-----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, WV43ZnBaflTKzebmbnRnXh/AzeG5+961v9eu9lxWdD3CU+FYM7pCyV/CTJn7CH8B A9SByfmzUK2Ga2B0Z5Drrg== 0000096294-99-000020.txt : 19990517 0000096294-99-000020.hdr.sgml : 19990517 ACCESSION NUMBER: 0000096294-99-000020 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TANDYCRAFTS INC CENTRAL INDEX KEY: 0000096294 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-MISCELLANEOUS SHOPPING GOODS STORES [5940] IRS NUMBER: 751475224 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-07258 FILM NUMBER: 99621673 BUSINESS ADDRESS: STREET 1: 1400 EVERMAN PKWY CITY: FORT WORTH STATE: TX ZIP: 76140 BUSINESS PHONE: 8175519600 MAIL ADDRESS: STREET 1: 1400 EVERMAN PKWY CITY: FORT WORTH STATE: TX ZIP: 76140 10-Q 1 THIRD QUARTER 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended March 31, 1999 OR [ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from ______________ to ________________ Commission File Number 1-7258 TANDYCRAFTS, INC. (Exact name of registrant as specified in its charter) Delaware 75-1475224 (State of incorporation) (I.R.S. Employer Identification Number) 1400 Everman Parkway, Fort Worth, Texas 76140 (Address of principal executive offices) (Zip Code) (817) 551-9600 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No___. ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Shares outstanding as of April 30, 1999 - ----------------------------- --------------------------------------- Common Stock, $1.00 par value 12,012,112 TANDYCRAFTS, INC. Form 10-Q Quarter Ended March 31, 1999 TABLE OF CONTENTS PART 1 - FINANCIAL INFORMATION Item Page No. - ---- -------- 1. Condensed Consolidated Financial Statements 3-9 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10-17 PART II - OTHER INFORMATION 6. Exhibits and Reports on Form 8-K 18 Signatures 19 PART I ------ Item 1. Financial Statements -------------------- TANDYCRAFTS, INC. Condensed Consolidated Statements of Income (In thousands, except per share amounts) (Unaudited) Three Months Ended Nine Months Ended March 31, March 31, --------------------------- --------------------------- 1999 1998 1999 1998 ---------- ----------- ----------- ----------- Net sales $ 50,253 $ 53,100 $ 154,171 $ 181,696 ---------- ----------- ----------- ----------- Operating costs and expenses: Cost of products sold 36,061 35,766 110,328 120,302 Selling, general and administrative 15,094 14,935 48,525 48,532 Restructuring charges - - 8,145 - Depreciation and amortization 1,117 1,254 3,284 3,783 ---------- ----------- ----------- ---------- Total operating costs and expenses 52,272 51,955 170,282 172,617 ---------- ----------- ----------- ---------- Operating income (loss) (2,019) 1,145 (16,111) 9,079 Interest expense, net 517 841 1,600 2,614 ---------- ----------- ----------- ----------- Income (loss) before provision for income taxes (2,536) 304 (17,711) 6,465 Provision (benefit) for income taxes (663) 106 (4,623) 2,262 ---------- ----------- ----------- ----------- Net income (loss) $ (1,873) $ 198 $ (13,088) $ 4,203 ========== =========== =========== =========== Net income (loss) per share - basic and diluted $ (0.16) $ 0.02 $ (1.07) $ 0.33 ========== =========== ========== =========== Weighted average common shares: Basic 12,052 12,649 12,236 12,657 Diluted 12,052 12,649 12,239 12,657
TANDYCRAFTS, INC. Condensed Consolidated Balance Sheets (Dollars in thousands) (Unaudited) March 31, June 30, 1999 1998 -------------- ------------- ASSETS - ------ Current assets: Cash, including short-term investments $ 1,365 $ 1,216 Trade accounts receivable, net of allowance for doubtful accounts of $2,947 and $2,755, respectively 22,861 28,086 Inventories 37,144 45,990 Other current assets 6,396 7,785 -------------- ------------- Total current assets 67,766 83,077 -------------- ------------- Property and equipment, at cost 55,056 46,327 Less-accumulated depreciation (29,086) (23,441) -------------- ------------- Property and equipment, net 25,970 22,886 -------------- ------------- Other assets 3,466 6,929 Goodwill 33,926 37,799 -------------- ------------- $ 131,128 $ 150,691 ============== ============= LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Current liabilities: Notes payable and current portion of long-term debt $ 600 $ 0 Accounts payable 9,001 12,155 Accrued liabilities and other 17,446 12,520 -------------- ------------- Total current liabilities 27,047 24,675 -------------- ------------- Long-term debt 27,500 34,230 Deferred income taxes 2,822 2,822 Stockholders' equity: Common stock, $1 par value, 50,000,000 shares authorized, 18,527,988 shares issued 18,528 18,528 Additional paid-in capital 20,555 20,545 Retained earnings 58,986 72,074 Cost of stock in treasury, 6,487,413 shares and 5,917,419 shares, respectively (24,310) (22,183) -------------- ------------- Total stockholders' equity 73,759 88,964 -------------- ------------- $ 131,128 $ 150,691 ============== =============
TANDYCRAFTS, INC. Condensed Consolidated Statements of Cash Flows (In thousands) (Unaudited) Nine Months Ended -------------------------------- March 31, March 31, 1999 1998 ------------ ------------- Net cash flows from operating activities $ 7,162 $ 3,031 ------------ ------------- Cash flows from investing activities: Additions to property and equipment, net (6,478) (2,720) Collection of note receivable 8,312 - ------------ ------------- Net cash used for investing activities 1,834 (2,720) ------------ ------------- Cash flows from financing activities: Sales of treasury stock to employee benefit programs, net 36 13 Purchases of treasury stock (2,153) - Repayments of credit facility, net (6,730) (470) ------------ ------------- Net cash used for financing activities (8,847) (457) ------------ ------------- Increase (decrease) in cash, including short-term investments 149 (146) Balance, beginning of period 1,216 1,005 ------------ ------------- Balance, end of period $ 1,365 $ 859 ============ ============= Supplemental data: Acquisition of business Fair value of assets acquired $ 3,856 $ - Liabilities assumed $ 3,856 $ -
TANDYCRAFTS, INC. Condensed Consolidated Statement of Stockholders' Equity (Dollars in thousands) (Unaudited) Additional Common paid-in Retained Treasury stock capital earnings stock Total -------- -------- -------- -------- ------- Balance, June 30, 1998 $ 18,528 $ 20,545 $ 72,074 $(22,183) $ 88,964 Sale of 9,686 shares of treasury stock to employee benefit programs - - - 36 36 Purchase of 579,680 shares of treasury stock - 10 - (2,163) (2,153) Net loss for nine months ended March 31, 1999 - - (13,088) - (13,088) -------- -------- -------- -------- -------- Balance, March 31, 1999 $ 18,528 $ 20,555 $ 58,986 $(24,310) $ 73,759 ======== ======== ======== ======== ========
TANDYCRAFTS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - BASIS OF FINANCIAL STATEMENTS The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary for a fair statement of the Company's financial position as of March 31, 1999 and June 30, 1998, and the results of operations and cash flows for the nine-month periods ended March 31, 1999 and March 31, 1998. The results of operations for the three and nine-month periods ended March 31, 1999 and 1998 are not necessarily indicative of the results to be expected for the full fiscal year. The consolidated financial statements should be read in conjunction with the financial statement disclosures contained in the Company's 1998 Form 10-K and Annual Report to Stockholders. NOTE 2 - INVENTORIES The components of inventories at March 31, 1999 consisted of the following (in thousands): Merchandise held for sale $ 26,739 Raw materials and work-in-process 10,405 ----------- $ 37,144 =========== NOTE 3 - EARNINGS PER SHARE Basic earnings per share is computed by dividing income available to common shareholders by the weighted-average common shares outstanding.' Diluted earnings per share is computed by dividing the income available to shareholders by the weighted-average common shares and potentially dilutive common shares outstanding during the period. For the three and nine-month periods ending March 31, 1999 and 1998, the number of weighted average shares and potentially dilutive common shares is as follows (in thousands): Three Months Ended Nine Months Ended March 31, March 31, -------------------- -------------------- 1999 1998 1999 1998 --------- --------- --------- --------- Weighted average shares - basic 12,052 12,649 12,236 12,657 Potentially dilutive shares - - 3 - --------- --------- --------- --------- Total weighted average common and potentially dilutive shares - diluted 12,052 12,649 12,239 12,657 ========= ========= ========= =========
NOTE 4 - SHARE REPURCHASE PROGRAM In September 1998, the Company's Board of Directors authorized a common share repurchase program that provides for the Company to purchase, in the open market and through negotiated transactions, up to $2 million of the Company's outstanding common stock. As of March 31, 1999, the Company had repurchased approximately 519,000 shares for an aggregate purchase price of $1,937,000. NOTE 5 - ACCOUNTS RECEIVABLE SECURITIZATION The Company utilizes a revolving trade accounts receivable securitization program to sell without recourse, through a wholly-owned subsidiary, certain trade accounts receivable. Under the program, the maximum amount allowed to be sold at any given time through March 31, 1999, was $12,000,000. The maximum amount of receivables that can be sold is seasonally adjusted. At March 31, 1999, the amount of trade accounts receivable outstanding which had been sold approximated $5,772,000. The proceeds from the sales were used to reduce borrowings under the Company's revolving credit facility. Costs of the program, which primarily consist of the purchaser's financing cost of issuing commercial paper backed by the receivables, totaled $86,000 and $270,000 for the three and nine-month periods ended March 31, 1999, respectively. The Company, as agent for the purchaser of the receivables, retains collection and administrative responsibilities for the purchased receivables. NOTE 6 - DIVESTITURE In the quarter ended December 31, 1998, the Board of Directors of the Company approved a plan to close the Company's 121 leather and crafts retail stores and related manufacturing operations to allow the Company to continue to narrow its focus to its more profitable business segments. The divestiture plan calls for all retail stores and related manufacturing operations to be closed by June 30, 1999. As a result of this plan, the Company recorded charges totaling $11,106,000 during the quarter ended December 31, 1998. Approximately $2,961,000 of these charges related to the write-down of inventory to its liquidation value and is included in cost of sales on the Condensed Consolidated Statements of Operations. Approximately $8,145,000 of the charges related to the write-down of assets and anticipated future cash outlays and is classified as restructuring charge on the Condensed Consolidated Statements of Operations. Approximately $5,441,000 of the restructuring charge related to non-cash write- downs of assets to their estimated net realizable value, including $3,923,000 related to the write-down of goodwill, $1,313,000 related to the write-down of fixed assets (primarily comprised of store fixtures and leasehold improvements and manufacturing equipment all of which will be abandoned or sold), and $205,000 related to the write-down of various other assets. The remaining restructuring charge of $2,704,000 represents an accrual for anticipated future cash outlays for lease obligations and other exit costs As of March 31, 1999, sixty-one retail stores were closed and the lease agreements for forty-seven of these stores had been terminated through settlement, sub-let or assignment. Subsequent to March 31, 1999, thirty-six more stores and substantially all of the manufacturing operations have been closed, leaving only twenty-four stores remaining open as of the date of this filing. The following table sets forth the activity in the restructuring reserve, which is included in current accrued liabilities in the March 31, 1999 balance sheet (in thousands): December 31, Cash March 31, 1998 Payments 1999 ------------ ---------- ------------ Lease obligations $ 2,346 $ 186 $ 2,160 Other 358 82 276 ------------ ---------- ----------- $ 2,704 $ 268 $ 2,436 ============ ========== =========== The above provisions are estimates based on the Company's judgment at this time. Adjustments to the restructuring provisions may be necessary in the future based on further development of restructuring related costs. Revenues and operating losses (before restructuring charges, but including the inventory write-down charge of $2,961,000) for the operations to be divested are set forth below (in thousands): Three months ended Nine months ended March 31, March 31, ----------------------- ----------------------- 1999 1998 1999 1998 ---------- ---------- ---------- ---------- Sales $ 10,788 $ 11,508 $ 30,971 $ 36,484 Operating income (loss) (3,095) 63 (8,570) 569 NOTE 7 - CARGO FURNITURE AND ACCENTS In October 1998, the Company was informed that Cargo Furniture and Accents ("Cargo"), a former subsidiary of the Company, had obtained a financial advisor for the purpose of actively pursuing additional capital to expedite the chain's conversion of their mall-based furniture stores to their new, higher performing Cargo Collection Store concept. To date, Cargo has opened eight of the Cargo Collection Stores and seen promising results. However, due to Cargo's limited capital resources and the poor performance of their mall-based stores, Cargo determined that it required additional capital to complete the conversion process. In December, 1998, Cargo informed the Company that it was unable to obtain additional investment capital. In addition, it was probable that Cargo would be in default of certain covenants contained in their term note agreement, and Cargo would not be able to cure the events of default. The Company had guaranteed Cargo's term note, and had additional amounts receivable from Cargo. On January 11, 1999, the Company was informed by Cargo's lender that Cargo had defaulted on its term note and that Cargo's lender required the Company to perform pursuant to its guaranty of the note. On February 1, 1999, the Company complied with the lender's request. As a result of this payment, the Company has the option to obtain a majority of Cargo's common stock, thereby obtaining voting control of Cargo. Accordingly, the Company began to consolidate the results of operations of Cargo effective February 1, 1999. Due to Cargo's poor financial condition, the Company determined that recovery of the $2,481,000 note balance and the receivables from Cargo was unlikely. Loss provisions of $3,465,000 were included in selling, general and administrative expenses in the December 31, 1998 financial statements. The Company is currently in negotiations with Cargo to effect a foreclosure of its assets. Item 2. Management's Discussion and Analysis of Financial Condition and --------------------------------------------------------------- Results of Operations --------------------- GENERAL Tandycrafts, Inc. ("Tandycrafts" or the "Company") is a ''leading maker and marketer of consumer products for the home and office, including frames and wall decor, office supplies, leather and crafts, and novelties and gift products. The Company's products are sold nationwide through wholesale distribution channels, including mass merchandisers and specialty retailers, and direct-to- consumer channels through the Company's retail stores, mail order and the Internet. During the quarter ended December 31, 1998, the Company adopted a plan of closing its leather and crafts retail stores and related manufacturing operations. These divested operations comprise substantially all of the operations within the Company's Leather and Crafts operating division. Certain statements in this discussion, other filings with the Securities and Exchange Commission and other Company statements are not historical facts but are forward-looking statements. The words "believes," "expects," "estimates," "projects," "plans," "could," "may," "anticipates," or the negative thereof or other variations or similar terminology, or discussions of strategies or plans identify forward-looking statements. These forward-looking statements reflect the Company's reasonable judgments with respect to future events and are subject to risks and uncertainties that could cause actual results to differ materially from such forward-looking statements. These risks and uncertainties include, but are not limited to, the Company's ability to reduce costs through the consolidation of certain operations, customers' willingness, need, demand and financial ability to purchase the Company's products, new business opportunities, the successful development and introduction of new products and the successful development of new retail stores, the successful implementation of new information systems, the development of direct import programs and foreign manufacturing facilities, relationships with key customers, relationships with professional sports leagues and other licensors, the possibility of players' strikes in professional sports leagues, price fluctuations for commodities such as lumber, paper, leather and other raw materials, seasonality of the Company's operations, effectiveness of promotional activities, changing business strategies and intense competition in retail operations. Additional factors include economic conditions such as interest rate fluctuations, consumer debt levels, changing consumer demand and tastes, competitive products and pricing, availability of products, inventory risks due to shifts in market demand, regulatory and trade environment, effects of Year 2000 issues and other factors or risks. The following table presents selected financial data for each of the Company's three continuing product divisions and divested operations for the three and nine-month periods ended March 31, 1999 and 1998 (in thousands): Three Months Ended March 31, ----------------------------------------- 1999 1998 % Increase (Decrease) ------------------- -------------------- --------------------- Operating Operating Operating Income Income Income Sales (loss) Sales (loss) Sales (loss) -------- ------- --------- --------- -------- --------- Frames and Wall Decor $ 22,772 $ 2,634 $ 21,318 $ 2,612 6.8% 0.8% Office Supplies 10,388 618 9,971 645 4.2 (4.2) Novelties and Promotional 3,785 (305) 3,915 (1,018) (3.3) 70.0 Cargo 2,520 (101) - - 100.0 (100.0) -------- ------- --------- --------- ------- -------- 39,465 2,846 35,204 2,239 12.1 27.1 Divested operations 10,788 (3,173) 17,896 (480) (39.7) (561.0) -------- ------- --------- --------- ------- -------- Total operations, excluding corporate $ 50,253 $ (327) $ 53,100 $ 1,759 (5.4)% (118.6)% ======== ======= ========= ========= ======= ======== Nine Months Ended March 31, ------------------------------------------ 1999 1998 % Increase (Decrease) ------------------- -------------------- --------------------- Operating Operating Operating Income Income Income Sales (loss) Sales (loss) Sales (loss) -------- ------- --------- --------- -------- ---------- Frames and Wall Decor $ 77,306 $ 9,979 $ 74,484 $ 9,495 3.8% 5.1% Office Supplies 31,232 1,548 30,238 1,557 3.3 (0.6) Novelties and Promotional 12,142 (525) 16,016 (294) (24.2) (78.6) Cargo 2,520 (101) - - 100.0 (100.0) -------- ------- --------- --------- ------- -------- 123,200 10,901 120,738 10,758 2.0 1.3 Divested operations 30,971 (8,777) 60,958 871 (49.2) (1107.7) Restructuring charge - (8,145) - - - (100.0) -------- ------- --------- --------- ------- -------- Total operations, excluding corporate $154,171 $(6,021) $ 181,696 $ 11,629 (15.1)% (151.8)% ======== ======= ========= ========= ======== ========
RESULTS OF OPERATIONS Consolidated net sales decreased $2,847,000, or 5.4%, and $27,525,000, or 15.1%, respectively, for the three and nine-month periods ended March 31, 1999, as compared to the same periods of the prior year. Excluding divested operations, consolidated net sales increased $4,261,000, or 12.1%, and $2,462,000, or 2.0%, respectively, for the three and nine-month periods ended March 31, 1999 compared to last year. The Company experienced operating losses before corporate expenses of $327,000 and $6,021,000, respectively, for the three and nine-month periods ended March 31, 1999, compared to operating income of $1,759,000 and $11,629,000, respectively, for the same periods last year. Excluding divested operations and restructuring charges, operating income before corporate expenses increased $607,000, or 27.1%, and $143,000, or 1.3%, respectively, for the three and nine- month periods ended March 31, 1999, compared to the same periods of the previous year. Discussions relative to each of the Company's product divisions are set forth below. Frames and Wall Decor Net sales at the Frames and Wall Decor division increased $1,454,000, or 6.8%, and $2,822,000, or 3.8%, for the three and nine months ended March 31, 1999 compared to the same periods last year. The increase in sales during the current quarter compared to the prior year quarter is largely due to an increase in sales of plastic picture frames to existing customers, primarily in the mass merchandise channel. The sales increase for the nine-month period reflects an increase in the sales of the plastic picture frames combined with a year-to-date increase in sales of framed art to existing customers. Operating income for the Frames and Wall Decor division was flat for the quarter ended March 31, 1999, but increased $484,000, or 5.1%, for the nine-month period, compared to same periods last year. For the nine-month period, gross margin as a percent of sales increased two percentage points due to improved operating efficiencies and decreases in raw materials prices from the prior year. Selling, General and Administrative ("SG&A") expenses increased $1,796,000, or 21.6%, over the nine months primarily due to increased marketing and product development costs related to the framed art program, as well as the increased costs associated with the Company's investment in a new frame manufacturing facility in Mexico. SG&A expenses as a percent of sales increased to 13.1% for the nine month period ended March 31, 1999 compared to 11.7% for the same period last year. Several significant events occurred during the current quarter that have not yet impacted sales but should positively effect future sales growth and profitability of this division. During the quarter, the division became the exclusive supplier of framed art to a national retailer and secured the majority of all the framed art business at another large retailer. The Company continues to be committed to making strategic investments in the Frames & Wall Decor division, including increased sales and marketing efforts and increased production capacity. During the fourth quarter of fiscal 1999, further manufacturing capacity will be added for plastic frame manufacturing and the new manufacturing facility in Mexico will begin production of frames and framed art. Office Supplies Sav-On Office Supplies' net sales increased $417,000, or 4.2%, and $994,000, or 3.3%, respectively, for the three and nine-month periods ended March 31, 1999, compared to the same periods last year. Same store sales for the two periods of fiscal 1999 increased 4.1% and 1.2%, respectively. The same-store sales increase of the quarter was achieved despite larger competitors entering eleven Sav-On markets during the past twelve months, including four markets during the current quarter. Sales comparisons were positively impacted by four new stores that were opened during the first six months of fiscal 1998. Sav-On's operating income decreased $27,000, or 4.2%, and $9,000, or 0.6%, for the three and nine-month periods ended March 31, 1999, compared to the same periods last year. Gross margin as a percent of sales decreased 0.5 points and 1.2 points, respectively, for the three and nine-month periods primarily due to increased competition and a change in sales mix, with lower-margin office equipment and promotional merchandise comprising a larger percentage of total sales. SG&A expenses increased $140,000, or 5.0%, and $70,000, or 1.1%, for the three and nine-month periods compared to the same periods of the prior year. SG&A expenses as a percent of sales decreased to 29.3% from 30.0% in the prior year nine month period. Novelties and Promotional Net sales for the Novelties and Promotional division decreased $130,000, or 3.3%, and $3,874,000, or 24.2%, respectively for the three and nine-month periods ended March 31, 1999, compared to the same periods last year. The year- to-date decrease in net sales primarily reflects a weaker market for sports- licensed novelty products, ""as well as a conscious effort to reposition this division's business to focus on larger customers. The Novelties and Promotional division had operating losses of $305,000 and $525,000, respectively, for the three and nine month periods ended March 31, 1999 compared to losses of $1,018,000 and $294,000, respectively, for the same periods last year. Gross margin as a percent of sales for this division increased 9.7 percentage points for the three month period ended March 31, 1999, but this percentage was relatively flat for the year-to-date period then ended. SG&A expenses decreased $386,000 and $906,000, respectively, for the three and nine-month periods primarily due to a reduction in labor and administrative costs. Steps are being taken in the fourth quarter of fiscal 1999 to consolidate certain functions within this division to further reduce fixed costs. Divested Operations Divested operations at March 31, 1999 consist primarily of the leather and crafts retail stores and related manufacturing operations for which a plan of closure was approved in the second quarter of fiscal 1999. The sales and operating income for divested operations for the two periods ending March 31, 1998 also includes Joshua's Christian Stores which the Company sold effective May 31, 1998. For the three and nine month periods ended March 31, 1999, net sales of the leather and crafts operations decreased $721,000, or 6.3%, and $5,513,000, or 15.1%, respectively. The leather and crafts operations had operating losses of $3,095,000 and $8,570,000, respectively, for the three and nine-month periods ended March 31, 1999 compared to operating income of $63,000 and $569,000, respectively, for the same periods of the prior year. Both periods of fiscal 1999 include a charge of $2,961,000 to write-down inventory of the leather operations to its estimated liquidation value. Restructuring Charges In the quarter ended December 31, 1998, the Board of Directors of the Company approved a plan to close the Company's 121 leather and crafts retail stores and related manufacturing operations to allow the Company to continue to narrow its focus to its more profitable operating business segments. The divestiture plan calls for all retail stores and related manufacturing operations to be closed by June 30, 1999. As a result of this plan, the Company recorded charges totaling $11,106,000 during the quarter ended December 31, 1998. Approximately $2,961,000 of these charges related to the write-down of inventory to its liquidation value and is included in cost of sales on the Condensed Consolidated Statements of Operations. Approximately $8,145,000 of the charges related to the write-down of assets and anticipated future cash outlays and is classified as restructuring charge on the Condensed Consolidated Statements of Operations. Approximately $5,441,000 of the restructuring charge related to non-cash write- downs of assets to their estimated net realizable value, including $3,923,000 related to the write-down of goodwill, $1,313,000 related to the write-down of fixed assets (primarily comprised of store fixtures and leasehold improvements and manufacturing equipment all of which will be abandoned or sold), and $205,000 related to the write-down of various other assets. The remaining restructuring charge of $2,704,000 represents an accrual for anticipated future cash outlays for lease obligations and other exit costs. As of March 31, 1999, sixty-one retail stores were closed and the lease agreements for forty-seven of these stores had been terminated through settlement, sub-let or assignment. Subsequent to March 31, 1999, thirty-six more stores and substantially all of the manufacturing operations have been closed, leaving only twenty-four stores remaining open as of the date of this filing. The following table sets forth the activity in the restructuring reserve, which is included in current accrued liabilities in the March 31, 1999 balance sheet (in thousands): December 31, Cash March 31, 1998 Payments 1999 ------------- ---------- ------------ Lease obligations $ 2,346 $ 186 $ 2,160 Other 358 82 276 ------------- ---------- ------------ $ 2,704 $ 268 $ 2,436 ============= ========== ============ The above provisions are estimates based on the Company's judgment at this time. Adjustments to the restructuring provisions may be necessary in the future based on further development of restructuring related costs. Although no additional restructuring plans are currently under consideration, the Company continues to evaluate possible actions which will improve the profitability and competitive position of the Company. Revenues and operating losses (before restructuring charges, but including the inventory write-down charge of $2,961,000) for the operations to be divested are set forth below (in thousands): Three months ended Nine months ended March 31, March 31, ---------------------- ---------------------- 1999 1998 1999 1998 ---------- ---------- ---------- ---------- Sales $ 10,788 $ 11,508 $ 30,971 $ 36,484 Operating income (loss) (3,095) 63 (8,570) 569 Cargo Furniture and Accents In October 1998, the Company was informed that Cargo Furniture and Accents ("Cargo"), a former subsidiary of the Company, had obtained a financial advisor for the purpose of actively pursuing additional capital to expedite the chain's conversion of their mall-based furniture stores to their new, higher performing Cargo Collection Store concept. To date, Cargo has opened eight of the Cargo Collection Stores and seen promising results. However, due to Cargo's limited capital resources and the poor performance of their mall-based stores, Cargo determined that it required additional capital to complete the conversion process. In December, 1998, Cargo informed the Company that it was unable to obtain additional investment capital. In addition, it was probable that Cargo would be in default of certain covenants contained in their term note agreement, and Cargo would not be able to cure the events of default. The Company had guaranteed Cargo's term note, and had additional amounts receivable from Cargo. On January 11, 1999, the Company was informed by Cargo's lender that had Cargo defaulted on its term note and that Cargo's lender required the Company to perform pursuant to its guaranty of the note. On February 1, 1999, the Company complied with the lender's request. As a result of this payment, the Company has the option to obtain a majority of Cargo's common stock, thereby obtaining voting control of Cargo. Accordingly, the Company began to consolidate the results of operations of Cargo effective February 1, 1999. Due to Cargo's poor financial condition, the Company determined that recovery of the $2,481,000 note balance and the receivables from Cargo was unlikely. Loss provisions of $3,465,000 were included in selling, general and administrative expenses during the quarter ended December 31, 1998. The Company is currently in negotiations with Cargo to effect a foreclosure of its assets. Once completed, the Company plans to execute Cargo's conversion plan for select stores to the Cargo Collection Store concept. Selling, general and administrative expenses Consolidated selling, general and administrative (SG&A) expenses were 30.0% and 31.5%, as a percent of sales, for the three and nine-month periods ended March 31, 1999, respectively, compared to 28.1% and 26.7% for the corresponding periods last year as a result of the decrease in consolidated sales. In total dollars, SG&A expenses increased $159,000, or 1.1%, for the three months ended March 31, 1999, but was essentially flat for the nine-month period ended March 31, 1999 compared to the corresponding periods last year. Interest expense, net Net interest expense decreased $324,000, or 38.5%, for the three-month period ended March 31, 1999, and $1,014,000, or 38.8%, for the nine-month period ended March 31, 1999 compared to the corresponding periods of the prior year. The decreases in interest expense are due primarily to lower average borrowings, as a result of the Company's efforts to reduce long-term debt, as well as $70,000 and $410,000 of interest income recognized during the three and nine-month periods ended March 31, 1999, respectively. Depreciation and amortization Consolidated depreciation and amortization decreased $137,000, or 10.9%, and $499,000, or 13.2%, for the three and nine-month periods ended March 31, 1999, respectively, compared to the corresponding periods last year. The decrease is primarily due to the divestiture of Joshua's during fiscal 1998. LIQUIDITY AND CAPITAL RESOURCES The Company's primary source of liquidity has been cash flows from operations and collection of a note receivable related to the sale of Joshua's Christian Stores. These funds have been used primarily for capital expenditures, to repurchase the Company's common stock and to reduce borrowings under the Company's revolving credit facility. During the nine-months ended March 31, 1999, cash increased $149,000. Cash provided by operating activities of $7,162,000 primarily resulted from improved working capital management and profitability (net of non-cash write-downs). 