0001477932-13-003852.txt : 20130816 0001477932-13-003852.hdr.sgml : 20130816 20130816154239 ACCESSION NUMBER: 0001477932-13-003852 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 20130630 FILED AS OF DATE: 20130816 DATE AS OF CHANGE: 20130816 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Aly Energy Services, Inc. CENTRAL INDEX KEY: 0000946822 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-EQUIPMENT RENTAL & LEASING, NEC [7359] IRS NUMBER: 752440201 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 033-92894 FILM NUMBER: 131045233 BUSINESS ADDRESS: STREET 1: 3 RIVERWAY STREET 2: SUITE 920 CITY: HOUSTON STATE: TX ZIP: 77056 BUSINESS PHONE: 713-333-4000 MAIL ADDRESS: STREET 1: 3 RIVERWAY STREET 2: SUITE 920 CITY: HOUSTON STATE: TX ZIP: 77056 FORMER COMPANY: FORMER CONFORMED NAME: PREFERRED VOICE INC DATE OF NAME CHANGE: 19970711 FORMER COMPANY: FORMER CONFORMED NAME: PREFERRED TELECOM INC DATE OF NAME CHANGE: 19950619 10-Q 1 alye_10q.htm FORM 10-Q alye_10q.htm


United States
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
 
Period Ended June 30, 2013.
 
or
 
o 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  33-92894

ALY ENERGY SERVICES, INC.
 
Delaware   75-2440201
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
     
3 Riverway, Suite 920
Houston, TX
  77056
(Address of Principal Executive Offices)
  (Zip Code) 
 
(713)-333-4000
(Registrant’s Telephone Number, including area code.)

Not Applicable
(Former name, Former Address and Former Fiscal year, if changed since last report.)
 
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 the filing requirements for at least the past 90 days. Yes x No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
 
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer o
 
Accelerated filer o
 
Non-accelerated filer o
(Do not check if a smaller reporting company)
 
Smaller reporting company x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
 
Applicable Only to Corporate Issuers
 
Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock, as of the latest practicable date.
 
Common Stock, $ 0.001 Par Value – 74,137,767 shares as of August 16, 2013.



 
 

 
 
INDEX
 
ALY ENERGY SERVICES, INC.
 
Part I.
Financial Information
     
         
Item 1.
Condensed Consolidated Financial Statements
    3  
           
 
Condensed Consolidated Balance Sheets
    3  
           
 
Condensed Consolidated Statement of Operations
    4  
           
 
Condensed Consolidated Statement of Stockholders’ Equity
    5  
           
 
Condensed Consolidated Statements of Cash Flows
    6  
           
 
Notes to Condensed Consolidated Financial Statements
    7  
           
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
    13  
           
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
    18  
           
Item 4T.
Controls and Procedures
    18  
 
         
Part II.
Other Information
       
           
Item 1.
Legal Proceedings
    19  
           
Item 1A.
Risk Factors
    19  
           
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
    19  
           
Item 3.
Defaults upon Senior Securities
    19  
           
Item 4.
Mine Safety Disclosures
    19  
           
Item 5.
Other Information
    19  
           
Item 6.
Exhibits
    20  
           
Signatures
      21  
 
 
2

 
 
ALY ENERGY SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
 
   
June 30,
   
December 31,
 
 
 
2013
   
2012
 
   
(Unaudited)
       
ASSETS
Current assets:
           
Cash and cash equivalents
  $ 169     $ 1,660  
                 
Accounts receivable, net of allowance for doubtful
               
accounts of $13 and $13, respectively
    4,507       4,492  
Deferred tax benefit
    347       -  
Prepaid expenses and other current assets
    190       299  
                 
Total current assets
    5,213       6,451  
                 
Property and equipment, net
    19,995       13,456  
                 
Intangible assets, net
    4,382       4,643  
Goodwill
    8,834       8,834  
Deferred loan costs
    593       520  
Other assets
    16       -  
                 
Total assets
  $ 39,033     $ 33,904  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
                 
Current liabilities:
               
Accounts payable
  $ 929     $ 632  
Accrued expenses
    1,297       1,031  
Accounts payable - affiliates
    1,320       761  
Deferred income taxes
    224       279  
Current portion of long term debt
    2,531       2,062  
                 
Total current liabilities
    6,301       4,765  
                 
Long term debt, net of current portion
    8,644       6,188  
Deferred income taxes
    6,484       6,068  
Other long term liabilities
    -       1,943  
                 
Total liabilities
    21,429       18,964  
                 
Commitments and contingencies (See Note 5)
               
                 
Series A Preferred Stock, $0.01 par value, 4,000,000 shares authorized,
               
4,000,000 and 2,000,000 shares issued and outstanding, respectively
    4,006       1,943  
                 
Stockholders' equity:
               
Common stock, $0.001 par value, 100,000,000 shares authorized,
               
74,137,767 and 67,967,763 shares issued and outstanding, respectively
    74       68  
Treasury stock
    (2 )     -  
Additional paid-in capital
    12,480       12,377  
Retained earnings
    1,046       552  
                 
Total stockholders' equity
    13,598       12,997  
                 
Total liabilities and stockholders' equity
  $ 39,033     $ 33,904  
 
See accompanying notes to condensed consolidated financial statements.
 
 
3

 
 
ALY ENERGY SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(In thousands, except share data)
 
   
Successor
   
Predecessor
   
Successor
   
Predecessor
 
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2013
   
2012
   
2013
   
2012
 
                         
Revenues
  $ 4,793     $ 3,649     $ 9,190     $ 6,658  
                                 
Cost of revenues
    1,579       639       3,050       1,338  
                                 
Gross profit
    3,214       3,010       6,140       5,320  
                                 
Operating expenses:
                               
  General and administrative     2,866       1,376       5,151       2,163  
                                 
Income from operations
    348       1,634       989       3,157  
                                 
Interest expense
    (146 )     (3 )     (268 )     (12 )
Other income
    -       -       3       1  
                                 
Income before income tax
    202       1,631       724       3,146  
                                 
Income tax expense
    151       -       276       40  
                                 
Net income
    51       1,631       448       3,106  
                                 
Preferred stock dividends
    (52 )     -       (102 )     -  
Accretion of preferred stock
    (9 )     -       (18 )     -  
                                 
Net income available to common stockholders
  $ (10 )   $ 1,631     $ 328     $ 3,106  
                                 
Basic and diluted earnings per share
  $ (0.00 )   $ 0.02     $ 0.00     $ 0.05  
                                 
Basic and diluted average common shares outstanding
    71,170,440       67,967,763       69,579,708       67,967,763  
 
See accompanying notes to condensed consolidated financial statements.
 
 
4

 
 
ALY ENERGY SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
(In thousands, except share and per share data)
 
               
Additional
                   
   
Common
   
Common
   
Paid-in
   
Treasury
   
Retained
       
   
Shares
   
Stock
   
Capital
   
Stock
   
Earnings
   
Total
 
                                     
Balance at December 31, 2012
    6,130,184     $ 6     $ 20,482     $ (2 )   $ (20,220 )   $ 266  
                                                 
Reverse merger transaction
    67,967,763       68       (7,890 )     -       20,818       12,996  
Stock based compensation
    39,820       -       8       -       -       8  
Preferred stock dividends
    -       -       (102 )     -       -       (102 )
Preferred stock accretion
    -       -       (18 )     -       -       (18 )
                                                 
Net income
    -       -       -       -       448       448  
                                                 
Balance at June 30, 2013
    74,137,767     $ 74     $ 12,480     $ (2 )   $ 1,046     $ 13,598  
 
See accompanying notes to condensed consolidated financial statements.
 
 
5

 
 
ALY ENERGY SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
 
   
Successor
   
Predecessor
 
   
Six Months Ended
 
   
June 30,
 
   
2013
   
2012
 
             
Cash flows from operating activities:
           
Net income
  $ 448     $ 3,106  
Adjustments to reconcile net income to net cash provided by
               
operating activities:
               
Depreciation
    835       487  
Amortization of deferred loan costs
    76       -  
Amortization of intangible assets
    261       -  
Stock-based compensation
    8       -  
Changes in assets and liabilities:
               
Accounts receivable
    (15 )     (1,369 )
Prepaid expenses and other assets
    93       16  
Accounts payable
    297       358  
Accounts payable - affiliate
    559       -  
Accrued expenses
    266       (454 )
Deferred taxes
    14       -  
Net cash provided by operating activities
    2,842       2,144  
Cash flows from investing activities:
               
Purchase of property and equipment
    (7,374 )     (1,116 )
Cash aquired from reverse merger
    265       -  
Net cash used in investing activities
    (7,109 )     (1,116 )
Cash flows from financing activities:
               
Proceeds from borrowing on debt
    4,750       -  
Repayment of debt
    (1,825 )     (70 )
Distributions to owner
    -       (995 )
Payment of deferred financing costs
    (149 )     -  
Net cash provided by (used in) financing activities
    2,776       (1,065 )
                 
Net decrease in cash and cash equivalents
    (1,491 )     (37 )
Cash and cash equivalents, beginning of period
    1,660       1,769  
Cash and cash equivalents, end of period
  $ 169     $ 1,732  
                 
Supplemental disclosure of cash flow information:
               
                 
Cash paid for interest
  $ 233     $ 12  
Cash paid for state and federal income taxes
  $ 531     $ 505  
 
See accompanying notes to condensed consolidated financial statements.
 
 
6

 
 
ALY ENERGY SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 1 – NATURE OF OPERATIONS

Aly Energy Services Inc. (“Aly Energy”) was incorporated in Delaware on July 17, 2012, for the purpose of creating a worldwide oilfield manufacturing, distribution and services company that services exploration and production companies from well planning to plug and abandonment.

On May 14, 2013, Aly Energy and Preferred Voice, Inc. (“Preferred Voice”) entered into a Share Exchange Agreement (the “Exchange Agreement”), pursuant to which the holders of common stock of Aly Energy surrendered all of their shares in exchange for approximately 68 million newly issued shares of common stock of Preferred Voice (the “Share Exchange”), representing approximately 92% of the outstanding common stock of Preferred Voice after giving effect to the Share Exchange.  Shares were exchanged at the ratio of 19.91 shares of Preferred Voice common stock for each one share of Aly Energy common stock.  Following the Share Exchange, Aly Energy (which changed its name to Aly Operating, Inc. or “Aly Operating”) became a subsidiary of Preferred Voice, with Preferred Voice (which changed its name to Aly Energy Services, Inc., or “Aly”, “the Company”, or “Successor”) owning all of the outstanding shares of common stock of Aly Operating.

For financial accounting purposes, this acquisition (referred to as the “Merger”) was a reverse acquisition of Preferred Voice by Aly Energy under the acquisition method of accounting and was treated as a recapitalization with Aly Energy as the accounting acquirer. Accordingly, the financial statements have been prepared to give retroactive effect of the merger completed on May 14, 2013 and represent the operations of Aly Energy.

On October 26, 2012, the Company acquired all the stock of Austin Chalk Petroleum Services Inc. ("Austin Chalk", “ACPS”, or “Predecessor”).  ACPS provides surface rental equipment as well as roustabout services which include the rig-up and rig-down of equipment and the hauling of equipment to and from the customer's location.

Aly Operating is a wholly-owned subsidiary of Aly., and Aly Operating has one wholly-owned subsidiary, Austin Chalk.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Principles of Consolidation:  The accompanying condensed consolidated financial statements of the Company have not been audited by the Company’s independent registered public accounting firm, except that the consolidated balance sheet at December 31, 2012 is derived from audited consolidated financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for fair presentation have been included.
 
These condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for complete financial statements. Therefore, these condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2012, which are included in the Company’s Current Report on From 8-K, as amended, originally filed with the SEC on May 14, 2013. The operating results for interim periods are not necessarily indicative of results that may be expected for any other interim period or for the full year.
 
These condensed consolidated financial statements include the accounts of Aly and its subsidiaries. All significant inter-company transactions and accounts have been eliminated upon consolidation.

Revenue Recognition: The Company provides rental equipment, oilfield services and drilling services to its customers at per-day contractual rates.  Revenue is recognized when it is realized or realizable and earned.

Financial Instruments: Financial instruments consist of cash and cash equivalents, accounts receivable and payable, and debt.  The carrying value of cash and cash equivalents and accounts receivable and payable approximate fair value due to their short-term nature.
 
 
7

 
 
ALY ENERGY SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
Property, Plant and Equipment:  Property, plant and equipment are recorded at cost less accumulated depreciation. Maintenance and repairs, which do not improve or extend the life of the related assets, are charged to expense when incurred.  Refurbishments and renewals are capitalized when the value of the equipment is enhanced for an extended period.  When property and equipment are sold or otherwise disposed of, the asset account and related accumulated depreciation account are relieved, and any gain or loss is included in operating income.
 
The cost of property and equipment currently in service is depreciated, on a straight-line basis, over the estimated useful lives of the related assets, which range from one to 12 years.  A residual value of 20% is used for asset types deemed to have a minimum salvage value, normally these assets contain a large amount of iron in their construction.  Major classifications of property, plant and equipment and their respective useful lives are as follows (in thousands):

 
Estimated
 
June 30,
   
December 31,
 
 
Useful Lives
 
2013
   
2012
 
               
Machinery and equipment
1-12 years
  $ 20,633     $ 13,680  
Office furniture, fixtures and equipment
3-7 years
    48       15  
Leasehold improvements
Remaining term
    9       9  
        20,690       13,704  
Less:  accumulated depreciation
      (1,161 )     (327 )
        19,529       13,377  
Assets not yet placed in service
      466       79  
                   
Property, plant and equipment, net
    $ 19,995     $ 13,456  
 
Depreciation expense for the six months ended June 30, 2013 and 2012 was approximately $835,000 and $487,000, respectively.

Intangible Assets:

Intangible assets consist of the following (in thousands):
 
 
Amortization
 
June 30,
   
December 31,
 
 
Period
 
2013
   
2012
 
               
Customer relationships
10 years
  $ 3,141     $ 3,141  
Trade name
10 years
    1,098       1,098  
Non-compete
5 years
    491       491  
        4,730       4,730  
Less: accumulated amortization
      (348 )     (87 )
                   
Intangible assets, net
    $ 4,382     $ 4,643  
 
Total amortization expense for the six months ended June 30, 2013 and 2012 was approximately $261,000 and $0 respectively.
  
Income Taxes:  The Company accounts for income taxes utilizing the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income or expense in the period that includes the enactment date.
 
 
8

 
 
ALY ENERGY SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. In assessing the likelihood and extent that deferred tax assets will be realized, consideration is given to projected future taxable income and tax planning strategies. A valuation allowance is recorded when, in the opinion of management, it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized.
 
