EXHIBIT 4.1
==============================================
CREDIT AND SECURITY AGREEMENT
BY AND AMONG
THE LEATHER FACTORY, INC., A DELAWARE CORPORATION,
THE LEATHER FACTORY, INC., A TEXAS CORPORATION,
THE LEATHER FACTORY, INC., AN ARIZONA CORPORATION,
ROBERTS, CUSHMAN & COMPANY, INC., AND
HI-LINE LEATHER & MANUFACTURING COMPANY
AND
WELLS FARGO BUSINESS CREDIT, INC.
Dated as of: November 22, 1999
==============================================
Table of Contents
Table of Contents
ARTICLE I Definitions..................................................................................................1
Section 1.1 Definitions.............................................................................................1
Section 1.2 Cross References.......................................................................................10
ARTICLE II Amount and Terms of the Credit Facility....................................................................10
Section 2.1 Revolving Advances.....................................................................................10
Section 2.2 Procedures for Borrowing...............................................................................10
Section 2.3 Letters of Credit......................................................................................11
Section 2.4 Payment of Amounts Drawn Under Letters of Credit; Obligation of Reimbursement..........................11
Section 2.5 Special Account........................................................................................12
Section 2.6 Obligations Absolute...................................................................................12
Section 2.7 Term Advance...........................................................................................13
Section 2.8 Payment of Term Note...................................................................................13
Section 2.9 Interest; Minimum Interest Charge; Default Interest; Participations; Usury.............................13
Section 2.10 Fees..................................................................................................14
Section 2.11 Computation of Interest and Fees; When Interest Due and Payable.......................................15
Section 2.13 Termination of Credit Facility; Automatic Renewal.....................................................17
Section 2.14 Voluntary Prepayment; Reduction of the Maximum Line; Termination of the Credit Facility by Borrowers..17
Section 2.15 Terminationand Line Reduction Fees; Waiver of Terminationand Line Reduction Fees......................17
Section 2.16 Mandatory Prepayment..................................................................................18
Section 2.17 Payment...............................................................................................18
Section 2.18 Payment on Non-Banking Days...........................................................................18
Section 2.19 Use of Proceeds.......................................................................................18
Section 2.20 Liability Records.....................................................................................18
ARTICLE III Security Interest; Occupancy; Setoff......................................................................19
Section 3.1 Grant of Security Interest.............................................................................19
Section 3.2 Notification of Account Debtors and Other Obligors.....................................................19
Section 3.3 Assignment of Insurance................................................................................19
Section 3.4 Occupancy..............................................................................................19
Section 3.5 License................................................................................................20
Section 3.6 Financing Statement....................................................................................20
Section 3.7 Setoff.................................................................................................20
Section 3.8 Accommodation Party Defenses Waived....................................................................20
ARTICLE IV Conditions of Lending......................................................................................21
Section 4.1 Conditions Precedent to the Initial Revolving and Term Advances and the Initial Letter of Credit.......21
Section 4.2 Conditions Precedent to All Advances and Letters of Credit.............................................23
ARTICLE V Representations and Warranties..............................................................................24
Section 5.1 Corporate Existence and Power; Name; Chief Executive Office; Inventory and Equipment Locations;
Tax Identification Number..........................................................................................24
Section 5.2 Capitalization.........................................................................................24
Section 5.3 Authorization of Borrowing; No Conflict as to Law or Agreements........................................24
Section 5.4 Legal Agreements.......................................................................................25
Section 5.5 Subsidiaries...........................................................................................25
Section 5.6 Financial Condition; No Adverse Change.................................................................25
Section 5.7 Litigation.............................................................................................25
Section 5.8 Regulation U...........................................................................................25
Section 5.9 Taxes..................................................................................................25
Section 5.10 Titles and Liens......................................................................................26
Section 5.11 Year 2000.............................................................................................26
Section 5.12 Intellectual Property Rights..........................................................................26
Section 5.13 Plans.................................................................................................26
Section 5.14 Default...............................................................................................27
Section 5.15 Environmental Matters.................................................................................27
Section 5.16 Submissions to Lender.................................................................................28
Section 5.17 Financing Statements..................................................................................28
Section 5.18 Rights to Payment.....................................................................................28
Section 5.19 Financial Solvency....................................................................................28
ARTICLE VI Borrowers' Affirmative Covenants...........................................................................29
Section 6.1 Reporting Requirements.................................................................................29
Section 6.2 Books and Records; Inspection and Examination..........................................................32
Section 6.3 Account Verification...................................................................................32
Section 6.4 Compliance with Laws...................................................................................32
Section 6.5 Payment of Taxes and Other Claims......................................................................33
Section 6.6 Maintenance of Properties..............................................................................33
Section 6.7 Insurance..............................................................................................33
Section 6.8 Preservation of Existence..............................................................................34
Section 6.9 Delivery of Instruments, etc...........................................................................34
Section 6.10 Lockbox; Collateral Accounts..........................................................................34
Section 6.11 Performance by the Lender.............................................................................35
Section 6.12 Minimum Debt Service Coverage Ratio...................................................................36
Section 6.13 Minimum Book Net Worth................................................................................36
Section 6.14 Minimum Net Income....................................................................................37
Section 6.15 New Covenants.........................................................................................37
ARTICLE VII Negative Covenants........................................................................................37
Section 7.1 Liens..................................................................................................37
Section 7.2 Indebtedness...........................................................................................38
-ii-
Section 7.3 Guaranties.............................................................................................38
Section 7.4 Investments and Subsidiaries...........................................................................38
Section 7.5 Dividends..............................................................................................39
Section 7.6 Sale or Transfer of Assets; Suspension of Business Operations..........................................39
Section 7.7 Intellectual Property..................................................................................39
Section 7.8 Consolidation and Merger; Asset Acquisitions...........................................................39
Section 7.9 Sale and Leaseback.....................................................................................40
Section 7.10 Restrictions on Nature of Business....................................................................40
Section 7.11 Capital Expenditures..................................................................................40
Section 7.12 Accounting............................................................................................40
Section 7.13 Discounts, etc........................................................................................40
Section 7.14 Defined Benefit Pension Plans.........................................................................40
Section 7.15 Other Defaults........................................................................................40
Section 7.16 Place of Business; Name...............................................................................40
Section 7.17 Organizational Documents..............................................................................41
Section 7.18 Salaries..............................................................................................41
ARTICLE VIII Events of Default, Rights and Remedies...................................................................41
Section 8.1 Events of Default......................................................................................41
Section 8.2 Rights and Remedies....................................................................................43
Section 8.3 Certain Notices........................................................................................44
ARTICLE IX Miscellaneous..............................................................................................44
Section 9.1 No Waiver; Cumulative Remedies.........................................................................44
Section 9.2 Amendments, Etc........................................................................................44
Section 9.3 Addresses for Notices, Etc.............................................................................45
Section 9.4 Further Documents......................................................................................45
Section 9.5 Collateral.............................................................................................46
Section 9.6 Costs and Expenses.....................................................................................46
Section 9.7 Indemnity..............................................................................................46
Section 9.8 Participants...........................................................................................47
Section 9.9 Execution in Counterparts..............................................................................47
Section 9.10 Binding Effect; Assignment; Complete Agreement; Exchanging Information................................47
Section 9.11 Severability of Provisions............................................................................48
Section 9.12 Headings..............................................................................................48
Section 9.13 Governing Law; Jurisdiction, Venue; Waiver of Jury Trial..............................................48
-iii-
CREDIT AND SECURITY AGREEMENT
Dated as of November 22, 1999
The Leather Factory, Inc., a Delaware corporation ("TLF Delaware"), The
Leather Factory, Inc., a Texas corporation ("TLF Texas"), The Leather Factory,
Inc., an Arizona corporation, Roberts, Cushman & Company, Inc., a New York
corporation ("RCC"), and Hi-Line Leather & Manufacturing Company, a California
corporation (collectively, the "Borrowers" and each "Borrower"), and Wells Fargo
Business Credit, Inc., a Minnesota corporation (the "Lender"), hereby agree as
follows:
ARTICLE I
Definitions
Section 1.1 Definitions. For all purposes of this Agreement, except as
otherwise expressly provided or unless the context otherwise requires:
(a) the terms defined in this Article have the meanings assigned to
them in this Article, and include the plural as well as the singular; and
(b) all accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with GAAP.
"Accounts" means as to any Person, all of that Person's accounts, as such
term is defined in the UCC, including without limitation the aggregate unpaid
obligations of customers and other account debtors to that Person arising out of
the sale or lease of goods or rendition of services by that Person on an open
account or deferred payment basis.
"Advance" means a Revolving Advance or a Term Advance.
"Affiliate" means, with respect to any specified person, any other person
directly or indirectly controlling or controlled by or under direct or indirect
common control with such specified person. For the 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;
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing.
"Agreement" means this Credit and Security Agreement, as amended,
supplemented or restated from time to time.
"Availability" means the difference of (i) the Borrowing Base and (ii) the
sum of (A) the outstanding principal balance of the Revolving Note and (B) the
L/C Amount.
"Banking Day" means a day other than a Saturday, Sunday or other day on
which banks are generally not open for business in Dallas, Texas or Minneapolis,
Minnesota.
"Book Net Worth" means the aggregate of the common and preferred
stockholders' equity in the Borrower, determined in accordance with GAAP and on
a consolidated basis.
"Borrowing Base" means, at any time the lesser of:
(a) the Maximum Line; or
(b) subject to change from time to time in the Lender's sole discretion,
the sum of:
(i) 85% of Eligible Accounts, plus
(ii) the lesser of (A) the Eligible Inventory Advance Rate times
Eligible Inventory or (B) the Eligible Inventory Cap.
"Capital Expenditures", as to any Person, means any expenditure of money
for the lease, purchase or other acquisition of any capital asset, or for the
lease of any other asset whether payable currently or in the future.
"Collateral" means all of the Borrowers' Equipment, General Intangibles,
Inventory, Receivables, Investment Property, all sums on deposit in any
Collateral Account, and any items in any Lockbox; together with (i) all
substitutions and replacements for and products of any of the foregoing; (ii)
proceeds of any and all of the foregoing; (iii) in the case of all tangible
goods, all accessions; (iv) all accessories, attachments, parts, equipment and
repairs now or hereafter attached or affixed to or used in connection with any
tangible goods; (v) all warehouse receipts, bills of lading and other documents
of title now or hereafter covering such goods; and (vi) all sums on deposit in
the Special Account.
"Collateral Account" means account subject to a Collateral Account
Agreement.
"Collateral Account Agreement" means one of the Collateral Account
Agreements of even date herewith by and among the Borrowers, a collateral
account agent and the Lender.
-2-
"Commitment" means the Lender's commitment to make Advances and to cause
the Issuer to issue Letters of Credit to or for the Borrowers' account pursuant
to Article II.
"Copyright Security Agreement" means the Copyright Security Agreement by
the Borrowers in favor of the Lender of even date herewith.
"Credit Facility" means the credit facility being made available to the
Borrowers by the Lender pursuant to Article II.
"Current Maturities of Long Term Debt" as of a given date means the amount
of the Borrowers' long-term debt and capitalized leases on a consolidated basis
which became due during the year-to-date period ending on the designated date.
"Debt" of any Person means all items of indebtedness or liability which in
accordance with GAAP would be included in determining total liabilities as shown
on the liabilities side of a balance sheet of that Person on a consolidated
basis as of the date as of which Debt is to be determined. For purposes of
determining a Person's aggregate Debt at any time, "Debt" shall also include the
aggregate payments required to be made by such Person at any time under any
lease that is considered a capitalized lease under GAAP.
"Debt Service Coverage Ratio" means the ratio of (i) the sum of (A) Net
Income, (B) depreciation and amortization minus (C) Capital Expenditures to (ii)
the sum of (A) Current Maturities of Long Term Debt each determined on a
consolidated basis in accordance with GAAP.
"Default" means an event that, with giving of notice or passage of time or
both, would constitute an Event of Default.
"Default Period" means any period of time beginning on the first day of any
month during which a Default or Event of Default has occurred and ending on the
date the Lender notifies the Parent Borrower in writing that such Default or
Event of Default has been cured or waived.
"Default Rate" means, with respect to the Revolving Advances, an annual
rate equal to three percent (3%) over the Revolving Floating Rate, which rate
shall change when and as the Revolving Floating Rate changes and with respect to
the Term Advances, an annual rate equal to three percent (3%) over the Term
Floating Rate, which rate shall change when and as the Term Floating Rate
changes.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
-3-
"Eligible Accounts" means all unpaid Accounts owed to an Eligible Borrower,
net of any credits, except the following shall not in any event be deemed
Eligible Accounts:
(i) That portion of Accounts unpaid 90 days or more after the invoice
date;
(ii) That portion of Accounts that is disputed or subject to a claim
of offset or a contra account;
(iii)That portion of Accounts not yet earned by the final delivery of
goods or rendition of services by the applicable Eligible Borrower to the
customer;
(iv) 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 Borrowers have 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);
(v) 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
and acceptable to the Lender in all respects, in its sole discretion, (B)
covered by a foreign receivables insurance policy acceptable to the Lender
in its sole discretion (the Lender has approved of the policy in effect as
of the date of this Agreement);
(vi) Accounts owed by an account debtor that is insolvent, the subject
of bankruptcy proceedings or has gone out of business;
(vii)Accounts owed by a shareholder, Subsidiary, Affiliate, officer or
employee of any Borrower;
(viii) Accounts not subject to a duly perfected security interest in
the Lender's favor or which are subject to any lien, security interest or
claim in favor of any Person other than the Lender including without
limitation any payment or performance bond;
(ix) That portion of Accounts that has been restructured, extended,
amended or modified;
(x) That portion of Accounts that constitutes advertising, finance
charges, service charges or sales or excise taxes;
(xi) Accounts owed by an account debtor, regardless of whether
otherwise eligible, if 15% or more of the total amount due under Accounts
from such debtor is ineligible under clauses (i), (ii) or (ix) above; and
-4-
(xii) Accounts, or portions thereof, otherwise deemed ineligible by
the Lender in its sole discretion.
"Eligible Borrower" means TLF Texas or RCC and "Eligible Borrowers" means
TLF Texas and RCC.
"Eligible Inventory" means all Inventory of TLF Texas and RCC consisting of
raw materials and finished goods, valued at the lower of cost or market value as
determined in accordance with GAAP; provided, however, that the following shall
not in any event be deemed Eligible Inventory:
(i) Inventory that is: in-transit; located at any warehouse, job site
or other premises not approved by the Lender in writing; located outside of
the states, or localities, as applicable, in which the Lender has filed
financing statements to perfect a first priority security interest in such
Inventory; covered by any negotiable or non-negotiable warehouse receipt,
bill of lading or other document of title; on consignment from or to any
Person or subject to any bailment;
(ii) Supplies, packaging or maintenance parts;
(iii) Sample Inventory owned by TLF Texas;
(iv) Work-in-process Inventory;
(v) Inventory that is damaged, obsolete, slow moving or not currently
saleable in the normal course of the applicable Eligible Borrower's
operations;
(vi) Inventory that the applicable Eligible Borrower has returned, has
attempted to return, is in the process of returning or intends to return to
the vendor thereof;
(vii) Inventory that is perishable or live;
(viii) Inventory manufactured by the applicable Eligible Borrower
pursuant to a license unless the applicable licensor has agreed in a
writing acceptable to the Lender in its sole discretion to permit the
Lender to exercise its rights and remedies against such Inventory;
(ix) Inventory that is subject to a security interest in favor of any
Person other than the Lender; and
(x) Inventory otherwise deemed ineligible by the Lender in its sole
discretion.
"Eligible Inventory Advance Rate" and "Eligible Inventory Cap" mean during
each period set forth below the percentage and the dollar amount, respectively,
set forth next to such period:
-5-
- ------------------------------------- ------------------------------ ----------------------------------
Period Eligible Inventory Eligible Inventory Cap
- ------------------------------------- ------------------------------ ----------------------------------
Advance Rate
- ------------------------------------- ------------------------------ ----------------------------------
Funding Date - 1/31/2000 55% $5,000,000
- ------------------------------------- ------------------------------ ----------------------------------
2/1/2000 - 4/30/2000 65% $5,300,000
- ------------------------------------- ------------------------------ ----------------------------------
5/1/2000 - 8/31/2000 60% $5,300,000
- ------------------------------------- ------------------------------ ----------------------------------
9/1/2000 - 9/30/2000 55% $4,500,000
- ------------------------------------- ------------------------------ ----------------------------------
10/1/2000 - 10/31/2000 54% $4,500,000
- ------------------------------------- ------------------------------ ----------------------------------
11/1/2000 - 11/30/2000 53% $4,500,000
- ------------------------------------- ------------------------------ ----------------------------------
12/1/2000 - 12/31/2000 52% $4,500,000
- ------------------------------------- ------------------------------ ----------------------------------
1/1/2000 - 1/31/2001 51% $4,500,000
- ------------------------------------- ------------------------------ ----------------------------------
2/1/2001 and thereafter 50% $4,500,000
- ------------------------------------- ------------------------------ ----------------------------------
"Environmental Laws" has the meaning specified in Section 5.15.
"Equipment" means, as to any Person, all of that Person's equipment, as
such term is defined in the UCC, whether now owned or hereafter acquired,
including but not limited to all present and future machinery, vehicles,
furniture, fixtures, manufacturing equipment, shop equipment, office and
recordkeeping equipment, parts, tools, supplies, and including specifically
(without limitation) the goods described in any equipment schedule or list
herewith or hereafter furnished to the Lender by the Borrowers.
"Event of Default" has the meaning specified in Section 8.1.
"Funding Date" has the meaning given in Section 2.1.
"GAAP" means generally accepted accounting principles, applied on a basis
consistent with the accounting practices applied in the financial statements
described in Section 5.6.
