U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-14189
CELTIC INVESTMENT, INC.
(Name of Small Business Issuer as specified in its charter)
Illinois 36-3729989
------------------------------- --------------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization identification No.)
17W220 22nd St., Suite 420
Oakbrook Terrace, Il 60181
(Address of principal executive offices)
Issuer's telephone number, including area code: (630) 993-9010
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act: $.001
Par Value Common Stock
Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes x/ No
.
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of Issuer's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.
The Issuer's revenues for the fiscal year ended June 30, 1998 were
$3,731,000.
As of September 8, 1998, 3,924,971 shares of the Issuer's common stock were
issued and outstanding of which 2,312,087 were held by non-affiliates. As of
September 8, 1998, the aggregate market value shares held by non-affiliates
(based upon the closing price reported by the NASDAQ Small Cap Market of
$1.9375) was approximately $7,604,631.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
1
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
Celtic Investment, Inc. ("the Company") is a diversified financial
services holding company. The Company has two wholly-owned subsidiary operating
companies, (1) U.S. Commercial Funding Corp. (USCF), and (2) Salt Lake Mortgage
Corp. (SLM). USCF is in the business of purchasing accounts receivable from
small to medium sized businesses. The purchase of accounts receivable is
commonly referred to as "factoring". USCF's purchase of accounts receivable have
historically been true purchases of assets and not loan transactions. SLM is a
mortgage broker with operations in Utah, California and Nevada. SLM originates
residential mortgage loans for clients seeking home ownership, "rate-terms"
refinances, cash-out refinancing, and second mortgages. These subsidiaries have
their own respective Board of Directors and management teams. Although the
subsidiaries operate independently from one another, the Company requires that
each subsidiary adopt a month by month operating plan for each fiscal year. The
Company oversees each operation and monitors the respective monthly results. Any
major cost or changes in business direction of the subsidiaries operation is
approved in advance by the Company's Board of Directors.
The Company's mission statement is two fold. First, to improve and expand
the existing business subsidiaries' operations. Second, attempt to expand the
Company through merger and/or acquisitions that meet the Company's criteria.
There can be no assurance that the company will be successful in acquiring any
future businesses.
History of the Company
The Company, was formed under the laws of the State of Delaware on March
22, 1989, for the purpose of investing in any and all types of assets,
properties, and businesses. In June 1992, the Company completed an initial
public offering of Units of its Securities consisting of shares of common stock
and warrants to purchase common stock. From June 1992 to June 1994, the
Company's activities were limited to searching for suitable acquisitions and
investments.
In July 1994, the Company acquired US Commercial Funding Corporation, a
Florida corporation (USCF - Florida) which had been formed in April 1994 to
engage in the factoring business. In connection with the acquisition of USCF,
the Company effected a 1-for 20 reverse stock split reducing the number of
shares issued and outstanding from 9,000,000 to 450,000 and reducing the number
of outstanding warrants and increasing the warrant exercise price respectively.
In connection with the acquisition of USCF-Florida, the Company issued 1,550,775
post split shares to the USCF-Florida shareholders in exchange for their shares
of USCF-Florida and converted options to purchase shares of USCF-Florida into
options to purchase 2,516,668 shares of the Company's common stock.
2
<PAGE>
The Company commenced operations in the factoring business in July 1994
when it acquired USCF-Florida. Prior to the time USCF-Florida was acquired by
the Company , its activities were limited to developing a business plan and
raising $1,000,000 from the sale of securities. USCF- Florida's first full
quarter of operation as a factoring company was the quarter ending December 31,
1994. In February 1995, the Company raised an additional $3,000,000 in gross
proceeds from the sale of securities. In March 1995, the Company formed another
subsidiary corporation under the laws of the State of Illinois under the name
U.S. Commercial Funding Corporation ("USCF"), in anticipation of its plan to
purchase receivable on a recourse basis as opposed to the nonrecourse purchases
made by USCF- Florida, and in anticipation of the relocation of the company
operations to Illinois.
On January 31, 1997 the Company finalized a merger with Salt Lake Mortgage
Corp. (SLM), a Salt Lake City based mortgage broker, and a real estate marketing
company, Advantage Realty, Inc. (ADR). The merger was a stock for stock
transaction. The Company issued 1,100,000 shares of its stock for the shares of
SLM. Five Hundred Thousand of such shares are held in escrow. The release of
such shares are based on a formula of future SLM/ADR pre-tax earnings. On
September 1, 1998 250,000 of such shares were canceled.
SLM was founded in 1993. SLM specializes primarily in conforming agency
and government loan products, such as FHA/VA. SLM has changed its strategy
shifting a significant portion of its originations from refinance to purchase
loans. In addition, the company is beginning to originate more non -conforming
loans including B and C credit mortgages.
ADR was founded in 1993. ADR is a real estate brokerage operation which
lists real estate properties for sale.
On February 22, 1998, the Company reincorporated in the State of Illinois.
As of June 30, 1998, the Company closed the ADR operations due to lack of
profitability.
On May 24, 1998, the Company entered into a non-binding Letter of Intent
to acqiure Goodman Factors, Inc., a Dallas, Texas based asset based lender. On
September 21, 1998, the acquisition of Goodman Factors, Inc. was finalized.
USCF
General
USCF provides working capital financing for its clients by purchasing
their accounts receivable (sometimes hereafter referred to as "invoices")
generally at face value less a factors fee. USCF provides financing to its
clients based principally on the financial condition of the client's account
debtors (which may be better than that of the client), rather than the financial
condition of the client itself. This allows USCF's clients to maintain regular
and predictable cash flow from
3
<PAGE>
receivable without (or as a supplement to) conventional borrowing. The sale by
the client of its accounts receivable to USCF may be accounted for by the client
as a true sale event, so that the client's balance sheet reflects less leverage
than it would if the client financed its receivable with a traditional secured
loan.
A client's receivable typically permits assignment to USCF without notice
to or the consent of the account debtors. In addition, in most instances, USCF
and its client notify the account debtor that the invoice has been assigned to
USCF and instructs the account debtor to make all payments on the invoice to the
USCF's Bank lockbox. The Company perfects its ownership in the accounts
receivable by making the appropriate filing under the applicable state Uniform
Commercial Codes.
Most of the accounts receivable purchased by USCF are short term invoices
that have payment terms within thirty days or less from the invoice date. USCF
typically purchases accounts receivable from its clients at face value less a
factors fee. USCF will typically advance 60% to 80% of the face value of the
account receivable to its customer depending upon the size, age, type of
accounts being purchased, the quality of client documentation, USCF's judgment
as to the payment history, and the credit worthiness of the account debtors. In
a continuing relationship with its client USCF will generally maintain a portion
of the payment in a reserve account which may be used to fund a credit reserve
to offset defaults of other invoices sold by the client to USCF. The factors fee
varies but are generally negotiated on a individual client basis on the face
value of the receivable. USCF supplies a client with information as to the
credit worthiness of and potential payment problems with its account debtors.
USCF also provides the client with a monthly portfolio analysis which includes
an aging schedule of all open accounts receivable, by account debtor.
Business to Date
The Company acquired USCF- Florida on July 22,1994. As of June 30, 1995,
USCF-Florida had been in business for less than one year. During this period,
USCF hired a staff, opened an office, developed marketing plans, developed
accounts receivable analysis and servicing procedures, raised capital, and
commenced marketing. From July 22, 1994 to June 30, 1995, the Company had
factored $5,244,019 in invoices purchased. Most of the invoices purchased were
payable by the debtor within 30 days of receipt by the debtor of the invoice.
The Company's total revenues from factoring invoices from July 1, 1994 to June
30, 1995 was $418,270. Most of these revenues were earned after December 31,
1995. The Company's loss during the fiscal year ending June 30, 1995 totaled
$1,135,827 which is directly attributed to the startup expenses of operation and
lack of initial factoring volume.
In the fiscal year ending June 30, 1996, USCF relocated the company to
Illinois, liquidated the Florida portfolio of non-recourse factored invoices,
obtained a rediscount line of credit, and improved profitability by both
increasing the volume of factored invoices and reducing costs. USCF successfully
achieved all of these objectives as factored invoice volume increased sharply to
$22,261,965, which generated factored revenue of $1,141,802 and reduced the net
loss to $170,002.
4
<PAGE>
USCF purchases invoices from clients involved in various industries. For
the year ending June 30, 1998, USCF purchased invoices totaling $69,877,282, a
82% increase over the year ending June 30, 1997. In addition, USCF diversified
the overall mixture of the receivable portfolio which improved client
concentration issues. The following table indicates the amount of invoices
purchased by USCF for the year ended June 30, 1998 as compared to the year ended
June 30, 1997 on a industry basis:
Factored
Invoices Purchased
For the year ended June
Business of Client 1997 1998
- ------------------ ---- ----
Audio Text $ 902,286 $ 18,705,475
Professional Services 4,358,272 5,464,448
Service Related 4,058,059 8,001,027
Custom Manufacturing 16,565,620 28,894,246
Temporary Help 4,753,416 4,636,149
Distribution/Trucking 6,799,010 4,175,906
Waste Disposal 939,097 -0-
----------- -------------
TOTAL $38,375,760 $69,877,282
=========== ==============
During the year ended June 30, 1998 the Company purchased invoices from
approximately 68 different clients. During this period 8% of all of the face
value of invoices purchased were from a single active client, Primary Resourses,
and 17% were from the Company's largest five clients. During the year ended June
30, 1998 one client totaled more than 20% of the purchased accounts receivable
and 12% of gross revenue. This client has terminated its relationship with USCF
in May 1998. The Company's clients are located in various states including
California, Arkansas, Florida, Illinois, and New York.
On September 21, 1998, USCF finalized the acquisition of Goodman Factors,
Inc. (GF). GF is a twenty-six year old commercial finance company located in
Dallas, Texas. GF specializes in the purchase of client's accounts receivable
and other asset based financial services. The total financing for the
acquisition and repayment of certain liabilities was in excess of $21,000,000.
USCF's rediscount line of credit was increased to $23,000,000 to provide growth
capital for the combined entities.
Competition
USCF encounters significant competition in purchasing accounts receivable,
from factoring companies, commercial banks, and other financial institutions
engaged in secured lending. Additionally, the Company's client's will likely
seek alternate sources of financing from many different sources, including
finance companies, investment partnerships and entities, small business
5
<PAGE>
investment companies, suppliers and individuals. As a result, USCF competes with
a large number of local and regional sources of financing, and a smaller number
of large national competitors. Many of USCF's competitors have significantly
greater financial and other resources than the Company and access to capital
markets at a lower cost than the Company. The Company believes that the
principal competitive factors in its business are price, flexibility and
service. There can be no assurance that the Company will be able to effectively
compete in the market place.
Governmental Regulation
Usury laws generally limit the amount of interest that a creditor may
contract for, charge or receive in connection with a loan of money. The Company
believes that its purchases of accounts receivable should not be subject to the
usury laws because the purchases do not constitute loans of money. The Company's
position is based upon the following: (i) the intention of the parties as
expressed in the documents evidencing the purchases; (ii) the absence of a
clients right to repurchase or redeem the purchased accounts receivable at face
value; (iii) the arms-length nature of the purchases and of the negotiations
resulting in a purchase price; (iv) the control that the Company has over the
collection and administration of the purchased accounts receivable; and (v) the
accounting treatment of the transactions as purchases. If, despite these facts,
a court or jury were to conclude that the Company's purchases of accounts
receivable should be re-characterized as loans of money, the fees contracted
for, charged and received by the Company in connection with the purchases could
be viewed as interest. To the extent that the rate of interest contracted for,
charged or received by the Company exceeds the usury ceiling, the Company could
be subject to usury penalties under applicable law.
SLM AND ADR
General
SLM is a mortgage broker operating in Utah, California and Nevada. SLM
originates residential mortgage loans for clients seeking home ownership,
"rate-term" refinances, "cash-out" refinances, and second mortgages. SLM
originates these mortgages through real estate industry referrals, relationships
with builders, and direct customer solicitations. SLM uses a sales force
comprised of loan officers. The loan officers develop sales leads by
implementing various advertising/marketing campaigns. These campaigns utilize
radio, direct mail, telemarketing, and other mediums in an attempt to initiate
contact with potential customers in need of residential mortgage loan products.
SLM has historically focused on the "Prime" mortgage market which is
dominated by Fannie Mae, Freddie Mac, and Government loans including traditional
VA and FHA.
Once a mortgage application is originated, SLM processes the application
in accordance with the guidelines which have been established for the different
types of loan products it offers. The majority of SLM loan products are
currently conventional, or government loans and are therefore, processed in
accordance with Fannie Mae, Freddie Mac, VA, or FHA guidelines. The
6
<PAGE>
underwritten application is submitted to the wholesale mortgage lender
which SLM has been awarded delegated underwriting authority. "Non-conforming" or
"Sub-Prime" products are forwarded to the respective lenders who will make the
underwriting decision. An approved loan is generally closed at a Title Company.
A majority of SLM loans are funded using "Table Funding" where the lender funds
directly to the Title Company who then makes the required disbursements. In the
event SLM does fund directly, its is reimbursed within several days by the final
investor after review of the closing documents.
ADR is a real estate brokerage firm and is a wholly owned subsidiary of
SLM. All operations of ADR have been discontinued.
Competition
SLM's competition in the mortgage industry is significant. There are many
mortgage brokers who have created a competitive environment. Other financial
institutions also compete on several levels of residential lending as well.
Pricing is a key issue for the consumer as well as the mortgage brokers. While
mortgage loans are themselves a commodity, the personalized service provided by
the mortgage broker creates a value added feature that differentiates mortgage
companies. SLM believe's it offers clients more personalized services that , in
fact, set them apart from the competition.
Government Regulation
Although SLM is not directly supervised by any specific local, state , or
federal government agency it must adhere to certain laws, and regulations
pertaining to the mortgage industry. The Real Estate Settlement and Procedures
Act (RESPA) has been established to guarantee borrowers receive adequate
disclosure upon initial loan application, and dictates certain procedures which
must be followed at closing, specifically the disclosure of all fees charged in
conjunction with the loan. In addition SLM must comply with the guidelines
established by the Department of Housing and Urban Development (HUD) pertaining
to a Non-supervised lender. ADR must adhere to the laws and regulations of the
Real Estate Division of the Department of Commerce of the State of Utah. There
are annual reporting documents which must be filed with the Real Estate Division
to ensure compliance with Utah law. ADR has discontinued operations and as such,
is not currently licensed to engage in real estate brokerage activities.
7
<PAGE>
OTHER BUSINESS OPERATIONS
The Company, USCF, and SLM have made several attempts to expand in the
financial services industry through the acquisition of other operating companies
or through starting operations internally. The Company's subsidiary-USCF
recently completed the acquisition of another commercial finance entity, Goodman
Factors, Inc. The Company is evaluating other potential acquisitions; however,
there can be no assurance that the Company will able to acquire these or any
other opportunities.
Employees
The Company and its subsidiaries currently have 17 full time employees. As
the Company's business grows, it will hire such additional employees as may be
reasonably necessary to conduct its business.
ITEM 2. PROPERTIES
The Company and its subsidiaries lease several office facilities which are
described below:
The Company leases approximately 500 square feet of space at 330 E. Main
St., Barrington, Illinois 60010. The lease is $250 per month, and expires in
December 1998.
USCF currently leases office facilities at 17W220 22nd St., Suite 420,
Oakbrook Terrace, Illinois 60181. The lease expires in November, 1999. These
facilities currently consist of approximately 2,500 square feet and requires a
monthly rent of approximately $4,800.
SLM currently leases office facilities at 102 West 500 South, Suite 300,
Salt Lake City, Utah 84101. These facilities consists of approximately 5400
square feet and requires a monthly rent of approximately $5,800. This lease
expires in April, 2001. SLM also leases office facilities at 340 Main Street,
Suite 202, Park City, Utah 84060. These facilities consist of approximately 1000
square feet, and a monthly rent of $1,148 that expires in December, 1999. SLM
leases approximately 500 square feet of office space at 7966 Arjohn Drive, Suite
A-204, San Diego, CA for $350 per month on a month-to month basis.
ITEM 3. LEGAL PROCEEDINGS
In August 1998, Roger Davis, a former employee of a subsidiary of the
Company, filed a law suit against the Company, Salt Lake Mortgage and Reese
Howell in The Third Judicial District Court of the State of Utah. Mr. Davis's
complaint alleges breach of contract, wrongful discharge, constructive fraud,
fraudulent concealment, slander, civil conspiracy and other claims against some
or all of the defendants. The Complaint seeks damages according to proof at
trial, including consequential damages and punitive damages. The Complaint also
seeks a rescission of the merger between the Company and Salt Lake Mortgage. The
defendants have filed an Answer to the Complaint which essentially denies any
wrong doing. The Company and Salt Lake Mortgage have
8
<PAGE>
also filed a counter claim against Mr. Davis for breach of contract, violation
of fiduciary duty, fraud and for other claims. The Company seeks damages as
proved at trial. The Company is unable to predict the outcome of the litigation;
however, the Company believes that it has good faith defenses and claims in
connection with such litigation.
USCF is involved in various legal proceedings arising out of the normal
course of business, which they are the plaintiff. None of the legal proceedings
which USCF is currently involved with is expected to have an adverse material
effect on USCF business or its financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the Companies' shareholders during the last
quarter of the fiscal year ended June 30, 1998.
ITEM 5. MARKET FOR THE REGISTRANTS COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS
Since May 20, 1996 the Company's common stock has traded on the NASDAQ
Small Cap market listing under the "CELT" symbol. The information with regard to
NASDAQ Small Cap quotes contained in the following table was obtained from the
NASDAQ and shows the range of representative bid prices for the Company's common
stock for the periods indicated. The prices represent quotations between dealers
and do not include retail mark ups and mark-downs or broker commissions and do
not necessarily represent actual transactions:
Fiscal 1998 Fiscal 1997
High Low High Low
First Quarter $1.375 $1.00 $3.50 $2.25
Second Quarter $2.00 $1.00 $2.50 $1.875
Third Quarter $1.25 $.875 $1.906 $1.875
Fourth Quarter $2.50 $1.00 $1.875 $1.00
Holders
The number of record holders of the Company's common stock as of September
1, 1998 was 161. The Company estimates that the number of beneficial owners of
its common stock is more than 450.
Dividends
The Company has not paid any cash dividends to date and does not
anticipate or contemplate paying dividends in the foreseeable future. It is the
present intention of management to utilize all available funds for the
development of the Company's business.
9
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
The Company is a diversified financial services company engaged in the
business of purchasing accounts receivable ("factoring") and originating
residential mortgages. USCF, the Company's factoring subsidiary, commenced
operations in July, 1994. SLM, the Company's residential mortgage loan
originator, and ADR, a real estate brokerage operation, were acquired by the
Company in January 1997 in a merger transaction.
Results of Operations
The following discussion and analysis in the table below presents the
significant changes in financial conditions and results of continuing operations
of the Company and is catagorized by the Company's subsidiaries for the years
ended June 30, 1998 and 1997. For the period ending June 30, 1997, the results
of operations of SLM and ADR are included in the consolidated financial
statement from the date of acquisition only. As a result, the discussion below
of SLM and ADR results of operations do not make a comparison between Fiscal
Year 1997 and Fiscal Year ending 1998. This discussion should be read in
conjunction with the consolidated financial statement and notes thereto (in
thousand).
Twelve Months Ended
June 30 Ended
Revenues 1998 1997
--------------------------------
USCF 2,181 1,523
SLM 1,550 232
--------- ---------
Total Revenue 3,731 1,755
Operating Expense
Interest 566 258
USCF 1,336 1,072
SLM 1,465 342
Corporate (Celtic) 241 121
---------- ----------
Total Operating Expense 3,608 1,793
Operating Profit (Loss) before Income
Taxes
USCF 318 221
SLM 46 -138
Corporate (Celtic) -241 -121
Operating Profit (Loss) before income 123 -38
taxes
Income Tax (credit) -394 -20
(Loss) Income from Operations of
Discontinued Segment less applicable
income tax effect -76 30
Net Income 441 12
Revenues
USCF revenues increased by $658,000 in Fiscal Year 1998, a 43% increase
from Fiscal Year June 30, 1997. For the quarter ended June 30, 1998 revenues
totaled $527,000 versus $509,000 for the quarter ended June 1997. The major
reason for the fiscal year increase is the total volume of purchased accounts
receivable increased from $38,375,760 to $69,877,282, a 82% increase. The
disproportional ratio of total revenue increase of 43% compared to the total
accounts receivable volume increase of 82% results from overall lower factor
fees earned. The lower fees earned is a result of a more competitive general
market.
SLM earned revenues of $1,550,000 for the year ended June 30, 1998. For
the quarter ended June 30, 1998 revenues totaled $435,000 versus the comparable
quarter ended of June 30, 1997 of $64,000. Management changes as well as a more
favorable economic environment due to continued low interest rates have
increased the volume of home sales and refinances which has positively impacted
SLM revenue.
ADR earned revenue of $189,000 for the year ended June 30, 1998. As of
June 30, 1998, operations were terminated due to lack of profitability.
Operating Expense
Interest expense totaled $566,000 for the year ending June 30, 1998 versus
$258,000 for the year ending June 30, 1997. For the year ending June 30, 1998
the Line of Credit was used to finance the significant growth in accounts
receivable purchases which resulted in the increase in interest expense.
USCF operating expense, not including interest, for the year ending June
30, 1998 totaled $1,336,000 or an increase of $264,000 or 25% from the year
ending June 30, 1997. For the quarter ended June 30, 1998 operating expenses
totaled $343,000 versus the comparable quarter ended June 30, 1997 of $280,000.
The reason for this increase in operating expenses in the comparable twelve
month periods ending June 30, 1998 and June 30, 1997 are the result of the
increased growth of 82% in purchased accounts receivable by USCF.
SLM operating expenses were $1,465,000 for the year ending June 30, 1998.
This expense total includes: Salaries and employee benefits - $388,000,
Occupancy - $124,000, and direct loan expense including origination commissions
amounted to $345,000.
ADR operating expenses were $308,000 for the year ending June 30, 1998.
The Company's corporate expense increased from $241,000 for the year ending
June 30, 1998 or an increase of $120,000 from the year ending June 30, 1997.
Professional fees totaled $155,000 for the year ending June 30, 1998 an increase
of $80,000 from the year ending June 30, 1997.
10
<PAGE>
At June 30, 1998, the Company did not provide for a valuation allowance on
its deferred tax assets. The valuation allowance of $516,200 was provided for at
June 30, 1997. This has resulted in a large increase in June 30, 1998 income tax
credits and net income. The Company did not provide for a valuation allowance as
it has generated taxable income for the past two years. The Company expects this
trend to continue with its recent acquisition of Goodman Factors, Inc. Based on
past profitability, expected continued profitability, and the acquisition of
Goodman Factors, Inc., management expects to realize the benefits of its
deferred tax assets.
Operating Profit (Loss)
USCF had an operating profit of $318,000 for the year ending June 30, 1998
compared to a operating profit of $221,000 for the year ending June 30,1997.
This profit increase of $97,000 is the result of a strong increase in volume of
factored purchased accounts receivable and continued expense control.
SLM had an operating profit of $46,000 for the year ending June 30, 1998
compared to the operating loss of $138,000 for the five month period ending June
30, 1997. Senior management changes have had a positive effective on revenue
generation coupled with a better economic climate related to lower mortgage
interest rates which account for the increased profitability.
The consolidated net income for the year ending June 30,1998 totaled
$441,000. This is an increase of $429,000 from the year ending June 30, 1997.
This profitability increase is largely a direct result of the removal of the
valuation allowance on the Company's deferred tax assets. The continued increase
in profitability of USCF and the turn around of SLM were offset by the loss of
the closed operations of ADR and increased corporate expense of the company.
Recent Developments
On September 21, 1998, the corporation completed the purchase of 100% of
the common stock of Goodman Factors, Inc. for approximately $21,500,000 in cash,
notes, and assumption of liabilities. The Company funded the transaction by
borrowing $4,500,000 in term debt, issuing $3,750,000 in notes payable to former
Goodman stockholders, using $1,750,000 proceeds from the sale of preferred stock
and the assumption of $11,500,000 in liabilities of Goodman. Goodman had total
assets of $14,580,000 and purchased invoices of approximately $120,000,000
during the year ended June 30, 1998. The acquisition will be recorded under the
purchase method of accounting.
In July, 1998, the Company began offering 100,000 shares of 9% Cumulative,
Redeemable Series A Preferred Stock. Holders of the preferred shares will be
entitled to receive cumulative preferential cash contributions at the annual
rate of 9% of the liquidation preference of $100.00 per
11
<PAGE>
preferred share, accruing from the date of original issuance and payable
quarterly in arrears on the last day of each calendar quarter of each year,
commencing September 30, 1998.
The preferred shares are redeemable at the option of the Company, in whole
or in part, from time to time, after June 30, 1999, at $100.00 per preferred
share, plus any accumulated and unpaid dividends thereon. However, redemption is
not permitted unless the Company's common stock is trading at $3.00 per share or
greater. The preferred shares are, at the option of the holder of the shares,
convertible into shares of the Company's common stock at $3.00 per share subject
to certain adjustments.
In the event of the dissolution of the Company, the holders of preferred
shares will be entitled to a liquidation preference for each preferred share of
$100.00, plus any accumulated and unpaid dividends thereon to the date of
payment, subject to certain limitations. The Company has received net cash
proceeds after offering expenses of $1,750,000 and issued 19,000 preferred
shares through September 21, 1998.
Liquidity and Capital Resources
The Company's capital requirements will most likely increase as the
Company's mission statement is achieved. The requirement may include additional
resources to increase volume of purchased receivable, expansion of the mortgage
brokerage operation, and financing any acquisition/merger activity. Inasmuch as
the Company's operations in the past were limited to USCF operations, the
existing equity capital and line of credit was sufficient. However, in order to
expand USCF's ability to purchase receivable on a meaningful basis and implement
the Company's overall plan, the Company will need to access additional equity
and debt capital.
USCF entered into a rediscount line of credit agreement with Capital
Business Credit, a division of Capital Factors Inc. of Los Angeles, California.
In December, 1997 the line of credit was successfully re-negotiated with
significant improvement in terms. Specifically, the line of credit was increased
from $6,000,000 to $15,000,000. The Company is a guarantor of this agreement and
has agreed to subordinate certain interests with regard to the agreement. In
August, 1998, USCF successfully renegotiated the line of credit to provide a
maximum of $23,000,000 to purchase client's accounts receivable for the combined
entities of USCF and Goodman Factors, Inc.
At June 30, 1998, the Company had total assets of $9,605,396 and total
liabilities of $5,460,915. This compares to the total assets of $7,911,086 and
total liabilities of $4,208,177 at June 30, 1997. The increase in net assets and
liabilities is the direct result of the use of the line of credit and the
increased level of factoring business activity. Cash at June 30, 1998 totaled
$905,093 compared to $941,789 at June 30, 1997. The Company used this cash to
fund additional receivable purchases, and fund it's ongoing operations. The
Company intends to continue to purchase accounts receivable through existing
cash and through the use of the line of credit as well as expand its mortgage
origination operation.
12
<PAGE>
The Company anticipates that its monthly general and administrative costs,
exclusive of depreciation and marketing expenses, commissions and professional
fees, will be approximately $110,000 for each of the next six months based on
current operations. However, if operations increase, the Company may be required
to increase its staff which will increase its monthly general and administrative
expenses. The Company anticipates that existing working capital and the line of
credit may not be adequate to fund its projected factoring volume during the
next six months.
The company is reviewing several alternatives with a number of financial
institutions that may provide the capital requirements for the next several
years.
Inflation
In the opinion of management, inflation has not had a material effect on
the operations of the Company. Given current inflationary trends, the Company
does not believe inflation will have any future adverse effect.
Year 2000
The year 2000 ("Y2K") issue is the result of computer programs using a
two-digit format, as opposed to four digits, to indicate the year. Such computer
systems will be unable to interpret dates beyond 1999, which could cause a
system failure or other computer errors, leading to disruptions in operations.
In 1997, the Company developed a three-phase program for Y2K information systems
compliance. Phase I is to identify those systems with which the Company has
exposure to Y2K issues. Phase II is the development and implementation of action
plans to be Y2K compliant in all areas by January 1999. Phase III to be
completed by Mid-1999, is the final testing of each major area of exposure to
ensure compliance. The Company has identified the major areas determined to be
critical for successful Y2K compliance. (1) financial and informational system
applications, and (2) third party relationships.
The Company, in accordance with Phase I of the program conducted an
internal review of all systems and contacted all software suppliers to determine
major areas of exposure to Y2K issues. In the financial and information system
area, a number of applications have been identified as being Y2K compliant due
to their recent implementation. The Company's core financial and reporting
systems are Y2K compliant. In the third-party area, the Company has communicated
with the primary vendors and has determined that all are making significant
progress toward their Y2K compliance.
Although the Company expects all of its systems to be Year 2000 compliant
by January 31, 1999, there can be no assurance that all business software
providers will be functional by January 31, 1999. The Company's cost to comply
with Year 2000 initiative is not expected to be significant.
13
<PAGE>
Forward-looking Statements
The foregoing discussion in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contains forward-looking
statements, within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act, which reflect Management's current
views with respect to future events and financial performance. Such forward
looking statements may be deemed to include, among other things, statements
relating to anticipated growth, and increased profitability, as well as to
statements relating to the Company's strategic plan, including plans to develop
and increase loan originations and to selectively acquire other companies. These
forward-looking statements are subject to certain risks and uncertainties,
including, but not limited to, future financial performance and future events,
competitive pricing for services, costs of obtaining capital as well as
national, regional and local economic conditions. Actual results could differ
materially from those addressed in the forward looking statements. Due to such
uncertainties and risks, readers are cautioned not to place undue reliance on
such forward-looking statement, which speak only as of the date whereof.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Celtic Investment Financial Statements
Independent Auditor's Report(s) 15
Consolidated Balance Sheet as of
June 30, 1998 and 1997 16
Consolidated Statements of Income 17
For the Years ended June 30, 1998 and 1997
Consolidated Statements of Stockholders' Equity 18
For the years ended June 30, 1998 and 1997
Consolidated Statements of Cash Flows for the 19-20
years ended June 30, 1998 and 1997
Notes to Consolidated Financial Statements 21
14
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
Celtic Investment, Inc.
Oakbrook Terrace, Illinois
We have audited the accompanying consolidated balance sheets of Celtic
Investment, Inc. and subsidiaries as of June 30, 1998 and 1997, and the related
consolidated statements of income, stockholders' equity and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Celtic Investment,
Inc. and subsidiaries as of June 30, 1998 and 1997, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
MCGLADREY & PULLEN, LLP
Chicago, Illinois
August 18, 1998, except for Note 13 as to
which the date is September 21, 1998
15
<PAGE>
ASSETS 1998 1997
- ---------------------------------------------- ----------- -----------
Cash and cash equivalents $ 905,093 $ 941,789
Mortgage loans held for sale - 113,786
Receivables 6,597,960 5,209,907
Notes receivable 245,400 426,037
Construction Loans receivable 553,968 123,441
Prepaid expenses and other assets 109,981 162,564
Deferred taxes 81,000 -
----------------------------
Total current assets 8,493,402 6,977,524
----------------------------
Furniture, fixtures and equipment, net of
accumulated depreciation 1998 $162,126;
1997 $127,912 94,327 145,218
Deferred finance fees, net of accumulated
amortization 1998 $162,434 1997 $90,157 39,397 111,674
Deferred taxes 391,000 -
Goodwill, net of accumulated amortization
in 1998 of $65,733; 1997 $19,333 587,270 676,670
---------------------------
1,111,994 933,562
Total assets $9,605,396 $7,911,086
===========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable $3,619,496 $2,448,060
Due to factoring clients 1,489,063 1,404,072
Current portion of long-term debt 22,906 22,016
Accounts payable and accrued expenses 314,760 293,772
---------------------------
Total current liabilities 5,446,225 4,167,920
---------------------------
Long-Term Debt, less current portion 14,690 40,257
--------------------------
Stockholders' Equity
Common stock, $.001 par value; authorized 25,000,000
shares; issued and outstanding 3,906,471;
Additional paid-in capital 3,906 3,906
Accumulated deficit 5,076,054 5,076,054
(871,767) (1,313,159)
---------------------------
Less notes receivable from stockholders 4,208,193 3,766,801
(63,712) (63,892)
---------------------------
4,144,481 3,702,909
---------------------------
$9,605,396 $7,911,086
===========================
See Notes to Consolidated Financial Statements
16
<PAGE>
CELTIC INVESTMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended June 30, 1998 and 1997
1998 1997
Revenues:
Factoring income $2,129,147 $1,424,363
Mortgage fee income 1,473,196 228,418
Interest 82,886 102,548
Other 45,966 -
--------------------------
Total revenue 3,731,195 1,755,329
Interest expense 565,794 258,781
--------------------------
Revenue after interest expense 3,165,401 1,496,548
Provision for credit losses 136,437 18,460
Revenue after interest expense and
provision for credit losses 3,028,964 1,478,088
--------------------------
Operating Expenses:
Salaries and employee benefits 1,109,853 748,741
Occupancy 206,965 139,434
Servicing costs 174,756 81,217
Commissions and other costs 360,640 66,978
Professional fees 372,268 233,328
Amortization of goodwill 46,400 19,333
Other 635,543 227,549
--------------------------
Total operating expenses 2,906,425 1,516,580
--------------------------
Income (loss) from continuing operations
before income taxes 122,539 (38,492)
Income taxes (credit) (394,963) (20,000)
Income (loss) from continuing
operations 517,502 (18,492)
(Loss income from operations of discontinued
segment, less applicable income tax effect
of 1997($51,000); 1996 $20,000
(76,110) 30,222
Net income
$ 441,392 $ 11,730
===========================
Net income (loss) per share; Basic:
Continuing operations
Discontinued operations $ 0.13 $ (0.01)
Net Income (0.02) (0.01)
-----------------------------
$ .011 $ -
=============================
Dilutive:
Continuing operations
Discontinued operations $ 0.13 $ (0.01)
(0.02) 0.01
-----------------------------
$ .011 $ -
=============================
See Notes to Consolidated Financial Statements
17
<PAGE>
CELTIC INVESTMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
Note
Additional Receivable Total
Common Stock Paid-in Accumulated from Stockholders'
Shares Amount Capital Deficit Stockholders Equity
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1996 3,306,471 $ 3,306 4,232,904 $(1,324,889) (71,276) 2,840,045
Net decrease in notes
receivable from director- - - - - 7,384 7,384
stockholders
Common stock issued in 600,000 600 843,150 - - 843,750
acqusition
Net income - - - 11,730 - 11,730
--------- ---------- ----------- ------------ ----------- -----------
Balance, June 30, 1997 3,906,471 3,906 5,076,054 (1,313,159) (63,892) 3,702,909
Net decrease in notes
receivable from director- - - - - 180 180
stockholders
Net Income - - - 441,392 - 441,392
--------- ---------- ----------- ------------ ----------- -----------
Balance, June 30, 1998 3,906,471 $3,906 $5,076,054 $(871,767) $(63,712) $4,144,481
========= ========== =========== ============ =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
18
<PAGE>
CELTIC INVESTMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
- ---------------------------------------------- ----------------- ---------------
<S> <C> <C>
Cash Flows From Operating Activities
Net Income $ 441,392 $ 11,730
Adjustments to reconcile net income to net cash
(used in) operating activities:
Provision for credit losses 136,437 18,460
Depreciation 49,018 42,241
Amortization of deferred finance fees 72,277 77,277
Amortization of goodwill 46,400 19,333
Deferred taxes (429,000) -
Loss on disposal of furniture, fixtures and equipment 18,095 -
Change in assets and liabilities, net of effects from
purchase of Salt Lake Mortgage Company:
(Increase) in receivables (1,749,563) (1,528,242)
Decrease (increase) in notes receivable (405,710) (356,552)
(Increase) in construction loans receivable (430,527) (123,441)
(Increase) decrease in mortgage loans held for sale 113,786 (113,786)
(Increase) decrease in prepaid expenses and other assets 52,583 (123,737)
(Decrease) increase in accounts payable and accrued 20,988 (116,623)
expenses
Increase in due to factoring clients 84,991 82,243
----------------- ---------------
Net cast (used in) operating activities (1,167,413) (2,111,097)
----------------- ---------------
Cash Flows From Investing Activities
Cash acquired on purchase of Salt Lake Mortgage - 253,905
Corporation
Acquisition costs paid on purchase of Salt Lake - (69,985)
Mortgage Corporation
Purchase of furniture, fixtures and equipment (16,222) (3,690)
Payment received on notes receivable from stockholders 180 7,384
----------------- ---------------
</TABLE>
19
<PAGE>
1998 1997
- ---------------------------------------------- ----------------- ---------------
Net cash provided by (used in) investing
activities (16,042) 187,614
----------------- ---------------
Cash Flows From Financing Activities
Payments on long-term debt (24,677) (3,652)
Payment of deferred finance fees - (30,000)
Net proceeds from notes payable 1,171,436 2,448,060
----------------- ---------------
Net cash provided by financing activities 1,146,759 2,414,408
----------------- ---------------
Net increase (decrease) in cash and cash
equivalents (36,696) 490,925
Cash and cash equivalents:
Beginning 941,789 450,864
----------------- ---------------
Ending $ 905,093 941,789
================= ===============
Supplemental Disclosure of Cash Flow Information
Cash paid for interest $ 565,794 258,781
Supplemental Disclosure of Noncash Financing and
Investing Activities
Accounts receivable transferred to notes
receivable 225,073
Reduction in valuation allowance for purchased net
operating loss carryforwards
recorded as a reduction of goodwill 43,000
Debt incurred for the purchase of furniture,
fixtures, and equipment and prepaid expenses $ 43,485
Acquisition of Salt Lake Mortgage Corporation:
Cash acquired $ 253,905
Other current assets acquired 23,263
Long-term assets acquired 106,595
Goodwill 696,004
Current liabilities assumed (152,530)
Long-term liabilities assumed (13,502)
Acquisition costs incurred (69,985)
--------------
Common stock issued $ 843,750
===============
See accompanying notes to financial statements.
