-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HzE0f6hu8foSv86HRa+fPUbqmisCg7DqQKoJowM0UDND1AS1X5s+/A6/eYsj1Lf8 Km0mtcMIjZIAI4qB2u7tYA== 0001010549-99-000221.txt : 19990729 0001010549-99-000221.hdr.sgml : 19990729 ACCESSION NUMBER: 0001010549-99-000221 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19990727 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19990728 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KARTS INTERNATIONAL INC CENTRAL INDEX KEY: 0001010077 STANDARD INDUSTRIAL CLASSIFICATION: GAMES, TOYS & CHILDREN'S VEHICLES (NO DOLLS & BICYCLES) [3944] IRS NUMBER: 752639196 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 000-23041 FILM NUMBER: 99671511 BUSINESS ADDRESS: STREET 1: 109 NORTHPARK BLVD STREET 2: STE 210 CITY: COVINGTON STATE: LA ZIP: 70433 BUSINESS PHONE: 5047471111 MAIL ADDRESS: STREET 1: 109 NORTHPARK BOULEVARD STREET 2: SUITE 210 CITY: COVINGTON STATE: LA ZIP: 70433 8-K 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------ FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported): June 30, 1999 KARTS INTERNATIONAL INCORPORATED (Exact name of registrant as specified in its charter) Nevada (State of incorporation) 000-23041 75-2639196 (Commission File Number) (I.R.S. Employer Identification Number) 62204 Commercial Street P.O. Box 695 Roseland, Louisiana 70456 (Address of principal executive offices) (Zip Code) (504) 747-1111 (Registrant's telephone number, including area code) Not Applicable (Former name or former address, if changed since last report.) ================================================================================ INFORMATION INCLUDED IN REPORT ON FORM 8-K Item 5. Other Events. Offering of 9% Cumulative Convertible Preferred Stock On June 30, 1999, Karts International Incorporated, a Nevada corporation (the "Registrant"), consummated a private offering (the "Offering") of its 9% Cumulative Convertible Preferred Stock (the "Preferred Stock"). Pursuant to the terms and conditions set forth in the Registrant's Private Placement Memorandum dated March 31, 1999, the Registrant sold an aggregate of 1,550,000 shares of Preferred Stock for aggregate Offering proceeds of $1,550,000 or a per share purchase price of $1.00. The proceeds from the sale of the Preferred Stock are being used by the Registrant for working capital and payment of trade debt. The Preferred Stock was sold to investors, which included officers and directors of the Registrant who purchased an aggregate of 520,000 shares of Preferred Stock on the same terms as other investors. Set forth below is a summary of the terms and provisions of the Preferred Stock. This summary does not purport to be complete and is qualified in its entirety by reference to the Certificate of Designation, Preferences and Rights of 9% Cumulative Convertible Preferred Stock filed as an exhibit to this Current Report. Dividends. Holders of shares of the Preferred Stock are entitled to receive, out of funds legally available therefor, a dividend at the rate of $.09 per share per annum, payable in semi-annual installments on June 30 and December 31, commencing December 31, 1999. Such dividends may be paid in cash or shares of the Registrant's common stock, par value $.001 per share (the "Common Stock"), at the Registrant's option. The number of shares of Common Stock to be issued as a stock dividend shall be determined by the current market price of a share of Common Stock on the record date for such stock dividend. The current market price of a share of Common Stock on the record date shall be the closing sale price on such day as reported by the Nasdaq SmallCap Market or on any other exchange on which the shares of Common Stock may be traded. No fractional shares will be issued for dividends. The amount of any dividends represented by such fractional shares will be payable by rounding up to the next whole number for such stock dividend. Dividends on the Preferred Stock will be cumulative from the date of initial issuance of the Preferred Stock. Dividends will be payable to holders of record as they appear on the stock books of the Registrant on such record dates, not more than 60 days nor less than 10 days preceding the payment dates, as shall be fixed by the Board. If dividends are not paid in full upon the Preferred Stock and any other preferred stock ranking on a parity as to dividends with the Preferred Stock, all dividends declared upon shares of Preferred Stock and such other preferred stock will be declared pro rata so that in all cases the amount of dividends declared per share on the Preferred Stock and such other preferred stock bear the same ratio to each other that accumulated dividends per share on the shares of the Preferred Stock and such other preferred stock bear to each other. Except as set forth above, unless full cumulative dividends on the Preferred Stock have been paid, dividends (other than in Common Stock) may not be paid or declared and set aside for payment and other distributions may not be made upon the Common Stock or on any other stock of the Registrant ranking junior to or on a parity with the Preferred Stock as to dividends, nor may any -2- Common Stock or any other stock of the Registrant ranking junior to or on a parity with the Preferred Stock as to dividends be redeemed, purchased or otherwise acquired for any consideration (or any payment made to or available for a sinking fund for the redemption of any shares of any shares of such stock) by the Registrant (except by conversion into or exchange for stock of the Registrant ranking junior to the Preferred Stock as to dividends). The Registrant has agreed not to declare or pay any cash dividend on its Common Stock during such period that the Preferred Stock remains outstanding. Conversion Rights. The holder of any shares of the Preferred Stock will have the right, at the holder's option, to convert any or all such shares into Common Stock at any time during the period commencing on June 30, 1999 and expiring on the fourth anniversary of such date (the "Conversion Period"). Subject to certain adjustments as described below, the Preferred Stock is convertible at the rate of one share of Common Stock for each $.25 in Face Amount of the Preferred Stock converted (initially four shares of Common Stock for each share of Preferred Stock converted). If the Preferred Stock is not voluntarily converted prior to the expiration of the Conversion Period, each share of Preferred Stock then outstanding shall be automatically converted at the rate of one share of Common Stock for each $.25 in Face Amount of the Preferred Stock converted, subject to certain adjustments described below. The Registrant shall also be required to pay all accrued but unpaid dividends due and owing to the holders of the Preferred Stock as of expiration date of the Conversion Period. The holders of the Preferred Stock have contractually agreed to suspend their right to convert their shares of Preferred Stock into shares of Common Stock until such time as the matters contemplated by this proposal and Proposal 4 below have been ratified and/or approved by the stockholders. In the event the Preferred Stock is called for redemption, the conversion right will terminate at the close of business on the fifth business day prior to the date fixed for redemption. Payment or adjustment shall be made upon any conversion of any share of Preferred Stock on account of any unpaid and accrued dividends on the shares surrendered for conversion. No fractional shares of Common Stock will be issued upon conversion but, in lieu thereof, the Registrant shall round up the fractional share. The conversion rate will be subject to adjustment upon the occurrence of the following events: (i) stock split, recapitalization, combination of shares of the Registrant, or other similar event or (ii) the sale or other issuance of shares of Common Stock at a price less than the then applicable conversion rate. If during the Conversion Period the Registrant sells or issues shares of Common Stock at less than the then applicable conversion rate, the conversion rate shall then become the price at which such securities were sold on a per share basis. The conversion rate will not be adjusted upon (i) the issuance of Common Stock as dividends on either the outstanding Common Stock, the Preferred Stock or other duly issued securities of the Registrant; (ii) the issuance of shares of Common Stock upon the exercise of outstanding options or warrants; (iii) the issuance of shares of Common Stock upon the exercise of options granted under the Registrant's 1998 Stock Compensation Plan; (iv) any issuance of shares of Common Stock to Charles Brister, Chief Executive Officer and President of the Registrant, or any other executive officer of the Registrant in lieu of compensation during calendar year 1999; and (v) an issuance or distribution of Common Stock, rights or warrants to subscribe for shares of Common Stock, or other securities or debt instruments convertible into Common Stock, subject only to the requirement that such securities be sold at a price per share or be convertible into Common Stock at a price in excess of the then applicable conversion rate of the Preferred Stock. In case of any reclassification of the Common Stock, any consolidation of the Registrant with, or merger of the Registrant into, any other entity, any merger of any entity into the Registrant (other than a merger which does not result in any reclassification, conversion, exchange or cancellation of -3- outstanding shares of Common Stock), any sale or transfer of all or substantially all of the assets of the Registrant or any compulsory share exchange whereby the Common Stock is converted into other securities, cash or other property, then provision shall be made such that the holder of each share of Preferred Stock then outstanding shall have the right thereafter, during the period such share of Preferred Stock shall be convertible, to convert such share only into the kind and amount of securities, cash and other property receivable upon such reclassification, consolidation, merger, sale, transfer or share exchange by a holder of the number of shares of Common Stock into which such shares of Preferred Stock might have been converted immediately prior to such reclassification, consolidation, merger, sale, transfer or share exchange. Holders of the Preferred Stock converted into Common Stock will be entitled to the same rights applicable at the time of conversion to other holders of Common Stock. The holders of the shares of the Preferred Stock have no preemptive rights with respect to any securities of the Registrant. Liquidation Rights. In the event of any liquidation, dissolution or winding up of the Registrant, the holders of shares of the Preferred Stock are entitled to receive out of assets of the Registrant available for distribution to stockholders, before any distribution of assets is made to holders of Common Stock or any other junior stock, liquidating distributions in the amount of $1.00 per share plus accumulated and unpaid dividends. If upon any liquidation, dissolution or winding up of the Registrant, the assets distributable to the holders of the Preferred Stock and any other preferred stock ranking as to any such distribution on a parity with the Preferred Stock are insufficient to fully pay the preferential amount, the holders of the Preferred Stock and of such other preferred stock will share ratably in such distribution of assets in proportion to the full respective preferential amounts to which they are entitled. After payment of the full amount of the liquidating distribution to which they are entitled, the holders of shares of the Preferred Stock will not be entitled to any further participation in any distribution of assets by the Registrant. Neither a consolidation or merger of the Registrant with another corporation nor a sale or transfer of all or part of the Registrant's assets for cash or securities will be considered a liquidation, dissolution or winding up of the Registrant. The right of the Registrant, and the rights of its creditors and stockholders (including holders of the Preferred Stock), to participate in the distribution of the assets of any subsidiary of the Registrant upon any liquidation or reorganization of such subsidiary, or otherwise, will be subject to the prior claims of creditors of such subsidiary (except to the extent the Registrant may itself be a creditor with recognized claims against such subsidiary). Redemption at the Option of Registrant. The Preferred Stock may not be redeemed prior to March 31, 2000. The Preferred Stock is redeemable thereafter for cash, in whole or in part, at any time at the option of the Registrant at $1.09 per share. If less than all of the outstanding shares of the Preferred Stock are to be redeemed, the Registrant will select those shares to be redeemed pro rata or by lot or in such other manner as the Board may determine. There is no mandatory redemption or sinking fund obligation with respect to the Preferred Stock. In the event the Registrant has failed to pay accrued and unpaid dividends on the Preferred Stock, it may not redeem any of the then outstanding shares of Preferred Stock until all such accrued and unpaid dividends have been paid in full. In the event the Preferred Stock is called for redemption, the conversion right will terminate at the close of business on the fifth business day prior to the date fixed for redemption. After the redemption date, dividends will cease to accrue on the shares of the Preferred Stock called for redemption -4- and all rights of the holders of such shares will terminate except the right to receive the redemption price without interest (unless the Registrant defaults in the payment of the redemption price). Voting Rights. Except as indicated below, the holders of shares of Preferred Stock have no voting rights. If the equivalent of two consecutive semi-annual (one year) dividends payable on the Preferred Stock or on any other preferred stock is in arrears, the number of directors of the Registrant will be increased by two and the holders of all outstanding shares of the Preferred Stock and any other preferred stock ranking on a parity as to dividends or upon liquidation with the Preferred Stock, voting as a single class without regard to series, will be entitled to elect two additional directors until all cumulative dividends in arrears have been paid in full and until any non-cumulative dividends payable on all preferred stock have been paid regularly for at least one year. In addition, without the vote or consent of the holders of at least a majority of the number of then outstanding shares of the Preferred Stock and any other preferred stock ranking on a parity as to dividends or upon liquidation with the Preferred Stock, the Registrant shall not (i) create, or increase the authorized number of shares of, any series or class of stock ranking prior to the Preferred Stock either as to dividends or upon liquidation, (ii) amend, alter or repeal any of the rights and preferences of the Preferred Stock or (iii) authorize any reclassification of the Preferred Stock. Accordingly, the voting rights of the holders of the Preferred Stock could under certain circumstances operate to restrict the flexibility the Registrant would otherwise have in connection with future changes to its capital structure. $1.5 Million Convertible Term Loan from The Schlinger Foundation On June 3, 1999, the Registrant concluded a loan transaction (the "Schlinger Loan") whereby the Registrant borrowed from The Schlinger Foundation ("The Foundation") the principal amount of $1,500,000 as evidenced by a $1.5 Million Convertible Term Note (the "Term Note") executed by the Registrant in favor of The Foundation. The Term Note requires that interest on the principal balance be paid monthly commencing June 30, 1999, with the principal of the loan plus accrued but unpaid interest being due and payable in one installment on May 31, 2004. The principal balance of the Term Note bears interest at the rate of twelve percent (12%) per annum. The principal balance of the Term Note is convertible, in whole or in part (in integral multiples of $500,000), into shares of Common Stock (the "Schlinger Conversion Shares"). The number of Schlinger Conversion Shares to be issued upon conversion is equal to the amount of unpaid principal converted divided by the conversion price of $.375. The conversion price is subject to adjustment upon the occurrence of certain events, including stock splits and combinations, dividends or distributions, and reclassifications, exchanges and substitutions. The Term Note is subject to the terms and conditions set forth in the Loan Agreement dated June 3, 1999 (the "Loan Agreement") by and between the Registrant and The Foundation. The Loan Agreement imposes upon the Registrant affirmative, negative and financial covenants customary in this type of loan transaction. Specifically, under the affirmative covenants, the Registrant must maintain adequate books and records, remain in compliance with applicable laws, satisfy all tax obligations, maintain proper insurance and advise The Foundation of certain corporate changes or events. A further affirmative covenant requires that the Registrant effect an amendment to its Articles of Incorporation to increase its authorized shares of Common Stock within 120 days of the date of the Loan Agreement. The negative covenants to which the Registrant is subject prohibit the Registrant from changing the nature of its business, liquidating, merging, consolidating or selling substantially all of its assets, or incurring -5- any additional debt obligations without the prior written consent of The Foundation. The financial covenants require that the Registrant (i) maintain a monthly ratio of current assets to current liabilities of not less than 1.5 to 1.0, (ii) maintain a total liabilities to tangible net worth ratio of 2.5 to 1.0 and (iii) have a monthly tangible net worth of $2.5 million. Failure by the Registrant to abide by or satisfy any of the foregoing covenants will result in an event of default under the Term Note. Upon an event of default, The Foundation may declare the unpaid principal balance plus accrued and unpaid interest immediately due and payable or foreclose on all liens granted to The Foundation. The Term Note is secured by all of the accounts, inventory and equipment of the Registrant and each of its wholly-owned subsidiaries. Furthermore, the obligations of the Registrant under the Term Note are guaranteed by each of the Registrant's wholly-owned subsidiaries. On July 12, 1999, the Registrant and The Foundation executed the Waiver and First Amendment to Loan Agreement (the "Amended Loan Agreement") whereby the Registrant agreed to obtain stockholder ratification and approval of the Schlinger Loan and the issuance of the Schlinger Conversion Shares on or before September 30, 1999. The failure of the Registrant to obtain stockholder ratification of the Schlinger Loan and approval of the issuance of the Schlinger Conversion Shares will constitute an event of default under the Loan Agreement. Item 7. Exhibits. Exhibit No. Description - -------------------------------------------------------------------------------- 4.9 Certificate of Designation, Preferences and Rights of 9% Cumulative Convertible Preferred Stock, filed with the Secretary of State of Nevada on May 3, 1999. 10.43 Loan Agreement dated June 3, 1999 by and between the Registrant and The Schlinger Foundation. 10.44 Convertible Term Note dated June 3, 1999 in the principal amount of $1,500,000 executed by the Registrant and payable to The Schlinger Foundation. 10.45 Security Agreement dated June 3, 1999 by and between the Registrant and The Schlinger Foundation. 10.46 Waiver and First Amendment to Loan Agreement dated July 12, 1999 by and between the Registrant and The Schlinger Foundation. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. KARTS INTERNATIONAL INCORPORATED By: /s/ Charles Brister -------------------------------- Charles Brister, Chief Executive Officer and President Date: July 27, 1999 EX-4.9 2 CERTIFICATE OF DESIGNATION EXHIBIT 4.9 KARTS INTERNATIONAL INCORPORATED (a Nevada corporation) CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS OF 9% CUMULATIVE CONVERTIBLE PREFERRED STOCK ($0.001 Par Value) Pursuant to the provisions of Section 78.195, 78.1955 and 78.196 of the Nevada General Corporation Law (the "Act"), the undersigned corporation, KARTS INTERNATIONAL INCORPORATED (the "Corporation), hereby submits the following statement for the purpose of establishing and designating a series of shares of preferred stock to be known as 9% Cumulative Convertible Preferred Stock and fixing and determining the relative rights and preferences thereof: ARTICLE ONE NAME 1. The name of the Corporation is KARTS INTERNATIONAL INCORPORATED. ARTICLE TWO CORPORATE RESOLUTIONS 2. The following resolution establishing and designating a series of preferred stock, to-wit: the 9% Cumulative Convertible Preferred Stock (the "Convertible Preferred Stock"), and fixing and determining the relative rights and preferences thereof was duly adopted by the Board of Directors of the Corporation on March 25, 1999: BE IT RESOLVED that, pursuant to the authority expressly granted and vested in the Board of Directors of the Corporation in accordance with Article Fourth of the Corporation's Articles of Incorporation, authorizing 10,000,000 shares of Preferred Stock (the "Preferred Stock"), $0.001 par value per share, approved and adopted on February 21, 1996, in accordance with and pursuant to the provisions of Sections 78.195, 78.1955 and 78.196 of the Act, the Board of Directors of the Corporation does hereby approve and adopt the following resolutions designating and authorizing for issuance, in accordance with the provisions of the Act, the Convertible Preferred Stock of the Corporation, said resolutions hereby effected being prior to the issuance of any shares of Convertible Preferred Stock, such shares of Convertible Preferred Stock to consist of 2,500,000 shares, each having a par value of $0.001 per share, and each of which shares of Convertible Preferred Stock shall have the dividend rights, voting powers, redemption provisions, liquidation preferences and the relative, optional or other special rights, and shall be subject to the qualifications, limitations or restrictions set forth below and the remaining 7,500,000 authorized shares of the Convertible Preferred Stock shall remain undesignated and reserved for future issuance subject to the future action of the Board of Directors of the Corporation. -1- Rights and Preferences of Convertible Preferred Stock 1. Dividends. (a) Amount and Payment of Dividend. Subject to the limitations hereinafter set forth, the holders of Convertible Preferred Stock shall be entitled to receive, but only when, if and as declared by the Board of Directors, dividends at the rate of nine percent (9%) per annum of the original issue price thereof of One and No/100 Dollars ($1.00) per share, and no more, payable in semiannual installments out of the funds of the Corporation legally available therefor on June 30 and December 31 of each year (the "Dividend Payment Date") commencing June 30, 1999, (or, if any such Dividend Payment Date shall be a weekend or a bank holiday, on the next business day thereafter). Such dividends may be paid in cash or in shares of Common Stock of the Corporation, or partly in cash and partly in shares of Common Stock of the Corporation as determined by the Corporation's Board of Directors in its sole discretion; provided, however, (i) no fractional shares of Common Stock may be issued for dividends, and (ii) the amount of any dividends represented by such fractional shares will be payable by rounding up to the next whole number for such stock dividend, and provided further that if any such dividend is paid in whole or in part by shares of Common Stock, the number of shares of Common Stock to be issued as a stock dividend shall be determined by the current market price of a share of Common Stock on the record date for such stock dividend. The current market price of a share of Common Stock on the record date shall be the closing sale price on such day as reported by the NASDAQ Small Cap Market or any other exchange on which the shares of Common Stock may be traded. Any shares of Convertible Preferred Stock issued after the date hereof shall accrue dividends from the date of issuance. Dividends will be payable to holders of record as they appear on the stock books of the Company on such record dates, not more than 60 days nor less than 10 days preceding the payment dates, as shall be fixed by the Corporation's Board of Directors. (b) Cumulative Rights. To the extent, if any, that dividends at the rate set forth in Section 1(a) above shall not be paid or set apart in full for the Convertible Preferred Stock, the aggregate deficiency shall be cumulated and must be fully paid or set apart for payment before any dividends may be paid upon or set apart for the Common Stock of the Corporation or before the Corporation may purchase, redeem or otherwise acquire for any consideration (or any payment made to or available for a sinking fund for the redemption of any of its Common Stock or any other stock of the Company ranking junior to or on a parity with the Convertible Preferred Stock as to dividends) any of its Common Stock or any other stock of the Company ranking junior to or on a parity with the Convertible Preferred Stock as to dividends or otherwise make any distribution on account of its Common Stock or any other class of capital stock now or hereafter authorized or issued by the Corporation which ranks on a parity with or junior to the Convertible Preferred Stock (other than (i) a dividend payable in Common Stock, or (ii) by conversion into or exchange for capital stock of the Corporation ranking junior to the Convertible Preferred Stock as to dividends). (c) No Interest on Accrued Dividends. Any accumulations of dividends on the Convertible Preferred Stock shall not bear interest. (d) Declaration. Dividends on the Convertible Preferred Stock shall be declared if, when and as the Board of Directors of the Corporation shall in its sole discretion deem advisable, and only from the surplus of the Corporation as such shall be fixed and determined by the said Board of Directors. The -2- determination of the Board of Directors at any time of the amount of surplus available for the payment of dividends shall be binding and conclusive on the holders of the shares of Convertible Preferred Stock then outstanding. If dividends are not paid in full upon the Convertible Preferred Stock and any other Preferred Stock ranking on a parity as to dividends with the Convertible Preferred Stock, all dividends declared upon shares of Convertible Preferred Stock and upon such other shares of Preferred Stock will be declared pro rata so that in all cases the amount of dividends declared per share on the Convertible Preferred Stock and such other Preferred Stock shall bear the same ratio to each other that the accumulated dividends per share on the shares of the Convertible Preferred Stock and such other shares of Preferred Stock bear to each other. The holders of the Convertible Preferred Stock shall not be entitled to receive any dividends thereon other than the dividends provided for in the preceding provisions of this Section. 