The Company recognizes the financial statement effects of a tax position when it is more-likely-than-not, based on the technical merits, that the position will be sustained upon examination. A tax position that meets the more-likely-than-not recognition threshold is measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with a taxing authority. Previously recognized tax positions are reversed in the first period in which it is no longer more-likely-than-not that the tax position would be sustained upon examination. Income tax related interest and penalties, if applicable, are recorded as a component of the provision for income tax expense. However, there were no amounts recognized relating to interest and penalties in the consolidated statements of operations for the three and six months ended June 30, 2013 and 2012, respectively.

The Predecessor was an S Corporation and in lieu of corporate income taxes, the shareholders of an S Corporation are taxed on their proportionate share of the company’s taxable income.  Therefore, no provision or liability for federal income taxes has been included in the Predecessor’s financial statements. 

Use of Estimates:  The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.
 
NOTE 3 – BUSINESS COMBINATION

On October 26, 2012, ACPS was acquired by Aly Operating for total consideration of approximately $22.5 million, net of cash acquired of approximately $58,000.  The business combination resulted in a change in control and was accounted for using the acquisition method of accounting.  As a result, at the date of the acquisition the purchase price was allocated to the net assets acquired upon their estimated value, as follows (in thousands):

Current assets
  $ 3,672  
Property and equipment
    13,373  
Goodwill
    8,834  
Other intangible assets
    4,730  
   Total assets acquired
    30,609  
         
Current liabilities
    1,649  
Deferred tax liabilities
    6,449  
   Total liabilities assumed
    8,098  
         
Net assets acquired
  $ 22,511  
 
Other intangible assets have a total value of $4.7 million with a weighted average amortization period of 9 years.  Other intangible assets consist of customer relationships of $3.1 million, amortizable over 10 years, trade name of $1.1 million, amortizable over 10 years, and a non-compete agreement of $0.5 million, amortizable over 5 years.  The amount allocated to goodwill represents the excess of the purchase price over the fair value of the net assets acquired.

In the 2012 consolidated financial statements, the initial accounting for the business combination was not completed pending tax to book reconciliations.
 
 
9

 
 
ALY ENERGY SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

In the June 30, 2013 condensed consolidated financial statements, the amounts and explanations of the adjustments to the provisional values are recognized during the current reporting period. Therefore, the Company discloses that the December 31, 2012 comparative information is retrospectively adjusted to increase the value of goodwill by approximately $133,000 and to increase deferred tax liabilities by approximately $133,000.

NOTE 4 – LONG-TERM DEBT

Long-term debt consists of the following:
 
   
June 30,
   
December 31,
 
   
2013
   
2012
 
Term loan
  $ 7,425     $ 8,250  
Delayed draw capital loan
    3,750       -  
Revolving credit facility
    -       -  
      11,175       8,250  
Less: current portion
    (2,531 )     (2,062 )
                 
Total Long-term debt
  $ 8,644     $ 6,188  
 
The terms of the term loan and revolving credit facility are described within Note D of the Company's consolidated financial statements for the year ended December 31, 2012, which are included in the Company's Current Report on Form 8-K, as amended, originally filed with the SEC on May 14, 2013.
 
On April 19, 2013, we obtained an amendment to our credit agreement in order to, among other things, provide for a $5.0 million delayed draw term loan facility for purposes of financing capital expenditures.  We are permitted to borrow under the facility from time to time in order to fund up to 80% of the cost of capital expenditures, subject to a $5.0 million limit on aggregate borrowings thereunder.  The delayed draw term loan facility is subject to the same covenants and restrictions, and bears the same interest rate, as the existing term loan and revolving credit facilities provided by the credit agreement.  Borrowings under the delayed draw term loan facility are repayable quarterly, commencing with the fiscal quarter ending March 31, 2014, in an amount per quarter equal to 6.25% of the aggregate amount of delayed draw term loan borrowings outstanding as of December 31, 2013.
 
The Company is required to satisfy certain financial and reporting covenants in conjunction with our debt facilities.  The Company was in compliance with all covenants at June 30, 2013.

NOTE 5 – COMMITMENTS, CONTINGENCIES

Contractual Commitments — The Company has numerous contractual commitments in the ordinary course of business including debt service requirements and operating leases. The Company leases land and other facilities from an affiliate and leases equipment from non-affiliates, which expire through 2014.

Litigation — The Company is subject to certain claims arising in the ordinary course of business.  Management does not believe that any claims will have a material adverse effect on the Company’s financial position or results of operations.
 
NOTE 6 – PREFERRED STOCK

As part of the acquisition of ACPS, Aly Operating agreed to issue up to 4 million shares of Series A Preferred Stock, with a par value of $0.01, to the seller. The shares were issued in two tranches. The first tranche of 2 million shares was issued on December 31, 2012 and the second tranche of 2 million shares was issued on March 31, 2013.
 
 
10

 
 
ALY ENERGY SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
The Series A Preferred Stock is entitled to a cumulative dividend of 5% per year on its liquidation preference, compounded quarterly.  The liquidation preference was $4.0 million on the closing date and will increase by the amount of dividends paid in kind.  Aly Operating is not required to pay cash dividends.

The holder of the preferred stock and Aly Operating have the option to redeem the preferred stock for cash, at either’s option, on the fourth anniversary of the closing date of the sale or October 26, 2016. There is no requirement for either party to redeem the preferred stock.

The preferred stock agreement also provides for conversion into shares of Company common stock or redemption should the Company transact a liquidity event, as defined in the agreement, or if the Company transacts an initial public offering.

The Series A Preferred Stock is classified outside of permanent equity in the Company’s condensed consolidated balance sheet because the settlement provisions provide the holder the option to require Aly Operating to redeem the Series A Preferred Stock at the liquidation price plus any accrued dividends.
  
The following table describes the changes in temporary equity, currently consisting of Series A Preferred Stock (in thousands, except for shares, and per share amounts):

   
Carrying Value of Series A Preferred Stock
   
Number of Outstanding Series A Preferred Shares
   
Liquidation Value of Series A Preferred Stock
 
                   
December 31, 2012
  $ 1,943       2,000,000     $ 4,000  
                         
Issuance
    1,943       2,000,000       -  
Accrued dividends
    102       -       102  
Accretion
    18       -       -  
                         
June 30, 2013
  $ 4,006       4,000,000     $ 4,102  
 
NOTE 7 – EARNING PER SHARE
 
Basic earnings per share is based on the weighted average number of shares of common stock (“common shares”) outstanding during the applicable period and excludes shares subject to outstanding stock options and shares of restricted stock. Diluted earnings per share is computed based on the weighted average number of common shares outstanding during the period plus, when their effect is dilutive, incremental shares consisting of shares subject to outstanding stock options and restricted stock as appropriate. A reconciliation of the denominator used in the basic and diluted per share calculations for the period ending June 30, 2013 is as follows:
 
   
Successor
   
Predecessor
   
Successor
   
Predecessor
 
   
Three Months Ended
   
Six Months Ended
 
   
2013
   
2012
   
2013
   
2012
 
Denominator for basic earnings per share
    71,170,440       67,967,763       69,579,708       67,967,763  
Effect of potentially dilutive securities
    -       -       -       -  
Denominator for diluted earnings per share
    71,170,440       67,967,763       69,579,708       67,967,763  
 
The denominator calculated for the three and six months ended June 30, 2012, the outstanding shares of Aly Energy Services, Inc., prior to the reverse merger with Preferred Voice, was used, and the conversion rate of 19.91 per Aly Energy share was applied to the outstanding common stock.

There were no securities excluded from the earnings per share calculation for the three and six months ended June 30, 2013, because their inclusion would be anti-dilutive.
 
 
11

 
 
ALY ENERGY SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 8 – STOCK BASED COMPENSATION
 
Share-Based Payments – The Company has issued 19,910 shares of company stock during the three months ended June 30, 2013, and 39,820 shares of company stock during the six months ended June 30, 2013, as part of compensation of an officer of the Company.  The Company recognized share-based compensation expense of $4,000 and $0 for the three months ended June 30, 2013 and 2012, respectively.  The Company recognized share-based compensation expense of $8,000 and $0 for the six months ended June 30, 2013 and 2012, respectively. 

The Company has a stock-based compensation plan available to grant incentive stock options, non-qualified stock options and restricted stock to employees and non-employee members of the Board of Directors.
  
The Omnibus Incentive Plan (the “Plan”) was approved by the board of directors on May 2, 2013.  A maximum of 6,769,400 shares of common stock may be awarded. As of June 30, 2013, options to purchase 6,769,400 shares of common stock were granted from the Plan, of which 6,769,400 were outstanding.

The option contract term is 10 years and the exercise price is $0.20.  The options vest and are exercisable if a “Liquidity Event” occurs and certain conditions are met.  A Liquidity Event is defined as an IPO or a change of control, as defined in the plan.  Pursuant to the plan, an IPO is defined as an underwritten public offering of shares.  If the first Liquidity Event is an IPO, then the options vest and are exercisable immediately if the IPO is effected at $0.40 per share.  If the stock price post-IPO reaches $0.40 per share during the six month period immediately following the IPO, then the options vest and are exercisable.  If the share price does not reach $0.40 per share prior to the sixth month anniversary of the IPO the options do not vest and expire.  If the first Liquidity Event to occur is a change of control, then the options vest if the change of control takes place at a price of $0.40 per share or more.  If such change in control occurs at a price less than $0.40 per share, the options do not vest and expire.
 
The fair value of each option award granted under the Plan is estimated on the date of grant using the Monte Carlo simulation method. The same Monte Carlo simulation method is used to determine the derived service period of five years. In addition, expected volatilities have been based on comparable public company data, with consideration given to the Company’s limited historical data. The Company makes estimates with respect to employee termination and forfeiture rates of the options within the valuation model. The risk-free rate is based on the approximate U.S. Treasury yield rate in effect at the time of grant. For options granted prior to the Company’s acquisition of Preferred Voice, which closed on May 14, 2013, the calculation of the Company’s stock price involved the use of different valuation techniques, including a combination of an income and/or market approach. Determination of the fair value was a matter of judgment and often involved the use of significant estimates and assumptions.  The following table presents the assumptions used in determining the fair value of option awards during the period:

Expected volatility
    80.0 %
Expected forfeiture rate
    0.0 %
Risk-free interest rate
    1.66 %
Fair value of company stock at May 2, 2013
  $ 0.171  
 
At June 30, 2013, there is approximately $494,200 of total unrecognized compensation cost related to non-vested stock option awards.  Such amount will be recognized in the future upon occurrence of a Liquidity Event that results in a vesting of the options.  No options vested during the six months ended June 30, 2013, as no vesting events occurred during the period.
 
 
12

 
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

As used in the discussion below, “we,” “our,” and “us” refers to Austin Chalk prior to the acquisition of Austin Chalk by Aly Energy on October 26, 2012, to the combined operations of Aly Energy and Austin Chalk from October 26, 2012, until the reverse acquisition of Preferred Voice by Aly Energy on May 14, 2013, and the combined operations of Aly Energy, Austin Chalk and Preferred Voice from and after May 14, 2013.
 
Overview of Our Business
 
We are a provider of surface rental equipment and a roustabout service which is responsible for delivery of equipment and rig-up on well sites.  Our primary products include mud circulating tanks (400 and 500 barrel capacity), mud pumps, mud gas separators, transfer pumps and 3” polyurethane pipe, and skimming systems.  We fabricate several of our products in-house.  Our operations are primarily based in Giddings, Texas, from where we service the Eagle Ford shale and other areas in Texas.
 
We derive the majority of our operating revenues from rates per day for the rental of equipment.  The remainder of our operating revenues are generated by delivery and rig-up services which we provide in conjunction with the rental of equipment.  These services are typically billed at a flat rate per job but in certain cases the customer is billed at an hourly rate.  The price we charge for our services depends on both the level of activity within the geographic area in which we operate and also the competitive environment.
 
Our operating costs do not fluctuate in direct proportion to changes in revenue.  Our operating expenses consist of both fixed and variable costs.  Variable costs, which are directly correlated with revenue, can be further reduced by our investment in rental and transportation equipment.
 
Current and anticipated oil and natural gas prices and the related level of drilling activity and general production spending in the areas in which we have operations primarily influence the demand for our services. The level of oil and natural gas exploration and production activity in the United States is volatile, and may vary based on oil prices, governmental regulation, governmental limitations on exploration and drilling activity and other factors.
 
During the three months ended June 30, 2013, our top 3 customers accounted for approximately 75% of total revenues.  Our largest customer accounted for approximately 46% of total revenue and our second largest customer accounted for approximately 15% of total revenue.
 
During the six months ended June 30, 2013, our top 3 customers accounted for approximately 75% of total revenues.  Our largest customer accounted for approximately 48% of total revenue and our second largest customer accounted for approximately 15% of total revenue. As a result, we rely on these two customers for the majority of our business.
 
Inception of Aly Energy
 
On July 17, 2012, Aly Energy was incorporated with the strategic objective of acquiring, integrating and growing a global oilfield services operation.
 
Acquisition of Austin Chalk
 
On October 26, 2012, Aly Energy acquired Austin Chalk for a total purchase price of $22.5 million, net of cash acquired of approximately $58,000. Total consideration included $17.9 million cash, a payable of $0.8 million and the issuance of 4.0 million shares of preferred stock, $0.01 par value, at fair value of $3.8 million.

Results of Operations
 
The results in the tables below represent the results of Austin Chalk for the three and six months ended June 30, 2012 and the results of Aly Energy consolidated for the three and six months ended June 30, 2013.
 
 
13

 

Comparison of the Three Months Ended June 30, 2013 and the Three Months Ended June 30, 2012
 
    Successor    
Predecessor
       
   
Three Months Ended June 30,
       
    2013     2012     $ Change  
Revenue   $ 4,793     $ 3,649     $ 1,144  
Costs and Expenses                        
Direct costs
    898       439       459  
Depreciation
    550       200       350  
Amortization expense
    131       -       131  
Selling, general and administrative expenses
    2,325       1,376       949  
Corporate expenses
    541       -       541  
Operating income
    348       1,634       (1,286 )
 
Other expense                  
Interest expense     (146     (3 )     (143 )
Total other expenses     (146     (3 )     (143 )
Net income before income tax
    202       1,631       (1,429 )
Provision for income tax
    (151 )     -       (151 )
Net income
  $ 51     $ 1,631     $ (1,580 )
 
Our revenues for the three months ended June 30, 2013 were $4.8 million, an increase of 31.4% compared to $3.6 million for the three months ended June 30, 2012.  Revenues increased primarily due to significant investment in new equipment, which included adding equipment based on demand for existing product offerings (400 and 500 barrel capacity mud circulating tanks, diesel mud pumps, skimming systems) and adding equipment to enable us to provide new product offerings (containment systems, driveovers, and ladders systems).  We also expanded our service offering by starting to provide washout services and starting to provide specialized labor for skimming systems.
 
