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SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
for the
quarterly period ended March 31, 2010
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission
File Number: 0-3295
KOSS CORPORATION
(Exact Name of
Registrant as Specified in its Charter)
A DELAWARE
CORPORATION
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39-1168275
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(State or other
jurisdiction of
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(I.R.S. Employer
Identification No.)
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incorporation or
organization)
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4129
North Port Washington Avenue, Milwaukee, Wisconsin
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53212
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(Address of
principal executive offices)
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(Zip Code)
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Registrants telephone number, including area code: (414) 964-5000
Indicate
by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes o No x (See Explanatory Note)
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 o 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
the definitions of large accelerated filer, accelerated filer and smaller
reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company x
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(Do not check if a smaller reporting company)
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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
At
May 17, 2010, there were 7,382,706 shares outstanding of the registrants
common stock, $0.005 par value per share.
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EXPLANATORY
NOTE
As discussed in the
Explanatory Note to the Form 10-Q for the quarter ended December 31,
2009, Koss Corporation (Company) discovered in December 2009 certain
unauthorized financial transactions from at least its fiscal year ended June 30,
2005 through December 2009. As a
result of the unauthorized transactions, the Company will restate its
previously issued consolidated financial statements for the fiscal years ended June 30,
2008 and 2009 and for each of the quarterly periods in the fiscal years then
ended, and for the quarter ended September 30, 2009. Baker Tilly Virchow Krause,
LLP (Baker Tilly),
the Companys independent auditor, has been engaged to audit the Companys
restated consolidated financial statements for the fiscal years ended June 30,
2008 and 2009. The Company intends to
amend its annual report on Form 10-K for the fiscal year ended June 30,
2009 and its quarterly reports on Form 10-Q for the quarters September 30,
2009 and December 31, 2009, and expects these amendments to be filed no
later than June 30, 2010. Because
of these events described above, the Companys unaudited consolidated financial
statements for the quarter ended March 31, 2010 are not yet available and
are not included in this quarterly report on Form 10-Q. The Company intends also to amend this Form 10-Q
to include the quarterly unaudited consolidated financial statements as soon as
practicable after the restatements of the Companys previously issued
consolidated financial statements are completed.
The Company is also
assisting an independent investigation being conducted by a committee of
independent directors and its independent counsel (Independent Investigation). The Company intends to pursue proceeds from
the sale of items seized by law enforcement authorities, as well
as from insurance coverage, potential claims against third parties and tax
refunds. The Company is also addressing the legal
matters described in Part II, Item 1 Legal Proceedings and continues to
cooperate with law enforcement and regulatory authorities in their
investigations.
Because the Company is
unable to file its quarterly unaudited consolidated financial statements in
this Form 10-Q, the Company may not be considered to be current in its
filings under the Securities Exchange Act of 1934, as amended (Exchange Act)
or in compliance with NASDAQ Listing Rule 5250(c)(1), which requires the
timely filing of financial statements in periodic reports. In connection with its partial filing of the Form 10-Q for
the quarter ended December 31, 2009, which also did not include quarterly
unaudited consolidated financial statements, the Company received from NASDAQ a
notification of non-compliance with Listing Rule 5250(c)(1). In the compliance plan submitted by the
Company, which has been accepted by NASDAQ, the Company proposed to file the
amended Form 10-Q with the required quarterly unaudited financial
statements for the period ended December 31, 2009 no later than June 30,
2010.
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PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
The
information required by this Item is not included in this Form 10-Q. Please see the discussion in the Explanatory
Note.
Item
2. Managements Discussion and Analysis
of Financial Condition and Results of Operations.
Because
the Companys unaudited consolidated financial statements for the quarter ended
March 31, 2010 are not yet available and are not included in this
quarterly report on Form 10-Q, the Company is unable to provide
comprehensive disclosure and discussion in this section. The Company intends to file an amendment to
this Form 10-Q after the restatements of the Companys previously issued
consolidated financial statements are completed.
Results of
Operations for the Quarter Ended March 31, 2010
As
previously reported, the Company announced that preliminary estimates of the
Independent Investigation indicated that the amount of unauthorized
transactions since fiscal year 2005 exceeded $31 million. The Companys results of operations have been
affected during these years by the unauthorized transactions. Although the unauthorized
transactions ended in December 2009, the Company incurred investigation
and other legal costs associated with the unauthorized transactions during the
quarter ended March 31, 2010. The
Company is pursuing reimbursement of these expenses pursuant to its available
insurance coverage. The Company received
$1 million of insurance proceeds under its fidelity coverage in the
quarter. Notwithstanding the disruption
resulting from the discovery of the unauthorized transactions in December 2009,
the Company operated in the normal course of business during the quarter ended March 31,
2010.
Liquidity and
Capital Resources
The
Company anticipates that its current liquidity and cash flow from operations
will meet its cash requirements for operations, including the additional
investigation costs related to the unauthorized transactions, and new product
development. The Companys cash and cash
equivalents have increased since discovery of the unauthorized
transactions. Although the Company has
incurred certain costs in connection with the investigation of and legal
proceedings related to the unauthorized transactions, the Company is pursuing
reimbursement of these costs through its available insurance coverage as
described above.
As of March 31,
2010, the outstanding balance on the Companys credit facility with Harris, N.A. was $5.9 million. This balance did not change during the
quarter ended March 31, 2010.
During the quarter, the Company was able to reduce outstanding amounts
due to suppliers by $4.9 million without drawing additional amounts on this
credit facility. On May 12, 2010,
the Company repaid the entire $5.9 million balance on this credit facility and
terminated the loan agreement with Harris, N.A.
On May 12, 2010, the Company entered into a new
credit facility with JPMorgan Chase Bank, N.A.
As of May 17, 2010, which is the date of this filing, the Company
had an outstanding balance of $3.4 million under this credit facility. See the Recent Developments for additional
description of the new credit facility.
