Exhibit 10.16
SECURITY
AGREEMENT
THIS SECURITY
AGREEMENT is dated as of
this 16th day of March, 2007, by and between TREX COMPANY,
INC. , a Delaware corporation (the “Debtor”), and
BRANCH BANKING AND TRUST COMPANY , a North Carolina banking
corporation as successor by merger to Branch Banking and Trust
Company of Virginia (the “Collateral Agent”), as
collateral agent for the benefit of the Secured Parties (as defined
in the Intercreditor Agreement (as hereinafter
defined)).
The Debtor, TREX Company, LLC, a
Delaware limited liability company (“Trex LLC”) and
Branch Banking and Trust Company, a North Carolina banking
corporation (“BB&T”), are parties to a Credit
Agreement dated as of June 19, 2002, as amended (as currently
amended and as from time to time hereafter amended, restated,
supplemented or otherwise modified, the “Credit
Agreement”), pursuant to which BB&T has made a
$100,000,000 revolving credit facility (the “Revolving Credit
Facility”) and term loans in the principal amount of
$8,418,780.30 (the “Term Loans”) available to the
Debtor. The Debtor, Trex LLC and the Noteholders (as defined and
identified in the hereinafter defined Note Agreement) are parties
to a Note Purchase Agreement dated as of June 19, 2002, as
amended (as currently amended and as from time to time hereinafter
amended, restated, supplemented or otherwise modified, the
“Note Agreement”), pursuant to which the Debtor and
Trex LLC sold Senior Secured Notes (as defined in the Note
Agreement) in the aggregate principal amount of $40,000,000 to the
Noteholders. Effective December 31, 2002, Trex LLC merged with
and into the Debtor, with the Debtor being the surviving
entity.
The Debtor and the Collateral Agent
entered into a Security Agreement dated as of June 19, 2002
(the “Original Security Agreement”) under and pursuant
to the terms and provisions of the Credit Agreement and the Note
Agreement. Under the Security Agreement, the Debtor granted a
security interest in various collateral described therein to the
Collateral Agent for the benefit of the Secured Parties (as defined
in the Original Security Agreement). In compliance with the terms
and provisions of the Credit Agreement and Section 22 of the
Note Agreement, on November 1, 2004, BB&T and the
Noteholders agreed to release the security interests granted under
the Original Security Agreement and such security interests were
released.
BB&T has now required the Debtor
to regrant certain of the security interests created under and
pursuant to the Original Security Agreement. Pursuant to
Section 22 of the Note Agreement, the Noteholders have also
required the Debtor to regrant certain of the security interests
created under and pursuant to the Original Security Agreement. In
connection with the regrant of such security interests, the
Collateral Agent has entered into an Intercreditor and Collateral
Agency Agreement dated of even date herewith by and among the
Collateral Agent and certain Secured Parties identified and defined
therein (as from time to time amended, restated, supplemented or
otherwise modified, the “Intercreditor
Agreement”).
Accordingly, for and in
consideration of good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Debtor and the
Collateral Agent hereby agree as follows:
SECTION 1 –
DEFINITIONS
The following terms shall have the
following respective meanings:
“ Accounts ”
means all of the Debtor’s now owned or hereafter acquired or
arising “accounts,” as defined in the UCC, including
any rights to payment for the sale or lease of Goods or rendition
of services, whether or not they have been earned by
performance.
“ Chattel Paper ”
means all of the Debtor’s now owned or hereafter acquired
“chattel paper,” as defined in the UCC, including
electronic chattel paper.
“ Collateral ”
has the meaning set forth in Section 2.
“ Collection Account
” has the meaning set forth in Section 6.3.
“ Dispute ” has
the meaning set forth in Section 10.4.
“ Documents ”
means all “documents,” as defined in the UCC, including
bills of lading, warehouse receipts or other documents of title,
now owned or hereafter acquired by Debtor.
“ Event of Default
” and “ Default ” have the respective
meanings assigned thereto in the Intercreditor
Agreement.