Our direct costs for the three months ended June 30, 2013 increased 104.6% to $0.9 million, or 18.7% of revenues, compared to $0.4 million, or 12.0% of revenues for the three months ended June 30, 2012.  The increase is primarily due to increased sub-rental expense and increased third party trucking expense.  Austin Chalk sub-rented an insignificant amount of equipment in the three months ended June 30, 2012 compared to significant sub-rental expense incurred for mud circulating tanks (500 barrel capacity) and other equipment during the three months ended June 30, 2013, to meet increasing customer demand.  The increases in third party trucking expense relate to the rapid increase in activity in sections of the Eagle Ford shale which are a greater distance from the Austin Chalk yard than the areas serviced during the three months ended June 30, 2012. No payroll, or related burden, is included in direct costs.
 
Depreciation expense for the three months ended June 30, 2013 increased 175.0% to $0.6 million, compared to $0.2 million, for the three months ended June 30, 2012.  The increase is due to the rapid expansion, and capital expenditures we have made subsequent to the acquisition of Austin Chalk.
 
Amortization expense, resulting from the intangible assets obtained in conjunction with the acquisition of Austin Chalk on October 26, 2012, was $0.1 million for the three months ended June 30, 2013.  Austin Chalk did not have any intangible assets on its balance sheet prior to the acquisition.
 
Selling, general and administrative expense increased 69.0% to $2.3 million for the three months ended June 30, 2013, compared to $1.4 million for the three months ended June 30, 2012.  The $0.9 million increase in selling, general and administrative expenses is primarily due to increased payroll expense, and related burden, as headcount increased from 67 at June 30, 2012 to 114 at June 30, 2013 to manage the rapid increase in activity.  Other expenses which increased included general liability, auto, and equipment insurance expense as a result of the addition of new equipment.
 
 
14

 
 
Corporate expense was $0.5 million for the three months ended June 30, 2013, consisting primarily of payroll for Aly Energy executives of $0.3 million and $0.2 million of legal and professional fees. During the three months ended June 30, 2013, non-recurring legal fees associated with both the Austin Chalk acquisition and the reverse merger transaction with Preferred Voice summed to approximately $0.1 million. We did not begin to incur corporate expense until the incorporation of Aly Energy on July 17, 2012, as such, the results for the three months ended June 30, 2012 do not include any corporate expense.
 
Interest expense was $0.1 million for the three months ended June 30, 2013 compared to $3,000 for the three months ended June 30, 2012. The interest expense for the three months ended June 30, 2013 relates to debt associated with a credit agreement entered into on October 26, 2012, in relation to the acquisition of ACPS.
 
Our income tax expense for the three months ended June 30, 2013, was $0.2 million, or 74.8% of our income before income taxes, compared to $0 of income tax expense for the three months ended June 30, 2012. Prior to the acquisition by Aly Energy on October 26, 2012, Austin Chalk operated as an S-corporation and was not subject to federal income tax, but was subject to Texas franchise tax.
 
Comparison of the Six Months Ended June 30, 2013 and the Six Months Ended June 30, 2012
 
    Successor     Predecessor        
    Six Months Ended June 30,  
    2013     2012     $ Change  
Revenue   $ 9,190     $ 6,658     $ 2,532  
Costs and Expenses                        
Direct costs
    1,954       851       1,103  
Depreciation
    835       487       348  
Amortization expense
    261       -       261  
Selling, general and administrative expenses
    4,179       2,163       2,016  
Corporate expenses
    972       -       972  
Operating income
    989       3,157       (2,168 )
 
Other expense                  
Interest expense
    (268 )     (12 )     (256 )
Other Income
    3       1       2  
Total other expenses
    (265 )     (11 )     (254 )
Net income before income tax
    724       3,146       (2,422 )
Provision for income tax
    (276 )     (40 )     (236 )
Net income
  $ 448     $ 3,106     $ (2,658 )
 
Our revenues for the six months ended June 30, 2013 were $9.2 million, an increase of 38.0% compared to $6.7 million for the six months ended June 30, 2012. Revenues increased for the six months ended June 30, 2013 primarily due to the expansion of the rental fleet through investment in new equipment, including mud circulating tanks (400 and 500 barrel capacity), containment systems, diesel mud pumps, and skimming systems. We expanded our service offering, including rig-up and rig-down services, and added equipment to facilitate our services, such as tucking and delivery. We also diversified our customer base in our existing areas of operation by adding new customers.
 
Our direct costs for the six months ended June 30, 2013 increased 129.6% to $1.9 million, or 21.3% of revenues, compared to $0.9 million, or 12.8% of revenues for the six months ended June 30, 2012. The increase is primarily due to increased sub-rental expense and increased third party trucking expense. Austin Chalk sub-rented an insignificant amount of equipment in the three months ended June 30, 2012 compared to significant sub-rental expense incurred for mud circulating tanks (500 barrel capacity) and other equipment during the three months ended June 30, 2013, to meet increasing customer demand. The increases in third party trucking expense relate to the rapid increase in activity in sections of the Eagle Ford shale which are a greater distance from the Austin Chalk yard than the areas serviced during the three months ended June 30, 2012. No payroll, or related burden, is included in direct costs.. We expect sub-rental expense, and third party trucking expense to decrease over time during the full fiscal year 2013, as our expanded fleet of rental and trucking equipment increases the mix of company owned assets in the rental fleet.
 
 
15

 
 
Depreciation expense increased 71.5% to $0.8 million for the six months ended June 30, 2013, compared to $0.5 million, for the six months ended June 30, 2012. The increase is due to capital expenditures made to upgrade and expand our rental equipment, and trucking fleet.
 
Amortization expense, resulting from the intangible assets obtained in conjunction with the acquisition of Austin Chalk on October 26, 2012, was $0.3 million for the six months ended June 30, 2013. Austin Chalk did not have any intangible assets on its balance sheet prior to the acquisition.
 
Selling, general and administrative expense increased 93.2% to $4.2 million for the six months ended June 30, 2013, compared to $2.2 million for the six months ended June 30, 2012. The $2.0 million increase in selling, general and administrative expenses is primarily due to increased payroll expense, related burden, and insurance coverage, both health and corporate, as headcount expanded rapidly.
 
Corporate expense was $1.0 million for the six months ended June 30, 2013, consisting primarily of payroll for Aly Energy executives of $0.5 million and $0.3 million of legal and professional fees. During the six months ended June 30, 2013, non-recurring legal fees associated with both the Austin Chalk acquisition and the reverse merger transaction with Preferred Voice summed to approximately $0.2 million. We did not begin to incur corporate expense until the incorporation of Aly Energy on July 17, 2012, as such, the results for the six months ended June 30, 2012 do not include any corporate expense.
 
Interest expense was $0.3 for the six months ended June 30, 2013 compared to $12,000 for the six months ended June 30, 2012. The interest expense for the six months ended June 30, 2013 relates to debt associated with a credit agreement entered into on October 26, 2012, in relation to the acquisition of ACPS.
 
Our income tax expense for the six months ended June 30, 2013, was $0.3 million, or 38.1% of our income before income taxes, compared to $40,000 of income tax expense for the six months ended June 30, 2012. Prior to the acquisition by Aly Energy on October 26, 2012, Austin Chalk operated as an S-corporation and was not subject to federal income tax, but was subject to Texas franchise tax.
 
Liquidity and Capital Resources
 
Our on-going capital requirements arise primarily from our need to acquire equipment to increase our existing rental fleet, to expand product offerings and service lines, to service our debt, and to fund our working capital requirements. Our primary source of liquidity has been internal cash flows from operations. Proceeds from the issuance of debt and equity funded the acquisition. Future funds are expected to be provided by operating cash flow and, to the extent we determine to do so, the issuance of debt and equity.
 
The net cash provided by or used in our operating, investing, and financing activities during the six months ended June 30, 2013 and 2012 is summarized below (in thousands):
 
    Successor     Predecessor  
    Six Months Ended June 30,  
   
2013
   
2012
 
Cash provided by (used in): Operating activities
  $ 2,842     $ 2,144  
Investing activities
    (7,109 )     (1,116 )
Financing activities
    2,776       (1,065 )
Change in cash and cash equivalents
  $ (1,491 )   $ (37 )
 
Operating Activities
 
For the six months ended June 30, 2013, we generated $2.8 million of cash from operating activities. Our net income for this period was $0.4 million. Non-cash additions to net income totaled $1.2 million consisting primarily of $1.2 million of depreciation and amortization.
 
 
16

 
 
During the six months ended June 30, 2013, changes in working capital provided $1.2 million in cash. Cash was provided by an increase in accounts payable and accounts payable - affiliate summing to $0.9 million, an increase in accrued expenses of $0.3 million, and a decrease in prepaid expenses of $0.1 million.
 
For the six months ended June 30, 2012, we generated $2.1 million of cash from operating activities. Our net income for this period was $3.1 million and the non-cash addition of depreciation expense was $0.5 million. Changes in working capital providing cash include a decrease in accounts payable and accrued expenses of $0.1 million, and increases in accounts receivable using $1.4 million in cash.
 
Investing Activities
 
During the six months ended June 30, 2013, we used $7.1 million in investing activities, consisting of the purchase or fabrication of capital assets, partially offset by $0.3 million of cash acquired from the reverse merger with Preferred Voice.
 
During the six months ended June 30, 2012, we used $1.1 million in investing activities, all consisting of the purchase or fabrication of capital assets.
 
Financing Activities
 
During the six months ended June 30, 2013, financing activities generated $2.8 million in cash, consisting of drawing under our credit facilities, net of principal payments and deferred financing costs.
 
During the six months ended June 30, 2012, financing activities used $1.1 million in cash, resulting from distributions to the owner of $1.0 million, and principal payments made on debt facilities of $0.1 million.
 
On October 26, 2012, Aly Energy closed on the acquisition of Austin Chalk with the proceeds of an issuance of common stock of $13.2 million before stock issuance costs of $0.7 million and term loan borrowings in the amount of $8.3 million before debt issuance costs of $0.5 million, borrowed under our credit facility with Wells Fargo. The executed credit agreement with Wells Fargo, entered into simultaneously with the closing of the Austin Chalk acquisition, provides for an $8.3 million term loan facility with a maturity date of October 26, 2016, and a revolving credit facility up to the lesser of (i) the borrowing base and (ii) $5.0 million with a maturity date of October 26, 2016. The borrowing base is redetermined monthly, based on our inventory and receivables, and as of June 30, 2013, the borrowing base under the credit facility was $3.4 million. The credit agreement contains customary events of default and covenants including restrictions on our ability, and the ability of Austin Chalk, to incur additional indebtedness, make capital expenditures, pay dividends or make other distributions, grant liens and sell assets. In addition, the credit agreement contains certain financial covenants including requirements to maintain (1) a consolidated funded debt to EBITDA ratio of not more than (a) 2.50 to 1.00 for the fiscal quarter ended December 31, 2012, and (b) 2.00 to 1.00 for any fiscal quarter ending on or after March 31, 2013, and (2) a fixed charge coverage ratio of not less than 1.5 to 1.0. Our obligations under the agreement are guaranteed by Austin Chalk and secured by substantially all of our assets and the assets of Austin Chalk.
 
The term loan is repayable in quarterly installments of $0.4 million. Borrowings under the credit facility bear interest, at our option, at the base rate or LIBOR. The annual interest rate on each base rate borrowing is (a) the greatest of Wells Fargo’s Prime Rate, the Federal Funds Rate plus 0.5% and the one-month LIBOR rate on such day plus 1.00%, plus (b) a margin between 2.50% and 3.50% (depending on the then-current leverage ratio). The interest rate on each LIBOR loan will be the LIBOR rate for the applicable interest period plus a margin between 3.50% to 4.50% (depending on the then-current leverage ratio). At June 30, 2013, there was $7.4 million of outstanding borrowings under the term loan and $0.0 outstanding under the revolving credit facility.
 
On April 19, 2013, we obtained an amendment to our credit agreement in order to, among other things, provide for a $5.0 million delayed draw term loan facility for purposes of financing capital expenditures. We are permitted to borrow under the facility from time to time in order to fund up to 80% of the cost of capital expenditures, subject to a $5.0 million limit on aggregate borrowings thereunder. The delayed draw term loan facility is subject to the same covenants and restrictions, and bears the same interest rate, as the existing term loan and revolving credit facilities provided by the credit agreement. At June 30, 2013, we had $3.8 million outstanding on the delayed draw loan facility.
 
 
17

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not required by smaller reporting companies.
 
Item 4T. Controls and Procedures

Evaluation of disclosure controls and procedures.  The Chief Executive Officer and Chief Financial Officer, of the Company have evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the quarter covered by this Quarterly Report on Form 10-Q.  Based on that evaluation, the Chief Executive Officer and Chief Financial Officer of the Company have concluded that the Company’s disclosure controls and procedures as of the end of the quarter covered by this Quarterly Report on Form 10-Q are effective as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act.

Changes in internal controls.   There were no changes in our internal controls over financial reporting identified in connection with our evaluation that occurred during our last fiscal quarter ended June 30, 2013 that materially affected, or was reasonably likely to materially affect our internal control over financial reporting.

 
18

 

PART II.    OTHER INFORMATION

Item 1. Legal Proceedings.
 
None

Item 1A. Risk Factors.
 
As a smaller reporting company, we are not required to provide the information required by this Item.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
 
None.

Item 3.  Defaults upon Senior Securities.
 
None.

Item 4.  Mine Safety Disclosures
 
None

Item 5.  Other Information.
 
None
 
 
19

 

Item 6.  Exhibits
 
Exhibit
Number
 
Exhibit
Description
     
4.1   Credit Agreement, dated as of October 26, 2012, among Aly Energy Services Inc., Wells Fargo National Association (as agent) and the other lenders named therein
     
4.2   Amendment No. 1 to Credit Agreement, dated as of April 13, 2013
     
31.1     Certification of Chief Executive Officer
     
31.2     Certification of Chief Financial Officer
     
32.1   Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
32.2   Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
101.INS **
 
XBRL Instance Document
     
101.SCH **
 
XBRL Taxonomy Extension Schema Document
     
101.CAL **
 
XBRL Taxonomy Extension Calculation Linkbase Document
     
101.DEF **
 
XBRL Taxonomy Extension Definition Linkbase Document
     
101.LAB **
 
XBRL Taxonomy Extension Label Linkbase Document
     
101.PRE **
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
** XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
 
 
20

 
 
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.
 
  ALY ENERGY SERVICES, INC.  
       
