Exhibit 10.7
FIRST AMENDMENT TO CREDIT AND SECURITY AGREEMENT
THIS AMENDMENT (the “Amendment”), dated as of March 2, 2007, is entered into by and among TRADESTAR CONSTRUCTION SERVICES, INC., a New Mexico corporation (“Tradestar”), PETROLEUM ENGINEERS, INC., a Louisiana corporation (“Petroleum Engineers”, and together with Tradestar, the “Borrower”), and WELLS FARGO BANK, NATIONAL ASSOCIATION (as more fully defined in Paragraph 1 of this Amendment, the “Lender”), acting through its Wells Fargo Business Credit operating division.
Recitals
The Borrower and the Lender are parties to a Credit and Security Agreement dated as of May 23, 2006 (as amended from time to time, the “Credit Agreement”). Capitalized terms used in these recitals have the meanings given to them in the Credit Agreement unless otherwise specified.
The Borrower has requested that certain amendments be made to the Credit Agreement, which the Lender is willing to make pursuant to the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements herein contained, it is agreed as follows:
1. Defined Terms. Capitalized terms used in this Amendment which are defined in the Credit Agreement shall have the same meanings as defined therein, unless otherwise defined herein. In addition, Section 1.1 of the Credit Agreement is amended by adding or amending, as the case may be, the following definitions:
“Affiliate” or “Affiliates” means Tradestar Services, Inc., Decca Consulting Ltd., and any other Person controlled by, controlling or under common control with the Borrower, including any Subsidiary of the Borrower. For purposes of this definition, “control,” when used with respect to any specified Person, means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise.
“Decca Consulting” means Decca Consulting Ltd., a corporation organized and existing under the laws of Alberta, Canada.
“Eligible Accounts” means all unpaid Accounts of the Borrower arising from the sale or lease of goods or the performance of services, net of any credits, but excluding any such Accounts having any of the following characteristics:
(i) That portion of Accounts unpaid 90 days or more after the invoice date or, if the Lender in its discretion has determined that a particular dated Account may be
eligible, that portion of such Account which is unpaid more than 60 days past the stated due date or more than 90 days past the invoice date;
(ii) That portion of Accounts related to goods or services with respect to which the Borrower has received notice of a claim or dispute, which are subject to a claim of offset or a contra account, or which reflect a reasonable reserve for warranty claims or returns;
(iii) That portion of Accounts not yet earned by the final delivery of goods or rendition of services, as applicable, by the Borrower to the customer, including progress billings, and that portion of Accounts for which an invoice has not been sent to the applicable account debtor;
(iv) Accounts constituting (i) proceeds of copyrightable material unless such copyrightable material shall have been registered with the United States Copyright Office, or (ii) proceeds of patentable inventions unless such patentable inventions have been registered with the United States Patent and Trademark Office;
(v) Accounts owed by any unit of government, whether foreign or domestic (provided, however, that there shall be included in Eligible Accounts that portion of Accounts owed by such units of government for which the Borrower has provided evidence satisfactory to the Lender that (A) the Lender has a first priority perfected security interest and (B) such Accounts may be enforced by the Lender directly against such unit of government under all applicable laws);
(vi) Accounts owed by an account debtor located outside the United States which are not (A) backed by a bank letter of credit naming the Lender as beneficiary or assigned to the Lender, in the Lender’s possession or control, and with respect to which a control agreement concerning the letter-of-credit rights is in effect, and acceptable to the Lender in all respects, in its sole discretion, or (B) covered by a foreign receivables insurance policy acceptable to the Lender in its sole discretion;
(vii) Accounts denominated in any currency other than United States dollars;
(viii) Accounts owed by an account debtor that is insolvent, the subject of bankruptcy proceedings or has gone out of business;
(ix) Accounts owed by an Owner, Subsidiary, Affiliate, Officer or employee of the Borrower;
(x) Accounts not subject to a duly perfected security interest in the Lender’s favor or which are subject to any Lien in favor of any Person other than the Lender;
(xi) That portion of Accounts that has been restructured, extended, amended or modified;
2
(xii) That portion of Accounts that constitutes advertising, finance charges, service charges or sales or excise taxes;
(xiii) Accounts owed by an account debtor other than Aspect Resources, Remington Oil and Gas, Walter Oil and Gas, Kearney Electric or Indicom Electric Company, regardless of whether otherwise eligible, to the extent that the aggregate balance of Accounts owed by such account debtor exceeds 15% of the aggregate amount of all Accounts;
(xiv) Accounts owed by Aspect Resources, Remington Oil and Gas, or Walter Oil and Gas, regardless of whether otherwise eligible, to the extent that the aggregate balance of Accounts owed by such account debtor exceeds 20% of the aggregate amount of all Accounts;
(xv) Accounts owed by an account debtor to Tradestar, regardless of whether otherwise eligible, if 10% or more of the total amount of Accounts due from such debtor is ineligible under clauses (i), (ii), or (xi) above;
(xvi) Accounts owed by an account debtor to Petroleum Engineers, regardless of whether otherwise eligible, if 20% or more of the total amount of Accounts due from such debtor is ineligible under clause (i) above or if 10% or more of the total amount of Accounts due from such debtor is ineligible under clauses (ii), or (xi) above;
(xvii) Accounts owed by Kearney Electric or Indicom Electric Company, regardless of whether otherwise eligible, to the extent that the aggregate balance of Accounts owed by such account debtor exceeds 25% of the aggregate amount of all Accounts; and
(xviii) Accounts, or portions thereof, otherwise deemed ineligible by the Lender in its sole discretion.