“ Goods ” means
all “goods,” as defined in the UCC, now owned or
hereafter acquired by the Debtor, wherever located.
“ Intercreditor
Agreement ” has the meaning set forth in the introductory
paragraphs of this Agreement.
“ Inventory ”
means all of the Debtor’s now owned or hereafter acquired
“inventory,” as defined in the UCC, including all
Goods, wherever located, to be furnished under any contract of
service or held for sale or lease, all raw materials,
work-in-process, finished goods, and other materials of any kind,
nature or description which are used or consumed in the
Debtor’s business.
“ Lease ” has the
meaning set forth in Section 4.4 hereof.
“ Obligations ”
has the meaning set forth in Section 3.
“ Permitted Liens
” means “Permitted Liens” under the Credit
Agreement and the Liens permitted under Section 10.3 of the
Note Agreement.
“ Proprietary Rights
” means all of the Debtor’s now owned or hereafter
arising or acquired: licenses, franchises, permits, patents, patent
rights, copyrights, works which are the subject matter of
copyrights, trademarks, service marks, trade names, trade styles,
patent, trademark and service mark applications, and all licenses
and rights related to any of the foregoing, and all other rights
under any of the foregoing, all extensions, renewals, reissues,
divisions, continuations, and continuations-in-part of any of the
foregoing, and all rights to sue for past, present and future
infringement of any of the foregoing.
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“ Secured Party ”
and “ Secured Parties ” have the meanings
assigned thereto in the Intercreditor Agreement.
“ Secured Obligations
” has the meaning assigned thereto in the Intercreditor
Agreement.
“ Supporting
Obligations ” means all supporting obligations as such
term is defined in the UCC.
“ UCC ” means the
Uniform Commercial Code, as in effect from time to time, of the
Commonwealth of Virginia or of any other state the laws of which
are required as a result thereof to be applied in connection with
the issue of perfection of security interests.
“ Uniform Commercial Code
jurisdiction ” means any jurisdiction that has adopted
“Revised Article 9” of the UCC on or after July 1,
2001.
All other capitalized terms used but
not otherwise defined herein have the meanings given to them in the
Credit Agreement. All other undefined terms contained in this
Security Agreement, unless the context indicates otherwise, have
the meanings provided for by the UCC to the extent the same are
used or defined therein.
SECTION 2 – GRANT OF
SECURITY INTEREST
The Debtor hereby grants to the
Collateral Agent for the ratable benefit of the Secured Parties a
continuing security interest in, lien on, assignment of and right
of set-off against, all of the following property and assets of the
Debtor, whether now owned or hereafter acquired or arising,
regardless of where located:
(i) all Accounts;
(ii) all Inventory;
(iii) all Chattel Paper to the
extent that such Chattel Paper constitutes proceeds of any of the
Accounts or Inventory;
(iv) all Documents to the extent
such Documents constitute proceeds of any of the Accounts or
Inventory;
(v) all Supporting Obligations to
the extent such Supporting Obligations constitute proceeds of any
of the Accounts;
(vi) the Collection
Account;
(vii) all books and records related
to or referring to any of the foregoing, including books, records,
account ledgers, data processing records, and computer software;
and
(viii) all proceeds of any of the
foregoing, including, but not limited to, proceeds of any insurance
policies (whether or not such policy shall contain an endorsement
in favor of the Collateral Agent or any Secured Party), claims
against third parties, and condemnation or requisition payments
with respect to all or any of the foregoing.
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All of the foregoing is herein collectively
referred to as the “Collateral.”
SECTION 3 – OBLIGATIONS
SECURED
The security interests granted to
the Collateral Agent herein for the ratable benefit of the Secured
Parties shall secure: (a) the payment and performance of the
Secured Obligations; and (b) all reasonable costs and
expenses, including, without limitation, reasonable
attorneys’ fees incurred by the Collateral Agent or the
Secured Parties, or any of them, for taxes and/or insurance
relating to, or maintenance or preservation of, the Collateral or
any part thereof or incurred by the Collateral Agent or any of the
Secured Parties, or any of them, arising from or in connection with
the modification, workout, collection or enforcement of any of
Secured Obligations, including, without limitation, any such
collection or enforcement of the Obligations by any action or
participation in, or in connection with a case or proceeding under,
Chapter 7 or Chapter 11 of the U.S. Bankruptcy Code or
any successor statute (collectively, the
“Obligations”).