'Cash provided by investing activities of $1,834,000 resulted primarily from the collection of a note receivable from the sale of Joshua's Christian Stores, partially offset by capital expenditures for property and equipment of $6,478,000 related primarily to additional capacity at Pinnacle Art & Frame and investments in information systems. Cash of approximately $8,847,000 was used by financing activities for repayments of borrowings under the Company's revolving credit facility and for repurchases of the Company's common stock. Effective March 31, 1999, the Company entered into a new revolving credit facility with a group of banks. The new facility is a $45 million two-year revolving line of credit which is renewable annually. The terms of the new facility are essentially the same as the $50 million facility the Company had been operating under previously. Effective November 3, 1997, the Company entered into an Interest Rate Swap Agreement with its primary bank in which a $20,000,000 notional amount of floating rate debt at LIBOR was swapped for a fixed rate of 6.01%. The Swap Agreement has a three-year term and is being accounted for as a hedge by the Company. The transaction was executed to hedge interest rate risk on the Company's interest obligation associated with a portion of its revolving credit facility, and to change the nature of the liability from a variable to a fixed interest obligation. At March 31, 1999, the Company would have had to pay approximately $261,500 to terminate the interest rate swap. This amount was obtained from the counterparties and represents the fair market value of the Swap Agreement. The Company utilizes a revolving trade accounts receivable securitization program to sell without recourse, through a wholly-owned subsidiary, certain trade accounts receivable. Under the program, the maximum amount allowed to be sold at any given time through March 31, 1999, was $12,000,000. The maximum amount of receivables that can be sold is seasonally adjusted. At March 31, 1999, the amount of trade accounts receivable outstanding which had been sold approximated $5,772,000. The proceeds from the sales were used to reduce borrowings under the Company's revolving credit facility. Costs of the program, which primarily consist of the purchaser's financing cost of issuing commercial paper backed by the receivables, totaled $86,000 and $270,000 for the three and nine-month periods ended March 31, 1999, respectively. The Company, as agent for the purchaser of the receivables, retains collection and administrative responsibilities for the purchased receivables. In September 1998, the Company's Board of Directors authorized a common share repurchase program that provides for the Company to purchase, in the open market and through negotiated transactions, up to $2 million of the Company's outstanding common stock. As of March 31, 1999, the Company had repurchased approximately 519,000 shares for an aggregate purchase price of $1,937,000. Cash of approximately $6,478,000 was used for capital expenditures during the nine-months ended March 31, 1999. Planned capital expenditures for the remainder of fiscal 1999 approximate $2,775,000 and are primarily targeted for investments in Pinnacle Art & Frame and investments in information systems. Management believes that the Company's current cash position, its cash flows from operations and available borrowing capacity will be sufficient to fund its current operations, capital expenditures and current growth plans. Actual results may differ from this forward-looking projection. Please refer to the discussion of risk factors contained herein. THE YEAR 2000 The Company has initiated a comprehensive project ("Year 2000 project") designed to minimize or eliminate business disruption caused by potential processing problems associated with the "Year 2000" issue. The Year 2000 project, which addresses both the Company's information technology ("IT") systems and non-IT systems, consists of three phases: identification and analysis, planning, and implementation and testing. The Company's Year 2000 project has used both internal and external resources. The first phase of the Company's Year 2000 project involves identifying and analyzing the IT and non-IT systems that are susceptible to failures or processing errors as a result of Year 2000 issues. This phase consisted of the Company and its operating units identifying the systems that may require remediation or replacement. Through its systems requirements study, the Company believed that, with respect to IT systems, five should be remediated through replacement and three remediated through upgrades. With respect to non-IT systems, the Company believed that there was an insubstantial susceptibility to the Year 2000 issue. This phase has been completed. The second phase of the Year 2000 project involves analyzing proposed remediations and planning how to implement such remediations. The Company then established priorities for remediation. This phase has been completed for IT systems. The third phase of the Year 2000 project involves implementing and testing the proposed remediations. With regard to IT systems, as of May 1, 1999 four of the five replacements have been completed and the remaining one is in process. One upgrade has been completed, while the other two are in process. The Company's objective is to substantially complete the implementation and testing phase by June 30, 1999, although it is possible that further remediation efforts may be required thereafter to address Year 2000 issues discovered during testing. Additionally, as part of its Year 2000 project, the Company has identified certain service providers, vendors, suppliers, and customers ("Key Partners") that it believes are critical to business operations after January 1, 2000. The Company initiated communications with such Key Partners in an attempt to reasonably ascertain their stage of Year 2000 readiness. The Company has received responses to approximately 75% of these questionnaires. The majority of such responses indicated that Key Partners had Year 2000 remediation programs and expected to be compliant by at least year end 1999. The Company has sent follow-up inquiries to the Key Partners who have not responded to the Company's questionnaire. The Company plans to continue assessment of Key Partners, which may include further communications, interviews and face-to-face meetings, as deemed appropriate. Despite the Company's efforts, there can be no guaranty that the systems of other companies which the Company relies upon to conduct its operations and business will be compliant. In addition to the above measures, the Company is currently developing contingency plans intended to mitigate the possible disruption in business operations from the Year 2000 issue. The Company intends to continue to evaluate and modify contingency planning as additional information becomes available. The Company estimates that the costs of the Year 2000 project will range from $2.2 million to $2.5 million. As of March 31, 1999, the Company had spent approximately $2.2 million. The cost estimates do not include any costs associated with the implementation of contingency plans and any potential costs related to any customer or other claims relating to the Year 2000 issue. Because of the number of systems used by the Company, the significant number of service providers, vendors, suppliers and customers, and the interdependent nature of systems, there can be no guaranty that the Company will not experience some disruption in its business due to the Year 2000 issue. Although it is not currently possible to quantify the most reasonably likely worst case scenario, the possible consequences of the Company or Key Partners not being fully ready in a timely manner include without limitation temporary plant closings, delays in the delivery of products, delays in the receipt of supplies, invoice and collection errors and inventory and supply obsolescence. Consequently, the business and operations of the Company could be materially adversely affected by a temporary inability of the Company to conduct its business in the ordinary course for periods of time due to the Year 2000 issue. However, the Company believes that its Year 2000 project and related contingency planning should reduce the adverse effect any such disruptions may have. The Year 2000 project is an ongoing process and the risk assessments, estimates of costs, projected completion dates and other factors are forward looking statements and are subject to change. Factors that may cause such changes include without limitation, the continued availability of qualified personnel and other information technology resources; the ability to identify and remediate all date sensitive lines of computer code and embedded chips; the timely receipt and installation of Year 2000 ready replacement systems and upgrades; the actions of governmental agencies, utilities and other third parties with respect to the Year 2000 issue; the ability to implement contingency plans; the occurrence of broad-based or systemic economic failures. CONTINGENCIES A former subsidiary of the Company, which was spun-off in 1978, filed for Chapter 11 protection under the federal bankruptcy code in January 1996. As part of the bankruptcy proceedings, the former subsidiary has rejected certain store leases which were originated prior to the spin-off and for which the Company was allegedly a guarantor. An accrual for claims associated with the alleged guarantees on leases rejected as of March 31, 1999 has been established. Based on the information presently available, management believes the amount of the accrual at March 31, 1999 is adequate to cover the liability the Company may incur under the alleged guarantees. TANDYCRAFTS, INC. PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits: Exhibit 10.22 Revolving Credit Agreement dated March 31, 1999 Exhibit 27 Financial Data Schedule (b) Reports on Form 8-K: The Company filed a Current Report on Form 8-K, dated March 8, 1999, which included the contents of a press leases announcing that the Company had sold Nocona Belt Company to M&F Western Products, Inc. The Company filed a Current Report on Form 8-K, dated April 23, 1999, which included the contents of a press release announcing the unaudited results of operations for the three and nine-month periods ended March 31, 1999. The Company filed a Current Report on Form 8-K, dated May 4, 1999, which included the contents of a press leases announcing that the Company had 'elevated James D. Allen to the position of executive vice president and chief operating officer. Tandycrafts also named Michael J. Murray as treasurer and Troy A. Huseman as controller. TANDYCRAFTS, INC. 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 thereunto duly authorized. TANDYCRAFTS, INC. (Registrant) Date: May 14, 1999 By:/s/Michael J. Walsh -------------------------- Michael J. Walsh Chief Executive Officer, President and Director Date: May 14, 1999 By:/s/James D. Allen -------------------------- James D. Allen Executive Vice President and Chief Operating Officer (Chief Financial Officer) Date: May 14, 1999 By:/s/Troy A. Huseman -------------------------- Troy A. Huseman Assistant Vice President and Controller (Chief Accounting Officer) EX-10.22 2 REVOLVING CREDIT AGREEMENT AMONG TANDYCRAFTS, INC. ("COMPANY") THE DEVELOPMENT ASSOCIATION, INC. SAV-ON, INC. DAVID JAMES MANUFACTURING, INC. PLC LEATHER COMPANY TANDYARTS, INC. LICENSED LIFESTYLES, INC. ("GUARANTORS") AND WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION BANK ONE, TEXAS, NATIONAL ASSOCIATION ("BANKS") AND WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION ("AGENT") $45,000,000.00 REVOLVING LINE $5,000,000.00 SWING LINE MARCH 31, 1999 TABLE OF CONTENTS ARTICLE I - DEFINITION OF TERMS.................................1 1.02. Other Definitional Provisions 11 ARTICLE II - REVOLVING CREDIT LOAN; SWING LINE LOAN; LETTER OF CREDIT FACILITY ..........................................................11 2.01. Revolving Credit Commitment 11 2.02. Manner of Borrowing 12 2.03. Interest Rate 14 2.04. Letters of Credit 14 ARTICLE III - NOTES AND INTEREST RATE PAYMENTS.................16 3.01. Promissory Notes 16 3.02. Principal Payments on Revolving Credit Loans and Swing Line Loans 16 3.03. Prepayments 16 3.04. Payment of Interest on the Notes 16 3.05. Calculation of Interest Rates 17 3.06. Manner and Application of Payments 17 3.07. Pro Rata Treatment 17 3.08. Lending Office 17 3.09. Taxes 18 3.10. Sharing of Payments 18 ARTICLE IV - SPECIAL PROVISIONS FOR LIBOR LOANS ...............19 4.01. Inadequacy of LIBOR Loan Pricing 19 4.02. Unavailability of LIBOR; Illegality 19 4.03. Increased Costs for LIBOR Loans 20 4.04. Effect on Interest Options 20 4.05. Payments Not at End of Interest Period 20 ARTICLE V - CONDITIONS PRECEDENT...............................21 5.01. Initial Advances 21 5.02. All Advances 22 5.03. Letters of Credit 23 ARTICLE VI - REPRESENTATIONS AND WARRANTIES....................23 6.01. Organization and Good Standing of Company 23 6.02. Organization and Good Standing of Guarantors 24 6.03. Authorization and Power 24 6.04. No Conflicts or Consents 24 6.05. Enforceable Obligations 24 6.06. No Liens 24 6.07. Financial Condition 24 6.08. Full Disclosure 24 6.09. No Default 25 6.10. No Litigation 25 6.11. Regulatory Defects 25 6.12. Use of Proceeds; Margin Stock 25 6.13. No Financing of Corporate Takeovers 25 6.14. Taxes 25 6.15. Principal Office, Etc. 25 6.16. ERISA 25 6.17. Compliance with Law 25 6.18. Government Regulation 26 6.19. Insider 26 6.20. Subsidiaries 26 6.21. Solvency 26 6.22. Environmental Matters 26 6.23. Representations and Warranties 27 6.24. No Subordination 27 6.25. Permits, Franchises 27 6.26. Survival of Representations, Etc. 27 ARTICLE VII - AFFIRMATIVE COVENANTS............................27 7.01. Financial Statements 27 7.02. Payment of Obligations; Maintain Books and Reserves 29 7.03. Inspection of Property 29 7.04. Compliance with Laws, Etc. 29 7.05. Maintenance of Existence and Qualifications 29 7.06. Maintenance of Properties; Insurance 29 7.07. Yield Maintenance 30 7.08. Transactions With Affiliates 30 7.09. Compliance with Loan Documents 30 7.10. Compliance with Material Agreements 30 7.11. Operations and Properties 30 7.12. Books and Records; Access 30 7.13. Security For Letters of Credit 30 7.14. Additional Information 31 7.15. Guaranty of Additional Subsidiary Corporations 31 7.16. Principal Depositary 31 7.17. Application of Proceeds of Sale and Equity Securities 31 7.18. Further Assurances 31 7.19. Year 2000 Compliance 31 7.20. Taxes and Other Liabilities 31 7.21. Litigation 31 ARTICLE VIII - NEGATIVE COVENANTS..............................32 8.01. Leverage Ratio 32 8.02. Fixed Charge Coverage Ratio 32 8.03. Current Ratio 32 8.04. Minimum Consolidated Tangible Net Worth 32 8.05. Limitation on Dividends, Acquisition of Stock and Restricted Payments 32 8.06. Acquisitions 32 8.07. Disposition of Assets 32 8.08. Sale of Accounts Receivable 33 8.09. Negative Pledge 33 8.10. No Grant of Negative Pledge 33 8.11. Limitation on Additional Indebtedness 33 8.12. Guaranty 33 8.13. Merger; Consolidation 33 8.14. Capital Expenditures 33 8.15. Sale and Leaseback 33 8.16. Prepayment of Indebtedness 33 ARTICLE IX - EVENTS OF DEFAULT; REMEDIES UPON EVENT OF DEFAULT.34 9.01. Events of Default 34 9.02. Remedies Upon Event of Default 34 9.03. Performance by Banks 35 9.04. Remedies Cumulative 35 ARTICLE X - ARBITRATION PROGRAM................................35 10.01. Binding Arbitration 35 10.02. Governing Rules 35 10.03. No Waiver; Provisional Remedies; Self-Help and Foreclosure 36 10.04. Arbitrator Qualifications and Powers; Awards 36 10.05. Judicial Review 36 10.06. Miscellaneous 36 ARTICLE XI - THE AGENT.........................................37 11.01. Appointment and Authorization 37 11.02. Note Holders 37 11.03. Consultation with Counsel 37 11.04. Documents 37 11.05. Resignation or Removal of Agent 37 11.06. Responsibility of Agent 37 11.07. Notices of Event of Default 38 11.08. Independent Investigation 38 11.09. Indemnification 38 11.10. Benefit of Article XI 38 11.11. Not a Loan to Agent; No Duty to Repurchase 38 11.12. Amendments, Waivers, etc. 38 11.13. Bank's Representations 39 ARTICLE XII - MISCELLANEOUS....................................39 12.01. Waiver 39 12.02. Notices 39 12.03. Payment of Expenses 39 12.04. Savings Clause 39 12.05. Amendments 40 12.06. Governing Law 40 12.07. Invalid Provisions 40 12.08. Headings 40 12.09. Participation Agreements and Assignments 40 12.10. Successors. 43 12.11. Right of Setoff; Deposit Accounts. 43 12.12. Survival. 43 12.13. No Third Party Beneficiary. 43 12.14. Counterpart Execution 43 12.15. Prior Agreement 43 12.16. Final Agreement 44 LIST OF EXHIBITS Exhibit "A" - Total Commitment Exhibit "B" - Promissory Note ($22,500,000.00 per Bank) Exhibit "C" - Promissory Note (Swing Line) Exhibit "D" - Request for Borrowing - Base Rate Borrowing Exhibit "E" - Request for Borrowing - Libor Borrowing Exhibit "F" - Confirmation of Request for Borrowing - Base Rate Borrowing Exhibit "G" - Confirmation of Request for Borrowing - Libor Borrowing Exhibit "H" - Unlimited Guaranty Exhibit "I" - Continuing Letter of Credit Agreement Exhibit "J" - Assignment and Acceptance Exhibit "K" - Litigation Exhibit "L" - Compliance with Law Exhibit "M" - Environmental Matters REVOLVING CREDIT AGREEMENT This Revolving Credit Agreement is made by and among TANDYCRAFTS, INC., a Delaware corporation ("Company "), THE DEVELOPMENT ASSOCIATION, INC., a Texas corporation, SAV-ON, INC., a Texas corporation, DAVID JAMES MANUFACTURING, INC., a Texas corporation, PLC LEATHER COMPANY, a Nevada corporation, TANDYARTS, INC., a Nevada corporation, and LICENSED LIFESTYLES, INC., a Nevada corporation (collectively the "Guarantors"), and WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION and BANK ONE, TEXAS, NATIONAL ASSOCIATION(collectively, the "Banks") and WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION, as agent for the Banks ("Agent"). W I T N E S S E T H: ------------------- WHEREAS, Company has requested Banks to provide it with a primary revolving credit facility and a secondary revolving credit facility for working capital and for general corporate purposes and a letter of credit facility to issue commercial and standby letters of credit; and WHEREAS, Company has requested that Banks provide it with such facilities, and Banks are willing to provide such facilities to Company, upon the terms and subject to the conditions hereinafter set forth. NOW, THEREFORE, in consideration of the mutual promises herein contained and for other valuable consideration, the parties hereto do hereby agree as follows: ARTICLE I --------- DEFINITION OF TERMS ------------------- For the purposes of this Revolving Credit Agreement, unless the context requires otherwise, the following terms shall have the respective meanings assigned to them in this Article I below: "Advance" has the meaning assigned to such term in Section 2.01(a). "Affiliate" of any designated Person means any Person that has a relationship with the designated Person whereby either of such Persons directly or indirectly controls or is controlled by or is under common control with the other, or holds or beneficially owns five percent (5%) or more of any class of voting securities of the other. For this purpose, "control" means the power, direct or indirect, of one Person to direct or cause direction of the management and policies of another, whether by contract, through voting securities or otherwise. Notwithstanding the foregoing, no Person shall be deemed to be an Affiliate of another solely by reason of such Person's being a participant in a joint operating group or joint undivided ownership group. "Applicable Margin" means the percentage set forth below determined by reference to the Leverage Ratio in effect from time to time: Commitment Base Leverage Ratio Libor Fee Rate - -------------- ----- ---------- ---- Equal to or less than 2.00 to 1.00 .65% .225% 0 Greater than 2.00 to 1.00 but equal .75% .225% 0 to or less than 2.50 to 1.00 Greater than 2.50 to 1.00 but equal 1.00% .25% 0 to or less than 3.00 to 1.00 Greater than 3.00 to 1.00 but equal 1.25% .375% 0 to or less than 3.25 to 1.00 Greater than 3.25 to 1.00 but equal 1.50% .45% 0 to or less than 3.50 to 1.00 Greater than 3.50 to 1.00 1.75% .50% 0 "Arbitration Program" has the meaning assigned to such term in Article X. "Banks" means Wells Fargo Bank (Texas), National Association and Bank One, Texas, National Association and all other banks which are parties to this Loan Agreement or any amendment thereto. "Base LIBOR" means the rate per annum for United States dollar deposits quoted by Agent as the Inter-Bank Market Offered Rate, with the understanding that such rate is quoted by Agent for the purpose of calculating effective rates of interest for loans making reference thereto, on the first day of an Interest Period for delivery of funds on said date for a period of time approximately equal to the number of days in such Interest Period and in an amount approximately equal to the principal amount to which such Interest Period applies. Company understands and agrees that Agent may base its quotation of the Inter-Bank Market Offered Rate upon such offers or other market indicators of the Inter-Bank Market as Agent in its discretion deems appropriate including, but not limited to, the rate offered for U.S. dollar deposits on the London Inter-Bank Market by reference to the Dow Jones Telerate page 3750. "Base Rate" means, at any time, the rate of interest per annum most recently announced within Wells Fargo Bank (Texas), National Association at its principal office as its Prime Rate, with the understanding that the Prime Rate is one of Bank's base rates and serves as the basis upon which effective rates of interest are calculated for those loans making reference thereto, and is evidenced by the recording thereof in such internal publication or publications as Wells Fargo Bank (Texas), National Association may designate. Each change in the rate of interest shall become effective on the date each Prime Rate change is announced within said Bank. ''Base Rate Advance" means any principal amount under a Note with respect to which the interest rate is calculated by reference to the Base Rate. "Base Rate Borrowing" means any Borrowing composed of Base Rate Advances and, if the context so indicates, a Swing Line Loan. "Borrowing" has the meaning assigned to such term in Section 2.01(a). "Business Day" means a day upon which business is transacted by national banks in Fort Worth, Texas, New York, New York and San Francisco, California. "Capital Lease" means, as of any date, any lease of property, real or personal, which would be capitalized on a balance sheet of the lessee prepared as of such date, in accordance with GAAP. "Capital Lease Obligation" means any rental obligation which, under GAAP, is or will be required to be capitalized on the books of the Company or any Subsidiary, taken at the amount thereof accounted for as indebtedness (net of interest expense) in accordance with such principles. "Capital Expenditures" means any expenditure by a Person for an asset which will be used in a year or years subsequent to the year in which the expenditure is made and which asset is properly classified in the relevant financial statements of such Person as property, equipment, improvements, fixed assets or a similar type of capitalized assets in accordance with GAAP. "Change in Law" has the meaning assigned to such term in Section 4.02. "Closing Date" means March 31, 1999. "Commitment" has the meaning assigned to such term in Section 2.01(a). "Commitment Fee" has the meaning assigned to such term in Section 2.01(c). "Consequential Loss" has the meaning assigned to such term in Section 4.05. "Consolidated" means the consolidation of any Person, in accordance with GAAP, with its properly consolidated subsidiaries. References herein to a Person's Consolidated financial statements, financial position, financial condition, liabilities, etc., refer to the consolidated financial statements, financial position, financial condition, liabilities, etc. of such Person and its properly consolidated subsidiaries. "Consolidated Net Income" means, with respect to any period, consolidated net earnings (after income taxes) of Company and its Subsidiaries for such period, determined in accordance with GAAP, but excluding (i) any gain or loss arising from the sale of capital assets; (ii) any gain arising from any write-up of assets; (iii) earnings of any other Person, substantially all of the assets of which have been acquired by Company or any of its Subsidiaries in any manner, to the extent that such earnings were realized by such other Person prior to the date of such acquisition; (iv) net earnings of any Person in which Company or any of its Subsidiaries has an ownership interest, unless such earnings have actually been received by Company or any of its Subsidiaries in the form of cash distributions; (v) the earnings of any Person to which assets of the Company or any of its Subsidiaries shall have been sold, transferred or disposed of, or into which Company or any of its Subsidiaries shall have merged, to the extent that such earnings arise prior to the date of such transaction; and (vi) any gain arising from the acquisition of any securities of Company or any of its Subsidiaries. "Consolidated Indebtedness" means all Indebtedness of Company and its Subsidiaries on a Consolidated basis. "Consolidated Net Worth" means, as of any date, the sum of the capital, surplus and retained earnings less any amount thereof attributable to treasury stock as would be reflected on a balance sheet of the Company and its Subsidiaries on a Consolidated basis in accordance with GAAP. "Consolidated Tangible Net Worth" means Consolidated Net Worth less Intangible Assets. "Controlled Group" means (i) the controlled group of corporations as defined in section 1563 of the United States Internal Revenue Code of 1986, as amended, or (ii) the group of trades or business under common control as defined in section 414(c) of the United States Internal Revenue Code of 1986, as amended, of which Company is part or may become a part. "Conversion Date" means the LIBOR Business Day that a Base Rate Borrowing is converted to a LIBOR Borrowing. "Current Assets" means, on a Consolidated basis, all cash, accounts receivable, inventory, marketable securities, and all other assets of Company and Subsidiaries as may properly be classified as current assets in accordance with GAAP. "Current Liabilities" means, on a Consolidated basis, all liabilities of Company and Subsidiaries maturing on demand or within one year from the date on which Current Liabilities are to be determined, and all other liabilities as may be properly classified as current liabilities in accordance with GAAP. The Revolving Credit Loans on the date in question shall be a Current Liability. "Current Maturities of Long Term Debt" means that portion of the long term debt of Company and Subsidiaries, on a consolidated basis, and that portion of the Capital Lease Obligations of Company and Subsidiaries, on a consolidated basis, which will be due in the twelve (12) months immediately following any date of computation of Current Maturities of Long Term Debt in accordance with GAAP, but excluding balloon payments of long term debt due at maturity, unless such balloon payment is reasonably expected to be paid at maturity. "Dividends," in respect of any corporation, means: (i) Cash distributions or any other distributions on, or in respect of, any class of capital stock of such corporation, except for distributions made solely in shares of stock of the same class; and (ii) Any and all funds, cash or other payments made in respect of the redemption, repurchase or acquisition of such stock, unless such stock shall be redeemed or acquired through the exchange of such stock with stock of the same class. "Dollars" and the sign $ means lawful currency of the United States of America. "EBITDA" means for any period, the sum of Consolidated Net Income (excluding extraordinary gains and losses) plus income taxes, Non-Cash Charges, Tandy Leather Restructuring Charges (which shall not exceed $26,056,000.00 for Company's fiscal year ending June 30, 1999) and interest expense deducted in calculating such Consolidated Net Income during such period. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, together with all regulations issued pursuant thereto. "Environmental Claim" means any written notice by any Person alleging potential liability or responsibility for (i) any removal or remedial action, including, without limitation, any clean-up, removal or treatment of any Hazardous Material or any action to prevent or minimize the release or movement of any Hazardous Materials through or in the air, soil, surface water, ground water or other property, (ii) damage to the environment, or costs with respect thereto, or (iii) personal injury (including sickness, disease or death), resulting from or based upon (A) the presence, release or movement (including sudden or nonsudden, accidental or nonaccidental, leaks or spills) of any Hazardous Material at, in or from the environment or any property, whether or not owned by the Company, or (B) circumstances forming the basis of any violation, or alleged violation, of any Environmental Law or any permit issued to Company or any of its Subsidiaries pursuant to any Environmental Law. "Environmental Laws" means the Comprehensive Environmental Response, compensation, and Liability Act (42 U.S.C. Section 9601 et seq.), the Hazardous Material Transportation Act (49 U.S.C. Section 1801 et seq.), the Recourse Conservation and Recovery Act (42 U.S.C. Section 6901 et seq. ), the Federal Water Pollution Control Act (33 U.S.C. Section 1251 et seq.), the Clean Air Act (42 U.S.C. Section 7401 et seq.), the Toxic Substances Control Act (15 U.S.C. Section 2601 et seq.), and the Occupational Safety and Health Act (29 U.S.C. Section 651 et seq.), as such laws have been or hereafter may be amended or supplemented, and any and all analogous future federal, or present and future state or local laws, and similar laws of jurisdictions other than the United States, to which Company or any of its Subsidiaries or any of its or their properties are subject. "Event of Default" has the meaning assigned to such term in Article IX. "Excess Interest Amount" has the meaning assigned to such term in Section 3.04(b). "FDIC" means the Federal Deposit Insurance Corporation (or any successor thereby). "Federal Funds Rate" has the meaning assigned to such term in Section 2.02(b). "Fixed Charge Coverage Ratio" means, on the date in question, for the trailing four (4) quarters, the relationship of Company's and its Subsidiaries' aggregate rent expense (excluding Joshua Christian Bookstore's rent expense for such period and excluding Tandy Leather's rent expense for such period if during such period the applicable lease was terminated with no further obligation of Tandy Leather to pay rent) plus EBITDA to Company's and its Subsidiaries' aggregate interest expense plus rent expense (excluding Joshua Christian Bookstore's rent expense for such period and excluding Tandy Leather's rent expense for such period if during such period the applicable lease was terminated with no further obligation of Tandy Leather to pay rent), plus Current Maturities of Long Term Debt. "Generally Accepted Accounting Principles" or "GAAP" means generally accepted accounting principles, applied on a consistent basis, as set forth in the Opinions of the Accounting Principles Board of the American Institute of Certified Public Accountants and/or in statements of the Financial Accounting Standards Board and/or in such other statements by such other entity as the Agent may approve, which are applicable as of the date in question. The requisite that such principles be applied on a consistent basis shall mean that the accounting principles observed in a current period are comparable in all material respects to those applied in a preceding period. Unless otherwise indicated herein, all accounting terms shall be defined according to GAAP. "Guarantors" means The Development Association, Inc., a Texas corporation, Sav-On, Inc., a Texas corporation, David James Manufacturing, Inc., a Texas corporation, PLC Leather Company, a Nevada corporation, Tandyarts, Inc., a Nevada corporation, and Licensed Lifestyles, Inc., a Nevada corporation, and any other corporation which executes a Guaranty Agreement after the date of this Loan Agreement. "Guaranty" of any Person means any contract, agreement or understanding of such Person pursuant to which such Person guarantees or in effect guarantees, any Indebtedness of any other Person (the "Primary Obligor") in any manner, whether directly or indirectly, including without limitation agreements: (i) to purchase such Indebtedness or any property constituting security therefor; (ii) to advance or supply funds (A) for the purchase or payment of such Indebtedness, or (B) to maintain working capital or other balance sheet conditions, or otherwise to advance or make available funds for the purchase or payment of such Indebtedness; (iii) to purchase property, securities or services primarily for the purpose of assuring the holder of such Indebtedness of the ability of the Primary Obligor to make payment of the Indebtedness; or (iv) otherwise to assure the holder of the Indebtedness of the Primary Obligor against loss in respect thereof; except that "Guaranty" shall not include the endorsement by Company or a Subsidiary in the ordinary course of business of negotiable instruments or documents for deposit or collection. "Guaranty Agreement" means the Guaranty Agreement executed by Guarantors, in the form of Exhibit "H" hereto, as the same may be amended or supplemented from time to time. "Guarantor" means any of the Guarantors. "Hazardous Materials" means those substances which are regulated by or form the basis of liability under any Environmental Laws. "Indebtedness" means, with respect to any Person, all indebtedness, obligations and liabilities of such Person, including without limitation: (i) all "liabilities" which would be reflected on a balance sheet of such Person, prepared in accordance with GAAP; (ii) all obligations of such Person in respect of any Capital Lease; and (iii) all obligations of such Person in respect of any Guaranty. "Intangible Assets" means, on a consolidated basis, those assets of Company and its Subsidiaries which, in accordance with GAAP, are (i) patents, copyrights, trademarks, tradenames, franchises, goodwill, experimental expenses and other similar assets which would be classified as intangible assets on a balance sheet of Company and its Subsidiaries, and (ii) unamortized debt discount. "Interest Period" means, with respect to a LIBOR Advance, a period commencing: (i) on the borrowing date of such LIBOR Advance made pursuant to Section 2.02; or (ii) on the Conversion Date pertaining to such LIBOR Advance, if such LIBOR Advance is made pursuant to a conversion as described in Section 2.02(c); or (iii) on the date of borrowing specified in the Request for Borrowing in the case of a rollover to a successive Interest Period, and ending one (1), two (2), three (3) or six (6) months thereafter (in the case of a LIBOR Advance), as Company shall elect in accordance with Section 2.02(c); provided, that: (A) any Interest Period which would otherwise end on a day which is not a LIBOR Business Day shall be extended to the next succeeding LIBOR Business Day unless such LIBOR Business Day falls in another calendar month in which case such Interest Period shall end on the next preceding LIBOR Business Day; (B) any Interest Period which begins on the last LIBOR Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month or at the end of such Interest Period) shall, subject to clause (A) above, end on the last LIBOR Business Day of a calendar month; and (C) if the Interest Period for any LIBOR Advance would otherwise end after the Termination Date, such Interest Period shall end on the Termination Date, as the case may be. "L/C Agreement" has the meaning assigned to such term in Section 5.03(d). "Law" means all statutes, laws, ordinances, rules, regulations, orders, writs, injunctions or decrees of any Tribunal. "Letter of Credit" means any commercial letter of credit or standby letter of credit issued pursuant to the terms of this Loan Agreement. "Letter of Credit Fee" has the meaning assigned to such term in Section 2.04(c). "Letter of Credit Liability'' means the aggregate undrawn face amount of all outstanding Letters of Credit. "Leverage Ratio" means, on the date in question, the relationship of Senior Funded Debt to EBITDA for the trailing four (4) quarters. "LIBOR" means the rate per annum (rounded upward, if necessary, to the nearest whole 1/8 of 1%) and determined pursuant to the following formula: LIBOR = Base LIBOR ------------------------------- 100% - LIBOR Reserve Percentage "LIBOR Advance" means any principal amount under a Note with respect to which the interest rate is calculated by reference to the Inter-Bank Market Offered Rate for a particular Interest Period. "LIBOR Borrowing" means any Borrowing composed of LIBOR Advances. "LIBOR Business Day" means a Business Day on which dealings in Dollars are carried out in the London Inter-Bank market. "LIBOR Reserve Percentage" means the reserve percentage prescribed by the Board of Governors of the Federal Reserve System (or any successor) for "Eurocurrency Liabilities" (as defined in Regulation D of the Federal Reserve Board, as amended), adjusted by Agent for expected changes in such reserve percentage during the applicable Interest Period. "Lien" means any mortgage, pledge, security interest, encumbrance, lien or charge of any kind , including without limitation, any agreement to give any of the foregoing, any conditional sale or other title retention agreement, any lease in the nature thereof, and the filing of or agreement to give any financing statement or other similar form of public notice under the Laws of any jurisdiction. "Loan Agreement" means this Revolving Credit Agreement as such may be amended, renewed, extended and superseded from time to time. "Loan Documents" means this Loan Agreement, the Notes (including any renewals, extensions and refinancing thereof), the Guaranty Agreement, and any agreements or documents (and with respect to this Loan Agreement, and such other agreements and documents, any amendments or supplements thereto or modifications thereof) executed or delivered pursuant to the terms of this Loan Agreement. "Loans" means the Revolving Credit Loans and the Swing Line Loans. "Majority Banks" means, at any time, Banks holding Notes representing at least sixty-seven percent (67.0%) of the aggregate unpaid principal amount of the aggregate Revolving Credit Loans, whichever is applicable at that time, or if no Revolving Credit Loans are at the time outstanding, Banks having at least sixty-seven percent (67.0%) of the Total Commitment. "Material Adverse Effect" means any act, circumstance, or event that in Bank's reasonable judgment could have any adverse effect whatsoever upon the validity or enforceability of the Loan Documents, (ii) causes or reasonably could be expected to cause an Event of Default under this Loan Agreement, (iii) is or might be material and adverse to the financial condition or business operations of the Company and its Subsidiaries on a consolidated basis, or (iv) could impair the ability of Company to perform its obligations under the Loan Documents in any material respect. "Maximum Rate" means, on any day, the highest nonusurious rate of interest (if any) permitted by applicable law on such day. Banks hereby notify Company that, and disclose to Company that, for purposes of the Texas Finance Code and Texas Credit Title, as such may from time to time be amended, the "applicable ceiling" shall be the "weekly ceiling" from time to time in effect ; provided, however, that to the extent permitted by applicable law, Banks reserve the right to change the "weekly ceiling" from time to time by further notice and disclosure to Company; and, provided further, that the "highest nonusurious rate of interest permitted by applicable law" for purposes of this Loan Agreement and the Notes shall not be limited to the applicable rate ceiling under the Texas Finance Code and Texas Credit Title federal laws or other state laws now or hereafter in effect and applicable to this Loan Agreement and the Notes (and the interest contracted for, charged and collected hereunder or thereunder) shall permit a higher rate of interest. "Net Income" means the net income of the applicable Person excluding equity in earnings of nonconsolidated entities as defined in accordance with GAAP. "Non-Cash Charges" means the sum of depreciation and amortization (including amortization of good will) plus the net increase in deferred tax liability, if any, less the net decrease in deferred tax liability, if any, plus contributions of common stock of Company by Company to the Tandycrafts, Inc. Retirement Savings Plan during such period, all as reflected in the Consolidated financial statements of Company and its Subsidiaries in accordance with GAAP in an amount not to exceed the aggregate amount deducted by Company for such period for federal income tax purposes with respect to Company's contribution to the Tandycrafts, Inc. Employee Stock Ownership Plan. "Notes" means the promissory notes executed by Company and delivered pursuant to the terms of this Loan Agreement, together with any renewals, extensions or modifications thereof. Depending on the context, the term "Notes" may include the Swing Line Note. "Note" means any of the Notes. "Notice of Swing Line Borrowing" has the meaning assigned to such term in Section 2.02(d). "Obligation" means all present and future indebtedness, obligations, and liabilities of Company to Banks or any of them, and all renewals and extensions thereof, or any part thereof, arising pursuant to this Loan Agreement or represented by the Notes, and all interest accruing thereon, and reasonable attorneys' fees incurred in the enforcement or collection thereof, regardless of whether such indebtedness, obligations and liabilities are direct, indirect, fixed, contingent, joint, several or joint and several; together with all indebtedness, obligations and liabilities of Company evidenced or arising pursuant to any of the other Loan Documents, and all renewals and extensions thereof, or part thereof. "Officer's Certificate" means a certificate signed in the name of Company by its Chief Executive Officer, President, one of its Executive Vice Presidents, its Chief Financial Officer, one of its Vice Presidents, or its Controller. "Operating Lease Expense" means all rental expenses of Company and its Subsidiaries relating to real estate, but specifically excluding any rental expense of Company and its Subsidiaries relating to equipment. "Other Taxes" has the meaning assigned to such term in Section 3.09(b). "Past Due Rate" means the lesser of (a) the Base Rate in effect from day-to-day, plus five percent (5.0%), or (b) the Maximum Rate. "PBGC" means the Pension Benefit Guaranty Corporation, and any successor to all or any of the Pension Benefit Guaranty Corporation's functions under ERISA. "Permitted Liens" means: (i) purchase money liens relating to or securing obligations in an aggregate amount not to exceed five hundred thousand dollars ($500,000.00); (ii) pledges or deposits made to secure payment of Worker's Compensation (or to participate in any fund in connection with Worker's Compensation), unemployment insurance, pensions or social security programs; (iii) Liens imposed by mandatory provisions of law such as for materialmen's, mechanics, warehousemen's and other like Liens arising in the ordinary course of business, securing Indebtedness whose payment is not yet due unless the same are being contested in good faith and for which adequate reserves have been provided; (iv) Liens for taxes, assessments and governmental charges or levies imposed upon a Person or upon such Person's income or profits or property, if the same are not yet due and payable or if the same are being contested in good faith and as to which adequate reserves have been provided; (v) good faith deposits in connection with tenders, leases, real estate bids or contracts (other than contracts involving the borrowing of money), pledges or deposits to secure public or statutory obligations, deposits to secure (or in lieu of) surety, stay, appeal or customs bonds and deposits to secure the payment of taxes, assessments, customs duties or other similar charges;(vi) encumbrances consisting of zoning restrictions, easements, or other restrictions on the use of real property, provided that such do not impair the use of such property for the uses intended, and none of which is violated by Company or any of its Subsidiaries in connection with existing or proposed structures or land use; and (vii) contractual liens and security interests applicable to inventory, equipment, and fixtures created by real property leases in which the lessee is SAV-ON, Inc., Casual Concepts, Inc., Joshua's Christian Bookstores, or Tandy Leather. "Percentage" means, with respect to any Bank, such Bank's proportionate share of the Total Commitment, as set forth in Exhibit "A" opposite its name under the heading "Commitment Percentage." "Person" means and include an individual, partnership, joint venture, corporation, trust, Tribunal, unincorporated organization or government or any department, agency or political subdivision thereof. "Plan" means an employee benefit plan or other plan maintained by Company for employees of Company and any of its Subsidiaries and/or covered by Title IV of ERISA, or subject to the minimum funding standards under Section 412 of the Internal Revenue Code of 1986, as amended. "Regulation U" means Regulation U promulgated by the Board of Governors of the Federal Reserve System, 12 C.F.R. Part 221, or any other regulation hereafter promulgated by said Board to replace the prior Regulation U and having substantially the same function. "Regulation X" means Regulation X promulgated by the Board of Governors of the Federal Reserve System, 12 C.F.R. Part 224, or any other regulation hereafter promulgated by said Board to replace the prior Regulation X and having substantially the same function. "Regulatory Defect" means (i) any failure of Company or any Guarantor to comply with any of the rules, regulations and other requirements as contemplated in Section 7.04 hereof which would have a Material Adverse Effect, and/or (ii) any unfavorable examination report shall be received by Company or any Guarantor from any regulatory or similar Tribunal regarding any of the businesses or activities in which the Company and Guarantors are engaged, if such report would have a Material Adverse Effect. "Request for Borrowing" has the meaning assigned to such term in Section 2.02(a). "Restricted Payments" has the meaning assigned to such term in Section 8.05. "Revolving Credit Loans" has the meaning assigned to such term in Section 2.01(a). "Revolving Credit Period" has the meaning assigned to such term in Section 2.01(a). "Senior Funded Debt" means the sum of (a) all Indebtedness to Banks, (b) all Indebtedness to financial institutions other than Banks, (c) obligations under Capital Leases, and (d) all contingent obligations of Company and its Subsidiaries (but excluding the guaranties of real property leases addressed in Section 8.12). "Subsidiary" means, as to any particular parent corporation, any corporation of which more than fifty percent (by number of votes) of the Voting Stock shall be owned by such parent corporation and/or one or more corporations which themselves have more than fifty percent (by number of votes) of their Voting Stock owned by such parent corporation. As used herein, the term "Subsidiary" means any "Subsidiary" of the Company. "Swing Line Bank" means Wells Fargo Bank (Texas), National Association. "Swing Line Borrowing" means a borrowing consisting of a Swing Line Loan. "Swing Line Facility" means the revolving line of credit described in Section 2.01(d) as such may be amended from time to time. "Swing Line Loan" has the meaning assigned to such term in Section 2.01(d). "Swing Line Note" means the Swing Line Note of Company payable to the order of Swing Line Bank, in substantially the form of Exhibit "C" hereto, and any and all replacements, amendments, renewals and modifications thereof. "Tandy Leather" means the Leather and Crafts reporting division of Company. "Tandy Leather Restructuring Charges" means the restructuring charges incurred by Tandy Leather resulting from the closing and liquidation of Tandy Leather. "Taxes" means all taxes, levies, assessments, fees, withholdings or other charges at any time imposed by any Laws or Tribunal. "Termination Date" means March 31, 2001. "Total Commitment" has the meaning assigned to such term in Section 2.01(a). "Tribunal" means any municipal, state, commonwealth federal, foreign, territorial or other court, governmental body, subdivision, agency, department, commission, board or bureau or instrumentality. "Voting Stock" means, with respect to any Subsidiary, any shares of any class of stock of such Subsidiary having general voting power under ordinary circumstances to elect a majority of the Board of Directors of such Subsidiary irrespective of whether at the time stock of any other class or classes shall have or might have voting power by reason of the happening of any contingency. 1.02. Other Definitional Provisions. (a) All terms defined in this Loan Agreement shall have the above-defined meanings when used in the Notes or any Loan Documents, certificate, report or other document made or delivered pursuant to this Loan Agreement, unless the context therein shall otherwise require. (b) Defined terms used herein in the singular shall import the plural and vice versa. (c) The words "hereof," "herein," "hereunder" and similar terms when used in this Loan Agreement shall refer to this Loan Agreement as a whole and not to any particular provision of this Loan Agreement. (d) All financial and other accounting terms not otherwise defined herein shall be defined and calculated in accordance with GAAP consistently applied. ARTICLE II ---------- REVOLVING CREDIT LOAN; SWING LINE LOAN; LETTER OF CREDIT FACILITY ----------------------------------------------------------------- 2.01. Revolving Credit Commitment. (a) Revolving Loan Commitments. Subject to the terms and conditions of this Loan Agreement, each Bank severally agrees to extend to Company, from the date hereof through the Termination Date (the "Revolving Credit Period"), a revolving line of credit which shall not exceed at any one time outstanding the amount set forth opposite its name on Exhibit "A" (for each Bank, such amount is hereinafter referred to as its "Commitment"). No Bank shall be obligated to make any Advance hereunder if, immediately after giving effect thereto, the aggregate amount of all indebtedness and obligation of Company to such Bank hereunder exceeds such Bank's Commitment. If at any time the aggregate amount of all indebtedness and obligations of Company to any Bank hereunder exceeds such Bank's Commitment, Company shall promptly pay to Agent for application to the unpaid principal balance of such Bank's Note in an amount such that the aggregate amount of all indebtedness and obligations of Company to such Bank (after giving effect to such payment and reduction in the unpaid principal balance of such Bank's Note) shall not exceed such Bank's Commitment. Banks shall not be obligated to make any Advance hereunder, if immediately after giving effect thereto, the sum of (i) the aggregate unpaid principal balance of the Notes, including the Swing Line Note and (ii) the Letter of Credit Liability would exceed at such time the Total Commitment. Within the limits of this Section 2.01, prior to the Termination Date, Company may borrow, prepay pursuant to Section 4.04 hereof and reborrow under this Section 2.01. Each borrowing pursuant to this Section 2.01 and Section 2.02 shall be funded ratably by Banks in proportion to their respective Percentages. Each advance made by a Bank under Section 2.01(a), Section 2.02, and Section 2.04 is herein called an "Advance"; all Advances made by a Bank hereunder are herein collectively called a "Revolving Credit Loan"; the aggregate unpaid principal balance of all Advances made by Banks hereunder are herein collectively called the "Revolving Credit Loans"; and the combined Advances made by Banks on any given day are herein collectively called a "Borrowing." The "Total Commitment" shall be that amount set forth opposite the term "Total Commitment" on Exhibit "A." A Swing Line Loan is not a Revolving Credit Loan or a Borrowing. (b) Optional and Mandatory Reduction of Commitment . Company shall have the right, upon three (3) Business Days' prior written notice to Agent, to terminate or to permanently reduce the unborrowed portion of the Total Commitment, in whole or in part (provided any partial reduction shall be in the minimum amount of $1,000,000.00 or any integral multiple thereof), effective on the first day of any calendar quarter hereafter. Effective March 31, 2000, the Total Commitment automatically shall reduce to an amount not to exceed $40,000,000.00. In addition, the application of net proceeds generated by the Company's sale of Sav-On, Inc. (as described in Section 7.17[c]) shall permanently reduce the Total Commitment by the amount of such net sales proceeds. Each partial reduction of the Total Commitment shall ratably reduce each Bank's Commitment. (c) Commitment Fee In addition to the payments provided for in Article III, Company shall pay to Agent, for the account of each Bank, on the first day of each fiscal quarter of Company, a Revolving Credit Loan commitment fee ("Commitment Fee"). The Commitment Fee shall be calculated by applying the Applicable Margin, determined as of the beginning of such fiscal quarter of Company (calculated on the basis of a year consisting of 360 days) to the average daily amount of such Bank's Commitment which was unused during the immediately preceding fiscal quarter of Company. Swing Line Loans shall not be considered use of the Commitment when calculating the Commitment Fee. (d) Swing Line Loans. Company may request Swing Line Bank to make, and Swing Line Bank, in its sole discretion, may make, on the terms and conditions hereinafter set forth, loans ("Swing Line Loans") to Company from time to time on any Business Day during the period from the Closing Date until the Termination Date in an aggregate amount not to exceed five million dollars ($5,000,000.00) at any one time outstanding. Swing Line Bank shall not make any Swing Line Loan, if immediately after giving effect thereto, the sum of (i) the aggregate unpaid principal balance of the Notes, including the Swing Line Note, and (ii) the Letter of Credit Liability would exceed at such time the Total Commitment. Each Swing Line Borrowing shall be in an amount not less than ten thousand dollars ($10,000.00). Within the limits of the Swing Line Facility, so long as Swing Line Bank, in its sole discretion, elects to make Swing Line Loans, Company may borrow under this Section 2.01(d), repay pursuant to Section 3.06 and reborrow under this Section 2.01(d); provided, however, no Swing Line Loan shall be outstanding for more than ten (10) consecutive Business Days. 2.02. Manner of Borrowing. (a) Request for Borrowing. Each request by Company to Agent for a Borrowing under Section 2.01 (a "Request for Borrowing") shall be in writing or by telephonic notice and specify the aggregate amount of such requested Borrowing, the requested date of such Borrowing, and, when the Request for Borrowing specifies a LIBOR Borrowing, the Interest Period which shall be applicable thereto; provided, however, that the aggregate number of unpaid LIBOR Borrowings shall not exceed eight (8) at any time. Company shall furnish to Agent the Request for Borrowing as set forth in Section 2.02(c). Any written Request for Borrowing shall: (i) in the case of a Base Rate Borrowing, be in the form attached hereto a Exhibit "D ," and (ii) in the case of a LIBOR Borrowing, be in the form attached hereto as Exhibit "E." If such Request for Borrowing is by telephonic notice, said telephonic notice shall be confirmed in writing promptly after such telephonic notice pursuant to a Confirmation of Request for Borrowing (i) substantially in the form attached hereto as Exhibit "F" in the case of a Base Rate Borrowing and (ii) substantially in the form attached hereto as Exhibit "G" in the case of a LIBOR Borrowing. A Request for Borrowing and a Confirmation of Request for Borrowing may be provided by facsimile transmission; however, Bank must be in receipt of one or the other prior to funding the Advance. Each Base Rate Borrowing shall be in an aggregate principal amount of one hundred thousand dollars ($100,000.00) or any integral multiple of one hundred thousand dollars ($100,000.00). Each LIBOR Borrowing shall be in an amount of one million dollars ($1,000,000.00) or any higher integral multiple of $1,000,000.00. Each Request for Borrowing shall be irrevocable and binding on Company and, in respect of the Borrowing specified in such Request for Borrowing, Company shall indemnify each Bank against any cost, loss or expense incurred by such Bank as a result of any failure to fulfill, on or before the date specified for such Borrowing, the conditions to such Advance set forth herein, including without limitation, any cost, loss or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by Bank to fund the Advance to be made by Bank as part of such Borrowing when such Advance, as a result of such failure, is not made on such date. After receiving a Request for Borrowing in the manner provided herein, Agent shall promptly notify each Bank by telephone (confirmed immediately by telex or cable), telex or cable of the amount of the Borrowing and such Bank's pro rata share of such Borrowing, the date on which the Borrowing is to be made, the interest option selected and, if applicable, the Interest Period selected. (b) Funding. Each Bank shall, before 1:00 P.M. (Fort Worth time) on the date of such Borrowing specified in the notice received from Agent pursuant to Section 2.02(a), deposit with Agent such Bank's ratable portion of such Borrowing in immediately available funds to Agent's account. Upon fulfillment of all applicable conditions set forth herein and after receipt by Agent of such funds, Agent shall pay or deliver such proceeds to or upon the order of Company at the principal office of Agent in immediately available funds. The failure of any Bank to make any Advance required to be made by it hereunder shall not relieve any other Bank of its obligation to make its Advance hereunder. If any Bank shall fail to provide its ratable portion of such funds and if all conditions to such Borrowing shall have been satisfied, Agent will make available such funds as shall have been received by it from the other Banks, in accordance with this Section 2.02(b). Neither Agent nor any Bank shall be responsible for the performance by any other Bank of its obligations hereunder. In the event of any failure by a Bank to make an Advance required hereunder, the other Banks may (but shall not be required to) purchase (on a pro rata basis, according to their respective Percentages) such Bank's Note. Upon the failure of a Bank to make an Advance required to be made by it hereunder, Agent shall use good faith efforts to obtain one or more banks, acceptable to Company and Agent, to replace such Bank, but neither the Agent nor any other Bank shall have any liability or obligation whatsoever as a result of the failure to obtain a replacement for such Bank. Unless Agent shall have received notice from a Bank prior to the date of any Borrowing that such Bank will not make available to Agent such Bank's ratable portion of such Borrowing, Agent may assume that such Bank has made such portion available to Agent on the date of such Borrowing in accordance with this Section 2.02(b) and Agent may, in reliance upon such assumption, make available to or on behalf of Company on such date a corresponding amount. If and to the extent such Bank shall not have so made such ratable portion available to Agent, such Bank severally agrees to repay to Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the date such amount is made available to or on behalf of Company until the date such amount is repaid to Agent, (i) in the case of Borrower, at the rate per annum equal to the rate applicable to the Borrowing in question, and (ii) in the case of a Bank, the Federal Funds Rate. If such Bank shall repay to the Agent such corresponding amount, such amount so repaid shall constitute such Bank's Advance as part of such Borrowing for purposes of this Agreement. As used herein, the phrase "Federal Funds Rate" shall mean, for any period, a fluctuating interest rate per annum equal for each day during such period to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of Dallas, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by the Agent from three Federal funds brokers of recognized standing selected by Agent. (c) Selection of Interest Option. Upon making a Request for Borrowing under Section 2.02(a) hereof, Company shall advise Agent as to whether the Borrowing shall be (i) a LIBOR Borrowing, in which case Company shall specify the applicable Interest Period therefor, or (ii) a Base Rate Borrowing. At any time any portion of a Revolving Credit Loan bears interest determined in relation to LIBOR, it may be continued by Company at the end of the Interest Period applicable thereto so that all or a portion thereof bears interest determined in relation to the Base Rate or to LIBOR for a new Interest Period designated by Company. At any time any portion of a Revolving Credit Loan bears interest determined in relation to the Base Rate, Company may convert all or a portion thereof so that it bears interest determined in relation to LIBOR for an Interest Period designated by Company. At such time as Company requests an Advance or wishes to select a LIBOR option for all or a portion of the outstanding principal balance of the Revolving Credit Loans, and at the end of each Interest Period, Company shall give Agent notice specifying: (i) the interest rate option selected by Company; (ii) the principal amount subject thereto; and (iii) for each LIBOR selection, the length of the applicable Interest Period. Any such notice may be given by telephone so long as, with respect to each LIBOR selection, Agent receives written confirmation from Company not later than 11:00 a.m., Fort Worth time, on the earlier of the day of the Advance or the first day of the Interest Period. For each LIBOR option requested hereunder, Agent will quote the applicable LIBOR interest rate to Company at approximately 10:00 a.m., Fort Worth time, on the first day of the Interest Period. If Company does not immediately accept the rate quoted by Agent, any subsequent acceptance by Company shall be subject to a redetermination by Agent of the applicable LIBOR interest rate; provided however, if Company fails to accept any such rate by 11:00 a.m., Fort Worth time, on the Business Day such quotation is given, then the quoted rate shall expire and Agent shall have no obligation to permit a LIBOR option to be selected on such day. If no specific designation of interest is made at the time any Advance is requested hereunder or at the end of any Interest Period, Company shall be deemed to have made a Base Rate interest selection for such Advance or for the principal amount to which such Interest Period applied. Notwithstanding anything to the contrary contained herein, Company shall have no right to request a LIBOR Borrowing if the interest rate applicable thereto under Section 2.03 hereof would exceed the Maximum Rate in effect on the first day of the Interest Period applicable to such LIBOR Borrowing. (d) Swing Line Funding. Each Swing Line Loan shall be made on notice, given not later than 1:00 p.m. (Fort Worth time) on the date of the proposed Swing Line Loan, by Company to Swing Line Bank. Each such notice of a Swing Line Loan (a "Notice of Swing Line Loan") shall be by telephone, telex or telecopier, specifying therein the requested (i) date of such Swing Line Loan and (ii) amount of such Swing Line Loan. If all applicable conditions set forth in Section 5.02 are fulfilled, Swing Line Bank will make the amount thereof available to Company by depositing such funds received in the general deposit account of Company with Agent. Upon demand by Swing Line Bank or in any event upon the making of the request or the granting of the consent specified by Section 9.02 to authorize Agent to declare the Notes due and payable pursuant to the provisions of Section 9.02, each Bank shall make, by 12:00 noon (Fort Worth time) on the first Business Day following receipt by such Bank of notice from Swing Line Bank, an advance in an amount equal to such Bank's Pro Rata share of such Swing Line Loan and the proceeds of such advance will be applied by Agent to repay the outstanding Swing Line Loans. 