaffiliated third parties; and
(q) Borrower shall promptly advise LaSalle in writing of
any Material Adverse Effect or the occurrence of any Default or Event of
Default.
15. CONDITIONS PRECEDENT.
(a) The obligation of LaSalle to fund the Term Loan and
to fund the initial Revolving Loan is subject to the satisfaction or waiver on
or before the Closing Date of the following conditions precedent:
(i) LaSalle shall have received each of the
agreements, opinions, reports, approvals, consents, certificates and
other documents set forth on the closing document list attached hereto
as SCHEDULE 15(a)(i) (the "Closing Agenda");
(ii) Except as set forth on Schedule 15(a), since
April 4, 1999, no event shall have occurred which has had or could
reasonably be expected to have a Material Adverse Effect, as determined
by LaSalle in its sole discretion;
(iii) LaSalle shall have received payment in full
of all fees and expenses payable to it by Borrower on or before the
Closing Date;
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(iv) LaSalle shall have determined that
immediately after giving effect to (A) the making of the initial Loans,
including without limitation the Term Loan, the Capital Expenditure
Loan, and the Revolving Loans, if any, requested to be made on the
Closing Date, and (B) the payment or reimbursement by Borrower of
LaSalle for all closing costs and expenses incurred in connection with
the transactions contemplated hereby, on a pro forma basis the Excess
Availability of Borrower shall not be less than Five Hundred Thousand
Dollars ($500,000.00);
(v) LaSalle shall have received a certificate
from Borrower's chief executive officer or chief financial officer,
pursuant to which such officer shall certify that in calculating the
Excess Availability described in clause (iv) above, Borrower's
outstanding trade payables were (and are) current and not past due in
any material respect;
(vi) The Obligors shall have executed and
delivered to LaSalle all documents which LaSalle determines are
reasonably necessary to consummate the transactions contemplated
hereby;
(vii) LaSalle shall have received evidence that
(A) LIG has made payment into escrow of One Hundred Fifty Thousand
Dollar ($150,000.00) for the nine (9) month extension of LIG's option
to purchase substantially all of the assets of the Borrower, and (B)
the only conditions for the release of such funds to the Borrower from
the escrow are (x) the approval by the Borrower's shareholders of the
nine (9) month extension of LIG's option, (y) the consent by Carolina
First Bank to the execution of LIG's option, which consent has been
obtained, and (z) the consent of LaSalle to the extension of LIG's
option;
(viii) Borrower shall have delivered to LaSalle a
list of all documents and agreements between Borrower and LIG and
LaSalle shall complete a satisfactory review of all such documents and
agreements which LaSalle has requested the Borrower to deliver to
LaSalle.
(b) After the Closing Date, the obligation of LaSalle to
make any requested Revolving Loan is subject to the satisfaction of the
conditions precedent set forth below. Each such request shall constitute a
representation and warranty that such conditions are satisfied:
(i) All representations and warranties contained
in this Agreement and the Other Agreements shall be true and correct on
and as of the date of such request, as if then made, other than
representations and warranties that relate solely to an earlier date;
(ii) No Default or Event of Default shall have
occurred, or would result from the making of the requested Revolving
Loan, which has not been waived; and
(iii) Since April 4, 1999, no event has occurred
which has had or could reasonably be expected to have a Material
Adverse Effect.
16. DEFAULT. The occurrence of any one or more of the following
events shall constitute an "Event of Default" hereunder:
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(a) the failure of the Borrower to pay when due, declared
due, or demanded by LaSalle in accordance with the terms hereof, any of the
Liabilities and such failure is not cured within three (3) Business Days;
(b) the failure of any Obligor to perform, keep or
observe any of the covenants, conditions, promises, agreements or obligations of
such Obligor under this Agreement or any of the Other Agreements;
(c) the making or furnishing by any Obligor to LaSalle of
any representation, warranty, certificate, schedule, report or other
communication within or in connection with this Agreement or the Other
Agreements or in connection with any other agreement between such Obligor and
LaSalle, which is untrue or misleading in any respect, or the failure of any
Obligor to perform, keep or observe any of the covenants, conditions, promises,
agreement of such Obligor under any other agreement with any Person if such
failure has or is reasonably likely to have a Material Adverse Effect;
(d) the creation (whether voluntary or involuntary) of,
or any attempt to create, any lien or other encumbrance upon any of the
Collateral, other than the Permitted Liens, or the making or any attempt to make
any levy, seizure or attachment thereof;
(e) the commencement of any proceedings: (i) in
bankruptcy by or against any Obligor; (ii) for the liquidation or reorganization
of any Obligor; (iii) alleging that such Obligor is insolvent or unable to pay
its debts as they mature; or (iv) for the readjustment or arrangement of any
Obligor's debts, whether under the United States Bankruptcy Code or under any
other law, whether state or federal, now or hereafter existing for the relief of
debtors, or the commencement of any analogous statutory or non-statutory
proceedings involving any Obligor; provided, however, that if such commencement
of proceedings against such Obligor is involuntary, such action shall not
constitute an Event of Default unless such proceedings are not dismissed within
thirty (30) days after the commencement of such proceedings;
(f) the appointment of a receiver or trustee for any
Obligor, for any of the Collateral or for any substantial part of any Obligor's
assets or the institution of any proceedings for the dissolution, or the full or
partial liquidation, or the merger or consolidation, of any Obligor which is a
corporation or a partnership; provided, however, that if such appointment or
commencement of proceedings against such Obligor is involuntary, such action
shall not constitute an Event of Default unless such appointment is not revoked
or such proceedings are not dismissed within thirty (30) days after the
commencement of such proceedings;
(g) the entry of any judgment or order in excess of
$50,000.00 against any Obligor which remains unsatisfied or undischarged and in
effect for thirty (30) days after such entry without a stay of enforcement or
execution;
(h) the occurrence of a default under, or the revocation
or termination of, any agreement, instrument or document executed and delivered
by any Person to LaSalle pursuant to which such Person has guaranteed to LaSalle
the payment of all or any of the Liabilities or has granted LaSalle a security
interest in or lien upon some or all of such Person's real and/or personal
property to secure the payment of all or any of the Liabilities;
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<PAGE> 32
(i) the occurrence of a default (unless such default has
been waived) under any other agreement or instrument evidencing indebtedness for
borrowed money in excess of $100,000.00 executed or delivered by Borrower or
pursuant to which agreement or instrument Borrower or its properties is or may
be bound;
(j) a Change of Control shall have occurred;
(k) if any Reportable Event shall have occurred or any
Benefit Plan shall be terminated within the meaning of title IV of ERISA, or a
trustee shall be appointed by the appropriate United States District Court to
administer any Benefit Plan, the PBGC shall institute proceedings to terminate
any Benefit Plan, or there shall be a withdrawal from any Multiemployer Plan,
and there shall be a Material Adverse Effect in the case of any event described
in this paragraph 16(k);
(l) the occurrence of any event or condition which has or
is reasonably likely to have a Material Adverse Effect;
(m) the making of any payments on the Subordinated Debt
which is not permitted pursuant to the terms of the Subordination And
Intercreditor Agreement dated June ____, 1999, between LaSalle and LIG or
otherwise permitted by LaSalle in writing;
(n) the occurrence of a default under any of the
Borrower's agreements with LIG which has not been waived or cured within any
applicable grace or cure period; or
(o) the occurrence of a default under the Real Estate
Loan which has not been waived or cured within any applicable grace or cure
period.