2. Voting Rights and Notice of Meetings. Except as otherwise provided in Paragraphs (a) and (b) of this Section, the holders of the Common Stock shall have the exclusive right and power to vote on any matter submitted to a vote of the stockholders of the Corporation, and the holders of the Convertible Preferred Stock shall have no right or power whether authorized by the Act or otherwise to vote on any matter or in any proceeding or to be represented at or to receive notice of any meeting of the stockholders. (a) Protective Voting Rights. The holders of Convertible Preferred Stock and any other Preferred Stock ranking on a parity as to dividends or upon liquidation with the Convertible Preferred Stock shall be entitled to vote separately as a class upon any proposed amendment(s) to the Corporation's Articles of Incorporation which would (i) create, or increase the authorized number of shares of, any series or class of stock ranking prior to the Convertible Preferred Stock either as to dividends or upon liquidation; (ii) amend, alter or repeal any of the rights and preferences of the Convertible Preferred Stock; or (iii) authorize any reclassification of the Preferred Stock. Such a proposed amendment must be approved by the holders of at least a majority of the number of then outstanding shares of the Convertible Preferred Stock and any other Preferred Stock ranking on a parity as to dividends or upon liquidation with the Preferred Stock. (b) Contingent Right to Elect Directors. (1) Preferred Stockholders' Right to Elect Directors When Dividends Not Paid and Divestment of Such Right. If at any time declared and accrued dividends on the Convertible Preferred Stock or any other Preferred Stock shall not have been paid in an amount equivalent to two (2) consecutive full semiannual dividends on all Convertible Preferred Stock or any other Preferred Stock at the time outstanding, the number of Directors of the Corporation shall be increased by two (2) and the holders of the Convertible Preferred Stock and the holders of any other Preferred Stock ranking on a parity as to dividends or upon liquidation with the Convertible Preferred Stock, voting as a single class without regard to series, shall be entitled to elect two (2) Directors and the holders of the Common Stock, voting separately as a class, shall be entitled to elect the remaining Directors of the Corporation. Such right of the holders of the Convertible Preferred Stock to elect two (2) Directors may be exercised until all such declared and accrued dividends on the Convertible Preferred Stock shall have been paid in full and until any noncumulative dividends payable on all shares of Preferred Stock then outstanding have been paid regularly for at least one (1) year or funds sufficient therefor deposited in trust, at which -3- time the holders of the Convertible Preferred Stock shall be divested of such voting rights, but subject always to the same provisions for the vesting of such voting rights in the holders of the Convertible Preferred Stock in the case of any future dividend default or defaults. (2) Procedure for Election of Such Directors. The foregoing right of the holders of the Convertible Preferred Stock with respect to the election of Directors of the Corporation may be exercised at any annual meeting of stockholders or, within the limitations hereinafter provided, at a special meeting of stockholders held for such purpose. If the date on which such right of the holders of the Convertible Preferred Stock shall become vested shall be more than ninety (90) days preceding the date of the next annual meeting of stockholders as fixed by the bylaws of the Corporation, the President of the Corporation shall, within ten (10) days after delivery to the Corporation at its principal office of a request to such effect signed by the holders of at least ten percent (10%) of the Convertible Preferred Stock then outstanding, call a special meeting of the holders of the Convertible Preferred Stock to be held within sixty (60) days after the delivery of such request for the purpose of electing two (2) Directors to serve until the next annual meeting and until their successors shall be elected and shall qualify. Notice of such meeting shall be mailed to each holder of the Convertible Preferred Stock not less than ten (10) nor more than sixty (60) days prior to the date of such meeting. Whenever the holders of the Convertible Preferred Stock shall be entitled to elect two (2) Directors, any such holder shall have the right, during regular business hours, in person or by a duly authorized representative, to examine and to make transcripts of the stock records of the Corporation for the Convertible Preferred Stock for the purpose of communicating with other holders of such Convertible Preferred Stock with respect to the exercise of such right of election. (3) Term of Office. Each Director elected by the holders of the Convertible Preferred Stock shall serve until the next annual meeting of the stockholders or until his successor shall be elected and shall qualify; provided, however, that whenever the holders of the Convertible Preferred Stock shall be divested of voting power as provided in Section 2(b)(1) above, the term of office of the persons elected as Directors by the holders of the Convertible Preferred Stock shall terminate, and the number of Directors comprising the Board of Directors shall be reduced accordingly. (4) Quorum. At any annual or special meeting of stockholders held for the purpose of electing Directors when the holders of the Convertible Preferred Stock shall be entitled to elect two (2) Directors, the presence in person or by proxy of the holders of a majority of the outstanding Convertible Preferred Stock shall be required to constitute a quorum for the election by such class of such Directors, and the presence in person or by proxy of the holders of a majority of the outstanding Common Stock shall be required to constitute a quorum for the election by such class of the remaining Directors; provided, however, that the majority of the holders of any such class of shares who are present in person or by proxy shall have power to adjourn such meeting for the election of Directors by such class from time to time, for a period of less than thirty (30) days, without notice other than announcement at the meeting. No delay or failure by the holders of either such class of shares to elect the members of the Board of Directors whom such holders are entitled to elect shall -4- invalidate the election of the remaining members of the Board of Directors by the holders of the other such class of shares. (5) Filling Vacancies in Board of Directors. If, during any interval between annual meetings of stockholders for the election of Directors and while the holders of the Convertible Preferred Stock shall be entitled to elect two (2) Directors, the number of Directors in office who have been elected by the holders of the Convertible Preferred Stock or the Common Stock, as the case may be, shall, by reason of resignation, death, or removal, be less than the total number of Directors subject to election by the holders of shares of such class: (i) The vacancy or vacancies in the Directors elected by the holders of such class shall be filled by a majority vote of the remaining Directors then in office, although less than a quorum, on nomination by a majority of the remaining Directors elected by the holders of such class or their successors, or by the sole remaining Director elected by the holders of such class or succeeding a Director so elected; and (ii) If not so filled within sixty (60) days after the creation thereof, the President of the Corporation shall call a special meeting of the holders of the shares of such class and such vacancy or vacancies shall be filled at such special meeting. (6) Removal of Directors. During such time that the holders of the Convertible Preferred Stock shall have members of the Board of Directors sitting on their behalf, any Director may be removed from office by vote of the holders of a majority of the shares of the class of shares by which his successor would be elected. A special meeting of the holders of shares of such class may be called by a majority vote of the Board of Directors for the purpose of removing a Director in accordance with the provisions of this subparagraph. The President of the Corporation shall, in any event, within ten (10) days after delivery to the Corporation at its principal office of a request to such effect signed by the holders of at least ten percent (10%) of the outstanding shares of such class, call a special meeting for such purpose to be held within sixty (60) days after the delivery of such request. As to the foregoing matters only, each holder of the Convertible Preferred Stock shall be entitled to one (1) vote for each share thereof standing in his name on the books of the Corporation on the record date fixed for a stockholders' meeting to vote on such transaction. 3. Redemption. (a) Selection of Shares for Redemption. At any time on or after March 31, 2000, the Corporation may purchase or redeem all, or from time to time any part of, the shares of Convertible Preferred Stock then issued and outstanding; provided, however, no shares of Convertible Preferred Stock may be redeemed until all accrued and unpaid dividends, if any, on all outstanding shares of Convertible Preferred Stock have been paid in full. If less than all of the shares of Convertible Preferred Stock then issued and outstanding are to be redeemed at one time, the shares of Convertible Preferred Stock to be redeemed shall be selected pro rata or by lot in such manner as may be prescribed by the -5- resolution of the Board of Directors of the Corporation. The Corporation shall on the redemption date pay the holders of the shares of Convertible Preferred Stock so purchased or redeemed the Redemption Price (as hereinafter defined) for such shares out of the funds of the Corporation legally available therefor. Such redemption shall be effected by call and written or printed notice (the "Redemption Notice") shall be given to each holder of record of Convertible Preferred Stock shares being called, either personally or by mail to such holders last known address as shown on the records of the Corporation, not less than twenty (20) nor more than sixty (60) days before the date fixed for redemption. The Redemption Notice shall set forth (i) the shares of Convertible Preferred Stock, or part thereof, to be redeemed, (ii) the date fixed for redemption, (iii) the Redemption Price, and (iv) the place at which the holders of Convertible Preferred Stock may obtain payment of the Redemption Price upon surrender of their respective share certificates. The redemption price (the "Redemption Price") for the shares of Convertible Preferred Stock being redeemed shall be One and 09/100 Dollars ($1.09) per share. There is no mandatory redemption or sinking fund obligation with respect to the Convertible Preferred Stock. (b) Surrender of Shares. On or after the date fixed for redemption, each holder of Convertible Preferred Stock called for redemption shall, unless such holder shall have previously exercised such holder's option to convert the Convertible Preferred Stock into Common Stock in the manner set forth in Section 4 below, surrender such holder's certificates for such shares of Convertible Preferred Stock to the Corporation at the place designated in the Redemption Notice and shall thereupon be entitled to receive the Redemption Price. Should less than all the shares of Convertible Preferred Stock represented by any surrendered certificate be redeemed, a new certificate for the unredeemed shares shall be issued to the holder of record of such unredeemed shares. (c) Cessation of Rights as Stockholder. From and after the redemption date (unless default shall be made by the Corporation in duly paying the Redemption Price in which case all rights of the holders of Convertible Preferred Stock shall continue), the holders of the shares of the Convertible Preferred Stock called for redemption shall cease to have any rights as stockholders of the Corporation except the right to receive, without interest, the Redemption Price thereof upon surrender of the certificate(s) representing the shares of Convertible Preferred Stock being redeemed, and such shares shall not thereafter be transferred (except with the consent of the Corporation) on the books of the Corporation and shall not be deemed outstanding for any purpose whatsoever. (d) Cancellation of Redeemed Shares. All shares of Convertible Preferred Stock that are redeemed shall be cancelled and such shares shall be restored to the status of authorized but unissued shares of Preferred Stock. (e) Deposit of Redemption Price into Trust. If, on or prior to any date fixed for redemption of shares of Convertible Preferred Stock as provided in this Section, the Corporation deposits with any bank or trust company, or any bank or trust company in the United States duly appointed and acting as transfer agent for the Corporation, as a trust fund, a sum sufficient to redeem, on the date fixed for redemption, the shares called for redemption, with irrevocable instructions and authority to the bank or trust company to publish the notice of redemption, or to complete such publication if already commenced, and to pay, on and after the date fixed for redemption or prior to such date, the Redemption -6- Price of the shares to their respective holders on surrender of their share certificates, then from and after the date of the deposit, even though such date may be prior to the date fixed for redemption, the shares so called shall be deemed to be redeemed and dividends on those shares shall cease to accrue after the date fixed for redemption. The deposit shall be deemed to constitute full payment of the shares to their holders and from and after the date of the deposit the shares shall be deemed to be no longer outstanding, and the holders of the shares shall cease to be stockholders with respect to such shares and shall have no rights with respect to such shares, except the right to receive from the bank or trust company payment of the Redemption Price of the shares, without interest, on surrender of their certificates, or the right to convert said shares to Common Stock as provided in Section 4 below. Any money so deposited on account of the Redemption Price of Convertible Preferred Stock shares converted after the making of the deposit shall be repaid immediately to the Corporation on the conversion of such preferred shares. Money so deposited and unclaimed at the end of three (3) years shall be repaid to the Corporation and thereafter the holders of such shares of Convertible Preferred Stock called for redemption shall look only to the Corporation for payment. 4. Conversion of Convertible Preferred Stock. (a) Conversion Right of Holder. Each share of the Convertible Preferred Stock shall be convertible, at the option of the holder thereof, at any time after the date of initial issuance of such share of Convertible Preferred Stock (or, if such share is called for redemption, at any time up to and including, but not after, the close of business on the fifth full business day prior to the date fixed for such redemption, unless default shall be made by the Corporation in providing funds for the payment of the Redemption Price) and until the fourth anniversary of such date (the "Conversion Period") into fully-paid and nonassessable whole shares of Common Stock upon the terms and conditions set forth in the following paragraphs of this Section. If the shares of Convertible Preferred Stock are not voluntarily converted prior to the expiration of the Conversion Period, each share of Convertible Preferred Stock then outstanding shall be automatically converted at the Conversion Rate (as defined below), subject to adjustment as provided in Section 4(d) hereof. (b) Exercise of Conversion Right. Any holder of the Convertible Preferred Stock electing to convert such stock into Common Stock pursuant to Section 4(a) hereof shall deposit the certificates for the Convertible Preferred Stock at the Corporation's principal office, with the form of written notice to the Corporation endorsed on such certificate(s) of his election to convert such Convertible Preferred Stock into Common Stock duly filled out and executed. The conversion right in respect of any such Convertible Preferred Stock shall be deemed to have been exercised at the date on which the certificates therefor and such notice of election duly filled out and executed shall have been so deposited with the Corporation. The person entitled to receive the Common Stock issuable upon such conversion shall be treated for all purposes as the record holder of such Common Stock on such date; provided, however, that the conversion right in respect of any certificate(s) so deposited after the close of business on any day shall not be deemed to have been exercised until the next succeeding business day. As soon as practicable, and in any event within thirty (30) business days after the date of conversion of any Convertible Preferred Stock into Common Stock pursuant to Section 4(a) hereof, the Corporation shall deliver to the person entitled thereto, certificate(s) representing the shares of Common Stock to which such person shall be entitled on such conversion. The Corporation, as a condition to the exercise of such rights of conversion, may -7- require the payment of a sum equal to any transfer tax or other governmental charge (but not including any tax payable upon the issue of stock deliverable upon such conversion) that may be imposed or required by law, upon any transfer incidental or prior thereto, or the submission of proper proof that the same has been paid. The Company shall pay all accrued but unpaid dividends due and owing to the then converting holder of the Convertible Preferred Stock as of either the conversion date or the expiration of the Conversion Period, as applicable. (c) Conversion Rate. Each share of Convertible Preferred Stock, converted as provided in Section 4(a) hereof, shall entitle the holder to receive upon conversion for each $.25 in face amount of Convertible Preferred Stock one share of Common Stock (the "Conversion Rate"), subject to adjustment as provided in Section 4(d) below. "Face Amount" meaning for all purposes herein the price of $1.00 per share of Convertible Preferred Stock. The Conversion Rate will initially allow a holder of Convertible Preferred Stock to receive four shares of Common Stock for each share of Convertible Preferred Stock converted. The Corporation shall not be required, in connection with any such conversion, to issue a fraction of a share of its Common Stock nor to deliver any stock certificate representing a fraction thereof. In lieu thereof, the Company shall round up such fractional share and issue such full share accordingly. (d) Adjustment of Conversion Rate. The Conversion Rate shall be subject to adjustment from time to time in certain instances, as follows: (1) On Recapitalization. On any recapitalization of the Corporation through a stock split or any subdivision or combination of its outstanding Common Stock into a greater or smaller number of shares, the number of shares of Common Stock into which the shares of Convertible Preferred Stock may be converted shall be increased or reduced in the same proportion, which shall have a corresponding effect upon the Conversion Rate. (2) On Sale of Additional Common Stock at Less Than $.25 Per Share or the then Applicable Conversion Rate. Except in those circumstances set forth in paragraph (4) of this Section 4(d), if the Corporation sells or otherwise issues shares of its Common Stock on payment of an amount less than the Conversion Rate, as applicable at the time of such sale or issuance, the Conversion Rate, at the time of such sale or issuance, shall be adjusted such that the Conversion Rate shall equal the price at which the shares of Common Stock were sold in the transaction resulting in the adjustment to the Conversion Rate required by this paragraph (2). (3) On Capital Reorganization, Reclassification, Consolidation, Merger, or Sale of Corporate Assets. On any capital reorganization, reclassification of the capital stock, consolidation, merger, sale or conveyance of all or substantially all of the assets of the Corporation to another corporation, or any compulsory share exchange whereby the Common Stock is converted into other securities, cash, or other property, each share of Convertible Preferred Stock shall be convertible into the same kind and amounts of securities, including share or other assets, or both, to which the number of common shares of the Corporation which would have been deliverable on conversion of such shares of Convertible Preferred Stock immediately prior to such reorganization, reclassification, consolidation, merger, sale, or conveyance would have been entitled. -8- Appropriate adjustments, as determined by the Board of Directors of the Corporation, shall be made in the application of the provisions herein set forth with respect to the rights and interests thereafter of the holders of the Convertible Preferred Stock so that said provisions, including the provisions with respect to changes in, and other adjustments of, the Conversion Rate, shall thereafter be applicable, as nearly as reasonably may be, in relation to any securities or other assets thereafter deliverable on conversion of the shares of Convertible Preferred Stock. (4) Events Not Requiring Adjustment to the Conversion Rate. The occurrence of any of the following events shall not require an adjustment to the Conversion Rate as contemplated by paragraph (2) above: (i) the issuance of Common Stock as dividends on either the outstanding Common Stock, the Convertible Preferred Stock or other duly issued security of the Company; (ii) the issuance of shares of Common Stock upon the exercise of outstanding options or warrants; (iii)the issuance of shares of Common Stock upon the exercise of options granted under the Corporation's 1998 Stock Compensation Plan; (iv)any issuance of shares of Common Stock to Charles Brister, Chief Executive Officer and President of the Corporation or any other executive officer of the Corporation, in lieu of compensation during calendar year 1999; and (v)the distribution or issuance of Common Stock, rights or warrants to subscribe for or purchase Common Stock or any other security, or other securities or debt instruments convertible into Common Stock, subject only to the requirement that such securities be sold at a price per share or be convertible into Common Stock at a rate in excess of the then applicable Conversion Rate. (e) Statement of Adjusted Amount. Whenever the amount of shares of Common Stock or other securities deliverable on the conversion of Convertible Preferred Stock shall be adjusted pursuant to the provisions hereof, the Corporation shall forthwith maintain at its office and deliver to each holder of the Convertible Preferred Stock, a statement signed by the President or a Vice President of the Corporation and by its Chief Financial Officer, stating the adjusted amount of the Common Stock or other securities deliverable for each share of Convertible Preferred Stock, calculated to the nearest one hundredth (1/100) share, and setting forth in reasonable detail the method of calculation and the facts requiring such adjustment and on which the calculation is based. Each adjustment shall remain in effect until a subsequent adjustment hereunder is required. (f) Payment of Taxes on Conversion of Convertible Preferred Stock. The Corporation shall not pay any issue or other taxes that may be payable in -9- respect of any issue or delivery of Common Stock on conversion of shares of Convertible Preferred Stock pursuant hereto. (g) Reservation of Sufficient Common Stock. So long as any shares of Convertible Preferred Stock shall remain outstanding and the holders thereof shall have the right to convert said shares in accordance with the provisions of this Section 4, the Corporation will at all times reserve from the authorized and unissued shares of its Common Stock a sufficient number of shares to provide for such conversions, and will take such other corporate action as may be necessary from time to time in order that it may validly and legally issue fully-paid and non-assessable shares of such Common Stock upon conversion of the Convertible Preferred Stock. (h) Definition of Common Stock. In each case where reference is made to the Common Stock of the Corporation in this Section, unless a different intention is expressed, such reference is to the class of Common Stock of the Corporation as such class of stock exists at the date of the adoption of these provisions, or stock into which the same may be changed from time to time. (i) Status of Converted Preferred Shares. All shares of Convertible Preferred Stock so converted shall be cancelled and such shares shall be restored to the status of authorized but unissued shares of Preferred Stock. 