"General Intangibles" means, as to any Person, all of that Person's general
intangibles, as such term is defined in the UCC, whether now owned or hereafter
acquired, including (without limitation) all present and future patents, patent
applications, copyrights, service marks, trademarks, trade names, trade secrets,
customer or supplier lists and contracts, manuals, operating instructions,
permits, franchises, the right to use each Borrower's name, and the goodwill of
each Borrower's business.
"Guarantors" means the Individual Guarantors, TLF Canada and any other
Person guaranteeing payment of any of the Obligations.
"Hazardous Substance" has the meaning given in Section 5.15.
"Individual Guarantors" means Wray Thompson, Sr., Ronald C. Morgan and
Robin L. Morgan.
-6-
"Inventory" means, as to any Person, all of that Person's inventory, as
such term is defined in the UCC, whether now owned or hereafter acquired,
whether consisting of whole goods, spare parts or components, supplies or
materials, whether acquired, held or furnished for sale, for lease or under
service contracts or for manufacture or processing, and wherever located.
"Investment Property" means, as to any Person, all of that Person's
investment property, as such term is defined in the UCC, whether now owned or
hereafter acquired, including but not limited to all securities, security
entitlements, securities accounts, commodity contracts, commodity accounts,
stocks, bonds, mutual fund shares, money market shares and U.S. Government
securities.
"Issuer" means the issuer of any Letter of Credit.
"L/C Amount" means the sum of (i) the aggregate face amount of any issued
and outstanding Letters of Credit and (ii) the unpaid amount of the Obligation
of Reimbursement.
"L/C Application" means an application and agreement for letters of credit
in a form acceptable to the Issuer and the Lender.
"Letter of Credit" has the meaning specified in Section 2.3.
"Loan Documents" means this Agreement, the Notes and the Security
Documents.
"Lockbox" has the meaning given in Section 6.10(a).
"Maturity Date" has the meaning given in Section 2.13.
"Maximum Line" means $8,500,000, unless said amount is reduced pursuant to
Section 2.14, in which event it means such lower amount.
"Minimum Interest Charge" has the meaning given in Section 2.9(c).
"Net Income" means fiscal year-to-date after-tax net income from continuing
operations as determined in accordance with GAAP.
"Note" means the Revolving Note or the Term Note, and "Notes" means the
Revolving Note and the Term Note.
"Obligations" means the Notes and each and every other debt, liability and
obligation of every type and description which any Borrower may now or at any
time hereafter owe to the Lender, whether such debt, liability or obligation now
exists or is hereafter created or incurred, whether it arises in a transaction
involving the Lender alone or in a transaction involving other creditors of such
Borrower, and whether it is direct or indirect, due or to become due, absolute
-7-
or contingent, primary or secondary, liquidated or unliquidated, or sole, joint,
several or joint and several, and including specifically, but not limited to,
the Obligation of Reimbursement and all indebtedness of the Borrowers arising
under this Agreement, the Notes, any L/C Application completed by any Borrower,
or any other loan or credit agreement or guaranty between any Borrower and the
Lender, whether now in effect or hereafter entered into.
"Obligation of Reimbursement" has the meaning given in Section 2.4(a).
"Original Maturity Date" means November 30, 2002.
"Parent Borrower" means TLF Delaware.
"Permitted Lien" has the meaning given in Section 7.1
"Person" means any individual, corporation, partnership, joint venture,
limited liability company, association, joint-stock company, trust,
unincorporated organization or government or any agency or political subdivision
thereof.
"Plan" means an employee benefit plan or other plan maintained for any
Borrower's employees and covered by Title IV of ERISA.
"Premises" means all premises where the Borrowers conduct their business or
have any rights of possession, including (without limitation) the premises
legally described in Exhibit D attached hereto.
"Prime Rate" means the rate publicly announced from time to time by Wells
Fargo Bank, N.A. as its "prime rate" or, if such bank ceases to announce a rate
so designated, any similar successor rate designated by the Lender.
"Receivables" means each and every right of each Borrower to the payment of
money, whether such right to payment now exists or hereafter arises, whether
such right to payment arises out of a sale, lease or other disposition of goods
or other property, out of a rendering of services, out of a loan, out of the
overpayment of taxes or other liabilities, or otherwise arises under any
contract or agreement, whether such right to payment is created, generated or
earned by such Borrower or by some other person who subsequently transfers such
person's interest to such Borrower, whether such right to payment is or is not
already earned by performance, and howsoever such right to payment may be
evidenced, together with all other rights and interests (including all liens and
security interests) which such Borrower may at any time have by law or agreement
against any account debtor or other obligor obligated to make any such payment
or against any property of such account debtor or other obligor; all including
but not limited to all present and future accounts, contract rights, loans and
obligations receivable, chattel papers, bonds, notes and other debt instruments,
tax refunds and rights to payment in the nature of general intangibles.
-8-
"Reportable Event" shall have the meaning assigned to that term in Title IV
of ERISA.
"Revolving Advance" has the meaning given in Section 2.1.
"Revolving Floating Rate" means an annual rate equal to the sum of the
Prime Rate plus one half of one percent (0.5%), which annual rate shall change
when and as the Prime Rate changes.
"Revolving Note" means the Borrowers' revolving promissory note, payable to
the order of the Lender in substantially the form of Exhibit A hereto and any
note or notes issued in substitution therefor, as the same may hereafter be
amended, supplemented or restated from time to time.
"Security Documents" means this Agreement, the Collateral Account
Agreements, the Copyright Security Agreement and any other document delivered to
the Lender from time to time to secure the Obligations, as the same may
hereafter be amended, supplemented or restated from time to time.
"Security Interest" has the meaning given in Section 3.1.
"Special Account" means a specified cash collateral account maintained by a
financial institution acceptable to the Lender in connection with Letters of
Credit, as contemplated by Section 2.5.
"Subsidiary" means any corporation of which more than 50% of the
outstanding shares of capital stock having general voting power under ordinary
circumstances to elect a majority of the board of directors of such corporation,
irrespective of whether or not at the time stock of any other class or classes
shall have or might have voting power by reason of the happening of any
contingency, is at the time directly or indirectly owned by any Borrower, by any
Borrower and one or more other Subsidiaries, or by one or more other
Subsidiaries.
"TLF Canada" means The Leather Factory of Canada Ltd., a Manitoba
corporation.
"Term Advance" has the meaning specified in Section 2.7.
"Term Floating Rate" means an annual rate equal to the sum of the Prime
Rate plus one half of one percent (0.5%), which annual rate shall change when
and as the Prime Rate changes.
"Term Note" means the Borrowers' promissory note, payable to the order of
the Lender in substantially the form of Exhibit B hereto and any note or notes
issued in substitution therefor, as the same may hereafter be amended,
supplemented or restated from time to time.
-9-
"Termination Date" means the earliest of (i) the Maturity Date, (ii) the
date the Borrowers terminate the Credit Facility, or (iii) the date the Lender
demands payment of the Obligations after an Event of Default pursuant to Section
8.2.
"UCC" means the Uniform Commercial Code as in effect from time to time in
the state designated in Section 9.13 as the state whose laws shall govern this
Agreement, or in any other state whose laws are held to govern this Agreement or
any portion hereof.
Section 1.2 Cross References. All references in this Agreement to Articles,
Sections and subsections, shall be to Articles, Sections and subsections of this
Agreement unless otherwise explicitly specified.
ARTICLE II
Amount and Terms of the Credit Facility
Section 2.1 Revolving Advances. The Lender agrees, on the terms and subject
to the conditions herein set forth, to make advances to the Borrowers from time
to time from the date all of the conditions set forth in Section 4.1 are
satisfied (the "Funding Date") to the Termination Date (the "Revolving
Advances"). The Lender shall have no obligation to make a Revolving Advance to
the extent it exceeds Availability. The Borrowers' obligation to pay the
Revolving Advances shall be evidenced by the Revolving Note and shall be secured
by the Collateral as provided in Article III. Within the limits set forth in
this Section 2.1, the Borrowers may borrow, prepay pursuant to Section 2.14 and
reborrow.
Section 2.2 Procedures for Borrowing. The Borrowers agree to comply with
the following procedures in requesting Revolving Advances under Section 2.1:
(a) The Parent Borrower shall make each request for a Revolving
Advance to the Lender before 11:00 a.m. (Dallas, Texas time) of the day of
the requested Revolving Advance. Requests may be made in writing or by
telephone, specifying the date of the requested Revolving Advance and the
amount thereof. Each request shall be by (i) any officer of the Parent
Borrower; or (ii) any person designated as the Parent Borrower's agent by
any officer of the Parent Borrower in a writing delivered to the Lender; or
(iii) any person whom the Lender reasonably believes to be an officer of
the Parent Borrower or such a designated agent.
(b) Upon fulfillment of the applicable conditions set forth in Article
IV, the Lender shall disburse the proceeds of the requested Revolving
Advance by crediting the same to the Parent Borrower's demand deposit
account maintained with Wells Fargo Bank Texas N.A. unless the Lender and
the Parent Borrower shall agree in writing to another manner of
disbursement. Upon the Lender's request, the Parent Borrower shall promptly
confirm each telephonic request for an Advance by executing and delivering
an appropriate confirmation certificate to the Lender. The Borrowers shall
repay all Advances even if the Lender does not receive such confirmation
and even if the person requesting an Advance was not in fact authorized to
do so. Any request for an Advance, whether written or telephonic, shall be
deemed to be a representation by the Borrowers that the conditions set
forth in Section 4.2 have been satisfied as of the time of the request.
-10-
Section 2.3 Letters of Credit.
(a) The Lender agrees, on the terms and subject to the conditions
herein set forth, to cause an Issuer to issue, from the Funding Date to the
Termination Date, one or more irrevocable standby or documentary letters of
credit (each, a "Letter of Credit") for the Borrowers' account. The Lender
shall have no obligation to cause an Issuer to issue any Letter of Credit
if the face amount of the Letter of Credit to be issued, would exceed the
lesser of:
(i) $500,000 less the L/C Amount, or
(ii) Availability.
Each Letter of Credit, if any, shall be issued pursuant to a separate L/C
Application entered into by the applicable Borrower and the Lender for the
benefit of the Issuer, completed in a manner satisfactory to the Lender and
the Issuer. The terms and conditions set forth in each such L/C Application
shall supplement the terms and conditions hereof, but if the terms of any
such L/C Application and the terms of this Agreement are inconsistent, the
terms hereof shall control.
(b) No Letter of Credit shall be issued with an expiry date later than
the Termination Date in effect as of the date of issuance.
(c) Any request to cause an Issuer to issue a Letter of Credit under
this Section 2.3 shall be deemed to be a representation by the Borrowers
that the conditions set forth in Section 4.2 have been satisfied as of the
date of the request.
Section 2.4 Payment of Amounts Drawn Under Letters of Credit; Obligation of
Reimbursement. The Borrowers acknowledge that the Lender, as co-applicant, will
be liable to the Issuer for reimbursement of any and all draws under Letters of
Credit and for all other amounts required to be paid under the applicable L/C
Application. Accordingly, the Borrowers agree to pay to the Lender any and all
amounts required to be paid under the applicable L/C Application, when and as
required to be paid thereby, and the amounts designated below, when and as
designated:
(a) The Borrowers shall pay to the Lender on the day a draft is
honored under any Letter of Credit a sum equal to all amounts drawn under
such Letter of Credit plus any and all reasonable charges and expenses that
the Issuer or the Lender may pay or incur relative to such draw and the
applicable L/C Application, plus interest on all such amounts, charges and
expenses as set forth below (the Borrowers' obligation to pay all such
amounts is herein referred to as the "Obligation of Reimbursement").
-11-
(b) Whenever a draft is submitted under a Letter of Credit, the Lender
shall make a Revolving Advance in the amount of the Obligation of
Reimbursement and shall apply the proceeds of such Revolving Advance
thereto. Such Revolving Advance shall be repayable in accordance with and
be treated in all other respects as a Revolving Advance hereunder.
(c) If a draft is submitted under a Letter of Credit when the
Borrowers are unable, because a Default Period exists or for any other
reason, to obtain a Revolving Advance to pay the Obligation of
Reimbursement, the Borrowers shall pay to the Lender on demand and in
immediately available funds, the amount of the Obligation of Reimbursement
together with interest, accrued from the date of the draft until payment in
full at the Default Rate. Notwithstanding the Borrowers' inability to
obtain a Revolving Advance for any reason, the Lender is irrevocably
authorized, in its sole discretion, to make a Revolving Advance in an
amount sufficient to discharge the Obligation of Reimbursement and all
accrued but unpaid interest thereon.
(d) The Borrowers' obligation to pay any Revolving Advance made under
this Section 2.4, shall be evidenced by the Revolving Note and shall bear
interest as provided in Section 2.9.
Section 2.5 Special Account. If the Credit Facility is terminated for any
reason whatsoever while any Letter of Credit is outstanding, the Borrowers shall
thereupon pay the Lender in immediately available funds for deposit in the
Special Account an amount equal to the L/C Amount. The Special Account shall be
an interest bearing account maintained for the Lender by any financial
institution acceptable to the Lender. Any interest earned on amounts deposited
in the Special Account shall be credited to the Special Account. Amounts on
deposit in the Special Account may be applied by the Lender at any time or from
time to time to the Obligations in the Lender's sole discretion, and shall not
be subject to withdrawal by the Borrowers so long as the Lender maintains a
security interest therein. The Lender agrees to transfer any balance in the
Special Account to the Parent Borrower at such time as the Lender is required to
release its security interest in the Special Account under applicable law.
Section 2.6 Obligations Absolute. The Borrowers' obligations arising under
Section 2.4 shall be absolute, unconditional and irrevocable, and shall be paid
strictly in accordance with the terms of Section 2.4, under all circumstances
whatsoever, including (without limitation) the following circumstances:
(a) any lack of validity or enforceability of any Letter of Credit or
any other agreement or instrument relating to any Letter of Credit
(collectively the "Related Documents");
(b) any amendment or waiver of or any consent to departure from all or
any of the Related Documents;
(c) the existence of any claim, setoff, defense or other right which
any Borrower may have at any time, against any beneficiary or any
-12-
transferee of any Letter of Credit (or any persons or entities for whom any
such beneficiary or any such transferee may be acting), or other person or
entity, whether in connection with this Agreement, the transactions
contemplated herein or in the Related Documents or any unrelated
transactions;
(d) any statement or any other document presented under any Letter of
Credit proving to be forged, fraudulent, invalid or insufficient in any
respect or any statement therein being untrue or inaccurate in any respect
whatsoever;
(e) payment by or on behalf of the Issuer or the Lender under any
Letter of Credit against presentation of a draft or certificate which does
not strictly comply with the terms of such Letter of Credit; or
(f) any other circumstance or happening whatsoever, whether or not
similar to any of the foregoing.
Section 2.7 Term Advance. The Lender agrees, on the terms and subject to
the conditions herein set forth, to make a single advance to the Borrowers on
the Funding Date in an amount equal to the lesser of $150,000 (the "Term
Advance"). The Borrowers' obligation to pay the Term Advances shall be evidenced
by the Term Note and shall be secured by the Collateral as provided in Article
III. The Lender shall deposit the proceeds of the Term Advance by crediting the
same to the Borrowers' demand deposit account specified in Section 2.1(b) unless
the Lender and the Parent Borrower shall agree in writing to another manner of
disbursement.
Section 2.8 Payment of Term Note. The outstanding principal balance of the
Term Note shall be due and payable as follows:
(a) In equal monthly installments of $30,000, beginning on January 1,
2000 and on the first day of each month thereafter; and
(b) On May 1, 2000, the entire unpaid principal balance of the Term
Note, and all unpaid interest accrued thereon, shall in any event be due
and payable.
Section 2.9 Interest; Minimum Interest Charge; Default Interest;
Participations; Usury. Interest accruing on the Notes shall be due and payable
in arrears on the first day of each month.
(a) Revolving Note. Except as set forth in Sections 2.9(d) or 2.9(f),
the outstanding principal balance of the Revolving Note shall bear interest
at the Revolving Floating Rate.
(b) Term Note. Except as set forth in Sections 2.9(d) and 2.9(f), the
outstanding principal balance of the Term Note shall bear interest at the
Term Floating Rate.
-13-
(c) Minimum Interest Charge. Notwithstanding the interest payable
pursuant to Section 2.9(a), the Borrowers shall pay to the Lender interest
of not less than $10,000 per calendar month and any part thereof (the
"Minimum Interest Charge") during the term of this Agreement, and the
Borrowers shall pay any deficiency between the Minimum Interest Charge and
the amount of interest otherwise calculated under Section 2.9(a) on the
date and in the manner provided in Section 2.11.
(d) Default Interest Rate. At any time during any Default Period, in
the Lender's sole discretion and without waiving any of its other rights
and remedies, the principal of the Advances outstanding from time to time
shall bear interest at the Default Rate, effective for any periods
designated by the Lender from time to time during that Default Period.
(e) Participations. If any Person shall acquire a participation in the
Advances or the Obligation of Reimbursement, the Borrowers shall be
obligated to the Lender to pay the full amount of all interest calculated
under this Section 2.9, along with all other fees, charges and other
amounts due under this Agreement, regardless if such Person elects to
accept interest with respect to its participation at a lower rate than the
Revolving Floating Rate or the Term Floating Rate, or otherwise elects to
accept less than its prorata share of such fees, charges and other amounts
due under this Agreement.
(f) Usury. In any event no rate change shall be put into effect which
would result in a rate greater than the highest rate permitted by law.
Section 2.10 Fees.
(a) Origination Fee. The Borrowers shall pay to the Lender a fully
earned and non-refundable origination fee of $25,000, due and payable upon
the execution of this Agreement. The Lender acknowledges receipt of $30,000
toward payment of this fee and the fees, costs and expenses described in
Sections 2.10(f) and 9.6.