2.03. Interest Rate. The unpaid principal of each Base Rate Advance shall bear interest from the date of Advance until paid at a rate per annum which shall from day to day be equal to the lesser of (a) the Base Rate in effect from day to day, or (b) the Maximum Rate. The unpaid principal of each LIBOR Advance shall bear interest from the date of advance until paid at a rate per annum which shall be equal to the lesser of (a) the sum of LIBOR for the applicable Interest Period, plus the Applicable Margin determined as of the Business Day Agent received the most recent Officer's Certificate described in Section 7.01, or (b) the Maximum Rate. All past due principal of, and to the extent permitted by applicable law, interest on the Notes (including the Swing Line Note) shall bear interest at the Past Due Rate. Notwithstanding the foregoing, the unpaid principal balance of the Notes shall bear interest as provided in Section 3.04(b), upon the occurrence of the circumstances described in such section. The unpaid principal balance of the Swing Line Note shall bear interest at the lesser of (a) the Base Rate in effect from day to day or (b) the Maximum Rate. 2.04. Letters of Credit. (a) From time to time from the Closing Date until the Business Day prior to the Termination Date, Company may request Agent to issue standby and commercial Letters of Credit for the account of Company. Each request shall be accompanied by a duly executed and completed Application and Agreement For Letter of Credit ("L/C Agreement") in form and substance reasonably satisfactory to Agent and such other documents as Agent may reasonably require. Each Letter of Credit shall have an expiration date which shall be the sooner of one year or the Termination Date. Agent shall not be obligated to issue any Letter of Credit for the account of Company, if, immediately after giving effect thereto, the sum of (a) the unpaid principal balance of the Notes, and (b) the Letter of Credit Liability would exceed at such time the Total Commitment; and provided further that the aggregate undrawn amount of all outstanding standby Letters of Credit shall not at any time exceed Five Million and no/100 Dollars ($5,000,000.00). The undrawn amount of all Letters of Credit shall be reserved under the Commitment and shall not be available for borrowings thereunder. Each draft paid by Agent under a Letter of Credit shall be deemed an Advance under the Total Commitment and shall be repaid by Company in accordance with the terms and conditions of this Loan Agreement applicable to such Advances; provided however, that if Advances are not available, for any reason, at the time any draft is paid by Agent then Company shall immediately pay to Agent the full amount of such draft, together with interest thereon from the date such amount is paid by Agent to the date such amount is fully repaid by Company. In such event Company agrees that Agent, in its sole discretion, may debit any demand deposit account maintained by Company with Agent for the amount of any such draft. Any draw or payment by Agent under a Letter of Credit for the account of Company shall be treated as a Base Rate Advance under each of the Notes in an amount determined by multiplying the amount of the draw or payment under the Letter of Credit by the Percentage of each such Bank, which amount shall be promptly remitted to Agent by each Bank on the same day as requested by Agent. (b) Upon the issuance of a Letter of Credit, each Bank shall be deemed to have purchased from Agent a pro rata participation in such Letter of Credit (including funding obligations, reimbursement rights and other rights and obligations of Agent thereunder and other applicable provisions of this Loan Agreement) according to such purchasing Bank's Percentage. As a result of such purchase, the amount of such purchasing Bank's Commitment available for the Revolving Credit Loan and Letters of Credit shall be reduced by the amount of such participation. If or to the extent that Agent has not been reimbursed by Company for any payment made by Agent under any Letter of Credit, each Bank shall, pro rata according to its participation in such Letter of Credit, reimburse Agent promptly upon demand for the amount of such payment. The obligation of each Bank to so reimburse Agent shall not be affected by the occurrence of an Event of Default. Any such reimbursement by any such Bank shall not relieve or otherwise impair the obligation of Company to reimburse Agent for the amount of any payment made by Agent under any Letter of Credit, together with interest and other payments as hereinafter provided. Agent shall administer each Letter of Credit which it issues in accordance with the L/C Agreement and its customary practices and procedures. (c) Fees Applicable to Letters of Credit. At the time of issuance of each Letter of Credit, Company shall pay to Agent, for the pro rata account of each Bank, a fee in an amount equal to the Applicable Margin (under the heading "LIBOR"), on the undrawn amount of each Letter of Credit. At the time of issuance of each Letter of Credit, Company shall pay to Agent, as issuing Bank, a fee of .125% per annum (calculated on the basis of a 360- day year, actual days elapsed), on the face amount of such Letter of Credit. The "Letter of Credit Fee" is not prorated among the Banks. In addition, Company shall be liable to Agent, as issuing Bank, for additional Letter of Credit fees, as such may be incurred from time to time, including, but not limited to, fees for amendment, transfer and negotiation, determined in accordance with Bank's standard fees and charges then in effect for such activity. ARTICLE III ----------- NOTES AND INTEREST RATE PAYMENTS -------------------------------- 3.01. Promissory Notes. The Advances under Section 2.02(a), Section 2.02(b), and Section 2.04 by a Bank shall be evidenced by a promissory note (each a "Note" and collectively, the "Notes") of Company, which Notes shall (a) be dated the date hereof, (b) be in the amount of such Bank's Commitment, (c) be payable to the order of such Bank at the office of Agent, (d) bear interest in accordance with Section 2.03, and (e) be in the form of Exhibit "B" attached hereto with blanks appropriately completed in conformity herewith. Swing Line Loans shall be evidenced by a promissory note (the "Swing Line Note") of Company which Note shall (a) be dated the date hereof, (b) be in the amount of five million dollars ($5,000,000.00), (c) be payable to the order of Agent at the office of Agent, (d) bear interest in accordance with Section 2.03, and (e) be in the form of Exhibit "C" attached hereto with blanks appropriately completed in conformity herewith. Notwithstanding the principal amount of any Bank's Note or the Swing Line Note as stated on the face thereof, the amount of principal actually owing on such Note at any given time shall be in the aggregate of all Advances or Swing Line Loans, as the case may be, theretofore made to Company hereunder, less all payments of principal theretofore actually received hereunder by a Bank or Swing Line Bank. 3.02. Principal Payments on Revolving Credit Loans and Swing Line Loans. The unpaid principal amount of each Note (including the Swing Line Note), and all accrued-but-unpaid interest thereon, shall be due and payable on the Termination Date. 3.03. Prepayments. (a) Optional Prepayments. Company may, without premium or penalty, prepay the principal of the Notes then outstanding, in whole or in part, at any time or from time to time; provided, however, that (i) each prepayment of less than the full outstanding principal balance of the Notes shall be in an amount equal to one hundred thousand dollars ($100,000.00) or an integral multiple thereof in the case of the Notes other than the Swing Line Note and shall be in an amount equal to ten thousand dollars ($10,000.00) or an integral multiple thereof in the case of the Swing Line Note, and (ii) if Company shall prepay the principal of any LIBOR Advance on any date other than the last day of the Interest Period applicable thereto, Company shall make the payments required by Section 4.05 hereof. (b) General Prepayment Provisions. Any prepayment of a Note hereunder shall be applied to interest and principal in such order as Agent shall determine in its sole discretion. (c) Mandatory Prepayment. Section 7.17 contains mandatory prepayment provisions. 3.04. Payment of Interest on the Notes. (a) Revolving Credit Period. Prior to the Termination Date, the interest on the unpaid principal amount of each Base Rate Advance and Swing Line Loan shall be payable quarterly as it accrues on the first Business Day of each January, April, July and October hereafter, commencing January 4, 1999, and on the Termination Date. Interest on the unpaid principal amount of each LIBOR Advance shall be payable on the last day of such Interest Period except in the case of a six (6) month Interest Period, when interest shall be payable at the end of the third month as well as the end of the Interest Period. Should any installment of interest become due and payable on a day other than a Business Day, the maturity thereof shall be extended to the next succeeding Business Day. (b) Recapture Rate. If, on any interest payment date, Agent does not receive interest (for the account of any Bank) on such Bank's Note computed (as if no Maximum Rate limitations were applicable) at the applicable contract rate described herein, because the applicable contract rate exceeds or has exceeded the Maximum Rate, then Company shall, upon the written demand of Agent or such Bank, pay to such Bank, in addition to interest otherwise required hereunder, on each interest payment date thereafter, the Excess Interest Amount calculated as of such later interest payment date; provided, however, that in no event shall Company be required to pay, for any appropriate computation period, interest at a rate exceeding the Maximum Rate effective during such period. The term "Excess Interest Amount" shall mean, on any date, with respect to the Note of any Bank, the amount by which (i) the amount of all interest which would have accrued prior to such date on the principal of such Note (had the applicable contract rate(s) described herein at all times been in effect, without limitation by the Maximum Rate) exceeds (ii) the aggregate amount of interest actually paid to such Bank on such Note on or prior to such date. 3.05. Calculation of Interest Rates. Interest on the unpaid principal of each LIBOR Advance and each Base Rate Advance shall be calculated on the basis of the actual days elapsed in a year consisting of 360 days. 3.06. Manner and Application of Payments. All regularly scheduled payments of principal of, and interest on, any Note shall be made by Company to Agent before 2:00 p.m. (Fort Worth time), in federal or other immediately available funds at Agent's principal banking office in Fort Worth. Should the principal of, or any installment of the principal or interest on, any Note, become due and payable on a day other than a Business Day or a LIBOR Business Day, as the case may be, the maturity thereof shall be extended to the next succeeding Business Day or LIBOR Business Day, as the case may be. Each payment received by Agent hereunder for the account of a Bank shall be promptly distributed by Agent to such Bank. All payments made on any Note shall be credited, to the extent of the amount thereof and subject to Section 3.03(b), in the following manner: (a) first, against the amount of interest accrued and unpaid on the Note as of the date of such payment; (b) second, against all principal (if any) due and owing on the Note; (c) third, as a prepayment of outstanding Base Rate Advances or Swing Line Loans under the Note; and (d) fourth, as a prepayment of outstanding LIBOR Advances under the Note. Subject to the foregoing, payments and prepayments of principal of the Notes shall be applied to such outstanding Base Rate Advances, Swing Line Loans, and LIBOR Advances under the Notes as Company shall select; provided, however, that Company shall select Base Rate Advances, Swing Line Loans and LIBOR Advances to be repaid in a manner designated to minimize the Consequential Loss, if any, resulting from such payments; and provided further that, if Company shall fail to select the Base Rate Advances, Swing Line Loans and LIBOR Advances to which such payments are to be applied, or if an Event of Default has occurred and is continuing at the time of such payment, then Agent shall apply the payment first to Base Rate Advances and Swing Line Loans and then to LIBOR Advances. 3.07. Pro Rata Treatment. Each payment received by Agent hereunder for or on account of Banks or any of them on the Notes shall be distributed to each Bank entitled to share in such payment, pro rata in proportion to the then unpaid principal balance of the Note of each Bank. Unless Agent shall have received notice from Company prior to the date on which any payment is due to Banks hereunder that Company will not make such payment in full, Agent may assume that Company has made such payment in full to Agent on such date and Agent may, in reliance upon such assumption, cause to be distributed to each Bank on such due date an amount equal to the amount then due such Bank. If and to the extent Company shall not have so made such payment in full to Agent, each Bank shall repay to Agent on demand such amount distributed to such Bank together with interest thereon, for each day from the date such amount is distributed to such Bank until the date such Bank repays such amount to Agent, at the rate applicable to such portion of the Revolving Credit Loan on its due date. 3.08. Lending Office. Each Bank may (a) designate its principal office or a foreign branch, subsidiary or affiliate of such Bank as its lending office (and the office to whose accounts payments are to be credited) for any LIBOR Advance, (b) designate its principal office or a domestic branch, subsidiary or affiliate as its lending office (and the office to whose accounts payments are to be credited) for any Base Rate Advance and (c) change its lending offices from time to time by notice to Agent and Company; provided, however, no Bank shall designate a foreign branch without the consent of Company if such designation would subject interest payments hereunder to withholding for Taxes. In such event, such Bank shall continue to hold the Note evidencing its loans for the benefit and account of such foreign branch, subsidiary or affiliate. Each Bank shall be entitled to fund all or any portion of its Revolving Credit Loan in any manner that it deems appropriate, but for the purposes of this Loan Agreement such Bank shall, regardless of such Bank's actual means of funding, be deemed to have funded its Loan in accordance with the interest option from time to time selected by Company for such Borrowing. 3.09. Taxes. (a) Any and all payments by Company hereunder or under the Notes shall be made, in accordance with Section 3.06, free and clear of and without deduction for any and all present or future Taxes, excluding, in the case of each Bank and Agent, taxes imposed on its income, and franchise taxes imposed on it, by the jurisdiction under the laws of which such Bank or Agent (as the case may be) is organized or is or should be qualified to do business or any political subdivision thereof and, in the case of each Bank Taxes imposed on its income and franchise taxes imposed on it by the jurisdiction of such Bank's lending office or any political subdivision thereof. If Company shall be required by law to deduct any Taxes (i.e., Taxes for which Company is responsible under the preceding sentence) from or in respect of any sum payable hereunder or under any Note to any Bank or Agent, (i) the sum payable shall be increased as may be necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 3.09) such Bank or Agent receives an amount equal to the sum it would have received had no such deductions been made, (ii) Company shall make such deductions and (iii) Company shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law. (b) In addition, Company agrees to pay any present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies which arise from any payment made hereunder or under the Loan Documents from the execution, delivery, or registration of, or otherwise with respect to, this Agreement or the other Loan Documents (hereinafter referred to as "Other Taxes"). (c) Company will indemnify each Bank and Agent for the full amount of Taxes or Other Taxes (including, without limitation, any Taxes or Other Taxes imposed by any jurisdiction on amounts payable under this Section 3.09) paid by such Bank or Agent (as the case may be) or any liability (including penalties and interest) arising therefrom or with respect thereto, whether or not such Taxes or Other Taxes were correctly or legally asserted. This indemnification shall be made within thirty (30) days from the date such Bank or Agent makes written demand therefor. (d) Within thirty (30) days after the date of any payment of Taxes, Company will furnish to Agent, at its address referred to in Section 12.02, the original or a certified copy of a receipt evidencing payment thereof. (e) Without prejudice to the survival of any other agreement of Company hereunder, the agreements and obligations of Company contained in this Section 3.09 shall survive the payment in full of the obligation. (f) Each Bank agrees to use good faith efforts to carry out its obligations under this Loan Agreement in such a way as to reduce the amount of Taxes attributable to the Revolving Credit Loans, including the use of a different lending office, as long as in the good faith opinion of such Bank such actions would not have a material adverse effect upon it. 3.10. Sharing of Payments. If any Bank shall obtain any payment (whether voluntary, involuntary, through the exercise of any right of set-off, or otherwise) on account of the Advances made by it in excess of its ratable share of payments on account of the Advances obtained by all Banks, such Bank shall forthwith purchase from the other Banks such participations in the Advances made by them as shall be necessary to cause such purchasing Bank to share the excess payment ratably with each of them; provided, however, that if all or any portion of such excess payment is thereafter recovered from such purchasing Bank, such purchase from each Bank shall be rescinded and such Bank shall repay to the purchasing Bank the purchase price to the extent of such recovery together with an amount equal to such Bank's ratable share (according to the proportion of (a) the amount of such Bank's required repayment, to (b) the total amount so recovered from the purchasing Bank) of any interest or other amount paid or payable by the purchasing Bank in respect of the total amount recovered. Company agrees that any Bank so purchasing a participation from another Bank pursuant to this Section 3.10 may, to the fullest extent permitted by law exercise all of its rights of payment (including the right of set-off) with respect to such participation as fully as if such Bank were the direct creditor of Company in the amount of such participation. ARTICLE IV ---------- SPECIAL PROVISIONS FOR LIBOR LOANS ---------------------------------- 4.01. Inadequacy of LIBOR Loan Pricing. If with respect to an Interest Period for any LIBOR Borrowing: (i) Agent determines that, by reason of circumstances affecting the Interbank LIBOR market generally, deposits in Dollars (in the applicable amounts) are not being offered to Banks in the Interbank LIBOR market for such Interest Period, or (ii) Majority Banks advise Agent that the Interbank Offered Rate as determined by Agent will not adequately and fairly reflect the cost to such Banks of maintaining or funding the LIBOR Borrowing for such Interest Period, then Agent shall forthwith give notice thereof to Company, whereupon, until Agent notifies Company that the circumstances giving rise to such suspension no longer exist, (a) the obligation of Banks to make LIBOR Advances shall be suspended and (b) Company shall either (i) repay in full the then outstanding principal amount of the LIBOR Advances, together with accrued interest thereon on the last day of the then current Interest Period applicable to such LIBOR Advances, or (ii) convert such LIBOR Advances to Base Rate Advances in accordance with Section 2.02(c) of this Loan Agreement on the last day of the then current Interest Period applicable to each such LIBOR Advance. 4.02. Unavailability of LIBOR; Illegality. (a) If Agent at any time shall determine that for any reason adequate and reasonable means do not exist for ascertaining LIBOR, then Agent shall promptly give notice thereof to Company. If such notice is given and until such notice has been withdrawn by Agent, then (i) no new LIBOR option may be selected by Company, and (ii) any portion of the outstanding principal balance hereof which bears interest determined in relation to LIBOR, subsequent to the end of the Interest Period applicable thereto, shall bear interest determined in relation to the Base Rate. (b) If any law, treaty, rule, regulation or determination of a court or governmental authority or any change therein or in the interpretation or application thereof (each, a "Change in Law") shall make it unlawful for any Bank (A) to make LIBOR options available hereunder, or (B) to maintain interest rates based on LIBOR, then in the former event, any obligation of any Bank to make available such unlawful LIBOR options shall immediately be canceled, and in the latter event, any such unlawful LIBOR-based interest rates then outstanding shall be converted, at any Bank's option, so that interest on the portion of the outstanding principal balance subject thereto is determined in relation to the Base Rate; provided, however, that if any such Change in Law shall permit any LIBOR-based interest rates to remain in effect until the expiration of the Interest Period applicable thereto, then such permitted LIBOR-based interest rates shall continue in effect until the expiration of such Interest Period. Upon the occurrence of any of the foregoing events, Company shall pay to Banks immediately upon demand such amounts as may be necessary to compensate Banks for any fines, fees, charges, penalties or other costs incurred or payable to Banks as a result thereof and which are attributable to any LIBOR options made available to Company hereunder, and any reasonable allocation made by Banks among their operations shall be conclusive and binding upon Company. 4.03. Increased Costs for LIBOR Loans. If any Change in Law or compliance by any Bank with any request or directive (whether or not having the force of law) from any central bank or other governmental authority shall: (a) subject any Bank to any tax, duty or other charge with respect to any LIBOR options, or change the basis of taxation of payments to any Bank of principal, interest, fees or any other amount payable hereunder (except for changes in the rate of tax on the overall net income of such Bank); or (b) impose, modify or hold applicable any reserve, special deposit, compulsory loan or similar requirement against assets held by, deposits or other liabilities in or for the account of, advances or loans by, or any other acquisition of funds by any office of any Bank; or (c) impose on any Bank any other condition; and the result of any of the foregoing is to increase the costs to any Bank of making, renewing or maintaining any LIBOR options hereunder and/or to reduce any amount receivable by such Bank in connection therewith, then in any such case, Company shall pay to such Bank immediately upon demand such amounts as may be necessary to compensate such Bank for any additional costs incurred by such Bank and/or reductions in amounts received by such bank which are attributable to such LIBOR options. In determining which costs incurred by any Bank and/or reductions in amounts received by any Bank are attributable to any LIBOR options made available to Company hereunder, any reasonable allocation made by such Bank among its operations shall be conclusive and binding upon Company. 4.04. Effect on Interest Options. If notice has been given pursuant to Section 4.02 or Section 4.03 requiring the LIBOR Advances of any Bank to be repaid or converted, then unless and until such Bank notifies Company that the circumstances giving rise to such repayment no longer apply, all Advances shall be Base Rate Advances. If such Bank notifies Company that the circumstances giving rise to such repayment no longer apply, Company may thereafter select Advances to be LIBOR Advances in accordance with Section 2.02(c) of this Loan Agreement. 4.05. Payments Not at End of Interest Period. Company may prepay principal on any portion of a Revolving Credit Loan which bears interest determined in relation to LIBOR at any time and in the minimum amount of One Hundred Thousand and No/100 Dollars ($100,000.00), or in integral multiple thereof; provided, however, that if the outstanding principal balance of such portion of said Revolving Credit Loan is less than said amount, the minimum prepayment amount shall be the entire outstanding principal balance thereof. In consideration of Banks providing this prepayment option to Company, or if any such portion of said Revolving Credit Loan shall become due and payable at any time prior to the last day of the Interest Period applicable thereto, Company shall pay to Banks immediately upon demand a fee (the "Consequential Loss") which is the sum of the discounted monthly differences for each month from the month of prepayment through the month in which such Interest Period matures, calculated as follows for each such month; (a) Determine the amount of interest which would have accrued each month on the amount prepaid at the interest rate applicable to such amount had it remained outstanding until the last day of the Interest Period applicable thereto. (b) Subtract from the amount determined in (a) above the amount of interest which would have accrued for the same month on the amount prepaid for the remaining term of such Interest Period at LIBOR in effect on the date of prepayment for new Advances made for such term and in a principal amount equal to the amount prepaid. (c) If the result obtained in (b) for any month is greater than zero, discount that difference by LIBOR used in (b) above. Company acknowledges that prepayment of such amount may result in Banks incurring additional costs, expenses and/or liabilities, and that it is difficult to ascertain the full extent of such costs, expenses and/or liabilities. Company, therefore, agrees to pay the above-described Consequential Loss and agrees that said amount represents a reasonable estimate of the prepayment costs, expenses and/or liabilities of Banks. ARTICLE V --------- CONDITIONS PRECEDENT -------------------- 5.01. Initial Advances. The obligation of each Bank to make the Loans herein provided for and the initial Advance (including a Swing line Loan) thereunder is subject to the condition precedent that, on or before the date of such Advance, Agent shall have received for each Bank the following, each dated the date of such Advance, in form and substance satisfactory to Agent and such Bank: (a) Promissory Note. A duly executed promissory note, drawn to the order of such Bank, in the form of Exhibit "B" attached hereto with appropriate insertions. (b) Swing Line Note. A duly executed promissory note drawn to the order of Agent, in the form of Exhibit "C" attached hereto with appropriate insertions. (c) Guaranty Agreement. The Guaranty Agreement executed by each Guarantor. (d) Articles of Incorporation of Company. A copy of the Articles of Incorporation of Company and all amendments thereto. (e) Bylaws of Company. A certified copy of the bylaws of Company. (f) Resolutions of Company. Resolutions of Company authorizing the execution of the Loan Documents duly adopted by the Board of Directors of Company and accompanied by a certificate of the Secretary of Company stating that such resolutions are true and correct, have not been altered or repealed and are in full force and effect. (g) Incumbency Certificate of Company. An incumbency certificate with respect to Company executed by the appropriate officers of Company. (h) Certificates of Existence and Account Status For Company. A current certificate of existence and good standing from the State of Delaware and a current certificate of account status from the Comptroller of Public Accounts of the State of Texas. (i) Authority to Transact Business. Certificate evidencing the authority of Company to conduct or transact business in the State of Texas. (j) Articles of Incorporation of Guarantors. A copy of the Articles of Incorporation of each Guarantor and all amendments thereto. (k) Bylaws of Guarantors. A certified copy of the Bylaws of each Guarantor. (l) Resolutions of Guarantors. Resolutions of each Guarantor approving the execution of the Guaranty Agreement duly adopted by the Board of Directors of each of such Guarantor and accompanied by a certificate of the Secretary of each of such Guarantor stating that such resolutions are true and correct, have not been altered or repealed and are in full force and effect. (m) Incumbency Certificates of Guarantors. An incumbency certificate with respect to each Guarantor executed by the appropriate officers of each such Guarantor. (n) Certificates of Existence and Account Status For Each Guarantor. A current certificate of existence from the state of incorporation of each Guarantor and a certificate of account status from the Comptroller of Public Accounts of the State of Texas for each Guarantor. (o) Opinion of Counsel. An executed opinion (in form and substance satisfactory to Agent)of counsel to Company and each Guarantor. (p) Loan Origination Fee. The loan origination fee in an amount equal to one-tenth of one percent (.1%) of the Total Commitment. (q) Financial Projections. Company's two (2) year financial projections which are satisfactory in form and substance to Agent. (r) Additional Information. Such other and additional documents, reports and information which Agent may reasonably request of Company and Guarantors. 