5. Liquidation Rights. (a) Liquidation Preference Amount. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the business or affairs of the Corporation, and after payment of, or adequate provision for payment of, the debts, liabilities and other claims of the Corporation as determined by its Board of Directors, each holder of the Convertible Preferred Stock shall be entitled to receive, out of the remaining net assets of the Corporation legally available for distribution to its stockholders, before any payment or distribution shall be made on the Common Stock, or on any other class of stock of the Corporation ranking junior to the shares of Convertible Preferred Stock upon liquidation, the amount of One and No/100 Dollar ($1.00) per share of Convertible Preferred Stock, plus all accrued and unpaid dividends on each such share up to the date fixed for distribution. (b) Proportionate Distribution Where Assets Insufficient. In the event the assets of the Corporation available for distribution to the holders of shares of Convertible Preferred Stock upon dissolution, liquidation or winding up of the Corporation whether voluntary or involuntary, shall be insufficient to pay in full all amounts to which such holders are entitled pursuant to paragraph (a) of this Section, no such distribution shall be made on account of any shares of any class of capital stock of the Corporation ranking on a parity with the shares of Convertible Preferred Stock upon such dissolution, liquidation or winding up unless proportionate distributive amounts shall be paid on account of the shares of Convertible Preferred Stock, ratably, in proportion to the full distributable amounts for which holders of all such parity shares are respectively entitled upon such dissolution, liquidation or winding up. (c) Nonparticipation Right. After the payment to the holders of the shares of Convertible Preferred Stock of the full preferential amounts provided for in either paragraph (a) or (b) of this Section, as applicable, the holders of Convertible Preferred Stock as such shall have no right or claim to any of the remaining assets of the Corporation. -10- (d) Excluded Transactions. Neither the consolidation nor merger of the Corporation with or into any other corporation, nor the sale, mortgage, exchange or conveyance of all or substantially all of the properties, assets or business of the Corporation, nor any liquidation, dissolution or winding up of the Corporation occurring substantially concurrently with any such transaction shall be deemed to be a liquidation, dissolution or winding up of the Corporation within the meaning hereof, unless otherwise determined by the Board of Directors of the Corporation. 6. No Preemptive Rights. No holder of shares of the Convertible Preferred Stock shall, as such holder, have any preemptive right to subscribe to or purchase any shares of any class of capital stock of the Corporation now or hereafter authorized or issued, whether or not exchangeable for any capital stock of the Corporation of any class or classes now or hereafter authorized or issued; nor shall any holder of shares of the Convertible Preferred Stock, as such holder, have any right to purchase, acquire or subscribe for any securities which the Corporation may issue or sell whether or not convertible into or exchangeable for shares of capital stock of the Corporation of any class or classes, and whether or not any such securities have attached or appurtenant thereto warrants, options or other instruments which entitle the holders thereof to purchase, acquire or subscribe for shares of capital stock of any class or classes of the Corporation. 7. Covenants of the Corporation. The Corporation will not, by amendment to its Articles of Incorporation, as amended, or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities, or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of the preferences and limitations of Convertible Preferred Stock to be observed or performed hereunder by the Corporation, but will at all times in good faith assist in the carrying out of all the provisions set forth herein relating to Convertible Preferred Stock and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the holders of the Convertible Preferred Stock against dilution or other impairment. IN WITNESS WHEREOF, KARTS INTERNATIONAL INCORPORATED has caused this Certificate of Designation, Preferences and Rights to be signed by Charles Brister, its President and Chief Executive Officer, and attested by Timothy P. Halter, its Secretary, this 29th day of April, 1999. KARTS INTERNATIONAL INCORPORATED By: /s/ Charles Brister ------------------------------------- CHARLES BRISTER President and Chief Executive Officer By: /s/ Timothy P. Halter ------------------------------------- TIMOTHY P. HALTER Secretary -11- STATE OF LOUISIANA PARISH OF ____________________ The foregoing instrument was acknowledged before me this day of ____________, 1999, by Charles Brister, as President and Chief Executive Officer of Karts International Incorporated, a Nevada corporation, on behalf of the corporation. [SEAL] Print Name: Notary Public Commission No. My Commission Expires: STATE OF TEXAS COUNTY OF DALLAS The foregoing instrument was acknowledged before me this day of ____________, 1999, by Timothy P. Halter, as Secretary of Karts International Incorporated, a Nevada corporation, on behalf of the corporation. [SEAL] Print Name: Notary Public Commission No. My Commission Expires: -12- EX-10.43 3 LOAN AGREEMENT EXHIBIT 10.43 LOAN AGREEMENT THIS LOAN AGREEMENT (the "Agreement") is made as of this 3rd day of June, 1999 by and between KARTS INTERNATIONAL INCORPORATED, a Nevada corporation ("Borrower") and THE SCHLINGER FOUNDATION ("Schlinger"). In connection with the mutual covenants and agreements contained herein, the parties hereto agree as follows: 1. Definitions. All terms and phrases used herein which are defined in the Uniform Commercial Code in the State of Texas, as amended from time to time (the "UCC"), shall have the meanings given them in the UCC unless otherwise defined herein. The following definitions shall apply throughout this Agreement: "Affiliate" means with respect to any Person in question, any other Person owned or controlled by, or which owns or controls or is under common control or is otherwise affiliated with such Person in question. A Person shall be deemed to control another Person if such Person possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of such other Person, whether through the ownership of voting securities, by contract or otherwise. "BTK" means Brister's Thunder Karts, Inc., a Louisiana corporation. "Business Day" means any day other than Saturday, Sunday or any other day on which financial institutions doing business in Dallas, Texas are closed. "Collateral" has the meaning given it in Section 4. "Common Stock" shall mean the common stock, $.001 par value, of the Borrower. "Environmental Laws" means any and all federal, state and local laws, regulations, rules, orders, licenses, agreements or other governmental restrictions relating to the protection of human health or the environment or to emissions, discharges or releases of pollutants or industrial, toxic or hazardous substances into the environment, or otherwise relating to the manufacture, processing, treatment, transport or handling of pollutants or industrial, toxic or hazardous substances. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, together with all rules and regulations promulgated with respect thereto. "ERISA Affiliate" means with respect to any Person in question, any Person that would be treated as a single, employer with Borrower. "ERISA Plan" means any pension benefit plan subject to Title IV of ERISA maintained by Borrower or any ERISA Affiliate thereof with respect to which Borrower or any ERISA Affiliate has a fixed or contingent liability. "Event of Default" has the meaning given it in Section 12. 1 "GAAP" means those generally accepted accounting principles and practices which are recognized as such by the Financial Accounting Standards Board (or any generally recognized successor), consistently applied throughout the period involved. "Guarantors" means USA, BTK, KINT and Straight Line (whether one or more). "Indemnified Claims" means any and all claims, demands, actions, causes of action, judgments, suits, liabilities, obligations, losses, damages and consequential damages, penalties, fines, costs, fees, expenses and disbursements (including without limitation, fees and expenses of attorneys and other professional consultants and experts in connection with any investigation or defense) of every kind or nature, known or unknown, existing or hereafter arising, foreseeable or unforeseeable, which may be imposed upon, threatened or asserted against or incurred or paid by any Indemnified Person at any time and from time to time, because of or resulting from, in connection with or in any way relating to or arising out of the Loan, the Collateral or any other transaction, act, omission, event or circumstance in any way connected with or contemplated by this Agreement or the other Loan Documents or any action taken or omitted by any such Indemnified Person under or in connection with any of the foregoing (including but not limited to any investigation, litigation, proceeding, enforcement of Schlinger's rights or defense of Schlinger's actions related to or arising out of this Agreement or the other Loan Documents), whether or not any Indemnified Person is a party hereto. "Indemnified Person" shall collectively mean Schlinger and its officers, directors, shareholders, employees, attorneys, representatives, agents, Affiliates, successors and assigns. "KBK" means KBK Financial, Inc., a Delaware corporation. "KBK Debt" means the indebtedness, liabilities and obligations of Borrower and the other Obligors to KBK pursuant to the KBK Loan Agreement and the other KBK Loan Documents. "KBK Loan Agreement" means that certain Loan Agreement dated as of September 28, 1998 between KBK and Borrower as the same may have been amended, modified, supplemented, renewed, extended or restated from time to time. "KBK Loan Documents" means the Loan Documents as defined in the KBK Loan Agreement that were heretofore or are hereafter entered into in connection the KBK Loan Agreement. "KINT" means KINT, L.L.C., a Louisiana limited liability company. "Lien" means any mortgage, lien, pledge, assignment, adverse claim, charge, security interest or other encumbrance. "Loan" has the meaning given it in Section 2. "Loan Documents" means this Agreement, the Note and all other documents, agreements and instruments now or hereafter required by Schlinger to be executed and delivered in connection herewith (including, without limitation, all documents, agreements and instruments evidencing, securing, governing, guaranteeing and/or pertaining to the Note and the Loan). 2 "Maximum Rate" means, with respect to Schlinger, the maximum non-usurious interest rate, if any, that any time or from time to time may be contracted for, taken, reserved, charged or received with respect to the Loan or other amount as to which such rate is to be determined, payable to Schlinger pursuant to this Agreement or any other Loan Document, under laws applicable to Schlinger which are presently in effect or, to the extent allowed by law, under such applicable laws which may hereafter be in effect and which allow a higher maximum non-usurious interest rate than applicable laws now allow. The Maximum Rate shall be calculated in a manner that takes into account any and all fees, payments and other charges in respect of the Loan Documents that constitute interest under applicable law. Each change in any interest rate provided for herein based upon the Maximum Rate resulting from a change in the Maximum Rate shall take effect without notice to the Borrower at the time of such change in the Maximum Rate. For purposes of determining the Maximum Rate under Texas law, the applicable rate ceiling shall be the weekly rate ceiling described in, and computed in accordance with the Texas Finance Code or any successor or replacement statute; provided, however, that, to the extent permitted by applicable law, Schlinger shall have the right to change the applicable rate ceiling from time to time in accordance with applicable law. "Net Profit" means net income after taxes (including extraordinary losses and excluding extraordinary gains) as of the end of time period being measured. "Note" has the meaning given it in Section 3. "Obligors" means Borrower and Guarantors. "Person" means a corporation, association, partnership, limited liability company, organization, business, individual, governmental or political subdivision thereof or governmental agency. "Subordinated Debt" means indebtedness owing by Borrower to a creditor other than Schlinger or KBK which has been subordinated and subject in right of payment to the prior payment of all indebtedness and obligations now or hereafter owing by Borrower to Schlinger, such subordination to be evidenced by a written agreement between Schlinger and the subordinated creditor which is in form and substance satisfactory to Schlinger. "Straight Line" means Straight Line Manufacturing, Inc., a Michigan corporation. "Tangible Net Worth" means, as of any date, the amount by which Borrower's total assets exceeds its total liabilities plus Subordinated Debt, less any intangible assets (as defined by GAAP), less deferred charges. "Termination Event" means (a) the occurrence with respect to any ERISA Plan of (i) a reportable event described in Sections 4043(b)(5) of ERISA or (ii) any other reportable event described in Section 4043 of ERISA other than a reportable event not subject to the provision for 30-day notice to the Pension Benefit Guaranty Corporation pursuant to a waiver by such corporation under Section 4043(a) of ERISA, (b) the withdrawal of Borrower or any Affiliate of Borrower from any ERISA Plan during a plan year in which it was a "substantial employer" as defined in Section 4001(a)(2) of ERISA, or (c) any event or condition which might constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any ERISA Plan. "USA" means USA Industries Incorporated, an Alabama corporation. 3 2. Loan. (a) Loan and Repayment. Subject to the terms of this Agreement, on the date of this Agreement or at such time that all applicable conditions have been satisfied, whichever is later, Schlinger will make a loan to the Borrower (the "Loan"), to the extent requested by the Borrower as of such date, in the original principal amount of One Million Five Hundred Thousand and No/100 Dollars ($1,500,000). Principal of the Loan shall be due and payable in one installment of all unpaid principal and accrued unpaid interest on May 31, 2004. (b) Prepayment. On or after the second anniversary of the date hereof, Borrower may prepay the Loan in full or in part at any time prior to May 31, 2004, provided, that the Borrower shall (i) give Schlinger thirty (30) days' written notice of the Borrower's intention to do so and (ii) pay to Schlinger, as liquidated damages and not as a penalty, an amount equal to the twelve percent (12%) multiplied by the principal amount of the Loan being prepaid at such time. 3. Promissory Note. (a) Note. Borrower agrees to execute, contemporaneously herewith, a promissory note payable to the order of Schlinger, in form and substance acceptable to Schlinger in Schlinger's sole and absolute discretion, for the Loan provided hereunder to evidence the indebtedness owing by Borrower to Schlinger under the Loan (whether one or more, together with any renewals, extensions and increases thereof, the "Note"). (b) Rate and Payments. The principal of and interest on the Note shall be due and payable and may be prepaid in accordance with the terms and conditions set forth in the Note and in this Agreement. Interest on the Note shall accrue at the rate set forth therein. (c) Conversion. The Note and the outstanding amount of the Loan shall be convertible into common stock of the Borrower and shall have certain registration rights in favor of the holder thereof, in accordance with the terms and conditions set forth therein. 4. Collateral. As security for the indebtedness evidenced by the Note and any and all other indebtedness or obligations owing from time to time by Borrower to Schlinger under this Agreement, Schlinger shall receive a Lien in and to the collateral described in the other Loan Documents (the "Collateral"). 5. Guarantors. As a condition precedent to Schlinger's obligation to provide the Loan to Borrower, Borrower agrees to cause the Guarantors to each execute and deliver to Schlinger contemporaneously herewith a guaranty agreement, in form and substance acceptable to Schlinger in Schlinger's sole and absolute discretion. 6. Representations and Warranties. Borrower hereby represents and warrants to Schlinger as follows: (a) Existence. Borrower is a corporation duly organized, validly existing and in good standing under the laws of the state of its incorporation and is duly licensed, qualified to do business and is in good standing in all other states in which such licensing, qualification and good standing are necessary. 4 Borrower has all requisite power and authority (i) to own and operate its properties, (ii) to carry on its business as now conducted and as proposed to be conducted, and (iii) to execute and deliver this Agreement and the other Loan Documents to which Borrower is a party. (b) Binding Obligations. The execution, delivery, and performance of this Agreement and all of the other Loan Documents by Borrower have been duly authorized by all necessary action by Borrower, have been duly executed and delivered by Borrower and constitute legal, valid and binding obligations of Borrower, enforceable in accordance with their respective terms, except as limited by bankruptcy, insolvency or similar laws of general application relating to the enforcement of creditors' rights and except to the extent specific remedies may generally be limited by equitable principles. (c) No Consent. The execution, delivery and performance of this Agreement and the other Loan Documents, and the consummation of the transactions contemplated hereby and thereby, do not (i) conflict with, result in a violation of, or constitute a default under (A) any provision of Borrower's articles or certificate of incorporation or bylaws, (B) any law, governmental regulation, court decree or order applicable to Borrower, or (C) any other document or agreement to which Borrower is a party, or (ii) require the consent, approval or authorization of any third party other than KBK. (d) Financial Condition. Each financial statement of Borrower supplied to Schlinger is true, correct and complete in all material respects and fairly presents Borrower's financial condition in all material respects as of the date of each such statement. There has been no material adverse change in such financial condition or results of operations of Borrower subsequent to the date of the most recent financial statement supplied to Schlinger. (e) Litigation. There are no actions, suits or proceedings, pending or, to the knowledge of Borrower, threatened against or affecting Borrower or the properties of Borrower, before any court or governmental department, commission or board, which, if determined adversely to Borrower, would have a material adverse effect on the business, financial condition, properties, operations or prospects of Borrower. (f) Taxes. Governmental Charges. Borrower has filed all federal, state and local tax reports and returns required by any law or regulation to be filed by it and has either duly paid all taxes, duties and charges indicated due on the basis of such returns and reports, or made adequate provision for the payment thereof, and the assessment of any material amount of additional taxes in excess of those paid and reported is not reasonably expected. There is no tax Lien notice against Borrower or its properties presently on file. (g) ERISA Compliance. Borrower is in compliance with ERISA concerning Borrower's ERISA Plan, if any, or is not required to contribute to any "multi-employer plan" as defined in Section 401 of ERISA. (h) Compliance with Laws. Borrower is conducting its business in material compliance with all statutes, rules, regulations and/or ordinances imposed by any governmental unit upon Borrower or upon its businesses, operations and property (including, without limitation, all Environmental Laws). 5 Borrower has all permits and licenses necessary for the operations of its business as presently conducted and as proposed to be conducted. (i) Tradenames. Borrower and Guarantors conduct business under no trade or assumed name except KINT conducts business under the tradename Bird Promotions. 7. Conditions Precedent to Loan. Schlinger's obligation to make the Loan under this Agreement and the other Loan Documents shall be subject to the conditions precedent that, as of the date of such Loan and after giving effect thereto (i) all representations and warranties made to Schlinger in this Agreement and the other Loan Documents shall be true and correct, as of and as if made on such date, (ii) no material adverse change in the financial condition of Borrower or its business since the effective date of the most recent financial statements furnished to Schlinger by Borrower shall have occurred, (iii) no Event of Default shall have occurred and no event has occurred and is continuing, or would result from the requested Loan, which with notice or lapse of time, or both, would constitute an Event of Default (as hereinafter defined), (iv) Schlinger shall have received all Loan Documents appropriately executed by Borrower and all other proper parties and all such Loan Documents are in full force and effect, (v) the KBK Loan Agreement shall have been amended to modify the financial covenants contained therein, in form and substance satisfactory to Schlinger, and (vi) Schlinger shall have received all fees and expenses owing to Schlinger under this Agreement and the other Loan Documents. 