(b) Unused Line Fee. For the purposes of this Section 2.10(b), "Unused
Amount" means the Maximum Line reduced by (1) outstanding Revolving
Advances and (2) the L/C Amount. The Borrowers shall pay to the Lender an
unused line fee at the rate of one half of one percent (0.5%) per annum on
the average daily Unused Amount from the date of this Agreement to and
including the Termination Date, due and payable monthly in arrears on the
first day of the month and on the Termination Date.
(c) Administrative Fees. The Borrowers shall pay to the Lender an
administrative fee of $2,000 per month and any part thereof until the
number of Receivables agings is reduced to fifteen (15) and a fee of $1,500
per month and any part thereof until the number of Receivables agings is
reduced to three (3). Such fee shall be due and payable monthly in arrears
-14-
on the first day of the month and on the Termination Date.
(d) Letter of Credit Fees. The Borrowers shall pay to the Lender a fee
with respect to each Letter of Credit, if any, accruing on a daily basis
and computed at the annual rate of two percent (2%) of the aggregate amount
that may then be drawn on all issued and outstanding Letters of Credit
assuming compliance with all conditions for drawing thereunder (the
"Aggregate Face Amount"), from and including the date of issuance of such
Letter of Credit until such date as such Letter of Credit shall terminate
by its terms or be returned to the Lender, due and payable monthly in
arrears on the first day of each month and on the Termination Date;
provided, however that during Default Periods, in the Lender's sole
discretion and without waiving any of its other rights and remedies, such
fee shall increase to five percent (5%) of the Aggregate Face Amount. The
foregoing fee shall be in addition to any and all fees, commissions and
charges of any Issuer of a Letter of Credit with respect to or in
connection with such Letter of Credit.
(e) Letter of Credit Administrative Fees. The Borrowers shall pay to
the Lender, on written demand, the administrative fees charged by the
Issuer in connection with the honoring of drafts under any Letter of
Credit, amendments thereto, transfers thereof and all other activity with
respect to the Letters of Credit at the then-current rates published by the
Issuer for such services rendered on behalf of customers of the Issuer
generally.
(f) Audit Fees. The Borrowers shall pay to the Lender, on demand,
audit fees in connection with any audits or inspections conducted by the
Lender of any Collateral or the Borrowers' operations or business at the
rates established from time to time by the Lender as its audit fees (which
fees are currently $600 per day per auditor), together with all reasonable
out-of-pocket costs and expenses incurred in conducting any such audit or
inspection.
Section 2.11 Computation of Interest and Fees; When Interest Due and
Payable. Fees hereunder and interest accruing on the outstanding principal
balance of the Advances and the Obligation of Reimbursement outstanding from
time to time shall be computed on the basis of actual number of days elapsed in
a year of 360 days. Interest shall be payable in arrears on the first day of
each month and on the Termination Date.
Section 2.12 Capital Adequacy; Increased Costs and Reduced Return.
(a) Capital Adequacy. If any Related Lender determines at any time
that its Return has been reduced as a result of any Rule Change, such
Related Lender may require the Borrowers to pay it the amount necessary to
restore its Return to what it would have been had there been no Rule
Change. For purposes of this Section 2.12(a):
-15-
(i) "Capital Adequacy Rule" means any law, rule, regulation,
guideline, directive, requirement or request regarding capital adequacy, or
the interpretation or administration thereof by any governmental or
regulatory authority, central bank or comparable agency, whether or not
having the force of law, that applies to any Related Lender. Such rules
include rules requiring financial institutions to maintain total capital in
amounts based upon percentages of outstanding loans, binding loan
commitments and letters of credit.
(ii) "L/C Rule" means any law, rule, regulation, guideline, directive,
requirement or request regarding letters of credit, or the interpretation
or administration thereof by any governmental or regulatory authority,
central bank or comparable agency, whether or not having the force of law,
that applies to any Related Lender. Such rules include rules imposing
taxes, duties or other similar charges, or mandating reserves, special
deposits or similar requirements against assets of, deposits with or for
the account of, or credit extended by any Related Lender, on letters of
credit.
(iii) "Related Lender" includes (but is not limited to) the Lender,
the Issuer, any parent corporation of the Lender or the Issuer and any
assignee of any interest of the Lender hereunder and any participant in the
loans made hereunder.
(iv) "Return", for any period, means the return as determined by a
Related Lender on the Advances and Letters of Credit based upon its total
capital requirements and a reasonable attribution formula that takes
account of the Capital Adequacy Rules and L/C Rules then in effect, costs
of issuing or maintaining any Letter of Credit and amounts received or
receivable under this Agreement or the Notes with respect to any Advance or
Letter of Credit. Return may be calculated for each calendar quarter and
for the shorter period between the end of a calendar quarter and the date
of termination in whole of this Agreement.
(v) "Rule Change" means any change in any Capital Adequacy Rule or L/C
Rule occurring after the date of this Agreement, but the term does not
include any changes in applicable requirements that at the Closing Date are
scheduled to take place under the existing Capital Adequacy Rules or L/C
Rules or any increases in the capital that any Related Lender is required
to maintain to the extent that the increases are required due to a
regulatory authority's assessment of the financial condition of such
Related Lender.
The Lender will promptly notify the Parent Borrower of any event of which it has
knowledge, occurring after the date hereof, which will entitle the Lender to
compensation pursuant to this Section 2.12. Certificates of any Related Lender
sent to the Parent Borrower from time to time claiming compensation under this
Section 2.12, stating the reason therefor and setting forth in reasonable detail
the calculation of the additional amount or amounts to be paid to the Related
Lender hereunder to restore its Return shall be conclusive absent manifest
-16-
error. In determining such amounts, the Related Lender may use any reasonable
averaging and attribution methods.
Section 2.13 Termination of Credit Facility; Automatic Renewal. Unless
terminated by the Lender during a Default Period or by the Parent Borrower
pursuant to Section 2.14, the Credit Facility shall remain in effect until the
Original Maturity Date and, thereafter, shall automatically renew for successive
one year periods (the Original Maturity Date and each anniversary date thereof
which is at the end of any year for which the Credit Facility has been
automatically renewed, is herein referred to as a "Maturity Date") unless the
Parent Borrower provides the Lender with 90 days prior written notice of its
election not to renew the Credit Facility.
Section 2.14 Voluntary Prepayment; Reduction of the Maximum Line;
Termination of the Credit Facility by Borrowers. Except as otherwise provided
herein, the Borrowers may prepay the Revolving Advances in whole at any time or
from time to time in part. The Borrowers may prepay the Term Advance, terminate
the Credit Facility or reduce the Maximum Line at any time if (i) the Parent
Borrower gives the Lender at least 30 days' prior written notice and (ii) the
Borrowers pay the Lender the prepayment, termination or line reduction fees in
accordance with Section 2.15. Any reduction in the Maximum Line must be in an
amount not less than $500,000 or an integral multiple thereof. If the Borrowers
reduce the Maximum Line to zero, all Obligations shall be immediately due and
payable. Any partial prepayments of the Term Note shall be applied to principal
payments due and owing in inverse order of their maturities. Upon termination of
the Credit Facility and payment and performance of all Obligations, the Lender
shall release or terminate the Security Interest and the Security Documents to
which the Borrowers are entitled by law.
Section 2.15 Termination and Line Reduction Fees; Waiver of Termination and
Line Reduction Fees.
(a) Termination and Line Reduction Fees. If the Lender or the
Borrowers terminate the Credit Facility for any reason as of a date other
than the Maturity Date, or if the Borrowers reduce the Maximum Line, the
Borrowers shall pay the Lender a fee in an amount equal to a percentage of
the Maximum Line (or the reduction, as the case may be) as follows: (i)
three percent (3%) if the termination or reduction occurs on or before
November 30, 2000; (ii) two percent (2%) if the termination or reduction
occurs after November 30, 2000 but on or before November 30, 2001; and
(iii) one percent (1%) if the termination or reduction occurs after
November 30, 2001 but not on the Maturity Date.
(b) Waiver of Fees. The Borrowers will not be required to pay the
termination, line reduction or prepayment fees otherwise due under this
Section 2.15 if such termination, line reduction or prepayment is made
because of increased cash flow generated from the Borrowers' operations or
refinancing by an affiliate of the Lender.
-17-
Section 2.16 Mandatory Prepayment. Without notice or demand, if the sum of
the outstanding principal balance of the Revolving Advances plus the L/C Amount
shall at any time exceed the Borrowing Base, the Borrowers shall (i) first,
immediately prepay the Revolving Advances to the extent necessary to eliminate
such excess; and (ii) if prepayment in full of the Revolving Advances is
insufficient to eliminate such excess, pay to the Lender in immediately
available funds for deposit in the Special Account an amount equal to the
remaining excess. Any payment received by the Lender under this Section 2.16 or
under Section 2.14 may be applied to the Obligations, in such order and in such
amounts as the Lender, in its discretion, may from time to time determine;
provided that any prepayment under Section 2.14 which the Parent Borrower
designates as a partial prepayment of the Term Note shall be applied to
principal installments of the Term Note in inverse order of maturity.
Section 2.17 Payment. All payments to the Lender shall be made in
immediately available funds and shall be applied to the Obligations one (1)
Banking Day after receipt by the Lender. The Lender may hold all payments not
constituting immediately available funds for three (3) additional days before
applying them to the Obligations. Notwithstanding anything in Section 2.1, the
Borrowers hereby authorize the Lender, in its discretion at any time or from
time to time without the Borrowers' request and even if the conditions set forth
in Section 4.2 would not be satisfied, to make a Revolving Advance in an amount
equal to the portion of the Obligations from time to time due and payable.
Section 2.18 Payment on Non-Banking Days. Whenever any payment to be made
hereunder shall be stated to be due on a day which is not a Banking Day, such
payment may be made on the next succeeding Banking Day, and such extension of
time shall in such case be included in the computation of interest on the
Advances or the fees hereunder, as the case may be.
Section 2.19 Use of Proceeds. The Borrowers shall use the proceeds of the
initial Revolving Advance and the Term Advance in accordance with Schedule 2.19.
and shall use all other Revolving Advances and each Letter of Credit, if any,
for ordinary working capital purposes.
Section 2.20 Liability Records. The Lender may maintain from time to time,
at its discretion, liability records as to the Obligations. All entries made on
any such record shall be presumed correct until the Borrowers establish the
contrary. Upon the Lender's demand, the Borrowers will admit and certify in
writing the exact principal balance of the Obligations that the Borrowers then
assert to be outstanding. Any billing statement or accounting rendered by the
Lender shall be conclusive and fully binding on the Borrowers unless the Parent
Borrower gives the Lender specific written notice of exception within 30 days
after receipt.
-18-
ARTICLE III
Security Interest; Occupancy; Setoff
Section 3.1 Grant of Security Interest. The Borrowers hereby pledge, assign
and grant to the Lender a security interest (collectively referred to as the
"Security Interest") in the Collateral, as security for the payment and
performance of the Obligations.
Section 3.2 Notification of Account Debtors and Other Obligors. The Lender
may at any time during any Default Period notify any account debtor or other
person obligated to pay the amount due that such right to payment has been
assigned or transferred to the Lender for security and shall be paid directly to
the Lender. The applicable Borrower will join in giving such notice if the
Lender so requests. At any time after the applicable Borrower or the Lender
gives such notice to an account debtor or other obligor, the Lender may, but
need not, in the Lender's name or in the applicable Borrower's name, (a) demand,
sue for, collect or receive any money or property at any time payable or
receivable on account of, or securing, any such right to payment, or grant any
extension to, make any compromise or settlement with or otherwise agree to
waive, modify, amend or change the obligations (including collateral
obligations) of any such account debtor or other obligor; and (b) as the
Borrowers' agent and attorney-in-fact, notify the United States Postal Service
to change the address for delivery of the Borrowers' mail to any address
designated by the Lender, otherwise intercept the Borrowers' mail, and receive,
open and dispose of the Borrowers' mail, applying all Collateral as permitted
under this Agreement and holding all other mail for the Borrowers' account or
forwarding such mail to the Borrowers' last known address.
Section 3.3 Assignment of Insurance. As additional security for the payment
and performance of the Obligations, the Borrowers hereby assign to the Lender
any and all monies (including, without limitation, proceeds of insurance and
refunds of unearned premiums) due or to become due under, and all other rights
of the Borrowers with respect to, any and all policies of insurance now or at
any time hereafter covering the Collateral or any evidence thereof or any
business records or valuable papers pertaining thereto, and the Borrowers hereby
direct the issuer of any such policy to pay all such monies directly to the
Lender. At any time, whether or not a Default Period then exists, the Lender may
(but need not), in the Lender's name or in any Borrower's name, execute and
deliver proof of claim, receive all such monies, endorse checks and other
instruments representing payment of such monies, and adjust, litigate,
compromise or release any claim against the issuer of any such policy.
Section 3.4 Occupancy.
(a) Each Borrower hereby irrevocably grants to the Lender the right to
take exclusive possession of the Premises at any time during a Default
Period.
(b) The Lender may use the Premises only to hold, process,
manufacture, sell, use, store, liquidate, realize upon or otherwise dispose
of goods that are Collateral and for other purposes that the Lender may in
good faith deem to be related or incidental purposes.
-19-
(c) The Lender's right to hold the Premises shall cease and terminate
upon the earlier of (i) payment in full and discharge of all Obligations
and termination of the Commitment, and (ii) final sale or disposition of
all goods constituting Collateral and delivery of all such goods to
purchasers.
(d) The Lender shall not be obligated to pay or account for any rent
or other compensation for the possession, occupancy or use of any of the
Premises; provided, however, that if the Lender does pay or account for any
rent or other compensation for the possession, occupancy or use of any of
the Premises, the Borrowers shall reimburse the Lender promptly for the
full amount thereof. In addition, the Borrowers will pay, or reimburse the
Lender for, all taxes, fees, duties, imposts, charges and expenses at any
time incurred by or imposed upon the Lender by reason of the execution,
delivery, existence, recordation, performance or enforcement of this
Agreement or the provisions of this Section 3.4.
Section 3.5 License. Without limiting the generality of the Copyright
Security Agreement, each Borrower hereby grants to the Lender a non-exclusive,
worldwide and royalty-free license to use or otherwise exploit all trademarks,
franchises, trade names, copyrights and patents of that Borrower for the purpose
of selling, leasing or otherwise disposing of any or all Collateral during any
Default Period.
Section 3.6 Financing Statement. A carbon, photographic or other
reproduction of this Agreement or of any financing statements signed by a
Borrower is sufficient as a financing statement and may be filed as a financing
statement in any state to perfect the security interests granted hereby. For
this purpose, certain information is set out in Schedule 3.6.
Section 3.7 Setoff. The Borrowers agree that the Lender may at any time or
from time to time, at its sole discretion and without demand and without notice
to anyone, setoff any liability owed to any Borrower by the Lender, whether or
not due, against any Obligation, whether or not due. In addition, each other
Person holding a participating interest in any Obligations shall have the right
to appropriate or setoff any deposit or other liability then owed by such Person
to any Borrower, whether or not due, and apply the same to the payment of said
participating interest, as fully as if such Person had lent directly to that
Borrower the amount of such participating interest.
Section 3.8 Accommodation Party Defenses Waived. The parties intend that
each Borrower shall be fully liable, jointly and severally, for all Obligations.
Nonetheless, in case a court finds that any Borrower is not such a primary
obligor with respect to all or any part of the Obligations, the Borrowers
expressly waive the benefit of any and all defenses and discharges available to
a guarantor, surety, endorser or accommodation party dependent on an obligor's
character as such. Without limiting the generality of the foregoing, the
liability of the Borrowers hereunder shall not be affected or impaired in any
-20-
way by any of the following acts or things (which the Lender is hereby expressly
authorized to do, omit or suffer from time to time without notice to or consent
of anyone): (i) any acceptance of collateral security, guarantors, accommodation
parties or sureties for any Obligations; (ii) any extension or renewal of any
Obligations (whether or not for longer than the original period) or any
modification of the interest rate, maturity or other terms of any Obligations;
(iii) any waiver or indulgence granted to any Borrower, and any delay or lack of
diligence in the enforcement of the Obligations; (iv) any full or partial
release of, compromise or settlement with, or agreement not to sue, any
Borrower, Guarantor or other person liable on any Obligations; (v) any release,
surrender, cancellation or other discharge of any Obligations or the acceptance
of any instrument in renewal or substitution for any instrument evidencing any
Obligations; (vi) any failure to obtain collateral security (including rights of
setoff) for any Obligations, or to see to the proper or sufficient creation and
perfection thereof, or to establish the priority thereof, or to preserve,
protect, insure, care for, exercise or enforce any collateral security for any
Obligations; (vii) any modification, alteration, substitution, exchange,
surrender, cancellation, termination, release or other change, impairment,
limitation, loss or discharge of any Collateral, Guarantor Collateral or other
collateral security for the Obligations; (viii) any assignment, sale, pledge or
other transfer of any of Obligations; or (ix) any manner, order or method of
application of any payments or credits on any Obligations.
ARTICLE IV
Conditions of Lending
Section 4.1 Conditions Precedent to the Initial Revolving and Term Advances
and the Initial Letter of Credit. The Lender's obligation to make the initial
Revolving Advance and Term Advance or to cause to be issued the initial Letter
of Credit shall be subject to the condition precedent that the Lender shall have
received all of the following, each in form and substance satisfactory to the
Lender:
(a) This Agreement, properly executed by each Borrower.
(b) The Notes, properly executed by each Borrower.
(c) A true and correct copy of any and all leases pursuant to which
any Borrower is leasing any Premises, together with a landlord's disclaimer
and consent with respect to each such lease.