SECTION 4 –
REPRESENTATIONS
The Debtor represents and warrants
to the Collateral Agent and to each of the Secured Parties (which
representations and warranties will survive the execution of the
Revolving Note, the making of the Revolving Loans and the purchase
of the Notes by the purchasers identified in the Note Agreement)
that:
4.1 Ownership of
Collateral . The
Debtor now owns or will become the owner of the Collateral in which
it has granted the Collateral Agent a security interest hereunder
and has the unrestricted right to grant the Collateral Agent a
security interest therein.
4.2 Location of
Records . The chief
executive office of the Debtor and the principal office where the
Debtor maintains its books and records relating to the Collateral
is located at the address listed next to the Debtor’s name on
Schedule 4.2 attached hereto and by this reference
incorporated herein. The Debtor will not change the location of its
chief executive office or the location of the principal office in
which it maintains its books and records without giving the
Collateral Agent and each of the Secured Parties at least thirty
(30) days’ prior written notice and, unless prior to
such change, the Debtor shall have taken all action reasonably
necessary or desirable or that the Collateral Agent may reasonably
request, to preserve, perfect, confirm and protect in the manner
and to the extent provided for in this Security Agreement the
security interests granted hereby.
4.3 Accounts .
(a) Each existing Account
represents, and each future Account will represent, a bona
fide sale and delivery of Inventory by the Debtor, or
rendition of services by the Debtor, in the ordinary course of the
Debtor’s business; (b) each existing Account is, and
each future Account will be, for a liquidated amount payable by the
Account Debtor thereon on the terms set forth in the invoice
therefor, without any offset, deduction, defense, or counterclaim
except those known to the Debtor and disclosed to the Collateral
Agent pursuant to this Security
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Agreement; (c) no payment will be received
with respect to any Account, and no credit, discount, or extension,
or agreement therefor will be granted on any Account, except as
reported to the Collateral Agent in Borrowing Base Certificates
delivered in accordance with the Credit Agreement; and (d) all
Inventory described in any invoice representing a sale of Goods
will have been delivered to the Account Debtor and all services of
the Debtor described in each invoice will have been
performed.
4.4 Inventory
. As of the date hereof, the
Inventory is maintained at the locations specified on Schedule
4.4 attached hereto and by this reference incorporated herein.
Except for Inventory (i) in transit to manufacturing plants or
warehouses owned or leased by the Debtor or to customers in the
ordinary course of business, and (ii) finished goods Inventory
consigned to either Home Depot U.S.A., Inc., a Delaware corporation
(“The Home Depot”), or Lowe’s Companies, Inc., a
North Carolina corporation (“Lowe’s”), the Debtor
does not store and will not store any Inventory on any real
property which is not owned by the Debtor in fee simple or subject
to a lease of real property under which the Debtor is the lessee
(each such lease, a “Lease”). The Debtor will not
permit any Inventory having an aggregate value of $500,000 or
greater to be maintained or stored in any location other than those
listed on Schedule 4.4 without giving the Collateral Agent
at least thirty (30) days’ prior written notice and,
unless prior to such change, the Debtor shall have taken all action
reasonably necessary or desirable or that the Collateral Agent may
reasonably request, to preserve, perfect, confirm and protect in
the manner and to the extent provided for in this Security
Agreement the security interests granted hereby. Without limiting
the foregoing, the Debtor represents that all of its finished goods
Inventory (other than finished goods Inventory in transit) is, and
covenants that all of its finished goods Inventory will be, located
(a) on premises owned by the Debtor in fee simple, (b) on
premises leased by the Debtor, provided that the Collateral Agent
has received an executed landlord waiver from the landlord of such
premises in form and substance satisfactory to the Collateral Agent