5.02. All Advances. The obligations of each Bank to make any Advance (including Swing Line Loans) under this Loan Agreement (including the initial Advance) shall be subject to the following conditions precedent: (a) No Defaults. As of the date of the making of such Advance, there exists no Event of Default or event which with notice or lapse of time or both could constitute an Event of Default. (b) Compliance with Loan Agreement. Company shall have performed and complied in all material respects with all agreements and conditions contained herein and in the Loan Documents which are required to be performed or complied with by Company before or at the date of such Advance or conversion. (c) Request for Borrowing. In the case of any Borrowing, Agent shall have received from Company a Request for Borrowing in the form of either Exhibit "D" or Exhibit "E" attached hereto, dated as of the date of such Advance and signed by an authorized officer of Company, all of the statements of which shall be true and correct, certifying that, as of the date thereof, (i) all of the representations and warranties of Company contained in this Loan Agreement and each of the Loan Documents executed by Company are true and correct, (ii) no event has occurred and is continuing, or would result from the Advance, which constitutes an Event of Default or which, with the lapse of time or giving of notice or both, would constitute an Event of Default, and (iii) such other facts as Agent may reasonably request. If any Advance was by telephonic notice, said telephonic notice must be confirmed in writing prior to Agent funding the Advance pursuant to a Confirmation of Request for Advance (A) substantially in the form attached as Exhibit "F" in the case of a Base Rate Advance and (B) substantially in the form attached as Exhibit "G" in the case of a LIBOR Advance. (d) No Material Adverse Change. As of the date of making such Advance, no change has occurred in the business or financial condition of the Company and its Subsidiaries on a Consolidated basis which causes or could cause a Material Adverse Effect. (e) Representations and Warranties. The representations and warranties contained in Article VI (other than the representations and warranties contained in Section 6.07) hereof shall be true in all material respects on the date of making of such Advance, with the same force and effect as though made on and as of that date. (f) Bankruptcy Proceedings. No proceeding or case under the United States Bankruptcy Code shall have been commenced by or against Company or any Guarantor. 5.03. Letters of Credit. The obligations of Bank to issue any Letter of Credit under this Agreement (including the initial Letter of Credit issued hereunder) shall be subject to the following conditions precedent: (a) No Defaults. As of the date of the issuance of such Letter of Credit, there exists no Event of Default or event which with notice or lapse of time or both could constitute an Event of Default. (b) Compliance with Loan Agreement. Company shall have performed and complied in all material respects with all agreements and conditions contained herein and in the Loan Documents which are required to be performed or complied with by Company before or at the date of issuance of such Letter of Credit. (c) Continuing Letter of Credit Agreement. In the case of a request for the issuance of a Letter of Credit, Agent shall have received from Company a Continuing Letter of Credit Agreement in the form of Exhibit "I" attached hereto. (d) L/C Agreement. In the case of each request for the issuance of a Letter of Credit, Agent shall have received from Company an Application and Agreement For Letter of Credit ("L/C Agreement"). (e) No Material Adverse Change. As of the date of issuance of such Letter of Credit or the creation of any Banker's Acceptance, no change has occurred in the business or financial condition of the Company and its Subsidiaries on a Consolidated basis which causes or could cause a Material Adverse Effect. (f) Representations and Warranties. The representations and warranties contained in Article VI (other than the representations and warranties contained in Section 6.07) hereof shall be true in all material respects on the date of issuance of the Letter of Credit, with the same force and effect as though made on and as of that date. (g) Bankruptcy Proceedings. No proceeding or case under the United States Bankruptcy Code shall have been commenced by or against Company or any Subsidiary, except Brand Name Apparel, Inc. ARTICLE VI ---------- REPRESENTATIONS AND WARRANTIES ------------------------------ To induce Banks to make the Loans, Company represents and warrants to Banks that: 6.01. Organization and Good Standing of Company. Company is a corporation duly organized and existing in good standing under the laws of the state of its incorporation, is duly qualified as a foreign corporation and in good standing in all states in which the failure to so qualify would have a Material Adverse Effect and has the corporate power and authority to own its properties and assets and to transact the business in which it is engaged and is or will be qualified in those states wherein it will transact business in the future and where the failure to so qualify would have a Material Adverse Effect. 6.02. Organization and Good Standing of Guarantors. Each Guarantor is a corporation duly organized and existing in good standing under the laws of the state of Its incorporation, is duly qualified as a foreign corporation and in good standing in all states in which the failure to so qualify would have a Material Adverse Effect and has the corporate power and authority to own its properties and assets and to transact the business in which it is engaged and is or will be qualified in those states wherein it will transact business in the future and where the failure to so qualify would have a Material Adverse Effect. 6.03. Authorization and Power. Company has the corporate power and requisite authority to execute, deliver and perform this Loan Agreement and the other Loan Documents to be executed by Company; Company is duly authorized to, and has taken all corporate action necessary to authorize Company to, execute, deliver and perform this Loan Agreement, the Notes and the other Loan Documents and is and will continue to be duly authorized to perform this Loan Agreement, the Notes and the other Loan Documents. Each Guarantor has the corporate power and requisite authority to execute, deliver and perform the Guaranty Agreement. 6.04. No Conflicts or Consents. Neither the execution and delivery of this Loan Agreement, the Notes, the Guaranty Agreement or the other Loan Documents, nor the consummation of any of the transactions herein or therein contemplated, nor compliance with the terms and provisions hereof or with the terms and provisions thereof, will contravene or materially conflict with any provision of law, statute or regulation to which Company or any Guarantor is subject or any judgment, license, order or permit applicable to Company or any Guarantor, or any indenture, loan agreement, mortgage, deed of trust, or other agreement or instrument to which Company or any Guarantor is a party or by which Company or any Guarantor may be bound, or to which Company or any Guarantor may be subject, or violate any provision of the Articles of Incorporation or Bylaws of Company or any Guarantor. No consent, approval, authorization or order of any court or governmental authority or third party is required in connection with the execution and delivery by Company or any Guarantor of the Loan Documents or to consummate the transactions contemplated hereby or thereby. 6.05. Enforceable Obligations. This Loan Agreement, the Notes, the Guaranty Agreement and the other Loan Documents are the legal and binding obligations of the person executing such Loan Documents, enforceable in accordance with their respective terms, except as limited by bankruptcy, insolvency or other laws of general application relating to the enforcement of creditors' rights. 6.06. No Liens. Except for Permitted Liens, all of the properties and assets of Company and its Subsidiaries are free and clear of all Liens and other adverse claims of any nature, and such corporation has and will have good and marketable title to such properties and assets. 6.07. Financial Condition. Company has delivered to Agent copies of the balance sheet of Company as of December 31, 1998, and the related consolidated statements of income, stockholders' equity and changes in financial position for the period ended such date; such financial statements are true and correct in all material respects, fairly present the financial condition of Company as of such date and have been prepared in accordance with GAAP applied on a basis consistent with that of prior periods except for the exclusion of footnotes and normal adjustments; as of the date hereof, there are no obligations, liabilities or indebtedness (including contingent and indirect liabilities and obligations or unusual forward or long-term commitments) of Company and its Subsidiaries which are (separately or in the aggregate) material and are not reflected in such financial statements or disclosed in writing to Agent; no changes having a Material Adverse Effect have occurred in the financial condition or business of Company since December 31, 1998. 6.08. Full Disclosure. There is no material fact that Company has not disclosed to Bank which could have a Material Adverse Effect on the properties business, prospects or condition (financial or otherwise) of Company or any Guarantor. Neither the financial statements referred to in Section 6.07 hereof, nor any certificate or statement delivered herewith or heretofore. by Company to Bank in connection with negotiation of this Loan Agreement, contains any untrue statement of a material fact or omits to state any material fact necessary to keep the statements contained herein or therein from being misleading in any material respect. 6.09. No Default. No event has occurred and is continuing which constitutes an Event of Default or which, with the lapse of time or giving of notice or both, would constitute an Event of Default. 6.10. No Litigation. Except as described in Exhibit "K" attached hereto, there are no actions, suits or legal, equitable, arbitration or administrative proceedings pending, or to the knowledge of Company threatened, against Company or any Guarantor that would, if adversely determined, have a Material Adverse Effect. 6.11. Regulatory Defects. As of the date hereof, Company has advised Banks, in writing, of all Regulatory Defects of which Company has been advised or has knowledge. 6.12. Use of Proceeds; Margin Stock. The proceeds of the Loans will be used by the Company solely for the purposes specified in the preamble. None of such proceeds will be used for the purpose of purchasing or carrying any "margin stock" as defined in Regulation U or G of the Board of Governors of the Federal Reserve System (12 C.F.R. Part 221 and 207), or for the purpose of reducing or retiring any indebtedness which was originally incurred to purchase or carry a margin stock or for any other purpose which might constitute this transaction a "purpose credit" within the meaning of such Regulation U or G. Company is not engaged in the business of extending credit for the purpose of purchasing or carrying margin stocks. Neither Company nor any Person acting on behalf of Company has taken or will take any action which might cause the Notes or any of the other Loan Documents, including this Loan Agreement, to violate Regulations U or G or any other regulations of the Board of Governors of the Federal Reserve System or to violate Section 7 of the Securities Exchange Act of 1934 or any rule or regulation thereunder, in each case as now in effect or as the same may hereinafter be in effect. Company does not own any "margin stock" except for that described in the financial statements referred to in Section 6.07 hereof and, as of the date hereof, the aggregate value of all "margin stock" owned by Company and its Subsidiaries does not exceed 25% of the aggregate value of all of the assets of Company and its Subsidiaries. 6.13. No Financing of Corporate Takeovers. No proceeds of the Loans will be used to acquire any security in any transaction which is subject to Section 13 or 14 of the Securities Exchange Act of 1934, including particularly (but without limitation) Sections 13(d) and 14(d) thereof. 6.14. Taxes. Except as previously disclosed to Bank, all tax returns required to be filed by the Company and its Subsidiaries in any jurisdiction have been filed or will be filed prior to the date on which the tax payable with respect to such return will become delinquent and all taxes (including mortgage recording taxes), assessments, fees and other governmental charges upon Company or any Subsidiary or upon any of its or their properties, income or franchises have been paid prior to the time that such taxes could give rise to a lien thereon. To the best of Company's knowledge, there is no proposed tax assessment for delinquent taxes against Company and there is no basis for such assessment. 6.15. Principal Office, Etc. The principal office, chief executive office and principal place of business of Company is at 1400 Everman Parkway, Fort Worth, Tarrant County, Texas 76140, and Company maintains its principal records and books at such address. 6.16. ERISA. (a) No Reportable Event has occurred and is continuing with respect to any Plan; (b) PBGC has not instituted proceedings to terminate any Plan;(c) neither the Company, any member of the Controlled Group, nor any duly appointed administrator of a Plan (i) has incurred any liability to PBGC with respect to any Plan other than for premiums not yet due or payable or (ii) has instituted or intends to institute proceedings to terminate any Plan under Section 4041 or 4041A of ERISA or withdraw from any Multi-Employer Pension Plan (as that term is defined in Section 3(37) of ERISA); and (d) each Plan of Company has been maintained and funded in all material respects in accordance with its terms and with all provisions of ERISA applicable thereto. 6.17. Compliance with Law. Except as described on Exhibit "L," Company and each of the Guarantors are in compliance in all material respects with all laws, rules, regulations, ordinances, orders and decrees which are applicable to Company, the Guarantors or any of their respective properties or business, the failure to comply with which could have a Material Adverse Effect, including all Environmental Laws. Neither Company nor any Subsidiary has been notified by any Governmental Authority that Company or any Subsidiary has failed to comply with any such laws, rules, regulations, orders or decrees, the failure to comply with which would result in a Material Adverse Effect, nor has Company or any Subsidiary been notified of any Environmental Claim except as described in Exhibit "M." 6.18. Government Regulation. Neither Company nor any of the Guarantors are subject to regulation under the Public Utility Holding Company Act of 1935, the Federal Power Act, the Investment Company Act of 1940, the Interstate Commerce Act (as any of the preceding acts have been amended), or any other law (other than Regulation X) which regulates the incurring by Company or any of its Consolidated Subsidiaries of indebtedness, including but not limited to laws relating to common contract carriers or the sale of electricity, gas, steam, water, or other public utility services. 6.19. Insider. Company is not, and no Person having "control" (as that term is defined in 12 U.S.C. Section375(b)(5) or in regulations promulgated pursuant thereto) of Company is, an "executive officer", "director", or "person who directly or indirectly or in concert with one or more persons owns, controls, or has the power to vote more than 10% of any class of voting securities" (as those terms are defined in 12 U.S.C. Section 375(b) or in regulations promulgated pursuant thereto) of any Bank, of a bank holding company of which any Bank is a subsidiary, or of any subsidiary of a bank holding company of which Bank is a subsidiary, or of any bank at which Bank maintains a correspondent account, or of any bank which maintains a correspondent account with any Bank. 6.20. Subsidiaries. Company directly owns all of the capital stock of The Development Association, Inc., a Texas corporation, Sav-On, Inc., a Texas corporation, David James Manufacturing, Inc., a Texas corporation, PLC Leather Company, a Nevada corporation, Tandyarts, Inc., a Nevada corporation, and Licensed Lifestyles, Inc., a Nevada corporation, in each case free and clear from all liens, security interests, charges and encumbrances. 6.21. Solvency. Except as disclosed to Agent in writing, Company and each of its Subsidiaries now have capital sufficient to carry on their businesses and transactions and all business and transactions in which they are about to engage, and for which they have projected, and are now solvent and able to pay their debts as they mature and each of Company and its Subsidiaries now owns property having a value, both at fair valuation and at present fair saleable value greater than the amount required to pay its respective debts. Without giving effect to the Guaranty Agreement, no Guarantor is "insolvent" on the date hereof (that is, the sum of such Guarantor's absolute and contingent liabilities does not exceed the fair market value of such Guarantor's assets). After giving effect to the Guaranty Agreement, no Guarantor is insolvent on the date hereof (that is, the sum of such Guarantor's absolute and contingent liabilities including under the Guaranty Agreement, does not exceed the fair market value of such Guarantor's assets). Each Guarantor has received or will receive good and fair consideration for its liability and obligations incurred in connection with the Guaranty Agreement, and the incurrence of its liability under the Guaranty Agreement in return for such consideration may reasonably be expected to benefit each Guarantor, directly or indirectly. 6.22. Environmental Matters. Except as described in Exhibit "M" attached hereto, none of the properties of Company or its Subsidiaries has been used at any time during their ownership to generate, manufacture, refine, transport, treat, store, handle, dispose, transfer, produce, process, or in any manner deal with Hazardous Materials. Except as described in Exhibit "M" attached hereto, there are no past, pending or, to the best of Company's knowledge, threatened or potential Environmental Claims against Company or any of its Subsidiaries or with respect to any properties owned or controlled by Company or any of its Subsidiaries. Except as described in Exhibit "M" attached hereto, there are no underground storage tanks located on any of the properties owned or controlled by Company or any of its Subsidiaries and, to Company's best knowledge, there never have been any underground storage tanks located on any of the properties owned or controlled by Company or any of its Subsidiaries, and the Company has received no actual (as contrasted with constructive) notification of any Environmental Claims relating to any property contiguous to any property owned or controlled by Company or any of its Subsidiaries. 6.23. Representations and Warranties. Each Request for Borrowing shall constitute, without the necessity of specifically containing a written statement, a representation and warranty by Company that no Event of Default exists and that all representations and warranties contained in this Article VI (other than in Section 6.07) or in any other Loan Document are true and correct at and as of the date the Advance is to be made. 6.24. No Subordination. There is no agreement, indenture, contract or instrument to which Company is a party or by which Company may be bound that requires the subordination in right of payment of any of Company's obligations subject to this Agreement to any other obligation of Company. 6.25. Permits, Franchises. To the best of Company's knowledge, Company possesses, and will hereafter possess, all permits, consents, approvals, franchises and licenses required and rights to all trademarks, trade names, patents, and fictitious names, if any, necessary to enable it to conduct the business in which it is now engaged in compliance with applicable law. 6.26. Survival of Representations, Etc. All representations and warranties made herein are true and correct when made by Company and shall survive delivery of the Notes and the Guaranty Agreement and the making of the Loans and any investigation at any time made by or on behalf of Agent or any Bank shall not diminish Agent or such Bank's right to rely thereon. ARTICLE VII ----------- AFFIRMATIVE COVENANTS --------------------- So long as Banks have any commitment to make Advances hereunder and until payment in full of the Notes and the Obligation, Company agrees and covenants that Company will (unless Majority Banks shall otherwise consent in writing): 7.01. Financial Statements. Deliver to each Bank in duplicate: (a) Quarterly Statements: as soon as practicable and in any event within forty-five (45) days after the end of each quarterly period (other than the last quarterly period) in each fiscal year, a Consolidated and consolidating statement of operations of Company and its, Subsidiaries, a Consolidated and consolidating statement of changes in financial position of the Company and its Subsidiaries, and a Consolidated and consolidating balance sheet of the Company and its Subsidiaries as at the end of such quarterly period, setting forth in each case in comparative form figures for the corresponding period in the preceding fiscal year, all in reasonable detail and prepared by an authorized financial officer of the Company, and certified as being true and correct by a senior financial officer of Company. (b) Annual Statements: as soon as practicable and in any event within ninety (90) days after the end of each fiscal year, a Consolidated statement of operations of Company and its Subsidiaries, and a Consolidated statement of changes in financial position of the Company and its Subsidiaries for such year, and a Consolidated balance sheet of the Company and its Subsidiaries as at the end of such year, setting forth in each case in comparative form corresponding Consolidated figures from the preceding year, all in reasonable detail and satisfactory in scope to Agent and certified as being true and correct by a senior financial officer of Company, together with an opinion by independent public accountants of recognized standing selected by the Company and satisfactory to Agent, whose opinion shall state that such financial statements have been prepared in accordance with GAAP and fairly present the Consolidated financial position of the Company and its Subsidiaries as of the date thereof and the Consolidated results of their operations for the period thereof; (c) Financial Projections: (i) as soon as practicable and in any event within forty-five (45) days after the end of each of Company's fiscal years, Consolidated projections of the Company's and its Subsidiaries' operations, financial position and balance sheet for the succeeding fiscal year, all in reasonable detail and satisfactory in scope to Agent; and (ii) as soon as practicable and in any event within ninety (90) days after the end of each of Company's fiscal years, Consolidated projections of the Company's and its Subsidiaries' operations, financial position and balance sheet for the second succeeding fiscal year, all in reasonable detail and satisfactory in scope to Agent. (d) SEC and Other Reports: promptly upon transmission thereof, copies of all such financial statements, proxy statements, notices and reports as Company shall send to its public security holders and copies of all registration statements (without exhibits) and all reports which it files with the Securities and Exchange Commission (or any governmental body or agency succeeding to the functions of the Securities and Exchange Commission) including, but not limited to, each Form 10-K and Form 10-Q; (e) Audit Reports: promptly upon receipt thereof, a copy of each other report submitted to the Company or any Subsidiary by independent accountants in connection with any annual, interim or special audit made by them of the books of the Company or any Subsidiary; (f) Other Notices: promptly upon the occurrence thereof, notice of any of the following: (i) the occurrence of any condition or event which constitutes an Event of Default, specifying the nature and period of existence thereof, (ii) that any Person has given any notice to the Company with respect to a claimed Event of Default, or (iii) that any Person has given any notice to the Company or any Subsidiary or taken any other action with respect to a claimed default or event of default with respect to any other indebtedness which in the aggregate exceeds the sum of two hundred fifty thousand dollars ($250,000.00) and, with respect to any of such events specified in subdivisions (i), (ii) or (iii) above of this Section 7.01(f), what action the Company or such Subsidiary has taken, is taking or proposes to take; (g) ERISA Events: promptly upon any officer of the Company obtaining knowledge of the occurrence thereof, notice of the occurrence of any (i) "reportable event," as such term is defined in section 4043 of ERISA, or (ii) "prohibited transaction," as such term is defined in section 4975 of the Code, in connection with any Plan or any trust created thereunder, specifying the nature thereof, what action the Company or its Subsidiary has taken, is taking or proposes to take with respect thereto, and, when known, any action taken or threatened by the Internal Revenue Service or the Pension Benefit Guaranty Corporation with respect thereto; provided that with respect to the occurrence of any "reportable event" as to which the Pension Benefit Guaranty Corporation has waived the 30-day reporting requirement, such written notice need be given only at such time as notice is given to the Pension Benefit Guaranty Corporation; (h) Requested Information: with reasonable promptness, such other financial data or other data or information related to the business or operations of Company or its Subsidiaries as Banks may reasonably request. Banks agree that Banks will not intentionally disclose any information given to Banks by the Company or any of its Subsidiaries which is either proprietary or confidential and which is prominently marked as such; provided, however, that this restriction shall not apply to information which has at the time in question entered the public domain, nor will this restriction prohibit any Bank from disclosing such information (i) as is required to be disclosed by Law or by any order, rule or regulation (whether valid or invalid) of any Tribunal, (ii) to Bank's auditors, attorneys, or agents, or (iii) to purchasers or prospective purchasers or assignees of interests in the Loan Agreement or the Obligation. Together with each delivery of financial statements required by Section 7.01(a) above, Company will deliver to Agent an Officer's Certificate demonstrating (with computations in reasonable detail) compliance by the Company and its Subsidiaries with the provisions of Sections 8.01, 8.02 and 8.03 and stating that there exists no Event of Default with respect to such covenants or otherwise under this Loan Agreement or, if any Event of Default exists with respect to such covenants or under this Loan Agreement, specifying the nature and period of existence thereof and what action the Company proposes to take with respect thereto. Together with each delivery of financial statements required by Section 7.01(b) above, the Company will deliver to Agent an Officer's Certificate of the Treasurer or Chief Financial Officer of Company demonstrating (with computations in reasonable detail) compliance by the Company and its Subsidiaries with the provisions of Sections 8.01, 8.02 and 8.03 and stating that there exists no Event of Default with respect thereto or otherwise under this Loan Agreement or, if any Event of Default exists with respect thereto or under this Loan Agreement, specifying the nature and period of existence thereof and what action the Company proposes to take with respect thereto. By delivery of such Officer's Certificate, the officer executing such certificate represents and warrants that the statements made therein are based upon the level of investigation normally and customarily taken by Treasurers or Chief Financial Officers of similarly situated corporations of established reputation in performing their regular duties. 7.02. Payment of Obligations; Maintain Books and Reserves. Duly and punctually pay the Obligation in accordance with the terms of this Loan Agreement. Company will, and will cause each of its Subsidiaries to, keep proper books of record and account and set aside appropriate reserves, all in accordance with GAAP. 7.03. Inspection of Property. Permit any Person designated by Agent, at Banks' expense and with reasonable notice to the Company, to visit and inspect any of the properties of the Company and its Subsidiaries, to examine the corporate books and financial records of the Company and its Subsidiaries and make copies thereof or extracts therefrom and to discuss the affairs, finances and accounts of any such corporations with officers and employees of the Company and its independent public accountants, all at such reasonable times and as often as Agent or Banks may reasonably request. Banks agree that Banks will keep confidential any proprietary or confidential information given to Banks by the Company or its Subsidiaries upon the same terms and conditions as agreed to with respect to information Banks have obtained pursuant to Section 7.01(h) hereof. 