Date: August 16, 2013
By:
/s/ Munawar H. Hidayatallah  
    Munawar H. Hidayatallah  
    Chairman and Chief Executive Officer  
    (Principal Executive Officer)  
 
 
21
EX-4.1 2 alye_ex41.htm CREDIT AGREEMENT alye_ex41.htm
EXHIBIT 4.1
 

 
 
 
CREDIT AGREEMENT
 
dated as of October 26, 2012
 
Among
 
ALY ENERGY SERVICES INC.,
 
as Borrower,
 
WELLS FARGO BANK, NATIONAL ASSOCIATION,
 
as Administrative Agent, Issuing Lender and Swing Line Lender,
 
and
 
THE LENDERS NAMED HEREIN,
 
as Lenders
 
$18,250,000
 
 
 

 
 
 

 
Table of Contents
 
        Page  
           
ARTICLE 1
DEFINITIONS AND ACCOUNTING TERMS
    1  
Section 1.1
Certain Defined Terms
    1  
Section 1.2
Computation of Time Periods
    31  
Section 1.3
Accounting Terms; Changes in GAAP
    31  
Section 1.4
Classes and Types of Advances
    32  
Section 1.5
Miscellaneous
    32  
ARTICLE 2
CREDIT FACILITIES
    32  
Section 2.1
Revolving, Term and CapEx Commitments
    32  
Section 2.2
Letters of Credit
    35  
Section 2.3
Advances
    41  
Section 2.4
Prepayments
    47  
Section 2.5
Repayment
    49  
Section 2.6
Fees
    49  
Section 2.7
Interest
    50  
Section 2.8
Illegality
    51  
Section 2.9
Breakage Costs
    52  
Section 2.10
Increased Costs
    52  
Section 2.11
Payments and Computations
    54  
Section 2.12
Taxes
    55  
Section 2.13
Mitigation Obligations; Replacement of Lenders
    58  
Section 2.14
Defaulting Lender
    60  
ARTICLE 3
CONDITIONS OF LENDING
    62  
Section 3.1
Conditions Precedent to Initial Borrowings and the Initial Letter of Credit
    62  
Section 3.2
Conditions Precedent to Each Borrowing and to Each Issuance, Extension or Renewal of a Letter of Credit
    65  
Section 3.3
Conditions Precedent to Effectiveness of Revolving Facility
    66  
Section 3.4
Conditions Precedent to Each CapEx Borrowing
    66  
Section 3.5
Determinations Under Sections 3.1, 3.2, 3.3 and 3.4
    67  
 
 
-i-

 
 
Table of Contents
(continued)
 
        Page  
           
ARTICLE 4
REPRESENTATIONS AND WARRANTIES
    67  
Section 4.1
Organization
    67  
Section 4.2
Authorization
    67  
Section 4.3
Enforceability
    67  
Section 4.4
Financial Condition
    67  
Section 4.5
Ownership and Liens; Real Property
    68  
Section 4.6
True and Complete Disclosure
    68  
Section 4.7
Litigation
    68  
Section 4.8
Compliance with Agreements
    68  
Section 4.9
Pension Plans
    69  
Section 4.10
Environmental Condition
    69  
Section 4.11
Subsidiaries
    70  
Section 4.12
Investment Company Act
    70  
Section 4.13
Taxes
    70  
Section 4.14
Permits, Licenses, etc
    70  
Section 4.15
Use of Proceeds
    71  
Section 4.16
Condition of Property; Casualties
    71  
Section 4.17
Insurance
    71  
Section 4.18
Security Interest
    71  
Section 4.19
OFAC; Anti-Terrorism
    71  
Section 4.20
Solvency
    71  
Section 4.21
Material Agreements
    71  
ARTICLE 5
AFFIRMATIVE COVENANTS
    71  
Section 5.1
Organization
    72  
Section 5.2
Reporting
    72  
Section 5.3
Insurance
    75  
Section 5.4
Compliance with Laws
    76  
Section 5.5
Taxes
    76  
Section 5.6
New Subsidiaries
    76  
Section 5.7
Security
    76  
Section 5.8
Deposit Accounts
    77  
Section 5.9
Records; Inspection
    77  
 
 
-ii-

 
Table of Contents
(continued)
 
        Page  
           
Section 5.10
Maintenance and Operation of Property
    77  
Section 5.11
Certificates of Title
    77  
Section 5.12
Appraisal Reports; Field Audits
    77  
Section 5.13
Material Contracts
    78  
Section 5.14
Further Assurances; Cure of Title Defects
    78  
Section 5.15
Post-Closing
    78  
ARTICLE 6
NEGATIVE COVENANTS
    79  
Section 6.1
Debt
    79  
Section 6.2
Liens
    80  
Section 6.3
Investments
    81  
Section 6.4
Acquisitions
    82  
Section 6.5
Agreements Restricting Liens
    82  
Section 6.6
Use of Proceeds; Use of Letters of Credit
    82  
Section 6.7
Corporate Actions; Accounting Changes
    82  
Section 6.8
Sale of Assets
    83  
Section 6.9
Restricted Payments
    83  
Section 6.10
Affiliate Transactions
    83  
Section 6.11
Line of Business
    84  
Section 6.12
Hazardous Materials
    84  
Section 6.13
Compliance with ERISA
    84  
Section 6.14
Sale and Leaseback Transactions
    85  
Section 6.15
Limitation on Hedging
    85  
Section 6.16
Leverage Ratio
    85  
Section 6.17
Fixed Charge Coverage Ratio
    85  
Section 6.18
Capital Expenditures
    85  
Section 6.19
[Reserved]
    85  
Section 6.20
Landlord Agreements
    85  
Section 6.21
[Reserved]
    85  
Section 6.22
Operating Leases
    85  
Section 6.23
Prepayment of Certain Debt and Other Obligations
    86  
Section 6.24
Material Agreements
    86  
 
 
-iii-

 
Table of Contents
(continued)
 
        Page  
           
ARTICLE 7
DEFAULT AND REMEDIES
    86  
Section 7.1
Events of Default
    86  
Section 7.2
Optional Acceleration of Maturity
    88  
Section 7.3
Automatic Acceleration of Maturity
    88  
Section 7.4
Set-off
    89  
Section 7.5
Remedies Cumulative, No Waiver
    89  
Section 7.6
Application of Payments
    90  
ARTICLE 8
THE ADMINISTRATIVE AGENT AND ISSUING LENDER
    92  
Section 8.1
Appointment and Authority
    92  
Section 8.2
Rights as a Lender
    92  
Section 8.3
Exculpatory Provisions
    92  
Section 8.4
Reliance by Administrative Agent, Swing Line Lender and Issuing Lender
    93  
Section 8.5
Delegation of Duties
    94  
Section 8.6
Resignation of Administrative Agent or Issuing Lender
    94  
Section 8.7
Non-Reliance on Administrative Agent and Other Lenders
    95  
Section 8.8
No Other Duties, etc
    95  
Section 8.9
Indemnification
    96  
Section 8.10
Administrative Agent May File Proofs of Claim
    97  
Section 8.11
Collateral and Guaranty Matters
    97  
 
 
-iv-

 
Table of Contents
(continued)
 
        Page  
           
ARTICLE 9
MISCELLANEOUS
    98  
Section 9.1
Costs and Expenses
    98  
Section 9.2
Indemnification; Waiver of Damages
    99  
Section 9.3
Waivers and Amendments
    100  
Section 9.4
Severability
    101  
Section 9.5
Survival of Representations and Obligations
    101  
Section 9.6
Binding Effect
    102  
Section 9.7
Successors and Assigns
    102  
Section 9.8
Confidentiality
    106  
Section 9.9
Notices, Etc
    106  
Section 9.10
Usury Not Intended
    107  
Section 9.11
Usury Recapture
    108  
Section 9.12
Payments Set Aside
    108  
Section 9.13
Governing Law; Service of Process
    108  
Section 9.14
Submission to Jurisdiction
    109  
Section 9.15
Electronic Execution of Assignments
    109  
Section 9.16
Execution in Counterparts
    109  
Section 9.17
Waiver of Jury
    109  
Section 9.18
USA Patriot Act
    109  
Section 9.19
Confirmation of Flood Policies and Procedures
    110  
Section 9.20
Keepwell
    110  
Section 9.21
Integration
    110  
 
 
-v-

 
 
SCHEDULES:
 
Schedule I
Pricing Schedule
Schedule II
Commitments, Contact Information
Schedule III
Additional Conditions and Requirements for New Subsidiaries
Schedule IV
Additional Conditions Precedent for CapEx Borrowings for Equipment
Schedule 3.1
Owned and Leased Real Properties
Schedule 3.1(q)
Certificates of Title to be Delivered Post-Closing
Schedule 4.1
Organizational Information
Schedule 4.7
Litigation
Schedule 4.10
Environmental Matters
Schedule 4.11
Subsidiaries
Schedule 4.21
Material Agreements
Schedule 6.3
Investments
Schedule 6.10
Affiliate Transactions
 
EXHIBITS:
 
Exhibit A
Form of Assignment and Acceptance
Exhibit B
Form of Borrowing Base Certificate
Exhibit C
Form of Compliance Certificate
Exhibit D
Form of Guaranty
Exhibit E-1
Form of Notice of Revolving Borrowing
Exhibit E-2
Form of Notice of Term Borrowing
Exhibit E-3
Form of Notice of CapEx Borrowing
Exhibit F
Form of Notice of Continuation or Conversion
Exhibit G
Form of Pledge and Security Agreement
Exhibit H-1
Form of Revolving Note
Exhibit H-2
Form of Term Note
Exhibit H-3
Form of Swing Line Note
Exhibit H-4
Form of CapEx Note
Exhibit I-1
Form of U.S. Tax Compliance Certificate
Exhibit I-2
Form of U.S. Tax Compliance Certificate
Exhibit I-3
Form of U.S. Tax Compliance Certificate
Exhibit I-4
Form of U.S. Tax Compliance Certificate
 
 
-vi-

 
 
CREDIT AGREEMENT
 
This CREDIT AGREEMENT dated as of October 26, 2012 (this “Agreement”) is among Aly Energy Services Inc., a Delaware corporation (the “Borrower”), the Lenders (as defined below) and Wells Fargo Bank, National Association as Administrative Agent (as defined below) for the Lenders, as Issuing Lender (as defined below) and as Swing Line Lender (as defined below).
 
In consideration of the mutual covenants and agreements herein contained, the parties hereto hereby agree as follows:
 
ARTICLE 1
DEFINITIONS AND ACCOUNTING TERMS
 
Section 1.1 Certain Defined Terms. The following terms shall have the following meanings (unless otherwise indicated, such meanings to be equally applicable to both the singular and plural forms of the terms defined):
 
Acceptable Letter of Credit Maturity Date” has the meaning assigned to it in Section 2.2(a)(ii) of this Agreement.
 
Acceptable Security Interest” means a security interest which (a) exists in favor of the Administrative Agent for its benefit and the ratable benefit of the Secured Parties, (b) is superior to all other security interests (other than the Permitted Liens), (c) secures the Secured Obligations, (d) is enforceable against the Credit Party which created such security interest and (e) is perfected.
 
Account Control Agreement” shall mean, as to any deposit account of any Credit Party held with a bank, an agreement or agreements in form and substance reasonably acceptable to the Administrative Agent, among the Credit Party owning such deposit account, the Administrative Agent and such other bank governing such deposit account.
 
Account Debtor” shall mean an account debtor as defined in the Uniform Commercial Code, as in effect in the State of New York.
 
Acquisition” means the purchase by any Credit Party of (a) all or substantially all of the assets of a Person, (b) substantially all of the equity interests of a Person, or (c) any business, division or enterprise, including the purchase of associated assets or operations or the Equity Interests of a Person and for the avoidance of doubt, excludes purchases of equipment only with no other tangible or intangible property associated with such equipment purchase unless such purchase of equipment involves all or substantially all the assets of the seller.
 
Adjusted Base Rate” means, for any day, the fluctuating rate per annum of interest equal to the greatest of (a) the Federal Funds Rate in effect on such day plus 0.50%, (b) the Prime Rate in effect on such day, and (c) a rate determined by the Administrative Agent to be the Daily One-Month LIBOR plus 1.00%. Any change in the Adjusted Base Rate due to a change in the Prime Rate, Daily One-Month LIBOR or the Federal Funds Rate shall be effective on the effective date of such change in the Prime Rate, Daily One-Month LIBOR or the Federal Funds Rate, respectively.
 
Administrative Agent” means Wells Fargo in its capacity as agent for the Lenders pursuant to Article 8 and any successor agent pursuant to Section 8.6.
 
 
1

 
 
Administrative Questionnaire” means an Administrative Questionnaire in a form supplied by the Administrative Agent.
 
Advance” means any advance by a Lender or the Swing Line Lender to the Borrower as a part of a Borrowing.
 
Affiliate” means, as to any Person, any other Person that, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, such Person or any Subsidiary of such Person. The term “control” (including the terms “controlled by” or “under common control with”) means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through ownership, by contract, or otherwise.
 
Agreement” has the meaning specified in the introductory paragraph hereto.
 
Applicable Margin” means, at any time with respect to each Type of Advance, the Letters of Credit and the Commitment Fees, the percentage rate per annum which is applicable at such time with respect to such Advance, Letter of Credit or Commitment Fees as set forth in Schedule I and subject to further adjustments as set forth in Section 2.7(d).
 
Asset Sale” means (a) any sale, transfer, or other disposition of any Property, by any Credit Party and (b) any issuance or sale of any Equity Interests of any Subsidiary of the Borrower, in each case, to any Person other than a Credit Party; provided that, any sale, transfer or other disposition of Property from one Credit Party to another Credit Party as permitted under Section 6.8(b) and the sale of inventory or equipment in the ordinary course as permitted under Section 6.8(a) shall not constitute an “Asset Sale” for purposes of this Agreement.
 
Assignment and Acceptance” means an assignment and acceptance executed by a Lender and an Eligible Assignee and accepted by the Administrative Agent, in substantially the same form as Exhibit A or any other form approved by the Administrative Agent.
 
Austin Chalk Corp.” means Austin Chalk Petroleum Services Corp., a Texas corporation.
 
Austin Chalk Corp. Acquisition” means the purchase by the Borrower from Kurt Chew of Austin Chalk Corp. pursuant to the Austin Chalk Corp. Acquisition Agreement.
 
Austin Chalk Corp. Acquisition Agreement” means that certain Stock Purchase Agreement between Kurt Chew and the Borrower dated September 27, 2012.
 
Austin Chalk Corp. Acquisition Documents” means the Austin Chalk Corp. Acquisition Agreement and all agreements, assignments, deeds, conveyances, certificates and other documents and instruments now or hereafter executed and delivered by the Borrower pursuant to the Austin Chalk Corp. Acquisition Agreement or in connection with the Austin Chalk Corp. Acquisition.
 