Notwithstanding anything contained in this paragraph 16 or contained in
any other provision of this Agreement or Other Agreements to the contrary, in
the event of the institution of any proceedings described in paragraph 16(e)
hereof against Borrower, LaSalle shall not be obligated to make advances to
Borrower during the sixty (60) day grace period provided in paragraph 16(e).
17. REMEDIES UPON AN EVENT OF DEFAULT.
(a) Upon the occurrence of an Event of Default described
in paragraph 16(e) hereof, all of the Liabilities shall immediately and
automatically become due and payable, without notice of any kind. Upon the
occurrence of any other Event of Default, all of the Liabilities may, at the
option of LaSalle, and without demand, notice or legal process of any kind, be
declared, and immediately shall become, due and payable.
(b) Upon the occurrence and during the continuance of an
Event of Default, LaSalle may exercise from time to time any rights and remedies
available to it under the Uniform Commercial Code and any other applicable law
in addition to, and not in lieu of, any rights and remedies expressly granted in
this Agreement or in any of the Other Agreements and all of LaSalle's rights and
remedies shall be cumulative and non-exclusive to the extent permitted by law.
In particular, but not by way of limitation of the foregoing, LaSalle may,
without notice, demand or legal process of any kind, take possession of any or
all of the Collateral (in addition to Collateral of which it already has
possession),
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<PAGE> 33
wherever it may be found, and for that purpose may pursue the same wherever it
may be found, and may enter into any of Borrower's premises where any of the
Collateral may be, and search for, take possession of, remove, keep and store
any of the Collateral until the same shall be sold or otherwise disposed of, and
LaSalle shall have the right to store the same at any of Borrower's premises
without cost to LaSalle. Upon the occurrence and during the continuance of an
Event of Default, at LaSalle's request, Borrower shall, at Borrower's expense,
assemble the Collateral and make it available to LaSalle at one or more places
to be designated by LaSalle and reasonably convenient to LaSalle and Borrower.
Borrower recognizes that if Borrower fails to perform, observe or discharge any
of its Liabilities under this Agreement or the Other Agreements, no remedy at
law will provide adequate relief to LaSalle, and Borrower agrees that LaSalle
shall be entitled to temporary and permanent injunctive relief in any such case
without the necessity of proving actual damages. Any notification of intended
disposition of any of the Collateral required by law will be deemed reasonably
and properly given if given at least ten (10) calendar days before such
disposition. Any proceeds of any disposition by LaSalle of any of the Collateral
may be applied by LaSalle to the payment of expenses in connection with the
Collateral including, without limitation, legal expenses and reasonable
attorneys' fees (both in-house and outside counsel) and any balance of such
proceeds may be applied by LaSalle toward the payment of such of the
Liabilities, and in such order of application, as LaSalle may from time to time
elect.
18. INDEMNIFICATION. Borrower agrees to defend (with counsel
reasonably satisfactory to LaSalle), protect, indemnify and hold harmless
LaSalle, each affiliate or subsidiary of LaSalle, and each of their respective
officers, directors, employees, attorneys and agents (each an "Indemnified
Party") from and against any and all liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, claims, reasonable costs, reasonable
expenses and reasonable disbursements of any kind or nature (including, without
limitation, the disbursements and the reasonable fees of counsel for each
Indemnified Party in connection with any investigative, administrative or
judicial proceeding, whether or not the Indemnified Party shall be designated a
party thereto), which may be imposed on, incurred by, or asserted against, any
Indemnified Party by any third party (whether direct, indirect or consequential
and whether based on any federal, state or local laws or regulations including,
without limitation, securities, environmental and commercial laws and
regulations, under common law or in equity, or based on contract or otherwise)
in any manner relating to or arising out of this Agreement or any Other
Agreement, or any act, event or transaction related or attendant thereto, the
making and the management of the Loans or the use or intended use of the
proceeds of the Loans; provided, however, that Borrower shall not have any
obligation hereunder to any Indemnified Party with respect to matters caused by
or resulting from the willful misconduct or gross negligence of such Indemnified
Party. To the extent that the undertaking to indemnify set forth in the
preceding sentence may be unenforceable because it is violative of any law or
public policy, Borrower shall satisfy such undertaking to the maximum extent
permitted by applicable law. Any liability, obligation, loss, damage, penalty,
cost or expense covered by this indemnity shall be paid to each Indemnified
Party on demand, and, failing prompt payment, shall, together with interest
thereon at the highest rate then applicable to Revolving Loans hereunder from
the date incurred by each Indemnified Party until paid by Borrower, be added to
the Liabilities of Borrower and be secured by the Collateral. The provisions of
this paragraph 18 shall survive the satisfaction and payment of the other
Liabilities and the termination of this Agreement.
19. NOTICES. All written notices and other written communications
with respect to this Agreement shall be sent by ordinary, certified or overnight
mail, by telecopy or delivered in person, and in the case of LaSalle shall be
sent to it at 120 East Baltimore Street, Suite 1802, Baltimore, Maryland
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<PAGE> 34
21202, Attention: John Baier, Vice President (if by telecopy to (410) 837-0644),
and in the case of Borrower shall be sent to Borrower at its principal place of
business as set forth on the first page of this Agreement (if by telecopy to
(843) 221-5201) with a courtesy copy to David L. Batty, Esquire, Kennedy,
Covington, Labdell & Hickman, L.L.P., 100 North Tryon Street, Charlotte, North
Carolina 28202-4006 (if by telecopy to (704) 331-7598)).
20. CHOICE OF GOVERNING LAW AND CONSTRUCTION. This Agreement and
the Other Agreements are submitted by Borrower to LaSalle for LaSalle's
acceptance or rejection at LaSalle's place of business identified in paragraph
19 hereof as an offer by Borrower to borrow monies from LaSalle now and from
time to time hereafter, and shall not be binding upon LaSalle or become
effective until accepted by LaSalle, in writing, at said place of business. If
so accepted by LaSalle, this Agreement and the Other Agreements shall be deemed
to have been made at said place of business. THIS AGREEMENT AND THE OTHER
AGREEMENTS SHALL BE GOVERNED AND CONTROLLED BY THE INTERNAL LAWS OF THE STATE OF
MARYLAND AS TO INTERPRETATION, ENFORCEMENT, VALIDITY, CONSTRUCTION, EFFECT, AND
IN ALL OTHER RESPECTS, INCLUDING, WITHOUT LIMITATION, THE LEGALITY OF THE
INTEREST RATE AND OTHER CHARGES, BUT EXCLUDING PERFECTION OF THE SECURITY
INTERESTS IN THE COLLATERAL, WHICH SHALL BE GOVERNED AND CONTROLLED BY THE LAWS
OF THE RELEVANT JURISDICTION. If any provision of this Agreement shall be held
to be prohibited by or invalid under applicable law, such provision shall be
ineffective only to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or remaining provisions of this
Agreement.