(d) The Collateral Account Agreement with Wells Fargo Bank (Texas),
N.A., properly executed by the Borrowers.
(e) The Copyright Security Agreement, properly executed by the
Borrowers.
(f) Current searches of appropriate filing offices showing that (i) no
state or federal tax liens have been filed and remain in effect against any
Borrower, (ii) no financing statements or assignments of patents,
trademarks or
-21-
copyrights have been filed and remain in effect against any Borrower except
those financing statements and assignments of patents, trademarks or
copyrights relating to Permitted Liens or to liens held by Persons who have
agreed in writing that upon receipt of proceeds of the Advances, they will
deliver UCC releases and/or terminations and releases of such assignments
of patents, trademarks or copyrights satisfactory to the Lender, and (iii)
the Lender has duly filed all financing statements necessary to perfect the
Security Interest, to the extent the Security Interest is capable of being
perfected by filing.
(g) A certificate of each Borrower's secretary certifying as to (i)
the resolutions of the Borrower's board of directors and if required,
shareholders, authorizing the execution, delivery and performance of the
Loan Documents, (ii) that Borrower's articles of incorporation and bylaws,
and (iii) the signatures of that Borrower's officers or agents authorized
to execute and deliver the Loan Documents and other instruments, agreements
and certificates, including Advance requests, on that Borrower's behalf.
(h) For each Borrower, a current certificate issued by the Secretary
of State of that Borrower's jurisdiction of organization, certifying that
that Borrower is in compliance with all applicable organizational
requirements of such State.
(i) Evidence that each Borrower is duly licensed or qualified to
transact business in all jurisdictions where the character of the property
owned or leased or the nature of the business transacted by it makes such
licensing or qualification necessary.
(j) A certificate of one of the Parent Borrower's officers confirming,
in his personal capacity, the representations and warranties set forth in
Article V.
(k) An opinion of counsel to the Borrowers, addressed to the Lender.
(l) Certificates of the insurance required hereunder, with all hazard
insurance containing a lender's loss payable endorsement in the Lender's
favor and with all liability insurance naming the Lender as an additional
insured.
(m) A separate guaranty, properly executed by each Guarantor, pursuant
to which each Guarantor unconditionally guarantees the full and prompt
payment of all Obligations.
(n) A waiver of interest, properly executed by the spouse of each
Individual Guarantor, waiving any and all interest such spouse may have in
the assets disclosed to the Lender in the financial statements of the
Individual Guarantor and in any future earnings or assets acquired by each
Individual Guarantor.
-22-
(o) A certificate of the secretary or assistant secretary of TLF
Canada certifying as to (i) the resolutions of the directors and, if
required, shareholders, of that company authorizing the execution, delivery
and performance of the guaranty and the security agreement executed and
delivered to the Lender by it; (ii) the company's articles of incorporation
and bylaws; and (iii) the signatures of the officers or agents authorized
to execute and deliver such guaranty and security agreement on behalf of
such company.
(p) Current searches of appropriate filing offices showing that (i) no
tax or judgment liens have been filed and remain in effect against TLF
Canada, (ii) no financing statements have been filed and remain in effect
against such company except financing statements acceptable to the Lender
in its sole discretion, and (iii) the Lender has duly filed all financing
statements necessary to perfect its security interests in the property of
such company, to the extent such security interests are capable of being
perfected by filing.
(q) A security agreement, duly executed by TLF Canada.
(r) An opinion of counsel to each Guarantor, addressed to the Lender.
(s) Payment of the fees and commissions due through the date of the
initial Advance or Letter of Credit under Section 2.10 and expenses
incurred by the Lender through such date and required to be paid by the
Borrowers under Section 9.6, including all legal expenses incurred through
the date of this Agreement.
(t) Evidence that after making the initial Revolving Advance and Term
Advance, Availability shall be not less than $100,000.
(u) Completion of an appraisal of the Borrowers' Inventory and
Equipment.
(v) Such other documents as the Lender in its sole discretion may
require.
Section 4.2 Conditions Precedent to All Advances and Letters of Credit. The
Lender's obligation to make each Advance or to cause the Issuer to issue any
Letter of Credit shall be subject to the further conditions precedent that on
such date:
(a) the representations and warranties contained in Article V are
correct on and as of the date of such Advance or issuance of Letter of
Credit as though made on and as of such date, except to the extent that
such representations and warranties relate solely to an earlier date; and
(b) no event has occurred and is continuing, or would result from such
Advance or the issuance of such Letter of Credit, as the case may be, which
constitutes a Default or an Event of Default.
-23-
ARTICLE V
Representations and Warranties
------------------------------
Each Borrower represents and warrants to the Lender as follows:
Section 5.1 Corporate Existence and Power; Name; Chief Executive Office;
Inventory and Equipment Locations; Tax Identification Number. Each Borrower is a
corporation, duly organized, validly existing and in good standing under the
laws of the State of its organization and is duly licensed or qualified to
transact business in all jurisdictions where the character of the property owned
or leased or the nature of the business transacted by it makes such licensing or
qualification necessary. No dissolution or termination of any Borrower has
occurred, and no notice of dissolution or articles of termination have been
filed with respect to any Borrower. Each Borrower has all requisite power and
authority, corporate or otherwise, to conduct its business, to own its
properties and to execute and deliver, and to perform all of its obligations
under, the Loan Documents. For each Borrower, during its existence, (i) it has
done business solely under the names set forth in Schedule 5.1 (ii) its chief
executive office and principal place of business is located at the address set
forth in Schedule 5.1, (iii) all of its records relating to its business or the
Collateral are kept at that location, (iv) all of its Inventory and Equipment is
located at that location or at one of the other locations set forth in Schedule
5.1 hereto, and (v) its tax identification number is correctly set forth in
Schedule 3.6 hereto.
Section 5.2 Capitalization. Schedule 5.2 constitutes a correct and complete
list of all owners holding more than ten percent (10%) of a Borrower's issued
and outstanding stock or rights to acquire such stock, including the amount and
record holder thereof and an organizational chart showing the ownership
structure of all Subsidiaries of each Borrower.
Section 5.3 Authorization of Borrowing; No Conflict as to Law or
Agreements. The execution, delivery and performance by the Borrowers of the Loan
Documents and the borrowings from time to time hereunder have been duly
authorized by all necessary corporate action and do not and will not (i) require
any consent or approval of any Borrower's shareholders; (ii) require any
authorization, consent or approval by, or registration, declaration or filing
with, or notice to, any governmental department, commission, board, bureau,
agency or instrumentality, domestic or foreign, or any third party, except such
authorization, consent, approval, registration, declaration, filing or notice as
has been obtained, accomplished or given prior to the date hereof; (iii) violate
any provision of any law, rule or regulation (including, without limitation,
Regulation X of the Board of Governors of the Federal Reserve System) or of any
order, writ, injunction or decree presently in effect having applicability to
any Borrower or its articles of incorporation; (iv) result in a breach of or
constitute a default under any indenture or loan or credit agreement or any
other material agreement, lease or instrument to which any Borrower is a party
or by which it or its properties may be bound or affected; or (v) result in, or
require, the creation or imposition of any mortgage, deed of trust, pledge,
-24-
lien, security interest or other charge or encumbrance of any nature (other than
the Security Interest) upon or with respect to any of the properties now owned
or hereafter acquired by any Borrower.
Section 5.4 Legal Agreements. This Agreement constitutes and, upon due
execution by the Borrowers, the other Loan Documents will constitute the legal,
valid and binding obligations of the Borrowers, enforceable against the
Borrowers in accordance with their respective terms.
Section 5.5 Subsidiaries. Schedule 5.5 is a complete and correct list of
all present Subsidiaries and of the percentage of the ownership of any Borrower
or any other Subsidiary in each as of the date of this Agreement. Except as
otherwise indicated in that Schedule, all shares of each Subsidiary owned by any
Borrower or by any such other Subsidiary are validly issued and fully paid and
nonassessable.
Section 5.6 Financial Condition; No Adverse Change. The Borrowers have
heretofore furnished to the Lender audited financial statements dated as of
December 31, 1998, and unaudited interim financial statements dated as of
September 30, 1999 and those statements fairly present the Borrowers' financial
condition on the dates thereof and the results of their operations and cash
flows for the periods then ended and were prepared in accordance with generally
accepted accounting principles. Since the date of the most recent financial
statements, there has been no material adverse change in any Borrower's
business, properties or condition (financial or otherwise).
Section 5.7 Litigation. There are no actions, suits or proceedings pending
or, to any Borrower's knowledge, threatened against or affecting any Borrower or
any of its Affiliates of the Borrowers or the properties of any Borrower or any
of its Affiliates before any court or governmental department, commission,
board, bureau, agency or instrumentality, domestic or foreign, which, if
determined adversely to that Borrower or any of its Affiliates, would have a
material adverse effect on the financial condition, properties or operations of
that Borrower or any of its Affiliates.
Section 5.8 Regulation U. No Borrower is engaged in the business of
extending credit for the purpose of purchasing or carrying margin stock (within
the meaning of Regulation U of the Board of Governors of the Federal Reserve
System), and no part of the proceeds of any Advance will be used to purchase or
carry any margin stock or to extend credit to others for the purpose of
purchasing or carrying any margin stock.
Section 5.9 Taxes. Each Borrower and its Affiliates has paid or caused to
be paid to the proper authorities when due all federal, state and local taxes
required to be withheld by each of them. Each Borrower and its Affiliates has
filed all federal, state and local tax returns which to the knowledge of the
officers of that Borrower or Affiliate, as the case may be, are required to be
filed, and each Borrower and its Affiliates has paid or caused to be paid to the
respective taxing authorities all taxes as shown on said returns or on any
assessment received by any of them to the extent such taxes have become due.
-25-
Section 5.10 Titles and Liens. Each Borrower has good and absolute title to
all Collateral described in the collateral reports provided to the Lender and
all other Collateral, properties and assets reflected in the latest financial
statements referred to in Section 5.6 and all proceeds thereof, free and clear
of all mortgages, security interests, liens, adverse claims and encumbrances,
except for Permitted Liens. No financing statement naming any Borrower as debtor
is on file in any office except to perfect only Permitted Liens.
Section 5.11 Year 2000. Each Borrower has evaluated all of the data
processing systems necessary to the conduct of its business (including computer
hardware, software and firmware, and including data processing systems embedded
within equipment) and has implemented such hardware and software modifications
and upgrades as may be necessary for such systems to be Year 2000 Compliant. For
purposes hereof, "Year 2000 Compliant" means with respect to any data processing
system, (i) that such system accurately records, stores, processes and presents
date data with respect to dates on and after January 1, 2000 in the same manner,
and with substantially the same functionality, as the such system records,
stores, processes and presents date data with respect to dates on and before
December 31, 1999; and (ii) that such system accurately records, stores,
processes and presents date ranges beginning on or before December 31, 1999 and
ending on or after January 1, 2000, or occurring entirely on or after January 1,
2000, in the same manner, and with substantially the same functionality, as such
system records, stores, processes and presents date ranges occurring entirely on
or before December 31, 1999.
Section 5.12 Intellectual Property Rights. Each Borrower owns or has the
exclusive right to use, free and clear of all material liens, claims and
restrictions, all patents, trademarks, service marks, trade names, copyrights,
licenses and rights with respect to the foregoing, used in the conduct of its
business as now conducted. No Borrower is obligated or under any liability
whatsoever to make any payments of a material nature by way of royalties, fees
or otherwise to any owner of, licensor of, or other claimant to, any patent,
trademark, trade name, copyright or other intangible asset, with respect to the
use thereof or in connection with the conduct of its business or otherwise. Each
Borrower owns or has the unrestricted right to use all trade secrets, including
know-how, inventions, designs, processes, computer programs and technical data
necessary to the development, operation and sale of all products and services
sold or proposed to be sold by it, free and clear of any rights, liens or claims
of others. No Borrower is using any confidential information or trade secrets of
others. No Borrower is, nor has any Borrower received notice with respect to,
infringing upon or otherwise acting adversely to any known right or claimed
right of any person under or with respect to any patents, trademarks, service
marks, trade names, copyrights, licenses or rights with respect to the
foregoing.
Section 5.13 Plans. Except as disclosed to the Lender in writing prior to
the date hereof, neither the Borrowers nor any of their Affiliates maintains or
has maintained any Plan. Neither the Borrowers nor any of their Affiliates have
received any notice or has any knowledge to the effect that they are not in full
compliance with any of the requirements of ERISA. No Reportable Event or other
fact or circumstance which may have an adverse effect on the Plan's tax
-26-
qualified status exists in connection with any Plan. Neither the Borrowers nor
any of their Affiliates have:
(a) Any accumulated funding deficiency within the meaning of ERISA; or
(b) Any liability or know of any fact or circumstances which could
result in any liability to the Pension Benefit Guaranty Corporation, the
Internal Revenue Service, the Department of Labor or any participant in
connection with any Plan (other than accrued benefits which or which may
become payable to participants or beneficiaries of any such Plan).
Section 5.14 Default. Each Borrower is in compliance with all provisions of
all agreements, instruments, decrees and orders to which it is a party or by
which it or its property is bound or affected, the breach or default of which
could have a material adverse effect on the Borrower's financial condition,
properties or operations.
Section 5.15 Environmental Matters.
(a) Definitions. As used in this Agreement, the following terms shall
have the following meanings:
(i) "Environmental Law" means any federal, state, local or other
governmental statute, regulation, law or ordinance dealing with the
protection of human health and the environment.
(ii) "Hazardous Substances" means pollutants, contaminants,
hazardous substances, hazardous wastes, petroleum and fractions
thereof, and all other chemicals, wastes, substances and materials
listed in, regulated by or identified in any Environmental Law.
(b) To each Borrower's best knowledge, there are not present in, on or
under the Premises any Hazardous Substances in such form or quantity as to
create any liability or obligation for any Borrower or the Lender under
common law of any jurisdiction or under any Environmental Law, and no
Hazardous Substances have ever been stored, buried, spilled, leaked,
discharged, emitted or released in, on or under the Premises in such a way
as to create any such liability.
(c) To each Borrower's best knowledge, no Borrower has disposed of
Hazardous Substances in such a manner as to create any liability under any
Environmental Law.
(d) There are not and there never have been any requests, claims,
notices, investigations, demands, administrative proceedings, hearings or
litigation, relating in any way to the Premises or any Borrower, alleging
liability under, violation of, or noncompliance with any Environmental Law
or any license, permit or other authorization issued pursuant thereto. To
each Borrower's best knowledge, no such matter is threatened or impending.
-27-
(e) To each Borrower's best knowledge, its businesses are and have in
the past always been conducted in accordance with all Environmental Laws
and all licenses, permits and other authorizations required pursuant to any
Environmental Law and necessary for the lawful and efficient operation of
such businesses are in that Borrower's possession and are in full force and
effect. No permit required under any Environmental Law is scheduled to
expire within 12 months and there is no threat that any such permit will be
withdrawn, terminated, limited or materially changed.
(f) To each Borrower's best knowledge, the Premises are not and never
have been listed on the National Priorities List, the Comprehensive
Environmental Response, Compensation and Liability Information System or
any similar federal, state or local list, schedule, log, inventory or
database.
(g) The Borrowers have delivered to Lender all environmental
assessments, audits, reports, permits, licenses and other documents
describing or relating in any way to the Premises or any Borrower's
businesses.
Section 5.16 Submissions to Lender. All financial and other information
provided to the Lender by or on behalf of the Borrowers in connection with the
Borrowers' request for the Credit Facility is true and correct in all material
respects and, as to projections, valuations or proforma financial statements,
present a good faith opinion as to such projections, valuations and proforma
condition and results.
Section 5.17 Financing Statements. The Borrowers have provided to the
Lender signed financing statements sufficient when filed to perfect the Security
Interest and the other security interests created by the Security Documents.
When such financing statements are filed in the offices noted therein, the
Lender will have a valid and perfected security interest in all Collateral and
all other collateral described in the Security Documents which is capable of
being perfected by filing financing statements. None of the Collateral or other
collateral covered by the Security Documents is or will become a fixture on real
estate, unless a sufficient fixture filing is in effect with respect thereto.
Section 5.18 Rights to Payment. Each right to payment and each instrument,
document, chattel paper and other agreement constituting or evidencing
Collateral or other collateral covered by the Security Documents is (or, in the
case of all future Collateral or such other collateral, will be when arising or
issued) the valid, genuine and legally enforceable obligation, subject to no
defense, setoff or counterclaim, of the account debtor or other obligor named
therein or in the applicable Borrower's records pertaining thereto as being
obligated to pay such obligation.
Section 5.19 Financial Solvency. Both before and after giving effect to the
transactions contemplated in the Loan Documents, none of the Borrowers or
Guarantors:
(a) was or will be insolvent, as that term is used and defined in
Section 101(32) of the United States Bankruptcy Code and Section 2 of the
Uniform Fraudulent Transfer Act;
-28-
(b) has unreasonably small capital or is engaged or about to engage in
a business or a transaction for which any remaining assets of such Borrower
or such Affiliate are unreasonably small;
(c) by executing, delivering or performing its obligations under the
Loan Documents or other documents to which it is a party or by taking any
action with respect thereto, intends to, nor believes that it will, incur
debts beyond its ability to pay them as they mature;
(d) by executing, delivering or performing its obligations under the
Loan Documents or other documents to which it is a party or by taking any
action with respect thereto, intends to hinder, delay or defraud either its
present or future creditors; and
(e) at this time contemplates filing a petition in bankruptcy or for
an arrangement or reorganization or similar proceeding under any law any
jurisdiction, nor, to the best knowledge of the Borrowers, is the subject
of any actual, pending or threatened bankruptcy, insolvency or similar
proceedings under any law of any jurisdiction.