AutoBorrow Agreement” means any agreement providing for automatic borrowing services between the Borrower and the Swing Line Lender.
 
Banking Services” means each and any of the following bank services: (a) commercial credit cards, (b) stored value cards and (c) treasury management services (including, without limitation, controlled disbursement, automated clearinghouse transactions, return items, overdrafts and interstate depository network services).
 
 
2

 
 
Banking Services Obligations” means any and all obligations of the Borrower or any other Credit Party to any Banking Services Provider, whether absolute or contingent and howsoever and whensoever created, arising, evidenced or acquired (including all renewals, extensions and modifications thereof and substitutions therefor) in connection with Banking Services.
 
Banking Services Provider” means any Lender (other than a Defaulting Lender) or Affiliate of a Lender (other than a Defaulting Lender) that provides Banking Services to the Borrower or any Subsidiary.
 
Base Rate Advance” means an Advance which bears interest based upon the Adjusted Base Rate.
 
BHP” means BHP Billiton Limited, together with any of its Affiliates.
 
Borrower” means ALY Energy Services Inc., a Delaware corporation.
 
Borrowing” means a Revolving Borrowing, a Swing Line Borrowing, a Term Borrowing or a CapEx Borrowing.
 
Borrowing Base” means, without duplication, the sum of (a) 80% of an amount equal to the Eligible Receivables plus (b) 50% of the value of Eligible Inventory valued at the lower of actual or fair market value in accordance with GAAP, in each case, determined as of the date of the Borrowing Base Certificate then most recently delivered pursuant to this Agreement minus (c) the Reserves; provided that (i) in no event shall the amount determined under clause (b) exceed 50% of the total amount of the Borrowing Base and (ii) notwithstanding the foregoing rates, the Lender may from time to time modify the percentage set forth in this definition if it determines, in its reasonable judgment, that such advance rate should be reduced based upon a Field Exam pursuant to Section 5.10 or a Field Audit pursuant to Section 5.12. Any change in the Borrowing Base shall be effective as of the date of the Borrowing Base Certificate then most recently delivered pursuant to this Agreement; provided that, should the Borrower fail to deliver the Administrative Agent and the Lenders the Borrowing Base Certificate as required under Section 5.2(e), the Administrative Agent may nonetheless redetermine the Borrowing Base from time-to-time thereafter in its sole discretion until the Administrative Agent and the Lenders receive the required Borrowing Base Certificate, whereupon the Administrative Agent shall redetermine the Borrowing Base based on such Borrowing Base Certificate and the other terms hereof. Anything to the contrary contained herein notwithstanding, the Lender shall, upon not less 30 days’ prior written notice to the Borrower, have the right (but not the obligation), in the exercise of its reasonable judgment, to establish and increase or decrease Reserves against the Borrowing Base. The amount of any Reserve established by the Lender shall have a reasonable relationship to the event, condition, other circumstance, or fact that is the basis for such reserve and shall not be duplicative of any other reserve established and currently maintained. Furthermore, the event, condition, circumstance or fact addressed in such reserve shall not be an event, condition, circumstance or fact otherwise addressed by the Lender in a change to any criteria for Eligible Inventory or Eligible Receivable then in effect.
 
Borrowing Base Certificate” means a certificate executed by a Responsible Officer of the Borrower in the form of the attached Exhibit B and including the following: (a) accounts receivable and accounts payable aging reports for each Credit Party with grand totals and (b) all other information as reasonably requested by the Administrative Agent.
 
 
3

 
 
Borrowing Base Deficiency” means the excess, if any, of (a) the Revolving Outstandings over (b) the lesser of (i) aggregate amount of Revolving Commitments, and (ii) the Borrowing Base then in effect.
 
Business Day” means a day (a) other than a Saturday, Sunday, or other day on which the Administrative Agent is authorized to close under the laws of, or is in fact closed in, New York or Texas, and (b) if the applicable Business Day relates to any Eurodollar Advances, on which dealings are carried on by commercial banks in the London interbank market.
 
CapEx Advance” means any advance by a CapEx Lender to the Borrower as part of a CapEx Borrowing.
 
CapEx Basket Amount” means $2,000,000 for fiscal year 2012, $10,000,000 for fiscal year 2013, and $6,000,000 for each fiscal year thereafter.
 
CapEx Borrowing” means a Borrowing consisting of simultaneous CapEx Advances of the same Type made by each CapEx Lender pursuant to Section 2.1(b)(ii) or Converted by each CapEx Lender to CapEx Advances of a different Type pursuant to Section 2.3(b).
 
CapEx Commitment” means, for each CapEx Lender, the obligation of such CapEx Lender to advance to the Borrower the amount set opposite such CapEx Lender’s name on Schedule II as its CapEx Commitment, or if such CapEx Lender has entered into any Assignment and Acceptance, set forth for such CapEx Lender as its CapEx Commitment in the Register; provided that, after the CapEx Commitment Termination Date, the CapEx Commitment for each CapEx Lender shall be zero. The aggregate CapEx Commitments as of April 19, 2013 is equal to $5,000,000.00.
 
CapEx Commitment Termination Date” means December 31, 2013.
 
CapEx Facility” means the term loan facility described in Section 2.1(b)(ii).
 
CapEx Lenders” means Lenders having a CapEx Commitment or if such CapEx Commitments have been terminated, Lenders that are owed CapEx Advances.
 
CapEx Maturity Date” means the earlier of (a) October 26, 2016, and (b) acceleration of the CapEx Advances pursuant to Article 7.
 
CapEx Note” means a promissory note made by the Borrower payable to the order of a CapEx Lender in the amount of such CapEx Lender’s CapEx Commitment, in substantially the same form as Exhibit H-4, evidencing indebtedness of the Borrower to such CapEx Lender resulting from the CapEx Advances owing to such Lender.
 
Capital Expenditures” for any Person and period of its determination means, without duplication, the aggregate of all expenditures and costs (whether paid in cash or accrued as liabilities during that period and including that portion of payments under Capital Leases that are capitalized on the balance sheet of such Person) of such Person during such period that, in conformity with GAAP, are required to be included in or reflected by the property, plant, or equipment or similar fixed asset accounts reflected in the balance sheet of such Person.
 
 
4

 
 
Capital Leases” means, for any Person, subject to Section 1.3(c), any lease of any Property by such Person as lessee which would, in accordance with GAAP, be required to be classified and accounted for as a capital lease on the balance sheet of such Person.
 
Cash Collateralize” means, to deposit in a Cash Collateral Account, pledge and deposit with or deliver to the Administrative Agent, for the benefit of one or more of the Issuing Lender, Swing Line Lender or Lenders, as collateral for Letter of Credit Obligations or obligations of Lenders to fund participations in respect of Letter of Credit Obligations or Swing Line Advances, cash or deposit account balances or, if the Administrative Agent, the Swing Line Lender and the Issuing Lender shall agree in their sole discretion, other credit support, in each case pursuant to documentation in form and substance satisfactory to the Administrative Agent, the Swing Line Lender and the Issuing Lender. “Cash Collateral” shall have a meaning correlative to the foregoing and shall include the proceeds of such cash collateral and other credit support.
 
Cash Collateral Account” means a cash collateral account pledged to the Administrative Agent containing cash deposited pursuant to the terms hereof.
 
Casualty Event” means the damage, destruction or condemnation, including by process of eminent domain or any transfer or disposition of property in lieu of condemnation, as the case may be, of property of any Person.
 
CERCLA” means the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (42 U.S.C. §§ 9601 et seq.), as amended, together with any analogous state and local counterparts or equivalents, and all rules and regulations and requirements thereunder in each case as now or hereafter in effect.
 
Certificated Equipment” means any equipment the ownership of which is evidenced by, or under applicable Legal Requirement, is required to be evidenced by, a certificate of title.
 
Change in Control” means the occurrence of any of the following events:
 
(a) the Borrower ceases to directly or indirectly own 100% of Austin Chalk Corp.;
 
(b) the Permitted Holders cease to own collectively, either directly or indirectly, at least 30% of the Voting Securities of the Borrower;
 
(c) Munawar H. Hidayatallah ceases to own, either directly or indirectly, at least 12.2% of the Voting Securities of the Borrower; provided that, at any point following (i) the offering of shares of capital stock of the Borrower in a firm-commitment underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended or (ii) the listing of the capital stock of the Borrower on any of the New York Stock Exchange, Inc., the NASDAQ Stock Market LLC, the NYSE MKT LLC or the successors thereof, Munawar H. Hidayatallah shall be permitted to transfer his Equity Interest in the Borrower (and no such transfer shall constitute a “Change in Control” for purposes hereof); or
 
(d) two or more of the Key Individuals shall cease to be actively engaged in the executive management of the Borrower and each such Key Individual is not replaced with an individual reasonably acceptable to the Administrative Agent who has comparable qualifications within one hundred twenty (120) days after such Person ceases to be so actively engaged.
 
 
5

 
 
Change in Law” means the occurrence, after the date of this Agreement (or with respect to any Lender, if later, the date on which such Lender becomes a Lender), of any of the following: (a) the adoption or taking effect of any law, rule, regulation or treaty, (b) any change in any law, rule, regulation or treaty or in the administration, interpretation, implementation or application thereof by any Governmental Authority or (c) the making or issuance of any request, rule, guideline or directive (whether or not having the force of law) by any Governmental Authority; provided that notwithstanding anything herein to the contrary, (x) the Dodd-Frank Wall Street Reform and Consumer Protection Act and all requests, rules, guidelines or directives made or issued by any Governmental Authority thereunder or issued in connection therewith and (y) all requests, rules, guidelines or directives promulgated by the Bank for International Settlements, the Basel Committee on Banking Supervision (or any successor or similar authority) or the United States or foreign regulatory authorities, in each case pursuant to Basel III, shall in each case be deemed to be a “Change in Law”, regardless of the date enacted, adopted or issued.
 
Class” has the meaning set forth in Section 1.4.
 
Closing Date” means October 26, 2012.
 
Closing Date Leverage Ratio” means the ratio of (a) the consolidated Debt of the Borrower on the Closing Date, after giving pro forma effect to any Advances and Transactions made on the Closing Date, to (b) the EBITDA of the Borrower for the 12- month period ending September 30, 2012.
 
Code” means the Internal Revenue Code of 1986, as amended, and the regulations and published interpretations thereof.
 
Collateral” means all property of the Credit Parties which is “Collateral” or “Mortgaged Property” (as defined in each of the Mortgages or the Security Agreement, as applicable) or similar terms used in the Security Documents.
 
Commitment Fees” means the fees required under Section 2.6(a).
 
Commitments” means, as to any Lender, its Revolving Commitment, its Term Commitment, and its CapEx Commitment, in each case, if applicable.
 
Common Equity Investments” means the common equity investments in the Borrower made on or prior to the Closing Date in cash by entities or individuals reasonably acceptable to the Administrative Agent.
 
Compliance Certificate” means a compliance certificate executed by the chief executive officer or chief financial officer of the Borrower in substantially the same form as Exhibit C.
 
Connection Income Taxes” means Other Connection Taxes that are imposed on or measured by net income (however denominated) or that are franchise Taxes or branch profits Taxes.
 
Controlled Group” means all members of a controlled group of corporations and all businesses (whether or not incorporated) under common control which, together with the Borrower or any Subsidiary, are treated as a single employer under Section 414 of the Code.
 
Convert,” “Conversion,” and “Converted” each refers to a conversion of Advances of one Type into Advances of another Type pursuant to Section 2.3(b).
 
 
6

 
 
Credit Documents” means this Agreement, the Notes, the Letters of Credit, the Letter of Credit Applications, the Guaranties, the Notices of Borrowing, the Notices of Conversion, the Security Documents, any AutoBorrow Agreement, the Fee Letter, and each other agreement, instrument, or document executed at any time in connection with this Agreement.
 
Credit Extension” means an Advance or a Letter of Credit Extension.
 
Credit Parties” means the Borrower and the Guarantors.
 
Daily One-Month LIBOR” means, for any day, the rate of interest equal to the Eurodollar Rate then in effect for delivery for a one (1) month period.
 
Debt” means, for any Person, without duplication: (a) indebtedness of such Person for borrowed money, including the face amount of any letters of credit supporting the repayment of indebtedness for borrowed money issued for the account of such Person; (b) to the extent not covered under clause (a) above, obligations under letters of credit and agreements relating to the issuance of letters of credit or acceptance financing, including Letters of Credit; (c) obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, or upon which interest payments are customarily made; (d) obligations of such Person under conditional sale or other title retention agreements relating to any Properties purchased by such Person (other than customary reservations or retentions of title under agreements with suppliers entered into in the ordinary course of business); (e) obligations of such Person to pay the deferred purchase price of property or services (including, without limitation, any contingent obligations or other similar obligations associated with such purchase, and including obligations that are non-recourse to the credit of such Person but are secured by the assets of such Person but excluding trade payables incurred in the ordinary course of such Person’s business which are either (i) not more than 90 days past due or (ii) subject to a good faith dispute); (f) obligations of such Person as lessee under Capital Leases and obligations of such Person in respect of Synthetic Leases; (g) obligations of such Person under any Hedging Arrangement (except that such obligations shall not constitute Debt for purposes of the calculations for compliance under Sections 6.16 and 6.17); (h) all obligations of such Person to mandatorily purchase, redeem, retire, defease or otherwise make any payment in respect of any Equity Interest in such Person or any other Person on a date certain or upon the occurrence of certain events or conditions; (i) the Debt of any partnership or unincorporated joint venture in which such Person is a general partner or a joint venturer, but only to the extent to which there is recourse to such Person for the payment of such Debt; (j) obligations of such Person under direct or indirect guaranties in respect of, and obligations (contingent or otherwise) of such Person to purchase or otherwise acquire, or otherwise to assure a creditor against loss in respect of, indebtedness or obligations of others of the kinds referred to in clauses (a) through (i) above; (k) indebtedness or obligations of others of the kinds referred to in clauses (a) through (j) secured by any Lien on or in respect of any Property of such Person provided that, solely in the case of liabilities of any Person not a Subsidiary or the Borrower secured by such a Lien, the amount of such Debt shall be deemed to the lesser of (i) the net book value of the property so encumbered and (ii) the amount of such liabilities, and (l) all liabilities of such Person in respect of unfunded vested benefits under any Plan.
 
Debt Funded Capital Expenditure” means Capital Expenditures to the extent funded with proceeds from Permitted Debt.
 
Debt Incurrence” means any issuance or sale by the Borrower or any of its Subsidiaries of any Debt after the Closing Date other than Permitted Debt.
 