20
<PAGE>
CELTIC INVESTMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
1. Nature of Business and Significant Accounting Policies
US Commercial Funding Corp., US Commercial Funding Corp. Illinois (collectively
"USCF"), and Salt Lake Mortgage Company are the wholly owned subsidiaries of
Celtic Investment, Inc. US Commercial Funding Corp. Illinois was formed in 1995,
and the operations were moved from Florida to Illinois. USCF purchases accounts
receivable, with recourse, from clients located in major U.S. cities. Clients
are found by the Company and by independent commissioned representatives. The
Company pays for a portion of the accounts receivable when purchased and the
balance, net of fees and interest, after the accounts receivable have been
collected. The Company requires a security interest in all of the client's
assets as part of the factoring arrangement. Salt Lake Mortgage Corporation is
engaged in the mortgage brokerage and real estate brokerage business with
offices in Utah and Nevada. The real estate brokerage business was discontinued
in 1998.
Significant accounting policies are as follows.
Principles of consolidation: The accompanying consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated.
Accounting estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Concentration of business and credit risk: The Company maintains its cash in
bank accounts with financial institutions which may, at times, exceed federally
insured limits. Approximately 13 percent of factored invoices at June 30, 1998,
consist of amounts due from a single client. Approximately 62 percent of
factored invoices at June 30, 1997, consist of amounts due from three clients.
The Company originates the majority of its residential mortgage loans for a
single investor.
Financial instruments: The Company has no financial instruments for which the
carrying value differs materially from fair value.
Cash and cash equivalents: For purposes of reporting cash flows, the Company
considers all highly liquid debt instruments purchased with a maturity of three
months or less to be cash equivalents.
21
<PAGE>
CELTIC INVESTMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies (Continued)
Mortgage loans held for sale: Mortgage loans held for sale, consisting of
mortgage loans made to individuals that are collateralized by residential one-
to four-family dwellings, are carried at the lower of aggregate cost or market.
Fees received for the funding of mortgage loans held for sale to investors are
recognized when the mortgages are sold to the investors. Loans are usually sold,
along with the servicing rights to investors, within two weeks of the initial
closing.
Furniture, fixtures and equipment: Furniture, fixtures and equipment are stated
at cost. Depreciation and amortization are computed using the straight-line
method over the estimated useful lives of the assets.
Deferred finance fees: Deferred finance fees consist of costs incurred in the
acquisition of an operating line of credit and are being amortized straight line
over the term of the line of credit.
Goodwill: The Company has classified as goodwill the cost in excess of fair
value of the net assets of the business acquired in a purchase transaction.
Goodwill is being amortized on a straight-line method over 15 years commencing
with the purchase of the business.
Impairment of long-lived assets: Long-lived assets are evaluated for impairment
based on a periodic analysis of projected, undiscounted future cash flows at the
operating level to which the assets relate.
Factoring operations: Income from factored invoices is recorded as earned in
accordance with the related agreements with clients. Income is earned when
receivables are purchased and over the time that a receivable remains unpaid.
The terms are normally 1 percent at the time of purchases and 1 percent every 10
days the invoice remains uncollected. A provision for credit losses on factored
invoices is charged to income in an amount sufficient to provide for anticipated
losses on such invoices. The Company determines those invoices that are
uncollectible based upon a detailed review. Any write-offs are charged to the
allowance for credit losses on such invoices. The Company has a right to amounts
due to factoring clients if a factored invoice becomes uncollectible. Upon
collection of the purchased invoices, amounts collected in excess of factoring
income and the initial payment are remitted to clients. Such amounts may, in
some instances, be applied to offset uncollected factored invoices.
Commission and mortgage fee income: Commission and mortgage fee income consists
of loan brokerage fees, application fees and commissions on sales of residential
real estate. Revenue from loan origination fees is recognized at the time of
closing or, for loans held for sale, when the loan is sold. Loan origination
fees are comprised of the fees paid to the Company by lenders of the various
residential mortgage placements. The loan origination fees vary based upon
current market rates for residential mortgages. Real estate commissions are
recognized at closing.
22
<PAGE>
CELTIC INVESTMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies (Continued)
Income taxes: Deferred taxes are provided on a liability method whereby deferred
tax assets are recognized for deductible temporary differences and operating
loss and tax credit carryforwards and deferred tax liabilities are recognized
for taxable temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred
tax assets will not be realized. Deferred tax assets and liabilities are
adjusted for the effects of changes in tax laws and rates on the date of
enactment.
Earnings per share: In 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earning Per Share.
Statement 128 replaces the previously reported primary and fully diluted net
income with basic and diluted net income per share. Unlike primary earnings per
share, basic earnings per share excludes any diluted effects of stock options,
warrants, and convertible securities. Diluted earnings per share is very similar
to the previously reported fully diluted earnings per share. All earnings per
share amounts for all periods have been presented, and where necessary, are
restated to conform to the Statement 128 requirements. A reconciliation between
the weighted average shares outstanding used in the basic and diluted EPS
computations is as follows:
1998 1997
Numerators, income (loss) from continuing operations $ 517,502 $ (18,492)
========== ===========
Denominators:
Basic earnings per share, weighted average common
shares outstanding 3,906,471 3,556,471
Dilutive common stock options 225,954 2,695
---------- -----------
Diluted earnings per share $ 4,132,425 $3,559,166
========== ===========
23
<PAGE>
CELTIC INVESTMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
Note 2. Business Combination
On January 31, 1997, the Company completed its merger with Salt Lake
Mortgage Corporation, whereby Salt Lake Mortgage Corporation became a subsidairy
of Celtic Investment, Inc. through the issuance of 1,100,000 shares of common
stock of which 500,000 shares were being held in escrow subject to the
satisfaction of certain conditions, for all of the oustanding common stock of
Salt Lake Mortgage Corporation.
The transaction was accounted for as a purchase and required the consideration
of $843,750 for the issuance of the 600,000 shares including $69,985 for
acquisition costs. The excess of cost over the net assets acquired of $696,004
was recorded as goodwill and is being amortized using the straight-line method
over 15 years. Subsequent to year-end, it was determined that certain conditions
mentioned above were not met. Therefore, 250,000 shares held in escrow will be
returned to Celtic Investment, Inc. At this time, it is not known whether or not
the conditions will be met in relation to the 250,000 shares remaining in
escrow. The value of any of the shares issued will be recognized as an increase
in goodwill. The goodwill was decreased by $43,000 at June 30, 1998, due to the
reduction of the valuation allowance on deferred tax assets.
The following unaudited pro forma consolidated results of operations for the
year ended June 30, 1997, as though Salt Lake Mortgage had been acquired as of
July 1, 1995, are as follows:
Revenue $2,774,000
Net Income 189,000
Net Income per common share:
Basic 0.05
Diluted 0.05
The above amounts represent the effect of combining actual results of operations
and recording the effect of amortization of goodwill. The Company believes no
other adjustments are necessary. The pro forma results do not necessarily
represent results which would have occurred if the business combination had
taken place at the date on the basis assumed above.
The Company acquired the following assets and liabilities in the merger:
Cash $253,905
Accounts receivable 23,263
Goodwill 696,004
Other assets 106,595
--------------
1,079,767
Accounts payable and accrued expenses 132,195
Other liabilities 33,837
Acquisition costs paid 69,985
--------------
Total consideration $843,750
==============
24
<PAGE>
CELTIC INVESTMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
Note 3. Receivables
Receivables at June 30, 1998 and 1997, are summarized as follows:
1998 1997
Factored invoices on a $ 6,831,359 $ 5,309,306
recourse basis
Less allowance for credit (233,399) (99,399)
losses ----------------- ---------------
$ 6,597,960 $ 5,209,907
================= ===============
Notes receivable consist of client notes receivable of $2,300 at June 30, 1998.
The notes bear interest at 18 percent. The remaining note receivable terms
provide for monthly payments of $5,000 plus interest at 10 percent through
August 1998 and payments of $7,500 plus interest through May 1999 with a final
payment on June 1, 1999. Notes receivable totaled $245,373 and $426,037 as of
June 30, 1998 and 1997.
Construction loans receivable at June 30, 1998 and 1997, consists of the
following:
<TABLE>
<S> <C> <C>
1998 1997
Construction line of credit for the development of a resident ------ ------
subdivision. The Comnpany has committed to lend the borrower up to $700,000. The
loan is collateralized by the property under development. The line of credit
bears interest at a rate of Prime (8.5% at June 30, 1998) + 3%. The oustanding
balance is due upon demand. The Company receives an origination fee in an amount
equal to 3% of the entire loan amount. In addition, the borrower will pay an
additional amount of $5,000 per lot, for any lot developed while the borrower
remains owner of the property. $553,968 $75,805
Construction line of credit with an $80,000 limit and bears interest at a
rate of Prime + 2%. The loan is collaterized by the property under
construction. The outstanding balance was due along with accrued
interest on October 31, 1997. - 7,204
Construction line of credit with an $122,800 limit and bears interest at a
rate of Prime + 3%. The loan is collateralized by the property under
construction. The oustanding balance along with accrued interest was
due on September 30, 1997. - 40,432
----------- ------------
$553,968 $123,441
=========== ============
</TABLE>
25
<PAGE>
CELTIC INVESTMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
Note 3. Receivables (continued)
All loans and notes receivable have been evaluated for collectibility on a
note-by-note basis. The Company does not recognize interest on loans and notes
receivable once they have been deemed to be impaired unless the interest is
collected.
The following is an analysis of the activity in the allowance for credit losses:
Years Ended June 30,
1998 1997
---------- ----------
Balance at beginning of year $ 99,399 $ 74,733
Provision for credit losses 136,437 18,460
Recoveries - 10,255
Charge-offs (2,437) (4,049)
----------- ----------
Balance at end of year $ 233,399 $ 99,399
======= =======
Note 4. Related Party Transactions
The Company incurred expenses related to promotion and professional services for
the years ended June 30, 1998 and 1997, of approximately $10,500 and $11,000,
respectively, which were provided by a corporation owned by a major stockholder
of the Company.
Note 5. Bank Line of Credit and Long-Term Debt
The Company has a $15,000,000 line of credit from a financial institution,
collateralized by substantially all of the Company's assets and due April 1999.
The Company can borrow in aggregate the lesser of $15,000,000 or its borrowing
base, essentially 80 percent of factored accounts receivable. At June 30, 1998
and 1997, the outstanding balance was $3,619,496 and $2,448,060, respectively.
The revolving line of credit bears interest at 2 percent plus the prime rate on
the average daily balance.
The Company has debt obligations for the purchase of certain equipment. The
notes are payable in monthly installments totaling $2,389 and are collateralized
by the equipment with a carrying value of $36,495. The notes bear interest at a
rate of 10 percent and 15 percent per annum. Aggregate maturities required at
June 30, 1998, are as follows:
Year ending June 30 $ 22,906
1999 14,690
2000 ------------
$ 37,596
=============
26
<PAGE>
CELTIC INVESTMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
Note 6. Income Taxes
The deferred tax assets and liabilities consist of the following components as
of June 30, 1996 and 1997:
1998 1997
---- ----
Deferred tax assets:
Allowance for credit losses $ 81,000 $ 38,300
Loss carryforwards 391,000 477,900
------------ -----------
472,000 516,200
Loss valuation allowance - 516,200
------------ ------------
$ 472,000 $ -
============= ============
The Company continues to generate taxable income. Taxable income should also
increase due to the subsequent events discussed in Note 13. As such, the Company
has reported a deferred tax of $472,000 as of June 30, 1998. Realization of this
asset is dependent on future taxable income. Although realization is not
assured, management believes that it is more likely than not that the deferred
tax asset will be realized. The amount realizable could be reduced in the near
term if estimates of future taxable income are reduced.
The deferred tax amounts mentioned above have been classified in the
accompanying consolidated balance sheets as of June 30, 1998 and 1997, as
follows:
1998 1997
---- ----
Current assets $ 81,000 $ -
Noncurrent assets 391,000 -
----------- --------
$ 472,000 $ -
=========== ========
Reconciliations of income taxes (credits) computed at the statutory federal
income tax rate to the Company's income tax (credits) from continuing operations
for the years ended June 30, 1998 and 1997, are as follows:
27
<PAGE>
CELTIC INVESTMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
1998 1997
---- ----
Computed "expected" taxes $ 42,900 $ (13,500)
(credits)
Increase (decrease) resulting
from:
State income taxes, net of 3,200 1,600
federal tax benefit 19,000 10,500
Nondeductible expenses (465,200) (17,400)
Valuation allowances 5,137 (1,200)
----------- -----------
Other $ (394,963) $ (20,000)
=========== ===========
At June 30, 1998, the Company had available net operating loss carryforwards of
approximately $1,140,000 for income tax purposes which expire in years 2005
through 2010.
Income tax (credit) consists of the following as of June 30, 1998 and 1997:
1998 1997
---- ----
Current $ 34,307 $ -
Deferred (429,000) (20,000)
------------ -----------
$ (394,693) (20,000)
============ ============
Note 7. Notes Receivable and Interest Receivable from Stockholders
During 1996, the Company issued notes receivable to two officer-stockholders for
the purchase of Company stock from a minority stockholder totaling $51,000. The
principal and interest at 5.5 percent per annum are due in June 1999. Interest
accrued on these notes was $2,713 and $2,616 for the years ended June 30, 1998
and 1997, respectively. Since these notes result from the purchase of the
Company's common stock they are presented in the financial statements as a
reduction in stockholders' equity.
During 1996, the Company issued a note receivable and advanced $20,000 to a
director-stockholder. This item has been presented in the financial statements
as a reduction in stockholders' equity since the amount is due from a
stockholder. During 1998 and 1997, the Company received payments of none and
$10,000 on this note, respectively.
Notes receivable and interest receivable from stockholders were $63,712 and
$63,892 for the years ended June 30, 1998 and 1997, respectively.
28
<PAGE>
CELTIC INVESTMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
Note 8. Common Stock Options and Warrants
There are currently outstanding various warrants and options which, if
exercised, will result in the issuance of additional shares of the Company's
common stock. The following table sets forth information about options and
warrants:
Exercise
Shares Price Per
Issuable Share
------------- ------------
Outstanding Options and Warrants
June 30, 1998:
Management Options(1) 300,000 $1.00
Private Placement Debt Options(2) 25,000 3.50 or 3.00
Management Options(3) 75,000 1.00
Ferguson Warrants(4) 100,000 3.00
Glick Morganstern Options(5) 60,000 3.00
USCF Management Options(6) 42,500 1.00
USCF Management Options(7) 12,500 3.00
USCF Management Options(8) 572,500 1.00
Salt Lake Mortgage Corporation Options(9) 260,937 1.00
Salt Lake Mortgage Corporation Options(10) 7,500 1.00
Director Options(15) 20,000 1.00
Management Options(16) 400,000 1.25
Options and Warrants Canceled/Expired
Year Ended June 30, 1998:
USCF Management Options(6) 12,500 3.13
Salt Lake Mortgage Corporation Options(9) 239,063 1.00
Salt Lake Mortgage Corporation Options(10) 37,500 3.00
Year Ended June 30, 1997:
Class A Warrants(11) 300,000 4.00
Class B Warrants(11) 300,000 8.00
USCF Options(12) 716,667 4.00
Private Placement Options(13) 1,357,134 4.00
Underwriter Warrants(14) 130,000 2.50
USCF Management Options(8) 537,500 3.00
Salt Lake Mortgage Corporation Options(9) 500,000 3.00
(1) The Company management had been granted options to purchase 1,800,000
shares of the Company's common stock. These options are exercisable
only upon fulfillment of certain conditions and are not currently
exercisable. During 1996, the Company and management agreed to reduce
the number of options to 300,000. The options are exercisable through
April 26, 1999.
29
<PAGE>
CELTIC INVESTMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
(2) These options were issued as part of the units sold in the Company's
private debt placement in December 1995. 11,625 options contain an
option to purchase one share of the Company's common stock at a price
of $3.50 per share. The remaining 13,375 options contain an option to
purchase one share of the Company's common stock at a price of $3.00
per share. The options are exercisable through December 31, 1999.
(3) These options were originally granted April 26, 1994, Each unit
contains an option to purchase one share of the Company's common stock.
The options may only be exercised if the Company meets certain
financial conditions relating to net worth. The options are exercisable
through April 26, 1999.
(4) These warrants were issued in consideration of the execution of a
financial consulting agreement which entitles the individual to
purchase 100,000 shares of the Company's common stock at any time prior
to June 1, 1999, at a price of $3.00 per share.
(5) These options were issued to Glick Morganstern as part of their
compensation in obtaining the line of credit in April 1996. The options
carry certain registration rights. These options are exercisable
through April 30, 1999.
(6) Under employment agreements, management has been granted options to
purchase 25,000 share of the Company's common stock at a price of $3.13
per share. During 1998, the Company and the employee agreed to reduce
the number of options to 12,500 in exchange for a reduction in the
option price to $1.00 per share. The Company granted an additional
30,000 options to purchase common stock on July 22, 1997 at $1.00.
These options will expire on August 29, 1998.
(7) Und er employment agreements, management has been granted options to
purchase 12,500 shares of the Company's common stock through September
18, 2000.
(8) Un der employment agreements, management has been granted options to
purchase 750,000 shares of the Company's common stock at a price of
$3.00 per share. 700,000 of the options are exercisable as to 25
percent as of June 28, 1995, and an additional 25 percent on each June
30, 1996, 1997, and 1998. The remaining 50,000 of these options are
exercisable as to 25 percent as of September 26, 1995, and an
additional 25 percent on each September 30, 1996, 1997, and 1998. The
Company granted options to purchase an additional 325,000 shares to
certain officers and employees on July 1, 1996. During 1997, the
Company and management agreed to reduce the number of options to
537,500 shares in exchange for a reduction in the option price to $1.00
per share. The Company granted an additional 35,000 options to purchase
common stock on April 1, 1998, at $1.00 under an employment agreement.
These options expire through July 1, 2003.
(9) Under the merger agreement dated January 31, 1997, with Salt Lake Mortgage
Corporation, the Company granted the option to purchase 1,000,000 shares of
the Company's common stock at a price of $3.00 per share. During 1997, the
Company and management of Salt Lake Mortgage have agreed to reduce the
number of shares to 500,000 in exchange for reduction of the option price
to $1.00 per share. During 1998, 239,063 of these options were canceled.
These options expire through June 30, 2007.
30
<PAGE>
CELTIC INVESTMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
(10) Under the merger agreement dated January 31, 1997, with Salt Lake
Mortgage Corporation, the Company granted the option to purchase 45,000
shares of the Company's common stock at a price of $3.00 per share.
During 1998, 30,000 of these options were canceled. Also, the Company
and an employee agreed to reduce the number of remaining options to
7,500 in exchange for a reduction in the option price to $1.00 per
share. These options expire through July 1, 2004.
(11) These warrants were issued as part of the units sold in Celtic's
initial public offering. As a result of the 1 for 20 reverse split
effective in June 1994, the exercise price of the Class A and Class B
warrants was adjusted to $6.00 and $12.00, respectively. The Company's
Board of Directors subsequently adopted resolutions reducing the
exercise price of the Class A and B warrants following the reverse
split to $4.00 and $8.00, respectively. In December 1995, the Company's
Board of Directors extended the exercise period of the Class A and B
warrants to December 31, 1996. In December 1996, the Company's Board of
Directors extended the exercise period of the Class A warrants to June
30, 1997. The Class A warrants expired on June 30, 1997.
(12) These options were issued to USCF stockholders as part of the units
sold by USCF in a private placement effected prior to the merger. The
shares underlying these options carry certain registration rights. The
options expired on June 30, 1997.
(13) These options were issued as part of the units sold in the Company's
private placement effective September 27, 1994. Each unit consists of
an option to purchase one share of the Company's common stock. The
options expired on June 30, 1997.
(14) These warrants, which expired on October 21, 1996, were issued as
underwriter compensation to ACAP, Inc. the underwriter of the Company's
initial public offering.
(15) The Company granted the option to purchase 20,000 shares of common
stock to a member of the board of directors through April 17, 2003.
(16) Under an employment agreement, the Company granted the option to
purchase 400,000 shares of common stock. 150,000 of these options may
only be exercised if the Company meets certain financial conditions
relating to total consolidated assets. The options are exercisable
through June 30, 2006.
Employee stock option agreements are accounted for following APB Opinion No. 25
and related interpretations. Accordingly, no expense has been recognized for
grants under the stock option agreements. Had compensation costs for all of the
stock option agreements been determined based on the grant date fair values of
awards (the method described in FASB Statement No. 123), reported net income and
earnings per common share would have been reduced to the pro forma amounts shown
below.
31
<PAGE>
CELTIC INVESTMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
1998 1997
----------- ------------
Net income (loss):
As reported $ 441,392 $ 11,730
Pro forma 54,305 (123,684)
Net income (loss) per share:
Basic:
As reported 0.11 0.00
Pro forma 0.01 (.03)
Diluted:
As reported 0.11 0.00
Pro forma 0.01 (.03)
The per share weighted average fair value of stock options granted under
employee stock option agreements granted during 1998 was $1.24 on the date of
grant.
The option values were determined using the Black Scholes option-pricing model
with the following assumptions: expected dividend yield 0 percent, expected
volatility 79 percent for 1998 and 42 percent for 1997, risk-free interest rate
varying from 5.34 percent to 6.22 percent and expected lives of 2 to 8 years.
A summary of the status of the Company's stock options and warrants as of June
30, 1998 and 1997, and changes during the years then ended is presented below:
1998 1997
----------------------------- ----------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
-------------- -------------- ------------ ---------
Options outstanding
beginning of year 1,680,000 $1.32 4,013,801 $3.77
Options granted 485,000 1.21 1,507,500 3.00
Options expired/canceled (289,063) 1.35 (3,841,301) 3.99
----------------------------------------------------
1,875,937 1.27 1,680,000 $1.32
====================================================
32
<PAGE>
CELTIC INVESTMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
The following table summarizes the stock options and warrants outstanding at
June 30, 1998:
Options and Warrants Outstanding Options and Warrants Exercisable
- --------------------------------- ---------------------------------------------
Average Total Weighted
Number Remaining Number Average Exercise
Exercise Price Outstanding Contractual Life Exercisable Price
$3.50 25,000 1.50 25,000
1.25 400,000 6.40 100,000
3.00 172,500 1.00 172,500
1.00 1,278,437 3.40 963,437
----------- ---- -------
1,875,937 3.80 1,260,937 1.34
=========== ==== ========= ====
Note 9. Commitments, Contingencies and Related Expenses
The Company has entered into employment agreements with certain officers that
expire at various times through January 2002. Under the terms of the agreements,
the Company has agreed to pay approximately $780,000 in compensation for the
remainder of the agreements' terms.
The Company leases office space under operating lease agreements expiring
through April 2001. The Company also leases office equipment under operating
leases expiring through May 2000.
Total lease commitments are:
Years ending June 30:
1999 $ 151,101
2000 118,487
2001 69,279
------------
$ 338,867
Rent expense under all operating leases including insurance and real estate
taxes for the years ended June 30, 1998 and 1997, amounted to approximately
$155,000 and $151,000, respectively.
The Company has a servicing agreement with a factoring company to process
factored invoices. The agreement can be terminated by either party with 30 days
written notice. The agreement requires the Company to pay fees that vary from .6
percent of the face value of invoices collected to 1.45 percent of the face
value of invoices collected plus 20 percent of the collected. Fees paid under
this agreement were $37,705 and $81,216 for the years ended June 30, 1998 and
1997, respectively.
33
<PAGE>
CELTIC INVESTMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
In 1997, the Company entered into a servicing agreement with a factoring
company to process factored invoices. The agreement can be terminated by either
party within 45 days written notice. The agreement requires the Company to share
35 percent of any revenues earned on purchased invoices. Revenues earned under
the agreement were approximately $363,000 and $86,000 of which $236,000 and
$56,000 was retained by the Company for the years ended June 30, 1998 and 1997,
respectively.
In August 1998, Roger Davis, a former employee of a subsidiary of the
Company, filed a law suit against the Company, Salt Lake Mortgage and Reese
Howell in The Third Judicial District Court of the State of Utah. Mr. Davis's
complaint alleges breach of contract, wrongful discharge, constructive fraud,
fraudulent concealment, slander, civil conspiracy and other claims against some
or all of the defendants. The Complaint seeks damages according to proof at
trial, including consequential damages and punitive damages. The Complaint also
seeks a rescission of the merger between the Company and Salt Lake Mortgage. The
defendants have filed an Answer to the Complaint which essentially denies any
wrong doing. The Company and Salt Lake Mortgage have also filed a counter claim
against Mr. Davis for breach of contract, violation of fiduciary duty, fraud and
for other claims. The Company seeks damages as proved at trial. While the
Company is unable to predict the outcome of its litigation, the Company believes
that it has good faith defenses and claims in connection with such litigation.
USCF is involved in various legal proceedings arising out of the normal
course of business, which they are the plaintiff. None of the legal proceedings
which USCF is currently involved with is expected to have an adverse material
effect on USCF business or its financial condition.
Note 10. Retirement Plan
The Company sponsors a 401(k) retirement plan covering substantially all of its
employees. Plan contributions are at the discretion of management. There were no
contributions for the years ended June 30, 1998 and 1997.
Note 11. Segment Information and Discontinued Segment
Effective January 1, 1998, the Company adopted the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 131,
Disclosures about Segments of an Enterprise and Related Information. Statement
131 establishes standards for reporting information about operating segments in
interim and annual financial statements. Statement 131 also establishes
standards for related disclosure about products and services, geographic areas,
and major customers. The adoption of Statement 131 did not effect results of
operations or financial position but did affect the disclosure of segment
information. The Company's operations include three primary segments that are
strategic business units offering different products and services: purchase of
accounts receivable, mortgage brokerage and real estate brokerage. The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies except that management evaluates
performance based on profit or loss from operations before corporate expenses
and income taxes. Selected financial information by business segment for the
years ended December 31 is included in the following summary:
34
<PAGE>
CELTIC INVESTMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Purchase of
Accounts Mortgage Real Estate
Receivable Brokerage Brokerage** Other*** Total
- -------------------- ------------ ------------ ------------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Year Ended June 30,
1998
Revenue $2,181,037 $1,550,158 $189,477 $ - $3,920,672
Interest expense 527,475 38,315 - - 565,790
Depreciation and
amortization 19,104 76,314 - - 95,418
Segment profit (loss) 317,731 45,805 (127,110) (240,997) (4,571)
Segment assets 7,916,572 1,688,824 - - 9,605,396
Year Ended June 30,
1997
Revenue* 1,523,537 231,792 268,600 - 2,023,929
Interest expense 257,491 1,290 - - 258,781
Depreciation and
amortization 18,540 43,034 - - 61,574
Segment profit (loss)* 220,235 (138,269) 50,222 (120,458) 11,730
Segment assets 6,561,442 1,327,238 22,406 - 7,911,086
* The amounts for the mortgage brokerage and real estate brokerage
segments reflect the period from January 31, 1997 to June 30, 1997.
** In 1998, the Company discontinued its real estate brokerage operations.
*** These amounts represent unallocated corporate expenses.
</TABLE>
Note 12. New Accounting Pronouncements
In June 1997, the FASB issued Statement 130, Reporting Comprehensive Income
which the Company will adopt for the year ended June 30, 1999. The Statement
establishes standards for the reporting and display of comprehensive income and
its components in a full set of general purpose financial statements. The
Statement does not address when transactions are recorded, how they are measured
in the financial statements, or whether they should be included in net income or
other comprehensive income. The impact of compliance with this statement will
not impact the consolidated financial position, net income or cash flows of the
Company.
During 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and for Hedging Activities, which establishes new standards for
reporting information about derivatives and hedging. It is effective for periods
beginning after June 15, 1999, and will be adopted by the Company as of July 1,
2000. The Company expects that adoption of this Standard will have no effect on
its consolidated financial position, results of operations or on disclosures
within the financial statements as they currently do not engage in the use of
derivative instruments or other hedging activities.
35
<PAGE>
CELTIC INVESTMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
Note 13. Subsequent Events
Acquisition of Goodman Factors: On September 21, 1998, the Corporation completed
the purchase of 100 percent of the common stock of Goodman Factors, Inc. for
approximately $21,500,000 in cash, notes and assumption of liabilities. The
Company funded the transaction by borrowing $4,500,000 in term debt, issuing
$3,750,000 in notes payable to former Goodman stockholders, using $1,750,000
proceeds from the sale of preferred stock and the assumption of $11,500,000 in
liabilities of Goodman. The acquisition will be recorded under the purchase
method of accounting.
Issuance of preferred stock: In July 1998, the Company began offering 100,000
shares of 9 percent Cumulative, Redeemable Series A Preferred Stock. Holders of
the preferred shares will be entitled to receive cumulative preferential cash
contributions at an annual rate of 9 percent of the liquidation preference of
$100 per preferred share, accruing from the date of original issuance and
payable quarterly in arrears on the last day of each calendar quarter of each
year, commencing September 30, 1998.
The preferred shares are redeemable at the option of the Company, in whole or in
part, from time to time, after June 30, 1999, at $100 per preferred share plus
any accumulated and unpaid dividends thereon. However, redemption is not
permitted unless the Company's common stock is trading at $3.00 per share or
greater. The preferred shares are, at the option of the holder of the shares,
convertible into shares of the Company's common stock at $3.00 per share subject
to certain adjustments.
In the event of the dissolution of the Company, the holders of preferred shares
will be entitled to a liquidation preference for each preferred share of $100
plus any accumulated and unpaid dividends thereon to the date of payment,
subject to certain limitations. The Company has received net cash proceeds after
offering expenses of $1,750,000 and issued 19,000 preferred shares through
September 21, 1998.
36
<PAGE>
ITEM 8. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
ACT.
Identification of Directors and Executive Officers. The current directors
and officers of the Company who will serve until the next annual meeting of
shareholders or until their successors are elected or appointed and qualified,
are set forth below:
Name Age Position
Douglas P. Morris 43 Director of Celtic, USCF, SLM, ADR,
Chairman and President of Celtic
Larry D. Meek 46 Director of Celtic and USCF,
President and CEO of USCF
Howard D. Talks 44 Director of Celtic
Reese Howell Jr. 30 Director and Senior Vice President of
Celtic, Director, President, and CEO
of SLM, Director of ADR
Robert Gregory 40 Director of Celtic
Frank Lucchese 48 CFO, Secretary/Treasurer of Celtic;
Director, Secretary /Treasurer, and CFO
of USCF, Director of SLM and ADR
There are no family relationships among the Company's officers and
directors. Background information concerning the Company's officers and
directors is as follows:
Douglas P. Morris. Mr. Morris has been an officer and director of the
Company since July, 1994. Mr. Morris is, and has been since 1988, the owner of H
& M Capital Investments, Inc., a privately-held business consulting firm, H & M
Capital Investments, Inc. is engaged in consulting with privately-held and
publicly-held companies relating to management, debt financing and equity
financing. Mr. Morris has inactivated H & M Capital Investments, Inc. From 1984
to 1988, Mr. Morris was self-employed in managing his own investments. Mr.
Morris received his Masters Degree in Public Administration at the University of
Southern California in 1982 and his Bachelor of Arts Degree in Judicial
Administration from Brigham Young University in 1978. Mr. Morris is a director
and officer of Emerald Capital Investments, Inc., a publicly held company with
no current operations. Mr. Morris is a director of Millenniun Electronics, Inc.,
a publicly-held computer/electronics company. Mr. Morris is a director of
Dauphin Technology, Inc., a publicly traded electronic manufacturing and
computer company.
37
<PAGE>
Howard D. Talks. Mr. Talks has been a director of the Company since July 1,
1994. Mr. Talks has been involved in the real estate industry for the past 19
years. Mr. Talks has developed and/or purchased commercial and residential real
estate properties in Florida. He has lectured at Dale Carnegie seminars. Mr.
Talks attended Queensboro Community College in New York.
Larry D. Meek. Mr. Meek became a director of the Company and President of
USCF in August 1995. He has over twenty years experience in sales, marketing,
general management, and business development. From 1992 to 1995, he was the Vice
President of Sales and Marketing for Oxford Capital Corporation. Mr. Meek served
in a number of positions with Budget Rent A Car and Hertz Corporation prior to
Oxford Capital Corporation. Mr. Meek earned his B.A. in Business Administration
from the University of Mississippi.
Frank Lucchese. Mr. Lucchese was appointed CFO of the Company and USCF in
August 1995. Mr. Lucchese is also a director of SLM and ADR. Mr. Lucchese has
over twenty years experience in financial management with companies such as
Budget Rent A Car and Continental Grain. Mr. Lucchese earned his M.B.A. from
Northern Illinois University and his B.S. in Accounting from Southern Illinois
University.
Reese Howell Jr Mr. Howell was appointed Senior Vice-President and a
director of the Company in January 1997. He also serves as President and CEO of
SLM and is a director of ADR. Mr. Howell was the founder of SLM and has been in
the mortgage industry since 1990. Prior to entering the mortgage industry he was
involved in the federal procurement process for IBM's Federal Systems Division.
Mr Howell obtained his B.S. in Finance and his M.B.A. from the University of
Utah.
Robert Gregory Mr. Gregory was appointed a director of the Company in
February 1998. He is currently employed by Westpointe Capital Management as
President. Mr. Gregory has over 20 years experience in finance and asset
management with such companies as Dart Energy and Union Texas Petroleum. Mr.
Gregory earned a M.B.A. in finance and a B.A. in economics from Michigan State
University and a B.B.A. in accounting from the University of Texas.
Compliance With Section 16(a) of the Exchange Act
Section 16(a) of the Exchange Act requires the Company's officers and
directors, and persons who beneficially own more than 10% of a registered class
of the Company's securities, to file reports of ownership and changes in
ownership with the Securities and Exchange Commission. Officers, directors and
greater than 10% shareholders are required by the Exchange Act regulations to
furnish to the Company copies of all Section 16(a) forms they file with the SEC.
Except as disclosed below and based solely on its review of the copies of such
forms received by it, or written representations from certain reporting persons,
the Company believes that during the fiscal year ended June 30, 1998, all filing
requirements applicable to its officers, directors and greater than 10%
beneficial owners were complied with.
Frank Lucchese and Robert Gregory were each granted options to purchase
shares of the Company's common stock in April 1998 as incentive compensation.
Mr. Lucchese and Mr. Gregory
38
<PAGE>
inadvertently failed to file the required reports relating to the grant of these
options in a timely manner. However, the required reports have been filed.
Neither of the options have been exercised.
ITEM 10. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth the aggregate compensation paid by the
Company for services rendered during the last three calendar years to the
Company's President and to the Company's most highly compensated executive
officers whose annual salary and bonus exceeded $100,000:
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
Long Term Compensation
Annual Compensation(1) Awards Payouts
Restricted Securities
Name and Fiscal Other Annual Stock Underlying LTIP All Other
Principal Position Year Salary Bonus Compensation Award(s) Option(s) Payouts Compensation
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Douglas P. Morris 1998 $41,224 $-0- $-0- $-0- # 400,000(2) $-0- $-0-
1997 $26,000 $-0- $-0- $-0- #-0- $-0- $-0-
1996 $26,000 $-0- $-0- $-0- #-0- $-0- $-0-
- ----------------------------------------------------------------------------------------------------------------------
Larry Meek 1998 $143,548 $18,583 $-0- $-0- #-0- $-0- $-0-
1997 $133,337 $-0- $-0- $-0- # 150,000(2) $-0- $-0-
1996 $125,000 $-0- $-0- $-0- # 560,000(2) $-0- $-0-
- ----------------------------------------------------------------------------------------------------------------------
Frank Lucchese 1998 $91,062 $12,882 $-0 $-0- # 35,000(3) $-0- $-0-
1997 $91,062 $-0- $-0- $-0- # 150,000(2) $-0- $-0-
1996 $85,000 $-0- $-0- $-0- # 140,000 $-0- $-0-
- ----------------------------------------------------------------------------------------------------------------------
Reese Howell Jr. 1998 $90,000 $-0- $-0- $-0- #-0- $-0- $-0-
1997 $37,500 $-0- $-0- $-0- # 560,000(2) $-0- $-0-
1996 $ -0- $-0- $-0- $-0- #-0- $-0- $-0-
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) See the discussions under the caption "EXECUTIVE COMPENSATION - Employment
Contracts" regarding certain other compensation the named officer may be
entitled to upon certain specified events.