ARTICLE VI
Borrowers' Affirmative Covenants
--------------------------------
So long as the Obligations shall remain unpaid, or the Credit Facility
shall remain outstanding, the Borrowers will comply with the following
requirements, unless the Lender shall otherwise consent in writing:
Section 6.1 Reporting Requirements. The Borrowers will deliver, or cause to
be delivered, to the Lender each of the following, which shall be in form and
detail acceptable to the Lender:
(a) as soon as available, and in any event within 90 days after the
end of each fiscal year of the Parent Borrower, the Parent Borrower's
audited financial statements with the unqualified opinion of Hein &
Associates LLP or such other accountants as are selected by the Parent
Borrower and acceptable to the Lender, which annual financial statements
shall include the Parent Borrower's balance sheet as at the end of such
fiscal year and the related statements of the Parent Borrower's income,
retained earnings and cash flows for the fiscal year then ended, prepared,
if the Lender so requests, on a consolidating and consolidated basis to
include any Affiliates, all in reasonable detail and prepared in accordance
with GAAP, together with (i) copies of all management letters prepared by
such accountants; (ii) a report signed by such accountants stating that in
making the investigations necessary for said opinion they obtained no
knowledge, except as specifically stated, of any Default or Event of
Default hereunder and all relevant facts in reasonable detail to evidence,
and the computations as to, whether or not the Parent Borrower is in
compliance with the requirements set forth in Sections 6.12, 6.13, 6.14 and
-29-
7.11; and (iii) a certificate of the Parent Borrower's chief financial
officer, chief operating officer or chief executive officer stating that
such financial statements have been prepared in accordance with GAAP,
fairly represent the Parent Borrower's financial position and the results
of its operations, and whether or not such officer has knowledge of the
occurrence of any Default or Event of Default hereunder and, if so, stating
in reasonable detail the facts with respect thereto;
(b) as soon as available and in any event within 25 days after the end
of each month, an unaudited/internal balance sheet and statements of income
and retained earnings of the Parent Borrower as at the end of and for such
month and for the year to date period then ended, prepared, if the Lender
so requests, on a consolidating and consolidated basis to include any
Affiliates, in reasonable detail and stating in comparative form the
figures for the corresponding date and periods in the previous year, all
prepared in accordance with GAAP, subject to year-end audit adjustments;
and accompanied by a certificate of the Parent Borrower's chief financial
officer, chief operating officer or chief executive officer, substantially
in the form of Exhibit C hereto stating (i) that such financial statements
have been prepared in accordance with GAAP, subject to year-end audit
adjustments, and fairly represent the Parent Borrower's financial position
and the results of its operations, (ii) whether or not such officer has
knowledge of the occurrence of any Default or Event of Default hereunder
not theretofore reported and remedied and, if so, stating in reasonable
detail the facts with respect thereto, and (iii) all relevant facts in
reasonable detail to evidence, and the computations as to, whether or not
the Parent Borrower is in compliance with the requirements set forth in
Sections 6.12, 6.13, 6.14 and 7.11;
(c) within 25 days after the end of each month or more frequently if
the Lender so requires, agings of each Borrower's accounts receivable, an
inventory certification report for each Borrower, and a calculation of each
Eligible Borrower's Accounts, Eligible Accounts, Inventory and Eligible
Inventory as at the end of such month or shorter time period;
(d) within 25 days after the end of each month or more frequently if
the Lender so requires, agings of each Borrower's accounts payable;
(e) at least 30 days before the beginning of each fiscal year of the
Borrowers, the projected balance sheets and income statements for each
month of such year, each in reasonable detail, representing the Borrowers'
good faith projections and certified by the Parent Borrower's chief
financial officer, chief operating officer, or chief executive officer as
being the most accurate projections available and identical to the
projections used by the Borrowers for internal planning purposes, together
with such supporting schedules and information as the Lender may in its
discretion require;
-30-
(f) immediately after the commencement thereof, notice in writing of
all litigation and of all proceedings before any governmental or regulatory
agency affecting any Borrower of the type described in Section 5.15 or
which seek a monetary recovery against any Borrower in excess of $50,000;
(g) as promptly as practicable (but in any event not later than five
business days) after an officer of a Borrower obtains knowledge of the
occurrence of any breach, default or event of default under any Security
Document or any event which constitutes a Default or Event of Default
hereunder, notice of such occurrence, together with a detailed statement by
a responsible officer of the Parent Borrower of the steps being taken by
the Borrowers to cure the effect of such breach, default or event;
(h) as soon as possible and in any event within 30 days after any
Borrower knows or has reason to know that any Reportable Event with respect
to any Plan has occurred, the statement of the Parent Borrower's chief
financial officer, chief operating officer or chief executive officer
setting forth details as to such Reportable Event and the action which the
Borrowers propose to take with respect thereto, together with a copy of the
notice of such Reportable Event to the Pension Benefit Guaranty
Corporation;
(i) as soon as possible, and in any event within 10 days after any
Borrower fails to make any contribution required with respect to any Plan
under Section 412(m) of the Internal Revenue Code of 1986, as amended, the
statement of the Parent Borrower's chief operating officer, chief financial
officer or chief executive officer setting forth details as to such failure
and the action which the Borrowers propose to take with respect thereto,
together with a copy of any notice of such failure required to be provided
to the Pension Benefit Guaranty Corporation;
(j) promptly upon knowledge thereof, notice of (i) any disputes or
claims by any Borrower's customer exceeding $50,000 individually or
$200,000 in the aggregate during any fiscal year; (ii) credit memos; (iii)
any goods returned to or recovered by any Borrower; and (iv) any change in
the persons constituting any Borrower's officers and directors;
(k) promptly upon knowledge thereof, notice of any loss of or material
damage to any Collateral or other collateral covered by the Security
Documents or of any substantial adverse change in any Collateral or such
other collateral or the prospect of payment thereof;
(l) promptly upon their distribution, copies of all financial
statements, reports and proxy statements which the Borrowers shall have
sent to their stockholders;
-31-
(m) promptly after the sending or filing thereof, copies of all
regular and periodic reports which any Borrower shall file with the
Securities and Exchange Commission or any national securities exchange;
(n) as soon as possible, and in any event by not later than April 30th
of each year, copies of the tax returns and all schedules thereto and an
updated personal financial statement of each Individual Guarantor;
(o) promptly upon knowledge thereof, notice of any Borrower's
violation of any law, rule or regulation, the non-compliance with which
could materially and adversely affect any Borrower's business or its
financial condition; and
(p) from time to time, with reasonable promptness, any and all
receivables schedules, collection reports, deposit records, equipment
schedules, copies of invoices to account debtors, shipment documents and
delivery receipts for goods sold, and such other material, reports, records
or information as the Lender may request.
Section 6.2 Books and Records; Inspection and Examination. Each Borrower
will keep accurate books of record and account for itself pertaining to the
Collateral and pertaining to its business and financial condition and such other
matters as the Lender may from time to time request in which true and complete
entries will be made in accordance with GAAP and, upon the Lender's request,
will permit any officer, employee, attorney or accountant for the Lender to
audit, review, make extracts from or copy any and all corporate and financial
books and records at all times during ordinary business hours, to send and
discuss with account debtors and other obligors requests for verification of
amounts owed to such Borrower, and to discuss such Borrower's affairs with any
of its directors, officers, employees or agents. Each Borrower will permit the
Lender, or its employees, accountants, attorneys or agents, to examine and
inspect any Collateral, other collateral covered by the Security Documents or
any other property of such Borrower at any time during ordinary business hours.
Section 6.3 Account Verification. The Lender may at any time and from time
to time send or require any Borrower to send requests for verification of
accounts or notices of assignment to account debtors and other obligors. The
Lender may also at any time and from time to time telephone account debtors and
other obligors to verify accounts.
Section 6.4 Compliance with Laws.
(a) Each Borrower will (i) comply with the requirements of applicable
laws and regulations, the non-compliance with which would materially and
adversely affect its business or its financial condition and (ii) use and
keep the Collateral, and require that others use and keep the Collateral,
only for lawful purposes, without violation of any federal, state or local
law, statute or ordinance.
(b) Without limiting the foregoing undertakings, each Borrower
specifically agrees that it will comply with all applicable Environmental
Laws and obtain and comply with all permits, licenses and similar approvals
-32-
required by any Environmental Laws, and will not generate, use, transport,
treat, store or dispose of any Hazardous Substances in such a manner as to
create any liability or obligation under the common law of any jurisdiction
or any Environmental Law.
Section 6.5 Payment of Taxes and Other Claims. Each Borrower will pay or
discharge, when due, (a) all taxes, assessments and governmental charges levied
or imposed upon it or upon its income or profits, upon any properties belonging
to it (including, without limitation, the Collateral) or upon or against the
creation, perfection or continuance of the Security Interest, prior to the date
on which penalties attach thereto, (b) all federal, state and local taxes
required to be withheld by it, and (c) all lawful claims for labor, materials
and supplies which, if unpaid, might by law become a lien or charge upon any
properties of such Borrower; provided, that no Borrower will be required to pay
any such tax, assessment, charge or claim whose amount, applicability or
validity is being contested in good faith by appropriate proceedings and for
which proper reserves have been made.
Section 6.6 Maintenance of Properties.
(a) Each Borrower will keep and maintain the Collateral, the other
collateral covered by the Security Documents and all of its other
properties necessary or useful in its business in good condition, repair
and working order (normal wear and tear excepted) and will from time to
time replace or repair any worn, defective or broken parts; provided,
however, that nothing in this Section 6.6 shall prevent any Borrower from
discontinuing the operation and maintenance of any of its properties if
such discontinuance is, in such Borrower's judgment, desirable in the
conduct of its business and not disadvantageous in any material respect to
the Lender as holder of the Obligations.
(b) Each Borrower will defend the Collateral against all claims or
demands of all persons (other than the Lender) claiming the Collateral or
any interest therein.
(c) Each Borrower will keep all Collateral and other collateral
covered by the Security Documents free and clear of all security interests,
liens and encumbrances except Permitted Liens.
Section 6.7 Insurance. Each Borrower will obtain and at all times maintain
insurance with insurers believed by that Borrower to be responsible and
reputable, in such amounts and against such risks as may from time to time be
required by the Lender, but in all events in such amounts and against such risks
as is usually carried by companies engaged in similar business and owning
similar properties in the same general areas in which that Borrower operates.
Without limiting the generality of the foregoing, each Borrower will at all
times maintain business interruption insurance including coverage for force
majeure and keep all tangible Collateral insured against risks of fire
(including so-called extended coverage), theft, collision (for Collateral
consisting of motor vehicles) and such other risks and in such amounts as the
Lender may reasonably request, with any loss payable to the Lender to the extent
of its interest, and all policies of such insurance shall contain a lender's
-33-
loss payable endorsement for the Lender's benefit acceptable to the Lender. All
policies of liability insurance required hereunder shall name the Lender as an
additional insured.
Section 6.8 Preservation of Existence. Each Borrower will preserve and
maintain its existence and all of its rights, privileges and franchises
necessary or desirable in the normal conduct of its business and shall conduct
its business in an orderly, efficient and regular manner.
Section 6.9 Delivery of Instruments, etc. Upon request by the Lender, each
Borrower will promptly deliver to the Lender in pledge all instruments,
documents and chattel papers constituting Collateral, duly endorsed or assigned
by that Borrower.
Section 6.10 Lockbox; Collateral Accounts.
(a) Lockbox. Upon the Lender's request during any Default Period, each
Borrower will irrevocably direct all present and future account debtors and
other Persons obligated to make payments on Receivables to make such
payments directly to a special lockbox (the "Lockbox") to be under the
Lender's control. After such request, all invoices, account statements and
other written or oral communications directing, instructing, demanding or
requesting payment of any Receivable or any other amount constituting
Collateral shall conspicuously direct that all payments be made to the
Lockbox and shall include the Lockbox address. All payments received in the
Lockbox shall be processed to a Collateral Account.
(b) Collateral Accounts.
(i) With 60 days after the date hereof, the Borrowers shall
deliver such Collateral Account Agreements as the Lender shall
require, duly executed by the Borrowers and the applicable collateral
account agent.
(ii) Each Borrower shall cause all checks and other non-cash
payments on Receivables to be deposited to account No. 4311266522
maintained with Wells Fargo Bank (Texas) N.A. within one Banking Day
of receipt. Until so deposited, each Borrower shall hold all such
payments in trust for and as the property of the Lender and shall not
commingle such payments with any of its other funds or property.
(iii) Amounts deposited in a Collateral Account shall not bear
interest and shall not be subject to withdrawal by any Borrower,
except after full payment and discharge of all Obligations.
(iv) All deposits in a Collateral Account shall constitute
proceeds of Collateral and shall not constitute payment of the
Obligations. The Lender from time to time at its discretion may, after
allowing one Banking Day, apply deposited funds in any Collateral
Account to the payment of the Obligations, in any order or manner of
application satisfactory to the Lender, by transferring such funds to
the Lender's general account.
-34-
(v) All items deposited in any Collateral Account shall be
subject to final payment. If any such item is returned uncollected,
the Borrowers will immediately pay the Lender, or, for items deposited
in a Collateral Account, the bank maintaining such account, the amount
of that item, or such bank at its discretion may charge any
uncollected item to the Borrowers' commercial account or other
account. The Borrowers shall be liable as an endorser on all items
deposited in each Collateral Account, whether or not in fact endorsed
by a Borrower.
Section 6.11 Performance by the Lender. If any Borrower at any time fails
to perform or observe any of the foregoing covenants contained in this Article
VI or elsewhere herein, and if such failure shall continue for a period of ten
calendar days after the Lender gives the Parent Borrower written notice thereof
(or in the case of the agreements contained in Sections 6.5, 6.7 and 6.10,
immediately upon the occurrence of such failure, without notice or lapse of
time), the Lender may, but need not, perform or observe such covenant on behalf
and in the name, place and stead of the applicable Borrower (or, at the Lender's
option, in the Lender's name) and may, but need not, take any and all other
actions which the Lender may reasonably deem necessary to cure or correct such
failure (including, without limitation, the payment of taxes, the satisfaction
of security interests, liens or encumbrances, the performance of obligations
owed to account debtors or other obligors, the procurement and maintenance of
insurance, the execution of assignments, security agreements and financing
statements, and the endorsement of instruments); and the Borrowers shall
thereupon pay to the Lender on demand the amount of all monies expended and all
costs and expenses (including reasonable attorneys' fees and legal expenses)
incurred by the Lender in connection with or as a result of the performance or
observance of such agreements or the taking of such action by the Lender,
together with interest thereon from the date expended or incurred at the Default
Rate. To facilitate the Lender's performance or observance of such covenants of
the Borrowers, each Borrower hereby irrevocably appoints the Lender, or the
Lender's delegate, acting alone, as that Borrower's attorney in fact (which
appointment is coupled with an interest) with the right (but not the duty) from
time to time to create, prepare, complete, execute, deliver, endorse or file in
the name and on behalf of that Borrower any and all instruments, documents,
assignments, security agreements, financing statements, applications for
insurance and other agreements and writings required to be obtained, executed,
delivered or endorsed by that Borrower under this Section 6.11.
-35-
Section 6.12 Minimum Debt Service Coverage Ratio. The Parent Borrower will
maintain, during each period described below, its Debt Service Coverage Ratio,
determined as at the end of each month, at not less than the ratio set forth
opposite such period:
Period Minimum Debt Service
Coverage Ratio
January 1, 2000 through March 30, 2000 0.6 to 1.0
March 31, 2000 through June 29, 2000 0.7 to 1.0
June 30, 2000 through September 29, 2000 0.8 to 1.0
September 30, 2000 to December 30, 2000 1.0 to 1.0
December 31, 2000 1.2 to 1.0
Section 6.13 Minimum Book Net Worth. The Parent Borrower will maintain, as
of each date listed below or as of the end of each month during each period
described below, its Book Net Worth at an amount not less than the amount set
forth opposite such date or period:
Date/Period Minimum Book Net Worth
----------- ----------------------
November 30, 1999 $8,450,000
December 31, 1999 $8,500,000
January 1, 2000 through greater of (i) $50,000 less than actual
March 30, 2000 Book Net Worth on December 31, 1999 or
(ii) $8,450,000
March 31, 2000 through greater of (i) actual Book Net Worth on
June 29, 2000 December 31, 1999 or
(ii) $8,500,000
June 30, 2000 through greater of (i) $125,000 more
September 29, 2000 than actual Book Net Worth on
December 31, 1999 or
(ii) $8,625,000
September 30, 2000 through greater of (i) $250,000 more
December 30, 2000 than actual Book Net Worth on
December 31, 1999 or
(ii) $8,750,000
December 31, 2000 greater of (i) $500,000 more
than actual Book Net Worth on
December 31, 1999 or
(ii) $9,000,000
-36-
Section 6.14 Minimum Net Income. The Parent Borrower will achieve as of
each date set forth below or as of the end of each month during each period
described below, Net Income, of not less than the amount set forth opposite such
date or period (numbers in parentheses are negative):
Date/Period Minimum Net Income
----------- ------------------
December 31, 1999 $275,000
January 1, 2000 through March 30, 2000 $(50,000)
March 31, 2000 through June 29, 2000 $-0-
June 30, 2000 through September 29, 2000 $125,000
September 30, 2000 through December 30, 2000 $250,000
December 31, 2000 $500,000
Section 6.15 New Covenants. On or before December 31, 2000, the Borrowers
and the Lender shall agree on new covenant levels for Sections 6.12, 6.13, 6.14
and 7.11 for periods after such date. The new covenant levels will be based on
the Borrowers' projections for such periods and shall be no less stringent than
the present levels.