8. Affirmative Covenants. Until the Note and all other obligations and liabilities of Borrower under this Agreement and the other Loan Documents are fully paid and satisfied, and Borrower agrees and covenants that it will, unless Schlinger shall otherwise consent in writing (which consent may be withheld by Schlinger in Schlinger's sole and absolute discretion): (a) Accounts and Records. Maintain its books and records in accordance with GAAP. (b) Right of Inspection. Permit Schlinger to visit its properties and installations and to examine, audit and make and take away copies or reproductions of Borrower's books and records, at all reasonable times. Borrower agrees to pay all costs associated with any such audits, at a rate equal to $500.00 per day, per person, plus out-of-pocket expenses; provided, however, as long as no Event of Default has occurred, Borrower's obligation for Schlinger's audits shall not exceed $15,000.00 per calendar year. (c) Right to Additional Information. Furnish Schlinger with such additional information and statements, lists of assets and liabilities, tax returns, and other reports with respect to Borrower's financial condition and business operations as Schlinger may request from time to time. (d) Compliance with Laws. Conduct its business in an orderly and efficient manner consistent with good business practices, and perform and comply with all statutes, rules, regulations and/or ordinances imposed by any governmental unit upon Borrower, its businesses, operations and properties (including without limitation, all Environmental Laws). (e) Taxes. Pay and discharge when due all assessments, taxes, governmental charges and levies, of every kind and nature, 6 imposed upon Borrower or its properties, income or profits, prior to the date on which penalties would attach, and all lawful claims that, if unpaid, might become a Lien upon any of Borrower's property, income or profits; provided, however, Borrower will not be required to pay and discharge any such assessment, tax, charge, levy or claim so long as (i) same shall be contested in good faith by appropriate judicial, administrative or other legal proceedings timely instituted, (ii) Borrower shall have established adequate reserves with respect to such contested assessment, tax, charge, levy or claim in accordance with GAAP, and (iii) the perfection and priority of Schlinger's security interest in the Collateral, or the value of the Collateral, is not impaired. (f) Insurance. Maintain, with financially sound and reputable insurers, such insurance as deemed necessary or otherwise reasonably required by Schlinger, including but not limited to, fire insurance, comprehensive property damage, public liability, worker's compensation and business interruption insurance. (g) Notice of Material Change/Litigation. Borrower shall promptly notify Schlinger in writing (i) of any material adverse change in Borrower's financial condition or its businesses, and (ii) of any litigation or claims against Borrower which could materially affect Borrower or its business operations, financial condition or prospects. (h) Corporate Existence. Maintain its corporate existence and good standing in the state of its incorporation and its qualification and good standing in all other states where required by applicable law. (i) ERISA. Borrower shall promptly notify Schlinger in writing of the adoption or amendment of any plan that results in the representations in Subsection 7(g) no longer being true and correct. (j) Additional Documentation. Execute and deliver, or cause to be executed and delivered, any and all other agreements, instruments or documents which Schlinger may reasonably request in order to give effect to the transactions contemplated under this Agreement and the other Loan Documents. (k) Authorization and Reservation of Sufficient Common Stock. (i) The Borrower shall, within one hundred twenty (120) after the date hereof: (A) take such corporate action as may be necessary to amend its articles of incorporation to increase the number of authorized but unissued shares of common stock of the Borrower as shall be sufficient to effect the conversion of the Note into Common Stock of the Borrower pursuant to the terms thereof; and (B) reserve and keep available such shares of Common Stock out if its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the Note into Common Stock of the Borrower, such number of its shares of Common Stock as shall be sufficient to effect the conversion of the entire outstanding principal amount of the Note in accordance the with provisions thereof. 7 The failure of the Borrower to amend its Articles of Incorporation and to reserve such number of shares of Common Stock as required by this Section 8 (k)(i) shall constitute an Event of Default under this Agreement. (ii) From and after the effective date of the amendment to the articles required in Section 8(k)(i) above, the Borrower shall at all times reserve and keep available, out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the Note, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of the Note pursuant to the terms thereof; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of the entire outstanding principal amount of the Note, in addition to such other remedies as shall be available to the holder of the Note, the Borrower will use its best efforts to take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes. (l) On or before thirty (30) days from the date hereof (i) Charles Brister shall have entered into an employment agreement with Borrower that is for a term of at least three (3) years and is otherwise in form and substance satisfactory to Schlinger and (ii) in connection with such employment agreement Borrower shall execute an agreement to and in favor of Schlinger whereby Borrower agrees to provide adequate anti-dilution protection that Schlinger deems necessary for the shares of Common Stock that may be issued to Schlinger pursuant to the conversion of the Note as a result of any Common Stock that may be issued to Charles Brister in connection with such employment agreement. 9. Negative Covenants. Until the Note and all other obligations and liabilities of Borrower under this Agreement and the other Loan Documents are fully paid and satisfied, Borrower will not and will cause Guarantors to not, without the prior written consent of Schlinger (which consent, withhold in Schlinger's sole and absolute discretion): (a) Nature of Business. Make any material change in the nature of its business as carried on as of the date hereof. (b) Liquidations, Mergers, Consolidations; Acquisitions; Name Change. Liquidate, merge or consolidate with or into any other Person, convert from one type of legal entity to another type of legal entity, form or acquire any new subsidiary or acquire by purchase or otherwise all or substantially all of the assets of any other Person, or change its name or operate under any new trade or assumed names. (c) Transactions with Affiliates. Enter into any transaction, including, without limitation, the purchase, sale or exchange of property or the rendering of any service, with any Affiliate of any Obligor, except in the ordinary course of and pursuant to the reasonable requirements of an Obligor's business, upon fair and reasonable terms no less favorable to Obligor than would be obtained in a comparable arm's-length transaction with a person or entity not an Affiliate of any Obligor and in accordance with the terms and provisions of the Loan Documents. 8 (d) Sale of Assets. Sell, lease, transfer or otherwise dispose of all or substantially all of its assets or properties, other than inventory sold in the ordinary course of business and as necessary to replace obsolete equipment. (e) Liens. Create or incur any Lien on any of its assets, other than (i) Liens securing indebtedness owing to Schlinger, (ii) Liens securing the KBK Debt, (iii) pledges or deposits to secure the payment of obligations under any worker's compensation laws or similar laws, (iv) deposits to secure the payment of public or statutory obligations, (v) mechanic's, carriers', workman's, repairman's or other Liens arising by operation of law in the ordinary course of business which secure obligations that are not overdue or are being contested in good faith and for which such entity has established adequate reserves in accordance with generally accepted accounting principles, (and for which Schlinger's security interest in the Collateral is not impaired) and (vi) Liens existing as of the date hereof which have been disclosed to and approved by Schlinger in writing. (f) Change in Management. Permit a change in the senior management of Borrower. (g) Loans. Make any loans to any person or entity. 10. Financial Covenants. Until the Note and all other obligations and liabilities of Borrower under this Agreement and the other Loan Documents are fully paid and satisfied, Obligors, on a consolidated basis, will maintain the following financial covenants: (a) Current Ratio. At the end of each fiscal month, a ratio of (i) current assets (excluding prepaid expenses), to (ii) current liabilities of not less than 1.5 to 1.0. (b) Debt/Tangible Net Worth Ratio. At the end of each fiscal month, a ratio of total liabilities to Tangible Net Worth of less than 2.5 to 1.0. (c) Tangible Net Worth. At the end of each fiscal month, its Tangible Net Worth of not less than $2,500,000.00. Unless otherwise specified, all accounting and financial terms and covenants set forth above are to be determined according to GAAP. 11. Reporting Requirements. Until the Note and all other obligations and liabilities of Borrower under this Agreement and the other Loan Documents are fully paid and satisfied, Borrower will and will cause the Guarantors to, unless Schlinger shall otherwise consent in writing, furnish to Schlinger: (a) Financial Statements. The following financial statements: (i) within 120 days after the last day of each fiscal year of Borrower a consolidated statement of income and a consolidated statement of cash flows of Obligors for such fiscal year, and a consolidated balance sheet of Obligors as of the last day of such fiscal year in each case audited by an independent certified public accounting firm acceptable to Schlinger, together with a copy of any report to management delivered to Borrower by such accountants in connection therewith; and (ii) within 30 days after the last day of each fiscal month of Borrower, an unaudited consolidated statement of income and statement of cash flows of Obligors for such fiscal month, and an unaudited 9 consolidated balance sheet of Obligors as of the last day of such fiscal month. Borrower represents and warrants that each such statement of income and statement of cash flows will fairly represent, in all material respects, the results of operations and cash flows of Borrower for the period set forth therein, and that each such balance sheet will fairly represent, in all material respects, the financial condition of Borrower as of the date set forth therein, all in accordance with GAAP, (or, with respect to unaudited financial statements, in the notes thereto and subject to year-end review adjustments). (b) Inventory Listing. A list of inventory for USA and BTK by location and type (to include the following: raw materials, work in process and finished goods) within ten (10) Business Days after the end of each month, in form and detail satisfactory to Schlinger. 12. Events of Default. Each of the following shall constitute an "Event of Default" under this Agreement and the other Loan Documents: (a) Failure to Pay Indebtedness. Borrower shall fail to pay as and when due any part of the principal of, or interest on, the Note or any other indebtedness or obligations now or hereafter owing to Schlinger by Borrower. (b) Event of Default Under KBK Loan Documents. A default or event of default shall occur under the KBK Loan Agreement or any of the other KBK Loan Documents. (c) Non-Performance of Covenants. Any of the Obligors shall breach any covenant or agreement made herein in any of the other Loan Documents or in any other agreement now or hereafter entered into between any of the Obligors and Schlinger. (d) False Representation. Any warranty or representation made herein, or in any of the other Loan Documents shall be false or misleading in any material respect when made. (e) Default Under Other Loan Documents. The occurrence of an event of default under any of the other Loan Documents or any other agreement now or hereafter entered into between any of the Obligors and Schlinger. (f) Untrue Financial Report. Any report, certificate, schedule, financial statement, profit and loss statement or other statement furnished by any Obligor, or by any other person on behalf of any Obligor, to Schlinger is not true and correct in any material respect. (g) Default to Third Party. The occurrence of any event which permits the acceleration of the maturity of any indebtedness owing by any of the Obligors to any third party, including, without limitation, KBK, under any agreement or undertaking. (h) Bankruptcy. The filing of a voluntary or involuntary case by or against any of the Obligors under the United States Bankruptcy Code or other present or future federal or state insolvency, bankruptcy or similar laws, or the appointment of a receiver, trustee, conservator or custodian for a substantial portion of the assets of any of the Obligors. (i) Insolvency. Any of the Obligors shall become insolvent, make a transfer in fraud of creditors or make an assignment for the benefit of creditors. 10 (j) Involuntary Lien. The filing or commencement of any involuntary Lien, garnishment, attachment or the like shall be issued against or with respect to the Collateral. (k) Material Adverse Change. A material adverse change shall have occurred in the financial condition, business prospects or operations of any of the Obligors. (l) Tax Lien. Any of the Obligors shall have a federal or state tax Lien filed against any of its properties. (m) Execution on Collateral. The Collateral or any portion thereof is taken on execution or other process of law. (n) ERISA Plan. Either (i) any "accumulated funding deficiency" (as defined in Section 412(a) of the Internal Revenue Code of 1986, as amended) in excess of $25,000 exists with respect to any ERISA Plan of Borrower or its ERISA Affiliate, or (ii) any Termination Event occurs with respect to any ERISA Plan of Borrower or its ERISA Affiliate and the then current value of such ERISA Plan's benefit liabilities exceeds the then current value of such ERISA Plan's assets available for the payment of such benefit liabilities by more than $25,000. (o) Guarantor's Obligations. If any of the obligations of any Guarantor is limited or terminated by operation of law or by such Guarantor, or any such Guarantor becomes the subject of an insolvency proceeding. (p) Judgment. The entry against any of the Obligors of a final and nonappealable judgment for the payment of money in excess of $25,000 (not covered by insurance satisfactory to Schlinger in Schlinger's sole discretion). Nothing contained in this Loan Agreement shall be construed to limit the events of default enumerated in any of the other Loan Documents and all such events of default shall be cumulative. 13. Remedies. Upon the occurrence of any one or more of the foregoing Events of Default, the entire unpaid balance of principal of the Note, together with all accrued but unpaid interest thereon, and all other indebtedness owing to Schlinger by Borrower at such time shall, at the option of Schlinger, become immediately due and payable without further notice, demand, presentation, notice of dishonor, notice of intent to accelerate, notice of acceleration, protest or notice of protest of any kind, all of which are expressly waived by Borrower; provided, however, concurrently and automatically with the occurrence of an Event of Default under Subsections (h) or (i) in the Section entitled "Event of Default" the Note and all other indebtedness owing to Schlinger by Borrower at such time shall, without any action by Schlinger, become immediately due and payable, without further notice, demand, presentation, notice of dishonor, notice of acceleration, notice of intent to accelerate, protest or notice of protest of any kind, all of which are expressly waived by Borrower. All rights and remedies of Schlinger set forth in this Agreement and in any of the other Loan Documents are cumulative and may also be exercised by Schlinger, at its option and in its sole discretion, upon the occurrence of an Event of Default. 11 14. Indemnification. Borrower hereby indemnifies and agrees to hold harmless and defend all Indemnified Persons from and against any and all Indemnified Claims. THE FOREGOING INDEMNIFICATION SHALL APPLY WHETHER OR NOT SUCH INDEMNIFIED CLAIMS ARE IN ANY WAY OR TO ANY EXTENT OWED, IN WHOLE OR IN PART, UNDER ANY CLAIM OR THEORY OF STRICT LIABILITY, OR ARE CAUSED, IN WHOLE OR IN PART, BY ANY NEGLIGENT ACT OR OMISSION OF ANY INDEMNIFIED PERSON, but shall exclude any of the foregoing resulting from such Indemnified Person's gross negligence or willful misconduct. If Borrower or any third party ever alleges any gross negligence or willful misconduct by any Indemnified Person, the indemnification provided for in this Section shall nonetheless be paid upon demand, subject to later adjustment or reimbursement, until such time as a court of competent jurisdiction enters a final judgment as to the extent and affect of the alleged gross negligence or willful misconduct. Upon notification and demand, Borrower agrees to provide defense of any Indemnified Claim and to pay all costs and expenses of counsel selected by any Indemnified Person in respect thereof. Any Indemnified Person against whom any Indemnified Claim may be asserted reserves the right to settle or compromise any such Indemnified Claim as such Indemnified Person may determine in its sole discretion, and the obligations of such Indemnified Person, if any, pursuant to any such settlement or compromise shall be deemed included within the Indemnified Claims. Except as specifically provided in this Section, Borrower waives all notices from any Indemnified Person. The provisions of this Section shall survive the termination of this Agreement. 15. Rights Cumulative. All rights of Schlinger under the terms of this Agreement shall be cumulative of, and in addition to, the rights of Schlinger under any and all other agreements between Borrower and Schlinger (including, but not limited to, the other Loan Documents), and not in substitution or diminution of any rights now or hereafter held by Schlinger under the terms of any other agreement. 16. Waiver and Agreement. Neither the failure nor any delay on the part of Schlinger to exercise any right, power or privilege herein or under any of the other Loan Documents shall operate as a waiver thereof, nor shall any single or partial exercise of such right, power or privilege preclude any other or further exercise thereof or the exercise of any other right, power or privilege. No waiver of any provision in this Loan Agreement or in any of the other Loan Documents and no departure by Borrower therefrom shall be effective unless the same shall be in writing and signed by Schlinger, and then shall be effective only in the specific instance as specified in such writing. No modification or amendment to this Loan Agreement or to any of the other Loan Documents shall be valid or effective unless the same is signed by the party against whom it is sought to be enforced. 17. Benefits. This Agreement shall be binding upon and inure to the benefit of Schlinger and Borrower, and their respective successors and assigns; provided, however, that Borrower may not, without the prior written consent of Schlinger, assign any rights, powers, duties or obligations under this Agreement or any of the other Loan Documents. 18. Notices. All notices, requests, demands or other communications required or permitted to be given pursuant to this Agreement shall be in writing and given by (i) personal delivery, (ii) expedited delivery service with proof of delivery, (iii) United States mail, postage prepaid, registered or certified mail, return receipt requested, or 12 (iv) telecopy (with receipt thereof confirmed by telecopier) sent to the intended addressee at the address set forth on the signature page hereof and shall be deemed to have been received either, in the case of personal delivery, as of the time of personal delivery, in the case of expedited delivery service, as of the date of first attempted delivery at the address and in the manner provided herein, in the case of mail, upon deposit in a depository receptacle under the care and custody of the United States Postal Service, or in the case of telecopy, upon receipt. Either party shall have the right to change its address for notice hereunder to any other location within the continental United States by notice to the other party of such new address at least thirty (30) days prior to the effective date of such new address. 19. Governing Law; Venue; Submission to Jurisdiction. THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS WITHOUT GIVING EFFECT TO THE PRINCIPLES OF CONFLICTS OF LAWS THEREOF, EXCEPT TO THE EXTENT PERFECTION AND THE EFFECT OF PERFECTION OR NON-PERFECTION OF THE SECURITY INTEREST GRANTED HEREUNDER OR THEREUNDER, IN RESPECT OF ANY PARTICULAR COLLATERAL, ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF TEXAS. THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS ARE PERFORMABLE BY THE PARTIES IN DALLAS COUNTY, TEXAS. BORROWER AND SCHLINGER EACH AGREE THAT DALLAS COUNTY, TEXAS, SHALL BE THE EXCLUSIVE VENUE FOR LITIGATION OF ANY DISPUTE OR CLAIM ARISING UNDER OR RELATING TO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS, AND THAT SUCH COUNTY IS A CONVENIENT FORUM IN WHICH TO DECIDE ANY SUCH DISPUTE OR CLAIM. BORROWER AND SCHLINGER EACH CONSENT TO THE PERSONAL JURISDICTION OF THE STATE AND FEDERAL COURTS LOCATED IN DALLAS COUNTY, TEXAS FOR THE LITIGATION OF ANY SUCH DISPUTE OR CLAIM. BORROWER IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. 20. Waiver of Jury Trial. BORROWER AND SCHLINGER EACH HEREBY IRREVOCABLY WAIVES, TO THE MAXIMUM EXTENT PERMITTED BY LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY AT ANY TIME ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY OR ASSOCIATED HEREWITH. 21. Invalid Provisions. If any provision of this Agreement or any of the other Loan Documents is held to be illegal, invalid or unenforceable under present or future laws, such provision shall be fully severable and the remaining provisions of this Agreement or any of the other Loan Documents shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance. 22. Expenses. Borrower shall pay all costs and expenses (including, without limitation, reasonable attorneys' fees) in connection with (i) the preparation of the Loan Documents, (ii) any action required in the course of administration of the indebtedness and obligations evidenced 13 by the Loan Documents, and (iii) any action in the enforcement of Schlinger's rights upon the occurrence of Event of Default. 23. Participation of the Loan. Provided that the prospective purchaser and/or assignee is not a business competitor of Borrower, as determined by Schlinger in its reasonable discretion, Borrower agrees that Schlinger may, at its option, sell interests in the Loan and its rights under this Agreement and the other Loan Documents and, in connection with each such sale, Schlinger may disclose any financial and other information available to Schlinger concerning Borrower to each prospective purchaser and assignee. 24. Maximum Interest Rate. (a) No interest rate specified in this Agreement or any other Loan Document shall at any time exceed the Maximum Rate. If at any time the interest rate (the "Contract Rate") for the Loan or any other indebtedness, liability or obligation shall exceed the Maximum Rate, thereby causing the interest accruing thereon to be limited to the Maximum Rate, then any subsequent reduction in the Contract Rate therefor shall not reduce the rate of interest therefor below the Maximum Rate until the aggregate amount of interest accrued thereon equals the aggregate amount of interest which would have accrued thereon if the Contract Rate had at all times been in effect. (b) Notwithstanding anything to the contrary contained in this Agreement or the other Loan Documents, none of the terms and provisions of this Agreement or the other Loan Documents shall ever be construed to create a contract or obligation to pay interest at a rate in excess of the Maximum Rate; and Schlinger shall never charge, receive, take, collect, reserve or apply, as interest on the Loan or any other indebtedness, liability or obligation, any amount in excess of the Maximum Rate. The parties hereto agree that any interest, charge, fee, expense or other obligation provided for in this Agreement or in the other Loan Documents which constitutes interest under applicable law shall be, ipso facto and under any and all circumstances, limited or reduced to an amount equal to the lesser of (i) the amount of such interest, charge, fee, expense or other obligation that would be payable in the absence of this Section 24(b) or (ii) an amount, which when added to all other interest payable under this Agreement and the other Loan Documents, equals the Maximum Rate. If, notwithstanding the foregoing, Schlinger ever contracts for, charges, receives, takes, collects, reserves or applies as interest any amount in excess of the Maximum Rate, such amount which would be deemed excessive interest shall be deemed a partial payment or prepayment of principal of the Loan or any other indebtedness, liability or obligation and treated hereunder as such; and if the Loan or any other indebtedness, liability or obligation, or applicable portions thereof, are paid in full, any remaining excess shall promptly be paid to the Borrower or other applicable Obligor or Obligors (as appropriate). In determining whether the interest paid or payable, under any specific contingency, exceeds the Maximum Rate, the Borrower and the other Obligors and Schlinger shall, to the maximum extent permitted by applicable law, (a) characterize any nonprincipal payment as an expense, fee or premium rather than as interest, (b) exclude voluntary prepayments and the effects thereof, and (c) amortize, prorate, allocate and spread in equal or unequal parts the total amount of interest throughout the entire contemplated term of the Loan or any other indebtedness, liability or obligation, or applicable portions thereof, so that the interest rate does not exceed the Maximum Rate at any time during the term of the Loan 14 or any other indebtedness, liability or obligation; provided that, if the unpaid principal balance is paid and performed in full prior to the end of the full contemplated term thereof, and if the interest received for the actual period of existence thereof exceeds the Maximum Rate, Schlinger shall refund to the Borrower or other applicable Obligor or Obligors (as appropriate) the amount of such excess and, in such event, Schlinger shall not be subject to any penalties provided by any laws for contracting for, charging, receiving, taking, collecting, reserving or applying interest in excess of the Maximum Rate. 25. Conflicts. In the event any term or provision hereof is inconsistent with or conflicts with any term or provision in any of the Loan Documents, the terms and provisions contained in this Agreement shall be controlling. 