(2) These options were granted pursuant to Employment Agreements.
(3) These Options were granted as performance bonus for fiscal year 1996, 1997
and 1998.
39
<PAGE>
Stock Options Granted in Last Fiscal Year
The following table set forth grants of stock options made during the fiscal
year ended June 30, 1998 to the employees of the Company.
<TABLE>
<CAPTION>
Individual Grants
% of Total
Options/SARs
Number of Securities Granted to Exercise or
Underlying Options/ Employees in Base Price
Name SARs Granted (#) Fiscal Year ($/Share) Expiration Date
<S> <C> <C> <C> <C>
Douglas P. Morris (1) 400,000 87.0% $1.25 Various
Frank Lucchese (2 ) 35,000 7.6% $1.00 6/30/2003
</TABLE>
(1) These Options are granted pursuant to a employment agreement The 100,000
signing bonus options have an expiration date of May 12, 2003. The 150,000
performance based options are granted based on a formula relating to the
Company's performance. They expire five years after being earned. 150,000 time
based options will vest in three equal installments on May 12, 1999, 2000, and
2001. These options are exercisable five years from the date of vesting.
(2) These Options are granted pursuant to a employment agreement and have a June
30, 2003 expiration date.
Aggregate Option Exercises and Number/Value of Unexercised Options
The following table provides information concerning the exercise of
options during the last fiscal year by persons named in the Summary Compensation
Table, the number of unexercised options held by such persons at the end of the
last fiscal year, and the value of such unexercised options as of such date:
<TABLE>
<CAPTION>
Shares Total Number of Value of Unexercised In-
Acquired on Value Unexercised Options at the-Money Options at
Name Exercise (1) Realized ($) 6/30/98 (1) 6/30/98 (1)
- ---- ------------ ------------ ----------------------------------------------------------
Exercisable Unexercisable Exercisable Unexercisable
<S> <C> <C> <C> <C> <C> <C>
Douglas P. -0- -0- 200,000 300,000 $100,000 $112,500
Morris
Larry Meek -0- -0- 355,000 -0- $221,875 $ -0-
Frank Lucchese -0- -0- 180,000 -0- $112,500 $ -0-
Reese Howell, Jr. -0- -0- 37,500 212,500 $ 23,438 $132,813
</TABLE>
40
<PAGE>
1 An "In-the-Money" stock option is an option for which the market
price of the company's Common Stock underlying the option on June 30,
1998 exceeded the option exercise price. The value shown is calculated
by multiplying the number of unexercised options by the difference
between (i) the average of the bid and ask price for the Common Stock
on the NASDAQ Small Cap Market on June 30, 1998 of $1.625 and (ii) the
exercise price of the stock options of $1.00 or $1.25.
Compensation of Directors
During the year ended June 30, 1998 the Company paid no compensation to
directors except under employment agreements set forth above in the Summary
Compensation Table and below in "Employment Agreements."
Employment Agreements
The Company is currently a party to the following Employment
Agreements:
Douglas P. Morris. In May 1998, the Company entered into an employment
agreement with Mr. Morris. The agreement is for a term of three years and
provides for an annual salary of $100,000 with cost of living increase
provisions. The agreement granted Mr. Morris an option to purchase 400,000
shares of the Company's common stock exercisable at $1.25 per share. A total of
100,000 of such options vested on the date of the execution of the agreement.
Options for 150,000 shares vest over three years - 50,000 shares on the
anniversary date of the agreement. Options for the remaining 150,000 shares vest
if certain financial performance is achieved by the Company.
Larry D. Meek. On June 28, 1995, the Company and Mr. Meek entered into a
three year Employment Agreement. The agreement provides for a signing bonus of
$50,000 and a salary of $125,000 with annual cost of living adjustments not
greater than 10%. Mr Meek is eligible for bonuses in subsequent years subject to
the discretion of the Board of Directors. Mr Meek has been granted options to
purchase 560,000 shares at $3.00 of the Company's common stock. Mr. Meek was
granted 150,000 share options at $3.00 in July 1996. In June 1997, Mr. Meek
canceled 355,000 options shares in consideration of the reduction in the
Exercise Price from $3.00 to $1.00.
41
<PAGE>
Frank Lucchese. On June 28, 1995, the Company and Mr. Lucchese entered into
a three year Employment Agreement. The agreement provides for a salary of
$85,000 with annual cost of living adjustments not greater than 10%. Mr.
Lucchese is eligible for bonuses in subsequent years subject to the discretion
of the Board of Directors. Mr. Lucchese has been granted options to purchase
140,000 shares at $3.00 of the Company's common stock. Mr. Lucchese was granted
150,000 options on the Company's shares at $3.00 in July, 1996. In June 1997,
Mr. Lucchese canceled 145,000 option shares in consideration of the reduction in
the Exercise Price from $3.00 to $1.00. In April, 1998, Mr. Lucchese was granted
options to purchase 35,000 shares at $1.00 of the Company's common stock.
Martha Marroquin. On September 26, 1995, the Company and Ms. Marroquin
entered into a three year Employment Agreement. The agreement provides for a
salary of $45,000 with annual cost of living adjustments not greater than 10%.
Ms. Marroquin is eligible for bonuses in subsequent years subject to the
discretion of the Board of Directors. Ms. Marroquin has been granted options to
purchase 50,000 shares at $3.00 of the Company's common stock. In June 1997, Ms.
Marroquin canceled 25,000 option shares in consideration of the reduction of the
Exercise Price from $3.00 to $1.00.
Reese Howell Jr. On January 31, 1997, the Company and Mr. Howell
entered into a five year Employment Agreement. The agreement provides for a
salary of $90,000 with annual cost of living adjustments not greater than 10%.
Mr. Howell is entitled to a bonus of 7.5% of pre-tax profits of SLM and ADR
until such time as his annual compensation reaches $150,000. After the $150,000
threshold is met, Mr. Howell is entitled to an additional bonus of 1.5% of the
pre-tax profits of SLM and ADR. Mr. Howell has been granted time based and
performance based options to purchase 500,000 shares of the Company"s stock at
$3.00 per share. The performance based options are contingent on the
profitability of SLM and ADR. In June 1997, Mr. Howell agreed to cancel 250,000
options shares in consideration of the reduction in the Exercise Price from
$3.00 to $1.00.
Future Incentive Plans
The Company will likely adopt additional incentive compensation plans
which might include incentive stock options, pension plans, or a profit sharing
plan. The Company offers to employees a 401K plan. The Company made no
contribution to the plan for the year ending June 30,1998.
42
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
Security Ownership of Certain Beneficial Owners
The following table sets forth information regarding shares of the
Company's common stock beneficially owned as of September 8, 1998 by: (i) each
officer and director of the Company; (including the officers and directors of
USCF, SLM, and ADR) (ii) all officers and directors as a group (including the
officers and directors of USCF, SLM, and ADR); and (iii) each person known by
the Company to beneficially own 5 percent or more of the outstanding shares of
the Company's common stock.
Douglas P. Morris(1)(2) 848,765 14.1%
515 Red Cypress Road
Cary, IL 60013
Howard D. Talks(1)(3) 451,384 7.5%
P.O. Box 250
Palm Beach, FL 33480
Larry D. Meek (1)(4) 375,401 6.2%
17W220 22nd St.. #420
Oakbrook Terrace, IL 60181
Frank Lucchese(1)(5) 195,028 3.3%
17W220 22nd St.. #420
Oakbrook Terrace, IL 60181
Reese Howell Jr. (1)(6) 700,500 11.6%
102 West 500 South #300
Salt Lake City, Utah 84101
Laurence J. Pin 308,257 5.1%
c/o Open University
Orlando, FL 33480
43
<PAGE>
Roger Davis 335,873 5.6%
1552 East 1300 South
Salt Lake City, Utah 84105
All Officers and Directors 2,571,078 43.7%
as a group (5 people)
- -----------
(1) Except as otherwise noted, each stockholder has sole voting and
investment power with respect to the shares beneficially owned. Each of the
above-listed persons is an officer and/or director of the Company and/or USCF,
and SLM, .
(2) A total of 208,527 of these shares are owned by Mr. Morris. The
remaining 140,239 shares are owned by Hyacinth Resources. Inc., an affiliate of
Mr. Morris. The number of shares listed includes 100,000 shares which may be
issued upon the exercise of an option exercisable at a price of $1.00 per share.
The number of shares listed includes 400,000 shares which may be issued upon the
exercise of an option exercisable at a price of $1.25 per share.
(See "Management Employment Agreement)
(3) Mr. Talks and his wife Carol Hall are joint owners of these shares.
The total includes 100,000 shares which may be issued upon the exercise of an
option exercisable at a price of $1.00 per share.
(4) The total includes up to 355,000 shares which may be issued upon
the exercise of stock options granted in connection with Mr. Meek's employment
at an exercise price of $1.00 per share (See Management Employment Agreement).
(5) The total includes up to 180,000 shares which may be issued upon
the exercise of stock options granted in connection with Mr. Lucchese's
employment at an exercise price of $1.00 per share (See "Management Employment
Agreement).
(6) The total includes 305,500 shares issued in the stock for stock
exchange of SLM and ADR, to Mr. Howell. In addition, 125,000 shares are being
held in escrow for Mr. Howell based on a profitability operation formula of SLM
and ADR. The total also includes 250,000 shares which may be issued upon the
exercise of an option at $1.00 per share. These shares relate to certain
employment agreements between Mr. Howell and the Company, 75,000 of such shares
are time based option shares and 175,000 are performance option shares based on
a profitability formula of SLM and ADR. (See "Management Employment Agreement")
(7) The total includes 199,936 shares issued in the stock for stock
exchange of SLM and ADR, to Mr. Davis. In addition, 125,000 shares are being
held in escrow for Mr. Davis based on a profitability operation formula of SLM
and ADR. The total also includes 10,937 shares which may be issued upon the
exercise of an option at $1.00 per share.
44
<PAGE>
(8) The Company had 3,924,971 shares outstanding on September 8, 1998.
Options held by directors, officers, and others totaled 1,850,937 shares.
Warrants and Options
There are currently outstanding various warrants and options which, if
exercised, will result in the issuance of additional shares of the Company's
common stock. There are outstanding warrants and options entitling the holders
to purchase 1,850,937 shares of the Company's common stock at prices ranging
from $1.00 to $3.50. (See "Footnote 8 to Financial Statements".)
Changes in Control
No changes in control are currently contemplated.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Douglas P. Morris and Reese Howell, Jr., both of whom are officers and
directors of the Company, each personally pledged 175,000 of their shares of the
Company's common stock to Capital Resources Funding, Inc. to enable the Company
to obtain a loan in the amount of $700,000. The loan proceeds were used to
complete the acquisition of Goodman Factors, Inc.
In September 1998, the Company borrowed $500,000 from affiliates of
Robert Gregory, a director of the Company. The loan proceeds were used in the
Goodman Factors purchase transaction. The loans are for a term of twelve months
and bear interest at 14% per annum. There is also a quarterly success fee
payable in the amount of $25,000 up to a maximum of $100,000. There is no
prepayment penalty for repayment of the loan.
ITEM 13. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON
FORM 8-K
A. The Exhibits which are filed with this Report or which are
incorporated herein by reference are set forth in the Exhibits Index
which appears below.
B. The Company filed no Form 8-K during the fiscal year ended September
30, 1998.
45
<PAGE>
<TABLE>
<CAPTION>
Exhibits to Form 10-KSB
Sequentially
Exhibit Numbered
Number Exhibit Page
<S> <C> <C>
3.1 Articles of Incorporation (1)
3.2 Bylaws (1)
10.1 Form of 1997 Stock Option Plan (1)
10.2 Agreement and Plan of Merger - USCF Form 8-K July, 1994
10.4 Stock Option - Laurence J. Pino Form 10-KSB, 1994
10.5 Stock Option - Douglas P. Morris Form 10-KSB, 1994
10.6 Stock Option - Howard D. Talks Form 10-KSB, 1994
10.7 Form Indemnification Agreement Form 10-KSB, 1994
(Identical Agreement for all officers
and directors)
10.8 Employment Agreement-Larry Meek Form 10-KSB, 1995
10.9 Employment Agreement-Frank Lucchese Form 10-KSB, 1995
10.10. Loan and Security Agreement Form 10-KSB, 1996
10.11 Agreement and Plan of Merger Form 8-K filed February 18, 1997
10.12. Escrow Agreement Form 8-K filed February 18, 1997
10.13 Employment Agreement - Reese Howell, Jr. Form 8-K filed February 18, 1997
10.14 Employment Agreement - Roger Davis Form 8-K filed February 18, 1997
10.15 Stock Option Agreement - Reese Howell, Jr. Form 8-K filed February 18, 1997
10.16 Stock Option Agreement - Roger Davis Form 8-K filed February 18, 1997
10.17. Employment Agreement - Douglas P. Morris 48
10.18 Loan Agreement RE: USCF 58
10.19 Loan Agreement RE: Goodman Factors, Inc. 103
11.1 Schedule of Weighted Average Shares (2)
21.1 Subsidiaries of Registrant 147
23.1 Consent of Independent Accountant 148
</TABLE>
(1) Incorporated by reference to Proxy Statement relating to Annual
Meeting of Shareholders held January 1998.
(2) Contained in Financial Statements.
46
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Celtic Investment, Inc.
Date: September 25, 1998 By: /s/ Douglas P. Morris
Douglas P. Morris
President/Principal Executive Officer
Date: September 25, 1998 By: /s/ Frank Lucchese
Frank Lucchese
Chief Financial Officer
Principal Financial Officer
In accordance with the Securities Exchange Act, this report has been
signed below by the following persons on behalf of the Company and in the
capacities and on the dates indicated.
Signature Capacity Date
/s/Douglas P. Morris President//Director September 25, 1998
Douglas P. Morris
/s/ Larry Meek Director September 25, 1998
Larry Meek
/s/ Reese Howell, Jr. Director September 25, 1998
Reese Howell, Jr.
/s/ Howard Talks Director September 25, 1998
Howard Talks
/s/Robert Gregory Director September 25, 1998
Robert Gregory
47
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT made this 12th day of May, 1998, by and between Celtic
Investment, Inc., an Illinois Corporation (the "Company") and Douglas P. Morris
("Employee").
RECITALS
WHEREAS, the Company and Employee desire to modify their employment
relationship by means of this agreement ("Employment Agreement"); and
WHEREAS, the Company desires to continue to employ Employee as its
President and Employee is willing to continue to accept such employment by the
Company on the terms and subject to the conditions set forth in this Employment
Agreement;
NOW THEREFORE, in consideration of the promises and mutual covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereby agree as
follows:
AGREEMENT
1. Employment and Duties. The Effective Date of this Agreement shall be
May 12, 1998. Upon the Effective Date of the employment, the Company shall, and
hereby does, employ the Employee and Employee shall, and hereby does, accept
employment as President of the Company. Employee agrees to devote in good faith
substantially all of his time and best efforts to the services that he is
required to render to the Company hereunder. Employee shall report to the
Company's Board of Directors and at all times during the term of this Agreement
shall have powers and duties at least commensurate with his position in the
Company. Employee's duties with the Company shall be consistent with those
historically held by Employee as President of the Company.
1.1. Disclosure and Acceptance of Other Activities. The Company
acknowledges that Employee is currently involved in other business activities
including but no limited to those related to H & Capital Investment, Emerald
Capital Investments, Inc., American Polymer Corporation and Millennium
Electronics, Inc. The Company consents to the continued participation by
Employee in such activities subject to his fulfillment of any and all fiduciary
duties he will have as an officer and director of the Company including those
fiduciary duties relating to corporate opportunities.
2. Term of Employment.
2.1 Definitions. For the purposes of this Employment Agreement, the
following terms shall have the following meanings:
48
<PAGE>
2.1.1.Stock Option Agreement. "Stock Option Agreement" shall mean
the Stock Option Agreement dated the date hereof, entered into by the
Company and Employee whereby Employee is granted (i) options to purchase
150,000 shares of the Company's Common Stock, which options vest over a
period of time as provided for in the Stock Option Agreement and (ii)
options to purchase 150,000 shares of the Company's Common Stock, which
options vest on the basis of the achievement of certain operating results
as agreed to in the Stock Option Agreement.
2.1.2. Termination for Cause. "Termination For Cause" shall mean
termination by the Company of Employee's employment by reason of
Employee's willful dishonesty towards, fraud upon, or deliberate injury or
attempted injury to the Company, or by reason of Employee's willful
material breach of this Employment Agreement which has resulted in
material injury to the Company.
2.1.3 Termination Without Cause. "Termination Without Cause" shall
mean any termination of employee's employment by the Company other than
for cause by Reason of Disability or by Reason of Death.
2.1.4.Voluntary Termination. "Voluntary Termination" shall mean termination
by Employee of Employee's employment by the Company other than (i) as described
in paragraph 2.1.5 or (ii) termination by reason of Employee's death or
disability as described in paragraphs 2. 5. and 2.6.
2.1.5.Good Reason Resignation. "Good Reason Resignation" shall mean
termination by Employee of Employee's employment by the Company following
the occurrence of any of the events set out below unless such event is
fully corrected by the Company within 30 days following written
notification by Employee to the Company that Employee intends to terminate
his employment for one or more of the reasons set out below:
(a) removal of Employee from, or a failure to appoint or
reappoint Employee to, any of his offices or the assignment of
Employee to any duties inconsistent with Employee's status as
Chairman and President of the Company;
(b) failure by the Company without Employee's consent to pay to
Employee any portion of Employee's current compensation, including
bonuses, the vesting of stock options and the issuance of shares
upon exercise of stock options; or
(c) any material breach by the Company of any provision of this
Employment Agreement.
49
<PAGE>
2.2. Initial Term. The term of employment of Employee by the Company under
this Employment Agreement shall be for a period of three (3) years beginning
with Effective Date ("Initial Term"), unless terminated earlier pursuant to this
Section. At any time prior to the expiration of the Initial Term, the Company
and Employee may, by mutual written agreement, extend Employee's employment
under the terms of this Employment Agreement for such additional periods as they
may agree.
2.3. Termination For Cause. Termination for Cause may be effected
immediately by the Company during the term of this Agreement by written
notification to Employee. Upon Termination For Cause, the following shall
promptly occur:
(a) The Company shall pay Employee all accrued salary earned at the
date of Termination for Cause;
(b) The Company shall pay Employee all vacation pay which is accrued
at the date of Termination for Cause;
(c) The Company shall pay all business expenses incurred by Employee
in connection with his duties hereunder which are unpaid at the date of
Termination for Cause;
(d) The Company shall pay to Employee all compensation or benefits
due to Employee at the date of Termination for Cause under any agreement
or plans, excluding stock options which are specifically provided for in
paragraphs 2.3 (e) and (f) below;
(e) Employee has been granted incentive stock options to purchase
150,000 shares of the Company's Common Stock pursuant to the Stock Option
Agreement which options vest solely on the basis of time of employment
("Time Based Options" and "Time Based Option Shares"). In the event the
Employee is Terminated for Cause, the Time Based Options shall terminate
immediately except to the extent such options have vested.
(f) Employee has been granted incentive stock options to purchase
150,000 shares of the Company's Common Stock pursuant to the Stock Option
Agreement which options vest solely on the basis of the achievement of
certain financial results ("Performance Based Options" and "Performance
Based Option Shares"). The Performance Based Options shall terminate
immediately except to the extent such options have vested.
2.4. Termination Without Cause. The Company may terminate Employee's
employment for any reason and without cause at any time upon thirty (30) days
written notice to Employee. Upon Termination without Cause, the following shall
promptly occur:
50
<PAGE>
(a) The Company shall pay Employee all salary compensation for a
period of one year from the date of Termination Without Cause.
(b) The Company shall pay Employee all vacation pay which is accrued
at the date of Termination without Cause;
(c) The Company shall pay all business expenses incurred by Employee
in the connection with his duties hereunder which are unpaid at the date
of Termination without Cause;
(d) The Company shall pay or deliver to Employee all compensation or
benefits due to Employee at the date of Termination without Cause under
any agreement or plans excluding stock options which are specifically
provided for in paragraphs 2.4 (e)and (f) below;
(e) Employee has been granted incentive stock options to purchase
150,000 Time Based Option Shares which vest solely on the basis of time of
employment. In the event the Employee is Terminated without Cause, all
Time Based Options shall be accelerated and shall vest immediately.
(f) Employee has been granted incentive stock options to purchase
150,000 shares of the Company's Common Stock pursuant to the Stock Option
Agreement which vest solely on the basis of the achievement of certain
operating results. In the event that Employee's employment is Terminated
without Cause all Performance Based Options shall be accelerated and shall
vest immediately.
2.5. Termination by Reason of Disability. If, during the term of this
Agreement, Employee, in the reasonable judgment of the Board of Directors of the
Company, has failed to perform his duties under this Agreement on account of
illness or physical or mental incapacity, and such illness or incapacity
continues for a period of more than three (3) consecutive months, the Company
shall have the right to terminate Employee's employment hereunder by twenty (20)
days written notification to Employee. In the event of termination by reason of
disability, Employee shall pay Employee all cash and other compensation which
would be due and owing to Employee under paragraph 2.3 of this Employment
Agreement if Employee's employment had been Terminated for Cause by the Company
rather than as a result of the Disability of Employee.
Upon receipt of notice of termination under this paragraph 2.5, Employee
may request an opportunity to discuss the termination of his employment at a
meeting of the Boards of Directors of the Company. Such request must be made, if
at all, in writing and shall be delivered to the Company withing five (5) days
from the date Employee receives notification of termination of employment under
this paragraph 2.5. Upon receipt of such request, the Company shall, within a
reasonable time, call and hold a Board of Directors meeting to allow Employee to
discuss termination for reason of disability.
51
<PAGE>
2.6 . Death. In the event of Employee's death during the term of this
Agreement, Employee's employment shall be deemed to have terminated as of the
last day of the month during which his death occurs and the Company shall pay to
his estate or such beneficiaries as Employee may from time to time designate, to
the date of Employee's death all cash and other compensation which would be due
and owing to Employee under paragraph 2.3 of this Employment Agreement if
Employee's employment had been Terminated for Cause by the Company rather than
by as a result of the Death of Employee.
2.7. Voluntary Termination. In the event of a Voluntary Termination, The
Company shall pay to Employee all cash and other compensation which would be due
and owing to Employee under paragraph 2.3 of this Employment Agreement if
Employee's employment had been Terminated for Cause by the Company rather than
by the Voluntary Termination by Employee.
2.8. Good Reason Resignation. In the event of a Good Reason Resignation
Employee resigns, The Company shall continue to pay to Employee his salary for a
period of one (1) year from the date of Resignation for Good Reason and the
Company shall pay to Employee all cash and other compensation which would be due
and owing to Employee under paragraph 2.4 of this Employment Agreement if
Employee's employment had been Terminated without Cause by the Company rather
than the Good Reason Resignation by Employee.
3. Compensation. As his entire compensation for all services rendered to
the Company during the term of this Agreement, in whatever capacity rendered,
the Employee shall be paid, subject to withholding and other applicable
employment taxes, as follows;
3.1. Base Salary. Employee shall be paid a base salary of $100,000
per year commencing on the Effective Date. Such base salary shall be payable in
bi-monthly installments, provided however, if the first pay period of employment
is less than a full pay period, the first payment shall be prorated for the
number of days worked in the first calendar month of employment. Employee's base
salary shall be reviewed annually by the Board of Directors, and the base salary
for each employment year (or portion thereof) beginning July 1, 1999, shall be
determined by the Board of Directors which shall authorize an increase in
Employee's base salary for such year in an amount which, at a minimum, shall be
equal to the cumulative cost-of-living increment on the Base Salary as reported
in the "Consumer Price Index, Chicago, IL, All Items," published by the U.S.
Department of Labor (using January 1, 1995 as the base date for computation).
Provided however, that the base salary shall not increase by more than ten
percent (10%) per year due to increases in the Consumer Price Index.
3.2. Vacation. Employee shall be entitled to four (4) weeks of
vacation during each year during the term of this Agreement and any extensions
thereof, prorated for partial years.
3.3. Automobile Allowance. The Company shall pay Employee $300 per
month as an automobile allowance.
52
<PAGE>
3.4. Reimbursement for Expenses. During the term of this Agreement,
the Company shall reimburse Employee for reasonable and properly documented
out-of-pocket business and/or entertainment expenses incurred by Employee in
connection with his duties under this Agreement. The Company shall reimburse
Employee for 100% of his cellular telephone expenses on a monthly basis.
3.5. Additional Benefits. The Company shall provide the Employee
with health and disability insurance during the term of this Agreement. The
Employee shall be entitled to participate in such benefit and compensation plans
as are now generally available or later made generally available to the
employees or executive officers of the Company, including, but not limited to,
401(k) plans, stock option plans, profit sharing plans and other such plans and
benefits. The health plan offered to Employee hereunder will be at least as
advantageous to Employee as those offered by the Company prior to the date of
the execution of this Agreement.
4. Stock Options. As additional consideration for Employee's services
hereunder, the Employee shall be granted an option to purchase 400,000 shares of
Celtic Investment common stock at a price of $1.25 per share. The terms and
condition of such options are set forth in Exhibit "A" attached hereto and shall
be included in the Stock Option Agreement.
5. Covenant not to Compete. Employee agrees that he will not, during the
term of his employment, and for the ("Restriction Period") which is defined in
paragraph 5.1.2 of this Employment Agreement directly or indirectly, in any
state, county, city or metropolitan area in which the Company, or any subsidiary
of the Company has transacted business in the three (3) years preceding said
termination, own, manage, operate or control, or participate in the ownership,
management, operation or control of, or be connected with or have any interest
in, as a stockholder, director, officer, employee, agent, consultant, partner or
otherwise, any business which is engaged in the same business as the Company or
any Subsidiary of the Company. Specifically, but without limitation, this
covenant shall extend to all existing clients or customers of the Company and
all subsidiaries of the Company and all of the funding sources of the Company
and all subsidiaries of the Company.
5.1.1.If any of the provisions of this paragraph are held to be
unenforceable because of the scope, duration or area of its applicability, the
court making such determination shall have the power to modify such scope,
duration or area or all of them, and such provision shall then be applicable in
such modified form. The Company and the Employee acknowledge the reasonableness
of this covenant not to compete and the reasonableness of the geographic area
and duration of time which are part of this covenant.
5.1.2. The Restricted Period shall be that period of time during
which the Covenant not to Compete set forth in this paragraph 6 is binding upon
Employee. The Restricted Period shall initially be a period of twenty four (24)
months commencing on the Effective Date but shall be reduced thereafter by one
month for each full month of employment of Employee by the Company. Subject to
paragraph 6.1.3 below, in no event shall the Restricted Period be less
53
<PAGE>
than six (6) months from the date of termination of employment regardless of the
number of months of employment prior to termination.
5.1.3.In the event Employee's employment is terminated by the
Company without cause or in the event Employee Resigns for Good Reason, the
restrictions set forth in this paragraph 6 shall be limited to the time in which
Employee continues to receive a salary from The Company under this Agreement.
6. Confidential Information. Employee covenants and agrees not to
disclose, directly or indirectly, at any time either during employment or within
twenty four (24) months subsequent to the termination of employment to anyone
not an employee or consultant of the Company, and not to use at any time either
during employment or within two (2) years subsequent to the termination of
employment, except in the course of employment with the Company, any
Confidential Information, as defined below, of the Company or any parties
dealing with the Company unless he shall first secure the consent of the Company
in writing or unless he shall involuntarily be required to do so by a court
having competent jurisdiction, by any governmental agency having supervisory
authority over the business of he Company, or by any administrative body or
legislative body (including a committee thereof) with purported or apparent
jurisdiction to order Employee to divulge, disclose or make accessible such
information after notice to the Company. The Company and Employee hereby
acknowledge that: (a) the duration and geographical limitations imposed with
respect to said secret and confidential information are reasonable; and (b) the
restrictions stated hereinabove are reasonably necessary for the protection of
The Company's legitimate proprietary interests.
For purposes of this Agreement, the term Confidential Information shall
mean any and all:
(a) trade secrets concerning the business and affairs of the
Company, data, know-how, customer lists, current and anticipated customer
requirements, market studies, business plans, and any other information,
however documented, that is a trade secret within the meaning of the
Illinois Trade Secrets Act; and
(b) information concerning the business and affairs of the Company
(which includes historical financial statements, financial projections and
budgets, historical and projected sales, capital spending budgets and
plans, the names and backgrounds of key personnel, personnel training and
techniques and materials however documented; and
(c) notes, analysis, compilations, studies, summaries, and other
material prepared by or for the Company containing or based, in whole or
in part, on any information included in the foregoing.
Nothing contained in this paragraph 6 shall be deemed to apply to (i) any
information which is or becomes known to the public other than as a result of a
breach of this Section 6 by
54
<PAGE>
Employee or (ii ) any information which is lawfully acquired from a third party
who is not obligated to the Company to maintain such information in confidence.
7. Solicitation of Other Employees and/or Consultants. Employee agrees
that he will not, during the course of his employment or for a period of twenty
four (24) months commencing upon the expiration of his employment, either
voluntary or involuntary, for any reason whatsoever, directly or indirectly,
individually or on behalf of persons not now parties to this agreement, aid or
endeavor to solicit or induce any other employee, employees, consultant and/or
consultants of the Company to leave their employment with the Company in order
to accept employment of any kind with any other person, firm, partnership or the
Company.
8. Breach of Covenants by Employee. In the event that the Employee shall
breach paragraphs 5,6 or 7 of this agreement, then the Company shall be entitled
to seek injunctive relief against the Employee. In any proceeding commenced by
the Company to enforce paragraphs 5,6 or 7 of this Employment Agreement, the
prevailing party shall be liable and shall pay for all damages, court costs, and
reasonable attorneys' fees incurred as the direct result of commencing or
defending such proceeding. The provisions of paragraphs 5, 6 and 7 hereof shall
survive the termination of this Employment Agreement.
9. Miscellaneous.
9.1 This Employment Agreement and the written agreements referred to
herein, constitutes the entire agreement between the parties or the matters
discussed herein. It also supersedes any and all other agreements or contracts,
either oral or written, between the parties with respect to the subject matter
hereof.
9.2. The terms and conditions of this Employment Agreement may be amended
at any time by mutual agreement of the parties, provided that before any
amendment shall be valid or effective it shall have been approved by the Board
of Directors of the Company, reduced to writing and signed by the Company and
the Employee.
9.3. The invalidity or unenforceability of any particular provision of
this Employment Agreement shall not affect its other provisions, and this
Employment Agreement shall be construed in all respects as if such invalid or
unenforceable provision had been omitted.
9.4. Except as otherwise expressly provided herein, this Employment
Agreement shall be binding upon and inure to the benefit of the Company, its
successors and assigns, and upon the Employee, his administrators, executors,
legatees, heirs and assigns.
9.5. This Employment Agreement shall be construed and enforced under and
in accordance with the laws of the State of Illinois.
IN WITNESS WHEREOF, the parties have executed this Employment Agreement
the day and year first above-written.
55
<PAGE>
Celtic Investment, Inc. Employee:
By /s/Reese Howell, Jr. By /s/ Douglas P. Morris
Reese Howell, Jr., Senior Vice President Douglas P. Morris
56
<PAGE>
EXHIBIT "A"
EMPLOYMENT AGREEMENT
As additional compensation under the Employment Agreement to which the
Exhibit "A" is attached, the Company shall grant the Employee, the following
options("Options") to purchase shares of its common stock.
1. Exercise Price - All Options granted hereby shall be exercisable at the
price of $1.25 per share (the "Exercise Price"), the Closing Price of the
Company's common stock on the day of the grant of options as reported by NASDAQ.
2. Initial Option - Upon the Effective Date of the Employment Agreement,
the Company shall grant Employment an Initial Option entitling him to purchase
100,000 shares of the Company at the Exercise Price. The Initial Option shall be
fully vested as of the Effective Date and shall be exercisable for a period of
five years from the Effective Date.
3. Time Based Options - Options to purchase 150,000 shares shall be deemed
to be "Time Based Options ". The Time Based Options shall be granted on the
Effective Date but shall vest on each Anniversary Date of the Employment
Agreement. Options to purchase 50,000 shares shall vest on the first anniversary
date of the Employment Agreement, Options to purchase 50,000 shares shall vest
on the second anniversary date of the Employment Agreement, and Options to
purchase 50,000 shares shall vest on the third anniversary date of the
Employment Agreement. All Time Based Options shall be exercisable at the
Exercise Price. All Time Based Options shall be exercisable for a period of five
years from the date of vesting.
4. Performance Based Options - Options to purchase 150,000 shares shall be
deemed to be "Performance Based Options ". The Performance Based Options shall
be granted on the Effective Date but shall vest on each Anniversary Date of the
Employment Agreement. The Performance Based Options shall vest upon the Company
achieving increases in total assets, calculated on a consolidated basis and
determined in accordance with its annual Audited Financial Statements or its
unaudited interim statements. The Measuring Base Date shall be September 30,
1998. If the Company's total assets, calculated on a consolidated basis,
increase over the Measuring Base Date as provided below, the Performance Based
Options shall vest according to the following schedule:
57
AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
THIS AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT, dated as of
August __, 1998, is entered into between CAPITAL BUSINESS CREDIT, A DIVISION OF
CAPITAL FACTORS, INC., a Florida corporation ("Capital"), and U.S. COMMERCIAL
FUNDING CORPORATION, an Illinois corporation ("Borrower") in light of the
following facts:
WHEREAS, Borrower and Capital previously entered into that certain
Loan and Security Agreement, dated April 30, 1996 (the "Original Loan
Agreement").
WHEREAS, Borrower and Capital have agreed to amend certain terms and
conditions contained in the Original Loan Agreement.
WHEREAS, Borrower and Capital have agreed to enter into this Amended
and Restated Loan and Security Agreement which shall supersede the Original Loan
Agreement in its entirety.
The parties agree as follows:
1. DEFINITIONS
In addition to the defined terms contained in the first
paragraph and recitals above, as used herein, the following terms shall have the
following definitions:
1.1 "Accounts" means all presently existing and hereafter
arising accounts, instruments, notes, drafts, chattel paper and all other forms
of obligations owing to Borrower arising out of the sale or lease of goods or
the rendition of services by Borrower, whether or not earned by performance, and
any and all credit insurance, guaranties and other security therefor, as well as
all merchandise returned to or reclaimed by Borrower.
1.2 "Agreement" means this Amended and Restated Loan and
Security Agreement, any concurrent or subsequent riders or exhibits to this
Amended and Restated Loan and Security Agreement, and any extensions,
supplements, amendments or modifications to or in connection with this Amended
and Restated Loan and Security Agreement and/or to any such riders or exhibits.
1.3 "Borrower's Books" means all of Borrower's books and
records including, but not limited to: minute books; ledgers; records
indicating, summarizing or evidencing Borrower's assets and liabilities; all
information relating to Borrower's business operations or financial condition;
and all computer programs, disc or tape files, printouts, runs, and other
computer prepared information and the equipment containing such information.
1.4 "Borrowing Base Certificate" means the certificate,
substantially in the form of Exhibit 1.4, with appropriate insertions, to be
submitted to Capital by Borrower pursuant to this Agreement and certified as
true and correct by the Chief Executive Officer of Borrower or such other
employee or agent of Borrower who may have specific knowledge of the matters set
forth therein.
58
<PAGE>
1.5 "Borrower Guaranty" means that certain General Continuing
Guaranty, of even date herewith, executed by Borrower in favor of Capital with
respect to all present and future obligations of GFI owing to Capital.
1.6 "Business Day" means any day other than a Saturday,
Sunday, the day after Thanksgiving or any holiday on which banks in the States
of California or Florida are authorized by law to close.
1.7 "Capital Expenses" means all of the following: (i) costs
or expenses (including, without limitation, taxes and insurance premiums)
required to be paid by Borrower under this Agreement or any of the other Loan
Documents which are paid or advanced by Capital; (ii) filing, recording,
publication and search fees paid or incurred by Capital; and (iii) costs, fees
(including reasonable attorneys' and paralegals' fees) and expenses incurred by
or charged to Capital: (a) in connection with the Lockbox Agreement; (b) to
audit the Collateral; (c) to correct any default or enforce any provision of
this Agreement or any of the other Loan Documents whether or not litigation is
commenced; (d) in gaining possession of, maintaining, handling, preserving,
storing, shipping, selling, preparing for sale and/or advertising to sell the
Collateral, whether or not a sale is consummated; (e) in the event that the
Security Documents are being foreclosed, in collecting the Contracts, with or
without suit, or gaining possession of, maintaining, storing, selling, or
preparing for sale and advertising to sell the Property; and (f) in structuring,
drafting, reviewing, amending, defending or concerning this Agreement or any of
the other Loan Documents.