“Floating Rate” means, (i) with respect to Revolving Advances evidenced by the Revolving Note, an annual interest rate equal to the sum of the Prime Rate plus one percent (1.0%), which interest rate shall change when and as the Prime Rate changes and (ii) with respect to the Structural Overadvance evidenced by the Structural Overadvance Note, an annual interest rate equal to the sum of the Prime Rate plus four percent (4.0%), which interest rate shall change when and as the Prime Rate changes.
“Lender” means Wells Fargo Bank, National Association in its broadest and most comprehensive sense as a legal entity, and is not limited in its meaning to Lender’s Wells Fargo Business Credit operating division, or to any other operating division of Lender.
“Maturity Date” means, with respect to the Credit Facility, May 23, 2010, as may be extended pursuant to Section 2.9.
3
“Maximum Line Amount” means $7,000,000, unless this amount is reduced pursuant to Section 2.9, in which event it means such lower amount.
“Note” means the Revolving Note, the Structural Overadvance Note, and the Revolving Note and the Structural Overadvance Note.
“Petroleum Engineers Borrowing Base” means at any time the lesser of:
(a) The Maximum Line Amount; or
(b) Subject to change from time to time in the Lender’s sole discretion, the sum of:
(i) the product of the Accounts Advance Rate times Petroleum Engineers’s Eligible Accounts, less
(ii) The Borrowing Base Reserve, less
(iii) Indebtedness that Petroleum Engineers owes to the Lender that has not yet been advanced on the Revolving Note, and the dollar amount that the Lender in its reasonable discretion then determines to be a reasonable determination of Petroleum Engineers’s credit exposure with respect to any swap, derivative, foreign exchange, hedge, deposit, treasury management or other similar transaction or arrangement in effect between the Borrower and the Lender that is not described in Article II of this Agreement and any indebtedness owed by Petroleum Engineers to Wells Fargo Merchant Services, L.L.C.
“Purchase Price” means the Purchase Price, as defined in the Stock Purchase Agreement.
“Stock Purchase Agreement” means the Amended and Restated Stock Purchase Agreement dated as of March 2, 2007 by and among Tradestar Services, Inc., 1297181 Alberta Ltd., 383210 Alberta Ltd, Dave Hunter Resources Inc., Barry Ahearn and Dave Hunter.
“Structural Overadvance” has the meaning specified in Section 2.14.
“Structural Overadvance Note” means the Borrower’s promissory note, payable to the order of the Lender in substantially the form of Exhibit D hereto, as same may be renewed and amended from time to time, and all replacements thereto.
“Tradestar Borrowing Base” means at any time the lesser of:
(a) The Maximum Line Amount; or
4
(b) Subject to change from time to time in the Lender’s sole discretion, the sum of:
(i) the product of the Accounts Advance Rate times Tradestar’s Eligible Accounts, less
(ii) The Borrowing Base Reserve, less
(iii) Indebtedness that Tradestar owes to the Lender that has not yet been advanced on the Revolving Note, and the dollar amount that the Lender in its reasonable discretion then determines to be a reasonable determination of the Tradestar’s credit exposure with respect to any swap, derivative, foreign exchange, hedge, deposit, treasury management or other similar transaction or arrangement in effect between Tradestar and the Lender that is not described in Article II of this Agreement and any indebtedness owed by Tradestar to Wells Fargo Merchant Services, L.L.C.