21. FORUM SELECTION. To induce LaSalle to accept this Agreement,
Borrower irrevocably agrees that, subject to LaSalle's sole and absolute
election, ALL ACTIONS OR PROCEEDINGS IN ANY WAY, MANNER OR RESPECT, ARISING OUT
OF OR FROM OR RELATED TO THIS AGREEMENT, THE OTHER AGREEMENTS OR THE COLLATERAL
SHALL BE LITIGATED IN COURTS HAVING SITUS WITHIN THE STATE OF MARYLAND. BORROWER
HEREBY CONSENTS AND SUBMITS TO THE JURISDICTION OF ANY LOCAL, STATE OR FEDERAL
COURTS LOCATED WITHIN SAID STATE. BORROWER HEREBY WAIVES ANY RIGHT IT MAY HAVE
TO TRANSFER OR CHANGE THE VENUE OF ANY LITIGATION BROUGHT AGAINST BORROWER BY
LASALLE IN ACCORDANCE WITH THIS PARAGRAPH.
22. MODIFICATION AND BENEFIT OF AGREEMENT. This Agreement and the
Other Agreements may not be modified, altered or amended except by an agreement
in writing signed by Borrower and LaSalle. Borrower may not sell, assign or
transfer this Agreement, or the Other Agreements or any portion thereof
including, without limitation, Borrower's rights, titles, interest, remedies,
powers or duties thereunder. Borrower hereby consents to LaSalle's sale,
assignment, transfer or other disposition, at any time and from time to time
hereafter, of this Agreement, or the Other Agreements, or of any portion
thereof, or participations therein including, without limitation, LaSalle's
rights, titles, interest, remedies, powers and/or duties thereunder. Borrower
agrees that it shall execute and deliver such documents as LaSalle may request
in connection with any such sale, assignment, transfer or other disposition.
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<PAGE> 35
23. HEADINGS OF SUBDIVISIONS. The headings of subdivisions in this
Agreement are for convenience of reference only, and shall not govern the
interpretation of any of the provisions of this Agreement.
24. POWER OF ATTORNEY. Borrower acknowledges and agrees that its
appointment of LaSalle as its attorney and agent-in-fact for the purposes
specified in this Agreement is an appointment coupled with an interest and shall
be irrevocable until all of the Liabilities are paid in full and this Agreement
is terminated.
25. WAIVER OF JURY TRIAL; OTHER WAIVERS; CONFIDENTIALITY.
(a) LASALLE AND BORROWER HEREBY WAIVE ALL RIGHTS TO TRIAL
BY JURY IN ANY ACTION OR PROCEEDING WHICH PERTAINS DIRECTLY OR INDIRECTLY TO
THIS AGREEMENT, ANY OF THE OTHER AGREEMENTS, THE LIABILITIES, THE COLLATERAL,
ANY ALLEGED TORTIOUS CONDUCT OF BORROWER OR LASALLE OR WHICH, IN ANY WAY,
DIRECTLY OR INDIRECTLY, ARISES OUT OF OR RELATES TO THE RELATIONSHIP BETWEEN
BORROWER AND LASALLE. IN NO EVENT SHALL LASALLE BE LIABLE FOR LOST PROFITS OR
OTHER SPECIAL OR CONSEQUENTIAL DAMAGES.
(b) BORROWER HEREBY WAIVES ALL RIGHTS TO NOTICE AND
HEARING OF ANY KIND PRIOR TO THE EXERCISE BY LASALLE OF ITS RIGHTS TO REPOSSESS
THE COLLATERAL OF BORROWER WITHOUT JUDICIAL PROCESS OR TO REPLEVY, ATTACH OR
LEVY UPON SUCH COLLATERAL WITHOUT PRIOR NOTICE OR HEARING.
(c) Borrower hereby waives demand, presentment, protest
and notice of nonpayment, and further waives the benefit of all valuation,
appraisal and exemption laws.
(d) LaSalle's failure, at any time or times hereafter, to
require strict performance by Borrower of any provision of this Agreement or any
of the Other Agreements shall not waive, affect or diminish any right of LaSalle
thereafter to demand strict compliance and performance therewith. Any suspension
or waiver by LaSalle of an Event of Default under this Agreement or any default
under any of the Other Agreements shall not suspend, waive or affect any other
Event of Default under this Agreement or any other default under any of the
Other Agreements, whether the same is prior or subsequent thereto and whether
of the same or of a different kind or character. No delay on the part of LaSalle
in the exercise of any right or remedy under this Agreement or any Other
Agreement shall preclude other or further exercise thereof or the exercise of
any right or remedy. None of the undertakings, agreements, warranties, covenants
and representations of Borrower contained in this Agreement or any of the Other
Agreements and no Event of Default under this Agreement or default under any of
the Other Agreements shall be deemed to have been suspended or waived by LaSalle
unless such suspension or waiver is in writing, signed by a duly authorized
officer of LaSalle and directed to Borrower specifying such suspension or
waiver.
(e) Borrower has furnished and will furnish to LaSalle
certain information concerning Borrower which Borrower has advised is
non-public, proprietary or confidential in nature ("Confidential Information").
LaSalle confirms to the Borrower that it is LaSalle's policy and practice to
maintain in confidence all Confidential Information which is provided to it
under agreements providing for the
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<PAGE> 36
extension of credit and which is identified to it as such, and that it will
protect the confidentiality of Confidential Information submitted to it with
respect to Borrower under this Agreement, commensurate with its efforts to
maintain the confidentiality of its own Confidential Information, provided,
however, that: (i) nothing contained herein shall prevent LaSalle from
disclosing Confidential Information (A) to its Affiliates and their respective
directors, officers, and employees and to any legal counsel, auditors,
appraisers, consultants or other persons retained by it or its Affiliates as
professional advisors, on the condition that such information not be further
disclosed except in compliance with this paragraph 25(e), (B) under color of
legal authority, including, without limitation, to any regulatory authority
having jurisdiction over it or its operations or to, or under the authority of,
any court deemed by it to be of competent jurisdiction, (C) to any actual or
potential assignee of or participant in LaSalle's rights and obligations under
this Agreement to the extent such actual potential assignee or participant has
agreed to maintain such information in confidence on the basis set forth in this
paragraph 25(e), and (D) as necessary in connection with the exercise of its
remedies under this Agreement or any of the Other Agreements; (ii) the terms of
this paragraph 25(e) shall be inapplicable to any information furnished to it
which is in possession prior to the delivery to it of such information by
Borrower or any other authorized Person, or otherwise has been obtained by it on
a non-confidential basis, or which was or becomes available to the public or
otherwise part of the public domain (other than as a result of LaSalle's failure
or any prospective participant's or assignee's failure to abide hereby), or
which was not non-public, proprietary or confidential when Borrower or any other
authorized Person delivered it to LaSalle; and (iii) the determination by
LaSalle as to the application of any of the circumstances described in the
foregoing clauses (i) and (ii) will be conclusive and binding if made in good
faith.
(f) Notwithstanding subparagraph (e) above, Borrower
consents to LaSalle publishing a tombstone or similar advertising material
relating to the financing transaction contemplated by this Agreement.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the 21st day of June, 1999.