1.8 "CII" means Celtic Investment, Inc., a Delaware
corporation.
1.9 "Code" means the California Uniform Commercial Code, and
any and all terms used in this Agreement which are not defined herein but which
are defined in the Code shall be construed under this Agreement in accordance
with the definition ascribed to such terms under the Code.
1.10 "Collateral" means all of the following:
A. The Accounts;
B. The Contracts and all of Borrower's rights and benefits under the
Contracts, including, but not limited to, Borrower's right to receive payment in
full of the indebtedness owing to Borrower thereunder, whether now or hereafter
existing, together with any and all guarantees and/or security therefor, as well
as all of Borrower's Books relating thereto;
C. The Security Documents, together with any and all of Borrower's rights
in and to the Property covered thereby and in and to any policies of insurance
relative to such Property;
D. The Equipment;
E. The Financial Assets;
F. The General Intangibles;
G. Any money, deposit accounts or other assets of Borrower in which Capital
receives a security interest or which hereafter come into the possession,
custody or control of Capital;
59
<PAGE>
and
H. The proceeds of any of the foregoing, including, but not limited to,
proceeds of insurance covering the Collateral, or any portion thereof, and any
and all Accounts, Equipment, Financial Assets, General Intangibles, inventory,
money, deposit accounts or other tangible and intangible property resulting from
the sale or other disposition of the Collateral, or any portion thereof or
interest therein, and the proceeds thereof.
1.11 "Collateral Assignment" means that certain Collateral
Assignment, of even date herewith, to be executed by Borrower and Capital, and
consent to by Goodman and Reid.
1.12 "Commitment Fee" shall have the meaning set forth in
Section 2.8D.
1.13 "Contract Debtor" means each person or entity which is
obligated to Borrower to perform any duty under or to make any payment pursuant
to the terms of a Contract.
1.14 "Contract(s)" means all of Borrower's right, title and
interest in and to each presently existing and hereafter arising loan agreement,
accounts receivable financing agreement, factoring agreement, contract right,
instrument, note, chattel paper, and any other agreement creating or evidencing
obligations owing to Borrower, all rights of Borrower to receive payment
pursuant to the terms of each of the foregoing, together with all guarantees and
other rights of Borrower obtained in connection therewith, and any collateral
therefor.
1.15 "Cornerstone" means Cornerstone Partners Limited Partnership, a
Michigan
limited partnership.
1.16 "Daily Balance" means the amount determined by taking the
amount of the Obligations owed at the beginning of a given day, adding any new
Obligations advanced or incurred on such date, and subtracting any payments or
collections which are deemed to be paid on that date under the provisions of
this Agreement.
1.17 "Eligible Contract(s)" means each of those Contracts
which satisfy all of the following conditions: (i) pursuant to which Borrower
has loaned or advanced monies to a Contract Debtor, (ii) which, along with all
loans, advances and collateral therefor, have been validly assigned to Capital,
(iii) which strictly comply with all of Borrower's warranties and
representations to Capital contained herein; (iv) with respect to which the
Contract Debtor is not more than sixty (60) days delinquent in the making of any
scheduled payment thereunder; (v) are not subject to any defense, counterclaim,
offset, discount or allowance; (vi) the outstanding advances made by Borrower
under such Contract do not exceed more than thirty five percent (35%) of the
Tangible Net Worth; and (vii) not more than twenty five percent (25%) of the
outstanding accounts assigned to Borrower under such Contract are subject to a
dispute by the account debtors thereunder.
1.18 "Eligible Underlying Accounts Collateral" means, with
respect to each Eligible Contract, those accounts owing to a Contract Debtor
which have been validly assigned to Borrower pursuant to the Contract, contain
payment terms of net sixty (60) days, or less, from the date of the invoice, are
paid within ninety (90) days from the date of the invoice, and strictly comply
with all of the Contract Debtor's
60
<PAGE>
warranties and representations to Borrower contained in the Contracts and
Security Documents; but excluding the following: (i) accounts with respect to
which the goods are placed on consignment, guaranteed sale or other terms by
reason of which the payment by the customer may be conditional; (ii) accounts
with respect to which the customer is not a resident of the United States; (iii)
accounts as to which the account debtor has disputed its obligation to make
payment thereof; (iv) accounts with respect to which the customer is the United
States or any department, agency or instrumentality of the United States;
provided, however, that an account as to which the United States is the customer
shall not be deemed ineligible by reason of this clause (iv) if Borrower and the
Contract Debtor have completed all of the steps necessary to comply with the
Federal Assignment of Claims Act of 1940 (31 U.S.C. '203) with respect to such
account; (v) accounts with respect to which the customer is a subsidiary of,
related to, affiliated with, or has common shareholders, officers or directors
with the Contract Debtor; (vi) accounts with respect to which the Contract
Debtor is or may become liable to the customer for goods sold or services
rendered by the customer to the Contract Debtor; (vii) all of the accounts owed
by a customer of a Contract Debtor where twenty-five percent (25%) or more of
all of the accounts owed by that customer are not paid within ninety (90) days
from the date of the invoice; and (viii) all accounts owed to a Contract Debtor
by a customer that is the subject of an Insolvency Proceeding. Under this
section, an account which remains unpaid more than ninety (90) days from its
invoice date is not deemed to be Eligible Underlying Accounts Collateral even if
otherwise satisfies the remaining requirements of this section. Upon the request
of Borrower, Capital shall consider, in Capital's sole and absolute discretion,
extending the ninety (90) day period to one hundred twenty days (120) for
specific accounts, with all of the remaining requirements of Section 1.18
remaining unchanged. In connection with Capital's consideration of Borrower's
request, Borrower shall deliver to Capital all documentation requested by
Capital which Capital deems relevant to its decision. The ninety (90) day period
shall apply to all accounts unless and until Capital has notified Borrower in
writing, pursuant to Section 13 of the Loan Agreement, that the ninety (90) day
period has been extended to one hundred twenty (120) days for the accounts
specifically included in Capital's notice to Borrower.
1.19 "Eligible Underlying Collateral" means, collectively, the
Eligible Underlying Accounts Collateral, Eligible Underlying Equipment
Collateral and Eligible Underlying Inventory Collateral.
1.20 "'Eligible Underlying Equipment Collateral" means, with
respect to each Contract Debtor, the Contract Debtor's machinery and equipment,
valued as at any date of determination at the forced liquidation value (as
determined by appraisers and/or liquidators acceptable to Capital) which is
located at the Contract Debtor's place of business in the United States of
America, except the following: (a) machinery and equipment which is broken or in
a state of disrepair; (b) machinery and equipment which Capital determines, in
the exercise of reasonable discretion and in accordance with Capital's or the
customary business practices of such Contract Debtor, to be unacceptable for
borrowing purposes due to age, type, category and/or obsolescence; (c) machinery
and equipment with respect to which Capital, as the assignee of Borrower, does
not have a valid, first priority and fully perfected security interest; or (d)
machinery and equipment with respect to which there exists any security
interest, lien or encumbrance in favor of any third party other than Capital.
1.21 "Eligible Underlying Inventory Collateral" means, with
respect to each Contract Debtor, that portion of the Contract Debtor's
inventory, valued at the lower of average cost or market, owned by and in the
possession of such Contract Debtor, and located in the United States of America,
except the following: (a) work-in-process; (b) finished goods which do not meet
the specifications of the purchase order for such goods; (c) inventory which
Capital determines, in the exercise of reasonable discretion and in accordance
with Capital's or the customary business practices of such Contract Debtor, to
be unacceptable for
61
<PAGE>
borrowing purposes due to age, quality, type, category and/or quantity
including, without limitation, any inventory which is obsolete, not in good
condition, or not either currently usable or currently salable in the ordinary
course of the business of such Contract Debtor as determined by Capital; (d)
inventory with respect to which Capital, as the assignee of Borrower, does not
have a valid, first priority and fully perfected security interest; (e)
inventory with respect to which there exists any security interest, lien or
encumbrance in favor of any third party other than Capital; (f) inventory
produced in violation of the Fair Labor Standards Act and subject to the
so-called "hot goods" provisions contained in Title 29 U.S.C. 215 (a)(i); and
(g) inventory consisting of packaging, shipping materials or supplies.
1.22 "Eligible Term Loan" means a term loan made to a Contract
Debtor which satisfies the following conditions: (i) such term loan is made
pursuant to an Eligible Contract which also includes an accounts receivable
financing facility; (ii) the original principal amount of the term loan does not
exceed seventy percent (70%) of the value of the Eligible Underlying Equipment
Collateral securing the term loan; (ii) the aggregate outstanding indebtedness
of the Contract Debtor for advances based upon Eligible Underlying Inventory
Collateral and term loans does not exceed, at any time, one hundred percent
(100%) of the outstanding indebtedness of the Contract Debtor for advances based
upon Eligible Underlying Accounts Collateral; (iii) such term loan is fully
amortized over a period of thirty six (36) months or less from the date it is
made; and (iv) such term loan is due and payable in full by a date that is no
later than the final maturity and termination date of the accounts receivable
financing facility under the Eligible Contract.
1.23 "Equipment" means all of Borrower's present and hereafter
acquired machinery, computers, equipment, furniture, furnishings, fixtures,
motor vehicles, tools, goods and any interest in any of the foregoing, and all
attachments, accessories, accessions, replacements, substitutions, additions and
improve ments thereto, wherever located.
1.24 "Event of Default" means the occurrence of any one of the events set
forth in Section 9.
1.25 "Facility Fee" shall have the meaning set forth in
Section 2.8A.
1.26 "Financial Assets" means all of Borrower's present and
future investment property, financial assets, securities, security entitlements,
securities accounts, commodity accounts and commodity contracts.
1.27 "General Intangibles" means all of Borrower's present and
future general intangibles and all other presently owned or hereafter acquired
intangible personal property of Borrower (including, without limitation, any and
all choses or things in action, goodwill, patents, trade names, trademarks,
blueprints, drawings, purchase orders, customer lists, monies due or recoverable
from pension funds, route lists, infringement claims, computer programs,
computer discs, computer tapes, literature, reports, catalogs, deposit accounts,
tax refunds and tax refund claims) other than goods and accounts, as well as
Borrower's Books relating to any of the foregoing.
1.28 "GFI" means Goodman Factors, Inc., a Texas corporation.
1.29 "Goodman" means Harold Goodman , an individual.
62
<PAGE>
1.30 "Guaranty" means individually and "Guaranties" means
collectively the following guaranties:
A. That certain Validity Guaranty, of even date herewith, executed by
Lucchese in favor of Capital with respect to the present and future Obligations.
B. That certain Validity Guaranty, of even date herewith, executed by Meek
in favor of Capital with respect to the present and future Obligations.
C. That certain General Continuing Guaranty, of even date herewith,
executed by CII in favor of Capital with respect to the present and future
Obligations.
D. That certain General Continuing Guaranty, of even date herewith,
executed by GFI in favor of Capital with respect to the present and future
Obligations.
1.31 "Initial Term" shall have the meaning set forth in
Section 3.1A.
1.32 "Insolvency Proceeding" means any proceeding commenced by
or against any person or entity under any provision of the federal Bankruptcy
Code, as amended, or under any other bankruptcy or insolvency law, including,
but not limited to, assignments for the benefit of creditors, formal or informal
moratoriums, compositions or extensions generally with its creditors.
1.33 "Judicial Officer or Assignee" means any trustee,
receiver, controller, custodian, assignee for the benefit of creditors or any
other person or entity having powers or duties like or similar to the powers and
duties of a trustee, receiver, controller, custodian or assignee for the benefit
of creditors.
1.34 "Loan Documents" means collectively this Agreement, the
Term Note, the Collateral Assignment, the Lockbox Agreement and any other
agreements entered into between Borrower and Capital in connection with this
Agreement.
1.35 "Lockbox Agreement" means that certain Lockbox Agreement,
of even date herewith, among Borrower, Capital and Comerica Bank-Illinois (the
"Depository Bank").
1.36 "Lucchese" means Frank Lucchese, an individual.
1.37 "Maximum Credit Limit" means Six Million and 00/100 Dollars
($6,000,000.00); provided, however, that upon the written request of Borrower,
delivered pursuant to Section 13 of this Agreement, and so long as no Event of
Default shall have occurred, the Maximum Credit Limit may be increased to Twenty
Three Million Dollars ($23,000,000.00). Each increase in the Maximum Credit
Limit shall be in increments of One Million Dollars ($1,000,000).
1.38 "Meek" means Larry Meek, an individual.
1.39 "Net Worth" means, as of any date, the total assets of
Borrower minus the total liabilities of Borrower calculated in conformity with
GAAP.
63
<PAGE>
1.40 "Obligations" means any and all loans, advances, debts,
liabilities (including, without limitation, any and all amounts charged to
Borrower's account pursuant to any agreement authorizing Capital to charge
Borrower's account), obligations, lease payments, guaranties (including, without
limitation, the Borrower Guaranty), covenants and duties owing by Borrower to
Capital of any kind and description (whether advanced pursuant to or evidenced
by this Agreement, any of the other Loan Documents, or any other instrument, or
by any other agreement between Capital and Borrower and whether or not for the
payment of money), whether direct or indirect, absolute or contingent, due or to
become due, now existing or hereafter arising, and including, without
limitation, any debt, liability or obligation owing from Borrower to others
which Capital may have obtained by assignment or otherwise, and further
including, without limitation, all interest not paid when due and all Capital
Expenses which Borrower is required to pay or reimburse by this Agreement, by
law, or otherwise.
1.41 "Over Advance" shall have the meaning set forth in
Section 2.2.
1.42 "Potential Event of Default" means an event which with
the passage of time or the giving of notice or both would constitute an Event of
Default under this Agreement.
1.43 "Prime Rate" means the variable rate of interest, per
annum, published daily as the "prime rate" in the Money Rates Section of the
Wall Street Journal. In the event that such a rate is no longer published, then
the "Prime Rate" shall mean the variable rate of interest, per annum, most
recently announced by Capital Bank at its headquarters office as its "prime
rate," with the understanding that Capital Bank's "prime rate" is one of its
base rates and serves as a basis upon which effective rates of interest are
calculated for loans making reference thereto and may not be the lowest of
Capital Bank's base rates.
1.44 "Property" means all of the personal and real property
collateral described in the Security Documents.
1.45 "Reid" means Keith Reid, an individual.
1.46 "Renewal Term" shall have the meaning set forth in
Section 3.1.
1.47 "Security Document(s)" means all security agreements,
chattel mortgages, leases, deeds of trust, mortgages, or other security
instruments or agreements of every type and nature securing the obligations of a
Contract Debtor under a Contract.
1.48 "Subordination" means individually, and "Subordinations"
means collectively the following subordination agreements:
A. Those certain Subordination Agreements entered into between CII and
Capital, and acknowledged by Borrower, pursuant to Sections 5.1L and 5.2H.
B. That certain Subordination Agreement entered into between Goodman and
Capital, and acknowledged by Borrower, pursuant to Section 5.2F.
C. That certain Subordination Agreement , of even date
herewith, executed
64
<PAGE>
by Reid in favor of Capital with respect to the present and future Obligations,
pursuant to Section 5.2F.
D. That certain Subordination Agreement , of even date
herewith, executed
by Westpointe in favor of Capital with respect to the present and future
Obligations, pursuant to Section 5.2F.
E. That certain Subordination Agreement , of even date
herewith, executed
by Cornerstone in favor of Capital with respect to the present and future
Obligations, pursuant to Section 5.2F.
F. That certain Subordination Agreement , of even date
herewith, executed
by Vista in favor of Capital with respect to the present and future Obligations,
pursuant to Section 5.2F.
1.49 "Subordinating Creditor" means individually, and
"Subordinating Creditors" means collectively, the following persons and
entities:
A. CII.
B. Goodman.
C. Reid.
D. Westpointe.
E. Cornerstone.
Vista.
1.50 "Subordinated Debt" means all indebtedness owing by
Borrower to the Subordinating Creditors and any other third parties which has
been subordinated to the Obligations pursuant to the terms of a subordination
agreement acceptable to Capital in its sole discretion.
1.51 "Success Fee" shall have the meaning set forth in Section
2.8C.
1.52 "Tangible Net Worth" means an amount equal to the Net
Worth of Borrower increased by Subordinated Debt and decreased by the following:
patents, licenses, leasehold improvements, goodwill, subscription lists,
organization expenses, monies due from affiliates (including officers, directors
and shareholders), security deposits, and prepaid costs and expenses.
1.53 "Term Loan" shall have the meaning set forth in Section
2.1D.
1.54 "Term Note" means that certain Term Note, in the original
principal amount of Three Million Dollars ($3,000,000), in
65
<PAGE>
the form of Exhibit 1.52, which evidences the Term Loan.
1.55 "Unused Line Fee" shall have the meaning set forth in
Section 2.8B.
1.56 "Vista" means Vista Income Partners Limited
Partnership, a Michigan limited partnership.
1.57 "Westpointe" means Westpointe Partners Limited
Partnership, a Michigan limited partnership.
1.58 "Working Capital" means the amount determined by
subtracting the aggregate amount of Borrower's current liabilities from the
aggregate amount of Borrower's current assets. Borrower's current liabilities
and current assets shall be determined in accordance with GAAP consistently
applied.
1.59 Other Definitional Provisions. References to "Sections",
"subsections", and "Exhibits" shall be to Sections, subsections, and Exhibits,
respectively, of this Agreement unless otherwise specifically provided.
References to "Dollars" means United States Dollars. Any of the terms defined in
Section 1 may, unless the context otherwise requires, be used in the singular or
the plural depending on the reference. In this Agreement, words importing any
gender include the other genders; the words "including," "includes" and
"include" shall be deemed to be followed by the words "without limitation";
references to agreements and other contractual instruments shall be deemed to
include subsequent amendments, assignments, and other modifications thereto, but
only to the extent such amendments, assignments and other modifications are not
prohibited by the terms of this Agreement; references to any person includes
their respective permitted successors and assigns or people succeeding to the
relevant functions of such persons; and all references to statutes and related
regulations shall include any amendments of same and any successor statutes and
regulations.
2. LOANS AND TERMS OF PAYMENT
2.1 Credit Facilities.
A. Subject to the provisions contained in
Section 2.4, upon the request of Borrower, made at any time and from time to
time during the term of this Agreement, and so long as no Event of Default or
Potential Event of Default has occurred, Capital shall lend to Borrower with
respect to each Eligible Contract the lesser of: (i) eighty seven and one-half
percent (87.5%) of the aggregate amount of all outstanding advances made by
Borrower pursuant to such Eligible Contract where such advances are based upon a
percentage of the Contract Debtor's Eligible Underlying Accounts Collateral; or
(ii) seventy percent (70%) of the amount of the then
66
<PAGE>
qualifying Eligible Underlying Accounts Collateral assigned by the Contract
Debtor to Borrower pursuant to such Eligible Contract; provided, however, that
in no event shall Capital be obligated to make advances to Borrower under this
Section 2.1A whenever the aggregate amount of the outstanding advances made
pursuant to Section 2.1, or the amount that would be outstanding if Capital made
a requested advance, exceeds, at any one time, the Maximum Credit Limit.
B. Subject to the provisions contained in this
Section and in Section 2.4, upon the request of Borrower, made at any time and
from time to time during the term of this Agreement, and so long as no Event of
Default or Potential Event of Default has occurred, Capital shall lend to
Borrower with respect to each Eligible Contract the lesser of: (i) seventy
percent (70%) of the aggregate amount of all outstanding advances made by
Borrower pursuant to such Eligible Contract where such advances are based upon a
percentage of the Contract Debtor's Eligible Underlying Inventory Collateral; or
(ii) fifty percent (50%) of the amount of the then qualifying Eligible
Underlying Inventory Collateral assigned by the Contract Debtor to Borrower
pursuant to such Eligible Contract; provided, however, that in no event shall
Capital be obligated to make advances to Borrower under this Section 2.1B
whenever the aggregate amount of the outstanding advances made pursuant to
Section 2.1, or the amount that would be outstanding if Capital made a requested
advance, exceeds, at any one time, the Maximum Credit Limit. In addition to the
conditions set forth in Section 1.15, the following conditions must also be
satisfied for a Contract to be an Eligible Contract for the purposes of this
Section:
(1) The Eligible Contract must include an
accounts receivable financing facility and the inventory financing facility
under such Contract must be conterminous with the accounts receivable financing
facility;
(2) The outstanding indebtedness of the
Contract Debtor for advances based upon Eligible Underlying Inventory Collateral
shall not exceed, at any time, fifty percent (50%) of the Eligible Underlying
Inventory Collateral;
(3) The aggregate outstanding indebtedness
of the Contract Debtor for advances based upon Eligible Underlying Inventory
Collateral and for Eligible Term Loans shall not exceed, at any time, one
hundred percent (100%) of the outstanding indebtedness of the Contract Debtor
for advances based upon Eligible Underlying Accounts Collateral;
(4) Borrower shall have obtained an
appraisal of the Eligible Underlying Inventory Collateral pledged to
67
<PAGE>
Borrower pursuant to the Eligible Contract within twelve (12) months prior to
the date of the requested advance under this Section and a copy of such
appraisal shall have been delivered to Capital prior to such request;
(5) The Contract Debtor must at all times
maintain a perpetual inventory system; and
(6) The Borrower shall have obtained
landlord's waivers and warehouseman's lien releases for all locations where the
Contract Debtor maintains inventory.
C. Subject to the provisions contained Section
2.4, upon the request of Borrower, made at any time and from time to time during
the term of this Agreement, and so long as no Event of Default or Potential
Event of Default has occurred, Capital shall lend to Borrower with respect to
each Eligible Term Loan an amount equal to seventy percent (70%) of the
outstanding principal balance of such Term Loan; provided, however, that in no
event shall Capital be obligated to make advances to Borrower under this Section
2.1C whenever the aggregate amount of the outstanding advances pursuant to this
Section exceeds ten percent (10%) of the Maximum Credit Limit. In addition, in
no event shall Capital be obligated to make advances to Borrower under this
Section 2.1C whenever the aggregate amount of the outstanding advances pursuant
to Section 2.1, or the amount that would be outstanding if Capital made a
requested advance, exceeds, at any one time, the Maximum Credit Limit.
D. Upon the request of Borrower, made at any
time prior to August __, 1998, and so long as no Event of Default of Potential
Event of Default has occurred, Capital shall make term loan to Borrower in the
principal amount of Three Million Dollars ($3,000,000), which shall be repaid in
thirty five (35) consecutive monthly payments of principal in the amount of
Fifty Thousand Dollars ($50,000) and a final balloon payment in the thirty sixth
(36th) month in the principal amount of One Million Two Hundred Fifty Thousand
Dollars ($1,250,000), with accrued and unpaid interest due and payment with each
installment of principal (the "Term Loan"). The Term Loan shall be evidenced by
the Term Note, the principal installments shall be due on the specific dates
contained in the Term Note, and the Term Loan shall bear interest at the rates
set forth in the Term Note. In addition to the conditions precedent contained in
Section 5.1, the Term Loan shall be subject to the conditions precedent in
Section 5.2.
2.2 Over Advances. All of the advances, as well as the Term
Loan, made pursuant to Section 2.1 shall be added to and deemed part of the
Obligations when made. If, at any time and for any reason, the amount of any
advance made pursuant to Section 2.1 exceeds the applicable percentage
limitations for such advance (or
68
<PAGE>
dollar limitation in the case of the sub-limit for advances made against
Eligible Term Loans), or if all of Borrower's Obligations, at any time and for
any reason, exceed the Maximum Credit Limit (an "Over Advance"), then Borrower,
upon Capital's election and demand, shall immediately pay to Capital, in cash,
the amount of such excess.
2.3 Authorizations. Capital is hereby authorized to make the
advances and the extensions of credit provided for in this Agreement based upon
telephonic or other instructions received from any one of the authorized
personnel of Borrower identified on Exhibit 2.3, or, at the discretion of
Capital, if such extensions of credit are necessary to satisfy any Obligations
of Borrower to Capital. Although Capital shall make a reasonable effort to
determine the person's identity, Capital shall not be responsible for
determining the exact identity of the person calling and Capital may act on the
instructions of anyone it perceives to be one of the authorized personnel.
2.4 Borrowing Base Certificate and Required
Documentation.
A. Concurrent with the execution of this
Agreement by Borrower, with the request for each advance pursuant to Section
2.1, with each delivery of a schedule of Eligible Underlying Collateral by
Borrower to Capital, and, in any event on the fifteenth (15th) day of each month
during the term of this Agreement (the Borrowing Base Certificate delivered on
the 15th day of the month shall be dated as of the last day of the immediately
preceding calendar month), Borrower shall deliver to Capital a fully completed
Borrowing Base Certificate certified by Chief Executive Officer of Borrower or
such other employee or agent of Borrower who may have specific knowledge of the
matters set forth therein as being true and correct as of the date thereof and
certifying that to the best of such officer's, employee's or agent's knowledge,
after reasonable inquiry, Borrower is in full compliance with all of the terms
and conditions of this Agreement and that no Event of Default or Potential Event
of Default currently exists under this Agreement. If Borrower fails to deliver
to Capital the Borrowing Base Certificate on the date when due, then
notwithstanding any of the provisions contained in Section 2.1, Capital shall
have no obligation to make any advances to Borrower until such item is delivered
to Capital. By no later than 12:00 noon (Los Angeles Time) on Tuesday of each
week during the term of this Agreement, Borrower shall deliver to Capital an
accounts receivable aging with respect to each account assigned to Borrower in
connection with each Contract.
B. Prior to the Borrower's request pursuant to
Section 2.1 for the first advance to be made in connection with a Contract
Debtor, Borrower shall deliver to and/or insure that Capital has each of the
following documents, in form and content satisfactory
69
<PAGE>
to Capital and its counsel, pertaining to such Contract Debtor:
(1) A true and correct copy of any credit
application, financial statements, and other documents and information obtained
by Borrower and supplied by such Contract Debtor, which credit application,
financial statements, and other documents shall be of the type which Borrower
typically obtains from its Contract Debtors;
(2) A true and correct copy of the
Contracts executed by the Contract Debtor;
(3) A true and correct copy of the filed
financing statement(s) (Form UCC-1) executed by the Contract Debtor, together
with a UCC-2 assignment thereof executed by Borrower as secured party and
reflecting Capital as the assignee of secured party;
(4) A copy of the UCC and tax lien search
conducted by Borrower with respect to the Contract Debtor, and all other
documents that Capital may reasonably request, in form satisfactory to Capital,
to perfect and maintain perfected Capital's security interest in the Collateral
and in order to fully consummate all of the transactions contemplated under this
Agreement.
C. Upon the request of Capital, Borrower shall
deliver to and/or insure that Capital has a true and correct copy of each
schedule of Eligible Underlying Collateral assigned by each Contract Debtor to
Borrower, along with a copy of each invoice assigned to Borrower, a copy of
proofs of delivery or signed acknowledgments of service executed by the customer
of such Contract Debtor and any other information which Capital may require,
each in form and content satisfactory to Capital. In addition, Borrower shall
immediately deliver to Capital any documentation or information which is
supplemental or an update of the items listed in Section 2.4B.
D. Immediately after each advance has been made
by Borrower to a Contract Debtor, and in any event not more that one (1)
Business Day after such advance has been made, Borrower shall provide evidence
satisfactory to Capital, in Capital's sole discretion, of the advance, including
evidence of the amount of the advance and the Contract Debtor to whom the
advance was made.
2.5 Interest Rates.
A. Other than the Obligations evidenced by the
Term Note, the Obligations owed by Borrower to Capital shall bear interest, on
the average Daily Balance owing, at a rate one (1) percentage point above the
Prime Rate; provided, however, that all Over Advances shall bear interest, on
the average Daily Balance
70
<PAGE>
owing, at a rate three (3) percentage points above the Prime Rate.
B. Notwithstanding the foregoing, at no time
during the term of this Agreement shall the rate of interest be less than nine
percent (9%), per annum. All Obligations owed by Borrower to Capital shall bear
interest, from and after the occurrence of an Event of Default, and without
constituting a waiver of any such Event of Default, on the average Daily Balance
owing, at a rate three (3) percentage points above the Prime Rate.
C. All interest chargeable under this Agreement
shall be computed on the basis of a three hundred sixty (360) day year for
actual days elapsed.
2.6 Payment of Interest.
A. The Prime Rate as of the date of this
Agreement is ____________ percent (_______%) per annum. In the event that the
Prime Rate announced is, from time to time hereafter, changed, adjustment in the
rate of interest payable by Borrower shall be made as of 12:01 a.m. on the first
day of the calendar month following such change and shall be based on the Prime
Rate prevailing on the last day of the month in which such change occurred. All
interest on the Obligations shall be due and payable on the first (1st) day of
each calendar month during the term of this Agreement and Capital shall, at its
option, charge such interest and any and all Capital Expenses to Borrower's loan
account with Capital, which amounts shall thereupon constitute Obligations
hereunder and shall thereafter accrue interest at the applicable rate then
provided under Section 2.5.
B. Notwithstanding any provision to the
contrary contained in this Agreement or the other Loan Documents, Borrower shall
not be required to pay, and Capital shall not be permitted to collect, any
amount of interest in excess of the maximum amount of interest permitted by law
which parties may agree to in a written contract ("Excess Interest"). If any
Excess Interest is provided for or determined by a court of competent
jurisdiction to have been provided for in this Agreement or in any of the other
Loan Documents, then in such event: (1) the provisions of this subsection shall
govern and control; (2) neither Borrower nor any guarantor shall be obligated to
pay any Excess Interest; (3) any Excess Interest that Capital may have received
hereunder shall be, at Capital's option, (a) applied as a credit against the
outstanding principal balance of the Obligations of Borrower or accrued and
unpaid interest (not to exceed the maximum amount permitted by law), (b)
refunded to the payor thereof, or (c) any combination of the foregoing; (4) the
interest rate(s) provided for herein shall be automatically reduced to the
maximum lawful rate allowed from time to time under applicable law (the "Maximum
Rate"), and this Agreement
71
<PAGE>
and the other Loan Documents shall be deemed to have been and shall be, reformed
and modified to reflect such reduction; and (5) neither Borrower nor any
guarantor shall have any action against Capital for any damages arising out of
the payment or collection of any Excess Interest. Notwithstanding the foregoing,
if for any period of time interest on any Obligations of Borrower is calculated
at the Maximum Rate rather than the applicable rate under this Agreement, and
thereafter such applicable rate becomes less than the Maximum Rate, the rate of
interest payable on such Obligations of Borrower shall remain at the Maximum
Rate until Capital shall have received the amount of interest which Capital
would have received during such period on such Obligations of Borrower had the
rate of interest not been limited to the Maximum Rate during such period.
2.7 Collections. Unless and until Capital shall instruct
Borrower to the contrary, Borrower shall direct all of the Contract Debtors and
their customers to make payments to a post office box established in the name of
Capital pursuant to the Lockbox Agreement. The terms of the Lockbox Agreement
shall restrict access to the post office box to only personnel and agents of
Capital and the Depository Bank. All payments made to the post office box shall
be removed from the post office box not less than every Business Day and, upon
such payments constituting goods funds, shall be promptly wired transferred to
Capital's bank account. Pursuant to the terms of the Depository Account, within
one (1) Business Day following the deposit of such payments to Capital's bank
account, the Depository Bank shall provide Borrower with a copy of the deposit
slip and each check and any other item delivered to the post office box. Within
one (1) Business Day of Borrower's receipt of the copy of the deposit slips,
Borrower shall provide Capital with a Borrowing Base Certificate and a
Collection Report in the form of Exhibit 2.7. Following the occurrence of an
Event of Default, Capital or Capital's designee may, at any time, notify
Contract Debtors and their customers or account debtors that the Accounts and
the Property have been assigned to Capital and that Capital has a security
interest therein, collect them directly, and charge the collection costs and
expenses to Borrower's loan account; provided, however, that notwithstanding the
foregoing, Capital shall be entitled to contact Contract Debtors and their
customers and account debtors at any time for the purpose confirming any
obligations owing to Borrower or payable to Borrower. Borrower agrees that all
payments received by Borrower in connection with the Accounts, Property and any
other Collateral shall be held in trust for Capital as Capital's trustee. The
receipt of any wire transfer of funds, check, or other item of payment by
Capital shall be applied to conditionally reduce Borrower's Obligations, but
shall not be considered a payment on account unless such wire transfer is of
immediately available federal funds and is made to the appropriate deposit
account of Capital or unless and until such check or other item of payment is
honored when presented for payment. The receipt of any wire transfer, check or
72
<PAGE>
other item of payment by Capital shall be deemed to have been paid to Capital
one (1) business day after the date Capital actually receives possession of such
wire transfer of funds, check or other item of payment.
2.8 Fees.
A0 Facility Fee. Concurrent with each notice
delivered by Borrower to Capital requesting an increase in the Maximum Credit
Limit, Borrower shall pay to Capital a facility fee (the "Facility Fee") in an
amount equal to one-half percent (.5%) of the amount of the increase in the
Maximum Credit Limit. Each increase in the Maximum Credit Limit must be in an
increment of One Million Dollars ($1,000,000) and the total Maximum Credit Limit
may not exceed Twenty Three Million Dollars ($23,000,000). Payment of the
Facility Fee shall be made as of the due date by charging Borrower's account
with the amount of the Facility Fee. The Facility Fee shall represent an
unconditional payment to Capital in consideration of Capital's agreement to
extend financial accommodations to Borrower pursuant to this Agreement and shall
not reduce or be a deposit on account of the Obligations.
B0 Unused Line Fee. As of the last day of each
month during the term of this Agreement, Borrower shall pay to Capital a monthly
unused line fee (the "Unused Line Fee") equal to (i) one-quarter of one percent
(0.25%) of the average daily unused portion of the Maximum Credit Limit during
that month, divided by (ii) twelve (12). Payment of the Unused Line Fee shall be
made as of the due date by charging Borrower's account with the amount of the
Unused Line Fee. The Unused Line Fee shall represent an unconditional payment to
Capital in consideration of Capital's agreement to extend financial
accommodations to Borrower pursuant to this Agreement and shall not reduce or be
a deposit on account of the Obligations.
C0 Success Fee. In order to induce Capital to
make the Term Loan, Borrower agrees to pay the following success fee (the
"Success Fee"). The amount of the Success Fee depends on how quickly the Term
Loan is repaid in full. The Success Fee shall be determined by the following
chart:
Month During Which Prepayment Occurs Amount of
Success Fee
Month 1 through end of month 6
$125,000
Month 7 through end of month 12
$175,000
Month 13 through end of month 24
$200,000
73
<PAGE>
Month 25 through end of month 36
$250,000
For example, if the Term Loan is prepaid in full during the sixth (6th)
month following the date the Term Loan is made, then the Success Fee will be
equal to $125,000. However, if the Term Loan is prepaid in full on the first day
of the seventh (7th) month following the date the Term Loan is made, then the
Success Fee will be equal to $175,000. Payment of the Success Fee shall be made
as of the due date by charging Borrower's account with the amount of the Success
Fee. The Success Fee shall represent an unconditional payment to Capital in
consideration of Capital's making the Term Loan to Borrower and shall not reduce
or be a deposit on account of the Obligations.
D0 Commitment Fee. Concurrent with the
execution of this Agreement, Borrower shall pay to Capital a commitment fee (the
"Commitment Fee") in an amount equal to Fifty Thousand Dollars ($50,000).
Payment of the Commitment Fee shall be made as of the due date by charging
Borrower's account with the amount of the Commitment Fee. The Commitment Fee
shall represent an unconditional payment to Capital in consideration of
Capital's agreement to extend financial accommodations to Borrower pursuant to
this Agreement and shall not reduce or be a deposit on account of the
Obligations.
2.9 Payment on Non-Business Days. Whenever any payment to be
made hereunder shall be stated to be due on a day which is not a Business Day,
such payment shall be made on the next succeeding Business Day. Interest shall
continue to accrue on such payments until the date such payments are deemed
received by Capital.
2.10 Monthly Statements. Capital shall render monthly
statements of the Obligations owing by Borrower to Capital, including statements
of all principal, interest, Capital Expenses owing, outstanding accounts
receivable assigned to Capital and the amount of any reserve being maintained by
Capital, and such statements shall be conclusively presumed to be correct and
accurate and constitute an account stated between Borrower and Capital unless,
within thirty (30) days after receipt thereof by Borrower, Borrower shall
deliver to Capital, by registered or certified mail, at Capital's address
indicated in Section 13, written objection thereto specifying the error or
errors, if any, contained in any such statement.
30 TERM AND PREPAYMENT
3.1 Term.
A0 This Agreement shall have an initial term
(the "Initial Term") of three (3) years commencing on the date hereof
74
<PAGE>
and shall thereafter be automatically renewed (a "Renewal Term") for successive
periods of one (1) year unless terminated by either party as set forth below.