if the Inventory located thereon on or after May 16, 2007 has
an aggregate value of $500,000 or greater, (c) in a warehouse
or with a bailee, provided that the Collateral Agent has received
an executed bailee letter from the applicable Person in form and
substance satisfactory to the Collateral Agent if the Inventory
located thereon on or after May 16, 2007 has an aggregate
value of $500,000 or greater, (d) in The Home Depot
distribution centers pursuant to a written consignment agreement
between the Debtor and The Home Depot, provided that the Collateral
Agent shall have received an executed consignee agreement from The
Home Depot in form and substance satisfactory to the Collateral
Agent if the Inventory located therein has an aggregate value of
$1,000,000 or greater, or (e) in Lowe’s distribution
centers pursuant to a written consignment agreement between the
Debtor and Lowe’s, provided that the Collateral Agent shall
have received an executed consignee agreement from Lowe’s in
form and substance satisfactory to the Collateral Agent if the
Inventory located therein has an aggregate value of $1,000,000 or
greater. Notwithstanding the foregoing, the failure of the
Collateral Agent to have received an executed landlord lien waiver
referred to in clause (b) of this Section 4.4 for a
particular location, an executed bailee letter referred to in
clause (c) of this Section 4.4 for a particular warehouse
or an executed bailee letter referred to in clause (c) of this
Section 4.4 from a particular bailee shall not be a default
hereunder (or a Default or an Event of Default); instead, none of
the Inventory located at such leased location, in such warehouse or
with such bailee shall be Eligible Inventory. Furthermore,
notwithstanding the foregoing, the failure of the Collateral Agent
to have received one or both of the consignee agreements referred
to in clauses (d) and (e)
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of this Section 4.4 shall not be a default
hereunder (or a Default or an Event of Default); instead, as
further provided in Section 2.01(c)iii. of the Credit
Agreement, any consigned Inventory with a value equal to or greater
than $1,000,000 which is held by a consignee that has not executed
and delivered to the Collateral Agent such a consignee agreement
shall not be Eligible Inventory.
4.5 Authorization, Execution,
Delivery and Enforceability . (a) The execution, delivery and performance
by the Debtor of this Security Agreement, the landlord lien waivers
required by Section 4.4 of this Security Agreement, the
consignee agreement between the Collateral Agent and The Home Depot
(in the form attached as Exhibit K-1 to that certain Eighth
Amendment to Credit Agreement dated as of even date hereof (the
“Eighth Amendment”) between the Debtor and Branch
Banking and Trust Company), the consignment agreement between the
Collateral Agent and Lowe’s (in the form attached as
Exhibit K-2 to the Eighth Amendment), and the Intercreditor
Agreement are within its corporate powers, have been duly
authorized by all necessary corporate action, require no action by
or in respect of, or filing with, any governmental body, agency or
official and do not contravene or constitute (with or without the
giving of notice or lapse of time or both) a default under any
provision of applicable law or of the organizational documents of
the Debtor or any Subsidiary or of any agreement, judgment,
injunction, order, decree or other instrument binding upon or
affecting the Debtor or any Subsidiary or result in the creation or
imposition of any Lien on any asset of the Debtor or any of its
Subsidiaries other than a Lien in favor of the Collateral Agent as
provided in this Security Agreement.
(b) This Security Agreement and the
Intercreditor Agreement constitute, and the landlord lien waivers
required by Section 4.4 of this Security Agreement and the two
consignee agreements described in Section 4.4 of this Security
Agreement when executed and delivered by the Debtor will
constitute, the valid and binding agreements of the Debtor,
enforceable against the Debtor in accordance with their respective
terms, except as such enforceability may be limited by bankruptcy,
insolvency or similar laws affecting creditors’ rights
generally and by equitable principles of general applicability
(regardless of whether such enforceability is considered in a
proceeding in equity or at law).