ARTICLE VII
Negative Covenants
So long as the Obligations shall remain unpaid, or the Credit
Facility shall remain outstanding, the Borrowers agree that, without the
Lender's prior written consent:
Section 7.1 Liens. No Borrower will create, incur or suffer to exist any
mortgage, deed of trust, pledge, lien, security interest, adverse claim,
assignment or transfer upon or of any of its assets, now owned or hereafter
acquired, to secure any indebtedness; excluding, however, from the operation of
the foregoing, the following (collectively, "Permitted Liens"):
(a) in the case of any of a Borrower's property which is not
Collateral or other collateral described in the Security Documents,
covenants, restrictions, rights, easements and minor irregularities in
title which do not materially interfere with that Borrower's business or
operations as presently conducted;
-37-
(b) mortgages, deeds of trust, pledges, liens, security interests and
assignments in existence on the date hereof and listed in Schedule 7.1,
securing indebtedness for borrowed money permitted under Section 7.2;
(c) the Security Interest and liens and security interests created by
the Security Documents; and
(d) purchase money security interests relating to the acquisition of
machinery and equipment of a Borrower not exceeding the lesser of cost or
fair market value thereof , not exceeding $100,000 for any one purchase or
$250,000 in the aggregate during any fiscal year and so long as no Default
Period is then in existence and none would exist immediately after such
acquisition.
Section 7.2 Indebtedness. No Borrower will 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 its behalf, or
any other indebtedness or liability evidenced by notes, bonds, debentures or
similar obligations, except:
(a) indebtedness arising hereunder;
(b) indebtedness of in existence on the date hereof and listed in
Schedule 7.2 hereto; and
(c) indebtedness relating to liens permitted in accordance with
Section 7.1.
Section 7.3 Guaranties. No Borrower will assume, guarantee, endorse or
otherwise become directly or contingently liable in connection with any
obligations of any other Person, except:
(a) the endorsement of negotiable instruments by a Borrower for
deposit or collection or similar transactions in the ordinary course of
business; and
(b) guaranties, endorsements and other direct or contingent
liabilities in connection with the obligations of other Persons, in
existence on the date hereof and listed in Schedule 7.2 hereto.
Section 7.4 Investments and Subsidiaries.
(a) No Borrower will purchase or hold beneficially any stock or other
securities or evidences of indebtedness of, make or permit to exist any
loans or advances to, or make any investment or acquire any interest
whatsoever in, any other Person, including specifically but without
limitation any partnership or joint venture, except:
(i) investments in direct obligations of the United States of
America or any agency or instrumentality thereof whose obligations
constitute full faith and credit obligations of the United States of
America having a maturity of one year or less, commercial paper issued
-38-
by U.S. corporations rated "A-1" or "A-2" by Standard & Poors
Corporation or "P-1" or "P-2" by Moody's Investors Service or
certificates of deposit or bankers' acceptances having a maturity of
one year or less issued by members of the Federal Reserve System
having deposits in excess of $100,000,000 (which certificates of
deposit or bankers' acceptances are fully insured by the Federal
Deposit Insurance Corporation);
(ii) travel advances to the Borrowers' officers and employees not
exceeding at any one time an aggregate of $35,000;
(iii) existing officer and employee loans secured by stock of the
Parent Borrower as set out on Schedule 7.4;
(iv) loans extended to managers of the Borrowers as permitted under
the Borrowers' bonus program;
(v) loans to TLF Canada not exceeding $250,000 outstanding at any time
(vi) equity investment in TLF Canada not exceeding $600,000 at any
time; and
(vii) advances in the form of progress payments, prepaid rent not
exceeding two months or security deposits.
(b) No Borrower will create or permit to exist any Subsidiary, other
than the Subsidiaries in existence on the date hereof and listed in
Schedule 5.5.
Section 7.5 Dividends. No Borrower will declare or pay any dividends (other
than dividends payable solely in stock of the applicable Borrower) on any class
of its stock or make any payment on account of the purchase, redemption or other
retirement of any shares of such stock or make any distribution in respect
thereof, either directly or indirectly.
Section 7.6 Sale or Transfer of Assets; Suspension of Business Operations.
No Borrower will sell, lease, assign, transfer or otherwise dispose of (i) the
stock of any Subsidiary, (ii) all or a substantial part of its assets, or (iii)
any Collateral or any interest therein (whether in one transaction or in a
series of transactions) to any other Person other than the sale of Inventory in
the ordinary course of business and will not liquidate, dissolve or suspend
business operations. No Borrower will in any manner transfer any property
without prior or present receipt of full and adequate consideration.
Section 7.7 Intellectual Property. No Borrower will sell, assign or grant
licenses to use, any of its applications for patents, patents, copyrights,
trademarks, trade secrets, trade names or other intellectual property to any
other Person.
Section 7.8 Consolidation and Merger; Asset Acquisitions. No Borrower will
consolidate with or merge into any Person, or permit any other Person to merge
into it, or acquire (in a transaction analogous in purpose or effect to a
consolidation or merger) all or substantially all the assets of any other
Person.
-39-
Section 7.9 Sale and Leaseback. No Borrower will enter into any
arrangement, directly or indirectly, with any other Person whereby that Borrower
shall sell or transfer any real or personal property, whether now owned or
hereafter acquired, and then or thereafter rent or lease as lessee such property
or any part thereof or any other property which that Borrower intends to use for
substantially the same purpose or purposes as the property being sold or
transferred.
Section 7.10 Restrictions on Nature of Business. No Borrower will engage in
any line of business materially different from that in which it is presently
engaged and will not purchase, lease or otherwise acquire assets not related to
its business.
Section 7.11 Capital Expenditures. The Borrowers will not incur or contract
to incur Capital Expenditures of more than $550,00 in the aggregate during the
fiscal year ending December 31, 1999, or more than $500,000 in the aggregate
during any fiscal year thereafter.
Section 7.12 Accounting. No Borrower will adopt any material change in
accounting principles other than as required by GAAP. No Borrower will adopt,
permit or consent to any change in its fiscal year.
Section 7.13 Discounts, etc. No Borrower will, after notice from the
Lender, grant any discount, credit or allowance to any customer or accept any
return of goods sold. No Borrower will at any time (whether before or after
notice from the Lender) modify, amend, subordinate, cancel or terminate the
obligation of any account debtor or other obligor.
Section 7.14 Defined Benefit Pension Plans. No Borrower will adopt, create,
assume or become a party to any defined benefit pension plan, unless disclosed
to the Lender pursuant to Section 5.13.
Section 7.15 Other Defaults. No Borrower will permit any breach, default or
event of default to occur under any note, loan agreement, indenture, lease,
mortgage, contract for deed, security agreement or other contractual obligation
binding upon it.
Section 7.16 Place of Business; Name. No Borrower will transfer its chief
executive office or principal place of business, or move, relocate, close or
sell any business location. No borrower will permit any tangible Collateral or
any records pertaining to the Collateral to be located in any state or area in
which, in the event of such location, a financing statement covering such
Collateral would be required to be, but has not in fact been, filed in order to
perfect the Security Interest. No Borrower will change its name.
-40-
Section 7.17 Organizational Documents. No Borrower will amend its articles
of incorporation and bylaws. No Borrower will become an S Corporation within the
meaning of the Internal Revenue Code of 1986, as amended.
Section 7.18 Salaries. No Borrower will pay excessive or unreasonable
salaries, bonuses, commissions, consultant fees or other compensation; or
increase the salary, bonus, commissions, consultant fees or other compensation
of any directors, shareholders or consultant, or any member of their families,
by more than ten percent (10%) in any one year, either individually or for all
such persons in the aggregate, or pay any such increase from any source other
than profits earned in the year of payment.
ARTICLE VIII
Events of Default, Rights and Remedies
--------------------------------------
Section 8.1 Events of Default. "Event of Default", wherever used herein,
means any one of the following events:
(a) Default in the payment of the Obligations when they become due and
payable;
(b) Failure to pay when due any amount specified in Section 2.4
relating to the Obligation of Reimbursement, or failure to pay immediately
when due or upon termination of the Credit Facility any amounts required to
be paid for deposit in the Special Account under Section 2.5 or;
(c) Default in the payment of any fees, commissions, costs or expenses
required to be paid by any Borrower under this Agreement ;
(d) Default in the performance, or breach, of any covenant or
agreement of any Borrower contained in this Agreement;
(e) Any Borrower or any Guarantor shall be or become insolvent, or
admit in writing its or his inability to pay its or his debts as they
mature, or make an assignment for the benefit of creditors; or any Borrower
or any Guarantor shall apply for or consent to the appointment of any
receiver, trustee, or similar officer for it or him or for all or any
substantial part of its or his property; or such receiver, trustee or
similar officer shall be appointed without the application or consent of
the applicable Borrower or such Guarantor, as the case may be; or any
Borrower or any Guarantor shall institute (by petition, application,
answer, consent or otherwise) any bankruptcy, insolvency, reorganization,
arrangement, readjustment of debt, dissolution, liquidation or similar
proceeding relating to it or him under the laws of any jurisdiction; or any
such proceeding shall be instituted (by petition, application or otherwise)
against any Borrower or any Guarantor; or any judgment, writ, warrant of
attachment or execution or similar process shall be issued or levied
against a substantial part of the property of any Borrower or any
Guarantor;
-41-
(f) A petition shall be filed by or against any Borrower or any
Guarantor under the United States Bankruptcy Code naming that Borrower or
that Guarantor as debtor;
(g) Any representation or warranty made by any Borrower in this
Agreement, by any Guarantor in any guaranty delivered to the Lender, or by
any Borrower (or any of its officers) or any Guarantor in any agreement,
certificate, instrument or financial statement or other statement
contemplated by or made or delivered pursuant to or in connection with this
Agreement or any such guaranty shall prove to have been incorrect in any
material respect when deemed to be effective;
(h) The rendering against any Borrower of a final judgment, decree or
order for the payment of money in excess of $100,000 individually or
$250,000 in the aggregate in any one year and the continuance of such
judgment, decree or order unsatisfied and in effect for any period of 30
consecutive days without a stay of execution;
(i) A default under any bond, debenture, note or other evidence of
indebtedness of any Borrower owed to any Person other than the Lender, or
under any indenture or other instrument under which any such evidence of
indebtedness has been issued or by which it is governed, or under any lease
of any of the Premises, and the expiration of the applicable period of
grace, if any, specified in such evidence of indebtedness, indenture, other
instrument or lease;
(j) Any Reportable Event, which the Lender determines in good faith
might constitute grounds for the termination of any Plan or for the
appointment by the appropriate United States District Court of a trustee to
administer any Plan, shall have occurred and be continuing 30 days after
written notice to such effect shall have been given to the Parent Borrower
by the Lender; or a trustee shall have been appointed by an appropriate
United States District Court to administer any Plan; or the Pension Benefit
Guaranty Corporation shall have instituted proceedings to terminate any
Plan or to appoint a trustee to administer any Plan; or any Borrower shall
have filed for a distress termination of any Plan under Title IV of ERISA;
or any Borrower shall have failed to make any quarterly contribution
required with respect to any Plan under Section 412(m) of the Internal
Revenue Code of 1986, as amended, which the Lender determines in good faith
may by itself, or in combination with any such failures that the Lender may
determine are likely to occur in the future, result in the imposition of a
lien on any Borrower's assets in favor of the Plan;
(k) An event of default shall occur under any Security Document or
under any other security agreement, mortgage, deed of trust, assignment or
other instrument or agreement securing any obligations of the Borrowers
hereunder or under any note;
(l) Any Borrower shall liquidate, dissolve, terminate or suspend its
business operations or otherwise fail to operate its business in the
ordinary course, or sell all or substantially all of its assets, without
the Lender's prior written consent;
-42-
(m) Any Borrower shall fail to pay, withhold, collect or remit any tax
or tax deficiency when assessed or due (other than any tax deficiency which
is being contested in good faith and by proper proceedings and for which it
shall have set aside on its books adequate reserves therefor) or notice of
any state or federal tax liens shall be filed or issued;
(n) The percentage of voting and non-voting stock of the Parent
Borrower owned by Wray Thompson, Sr., Ronald C. Morgan and Robin L. Morgan
in the aggregate after such change would be less than sixty percent (51%)
of the Parent Borrower's voting stock and sixty percent (51%) of the Parent
Borrower's non-voting stock.
(o) Default in the payment of any amount owed by any Borrower to the
Lender other than any indebtedness arising hereunder;
(p) Any Guarantor shall repudiate, purport to revoke or fail to
perform any such Guarantor's obligations under such Guarantor's guaranty in
favor of the Lender, any individual Guarantor shall die or any other
Guarantor shall cease to exist;
(q) Any event or circumstance with respect to any Borrower shall occur
such that the Lender shall believe in good faith that the prospect of
payment of all or any part of the Obligations or the performance by that
Borrower under the Loan Documents is impaired or any material adverse
change in the business or financial condition of any Borrower shall occur;
or
(r) Any breach, default or event of default by or attributable to any
Affiliate under any agreement between such Affiliate and the Lender.
Section 8.2 Rights and Remedies. During any Default Period, the Lender may
exercise any or all of the following rights and remedies:
(a) the Lender may, by notice to the Parent Borrower, declare the
Commitment to be terminated, whereupon the same shall forthwith terminate;
(b) the Lender may, by notice to the Parent Borrower, declare the
Obligations to be forthwith due and payable, whereupon all Obligations
shall become and be forthwith due and payable, without presentment, notice
of dishonor, protest or further notice of any kind, all of which the
Borrowers hereby expressly waive;
(c) the Lender may, without notice to any Borrower and without further
action, apply any and all money owing by the Lender to any Borrower to the
payment of the Obligations;
(d) the Lender may make demand upon the Borrowers and, forthwith upon
such demand, the Borrowers will pay to the Lender in immediately available
funds for deposit in the Special Account pursuant to Section 2.16 an amount
equal to the aggregate maximum amount available to be drawn under all
-43-
Letters of Credit then outstanding, assuming compliance with all conditions
for drawing thereunder;
(e) the Lender may exercise and enforce any and all rights and
remedies available upon default to a secured party under the UCC,
including, without limitation, the right to take possession of Collateral,
or any evidence thereof, proceeding without judicial process or by judicial
process (without a prior hearing or notice thereof, which the Borrowers
hereby expressly waive) and the right to sell, lease or otherwise dispose
of any or all of the Collateral, and, in connection therewith, the
Borrowers will on demand assemble the Collateral and make it available to
the Lender at a place to be designated by the Lender which is reasonably
convenient to both parties;
(f) the Lender may exercise and enforce its rights and remedies under
the Loan Documents; and
(g) the Lender may exercise any other rights and remedies available to
it by law or agreement.
Notwithstanding the foregoing, upon the occurrence of an Event of Default
described in subsections (e) or (f) of Section 8.1, the Obligations shall be
immediately due and payable automatically without presentment, demand, protest
or notice of any kind.
Section 8.3 Certain Notices. If notice to the Borrowers of any intended
disposition of Collateral or any other intended action is required by law in a
particular instance, such notice shall be deemed commercially reasonable if
given (in the manner specified in Section 9.3) at least ten calendar days before
the date of intended disposition or other action.
ARTICLE IX
Miscellaneous
-------------
Section 9.1 No Waiver; Cumulative Remedies. No failure or delay by the
Lender in exercising any right, power or remedy under the Loan Documents shall
operate as a waiver thereof; nor shall any single or partial exercise of any
such right, power or remedy preclude any other or further exercise thereof or
the exercise of any other right, power or remedy under the Loan Documents. The
remedies provided in the Loan Documents are cumulative and not exclusive of any
remedies provided by law.
Section 9.2 Amendments, Etc. No amendment, modification, termination or
waiver of any provision of any Loan Document or consent to any departure by any
Borrower therefrom or any release of a Security Interest shall be effective
unless the same shall be in writing and signed by the Lender, and then such
waiver or consent shall be effective only in the specific instance and for the
specific purpose for which given. No notice to or demand on any Borrower in any
-44-
case shall entitle any Borrower to any other or further notice or demand in
similar or other circumstances.
Section 9.3 Addresses for Notices, Etc. Except as otherwise expressly
provided herein, all notices, requests, demands and other communications
provided for under the Loan Documents shall be in writing and shall be (a)
personally delivered, (b) sent by first class United States mail, (c) sent by
overnight courier of national reputation, or (d) transmitted by telecopy, in
each case addressed or telecopied to the party to whom notice is being given at
its address or telecopier number as set forth below:
If to the Borrowers:
The Leather Factory, Inc.
3825 E. Loop 820 South
P.O. Box 50429
Ft. Worth, Texas 76105
Telecopier: (817) 446-3713
Attention: Wray Thompson
with a copy to:
Mr. William Warren
Loe, Warren, Rosenfield, Kaitecer & Hibbs
4420 West Vickery
Ft. Worth, Texas 76185
Telecopier: (817) 377-1120
If to the Lender:
Wells Fargo Business Credit, Inc.
4975 Preston Park Blvd. Suite 280
Plano, Texas 75093
Telecopier: (972) 867-7838
Attention: Thomas J. Krueger
or, as to each party, at such other address or telecopier number as may
hereafter be designated by such party in a written notice to the other party
complying as to delivery with the terms of this Section. All such notices,
requests, demands and other communications shall be deemed to have been given on
(a) the date received if personally delivered, (b) when deposited in the mail if
delivered by mail, (c) the date sent if sent by overnight courier, or (d) the
date of transmission if delivered by telecopy, except that notices or requests
to the Lender pursuant to any of the provisions of Article II shall not be
effective until received by the Lender.
Section 9.4 Further Documents. Each Borrower will from time to time execute
and deliver or endorse any and all instruments, documents, conveyances,
-45-
assignments, security agreements, financing statements and other agreements and
writings that the Lender may reasonably request in order to secure, protect,
perfect or enforce the Security Interest or the Lender's rights under the Loan
Documents (but any failure to request or assure that the applicable Borrower
executes, delivers or endorses any such item shall not affect or impair the
validity, sufficiency or enforceability of the Loan Documents and the Security
Interest, regardless of whether any such item was or was not executed, delivered
or endorsed in a similar context or on a prior occasion).