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Off-Balance Sheet
Arrangements
The Company has no
off-balance sheet arrangements other than the lease for the main plant in
Milwaukee, Wisconsin, which it leases from its Chairman, John C. Koss. On August 15, 2007, the lease was
renewed for a period of five years, and is being accounted for as an operating
lease. The lease extension maintained
the rent at a fixed rate of $380,000 per year.
At anytime during this period the Company has the option to renew the
lease for an additional five years for the period commencing July 1, 2013
and ending June 30, 2018 under the same terms and conditions. The lease is on terms no less favorable to
the Company than those that could be obtained from an independent party. The Company is responsible for all property
maintenance, insurance, taxes, and other normal expenses related to
ownership. All facilities are in good
repair and, in the opinion of management, are suitable and adequate for the
Companys business purposes.
Recent
Developments
On May 12, 2010, the Company entered into a new
secured credit facility with JPMorgan Chase Bank, N.A. (Lender). The Credit Agreement dated May 12, 2010
between the Company and the Lender (Credit Agreement) provides for an $8
million revolving secured credit facility with interest rates either ranging
from 0.0% to 0.75% over the Lenders most recently publicly announced prime
rate or 2.0% to 3.0% over LIBOR, depending on the Companys leverage
ratio. The Credit Agreement expires on July 31,
2013 (Maturity Date). Accrued and
unpaid interest on loans under the Credit Agreement is due and payable
monthly. Lender may accelerate repayment
of any amounts outstanding if any event of default, as more fully described in
the Credit Agreement, shall occur. In
addition to the revolving loans, the Credit Agreement also provides that the Company
may, from time to time, request the Lender to issue letters of credit for the
benefit of the Company of up to a sublimit of $2 million, and subject to
certain other limitations. The loans may be used only
for general corporate purposes of the Company.
The Credit Agreement contains certain affirmative,
negative and financial covenants customary for financings of this type. The negative covenants include restrictions
on other indebtedness, liens, fundamental changes, certain investments, asset
sales, sale and leaseback transactions, and transactions with affiliates, among
other restrictions. The financial
covenants include a minimum current ratio, minimum tangible net worth and
maximum leverage ratio requirements.
The Company and the Lender also entered into the
Pledge and Security Agreement dated May 12, 2010 (the Security Agreement)
under which the Company granted the Lender a security interest in the Companys
personal property and other assets in connection with the Companys obligations
under the Credit Agreement.
On May 12, 2010, the Company also terminated
its loan agreement with Harris, N.A. and repaid the entire $5.9 million balance
outstanding.
The descriptions of the Credit Agreement and the
Security Agreement are qualified in their entirety by the actual agreements,
which have been filed as exhibits to this quarterly report on Form 10-Q.
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Recently Issued
Financial Accounting Pronouncements
None.
Item 3. Quantitative
and Qualitative Disclosures about Market Risk.
Not
applicable.
Item 4. Controls and
Procedures.
(a) Evaluation
of Disclosure Controls and Procedures. The Company maintains a system of disclosure
controls and procedures that were designed to and believed to provide reasonable
assurance that information, which is required to be timely disclosed, is
accumulated and communicated to management in a timely fashion. A control system, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance that
the objectives of the control system are met.
It is possible for even the best control system to be circumvented by
those with the intent, knowledge and opportunity to do so.
The Companys management, including the Companys
Chief Executive Officer and Chief Financial Officer, is reevaluating the
effectiveness of the Companys disclosure controls and procedures (as defined
in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) to
identify any enhancements that may provide greater comfort that the Companys
disclosure controls and procedures are effective to provide reasonable
assurance that information required to be disclosed by the Company in the
reports that it files or submits under the Exchange Act is accumulated and
communicated to the Companys management, including its principal executive
officer and principal financial officer, as appropriate to allow timely
decisions regarding required disclosure and are effective to provide reasonable
assurance that such information is recorded, processed, summarized, and
reported within the time periods specified in the SECs rules and
forms. In particular, the Company is
currently working with outside consultants on its plan to document, assess and
test the Companys internal control over financial reporting in anticipation of
complying with Section 404 of Sarbanes-Oxley as required.
(b) Changes
in Internal Controls. The Companys
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) was designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud within the Company have been detected. Numerous actions were taken beginning in late
December 2009 following the discovery of the unauthorized transactions,
including changes relating to the Companys banking procedures and certain
other internal policies and procedures.
These actions, many of which occurred during the Companys most recent
fiscal quarter, enhance, and are expected to improve, the Companys internal
control over financial reporting. Other
improvements relating to enhancing the Companys internal controls relate to
increased documentation of the Companys controls, improved account
reconciliations, and additional review and approval processes. The Company is planning to provide a more
detailed description of these actions in the amended Form 10-K for the
fiscal year ended June 30, 2009, as described in the Explanatory Note.
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PART II
OTHER INFORMATION
Item 1. Legal Proceedings
The Company became subject to the following material
legal proceedings during the period covered by this quarterly report as a
result of the unauthorized transactions:
· On January 11, 2010,
the Company received a letter from a law firm stating that it represented a
shareholder and demanding that the Companys Board of Directors investigate and
take legal action against all responsible parties to ensure compensation for the
Companys losses stemming from the unauthorized transactions. The Companys legal counsel has responded
preliminarily to the letter indicating that the Board of Directors will
determine the appropriate course of action after the Independent Investigation
is completed.
· On January 15, 2010, a
class action complaint was filed in federal court in Wisconsin against the
Company, Michael Koss and Sujata Sachdeva.
The suit alleges violations of Section 10(b), Rule 10b-5 and Section 20(a) of
the Exchange Act relating to the unauthorized transactions and requests an
award of compensatory damages in an amount to be proven at trial. See David A.
Puskala v. Koss Corporation, et al., United States District Court, Eastern
District of Wisconsin, Case No. 2:2010cv00041.
· On January 26, 2010,
the SECs Division of Enforcement advised the Company that it obtained a formal
order of investigation in connection with the unauthorized transactions. The
Company voluntarily brought the unauthorized transactions to the SEC staffs
attention when they were discovered in December 2009, and is cooperating
fully with the ongoing SEC investigation.