7.04. Compliance with Laws, Etc. Comply and cause each of its Subsidiaries to comply, in all material respects with all applicable laws, rules, regulations and orders applicable to its business, such compliance to include, without limitation, paying before the same become delinquent all taxes, assessments, and governmental charges imposed upon it or upon its property, except to the extent contested in good faith by appropriate proceedings and for which adequate reserves have been established in accordance with GAAP, and provided the Company or its Subsidiary, as the case may be, retains good and marketable title to and the right to use and enjoyment of its properties or other assets which may be affected by any such contest. Company will timely pay and will cause its Subsidiaries to timely pay, all payments due for labor, services and materials rendered or furnished in the ordinary course of business which are secured by inchoate statutory Liens, except to the extent contested in good faith by appropriate proceedings, and provided that the Company or its Subsidiary, as the case may be, retains good and marketable title to and the right to the use and enjoyment of its properties or other assets which may be affected by any such contest. Company will promptly notify Agent if the Company or any Subsidiary receives any notice, claim or demand from any governmental agency which alleges that the Company or any Subsidiary is in violation of any Laws or has failed to comply with any order issued pursuant to any federal, state or local statute regulating its operation and business, the result of which may have a Material Adverse Effect. 7.05. Maintenance of Existence and Qualifications. Maintain and preserve and cause each of its Subsidiaries to maintain and preserve its corporate existence and its rights and franchises in full force and effect and obtain and maintain and cause its Subsidiaries to obtain and maintain all permits and licenses necessary to the proper conduct of its business, including without limitation qualifying to do business as a foreign corporation in all states or jurisdictions where required by applicable Law. 7.06. Maintenance of Properties; Insurance. Maintain, preserve protect, and keep and cause each of its Subsidiaries to maintain, preserve, protect and keep, all property used or useful in the conduct of its business in good condition and in compliance with all applicable Laws, and will from time to time make all repairs, renewals and replacements needed to enable the business and operations carried on in connection therewith to be promptly and advantageously conducted at all times. Company will, and will cause each of its Subsidiaries, to carry and maintain in full force and effect at all times with financially sound and reputable insurers (or, in an insurance fund or by self-insurance authorized by the jurisdiction in which its operations are carried on) insurance in such amounts (and with co-insurance and deductibles) as such insurance is usually carried by corporations of established reputation engaged in the same or similar businesses and similarly situated, and the Company and its Subsidiaries shall maintain self-insurance only to the extent that a prudent corporation of established reputation engaged in the same or similar businesses and similarly situated would rely upon self-insurance. 7.07. Yield Maintenance. If at any time after the date hereof, and from time to time, any Bank determines that the adoption or modification of any applicable law, rule or regulation regarding taxation, such Bank's required levels of reserves, deposits, insurance or capital (including any allocation of capital requirements or conditions), or similar requirements, or any interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation, administration or compliance of such Bank with any of such requirements, has or would have the effect of (a) materially increasing such Bank's costs relating to the obligation hereunder, or (b) reducing the yield or rate of return of such Bank on the Obligation hereunder to a level below that which Bank could have achieved but for the adoption or modification of any such requirements, Company shall, within fifteen (15) days of any request by any such Bank, pay to Bank such additional amounts as (in the Bank's sole judgment, after good faith and reasonable computation) will compensate Bank. No failure by a Bank to immediately demand payment of any additional amounts payable hereunder shall constitute a waiver of Bank's right to demand payment of such amounts at any subsequent time. Nothing herein contained shall be construed or so operate as to require Company to pay any interest, fees, costs or charges greater than is permitted by applicable law. 7.08. Transactions With Affiliates. Conduct and cause each Subsidiary to conduct all of their respective transactions with any Affiliate on an arm's length basis and pursuant to the reasonable requirements of Company's and/or such Subsidiary's business. 7.09. Compliance with Loan Documents. Company will promptly comply in all material respects with any and all covenants and provisions of this Loan Agreement, the Notes and all other of the Loan Documents. 7.10. Compliance with Material Agreements. Company will all comply with all material agreements, indentures, mortgages or documents binding on it or affecting its properties or business where the failure to so comply would have a Material Adverse Effect. 7.11. Operations and Properties. Company will act prudently and in accordance with customary industry standards in managing or operating its assets, properties, business and investments; Company will keep in good working order and condition, ordinary wear and tear excepted, all of its assets and properties which are necessary to the conduct of its business. 7.12. Books and Records; Access. Upon prior written notice, Company will give any representative of Agent and Banks access during all business hours to, and permit such representatives to examine, copy or make excerpts from, any and all books, records and documents in the possession of Company and relating to its affairs, and to inspect any of the properties of Company. Company will maintain complete and accurate books and records of its transactions in accordance with good accounting practices. 7.13. Security For Letters of Credit. At the sole option and request of Agent upon the occurrence of an Event of Default, Company shall pledge to Agent certificates of deposit or marketable securities satisfactory to Agent in an amount or having a value (a) at least equal to the aggregate undrawn face amount of the Letters of Credit which are issued and outstanding at the time of occurrence of such Event of Default in order to secure the obligations of Company under such Letters of Credit, and (b) which satisfy Agent's margin requirements established by Agent in its absolute discretion. 7.14. Additional Information. Company shall promptly furnish to Agent, at Agent's request, such additional financial or other information concerning assets, liabilities, operations and transactions of Company or any Subsidiary as Agent may from time to time reasonably request. 7.15. Guaranty of Additional Subsidiary Corporations. Company shall cause each of its Subsidiaries having gross assets in excess of $250,000.00 in the aggregate formed after the date of this Loan Agreement to execute a guaranty of payment of the Notes in form satisfactory to Agent within ten (10) days after the date of formation of such Subsidiary. 7.16. Principal Depositary. Company and its Subsidiaries shall use Agent as its principal depository and shall maintain all of their primary operating accounts with Agent. 7.17. Application of Proceeds of Sale and Equity Securities. Company and its Subsidiaries shall apply (a) all of the net proceeds generated by the sale of their respective assets (except proceeds generated by the sale of Wal- Mart, Inc. accounts receivable) during any fiscal year; provided, however, net proceeds generated by the closure of Tandy Leather retail stores shall be remitted to Agent for application to the Revolving Credit Loans within a reasonable period of time, and (b) seventy-five percent (75%) of the net cash proceeds generated by the issuance by Company or any of its Subsidiaries of equity securities to the payment of the Revolving Credit Loans and (c) all of the net proceeds generated by Company's sale of Sav-On, Inc. 7.18. Further Assurances. Upon request of Agent, promptly cure any defects in the creation, issuance, execution and delivery of this Loan Agreement or in the Loan Documents. Company, at its expense, will further promptly execute and deliver to Agent upon request all such other and further documents, agreements and instruments in compliance with or accomplishment of the covenants and agreements of Company hereunder, or to further evidence and more fully describe the obligations of Company hereunder, or to correct any omissions herein, or to more fully state the obligations set out herein. 7.19. Year 2000 Compliance. Company shall perform all acts reasonably necessary to ensure that (a) Company and any business in which Company holds a substantial interest, and (b) all customers, suppliers and vendors that are material to Company's business, become Year 2000 Complaint in a timely manner. Such acts shall include, without limitation, performing a comprehensive review and assessment of all of Company's systems and adopting a detailed plan, with itemized budget, for the remediation, monitoring and testing of such systems. As used herein, "Year 2000 Compliant" shall mean, in regard to any entity, that all software, hardware, firmware, equipment, goods or systems utilized by or material to the business operations or financial condition of such entity, will properly perform date sensitive functions before, during and after the year 2000. Company shall, immediately upon request, provide to Bank such certifications or other evidence of Company's compliance with the terms hereof as Agent may from time to time require. 7.20. Taxes and Other Liabilities. Company shall pay and discharge when due any and all indebtedness, obligations, assessments and taxes, both real or personal, including without limitation federal and state income taxes and state and local property taxes and assessments, except such (a) as Company may in good faith contest or as to which a bona fide dispute may arise, and (b) for which Company has made provision, to Agent's satisfaction, for eventual payment thereof in the event Company is obligated to make such payment. 7.21. Litigation. Company shall promptly give notice in writing to Agent of any litigation pending or threatened against Company with a claim in excess of $2,500,000.00. ARTICLE VIII ------------ NEGATIVE COVENANTS ------------------ So long as Banks have any commitment to make Loans hereunder, and until full payment of the Notes and the performance of the Obligation, Company covenants and agrees that neither Company nor any of its Subsidiaries will, unless Majority Banks otherwise consent in writing: 8.01. Leverage Ratio. Permit the Leverage Ratio, on the last day of each fiscal quarter to be greater than: 3.85 to 1.00 on March 31, 1999, on June 30, 1999, and on September 30, 1999, and 3.00 to 1.00 on December 31, 1999 and on each test date thereafter. 8.02. Fixed Charge Coverage Ratio. Permit the Fixed Charge Coverage Ratio to be less than (a) 1.75 to 1.00 on the last day of each fiscal quarter through June 30, 1999 and (b) 2.00 to 1.00 on each test date thereafter. 8.03. Current Ratio. Calculated as of the end of each fiscal quarter and fiscal year end, permit the ratio of Current Assets to Current Liabilities to be less than 1.10 to 1.00. 8.04. Minimum Consolidated Tangible Net Worth. Permit Company's Consolidated Tangible Net Worth on the last day of each fiscal quarter to be less than an amount equal to the sum of thirty-six million dollars ($36,000,000.00) plus (a) 50% of the aggregate Consolidated Net Income for the period commencing December 31, 1998 (without deduction for any net loss in any fiscal quarter ending after December 31, 1998) and terminating at the end of the last fiscal quarter preceding the date of any determination of Consolidate Tangible Net Worth, plus (b) the full amount of proceeds generated by all equity issues after December 31, 1998. 8.05. Limitation on Dividends, Acquisition of Stock and Restricted Payments. Pay or declare any dividend on any class of its stock (other than stock dividends) or make any other distribution on account of any class of its stock (other than dividends or distributions payable solely in shares of its stock) or redeem, purchase or otherwise acquire, directly or indirectly, any shares of its stock (all of the foregoing being herein called "Restricted Payments"); provided, however, Company may redeem its stock and pay dividends as long as the aggregate purchase price and/or payment amount does not exceed two million fifty thousand dollars ($2,050,000.00) during fiscal year 1999 and during each fiscal year thereafter the lesser of (a) up to fifty percent (50%) of Borrower's Consolidated Net Income on a year-to-date fiscal quarter basis, or (b) one million five hundred thousand dollars ($1,500,000.00). A dividend distribution and/or treasury stock repurchase under the preceding sentence, if accomplished immediately subsequent to a fiscal quarter in which Borrower's Consolidated Net Income was positive, shall not constitute an Event of Default even if Borrower's aggregate Consolidated Net Income for the applicable fiscal year is $0.00 or a negative amount. Notwithstanding the foregoing, no Restricted Payments shall be made if, after giving effect thereto, an Event of Default shall have occurred and be continuing. There shall not be included in the limitation on Restricted Payments any dividends paid by any Subsidiary of Company (y) to its corporate parent which is also a Subsidiary of Company, or (z) to Company. 8.06. Acquisitions. Acquire the assets or stock of any Person not engaged in a line of business similar in nature to the lines of business engaged in by Company or any of its Subsidiaries; provided, however, Company and its Subsidiaries may expend, in the aggregate, up to two million five hundred thousand dollars ($2,500,000.00) per fiscal year for the acquisition of the stock or assets of Persons which are engaged in lines of business similar to the line of business engaged by Company and its Subsidiaries. 8.07. Disposition of Assets. Sell or otherwise dispose of more than four million dollars ($4,000,000.00) in assets other than in the ordinary course of business during any fiscal year except for (a) the sale of accounts receivable from Wal-Mart, Inc., and (b) the sale of assets in connection with the closure and liquidation of Tandy Leather retail stores; provided, however, the maximum face amount of sold accounts receivable of Wal-Mart, Inc. which may be outstanding at any time is twelve million dollars ($12,000,000.00). 8.08. Sale of Accounts Receivable. Except as permitted in Section 8.07, sell any of its accounts receivable, with or without recourse, except accounts receivable which are in default and uncollectible ("Delinquent Accounts"); provided, however, no more than $500,000.00 in Delinquent Accounts may be sold during any twelve (12) month period. 8.09. Negative Pledge. Create or suffer to exist any mortgage, pledge, security interest, conditional sale or other title retention agreement, charge, encumbrance or other Lien (whether such interest is based on common law, statute, other law or contract) upon any of its property or assets, now owned or hereafter acquired, except for Permitted Liens. 8.10. No Grant of Negative Pledge. Agree with any Person not to create or suffer to exist any mortgage, pledge, security interest or encumbrance or Lien upon any of its property or assets now owned or hereafter acquired; or 8.11. Limitation on Additional Indebtedness. Incur or assume any Indebtedness for borrowed money, except for (a) the indebtedness evidenced by the Notes; (b) Consolidated Indebtedness (excluding the indebtedness evidenced by the Notes) not to exceed three million dollars ($3,000,000.00) in the aggregate at any one time; and (c) trade debt incurred in the ordinary course of business. 8.12. Guaranty. Create, assume or suffer to exist any Guaranty except (a) any Guaranty relating to this Loan Agreement and the Loan Documents, and (b) any Guaranty in existence on the Closing Date, and (c) guaranties of real property leases under which SAV-ON, Inc. or Casual Concepts, Inc. is the lessee. 8.13. Merger; Consolidation. Merge into or consolidate with any other Person unless Company is the surviving entity; make any substantial change in the nature of Company's business as conducted as of the date hereof; or make any substantial change in Company's capitalization; acquire all or substantially all of the assets of any other Person. 8.14. Capital Expenditures. Make any investment in Capital Expenditures (including Capital Lease Obligations) during any fiscal year in excess of thirteen million five hundred thousand dollars ($13,500,000.00) during fiscal years 1999 and 2000 in the aggregate, and six million dollars ($6,000,000.00) in the aggregate during any fiscal year thereafter. 8.15. Sale and Leaseback. Directly or indirectly enter into any contract or arrangement whereby Company or any Subsidiary shall sell or transfer all or any substantial part of its fixed assets then owned by it and shall thereafter upon or within one year thereafter rent or lease the assets so sold or transferred; provided, however, Company may enter into a sale and leaseback arrangement with Banker's Assurance involving software and computer equipment, but such arrangement shall be subject to the limitation on additional indebtedness set forth in Section 8.11. 8.16. Prepayment of Indebtedness. Will make or cause to be made, directly or indirectly, in whole or in part, any prepayment of principal or interest on any Indebtedness except (a) the Obligation and (b) accounts payable in the ordinary course of business. If any action or failure to act by Company or any Subsidiary violates any covenant or obligations of Company contained herein, then such violation shall not be excused by the fact that such action or failure to act would otherwise be required or permitted by any covenant (or exception to any covenant) other than the covenant violated. ARTICLE IX ---------- EVENTS OF DEFAULT; REMEDIES UPON EVENT OF DEFAULT ------------------------------------------------- 9.01. Events of Default. An "Event of Default" shall exist if any one or more of the following events (herein collectively called "Events of Default") shall occur and be continuing: (a) Company shall fail to pay when due any principal of, or interest on any Note, or any other fee or payment due hereunder or under any of the Loan Documents; or (b) Company shall fail or refuse to observe, keep and perform any of the covenants, agreements and obligations hereunder or any of the Loan Documents and the continuance of such failure or refusal for a period of twenty (20) days after receipt of written notice from Agent to Company specifying such failure; or (c) Any financial statement or certificate furnished to Banks in connection with, or any representation or warranty made by Company or any Subsidiary under this Loan Agreement or any other Loan Document shall prove to be incorrect, false or misleading in any material respect when furnished or made; or (d) Company or any of its Subsidiaries shall (i) apply for or consent to the appointment of a receiver, custodian, trustee, intervenor or liquidator of all or a substantial part of its assets, (ii) voluntarily become the subject of a bankruptcy, reorganization or insolvency proceeding or be insolvent or admit in writing that it is unable to pay its debts as they become due, (iii) make a general assignment for the benefit of creditors, (iv) file a petition or answer seeking reorganization or an arrangement with creditors or to take advantage of any bankruptcy or insolvency laws, (v) file an answer admitting the material allegations of, or consent to, or default in answering, a petition filed against it in any bankruptcy, reorganization or insolvency proceeding, (vi) become the subject of an order for relief under any bankruptcy, reorganization or insolvency proceeding, or (vii) fail to pay any money judgment against it in excess of twenty-five thousand dollars ($25,000.00) before the expiration of thirty (30) days after such judgment becomes final and no longer subject to appeal; or (e) An order, judgment or decree shall be entered by any court of competent jurisdiction or other competent authority approving a petition appointing a receiver, custodian, trustee, intervenor or liquidator of Company or any of its Subsidiaries or of all or substantially all of -its assets, and such order, judgment or decree shall continue unstayed and in effect for a period of sixty (60) days; or a complaint or petition shall be filed against Company or any of its Subsidiaries seeking or instituting a bankruptcy, insolvency, reorganization, rehabilitation or receivership proceeding of Company or any of its Subsidiaries, and such petition or complaint shall not have been dismissed within sixty (60) days; or (f) Company shall default in the payment of any material Indebtedness of Company to any of Banks other than the Notes and the obligations hereunder; or (g) Company shall default in the payment of any Indebtedness of Company to Persons other than Banks then having a principal balance in excess of two hundred fifty thousand dollars ($250,000.00); or (h) There shall occur any change in the condition (financial or otherwise) of Company or any Subsidiary which has a Material Adverse Effect. 9.02. Remedies Upon Event of Default. If an Event of Default shall have occurred and be continuing, then Agent shall, at the request of Majority Banks, exercise any one or more of the following rights and remedies, and any other remedies in any of the Loan Documents, as Majority Banks in their sole discretion, may deem necessary or appropriate: (a) declare the principal of, and all interest then accrued on, the Notes and any other liabilities hereunder to be forthwith due and payable, whereupon the same shall forthwith become due and payable without presentment, demand, protest, notice of default, notice of acceleration or notice of intention to accelerate or other notice of any kind, all of which Company hereby expressly waives, anything contained herein or in the Notes to the contrary notwithstanding, (b) refuse to make any additional Advances under the Notes, (c) refuse to issue any additional Letter of Credit, (d) reduce any claim to judgment, and/or (e) without notice of default or demand, pursue and enforce any of Banks' rights and remedies under the Loan Documents or otherwise provided under or pursuant to any applicable law or agreement. 9.03. Performance by Banks. Should Company fail to perform in any material respect any covenant, duty or agreement contained herein or in any of the Loan Documents, Agent or Banks may, at their option, perform or attempt to perform such covenant, duty or agreement on behalf of the Company following written notice to Company of such intention to perform. In such event, Company shall, at the request of Agent or Banks, promptly pay any amount reasonably expended by Agent or Banks in performance or attempted performance to Agent at its principal office in Fort Worth, Texas, together with interest thereon at the Past Due Rate from the date of such expenditure until paid. Notwithstanding the foregoing, it is expressly understood that neither Banks nor Agent assume any liability or responsibility (except liability attributable to their gross negligence or willful misconduct) for the performance of any duties of Company hereunder or under any of the Loan Documents or other control over the management and affairs of the Company. 9.04. Remedies Cumulative. All covenants, conditions, provisions, warranties, indemnities and other undertakings of Company contained in this Agreement, or in any document referred to herein or in any agreement supplementary hereto or in any of the Loan Documents shall be deemed cumulative to and not in derogation or substitution of any of the terms, covenants, conditions or agreements of Company contained herein. The failure or delay of Agent or Banks to exercise or enforce any rights, liens, powers or remedies hereunder or under any of the aforesaid agreements or other documents against any security shall not operate as a waiver of such liens, rights, powers and remedies, but all such rights, powers and remedies shall continue in full force and effect until the loans evidenced by the Notes and the entire Obligation of Company to Banks shall have been fully satisfied, and all rights, liens, powers and remedies herein provided for are cumulative and none are exclusive. ARTICLE X --------- ARBITRATION PROGRAM ------------------- 10.01. Binding Arbitration. Upon the demand of any party, any Dispute shall be resolved by binding arbitration (except as set forth in Section 10.05 below) in accordance with the terms of this Loan Agreement. A "Dispute" shall mean any action, dispute, claim or controversy of any kind, whether in contract or tort, statutory or common law, legal or equitable, now existing or hereafter arising under or in connection with, or in any way pertaining to, any of the Loan Documents, or any past, present or future extensions of credit and other activities, transactions or obligations of any kind related directly or indirectly to any of the Loan Documents, including without limitation, any of the foregoing arising in connection with the exercise or any self-help, ancillary or other remedies pursuant to any of the Loan Documents. Any party may by summary proceedings bring an action in court to compel arbitration of a Dispute. Any party who fails or refuses to submit to arbitration following a lawful demand by any other party shall bear all costs and expenses incurred by such other party in compelling arbitration of any Dispute. 10.02. Governing Rules. Arbitration proceedings shall be administered by the American Arbitration Association ("AAA") or such other administrator as the parties shall mutually agree upon in accordance with the AAA Commercial Arbitration Rules. All Disputes submitted to arbitration shall be resolved in accordance with the Federal Arbitration Act (title 9 of the United States Code, notwithstanding any conflicting choice of law provisions in any of the Loan Documents. The arbitration shall be conducted at a location in Fort Worth, Texas selected by the AAA or other administrator. If there is any inconsistency between the terms hereof and any such rules, the terms and procedures set forth herein shall control. All statutes of limitation applicable to any Dispute shall apply to any arbitration proceeding. All discovery activities shall be expressly limited to matters directly relevant to the Dispute being arbitrated. Judgment upon any award rendered in an arbitration may be entered in any court having jurisdiction; provided however, that nothing contained herein shall be deemed to be a waiver by any party that is a bank of the protections afforded to it under 12 U.S.C. Section 91 or any similar applicable state law. 10.03. No Waiver; Provisional Remedies; Self-Help and Foreclosure. No provision hereof shall limit the right of any party to exercise self-help remedies such as setoff, foreclosure against or sale of any real or personal property collateral or security, or to obtain provisional or ancillary remedies, including without limitation injunctive relief, sequestration, attachment, garnishment or the appointment of a receiver, from a court of competent jurisdiction before, after or during the pendency of any arbitration or other proceeding. The exercise of any such remedy shall not waive the right of any party to compel arbitration hereunder. 10.04. Arbitrator Qualifications and Powers; Awards. Arbitrators must be active members of the Texas State Bar with expertise in the substantive laws applicable to the subject matter of the Dispute. Arbitrators are empowered to resolve Disputes by summary rulings in response to motions filed prior to the final arbitration hearing. Arbitrators (a) shall resolve all Disputes in accordance with the substantive law of the state of Texas, (b) may grant any remedy or relief that a court of the state of Texas could order or grant within the scope hereof and such ancillary relief as is necessary to make effective any award, and (c) shall have the power to award recovery of all costs and fees, to impose sanctions and to take such other actions as they deem necessary to the same extent a judge could pursuant to the Federal Rules of Civil Procedure, the Texas Rules of Civil Procedure or other applicable law. Any Dispute the amount in controversy is $5,000,000.00 or less shall be decided by a single arbitrator who shall not render an award of greater than $5,000,000.00 (including damages, costs, fees and expenses). By submission to a single arbitrator, each party expressly waives any right or claim to recover more than $5,000,000.00. Any Dispute in which the amount in controversy exceeds $5,000,000.00 shall be decided by a majority vote of a panel of three arbitrators; provided however, that all three arbitrators must actively participate in all hearings and deliberations. 10.05. Judicial Review. Notwithstanding anything herein to the contrary, in any arbitration in which the amount in controversy exceeds $25,000.00.00, the arbitrators shall be required to make specific, written findings of fact and conclusions of law. In such arbitrations (a) the arbitrators shall not have the power to make any award which is not supported by substantial evidence or which is based on legal error, (b) an award shall not be binding upon the parties unless the findings of fact are supported by substantial evidence and the conclusions of law are not erroneous under the substantive law of the state of Texas, and (c) the parties shall have in addition to the grounds referred to in the Federal Arbitration Act for vacating, modifying or correcting an award the right to judicial review of (i) whether the findings of fact rendered by the arbitrators are supported by substantial evidence, and (ii) whether the conclusions of law are erroneous under the substantive law of the state of Texas. Judgment confirming an award in such a proceeding may be entered only if a court determines the award is supported by substantial evidence and not based on legal error under the substantive law of the state of Texas. 10.06. Miscellaneous. To the maximum extent practicable, the AAA, the arbitrators and the parties shall take all action required to conclude any arbitration proceeding within 180 days of the filing of the Dispute with the AAA. No arbitrator or other party to an arbitration proceeding may disclose the existence, content or results thereof, except for disclosures of information by a party required in the ordinary course of its business, by applicable law or regulation, or to the extent necessary to exercise any judicial review rights set forth herein. If more than one agreement for arbitration by or between the parties potentially applies to a Dispute, the arbitration provision most directly related to the Loan Documents or the subject matter of the Dispute shall control. This arbitration provision shall survive termination, amendment or expiration of any of the Loan Documents or any relationship between the parties. ARTICLE XI ---------- THE AGENT --------- 11.01. Appointment and Authorization. Each Bank hereby irrevocably appoints and authorizes Agent to take such action on its behalf and to exercise such powers under the Loan Papers as are delegated to Agent by the terms thereof, together with such powers as are reasonably incidental thereto. With respect to its Commitment, the Advances made by it and the Notes issued to it, Agent shall have the same rights and powers under this Agreement as any other Bank and may exercise the same as though it were not Agent; and the term "Bank" or "Banks" shall, unless otherwise expressly indicated, include the Agent in its capacity as a Bank. The Agent and its affiliates may accept deposits from, lend money to, act as trustee under indentures of, and generally engage in any kind of business with, Company, and any Person which may do business with Company, all as if Agent were not Agent hereunder and without any duty to account therefor to Banks. 