 
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Debt Incurrence Proceeds” means, with respect to any Debt Incurrence, all cash and cash equivalent investments received by the Borrower or any of its Subsidiaries from such Debt Incurrence after payment of, or provision for, all underwriter fees and expenses, original issued discount, SEC and blue sky fees, printing costs, fees and expenses of accountants, lawyers and other professional advisors, brokerage commissions and other reasonable out-of-pocket fees and expenses actually incurred in connection with such Debt Incurrence; provided that, an original issued discount shall not reduce the amount of such Debt Incurrence Proceeds unless such discount is due and payable at or immediately following the closing of such Debt Incurrence and such discount has not already been taken into account to reduce the amount of proceeds received by the Borrower or such Subsidiary from such Debt Incurrence.
 
Debtor Relief Laws” means (a) the Bankruptcy Code of the United States of America, and (b) all other liquidation, conservatorship, bankruptcy, assignment for the benefit of creditors, moratorium, rearrangement, receivership, insolvency, reorganization, or similar debtor relief laws of the United States or other applicable jurisdictions from time to time in effect.
 
Default” means (a) an Event of Default or (b) any event or condition which with notice or lapse of time or both would, unless cured or waived, become an Event of Default.
 
Default Rate” means a per annum rate equal to (a) in the case of principal of any Advance, 2.00% plus the rate otherwise applicable to such Advance as provided in Sections 2.7(a), (b), (c) or (d), (b) in the case of any other Obligation other than Letter of Credit Fees, 2.00% plus the non-default rate applicable to Base Rate Advances as provided in Section 2.7(a) or (d), and (c) when used with respect to Letter of Credit Fees, a rate equal to the Applicable Margin for Eurodollar Advances plus 2.00% per annum.
 
Defaulting Lender” means, subject to Section 2.14(b), any Lender that (a) (except, with regards to the funding of Swing Line Advances, the Swing Line Lender) has failed to (i) fund all or any portion of its Advances within two Business Days of the date such Advances were required to be funded hereunder unless such Lender notifies the Administrative Agent and the Borrower in writing that such failure is the result of such Lender’s good faith determination that one or more conditions precedent to funding (each of which conditions precedent, together with any applicable default, shall be specifically identified in such writing) has not been satisfied, or (ii) pay to the Administrative Agent, the Issuing Lender, the Swing Line Lender or any other Lender any other amount required to be paid by it hereunder (including in respect of its participation in Letters of Credit or Swing Line Advances) within two Business Days of the date when due, (b) ) (except, with regards to the funding of Swing Line Advances, the Swing Line Lender) has notified the Borrower, the Administrative Agent or the Issuing Lender or the Swing Line Lender in writing, or has made a public statement to the effect, that it does not intend to comply with its funding obligations hereunder or generally under other agreements in which it commits to extend credit (unless such writing or public statement relates to such Lender’s obligation to fund an Advance hereunder and states that such position is based on such Lender’s good faith determination that a condition precedent to funding (which condition precedent, together with any applicable default, shall be specifically identified in such writing or public statement) cannot be satisfied), (c) has failed, within three Business Days after written request by the Administrative Agent or the Borrower, to confirm in writing to the Administrative Agent and the Borrower that it will comply with its prospective funding obligations hereunder (provided that such Lender shall cease to be a Defaulting Lender pursuant to this clause (c) upon receipt of such written confirmation by the Administrative Agent and the Borrower in form and substance satisfactory to the Administrative Agent and the Borrower), or (d) has, or has a direct or indirect parent company that has, (i) become the subject of a proceeding under any Debtor Relief Law, or (ii) had appointed for it a receiver, custodian, conservator, trustee, administrator, assignee for the benefit of creditors or similar Person charged with reorganization or liquidation of its business or assets, including the Federal Deposit Insurance Corporation or any other state or federal regulatory authority acting in such a capacity; provided that a Lender shall not be a Defaulting Lender solely by virtue of the ownership or acquisition of any equity interest in that Lender or any direct or indirect parent company thereof by a Governmental Authority so long as such ownership interest does not result in or provide such Lender with immunity from the jurisdiction of courts within the United States or from the enforcement of judgments or writs of attachment on its assets or permit such Lender (or such Governmental Authority) to reject, repudiate, disavow or disaffirm any contracts or agreements made with such Lender. Any determination by the Administrative Agent that a Lender is a Defaulting Lender under any one or more of clauses (a) through (d) above shall be conclusive and binding absent manifest error, and such Lender shall be deemed to be a Defaulting Lender (subject to Section 2.14(b)) upon delivery of written notice of such determination to the Borrower, the Issuing Lender, the Swing Line Lender and each Lender.
 
 
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Dollars” and “$” means lawful money of the United States of America.
 
Domestic Subsidiary” means, with respect to any Person, any of its Subsidiaries that (a) is incorporated or organized under the laws of the United States, any State thereof or the District of Columbia, (b) could provide a guarantee without any material adverse federal income tax consequence of the Borrower (by constituting an investment of earnings in United States property under Section 956 (or any successor provision) of the Code, triggering an increase in the gross income of the Borrower pursuant to Section 951 (or a successor provision) of the Code without corresponding credits or other offsets), or (c) any Foreign Subsidiary that is disregarded for tax purposes so long as each Person who, directly or indirectly, holds the Equity Interests of such Foreign Subsidiary is the Borrower, is a Domestic Subsidiary, or is a Foreign Subsidiary disregarded for U.S. Federal income tax purposes.
 
EBITDA” means for the Borrower and its Subsidiaries, on a consolidated basis for any period, the sum of (a) Net Income for such period, plus (b) without duplication and to the extent deducted in determining such Net Income (i) depreciation and amortization for such period, plus (ii) Interest Expense for such period, plus (iii) Income Tax Expense for such period, plus (iv) non-cash charges plus (v) fees and expenses accrued under, or incurred in connection with, the closing of the Credit Documents and other Transactions in an amount not to exceed $1,700,000, minus (c) to the extent included in determining Net Income, all non-cash items of income; provided that such EBITDA shall be subject to pro forma adjustments for acquisitions and asset sales assuming that such transactions had occurred on the first day of the determination period, which adjustments shall be made in a manner, and subject to supporting documentation, acceptable to the Administrative Agent.
 
Eligible Assignee” means any Person that meets the requirements to be an assignee under Section 9.7(b)(iii), (v) and (vi) (subject to such consents, if any, as may be required under Section 9.7(b)(iii)).
 
Eligible Inventory” means at any time Inventory that is ready and available to be sold without requiring any additional processing and then owned by, and in the possession of, any Credit Party (or in the possession of a third party lessor or landlord that is party to a collateral access agreement or landlord waiver agreement with the Administrative Agent on terms reasonably satisfactory to the Administrative Agent), and held for sale or disposition in the ordinary course of the Credit Parties’ business and in which the Administrative Agent has an Acceptable Security Interest but specifically excluding Inventory which meets any of the following conditions or descriptions:
 
(a) Inventory with respect to which a claim exists disputing applicable Credit Party’s title to or right to possession;
 
(b) obsolete or slow moving Inventory;
 
 
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(c) rejected, spoiled or damaged Inventory, or Inventory otherwise not readily saleable or usable in its present state for the use for which it was processed or purchased;
 
(d) Inventory that the Administrative Agent has determined (in its reasonable credit judgment) to be unmarketable;
 
(e) Inventory that has been shipped or delivered to a customer on consignment, on a sale or return basis, or on the basis of any similar understanding;
 
(f) Inventory which is in transit (other than Inventory in transit between locations of Credit Parties so long as a Credit Party maintains sole control and possession of such Inventory while it is in transit);
 
(g) Inventory held for lease;
 
(h) Inventory which is located on premises owned or operated by the customer that is to purchase such Inventory or which is located on premises leased by a Credit Party that is not subject to a landlord lien waiver or subordination reasonably acceptable to the Administrative Agent;
 
(i) Inventory that is not in good condition or does not comply with any Legal Requirement or the standards imposed by any Governmental Authority with respect to its manufacture, use, or sale;
 
(j) Inventory that is bill and hold goods or deferred shipment;
 
(k) Inventory evidenced by any negotiable or non-negotiable document of title;
 
(l) Inventory produced in violation of the Fair Labor Standards Act or that is subject to the “hot goods” provisions contained in Title 29 U.S.C. §215;
 
(m) Inventory that is subject to any agreement which would, in any material respect, restrict the Lender’s ability to sell or otherwise dispose of such Inventory;
 
(n) Inventory that is located in a jurisdiction outside the United States or in any territory or possession of the United States that has not adopted Article 9 of the Uniform Commercial Code;
 
(o) Inventory that is subject to any third party’s rights (including Permitted Liens) which would be superior to the lien and rights of the Administrative Agent created under the Credit Documents;
 
(p) Inventory that has been reflected on any Credit Party’s books for more than one year; and
 
(q) Inventory that is otherwise deemed ineligible by the Administrative Agent in its reasonable discretion.
 
 
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Inventory which is at any time Eligible Inventory but which subsequently fails to meet any of the foregoing requirements shall forthwith cease to be Eligible Inventory until such time as the foregoing requirements are met with respect to such Inventory. Notwithstanding the foregoing, the Administrative Agent may, from time to time, and upon not less than 30 days’ prior written notice to the Borrower, in the exercise of its reasonable judgment, change the criteria for Eligible Inventory based on either: (A) an event, condition or other circumstance arising after the Closing Date, or (B) an event, condition or other circumstance existing on the Closing Date to the extent the Administrative Agent has no written notice thereof from the Borrower prior to the Closing Date, in either case under clause (A) or (B) which adversely affects (other than in a de minimus manner) or, in the Administrative Agent’s reasonable judgment, could reasonably be expected to adversely affect (other than in a de minimus manner), the Inventory as determined by Administrative Agent.
 
Eligible Receivables” means, as to the Borrower and its consolidated Subsidiaries, on a consolidated basis and without duplication, all Receivables of such Person, in each case reflected on its books in accordance with GAAP which conform to the representations and warranties in Article 4 hereof and in the Security Documents to the extent such provisions are applicable to the Receivables, and each of which meets all of the following criteria on the date of any determination:
 
(a) such Receivable is subject to an Acceptable Security Interest;
 
(b) such Credit Party has good and marketable title to such Receivable,
 
(c) such Receivable has been billed substantially in accordance with customary billing practices of such Credit Party in effect on the Closing Date and such Receivable is not unpaid for more than 90 days from the date of the invoice;
 
(d) such Receivable was created in the ordinary course of business of any Credit Party from the performance by such Credit Party of services which have been fully and satisfactorily performed (and not a progress billing or contingent upon any further performance), or from the absolute sale on open account (and not on consignment, on approval or on a “sale or return” basis) by such Credit Party of goods (i) in which such Credit Party had sole and complete ownership and (ii) which have been shipped or delivered to the Account Debtor, and such Credit Party has possession of shipping or delivery receipts evidencing such shipment or delivery;
 
(e) such Receivable represents a legal, valid and binding payment obligation of the Account Debtor thereof enforceable in accordance with its terms and arises from an enforceable contract;
 
(f) such Receivable is owed by an Account Debtor that the Credit Parties deem to be creditworthy and is not owed by an Account Debtor which has, (i) applied for, suffered, or consented to the appointment of any receiver, custodian, trustee, or liquidator of its assets, (ii) has had possession of all or a material part of its property taken by any receiver, custodian, trustee or liquidator, (iii) filed, or had filed against it, any request or petition for liquidation, reorganization, arrangement, adjustment of debts, adjudication as bankrupt, winding-up, or voluntary or involuntary case under any state, federal or foreign bankruptcy laws, (iv) has admitted in writing its inability to, or is generally unable to, pay its debts as they become due, (v) become insolvent, or (vi) ceased operation of its business;
 
(g) the Account Debtor on such Receivable is not a Credit Party, an Affiliate of a Credit Party, nor a director, officer or employee of a Credit Party or of an Affiliate of a Credit Party;
 
(h) such Receivable is evidenced by an invoice and not by any chattel paper, promissory note or other instrument;
 
 
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(i) such Receivable is not due from an Account Debtor from whom on the date of determination more than 20% of its aggregate Receivables owed to any Credit Party are more than 90 days past the invoice date;
 
(j) such Receivable, together with all other Receivables due from the same Account Debtor does not comprise more than 25% of the aggregate Eligible Receivables (provided, however, that the amount of any such Receivable excluded pursuant to this clause (j) shall only be the amount by which Eligible Receivables due from such Account Debtor exceed 25% of the aggregate Eligible Receivables and provided further that all Receivables due from BHP shall be included notwithstanding anything to the contrary contained in this clause (j) so long as BHP is rated at least A1 by Moody’s or A+ by S&P);
 
(k) such Receivable is not subject to any set-off, counterclaim, defense, allowance or adjustment and there has been no dispute, objection or complaint by the Account Debtor concerning its liability for such Receivable or a claim for any such set-off, counterclaim, defense, allowance or adjustment by the Account Debtor thereof (provided, however, that the amount of any such Receivable excluded pursuant to this clause (k) shall only be only the amount of such set-off, counterclaim, allowance or adjustment or claimed set-off, counterclaim, allowance or adjustment);
 
(l) such Receivable is owed in Dollars and is due from an Account Debtor that is organized under the laws of the U.S. or any state of the U.S.;
 
(m) such Receivable is not due from the United States government, or any department, agency, public corporation, or instrumentality thereof, unless the Federal Assignment of Claims Act of 1940, as amended (31 U.S.C. § 3727 et seq. and 41 U.S.C. § 15 et seq.), and any other steps necessary to perfect the Lien of the Administrative Agent in such Receivable has been complied with to the Administrative Agent’s satisfaction;
 
(n) such Receivable is not owed by an Account Debtor located in any jurisdiction which requires filing of a “Notice of Business Activities Report” or other similar report or requires any Credit Party to qualify to do business in order to permit such Credit Party to seek judicial enforcement in such jurisdiction of payment of such Receivable, unless such Credit Party has filed such report or qualified to do business in such jurisdiction;
 
(o) such Receivable is not the result of (i) a credit balance relating to a Receivable more than 90 days past the invoice date, (ii) work-in-progress, (iii) finance or service charges, or (iv) payments of interest;
 
(p) such Receivable has not been written off the books of any Credit Party or otherwise designated as uncollectible by any Credit Party;
 
(q) such Receivable is not subject to any reduction thereof, other than discounts and adjustments given in the ordinary course of business and deducted from such Receivable;
 
(r) such Receivable is not a newly created Receivable resulting from the unpaid portion of a partially paid Receivable;
 
(s) such Receivable is not subject to any third party’s rights (including Permitted Liens) which would be superior to the lien and rights of Administrative Agent created under the Credit Documents; and
 
(t) such Receivable is not otherwise deemed ineligible by the Administrative Agent in its reasonable credit judgment, including such Receivable from any Account Debtor that does not have a satisfactory credit standing (as determined in the reasonable discretion of the Administrative Agent).
 