· On February 16 and 18, 2010, separate shareholder
derivative suits were filed in Milwaukee County Circuit Court in connection
with the previously disclosed unauthorized transactions. The first suit names
as defendants Michael Koss, John Koss Sr., the other Koss directors, Sujata
Sachdeva, Grant Thornton LLP, and Koss Corporation (as a nominal defendant);
the second suit names the same parties except Grant Thornton LLP. Among other
things, both suits allege various breaches of fiduciary and other duties, and
seek recovery of unspecified damages and other relief. See Ruiz v. Koss, et
al., Circuit Court, Milwaukee County, Wisconsin, No. 10CV002422 (February 16,
2010) and Mentkowski v. Koss, et al., Circuit Court, Milwaukee County,
Wisconsin, No. 10CV002290 (February 18, 2010). These two shareholder derivative suits have
been consolidated under Master File No. 10CV002422.
Item 1A. Risk Factors
In addition to the other information set forth in
this report and the reports referenced therein, you should also carefully
consider the risk factors discussed below, which could materially affect the
Companys business, financial condition or operating results. These risks are not the only risks facing the
Company. Additional risk and
uncertainties not currently known that the Company currently deems to be
immaterial also may materially adversely affect the Companys business,
financial condition or operating results.
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The Company is currently determining the extent to
which the unauthorized transactions will affect the Companys previously issued
consolidated financial statements.
As described in the Explanatory Note, the Company is
restating its previously issued consolidated financial statements since fiscal
year 2008 because of the unauthorized transactions during that period. The restatements could result in materially
adverse adjustments to the Companys previously reported financial results.
The Company is currently unable to assess the
amounts that may be recovered through the proceeds from the sale of items
seized by law enforcement, insurance, potential claims against third parties or
tax refunds.
The Company has estimated that the amount of the
unauthorized transactions exceeds $31 million since fiscal year 2005. Over 25,000 items have been seized by law
enforcement authorities. Although the Company intends to pursue proceeds from the sale of items seized by
law enforcement authorities, as well as from insurance coverage, potential
claims against third parties and tax refunds, the Company cannot reasonably
assess the amounts or timing of such recoveries. The Companys inability to recover its losses
could have a significant and adverse effect on its future financial condition.
The Companys inability to file its quarterly
financial statements on Form 10-Q in a timely manner could result in a
loss of liquidity for the Companys common stock if its shares are delisted by
the NASDAQ Stock Exchange.
On February 16, 2010, the Company filed a
partial 10-Q for the period ended December 31, 2009 that did not include
quarterly financial statements. NASDAQ
previously notified the Company of its noncompliance with Listing Rule 5250(c)(1),
and accepted the Companys plan to file by June 30, 2010 its amended quarterly unaudited
financial statements for the period ended December 31, 2009. This partial 10-Q for the
period ended March 31, 2010 also does not include quarterly financial
statements, and likely will result in another notification by NASDAQ of the
Companys noncompliance with Listing Rule 5250(c)(1). If the Company is unable to provide these
quarterly financial statements on a timeline that is acceptable to NASDAQ, then
the Companys shares may be delisted.
Such delisting may cause a loss of liquidity for shares of the Companys
common stock. The Company is working
diligently to complete the restatements of the Companys previously issued
consolidated financial statements since fiscal year 2008 and the Company
intends to amend the applicable periodic reports as promptly as it is able to do
so. Although the Company is planning to
file the restatements by June 30, 2010, the Company cannot predict with
certainty when these financial statements will actually be available or what
action NASDAQ will take in response to the partial filing of this Form 10-Q.
Legal proceedings related to the unauthorized
transactions may adversely affect the Companys financial condition.
As further described in Part II, Item 1, Legal
Proceedings, the Company is currently addressing several legal matters related to the unauthorized transactions. The Company is
unable at this time to quantify its exposure, if any. The costs of dealing with these matters and
any penalties and awards that may be assessed against the Company could be
substantial, and may adversely affect the Companys financial condition.
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The Companys stock price may fluctuate as a result
of the unauthorized transactions and because of the uncertainties about their
effect on the Companys financial condition.
Uncertainties about the effect of the unauthorized
transactions and significant developments related to the unauthorized
transactions, such as the results of the restatements of the Companys
previously issued consolidated financial statements, the legal matters
described above or the results and recommendations of the Independent
Investigation, could cause fluctuation in the Companys stock price. The Companys
common stock could also be subject to wide fluctuations in response to
additional business factors such as the following:
· the sale or availability for
sale of substantial amounts of the Companys common stock;
· actual or anticipated
fluctuations in the Companys operating results or its competitors operating
results;
· announcements by the Company
or its competitors of new products;
· capacity changes,
significant contracts, acquisitions or strategic investments;
· the Companys growth rate
and its competitors growth rates;
· changes in stock market
analyst recommendations regarding the Company, its competitors or the industry
generally, or lack of analyst coverage of the Companys common stock;
· sales of the Companys
common stock by its executive officers, directors and significant stockholders
or sales of substantial amounts of common stock; and
· changes in accounting
principles.
Reduction in present levels of
cash flow could adversely affect the Companys business.
The Companys primary source of liquidity over the
past 12 months has been operating cash flows. The Companys future cash
flows from operations (on both a short term and long term basis) are dependent
upon, but not limited to:
· the Companys ability to attract new
customers that will sell the Companys products and pay for them;
· the Companys ability to retain the
Companys existing customers at the level of sales previously produced;
· the volume of sales for these customers;
· the loss of business of one or more
primary customers;
· changes in types of products that the
customers purchase in their sales mix;
· poor or deteriorating economic conditions
which would directly impact the ability of the Companys customers to remain in
business and pay for their products on a timely basis;
· managements ability to hold the line on
any requests for increases in material or labor cost increases; and
· the ability to collect in full and in a
timely manner, amounts due to the Company.
In
addition, as noted above, the Companys cash flow is also dependent, to some
extent, upon the ability to maintain operating margins. The continuing
general downturn in economic conditions or other events that caused the Companys
customers to turn to lower-priced, lower-margin products, the Companys cash
flow and profitability could be materially and adversely affected.