Section 9.5 Collateral. This Agreement does not contemplate a sale of
accounts, contract rights or chattel paper, and, as provided by law, the
Borrowers are entitled to any surplus and shall remain liable for any
deficiency. The Lender's duty of care with respect to Collateral in its
possession (as imposed by law) shall be deemed fulfilled if it exercises
reasonable care in physically keeping such Collateral, or in the case of
Collateral in the custody or possession of a bailee or other third person,
exercises reasonable care in the selection of the bailee or other third person,
and the Lender need not otherwise preserve, protect, insure or care for any
Collateral. The Lender shall not be obligated to preserve any rights any
Borrower may have against prior parties, to realize on the Collateral at all or
in any particular manner or order or to apply any cash proceeds of the
Collateral in any particular order of application.
Section 9.6 Costs and Expenses. The Borrowers shall pay on demand all costs
and expenses, including (without limitation) reasonable attorneys' fees,
incurred by the Lender in connection with the Obligations, this Agreement, the
Loan Documents, any Letters of Credit, and any other document or agreement
related hereto or thereto, and the transactions contemplated hereby, including
without limitation all such costs, expenses and fees incurred in connection with
the negotiation, preparation, execution, amendment, administration, performance,
collection and enforcement of the Obligations and all such documents and
agreements and the creation, perfection, protection, satisfaction, foreclosure
or enforcement of the Security Interest.
Section 9.7 Indemnity. In addition to the payment of expenses pursuant to
Section 9.6, the Borrowers shall indemnify, defend and hold harmless the Lender,
and any of its participants, parent corporations, subsidiary corporations,
affiliated corporations, successor corporations, and all present and future
officers, directors, employees, attorneys and agents of the foregoing (the
"Indemnitees") from and against any of the following (collectively, "Indemnified
Liabilities"):
(i) any and all transfer taxes, documentary taxes, assessments or
charges made by any governmental authority by reason of the execution and
delivery of the Loan Documents or the making of the Advances;
(ii) any claims, loss or damage to which any Indemnitee may be
subjected if any representation or warranty contained in Section 5.15
proves to be incorrect in any respect or as a result of any violation of
the covenant contained in Section 6.4(b); and
-46-
(iii) any and all other liabilities, losses, damages, penalties,
judgments, suits, claims, costs and expenses of any kind or nature
whatsoever (including, without limitation, the reasonable fees and
disbursements of counsel) in connection with the foregoing and any other
investigative, administrative or judicial proceedings, whether or not such
Indemnitee shall be designated a party thereto, which may be imposed on,
incurred by or asserted against any such Indemnitee, in any manner related
to or arising out of or in connection with the making of the Advances and
the Loan Documents or the use or intended use of the proceeds of the
Advances.
If any investigative, judicial or administrative proceeding arising from any of
the foregoing is brought against any Indemnitee, upon such Indemnitee's request,
the Borrowers, or counsel designated by the Parent Borrower and satisfactory to
the Indemnitee, will resist and defend such action, suit or proceeding to the
extent and in the manner directed by the Indemnitee, at the Borrowers' sole
costs and expense. Each Indemnitee will use its best efforts to cooperate in the
defense of any such action, suit or proceeding. If the foregoing undertaking to
indemnify, defend and hold harmless may be held to be unenforceable because it
violates any law or public policy, the Borrowers shall nevertheless make the
maximum contribution to the payment and satisfaction of each of the Indemnified
Liabilities which is permissible under applicable law. The Borrowers' obligation
under this Section 9.7 shall survive the termination of this Agreement and the
discharge of the Borrowers' other obligations hereunder.
Section 9.8 Participants. The Lender and its participants, if any, are not
partners or joint venturers, and the Lender shall not have any liability or
responsibility for any obligation, act or omission of any of its participants.
All rights and powers specifically conferred upon the Lender may be transferred
or delegated to any of the Lender's participants, successors or assigns.
Section 9.9 Execution in Counterparts. This Agreement and other Loan
Documents may be executed in any number of counterparts, each of which when so
executed and delivered shall be deemed to be an original and all of which
counterparts, taken together, shall constitute but one and the same instrument.
Section 9.10 Binding Effect; Assignment; Complete Agreement; Exchanging
Information. The Loan Documents shall be binding upon and inure to the benefit
of the Borrowers and the Lender and their respective successors and assigns,
except that no Borrower will have the right to assign its rights thereunder or
any interest therein without the Lender's prior written consent. This Agreement,
together with the Loan Documents, comprises the complete and integrated
agreement of the parties on the subject matter hereof and supersedes all prior
agreements, written or oral, on the subject matter hereof. Without limiting the
Lender's right to share information regarding any Borrower and its Affiliates
with the Lender's participants, accountants, lawyers and other advisors, the
Lender, Wells Fargo & Company, and all direct and indirect subsidiaries of Wells
Fargo & Company, may exchange any and all information they may have in their
possession regarding any Borrower and its Affiliates, and the Borrowers waive
-47-
any right of confidentiality it may have with respect to such exchange of such
information.
Section 9.11 Severability of Provisions. Any provision of this Agreement
which is prohibited or unenforceable shall be ineffective to the extent of such
prohibition or unenforceability without invalidating the remaining provisions
hereof.
Section 9.12 Headings. Article and Section headings in this Agreement are
included herein for convenience of reference only and shall not constitute a
part of this Agreement for any other purpose.
Section 9.13 Governing Law; Jurisdiction, Venue; Waiver of Jury Trial. THE
PARTIES AGREE THAT THE LAW OF THE STATE OF MINNESOTA (OTHER THAN CONFLICT OF
LAWS RULES OF THE STATE OF MINNESOTA) SHALL BE APPLICABLE TO AND GOVERN ALL
ASPECTS OF THIS TRANSACTION AND, WITHOUT LIMITING THE GENERALITY OF THE
FOREGOING, THE PARTIES AGREE THAT ALL DOCUMENTS AND AGREEMENTS EXECUTED AND
DELIVERED IN CONNECTION WITH THIS AGREEMENT INCLUDING, WITHOUT LIMITATION, ALL
MATTERS PERTAINING TO THE VALIDITY OR ENFORCEABILITY OF SUCH DOCUMENTS AND
AGREEMENTS AS WELL AS ALL MATTERS PERTAINING TO THE INTERPRETATION OR
CONSTRUCTION OF SUCH DOCUMENTS AND AGREEMENTS, SHALL BE DETERMINED UNDER AND
GOVERNED BY THE LAWS (OTHER THAN CONFLICT OF LAWS RULES) OF THE STATE OF
MINNESOTA. FURTHER, THE PARTIES AGREE THAT THE TRANSACTIONS CONTEMPLATED BY THE
LOAN DOCUMENTS AND THE SUBJECT MATTER OF SUCH TRANSACTIONS BEAR A REASONABLE
RELATION TO THE STATE OF MINNESOTA. THE PARTIES HERETO HEREBY (i) CONSENT TO THE
PERSONAL JURISDICTION OF THE STATE AND FEDERAL COURTS LOCATED IN THE STATE OF
MINNESOTA IN CONNECTION WITH ANY CONTROVERSY RELATED TO THIS AGREEMENT; (ii)
WAIVE ANY ARGUMENT THAT VENUE IN ANY SUCH FORUM IS NOT CONVENIENT, (iii) AGREE
THAT ANY LITIGATION INITIATED BY THE LENDER OR ANY BORROWER IN CONNECTION WITH
THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS SHALL BE VENUED IN EITHER THE
DISTRICT COURT OF HENNEPIN COUNTY, MINNESOTA, OR THE UNITED STATES DISTRICT
COURT, DISTRICT OF MINNESOTA, FOURTH DIVISION; AND (iv) AGREE THAT A FINAL
JUDGMENT IN ANY SUCH SUIT, ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE
ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER
PROVIDED BY LAW. THE PARTIES WAIVE ANY RIGHT TO TRIAL BY JURY IN ANY ACTION OR
PROCEEDING BASED ON OR PERTAINING TO THIS AGREEMENT.
-48-
THE PARTIES WAIVE ANY RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING
BASED ON OR PERTAINING TO THIS AGREEMENT.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized as of the date
first above written.
WELLS FARGO BUSINESS CREDIT, INC. THE LEATHER FACTORY, INC., a
Delaware corporation, THE LEATHER
FACTORY, INC., a Texas corporation, THE
LEATHER FACTORY, INC., an Arizona
corporation, ROBERTS, CUSHMAN &
COMPANY, INC., and HI-LINE LEATHER
& MANUFACTURING COMPANY
By /s/ Thomas J. Krueger
---------------------------
Thomas J. Krueger
Its Vice President By /s/ Wray Thompson
-----------------
Wray Thompson
Its President
-49-
Table of Exhibits and Schedules
Exhibit A Form of Revolving Note
Exhibit B Form of Term Note
Exhibit C Form of Compliance Certificate
Exhibit D Premises
-------------
Schedule 2.19 Sources and Uses of Funds
Schedule 3.6 Financing Statement Information
Schedule 5.1 Trade Names, Chief Executive Office, Principal
Place of Business, and Locations of Collateral
Schedule 5.2 Capital Stock
Schedule 5.5 Subsidiaries
Schedule 7.1 Permitted Liens
Schedule 7.2 Permitted Indebtedness and Guaranties
Schedule 7.4 Existing Loans to Officers and Employees
Exhibit A to Credit and Security Agreement
REVOLVING NOTE
$8,500,000 Dallas, Texas
November 22, 1999
For value received, the undersigned, The Leather Factory, Inc., a Delaware
corporation, The Leather Factory, Inc., a Texas corporation, The Leather
Factory, Inc., an Arizona corporation, Roberts, Cushman & Company, Inc., a New
York corporation, and Hi-Line Leather & Manufacturing Company, a California
corporation (collectively, the "Borrowers" and each "Borrower"), hereby promise
to pay on the Termination Date under the Credit Agreement (defined below), to
the order of Wells Fargo Business Credit, Inc., a Minnesota corporation (the
"Lender"), at its main office in Minneapolis, Minnesota, or at any other place
designated at any time by the holder hereof, in lawful money of the United
States of America and in immediately available funds, the principal sum of Eight
Million Five Hundred Thousand Dollars and No Cents ($8,500,000) or, if less, the
aggregate unpaid principal amount of all Revolving Advances made by the Lender
to any Borrower under the Credit Agreement (defined below) together with
interest on the principal amount hereunder remaining unpaid from time to time,
computed on the basis of the actual number of days elapsed and a 360-day year,
from the date hereof until this Note is fully paid at the rate from time to time
in effect under the Credit and Security Agreement of even date herewith (as the
same may hereafter be amended, supplemented or restated from time to time, the
"Credit Agreement") by and between the Lender and the Borrowers. The principal
hereof and interest accruing thereon shall be due and payable as provided in the
Credit Agreement. This Note may be prepaid only in accordance with the Credit
Agreement.
This Note is issued pursuant, and is subject, to the Credit Agreement,
which provides, among other things, for acceleration hereof. This Note is the
Revolving Note referred to in the Credit Agreement. This Note is secured, among
other things, pursuant to the Credit Agreement and the Security Documents as
therein defined, and may now or hereafter be secured by one or more other
security agreements, mortgages, deeds of trust, assignments or other instruments
or agreements.
The Borrowers hereby agree to pay all costs of collection, including
attorneys' fees and legal expenses if this Note is not paid when due, whether or
not legal proceedings are commenced.
Presentment or other demand for payment, notice of dishonor and protest are
expressly waived.
THE LEATHER FACTORY, INC., a Delaware corporation, THE
LEATHER FACTORY, INC., a Texas corporation, THE LEATHER
FACTORY, INC., an Arizona corporation, ROBERTS, CUSHMAN &
COMPANY, INC., and HI-LINE LEATHER & MANUFACTURING COMPANY
By _______________________________
Wray Thompson
Its President
-2-
Exhibit B to Credit and Security Agreement
TERM NOTE
$150,000 Dallas, Texas
November 22, 1999
For value received, the undersigned, The Leather Factory, Inc., a Delaware
corporation, The Leather Factory, Inc., a Texas corporation, The Leather
Factory, Inc., an Arizona corporation, Roberts, Cushman & Company, Inc., a New
York corporation, and Hi-Line Leather & Manufacturing Company, a California
corporation (collectively, the "Borrowers" and each "Borrower"), hereby promise
to pay on the Termination Date under the Credit Agreement (defined below), to
the order of Wells Fargo Business Credit, Inc., a Minnesota corporation (the
"Lender"), at its main office in Minneapolis, Minnesota, or at any other place
designated at any time by the holder hereof, in lawful money of the United
States of America and in immediately available funds, the principal sum of One
Hundred Fifty Thousand Dollars and No Cents ($150,000) or, if less, the
aggregate unpaid principal amount of all Term Advances made by the Lender to the
Borrowers under the Credit Agreement (defined below) together with interest on
the principal amount hereunder remaining unpaid from time to time, computed on
the basis of the actual number of days elapsed and a 360-day year, from the date
hereof until this Note is fully paid at the rate from time to time in effect
under the Credit and Security Agreement of even date herewith (as the same may
hereafter be amended, supplemented or restated from time to time, the "Credit
Agreement") by and between the Lender and the Borrowers. The principal hereof
and interest accruing thereon shall be due and payable as provided in the Credit
Agreement. This Note may be prepaid only in accordance with the Credit
Agreement.
This Note is issued pursuant, and is subject, to the Credit Agreement,
which provides, among other things, for acceleration hereof. This Note is the
Term Note referred to in the Credit Agreement. This Note is secured, among other
things, pursuant to the Credit Agreement and the Security Documents as therein
defined, and may now or hereafter be secured by one or more other security
agreements, mortgages, deeds of trust, assignments or other instruments or
agreements.
The Borrowers hereby agrees to pay all costs of collection, including
attorneys' fees and legal expenses in the event this Note is not paid when due,
whether or not legal proceedings are commenced.
Presentment or other demand for payment, notice of dishonor and protest are
expressly waived.
THE LEATHER FACTORY, INC., a Delaware corporation, THE
LEATHER FACTORY, INC., a Texas corporation, THE LEATHER
FACTORY, INC., an Arizona corporation, ROBERTS, CUSHMAN &
COMPANY, INC., and HI-LINE LEATHER & MANUFACTURING COMPANY
By _______________________________
Wray Thompson
Its President
-2-
Exhibit C to Credit and Security Agreement
Compliance Certificate
----------------------
To: Thomas J. Krueger
Wells Fargo Business Credit, Inc.
Date: __________________, 199___
Subject: ________________________
Financial Statements
In accordance with our Credit and Security Agreement dated as of November
22, 1999 (the "Credit Agreement"), attached are the financial statements of The
Leather Factory, Inc., a Delaware corporation, The Leather Factory, Inc., a
Texas corporation, The Leather Factory, Inc., an Arizona corporation, Roberts,
Cushman & Company, Inc., a New York corporation, and Hi-Line Leather &
Manufacturing Company, a California corporation (collectively, the "Borrowers"
and each "Borrower") as of and for ________________, __________ (the "Reporting
Date") and the year-to-date period then ended (the "Current Financials"). All
terms used in this certificate have the meanings given in the Credit Agreement.
I certify that the Current Financials have been prepared in accordance with
GAAP, subject to year-end audit adjustments, and fairly present the Borrowers'
financial condition and the results of its operations as of the date thereof.
Events of Default. (Check one):
-----------------
[ ] The undersigned does not have knowledge of the occurrence of a
Default or Event of Default under the Credit Agreement.
[ ] The undersigned has knowledge of the occurrence of a Default
or Event of Default under the Credit Agreement and attached
hereto is a statement of the facts with respect to thereto.
The Borrowers acknowledge that pursuant to Section 2.9(d) the
Lender may impose the Default Rate at any time during the
resulting Default Period.
Financial Covenants. I further hereby certify as follows:
1. Minimum Debt Service Coverage Ratio. Pursuant to Section 6.12 of the
Credit Agreement, as of the Reporting Date, the Parent Borrower's Debt Service
Coverage Ratio was _____ to 1.0 which [ ] satisfies [ ]does not satisfy the
requirement that such ratio be no less than ______ to 1.00 on the Reporting Date
as set forth in table below:
Period Minimum Debt Service Coverage
Ratio
January 1, 2000 through March 30, 2000 0.6 to 1.0
March 31, 2000 through June 29, 2000 0.7 to 1.0
June 30, 2000 through September 29, 2000 0.8 to 1.0
September 30, 2000 to December 30, 2000 1.0 to 1.0
December 31, 2000 1.2 to 1.0
2. Minimum Book Net Worth. Pursuant to Section 6.13 of the Credit
Agreement, as of the Reporting Date the Parent Borrower's Book Net Worth was
$____________ which [ ] satisfies [ ] does not satisfy the requirement that
such amount be not less than $_____________ on the Reporting Date as set forth
in table below:
Date/Period Minimum Book Net Worth
----------- ----------------------
November 30, 1999 $8,450,000
December 31, 1999 $8,500,000
January 1, 2000 through greater of (i) $50,000 less than
March 30, 2000 actual Book Net Worth on
December 31, 1999 or
(ii)$8,450,000
March 31, 2000 through greater of (i) actual Book Net
June 29, 2000 Worth on December31, 1999 or
(ii) $8,500,000
June 30, 2000 through greater of (i) $125,000 more
September 29, 2000 than actual Book Net Worth on
December 31, 1999 or
(ii) $8,625,000
September 30, 2000 greater of (i) $250,000 more
through December 30, 2000 than actual Book Net Worth on
December 31, 1999 or
(ii) $8,750,000
December 31, 2000 greater of (i) $500,000 more
than actual Book Net Worth on
December 31, 1999 or
(ii) $9,000,000
-2-
3. Minimum Net Income. Pursuant to Section 6.14 of the Credit Agreement,
the Parent Borrower's Earnings Before Taxes for the ________ period ending on
the Reporting Date, was $____________, which [ ] satisfies [ ] does not satisfy
the requirement that such amount be not less than $_____________ during such
period as set forth in table below:
Date/Period Minimum Net Income
December 31, 1999 $275,000
January 1, 2000 through March 30, 2000 $(50,000)
March 31, 2000 through June 29, 2000 $-0-
June 30, 2000 through September 29, 2000 $125,000
September 30, 2000 through December 30, 2000 $250,000
December 31, 2000 $500,000
4. Capital Expenditures. Pursuant to Section 7.11 of the Credit Agreement,
for the year-to-date period ending on the Reporting Date, the Borrowers have
expended or contracted to expend during the _____________ year ended
______________, 199___, for Capital Expenditures, $__________________ in the
aggregate and at most $______________ in any one transaction, which [ ]
satisfies [ ]does not satisfy the requirement that such expenditures not exceed
$__________ in the aggregate and $___________ for any one transaction during
such year.