2. The definition of “Wells Fargo Bank Affiliate Obligations” is hereby deleted in its entirety from the Credit Agreement and shall not be replaced, and each reference in the Credit Agreement to “Obligations” is hereby deleted and replaced with the term “Indebtedness”, and Section 1.1 of the Agreement shall further be amended to include the following definition:
“Indebtedness” is used herein in its most comprehensive sense and means any and all advances, debts, obligations and liabilities of the Borrower to the Lender, heretofore, now or hereafter made, incurred or created, whether voluntary or involuntary and however arising, whether due or not due, absolute or contingent, liquidated or unliquidated, determined or undetermined, including under any swap, derivative, foreign exchange, hedge, deposit, treasury management or other similar transaction or arrangement at any time entered into by the Borrower with the Lender or with Wells Fargo Merchant Services, L.L.C., and whether the Borrower may be liable individually or jointly with others, or whether recovery upon such Indebtedness may be or hereafter becomes unenforceable.
3. Section 2.6(g) and 2.6(h) of the Credit Agreement are hereby amended and restated to read in their entirety as follows:
“(g) Termination and Line Reduction Fees. If (i) the Lender terminates the Credit Facility during a Default Period, or if (ii) the Borrower terminates or reduces the Credit Facility as provided under Section 2.9 on a date prior to the Maturity Date, then the Borrower shall pay the Lender as liquidated damages and not as a penalty a termination fee in an amount equal to a percentage of (A) the Maximum Line Amount (or the reduction of the Maximum Line Amount, as the case may be) and (B) the amount prepaid on the Structural Overadvance Note, calculated as follows: (A) three percent (3.0%) if the termination or reduction occurs on or before March 2, 2008; (B) two percent (2.0%) if the termination or reduction occurs after March 2, 2008, but on or before March 2, 2009; and (C) one percent (1.0%) if the termination or reduction occurs after March 2,
5
2009; provided, however, that a termination fee will not be payable on the Structural Overadvance Note unless the Maximum Line Amount is terminated or reduced at the same time.
(h) Waiver of Termination Fees. The Borrower will be excused from the payment of termination fees otherwise due under Section 2.6(g) if such termination is made (i) because of refinancing through another division of the Lender after March 2, 2008, (ii) so long as no Default Period is then in existence, within sixty (60) days of the Lender establishing an aggregate Borrowing Base Reserve in excess of $100,000 or (iii) so long as no Default Period is then in existence, within sixty (60) days of the Lender designating the required amounts of new covenants, in accordance with Section 6.2(j), at levels that are more restrictive than the covenants that were previously established for the Borrower.”
4. New Sections 2.14 and 2.15 of the Credit Agreement are hereby added to read in their entirety as follow:
“Section 2.14 Structural Overadvance. The Lender agrees, subject to the terms and conditions of this Credit Agreement, to make a single advance to the Borrower (the “Structural Overadvance”) in an amount not to exceed $1,500,000. The Structural Overadvance will be made on the Closing Date (as defined the Stock Purchase Agreement) for the acquisition of Decca Consulting by Tradestar Services, Inc. The Borrower’s obligation to pay the Structural Overadvance shall be evidenced by the Structural Overadvance Note and shall be secured by the Collateral as provided in Article III. Upon fulfillment of the applicable conditions set forth in this Credit Agreement, the Lender shall deposit the proceeds of the Structural Overadvance by crediting the same to the Borrower’s demand deposit account specified in Section 2.2(b) unless the Lender and the Borrower shall agree in writing to another manner of disbursement.
Section 2.15 Payment of Structural Overadvance Note. The outstanding principal balance of the Structural Overadvance Note shall be due and payable as follows:
(a) On the earlier of (i) the closing of the Decca Consulting credit facilities with Wells Fargo Financial Corporation Canada (which is expected to occur prior to March 15, 2007) and (ii) March 15, 2007, the Borrower shall pay principal on the Structural Overadvance Note in the amount necessary such that the remaining principal balance on the Structural Overadvance Note shall not exceed $638,000;
(b) Beginning on April 1, 2007, and on the first day of each month thereafter, in equal monthly principal installments of approximately $26,583, plus interest, such that the remaining balance of the Structural Overadvance Note is amortized over 24 months (such that the Structural Overadvance Note is paid in full on March 1, 2009); and
6
(c) On the Termination Date, the entire unpaid principal balance of the Structural Overadvance Note, and all unpaid interest accrued thereon, shall in any event be due and payable.
All prepayments of principal with respect to the Structural Overadvance Note shall be applied to the most remote principal installment or installments then unpaid.”