11.02. Note Holders. Agent may treat the payee of any Note as the holder thereof until written notice of transfer shall have been filed with it signed by such payee and in form satisfactory to Agent. 11.03. Consultation with Counsel. Banks agree that Agent may consult with legal counsel selected by it and shall not be liable for any action taken or suffered in good faith by them in accordance with the advice of such counsel. 11.04. Documents. Agent shall not be under a duty to examine or pass upon the validity, effectiveness, enforceability, genuineness or value of any of the Loan Documents or any other instrument or document furnished pursuant thereto or in connection therewith, and Agent shall be entitled to assume that the same are valid, effective, enforceable and genuine and what they purport to be. 11.05. Resignation or Removal of Agent. Subject to the appointment and acceptance of a successor Agent as provided below, Agent may resign at any time by giving written notice thereof to Banks and Company and Agent may be removed at any time with or without cause by Majority Banks. Upon any such resignation or removal, Majority Banks shall have the right to appoint a successor Agent. If no successor Agent shall have been so appointed by Majority Banks and shall have accepted such appointment within 30 days after the retiring Agent's giving of notice of resignation or Majority Banks' removal of the retiring Agent, then the retiring Agent may, on behalf of the Banks, appoint a successor Agent. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations hereunder. After any retiring Agent's resignation or removal hereunder as Agent, the provisions of this Article XI shall continue in effect for its benefit in respect to any actions taken or omitted to be taken by it while it was acting as Agent. 11.06. Responsibility of Agent It is expressly understood and agreed that the obligations of Agent under the Loan Documents are only those expressly set forth in the Loan Documents and that Agent shall be entitled to assume that no Event of Default or event which, with the giving of notice or lapse of time, or both, would constitute an Event of Default has occurred and is continuing, unless Agent has actual knowledge of such fact or has received notice from a Bank that such Bank considers that an Event of Default or such event has occurred and is continuing and specifying the nature thereof. Banks recognize and agree, that for purposes of Section 2.02(b) hereof, Agent shall not be required to determine independently whether the conditions described in Sections 5.02(a), (b), (c), (d), (e) and (f) have been satisfied and, in disbursing funds to Company, may rely fully upon statements contained in the relevant Request for Borrowing. Neither Agent nor any of its directors, officers or employees shall be liable for any action taken or omitted to be taken by it under or in connection with the Loan Documents, except for its own gross negligence or willful misconduct. Agent shall incur no liability under or in respect of any of the Loan Documents by acting upon any notice, consent, certificate, warranty or other paper or instrument believed by it to be genuine or authentic or to be signed by the proper party or parties, or with respect to anything which it may do or refrain from doing in the reasonable exercise of its judgment, or which may seem to it to be necessary or desirable in the premises. The relationship between Agent and each of the Banks is only that of agent and principal and has no fiduciary aspects, and Agent's duties hereunder are acknowledged to be only ministerial and not involving the exercise of discretion on its part. Nothing in this Loan Agreement or elsewhere contained shall be construed to impose on Agent any duties or responsibilities other than those for which express provision is herein made. In performing its duties and functions hereunder, Agent does not assume and shall not be deemed to have assumed, and hereby expressly disclaims, any obligation or responsibility toward or any relationship of agency or trust with or for, Company. As to any matters not expressly provided for by this Loan Agreement (including, without limitation, enforcement or collection of the Notes). Agent shall not be required to exercise any discretion or take any action, but shall be required to act or to refrain from acting (and shall be fully protected in so acting or refraining from acting) upon the instructions of Majority Banks and such instructions shall be binding upon all Banks and all holders of Notes; provided, however, that Agent shall not be required to take any action which exposes Agent to personal liability or which is contrary to this Loan Agreement or applicable law. 11.07. Notices of Event of Default. In the event that Agent shall have acquired actual knowledge of any Event of Default or of an event which, with the giving of notice or the lapse of time, or both, would constitute an Event of Default, Agent shall promptly give notice thereof to the other Banks. 11.08. Independent Investigation. Each of the Banks severally represents and warrants to Agent that it has made-its own independent investigation and assessment of the financial condition and affairs of the Company in connection with the making and continuation of its participation in the Loans hereunder and has not relied exclusively on any information provided to such Bank by Agent in connection herewith, and each Bank represents, warrants and undertakes to Agent that it shall continue to make its own independent appraisal of the creditworthiness of the Company while the Loans are outstanding or its commitment hereunder is in force. 11.09. Indemnification. Banks agree to indemnify Agent (to the extent not reimbursed by Company), ratably according to the proportion that the respective principal amounts of the Note held by each of them bears to the sum of the aggregate principal amount of the Notes, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses, or disbursements of any kind or nature whatsoever which may be imposed on, incurred by or asserted against Agent in any way relating to or arising out of the Loan Documents or any action taken or omitted by Agent under the Loan Documents, provided that no Bank shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from Agent's gross negligence or willful misconduct. 11.10. Benefit of Article XI. The agreements contained in this Article XI are solely for the benefit of Agent and the Banks, and are not for the benefit of, or to be relied upon by, the Company, or any third party. 11.11. Not a Loan to Agent; No Duty to Repurchase. No amount paid by any Bank hereunder shall be considered a loan by Agent. Agent shall have no obligation to repurchase any interest from any Bank. 11.12. Amendments, Waivers, etc. Agent may enter into any amendment or modification of, or may waive compliance with the terms of, any of the Loan Documents with the written direction of the Majority Banks; provided that the consent of all Banks shall be required before Agent may take or omit to take any action under any of the Loan Documents directly affecting (a) the extension of the maturity of or the postponement of the payment of any portion of the principal of or interest on a Revolving Credit Loan or any fees relating thereto, (b) a reduction of or increase in the principal amount of or rate of interest payable on Revolving Credit Loans or any fees related thereto, or (c) the release of Company. Nor shall any of the following occur without the consent of all Banks: (a) any amendment to the definition of Majority Banks, (b) any amendment to this Section 11.12 or (c) any waiver of compliance with Section 7.19 of this Loan Agreement. The Commitment of a Bank shall not be increased without the consent of such Bank. If any Bank is unwilling to consent to any amendment or modification of, or waiver of compliance with, the Loan Agreement (where the consent of such Bank is required), the consenting Majority Banks shall have the right, but not the obligation, to repurchase such Bank's Percentage of the Obligation at such time for a purchase price equal to Bank's Percentage of any and all unpaid Advances made by Agent to the Company under the Loan Agreement, any and all unpaid interest thereon and unpaid accrued fees or other amounts owing to such Bank. 11.13. Bank's Representations. Each Bank represents and warrants to Agent and the other Banks that: (a) it is engaged in the business of entering into commercial lending transactions (including transactions of the nature contemplated herein) and can bear the economic risk related to the same; and (b) it does not consider the obligations hereunder to constitute the "purchase" or "sale" of a "security" within the meaning of any federal or state securities statute or law, or any rule or regulation under any of the foregoing. ARTICLE XII ----------- MISCELLANEOUS ------------- 12.01. Waiver. No failure to exercise, and no delay in exercising, on the part of any Bank, any right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof preclude any other further exercise thereof or the exercise of any other right. The rights of Banks hereunder and under the Loan Documents shall be in addition to all other rights provided by law. No notice or demand given in any case shall constitute a waiver of the right to take other action in the same, similar or other instances without such notice or demand. 12.02. Notices. Any notices or other communications required or permitted to be given by this Agreement or any other documents relating to the loans evidenced by the Notes (the "Loan Documents") must be given in writing and personally delivered, sent by telecopy or telex (answerback received) or mailed by prepaid certified or registered mail, return receipt requested, to the party to whom such notice or communication is directed at the address of such party as set forth on the signature pages of this Loan Agreement. Any such notice or other communication shall be deemed to have been given on the date it is personally delivered or sent by telecopy or telex as aforesaid or, if mailed, on the second day after it is mailed as aforesaid (whether actually received or not). Any party may change its address for purposes of this Loan Agreement by giving notice of such change to all other parties pursuant to this Section 12.02. 12.03. Payment of Expenses. Company agrees to pay all costs and expenses of Banks (including, without limitation, the reasonable attorneys' fees of Banks' outside legal counsel) incurred by Banks in connection with the preservation and enforcement of Banks' rights under this Loan Agreement, the Notes, and/or the other Loan Documents, and all reasonable costs and expenses of Banks (including without limitation the reasonable fees and expenses of Banks' outside legal counsel) in connection with the negotiation, preparation, execution and delivery of this Loan Agreement, the Notes, and the other Loan Documents and any and all amendments, modifications and supplements thereof or thereto. 12.04. Savings Clause. It is the intention of the parties to comply strictly with applicable usury laws. Accordingly, notwithstanding any provision to the contrary in the Loan Documents, in no event shall any Loan Documents require the payment or permit the payment, taking, reserving, receiving, collection or charging of any sums constituting interest under applicable laws that exceed the maximum amount permitted by such laws, as the same may be amended or modified from time to time. If any such excess interest is called for, contracted for, charged, taken, reserved or received in connection with any Loan Documents, or in any communication by or any other person to Company or any other person, or in the event that all or part of the principal or interest hereof or thereof shall be prepaid or accelerated, so that under any of such circumstances or under any other circumstances whatsoever the amount of interest contracted for, charged, taken, reserved or received on the amount of principal actually outstanding from time to time under the Loan Documents shall exceed the Maximum Rate, then in such event it is agreed that: (a) the provisions of this paragraph shall govern and control; (b) neither Company nor any other person or entity now or hereafter liable for the payment of any Loan Documents shall be obligated to pay the amount of such interest to the extent it is in excess of the Maximum Rate; (c) any such excess interest which is or has been received by Bank, notwithstanding this paragraph, shall be credited against the then unpaid principal balance hereof or thereof, or if any of the Loan Documents has been or would be paid in full by such credit, refunded to Company; and (d) the provisions of each of the Loan Documents, and any other communications to Company, shall immediately be deemed reformed and such excess interest reduced, without the necessity of executing any other document, to the Maximum Rate. The right to accelerate the maturity of the Loan Documents does not include the right to accelerate, collect or charge unearned interest, but only such interest that has otherwise accrued as of the date of acceleration. Without limiting the foregoing, all calculations of the rate of interest contracted for, charged, taken, reserved or received in connection with any of the Loan Documents which are made for the purpose of determining whether such rate exceeds the Maximum Rate shall be made to the extent permitted by applicable laws by amortizing, prorating, allocating and spreading during the period of the full term of such Loan Documents, including all prior and subsequent renewals and extensions hereof or thereof, all interest at any time contracted for, charged, taken, reserved or received by Bank. The terms of this paragraph shall be deemed to be incorporated into each of the other Loan Documents. In no event shall Chapter 346 of the Texas Finance Code apply to this Loan Agreement or any other Loan Document. 12.05. Amendments. This Loan Agreement and the other Loan Documents may be amended only by an instrument in writing executed by the party, or an authorized officer of the party, against whom such amendment is sought to be enforced. 12.06. Governing Law. This Loan Agreement has been prepared, is being executed and delivered, and is intended to be performed in the State of Texas, and the substantive laws of such state and the applicable federal laws of the United States of America shall govern the validity, construction, enforcement and interpretation of this Loan Agreement and all of the other Loan Documents. 12.07. Invalid Provisions. If any provision of any Loan Document is held to be illegal, invalid or unenforceable under present or future laws during the term of this Loan Agreement, such provision shall be fully severable; such Loan Document shall be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a part of such Loan Document; and the remaining provisions of such Loan Document shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance from such Loan Document. Furthermore, in lieu of each such illegal, invalid or unenforceable provision shall be added as part of such Loan Document a provision mutually agreeable to Company, Agent and Majority Banks as similar in terms to such illegal, invalid or unenforceable provision as may be possible and be legal, valid and enforceable. In the event Company, Agent and Majority Banks are unable to agree upon a provision to be added to the Loan Document within a period of ten (10) Business Days after a provision of the Loan Document is held to be illegal, invalid or unenforceable, then a provision reasonably acceptable to Agent and Majority Banks as similar in terms to the illegal, invalid or unenforceable provision as is possible and be legal, valid and enforceable shall be added automatically to such Loan Document. In either case, the effective date of the added provision shall be the date upon which the prior provision was held to be illegal, invalid or unenforceable. 12.08. Headings. Section headings are for convenience of reference only and shall in no way affect the interpretation of this Loan Agreement. 12.09. Participation Agreements and Assignments. (a)(i) Subject to Section 12.09(a)(ii), each Bank may assign to one or more Eligible Assignees all or a portion of its rights and obligations under this Loan Agreement (including, without limitation, all or a portion of its Commitment, the Loan owing to it and the Note held by it) and the other Loan Documents; provided however , that (A) no such assignment shall be made unless such assignment and assignee have been approved by Agent and, so long as no Event of Default exists, such approvals not to be unreasonably withheld, (B) each such assignment shall be of a constant, and not a varying, percentage of all rights and obligations of the assignor under this Loan Agreement and the other Loan Documents, and no assignment shall be made unless it covers a pro rata share of all rights and obligations of such assignor under this Loan Agreement and the other Loan Documents, (C) the amount of the Commitment of the assigning Bank being assigned pursuant to each such assignment (determined as of the date of the Assignment and Acceptance substantially in the form of Exhibit "J" (hereinafter referred to as the "Assignment and Acceptance") with respect to such assignment) shall, unless otherwise agreed to by the Agent, in no event be less than $5,000,000.00 or, if less, the entirety of its Commitment and shall be an integral multiple of $1,000,000.00, (D) each such assignment shall be to an Eligible Assignee (defined below), (E) the parties to each such assignment shall execute and deliver to the Agent, for its acceptance and recording in the Register (defined below), an Assignment and Acceptance, together with any Note subject to such assignment, and (F) Agent receives a fee from the assignor in the amount of $2,500.00. Upon such execution, delivery, acceptance and recording, from and after the effective date specified in each Assignment and Acceptance, (1) the assignee thereunder shall be a party hereto and, to the extent that rights and obligations under the Loan Documents have been assigned to it pursuant to such Assignment and Acceptance, have the rights and obligations of a Bank under the Loan Documents, (2) the assigning Bank thereunder shall, to the extent that rights and obligations under the Loan Documents have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights and be released from its obligations under the Loan Documents (and, in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Bank's rights and obligations under this Loan Agreement, such Bank shall cease to be a party hereto), and (3) Exhibit "A" shall be deemed to have been automatically amended to reflect the revised Commitments. As used herein, "Eligible Assignee" shall mean (a) any Bank or any Affiliate of any Bank; (b) a commercial bank organized under the laws of the United States, or any state thereof, and having total assets in excess of $1,000,000,000.00 and having deposits rated in either of the two highest generic letter rating categories (without regard to subcategories) from either Standard & Poor's Corporation or Moody's Investors Service, Inc.; (c) a commercial bank organized under the laws of any other country which is a member of the Organization for Economic Cooperation and Development ("OECD")., or a political subdivision of any such country, and having total assets in excess of $1,000,000,000.00, provided that such bank is acting through a branch or agency located in the country in which it is organized or another country which is also a member of the OECD; (d) the central bank of any country which is a member of the OECD; (d) the central bank of any country which is a member of the OECD; and (e) any other financial institution approved by the Agent. (ii) In the event any Bank desires to transfer all or any portion of its rights and obligations under the Loan Documents, it shall give Company and Agent prior written notice of the identity of such transferee and the terms and conditions of such transfer (a "Transfer Notice"). So long as no Event of Default has occurred and is continuing, Company may, no later than ten (10) days following receipt of such Transfer Notice, designate an alternative transferee and such Bank shall thereupon be obligated to sell the interests specified in such Transfer Notice to such alternative transferee, subject to the following: (A) such transfer shall be made on the same terms and conditions outlined in such Transfer Notice; (B) such transfer shall otherwise comply with the terms and conditions of the Loan Documents (including Section 12.09(a)(i), and (C) such alternative transferee must be an Eligible Assignee approved by Agent. If Company shall fail to designate an alternative transferee within such ten (10) day period, such Bank shall, subject to compliance with the other terms and provisions hereof, be free to consummate the transfer described in such Transfer Notice. (b) By executing and delivering an Assignment and Acceptance substantially in the form of Exhibit "J", the assigning Bank thereunder and the assignee thereunder confirm to and agree with each other and the other parties hereto as follows: (i) other than as provided in such Assignment and Acceptance, such assigning Bank makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Loan Documents or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Loan Agreement or any other instrument or document furnished pursuant hereto, (ii) such assigning Bank makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Company or the performance or observance by the Company of any of its obligations under this Loan Agreement or any other instrument or document furnished pursuant hereto; (iii) such assignee confirms that it has received a copy of this Loan Agreement and the other Loan Documents, together with copies of the financial statements referred to in Section 6.07 and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and acceptance; (iv) such assignee will, independently and without reliance upon any of the Banks (including such assigning Bank) and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Loan Agreement; (v) such assignee confirms that it is an Eligible Assignee; (vi) such assignee appoints and authorizes the Agent to take such action on its behalf and to exercise such powers under this Loan Agreement, and the other Loan Documents as are delegated to such Person by the terms thereof, together with such powers as are reasonably incidental thereto; and (vii) such assignee agrees that it will perform in accordance with their terms all of the obligations which by the terms of this Loan Agreement and the other Loan Documents are required to be performed by it as a Bank. (c) Agent shall maintain a copy of each Assignment and Acceptance delivered to and accepted by it and a register for the recordation of the names and addresses of the Banks and the Commitment of, and principal amount of the Notes owing to, each Bank from time to time (the "Register"). The entries in the Register shall be conclusive and binding for all purposes, absent manifest error, and the Company and each of the Banks may treat each Person whose name is recorded in the Register as a Bank hereunder for all purposes of this Loan Agreement. The Register shall be available for inspection by the Company of any of the Banks at any reasonable time and from time to time upon reasonable prior notice. (d) Upon its receipt of an Assignment and Acceptance executed by an assigning Bank and an assignee representing that it is an Eligible Assignee, together with any Note subject to such assignment, the Agent shall, if such Assignment and Acceptance has been completed and is insubstantially the form of Exhibit "J" hereto and satisfies all other requirements set forth in this Section 12.09, (i) accept such Assignment and Acceptance, (ii) record the information contained therein in the Register and (iii) give prompt notice thereof to the Company and the other Banks. Within five (5) Business Days after its receipt of such notice, the Company, at its own expense, shall execute and deliver to the Agent, in exchange for the surrendered Note, a new Note to the order of such Eligible Assignee in an amount corresponding to the Commitment assumed by such Eligible Assignee pursuant to such Assignment and Acceptance and, if the assigning Bank has retained a Commitment hereunder, a new Note to the order of the assigning Bank in an amount corresponding to the Commitment retained by it hereunder. Such new Notes shall be in an aggregate principal amount equal to the aggregate principal amount of such surrendered Notes, shall be dated the effective date of such Assignment and Acceptance and shall otherwise be in substantially the form prescribed by Exhibit "J" hereto. (e) Each Bank may sell participations to one or more banks or other entities in or to all or a portion of its rights and obligations under this Loan Agreement and the other Loan Documents (including, without limitation, all or a portion of its Commitment and the Notes owing to it); provided, however, that (i) such Bank's obligations under this Loan Agreement (including, without limitation, its Commitment to the Company here under) and the other Loan Documents shall remain unchanged, (ii) such Bank shall remain solely responsible to the other parties hereto for the performance of such obligations, and the participating banks or other entities shall not be considered a "Bank" for purposes of the Loan Documents, (iii) the participating banks or other entities shall be entitled to the cost protection provision contained in Section 4.03, in each case to the same extent that the Bank from which such participating bank or other entity acquired its participations would be entitled to the benefit of such cost protection provisions and (iv) the Company and the other Banks shall continue to deal solely and directly with such Bank in connections with such Bank's rights and obligations under this Loan Agreement and the other Loan Documents, and such Bank shall retain the sole right to enforce the obligations of the Company relating to the Loans and to approve any amendment, modification or waiver of any provision of this Loan Agreement (other than amendments or waives with respect to the amounts of any fees payable hereunder or the amount of principal of or the rate at which interest is payable on the Notes, or the dates fixed for payments of principal or interest on the Notes). (f) Any Bank may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section 12.09, disclose to the assignee or participant or proposed assignee or participant, any information relating to the Company furnished to such Bank by or on behalf of the Company; provided that prior to any such disclosure, each such assignee or participant or proposed assignee or participant shall agree (subject to customary exceptions) to preserve the confidentiality of any confidential information relating to the Company received from such Bank. (g) The obligations of the Banks in this Loan Agreement, the Notes and any other Loan Documents shall not be assignable or transferable by Company and any purported assignment or transfer shall, as to Agent and Banks, be of no force and effect. 12.10. Successors. This Loan Agreement shall be binding upon and inure to the benefit of the successors and assigns of the parties; provided however, Company may not assign or transfer its interest hereunder without Bank's prior written consent. 12.11. Right of Setoff; Deposit Accounts. Upon and after the occurrence of an Event of Default, (a) Company hereby authorizes Banks, at any time and from time to time, without notice, which is hereby expressly waived by Company, and whether or not Banks shall have declared the Obligation to be due and payable in accordance with the terms hereof, to set off against, and to appropriate and apply to the payment of, Company's obligations and liabilities under the Loan Documents (whether matured or unmatured, fixed or contingent, liquidated or unliquidated), any and all amounts owing by Banks to Company (whether payable in U.S. dollars or any other currency, whether matured or unmatured, and in the case of deposits, whether general or special (except trust and escrow accounts), time or demand and however evidenced), and (b) pending any such action, to the extent necessary, to hold such amounts as collateral to secure such obligations and liabilities and to return as unpaid for insufficient funds any and all checks and other items drawn against any deposits so held as Banks, in their sole discretion, may elect. Company hereby grants to Banks a security interest in all deposits and accounts maintained with Banks and with any other financial institution to secure the payment of all obligations and liabilities of Company to Banks under the Loan Documents. 12.12. Survival. All representations and warranties made by Company herein shall survive delivery of the Notes and the making of the Loans. 12.13. No Third Party Beneficiary. The parties do not intend the benefits of this Agreement to inure to any third party, nor shall this Loan Agreement be construed to make or render Banks liable to any materialman, supplier, contractor, subcontractor, purchaser or lessee of any property owned by Company, or for debts or claims accruing to any such persons against Company. Notwithstanding anything contained herein or in the Notes, or in any other Loan Document, or any conduct or course of conduct by any or all of the parties hereto, before or after signing this Loan Agreement or any of the other Loan Documents, neither this Loan Agreement nor any other Loan Document shall be construed as creating any right, claim or cause of action against Banks, or any of its officers, directors, agents or employees, in favor of any materialman, supplier, contractor, subcontractor, purchaser or lessee of any property owned by Company, nor to any other person or entity other than Company. 12.14. Counterpart Execution. This Loan Agreement may be executed in multiple counterparts, all of which taken together shall constitute one and the same instrument. 12.15. Prior Agreement. This Loan Agreement supersedes and replaces in its entirety the "Revolving Credit and Term Loan Agreement" dated September 29, 1993, between Agent and Company, and all amendments, renewals, and extensions thereto. 