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Failure to attract and retain customers to sell the Companys products
could adversely affect sales volume and future profitability.
The Company markets a line of products used by
consumers to listen to music. The Company distributes these products
through retail channels in the U.S. and independent distributors throughout the
rest of the world. The Company is dependent upon the Companys ability to
retain an existing base of customers to sell the Companys line of
products. Loss of customers means loss of product placement. The
Company has broad distribution across many channels including specialty stores,
mass merchants, electronics stores and computer retailers. Since
distribution is broadly based, any loss of a customer directly translates into
a reduction in sales volume which can only be replaced by replacing a similar
number of representative retail outlets. The inability of the Companys
sales and marketing staff to obtain new distribution outlets translates into a
lack of future growth and possibly a setback in sales volumes when loss of
current customers occur. For example, the loss of a customer representing
10% of the Companys business would translate into a reduction in revenues of
up to 10% based upon the point through the fiscal year that the customer was
lost. Attracting a new customer during the course of a fiscal year could
have a positive impact or simply replace an account which has been lost.
In addition, a customer can decide to make a change in the models that it
decides to offer for sale. Such changes can take place arbitrarily
throughout the course of a year which can cause reductions in sales revenues in
proportion to the number of retail outlets that the store represents in the
market. The Company may not be able to maintain customers or model
selections and therefore experience a reduction in its sales revenue until a
model is restored to the mix or a customer is replaced by a new customer.
A reduction in sales volume would cause a reduction in profitability. The
Companys failure to retain existing customers, obtain new customers or develop
new product lines that customers would choose to offer to consumers could
significantly affect the Companys future profitability. The loss of
business of one or more principal customers or a change in the sales volume
from a particular customer could have a material adverse effect on the Companys
sales volume and profitability.
Shift in customer specifications
to lower priced items can reduce profit margins negatively, impacting
profitability.
The Company sells a line of products with a suggested
retail price ranging from less than $10 up to $1,000. The gross margin
for each of these models is unique in terms of percentages. The price
range of the products also produces a different level of actual dollar
contribution per unit. For example a product with a gross margin
contribution of 50% might yield a $5.00 contribution for one item, while
another item may feature a 30% gross margin which could yield $50.00. The
Company finds the low priced portion of the market most competitive and
therefore most subject to pressure on gross margin percentages, which tends to
lower profit contributions. Retail preference for lower priced items can
reduce profit margins and contributions. The risk is that a shift in
retail customer specifications toward lower priced items can lead to lower
gross margins and lower profit contributions per unit of sale. Due to the
range of products that the Company sells, the product sales mix can produce a
variation in terms of a range of profit margins. Some customers sell a
limited range of products that yield lower profit margins than others.
Most notably, the budget priced headphone segment of the market below $10.00
retail which is distributed through computer stores, office supply stores, and
mass market retailers tend to yield the lowest gross margins. An increase
in business with these types of accounts, if coupled with a simultaneous
reduction in sales to customers with higher gross margins would reduce profit
margins and profitability.
Poor economic conditions can
restrict or limit product placement, sales and replenishment which could
decrease profits.
Deteriorating or weak economic conditions, or a
forecast for the same, can trigger changes in inventory stocking at
retail. This may in turn lead to a reduction in model offerings and to
out of stock situations. If a retail customer of the Company does not
have adequate stocks of the Companys products to offer for sale in a retail
store, consumers may choose another competitive model instead. Customers
operating retail stores anticipate future sales demands and inventory products
accordingly. Whenever a general economic slowdown occurs, at both the
domestic or foreign level, sales volume levels and re-orders change.
These changes directly impact the Companys sales and profitability. The
Company is not in a position to determine how it will be affected by these
circumstances, how extensive the effects may be, or for how long the Company
may be impacted by these circumstances. The Companys customers respond
to changes in economic conditions and any adverse changes in economic
conditions can therefore restrict product placement, availability, sales,
replenishment and ultimately profitability. These conditions exist
domestically and internationally.
Management is subject to
decisions made outside its control which could directly affect future
profitability.
Retail customers determine which products they will
stock for resale. The Company competes with other manufacturers to secure
shelf space in retail stores for the Companys products. During the
course of a year, changes in the customers management personnel can ultimately
lead to changes in the stock assortment offered to consumers. These
changes are often arbitrary. In addition to changes in personnel within
the Companys customers, it is also possible that a strategic decision can be
made by a retail customer to consolidate vendors, or to discontinue certain
product categories altogether. In these instances, the Companys
management team may not able to convince customers to reverse such
decisions. The Companys management team is also engaged in the effective
procurement, assembly, and manufacture of products. The ability to
negotiate with suppliers, maintain productivity, and hold the line on cost
increases can be subjected to pressures outside the control of
management. For example, increases in fuel costs can increase rates of
freight. Increases of this nature can seldom be avoided and the Company
may not be able to pass such increases along to its customers. Managements
effective control of the manufacturing processes will have a direct impact on
the Companys future profitability. The Company regularly makes decisions
that affect production schedules, shipping schedules, employee levels, and
inventory levels. The Companys ability to make effective decisions in
managing these areas has a direct effect on future profitability.
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Accounts receivable amounts due
from our customers can be lost as a result of customer bankruptcy, operational
difficulty, or failure to pay, negatively impacting future profitability.
The Company has significant accounts receivable or
other amounts due from the Companys customers. Terms of payment for
customers generally range from cash in advance to net 90 day credit
terms. These credit arrangements are negotiated at unspecified and
irregular intervals. The largest customers generate the largest
receivable balances. If a customer develops operational difficulty it is
not uncommon to temporarily suspend payment to vendors. The Company is
subject to this risk in the retail marketplace. From time to time a
customer may develop severe operating losses which can lead to a
bankruptcy. In these cases, the Company may lose most of the outstanding
balance due. Occasionally, the Company has been current with a customer
at the time such an event occurs. The more material risk is that of
losing the revenue of the customer which might be more onerous than losing the
current outstanding accounts receivable. In addition, many companies that
will insure accounts receivables will not do so for the Companys largest mass
market customers. The Company derives most of its sales revenue and
profits from selling products to retailers for resale to consumers. The
failure of the Companys customers to pay in full amounts due to the Company
could negatively affect future profitability.