Notice of such termination shall be effectuated by the mailing of a certified
letter, return receipt requested, not less than sixty (60) days immediately
prior to the effective date of such termination, which date shall be an
anniversary date of this Agreement, addressed to the other party in the manner
and the address set forth in Section 13.
B0 Notwithstanding such term, upon the
occurrence of an Event of Default and during the continuation thereof, Capital
may terminate this Agreement without notice. In addition, should either Capital
or Borrower become insolvent or is unable to meet its debts as they mature, then
the other party shall have the right to terminate this Agreement at any time
without notice. On the date of a termination by Borrower or Capital, all
Obligations shall become immediately due and payable without notice or demand
and shall be paid to Capital in cash or by a wire transfer of immediately
available funds.
C0 When Capital has received payment and
performance in full of all Obligations (whether pursuant to this Section 3.1 or
Section 3.2) and an acknowledgment from Borrower that it is no longer entitled
to request any advances from Capital under this Agreement, Capital shall execute
a termination of all security interests given by Borrower to Capital.
3.2 Prepayment. Borrower may at any time on thirty (30) days
prior written notice, prepay the Obligations and terminate this Agreement by
paying to Capital in cash or by a wire transfer of immediately available federal
funds, the Obligations together with an amount equal to the following: (a) if
prepayment occurs during the first six (6) months of the Initial Term, an amount
equal to two percent (2%) of the then prevailing Maximum Credit Limit; (b) if
prepayment occurs at any time during the second six (6) months of the Initial
Term, an amount equal to one and one-half percent (1.5%) of the then prevailing
Maximum Credit Limit; and (c) if prepayment occurs at any time after the first
year of the Initial Term, an amount equal to one-half percent (0.5%) of the then
prevailing Maximum Credit Limit. When prepaying the Obligations, Borrower shall
also pay the interest accrued on the principal amount being prepaid to the date
of such prepayment.
40 CREATION OF SECURITY INTEREST
4.1 Grant of Security Interest. Borrower hereby grants to
Capital a continuing security interest in all presently existing and hereafter
acquired or arising Collateral in order to secure prompt repayment of any and
all Obligations owed by Borrower to Capital and in order to secure prompt
performance by Borrower of
75
<PAGE>
each and all of its covenants and obligations under this Agreement and otherwise
created. Capital's security interest in the Collateral shall attach to all
Collateral without further act on the part of Capital or Borrower.
4.2 Right to Audit and Inspect. In order to verify the
validity of any Borrowing Base Certificate, Borrower shall, upon the request of
Capital, promptly furnish Capital with copies of Borrower's financial and
business records, as well as any information which has been provided by Contract
Debtors to Borrower, and Borrower shall warrant the genuineness thereof. For
each twelve (12) month period commencing on the date of this Agreement, Capital
shall have the right to conduct four (4) periodic audits of the Collateral and
Borrower's financial condition at Borrower's expense; provided, however, that
Capital may conduct additional audits, at Capital's own expense so long as no
Event of Default shall have occurred, during each such twelve (12) month period.
Borrower shall pay to Capital as an audit fee Six Hundred Fifty Dollars ($650)
per auditor, per day for each audit in connection with the first four (4) audits
during each twelve (12) month period, as well as in connection with any audits
conducted following an Event of Default and the amount charged shall be deemed
included in the "Obligations" when incurred. The maximum audit fees shall not
apply to (i) the preliminary audit conducted prior to the date of this
Agreement; and (ii) the travel expenses reasonably incurred by Capital in
connection with each audit. Borrower shall reimburse Capital for all such travel
expenses. Capital will invoice Borrower for such audit fees and travel expenses
and Borrower shall pay to Capital the full amount of such costs and expenses
within fifteen (15) calendar days from the date of invoice.
4.3 Continuation of Security Interest. Until all Obligations,
contingent or otherwise, have been fully repaid and performed, Capital shall
retain its security interest in all existing Collateral and Collateral arising
thereafter.
4.4 Perfection of Security Interest. Borrower shall execute
and deliver to Capital, concurrent with Borrower's execution of this Agreement,
and at any time or times hereafter at the request of Capital, all financing
statements, continuation financing statements, fixture filings, security
agreements, chattel mortgages, assignments, endorsements of certificates of
title, applications for titles, affidavits, reports, notices, schedules of
accounts, letters of authority and all other documents that Capital may
reasonably request, in form satisfactory to Capital, to perfect and maintain
perfected Capital's security interests in the Collateral and in order to fully
consummate all of the transactions contemplated under this Agreement. In
connection with the foregoing, Borrower agrees to cause to be delivered to
Capital the consent on any computer software licensor to the assignment by
Borrower to Capital of those rights of
76
<PAGE>
Borrower in such software in order to enable Capital to obtain any computer
information which Capital requires which is accessible utilizing such software.
4.5 Access to Borrower's Books. Capital (through any of its
officers, employees or agents) shall have the right, at any time or times
hereafter, during Borrower's usual business hours, or during the usual business
hours of any third party having control over the records of Borrower, to inspect
and verify Borrower's Books in order to verify the amount or condition of, or
any other matter relating to, the Collateral and Borrower's financial condition.
Capital (through any of its officers, employees or agents) shall also have the
right, at any time or times hereafter, to confirm with the Contract Debtors the
amount of their indebtedness owing to Borrower, the assignment of all or any of
the Property to Borrower, the value and amount of the Property (including
contacting any customers or account debtors thereunder), and any other
information relating to the Collateral.
4.6 Additional Documentation. With each assignment of
Collateral hereunder Borrower shall deliver to and/or insure that Capital has,
in form satisfactory to Capital and its counsel, such other instruments,
financing statements, continuation financing statements, fixture filings,
security agreements, mortgages, assignments, certificates of title, affidavits,
reports, documents, notices, schedules of Contracts, letters of authority and
all other documents that Capital may reasonably request, in form satisfactory to
Capital, to perfect and maintain perfected Capital's security interest in the
Collateral and in order to fully consummate all of the transactions contemplated
under this Agreement.
4.7 Retention of Security Interest. Capital shall retain its
security interest in all Collateral until all of Borrower's Obligations have
been fully repaid as required hereunder and this Agreement has been terminated.
Capital may, after the occurrence of an Event of Default, settle or adjust
disputes and claims directly with Contract Debtors and customers of Contract
Debtors for such amounts and upon such terms as Capital considers advisable, and
in such cases, Capital will credit Borrower's account with only the net amounts
received by Capital in payment of such disputed Contracts or Property, after
deducting all Capital Expenses incurred or expended in connection therewith.
4.8 Power of Attorney. Borrower hereby irrevocably makes,
constitutes and appoints Capital (and any of Capital's officers, employees or
agents designated by Capital) as Borrower's true and lawful attorney with power:
A0 Upon Borrower's failure or refusal to comply
with its undertakings contained in Section 4.4, to sign the name of
77
<PAGE>
Borrower on any of the documents described in that section or on any other
similar documents which need to be executed, recorded and/or filed in order to
perfect or continue perfected Capital's security interest in the Collateral;
B0 To endorse Borrower's name on any checks,
notes, acceptances, money orders, drafts or other forms of payment or security
that may come into Capital's possession and to execute UCC Termination
Statements on behalf of Borrower;
C0 After the occurrence of an Event of Default
and so long as such Event of Default has not been waived of cured (to the extent
there is an applicable cure period), to notify the post office authorities to
change the address for delivery of Borrower's mail to an address designated by
Capital, to receive and open all mail addressed to Borrower, and to retain all
mail relating to the Collateral and forward, within two (2) business days of
Capital's receipt thereof, all other mail to Borrower;
D0 After the occurrence of an Event of Default
and so long as such Event of Default has not been waived of cured (to the extent
there is an applicable cure period), to compromise and settle any and all
Accounts, indebtedness owing to Borrower under Contracts, Eligible Underlying
Accounts Collateral, and other obligations owing to Borrower or which have been
assigned to Borrower, to enter into settlement agreements and mutual general
releases on Borrower's behalf and to execute any notices, reconveyances or other
documentation in connection with any such settlement; and
E0 To do all things reasonably necessary to
carry out this Agreement.
The appointment of Capital as Borrower's attorney, and each
and every one of Capital's rights and powers, being coupled with an interest,
are irrevocable until all of the Obligations have been fully paid and performed
and payments received by Capital are no longer subject to avoidance. Borrower
ratifies and approves all acts of Capital as Borrower's attorney taken in
connection with the transactions contemplated by this Agreement and neither
Capital nor its employees, officers or agents shall be liable for any acts or
omissions or for any error in judgment or mistake of fact or law made in good
faith except for gross negligence or willful misconduct.
50 CONDITIONS PRECEDENT
5.1 As conditions precedent to Capital's obligation to make
the advances and extend the financial accommodations hereunder, Borrower shall
execute and deliver, or cause to be executed and delivered, to Capital, in form
and substance satisfactory to Capital and its counsel, the following:
78
<PAGE>
A0 Financing statements (form UCC-1) and
fixture filings in form satisfactory for filing and recording with
the appropriate governmental authorities;
B0 Certified extracts from the minutes of the
meetings of board of directors of Borrower authorizing the borrowings and the
granting of the security interest provided for herein and authorizing specific
officers to execute and deliver the Loan Documents;
C0 A certified copy of Borrower's Articles of
Incorporation and any amendments thereto, a certificate of status showing that
Borrower is in good standing under the laws of the State of Illinois and
certificates indicating that Borrower has qualified to transact business and is
in good standing in any other state in which the conduct of its business or its
ownership of property requires that it be so qualified;
D0 UCC searches, tax lien and litigation
searches, fictitious business statement filings, insurance certificates, notices
or other similar documents which Capital may require and in such form as Capital
may require, in order to reflect, perfect or protect the priority of Capital's
security interests in the Collateral and in order to fully consummate all of the
transactions contemplated under this Agreement;
E0 Evidence satisfactory to Capital that
Borrower has obtained insurance policies or binders, with such insurers and in
such amounts as may be acceptable to Capital, respecting the Equipment and any
other tangible personal property comprising the Collateral and naming Capital as
a loss payee on a 438-BFU endorsement;
F0 The Commitment Fee;
G0 The Facility Fee (if Borrower has requested
an increase in the Maximum Credit Limit);
H0 The Loan Documents;
I0 A fully completed Borrowing Base
Certificate, dated as of the effective date of this Agreement;
J0 The original Contracts properly endorsed in
favor of and assigned to Capital;
K0 The Guaranties prepared on Capital's
standard form and duly executed;
L0 Certified extracts from the minutes of the
79
<PAGE>
meetings of CII's and GFI's board of directors authorizing the execution of
their respective General Continuing Guaranties of the Obligations and
authorizing specific officers to execute and deliver such guaranties;
M0 The Subordination Agreement prepared on
Capital's standard form and duly executed by CII and acknowledged by
Borrower;
N0 Certified extracts from the minutes of the
meetings of CII's board of directors authorizing the execution of the
Subordination Agreement and authorizing specific officers to execute and deliver
such Subordination Agreement;
O0 A disbursement letter from Borrower
authorizing and directing Capital to make the initial advances
hereunder.
5.2 In addition to the conditions precedent contained in
Section 5.1, as additional conditions precedent to Capital's obligation to make
the Term Loan, Borrower shall execute and deliver, or cause to be executed and
delivered, to Capital, in form and substance satisfactory to Capital and its
counsel, the following:
A0 Borrower shall have delivered to Capital a
certified copy of that certain Stock Purchase Agreement, dated ___________ 1998,
among Borrower, Goodman and Reid, pursuant to which Borrower is acquiring the
capital stock of GFI and Capital and its legal counsel shall have approved, in
their sole discretion, the terms of such stock purchase agreement;
B0 Evidence satisfactory to Capital that
Borrower has completed all of the non-monetary conditions for the
purchase of the capital stock of GFI;
C0 Evidence satisfactory to Capital that CII,
Cornerstone, Westpointe and/or Vista have, in the aggregate, made capital
contributions or subordinated loans (or a combination thereof) to Borrower in an
amount not less than Three Million Dollars ($3,000,000) the proceeds of which
were used by Borrower in connection with its purchase of the capital stock of
GFI;
D0 A copy of the certified extracts from the
minutes of the meetings of Borrower's board of directors authorizing
the purchase of the capital stock of GFI;
E0 A disbursement letter from Borrower
authorizing and directing Capital to disburse the loan proceeds;
F0 The Subordination Agreements prepared on
Capital's standard form and duly executed by each of the Goodman,
80
<PAGE>
Reid, Westpointe, Cornerstone and Vista, respectively, and each
acknowledged by Borrower;
G0 Certified extracts from the minutes of the
meetings of Westpointe's, Cornerstone's and Vista=s general partners authorizing
the execution of their respective Subordinations and authorizing specific
partners to execute and deliver such Subordinations;
H0 To the extent that CII has made a term loan
to Borrower (in connection with the required funding under Section 5.2C above),
CII shall execute and deliver to Capital a subordination agreement containing
terms and conditions satisfactory to Capital, in its sole discretion, and CII
shall also deliver to Capital a copy of the certified extracts from the minutes
of the meetings of CII's board of directors authorizing the execution and
delivery of such subordination agreement. The subordination agreement shall be
included in the defined term "Surbordinations."
60 BORROWER'S REPRESENTATIONS AND WARRANTIES
Borrower makes the following representations and warranties
which shall be deemed to be continuing representations and warranties so long as
any credit hereunder shall be available and until the Obligations have been
repaid in full:
6.1 Existence and Rights.
A0 The chief executive office of Borrower is
located at 17W220 22nd Street, Suite 420, Oakbrook Terrace, Illinois
60181;
B0 Borrower is duly organized and existing
under the laws of the State of Illinois and is qualified and licensed to do
business and is in good standing in any state in which the conduct of its
business or its ownership of property requires that it be so qualified;
C0 Borrower has the right and power to enter
into this Agreement and each of the other Loan Documents;
D0 Borrower has the power, authority, rights
and franchises to own its property and to carry on its business as
now conducted;
E0 Borrower has no investment in any business
entity except as previously disclosed to Capital in writing.
6.2 Agreement Authorized. The execution, delivery
and performance by Borrower of this Agreement and each of the other
81
<PAGE>
Loan Documents: (a) have been duly authorized and do not require the
consent or approval of any governmental body or other regulatory
authority; and (b) shall not constitute a breach of any provision
contained in Borrower's Articles of Incorporation or Bylaws.
6.3 Binding Agreement. This Agreement is the valid, binding
and legally enforceable obligation of Borrower in accordance with its terms.
6.4 No Conflict. The execution, delivery and performance by
Borrower of this Agreement and each of the other Loan Documents: (a) shall not
constitute an event of default under any agreement, indenture or undertakings to
which Borrower is a party or by which it or any of its property may be bound or
affected; (b) are not in contravention of or in conflict with any law or
regulation; and (c) do not cause any lien, charge or other encumbrance to be
created or imposed upon any such property by reason thereof.
6.5 Litigation. There are no actions or proceedings pending by
or against Borrower or any guarantor of Borrower before any court or
administrative agency, and Borrower has no knowledge or belief of any pending,
threatened or imminent litigation, governmental investigations or claims,
complaints, actions or prosecutions involving Borrower or any guarantor of
Borrower, except for ongoing collection matters in which Borrower is the
plaintiff and except as heretofore disclosed, in writing, to Capital. Borrower
is not in default with respect to any order, writ, injunction, decree or demand
of any court or any governmental or regulatory authority.
6.6 Financial Condition. All financial statements and
information relating to Borrower which have been delivered by Borrower to
Capital have been prepared in accordance with generally accepted accounting
principles consistently applied, unless otherwise stated therein, and fairly and
reasonably present Borrower's financial condition. There has been no material
adverse change in the financial condition of Borrower since the date of the most
recent of such financial statements submitted to Capital. Borrower has no
knowledge of any liabilities, contingent or otherwise, which are not reflected
in such financial statements and information, and Borrower has not entered into
any special commitments or contracts which are not reflected in such financial
statements or information which may have a materially adverse effect upon
Borrower's financial condition, operations or business as now conducted.
6.7 Tax Status. Borrower has no liability nor have any claims
been asserted against Borrower for any delinquent state, local or federal taxes.
6.8 Title to Assets. Other than the security interests granted
to Cornerstone and Westpointe and subordinated to the security interests of
Capital, Borrower has good title to its
82
<PAGE>
assets and the same are not subject to any liens or encumbrances.
6.9 Trademarks and Patents. Borrower, as of the date hereof,
possesses all necessary trademarks, trade names, copyrights, patents, patent
rights and licenses to conduct its business as now operated, without any known
conflict with the valid trademarks, trade names, copyrights, patents and license
rights of others.
6.10 Environmental Quality. Borrower has in the past and is
currently in compliance with any and all federal, state and local statutes, laws
and regulations concerning the preservation of the environment and the use and
disposal of hazardous and toxic materials and substances. Borrower is not aware
that it is under investigation by any state or federal agency designed to
enforce any of such laws or regulations.
6.11 Equipment.
A0 All of the Equipment is currently located at
Borrower's address set forth in Section 6.1A;
B0 The Equipment is and shall remain free from
all liens, claims, encumbrances, and security interests (except as held by
Capital, except for the subordinate security interests granted to Cornerstone
and Westpointe, and except as may be specifically consented to, in advance and
in writing, by Capital).
6.12 Contracts and Security Documents.
A0 Each Contract is a bona fide, good, valid,
enforceable and subsisting obligation of the Contract Debtor thereunder, and
Borrower does not know of any fact which impairs or will impair the validity of
any such Contract.
B0 Each Contract and the Security Documents are
free of any claim for credit, deduction, discount, allowance, defense (including
the defense of usury), dispute, counter-claim or setoff.
C0 Each Contract is wholly free of any prior
assignment, superior security interest, lien, claim or encumbrance in favor of
any person other than Capital.
D0 The Security Documents properly and
reasonably describe the subject personal property collateral.
E0 Each Contract correctly sets forth the terms
between Borrower and the Contract Debtor, including, without limitation, the
interest rate and/or fees applicable thereto.
F0 All state and federal laws have been
83
<PAGE>
complied with in conjunction with the Contracts and Security Documents, the
non-compliance with which would have an adverse impact on the value,
enforceability or collectability of the Contracts or Security Documents.
G0 Borrower has good and valid title to, and
full right and authority to pledge and assign the Contracts and Security
Documents to Capital and no payment is past due under any Eligible Contract.
H0 The signatures of officers of the Contract
Debtor on each Contract and Security Documents related thereto are genuine, and,
to the best knowledge of Borrower, such officers were authorized and had the
legal capacity to enter into and execute such documents on the date thereof.
70 BORROWER'S AFFIRMATIVE COVENANTS
Borrower covenants and agrees that so long as any credit
hereunder shall be available and until the Obligations have been repaid in full,
unless Capital shall otherwise consent in writing, Borrower shall do all of the
following:
7.1 Rights and Facilities. Borrower shall maintain and
preserve all rights, franchises and other authority adequate for the conduct of
its business. Borrower shall also maintain its properties, equipment and
facilities in good order and repair and conduct its business in an orderly
manner without voluntary interruption and maintain and preserve its existence.
7.2 Records and Servicing of Contracts.
A0 Borrower shall keep or will cause to be kept
in a safe place, at its chief executive office, copies (or the originals if
Capital determines in its sole discretion to allow Borrower to retain such
originals) of the Contracts and Security Documents, all necessary, proper and
accurate books, records, ledgers, correspondence and other documents or
instruments related to or concerning the Contracts and the Security Documents.
Capital shall, at all reasonable times, have the right to inspect, verify,
check, make abstracts from and photocopies of Borrower's Books, and any
correspondence and other papers pertaining to the Contracts and Security
Documents.
B0 In consideration of the advances to be made
by Capital pursuant hereto, and at no expense to Capital, Borrower covenants and
agrees to diligently and faithfully perform the following services relating to
the Contracts and Security Documents, unless and until notified by Capital that
it does not desire Borrower to continue to perform any or all such services:
84
<PAGE>
(1) Borrower will use commercially
reasonable efforts to collect all payments due under the Contracts. On the
fifteenth (15th) day of each month, Borrower shall provide Capital with a
written report identifying each Contract, if any, under which scheduled payments
are thirty (30) days or more past due and shall inform Capital, in writing, of
all decisions regarding collection efforts concerning any such Contract and
concerning repossession of Property.
(2) Borrower will perform customary
insurance follow-up with respect to each policy of insurance covering the
Property, if any. If required or prudent insurance on any Property is canceled,
terminated or lapses, Borrower shall immediately, and at its sole cost and
expense, obtain replacement insurance coverage.
(3) Borrower will promptly notify Capital
if and when any of the following shall come to its attention: (a) if any
material default arises under the terms of a Contract and/or Security Document,
which default shall not be waived by Borrower without the prior written consent
of Capital; (b) if any material item of Property should be damaged, lost,
destroyed or stolen, and such item or items of Property shall not have been
repaired, replaced or cured by the Contract Debtor within a reasonable time; or
(c) if any Property is moved from the location or locations where it is required
to be kept under the terms of the Security Document.
(4) Borrower acknowledges that it is not
authorized or empowered to waive or vary the terms of any Contract or Security
Document in a way that would be adverse to Capital's interests, and Borrower
agrees that it will not, at any time, waive or consent to a postponement of
strict compliance on the part of a Contract Debtor with respect to any material
term, provision or covenant contained in any Contract or Security Document, nor
forbear or grant any material indulgence to a Contract Debtor, without the prior
written consent of Capital.
7.3 Location of Equipment. The Equipment shall be located only
at Borrower's chief executive office or such other locations as shall have been
approved by Capital, which approval shall not be unreasonably withheld.
7.4 Insurance.
A0 Borrower, at its expense, shall insure the
Equipment against loss or damage by fire, theft, explosion, sprinklers and all
other hazards and risks ordinarily insured against by other owners who use such
properties in similar businesses for the full insurable value thereof. Borrower
shall deliver to Capital certified copies of such policies of insurance and
evidence of the
85
<PAGE>
payments of all premiums therefor. Borrower shall also keep and maintain
business interruption, public liability, and property damage insurance relating
to Borrower's ownership and use of the Equipment and its other assets. All such
policies of insurance shall be in such form, with such companies, and in such
amounts as may be satisfactory to Capital. All such policies of insurance
(except those of public liability and property damage) shall contain an
endorsement in a form satisfactory to Capital showing Capital as a loss payee
thereof, with a waiver of warranties on a 438-BFU endorsement, and all proceeds
payable thereunder shall be payable to Capital and, upon receipt by Capital,
shall be applied on account of the Obligations owing to Capital. To secure the
payment of the Obligations, Borrower grants Capital a security interest in and
to all such policies of insurance (except those of public liability and property
damage) and the proceeds thereof, and Borrower shall direct all insurers under
such policies of insurance to pay all proceeds thereof directly to Capital.
B0 Prior to an Event of Default under this
Agreement, Borrower shall have the exclusive right to make, settle and adjust
any and all claims under such policies of insurance; provided, however, that
Borrower shall not legally conclude the settlement or adjustment of any claim in
excess of Ten Thousand and 00/100 Dollars ($10,000.00) without first obtaining
the written consent of Capital.
C0 Borrower hereby irrevocably appoints Capital
(and any of Capital's officers, employees or agents designated by Capital) as
Borrower's attorney following the occurrence of an Event of Default for the
purpose of making, settling and adjusting all claims under such policies of
insurance, endorsing the name of Borrower on any check, draft, instrument or
other item of payment for the proceeds of such policies of insurance, and for
making all determinations and decisions with respect to such policies of
insurance.
D0 Borrower will not cancel any of such
policies without Capital's prior written consent. Each such insurer shall agree
by endorsement upon the policy or policies of insurance issued by it to Borrower
as required above, or by independent instruments furnished to Capital, that it
will give Capital at least ten (10) days written notice before any such policy
or policies of insurance will be altered or canceled, and that no act or default
of Borrower, or any other person, shall affect the right of Capital to recover
under such policy or policies of insurance or to pay any premium in whole or in
part relating thereto. If Borrower fails to comply with its covenants contained
in this Section 7.4, Capital may, but shall have no obligation to, obtain and
maintain such policies of insurance and pay such premiums and take such other
action with respect to such policies which Capital deems prudent.
86
<PAGE>
7.5 Notice of Litigation. If at any time during the term of
this Agreement any litigation, governmental investigations or claims,
complaints, actions or prosecutions involving Borrower or any guarantor of
Borrower shall be commenced or threatened, Borrower shall immediately notify
Capital in writing of such event.
7.6 Submission of Records and Reports.
A0 Borrower agrees to use its best efforts to
deliver to Capital, on a daily basis, a collateral and loan status report
summarizing the status of each Contract by indicating, with respect to each
Contract, the amount of outstanding advances made by Borrower under such
Contract, the amount of all outstanding accounts and other Property assigned to
Borrower thereunder, the amount of loan availability under the Contract, the
amount of collections received since the last report, the date of the last
accounts receivable aging with respect to such Contract Debtor, a copy of each
invoice assigned to Borrower (together with a copy of proofs of delivery or
signed acknowledgments of service executed by the customer of such Contract
Debtor), and any other information required by Capital.
B0 Borrower shall deliver to Capital on first
Business Day of each week during the term of this Agreement a detailed report of
all outstanding accounts assigned to Borrower by the Contract Debtors which, as
of the last Business Day of the immediately preceding week, do not constitute
Eligible Underlying Accounts Collateral.
C0 Borrower shall execute and deliver to
Capital by the fifteenth (15th) day of each month during the term of this
Agreement, a report containing the following information regarding each Contract
as of the last day of the immediately preceding calendar month: (i) a statement
reflecting all of the advances, repayments, other loan activity, and the status
of the Property securing the obligations of the Contract Debtor under that
Contract; (ii) an accounts receivable status report setting forth, among other
information, an aging of the accounts receivable, the amount of the Eligible
Underlying Accounts Collateral, the amount of the ineligible accounts
receivable, and the percentage determined by dividing the total amount of all
obligations of a Contract Debtor arising under the Contract by the aggregate
amount of all obligations owing to Borrower from all of its Contract Debtors;
and (iii) a summary of the Contracts which shall set forth, among other things,
the delinquency rate of the obligations arising under the Contracts and
indicating under which Contracts, if any, Property is in foreclosure;
D0 Borrower shall promptly supply Capital with
such other information concerning its affairs as Capital may request
87
<PAGE>
from time to time hereafter, and shall promptly notify Capital of any material
adverse change in Borrower's financial condition and of any condition or event
which constitutes a breach of, or an event which constitutes an Event of Default
or Potential Event of Default under, this Agreement.
7.7 Acquisition of Assets. Borrower shall promptly notify
Capital in writing of its acquisition by purchase, lease or otherwise of any
after-acquired tangible property having a value greater than Fifty Thousand and
00/100 Dollars ($50,000.00) and of the type included in the Collateral.
7.8 Taxes. All assessments and taxes, whether real, personal
or otherwise, due or payable by, or imposed, levied or assessed against Borrower
or any of its property shall be paid in full, before delinquency or before the
expiration of any extension period. Borrower shall make due and timely payment
or deposit of all federal, state and local taxes, assessments or contributions
required of it by law, and will execute and deliver to Capital, on demand,
appropriate certificates attesting to the payment or deposit thereof. Borrower
will make timely payment or deposit of all F.I.C.A. payments and withholding
taxes required of it by applicable laws, and will, upon request, furnish Capital
with proof satisfactory to Capital indicating that Borrower has made such
payments or deposits.
7.9 Financial Statements.
A0 Borrower shall maintain a standard and
modern system of accounting in accordance with generally accepted accounting
principles consistently applied with ledger and account cards and/or computer
tapes, discs, printouts, and records pertaining to the Collateral which contain
information as may from time to time be requested by Capital. Borrower shall not
modify or change its method of accounting or enter into, modify or terminate any
agreement presently existing, or at any time hereafter entered into with any
third party accounting firm and/or service bureau for the preparation and/or
storage of Borrower's accounting records without said accounting firm and/or
service bureau agreeing to provide to Capital information regarding the
Collateral and Borrower's financial condition. Borrower agrees to permit Capital
and any of its employees, officers or agents, upon demand, during Borrower's
usual business hours, or the usual business hours of third persons having
control thereof, to have access to and examine all of Borrower's Books relating
to the Collateral, the Obligations, Borrower's financial condition and the
results of Borrower's operations, and, in connection therewith, permit Capital
or any of its agents, employees or officers to copy and make extracts therefrom.
B0 Borrower shall deliver to Capital:
88
<PAGE>
(1) within forty five (45) days after the
end of each of the first three fiscal quarters of Borrower, for each of
Borrower's fiscal years, a company prepared consolidated and consolidating
statement of the financial condition of Borrower and its affiliates for such
quarterly period, including, but not limited to, a balance sheet, a profit and
loss statement, and a cash flow statement, and any other report requested by
Capital relating to the Collateral and the financial condition of Borrower, and
a certificate signed by the Chief Executive Officer of Borrower, to the effect
that all statements and reports delivered or caused to be delivered to Capital
under this subsection, fairly and thoroughly present the financial condition of
Borrower and its affiliates and that there exists on the date of delivery to
Capital no condition or event which constitutes an Event of Default or Potential
Event of Default;
(2) within forty five (45) days after the
end of each of the first three fiscal quarters of CII, for each of CII's fiscal
years, a copy of the Form 10Q filed by CII with the Securities and Exchange
Commission for such period;
(3) within ninety (90) days after the end
of each of CII's fiscal years, an audited consolidated and consolidating
statement of the financial condition of CII and its subsidiaries and affiliates
for such fiscal year, prepared by independent certified public accountants
acceptable to Capital, including, but not limited to, a balance sheet, a profit
and loss statement, and a cash flow statement, and any other report requested by
Capital relating to the Collateral and the financial condition of Borrower, and
a certificate signed by the Chief Executive Officer of Borrower to the effect
that all reports, statements, computer disc or tape files, printouts, runs, or
other computer prepared information of any kind or nature relating to the
foregoing or documents delivered or caused to be delivered to Capital under this
subsection, fairly and thoroughly present the financial condition of Borrower
and its affiliates and that there exists on the date of delivery to Capital no
condition or event which constitutes an Event of Default or Potential Event of
Default.
7.10 Tax Returns. Borrower shall deliver to Capital copies of
each of CII's and, if Borrower files a separate tax return, Borrower's future
federal income tax returns, and any amendments thereto, within thirty (30)
calendar days following the filing thereof. Borrower further agrees to promptly
deliver to Capital copies of all receipts issued to Borrower for the payment of
federal withholding taxes required of it.
7.11 Payment of Debts. Borrower shall be at all times
hereafter solvent and able to pay its debts (including trade debts) as they
mature.
89
<PAGE>
7.12 Financial Covenants. Borrower shall maintain at all times
during the term of this Agreement each of the following:
A0 A ratio of Obligations to Tangible Net Worth
of not more than 5.0 to 1.0.
B0 Positive Working Capital.
C0 Positive Tangible Net Worth.
D0 The Subordinated Debt of CII shall be not
less than Two Million Dollars ($2,000,000); provided, however, that to the
extent that CII makes a subordinated loan pursuant to Section 5.2(C), then the
amount of the Subordinated Debt of CII which is required be maintained pursuant
to this Section shall be increased by the full principal amount of such
subordinated loan.
7.13 Compliance with Environmental Laws. Borrower shall comply
with any and all federal, state and local statutes, laws and regulations
concerning the preservation of the environment and the use and disposal of
hazardous and toxic materials and substances.
7.14 Notice of Reportable Event. Borrower shall furnish to
Capital: (a) as soon as possible, but in no event later than thirty (30) days
after Borrower knows or has reason to know that any reportable event with
respect to any deferred compensation plan has occurred, a statement of the Chief
Financial Officer of Borrower setting forth the details concerning such
reportable event and the action which Borrower proposes to take with respect
thereto, together with a copy of the notice of such reportable event given to
the Pension Benefit Guaranty Corporation, if a copy of such notice is available
to Borrower; (b) promptly after the filing thereof with the Internal Revenue
Service, the United States Secretary of Labor or the Pension Benefit Guaranty
Corporation, copies of each annual report with respect to each deferred
compensation plan together with certified financial statements and actuarial
statements for such plan; (c) promptly after receipt thereof, a copy of any
notice Borrower may receive from the Pension Benefit Guaranty Corporation or the
Internal Revenue Service with respect to any deferred compensation plan;
provided, however, this subparagraph shall not apply to notice of general
application issued by the Pension Benefit Guaranty Corporation or the Internal
Revenue Service; (d) at least ten (10) days prior to the filing by the Borrower
or the administrator of any deferred compensation plan of a notice of intent to
terminate such plan, a copy of such notice; (e) when the same is made available
to participants in the deferred compensation plan, all notices and other forms
of information from time to time disseminated to the participants by the
administrator of the deferred compensation plan; and (f) promptly and in no
event more than ten (10) days after receipt thereof by Borrower, each notice
received by Borrower
90
<PAGE>
concerning the imposition of any withdrawal liability under Section 4202 of the
Employee Retirement Income Security Act ("ERISA") of 1974, as amended.
7.15 Reimbursement for Capital Expenses. Upon the demand of
Capital, Borrower shall immediately reimburse Capital for all sums reasonably
incurred and expended by Capital which constitute Capital Expenses, and Borrower
hereby authorizes and approves all advances and payments by Capital for items
constituting such Capital Expenses.
8. BORROWER'S NEGATIVE COVENANTS
Borrower covenants and agrees that so long as any credit
hereunder shall be available and until the Obligations have been repaid in full,
unless Capital shall otherwise consent in writing, Borrower shall not do any of
the following:
8.1 Relocate of Chief Executive Office. Borrower will not,
without thirty (30) days prior written notification to Capital, relocate its
chief executive office.
8.2 Business Structure and Operations. Borrower shall not,
without Capital's prior written consent:
A. Sell, lease, or otherwise dispose of, move,
relocate (except in connection with a relocation of Borrower's business
facility) or transfer, whether by sale or otherwise, any of Borrower's assets;
provided, however, that during each of Borrower's fiscal years, Borrower does
not need to obtain the prior written consent of Capital in connection with the
sale or disposal of assets in the ordinary course of Borrower's business unless
and until the aggregate amount of such assets sold or disposed of, or to be sold
or disposed of, during such fiscal year exceeds an aggregate value of Twenty
Five Thousand and 00/100 Dollars ($25,000.00);
B. Use the proceeds of any advance made under
Section 2.1 for any purpose other than the daily financing needs of Borrower in
funding advances to the Contract Debtors or the proceeds of the Term Loan for
any purpose other than the purchase of the capital stock of GFI;
C. Change Borrower's name or form of entity, or
add any new fictitious name;
D. Other than the acquisition of the capital
stock of GFI, acquire, merge or consolidate with or into any other
business organization;
E. Enter into any transaction not in the
91
<PAGE>
ordinary and usual course of Borrower's business;
F. Guarantee or otherwise become in any way
liable with respect to the obligations of any third party except by endorsement
of instruments or items of payment for deposit to the general account of
Borrower or which are transmitted or turned over to Capital;
G. Make any change in the Borrower's financial
structure or in any of its business objectives, purposes or
operations which could adversely affect the ability of Borrower to
repay the Obligations;
H. Incur any debts outside the ordinary and
usual course of Borrower's business, except for renewals or
extensions of existing debts;
I. Make any advance or loan except in the
ordinary course of business; provided, however, that the outstanding amount of
term loans made in the ordinary course of business shall not exceed, at any one
time, fifteen percent (15%) of the then existing Tangible Net Worth;
J. Prepay any existing indebtedness owing to
any third party;
K. Cause, permit or suffer any change, direct
or indirect, in Borrower's capital ownership;
L. Make any advance to any Contract Debtor
where the making of such advance would cause the total amount of the outstanding
indebtedness of such Contract Debtor to exceed thirty five percent (35%) of the
Tangible Net Worth;
M. Make any plant or fixed capital expenditure,
or any commitment therefor, in any fiscal year, in an aggregate
amount in excess of Fifty Thousand and 00/100 Dollars ($50,000.00);
N. Enter into any lease, or any commitment
therefor, in any fiscal year, requiring aggregate payments in such any such
fiscal year in excess of Seventy Five Thousand and 00/100 Dollars ($75,000.00);
O. Borrower will not, without Capital's prior
written consent, make any distribution to its shareholders (in cash or in stock)
on, or purchase, acquire, redeem or retire any of its capital stock, of any
category thereof, whether now or hereafter outstanding; provided, however, that
Borrower shall be permitted to make distributions to CII in order to reimburse
CII for reasonable
92
<PAGE>
costs and expenses actually incurred by CII in the administration of
Borrower's business;
P. Suspend or go out of business.
8.3 ERISA.
A. Borrower shall not withdraw from partici
pation in, permit the termination or partial termination of, or permit the
occurrence of any other event with respect to any deferred compensation plan
maintained for the benefit of Borrower's employees under circumstances that
could result in liability to the Pension Benefit Guaranty Corporation, or any of
its successors or assigns, or to any entity which provides funds for such
deferred compensation plan.