 
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In the event that a Receivable which was previously an Eligible Receivable ceases to be an Eligible Receivable hereunder, the Borrower shall notify the Administrative Agent thereof at the time of submission to the Administrative Agent of the next Borrowing Base Certificate. In determining the amount of an Eligible Receivable, the face amount of such Receivable shall be reduced by, without duplication, to the extent not reflected in such face amount, (i) the amount of all accrued and actual discounts, claims, credits or credits pending, promotional program allowances, price adjustments, finance charges or other allowances, payables or obligations to the Account Debtor (including any amount that any Credit Party may be obligated to rebate to an Account Debtor pursuant to the terms of any agreement or understanding (written or oral)), (ii) all taxes, duties or other governmental charges included in such Receivable, and (iii) the aggregate amount of all cash received in respect of such Receivable but not yet applied by any Credit Party to reduce the amount of such Receivable. Notwithstanding the foregoing, the Administrative Agent may, from time to time, and upon not less than 30 days’ prior written notice to the Borrower, in the exercise of its reasonable judgment, change the criteria for Eligible Receivables based on either: (A) an event, condition or other circumstance arising after the Closing Date, or (B) an event, condition or other circumstance existing on the Closing Date to the extent the Lender has no written notice thereof from the Borrower prior to the Closing Date or is not otherwise reflected in any appraisals, reports or other similar written information received by the Administrative Agent in connection with this Agreement prior to the Closing Date, in either case under clause (A) or (B) which adversely affects (other than in a de minimus manner) or, in the Administrative Agent’s reasonable judgment, could reasonably be expected to adversely affect (other than in de minimus manner), the Receivables as determined by the Administrative Agent.
 
Environment” or “Environmental” shall have the meanings set forth in 42 U.S.C. 9601(8) (1988).
 
Environmental Claim” means any third party (including any governmental agency and employees) action, lawsuit, claim, demand, regulatory action or proceeding, order, decree, consent agreement or written notice of potential or actual responsibility or violation (including claims or proceedings under the Occupational Safety and Health Acts or similar Legal Requirements relating to health or safety of employees) that seeks to impose liability under any Environmental Law.
 
Environmental Law” means all federal, state, and local laws, rules, regulations, ordinances, orders, decisions, agreements, and other Legal Requirements, including common law theories, now or hereafter in effect and relating to, or in connection with the Environment, health, or safety, including without limitation CERCLA, relating to (a) pollution, contamination, injury, destruction, loss, protection, cleanup, reclamation or restoration of the air, surface water, groundwater, land surface or subsurface strata, or other natural resources; (b) solid, gaseous or liquid waste generation, treatment, processing, recycling, reclamation, cleanup, storage, disposal or transportation; (c) exposure to Hazardous Substances, Hazardous Waste, other pollutants, contaminants, hazardous, medical infections, or toxic substances, materials or wastes; (d) the safety or health of employees; or (e) the manufacture, processing, handling, transportation, distribution in commerce, use, storage or disposal of hazardous, medical infections, or toxic substances, materials or wastes.
 
Environmental Permit” means any permit, license, order, approval, registration or other authorization under Environmental Law.
 
Equity Funded Capital Expenditures” means Capital Expenditures that are fully funded solely with Equity Issuance Proceeds.
 
 
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Equity Interest” means with respect to any Person, any shares, interests, participation, or other equivalents (however designated) of corporate stock, membership interests or partnership interests (or any other ownership interests) of such Person.
 
Equity Issuance” means any issuance of equity securities or any other Equity Interests (including any preferred equity securities) by the Borrower or any of its Subsidiaries other than equity securities issued (i) to the Borrower or one of its Subsidiaries, (ii) the Preferred Equity Investment, and (iii) pursuant to employee or director and officer unit option or restricted unit plans in the ordinary course of business.
 
Equity Issuance Proceeds” means, with respect to any Equity Issuance, all cash and cash equivalent investments received by the Borrower or any of its Subsidiaries from such Equity Issuance (other than from any other Credit Party) after payment of, or provision for, all underwriter fees and expenses, SEC and blue sky fees, printing costs, fees and expenses of accountants, lawyers and other professional advisors, brokerage commissions and other reasonable out-of-pocket fees and expenses actually incurred in connection with such Equity Issuance.
 
ERISA” means the Employee Retirement Income Security Act of 1974, as amended from time to time.
 
Eurocurrency Liabilities” has the meaning assigned to that term in Regulation D of the Federal Reserve Board as in effect from time to time.
 
Eurodollar Advance” means an Advance that bears interest based upon the Eurodollar Rate (other than Advances that bear interest based upon the Daily One Month LIBOR).
 
Eurodollar Base Rate” means (a) in determining Eurodollar Rate for purposes of the “Daily One Month LIBOR”, the rate per annum for Dollar deposits quoted by the Administrative Agent for the purpose of calculating effective rates of interest for loans making reference to the “Daily One-Month LIBOR” or the “LIBOR Market Index Rate” or other words of similar import, as the inter-bank offered rate in effect from time to time for delivery of funds for one (1) month in amounts approximately equal to the principal amount of the applicable Advances; provided that, the Administrative Agent may base its quotation of the inter-bank offered rate upon the rates appearing on Reuters Reference LIBOR01 page, Bloomberg L.P.’s page BBAM, or such other screen rates offered to the inter-bank market, in any case, as the Administrative Agent in its reasonable discretion deems appropriate, and (b) in determining Eurodollar Rate for all other purposes, the rate per annum (rounded upward to the nearest whole multiple of 1/100 of 1%) equal to the interest rate per annum set forth on the Reuters Reference LIBOR01 page (or on any successor or substitute page of such service, or any successor to or substitute for such service, as determined by the Administrative Agent from time to time for purposes of providing quotations of interest rates applicable to dollar deposits in the London interbank market) as the London Interbank Offered Rate, for deposits in Dollars at 11:00 a.m. (London, England time) two Business Days before the first day of the applicable Interest Period and for a period equal to such Interest Period; provided that, if such quotation is not available for any reason, then for purposes of this clause (b), Eurodollar Base Rate shall then be the rate determined by the Administrative Agent to be the rate at which deposits in Dollars for delivery on the first day of such Interest Period in immediately available funds in the approximate amount of the Advances being made, continued or Converted by the Lenders and with a term equivalent to such Interest Period would be offered by the Administrative Agent’s London Branch (or other branch or Affiliate of the Administrative Agent, or in the event that the Administrative Agent does not have a London branch, the London branch of a Lender chosen by the Administrative Agent) to major banks in the London or other offshore inter-bank market for Dollars at their request at approximately 11:00 a.m. (London time) two Business Days prior to the commencement of such Interest Period.
 
 
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Eurodollar Rate” means a rate per annum determined by the Administrative Agent pursuant to the following formula:
 
Eurodollar Rate =
 
Eurodollar Base Rate                              
1.00 – Eurodollar Reserve Percentage
 
Where,
 
Eurodollar Reserve Percentage” means, as of any day, the reserve percentage (expressed as a decimal, carried out to five decimal places) in effect on such day, whether or not applicable to any Lender, under regulations issued from time to time by the Federal Reserve Board for determining the maximum reserve requirement (including any emergency, supplemental or other marginal reserve requirement) with respect to liabilities or assets consisting of or including Eurocurrency Liabilities. The Eurodollar Rate for each outstanding Advance shall be adjusted automatically as of the effective date of any change in the Eurodollar Reserve Percentage.
 
Event of Default” has the meaning specified in Section 7.1.
 
Excluded Certificated Equipment” means, as of the date of determination, any Certificated Equipment owned by the Borrower or any Subsidiary that is subject to the senior rights of any third party, including a Permitted Lien of the type described under Section 6.2(e).
 
Excluded Equity Issuance” means (a) an Equity Issuance to management or employees of a Credit Party under any employee stock option or stock purchase plan or other employee benefits plan in existence from time to time, and (b) an Equity Issuance by a Credit Party to another Credit Party.
 
Excluded Property” has the meaning given such term in the Security Agreement.
 
Excluded Swap Obligations” means, with respect to any Credit Party other than the Borrower, any Swap Obligation if, and to the extent that, all or a portion of the guarantee of such Credit Party of, or the grant by such Credit Party of a security interest to secure, such Swap Obligation (or any guarantee thereof) is or becomes illegal under the Commodity Exchange Act or any rule, regulation or order of the Commodity Futures Trading Commission (or the application or official interpretation of any thereof) by virtue of such Credit Party’s failure for any reason to constitute an “eligible contract participant” as defined in the Commodity Exchange Act and the regulations thereunder at the time the guarantee of such Credit Party or the grant of such security interest becomes effective with respect to such Swap Obligation. If a Swap Obligation arises under a master agreement governing more than one swap, such exclusion shall apply only to the portion of such Swap Obligation that is attributable to swaps for which such guarantee or security interest is or becomes illegal.
 
 
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Excluded Taxes” means any of the following Taxes imposed on or with respect to a Recipient or required to be withheld or deducted from a payment to a Recipient, (a) Taxes imposed on or measured by net income (however denominated), franchise Taxes, and branch profits Taxes, in each case, (i) imposed as a result of such Recipient being organized under the laws of, or having its principal office or, in the case of any Lender, its applicable lending office located in, the jurisdiction imposing such Tax (or any political subdivision thereof) or (ii) that are Other Connection Taxes, (b) in the case of a Lender, U.S. federal withholding Taxes imposed on amounts payable to or for the account of such Lender with respect to an applicable interest in an Advance or Commitment pursuant to a law in effect on the date on which (i) such Lender acquires such interest in the Advance or Commitment (other than pursuant to an assignment request by the Borrower under Section 2.13 or reallocation pursuant to Section 2.14) or (ii) such Lender changes its lending office, except in each case to the extent that, pursuant to Section 2.12, additional amounts with respect to such Taxes were payable either to such Lender’s assignor immediately before such Lender became a party hereto or to such Lender immediately before it changed its lending office, (c) Taxes attributable to such Recipient’s failure to comply with Section 2.12(g), and (d) any U.S. federal withholding Taxes imposed under FATCA.
 
Extraordinary Receipts” means any proceeds of insurance, including any insurance proceeds resulting from a Casualty Event, property insurance proceeds, and life insurance proceeds, and any other extraordinary cash receipts, including any award or other compensation as a result of a Casualty Event and any settlement or other litigation proceeds.
 
Facility” means the Revolving Facility, the Term Facility or the CapEx Facility.
 
FATCA” means Sections 1471 through 1474 of the Code, as of the date of this Agreement (or any amended or successor version that is substantively comparable and not materially more onerous to comply with) and any current or future regulations or official interpretations thereof.
 
Federal Funds Rate” means, for any day, the rate per annum equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Business Day immediately succeeding such day; provided that (a) if such day is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Business Day as so published on the next succeeding Business Day and (b) if no such rate is so published on such next succeeding Business Day, the Federal Funds Rate for such day shall be the average rate charged to the Administrative Agent (in its individual capacity) on such day on such transactions as determined by the Administrative Agent.
 
Federal Reserve Board” means the Board of Governors of the Federal Reserve System or any of its successors.
 
Fee Letter” means that certain Fee Letter dated as September 26, 2012, by and between the Borrower and Wells Fargo.
 
Field Audit” means an audit, verification and inspection of the books and records, accounts receivable and inventory of the Borrower and its Subsidiaries, conducted by the Administrative Agent or any other Person selected by the Administrative Agent.
 
Field Exam” means a field inspection of the books, records and asset value of the Properties of the Borrower and its Subsidiaries, conducted by the Administrative Agent or any other Person selected by the Administrative Agent.
 
Financial Statements” means, for any period, the consolidated financial statements of the Borrower and its Subsidiaries, including statements of income, retained earnings, changes in equity and cash flow for such period as well as a balance sheet as of the end of such period, all prepared in accordance with GAAP.
 
 
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First Tier Foreign Subsidiary” means any Foreign Subsidiary the Equity Interests of which are held directly by the Borrower or a Domestic Subsidiary.
 
Fixed Charge Coverage Ratio” means, for each fiscal quarter, the ratio of (a) the amount equal to (i) EBITDA for the four-fiscal quarter period then ended minus (ii) the sum of (A) cash taxes paid by the Credit Parties during such four-fiscal quarter period plus (B) Maintenance Capital Expenditures paid during such four-fiscal quarter period; to (b) Interest Expense for such four-fiscal quarter period plus scheduled principal payments of Funded Debt required during such four-fiscal quarter period, including scheduled principal payments of Advances (but excluding payments of Swing Line Advances).
 
Flood Laws” shall have the meaning set forth in Section 9.19.
 
Foreign Lender” means, with respect to the Borrower, any Lender that is organized under the laws of a jurisdiction other than that in which the Borrower is resident for tax purposes. For purposes of this definition, the United States, each State thereof and the District of Columbia shall be deemed to constitute a single jurisdiction.
 
Foreign Subsidiary” means any Subsidiary of a Person that is not a Domestic Subsidiary.
 
Fronting Exposure” means, at any time there is a Defaulting Lender, (a) with respect to the Issuing Lender, such Defaulting Lender’s Revolving Pro Rata Share of the outstanding Letter of Credit Exposure other than Letter of Credit Exposure as to which such Defaulting Lender’s participation obligation has been funded by it, reallocated to other Lenders or Cash Collateralized in accordance with the terms hereof, and (b) with respect to the Swing Line Lender, such Defaulting Lender’s Revolving Pro Rata Share of outstanding Swing Line Advances other than Swing Line Advances as to which such Defaulting Lender’s participation obligation has been funded by it or reallocated to other Lenders or Cash Collateralized in accordance with the terms hereof.
 
Fund” means any Person (other than a natural Person) that is (or will be) engaged in making, purchasing, holding or otherwise investing in commercial loans and similar extensions of credit in the ordinary course of its activities.
 
Funded Debt” of any Credit Party means, at any time, without duplication, Debt of such Credit Party (a) of the type described in clauses (a), (b), (c), (f), and (h) of the definition of “Debt”; provided that Debt with respect to letters of credit referred to in clause (b) of such definition shall be considered “Funded Debt” regardless of whether such letters of credit are drawn or funded, (b) of the type described in clause (i) of the definition of “Debt”; provided that such Debt would otherwise qualify as “Funded Debt” under this definition, or (c) of the type described in clauses (j) or (k) of the definition of “Debt” to the extent that such guaranty covers, or such Lien secures, Debt of the type described in clause (a) or clause (b) of this definition of “Funded Debt”.
 
GAAP” means United States of America generally accepted accounting principles as in effect from time to time, applied on a basis consistent with the requirements of Section 1.3.
 