WITNESS/ATTEST: LASALLE BUSINESS CREDIT, INC.
By: /s/ Ronald W. Kerdasha, Jr. (SEAL)
-----------------------------------
Name: Ronald W. Kerdasha, Jr.
-----------------------------
Title: First Vice President
-----------------------------
PHOENIX MEDICAL TECHNOLOGY, INC.,
A Delaware Corporation
By: /s/ Edward W. Gallaher, Sr. (SEAL)
-----------------------------------
Name: Edward W. Gallaher, Sr.
-----------------------------
Title: President
-----------------------------
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EXHIBIT 4.3
MODIFICATION AGREEMENT
THIS MODIFICATION AGREEMENT ("MODIFICATION") is made as of August 6, 1999 by
and between PHOENIX MEDICAL TECHNOLOGY, INC., a Delaware corporation
("BORROWER") and LASALLE BUSINESS CREDIT, INC., a Delaware corporation
("LASALLE").
RECITALS
Pursuant to the terms and provisions of a Loan And Security Agreement dated
June 21, 1999 by and between the BORROWER and LASALLE ("LOAN AGREEMENT"),
LASALLE is providing to the BORROWER certain credit accommodations
(collectively, "LOANS"), including, but not limited to, a revolving line of
credit in the maximum principal amount of Three Million Eight Hundred Thousand
Dollars ($3,800,000.00) ("REVOLVER").
The BORROWER has requested that LASALLE modify the terms of the LOAN AGREEMENT
to provide that under the REVOLVER the BORROWER shall have the availability to
obtain the issuance of letters of credit for the account of the BORROWER.
LASALLE is willing to consent to the request of the BORROWER subject to, and
pursuant to the terms and provisions of, this MODIFICATION.
NOW, THEREFORE, in consideration of the premises, and other good and valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
parties agree as follows:
Section 1. Recitals. The parties acknowledge the accuracy of
the above Recitals and hereby incorporate the Recitals into this MODIFICATION.
Section 2. Amendment To Loan Agreement. The LOAN AGREEMENT is
hereby amended as follows:
a. Paragraph 1.(a). Paragraph 1.(a) of the LOAN AGREEMENT is
hereby amended by inserting the following new definitions:
"LETTERS OF CREDIT" shall mean those documentary or standby
letters of credit issued for Borrower's account in accordance with the
terms of paragraph 2.A hereof.
"LETTER OF CREDIT OBLIGATIONS" shall mean, as of any date of
determination, the sum of: (i) the aggregate undrawn face amount of
all Letters of Credit; and (ii) the aggregate unreimbursed amount of
all drawn Letters of Credit not already converted to a Loan hereunder.
<PAGE> 2
b. Paragraph 2. Paragraph 2 of the LOAN AGREEMENT is hereby
amended by deleting its present language in its entirety and substituting in
lieu thereof:
2. REVOLVING LOANS. Subject to the terms and conditions
of this Agreement and the Other Agreements, during the Original Term and any
Renewal Term, absent the existence of an Event of Default:
(a) LaSalle shall make such revolving loans and
advances (the "Revolving Loans") to Borrower as Borrower shall from time to
time request, in accordance with the terms of paragraph 2(b) hereof. The
aggregate unpaid principal amount of all Revolving Loans outstanding at any one
time made to Borrower shall not exceed the lesser of: (i) the Borrowing Base
minus one hundred percent (100%) of the Letter of Credit Obligations for
standby Letters of Credit and minus forty percent (40%) of the Letter of Credit
Obligations for documentary Letters of Credit; or (ii) the Revolving Loan
Commitment minus the outstanding Letter of Credit Obligations. All Revolving
Loans shall be repaid in full upon the earlier to occur of (A) the end of the
Original Term or any Renewal Term, if either LaSalle or Borrower elects to
terminate this Agreement as of the end of any such term and (B) the
acceleration of the Liabilities pursuant to paragraph 17 of this Agreement. If
at any time the outstanding principal balance of the Revolving Loans made to
Borrower exceeds: (1) the Borrowing Base minus one hundred percent (100%) of
the Letter of Credit Obligations for standby Letters of Credit and minus forty
percent (40%) of the Letter of Credit Obligations for documentary Letters of
Credit; or (2) the Revolving Loan Commitment minus the outstanding Letter of
Credit Obligations, Borrower shall immediately, and upon the request of
LaSalle, pay to LaSalle such amount as may be necessary to eliminate such
excess, and LaSalle shall apply such payment against the outstanding principal
balance of the Revolving Loans. In addition, if at any time the sum of (A) the
outstanding principal balance of the Loans and (B) the outstanding Letter of
Credit Obligations exceeds the Total Credit Facility, Borrower shall
immediately upon the request of LaSalle pay to LaSalle such amount as may be
necessary to eliminate such excess, and LaSalle shall apply such payment
against the outstanding principal balance of the Loans in such order as LaSalle
shall determine in its sole discretion. Borrower hereby authorizes LaSalle to
charge any of Borrower's accounts to make any payments of principal or interest
required by this Agreement. All Revolving Loans shall, in LaSalle's sole
discretion, be evidenced by one or more promissory notes in form and substance
satisfactory to LaSalle. However, if such Revolving Loans are not so evidenced,
such Revolving Loans may be evidenced solely by entries upon the books and
records maintained by LaSalle.
(b) LaSalle shall make Revolving Loans to
Borrower up to the lesser of the following amounts:
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<PAGE> 3
(i) an amount equal to (1) the sum
(such sum being herein referred to as the "Borrowing Base") of: (A) up
to eighty-five percent (85%) of the face amount of Eligible Accounts
plus, (B) the lesser of (x) up to sixty percent (60%) of the value of
Eligible Inventory, calculated on the basis of the lower of cost or
market value on a first-in, first-out basis, and (y) One Million Five
Hundred Thousand Dollars ($1,500,000.00), in each case, less such
reserves as LaSalle elects to establish from time to time in the
exercise of its reasonable discretion (to establish a reserve, LaSalle
shall provide written notice to Borrower of the amount of, and reason
for, such reserve) including, without limitation, a Dilution reserve
if Dilution exceeds five percent (5%); minus (2) the sum of one
hundred percent (100%) of Letter of Credit Obligations for standby
Letters of Credit plus forty percent (40%) of Letter of Credit
Obligations for documentary Letters of Credit; or
(ii) the Revolving Loan Commitment, minus
the outstanding amount of all Letter of Credit Obligations.
2A. LETTERS OF CREDIT. Subject to the terms and
conditions of this Agreement, and the Other Agreements, during the Original
Term or any Renewal Term, LaSalle shall, absent the existence of an Event of
Default, from time to time cause the issuance of and co- sign for, upon
Borrower's request, Letters of Credit; provided, that the Letters of Credit
shall be in form and substance acceptable to LaSalle in its sole discretion and
that the aggregate undrawn face amount of all such Letters of Credit shall at
no time exceed Two Hundred Fifty Thousand Dollars ($250,000.00); and provided
further, that no Letter of Credit shall have an expiry date: (a) more than 365
days from the date of issuance; or (b) beyond five (5) days prior to the
expiration of the Original Term or the Renewal Term, as the case may be.