5. Section 3.1 of the Credit Agreement is hereby amended and restated to read in its entirety as follows:
“Section 3.1 Grant of Security Interest. The Borrower hereby pledges, assigns and grants to the Lender, for the benefit of itself and as agent for Wells Fargo Merchant Services, L.L.C., a lien and security interest (collectively referred to as the “Security Interest”) in the Collateral, as security for the payment and performance of: (a) all present and future Indebtedness of the Borrower to the Lender; (b) all obligations of the Borrower and rights of the Lender under this Agreement; and (c) all present and future obligations of the Borrower to the Lender of other kinds. Upon request by the Lender, the Borrower will grant the Lender, for the benefit of itself and as agent for Wells Fargo Merchant Services, L.L.C., a security interest in all commercial tort claims that the Borrower may have against any Person.”
6. Section 6.2 of the Credit Agreement, Financial Covenants, is hereby amended and restated to read in its entirety as follows:
“(a) Minimum Book Net Worth. Tradestar will maintain, during each period described below, its Book Net Worth (calculated without regard to (i) any change in the valuation of goodwill made in accordance with FASB Accounting Standard 142, and (ii) any non-cash effects of accounting for stock based compensation in accordance with FASB pronouncement SFAS 123(r)), determined as of the end of each month, in an amount not less than the amount set forth for each such period (numbers appearing between “( )” are negative):
Period | | Minimum Book
Net Worth |
February 28, 2007 | | ($421,000) |
March 31, 2007 | | ($386,000) |
April 30, 2007 | | ($366,000) |
May 31, 2007 | | ($316,000) |
June 30, 2007 | | ($162,000) |
July 31, 2007 | | ($132,000) |
August 31, 2007 | | ($100,000) |
September 30, 2007 | | $193,000 |
October 31, 2007 | | $243,000 |
November 30, 2007 | | $293,000 |
December 31, 2007 and each month thereafter | | $446,000 |
7
(b) Minimum Net Income. Tradestar will achieve, for each period described below, fiscal year-to-date before-tax net income from continuing operations, including extraordinary losses but excluding extraordinary gains, all as determined in accordance with GAAP (calculated without regard to (i) any change in the valuation of goodwill made in accordance with FASB Accounting Standard 142, and (ii) any non-cash effects of accounting for stock based compensation in accordance with FASB pronouncement SFAS 123(r)) of not less than the amount set forth for each such period:
Period | | Minimum Net Income |
Three months ending March 31, 2007 | | $85,000 |
Six months ending June 30, 2007 | | $309,000 |
Nine months ending September 30, 2007 | | $664,000 |
Twelve months ending December 31, 2007 | | $917,000 |
(c) Minimum Book Net Worth. Petroleum Engineers will maintain, during each period described below, its Book Net Worth (calculated without regard to (i) any change in the valuation of goodwill made in accordance with FASB Accounting Standard 142, and (ii) any non-cash effects of accounting for stock based compensation in accordance with FASB pronouncement SFAS 123(r)), determined as of the end of each month, in an amount not less than the amount set forth for each such period:
Period | | Minimum Book
Net Worth |
February 28, 2007 | | $2,017,000 |
March 31, 2007 | | $2,231,000 |
April 30, 2007 | | $2,291,000 |
May 31, 2007 | | $2,351,000 |
June 30, 2007 | | $2,576,000 |
July 31, 2007 | | $2,637,000 |
August 31, 2007 | | $2,697,000 |
September 30, 2007 | | $2,940,000 |
October 31, 2007 | | $3,002,000 |
November 30, 2007 | | $3,062,000 |
December 31, 2007 and each month thereafter | | $3,314,000 |
(d) Minimum Net Income. Petroleum Engineers will achieve, for each period described below, fiscal year-to-date after-tax net income from continuing operations, including extraordinary losses but excluding extraordinary gains, all as determined in accordance with GAAP (calculated without regard to (i) any change in the valuation of goodwill made in accordance with FASB Accounting Standard 142, and (ii) any non-cash
8
effects of accounting for stock based compensation in accordance with FASB pronouncement SFAS 123(r)) of not less than the amount set forth for each such period:
Period | | Minimum Net Income |
Three months ending March 31, 2007 | | $334,000 |
Six months ending June 30, 2007 | | $680,000 |
Nine months ending September 30, 2007 | | $1,045,000 |
Twelve months ending December 31, 2007 | | $1,417,000 |
(e) Capital Expenditures. Tradestar will not incur or contract to incur Capital Expenditures of more than $25,000 in the aggregate during the fiscal year ended December 31, 2007, and zero during any fiscal year thereafter.