5. Salaries. As of the Reporting Date, the Borrowers [ ] are [ ] are not in
compliance with Section 7.18 of the Credit Agreement concerning salaries.
Attached hereto are all relevant facts in reasonable detail to evidence,
and the computations of the financial covenants referred to above. These
computations were made in accordance with GAAP.
THE LEATHER FACTORY, INC., a Delaware Corporation, THE
LEATHER FACTORY, INC., a Texas corporation, THE LEATHER
FACTORY, INC., an Arizona corporation, ROBERT S. CUSHMAN &
COMPANY, INC., and HI-LINE LEATHER & MANUFACTURING COMPANY
By ____________________________
Its Chief Financial Officer/ Chief Executive
Officer/Chief Operating Officer
-3-
Exhibit D to Credit and Security Agreement
Premises
--------
The Premises referred to in the Credit and Security Agreement are legally
described as follows:
- ------------- -------------------------------------------- ---------- ------------------------------------------------
Unit # Location Unit # Location
- ------------- -------------------------------------------- ---------- ------------------------------------------------
01 The Leather Factory, Inc. 12 The Leather Factory, Inc.
3101 Williams Street 1376-A Main Avenue
Chattanooga, TN 37410 Baldwin Park, CA 91706
- ------------- -------------------------------------------- ---------- ------------------------------------------------
02 The Leather Factory, Inc. 13 The Leather Factory, Inc.
4488 Forest Street 4901-A Rio Vista
Denver, CO 80216 Tampa, FL 33634
- ------------- -------------------------------------------- ---------- ------------------------------------------------
03 The Leather Factory, Inc. 14 The Leather Factory, Inc.
1818 North Cameron Street 5710 Mobud Street
Harrisburg, PA 17110 San Antonio, TX 78238
- ------------- -------------------------------------------- ---------- ------------------------------------------------
04 The Leather Factory, Inc. 15 The Leather Factory, Inc.
3847 East Loop 820 South 4683 Morse Center Drive
Fort Worth, TX 76119 Columbus, OH 43229
- ------------- -------------------------------------------- ---------- ------------------------------------------------
05 The Leather Factory, Inc. 16 The Leather Factory, Inc.
2750 North Clovis Avenue 8340 Burnham Road, Suite 100
Fresno, CA 93747 El Paso, TX 79907
- ------------- -------------------------------------------- ---------- ------------------------------------------------
06 The Leather Factory, Inc. 17 The Leather Factory, Inc.
5041 N.E. 14th Street 919 East 14th Street
Des Moines, IA 50316 Oakland, CA 94606
- ------------- -------------------------------------------- ---------- ------------------------------------------------
07 The Leather Factory, Inc. 18 The Leather Factory, Inc.
425 North 19th Avenue 3134 South Division Avenue
Phoenix, AZ 85009 Wyoming, MI 49548
- ------------- -------------------------------------------- ---------- ------------------------------------------------
08 The Leather Factory, Inc. 19 The Leather Factory, Inc.
2341 East Kearney 2435 West Pawnee
Springfield, MO 65803 Wichita, KS 67213
- ------------- -------------------------------------------- ---------- ------------------------------------------------
09 The Leather Factory, Inc. 20 The Leather Factory, Inc.
28 West Boone Avenue 5617 Crawford Street
Spokane, WA 99201 New Orleans, LA 70123
- ------------- -------------------------------------------- ---------- ------------------------------------------------
10 The Leather Factory, Inc. 21 The Leather Factory, Inc.
2412 Candelaria, NE 13221 N.E. Whitaker Way
Albuquerque, NM 87107 Portland, OR 97230
- ------------- -------------------------------------------- ---------- ------------------------------------------------
11 The Leather Factory, Inc. 22 The Leather Factory, Inc.
1101 South State Street 2526 South Tyron Street
Salt Lake City, UT 84111 Charlotte, NC 28203
- ------------- -------------------------------------------- ---------- ------------------------------------------------
-4-
23 The Leather Factory, Inc. 50 Roberts, Cushman & Company, Inc.
115 North 30th Stret 3510-36th Avenue
Billings, MT 59101 Long Island City, NY 11106
- ------------- -------------------------------------------- ---------- ------------------------------------------------
24 The Leather Factory, Inc. 70 The Leather Factory of Canada, Ltd.
5320 Cameron Road 104 King Edward Street East
Austin, TX 78723 Winnipeg, Manitoba R3H ON8
- ------------- -------------------------------------------- ---------- ------------------------------------------------
25 The Leather Factory, Inc.
3651 East 44th Street
Tucson, AZ 85713
- ------------- -------------------------------------------- ---------- ------------------------------------------------
-5-
Schedule 2.19 to Credit and Security Agreement
Sources and Uses of Funds At Closing
- ------------------------------------------------------------ -----------------------------------------------------
Sources Uses
- ------------------------------------------------------------ -----------------------------------------------------
Revolving Advance $6,044,000 FINOVA Capital Corporation $5,949,000
- --------------------------------------- -------------------- ------------------------------- ---------------------
Term Advance $150,000 The Schlinger Foundation $1,000,000
- --------------------------------------- -------------------- ------------------------------- ---------------------
Cash $509,000 Payables over 60 days $20,000
- --------------------------------------- -------------------- ------------------------------- ---------------------
Estimated Closing Costs $50,000
- --------------------------------------- -------------------- ------------------------------- ---------------------
Required Availability after $100,000
funding
- --------------------------------------- -------------------- ------------------------------- ---------------------
Total $6,703,000 Total $7,119,000
- --------------------------------------- -------------------- ------------------------------- ---------------------
Schedule 3.6 to Credit and Security
Agreement
Financing Statement Information
- ------------------------------------------------------------ -----------------------------------------------------
Name, address and employer Name, address and employer
identification number of Debtor: identification number of Debtor:
The Leather Factory, Inc., a Delaware corporation
3825 E. Loop 820 South The Leather Factory, Inc., a Texas corporation
P.O. Box 50429 3825 E. Loop 820 South
Ft. Worth, Texas 76105 P.O. Box 50429
Ft. Worth, Texas 76105
Employer Identification No. 75-2543540
Employer Identification No. 75-1721123
Name, address and employer identification number of
Secured Party: Name, address and employer identification number of
Secured Party:
Wells Fargo Business Credit, Inc.
4975 Preston Park Blvd. Suite 280 Wells Fargo Business Credit, Inc.
Plano, Texas 75093 4975 Preston Park Blvd. Suite 280
Plano, Texas 75093
Federal Tax Identification No. 41-1237652
Federal Tax Identification No. 41-1237652
- ------------------------------------------------------------ -----------------------------------------------------
Name, address and employer Name, address and employer
identification number of Debtor: identification number of Debtor:
The Leather Factory, Inc., an Arizona Roberts, Cushman & Company, Inc.
corporation c/o The Leather Factory, Inc.
3825 E. Loop 820 South 3825 E. Loop 820 South
P.O. Box 50429 P.O. Box 50429
Ft. Worth, Texas 76105 Ft. Worth, Texas 76105
Employer Identification No. 86-0540648 Employer Identification No. 13-2682601
Name, address and employer Name, address and employer
identification number of Secured Party: identification number of Secured Party:
Wells Fargo Business Credit, Inc. Wells Fargo Business Credit, Inc.
4975 Preston Park Blvd. Suite 280 4975 Preston Park Blvd. Suite 280
Plano, Texas 75093 Plano, Texas 75093
Federal Tax Identification No. 41-1237652 Federal Tax Identification No. 41-1237652
- ------------------------------------------------------------ -----------------------------------------------------
Name, address and employer
identification number of Debtor:
Hi-Line Leather & Manufacturing Company
c/o The Leather Factory, Inc.
3825 E. Loop 820 South
P.O. Box 50429
Ft. Worth, Texas 76105
Employer Identification No. 94-1122115
Name, address and employer
identification number of Secured Party:
Wells Fargo Business Credit, Inc.
4975 Preston Park Blvd. Suite 280
Plano, Texas 75093
Federal Tax Identification No. 41-1237652
- ------------------------------------------------------------ -----------------------------------------------------
-8-
Schedule 5.1 to Credit and Security
Agreement
Trade Names, Chief Executive Office, Principal Place of Business, and Locations
of Collateral
Trade Names
-----------
The Leather Factory, Inc.
Roberts, Cushman & Company, Inc.
Hi-Line Leather & Manufacturing Company
The Leather Factory
Royal Crown Custom Leathers
Midas Leathercraft Tool Company
Tejas Lace
Midas Metals
Chief Executive Office/Principal Place of Business
--------------------------------------------------
3825 East Loop 820 South
Fort Worth, Texas 76119
Other Inventory and Equipment Locations
---------------------------------------
(See Exhibit D)
Schedule 5.2 to Credit and Security
Agreement
Capital Stock
-------------
- -------------------------- -------------------- --------------------
Type/Class/Series of Stock Number of authorized Number of issued and
shares outstanding share
- -------------------------- -------------------- --------------------
Common 25,000,000 9,853,161
- -------------------------- -------------------- --------------------
Preferred 20,000,000 None
- -------------------------- -------------------- --------------------
Describe any outstanding subscriptions, options, warrants, calls, contracts,
demands, commitments, or convertible securities.
Mr. Thompson entered into a Pledge and Security Agreement with the
Schlinger Foundation, where by he pledged 2,666,666 shares of the
Common Stock to partially secure the obligation of the Company to the
subordinated debenture holder. In the event of a default under this
agreement, there could be a change in the control of these shares.
The shares beneficially owned by Mr. Morgan and Ms. Morgan are held as
community property.
The Schlinger Foundation, of which Evert J. Schlinger is President and
sole Trustee, has the right to acquire beneficial ownership of 690,608
shares by converting up to 50% of the $1,000,000 subordinated debenture
it holds into common stock at $0.724 per share. Evert J. Schlinger also
holds an option to acquire 200,000 shares at approximately $.44 per
share pursuant to a consulting agreement with the company. In May 1998
Mr. Schlinger exercised an option to acquire 100,000 shares which were
concurrently donated to the Foundation. Both the Foundation and Mr.
Schlinger disclaim ownership of the share or options owned by the
other.
The Trustee of the Employee's Stock Ownership Plan & Trust ("ESOP")
votes the shares held by ESOP which are allocated to participant
accounts, as directed by the participants or beneficiaries of the ESOP
and, except in certain limited circumstances, may acquire and dispose
of the assets of the ESOP only as the ESOP Committee of the ESOP
directs. The ESOP Committee is made up of officers and other employee
participants of the Company and presently consists of Ronald C. Morgan,
Robin L. Morgan, Shannon Greene and Coy Kindsfather. As members of this
Committee, such persons may b deemed to share investment power with
respect to the allocated shares held by the ESOP. Each of the members
of the ESOP Committee disclaims any beneficial ownership of the
securities held by the ESOP except for those that have been allocated
to such member as a participant in the ESOP. The total number of shares
held by the ESOP includes 244,665 shares which are beneficially owned
by Directors and the above-names Executive Officers and are reflected
in the table as being owned by such persons.
Stock Option Plans
The Company has outstanding options to purchase its common stock under
the 1995 Stock Option Plan for officers and key management employees
and The 1995 Director Non-qualified Stock Option Plan for non-employee
directors. The plan for employees provides for the granting or either
qualified incentive stock options or non-qualified options at the
discretion of the Compensation Committee of the Board of Directors.
Options are granted at the fair market value of the underlying common
stock at the date of grant. Employee options vest over a five-year
period while the director options vest after six months. All options
expire ten years from the date of grant and are exercisable at any time
after vesting. The Company has reserved 1,100,000 shares of common
stock for issuance under these plans, and at December 31, 1998, 1997
and 1996, there were 557,000; 534,000; and 590,000: respectively, in
un-optioned shares available for future grants.
A summary of the Company's stock option activity and related
information for the years ended December 31, 1998, 1997 and 1996, is as
follows:
1998 1997 1996
---- ---- -----
Weighted Weighted Weighted
Average Average Average
Option Exercise Option Exercise Option Exercise
Shares Price Shares Price Shares Price
--------- -------- --------- -------- -------- --------
Outstanding at January 1 586,000 $ 0.874 510,000 $ 2.653 585,000 $ 3.063
Granted 108,000 0.500 455,000 0.805 106,000 1.086
Forfeited (131,000) 1,047 (181,000) 3.063
Exchanged* (400,000) 3.063
Exercised (400,000) 3.063
Outstanding at December 31 543,000 $ 0.758 566,000 $ 0.874 510,000 $ 2,653
Exercisable at end of year 255,000 0.838 190,000 $ 0.905 84,000 $ 3,063
Weighted-average fair $ 0.31 $ 0.31 $ 0.52
value of options
granted during year
-11-
*In 1997 , options originally granted in 1995 were canceled and reissued. This
action was taken to provide incentive to and in order to retain the Company's
key management personnel in light of the severe decline in the market price for
the Company's common stock.
The following table segregates outstanding options into groups based upon
exercise price ranges.
Outstanding Exercisable
----------- -----------
Weighted Weighted Weighted Weighted
Average Average Average Average
Option Exercise Maturity Option Exercise Maturity
Shares Price (Years) Shares Price (Years)
--------- -------- --------- -------- -------- --------
Exercise
Price Range 137,000 $ 0.542 9.05 9,000 $ 0.715 8.74
$0.75 or Less
More than 400,000 0.813 6.74 240,000 0.813 6.74
$0.75 & Less
Than $1.00 6,000 2.021 7.41 6,000 2,021 7.41
More than --------- -------- --------- -------- -------- --------
$1.00 543,000 $ 0.758 7.33 255,000 $ 0.838 6.83
========= ======== ========= ======== ======== ========
-12-
Warrants
In connection with the issuance of the Subordinated Debenture discussed
above, the Company issued warrants to acquire up to 100,000 shares of
Common Stock at $.54 per share to an unrelated individual. The warrants
may be exercised at anytime until expiration on November 21, 2002. The
fair value for these warrants was estimated at the date of grant using
the Black Scholes option pricing model with the following
weighted-average assumptions: risk-free interest rate of 6.5%; dividend
yield of 0%: volatility factor of .550; and an expected life of 3
years.
Warrants to acquire up to 200,000 shares of common stock at
approximately $0.44 per share were issued to an unrelated individual in
August 1998. The warrants may be exercised at anytime until expiration
on August 3, 2003. The fair value for these warrants was estimated at
the date of grant using the Black Scholes option pricing model with the
following weighted-average assumptions: risk-free interest rate of
5.0%; dividend yield of 0%; volatility factor of .645; and an expected
life of 3 years.
-13-
Organizational Chart
--------------------
-------------------------
The Leather Factory, Inc.
(Delaware)
-------------------------
------------------------------------------------------------------------
- ------------------------- ------------------ --------------------- ----------------------
The Leather Factory, Inc. Roberts, Cushman & Hi-Line Leather & The Leather Factory of
(Texas) Company, Inc. Manufacturing Company Canada, Ltd.
(New York) (California) (Canada)
- ------------------------- ------------------ --------------------- ----------------------
- -------------------------
The Leather Factory, Inc
(Arizonia)
- -------------------------
Schedule 5.5 to Credit and Security
Agreement
Subsidiaries
------------
The Leather Factory of Canada Ltd.
Schedule 7.1 to Credit and Security
Agreement
Permitted Liens
---------------
Creditor Collateral Jurisdiction Filing Date Filing No.
-------- ---------- ------------ ----------- ----------
NONE
Schedule 7.2 to Credit and Security
Agreement
Permitted Indebtedness and Guaranties
-------------------------------------
Indebtedness
------------
Creditor Principal Maturity Monthly Collateral
-------- Amount Date Payment ----------
--------- ----------- --------
AC Financial Corp. $65,150 August 2002 $2,599 Computer Equipment
IBM Corporation $80,560 January 2002 $3,453 Computer Equipment
Newcourt Financial $78,050 January 2002 $3,022 Computer Equipment
Guaranties
Primary Obligor Amount and Description of Beneficiary of Guaranty
--------------- Obligation Guaranteed -----------------------
-------------------------
NONE
Schedule 7.4 to Credit and Security
Agreement
Existing Loans to Officers and Employees
----------------------------------------
See Attached
Schedule 7.4 to Credit and Security Agreement
Existing Loans to Offiers and Empoyees
--------------------------------------
Mark Angus $ 56,203.35
Dave Ferrill $ 2,919.26
Anthony Morton $ 6,788.33
Greg Sartor $ 45,912.56
Kim West $ 42,312.23
Total $154,135.73