4.6 Documents and Chattel
Paper . All Documents
and Chattel Paper are and will be owned by the Debtor, free and
clear of all Liens other than Permitted Liens. If the Debtor
retains possession of any Chattel Paper with the Collateral
Agent’s consent, such Chattel Paper shall be marked with the
following legend: “This writing and the obligations evidenced
or secured hereby are subject to the security interest of Branch
Banking and Trust Company, as Collateral Agent, for the benefit of
the Secured Parties under and pursuant to Intercreditor and
Collateral Agency Agreement dated as of March 16,
2007.”
4.7 [Reserved].
4.8 Prior
Encumbrances . There
are no existing mortgages, pledges, liens or other encumbrances of
any kind upon, or any security interests in, any of the Collateral,
except for Permitted Liens. The Debtor will defend the Collateral
against all claims and demands of all Persons at any time claiming
any interest therein, except for claims and demands relating to
Permitted Liens.
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4.9 Financing
Statements . Except
for financing statements specified on Schedule 4.9
attached hereto and by this reference incorporated herein, no
financing statement under the UCC of any state which names the
Debtor or any of its trade names or divisions as debtor is on file
in any state or other jurisdiction, and the Debtor has not signed
or authorized any financing statement to be filed and the Debtor
has not signed any security agreement authorizing any secured party
thereunder to file any financing statements, except financing
statements filed to perfect Permitted Liens.
4.10 Organizational
Information . The
jurisdiction of incorporation, the organizational identification
number and the Federal Employer Identification Number of the Debtor
are specified next to the Debtor’s name on
Schedule 4.10 attached hereto and by this reference
incorporated herein. The Debtor has only one state of
organization.
SECTION 5 –
COVENANTS
Until all of the Obligations have
been finally and indefeasibly paid and satisfied in full and the
Revolving Commitment terminated, the Debtor covenants and agrees
that:
5.1 Perfection and Protection
of Security Interest . (a) The Debtor shall, at its expense,
perform all steps reasonably requested by the Collateral Agent at
any time to perfect, maintain, protect, and enforce the Collateral
Agent’s Liens, including: (i) filing financing or
continuation statements, and amendments thereof, in form and
substance reasonably satisfactory to the Collateral Agent;
(ii) when any Event of Default has occurred and is continuing,
transferring Inventory to warehouses or other locations designated
by the Collateral Agent; (iii) placing notations on the
Debtor’s books of account to disclose the Collateral
Agent’s security interest; and (iv) taking such other
steps as are deemed reasonably necessary or desirable by the
Collateral Agent to maintain and protect the Collateral
Agent’s Liens. Notwithstanding the foregoing, unless any
Event of Default shall have occurred and be continuing, the Debtor
shall not be required to take any action to perfect the Collateral
Agent’s Liens in electronic Chattel Paper in an aggregate
amount of less than $100,000. The Debtor agrees that a carbon,
photographic, photostatic, or other reproduction of this Security
Agreement or of a financing statement is sufficient as a financing
statement.
(b) Upon the Collateral
Agent’s request, the Debtor shall deliver to the Collateral
Agent all Collateral consisting of negotiable or non-negotiable
Documents and Chattel Paper promptly after the Debtor receives the
same.
(c) Subject to Section 5.1(a)
hereof, the Debtor shall take all steps necessary to grant the
Collateral Agent control of all electronic Chattel Paper in
accordance with the UCC.
(d) The Debtor hereby irrevocably
authorizes the Collateral Agent at any time and from time to time
to file in any filing office in any Uniform Commercial Code
jurisdiction any initial financing statements and amendments
thereto that contain any information required by part 5 of Article
9 of the UCC of the State of Delaware for the sufficiency or filing
office acceptance of any financing statement or amendment,
including whether the Debtor is an organization, the type of
organization and any organizational identification number issued to
the Debtor. The Debtor agrees to furnish any such information to
the Collateral Agent promptly
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upon request, and to pay on demand all fees,
costs and expenses associated with all such filings. The Debtor
also ratifies its authorization for the Collateral Agent to have
filed in any Uniform Commercial Code jurisdiction any like initial
financing statements or amendments thereto if filed prior to the
date hereof.