Borrower's reimbursement obligation in respect of the Letters of Credit shall
automatically reduce, dollar for dollar, the amount which Borrower may borrow
based upon the Revolving Loan Commitment and the Borrowing Base. Any payment
made by LaSalle to any Person on account of any Letter of Credit shall
constitute a Revolving Loan hereunder. At no time shall the aggregate sum of
direct Revolving Loans by LaSalle to Borrower plus the contingent liability of
LaSalle under the outstanding Letters of Credit be in excess of the Revolving
Loan Commitment, and at no time shall the aggregate sum of direct Revolving
Loans plus one hundred percent (100%) of the contingent liability of LaSalle
under outstanding standby Letters of Credit plus forty percent (40%) of the
contingent liability of LaSalle under outstanding documentary Letters of Credit
be in excess of the Borrowing Base.
c. Paragraph 5.(e). Paragraph 5.(e) of the LOAN AGREEMENT is
hereby amended by deleting the first sentence thereof in its entirety and
substituting in lieu thereof the following: "Borrower shall pay to LaSalle at
the end of each month, in arrears, an
3
<PAGE> 4
Unused Line Fee equal to one-half of one percent (.5%) per annum on the daily
average amount by which the Revolving Loan Commitment exceeds the sum of: (i)
the outstanding principal balance of the Revolving Loans; and (ii) the
outstanding Letter of Credit Obligations.
d. Paragraph 5. Paragraph 5 of the LOAN AGREEMENT is hereby
amended by inserting at the end thereof, immediately after the presently
existing paragraph 5.(g), the following new paragraph:
(h) Letter of Credit Fees. Borrower shall remit
to LaSalle a Letter of Credit fee equal to two percent (2%) per annum
on the aggregate undrawn face amount of all outstanding Letters of
Credit issued for the account of Borrower, which fees shall be payable
monthly in arrears on each day that interest is payable hereunder.
Borrower shall also pay on demand the normal and customary
administrative charges for issuance, amendment, negotiation, renewal,
or extension of any Letter of Credit imposed by the bank issuing such
Letter of Credit. Upon the occurrence and during the continuance of an
Event of Default, all Letter of Credit fees shall be payable on demand
at a rate equal to four percent (4%) per annum on the aggregate
undrawn face amount thereof.
e. Paragraph 13. The last paragraph of Paragraph 13 of the LOAN
AGREEMENT (i.e., the paragraph immediately preceding Paragraph 14) is hereby
amended by deleting the words "shall be remade by Borrower at the time each
Revolving Loan is made and each Capital Expenditure Loan is issued pursuant to
this Agreement" and substituting in lieu thereof the phrase "shall be remade by
Borrower at the time each Revolving Loan is made, at the time each Capital
Expenditure Loan is made, and at the time each Letter of Credit is issued
pursuant to this Agreement."
f. Paragraph 15.(b). Paragraph 15.(b) of the LOAN AGREEMENT is
hereby amended by deleting its present language in its entirety and
substituting in lieu thereof the following:
(b) After the Closing Date, the obligation of LaSalle to
make any requested Revolving Loan or any Capital Expenditure Loan, or
to co-sign as applicant for any requested Letter of Credit is subject
to the satisfaction of the conditions precedent set forth below. Each
such request shall constitute a representation and warranty that such
conditions are satisfied:
(i) All representations and warranties
contained in this Agreement and the Other Agreements shall be true and
correct on and as of the date of such request, as if then made, other
than representations and warranties that relate solely to an earlier
date;
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<PAGE> 5
(ii) No Default or Event of Default shall have
occurred, or would result from the making of the requested Revolving
Loan, the making of the requested Capital Expenditure Loan, or the
issuance of the requested Letter of Credit, which has not been waived;
and
(iii) Since April 4, 1999, no event has occurred
which has had or could reasonably be expected to have a Material
Adverse Effect.
g. Paragraph 18. Paragraph 18 of the LOAN AGREEMENT is hereby
amended by deleting its present language in its entirety and substituting in
lieu thereof the following:
18. INDEMNIFICATION. Borrower agrees to defend (with
counsel reasonably satisfactory to LaSalle), protect, indemnify and
hold harmless LaSalle, each affiliate or subsidiary of LaSalle, and
each of their respective officers, directors, employees, attorneys and
agents (each an "Indemnified Party") from and against any and all
liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, claims, reasonable costs, reasonable expenses and
reasonable disbursements of any kind or nature (including, without
limitation, the disbursements and the reasonable fees of counsel for
each Indemnified Party in connection with any investigative,
administrative or judicial proceeding, whether or not the Indemnified
Party shall be designated a party thereto), which may be imposed on,
incurred by, or asserted against, any Indemnified Party by any third
party (whether direct, indirect or consequential and whether based on
any federal, state or local laws or regulations including, without
limitation, securities, environmental and commercial laws and
regulations, under common law or in equity, or based on contract or
otherwise) in any manner relating to or arising out of this Agreement
or any Other Agreement, or any act, event or transaction related or
attendant thereto, the making and the management of the Loans or any
Letters of Credit or the use or intended use of the proceeds of the
Loans or any Letters of Credit; provided, however, that Borrower shall
not have any obligation hereunder to any Indemnified Party with
respect to matters caused by or resulting from the willful misconduct
or gross negligence of such Indemnified Party. To the extent that the
undertaking to indemnify set forth in the preceding sentence may be
unenforceable because it is violative of any law or public policy,
Borrower shall satisfy such undertaking to the maximum extent
permitted by applicable law. Any liability, obligation, loss, damage,
penalty, cost or expense covered by this indemnity shall be paid to
each Indemnified Party on demand, and, failing prompt payment, shall,
together with interest thereon at the highest rate then applicable to
Revolving Loans hereunder from the date incurred by each Indemnified
Party until paid by Borrower, be added to the
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<PAGE> 6
Liabilities of Borrower and be secured by the Collateral. The
provisions of this paragraph 18 shall survive the satisfaction and
payment of the other Liabilities and the termination of this
Agreement.
Section 3. Other Terms. Other than as specifically modified herein, all
other terms and provisions of the LOAN AGREEMENT and all other documents
evidencing, securing or otherwise documenting the terms and provisions of the
LOANS (collectively, "LOAN DOCUMENTS") remain in full force and effect and are
hereby ratified and confirmed.
Section 4. Final Agreement. This MODIFICATION and the other LOAN
DOCUMENTS, as modified herein, constitute the entire agreement between the
parties hereto with respect to the LOANS, and may not be altered, modified or
amended except by a writing executed by LASALLE and any other party against
whom any such modification or amendment is to be enforced against.
Section 5. Fees And Expenses. The BORROWER shall pay all costs and
expenses incurred by LASALLE in connection with this MODIFICATION, including,
but not limited to, all attorneys' fees.
Section 6. Binding Effect. This MODIFICATION shall inure to the benefit
of the parties hereto, and shall be binding upon, their respective personal
representatives, successors and assigns.
Section 7. Choice Of Law. The laws of the State of Maryland (excluding,
however, conflicts of law principles) shall govern and be applied to determine
all issues relating to this MODIFICATION and the rights and obligations of the
parties hereto, including the validity, construction, interpretation, and
enforceability of this MODIFICATION and its various provisions and the
consequences and legal effect of all transactions and events which resulted in
the execution of this MODIFICATION or which occurred or were to occur as a
direct or indirect result of this MODIFICATION having been executed.