Company profits can suffer from
interruptions in supply chain.
The Company uses contract manufacturing facilities in
Mainland China, Taiwan, and South Korea. These independent supplier
entities are distant from the Company which means that the Company is at risk
of business interruptions due to natural disaster, war, disease, and government
intervention through tariffs or trade restrictions that are of less concern
domestically. An additional area of concern for the Company is with the
continuing War on Terror and the most recent developments in North Korea,
Iran, and Lebanon. Three of our largest distributors outside the U.S.
have already experienced a general tightening of the availability of credit in
recent months, which we believe to be partly a result of certain of these
external concerns. Therefore, if there are any interruptions in the
supply chain for any of these reasons, this could directly impact the Companys
profits in a negative way. The Company is also at risk if trade
restrictions are imposed on the Companys products based upon country of
origin. In addition, any increase in tariffs and freight charges may not
be acceptable to pass along to the Companys customers and could directly
impact the Companys profits.
Fluctuations in currency exchange
rates could affect pricing of products and cause customers to purchase
lower-priced, less profitable products and could affect overall demand for the
Companys products.
The Company receives a material portion of its revenue
and profits from business in Canada and Europe. To the extent that value
of the U.S. dollar increases relative to currencies in those jurisdictions, it
increases the cost of the Companys products in those jurisdictions, which
could create negative pressure on the overall demand for the Companys
products. The Company gets paid from its international customers in U.S.
dollars. To the extent that increased prices arising from currency fluctuations
decrease the overall demand for the Companys products and the Companys sales
or motivate customers to purchase lower-priced, lower profit products, the
Companys revenues, profits, and cash flows could be adversely affected.
Company profits can suffer from
increasing manufacturing costs in China as a result of increased wages and wage
taxes.
The Company uses contract manufacturing facilities in
Mainland China. An increase in the cost of labor or taxes on wages in
China may lead to an increase in the cost of goods manufactured in China.
The cost of labor and wage taxes have increased in China which means that the
Company is at risk of higher manufacturing costs associated with goods
manufactured in China. Additionally, in response to inflationary
concerns, wages in certain provinces in China have recently increased and may
continue to do so in the future. Significant increases in wages or wage
taxes paid by contract manufacturing facilities may increase the cost of goods
manufactured in China which could have a material adverse effect on the Companys
profit margins and profitability.
The Company uses third party
carriers to ship its products which may pass on increases in
transportation-related fuel cost to the Company which can reduce profit
margins, negatively impacting profitability.
The Company uses numerous third party carriers to ship
product, both domestically and internationally. If the price of fuel
continues to increase and the carriers choose to pass on these increase to the
Company, our freight costs may increase. As a result, the Companys
freight cost is impacted by changes in fuel prices. Fuel prices affect
freight costs to both our customers location and our distribution
center. Increase in fuel prices and surcharges and other factors have
increased and may continue to increase freight costs in the future. This
inflationary pressure of higher fuel costs and continued increase in
transportation-related fuel costs could have a material adverse effect on the
Companys profit margins and profitability.
Consistency of the Companys
business with several U.S. retailers.
The Company is concerned about the consistency of
business with several U.S. retailers for the coming year. The recent
tightening of credit availability worldwide caused all retailers to sharply
curtail inventory increases in advance of this years holiday season. The
Company has already seen some consolidation in product lines, and item
elimination, or reductions at several big box retailers. The Company also
recognizes the struggle that many of the Companys automobile customers have
been reporting in the news, and the potential impact that a reduction in
automobile unit sales might have upon our rear seat entertainment products for
the automotive market in the coming fiscal year.
11
Table of Contents
We may not be able to enforce or protect our intellectual property
rights, which may harm our ability to compete and harm our business.
Our ability to enforce our patents, copyrights,
licenses, trademarks and other intellectual property rights is subject to
general litigation risks, as well as uncertainty as to the enforceability of
our intellectual property rights in various countries. When we seek to enforce
our rights, we are often subject to claims that the intellectual property right
is invalid, is otherwise not enforceable, or is licensed to the party against
whom we are asserting a claim. In addition, our assertion of intellectual
property rights often results in the other party seeking to assert alleged
intellectual property rights of its own or assert other claims against us,
which could harm our business.
Third parties may assert against us or our customers
alleged patent, copyright, trademark, or other intellectual property rights to
technologies that are important to our business. Any claims that our products
or processes infringe the intellectual property rights of others, regardless of
the merit or resolution of such claims, could cause us to incur significant
costs in responding to, defending, and resolving such claims, and may divert
the efforts and attention of our management and technical personnel from our
business.
As a result of such intellectual property claims, we
could be required or otherwise decide that it is appropriate to:
· pay damages related to third-party
infringement or other claims;
· discontinue manufacturing, using, or
selling particular products;
· discontinue using certain technology or
processes;
· develop other technology, which could be
time-consuming and costly or may not be possible; and/or
· license technology from a third party
claiming infringement, which license may not be available on commercially
reasonable terms.
In addition, governments may adopt regulations, and
governments or courts may render decisions, requiring compulsory licensing of
intellectual property to others, or governments may require that products meet
specified standards that serve to favor local companies. Our inability to enforce our intellectual
property rights under these circumstances may harm our competitive position and
our business.
The occurrence of any of the foregoing could result in
unexpected expenses or require us to recognize an impairment of our assets,
which would reduce the value of our assets and increase expenses. In addition,
if we alter or discontinue our production of affected items, our revenue could
be harmed.
Item 2. Unregistered Sales of
Equity Securities and Use of Proceeds
In April of 1995, the
Board of Directors approved a stock repurchase program authorizing the Company
to purchase its common stock from time to time for its own account. No purchases were made by the Company under
the stock repurchase program during the quarter ended March 31, 2010.