26. Counterparts. This Agreement may be separately executed in any number of counterparts, each of which shall be an original, but all of which, taken together, shall be deemed to constitute one and the same instrument. Delivery of an executed counterpart of this Agreement by telecopy shall be equally as effective as delivery of a manually executed counterpart of this Agreement. Any party delivering an executed counterpart of this Agreement by telecopy also shall deliver a manually executed counterpart of this Agreement but the failure to deliver a manually executed counterpart shall not affect the validity, enforceability, and binding effect of this Agreement. 27. Agreement Subject to Subordination Agreement. This Agreement and the terms and provisions hereof are subject to the terms and provisions of that certain Subordination Agreement of even date herewith between Schlinger and KBK. 28. ENTIRE AGREEMENT. THIS AGREEMENT, THE NOTE AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES HERETO WITH RESPECT TO THE TRANSACTIONS CONTEMPLATED HEREIN AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. THIS AGREEMENT ALSO AMENDS AND SUPERSEDES ANY OF THE TERMS OF ANY PRIOR WRITTEN AGREEMENTS WITH RESPECT TO THE MATTERS SET FORTH IN THIS AGREEMENT. 15 EXECUTED as of the date first above written. BORROWER: SCHLINGER: KARTS INTERNATIONAL THE SCHLINGER FOUNDATION INCORPORATED By: /s/ Charles Brister By: ------------------------ Charles Brister Name: President & C.E.O. Title: Borrower's Address: Schlinger's Address: P. O. Box 695 The Schlinger Foundation 62204 Commercial Street 1944 Edison Street Roseland, Louisiana 70456 Santa Yinez, California 93460 Telecopy No.: 504-747-2700 Telecopy No.: (805) 686-1618 16 EX-10.44 4 CONVERTIBLE TERM NOTE EXHIBIT 10.44 CONVERTIBLE TERM NOTE $1,500,000.00 June 3, 1999 FOR VALUE RECEIVED, on or before May 31, 2004 ("Maturity Date"), the undersigned and if more than one, each of them, jointly and severally (hereinafter referred to as "Borrower"), promises to pay to the order of THE SCHLINGER FOUNDATION ("Schlinger") at its offices in 1944 Edison Street, Santa Yinez, California 93460, the principal amount of ONE MILLION FIVE HUNDRED THOUSAND AND 00/100 DOLLARS ($1,500,000.00) ("Total Principal Amount"), together with interest at the rate set forth below. 1. Interest Rate. The unpaid principal amount of this Note shall bear interest at a rate per annum which shall be equal to twelve percent (12%) ("Contract Rate"); provided, however, in no event shall the Contract Rate exceed the maximum rate allowed by applicable law. 2. Repayment Terms. The principal of and all accrued but unpaid interest on this Note (the "Loan") shall be due and payable as follows: (a) interest shall be due and payable monthly as it accrues, commencing on the 30th day of June, 1999 and continuing on the last day of each successive month thereafter during the term of this Note; and (b) principal of the Loan shall be due and payable in one installment of all unpaid principal and accrued unpaid interest on May 31, 2004. 3. Prepayment Penalty. On or after the second anniversary of the date hereof, Borrower may prepay the Loan in full or in part at any time prior to May 31, 2004, provided, that the Borrower shall (i) give Schlinger thirty (30) days' written notice of the Borrower's intention to do so and (ii) pay to Schlinger, as liquidated damages and not as a penalty, an amount equal to the twelve percent (12%) multiplied by the principal amount of the Loan being prepaid at such time. 4. Loan Documents. This Note is subject to the terms and conditions set forth in that certain Loan Agreement dated June __, 1999 by and between Borrower and Schlinger, as may be amended from time to time (the "Loan Agreement"). All capitalized terms used herein that are not otherwise defined herein shall have the same meaning given to such terms in the Loan Agreement. This Note, the Loan Agreement and all other documents evidencing, securing, governing, guaranteeing and/or pertaining to this Note are hereinafter collectively referred to as the "Loan Documents". The holder of this Note is entitled to the benefits and security provided in the Loan Documents. 5. Purpose. Borrower agrees that no proceeds of the Loan under this Note shall be used for personal, family or household purposes, and that the proceeds of the Loan hereunder shall be used solely for business, commercial, investment or other similar purposes. 6. Event of Default. Borrower agrees that upon the occurrence of any one ormore of the following events of default ("Event of Default"): 1 (a) failure of Borrower to pay when due any installment of principal of or interest on this Note or on any other indebtedness now or hereafter owing by Borrower to Schlinger, or (b) the occurrence of any event of default specified in any of the other Loan Documents; or (c) the bankruptcy or insolvency of, the assignment for the benefit of creditors by, or the appointment of a receiver for any of the property of, or the liquidation, termination, dissolution or death or legal incapacity of Borrower; the holder of this Note may, at its option, without further notice or demand, (i) declare the outstanding principal balance of and accrued but unpaid interest on this Note at once due and payable, (ii) foreclose all liens securing payment hereof, (iii) pursue any and all other rights, remedies and recourses available to the holder hereof, including but not limited to any such rights, remedies or recourses under the other Loan Documents, at law or in equity, or (iv) pursue any combination of the foregoing. The failure to exercise the option to accelerate the maturity of this Note or any other right, remedy or recourse available to the holder hereof upon the occurrence of an Event of Default hereunder shall not constitute a waiver of the right of the holder of this Note to exercise the same at that time or at any subsequent time with respect to such Event of Default or any other Event of Default. The rights, remedies and recourses of the holder hereof, as provided in this Note and in any of the other Loan Documents, shall be cumulative and concurrent and may be pursued separately, successively or together as often as occasion therefore shall arise, at the sole discretion of the holder hereof. The acceptance by the holder hereof of any payment under this Note which is less than the payment in full of all amounts due and payable at the time of such payment shall not (i) constitute a waiver of or impair, reduce, release or extinguish any right, remedy or recourse of the holder hereof, or nullify any prior exercise of any such right, remedy or recourse, or (ii) impair, reduce, release or extinguish the obligations of any party liable under any of the other Loan Documents as originally provided herein or therein. 7. Conversion Rights. (a) Conversion into Shares of Common Stock at Option of Holder. At any time, the holder of this Note ("Holder") shall have the right by delivering at least five (5) business days prior to the anticipated conversion date an irrevocable Conversion Notice (as defined below) to convert all or any part (in integral multiples of $500,000) of the principal balance this Note into such number of fully paid and non-assessable shares of common stock, $.001 par value, of the Borrower (the "Common Stock") as is equal to the amount of unpaid principal under this Note to be converted as specified in the Conversion Notice, divided by the Conversion Price (as defined below) then in effect. (b) Conversion into Shares of Common Stock at Option of Borrower. If (i) the average closing bid price (as reported on the NASDAQ) of a share of Common Stock for a twenty-five (25) consecutive trading day period (the "Average Closing Price") is at least $4.00 per share (the "Target Price"), or (ii) an underwriter for the Borrower's Common Stock shall have agreed to sell in a firm commitment underwriting on behalf of Schlinger the Common Stock to be held by Schlinger upon conversion hereunder to result in 2 net proceeds (after underwriting discounts, commissions and expenses) to Schlinger from such offering of not less than $1,500,000, the Borrower shall have the right (subject to the requirements set forth in the next sentence) to convert all or any part (in integral multiples of $500,000) of the unpaid principal of this Note into such number of fully paid and non-assessable shares of Common Stock as is equal to the amount of unpaid principal of this Note to be converted as specified in the Conversion Notice, divided by the Conversion Price (as defined below) then in effect. Upon receipt of a Conversion Notice from the Borrower, Holder may elect, upon one (1) business day's notice, to have such conversion be effected prior to the conversion date specified in the Conversion Notice. (c) Obligations Upon Conversion. In the event of any conversion of all or any part of this Note by either Borrower or Holder, all accrued but unpaid interest on the principal to be converted to, but not including, the effective date of such conversion shall be paid to Holder within ten (10) business days of such conversion. Upon the conversion of all or any part of this Note by either Borrower or Holder, Holder shall deliver this Note to the Borrower and, upon such delivery, Holder shall be entitled to receive, as soon as practicable but in no event later than ten (10) days thereafter, and the Borrower shall issue: (i) a certificate evidencing the number of shares of Common Stock issuable upon conversion hereof ("Conversion Shares") (or if such shares of Common Stock have been converted into cash, securities or other property in connection with the sale, transfer or other disposition of the Borrower or substantially all of the Borrower's assets, such cash, securities or other property), (ii) payment of any accrued but unpaid interest to, but not including, the effective date of such conversion, (iii) cash for any fractional share resulting from the conversion of this Note into Common Stock, and (iv) a replacement Note evidencing the remaining balance not converted. As soon as practicable after the date of such conversion and the surrender of this Note, the Borrower shall cause to be issued and delivered to Holder, or to Holder's written order, a certificate or certificates for the number of full shares of Common Stock or other securities issuable on such conversion (or if such shares of Common Stock have been converted into cash, securities or other property in connection with a sale, transfer or other disposition of all or substantially all of the Borrower's assets, such cash, securities or other property) in accordance with the provisions hereof and cash for any fractional share. (d) Conversion Price; Conversion Notice. For purposes hereof, the term "Conversion Price" shall initially mean $0.375. For purposes hereof, the term "Conversion Notice" shall mean a written notice delivered pursuant to conversion by Borrower or Holder as described above specifying the principal amount hereunder to be converted, and the date on which such conversion is proposed to be completed. (e) Adjustment for Stock Splits and Combinations. If at any time or from time to time after the date hereof, the Borrower (i) effects a subdivision of the outstanding Common Stock, then, and in each such event, the then current Conversion Price shall be proportionately decreased, or (ii) combines the outstanding shares of Common Stock into a smaller number of shares, then, and in each such event, the Conversion Price shall be proportionately increased. Any adjustment under this paragraph shall become 3 effective at the close of business on the date the subdivision or combination becomes effective. (f) Adjustment for Certain Dividends and Distributions. If at any time or from time to time after the date hereof, the Borrower makes a dividend or other distribution payable in additional shares of Common Stock, then, and in each such event, the then current Conversion Price shall be decreased by multiplying the then current Conversion Price by a fraction (A) the numerator of which is the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date, and (B) the denominator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date plus the number of shares of Common Stock issuable in payment of such dividend or distribution. (g) Adjustments for Other Dividends and Distributions. If at any time or from time to time after the date hereof, the Borrower makes a dividend or other distribution payable in securities of the Borrower other than shares of Common Stock, then and in each such event, provision shall be made so that Holder shall receive upon conversion of this Note, in addition to the number of shares of Common Stock receivable thereupon, the amount of securities of the Borrower that Holder would have received had this Note been converted into Common Stock on the date of such event and had Holder thereafter, during the period from the date of such event to and including the conversion date, retained such securities receivable by Holder during such period, subject to all other adjustments called for during such period hereunder with respect to the rights under this Note. (h) Adjustment for Reclassification, Exchange and Substitution. If at any time or from time to time after the date hereof, the Common Stock issuable upon the conversion of this Note is changed into the same or a different number of shares of any class or classes of stock, whether by recapitalization, reclassification, exchange or otherwise (other than a subdivision or combination of shares or dividend or distribution provided for above), then and in any such event thereafter this Note shall be convertible into the kind and amount of stock and other securities and property receivable upon such recapitalization, reclassification, exchange or other change by holders of the number of shares of Common Stock into which the Note could have been converted immediately prior to such recapitalization, reclassification or exchange, all subject to further adjustment as provided herein. (i) Fractional Shares. No fractional shares of Common Stock shall be issued upon conversion hereof. In lieu of any fractional shares to which Holder would otherwise be entitled, the Borrower shall pay cash equal to the fair market value of the fractional share of Common Stock into which this Note would otherwise be converted. 8. Registration Rights. (a) Optional Registrations. 4 (i) If the Borrower decides to register any of its Common Stock or securities convertible into or exchangeable for Common Stock under the Securities Act on a form which is suitable for an offering for cash of shares of the Borrower held by third parties and which is not a registration solely to implement an employee benefit plan or a transaction to which Rule 145, S-8 or any other similar rule of the Securities and Exchange Commission (the "Commission") is applicable, the Borrower will promptly give written notice to the Holder, and the Borrower will use all reasonable efforts to effect the registration under the Securities Act of all Registrable Securities that the Holder requests be included in such registration by a written notice delivered to the Borrower within fifteen (15) days after the notice given by the Borrower. The Holder agrees that any securities it requests to be included in a Company registration pursuant to this Section 8(a) shall be included by the Borrower on the same form of registration statement as has been selected by the Borrower for the securities the Borrower is registering for sale for its own account. (ii) If the registration involves an underwritten public offering, the Borrower will not be required to register Registrable Securities in excess of the amount that the principal underwriter reasonably and in good faith recommends may be included in such offering (a "Cutback"), which recommendation, and supporting reasoning, shall be delivered in writing to the Holder. If such a Cutback occurs, the number of shares that are entitled to be included in the registration and underwriting shall first be allocated to the Borrower for securities being sold for its own account and thereafter shall be allocated to the Holder requesting inclusion in the registration. (iii)If the Borrower elects to terminate any registration filed under this Section 8(a), the Borrower will have no obligation to register the securities sought to be included by the Holder in such registration. If the Borrower includes in such registration any securities to be offered by it, all expenses of the registration and offering and the reasonable fees and expenses of not more than one independent counsel for the Holder will be borne by the Borrower, except that the Holder will bear underwriting discounts and commissions attributable to its Registrable Securities being registered and transfer taxes on shares being sold by it. (b) Required Registrations. (i) If the Holder notifies the Borrower in writing that the Holder intends to offer for public sale any Registrable Securities, the Borrower will cause the Conversion Shares as may be requested by the Holder to be included in a registration statement under the Securities Act of 1933, as amended (the "Securities Act"). In connection with one (1) registration made by the Borrower pursuant to this Section 8(b), all expenses of such registration and the reasonable fees and expenses of not more than one independent counsel for the Holder will be borne by the Borrower, except that the Holder will bear underwriting discounts and commissions and transfer taxes on shares being sold by the Holder. The Borrower shall not be required to file any registration 5 statement for securities other than shares of Common Stock, although any conversion of this Note may be conditioned upon such registration statement becoming effective, to the extent that the conversion relates to Conversion Shares covered by the Holder's written notice of an intended public offering. In connection with all other registrations made by the Borrower pursuant to this Section 8(b), all expenses of any such registrations (other than audit and "blue sky" fees and expenses, which fees and expenses will be borne by the Borrower) shall be borne by the Holder; provided, however, that if the Borrower for its own account or any other holder of shares elects to register its shares under this Section 8(b) as permitted below, the expenses of such registration shall be borne pro rata by all parties to the registration based upon the ratio that the number of such shares being registered by such entity bears to the total number of shares to be registered pursuant to this Section 8(b). Except as provided in Section 8(c), this Section 8(b) will not apply to a request for registration on Form S-3 (or successor form) which will be governed by Section 8(c). In the event any registration attempted under this Section 8(b) pursuant to which the Borrower would be responsible for the above expenses of the Holder is not consummated, then the Borrower shall pay such expenses and shall remain responsible for the above expenses of the Holder with respect to one (1) consummated registration under this Section 8(b). (ii) The registration statement filed pursuant to the request of the Holder may include other securities of the Borrower, with respect to which "piggyback" registration rights have been granted, and may include securities of the Borrower being sold for the account of the Borrower; provided, however, that if the Borrower shall request inclusion in any registration pursuant to this Section 8(b) of the securities being sold for its own account, or if other persons shall request inclusion in any registration pursuant to this Section 8(b), the Holder shall, on behalf of all entities requesting inclusion in such registration, offer to include such securities in the offering and may condition such offer on their acceptance of any other reasonable conditions (including, without limitation, if such offering is underwritten, that such requesting holders agree in writing to enter into an underwriting agreement with usual and customary terms). Notwithstanding any other provisions of this Section 8(b), if the representative of the underwriters advises the Holder in writing that marketing factors require a limitation on the number of shares to be underwritten, the number of shares to be included in the underwriting or registration shall be allocated first to the Holder, second to the Borrower and thereafter to the holders requesting inclusion in the registration on the basis of the number of shares each requesting holder requests be included bears to the total number of shares of all requesting holders that have been requested be included in such registration. If a person who has requested inclusion in such registration as provided above does not agree to the terms of any such underwriting, such person shall be excluded therefrom by written notice from the Borrower, the underwriter or the Holder. The securities so excluded shall also be withdrawn from registration. 6 (c) Form S-3. (i) Once the Borrower is eligible to effect a registration of its securities under Form S-3 (or a successor form), the Holder will have the right to request and have effected registrations of shares of its Registrable Securities on Form S-3 as long as the aggregate proposed offering price is not less than $1,000,000 for any such registration. (ii) Upon written request of the Holder, the Borrower will cause the registration of all Registrable Securities on Form S-3 or such successor form to the extent requested by the Holder. All expenses incurred in connection with such registration requested pursuant to this Section 8(c) shall be borne by the Holder; provided, however, that if the Borrower for its own account or any other holder of shares elects to register its shares as permitted below, the expenses of such registration shall be borne pro rata by all parties to the registration based upon the ratio that the number of such shares registered by such entity bears to the total number of shares to be registered; provided, further, however, that if the Holder elects to treat this request as a required registration pursuant to Section 8(b) above, then the Borrower, if requested by the Holder, will bear all such expenses as provided in such Section to the extent that it would be required to pursuant to said Section. (iii)The registration statement filed pursuant to the request of the Holder may include other securities of the Borrower, with respect to which "piggyback" registration rights have been granted, and may include securities of the Borrower being sold for the account of the Borrower; provided, however, that any Cutback shall be dealt with in the same manner as the second paragraph of Section 8(b). (d) Procedure for Registration. Whenever the Borrower is required under this Agreement to register Common Stock, it agrees to the following: (i) Use all reasonable efforts to prepare promptly for filing with the Commission a registration statement and such amendments and supplements to said registration statement and the prospectus as may be necessary to keep the registration statement effective and to comply with the provisions of the Securities Act for the period necessary to complete the proposed public offering, but not more than 180 days; (ii) Furnish to each selling holder such copies of each preliminary and final prospectus and such other documents as such holder may reasonably request to facilitate the public offering of its Common Stock; (iii)Enter into any underwriting agreement with provisions reasonably required by the proposed underwriter for the selling holders, if any; and (iv) Use all reasonable efforts to register or qualify the Common Stock covered by the registration statement under the securities or "blue-sky" laws of such jurisdictions as any 7 selling holder may reasonably request, although the Borrower will not have to register in any states that require it to qualify to do business or subject itself to general service of process, and for a registration under Section 8(a), the Borrower will not be required to register in more states than are necessary to permit the sale of the securities. (e) Limitation on Registration. The Borrower is not required to file a registration statement requested under Sections 8(b) or 8(c) prior to the earlier of (i) twenty- four (24) months from the date of this Agreement, or (ii) ninety (90) days following the effective date of any other registration statement initiated by the Borrower except for registrations being initiated solely to implement an employee's benefit plan. The Borrower is not required to file a registration statement requested under Section 8(b) unless requested by holders owning in the aggregate a majority of the Registrable Securities. The Borrower may postpone the filing of any registration statement required under Sections 8(b) or 8(c) for a reasonable period of time, not to exceed ninety (90) days, if the Borrower has been advised by legal counsel that such filing would require the disclosure of a material fact, and the Borrower determines reasonably and in good faith that such disclosure would have a material adverse effect on the Borrower. In addition, if (i) in the good faith judgment of the Board of Directors of the Borrower, a required registration under Section 8(b) or 8(c) would be seriously detrimental to the Borrower and the Board of Directors of the Borrower concludes, as a result, that it is essential to defer the filing of such registration statement at such time, and (ii) the Borrower shall furnish to the Holder a certificate signed by the President of the Borrower stating that in the good faith judgment of the