12.16. Final Agreement. THIS WRITTEN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES 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. EXECUTED to be effective as of the 31st day of March, 1999. COMPANY: TANDYCRAFTS, INC., a Delaware corporation By: /s/James D. Allen -------------------------- Name: James D. Allen -------------------------- Title: Chief Financial Officer Address for mail delivery and notices: 1400 Everman Parkway Fort Worth, Texas 76140 Attn: Chief Financial Officer Telephone No.: (817) 551-9602 Telecopy No.: (817) 551-9795 GUARANTORS: THE DEVELOPMENT ASSOCIATION, INC., a Texas corporation By: /s/Russell L. Price -------------------------- Name: Russell L. Price -------------------------- Title: Secretary Address for mail delivery and notices: 1400 Everman Parkway Fort Worth, Texas 76140 Attn: Chief Financial Officer Telephone No. (817) 551-9609 Telecopy No.: (817) 551-9795 SAV-ON, INC., a Texas corporation By: /s/Russell L. Price -------------------------- Name: Russell L. Price -------------------------- Title: Secretary Address for mail delivery and notices: 1400 Everman Parkway Fort Worth, Texas 76140 Attn: Chief Financial Officer Telephone No. (817) 551-9609 Telecopy No.: (817) 551-9795 DAVID JAMES MANUFACTURING, INC., a Texas corporation By: /s/Russell L. Price -------------------------- Name: Russell L. Price -------------------------- Title: Secretary Address for mail delivery and notices: 1400 Everman Parkway Fort Worth, Texas 76140 Attn: Chief Financial Officer Telephone No. (817) 551-9609 Telecopy No.: (817) 551-9795 PLC LEATHER COMPANY, a Nevada corporation By: /s/Russell L. Price -------------------------- Name: Russell L. Price -------------------------- Title: Secretary Address for mail delivery and notices: 1400 Everman Parkway Fort Worth, Texas 76140 Attn: Chief Financial Officer Telephone No. (817) 551-9609 Telecopy No.: (817) 551-9795 TANDYARTS, INC., a Nevada corporation By: /s/Russell L. Price -------------------------- Name: Russell L. Price -------------------------- Title: Secretary Address for mail delivery and notices: 1400 Everman Parkway Fort Worth, Texas 76140 Attn: Chief Financial Officer Telephone No. (817) 551-9609 Telecopy No.: (817) 551-9795 LICENSED LIFESTYLES, INC., a Nevada corporation By: /s/Russell L. Price -------------------------- Name: Russell L. Price -------------------------- Title: Secretary Address for mail delivery and notices: 1400 Everman Parkway Fort Worth, Texas 76140 Attn: Chief Financial Officer Telephone No. (817) 551-9609 Telecopy No.: (817) 551-9795 BANKS: WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION By:/s/Susan B. Sheffield --------------------------- Name: Susan B. Sheffield --------------------------- Title: Vice President Address for mail delivery and notices: 505 Main Street, Suite 300 Fort Worth, Texas 76102 Attn: Susan B. Sheffield Telephone No.: (817) 347-0022 Telecopy No.: (817) 347-0056 BANK ONE, TEXAS, NATIONAL ASSOCIATION By: /s/J. Michael Wilson -------------------------- Name: J. Michael Wilson -------------------------- Title: Senior Vice President Address for mail delivery and notices: 500 Throckmorton Street Fort Worth, Texas 76102 Attn: Mike Wilson Telephone No.: (817) 884-4283 Telecopy No.: (817) 884-5697 AGENT: WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION By: /s/Susan B. Sheffield --------------------------- Name: Susan B. Sheffield --------------------------- Title: Vice President Address for mail delivery and notices: 505 Main Street, Suite 300 Fort Worth, Texas 76102 Attn: Susan B. Sheffield Telephone No.: (817) 347-0022 Telecopy No.: (817) 347-0056 EXHIBIT "A" TO REVOLVING CREDIT AGREEMENT DATED MARCH 31, 1999 Commitment Banks Commitment Percentage - ----- -------------- ---------- Wells Fargo Bank (Texas), $22,500,000.00 50% National Association Bank One, Texas, National $22,500,000.00 50% Association Total Commitment $45,000,000.00 100% EXHIBIT "B" TO REVOLVING CREDIT AGREEMENT DATED MARCH 31, 1999 PROMISSORY NOTE $22,500,000.00 March 31, 1999 FOR VALUE RECEIVED, the undersigned TANDYCRAFTS, INC., a Delaware corporation ("Company"), hereby unconditionally promises to pay to the order of ______________________ ("Bank"), the principal sum of TWENTY-TWO MILLION FIVE HUNDRED THOUSAND DOLLARS ($22,500,000.00), or such lesser aggregate amount of Advances as may be made pursuant to Bank's Commitment, which principal shall be payable as provided in Sections 2.01, 2.02, 2.03 and 2.04 of the Loan Agreement, together with the interest on the unpaid principal balance of each Advance from the date made until maturity, which interest shall be determined at the varying rates per annum, and shall be payable as provided in Sections 2.02, 2.03, 3.03, 3.04, 3.05, 3.06, 3.07 and 3.08 of the Loan Agreement. Payments of both principal and interest herein shall be made to Agent's account at 505 Main Street, Suite 300, Fort Worth, Texas, in lawful money of the United States of America and in immediately available funds. This Note has been executed and delivered pursuant to the terms of that certain Revolving Credit Agreement (the "Loan Agreement") by and among Company, the Guarantors (as defined in the Loan Agreement) and Wells Fargo Bank (Texas), National Association , as Agent, and the Banks (as defined in the Loan Agreement) dated as of March 31, 1999, and is a "Note" referred to therein. Reference is hereby made to the Loan Agreement for a statement of the repayment rights and obligations of Company and for a statement of the events upon which the maturity of this Note may be accelerated. Each defined term used herein shall have the same meaning assigned to it in the Loan Agreement, unless the context hereof otherwise requires or provides. Company agrees to pay all costs and expenses of Bank incurred in the collection of this Note, including but not limited to court costs and reasonable attorneys' fees and all other costs and expenses described in Section 12.03 of the Loan Agreement. Company and each surety, endorser, guarantor and any other party now or hereafter liable for payment of any sums of money payable on this Note, except as otherwise provided in the Loan Agreement, jointly and severally waive presentment and demand for payment, protest, notice of protest and nonpayment, notice of intent to accelerate, notice of acceleration and all other notices, filing of suit and diligence in collecting this Note or enforcing any security with respect to same, and agree that their liability under this Note shall not be affected by any renewal or extension in the time of payment hereof, or in any indulgences, or by any release, substitution or change in any security for the payment of this Note, and hereby consent to any and all renewals, extensions, indulgences, releases or changes, regardless of the number of such renewals, extensions, indulgences, releases or changes. Regardless of any provision contained in this Note, the Loan Agreement or any other document executed or delivered in connection therewith, neither Bank nor any holder hereof shall be deemed to have contracted for or be entitled to receive, collect or apply as interest (including any fee, charge or amount which is not denominated as "interest" but is legally deemed to be interest under applicable law) on this Note, the Loan Agreement, the Loan Documents or otherwise, any amount in excess of the Maximum Rate, and, in the event that Bank or any holder hereof ever receives, collects or applies as interest any such excess, such amount which would be excessive interest shall be applied to the reduction of the unpaid principal balance of this Note, and, if the principal balance of this Note is paid in full, any remaining excess shall forthwith be paid to Company. In determining whether or not the interest paid or payable under any specific contingency exceeds the Maximum Rate, Company, Bank and any other holder hereof shall, to the maximum extent permitted under applicable law, (i) characterize any non-principal payment (other than payments which are expressly designated as interest payments hereunder) as an expense or fee rather than as interest, (ii) exclude voluntary prepayments and the effect thereof, and (iii) amortize, prorate, allocate and spread the total amount of interest throughout the entire contemplated term of this Note so that the interest rate is uniform throughout the entire term; provided that, if this Note is finally paid and performed in full prior to the end of the full contemplated term hereof, and if the interest received for the actual period of existence thereof exceeds the Maximum Rate, Bank or any holder hereof shall refund to Company the amount of such excess, or credit the amount of such excess against the principal amount of this Note and, in such event, neither Bank nor any other holder shall be subject to any penalties provided by any laws for contracting for, charging, taking, reserving or receiving interest in excess of the Maximum Rate. This Note is being executed and delivered, and is intended to be performed in the State of Texas. Except to the extent that the laws of the United States may apply to the terms hereof, the substantive laws of the State of Texas shall govern the validity, construction, enforcement and interpretation of this Note. This Note may not be changed or terminated orally, but only by an agreement in writing signed by Bank and Company. This Note is given in modification, renewal, and extension (but not in novation) of the amount left owing under the Promissory Note in the original principal amount of $____________ executed by Company and payable to the order of Bank. TANDYCRAFTS, INC. By: Name: Title: EXHIBIT "C" TO REVOLVING CREDIT AGREEMENT DATED MARCH 31, 1999 PROMISSORY NOTE $5,000,000.00 March 31, 1999 FOR VALUE RECEIVED, the undersigned, TANDYCRAFTS, INC., a Delaware corporation (the "Company"), hereby unconditionally promises to pay to the order of WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION ("Bank"), the principal sum of five million dollars ($5,000,000.00), or such lesser aggregate amount of Swing Line Loans as may be made pursuant to Section 2.01(d) of the Loan Agreement, which principal shall be payable as provided in Sections 3.01, 3.02 and 3.03 of the Loan Agreement, together with the interest on the unpaid principal balance of each Swing Line Loan from the date made until maturity, which interest shall be determined at the varying rates per annum, and shall be payable as provided in Sections 2.03, 3.04, 3.05 and 4.06 of the Loan Agreement. Payments of both principal and interest herein shall be made to Agent's account at 309 W. Seventh Street, Fort Worth, Texas, in lawful money of the United States of America and in immediately available funds. This Note has been executed and delivered pursuant to the terms of that certain Revolving Credit Agreement (the "Loan Agreement") by and among Company, Guarantors (as defined in the Loan Agreement) and Wells Fargo Bank (Texas), National Association, as Agent, and Banks (as defined in the Loan Agreement) dated as of March 31, 1999, as amended, and is the "Swing Line Note" referred to therein. Reference is hereby made to the Loan Agreement for a statement of the repayment rights and obligations of Company and for a statement of the events upon which the maturity of this Note may be accelerated. Each capitalized term used herein shall have the same meaning assigned to it in the Loan Agreement, unless the context hereof otherwise requires or provides. Company agrees to pay all costs and expenses of Bank incurred in the collection of this Note, including but not limited to court costs and reasonable attorneys' fees and all other costs and expenses described in Section 12.03 of the Loan Agreement. Except as otherwise provided in the Loan Agreement, Company and each surety, endorser, guarantor and any other party now or hereafter liable for payment of any sums of money payable on this Note, jointly and severally waive presentment and demand for payment, protest, notice of protest and nonpayment, notice of intent to accelerate, notice of acceleration and all other notices, filing of suit and diligence in collecting this Note or enforcing any security with respect to same, and agree that their liability under this Note shall not be affected by any renewal or extension in the time of payment hereof, or in any indulgences, or by any release, substitution or change in any security for the payment of this Note, and hereby consent to any and all renewals, extensions, indulgences, releases or changes, regardless of the number of such renewals, extensions, indulgences, releases or changes. Regardless of any provision contained in this Note, the Loan Agreement or any other document executed or delivered in connection therewith, neither Bank nor any holder hereof shall be deemed to have contracted for or be entitled to receive, collect or apply as interest (including any fee, charge or amount which is not denominated as "interest" but is legally deemed to be interest under applicable law) on this Note, the Loan Agreement, the Loan Documents or otherwise, any amount in excess of the Maximum Rate, and, in the event that Bank or any holder hereof ever receives, collects or applies as interest any such excess, such amount which would be excessive interest shall be applied to the reduction of the unpaid principal balance of this Note, and, if the principal balance of this Note is paid in full, any remaining excess shall forthwith be paid to Company. In determining whether or not the interest paid or payable under any specific contingency exceeds the Maximum Rate, Company, Bank and any other holder hereof shall, to the maximum extent permitted under applicable law, (i) characterize any non-principal payment (other than payments which are expressly designated as interest payments hereunder) as an expense or fee rather than as interest, (ii) exclude voluntary prepayments and the effect thereof, and (iii) amortize, prorate, allocate and spread the total amount of interest throughout the entire contemplated term of this Note so that the interest rate is uniform throughout the entire term; provided that, if this Note is finally paid and performed in full prior to the end of the full contemplated term hereof, and if the interest received for the actual period of existence thereof exceeds the Maximum Rate, Bank or any holder hereof shall refund to Company the amount of such excess, or credit the amount of such excess against the principal amount of this Note and, in such event, neither Bank nor any other holder shall be subject to any penalties provided by any laws for contracting for, charging, taking, reserving or receiving interest in excess of the Maximum Rate. This Note may not be changed or terminated orally, but only by an agreement in writing signed by Bank and Company. TANDYCRAFTS, INC. By: Name: Title: EXHIBIT "D" TO REVOLVING CREDIT AGREEMENT DATED MARCH 31, 1999 REQUEST FOR BORROWING - BASE RATE BORROWING Date: ___________________ Wells Fargo Bank (Texas), National Association 505 Main Street Suite 300 Fort Worth, Texas 76102 Attn: Susan B. Sheffield Re: Request For Base Rate Borrowing This Request for Borrowing has been prepared and is being delivered to Agent pursuant to Section 2.02(a) of that certain Revolving Credit Agreement ("Loan Agreement") dated as of March 31, 1999 by and among Tandycrafts, Inc., a Delaware corporation ("Company"), the Guarantors, and Wells Fargo Bank (Texas), National Association, as "Agent," and "Banks." Capitalized terms in this document shall have the meanings assigned to them in the Loan Agreement unless otherwise provided herein or the context hereof otherwise requires. On this date Company hereby requests that Banks make an Advance for a Base Rate Borrowing (i) in the aggregate principal amount of $___________ (such amount shall be in an integral multiple of $100,000.00 unless such Base Rate Borrowing would exhaust the Total Commitment in which case, such amount may be in an amount of the unused portion of the Total Commitment) (ii) on _______________, 199___. The undersigned (in his representative capacity and not in his individual capacity) hereby represents and warrants to Agent and Banks that all of the representations and warranties contained in Article VI of the Loan Agreement (except Section 6.07) are true and correct in all material respects as of the date hereof, with the same force and effect as if made on the date hereof, and that no Event of Default or condition, event or act which with the giving of notice or lapse of time, or both, would constitute an Event of Default exists and is continuing on this date, unless noted below (if such a condition, event or act is so noted, there shall also be noted below the nature, period of existence thereof and the action which the Company is taking or proposes to take with respect thereto): TANDYCRAFTS, INC. By: Name: Title: EXHIBIT "E" TO REVOLVING CREDIT AGREEMENT DATED MARCH 31, 1999 REQUEST FOR BORROWING - LIBOR BORROWING Date: __________________ Wells Fargo Bank (Texas), National Association 505 Main Street Suite 300 Fort Worth, Texas 76102 Attn: Susan B. Sheffield Re: Request For LIBOR Borrowing This Request for Borrowing has been prepared and is being delivered to Agent pursuant to Section 2.02(a) of that certain Revolving Credit Agreement dated as of March 31, 1999, by and among Tandycrafts, Inc., a Delaware corporation, the Guarantors, Wells Fargo Bank (Texas), National Association, as Agent, and Banks. Capitalized terms in this document shall have the meanings assigned to them in the Loan Agreement unless otherwise provided herein or the context hereof otherwise requires. (Check applicable box below.) . [For New Advances] On this date Company hereby requests that Banks make Advances for a LIBOR Borrowing (i) in the aggregate principal amount of $_________ (such amount shall be in an integral multiple of $1,000,000.00), (ii) for the following Interest Period ____________ (one [1], two [2], three [3] or six [6] months), (iii) on ______________, 199___ (which date shall be at least three (3) LIBOR Business Days after the date on which this Request for Borrowing shall be submitted to Agent). After taking into account the Borrowing requested hereby, the total number of unpaid LIBOR Borrowings does not exceed eight (8). . [For Rollover Notices] On this date the undersigned does hereby request a LIBOR Borrowing (i) in the aggregate principal amount of $__________ (such amount shall be in an integral multiple of $1,000,000.00), (ii) for the following, Interest Period ___________ (one [1], two [2] or three [3] months), (iii) on ___________, 199___ (which date shall be at least three (3) LIBOR Business Days after the date on which this Request for Borrowing shall be submitted to Agent). After taking into account the Borrowing requested hereby, the total number of unpaid LIBOR Borrowings does not exceed eight (8). This Request for Borrowing shall serve as a notification under Section 2.02(c) of the Agreement, with respect to the LIBOR Borrowing made on _____________, 199___ ("Prior Borrowing"). This Request for Borrowing is being submitted at least three (3) LIBOR Business Days (if the Prior Borrowing was a LIBOR Borrowing) prior to the termination of the Interest Period for the Prior Advance. The undersigned (in his representative capacity and not in his individual capacity) hereby represents and warrants to Agent and Banks that all of the representations and warranties contained in Article VI of the Agreement (except Section 6.07) are true and correct in all material respects as of the date hereof, with the same force and effect as if made on the date hereof, and that no Event of Default or condition, event or act which with the giving of notice or lapse of time, or both, would constitute an Event of Default, exists and is continuing on this date, unless noted below (if such a condition, event or act is so noted, there shall also be noted below the nature, period of existence thereof and the action which the Company is taking, or proposes to take with respect thereto): TANDYCRAFTS, INC. By: Name: Title: EXHIBIT "F" TO REVOLVING CREDIT AGREEMENT DATED MARCH 31, 1999 CONFIRMATION OF REQUEST FOR BORROWING - BASE RATE BORROWING Date: ____________________ Wells Fargo Bank (Texas), National Association 505 Main Street Suite 300 Fort Worth, Texas 76102 Attn: Susan B. Sheffield Re: Request For Base Rate Borrowing This Confirmation of Request for Borrowing has been prepared and is being delivered to Agent pursuant to Section 2.02(a) of that certain Revolving Credit Agreement ("Agreement") dated as of March 31, 1999 by and among Tandycrafts, Inc., a Delaware corporation ("Company"), the Guarantors, Wells Fargo Bank (Texas), National Association, as "Agent," and the "Banks" as defined therein. Capitalized terms shall have the meanings assigned to them in the Agreement unless otherwise provided herein or the context hereof otherwise requires. On ___________________ the undersigned requested that Banks make a Base Rate Advance in the aggregate principal amount of $_____________ on __________________, 199___. The undersigned (in his representative capacity and not in his individual capacity) hereby represents and warrants to Agent and Banks that all of' the representations and warranties contained in Article VI of the Agreement (except Section 6.07) are true and correct in all material respects as of the date hereof, with the same force and effect as if made on the date hereof, and that no Event of Default or condition, event or act which with the giving of notice or lapse of time, or both, would constitute an Event of Default exists and is continuing on this date, unless noted below (if such a condition, event or act is so noted, there shall also be noted below the nature, period of existence thereof and the action which the Company is taking or proposes to take with respect thereto): TANDYCRAFTS, INC. By: Name: Title: EXHIBIT "G" TO REVOLVING CREDIT AGREEMENT DATED MARCH 31, 1999 CONFIRMATION OF REQUEST FOR BORROWING - LIBOR BORROWING Date: _____________________ Wells Fargo Bank (Texas), National Association 505 Main Street Suite 300 Fort Worth, Texas 76102 Attn: Susan B. Sheffield Re: Request For LIBOR Borrowing This Confirmation of Request for Borrowing has been prepared and is being delivered to Agent pursuant to Section 2.02(a) of that certain Revolving Credit Agreement ("Agreement") dated as of March 31, 1999, by and among Tandycrafts, Inc., a Delaware corporation ("Company"), the Guarantors, Wells Fargo Bank (Texas), National Association, as "Agent," and the "Banks" as defined therein. Capitalized terms shall have the meanings assigned to them in the Agreement unless otherwise provided herein or the context hereof otherwise requires. On _____________ the undersigned requested that Banks make a LIBOR Advance (i) in the aggregate principal amount of $_________________ (ii) for the following Interest Period ________________ (one [1], two [2], three [3] or six [6] months), (iii) on __________________, 199___. After taking into account such Borrowing, the total number of unpaid LIBOR Borrowings does not exceed eight (8). The undersigned (in his representative capacity and not in his individual capacity) hereby represents and warrants to Agent and Banks that all of the representations and warranties contained in Article VI of the Agreement (except Section 6.07) are true and correct in all material respects as of the date hereof, with the same force and effect as if made on the date hereof, and that no Event of Default or condition, event or act which with the giving of notice or lapse of time, or both, would constitute an Event of Default, exists and is continuing on this date, unless noted below (if such a condition, event or act is so noted, there shall also be noted below the nature, period of existence thereof and the action which the Company is taking, or proposes to take with respect thereto): TANDYCRAFTS, INC. By: Name: Title: EXHIBIT "J" TO REVOLVING CREDIT AGREEMENT DATED MARCH 31, 1999 ASSIGNMENT AND ACCEPTANCE Dated: _______________, 19___ Reference is made to the Revolving Credit Agreement dated as of March 31, 1999 (as amended from time to time, the "Loan Agreement") among TANDYCRAFTS, INC. (the "Borrower"), the Guarantors named therein, the Banks named therein, and Wells Fargo Bank (Texas), National Association , as Agent. Terms as defined in the Loan Agreement and not otherwise defined herein are used herein with the meanings specified in the Loan Agreement. _____________________, acting as one of the Banks referred to in the Loan Agreement (the "Assignor"), and ____________________(the "Assignee") agree as follows: 1. The Assignor hereby sells and assigns to the Assignee, and the Assignee hereby purchases and assumes from the Assignor, that interest in and to a portion of the Assignor's rights and obligations as of the date hereof under the Loan Agreement and the other Loan Documents sufficient to give the Assignee the percentage interest specified in Section 1 of Schedule I hereto of all outstanding rights and obligations under the Loan Agreement and the other Loan Documents. Such sale and assignment shall [include] [exclude] a proportionate share of the loan origination fee previously paid to Assignor pursuant to Section 2.04 of the Loan Agreement, the amounts of such proportionate shares being specified in Section 2 of Schedule 1 hereto. After giving effect to such sale and assignment, the respective Commitments of and amounts of the Loans owing to the Assignor and the Assignee will be as set forth in Section 3 of Schedule 1 hereto. 2. The Assignor (i) represents and warrants that it (a) is the legal and beneficial owner of the interest being assigned by it hereunder and that such interest is free and clear of any adverse claim and (b) to its knowledge (1) there exists no Event of Default, or event which with the giving of notice or the passage of time or both, would constitute and Event of Default and (2) it has not waived any material provision of any Loan Document; (ii) makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made by another Person in or in connection with the Loan Documents or the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Loan Documents or any other instrument or document furnished pursuant thereto; (iii) makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Borrower or any other Person or the performance or observance by the Borrower or any other Person of any of its obligations under the Loan Documents or any other instrument or document furnished pursuant thereto; and (iv) will deliver the Note issued to it pursuant to the Credit Agreement to the Agent concurrently with the presentation hereof to the Agent for acceptance and requests that, upon receipt of such Note, the Agent shall exchange such Note for a new Note [new Notes] payable to the order of the Assignee in an amount equal to the Commitment assumed by the Assignee pursuant hereto and the Assignor in an amount equal to the Commitment retained by the Assignor under the Loan Agreement, respectively, as specified in Section 4 of Schedule 1 hereto. 3. The Assignee (i) confirms that it has received a copy of the Loan Agreement and the other Loan Documents, together with copies of the financial statements referred to in Section 7.07 thereof and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment and Acceptance; (ii) agrees that it will, independently and without reliance upon the Assignor or any other of the Banks and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Loan Agreement; (iii) confirms that it is an Eligible Assignee; (iv) appoints and authorizes the Agent to take such action on its behalf and to exercise such powers under the Loan Agreement and the other Loan Documents as are delegated to such Person by the terms thereof, together with such powers as are reasonably incidental thereto; (v) agrees that it will perform in accordance with their terms all of the obligations which by the terms of the Loan Agreement and the other Loan Documents are required to be performed by it as a Bank; and (vi) specifies as its domestic lending office (and address for notices) and LIBOR lending office the offices set forth in Section 5 of Schedule 1 hereto; and (vii) represents that it is either (y) a corporation organized under the laws of the United States, a state thereof or the Distinct of Columbia or (z) presently entitled to complete exemption from United States withholding tax imposed on or with respect to any payments, including fees, to be made to it pursuant to the Loan Agreement (A) under an applicable provision of a tax convention or treaty to which the United States is a party or (B) because it is acting through a branch, agency or office in the United States and any payment to be received by it under the Loan Agreement is effectively connected with a trade or business in the United States. 4. Following the execution of this Assignment and Acceptance by the Assignor and the Assignee, it will be delivered to the Agent for the approval of the Borrower and the Agent and acceptance by the Agent, and the effective date of this Assignment and Acceptance (the "Effective Date") shall be the date on which such approval and acceptance has occurred. 5. Upon the Effective Date, (i) the Assignee shall be a party to the Loan Agreement and, to the extent provided in this Assignment and Acceptance, have the rights and obligations of a Bank thereunder and (ii) the Assignor shall, to the extent provided in this Assignment and Acceptance, relinquish its rights and be released from its obligations under the Loan Agreement. 6. From and after the Effective Date, the Agent shall make all payments under the Loan Agreement and the other Loan Documents in respect of the interest assigned hereby (including, without limitation, all payments of principal, interest and commitment fees with respect thereto) to the Assignee. The Assignor and Assignee shall make all appropriate adjustments in payments and fundings under the Loan Agreement and the other Loan Documents for periods prior to the Effective Date directly between themselves. 7. This Assignment and Acceptance shall be governed by, and construed in accordance with, the laws of the State of Texas (without giving effect to the conflict of law principles thereof) and applicable federal law. This Assignment and Acceptance may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute but one and the same instrument. This Assignment and Acceptance shall be binding upon and inure to the benefit of the Assignor and the Assignee and their respective successors and assigns. IN WITNESS WHEREOF, the parties hereto have caused this Assignment and Acceptance to be executed by their respective officers thereunto duly authorized effective as of the date first above written. Attachments: ASSIGNOR: Schedule 1 By: Name: Title: ASSIGNEE: By: Name: Title: Approved this _____ day of __________________, 199___. TANDYCRAFTS, INC. By: Name: Title: WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION, as Agent By: Name: Title: SCHEDULE I TO ASSIGNMENT AND ACCEPTANCE DATED _____________, 199___ Section 1. Percentage Interest acquired by Assignee relative to all Banks ---------------- Section 2. 1. Assignee's proportionate share of loan origination fee previously paid to Assignor pursuant to Subsection 5.01(p) the Loan Agreement: $ ---------------- Section 3. 1. Assignee's Acquired Interest. Assignee's Commitment: $ ---------------- Aggregate outstanding principal amount of Loans owing to the Assignee: $ ---------------- 2. Assignor's Retained Interest. Assignor's Commitment: $ ---------------- Aggregate outstanding principal amount of Loans owing to the Assignor: $ ---------------- Section 4. 1. A Note payable to the order of the Assignee in the principal amount of $ --------------. 2. A Note payable to the order of the Assignor in the principal amount of $_____________. Section 5. Domestic Lending Office LIBOR Lending Office EXHIBIT "K" TO REVOLVING CREDIT AGREEMENT DATED MARCH 31, 1999 LITIGATION Tandy Corporation vs. Tandycrafts, Inc., No. 348-174610-98, District Court of Tarrant County, Texas EXHIBIT "L" TO REVOLVING CREDIT AGREEMENT DATED MARCH 31, 1999 COMPLIANCE WITH LAW None EXHIBIT "M" TO REVOLVING CREDIT AGREEMENT DATED MARCH 31, 1999 ENVIRONMENTAL MATTERS None EX-27 3
5 This schedule contains summary financial information extracted from Tandycrafts, Inc. March 31, 1999 Form 10-Q and is qualified in its entirety by reference to such Form 10-Q filing. 1,000 9-MOS JUN-30-1999 MAR-31-1999 1,365 0 25,808 2,947 37,144 67,766 55,056 29,086 131,128 27,047 0 0 0 18,528 55,231 131,128 154,171 154,171 110,328 162,137 0 8,145 1,600 (17,711) (4,623) (13,088) 0 0 0 (13,088) (1.07) (1.07)
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