B. Borrower shall not withdraw from any
multi-employer plan described in Section 4001(a)(3) of ERISA which covers
Borrower's employees.
9. EVENTS OF DEFAULT
Any one or more of the following events shall constitute an
Event of Default by Borrower under this Agreement:
9.1 Failure to Pay Obligations. If Borrower fails to pay when
due and payable or when declared due and payable all or any portion of the
Obligations owing to Capital (whether of principal, interest, taxes,
reimbursement of Capital Expenses, or otherwise);
9.2 Failure to Perform. If Borrower fails or neglects to
perform, keep or observe any term, provision, condition, covenant, agreement,
warranty or representation contained in this Agreement, in any of the other Loan
Documents, or in any other present or future agreement between Borrower and
Capital and such failure continues for twenty one (21) calendar days after
written notice thereof from Capital to Borrower or, if such failure is one which
cannot be cured within twenty one (21) calendar days, then if Borrower has
commenced curing such failure by means acceptable to Capital in its sole
discretion, then such failure shall not be deemed an Event of Default under this
Section so long as in the sole and exclusive opinion of Capital, Borrower is
diligently attempting to cure the failure;
9.3 Inaccurate Information. If any material
representation, statement, report, or certificate made or delivered
by Borrower, or any of its officers, employees or agents, to Capital
is not true and correct;
9.4 Third Party Claim. If any or a material portion
93
<PAGE>
of Borrower's assets are attached, seized, subjected to a writ or distress
warrant, or are levied upon, or come into the possession of any Judicial Officer
or Assignee;
9.5 Impairment. If there is a material impairment of the
prospect of repayment of all or any portion of the Obligations owing to Capital
or a material impairment of the value or priority of Capital's security
interests in the Collateral;
9.6 Voluntary Insolvency Proceeding. If an
Insolvency Proceeding is commenced by Borrower;
9.7 Involuntary Insolvency Proceeding. If an
Insolvency Proceeding is commenced against Borrower;
9.8 Interruption of Business. If Borrower is enjoined,
restrained or in any way prevented by court order from continuing to conduct all
or any material part of its business affairs;
9.9 Governmental Lien. If a notice of lien, levy or assessment
is filed of record with respect to any or all of Borrower's assets by the United
States Government, or any department, agency or instrumentality thereof, or by
any state, county, municipal or other governmental agency, or if any tax or debt
owing at any time hereafter to any one or more of such entities becomes a lien,
whether choate or otherwise, upon any or all of the Borrower's assets and the
same is not paid on the payment date thereof;
9.10 Liens. If a judgment or other claim becomes a lien or
encumbrance upon all or a material portion of Borrower's assets;
9.11 Default in Agreement with Third Party. If there is a
default in any loan agreement, mortgage, indenture or other agreement to which
Borrower is a party with third parties which is not cured during any applicable
cure period and where the obligations of Borrower under such contract
individually or in the aggregate with any other contracts under which Borrower
is then in default equals or exceeds Fifty Thousand Dollars ($50,000);
9.12 Payment on Subordinated Debt. If Borrower makes any
payment to any third party which would violate the terms of any agreement
pursuant to which such third party has subordinated indebtedness owed to him,
her or it to Borrower's Obligations to Capital;
9.13 Misrepresentation. If any misrepresentation exists now or
hereafter in any warranty or representation made to Capital by Borrower or any
officer or director of Borrower, or if any
94
<PAGE>
such warranty or representation is withdrawn by Borrower or by any
officer or director of Borrower;
9.14 Impairment of Guaranty. If any guarantor of Borrower's
indebtedness to Capital dies, terminates its guaranty, defaults in the payment
or performance of any obligations of guarantor owing to Capital, or becomes the
subject of an Insolvency Proceeding;
9.15 Reportable Event Under ERISA. If any reportable event,
which Capital determines will have a material adverse effect on the financial
condition of Borrower or which Capital determines constitutes grounds for the
termination of any deferred compensation plan by the Pension Benefit Guaranty
Corporation or for the appointment by the appropriate United States District
Court of a trustee to administer any such plan, shall have occurred and be
continuing thirty (30) days after written notice of such determination shall
have been given to Borrower by Capital, or any such Plan shall be terminated
within the meaning of Title IV of ERISA, or a trustee shall be appointed by the
appropriate United States District Court to administer any such plan, or the
Pension Benefit Guaranty Corporation shall institute proceedings to terminate
any plan and in case of any event described in this Section 9.15, the aggregate
amount of the Borrower's liability to the Pension Benefit Guaranty Corporation
under Sections 4062, 4063 or 4064 of ERISA shall exceed five percent (5%) of
Borrower's tangible net worth;
9.16 Withdrawal from Multi-Employer Plan. Borrower shall have
withdrawn from a multi-employer plan described in Section 4001(a)(3) of ERISA
and Capital determines that such withdrawal would have a material adverse effect
on the financial condition of Borrower.
9.17 Cure Periods. Notwithstanding anything contained in this
Section 9 to the contrary, Capital shall refrain from exercising its rights and
remedies and an Event of Default shall not be deemed to have occurred by reason
of the occurrence of: (i) an event set forth in Section 9.7 if, within forty
five (45) calendar days from the date thereof, the same is discharged or
dismissed, or (ii) any of the events set forth in Sections 9.4, 9.8, 9.9 or 9.10
if, within twenty one (21) calendar days from the date thereof, the same is
released, discharged, dismissed, bonded against or satisfied; provided, however,
if the event is the institution of Insolvency Proceedings against Borrower,
Capital shall not be obligated to make advances to Borrower during such cure
period.
10. CAPITAL'S RIGHTS AND REMEDIES
10.1 Remedies. Upon the occurrence of an Event of Default by
Borrower under this Agreement, Capital may, at its
95
<PAGE>
election, without notice of its election and without demand, do any one or more
of the following, all of which are authorized by Borrower:
A. Declare all Obligations, whether evidenced
by this Agreement or otherwise, immediately due and payable;
B. Cease advancing money or extending credit to
or for the benefit of Borrower under this Agreement or under any
other agreement between Borrower and Capital;
C. Terminate this Agreement and any of the
other Loan Documents as to any future liability or obligation of Capital, but
without affecting Capital's rights and security interest in the Collateral and
without affecting the Obligations owing by Borrower to Capital;
D. Capital or Capital's designee may notify
each Contract Debtor that its Contract, Security Documents and all rights
thereunder have been assigned to Capital and that Capital has a security
interest therein, collect the indebtedness of such Contract Debtor owing to
Borrower directly if Capital has not already been authorized to do so, and
charge the collection costs and expenses to Borrower's loan account.
E. Without notice to or demand upon Borrower or
any guarantor, make such payments and do such acts as Capital considers
necessary or reasonable to protect its security interest in the Collateral.
Borrower agrees to assemble the Collateral if Capital so requires, and to make
the Collateral available to Capital as Capital may designate. Borrower
authorizes Capital to enter the premises where the Collateral is located, take
and maintain possession of the Collateral, or any part of it, and to pay,
purchase, contest or compromise any encumbrance, charge or lien which in the
opinion of Capital appears to be prior or superior to its security interest and
to pay all expenses incurred in connection therewith;
F. Capital is hereby granted a license or other
right to use, without charge, Borrower's labels, patents, copyrights, rights of
use of any name, trade secrets, trade names, trademarks and advertising matter,
or any property of a similar nature, as it pertains to the Collateral, in
completing production of, advertising for sale and selling any Collateral and
Borrower's rights under all licenses, and all franchise agreements shall insure
to Capital's benefit;
G. Ship, reclaim, recover, store, finish,
maintain, repair, prepare for sale, advertise for sale and sell (in
the manner provided for herein) the Collateral;
96
<PAGE>
H. Sell the Collateral at either a public or
private sale, or both, by way of one or more contracts or transactions, for cash
or on terms, in such manner and at such places (including Borrower's premises)
as is commercially reasonable in the opinion of Capital. It is not necessary
that the Collateral be present at any such sale;
I. Capital shall give notice of the disposition
of the Collateral as follows:
(1 Capital shall give Borrower and each
holder of a security interest in the Collateral who has filed with Capital a
written request for notice, a notice in writing of the time and place of public
sale, or, if the sale is a private sale or some other disposition other than a
public sale is to be made of the Collateral, the time on or after which the
private sale or other disposition is to be made;
(2 The notice shall be personally
delivered or mailed, postage prepaid, to Borrower as provided in Section 13, at
least ten (10) calendar days before the date fixed for the sale, or at least ten
(10) calendar days before the date on or after which the private sale or other
disposition is to be made, unless the Collateral is perishable or threatens to
decline speedily in value. Notice to persons other than Borrower claiming an
interest in the Collateral shall be sent to such addresses as they have
furnished to Capital;
(3 If the sale is to be a public sale,
Capital shall also give notice of the time and place by publishing a notice one
time at least ten (10) calendar days before the date of the sale in a newspaper
of general circulation in the county in which the sale is to be held;
J. Capital may credit bid and purchase at any
public sale;
K. Borrower shall pay all Capital Expenses
incurred in connection with Capital's enforcement and exercise of any of its
rights and remedies as herein provided, whether or not suit is commenced by
Capital;
L. Any deficiency which exists after
disposition of the Collateral as provided above will be paid immediately by
Borrower. Any excess will be returned, without interest and subject to the
rights of third parties, to Borrower by Capital.
10.2 Cumulative Rights. Capital's rights and remedies under
this Agreement and all other agreements shall be cumulative.
97
<PAGE>
Capital shall have all other rights and remedies not inconsistent herewith as
provided under the Code, by law, or in equity. No exercise by Capital of one
right or remedy shall be deemed an election, and no waiver by Capital of any
default on Borrower's part shall be deemed a continuing waiver. No delay by
Capital shall constitute a waiver, election or acquiescence by it.
11. TAXES AND EXPENSES REGARDING THE COLLATERAL. If Borrower fails
to pay any monies (whether taxes, assessments, insurance premiums, or otherwise)
due to third persons or entities, or fails to make any deposits or furnish any
required proof of payment or deposit, all as required under the terms of this
Agreement, then Capital may, to the extent that it determines that such failure
by Borrower could have a material adverse change on Capital's interests in the
Collateral, in its discretion and without prior notice to Borrower, (i) make
payment of the same or any part thereof; (ii) set up such reserves in Borrower's
loan account as Capital deems necessary to protect Capital from the exposure
created by such failure; or (iii) both. Any amounts paid or deposited by Capital
shall constitute Capital Expenses, shall be immediately charged to Borrower's
loan account and become additional Obligations owing to Capital, shall bear
interest at the applicable rate set forth in Section 2.5, and shall be secured
by the Collateral. Any payments made by Capital shall not constitute: (i) an
agreement by Capital to make similar payments in the future, or (ii) a waiver by
Capital of any Event of Default under this Agreement. Capital need not inquire
as to, or contest the validity of, any such expense, tax, security interest,
encumbrance or lien, and the receipt of the usual official notice for the
payment thereof shall be conclusive evidence that the same was validly due and
owing.
12. WAIVERS
12.1 Application of Payments. Borrower waives the right to
direct the application of any and all payments at any time or times hereafter
received by Capital on account of any Obligations owed by Borrower to Capital,
and Borrower agrees that Capital shall have the continuing exclusive right to
apply and reapply such payments in any manner as Capital may deem advisable,
notwithstanding any entry by Capital upon its books.
12.2 Demand, Protest, Default, Etc. Except as otherwise
provided herein, Borrower waives demand, protest, notice of protest, notice of
default or dishonor, notice of payment and nonpayment, notice of any default,
nonpayment at maturity, release, compromise, settlement, extension or renewal of
any or all commercial paper, accounts, documents, instruments, chattel paper,
and guarantees at any time held by Capital on which Borrower may in any way be
liable.
98
<PAGE>
12.3 Confidential Relationship. Borrower waives the right to
assert a confidential relationship, if any, it may have with any accounting firm
and/or service bureau in connection with any information requested by Capital
pursuant to or in accordance with this Agreement. So long as no Event of Default
shall have occurred, Capital agrees that prior to requesting information
directly from any such accounting firm and/or service bureau, Capital shall
first request such information from Borrower. If Borrower fails to provide such
information to Capital within four (4) Business Days, the Borrower agrees that
Capital may contact directly any such accounting firm and/or service bureau in
order to obtain such information.
13. NOTICES. Unless otherwise specifically provided herein, all
notices and service of any process shall be in writing addressed to the
respective party as set forth below and may be personally served, telecopied or
sent by overnight courier service or United States mail and shall be deemed to
have been given: (a) if delivered in person, when delivered; (b) if delivered by
telecopy, on the date of transmission if confirmed and if transmitted on a
Business Day before 4:00 p.m. (Los Angeles time) or, if not, on the next
succeeding Business Day; (c) if delivered by overnight courier, two Business
Days after delivery to such courier properly addressed; or (d) if by U.S. Mail,
four Business Days after depositing in the United States mail, with postage
prepaid and properly addressed.
If to Borrower: U.S. COMMERCIAL FUNDING
CORPORATION
17W220 22nd Street, Suite 420
Oakbrook Terrace, Illinois 60181
Attn: Larry Meek
Telecopier Number (630) 993-9190
With a Copy to: CHUHAK & TECSON P.C.
225 W. Washington Street, Suite 1300
Chicago, Illinois 60606
Attn: James Gottlieb, Esq.
Telecopier Number (312) 444-9027
If to Capital: CAPITAL BUSINESS CREDIT
700 S. Flower Street, Suite 2001
Los Angeles, California 90017-4101
Attn: Nathan L. Hugg
Telecopier Number (213) 236-1375
With a Copy to: KATZ, HOYT, SEIGEL & KAPOR
11111 Santa Monica Boulevard, Suite 820
Los Angeles, California 90025-3342
Attn: William Schoenholz, Esq.
Telecopier Number (310) 473-7138
99
<PAGE>
The parties hereto may change the address at which they are to
receive notices and the telecopier number at which they are to receive
telecopies hereunder, by notice in writing in the foregoing manner given to the
other.
14. DESTRUCTION OF BORROWER'S DOCUMENTS. Any documents, schedules,
invoices or other papers delivered to Capital may be destroyed or otherwise
disposed of by Capital four (4) months after they are delivered to or received
by Capital, unless Borrower requests, in writing, the return of the said
documents, schedules, invoices or other papers and makes arrangements, at
Borrower's expense, for their return. Capital will notify Borrower not less than
ten (10) days prior to destroying any original Contracts for the purpose of
allowing Borrower to request the return of such Contracts pursuant to the
immediately preceding sentence; provided, however, that Capital shall not be
liable to Borrower or any third party if Capital fails to provide Borrower with
such ten (10) days notice unless Capital's failure to notify was caused by
Capital's gross negligence or wilful misconduct.
15. CHOICE OF LAW. The validity of this Agreement, its construction,
interpretation and enforcement, and the rights of the parties hereunder shall be
determined under, governed by, and construed in accordance with the laws of the
State of California. The parties agree that all arbitration proceedings shall be
conducted in County of Los Angeles, State of California, and all other actions
or proceedings arising in connection with this Agreement shall be tried and
litigated only in the state and federal courts located in the County of Los
Angeles, State of California. Borrower waives any right it may have to assert
the doctrine of forum non conveniens or to object to such venue and hereby
consents to any court ordered relief.
16. GENERAL PROVISIONS
16.1 Representations and Warranties. Each representation,
warranty and agreement contained in this Agreement shall be conclusively
presumed to have been relied on by Capital regardless of any investigation made
or information possessed by Capital. The warranties, representations and
agreements set forth herein shall be cumulative and in addition to any and all
other warranties, representations and agreements which Borrower shall give, or
cause to be given, to Capital, either now or hereafter.
16.2 Binding Agreement. This Agreement shall be binding and
deemed effective when executed by Borrower and accepted and executed by Capital.
16.3 Right to Grant Participations. This Agreement
shall bind and inure to the benefit of the respective successors and
100
<PAGE>
assigns of each of the parties; provided, however , that Borrower may not assign
this Agreement or any rights hereunder without Capital's prior written consent
and any prohibited assignment shall be absolutely void. No consent to an
assignment by Capital shall release Borrower from its Obligations to Capital.
Capital may assign this Agreement and its rights and duties hereunder. Capital
reserves the right to sell, assign, transfer, negotiate or grant participations
in all or any part of, or any interest in, Capital's rights and benefits
hereunder. In connection therewith, Capital may disclose all documents and
information which Capital now or hereafter may have relating to Borrower or
Borrower's business.
16.4 Section Headings. Section headings and section numbers
have been set forth herein for convenience only. Unless the contrary is
compelled by the context, everything contained in each section applies equally
to this entire Agreement.
16.5 Interpretation. Neither this Agreement nor any
uncertainty or ambiguity herein shall be construed or resolved against Capital
or Borrower, whether under any rule of construction or otherwise. On the
contrary, this Agreement has been reviewed by all parties and shall be construed
and interpreted according to the ordinary meaning of the words used so as to
fairly accomplish the purposes and intentions of all parties hereto.
16.6 Severability. Each provision of this Agreement shall be
severable from every other provision of this Agreement for the purpose of
determining the legal enforceability of any specific provision.
16.7 Modification and Merger. This Agreement cannot be changed
or terminated orally. All prior agreements, understandings, representations,
warranties and negotiations, if any, are merged into this Agreement.
16.8 Good Faith Requirement. The parties intend and agree that
their respective rights, duties, powers, liabilities, obligations and
discretions shall be performed, carried out, discharged and exercised reasonably
and in good faith.
16.9 Termination of Original Loan Agreement. The Original Loan
Agreement is hereby terminated and of no further force or effect.
16.10 WAIVER OF JURY TRIAL. BORROWER AND CAPITAL HEREBY WAIVE
THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED
UPON OR ARISING OUT OF THIS AGREEMENT OR ANY OTHER LOAN DOCUMENTS EXECUTED IN
CONNECTION WITH THIS AGREEMENT OR ANY DEALINGS BETWEEN BORROWER AND CAPITAL
RELATING TO THE SUBJECT
101
<PAGE>
MATTER OF THIS TRANSACTION AND THE BUSINESS RELATIONSHIP THAT IS BEING
ESTABLISHED. BORROWER AND CAPITAL EACH ACKNOWLEDGE THAT THIS WAIVER IS A
MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT EACH OF BORROWER
AND CAPITAL HAS ALREADY RELIED ON THIS WAIVER IN ENTERING INTO THIS AGREEMENT
AND THAT EACH OF BORROWER AND CAPITAL WILL CONTINUE TO RELY ON THIS WAIVER IN
ANY RELATED FUTURE DEALINGS BETWEEN BORROWER AND CAPITAL. BORROWER AND CAPITAL
FURTHER WARRANT AND REPRESENT THAT THEY EACH KNOWINGLY AND VOLUNTARILY WAIVE
THEIR RESPECTIVE JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL.
IN WITNESS WHEREOF, Capital and Borrower have executed this
Agreement as of the date first set forth above.
U.S. COMMERCIAL FUNDING CORPORATION,
an Illinois corporation
By ______________________________
Title:___________________________
CAPITAL BUSINESS CREDIT, A DIVISION OF
CAPITAL FACTORS, INC.,
a Florida corporation
By ______________________________
Title:___________________________
102
LOAN AND SECURITY AGREEMENT
THIS LOAN AND SECURITY AGREEMENT, dated as of August __, 1998, is
entered into between CAPITAL BUSINESS CREDIT, A DIVISION OF CAPITAL FACTORS,
INC., a Florida corporation ("Capital"), and GOODMAN FACTORS, INC., a Texas
corporation ("Borrower").
The parties agree as follows:
1. DEFINITIONS
In addition to the defined terms contained in the first
paragraph and recitals above, as used herein, the following terms shall have the
following definitions:
1.1 "Accounts" means all presently existing and hereafter
arising accounts, instruments, notes, drafts, chattel paper and all other forms
of obligations owing to Borrower arising out of the sale or lease of goods or
the rendition of services by Borrower, whether or not earned by performance, and
any and all credit insurance, guaranties and other security therefor, as well as
all merchandise returned to or reclaimed by Borrower.
1.2 "Agreement" means this Loan and Security Agreement, any
concurrent or subsequent riders or exhibits to this Loan and Security Agreement,
and any extensions, supplements, amendments or modifications to or in connection
with this Loan and Security Agreement and/or to any such riders or exhibits.
1.3 "Borrower's Books" means all of Borrower's books and
records including, but not limited to: minute books; ledgers; records
indicating, summarizing or evidencing Borrower's assets and liabilities; all
information relating to Borrower's business operations or financial condition;
and all computer programs, disc or tape files, printouts, runs, and other
computer prepared information and the equipment containing such information.
1.4 "Borrowing Base Certificate" means the certificate,
substantially in the form of Exhibit 1.4, with appropriate insertions, to be
submitted to Capital by Borrower pursuant to this Agreement and certified as
true and correct by the Chief Executive Officer of Borrower or such other
employee or agent of Borrower who may have specific knowledge of the matters set
forth therein.
1.5 "Borrower Guaranty" means that certain General Continuing
Guaranty, of even date herewith, executed by Borrower in favor of Capital with
respect to all present and future obligations of USCF owing to Capital.
1.6 "Business Day" means any day other than a Saturday,
Sunday, the day after Thanksgiving or any holiday on which banks in the States
of California or Florida are authorized by law to close.
1.7 "Capital Expenses" means all of the following: (i) costs
or expenses (including, without limitation, taxes and insurance premiums)
required to be paid by Borrower under this Agreement or any of the other Loan
Documents which are paid or advanced by Capital; (ii) filing, recording,
publication and
103
<PAGE>
search fees paid or incurred by Capital; and (iii) costs, fees (including
reasonable attorneys' and paralegals' fees) and expenses incurred by or charged
to Capital: (a) in connection with the Lockbox Agreement; (b) to audit the
Collateral; (c) to correct any default or enforce any provision of this
Agreement or any of the other Loan Documents whether or not litigation is
commenced; (d) in gaining possession of, maintaining, handling, preserving,
storing, shipping, selling, preparing for sale and/or advertising to sell the
Collateral, whether or not a sale is consummated; (e) in the event that the
Security Documents are being foreclosed, in collecting the Contracts, with or
without suit, or gaining possession of, maintaining, storing, selling, or
preparing for sale and advertising to sell the Property; and (f) in structuring,
drafting, reviewing, amending, defending or concerning this Agreement or any of
the other Loan Documents.
1.8 "CII" means Celtic Investment, Inc., a Delaware
corporation.
1.9 "Code" means the California Uniform Commercial Code, and
any and all terms used in this Agreement which are not defined herein but which
are defined in the Code shall be construed under this Agreement in accordance
with the definition ascribed to such terms under the Code.
1.10 "Collateral" means all of the following:
A. The Accounts;
B. The Contracts and all of Borrower's rights and benefits under the
Contracts, including, but not limited to, Borrower's right to receive payment in
full of the indebtedness owing to Borrower thereunder, whether now or hereafter
existing, together with any and all guarantees and/or security therefor, as well
as all of Borrower's Books relating thereto;
C. The Security Documents, together with any and all of Borrower's rights
in and to the Property covered thereby and in and to any policies of insurance
relative to such Property;
D. The Equipment;
E. The Financial Assets;
F. The General Intangibles;
G. Any money, deposit accounts or other assets of Borrower in which Capital
receives a security interest or which hereafter come into the possession,
custody or control of Capital; and
H. The proceeds of any of the foregoing, including, but not limited to,
proceeds of insurance covering the Collateral, or any portion thereof, and any
and all Accounts, Equipment, Financial Assets, General Intangibles, inventory,
money, deposit accounts or other tangible and intangible property resulting from
the sale or other disposition of the Collateral, or any portion thereof or
interest therein, and the proceeds thereof.
104
<PAGE>
1.11 "Contract Debtor" means each person or entity which is
obligated to Borrower to perform any duty under or to make any payment pursuant
to the terms of a Contract.
1.12 "Contract(s)" means all of Borrower's right, title and
interest in and to each presently existing and hereafter arising loan agreement,
accounts receivable financing agreement, factoring agreement, contract right,
instrument, note, chattel paper, and any other agreement creating or evidencing
obligations owing to Borrower, all rights of Borrower to receive payment
pursuant to the terms of each of the foregoing, together with all guarantees and
other rights of Borrower obtained in connection therewith, and any collateral
therefor.
1.13 "Cornerstone" means Cornerstone Partners Limited Partners, a Michigan
limited partnership.
1.14 "Daily Balance" means the amount determined by taking the
amount of the Obligations owed at the beginning of a given day, adding any new
Obligations advanced or incurred on such date, and subtracting any payments or
collections which are deemed to be paid on that date under the provisions of
this Agreement.
1.15 "Eligible Contract(s)" means each of those Contracts
which satisfy all of the following conditions: (i) pursuant to which Borrower
has loaned or advanced monies to a Contract Debtor, (ii) which, along with all
loans, advances and collateral therefor, have been validly assigned to Capital,
(iii) which strictly comply with all of Borrower's warranties and
representations to Capital contained herein; (iv) with respect to which the
Contract Debtor is not more than sixty (60) days delinquent in the making of any
scheduled payment thereunder; (v) are not subject to any defense, counterclaim,
offset, discount or allowance; (vi) the outstanding advances made by Borrower
under such Contract do not exceed more than thirty five percent (35%) of the
Tangible Net Worth; and (vii) not more than twenty five percent (25%) of the
outstanding accounts assigned to Borrower under such Contract are subject to a
dispute by the account debtors thereunder.
1.16 "Eligible Underlying Accounts Collateral" means, with
respect to each Eligible Contract, those accounts owing to a Contract Debtor
which have been validly assigned to Borrower pursuant to the Contract, contain
payment terms of net sixty (60) days, or less, from the date of the invoice, are
paid within ninety (90) days from the date of the invoice, and strictly comply
with all of the Contract Debtor's warranties and representations to Borrower
contained in the Contracts and Security Documents; but excluding the following:
(i) accounts with respect to which the goods are placed on consignment,
guaranteed sale or other terms by reason of which the payment by the customer
may be conditional; (ii) accounts with respect to which the customer is not a
resident of the United States; (iii) accounts as to which the account debtor has
disputed its obligation to make payment thereof; (iv) accounts with respect to
which the customer is the United States or any department, agency or
instrumentality of the United States; provided, however, that an account as to
which the United States is the customer shall not be deemed ineligible by reason
of this clause (iv) if Borrower and the Contract Debtor have completed all of
the steps necessary to comply with the Federal Assignment of Claims Act of 1940
(31 U.S.C. '203) with respect to such account; (v) accounts with respect to
which the customer is a subsidiary of, related to, affiliated with, or has
common shareholders, officers or directors with the Contract Debtor; (vi)
accounts with respect to which the Contract Debtor is or may become liable to
the customer for goods sold or services rendered by the customer to the
105
<PAGE>
Contract Debtor; (vii) all of the accounts owed by a customer of a Contract
Debtor where twenty-five percent (25%) or more of all of the accounts owed by
that customer are not paid within ninety (90) days from the date of the invoice;
and (viii) all accounts owed to a Contract Debtor by a customer that is the
subject of an Insolvency Proceeding. Under this section, an account which
remains unpaid more than ninety (90) days from its invoice date is not deemed to
be Eligible Underlying Accounts Collateral even if otherwise satisfies the
remaining requirements of this section. Upon the request of Borrower, Capital
shall consider, in Capital's sole and absolute discretion, extending the ninety
(90) day period to one hundred twenty days (120) for specific accounts, with all
of the remaining requirements of Section 1.16 remaining unchanged. In connection
with Capital's consideration of Borrower's request, Borrower shall deliver to
Capital all documentation requested by Capital which Capital deems relevant to
its decision. The ninety (90) day period shall apply to all accounts unless and
until Capital has notified Borrower in writing, pursuant to Section 13 of the
Loan Agreement, that the ninety (90) day period has been extended to one hundred
twenty (120) days for the accounts specifically included in Capital's notice to
Borrower.
1.17 "Eligible Underlying Collateral" means, collectively, the Eligible
Underlying Accounts Collateral, Eligible Underlying Equipment Collateral and
Eligible Underlying Inventory Collateral.
1.18 "'Eligible Underlying Equipment Collateral" means, with respect to
each Contract Debtor, the Contract Debtor's machinery and equipment, valued as
at any date of determination at the forced liquidation value (as determined by
appraisers and/or liquidators acceptable to Capital) which is located at the
Contract Debtor's place of business in the United States of America, except the
following: (a) machinery and equipment which is broken or in a state of
disrepair; (b) machinery and equipment which Capital determines, in the exercise
of reasonable discretion and in accordance with Capital's or the customary
business practices of such Contract Debtor, to be unacceptable for borrowing
purposes due to age, type, category and/or obsolescence; (c) machinery and
equipment with respect to which Capital, as the assignee of Borrower, does not
have a valid, first priority and fully perfected security interest; or (d)
machinery and equipment with respect to which there exists any security
interest, lien or encumbrance in favor of any third party other than Capital.
1.19 "Eligible Underlying Inventory Collateral" means, with
respect to each Contract Debtor, that portion of the Contract Debtor's
inventory, valued at the lower of average cost or market, owned by and in the
possession of such Contract Debtor, and located in the United States of America,
except the following: (a) work-in-process; (b) finished goods which do not meet
the specifications of the purchase order for such goods; (c) inventory which
Capital determines, in the exercise of reasonable discretion and in accordance
with Capital's or the customary business practices of such Contract Debtor, to
be unacceptable for borrowing purposes due to age, quality, type, category
and/or quantity including, without limitation, any inventory which is obsolete,
not in good condition, or not either currently usable or currently salable in
the ordinary course of the business of such Contract Debtor as determined by
Capital; (d) inventory with respect to which Capital, as the assignee of
Borrower, does not have a valid, first priority and fully perfected security
interest; (e) inventory with respect to which there exists any security
interest, lien or encumbrance in favor of any third party other than Capital;
(f) inventory produced in violation of the Fair Labor Standards Act and subject
to the so-called "hot goods" provisions contained in Title 29 U.S.C. 215 (a)(i);
and (g) inventory consisting of packaging, shipping materials or supplies.
1.20 "Eligible Term Loan" means a term loan made to a Contract
Debtor which
106
<PAGE>
satisfies the following conditions: (i) such term loan is made pursuant to an
Eligible Contract which also includes an accounts receivable financing facility;
(ii) the original principal amount of the term loan does not exceed seventy
percent (70%) of the value of the Eligible Underlying Equipment Collateral
securing the term loan; (ii) the aggregate outstanding indebtedness of the
Contract Debtor for advances based upon Eligible Underlying Inventory Collateral
and term loans does not exceed, at any time, one hundred percent (100%) of the
outstanding indebtedness of the Contract Debtor for advances based upon Eligible
Underlying Accounts Collateral; (iii) such term loan is fully amortized over a
period of thirty six (36) months or less from the date it is made; and (iv) such
term loan is due and payable in full by a date that is no later than the final
maturity and termination date of the accounts receivable financing facility
under the Eligible Contract.
1.21 "Equipment" means all of Borrower's present and hereafter
acquired machinery, computers, equipment, furniture, furnishings, fixtures,
motor vehicles, tools, goods and any interest in any of the foregoing, and all
attachments, accessories, accessions, replacements, substitutions, additions and
improvements thereto, wherever located.
1.22 "Event of Default" means the occurrence of any one of the events set
forth in Section 9.
1.23 "Facility Fee" shall have the meaning set forth in
Section 2.8A.
1.24 "Financial Assets" means all of Borrower's present and
future investment property, financial assets, securities, security entitlements,
securities accounts, commodity accounts and commodity contracts.
1.25 "General Intangibles" means all of Borrower's present and
future general intangibles and all other presently owned or hereafter acquired
intangible personal property of Borrower (including, without limitation, any and
all choses or things in action, goodwill, patents, trade names, trademarks,
blueprints, drawings, purchase orders, customer lists, monies due or recoverable
from pension funds, route lists, infringement claims, computer programs,
computer discs, computer tapes, literature, reports, catalogs, deposit accounts,
tax refunds and tax refund claims) other than goods and accounts, as well as
Borrower's Books relating to any of the foregoing.
1.26 "GFI" means Goodman Factors, Inc., a Texas corporation.
1.27 "Guaranty" means individually and "Guaranties" means
collectively the following guaranties:
A. That certain Validity Guaranty, of even date herewith, executed by
Lucchese in favor of Capital with respect to the present and future Obligations.
B. That certain Validity Guaranty, of even date herewith, executed by Meek
in favor of Capital with respect to the present and future Obligations.
C. That certain General Continuing Guaranty, of even date herewith,
executed by CII in favor of Capital with respect to the present and future
Obligations.
107
<PAGE>
D. That certain General Continuing Guaranty, of even date herewith,
executed by USCF in favor of Capital with respect to the present and future
Obligations.
1.28 "Initial Term" shall have the meaning set forth in
Section 3.1A.
1.29 "Insolvency Proceeding" means any proceeding commenced by
or against any person or entity under any provision of the federal Bankruptcy
Code, as amended, or under any other bankruptcy or insolvency law, including,
but not limited to, assignments for the benefit of creditors, formal or informal
moratoriums, compositions or extensions generally with its creditors.
1.30 "Judicial Officer or Assignee" means any trustee,
receiver, controller, custodian, assignee for the benefit of creditors or any
other person or entity having powers or duties like or similar to the powers and
duties of a trustee, receiver, controller, custodian or assignee for the benefit
of creditors.
1.31 "Loan Documents" means collectively this Agreement, the
Lockbox Agreement and any other agreements entered into between Borrower and
Capital in connection with this Agreement.
1.32 "Lockbox Agreement" means that certain Lockbox Agreement,
of even date herewith, among Borrower, Capital and NationsBank of Texas, N.A.
(the "Depository Bank").
1.33 "Lucchese" means Frank Lucchese, an individual.
1.34 "Maximum Credit Limit" means Six Million and 00/100
Dollars ($6,000,000.00); provided, however, that upon the written request of
Borrower, delivered pursuant to Section 13 of this Agreement, and so long as no
Event of Default shall have occurred, the Maximum Credit Limit may be increased
to Twenty Three Million Dollars ($23,000,000.00). Each increase in the Maximum
Credit Limit shall be in increments of One Million Dollars ($1,000,000).
1.35 "Meek" means Larry Meek, an individual.
1.36 "Net Worth" means, as of any date, the total assets of
Borrower minus the total liabilities of Borrower calculated in conformity with
GAAP.
1.37 "Obligations" means any and all loans, advances, debts,
liabilities (including, without limitation, any and all amounts charged to
Borrower's account pursuant to any agreement authorizing Capital to charge
Borrower's account), obligations, lease payments, guaranties (including, without
limitation, the Borrower Guaranty), covenants and duties owing by Borrower to
Capital of any kind and description (whether advanced pursuant to or evidenced
by this Agreement, any of the other Loan Documents, or any other instrument, or
by any other agreement between Capital and Borrower and whether or not for the
payment of money), whether direct or indirect, absolute or contingent, due or to
become due, now existing or hereafter arising, and including, without
limitation, any debt, liability or obligation owing from Borrower to others
which Capital may have obtained by assignment or otherwise, and further
including, without limitation, all interest not paid when due and all Capital
Expenses which Borrower is required to pay or reimburse by this Agreement, by
law, or otherwise.
108
<PAGE>
1.38 "Over Advance" shall have the meaning set forth in
Section 2.2.
1.39 "Potential Event of Default" means an event which with
the passage of time or the giving of notice or both would constitute an Event of
Default under this Agreement.
1.40 "Prime Rate" means the variable rate of interest, per
annum, published daily as the "prime rate" in the Money Rates Section of the
Wall Street Journal. In the event that such a rate is no longer published, then
the "Prime Rate" shall mean the variable rate of interest, per annum, most
recently announced by Capital Bank at its headquarters office as its "prime
rate," with the understanding that Capital Bank's "prime rate" is one of its
base rates and serves as a basis upon which effective rates of interest are
calculated for loans making reference thereto and may not be the lowest of
Capital Bank's base rates.
1.41 "Property" means all of the personal and real property
collateral described in the Security Documents.
1.42 "Security Document(s)" means all security agreements,
chattel mortgages, leases, deeds of trust, mortgages, or other security
instruments or agreements of every type and nature securing the obligations of a
Contract Debtor under a Contract.
1.43 "Subordination" means individually, and "Subordinations"
means collectively the following subordination agreements:
A. That certain Subordination Agreement , of even date herewith, executed
by Westpointe in favor of Capital with respect to the present and future
Obligations, pursuant to Section 5.1L.
B. That certain Subordination Agreement , of even date herewith, executed
by Cornerstone in favor of Capital with respect to the present and future
Obligations, pursuant to Section 5.1L.
C. That certain Subordination Agreement , of even date herewith, executed
by Vista in favor of Capital with respect to the present and future Obligations,
pursuant to Section 5.1L.
1.44 "Subordinating Creditor" means individually, and
"Subordinating Creditors" means collectively, the following persons and
entities:
A. Westpointe.
B. Cornerstone.
Vista.