Governmental Authority” means the government of the United States of America or any other nation, or of any political subdivision thereof, whether state or local, and any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government (including any supra-national bodies such as the European Union or the European Central Bank).
 
 
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Guarantors” means any Person that now or hereafter executes a Guaranty, including (a) the Subsidiaries of the Borrower listed on Schedule 4.11 , (b) Austin Chalk Corp., and (c) each Subsidiary that becomes a guarantor of all or a portion of the Obligations and which has entered into either a joinder agreement substantially in the form attached to the Guaranty or a new Guaranty, in each case other than those released from their obligations under such Guaranties in accordance with the terms and provisions of the Credit Documents.
 
Guaranty” means the Guaranty Agreement executed in substantially the same form as Exhibit D.
 
Hazardous Substance” means any substance or material identified as such pursuant to CERCLA and those regulated under any other Environmental Law, including without limitation pollutants, contaminants, petroleum, petroleum products, radionuclides, and radioactive materials.
 
Hazardous Waste” means any substance or material regulated or designated as such pursuant to any Environmental Law, including without limitation, pollutants, contaminants, flammable substances and materials, explosives, radioactive materials, oil, petroleum and petroleum products, chemical liquids and solids, polychlorinated biphenyls, asbestos, toxic substances, and similar substances and materials.
 
Hedging Arrangement” means a hedge, call, swap, collar, floor, cap, option, forward sale or purchase or other contract or similar arrangement (including any obligations to purchase or sell any commodity or security at a future date for a specific price) which is entered into to reduce or eliminate or otherwise protect against the risk of fluctuations in prices or rates, including interest rates, foreign exchange rates, commodity prices and securities prices.
 
Income Tax Expense” means for Borrower and its Subsidiaries, on a consolidated basis for any period, all state and federal income taxes (including without limitation franchise taxes) paid or due to be paid during such period.
 
Indemnified Taxes” means (a) Taxes, other than Excluded Taxes, imposed on or with respect to any payment made by or on account of any obligation of any Credit Party under any Credit Document and (b) to the extent not otherwise described in clause (a), Other Taxes.
 
Interest Expense” means, for any period and with respect to any Person, total cash interest expense, letter of credit fees and other fees and expenses incurred by such Person in connection with any Debt (including but not limited to Debt under this Agreement) for such period, whether paid or accrued (including that attributable to obligations which have been or should be, in accordance with GAAP, recorded as Capital Leases), including, without limitation, all commissions, discounts, and other fees and charges owed with respect to letters of credit and bankers’ acceptance financing, fees owed with respect to the Secured Obligations, and net costs under Hedging Arrangements entered into addressing interest rates, all as determined in conformity with GAAP.
 
Interest Period” means for each Eurodollar Advance comprising part of the same Borrowing, the period commencing on the date of such Eurodollar Advance is made or deemed made and ending on the last day of the period selected by the Borrower pursuant to the provisions below and Section 2.3, and thereafter, each subsequent period commencing on the day following the last day of the immediately preceding Interest Period and ending on the last day of the period selected by the Borrower pursuant to the provisions below and Section 2.3. The duration of each such Interest Period shall be one, three, or six months, in each case as the Borrower may select, provided that:
 
 
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(a) the Borrower shall select Interest Periods so that it is not necessary to repay any portion of any Term Advance or CapEx Advance prior to the last day of the applicable Interest Period in order to make a mandatory scheduled repayment required pursuant to Section 2.5(b);
 
(b) Interest Periods commencing on the same date for Advances comprising part of the same Borrowing shall be of the same duration;
 
(c) whenever the last day of any Interest Period would otherwise occur on a day other than a Business Day, the last day of such Interest Period shall be extended to occur on the next succeeding Business Day, provided that if such extension would cause the last day of such Interest Period to occur in the next following calendar month, the last day of such Interest Period shall occur on the next preceding Business Day;
 
(d) any Interest Period which begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of the calendar month in which it would have ended if there were a numerically corresponding day in such calendar month; and
 
(e) the Borrower may not select any Interest Period for any Advance which ends after the Term Maturity Date, CapEx Maturity Date or the Revolving Maturity Date, as applicable.
 
Inventory” of any Person means all inventory (as defined in the Uniform Commercial Code, as in effect in the State of New York) now owned or hereafter acquired by such Person, wherever located and whether or not in transit, which is held for sale; provided, that Inventory shall not include raw materials or supplies or materials consumed in the business of such Person or, subject to clause (b) below, work in progress; and provided further that (a) purchased items (including plain end tubulars) shall be considered Inventory and not raw materials if such purchased items could be resold in their existing condition as finished goods without requiring further modification, and (b) items that are work in progress shall be considered Inventory if such items could be sold in their existing condition as goods.
 
IRS” means the United States Internal Revenue Service.
 
Issuing Lender” means Wells Fargo in its capacity as the issuer of Letters of Credit for the account of any Credit Party pursuant to the terms of this Agreement, and its successors in such capacity.
 
Key Individuals” means (a) Mark Patterson, (b) Munawar H. Hidayatallah, (c) Kurt Chew and (d) any individual acceptable to the Administrative Agent that has replaced any of the foregoing persons in a comparable executive or officer position.
 
Key Employment Agreements” means the employment agreements for the Key Individuals.
 
Legal Requirement” means any law, statute, ordinance, decree, code, act, requirement, order, judgment, rule, regulation (or official interpretation of any of the foregoing) of, and the terms of any license or permit issued by, any Governmental Authority, including, but not limited to, Regulations T, U and X, whether now or hereafter in effect.
 
Lender Insolvency Event” means that (a) a Lender or its Lender Parent Company is insolvent, or is generally unable to pay its debts as they become due, or admits in writing its inability to pay its debts as they become due, or makes a general assignment for the benefit of its creditors, or (b) such Lender or its Lender Parent Company is the subject of a bankruptcy, insolvency, reorganization, liquidation or similar proceeding, or a receiver, trustee, conservator, intervenor or sequestrator or the like has been appointed for such Lender or its Lender Parent Company, or such Lender or its Lender Parent Company has taken any action in furtherance of or indicating its consent to or acquiescence in any such proceeding or appointment; provided, that a Lender Insolvency Event shall not be triggered solely as the result of the acquisition or maintenance of an ownership interest in such Lender or its Lender Parent Company by a Governmental Authority or an instrumentality thereof so long as such ownership interest does not result in or provide such Lender with immunity from the jurisdiction of courts within the United States or from the enforcement of judgments or writs of attachment on its assets or permit such Lender (or such Governmental Authority) to reject, repudiate, disavow or disaffirm any contracts or agreements made with such Lender.
 
 
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Lender Parent Company” means, with respect to a Lender, the bank holding company (as defined in Federal Reserve Board Regulation Y), if any, of such Lender, and/or any Person owning, beneficially or of record, directly or indirectly, a majority of the shares of such Lender.
 
Lender Parties” means Lenders, the Issuing Lender, the Swing Line Lender and the Administrative Agent.
 
Lenders” means the Persons listed on the signature pages hereto as Lenders, any other Person that shall have become a Lender hereto pursuant to Section 2.13, and any other Person that shall have become a Lender hereto pursuant to an Assignment and Acceptance, but in any event, excluding any such Person that ceases to be a party hereto pursuant to an Assignment and Acceptance. Unless the context otherwise requires, the term “Lenders” includes the Revolving Lenders, the Swing Line Lender and the Term Lenders.
 
Lending Office” means, as to any Lender, the office or offices of such Lender described as such in such Lender’s Administrative Questionnaire, or such other office or offices as a Lender may from time to time notify the Borrower and the Administrative Agent.
 
Letter of Credit” means any standby or commercial letter of credit issued by the Issuing Lender for the account of a Credit Party pursuant to the terms of this Agreement, in such form as may be agreed by the Borrower and the Issuing Lender.
 
Letter of Credit Application” means the Issuing Lender’s standard form letter of credit application for standby or commercial letters of credit which has been executed by the Borrower and accepted by the Issuing Lender in connection with the issuance of a Letter of Credit.
 
Letter of Credit Documents” means all Letters of Credit, Letter of Credit Applications, the Letter of Credit Reimbursement Agreements, and amendments thereof, and agreements, documents, and instruments entered into in connection therewith or relating thereto.
 
Letter of Credit Extension” means, with respect to any Letter of Credit, the issuance thereof, extension of the expiry date thereof, or the increase of the amount thereof.
 
Letter of Credit Exposure” means, at the date of its determination by the Administrative Agent, the aggregate outstanding undrawn amount of Letters of Credit plus the aggregate unpaid amount of all of the Borrower’s payment obligations under drawn Letters of Credit.
 
Letter of Credit Maximum Amount” means $1,000,000; provided that, on and after the Revolving Maturity Date, the Letter of Credit Maximum Amount shall be zero.
 
 
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Letter of Credit Obligations” means any obligations of the Borrower under this Agreement in connection with the Letters of Credit.
 
Letter of Credit Reimbursement Agreement” means the Issuing Lender’s standard form letter of credit reimbursement agreement (with such modifications thereto as may be agreed between the Borrower and the Issuing Lender) for standby or commercial letters of credit which has been executed by the Borrower and accepted by such Issuing Lender in connection with the issuance of a Letter of Credit.
 
Leverage Ratio” means, for each fiscal quarter, the ratio of (a) the consolidated Funded Debt of the Borrower as of the last day of such fiscal quarter to (b) EBITDA for the four-fiscal quarter period then ended.
 
Lien” means any mortgage, lien, pledge, charge, deed of trust, security interest, or encumbrance to secure or provide for the payment of any obligation of any Person, whether arising by contract, operation of law, or otherwise (including the interest of a vendor or lessor under any conditional sale agreement, Capital Lease, or other title retention agreement).
 
Liquid Investments” means (a) readily marketable direct full faith and credit obligations of the United States of America or obligations unconditionally guaranteed by the full faith and credit of the United States of America; (b) commercial paper issued by (i) any Lender or any Affiliate of any Lender or (ii) any commercial banking institutions or corporations rated at least P-1 by Moody’s or A-1 by S&P; (c) certificates of deposit, time deposits, and bankers’ acceptances issued by (i) any of the Lenders or (ii) any other commercial banking institution which is a member of the Federal Reserve System and has a combined capital and surplus and undivided profits of not less than $250,000,000 and rated Aa by Moody’s or AA by S&P; (d) repurchase agreements which are entered into with any of the Lenders or any commercial banking institutions described in clause (c) and which are secured by readily marketable direct full faith and credit obligations of the government of the United States of America or any agency thereof; (e) investments in any money market fund which holds investments substantially of the type described in the foregoing clauses (a) through (d); (f) readily and immediately available cash held in any money market account maintained with any Lender; provided that, such money market accounts and the funds therein shall be unencumbered and free and clear of all Liens and other third party rights other than a Lien in favor of the Administrative Agent pursuant to the Security Documents and Liens of the type described in Section 6.2(g); and (g) other investments made through the Administrative Agent or its Affiliates and approved by the Administrative Agent. All the Liquid Investments described in clauses (a) through (d) above shall have maturities of not more than 365 days from the date of issue.
 
Maintenance Capital Expenditure” means Capital Expenditures made by any Credit Party related to extending the life of, or maintaining the working condition of, existing assets. The term “Maintenance Capital Expenditures” does not include capital spending for new assets or expansion or enhancement of existing assets (so-called “growth capital expenditures”).
 
Majority CapEx Lenders” means (a) other than as provided in clauses (b) and (c) below, CapEx Lenders holding greater than 50% of the sum of (i) the aggregate unfunded CapEx Commitments at such time plus (ii) the aggregate unpaid principal amount of the CapEx Notes, (b) at any time when there are only two CapEx Lenders, both CapEx Lenders, and (c) at any time when there is only one CapEx Lender, such CapEx Lender; provided that, in any event, if there are two or more CapEx Lenders, the CapEx Commitment of, and the portion of the CapEx Advances held or deemed held by, any Defaulting Lender shall be excluded for purposes of making a determination of Majority CapEx Lenders unless all CapEx Lenders are Defaulting Lenders.
 
 
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Majority Lenders” means (a) other than as provided in clauses (b) and (c) below, Lenders holding greater than 50% of the aggregate Maximum Exposure Amount, (b) at any time when there are only two Lenders, both Lenders, and (c) at any time when there is only one Lender, such Lender; provided that,
 
(i) with respect to amendments, waivers or consents relating to Section 2.1(a) and Section 2.1(c)(i), “Majority Lenders” means the Majority Revolving Lenders;
 
(ii) with respect to amendments, waivers or consents relating to Section 2.1(b)(i) and Section 2.1(c)(ii)(A), “Majority Lenders” means the Majority Term Lenders;
 
(iii) with respect to amendments, waivers or consents relating to Section 2.1(b)(ii) and Section 2.1(c)(ii)(B), “Majority Lenders” means the Majority CapEx Lenders;
 
(iv) with respect to Section 2.3(c)(v), “Majority Lenders” means Lenders that would be required to fund more than 50% of the Eurodollar Advances comprising such requested Borrowing;
 
(v) with respect to Section 7.2(a)(i), 7.2(b) and 7.3(b), “Majority Lenders” means the Majority Revolving Lenders; and
 
(vi) in any event, if there are two or more Lenders, the Commitments of, and the portion of the Advances and Letter of Credit Exposure held or deemed held by, any Defaulting Lender shall be excluded for purposes of making a determination of Majority Lenders unless all Lenders are Defaulting Lenders.
 
Majority Revolving Lenders” means (a) other than as provided in clause (b) and (c) below, Revolving Lenders holding greater than 50% of the sum of (i) the aggregate unfunded Revolving Commitments at such time plus (ii) the aggregate unpaid principal amount of the Revolving Notes (with the aggregate amount of each Lender’s risk participation and funded participation in the Letter of Credit Exposure (including any such Letter of Credit Exposure that has been reallocated pursuant to Section 2.14) and Swing Line Advances being deemed as unpaid principal under such Lender’s Revolving Note); (b) at any time when there are only two Revolving Lenders, both Revolving Lenders, and (c) at any time when there is only one Revolving Lender, such Revolving Lender; provided that, in any event, if there are two or more Lenders, the Commitment of, and the portion of the Advances and Letter of Credit Exposure held or deemed held by, any Defaulting Lender shall be excluded for purposes of making a determination of Majority Revolving Lenders unless all Revolving Lenders are Defaulting Lenders.
 
Majority Term Lenders” means (a) other than as provided in clauses (b) and (c) below, Term Lenders holding greater than 50% of the sum of (i) the aggregate unfunded Term Commitments at such time plus (ii) the aggregate unpaid principal amount of the Term Notes, (b) at any time when there are only two Term Lenders, both Term Lenders, and (c) at any time when there is only one Term Lender, such Term Lender; provided