Board of Directors of the Borrower, it would be seriously detrimental to the Borrower for such registration statement to be filed in the near future and that it is, therefore, essential to defer the filing of such registration statement, then the Borrower shall have the right to defer such filing for a period of not more than one hundred eighty (180) days after receipt of the request of the Holder, and, provided further, that the Borrower shall not defer its obligation in this manner more than once in any twelve-month period. (f) Indemnification. Subject to applicable law, the Borrower will indemnify each underwriter and the Holder and each person controlling any of them, against all claims, losses, damages and liabilities, including legal and other expenses reasonably incurred, arising out of any untrue or allegedly untrue statement of a material fact contained in the registration statement, or any omission or alleged omission to state a material fact required to be stated in the registration statement or necessary to make the statements not misleading, or arising out of any violation by the Borrower of the Securities Act, any state securities or "blue-sky" laws or any applicable rule or regulation. This indemnification will not apply to any claims, losses, damages or liabilities to the extent they may have been caused by an untrue statement or omission based upon information furnished in writing to the Borrower by such underwriter, the Holder, or controlling person, respectively, expressly for use in the registration statement. With respect to such untrue statement or omission in the information furnished in writing to the Borrower by the Holder, such person will indemnify the underwriters, the Borrower, its directors and officers, the other persons selling securities under the registration statement and each person controlling any of them against any losses, claims, 8 damages, expenses or liabilities to which any of them may become subject as a result of such untrue statement or omission (including those incurred in connection with investigating or defending against such claims). (g) Rule 144 Requirements. The Borrower will file with the Commission such information as the Commission may require and will make available Rule 144 under the Securities Act (or any successor exemptive rule). (h) Obligations of Investor and Others in a Registration. The Holder agrees timely to furnish such information regarding such person and the securities sought to be registered and to take such other action as the Borrower may reasonably request in connection with the registration, qualification or compliance. The Borrower agrees that, in connection with any offering undertaken pursuant to Section 8(b), the Holder shall have the right if it deems an underwriter or underwriters necessary or appropriate, to designate such underwriter(s), which underwriters shall be reasonably acceptable to the Borrower and subject to the written approval of the Borrower, which approval shall not be unreasonably withheld. If the registration involves an underwriter, the Holder agrees, upon the request of such underwriter, not to sell any unregistered securities of the Borrower for a period of ninety (90) days following the effective date of the registration statement for such offering and to enter into an underwriting agreement with such underwriters containing usual and customary terms and provisions. (i) Preparation: Reasonable Investigation. In connection with the preparation and filing of each registration statement under the Securities Act pursuant to this Agreement, the Borrower will give the holders of Registrable Securities registered under such registration statement, their underwriters, if any, and one counsel or firm of counsel and one accountant or firm of accountants representing all the holders of Registrable Securities to be registered under such registration statement, the opportunity to participate in the preparation of such registration statement, each prospectus included therein or filed with the Commission, and each amendment thereof or supplement thereto, and will give each of them such access to its books and records and such opportunities to discuss the business of the Borrower with its officers and the independent public accountants who have certified its financial statements as shall be necessary in the opinion of such holders' and such underwriters' respective counsel to conduct a reasonable investigation within the meaning of the Securities Act. (j) Rule 144A. The Borrower agrees that, upon the request of any holder of Registrable Securities or any prospective purchaser of Registrable Securities designated by a holder, the Borrower shall promptly provide (but in any case within 15 days of a request) to such holder or potential purchaser, the following information: (i) a brief statement of the nature of the business of the Borrower and any Subsidiaries and the products and services they offer; (ii) the most recent consolidated balance sheets and profit and losses and retained earnings statements, and similar 9 financial statements of the Borrower for the two most recent fiscal years (such financial information shall be audited, to the extent reasonably available); and (iii)such other information about the Borrower, any Subsidiaries, and their business, financial condition and results of operations as the requesting holder or purchaser of such Registrable Securities shall request in order to comply with Rule 144A, as amended, and the antifraud provisions of the federal and state securities laws. The Borrower hereby represents and warrants to any such requesting holder and any prospective purchaser of Registrable Securities from such holder that the information provided by the Borrower pursuant to this Section 8(j) will not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading. (k) Limitations on Subsequent Registration Rights. The Borrower will not, without the prior written consent of the Holder, enter into any agreement with any holder or prospective holder of any securities of the Borrower which would grant such holder or prospective holder registration rights with respect to securities of the Borrower. (l) Definitions. For purposes of this Note: "Conversion Shares" shall mean any securities of the Borrower issued or issuable upon conversion of this Note. "Registrable Securities" shall mean any shares of Common Stock issuable to the Holder upon conversion of this Note and any other Common Stock distributable on, with respect to, or in substitution for such Registrable Securities, including those which have been transferred as permitted under Section 8(h), except for those that have been sold or transferred pursuant to an effective registration statement or pursuant to Rule 144 under the Securities Act. 9. Compliance With Usury Laws. (a) No interest rate specified in this Note or any other Loan Document shall at any time exceed the Maximum Rate. If at any time the Contract Rate for the Loan or any other indebtedness, liability or obligation shall exceed the Maximum Rate, thereby causing the interest accruing thereon to be limited to the Maximum Rate, then any subsequent reduction in the Contract Rate therefor shall not reduce the rate of interest therefor below the Maximum Rate until the aggregate amount of interest accrued thereon equals the aggregate amount of interest which would have accrued thereon if the Contract Rate had at all times been in effect. (b) Notwithstanding anything to the contrary contained in this Note or the other Loan Documents, none of the terms and provisions of this Note or the other Loan Documents shall ever be construed to create a contract or obligation to pay interest at a rate in excess of the Maximum Rate; and Schlinger shall never charge, receive, take, collect, reserve or apply, as interest on the Loan or any other indebtedness, liability or obligation, any amount in excess of the Maximum Rate. The parties hereto agree that any interest, charge, fee, expense or other 10 obligation provided for in this Note or in the other Loan Documents which constitutes interest under applicable law shall be, ipso facto and under any and all circumstances, limited or reduced to an amount equal to the lesser of (i) the amount of such interest, charge, fee, expense or other obligation that would be payable in the absence of this Section 9 (b) or (ii) an amount, which when added to all other interest payable under this Note and the other Loan Documents, equals the Maximum Rate. If, notwithstanding the foregoing, Schlinger ever contracts for, charges, receives, takes, collects, reserves or applies as interest any amount in excess of the Maximum Rate, such amount which would be deemed excessive interest shall be deemed a partial payment or prepayment of principal of the Loan or any other indebtedness, liability or obligation and treated hereunder as such; and if the Loan or any other indebtedness, liability or obligation, or applicable portions thereof, are paid in full, any remaining excess shall promptly be paid to the Borrower or other applicable Obligor or Obligors (as appropriate). In determining whether the interest paid or payable, under any specific contingency, exceeds the Maximum Rate, the Borrower and the other Obligors and Schlinger shall, to the maximum extent permitted by applicable law, (a) characterize any nonprincipal payment as an expense, fee or premium rather than as interest, (b) exclude voluntary prepayments and the effects thereof, and (c) amortize, prorate, allocate and spread in equal or unequal parts the total amount of interest throughout the entire contemplated term of the Loan or any other indebtedness, liability or obligation, or applicable portions thereof, so that the interest rate does not exceed the Maximum Rate at any time during the term of the Loan or any other indebtedness, liability or obligation; provided that, if the unpaid principal balance is paid and performed in full prior to the end of the full contemplated term thereof, and if the interest received for the actual period of existence thereof exceeds the Maximum Rate, Schlinger shall refund to the Borrower or other applicable Obligor or Obligors (as appropriate) the amount of such excess and, in such event, Schlinger shall not be subject to any penalties provided by any laws for contracting for, charging, receiving, taking, collecting, reserving or applying interest in excess of the Maximum Rate. The terms of this Section shall be deemed to be incorporated into every other Loan Document. As used herein the term "Maximum Rate" means, with respect to Schlinger, the maximum non-usurious interest rate, if any, that any time or from time to time may be contracted for, taken, reserved, charged or received with respect to the Loan or other amount as to which such rate is to be determined, payable to Schlinger pursuant to this Note or any other Loan Document, under laws applicable to Schlinger which are presently in effect or, to the extent allowed by law, under such applicable laws which may hereafter be in effect and which allow a higher maximum non-usurious interest rate than applicable laws now allow. The Maximum Rate shall be calculated in a manner that takes into account any and all fees, payments and other charges in respect of the Loan Documents that constitute interest under applicable law. Each change in any interest rate provided for herein based upon the Maximum Rate resulting from a change in the Maximum Rate shall take effect without notice to the Borrower at the time of such change in the Maximum Rate. For purposes of determining the Maximum Rate under Texas law, the applicable rate ceiling shall be the weekly rate ceiling described in, and computed in accordance with the Texas Finance Code or any successor or replacement statute; provided, however, that, to the extent permitted by applicable law, Schlinger shall have the right to change the applicable rate ceiling from time to time in accordance with applicable law. 10. Costs of Collection; Waivers. If this Note is placed in the hands of an attorney for collection, or is collected in whole or in part by suit or 11 through probate, bankruptcy or other legal proceedings of any kind, Borrower agrees to pay, in addition to all other sums payable hereunder, all costs and expenses of collection, including but not limited to reasonable attorneys' fees. Borrower and any and all endorsers and guarantors of this Note severally waive presentment for payment, notice of nonpayment, protest, demand, notice of protest, notice of intent to accelerate, notice of acceleration and dishonor, diligence in enforcement and indulgences of every kind and without further notice hereby agree to renewals, extensions, exchanges or releases of collateral, taking of additional collateral indulgences or partial payments, either before or after maturity. 11. Governing Law; Venue; Submission to Jurisdiction. THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, WITHOUT GIVING EFFECT TO THE PRINCIPLES OF CONFLICTS OF LAWS THEREOF. THIS NOTE IS PERFORMABLE IN DALLAS COUNTY, TEXAS. BORROWER AGREES THAT DALLAS COUNTY, TEXAS SHALL BE THE EXCLUSIVE VENUE FOR LITIGATION OF ANY DISPUTE OR CLAIM ARISING UNDER OR RELATING TO THIS NOTE, AND THAT SUCH COUNTY IS A CONVENIENT FORUM IN WHICH TO DECIDE ANY SUCH DISPUTE OR CLAIM. BORROWER CONSENTS TO THE PERSONAL JURISDICTION OF THE STATE AND FEDERAL COURTS LOCATED IN DALLAS COUNTY, TEXAS FOR THE LITIGATION OF ANY SUCH DISPUTE OR CLAIM. BORROWER IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. 12. Waiver of Jury Trial. BORROWER HEREBY IRREVOCABLY WAIVES, TO THE MAXIMUM EXTENT PERMITTED BY LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY AT ANY TIME ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS NOTE OR ANY TRANSACTION CONTEMPLATED HEREBY OR ASSOCIATED HEREWITH. 13. Final Agreement. THIS NOTE AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN SCHLINGER AND BORROWER WITH RESPECT TO THE TRANSACTIONS CONTEMPLATED HEREIN AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. BORROWER: KARTS INTERNATIONAL INCORPORATED By: /s/ Charles Brister ------------------------- Name: Charles Brister Title: President & C.E.O. 12 EX-10.45 5 SECURITY AGREEMENT EXHIBIT 10.45 SECURITY AGREEMENT THIS SECURITY AGREEMENT ("Agreement") is made as of the 3rd day of June, 1999, by KARTS INTERNATIONAL INCORPORATED (hereinafter called "Debtor", whether one or more), in favor of THE SCHLINGER FOUNDATION, ("Secured Party"). Debtor hereby agrees with Secured Party as follows: 1. Definitions. As used in this Agreement, the following terms shall have the meanings indicated below: (a) "Code" shall mean the Uniform Commercial Code as in effect in the State of Texas, as it may hereafter be amended from time to time. (b) "Collateral" shall mean all of the property set forth below: Accounts. All present and future accounts, contract rights, chattel paper, documents, instruments, deposit accounts and general intangibles now or hereafter owned by Debtor, all money and other funds of Debtor which may now or hereafter come into the possession, custody or control of Secured Party, all books of account and customer lists, and in any case where an account arises from the sale of goods, the interest of Debtor in such goods. Inventory. All present and hereafter acquired inventory (including without limitation, all raw materials, work in process and finished goods) owned by Debtor wherever located. Equipment. All equipment of whatsoever kind and character now or hereafter owned by Debtor, together with all replacements, accessories, additions, substitutions and accessions to all of the foregoing. The term Collateral, as used herein, shall also include (i) all records relating in any way to the foregoing (including, without limitation, any computer software, whether on tape, disk, card, strip, cartridge or any other form), and (ii) all PRODUCTS and PROCEEDS of all of the foregoing (including without limitation, insurance payable by reason of loss or damage to the foregoing property). The designation of proceeds does not authorize Debtor to sell, transfer or otherwise convey any of the foregoing property except finished goods intended for sale in the ordinary course of Debtor's business or as otherwise provided herein. (c) "Financing Documents" shall mean all instruments and documents evidencing, securing, governing, guaranteeing and/or pertaining to the Indebtedness. (d) "Indebtedness" shall mean (i) indebtedness, obligations and liabilities owing by Debtor to Secured Party under the Note and all other indebtedness, obligations and liabilities of Debtor to Secured Party of any kind or character, now existing or hereafter arising, 1 whether direct, indirect, related, unrelated, fixed, contingent, liquidated, unliquidated, joint, several or joint and several, and regardless of whether such indebtedness, obligations and liabilities may, prior to their acquisition by Secured Party, be or have been payable to or in favor of a third party and subsequently acquired by Secured Party (it being contemplated that Secured Party may make such acquisitions from third parties), including without limitation all indebtedness, obligations and liabilities of Debtor to Secured Party now existing or hereafter arising by note, draft, acceptance, guaranty, endorsement, letter of credit, assignment, purchase, overdraft, discount, indemnity agreement or otherwise, (ii) all obligations of Debtor to Secured Party under any documents evidencing, securing, governing and/or pertaining to all or any part of the indebtedness, obligations and liabilities described in (i) above, (iii) all costs and expenses incurred by Secured Party in connection with the collection and administration of all or any part of the indebtedness, obligations and liabilities described in (i) and (ii) above or the protection or preservation of, or realization upon, the collateral securing all or any part of such indebtedness, obligations and liabilities, including without limitation all reasonable attorneys' fees, and (iv) all renewals, extensions, modifications and rearrangements of the indebtedness, obligations and liabilities described in (i), (ii) and (iii) above. (e) "Loan Agreement" means that certain Loan Agreement of even date herewith entered into between Debtor and Secured Party, as the same may be renewed, extended, modified, supplement or restated from time to time. (f) "Note" means that certain Convertible Term Note of even date herewith payable by Debtor to the order of Secured Party in the stated principal amount of $1,500,000.00, as may be renewed, extended, amended and modified. All words and phrases used herein which are expressly defined in Section 1.201 or Chapter 9 of the Code shall have the meaning provided for therein. Other words and phrases defined elsewhere in the Code shall have the meaning specified therein except to the extent such meaning is inconsistent with a definition in Section 1.201 or Chapter 9 of the Code. All other words used herein which are not herein defined or defined in the Code shall have the meaning ascribed to them in the Loan Agreement. 2. Security Interest. As security for the Indebtedness, Debtor, for value received, hereby grants to Secured Party a continuing security interest in the Collateral. 3. Representations and Warranties. Debtor hereby represents and warrants the following to Secured Party: (a) Due Authorization. The execution, delivery and performance of this Agreement and all of the other Financing Documents executed by Debtor have been duly authorized by all necessary corporate action of Debtor, to the extent Debtor is a corporation, or by all necessary partnership action, to the extent Debtor is a partnership. 2 (b) Enforceability. This Agreement and the other Financing Documents executed by Debtor constitute legal, valid and binding obligations of Debtor, enforceable in accordance with their respective terms, except as limited by bankruptcy, insolvency or similar laws of general application relating to the enforcement of creditors' rights and except to the extent specific remedies may generally be limited by equitable principles. (c) Ownership and Liens. Debtor has good and marketable title to the Collateral free and clear of all liens, security interests, encumbrances or adverse claims, (other than those in favor of Secured Party or otherwise expressly permitted by Secured Party in the other Financing Documents including those incurred in connection with the KBK Debt). No dispute, right of setoff, counterclaim or defense exists with respect to all or any part of the Collateral. Debtor has not executed any other security agreement currently affecting the Collateral and no effective financing statement or other instrument similar in effect covering all or any part of the Collateral is on file in any recording office except as may have been executed or filed in favor of Secured Party or expressly permitted by Secured Party in the other Financing Documents including those executed in connection with the KBK Debt. (d) No Conflicts or Consents. Neither the ownership, the intended use of the Collateral by Debtor, the grant of the security interest by Debtor to Secured Party herein nor the exercise by Secured Party of its rights or remedies hereunder, will (i) conflict with any provision of (A) any domestic or foreign law, statute, rule or regulation, (B) the articles or certificate of incorporation, charter, bylaws or partnership agreement, as the case may be, of Debtor, or (C) any agreement, judgment, license, order or permit applicable to or binding upon Debtor, or (ii) result in or require the creation of any lien, charge or encumbrance upon any assets or properties of Debtor or of any person except as may be expressly contemplated in the Financing Documents. Except as expressly contemplated in the Financing Documents, no consent, approval, authorization or order of, and no notice to or filing with, any court, governmental authority or third party is required in connection with the grant by Debtor of the security interest herein or the exercise by Secured Party of its rights and remedies hereunder. (e) Security Interest. Debtor has and will have at all times full right, power and authority to grant security interest in the Collateral to Secured Party in the manner provided herein, free and clear of any lien, security interest or other charge or encumbrance (other than those in favor of Secured Party or otherwise expressly permitted by Secured Party in the other Financing Documents, including those granted in connection with the KBK Debt). This Agreement creates a legal, valid and binding security interest in favor of Secured Party in the Collateral securing the Indebtedness. Possession by Secured Party of all instruments, chattel paper and cash constituting Collateral from time to time and/or the filing of the financing statements delivered prior hereto and /or concurrently herewith by Debtor to Secured Party will perfect Secured Party's security interest hereunder in the Collateral. (f) Location. Debtor's residence or chief executive office, as the case may be, and the office where the records concerning the Collateral are kept is located at its address set forth on the signature page hereof. 3 Except as specified elsewhere herein, all Collateral shall be kept at such address and such other addresses as may be listed in Schedule "A" attached hereto and made a part hereof. (g) Solvency of Debtor. As of the date hereof, and after giving effect to this Agreement and the completion of all other transactions contemplated by Debtor at the time of the execution of this Agreement, (i) Debtor is and will be solvent, (ii) the fair saleable value of Debtor's assets exceeds and will continue to exceed Debtor's liabilities (both fixed and contingent), (iii) Debtor is paying and will continue to be able to pay its debts as they mature, and (iv) if Debtor is not an individual, Debtor has and will have sufficient capital to carry on Debtor's businesses and all businesses in which Debtor is about to engage. (h) Employer Identification Number. Debtor's employer identification number is set forth below Debtor's signature on the signature page hereof. (i) Compliance with Environmental Laws. Except as disclosed in writing to Secured Party, Debtor is conducting Debtor's businesses in material compliance with all applicable federal, state and local laws, statutes, ordinances, rules, regulations, orders, determinations and court decisions, including without limitation, those pertaining to health or environmental matters. (j) Inventory. The security interest in the inventory granted hereunder shall continue through all stages of manufacture and shall, without further action, attach to the accounts or other proceeds resulting from the sales, lease or other disposition thereof and to all such inventory as may be returned to Debtor by its account debtors. (k) Accounts. Each account pledged hereunder represents the valid and legally binding indebtedness of a bona fide account debtor arising from the sale or lease by Debtor of goods or the rendition by Debtor of services and is not subject to contra accounts, setoffs, defenses or counterclaims by or available to account debtors obligated on the accounts except as disclosed by Debtor to Secured Party from time to time in writing. The amount shown as to each account on Debtor's books is the true and undisputed amount owing and unpaid thereon, subject only to discounts, allowances, rebates, credits and adjustments to which the account debtor has a right and which have been disclosed to Secured Party in writing. (l) Chattel Paper, Documents and Instruments. The chattel paper, documents and instruments of Debtor pledged hereunder have only one original counterpart and no party other than Debtor or Secured Party is in actual or constructive possession of any such chattel paper, documents or instruments, except those which are in the possession of KBK in connection with the KBK. 4. Affirmative Covenants. Debtor will comply with the covenants contained in this Section at all times during the period of time this Agreement is effective unless Secured Party shall otherwise consent in writing. 