(e) Upon the Collateral
Agent’s request, but not more frequently than once during
each calendar year, the Debtor shall provide to the Collateral
Agent a certificate of good standing from its state of
incorporation or organization.
(f) Without limiting the
prohibitions on mergers involving the Debtor contained in the
Credit Agreement and the Note Agreement, the Debtor will not change
its name, operate under any assumed name, change its structure,
reincorporate or reorganize itself, or change its jurisdiction of
incorporation without giving the Collateral Agent at least thirty
(30) days’ prior written notice and, unless prior to
such change, the Debtor shall have taken all action reasonably
necessary or desirable or that the Collateral Agent may reasonably
request, to preserve, perfect, confirm and protect in the manner
and to the extent provided for in this Security Agreement the
security interests granted hereby.
(g) The Debtor acknowledges that it
is not authorized to file any financing statement or amendment or
termination statement with respect to any financing statement
without the prior written consent of the Collateral Agent and
agrees that it will not do so without the prior written consent of
the Collateral Agent, subject to the Debtor’s rights under
Section 9-509(d)(2) of the UCC.
(h) The Debtor shall not, except in
connection with any Permitted Lien, enter into any contract or
agreement that restricts or prohibits the grant of a security
interest in Accounts, Chattel Paper or the proceeds of the
foregoing to the Collateral Agent.
5.2 Accounts .
(a) The Debtor shall not re-date any
invoice, provided that the Debtor shall have the right, in the
exercise of its reasonable business judgment, to re-date invoices
that in the aggregate do not exceed at any one time $100,000. The
Debtor shall not make sales on extended terms dating beyond that
customary in the Debtor’s business (which customary terms
include customer incentive terms) or extend or modify any Account
except in the ordinary course of business.
(b) The Debtor shall not accept any
note or other instrument (except a check or other instrument for
the immediate payment of money) with respect to any Account without
providing to the Collateral Agent prompt written notice thereof.
Any such instrument shall be considered as evidence of proceeds of
the Account and not payment thereof and the Debtor will promptly
deliver such instrument to the Collateral Agent, endorsed without
recourse by the Debtor to the Collateral Agent in a manner
reasonably satisfactory in form and substance to the Collateral
Agent.
(c) The Debtor shall notify the
Collateral Agent promptly of all disputes and claims in excess of
$250,000 with any Account Debtor, and agrees to settle, contest, or
adjust such dispute or claim at no expense to the Collateral Agent.
No discount, credit or allowance shall be granted to any such
Account Debtor without the Collateral Agent’s prior
written
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consent, except for discounts, credits and
allowances made or given in the ordinary course of the
Debtor’s business when no Event of Default exists hereunder.
The Debtor shall send the Collateral Agent a copy of each credit
memorandum in excess of $250,000 as soon as issued, and the Debtor
shall promptly report that credit on Borrowing Base Certificates
submitted by it.
(d) If an Account Debtor returns any
Inventory to the Debtor when no Event of Default exists, then the
Debtor shall promptly determine the reason for such return and
shall issue a credit memorandum to the Account Debtor in the
appropriate amount. The Debtor shall immediately report to the
Collateral Agent any return involving an amount in excess of
$250,000. Each such report shall indicate the reasons for the
return and the locations and condition of the returned Inventory.
In the event any Account Debtor returns Inventory to the Debtor
when any Event of Default exists, the Debtor, upon the request of
the Collateral Agent, shall: (i) hold the returned Inventory
in trust for the Collateral Agent; (ii) segregate all returned
Inventory from all of its other property; (iii) dispose of the
returned Inventory solely according to the Collateral Agent’s
written instructions; and (iv) not issue any credits or
allowances with respect thereto without the Collateral
Agent’s prior written consent. All returned Inventory shall
be subject to the Collateral Agent’s Liens thereon. Whenever
any Inventory is returned, the related Account shall be