1.45 "Subordinated Debt" means all indebtedness owing by
Borrower to the Subordinating Creditors and any other
109
<PAGE>
third parties which has been subordinated to the Obligations pursuant to the
terms of a subordination agreement acceptable to Capital in its sole discretion.
1.46 "Tangible Net Worth" means an amount equal to the Net
Worth of Borrower increased by Subordinated Debt and decreased by the following:
patents, licenses, leasehold improvements, goodwill, subscription lists,
organization expenses, monies due from affiliates (including officers, directors
and shareholders), security deposits, and prepaid costs and expenses.
1.47 "Unused Line Fee" shall have the meaning set forth in
Section 2.8B.
1.48 "USCF" means U.S. Commercial Funding
Corporation, an Illinois corporation.
1.49 "Vista" means Vista Income Partners Limited
Partnership, a Michigan limited partnership.
1.50 "Westpointe" means Westpointe Partners Limited
Partnership, a Michigan limited partnership.
1.51 "Working Capital" means the amount determined by
subtracting the aggregate amount of Borrower's current liabilities from the
aggregate amount of Borrower's current assets. Borrower's current liabilities
and current assets shall be determined in accordance with GAAP consistently
applied.
1.52 Other Definitional Provisions. References to "Sections",
"subsections", and "Exhibits" shall be to Sections, subsections, and Exhibits,
respectively, of this Agreement unless otherwise specifically provided.
References to "Dollars" means United States Dollars. Any of the terms defined in
Section 1 may, unless the context otherwise requires, be used in the singular or
the plural depending on the reference. In this Agreement, words importing any
gender include the other genders; the words "including," "includes" and
"include" shall be deemed to be followed by the words "without limitation";
references to agreements and other contractual instruments shall be deemed to
include subsequent amendments, assignments, and other modifications thereto, but
only to the extent such amendments, assignments and other modifications are not
prohibited by the terms of this Agreement; references to any person includes
their respective permitted successors and assigns or people succeeding to the
relevant functions of such persons; and all references to statutes and related
regulations shall include any amendments of same and any successor statutes and
regulations.
2. LOANS AND TERMS OF PAYMENT
110
<PAGE>
2.1 Credit Facilities.
A. Subject to the provisions contained in
Section 2.4, upon the request of Borrower, made at any time and from time to
time during the term of this Agreement, and so long as no Event of Default or
Potential Event of Default has occurred, Capital shall lend to Borrower with
respect to each Eligible Contract the lesser of: (i) eighty seven and one-half
percent (87.5%) of the aggregate amount of all outstanding advances made by
Borrower pursuant to such Eligible Contract where such advances are based upon a
percentage of the Contract Debtor's Eligible Underlying Accounts Collateral; or
(ii) seventy percent (70%) of the amount of the then qualifying Eligible
Underlying Accounts Collateral assigned by the Contract Debtor to Borrower
pursuant to such Eligible Contract; provided, however, that in no event shall
Capital be obligated to make advances to Borrower under this Section 2.1A
whenever the aggregate amount of the outstanding advances made pursuant to
Section 2.1, or the amount that would be outstanding if Capital made a requested
advance, exceeds, at any one time, the Maximum Credit Limit.
B. Subject to the provisions contained in
this Section and in Section 2.4, upon the request of Borrower, made at any time
and from time to time during the term of this Agreement, and so long as no Event
of Default or Potential Event of Default has occurred, Capital shall lend to
Borrower with respect to each Eligible Contract the lesser of: (i) seventy
percent (70%) of the aggregate amount of all outstanding advances made by
Borrower pursuant to such Eligible Contract where such advances are based upon a
percentage of the Contract Debtor's Eligible Underlying Inventory Collateral; or
(ii) fifty percent (50%) of the amount of the then qualifying Eligible
Underlying Inventory Collateral assigned by the Contract Debtor to Borrower
pursuant to such Eligible Contract; provided, however, that in no event shall
Capital be obligated to make advances to Borrower under this Section 2.1B
whenever the aggregate amount of the outstanding advances made pursuant to
Section 2.1, or the amount that would be outstanding if Capital made a requested
advance, exceeds, at any one time, the Maximum Credit Limit. In addition to the
conditions set forth in Section 1.15, the following conditions must also be
satisfied for a Contract to be an Eligible Contract for the purposes of this
Section:
(1) The Eligible Contract must include an
accounts receivable financing facility and the inventory financing facility
under such Contract must be conterminous with the accounts receivable financing
facility;
(2) The outstanding indebtedness of the
Contract Debtor for advances based upon Eligible Underlying
111
<PAGE>
Inventory Collateral shall not exceed, at any time, fifty percent (50%) of the
Eligible Underlying Inventory Collateral;
(3) The aggregate outstanding
indebtedness of the Contract Debtor for advances based upon Eligible Underlying
Inventory Collateral and for Eligible Term Loans shall not exceed, at any time,
one hundred percent (100%) of the outstanding indebtedness of the Contract
Debtor for advances based upon Eligible Underlying Accounts Collateral;
(4) Borrower shall have obtained an
appraisal of the Eligible Underlying Inventory Collateral pledged to Borrower
pursuant to the Eligible Contract within twelve (12) months prior to the date of
the requested advance under this Section and a copy of such appraisal shall have
been delivered to Capital prior to such request;
(5) The Contract Debtor must at all times
maintain a perpetual inventory system; and
(6) The Borrower shall have obtained
landlord's waivers and warehouseman's lien releases for all locations where the
Contract Debtor maintains inventory.
C. Subject to the provisions contained
Section 2.4, upon the request of Borrower, made at any time and from time to
time during the term of this Agreement, and so long as no Event of Default or
Potential Event of Default has occurred, Capital shall lend to Borrower with
respect to each Eligible Term Loan an amount equal to seventy percent (70%) of
the outstanding principal balance of such Term Loan; provided, however, that in
no event shall Capital be obligated to make advances to Borrower under this
Section 2.1C whenever the aggregate amount of the outstanding advances pursuant
to this Section exceeds ten percent (10%) of the Maximum Credit Limit. In
addition, in no event shall Capital be obligated to make advances to Borrower
under this Section 2.1C whenever the aggregate amount of the outstanding
advances pursuant to Section 2.1, or the amount that would be outstanding if
Capital made a requested advance, exceeds, at any one time, the Maximum Credit
Limit.
2.2 Over Advances. All of the advances, made pursuant to
Section 2.1 shall be added to and deemed part of the Obligations when made. If,
at any time and for any reason, the amount of any advance made pursuant to
Section 2.1 exceeds the applicable percentage limitations for such advance (or
dollar limitation in the case of the sub-limit for advances made against
Eligible Term Loans), or if all of Borrower's Obligations, at any time and for
any reason, exceed the Maximum Credit Limit (an "Over Advance"), then Borrower,
upon Capital's election and demand, shall
112
<PAGE>
immediately pay to Capital, in cash, the amount of such excess.
2.3 Authorizations. Capital is hereby authorized to make the
advances and the extensions of credit provided for in this Agreement based upon
telephonic or other instructions received from any one of the authorized
personnel of Borrower identified on Exhibit 2.3, or, at the discretion of
Capital, if such extensions of credit are necessary to satisfy any Obligations
of Borrower to Capital. Although Capital shall make a reasonable effort to
determine the person's identity, Capital shall not be responsible for
determining the exact identity of the person calling and Capital may act on the
instructions of anyone it perceives to be one of the authorized personnel.
2.4 Borrowing Base Certificate and Required
Documentation.
A. Concurrent with the execution of this
Agreement by Borrower, with the request for each advance pursuant to Section
2.1, with each delivery of a schedule of Eligible Underlying Collateral by
Borrower to Capital, and, in any event on the fifteenth (15th) day of each month
during the term of this Agreement (the Borrowing Base Certificate delivered on
the 15th day of the month shall be dated as of the last day of the immediately
preceding calendar month), Borrower shall deliver to Capital a fully completed
Borrowing Base Certificate certified by Chief Executive Officer of Borrower or
such other employee or agent of Borrower who may have specific knowledge of the
matters set forth therein as being true and correct as of the date thereof and
certifying that to the best of such officer's, employee's or agent's knowledge,
after reasonable inquiry, Borrower is in full compliance with all of the terms
and conditions of this Agreement and that no Event of Default or Potential Event
of Default currently exists under this Agreement. If Borrower fails to deliver
to Capital the Borrowing Base Certificate on the date when due, then
notwithstanding any of the provisions contained in Section 2.1, Capital shall
have no obligation to make any advances to Borrower until such item is delivered
to Capital. By no later than 12:00 noon (Los Angeles Time) on Tuesday of each
week during the term of this Agreement, Borrower shall deliver to Capital an
accounts receivable aging with respect to each account assigned to Borrower in
connection with each Contract.
B. Prior to the Borrower's request pursuant
to Section 2.1 for the first advance to be made in connection with a Contract
Debtor, Borrower shall deliver to and/or insure that Capital has each of the
following documents, in form and content satisfactory to Capital and its
counsel, pertaining to such Contract Debtor:
113
<PAGE>
(1) A true and correct copy of any credit
application, financial statements, and other documents and information obtained
by Borrower and supplied by such Contract Debtor, which credit application,
financial statements, and other documents shall be of the type which Borrower
typically obtains from its Contract Debtors;
(2) A true and correct copy of the
Contracts executed by the Contract Debtor;
(3) A true and correct copy of the filed
financing statement(s) (Form UCC-1) executed by the Contract Debtor, together
with a UCC-2 assignment thereof executed by Borrower as secured party and
reflecting Capital as the assignee of secured party;
(4) A copy of the UCC and tax lien search
conducted by Borrower with respect to the Contract Debtor, and all other
documents that Capital may reasonably request, in form satisfactory to Capital,
to perfect and maintain perfected Capital's security interest in the Collateral
and in order to fully consummate all of the transactions contemplated under this
Agreement.
C. Upon the request of Capital, Borrower
shall deliver to and/or insure that Capital has a true and correct copy of each
schedule of Eligible Underlying Collateral assigned by each Contract Debtor to
Borrower, along with a copy of each invoice assigned to Borrower, a copy of
proofs of delivery or signed acknowledgments of service executed by the customer
of such Contract Debtor and any other information which Capital may require,
each in form and content satisfactory to Capital. In addition, Borrower shall
immediately deliver to Capital any documentation or information which is
supplemental or an update of the items listed in Section 2.4B.
D. Immediately after each advance has been
made by Borrower to a Contract Debtor, and in any event not more that one (1)
Business Day after such advance has been made, Borrower shall provide evidence
satisfactory to Capital, in Capital's sole discretion, of the advance, including
evidence of the amount of the advance and the Contract Debtor to whom the
advance was made.
2.5 Interest Rates.
A. The Obligations owed by Borrower to
Capital shall bear interest, on the average Daily Balance owing, at a rate one
(1) percentage point above the Prime Rate; provided, however, that all Over
Advances shall bear interest, on the
114
<PAGE>
average Daily Balance owing, at a rate three (3) percentage points above the
Prime Rate.
B. Notwithstanding the foregoing, at no time
during the term of this Agreement shall the rate of interest be less than nine
percent (9%), per annum. All Obligations owed by Borrower to Capital shall bear
interest, from and after the occurrence of an Event of Default, and without
constituting a waiver of any such Event of Default, on the average Daily Balance
owing, at a rate three (3) percentage points above the Prime Rate.
C. All interest chargeable under this
Agreement shall be computed on the basis of a three hundred sixty (360) day year
for actual days elapsed.
2.6 Payment of Interest.
A. The Prime Rate as of the date of this
Agreement is ____________ percent (_______%) per annum. In the event that the
Prime Rate announced is, from time to time hereafter, changed, adjustment in the
rate of interest payable by Borrower shall be made as of 12:01 a.m. on the first
day of the calendar month following such change and shall be based on the Prime
Rate prevailing on the last day of the month in which such change occurred. All
interest on the Obligations shall be due and payable on the first (1st) day of
each calendar month during the term of this Agreement and Capital shall, at its
option, charge such interest and any and all Capital Expenses to Borrower's loan
account with Capital, which amounts shall thereupon constitute Obligations
hereunder and shall thereafter accrue interest at the applicable rate then
provided under Section 2.5.
B. Notwithstanding any provision to the
contrary contained in this Agreement or the other Loan Documents, Borrower shall
not be required to pay, and Capital shall not be permitted to collect, any
amount of interest in excess of the maximum amount of interest permitted by law
which parties may agree to in a written contract ("Excess Interest"). If any
Excess Interest is provided for or determined by a court of competent
jurisdiction to have been provided for in this Agreement or in any of the other
Loan Documents, then in such event: (1) the provisions of this subsection shall
govern and control; (2) neither Borrower nor any guarantor shall be obligated to
pay any Excess Interest; (3) any Excess Interest that Capital may have received
hereunder shall be, at Capital's option, (a) applied as a credit against the
outstanding principal balance of the Obligations of Borrower or accrued and
unpaid interest (not to exceed the maximum amount permitted by law), (b)
refunded to the payor thereof, or (c) any combination of the foregoing; (4) the
interest rate(s) provided for herein shall be automatically reduced to the
maximum lawful rate
115
<PAGE>
allowed from time to time under applicable law (the "Maximum Rate"), and this
Agreement and the other Loan Documents shall be deemed to have been and shall
be, reformed and modified to reflect such reduction; and (5) neither Borrower
nor any guarantor shall have any action against Capital for any damages arising
out of the payment or collection of any Excess Interest. Notwithstanding the
foregoing, if for any period of time interest on any Obligations of Borrower is
calculated at the Maximum Rate rather than the applicable rate under this
Agreement, and thereafter such applicable rate becomes less than the Maximum
Rate, the rate of interest payable on such Obligations of Borrower shall remain
at the Maximum Rate until Capital shall have received the amount of interest
which Capital would have received during such period on such Obligations of
Borrower had the rate of interest not been limited to the Maximum Rate during
such period.
2.7 Collections. Unless and until Capital shall instruct
Borrower to the contrary, Borrower shall direct all of the Contract Debtors and
their customers to make payments to a post office box established in the name of
Capital pursuant to the Lockbox Agreement. The terms of the Lockbox Agreement
shall restrict access to the post office box to only personnel and agents of
Capital and the Depository Bank. All payments made to the post office box shall
be removed from the post office box not less than every Business Day and, upon
such payments constituting goods funds, shall be promptly wired transferred to
Capital's bank account. Pursuant to the terms of the Depository Account, within
one (1) Business Day following the deposit of such payments to Capital's bank
account, the Depository Bank shall provide Borrower with a copy of the deposit
slip and each check and any other item delivered to the post office box. Within
one (1) Business Day of Borrower's receipt of the copy of the deposit slips,
Borrower shall provide Capital with a Borrowing Base Certificate and a
Collection Report in the form of Exhibit 2.7. Following the occurrence of an
Event of Default, Capital or Capital's designee may, at any time, notify
Contract Debtors and their customers or account debtors that the Accounts and
the Property have been assigned to Capital and that Capital has a security
interest therein, collect them directly, and charge the collection costs and
expenses to Borrower's loan account; provided, however, that notwithstanding the
foregoing, Capital shall be entitled to contact Contract Debtors and their
customers and account debtors at any time for the purpose confirming any
obligations owing to Borrower or payable to Borrower. Borrower agrees that all
payments received by Borrower in connection with the Accounts, Property and any
other Collateral shall be held in trust for Capital as Capital's trustee. The
receipt of any wire transfer of funds, check, or other item of payment by
Capital shall be applied to conditionally reduce Borrower's Obligations, but
shall not be considered a payment on account unless such wire transfer is of
immediately available
116
<PAGE>
federal funds and is made to the appropriate deposit account of Capital or
unless and until such check or other item of payment is honored when presented
for payment. The receipt of any wire transfer, check or other item of payment by
Capital shall be deemed to have been paid to Capital one (1) business day after
the date Capital actually receives possession of such wire transfer of funds,
check or other item of payment.
2.8 Fees.
A. Facility Fee. Concurrent with each notice
delivered by Borrower to Capital requesting an increase in the Maximum Credit
Limit, Borrower shall pay to Capital a facility fee (the "Facility Fee") in an
amount equal to one-half percent (.5%) of the amount of the increase in the
Maximum Credit Limit. Each increase in the Maximum Credit Limit must be in an
increment of One Million Dollars ($1,000,000) and the total Maximum Credit Limit
may not exceed Twenty Three Million Dollars ($23,000,000). Payment of the
Facility Fee shall be made as of the due date by charging Borrower's account
with the amount of the Facility Fee. The Facility Fee shall represent an
unconditional payment to Capital in consideration of Capital's agreement to
extend financial accommodations to Borrower pursuant to this Agreement and shall
not reduce or be a deposit on account of the Obligations.
B. Unused Line Fee. As of the last day of
each month during the term of this Agreement, Borrower shall pay to Capital a
monthly unused line fee (the "Unused Line Fee") equal to (i) one-quarter of one
percent (0.25%) of the average daily unused portion of the Maximum Credit Limit
during that month, divided by (ii) twelve (12). Payment of the Unused Line Fee
shall be made as of the due date by charging Borrower's account with the amount
of the Unused Line Fee. The Unused Line Fee shall represent an unconditional
payment to Capital in consideration of Capital's agreement to extend financial
accommodations to Borrower pursuant to this Agreement and shall not reduce or be
a deposit on account of the Obligations.
2.9 Payment on Non-Business Days. Whenever any payment to be
made hereunder shall be stated to be due on a day which is not a Business Day,
such payment shall be made on the next succeeding Business Day. Interest shall
continue to accrue on such payments until the date such payments are deemed
received by Capital.
2.10 Monthly Statements. Capital shall render monthly
statements of the Obligations owing by Borrower to Capital, including statements
of all principal, interest, Capital Expenses owing, outstanding accounts
receivable assigned to Capital and the amount of any reserve being maintained by
Capital, and such
117
<PAGE>
statements shall be conclusively presumed to be correct and accurate and
constitute an account stated between Borrower and Capital unless, within thirty
(30) days after receipt thereof by Borrower, Borrower shall deliver to Capital,
by registered or certified mail, at Capital's address indicated in Section 13,
written objection thereto specifying the error or errors, if any, contained in
any such statement.
3. TERM AND PREPAYMENT
3.1 Term.
A. This Agreement shall have an initial term
(the "Initial Term") of three (3) years commencing on the date hereof and shall
thereafter be automatically renewed (a "Renewal Term") for successive periods of
one (1) year unless terminated by either party as set forth below. Notice of
such termination shall be effectuated by the mailing of a certified letter,
return receipt requested, not less than sixty (60) days immediately prior to the
effective date of such termination, which date shall be an anniversary date of
this Agreement, addressed to the other party in the manner and the address set
forth in Section 13.
B0 Notwithstanding such term, upon the
occurrence of an Event of Default and during the continuation thereof, Capital
may terminate this Agreement without notice. In addition, should either Capital
or Borrower become insolvent or is unable to meet its debts as they mature, then
the other party shall have the right to terminate this Agreement at any time
without notice. On the date of a termination by Borrower or Capital, all
Obligations shall become immediately due and payable without notice or demand
and shall be paid to Capital in cash or by a wire transfer of immediately
available funds.
C0 When Capital has received payment and
performance in full of all Obligations (whether pursuant to this Section 3.1 or
Section 3.2) and an acknowledgment from Borrower that it is no longer entitled
to request any advances from Capital under this Agreement, Capital shall execute
a termination of all security interests given by Borrower to Capital.
3.2 Prepayment. Borrower may at any time on thirty (30) days
prior written notice, prepay the Obligations and terminate this Agreement by
paying to Capital in cash or by a wire transfer of immediately available federal
funds, the Obligations together with an amount equal to the following: (a) if
prepayment occurs during the first six (6) months of the Initial Term, an amount
equal to two percent (2%) of the then prevailing Maximum Credit Limit; (b) if
prepayment occurs at any time during the second six (6) months of the Initial
Term, an amount equal to one
118
<PAGE>
and one-half percent (1.5%) of the then prevailing Maximum Credit Limit; and (c)
if prepayment occurs at any time after the first year of the Initial Term, an
amount equal to one-half percent (0.5%) of the then prevailing Maximum Credit
Limit. When prepaying the Obligations, Borrower shall also pay the interest
accrued on the principal amount being prepaid to the date of such prepayment.
40 CREATION OF SECURITY INTEREST
4.1 Grant of Security Interest. Borrower hereby grants to
Capital a continuing security interest in all presently existing and hereafter
acquired or arising Collateral in order to secure prompt repayment of any and
all Obligations owed by Borrower to Capital and in order to secure prompt
performance by Borrower of each and all of its covenants and obligations under
this Agreement and otherwise created. Capital's security interest in the
Collateral shall attach to all Collateral without further act on the part of
Capital or Borrower.
4.2 Right to Audit and Inspect. In order to verify the
validity of any Borrowing Base Certificate, Borrower shall, upon the request of
Capital, promptly furnish Capital with copies of Borrower's financial and
business records, as well as any information which has been provided by Contract
Debtors to Borrower, and Borrower shall warrant the genuineness thereof. For
each twelve (12) month period commencing on the date of this Agreement, Capital
shall have the right to conduct four (4) periodic audits of the Collateral and
Borrower's financial condition at Borrower's expense; provided, however, that
Capital may conduct additional audits, at Capital's own expense so long as no
Event of Default shall have occurred, during each such twelve (12) month period.
Borrower shall pay to Capital as an audit fee Six Hundred Fifty Dollars ($650)
per auditor, per day for each audit in connection with the first four (4) audits
during each twelve (12) month period, as well as in connection with any audits
conducted following an Event of Default and the amount charged shall be deemed
included in the "Obligations" when incurred. The maximum audit fees shall not
apply to (i) the preliminary audit conducted prior to the date of this
Agreement; and (ii) the travel expenses reasonably incurred by Capital in
connection with each audit. Borrower shall reimburse Capital for all such travel
expenses. Capital will invoice Borrower for such audit fees and travel expenses
and Borrower shall pay to Capital the full amount of such costs and expenses
within fifteen (15) calendar days from the date of invoice.
4.3 Continuation of Security Interest. Until all Obligations,
contingent or otherwise, have been fully repaid and performed, Capital shall
retain its security interest in all existing Collateral and Collateral arising
thereafter.
119
<PAGE>
4.4 Perfection of Security Interest. Borrower shall execute
and deliver to Capital, concurrent with Borrower's execution of this Agreement,
and at any time or times hereafter at the request of Capital, all financing
statements, continuation financing statements, fixture filings, security
agreements, chattel mortgages, assignments, endorsements of certificates of
title, applications for titles, affidavits, reports, notices, schedules of
accounts, letters of authority and all other documents that Capital may
reasonably request, in form satisfactory to Capital, to perfect and maintain
perfected Capital's security interests in the Collateral and in order to fully
consummate all of the transactions contemplated under this Agreement. In
connection with the foregoing, Borrower agrees to cause to be delivered to
Capital the consent on any computer software licensor to the assignment by
Borrower to Capital of those rights of Borrower in such software in order to
enable Capital to obtain any computer information which Capital requires which
is accessible utilizing such software.
4.5 Access to Borrower's Books. Capital (through any of its
officers, employees or agents) shall have the right, at any time or times
hereafter, during Borrower's usual business hours, or during the usual business
hours of any third party having control over the records of Borrower, to inspect
and verify Borrower's Books in order to verify the amount or condition of, or
any other matter relating to, the Collateral and Borrower's financial condition.
Capital (through any of its officers, employees or agents) shall also have the
right, at any time or times hereafter, to confirm with the Contract Debtors the
amount of their indebtedness owing to Borrower, the assignment of all or any of
the Property to Borrower, the value and amount of the Property (including
contacting any customers or account debtors thereunder), and any other
information relating to the Collateral.
4.6 Additional Documentation. With each assignment of
Collateral hereunder Borrower shall deliver to and/or insure that Capital has,
in form satisfactory to Capital and its counsel, such other instruments,
financing statements, continuation financing statements, fixture filings,
security agreements, mortgages, assignments, certificates of title, affidavits,
reports, documents, notices, schedules of Contracts, letters of authority and
all other documents that Capital may reasonably request, in form satisfactory to
Capital, to perfect and maintain perfected Capital's security interest in the
Collateral and in order to fully consummate all of the transactions contemplated
under this Agreement.
4.7 Retention of Security Interest. Capital shall retain its
security interest in all Collateral until all of Borrower's Obligations have
been fully repaid as required hereunder and this Agreement has been terminated.
Capital may, after the
120
<PAGE>
occurrence of an Event of Default, settle or adjust disputes and claims directly
with Contract Debtors and customers of Contract Debtors for such amounts and
upon such terms as Capital considers advisable, and in such cases, Capital will
credit Borrower's account with only the net amounts received by Capital in
payment of such disputed Contracts or Property, after deducting all Capital
Expenses incurred or expended in connection therewith.
4.8 Power of Attorney. Borrower hereby irrevocably makes,
constitutes and appoints Capital (and any of Capital's officers, employees or
agents designated by Capital) as Borrower's true and lawful attorney with power:
A0 Upon Borrower's failure or refusal to
comply with its undertakings contained in Section 4.4, to sign the name of
Borrower on any of the documents described in that section or on any other
similar documents which need to be executed, recorded and/or filed in order to
perfect or continue perfected Capital's security interest in the Collateral;
B0 To endorse Borrower's name on any checks,
notes, acceptances, money orders, drafts or other forms of payment or security
that may come into Capital's possession and to execute UCC Termination
Statements on behalf of Borrower;
C0 After the occurrence of an Event of
Default and so long as such Event of Default has not been waived of cured (to
the extent there is an applicable cure period), to notify the post office
authorities to change the address for delivery of Borrower's mail to an address
designated by Capital, to receive and open all mail addressed to Borrower, and
to retain all mail relating to the Collateral and forward, within two (2)
business days of Capital's receipt thereof, all other mail to Borrower;
D0 After the occurrence of an Event of
Default and so long as such Event of Default has not been waived of cured (to
the extent there is an applicable cure period), to compromise and settle any and
all Accounts, indebtedness owing to Borrower under Contracts, Eligible
Underlying Accounts Collateral, and other obligations owing to Borrower or which
have been assigned to Borrower, to enter into settlement agreements and mutual
general releases on Borrower's behalf and to execute any notices, reconveyances
or other documentation in connection with any such settlement; and
E0 To do all things reasonably necessary to
carry out this Agreement.
The appointment of Capital as Borrower's attorney,
and each and every one of Capital's rights and powers, being
121
<PAGE>
coupled with an interest, are irrevocable until all of the Obligations have been
fully paid and performed and payments received by Capital are no longer subject
to avoidance. Borrower ratifies and approves all acts of Capital as Borrower's
attorney taken in connection with the transactions contemplated by this
Agreement and neither Capital nor its employees, officers or agents shall be
liable for any acts or omissions or for any error in judgment or mistake of fact
or law made in good faith except for gross negligence or willful misconduct.
50 CONDITIONS PRECEDENT
5.1 As conditions precedent to Capital's obligation to make
the advances and extend the financial accommodations hereunder, Borrower shall
execute and deliver, or cause to be executed and delivered, to Capital, in form
and substance satisfactory to Capital and its counsel, the following:
A0 Financing statements (form UCC-1) and
fixture filings in form satisfactory for filing and recording with
the appropriate governmental authorities;
B0 Certified extracts from the minutes of the
meetings of board of directors of Borrower authorizing the borrowings and the
granting of the security interest provided for herein and authorizing specific
officers to execute and deliver the Loan Documents;
C0 A certified copy of Borrower's Articles of
Incorporation and any amendments thereto, a certificate of status showing that
Borrower is in good standing under the laws of the State of Illinois and
certificates indicating that Borrower has qualified to transact business and is
in good standing in any other state in which the conduct of its business or its
ownership of property requires that it be so qualified;
D0 UCC searches, tax lien and litigation
searches, fictitious business statement filings, insurance certificates, notices
or other similar documents which Capital may require and in such form as Capital
may require, in order to reflect, perfect or protect the priority of Capital's
security interests in the Collateral and in order to fully consummate all of the
transactions contemplated under this Agreement;
E0 Evidence satisfactory to Capital that
Borrower has obtained insurance policies or binders, with such insurers and in
such amounts as may be acceptable to Capital, respecting the Equipment and any
other tangible personal property comprising the Collateral and naming Capital as
a loss payee on a 438-BFU endorsement;
122
<PAGE>
F0 The Facility Fee (if Borrower has
requested an increase in the Maximum Credit Limit);
G0 The Loan Documents;
H0 A fully completed Borrowing Base
Certificate, dated as of the effective date of this Agreement;
I0 The original Contracts properly endorsed
in favor of and assigned to Capital;
J0 The Guaranties prepared on Capital's
standard form and duly executed;
K0 Certified extracts from the minutes of the
meetings of CII's and GFI's board of directors authorizing the execution of
their respective General Continuing Guaranties of the Obligations and
authorizing specific officers to execute and deliver such guaranties;
L0 The Subordination Agreements prepared on
Capital's standard form and duly executed by Westpointe,
Cornerstone and Vista and acknowledged by Borrower;
M0 Certified extracts from the minutes of the
meetings of Cornerstone's, Westpointe's and Vista=s general partners authorizing
the execution of their respective Subordination Agreements and authorizing
specific partners to execute and deliver such Subordination Agreements;
N0 A disbursement letter from Borrower
authorizing and directing Capital to make the initial advances
hereunder.
60 BORROWER'S REPRESENTATIONS AND WARRANTIES
Borrower makes the following representations and warranties
which shall be deemed to be continuing representations and warranties so long as
any credit hereunder shall be available and until the Obligations have been
repaid in full:
6.1 Existence and Rights.
A0 The chief executive office of Borrower is
located at 3003 LBJ Freeway, Suite 200, Dallas, Texas 75234.
B0 Borrower is duly organized and existing
under the laws of the State of Texas and is qualified and licensed to do
business and is in good standing in any state in which the conduct of its
business or its ownership of property requires that
123
<PAGE>
it be so qualified;
C0 Borrower has the right and power to enter
into this Agreement and each of the other Loan Documents;
D0 Borrower has the power, authority, rights
and franchises to own its property and to carry on its business as
now conducted;
E0 Borrower has no investment in any business
entity except as previously disclosed to Capital in writing.
6.2 Agreement Authorized. The execution, delivery and
performance by Borrower of this Agreement and each of the other Loan Documents:
(a) have been duly authorized and do not require the consent or approval of any
governmental body or other regulatory authority; and (b) shall not constitute a
breach of any provision contained in Borrower's Articles of Incorporation or
Bylaws.
6.3 Binding Agreement. This Agreement is the valid, binding
and legally enforceable obligation of Borrower in accordance with its terms.
6.4 No Conflict. The execution, delivery and performance by
Borrower of this Agreement and each of the other Loan Documents: (a) shall not
constitute an event of default under any agreement, indenture or undertakings to
which Borrower is a party or by which it or any of its property may be bound or
affected; (b) are not in contravention of or in conflict with any law or
regulation; and (c) do not cause any lien, charge or other encumbrance to be
created or imposed upon any such property by reason thereof.
6.5 Litigation. There are no actions or proceedings pending by
or against Borrower or any guarantor of Borrower before any court or
administrative agency, and Borrower has no knowledge or belief of any pending,
threatened or imminent litigation, governmental investigations or claims,
complaints, actions or prosecutions involving Borrower or any guarantor of
Borrower, except for ongoing collection matters in which Borrower is the
plaintiff and except as heretofore disclosed, in writing, to Capital. Borrower
is not in default with respect to any order, writ, injunction, decree or demand
of any court or any governmental or regulatory authority.
6.6 Financial Condition. All financial statements and
information relating to Borrower which have been delivered by Borrower to
Capital have been prepared in accordance with generally accepted accounting
principles consistently applied, unless
124
<PAGE>
otherwise stated therein, and fairly and reasonably present Borrower's financial
condition. There has been no material adverse change in the financial condition
of Borrower since the date of the most recent of such financial statements
submitted to Capital. Borrower has no knowledge of any liabilities, contingent
or otherwise, which are not reflected in such financial statements and
information, and Borrower has not entered into any special commitments or
contracts which are not reflected in such financial statements or information
which may have a materially adverse effect upon Borrower's financial condition,
operations or business as now conducted.
6.7 Tax Status. Borrower has no liability nor have any claims
been asserted against Borrower for any delinquent state, local or federal taxes.
6.8 Title to Assets. Other than the security interests granted
to Cornerstone and Westpointe and subordinated to the security interests of
Capital, Borrower has good title to its assets and the same are not subject to
any liens or encumbrances.
6.9 Trademarks and Patents. Borrower, as of the date hereof,
possesses all necessary trademarks, trade names, copyrights, patents, patent
rights and licenses to conduct its business as now operated, without any known
conflict with the valid trademarks, trade names, copyrights, patents and license
rights of others.
6.10 Environmental Quality. Borrower has in the past and is
currently in compliance with any and all federal, state and local statutes, laws
and regulations concerning the preservation of the environment and the use and
disposal of hazardous and toxic materials and substances. Borrower is not aware
that it is under investigation by any state or federal agency designed to
enforce any of such laws or regulations.
6.11 Equipment.
A0 All of the Equipment is currently located
at Borrower's address set forth in Section 6.1A;
B0 The Equipment is and shall remain free
from all liens, claims, encumbrances, and security interests (except as held by
Capital, except for the subordinate security interests granted to Cornerstone
and Westpointe, and except as may be specifically consented to, in advance and
in writing, by Capital).
6.12 Contracts and Security Documents.
125
<PAGE>
A0 Each Contract is a bona fide, good, valid,
enforceable and subsisting obligation of the Contract Debtor thereunder, and
Borrower does not know of any fact which impairs or will impair the validity of
any such Contract.
B0 Each Contract and the Security Documents
are free of any claim for credit, deduction, discount, allowance, defense
(including the defense of usury), dispute, counter-claim or setoff.
C0 Each Contract is wholly free of any prior
assignment, superior security interest, lien, claim or encumbrance in favor of
any person other than Capital.
D0 The Security Documents properly and
reasonably describe the subject personal property collateral.
E0 Each Contract correctly sets forth the
terms between Borrower and the Contract Debtor, including, without limitation,
the interest rate and/or fees applicable thereto.
F0 All state and federal laws have been
complied with in conjunction with the Contracts and Security Documents, the
non-compliance with which would have an adverse impact on the value,
enforceability or collectability of the Contracts or Security Documents.
G0 Borrower has good and valid title to, and
full right and authority to pledge and assign the Contracts and Security
Documents to Capital and no payment is past due under any Eligible Contract.
H0 The signatures of officers of the Contract
Debtor on each Contract and Security Documents related thereto are genuine, and,
to the best knowledge of Borrower, such officers were authorized and had the
legal capacity to enter into and execute such documents on the date thereof.
70 BORROWER'S AFFIRMATIVE COVENANTS
Borrower covenants and agrees that so long as any credit
hereunder shall be available and until the Obligations have been repaid in full,
unless Capital shall otherwise consent in writing, Borrower shall do all of the
following:
7.1 Rights and Facilities. Borrower shall maintain and
preserve all rights, franchises and other authority adequate for the conduct of
its business. Borrower shall also maintain its properties, equipment and
facilities in good order and repair and
126
<PAGE>
conduct its business in an orderly manner without voluntary interruption and
maintain and preserve its existence.
7.2 Records and Servicing of Contracts.
A0 Borrower shall keep or will cause to be
kept in a safe place, at its chief executive office, copies (or the originals if
Capital determines in its sole discretion to allow Borrower to retain such
originals) of the Contracts and Security Documents, all necessary, proper and
accurate books, records, ledgers, correspondence and other documents or
instruments related to or concerning the Contracts and the Security Documents.
Capital shall, at all reasonable times, have the right to inspect, verify,
check, make abstracts from and photocopies of Borrower's Books, and any
correspondence and other papers pertaining to the Contracts and Security
Documents.
B0 In consideration of the advances to be
made by Capital pursuant hereto, and at no expense to Capital, Borrower
covenants and agrees to diligently and faithfully perform the following services
relating to the Contracts and Security Documents, unless and until notified by
Capital that it does not desire Borrower to continue to perform any or all such
services:
(1) Borrower will use commercially
reasonable efforts to collect all payments due under the Contracts. On the
fifteenth (15th) day of each month, Borrower shall provide Capital with a
written report identifying each Contract, if any, under which scheduled payments
are thirty (30) days or more past due and shall inform Capital, in writing, of
all decisions regarding collection efforts concerning any such Contract and
concerning repossession of Property.
(2) Borrower will perform customary
insurance follow-up with respect to each policy of insurance covering the
Property, if any. If required or prudent insurance on any Property is canceled,
terminated or lapses, Borrower shall immediately, and at its sole cost and
expense, obtain replacement insurance coverage.
(3) Borrower will promptly notify Capital
if and when any of the following shall come to its attention: (a) if any
material default arises under the terms of a Contract and/or Security Document,
which default shall not be waived by Borrower without the prior written consent
of Capital; (b) if any material item of Property should be damaged, lost,
destroyed or stolen, and such item or items of Property shall not have been
repaired, replaced or cured by the Contract Debtor within a reasonable time; or
(c) if any Property is moved from the location or locations where it is required
to be kept under the terms of the Security
127
<PAGE>
Document.