12
Table of Contents
Item 3. Defaults Upon Senior
Securities
None.
Item 4. Other Information
None.
Item 5. Exhibits
See Exhibit Index
attached hereto.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING
STATEMENTS
This Form 10-Q
contains forward-looking statements within the meaning of that term in the
Private Securities Litigation Reform Act of 1995 (the Act) (Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange
Act of 1934). Additional written or oral
forward-looking statements may be made by the Company from time to time in
filings with the Securities Exchange Commission, press releases, or otherwise. Statements contained in this Form 10-Q
that are not historical facts are forward-looking statements made pursuant to
the safe harbor provisions of the Act.
Forward-looking statements may include, but are not limited to,
projections of revenue, income or loss and capital expenditures, statements
regarding future operations, anticipated financing needs, compliance with
financial covenants in loan agreements, plans for acquisitions or sales of
assets or businesses, plans relating to products or services of the Company,
assessments of materiality, predictions of future events, the effects of
pending and possible litigation, and assumptions relating to the
foregoing. In addition, when used in
this Form 10-Q, the words anticipates, believes, estimates, expects,
intends, plans and variations thereof and similar expressions are intended
to identify forward-looking statements.
Forward-looking
statements are inherently subject to risks and uncertainties, some of which
cannot be predicted or quantified based on current expectations. Consequently, future events and actual
results could differ materially from those set forth in, contemplated by, or
underlying the forward-looking statements contained in this Form 10-Q, or
in other Company filings, press releases, or otherwise. In addition to the factors discussed in this Form 10-Q,
other factors that could contribute to or cause such differences include, but
are not limited to, developments in any one or more of the following
areas: future fluctuations in economic
conditions, the receptivity of consumers to new consumer electronics
technologies, the rate and consumer acceptance of new product introductions,
competition, pricing, the number and nature of customers and their product
orders, production by third party vendors, foreign manufacturing, sourcing and
sales (including foreign government regulation, trade and importation
concerns), borrowing costs, changes in tax rates, pending or threatened
litigation and investigations, fluctuations in currency exchange rates and
other risk factors which may be detailed from time to time in the Companys
Securities and Exchange Commission filings.
Readers are cautioned not to place undue reliance on
any forward-looking statements contained herein, which speak only as of the
date hereof. The Company undertakes no
obligation to publicly release the result of any revisions to these
forward-looking statements that may be made to reflect events or circumstances
after the date hereof or to reflect the occurrence of unexpected events.
13
Table of
Contents
Signatures
Pursuant
to the requirements of the Securities and Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
|
KOSS
CORPORATION
|
|
|
|
|
Date:
May 17, 2010
|
/s/
Michael J. Koss
|
|
Michael J. Koss
|
|
Vice Chairman,
President and
|
|
Chief Executive
Officer
|
|
|
|
|
Date:
May 17, 2010
|
/s/
David D. Smith
|
|
David D. Smith
|
|
Executive Vice President, Chief Financial Officer and Principal
Accounting Officer
|
14
Table of
Contents
EXHIBIT INDEX
Exhibit No.
|
|
Exhibit Description
|
|
|
|
3.1
|
|
Amended and Restated Certificate of Incorporation of Koss
Corporation, as in effect on November 19, 2009. Filed as
Exhibit 3.1 to the Companys Quarterly Report on Form 10-Q for the
period ended December 31, 2009 and incorporated herein by reference.
|
|
|
|
3.2
|
|
By-Laws of Koss Corporation, as in effect on September 25, 1996.
Filed as Exhibit 3.2 to the Companys Annual Report on Form 10-K
for the year ended June 30, 1996 and incorporated herein by reference.
|
|
|
|
10.1
|
|
Death Benefit Agreement with John C. Koss. Filed as Exhibit 10.4
to the Companys Annual Report on Form 10-K for the year ended
June 30, 1996 and incorporated herein by reference.
|
|
|
|
10.2
|
|
Stock Purchase Agreement with John C. Koss. Filed as
Exhibit 10.5 to the Companys Annual Report on Form 10-K for the
year ended June 30, 1996 and incorporated herein by reference.
|
|
|
|
10.3
|
|
Salary Continuation Resolution for John C. Koss. Filed as
Exhibit 10.6 to the Companys Annual Report on Form 10-K for the
year ended June 30, 1996 and incorporated herein by reference.
|
|
|
|
10.4
|
|
1983 Incentive Stock Option Plan. Filed as Exhibit 10.7 to the
Companys Annual Report on Form 10-K for the year ended June 30,
1996 and incorporated herein by reference.
|
|
|
|
10.5
|
|
Assignment of Lease to John C. Koss. Filed as Exhibit 10.7 to
the Companys Annual Report on Form 10-K for the year ended
June 30, 1988 and incorporated herein by reference.
|
|
|
|
10.6
|
|
Addendum to Lease. Filed as Exhibit 10.8 to the Companys Annual
Report on Form 10-K for the year ended June 30, 1988 and
incorporated herein by reference.
|
|
|
|
10.7
|
|
Amendment to Lease. Filed as Exhibit 10.22 to the Companys
Annual Report on Form 10-K for the year ended June 30, 2000 and
incorporated herein by reference.
|
|
|
|
10.8
|
|
Partial Assignment, Termination and Modification of Lease. Filed as
Exhibit 10.25 to the Companys Annual Report on Form 10-K for the
year ended June 30, 2001 and incorporated herein by reference.
|
|
|
|
10.9
|
|
Restated Lease. Filed as Exhibit 10.26 to the Companys Annual
Report on Form 10-K for the year ended June 30, 2001 and
incorporated herein by reference.
|
|
|
|
10.10
|
|
1990 Flexible Incentive Plan. Filed as Exhibit 25 to the
Companys Annual Report on Form 10-K for the year ended June 30,
1990 and incorporated herein by reference.
|
|
|
|
10.11
|
|
Consent of Directors (Supplemental Executive Retirement Plan for
Michael J. Koss dated March 7, 1997). Filed as Exhibit 10.2 to the
Companys Quarterly Report on Form 10-Q for the quarter ended
March 31, 1997 and incorporated herein by reference.
|
|
|
|
10.12
|
|
Credit Agreement dated May 12, 2010, between Koss Corporation
and JPMorgan Chase Bank, N.A.*
|
|
|
|
10.13
|
|
Pledge and Security Agreement dated May 12, 2010, between Koss
Corporation and JPMorgan Chase Bank, N.A.*
|
*
Filed herewith
Exhibit
10.12
EXECUTION VERSION
CREDIT AGREEMENT
DATED AS OF
MAY 12, 2010
BETWEEN
KOSS CORPORATION
AND
JPMORGAN CHASE BANK, N.A.