4 (a) Ownership and Liens. Debtor will maintain good and marketable title to all Collateral free and clear of all liens, security interests, encumbrances or adverse claims, except those in favor of Secured Party, the security interests and other encumbrances expressly permitted by the other Financing Documents and those granted in connection with the KBK Debt. Debtor will not permit any dispute, right of setoff, counterclaim or defense to exist with respect to all or any part of the Collateral. Debtor will cause any financing statement or other security instrument with respect to the Collateral to be terminated, except those liens expressly permitted in the other Financing Documents (including those securing the KBK Debt) or as may have been filed in favor of Secured Party. Debtor will defend at its expense Secured Party's right, title and security interest in and to the Collateral against the claims of any third party. (b) Further Assurances. Debtor will from time to time at its expense promptly execute and deliver all further instruments and documents and take all further action necessary or appropriate or that Secured Party may request in order (i) to perfect and protect the security interest created or purported to be created hereby and the priority of such security interest, (ii) to enable Secured Party to exercise and enforce its rights and remedies hereunder in respect of the Collateral, and (iii) to otherwise effect the purposes of this Agreement, including without limitation: (A) executing and filing such financing or continuation statements, or amendments thereto; and (B) furnishing to Secured Party from time to time statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral, all in reasonable detail satisfactory to Secured Party. (c) Inspection of Collateral. Debtor will keep adequate records concerning the Collateral and will permit Secured Party and all representatives and agents appointed by Secured Party to inspect any of the Collateral and the books and records of or relating to the Collateral at any time during normal business hours, to make and take away photocopies, photographs and printouts thereof and to write down and record any such information. (d) Payment of Taxes. Debtor (i) will timely pay all property and other taxes, assessments and governmental charges or levies imposed upon the Collateral or any part thereof, (ii) will timely pay all lawful claims which, if unpaid, might become a lien or charge upon the Collateral or any part thereof, and (iii) will maintain appropriate accruals and reserves for all such liabilities in a timely fashion in accordance with generally accepted accounting principles. Debtor may, however, delay paying or discharging any such taxes, assessments, charges, claims or liabilities so long as the validity thereof is contested in good faith by proper proceedings and provided Debtor has set aside on Debtor's books adequate reserves therefor; provided, however, Debtor understands and agrees that in the event of any such delay in payment or discharge and upon Secured Party's written request, Debtor will establish with Secured Party an escrow acceptable to Secured Party adequate to cover the payment of such taxes, assessments and governmental charges with interest, costs and penalties and a reasonable additional sum to cover possible costs, interest and penalties (which escrow shall be returned to Debtor upon payment of such taxes, assessments, governmental charges, interests, costs and 5 penalties or disbursed in accordance with the resolution of the contest to the claimant) or furnish Secured Party with an indemnity bond secured by a deposit in cash or other security acceptable to Secured Party. Notwithstanding any other provision contained in this Subsection, Secured Party may at its discretion exercise its rights under Subsection 6(c) at any time to pay such taxes, assessments, governmental charges, interest, costs and penalties. (e) Mortgagee's and Landlord's Waivers. Debtor shall cause each mortgagee of real property owned by Debtor and each landlord of real property leased by Debtor to execute and deliver agreements satisfactory in form and substance to Secured Party by which such mortgagee or landlord waives or subordinates any rights it may have in the Collateral. (f) Accounts and General Intangibles. Debtor will duly perform and cause to be performed all of its obligations with respect to the goods or services, the sale or lease or rendition of which gave rise or will give rise to each account pledged hereunder and all of its obligations to be performed under or with respect to the general intangibles pledged hereunder. Debtor also covenants and agrees to take any action and/or execute any documents that Secured Party may request in order to comply with the Federal Assignment of Claims Act, as amended. (g) Chattel Paper, Documents and Instruments. Debtor will take such action as may be requested by Secured Party in order to cause any Collateral which constitute chattel paper, documents or instruments to be valid and enforceable and will cause all chattel paper to have only one original counterpart. Upon request by Secured Party, Debtor will deliver to Secured Party all originals of chattel paper, documents or instruments or will mark all originals of chattel paper with a legend indicating that such chattel paper is subject to the security interest granted hereunder. (h) Condition of Goods. Debtor will maintain, preserve, protect and keep all Collateral which constitutes goods in good condition, repair and working order and will cause such Collateral to be used and operated in good and workmanlike manner, in accordance with applicable laws and in a manner which will not make void or cancelable any insurance with respect to such Collateral. Debtor will promptly make or cause to be made all repairs, replacements and other improvements to or in connection with the Collateral which Secured Party may request from time to time. (i) Insurance. Debtor will, at its own expense, maintain insurance with respect to all Collateral which constitutes goods in such amounts, against such risks, in such form and with such insurers, as shall be satisfactory to Secured Party from time to time. If requested by Secured Party, each policy for property damage insurance shall provide for all to be paid directly to Secured Party. If requested by Secured Party, each policy of insurance maintained by Debtor shall (i) name Debtor and Secured Party as insured parties thereunder (without any representation or warranty by or obligation upon Secured Party) as their interests may appear, (ii) contain the agreement by the insurer that any loss thereunder shall be payable to Secured Party notwithstanding any action, inaction or breach of representation or 6 warranty by Debtor, (iii) provide that there shall be no recourse against Secured Party for payment of premiums or other amounts with respect thereto, and (iv) provide that at least ten (10) days prior written notice of cancellation or of lapse shall be given to Secured Party by the insurer. Debtor will, if requested by Secured Party, deliver to Secured Party original or duplicate policies of such insurance and, as often as Secured Party may reasonably request, a report of a reputable insurance broker with respect to such insurance. Debtor will also, at the request of Secured Party, duly execute and deliver instruments of assignment of such insurance policies and cause the respective insurers to acknowledge notice of such assignment. All insurance payments in respect of loss of or damage to any Collateral shall be paid to Secured Party, as provided for in this paragraph, and applied as Secured Party in its sole discretion deems appropriate. 5. Negative Covenants. Debtor will comply with the covenants contained in this Section at all times during the period of time this Agreement is effective, unless Secured Party shall otherwise consent in writing. (a) Transfer or Encumbrance. Debtor will not (i) sell, assign (by operation of law or otherwise), transfer, exchange, lease or otherwise dispose of any of the Collateral, (ii) grant a lien or security interest in or execute, file or record any financing statement or other security instrument with respect to the Collateral to any party other than Secured Party except as expressly permitted in the other Financing Documents or as provided for in the KBK Loan Documents, or (iii) deliver actual or constructive possession of any of the Collateral to any party other than Secured Party or KBK in connection with the KBK Debt, except for (A) sales and leases of inventory in the ordinary course of business, and (B) the sale or other disposal of any item of equipment which is worn out or obsolete and which has been replaced by an item of equal suitability and value, owned by Debtor and made subject to the security interest under this Agreement, but which is otherwise free and clear of any lien, security interest, encumbrance or adverse claim; provided, however, the exceptions permitted in clauses (A) and (B) above shall automatically terminate upon the occurrence of an Event of Default. (b) Impairment of Security Interest. Debtor will not take or fail to take any action which would in any manner impair the value or enforceability of Secured Party's security interest in any Collateral. (c) Possession of Collateral. Debtor will not cause or permit the removal of any Collateral from its possession, control and risk of loss, nor will Debtor cause or permit the removal of any Collateral from the address signature page hereof and the addresses specified on Schedule "A" to this Agreement other than (i) as permitted by Subsection 5(a), (ii) in connection with the possession of any Collateral by Secured Party or by its bailee or (iii) in connection with the possession of any Collateral by KBK pursuant to the KBK Loan Documents. (d) Goods. Debtor will not permit any Collateral which constitutes goods to at any time (i) be covered by any document except documents in the 7 possession of the Secured Party or KBK pursuant to the KBK Loan Documents, (ii) become so related to, attached to or used in connection with any particular real property so as to become a fixture upon such real property, or (iii) be installed in or affixed to other goods so as to become an accession to such other goods unless such other goods are subject to a perfected security interest under this Agreement. (e) Compromise of Collateral. Debtor will not adjust, settle, compromise, amend or modify any Collateral, except an adjustment, settlement, compromise, amendment or modification in good faith and in the ordinary course of business; provided, however, this exception shall automatically terminate upon the occurrence of an Event of Default or upon Secured Party's written request. Debtor shall provide to Secured Party such information concerning (i) any adjustment, settlement, compromise, amendment or modification of any Collateral, and (ii) any claim asserted by any account debtor for credit, allowance, adjustment, dispute, setoff or counterclaim, as Secured Party may request from time to time. (f) Financing Statement Filings. Debtor recognizes that financing statements pertaining to the Collateral have been or may be filed where Debtor maintains any Collateral, has its records concerning any Collateral or has its residence or chief executive office, as the case may be. Without limitation of any other covenant herein, Debtor will not cause or permit any change in the location of (i) any Collateral, (ii) any records concerning any Collateral, or (iii) Debtor's residence or chief executive office, as the case may be, to a jurisdiction other than as represented in Subsection 3(f) unless Debtor shall have notified Secured Party in writing of such change at least thirty (30) days prior to the effective date of such change, and shall have first taken all action required by Secured Party for the purpose of further perfecting or protecting the security interest in favor of Secured Party in the Collateral. In any written notice furnished pursuant to this Subsection, Debtor will expressly state that the notice is required by this Agreement and contains facts that may require additional filings of financing statements or other notices for the purpose of continuing perfection of Secured Party's security interest in the Collateral. (g) Liquidations, Mergers. Debtor shall not merge or consolidate with or into any other entity or liquidate, dissolve or otherwise cease conducting business. 6. Rights of Secured Party. Secured Party shall have the rights contained in this Section at all times during the period of time this Agreement is effective. (a) Additional Financing Statements Filings. Debtor hereby authorizes Secured Party to file, without the signature of Debtor, one or more financing or continuation statements, and amendments thereto, relating to the Collateral. Debtor further agrees that a carbon, photographic or other reproduction of this Security Agreement or any financing statement describing any Collateral is sufficient as a financing statement and may be filed in any jurisdiction Secured Party may deem appropriate. 8 (b) Power of Attorney. Debtor hereby irrevocably appoints Secured Party as Debtor's attorney-in-fact, such power of attorney being coupled with an interest, with full authority in the place and stead of Debtor and in the name of Debtor or otherwise, from time to time in Secured Party's discretion, to take any action and to execute any instrument which Secured Party may deem necessary or appropriate to accomplish the purposes of this Agreement, including without limitation: (i) to obtain and adjust any insurance required by Secured Party hereunder; (ii) to demand, collect, sue for, recover, compound, receive and give acquittance and receipts for moneys due and to become due under or in respect of the Collateral; (iii) to receive, endorse and collect any drafts or other instruments, documents and chattel paper in connection with clause (i) or (ii) above; and (iv) to file any claims or take any action or institute any proceedings which Secured Party may deem necessary or appropriate for the collection and/or preservation of the Collateral or otherwise to enforce the rights of Secured Party with respect to the Collateral. (c) Performance by Secured Party. If Debtor fails to perform any agreement or obligation provided herein, Secured Party may itself perform, or cause performance of, such agreement or obligation, and the expenses of Secured Party incurred in connection therewith shall be a part of the Indebtedness, secured by the Collateral and payable by Debtor on demand. (d) Debtor's Receipt of Proceeds. All amounts and proceeds (including instruments and writings) received by Debtor in respect of accounts, general intangibles or chattel paper shall be received in trust for the benefit of Secured Party hereunder and, upon request of Secured Party, shall be segregated from other property of Debtor and shall be forthwith delivered to Secured Party in the same form as so received (with any necessary endorsement) and applied to the Indebtedness in such manner as Secured Party deems appropriate in its sole discretion. (e) Notification of Account Debtors. Secured Party may at its discretion from time to time notify any or all obligors under any accounts, general intangibles or chattel paper (i) of Secured Party's security interest in such accounts or general intangibles and direct such obligors to make payment of all amounts due or to become due to Debtor thereunder directly to Secured Party, and (ii) to verify the accounts, general intangibles or chattel paper with such obligors. Secured Party shall have the right, at the expense of Debtor, to enforce collection of any such accounts, general intangibles or chattel paper and to adjust, settle or compromise the amount or payment thereof, in the same manner and to the same extent as Debtor. (f) License. Secured Party is hereby granted a license or other right to use, without charge, Debtor'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 Debtor's rights under all licenses and all franchise agreements shall inure to Secured Party's benefit. 9 7. Events of Default. Each of the following constitutes an "Event of Default" under this Agreement: (a) Failure to Pay Indebtedness. Debtor shall fail to pay as and when due any Indebtedness. (b) Non-Performance of Covenants. Debtor shall breach any covenant or agreement made herein, in any of the Financing Documents or in any other agreement now or hereafter entered into between Debtor and Secured Party. (c) False Representation. Any warranty or representation made herein or in any of the Financing Documents shall be false or misleading in any material respect when made. (d) Default Under Other Financial Documents. The occurrence of an event of default under any of the Financing Documents or any other agreement now or hereafter entered into between Debtor and Secured Party. (e) Default Under KBK Loan Documents. The occurrence of an event of default under the KBK Loan Agreement or any of the other KBK Loan Documents or any other agreement now or hereafter entered into between Debtor and Secured Party. (f) Untrue Financial Report. Any report, certificate, schedule, financial statement, profit and loss statement or other statement furnished by Debtor, or by any other person on behalf of Debtor, to Secured Party is not true and correct in any material respect. (g) Default to Third Party. The occurrence of any event which permits the acceleration of the maturity of any indebtedness owing by Debtor to any third party under any agreement or undertaking, including, without limitation, KBK. (h) Bankruptcy. The filing of a voluntary or involuntary case by or against Debtor under the United States Bankruptcy Code or other present or future federal or state insolvency, bankruptcy or similar laws, or the appointment of a receiver, trustee, conservator or custodian for a substantial portion of Debtor's assets. (i) Insolvency. Debtor shall become insolvent, make a transfer in fraud of creditors or make an assignment for the benefit of creditors. (j) Involuntary Lien. The filing or commencement of any involuntary lien, garnishment, attachment or the like shall be issued against or with respect to the Collateral. (k) Material Adverse Change. A material adverse change shall have occurred in the financial condition, business prospects or operations of Debtor or any of its subsidiaries. (l) Tax Lien. Debtor shall have a federal or state tax lien filed against any of its properties. 10 (m) Execution on Collateral. The Collateral or any portion thereof is taken on execution or other process of law. (n) Guarantor's Obligations. If any of the obligations of any guarantor under the Financing Documents is limited or terminated by operation of law or by the guarantor, or any such guarantor becomes the subject of an insolvency proceeding. (o) Judgment. The entry against Debtor of a final and nonappealable judgment for the payment of money in excess of $25,000 (not covered by insurance satisfactory to Secured Party in its sole discretion). 8. Remedies and Related Rights. If an Event of Default shall have occurred, and without limiting any other rights and remedies provided herein, under any of the other Financing Documents or otherwise available to Secured Party, Secured Party may exercise one or more of the rights and remedies provided in this Section. (a) Remedies. Secured Party may from time to time at its discretion, without limitation and without notice except as expressly provided in any of the Financing Documents: (i) exercise in respect of the Collateral all the rights and remedies of a secured party under the Code (whether or not the Code applies to the affected Collateral); (ii) require Debtor to, and Debtor hereby agrees that it will at its expense and upon request of Secured Party, assemble the Collateral as directed by Secured Party and make it available to Secured Party at a place to be designated by Secured Party which is reasonably convenient to both parties; (iii)reduce its claim to judgment or foreclose or otherwise enforce, in whole or in part, the security interest granted hereunder by any available judicial procedure; (iv) sell or otherwise dispose of, at its office, on the premises of Debtor or elsewhere, the Collateral, as a unit or in parcels, by public or private proceedings, and by way of one or more contracts (it being agreed that the sale or other disposition of any part of the Collateral shall not exhaust Secured Party's power of sale, but sales or other dispositions may be made from time to time until all of the Collateral has been sold or disposed of or until the Indebtedness has been paid and performed in full), and at any such sale or other disposition it shall not be necessary to exhibit any of the Collateral; (v) buy the Collateral, or any portion thereof, at any public sale; (vi) buy the Collateral, or any portion thereof, at any private sale if the Collateral is of a type customarily sold in a recognized market or is of a type which is the subject of widely distributed standard price quotations; 11 (vii)apply for the appointment of a receiver for the Collateral, and Debtor hereby consents to any such appointment; and (viii) at its option, retain the Collateral in satisfaction of the Indebtedness whenever the circumstances are such that Secured Party is entitled to do so under the Code or otherwise. Debtor agrees that in the event Debtor is entitled to receive any notice under the Uniform Commercial Code, as it exists in the state governing any such notice, of the sale or other disposition of any Collateral, reasonable notice shall be deemed given when such notice is deposited in a depository receptacle under the care and custody of the United States Postal Service, postage prepaid, at Debtor's address set forth on the signature page hereof, five (5) days prior to the date of any public sale, or after which a private sale, of any of such Collateral is to be held. Secured Party shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. Secured Party may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. (b) Executory Process. Debtor hereby acknowledges the Indebtedness, CONFESSES JUDGMENT thereon and consents that judgment be rendered and signed, whether during the court's term or during vacation, in favor of the Secured Party, for the full amount of the Indebtedness, including without limitation the Note and the Loan Agreement, in principal, interest, and attorney's fees, together with all reasonable and necessary charges and expenses pursuant to this instrument, the Note, the Loan Agreement or other evidence of Indebtedness. Upon the occurrence of an Event of Default, and in addition to all of its rights, powers and remedies under this instrument and applicable law, Secured Party may, at its option, cause all or any part of the Collateral to be seized and sold under executory process or under writ of fieri fascias issued in execution of an ordinary judgment obtained upon the Indebtedness, without appraisement to the highest bidder, for cash or under such terms as Secured Party deems acceptable. Debtor hereby waives all and every appraisement of the Collateral and waives and renounces the benefit of appraisement and the benefit of all laws relative to the appraisement of the Collateral seized and sold under executory or other legal process. (c) Application of Proceeds. If any Event of Default shall have occurred, Secured Party may at its discretion and without notice to Debtor (any requirement of notice being expressly waived) apply or use any cash held by Secured Party as Collateral, and any cash proceeds received by Secured Party in respect of any sale or other disposition of, collection from, or other realization upon, all or any part of the Collateral as follows in such order and manner as Secured Party may elect: (i) to the repayment or reimbursement of the reasonable costs and expenses (including, without limitation, reasonable attorneys' fees and expenses) incurred by Secured Party in connection with (A) the administration of the Financing Documents, (B) the 12 custody, preservation, use or operation of, or the sale of, collection from, or other realization upon, the Collateral, and (C) the exercise or enforcement of any of the rights and remedies of Secured Party hereunder; (ii) to the payment or other satisfaction of any liens and other encumbrances upon the Collateral; (iii)to the satisfaction of the Indebtedness (without constituting a retention of collateral in satisfaction of an obligation within the meaning of Section 9.505 of the Code); (iv) by holding such cash and proceeds as Collateral; (v) to the payment of any other amounts required by applicable law; and (vi) by delivery to Debtor or any other party lawfully entitled to receive such cash or proceeds whether by direction of a court of competent jurisdiction or otherwise. (d) Deficiency. In the event that the proceeds of any sale of, collection from, or other realization upon, all or any part of the Collateral by Secured Party are insufficient to pay all amounts to which Secured Party is legally entitled, Debtor and any party who guaranteed or is otherwise obligated to pay all or any portion of the Indebtedness shall be liable for the deficiency, together with interest thereon as provided in the Financing Documents. (e) Non-Judicial Remedies. In granting to Secured Party the power to enforce its rights hereunder without prior judicial process or judicial hearing, Debtor expressly waives, renounces and knowingly relinquishes any legal right which might otherwise require Secured Party to enforce its rights by judicial process. Debtor recognizes and concedes that non-judicial remedies are consistent with the usage of trade, are responsive to commercial necessity and are the result of a bargain at arm's length. Nothing herein is intended to prevent Secured Party or Debtor from resorting to judicial process at either party's option. (f) Other Recourse. Debtor waives any right to require Secured Party to proceed against any third party, exhaust any Collateral or other security for the Indebtedness, or to have any third party joined with Debtor in any suit arising out of the Indebtedness or any of the Financing Documents, or pursue any other remedy available to Secured Party. Debtor further waives any and all notice of acceptance of this Agreement and of the creation, modification, rearrangement, renewal or extension of the Indebtedness. Debtor further waives any defense arising by reason of any disability or other defense of any third party or by reason of the cessation from any cause whatsoever of the liability of any third party. Until all of the Indebtedness shall have been paid in full, Debtor shall have no right of subrogation and Debtor waives the right to enforce any remedy which Secured Party has or may hereafter have against any third party, and waives any benefit 13 of and any right to participate in any other security whatsoever now or hereafter held by Secured Party. Debtor authorizes Secured Party, and without notice or demand and without any reservation of rights against Debtor and without affecting Debtor's liability hereunder or on the Indebtedness to (i) take or hold any other property of any type from any third party as security for the Indebtedness, and exchange, enforce, waive and release any or all of such other property, (ii) apply such other property and direct the order or manner of sale thereof as Secured Party may in its discretion determine, (iii) renew, extend, accelerate, modify, compromise, settle or release any of the Indebtedness or other security for the Indebtedness, (iv) waive, enforce or modify any of the provisions of any of the Financing Documents executed by any third party, and (v) release or substitute any third party. 