Section 8. Consent To Jurisdiction; Agreement As To Venue. The BORROWER
irrevocably consents to the non-exclusive jurisdiction of the courts of the
State of Maryland and of the United States District Court for the District of
Maryland, if a basis for federal jurisdiction exists. In addition, the BORROWER
agrees that venue shall be proper in any circuit court of the State of Maryland
selected by LASALLE or in the United States District Court for the District of
Maryland if a basis for federal jurisdiction exists, and the BORROWER waives
any right to object to the maintenance of a suit in any of the state or federal
courts of the State of Maryland on the basis of improper venue or of
inconvenience of forum.
Section 9. Tense, Gender, Defined Terms, Captions. As used herein, the
plural shall refer to and include the singular, and the singular shall refer to
and include the plural. The use of any
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<PAGE> 7
gender shall include and refer to any other gender. All defined terms are
completely capitalized throughout this MODIFICATION. All captions are for the
purpose of convenience only.
Section 10. Time. Time is of the essence with respect to this
MODIFICATION and all terms and conditions described herein.
Section 11. Waiver Of Jury Trial. The BORROWER and LASALLE each agree
that any suit, action, or proceeding, whether claim or counterclaim, brought or
instituted by the BORROWER or LASALLE, or any successor or assign of the
BORROWER or LASALLE, on or with respect to this MODIFICATION or any of the LOAN
DOCUMENTS, as amended pursuant to this MODIFICATION, or which in any way
relates, directly or indirectly, to the obligations of the BORROWER to LASALLE
under this MODIFICATION or any of the LOAN DOCUMENTS, as amended pursuant to
this MODIFICATION, or the dealings of the parties with respect thereto, shall
be tried only by a court and not by a jury. THE BORROWER AND LASALLE EACH
HEREBY EXPRESSLY WAIVE ANY RIGHT TO A TRIAL BY JURY IN ANY SUCH SUIT, ACTION,
OR PROCEEDING. The BORROWER and LASALLE acknowledge and agree that this
provision is a specific and material aspect of the agreement between the
parties and that LASALLE would not enter into this transaction with the
BORROWER if this provision were not part of their agreement.
IN WITNESS WHEREOF, the parties hereto have duly executed this MODIFICATION as
of the 6th day of August, 1999.
WITNESS/ATTEST: PHOENIX MEDICAL TECHNOLOGY, INC.,
A Delaware Corporation
By:
/s/ Edward W. Gallaher, Sr. (SEAL)
----------------------------------
Name: Edward W. Gallaher, Sr.
------------------------
Title: President
------------------------
LASALLE BUSINESS CREDIT, INC.
By: /s/ Ronald W. Kerdasha, Jr. (SEAL)
----------------------------------
Name: Ronald W. Kerdasha, Jr.
------------------------
Title: First Vice President
------------------------
7
<PAGE> 1
EXHIBIT 4.4
SECOND MODIFICATION AGREEMENT
THIS SECOND MODIFICATION AGREEMENT ("MODIFICATION") is made as of November 15,
1999, by and between PHOENIX MEDICAL TECHNOLOGY, INC., a Delaware corporation
("BORROWER") and LASALLE BUSINESS CREDIT, INC., a Delaware corporation
("LASALLE").
RECITALS
Pursuant to the terms and provisions of a Loan and Security Agreement dated
June 21, 1999 by and between the BORROWER and LASALLE, as previously amended
("LOAN AGREEMENT"), LASALLE is providing to the BORROWER certain credit
accommodations, including a revolving line of credit in the maximum principal
amount of Three Million Eight Hundred Thousand Dollars ($3,800,000.00), a term
loan in the maximum principal amount of One Million Seven Hundred Thousand
Dollars ($1,700,000.00) and a capital expenditure credit facility in the
maximum amount of Five Hundred Thousand Dollars ($500,000.00) (collectively,
"LOANS").
The BORROWER's obligations to LASALLE under the LOANS are secured by: (a) the
security interest and liens granted in the LOAN AGREEMENT; (b) the mortgage
lien granted in the Mortgage and Absolute Assignment of Rents dated June 21,
1999 from the BORROWER to LASALLE ("MORTGAGE"); (c) the Trademark Security
Agreement dated June 21, 1999 by and between the BORROWER and LASALLE
("TRADEMARK AGREEMENT"); and (d) the Patent Security Agreement dated June 21,
1999 by and between the BORROWER and LASALLE ("PATENT AGREEMENT").
In addition, the LOAN has the benefit of: (a) the Subordination Agreement dated
July 28, 1999 by and between the BORROWER and Williamsburg County, South
Carolina; and (b) the Subordination and Intercreditor Agreement dated June 21,
1999 by and between LASALLE and London International Group, Inc. (collectively,
"SUBORDINATION AGREEMENTS"). As used herein the term "LOAN DOCUMENTS") means
collectively the LOAN AGREEMENT, the MORTGAGE, the TRADEMARK AGREEMENT, the
PATENT AGREEMENT, the SUBORDINATION AGREEMENTS and all other documents
evidencing, securing or otherwise documenting the LOANS.
As of this date, the BORROWER is in violation of the covenants contained in
paragraphs 14(m)(ii) and 14(m)(iii) of the LOAN AGREEMENT (collectively,
"EXISTING COVENANT VIOLATIONS").
The BORROWER has requested that LASALLE: (a) waive its rights to declare a
default based upon the EXISTING COVENANT VIOLATIONS; and (b) modify the
financial covenants contained in the LOAN AGREEMENT. LASALLE is willing to
consent to the requests of the BORROWER subject to the terms and provisions of
this MODIFICATION.
<PAGE> 2
NOW, THEREFORE, in consideration of the premises, and other good and valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
parties agree as follows:
Section 1. Recitals. The parties acknowledge the accuracy of the
Recitals and hereby incorporate the Recitals into this MODIFICATION.
Section 2. Waiver. LASALLE hereby waives its right to declare a default
under the LOAN AGREEMENT as a result of the EXISTING COVENANT VIOLATIONS. This
waiver is specifically limited to the EXISTING COVENANT VIOLATIONS as of the
date of this MODIFICATION and LASALLE hereby reserves all of its rights and
remedies which may arise as a result of any other existing defaults under the
LOAN AGREEMENT or any other LOAN DOCUMENT or as a result of any future
violation of any covenants under the LOAN AGREEMENT or any other LOAN DOCUMENT.