(f) Capital Expenditures. Petroleum Engineers will not incur or contract to incur Capital Expenditures of more than $150,000 in the aggregate during the fiscal year ended December 31, 2007, and zero during any fiscal year thereafter.
(g) Distributions from Tradestar to Tradestar Services, Inc. Tradestar will not pay any dividends or distributions to Tradestar Services, Inc., or repay existing intercompany debt to Tradestar Services, Inc., other than distributions or repayments to allow Tradestar Services, Inc. to make scheduled principal and interest payments on debt owed by Tradestar Services, Inc. to the creditors listed on Schedule 6.2, which distributions or repayments shall not exceed $100,000 in any month during Tradestar’s fiscal year ending December 31, 2007, and shall be zero during any fiscal year thereafter. Before Tradestar makes any distribution or repayment to Tradestar Services, Inc. otherwise permitted under this Section 6.2(g), and immediately after making any such payment, (i) Tradestar Availability shall not be less than $375,000, (ii) Tradestar shall have positive Book Net Worth and (iii) no Default Period is then in existence and none would exist immediately after such distribution. The debt owed by Tradestar Services, Inc. is not, and will not, be guaranteed by Tradestar.
(h) Distributions from Petroleum Engineers to Tradestar Services, Inc. Petroleum Engineers will not pay any dividends or distributions to Tradestar Services, Inc. other than distributions (i) to allow Tradestar Services, Inc. to make scheduled principal and interest payments on debt owed by Tradestar Services, Inc. to the creditors listed on Schedule 6.2, (ii) to allow Tradestar Services, Inc. to make loans or advances on a subordinated basis to Tradestar, or (iii) to allow Tradestar Services, Inc. to fund corporate overhead needs; which distributions shall not exceed $150,000 in any month, or $1,800,000 in the aggregate during Petroleum Engineers’s fiscal year ending December 31, 2007, and shall be zero during any fiscal year thereafter. Before Petroleum Engineers makes any distribution to Tradestar Services, Inc. otherwise permitted under this Section 6.2(h), and immediately after making any such payment (i) Petroleum Engineers Availability shall not be less than $350,000, (ii) Petroleum Engineers shall have positive Book Net Worth and (iii) no Default Period is then in existence and none would exist
9
immediately after such distribution. The debt owed by Tradestar Services, Inc. is not, and will not, be guaranteed by Petroleum Engineers.
(i) Distributions from Borrowers to Tradestar Services, Inc. for the purchase of Decca Consulting. Borrower will not pay any dividends or distributions to Tradestar Services, Inc. for the purchase of Decca Consulting except as permitted under this Section 6.2(i), which dividends or distributions shall not exceed $1,500,000 in the aggregate during Borrower’s fiscal year ending December 31, 2007, and shall be zero during any fiscal year thereafter. Borrower may make distributions to Tradestar Services, Inc. (i) from the Structural Overadvance to allow 1297181 Alberta Ltd. and Tradestar Services, Inc. to pay the Purchase Price for the purchase of Decca Consulting and (ii) to allow Decca Consulting to repay loans or advances made by Wells Fargo Financial Corporation Canada. Before either Borrower makes any distribution to Tradestar Services, Inc. otherwise permitted under this Section 6.2(i), and immediately after making any such payment (i) such Borrower shall have positive Book Net Worth and (ii) no Default Period is then in existence and none would exist immediately after such distribution.
(j) New Covenants. The Borrower and the Lender shall agree on new covenant levels for this Section 6.2 prior to December 31, 2007, but if the Borrower and the Lender do not agree, the Lender shall designate the required amounts in its sole discretion based on (i) the Borrower’s reasonable projections for such periods and/or (ii) the Borrower’s historical financial performance, and the failure by the Borrower to maintain the designated amounts shall constitute an Event of Default.”
7. Section 6.4 of the Credit Agreement is hereby amended and restated to read in its entirety as follows:
“Section 6.4 Indebtedness. The Borrower will not incur, create, assume or permit to exist any indebtedness or liability on account of deposits or advances or any indebtedness for borrowed money or letters of credit issued on the Borrower’s behalf, or any other indebtedness or liability evidenced by notes, bonds, debentures or similar obligations, except:
(a) Any existing or future Indebtedness or any other obligations of the Borrower to the Lender;
(b) Any indebtedness of the Borrower in existence on the date hereof and listed in Schedule 6.4 hereto; and
(c) Any indebtedness relating to Permitted Liens.”
8. Section 7.1(q) of the Credit Agreement, Events of Default, is hereby amended and restated to read in its entirety as follows:
10