9. Indemnity. Debtor hereby indemnifies and agrees to hold harmless Secured Party, and its officers, directors, shareholders, employees, attorneys, representatives, agents and affiliates (each an "Indemnified Person") from and against any and all liabilities, obligations, claims, demands, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature (collectively, the "Claims") which may be imposed on, incurred by, or asserted against, any Indemnified Person arising in connection with the Financing Documents, the Indebtedness or the Collateral (including without limitation, the enforcement of the Financing Documents and the defense of any Indemnified Person's actions and/or inactions in connection with the Financing Documents). WITHOUT LIMITATION, THE FOREGOING INDEMNITIES SHALL APPLY TO EACH INDEMNIFIED PERSON WITH RESPECT TO ANY CLAIMS WHICH IN WHOLE OR IN PART ARE CAUSED BY OR ARISE OUT OF THE NEGLIGENCE OF SUCH AND/OR ANY OTHER INDEMNIFIED PERSON, except to the limited extent the Claims against an Indemnified Person are proximately caused by such Indemnified Person's gross negligence or willful misconduct. If Debtor or any third party ever alleges such gross negligence or willful misconduct by any Indemnified Person, the indemnification provided for in this Section shall nonetheless be paid upon demand, subject to later adjustment or reimbursement, until such time as a court of competent jurisdiction enters a final judgment as to the extent and effect of the alleged gross negligence or willful misconduct. The indemnification provided for in this Section shall survive the termination of this Agreement and shall extend and continue to benefit each individual or entity who is or has at any time been an Indemnified Person hereunder. 10. Miscellaneous. (a) Entire Agreement. This Agreement contains the entire agreement of Secured Party and Debtor with respect to the Collateral. If the parties hereto are parties to any prior agreement, either written or oral, relating to the Collateral, the terms of this Agreement shall amend and supersede the terms of such prior agreements as to transactions on or after the effective date of this Agreement, but all security agreements, financing statements, guaranties, other contracts and notices for the benefit of Secured Party shall continue in full force and effect to secure the Indebtedness unless Secured Party specifically releases its rights thereunder by separate release. 14 (b) Amendment. No modification, consent or amendment of any provision of this Agreement or any of the other Financing Documents shall be valid or effective unless the same is in writing and signed by the party against whom it is sought to be enforced. (c) Actions by Secured Party. The lien, security interest and other security rights of Secured Party hereunder shall not be impaired by (i) any renewal, extension, increase or modification with respect to the Indebtedness, (ii) any surrender, compromise, release, renewal, extension, exchange or substitution which Secured Party may grant with respect to the Collateral, or (iii) any release or indulgence granted to any endorser, guarantor or surety of the Indebtedness. The taking of additional security by Secured Party shall not release or impair the lien, security interest or other security rights of Secured Party hereunder or affect the obligations of Debtor hereunder. (d) Waiver by Secured Party. Secured Party may waive any Event of Default without waiving any other prior or subsequent Event of Default. Secured Party may remedy any default without waiving the Event of Default remedied. Neither the failure by Secured Party to exercise, nor the delay by Secured Party in exercising, any right or remedy upon any Event of Default shall be construed as a waiver of such Event of Default or as a waiver of the right to exercise any such right or remedy at a later date. No single or partial exercise by Secured Party of any right or remedy hereunder shall exhaust the same or shall preclude any other or further exercise thereof, and every such right or remedy hereunder may be exercised at any time. No waiver of any provision hereof or consent to any departure by Debtor therefrom shall be effective unless the same shall be in writing and signed by Secured Party and then such waiver or consent shall be effective only in the specific instances, for the purpose for which given and to the extent therein specified. No notice to or demand on Debtor in any case shall of itself entitle Debtor to any other or further notice or demand in similar or other circumstances. (e) Costs and Expenses. Debtor will upon demand pay to Secured Party the amount of any and all costs and expenses (including without limitation, attorneys' fees and expenses), which Secured Party may incur in connection with (i) the transactions which give rise to the Financing Documents, (ii) the preparation of this Agreement and the perfection and preservation of the security interests granted under the Financing Documents, (iii) the administration of the Financing Documents, (iv) the custody, preservation, use or operation of, or the sale of, collection from, or other realization upon, the Collateral, (v) the exercise or enforcement of any of the rights of Secured Party under the Financing Documents, or (vi) the failure by Debtor to perform or observe any of the provisions hereof. (f) Governing Law; Venue; Submission to Jurisdiction. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS WITHOUT GIVING EFFECT TO THE PRINCIPLES OF CONFLICTS OF LAWS THEREOF, EXCEPT TO THE EXTENT PERFECTION AND THE EFFECT OF PERFECTION OR NONPERFECTION OF THE SECURITY INTEREST GRANTED HEREUNDER, IN RESPECT OF ANY PARTICULAR COLLATERAL, ARE GOVERNED BY THE LAWS OF A 15 JURISDICTION OTHER THAN THE STATE OF TEXAS. THIS AGREEMENT IS PERFORMABLE BY THE PARTIES IN DALLAS COUNTY, TEXAS. DEBTOR AND SECURED PARTY (BY ITS ACCEPTANCE HEREOF) EACH AGREE THAT DALLAS COUNTY, TEXAS SHALL BE THE EXCLUSIVE VENUE FOR LITIGATION OF ANY DISPUTE OR CLAIM ARISING UNDER OR RELATING TO THIS AGREEMENT, AND THAT SUCH COUNTY IS A CONVENIENT FORUM IN WHICH TO DECIDE ANY SUCH DISPUTE OR CLAIM. DEBTOR AND SECURED PARTY (BY ITS ACCEPTANCE HEREOF) EACH CONSENT TO THE PERSONAL JURISDICTION OF THE STATE AND FEDERAL COURTS LOCATED IN DALLAS COUNTY, TEXAS FOR THE LITIGATION OF ANY SUCH DISPUTE OR CLAIM. DEBTOR IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER RAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. (g) Waiver of Jury Trial. DEBTOR AND SECURED PARTY (BY ITS ACCEPTANCE HEREOF) EACH HEREBY IRREVOCABLY WAIVES, TO THE MAXIMUM EXTENT PERMITTED BY LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY AT ANY TIME ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY OR ASSOCIATED HEREWITH. (h) Severability. If any provision of this Agreement is held by a court of competent jurisdiction to be illegal, invalid or unenforceable under present or future laws, such provision shall be fully severable, shall not impair or invalidate the remainder of this Agreement and the effect thereof shall be confined to the provision held to be illegal, invalid or unenforceable. (i) No Obligation. Nothing contained herein shall be construed as an obligation on the part of Secured Party to extend or continue to extend credit to Debtor. (j) Notices. All notices, requests, demands or other communications required or permitted to be given pursuant to this Agreement shall be in writing and given by (i) personal delivery, (ii) expedited delivery service with proof of delivery, (iii) United States mail, postage prepaid, registered or certified mail, return receipt requested, or (iv) telecopy (with receipt thereof confirmed by telecopier) sent to the intended addressee at the address set forth on the signature page hereof or to such different address as the addressee shall have designated by written notice sent pursuant to the terms hereof and shall be deemed to have been received either, in the case of personal delivery, at the time of personal delivery, in the case of expedited delivery service, as of the date of first attempted delivery at the address and in the manner provided herein, in the case of mail, upon deposit in a depository receptacle under the care and custody of the United States Postal Service, or in the case of telecopy, upon receipt. Either party shall have the right to change its address for 16 notice hereunder to any other location within the continental United States by notice to the other party of such new address at least thirty (30) days prior to the effective date of such new address. (k) Binding Effect and Assignment. This Agreement (i) creates a continuing security interest in the Collateral, (ii) shall be binding on Debtor and the heirs, executors, administrators, personal representatives, successors and assigns of Debtor, and (iii) shall inure to the benefit of Secured Party and its successors and assigns. Without limiting the generality of the foregoing, Secured Party may pledge, assign or otherwise transfer the Indebtedness and its rights under this Agreement and any of the other Financing Documents to any other party. Debtor's rights and obligations hereunder may not be assigned or otherwise transferred without the prior written consent of Secured Party. (l) Termination. Upon (i) the satisfaction in full of the Indebtedness, (ii) the termination or expiration of any commitment of Secured Party to extend credit to Debtor, (iii) written request for the termination hereof delivered by Debtor to Secured Party, and (iv) written release or termination delivered by Secured Party to Debtor, this Agreement and the security interests created hereby shall terminate. Upon termination of this Agreement and Debtor's written request, Secured Party will, at Debtor's sole cost and expense, return to Debtor such of the Collateral as shall not have been sold or otherwise disposed of or applied pursuant to the terms hereof and execute and deliver to Debtor such documents as Debtor shall reasonably request to evidence such termination. (m) Cumulative Rights. All rights and remedies of Secured Party hereunder are cumulative of each other and of every other right or remedy which Secured Party may otherwise have at law or in equity or under any of the other Financing Documents, and the exercise of one or more of such rights or remedies shall not prejudice or impair the concurrent or subsequent exercise of any other rights or remedies. (n) Gender and Number. Within this Agreement, words of any gender shall be held and construed to include the other gender, and words in the singular number shall be held and construed to include the plural and words in the plural number shall be held and construed to include the singular, unless in each instance the context requires otherwise. (o) Descriptive Headings. The headings in this Agreement are for convenience only and shall in no way enlarge, limit or define the scope or meaning of the various and several provisions hereof. 11. Agreement Subject to Subordination Agreement. This Agreement and the terms and provisions hereof are subject to the terms and provisions of that certain Subordination Agreement of even date herewith between Schlinger and KBK. 17 EXECUTED as of the date first written above. DEBTOR: KARTS INTERNATIONAL INCORPORATED By: /s/ Charles Brister ------------------------ Charles Brister President & C.E.O. Debtor's Address: P.O. Box 695 62204 Commercial Street Roseland, Louisiana Telecopy No.: 504-747-2700 Debtor's Employer Identification Number: 75-2639196 Secured Party's Address: The Schlinger Foundation 1944 Edison Street Santa Ynez, California 93460 Telecopy No.: 805-686-1618 18 SCHEDULE "A" TO SECURITY AGREEMENT DATED June 3, 1999 EXECUTED BY KARTS INTERNATIONAL INCORPORATED FOR THE BENEFIT OF THE SCHLINGER FOUNDATION. The addresses of any other locations of Collateral referenced in Subsection 3(f) are as follows: None. EX-10.46 6 WAIVER AND FIRST AMENDMENT TO LOAN AGREEMENT EXHIBIT 10.46 WAIVER AND FIRST AMENDMENT TO LOAN AGREEMENT THIS WAIVER AND FIRST AMENDMENT TO LOAN AGREEMENT (the "Amendment"), dated as of July 12, 1999, is between KARTS INTERNATIONAL INCORPORATED, a Nevada corporation ("Borrower") and THE SCHLINGER FOUNDATION ("Schlinger"). RECITALS: WHEREAS, Borrower and Schlinger have entered into that certain Loan Agreement dated as of June 3, 1999 (as the same may hereafter be amended or otherwise modified, the "Agreement"); WHEREAS, Borrower has requested that Schlinger waive Borrower's non-compliance with the covenant contained in Section 8 (l) of the Agreement; and WHEREAS, Borrower and Schlinger now desire to amend the Agreement as herein set forth; NOW, THEREFORE, in consideration of the premises herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows effective as of the date hereof unless otherwise indicated: ARTICLE 1 Definitions Section 1.1 Definitions. Capitalized terms used in this Amendment, to the extent not otherwise defined herein, shall have the same meanings as in the Agreement, as amended hereby. ARTICLE 2 Amendments Section 2.1 Amendment to Section 12; Events of Default. Section 12 of the Agreement is hereby amended by adding a new Subsection 12 (q) which shall read in its entirety to read as follows: "(q) Shareholder Approval. Borrower shall fail to obtain approval from its shareholders of all terms, conditions, covenants and agreements contained in this Agreement, the Note and the other Loan Documents on or before September 30, 1999." ARTICLE 3 Waiver Section 3.1 Limited Waiver of Section 8 (l) of the Agreement. (a) Schlinger hereby waives any Event of Default resulting from the Borrower's failure to, on or before thirty (30) days from date of the Agreement, (i) enter into an employment agreement with Charles Brister that is for a term of at least three (3) years and is otherwise in form and substance satisfactory to Schlinger and (ii) in connection with such employment agreement, execute an agreement to and in favor of Schlinger whereby Borrower agrees to provide adequate anti-dilution protection that Schlinger deems necessary for the shares of Common Stock that may be issued to Schlinger pursuant to the conversion of the Note as a result of any Common Stock that may be issued to Charles Brister in connection with such employment agreement. (b) Schlinger hereby grants Borrower an additional thirty (30) days from the date hereof to comply with the covenants set forth in Section 8 (l) of the Agreement. (c) The waiver contained in this Section 3.1 shall be limited strictly as written and shall not be deemed to constitute a waiver of, or any consent to noncompliance with, any term or provision of the Agreement except as expressly set forth herein. Further, the waiver contained in this Section 3.1 shall not constitute a waiver of any future Event of Default that may occur, including, without limitation, the Borrower's failure to keep, perform or observe the covenants set forth in Section 8 (l) of the Agreement (as amended by this Amendment) after thirty (30) days from the date hereof. ARTICLE 4 Ratifications, Representations and Warranties Section 4.1 Ratifications. The terms and provisions set forth in this Amendment shall modify and supersede all inconsistent terms and provisions set forth in the Agreement and except as expressly modified and superseded by this Amendment, the terms and provisions of the Agreement and the other Loan Documents are ratified and confirmed and shall continue in full force and effect. Borrower and Schlinger agree that the Agreement as amended hereby and the other Loan Documents shall continue to be legal, valid, binding and enforceable in accordance with their respective terms. Section 4.2 Representations and Warranties. Borrower hereby represents and warrants to Schlinger as follows: (a) after giving effect to this Amendment, no Event of Default has occurred and is continuing; (b) after giving effect to this Amendment, the representations and warranties set forth in the Loan Documents are true and correct in all material respects on and as of the date hereof with the same effect as though made on and as of such date except with respect to any representations and warranties limited by their terms to a specific date; (c) the execution, delivery and performance of this Amendment has been duly authorized by all necessary action on the part of Borrower and each Obligor and does not and will not: (1) violate any provision of law applicable to Borrower or any Obligor, the articles of incorporation, bylaws, partnership agreement, membership agreement, or other applicable governing document of Borrower or any Obligor or any order, judgment, or decree of any court or agency of government binding upon Borrower or any Obligor; (2) conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default under any material contractual obligation of Borrower or any Obligor; (3) result in or require the creation or imposition of any material lien upon any of the assets of Borrower or any Obligor; or (4) require any approval or consent of any Person under any material contractual obligation of Borrower or any Obligor; and (d) the articles of incorporation, bylaws, partnership agreement, certificate of limited partnership, membership agreement, articles of organization or other applicable governing document of the Borrower and each Obligor have not been modified or rescinded and remain in full force and effect. IN ADDITION, TO INDUCE SCHLINGER TO AGREE TO THE TERMS OF THIS AMENDMENT, BORROWER AND EACH OBLIGOR (BY IT EXECUTION BELOW) REPRESENTS AND WARRANTS THAT AS OF THE DATE OF ITS EXECUTION OF THIS AMENDMENT THERE ARE NO CLAIMS OR OFFSETS AGAINST OR DEFENSES OR COUNTERCLAIMS TO ITS OBLIGATIONS UNDER THE LOAN DOCUMENTS AND IN ACCORDANCE THEREWITH IT: (a) WAIVER. WAIVES ANY AND ALL SUCH CLAIMS, OFFSETS, DEFENSES OR COUNTERCLAIMS, WHETHER KNOWN OR UNKNOWN, ARISING PRIOR TO THE DATE OF ITS EXECUTION OF THIS AMENDMENT AND (b) RELEASE. RELEASES AND DISCHARGES SCHLINGER, AND ITS OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, SHAREHOLDERS, AFFILIATES AND ATTORNEYS (COLLECTIVELY THE "RELEASED PARTIES") FROM ANY AND ALL OBLIGATIONS, INDEBTEDNESS, LIABILITIES, CLAIMS, RIGHTS, CAUSES OF ACTION OR DEMANDS WHATSOEVER, WHETHER KNOWN OR UNKNOWN, SUSPECTED OR UNSUSPECTED, IN LAW OR EQUITY, WHICH THE BORROWER OR ANY OBLIGOR EVER HAD, NOW HAS, CLAIMS TO HAVE OR MAY HAVE AGAINST ANY RELEASED PARTY ARISING PRIOR TO THE DATE HEREOF AND FROM OR IN CONNECTION WITH THE LOAN DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED THEREBY. ARTICLE 5 Miscellaneous Section 5.1 Survival of Representations and Warranties. All representations and warranties made in this Amendment or any other Loan Document including any Loan Document furnished in connection with this Amendment shall survive the execution and delivery of this Amendment and the other Loan Documents, and no investigation by Schlinger or any closing shall affect the representations and warranties or the right of Schlinger to rely upon them. Section 5.2 Reference to Agreement. Each of the Loan Documents, including the Agreement and any and all other agreements, documents, or instruments now or hereafter executed and delivered pursuant to the terms hereof or pursuant to the terms of the Agreement as amended hereby, are hereby amended so that any reference in such Loan Documents to the Agreement shall mean a reference to the Agreement as amended hereby. Section 5.3 Expenses of Schlinger. As provided in the Agreement, Borrower agrees to pay on demand all costs and expenses incurred by Schlinger in connection with the preparation, negotiation, and execution of this Amendment and the other Loan Documents executed pursuant hereto, including without limitation, the costs and fees of Schlinger's legal counsel. Section 5.4 Severability. Any provision of this Amendment held by a court of competent jurisdiction to be invalid or unenforceable shall not impair or invalidate the remainder of this Amendment and the effect thereof shall be confined to the provision so held to be invalid or unenforceable. Section 5.5 Applicable Law. This Amendment and all other Loan Documents executed pursuant hereto shall be governed by and construed in accordance with the laws of the State of Texas and the applicable laws of the United States of America. Section 5.6 Successors and Assigns. This Amendment is binding upon and shall inure to the benefit of Schlinger and Borrower and their respective successors and assigns, except Borrower may not assign or transfer any of its rights or obligations hereunder without the prior written consent of Schlinger. Section 5.7 Counterparts. This Amendment may be executed in one or more counterparts and on telecopy counterparts, each of which when so executed shall be deemed to be an original, but all of which when taken together shall constitute one and the same agreement. Section 5.8 Effect of Waiver. No consent or waiver, express or implied, by Schlinger to or for any breach of or deviation from any covenant, condition or duty by Borrower or any Obligor shall be deemed a consent or waiver to or of any other breach of the same or any other covenant, condition or duty. Section 5.9 Headings. The headings, captions, and arrangements used in this Amendment are for convenience only and shall not affect the interpretation of this Amendment. Section 5.10 ENTIRE AGREEMENT. THIS AMENDMENT AND ALL OTHER INSTRUMENTS, DOCUMENTS AND AGREEMENTS EXECUTED AND DELIVERED IN CONNECTION WITH THIS AMENDMENT EMBODY THE FINAL, ENTIRE AGREEMENT AMONG THE PARTIES HERETO AND SUPERSEDE ANY AND ALL PRIOR COMMITMENTS, AGREEMENTS, REPRESENTATIONS AND UNDERSTANDINGS, WHETHER WRITTEN OR ORAL, RELATING TO THIS AMENDMENT, AND MAY NOT BE CONTRADICTED OR VARIED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OR DISCUSSIONS OF THE PARTIES HERETO. THERE ARE NO ORAL AGREEMENTS AMONG THE PARTIES HERETO. Executed as of the date first written above. BORROWER: KARTS INTERNATIONAL INCORPORATED By: /s/ Charles Brister ----------------------- Name: Title: SCHLINGER: THE SCHLINGER FOUNDATION By: Name: Title: Obligor Consent Each of the undersigned Obligors: (i) consents and agrees to this Amendment; (ii) agrees that the Loan Documents to which it is a party shall remain in full force and effect and shall continue to be the legal, valid and binding obligation of such Obligor enforceable against it in accordance with their respective terms; and (iii) agree that the obligations, indebtedness and liabilities of the Borrower arising under this Amendment are "Guaranteed Indebtedness" as defined in the guaranty agreement to which it is a party in connection with the Agreement. OBLIGORS: BRISTER'S THUNDER KARTS, INC. By: Name: Title: KINT, L.L.C. By: Name: Title: STRAIGHT LINE MANUFACTURING, INC. By: Name: Title: USA INDUSTRIES INCORPORATED By: Name: Title: -----END PRIVACY-ENHANCED MESSAGE-----