Section 3. Amendment To Loan Agreement. The LOAN AGREEMENT is hereby
amended as follows:
a. Paragraph 1.(a) of the LOAN AGREEMENT is hereby amended by
deleting its present language in its entirety and substituting in lieu thereof
the following:
"Debt Service Coverage Ratio" shall mean, with respect to any
period, the ratio of: (i) net income after taxes for such period
(excluding any after-tax gains or losses on the sale of assets (other
than the sale of Inventory in the ordinary course of business) and
excluding other after-tax extraordinary gains or losses), plus
deferred taxes, plus depreciation and amortization deducted in
determining net income for such period, minus Capital Expenditures for
such period not financed, minus any cash dividends paid or accrued and
cash withdrawals paid or accrued to shareholders or other Affiliates
for such period which were not calculated in determining net income
after taxes, and plus the after-tax increase in LIFO reserves or minus
the after tax decrease in LIFO reserves; to (ii) current principal
maturities of long term debt, which has not been subordinated to the
Borrower's obligations to LaSalle pursuant to a writing acceptable to
LaSalle, and capitalized leases paid or scheduled to be paid during
such period.
b. Paragraph 5.(a) of the LOAN AGREEMENT is hereby amended by
deleting its existing language in its entirety and substituting in lieu thereof
the following:
(a) Rates Of Interest. Interest accrued on all
Loans shall be due on the earliest of: (i) the first day of each month
(for the immediately preceding month), computed through the last
calendar day of the preceding month; (ii) the occurrence of an Event
of Default in consequence of which
<PAGE> 3
LaSalle elects to accelerate the maturity and payment of the
Liabilities; or (iii) termination of this Agreement pursuant to
paragraph 12 hereof. Interest shall accrue on: (A) the unpaid
principal balance of the Term Loan made to Borrower outstanding at the
end of each day at a fluctuating rate per annum equal to two and
one-quarter percent (2.25%) above the Prime Rate; (B) the unpaid
principal balance of the Capital Expenditure Loan made to Borrower
outstanding at the end of each day at a fluctuating rate per annum
equal to two and one-quarter percent (2.25%) above the Prime Rate; and
(C) the principal amount of the Revolving Loans made to Borrower
outstanding at the end of each day at a fluctuating rate per annum
equal to two percent (2.0%) above the Prime Rate. The rate of interest
payable on the Loans shall increase or decrease by an amount equal to
any increase or decrease in the Prime Rate, effective as of the
opening of business on the day that any such change in the Prime Rate
occurs. Upon and after the occurrence of an Event of Default, and
during the continuation thereof, the principal amount of all Loans
shall bear interest on demand at a rate per annum equal to the rate of
interest then in effect plus two percent (2%).
c. Paragraph 14.(m) is hereby amended by deleting its present
language in its entirety and substituting in lieu thereof the following:
(m) Borrower shall maintain and keep in full force and
effect each of the financial covenants set forth below until the
termination of this Agreement and the repayment of all Liabilities.
The calculation and determination of each such financial covenant, and
all accounting terms contained therein, shall be so calculated and
construed in accordance with GAAP, applied on a basis consistent with
the financial statements of Borrower delivered on or before the
Closing Date:
(i) Consolidated Tangible Net Worth. Borrower
and its Subsidiaries, on a consolidated basis, shall maintain as of
the end of (A) the fiscal quarter ending December 31, 1999, a Tangible
Net Worth of not less than Six Hundred Fifty Thousand Dollars
($650,000.00), and (B) each fiscal quarter commencing with March 31,
2000 and continuing until this Agreement is terminated and all of the
Liabilities have been repaid, a Tangible Net Worth of not less than
Five Hundred Seventy-Five Thousand Dollars ($575,000.00);
(ii) Consolidated Interest Coverage Ratio.
Borrower and its Subsidiaries, on a consolidated basis, shall have:
(A) as of the last day of (and for) the three (3) month period ending
March 31, 2000, a ratio of (1) EBITDA for such period minus Capital
Expenditures for such period not financed, to (2) interest expense for
such period, of not less than 0.85 to 1.0; (B) as of the last day of
(and for) the six month period ending June 30, 2000, a ratio of (1)
EBITDA for
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<PAGE> 4
such period minus Capital Expenditures for such period not financed,
to (2) interest expense for such period, of not less than 1.0 to 1.0;
(C) as of the last day of (and for) the nine month period ending
September 30, 2000, a ratio of (1) EBITDA for such period minus
Capital Expenditures for such period not financed, to (2) interest
expense for such period, of not less than 1.1 to 1.0; and (D) as of
the last day of (and for) each twelve month period ending on the last
day of a fiscal quarter commencing with the quarter ending December
31, 2000, a ratio of (1) EBITDA for such period minus Capital
Expenditures for such period not financed, to (2) interest expense for
such period, of not less than 1.5 to 1.0.
(iii) Consolidated Debt Service Coverage Ratio.
Borrower and its Subsidiaries, on a consolidated basis, shall have:
(A) as of the last day of (and for) the three (3) month period ending
June 30, 2000, a Debt Service Coverage Ratio of not less than 0.90 to
1.0; (B) as of the last day of (and for) the six month period ending
September 30, 2000, a Debt Service Coverage Ratio of not less than
0.90 to 1.0; (C) as of the last day of (and for) the nine month period
ending December 31, 2000, a Debt Service Coverage Ratio of not less
than 1.10 to 1.0; and (D) as of the last day of (and for) each twelve
month period ending on the last day of a fiscal quarter commencing
with the quarter ending March 31, 2000, a Debt Service Coverage Ratio
of not less than 1.25 to 1.0.
(iv) Consolidated Capital Expenditures. Borrower
and its Subsidiaries, on a consolidated basis, shall not: (A) make
Capital Expenditures, which are not financed by term loans or capital
leases of an aggregate amount of more than (1) Two Hundred Thousand
Dollars ($200,000.00) during the period between the Closing Date and
December 31, 1999, inclusive, or (2) Two Hundred Thousand Dollars
($200,000.00) during any fiscal year of the Borrower thereafter; or
(B) make any Capital Expenditures, which are financed by term loans
(other than the Capital Expenditure Loan) or capital leases, of an
aggregate amount of more than (a) Two Hundred Thousand Dollars
($200,000.00) through the period between the Closing Date and December
31, 1999, inclusive, or (b) One Hundred Thousand Dollars ($100,000.00)
during any fiscal year of the Borrower thereafter.
(v) Consolidated EBITDA. Borrower and its
Subsidiaries, on a consolidated basis, shall have as of the last day
of (and for): (A) December, 1999, EBITDA for such period of not less
than Twenty- Five Thousand Dollars ($25,000.00); (B) the two month
period ending January 31, 2000, EBITDA for such period of not less
than Negative Sixty Thousand Dollars (-$60,000.00); (C) the three
month period ending February 29, 2000, EBITDA for such period of not
less than Negative Fifteen Thousand Dollars (- $15,000.00); (D) the
four month period ending March 31, 2000, EBITDA for such period of not
less than One Hundred Twenty-Four Thousand
4
<PAGE> 5
Dollars ($124,000.00); (E) the five month period ending April 30,
2000, EBITDA for such period of not less than One Hundred Seven
Thousand Dollars ($107,000.00); (F) the six month period ending May
31, 2000, EBITDA for such period of not less than Two Hundred
Fifty-Eight Thousand Dollars ($258,000.00); (G) the seven month period
ending June 30, 2000, EBITDA for such period of not less than Two
Hundred Seventy-Eight Thousand Dollars ($278,000.00); (H) the eight
month period ending July 31, 2000, EBITDA for such period of not less
than Three Hundred Eighty Thousand Dollars ($380,000.00); (I) the nine
month period ending August 31, 2000, EBITDA for such period of not
less than Four Hundred Eighty Thousand Dollars ($480,000.00); (J) the
ten month period ending September 30, 2000, EBITDA for such period of
not less than Five Hundred Eighty Thousand Dollars ($580,000.00); (K)
the eleven month period ending October 31, 2000, EBITDA for such
period of not less than Seven Hundred Thousand Dollars ($700,000.00);
(L) the twelve month period ending November 30, 2000, EBITDA for such
period of not less than Eight Hundred Twenty-Five Thousand Dollars
($825,000.00); and (M) each twelve month period ending on the last day
of a calendar month commencing with the twelve month period ending
December 31, 2000, EBITDA for such period of not less than Nine
Hundred Thousand Dollars ($900,000.00).