TABLE OF CONTENTS
|
Page
|
|
|
ARTICLE I
|
|
|
|
Definitions
|
|
|
|
SECTION 1.01.
Defined Terms
|
1
|
SECTION 1.02.
Accounting Terms; GAAP
|
21
|
|
|
ARTICLE II
|
|
|
|
The Credits
|
|
|
|
SECTION 2.01.
Commitment
|
22
|
SECTION 2.02.
Loans and Borrowings
|
22
|
SECTION 2.03.
Borrowing Procedures; Requests for Revolving Borrowings
|
22
|
SECTION 2.04.
Protective Advances
|
23
|
SECTION 2.05.
Letters of Credit
|
23
|
SECTION 2.06.
Funding of Borrowings
|
26
|
SECTION 2.07.
Interest Elections
|
26
|
SECTION 2.08.
Termination of Commitment
|
27
|
SECTION 2.09.
Repayment and Amortization of Loans; Evidence of Debt
|
28
|
SECTION 2.10.
Prepayment of Loans
|
28
|
SECTION 2.11.
Fees
|
30
|
SECTION 2.12.
Interest.
|
30
|
SECTION 2.13.
Alternate Rate of Interest
|
31
|
SECTION 2.14.
Increased Costs
|
31
|
SECTION 2.15.
Break Funding Payments
|
32
|
SECTION 2.16.
Taxes
|
33
|
SECTION 2.17.
Payments Generally; Allocation of Proceeds; Sharing of Set-offs
|
34
|
SECTION 2.18.
Indemnity for Returned Payments
|
35
|
|
|
ARTICLE III
|
|
|
|
Representations and Warranties
|
|
|
|
SECTION 3.01.
Organization; Powers
|
35
|
SECTION 3.02.
Authorization; Enforceability
|
35
|
SECTION 3.03.
Governmental Approvals; No Conflicts
|
36
|
SECTION 3.04.
Financial Condition; No Material Adverse Change
|
36
|
SECTION 3.05.
Properties
|
36
|
SECTION 3.06.
Litigation and Environmental Matters
|
36
|
SECTION 3.07.
Compliance with Laws and Agreements
|
37
|
SECTION 3.08.
Investment Company Status
|
37
|
SECTION 3.09.
Taxes
|
37
|
i
SECTION 3.10.
ERISA
|
37
|
SECTION 3.11.
Disclosure
|
37
|
SECTION 3.12.
Material Agreements
|
38
|
SECTION 3.13.
Solvency
|
38
|
SECTION 3.14.
Insurance
|
38
|
SECTION 3.15.
Capitalization and Subsidiaries
|
38
|
SECTION 3.16.
Security Interest in Collateral
|
39
|
SECTION 3.17.
Employment Matters
|
39
|
|
|
ARTICLE IV
|
|
|
|
Conditions
|
|
|
|
SECTION 4.01.
Effective Date
|
39
|
SECTION 4.02.
Each Credit Event
|
41
|
|
|
ARTICLE V
|
|
|
|
Affirmative Covenants
|
|
|
|
SECTION 5.01.
Financial Statements; Borrowing Base and Other Information
|
41
|
SECTION 5.02.
Notices of Material Events
|
43
|
SECTION 5.03.
Existence; Conduct of Business
|
44
|
SECTION 5.04.
Payment of Obligations
|
44
|
SECTION 5.05.
Maintenance of Properties
|
44
|
SECTION 5.06.
Books and Records; Inspection Rights
|
44
|
SECTION 5.07.
Compliance with Laws
|
44
|
SECTION 5.08.
Use of Proceeds and Letters of Credit
|
44
|
SECTION 5.09.
Insurance
|
45
|
SECTION 5.10.
Casualty and Condemnation
|
45
|
SECTION 5.11.
Collateral Assessments and Appraisals
|
45
|
SECTION 5.12.
Depository Banks
|
45
|
SECTION 5.13.
Additional Collateral; Further Assurances
|
45
|
SECTION 5.14.
Dissolution of Koss Classics Ltd.
|
46
|
|
|
ARTICLE VI
|
|
|
|
Negative Covenants
|
|
|
|
SECTION 6.01.
Indebtedness
|
46
|
SECTION 6.02.
Liens
|
47
|
SECTION 6.03.
Fundamental Changes
|
48
|
SECTION 6.04.
Investments, Loans, Advances, Guarantees and Acquisitions
|
48
|
SECTION 6.05.
Asset Sales
|
49
|
SECTION 6.06.
Sale and Leaseback Transactions
|
50
|
SECTION 6.07.
Swap Agreements
|
50
|
SECTION 6.08.
Restricted Payments; Certain Payments of Indebtedness
|
51
|
ii
SECTION 6.09.
Transactions with Affiliates
|
51
|
SECTION 6.10.
Restrictive Agreements
|
51
|
SECTION 6.11.
Amendment of Material Documents
|
52
|
SECTION 6.12.
Financial Covenants
|
52
|
SECTION 6.13.
ERISA Plans
|
52
|
|
|
ARTICLE VII
|
|
Events of Default
|
|
|
|
ARTICLE VIII
|
|
|
|
Miscellaneous
|
|
|
|
SECTION 8.01.
Notices
|
55
|
SECTION 8.02.
Waivers; Amendments
|
56
|
SECTION 8.03.
Expenses; Indemnity; Damage Waiver
|
57
|
SECTION 8.04.