(4) Borrower acknowledges that it is not
authorized or empowered to waive or vary the terms of any Contract or Security
Document in a way that would be adverse to Capital's interests, and Borrower
agrees that it will not, at any time, waive or consent to a postponement of
strict compliance on the part of a Contract Debtor with respect to any material
term, provision or covenant contained in any Contract or Security Document, nor
forbear or grant any material indulgence to a Contract Debtor, without the prior
written consent of Capital.
7.3 Location of Equipment. The Equipment shall be located only
at Borrower's chief executive office or such other locations as shall have been
approved by Capital, which approval shall not be unreasonably withheld.
7.4 Insurance.
A0 Borrower, at its expense, shall insure the
Equipment against loss or damage by fire, theft, explosion, sprinklers and all
other hazards and risks ordinarily insured against by other owners who use such
properties in similar businesses for the full insurable value thereof. Borrower
shall deliver to Capital certified copies of such policies of insurance and
evidence of the payments of all premiums therefor. Borrower shall also keep and
maintain business interruption, public liability, and property damage insurance
relating to Borrower's ownership and use of the Equipment and its other assets.
All such policies of insurance shall be in such form, with such companies, and
in such amounts as may be satisfactory to Capital. All such policies of
insurance (except those of public liability and property damage) shall contain
an endorsement in a form satisfactory to Capital showing Capital as a loss payee
thereof, with a waiver of warranties on a 438-BFU endorsement, and all proceeds
payable thereunder shall be payable to Capital and, upon receipt by Capital,
shall be applied on account of the Obligations owing to Capital. To secure the
payment of the Obligations, Borrower grants Capital a security interest in and
to all such policies of insurance (except those of public liability and property
damage) and the proceeds thereof, and Borrower shall direct all insurers under
such policies of insurance to pay all proceeds thereof directly to Capital.
B0 Prior to an Event of Default under this
Agreement, Borrower shall have the exclusive right to make, settle and adjust
any and all claims under such policies of insurance; provided, however, that
Borrower shall not legally conclude the settlement or adjustment of any claim in
excess of Ten Thousand and 00/100 Dollars ($10,000.00) without first obtaining
the written
128
<PAGE>
consent of Capital.
C0 Borrower hereby irrevocably appoints
Capital (and any of Capital's officers, employees or agents designated by
Capital) as Borrower's attorney following the occurrence of an Event of Default
for the purpose of making, settling and adjusting all claims under such policies
of insurance, endorsing the name of Borrower on any check, draft, instrument or
other item of payment for the proceeds of such policies of insurance, and for
making all determinations and decisions with respect to such policies of
insurance.
D0 Borrower will not cancel any of such
policies without Capital's prior written consent. Each such insurer shall agree
by endorsement upon the policy or policies of insurance issued by it to Borrower
as required above, or by independent instruments furnished to Capital, that it
will give Capital at least ten (10) days written notice before any such policy
or policies of insurance will be altered or canceled, and that no act or default
of Borrower, or any other person, shall affect the right of Capital to recover
under such policy or policies of insurance or to pay any premium in whole or in
part relating thereto. If Borrower fails to comply with its covenants contained
in this Section 7.4, Capital may, but shall have no obligation to, obtain and
maintain such policies of insurance and pay such premiums and take such other
action with respect to such policies which Capital deems prudent.
7.5 Notice of Litigation. If at any time during the term of
this Agreement any litigation, governmental investigations or claims,
complaints, actions or prosecutions involving Borrower or any guarantor of
Borrower shall be commenced or threatened, Borrower shall immediately notify
Capital in writing of such event.
7.6 Submission of Records and Reports.
A0 Borrower agrees to use its best efforts to
deliver to Capital, on a daily basis, a collateral and loan status report
summarizing the status of each Contract by indicating, with respect to each
Contract, the amount of outstanding advances made by Borrower under such
Contract, the amount of all outstanding accounts and other Property assigned to
Borrower thereunder, the amount of loan availability under the Contract, the
amount of collections received since the last report, the date of the last
accounts receivable aging with respect to such Contract Debtor, a copy of each
invoice assigned to Borrower (together with a copy of proofs of delivery or
signed acknowledgments of service executed by the customer of such Contract
Debtor), and any other information required by Capital.
129
<PAGE>
B0 Borrower shall deliver to Capital on first
Business Day of each week during the term of this Agreement a detailed report of
all outstanding accounts assigned to Borrower by the Contract Debtors which, as
of the last Business Day of the immediately preceding week, do not constitute
Eligible Underlying Accounts Collateral.
C0 Borrower shall execute and deliver to
Capital by the fifteenth (15th) day of each month during the term of this
Agreement, a report containing the following information regarding each Contract
as of the last day of the immediately preceding calendar month: (i) a statement
reflecting all of the advances, repayments, other loan activity, and the status
of the Property securing the obligations of the Contract Debtor under that
Contract; (ii) an accounts receivable status report setting forth, among other
information, an aging of the accounts receivable, the amount of the Eligible
Underlying Accounts Collateral, the amount of the ineligible accounts
receivable, and the percentage determined by dividing the total amount of all
obligations of a Contract Debtor arising under the Contract by the aggregate
amount of all obligations owing to Borrower from all of its Contract Debtors;
and (iii) a summary of the Contracts which shall set forth, among other things,
the delinquency rate of the obligations arising under the Contracts and
indicating under which Contracts, if any, Property is in foreclosure;
D0 Borrower shall promptly supply Capital
with such other information concerning its affairs as Capital may request from
time to time hereafter, and shall promptly notify Capital of any material
adverse change in Borrower's financial condition and of any condition or event
which constitutes a breach of, or an event which constitutes an Event of Default
or Potential Event of Default under, this Agreement.
7.7 Acquisition of Assets. Borrower shall promptly notify
Capital in writing of its acquisition by purchase, lease or otherwise of any
after-acquired tangible property having a value greater than Fifty Thousand and
00/100 Dollars ($50,000.00) and of the type included in the Collateral.
7.8 Taxes. All assessments and taxes, whether real, personal
or otherwise, due or payable by, or imposed, levied or assessed against Borrower
or any of its property shall be paid in full, before delinquency or before the
expiration of any extension period. Borrower shall make due and timely payment
or deposit of all federal, state and local taxes, assessments or contributions
required of it by law, and will execute and deliver to Capital, on demand,
appropriate certificates attesting to the payment or deposit thereof. Borrower
will make timely payment or deposit of all F.I.C.A. payments and withholding
taxes required of
130
<PAGE>
it by applicable laws, and will, upon request, furnish Capital with proof
satisfactory to Capital indicating that Borrower has made such payments or
deposits.
7.9 Financial Statements.
A0 Borrower shall maintain a standard and
modern system of accounting in accordance with generally accepted accounting
principles consistently applied with ledger and account cards and/or computer
tapes, discs, printouts, and records pertaining to the Collateral which contain
information as may from time to time be requested by Capital. Borrower shall not
modify or change its method of accounting or enter into, modify or terminate any
agreement presently existing, or at any time hereafter entered into with any
third party accounting firm and/or service bureau for the preparation and/or
storage of Borrower's accounting records without said accounting firm and/or
service bureau agreeing to provide to Capital information regarding the
Collateral and Borrower's financial condition. Borrower agrees to permit Capital
and any of its employees, officers or agents, upon demand, during Borrower's
usual business hours, or the usual business hours of third persons having
control thereof, to have access to and examine all of Borrower's Books relating
to the Collateral, the Obligations, Borrower's financial condition and the
results of Borrower's operations, and, in connection therewith, permit Capital
or any of its agents, employees or officers to copy and make extracts therefrom.
B0 Borrower shall deliver to Capital:
(1) within forty five (45) days after the
end of each of the first three fiscal quarters of Borrower, for each of
Borrower's fiscal years, a company prepared consolidated and consolidating
statement of the financial condition of Borrower and its affiliates for such
quarterly period, including, but not limited to, a balance sheet, a profit and
loss statement, and a cash flow statement, and any other report requested by
Capital relating to the Collateral and the financial condition of Borrower, and
a certificate signed by the Chief Executive Officer of Borrower, to the effect
that all statements and reports delivered or caused to be delivered to Capital
under this subsection, fairly and thoroughly present the financial condition of
Borrower and its affiliates and that there exists on the date of delivery to
Capital no condition or event which constitutes an Event of Default or Potential
Event of Default;
(2) within forty five (45) days after the
131
<PAGE>
end of each of the first three fiscal quarters of CII, for each of CII's fiscal
years, a copy of the Form 10Q filed by CII with the Securities and Exchange
Commission for such period;
(3) within ninety (90) days after the end
of each of CII's fiscal years, an audited consolidated and consolidating
statement of the financial condition of CII and its subsidiaries and affiliates
for such fiscal year, prepared by independent certified public accountants
acceptable to Capital, including, but not limited to, a balance sheet, a profit
and loss statement, and a cash flow statement, and any other report requested by
Capital relating to the Collateral and the financial condition of Borrower, and
a certificate signed by the Chief Executive Officer of Borrower to the effect
that all reports, statements, computer disc or tape files, printouts, runs, or
other computer prepared information of any kind or nature relating to the
foregoing or documents delivered or caused to be delivered to Capital under this
subsection, fairly and thoroughly present the financial condition of Borrower
and its affiliates and that there exists on the date of delivery to Capital no
condition or event which constitutes an Event of Default or Potential Event of
Default.
7.10 Tax Returns. Borrower shall deliver to Capital copies of
each of CII's and, if Borrower files a separate tax return, Borrower's future
federal income tax returns, and any amendments thereto, within thirty (30)
calendar days following the filing thereof. Borrower further agrees to promptly
deliver to Capital copies of all receipts issued to Borrower for the payment of
federal withholding taxes required of it.
7.11 Payment of Debts. Borrower shall be at all times
hereafter solvent and able to pay its debts (including trade debts) as they
mature.
7.12 Financial Covenants. Borrower shall maintain at all times
during the term of this Agreement each of the following:
A0 A ratio of Obligations to Tangible Net
Worth of not more than 5.0 to 1.0.
B0 Positive Working Capital.
C0 Positive Tangible Net Worth.
7.13 Compliance with Environmental Laws. Borrower shall comply
with any and all federal, state and local statutes, laws and regulations
concerning the preservation of the environment and the use and disposal of
hazardous and toxic materials and
132
<PAGE>
substances.
7.14 Notice of Reportable Event. Borrower shall furnish to
Capital: (a) as soon as possible, but in no event later than thirty (30) days
after Borrower knows or has reason to know that any reportable event with
respect to any deferred compensation plan has occurred, a statement of the Chief
Financial Officer of Borrower setting forth the details concerning such
reportable event and the action which Borrower proposes to take with respect
thereto, together with a copy of the notice of such reportable event given to
the Pension Benefit Guaranty Corporation, if a copy of such notice is available
to Borrower; (b) promptly after the filing thereof with the Internal Revenue
Service, the United States Secretary of Labor or the Pension Benefit Guaranty
Corporation, copies of each annual report with respect to each deferred
compensation plan together with certified financial statements and actuarial
statements for such plan; (c) promptly after receipt thereof, a copy of any
notice Borrower may receive from the Pension Benefit Guaranty Corporation or the
Internal Revenue Service with respect to any deferred compensation plan;
provided, however, this subparagraph shall not apply to notice of general
application issued by the Pension Benefit Guaranty Corporation or the Internal
Revenue Service; (d) at least ten (10) days prior to the filing by the Borrower
or the administrator of any deferred compensation plan of a notice of intent to
terminate such plan, a copy of such notice; (e) when the same is made available
to participants in the deferred compensation plan, all notices and other forms
of information from time to time disseminated to the participants by the
administrator of the deferred compensation plan; and (f) promptly and in no
event more than ten (10) days after receipt thereof by Borrower, each notice
received by Borrower concerning the imposition of any withdrawal liability under
Section 4202 of the Employee Retirement Income Security Act ("ERISA") of 1974,
as amended.
7.15 Reimbursement for Capital Expenses. Upon the demand of
Capital, Borrower shall immediately reimburse Capital for all sums reasonably
incurred and expended by Capital which constitute Capital Expenses, and Borrower
hereby authorizes and approves all advances and payments by Capital for items
constituting such Capital Expenses.
80 BORROWER'S NEGATIVE COVENANTS
Borrower covenants and agrees that so long as any credit
hereunder shall be available and until the Obligations have been repaid in full,
unless Capital shall otherwise consent in writing, Borrower shall not do any of
the following:
8.1 Relocate of Chief Executive Office. Borrower
133
<PAGE>
will not, without thirty (30) days prior written notification to Capital,
relocate its chief executive office.
8.2 Business Structure and Operations. Borrower shall not,
without Capital's prior written consent:
A0 Sell, lease, or otherwise dispose of,
move, relocate (except in connection with a relocation of Borrower's business
facility) or transfer, whether by sale or otherwise, any of Borrower's assets;
provided, however, that during each of Borrower's fiscal years, Borrower does
not need to obtain the prior written consent of Capital in connection with the
sale or disposal of assets in the ordinary course of Borrower's business unless
and until the aggregate amount of such assets sold or disposed of, or to be sold
or disposed of, during such fiscal year exceeds an aggregate value of Twenty
Five Thousand and 00/100 Dollars ($25,000.00);
B0 Use the proceeds of any advance made under
Section 2.1 for any purpose other than the daily financing needs of Borrower in
funding advances to the Contract Debtors;
C0 Change Borrower's name or form of entity,
or add any new fictitious name;
D0 Acquire, merge or consolidate with or into
any other business organization;
E0 Enter into any transaction not in the
ordinary and usual course of Borrower's business;
F0 Guarantee or otherwise become in any way
liable with respect to the obligations of any third party except by endorsement
of instruments or items of payment for deposit to the general account of
Borrower or which are transmitted or turned over to Capital;
G0 Make any change in the Borrower's
financial structure or in any of its business objectives, purposes or operations
which could adversely affect the ability of Borrower to repay the Obligations;
H0 Incur any debts outside the ordinary and
usual course of Borrower's business, except for renewals or
extensions of existing debts;
I0 Make any advance or loan except in the
ordinary course of business; provided, however, that the
outstanding amount of term loans made in the ordinary course of
134
<PAGE>
business shall not exceed, at any one time, fifteen percent (15%)
of the then existing Tangible Net Worth;
J0 Prepay any existing indebtedness owing to
any third party;
K0 Cause, permit or suffer any change, direct
or indirect, in Borrower's capital ownership;
L0 Make any advance to any Contract Debtor
where the making of such advance would cause the total amount of the outstanding
indebtedness of such Contract Debtor to exceed thirty five percent (35%) of the
Tangible Net Worth;
M0 Make any plant or fixed capital expendi
ture, or any commitment therefor, in any fiscal year, in an
aggregate amount in excess of Fifty Thousand and 00/100 Dollars
($50,000.00);
N0 Enter into any lease, or any commitment
therefor, in any fiscal year, requiring aggregate payments in such any such
fiscal year in excess of Seventy Five Thousand and 00/100 Dollars ($75,000.00);
O0 Borrower will not, without Capital's prior
written consent, make any distribution to its shareholders (in cash or in stock)
on, or purchase, acquire, redeem or retire any of its capital stock, of any
category thereof, whether now or hereafter outstanding; provided, however, that
Borrower shall be permitted to make distributions to CII in order to reimburse
CII for reasonable costs and expenses actually incurred by CII in the
administration of Borrower's business;
P0 Suspend or go out of business.
8.3 ERISA.
A0 Borrower shall not withdraw from partici
pation in, permit the termination or partial termination of, or permit the
occurrence of any other event with respect to any deferred compensation plan
maintained for the benefit of Borrower's employees under circumstances that
could result in liability to the Pension Benefit Guaranty Corporation, or any of
its successors or assigns, or to any entity which provides funds for such
deferred compensation plan.
B0 Borrower shall not withdraw from any
multi-employer plan described in Section 4001(a)(3) of ERISA which covers
Borrower's employees.
135
<PAGE>
90 EVENTS OF DEFAULT
Any one or more of the following events shall constitute an
Event of Default by Borrower under this Agreement:
9.1 Failure to Pay Obligations. If Borrower fails to pay when
due and payable or when declared due and payable all or any portion of the
Obligations owing to Capital (whether of principal, interest, taxes,
reimbursement of Capital Expenses, or otherwise);
9.2 Failure to Perform. If Borrower fails or neglects to
perform, keep or observe any term, provision, condition, covenant, agreement,
warranty or representation contained in this Agreement, in any of the other Loan
Documents, or in any other present or future agreement between Borrower and
Capital and such failure continues for twenty one (21) calendar days after
written notice thereof from Capital to Borrower or, if such failure is one which
cannot be cured within twenty one (21) calendar days, then if Borrower has
commenced curing such failure by means acceptable to Capital in its sole
discretion, then such failure shall not be deemed an Event of Default under this
Section so long as in the sole and exclusive opinion of Capital, Borrower is
diligently attempting to cure the failure;
9.3 Inaccurate Information. If any material
representation, statement, report, or certificate made or delivered
by Borrower, or any of its officers, employees or agents, to
Capital is not true and correct;
9.4 Third Party Claim. If any or a material portion of
Borrower's assets are attached, seized, subjected to a writ or distress warrant,
or are levied upon, or come into the possession of any Judicial Officer or
Assignee;
9.5 Impairment. If there is a material impairment of the
prospect of repayment of all or any portion of the Obligations owing to Capital
or a material impairment of the value or priority of Capital's security
interests in the Collateral;
9.6 Voluntary Insolvency Proceeding. If an
Insolvency Proceeding is commenced by Borrower;
9.7 Involuntary Insolvency Proceeding. If an
Insolvency Proceeding is commenced against Borrower;
9.8 Interruption of Business. If Borrower is enjoined,
restrained or in any way prevented by court order from continuing to conduct all
or any material part of its business affairs;
136
<PAGE>
9.9 Governmental Lien. If a notice of lien, levy or assessment
is filed of record with respect to any or all of Borrower's assets by the United
States Government, or any department, agency or instrumentality thereof, or by
any state, county, municipal or other governmental agency, or if any tax or debt
owing at any time hereafter to any one or more of such entities becomes a lien,
whether choate or otherwise, upon any or all of the Borrower's assets and the
same is not paid on the payment date thereof;
9.10 Liens. If a judgment or other claim becomes a lien or
encumbrance upon all or a material portion of Borrower's assets;
9.11 Default in Agreement with Third Party. If there is a
default in any loan agreement, mortgage, indenture or other agreement to which
Borrower is a party with third parties which is not cured during any applicable
cure period and where the obligations of Borrower under such contract
individually or in the aggregate with any other contracts under which Borrower
is then in default equals or exceeds Fifty Thousand Dollars ($50,000);
9.12 Payment on Subordinated Debt. If Borrower makes any
payment to any third party which would violate the terms of any agreement
pursuant to which such third party has subordinated indebtedness owed to him,
her or it to Borrower's Obligations to Capital;
9.13 Misrepresentation. If any misrepresentation exists now or
hereafter in any warranty or representation made to Capital by Borrower or any
officer or director of Borrower, or if any such warranty or representation is
withdrawn by Borrower or by any officer or director of Borrower;
9.14 Impairment of Guaranty. If any guarantor of Borrower's
indebtedness to Capital dies, terminates its guaranty, defaults in the payment
or performance of any obligations of guarantor owing to Capital, or becomes the
subject of an Insolvency Proceeding;
9.15 Reportable Event Under ERISA. If any reportable event,
which Capital determines will have a material adverse effect on the financial
condition of Borrower or which Capital determines constitutes grounds for the
termination of any deferred compensation plan by the Pension Benefit Guaranty
Corporation or for the appointment by the appropriate United States District
Court of a trustee to administer any such plan, shall have occurred and be
continuing thirty (30) days after written notice of such determination shall
have been given to Borrower by Capital, or any such Plan shall be terminated
within the meaning of Title IV of
137
<PAGE>
ERISA, or a trustee shall be appointed by the appropriate United States District
Court to administer any such plan, or the Pension Benefit Guaranty Corporation
shall institute proceedings to terminate any plan and in case of any event
described in this Section 9.15, the aggregate amount of the Borrower's liability
to the Pension Benefit Guaranty Corporation under Sections 4062, 4063 or 4064 of
ERISA shall exceed five percent (5%) of Borrower's tangible net worth;
9.16 Withdrawal from Multi-Employer Plan. Borrower shall have
withdrawn from a multi-employer plan described in Section 4001(a)(3) of ERISA
and Capital determines that such withdrawal would have a material adverse effect
on the financial condition of Borrower.
9.17 Cure Periods. Notwithstanding anything contained in this
Section 9 to the contrary, Capital shall refrain from exercising its rights and
remedies and an Event of Default shall not be deemed to have occurred by reason
of the occurrence of: (i) an event set forth in Section 9.7 if, within forty
five (45) calendar days from the date thereof, the same is discharged or
dismissed, or (ii) any of the events set forth in Sections 9.4, 9.8, 9.9 or 9.10
if, within twenty one (21) calendar days from the date thereof, the same is
released, discharged, dismissed, bonded against or satisfied; provided, however,
if the event is the institution of Insolvency Proceedings against Borrower,
Capital shall not be obligated to make advances to Borrower during such cure
period.
10. CAPITAL'S RIGHTS AND REMEDIES
10.1 Remedies. Upon the occurrence of an Event of Default by
Borrower under this Agreement, Capital may, at its election, without notice of
its election and without demand, do any one or more of the following, all of
which are authorized by Borrower:
A. Declare all Obligations, whether evidenced
by this Agreement or otherwise, immediately due and payable;
B. Cease advancing money or extending credit
to or for the benefit of Borrower under this Agreement or under any
other agreement between Borrower and Capital;
C. Terminate this Agreement and any of the
other Loan Documents as to any future liability or obligation of Capital, but
without affecting Capital's rights and security interest in the Collateral and
without affecting the Obligations owing by Borrower to Capital;
138
<PAGE>
D. Capital or Capital's designee may notify
each Contract Debtor that its Contract, Security Documents and all rights
thereunder have been assigned to Capital and that Capital has a security
interest therein, collect the indebtedness of such Contract Debtor owing to
Borrower directly if Capital has not already been authorized to do so, and
charge the collection costs and expenses to Borrower's loan account.
E. Without notice to or demand upon Borrower
or any guarantor, make such payments and do such acts as Capital considers
necessary or reasonable to protect its security interest in the Collateral.
Borrower agrees to assemble the Collateral if Capital so requires, and to make
the Collateral available to Capital as Capital may designate. Borrower
authorizes Capital to enter the premises where the Collateral is located, take
and maintain possession of the Collateral, or any part of it, and to pay,
purchase, contest or compromise any encumbrance, charge or lien which in the
opinion of Capital appears to be prior or superior to its security interest and
to pay all expenses incurred in connection therewith;
F. Capital is hereby granted a license or
other right to use, without charge, Borrower's labels, patents, copyrights,
rights of use of any name, trade secrets, trade names, trademarks and
advertising matter, or any property of a similar nature, as it pertains to the
Collateral, in completing production of, advertising for sale and selling any
Collateral and Borrower's rights under all licenses, and all franchise
agreements shall insure to Capital's benefit;
G. Ship, reclaim, recover, store, finish,
maintain, repair, prepare for sale, advertise for sale and sell (in
the manner provided for herein) the Collateral;
H. Sell the Collateral at either a public or
private sale, or both, by way of one or more contracts or transactions, for cash
or on terms, in such manner and at such places (including Borrower's premises)
as is commercially reasonable in the opinion of Capital. It is not necessary
that the Collateral be present at any such sale;
I. Capital shall give notice of the
disposition of the Collateral as follows:
(1 Capital shall give Borrower and each
holder of a security interest in the Collateral who has filed with Capital a
written request for notice, a notice in writing of the time and place of public
sale, or, if the sale is a private sale or some other disposition other than a
public sale is to be made of the Collateral, the time on or after which the
private sale or
139
<PAGE>
other disposition is to be made;
(2 The notice shall be personally
delivered or mailed, postage prepaid, to Borrower as provided in Section 13, at
least ten (10) calendar days before the date fixed for the sale, or at least ten
(10) calendar days before the date on or after which the private sale or other
disposition is to be made, unless the Collateral is perishable or threatens to
decline speedily in value. Notice to persons other than Borrower claiming an
interest in the Collateral shall be sent to such addresses as they have
furnished to Capital;
(3 If the sale is to be a public sale,
Capital shall also give notice of the time and place by publishing a notice one
time at least ten (10) calendar days before the date of the sale in a newspaper
of general circulation in the county in which the sale is to be held;
J. Capital may credit bid and purchase at any
public sale;
K. Borrower shall pay all Capital Expenses
incurred in connection with Capital's enforcement and exercise of any of its
rights and remedies as herein provided, whether or not suit is commenced by
Capital;
L. Any deficiency which exists after
disposition of the Collateral as provided above will be paid immediately by
Borrower. Any excess will be returned, without interest and subject to the
rights of third parties, to Borrower by Capital.
10.2 Cumulative Rights. Capital's rights and remedies under
this Agreement and all other agreements shall be cumulative. Capital shall have
all other rights and remedies not inconsistent herewith as provided under the
Code, by law, or in equity. No exercise by Capital of one right or remedy shall
be deemed an election, and no waiver by Capital of any default on Borrower's
part shall be deemed a continuing waiver. No delay by Capital shall constitute a
waiver, election or acquiescence by it.
11. TAXES AND EXPENSES REGARDING THE COLLATERAL. If Borrower fails
to pay any monies (whether taxes, assessments, insurance premiums, or otherwise)
due to third persons or entities, or fails to make any deposits or furnish any
required proof of payment or deposit, all as required under the terms of this
Agreement, then Capital may, to the extent that it determines that such failure
by Borrower could have a material adverse change on Capital's interests in the
Collateral, in its discretion and without prior notice to Borrower, (i) make
payment of the same or
140
<PAGE>
any part thereof; (ii) set up such reserves in Borrower's loan account as
Capital deems necessary to protect Capital from the exposure created by such
failure; or (iii) both. Any amounts paid or deposited by Capital shall
constitute Capital Expenses, shall be immediately charged to Borrower's loan
account and become additional Obligations owing to Capital, shall bear interest
at the applicable rate set forth in Section 2.5, and shall be secured by the
Collateral. Any payments made by Capital shall not constitute: (i) an agreement
by Capital to make similar payments in the future, or (ii) a waiver by Capital
of any Event of Default under this Agreement. Capital need not inquire as to, or
contest the validity of, any such expense, tax, security interest, encumbrance
or lien, and the receipt of the usual official notice for the payment thereof
shall be conclusive evidence that the same was validly due and owing.
12. WAIVERS
12.1 Application of Payments. Borrower waives the right to
direct the application of any and all payments at any time or times hereafter
received by Capital on account of any Obligations owed by Borrower to Capital,
and Borrower agrees that Capital shall have the continuing exclusive right to
apply and reapply such payments in any manner as Capital may deem advisable,
notwithstanding any entry by Capital upon its books.
12.2 Demand, Protest, Default, Etc. Except as otherwise
provided herein, Borrower waives demand, protest, notice of protest, notice of
default or dishonor, notice of payment and nonpayment, notice of any default,
nonpayment at maturity, release, compromise, settlement, extension or renewal of
any or all commercial paper, accounts, documents, instruments, chattel paper,
and guarantees at any time held by Capital on which Borrower may in any way be
liable.
12.3 Confidential Relationship. Borrower waives the right to
assert a confidential relationship, if any, it may have with any accounting firm
and/or service bureau in connection with any information requested by Capital
pursuant to or in accordance with this Agreement. So long as no Event of Default
shall have occurred, Capital agrees that prior to requesting information
directly from any such accounting firm and/or service bureau, Capital shall
first request such information from Borrower. If Borrower fails to provide such
information to Capital within four (4) Business Days, the Borrower agrees that
Capital may contact directly any such accounting firm and/or service bureau in
order to obtain such information.
13. NOTICES. Unless otherwise specifically provided herein, all
notices and service of any process shall be in writing
142
<PAGE>
addressed to the respective party as set forth below and may be personally
served, telecopied or sent by overnight courier service or United States mail
and shall be deemed to have been given: (a) if delivered in person, when
delivered; (b) if delivered by telecopy, on the date of transmission if
confirmed and if transmitted on a Business Day before 4:00 p.m. (Los Angeles
time) or, if not, on the next succeeding Business Day; (c) if delivered by
overnight courier, two Business Days after delivery to such courier properly
addressed; or (d) if by U.S. Mail, four Business Days after depositing in the
United States mail, with postage prepaid and properly addressed.
If to Borrower: GOODMAN FACTORS, INC.
3003 LBJ Freeway, Suite 200
Dallas, Texas 75234
Attn: _______________
Telecopier Number (972) 243-6285
With a Copy to: ____________________________
============================
Attn: _____________________
Telecopier Number ____________
If to Capital: CAPITAL BUSINESS CREDIT
700 S. Flower Street, Suite 2001
Los Angeles, California 90017-4101
Attn: Nathan L. Hugg
Telecopier Number (213) 236-1375
With a Copy to: KATZ, HOYT, SEIGEL & KAPOR
11111 Santa Monica Boulevard, Suite
820
Los Angeles, California 90025-3342
Attn: William Schoenholz, Esq.
Telecopier Number (310) 473-7138
The parties hereto may change the address at which they are to
receive notices and the telecopier number at which they are to receive
telecopies hereunder, by notice in writing in the foregoing manner given to the
other.
14. DESTRUCTION OF BORROWER'S DOCUMENTS. Any documents, schedules,
invoices or other papers delivered to Capital may be destroyed or otherwise
disposed of by Capital four (4) months after they are delivered to or received
by Capital, unless Borrower requests, in writing, the return of the said
documents, schedules, invoices or other papers and makes arrangements, at
Borrower's expense, for their return. Capital will notify Borrower not less than
ten (10) days prior to destroying any original Contracts for
143
<PAGE>
the purpose of allowing Borrower to request the return of such Contracts
pursuant to the immediately preceding sentence; provided, however, that Capital
shall not be liable to Borrower or any third party if Capital fails to provide
Borrower with such ten (10) days notice unless Capital's failure to notify was
caused by Capital's gross negligence or wilful misconduct.
15. CHOICE OF LAW. The validity of this Agreement, its construction,
interpretation and enforcement, and the rights of the parties hereunder shall be
determined under, governed by, and construed in accordance with the laws of the
State of California. The parties agree that all arbitration proceedings shall be
conducted in County of Los Angeles, State of California, and all other actions
or proceedings arising in connection with this Agreement shall be tried and
litigated only in the state and federal courts located in the County of Los
Angeles, State of California. Borrower waives any right it may have to assert
the doctrine of forum non conveniens or to object to such venue and hereby
consents to any court ordered relief.
16. GENERAL PROVISIONS
16.1 Representations and Warranties. Each representation,
warranty and agreement contained in this Agreement shall be conclusively
presumed to have been relied on by Capital regardless of any investigation made
or information possessed by Capital. The warranties, representations and
agreements set forth herein shall be cumulative and in addition to any and all
other warranties, representations and agreements which Borrower shall give, or
cause to be given, to Capital, either now or hereafter.
16.2 Binding Agreement. This Agreement shall be binding and
deemed effective when executed by Borrower and accepted and executed by Capital.
16.3 Right to Grant Participations. This Agreement shall bind
and inure to the benefit of the respective successors and assigns of each of the
parties; provided, however , that Borrower may not assign this Agreement or any
rights hereunder without Capital's prior written consent and any prohibited
assignment shall be absolutely void. No consent to an assignment by Capital
shall release Borrower from its Obligations to Capital. Capital may assign this
Agreement and its rights and duties hereunder. Capital reserves the right to
sell, assign, transfer, negotiate or grant participations in all or any part of,
or any interest in, Capital's rights and benefits hereunder. In connection
therewith, Capital may disclose all documents and information which Capital now
or hereafter may have relating to Borrower or Borrower's business.
144
<PAGE>
16.4 Section Headings. Section headings and section numbers
have been set forth herein for convenience only. Unless the contrary is
compelled by the context, everything contained in each section applies equally
to this entire Agreement.
16.5 Interpretation. Neither this Agreement nor any
uncertainty or ambiguity herein shall be construed or resolved against Capital
or Borrower, whether under any rule of construction or otherwise. On the
contrary, this Agreement has been reviewed by all parties and shall be construed
and interpreted according to the ordinary meaning of the words used so as to
fairly accomplish the purposes and intentions of all parties hereto.
16.6 Severability. Each provision of this Agreement shall be
severable from every other provision of this Agreement for the purpose of
determining the legal enforceability of any specific provision.
16.7 Modification and Merger. This Agreement cannot be changed
or terminated orally. All prior agreements, understandings, representations,
warranties and negotiations, if any, are merged into this Agreement.
16.8 Good Faith Requirement. The parties intend and agree that
their respective rights, duties, powers, liabilities, obligations and
discretions shall be performed, carried out, discharged and exercised reasonably
and in good faith.
16.9 WAIVER OF JURY TRIAL. BORROWER AND CAPITAL HEREBY WAIVE
THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED
UPON OR ARISING OUT OF THIS AGREEMENT OR ANY OTHER LOAN DOCUMENTS EXECUTED IN
CONNECTION WITH THIS AGREEMENT OR ANY DEALINGS BETWEEN BORROWER AND CAPITAL
RELATING TO THE SUBJECT MATTER OF THIS TRANSACTION AND THE BUSINESS RELATIONSHIP
THAT IS BEING ESTABLISHED. BORROWER AND CAPITAL EACH ACKNOWLEDGE THAT THIS
WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT EACH
OF BORROWER AND CAPITAL HAS ALREADY RELIED ON THIS WAIVER IN ENTERING INTO THIS
AGREEMENT AND THAT EACH OF BORROWER AND CAPITAL WILL CONTINUE TO RELY ON THIS
WAIVER IN ANY RELATED FUTURE DEALINGS BETWEEN BORROWER AND CAPITAL. BORROWER AND
CAPITAL FURTHER WARRANT AND REPRESENT THAT THEY EACH KNOWINGLY AND VOLUNTARILY
WAIVE THEIR RESPECTIVE JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL
COUNSEL.
145
<PAGE>
IN WITNESS WHEREOF, Capital and Borrower have executed this
Agreement as of the date first set forth above.
GOODMAN FACTORS, INC.,
a Texas corporation
By:_____________________________
Name:___________________________
Title:__________________________
CAPITAL BUSINESS CREDIT, A DIVISION OF
CAPITAL FACTORS, INC.,
a Florida corporation
By:_____________________________
Name:___________________________
Title:__________________________
146
EXHIBIT 21.1
SUBSIDIARIES OF REGISTRANT
The Company's only Subsidiaries are:
1. U.S. Commercial Funding Corp., a Florida Corporation;
2. U.S. Commercial Funding Corp., an Illinois Corporation;
3. Salt Lake Mortgage Corp., a Utah Corporation;
4. Advantage Realty Corp., a Utah Corporation.
5. Goodman Factors, Inc., a Texas corporation
147
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our report dated August 18, 1998, with respect to
the financial statements of Celtic Investment, Inc. and subsidiaries for the
years ended June 30, 1998 and 1997, included in the Annual Report (Form 10-KSB)
of Celtic Investments, Inc. and subsidiaries for the year ended June 30, 1998.
We also consent to the incorporation by reference in the Registration
Statement (Form S- 8 No. 333-58409) pertaining to Employee and Consultant Stock
Option Agreements and Celtic Investment, Inc. 1997 Stock Option Plan of our
report dated August 18, 1998, with respect to the consolidated financial
statements of Celtic Investments, Inc. and subsidiaries included in this Annual
Report (Form 10-KSB) for the year ended June 30, 1998.
MCGLADREY & PULLEN, LLP
Chicago, Illinois
September 28, 1998
148
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
CELTIC INVESTMENT, INC.'S FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> 905,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 905,000
<SECURITIES> 0
<RECEIVABLES> 6,832,000
<ALLOWANCES> (233,000)
<INVENTORY> 0
<CURRENT-ASSETS> 7,504,000
<PP&E> 256,000
<DEPRECIATION> (162,000)
<TOTAL-ASSETS> 9,605,000
<CURRENT-LIABILITIES> 5,461,000
<BONDS> 0
0
0
<COMMON> 5,080,000
<OTHER-SE> (936,000)
<TOTAL-LIABILITY-AND-EQUITY> 9,605,000
<SALES> 3,731,000
<TOTAL-REVENUES> 3,731,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,906,000
<LOSS-PROVISION> 136,000
<INTEREST-EXPENSE> 566,000
<INCOME-PRETAX> 123,000
<INCOME-TAX> (395,000)
<INCOME-CONTINUING> 518,000
<DISCONTINUED> (76,000)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 442,000
<EPS-PRIMARY> .11
<EPS-DILUTED> .11
</TABLE>