Section 4. Other Terms. Except as specifically modified herein, all
other terms and provisions of the LOAN DOCUMENTS remain in full force and
effect and are hereby ratified and confirmed. It is the specific intention of
the parties hereto that the modifications contained herein shall not constitute
a novation of any of the BORROWER's obligations to LASALLE.
Section 5. Final Agreement. This MODIFICATION and the other LOAN
DOCUMENTS, as modified herein, constitute the entire agreement between the
parties hereto with respect to the LOANS, and may not be altered, modified or
amended except by a writing executed by LASALLE and the BORROWER.
Section 6. Fees And Expenses. The BORROWER shall pay all costs and
expenses incurred by LASALLE in connection with this MODIFICATION, including,
but not limited to, all attorneys' fees.
Section 7. Binding Effect. This MODIFICATION shall inure to the benefit
of, and shall be binding upon, the parties hereto and their respective personal
representatives, successors and assigns.
Section 8. Choice Of Law. The laws of the State of Maryland (excluding,
however, conflicts of law principles) shall govern and be applied to determine
all issues relating to this MODIFICATION and the rights and obligations of the
parties hereto, including the validity, construction, interpretation, and
enforceability of this MODIFICATION and its various provisions and the
consequences and legal effect of all transactions and events which resulted in
the execution of this MODIFICATION or which occurred or were to occur
5
<PAGE> 6
as a direct or indirect result of this MODIFICATION having been executed.
Section 9. Consent To Jurisdiction; Agreement As To Venue. The BORROWER
irrevocably consents to the non-exclusive jurisdiction of the courts of the
State of Maryland and of the United States District Court for the District of
Maryland, if a basis for federal jurisdiction exists. In addition, the BORROWER
agrees that venue shall be proper in any circuit court of the State of Maryland
selected by LASALLE or in the United States District Court for the District of
Maryland if a basis for federal jurisdiction exists, and the BORROWER waives
any right to object to the maintenance of a suit in any of the state or federal
courts of the State of Maryland on the basis of improper venue or of
inconvenience of forum.
Section 10. Tense, Gender, Defined Terms, Captions. As used herein, the
plural shall refer to and include the singular, and the singular shall refer to
and include the plural. The use of any gender shall include and refer to any
other gender. All defined terms are completely capitalized throughout this
MODIFICATION. All captions are for the purpose of convenience only.
Section 11. Time. Time is of the essence with respect to this
MODIFICATION and all terms and conditions described herein.
Section 12. Release Of Claims. The BORROWER hereby releases, waives,
discharges and agrees to hold LASALLE and its officers, directors, agents,
attorneys, and employees harmless from any and all claims, known or unknown,
which the BORROWER may currently have against LASALLE or its officers,
directors, agents, attorneys, or employees which in any way relate, pertain, or
arise, directly or indirectly, from the LOANS (or any of them), the LOAN
DOCUMENTS, this MODIFICATION, or which otherwise relate or pertain to the
collateral securing the obligations of the BORROWER (or any of them) to
LASALLE, the transactions described in this MODIFICATION, or the conduct of the
parties with respect thereto.
Section 13. No Waiver. LASALLE, at any time or from time to time, may
waive all or any rights under this MODIFICATION or the other LOAN DOCUMENTS, as
amended, but any such waiver or indulgence by LASALLE at any time or from time
to time shall not constitute a future waiver of performance or exact
performance by the BORROWER.
Section 14. Waiver Of Jury Trial. The BORROWER and LASALLE each agree
that any suit, action, or proceeding, whether claim or counterclaim, brought or
instituted by the BORROWER or LASALLE, or any successor or assign of the
BORROWER or LASALLE, on or with respect to this MODIFICATION or any of the LOAN
DOCUMENTS, as amended pursuant to this MODIFICATION, or which in any way
relates, directly or indirectly, to the obligations of the BORROWER to LASALLE
under this MODIFICATION or any of the LOAN DOCUMENTS, as amended pursuant to
this MODIFICATION, or the dealings of the parties with respect thereto, shall
be tried only by a court and
6
<PAGE> 7
not by a jury. THE BORROWER AND LASALLE EACH HEREBY EXPRESSLY WAIVE ANY RIGHT
TO A TRIAL BY JURY IN ANY SUCH SUIT, ACTION, OR PROCEEDING. The BORROWER and
LASALLE acknowledge and agree that this provision is a specific and material
aspect of the agreement between the parties and that LASALLE would not enter
into this transaction with the BORROWER if this provision were not part of
their agreement.
7
<PAGE> 8
IN WITNESS WHEREOF, the parties have executed this MODIFICATION with the
specific intention of creating a document under seal as of the date first above
written.
WITNESS/ATTEST: BORROWER:
PHOENIX MEDICAL TECHNOLOGY, INC.
A Delaware Corporation
By: /s/ Edward W. Gallaher (SEAL)
- ---------------------- ----------------------------
Name: Edward W. Gallaher
---------------------------
Title: President
--------------------------
LASALLE:
LASALLE BUSINESS CREDIT, INC.,
A Delaware Corporation
By: /s/ Ronald W. Kerdasha, Jr. (SEAL)
- ---------------------- ----------------------------
Name: Ronald W. Kerdasha, Jr.
---------------------------
Title: First Vice President
--------------------------
8
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE
SHEET, (FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA), STATEMENT OF OPERATIONS
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH ANNUAL FINANCIAL STATEMENT
FOR THE PERIOD ENDED DECEMBER 31, 1999.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 750
<SECURITIES> 0
<RECEIVABLES> 1,498,136<F1>
<ALLOWANCES> 0
<INVENTORY> 1,682,685
<CURRENT-ASSETS> 3,181,571
<PP&E> 4,695,946<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 7,877,517
<CURRENT-LIABILITIES> 4,285,360
<BONDS> 3,916,152
0
0
<COMMON> 245,962
<OTHER-SE> (569,957)
<TOTAL-LIABILITY-AND-EQUITY> 7,877,517
<SALES> 13,138,306
<TOTAL-REVENUES> 44,892
<CGS> 11,736,007
<TOTAL-COSTS> 11,736,007
<OTHER-EXPENSES> 1,581,174
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 567,312
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> (185,334)
<CHANGES> 0
<NET-INCOME> (515,961)
<EPS-BASIC> (.21)
<EPS-DILUTED> (.21)
<FN>
<F1>REPRESENTS NET AMOUNT
</FN>
</TABLE>