Successors and Assigns
|
58
|
SECTION 8.05.
Survival
|
59
|
SECTION 8.06.
Counterparts; Integration; Effectiveness
|
60
|
SECTION 8.07.
Severability
|
60
|
SECTION 8.08.
Right of Setoff
|
60
|
SECTION 8.09.
Governing Law; Jurisdiction; Consent to Service of Process
|
60
|
SECTION 8.10.
WAIVER OF JURY TRIAL
|
61
|
SECTION 8.11.
Headings
|
61
|
SECTION 8.12.
Confidentiality
|
61
|
SECTION 8.13.
Nonreliance; Violation of Law
|
62
|
SECTION 8.14.
USA PATRIOT Act
|
62
|
SECTION 8.15.
Disclosure
|
62
|
SECTION 8.16.
Interest Rate Limitation
|
62
|
iii
This CREDIT AGREEMENT dated
as of May 12, 2010 (as it may be amended or modified from time to time,
this Agreement), is entered into by and between KOSS CORPORATION, a Delaware
corporation (Borrower), and JPMORGAN CHASE BANK, N.A (Lender).
The parties hereto agree as
follows:
ARTICLE I
Definitions
SECTION 1.01. Defined Terms. As used in this Agreement, the following
terms have the meanings specified below:
Account has the
meaning assigned to such term in the Security Agreement.
Account Debtor
means any Person obligated on an Account.
Adjusted LIBO Rate
means, with respect to any Eurodollar Borrowing for any Interest Period, an
interest rate per annum (rounded upwards, if necessary, to the next 1/16 of 1%)
equal to (a) the LIBO Rate for such Interest Period multiplied by (b) the
Statutory Reserve Rate.
Adjusted One Month LIBO
Rate means, with respect to a CB Floating Rate Loan for any date, an
interest rate equal to the sum of (a) 2.50% per annum plus (b) the
rate equal to (i) the interest rate determined by Lender by reference to
the Page to be the rate at approximately 11:00 am London time, on such
date or, if such date is not a Business Day, on the immediately preceding
Business Day for dollar deposits with a maturity equal to one month, multiplied
by (ii) the Statutory Reserve Rate applicable to dollar deposits in the
London interbank market with a maturity equal to one month.
Affiliate means,
with respect to a specified Person, another Person that directly, or indirectly
through one or more intermediaries, Controls or is Controlled by or is under
common Control with the Person specified.
Applicable Rate
means, for any day, with respect to any CB Floating Rate Loan or Eurodollar
Revolving Loan, or with respect to the commitment fees payable hereunder, as
the case may be, the applicable rate per annum set forth below under the
caption CB Floating Rate Spread, Eurodollar Spread or Commitment Fee Rate,
as the case may be, based upon Borrowers Leverage Ratio as of the most recent
determination date, provided that until the delivery to Lender, pursuant
to Section 5.01, of Borrowers consolidated financial information for
Borrowers fiscal quarter ending September 30, 2010, the Applicable Rate
shall be the applicable rate per annum set forth below in Category 3:
Leverage
Ratio
|
|
Revolver
CB Floating Rate
Spread
|
|
Revolver
Eurodollar Spread
|
|
Commitment Fee
Rate
|
|
Category 1
Less than or equal to 1.00 to 1.00
|
|
0.00
|
%
|
2.00
|
%
|
0.30
|
%
|
Category 2
Greater than 1.00 to 1.00 and less then or equal
to 1.50 to 1.00
|
|
0.25
|
%
|
2.25
|
%
|
0.35
|
%
|
Category 3
Greater than 1.50 to 1.00 but less than or equal
to 2.00 to 1.00
|
|
0.50
|
%
|
2.50
|
%
|
0.40
|
%
|
Category 4
Greater than 2.00 to 1.00
|
|
0.75
|
%
|
3.00
|
%
|
0.45
|
%
|
For purposes of the foregoing,
(a) the Applicable Rate shall be determined as of the end of each fiscal
quarter of Borrower based upon Borrowers annual or quarterly consolidated
financial statements delivered pursuant to Section 5.01 and (b) each
change in the Applicable Rate resulting from a change in the Leverage Ratio
shall be effective during the period commencing on and including the date of
delivery to Lender of such consolidated financial statements indicating such
change and ending on the date immediately preceding the effective date of the
next such change, provided that the Leverage Ratio shall be deemed to be
in Category 4 at the option of Lender if Borrower fails to deliver the annual
or quarterly consolidated financial statements required to be delivered by it
pursuant to Section 5.01, during the period from the expiration of the
time for delivery thereof until such consolidated financial statements are
delivered.
Approved Fund has
the meaning assigned to such term in Section 8.04(b).
Availability means,
at any time, an amount equal to (a) the lesser of the Revolving Commitment
and the Borrowing Base minus (b) the
Revolving Exposure.
Available Revolving
Commitment means, at any time, the Revolving Commitment then in effect minus the Revolving Exposure at such
time.
Availability Period
means the period from and including the Effective Date to but excluding the
earlier of the Maturity Date and the date of termination of the Revolving
Commitment.
Banking Services
means each and any of the following bank services provided to Borrower by
Lender or any of its Affiliates: (a) commercial credit cards, (b) stored
value cards and (c) treasury management services (including, without
limitation, controlled disbursement,
2
automated clearinghouse transactions, return
items, overdrafts and interstate depository network services).
Banking Services
Obligations means any and all obligations of Borrower or any Subsidiary,
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
Reserves means all Reserves which Lender from time to time establishes in
its Permitted Discretion for Banking Services then provided or outstanding.
Board means the
Board of Governors of the Federal Reserve System of the United States of
America.
Borrower means Koss
Corporation, a Delaware corporation.
Borrowing means (a) Revolving
Loans bearing interest by reference to the same rate, made, converted or
continued on the same date and, in the case of Eurodollar Loans, as to which a
single Interest Period is in effect and (b) a Protective Advance.
Borrowing Base
means, at any time, the sum of (a) 80% of Borrowers Eligible Receivables
at such time, plus (b) 60% of
Borrowers Eligible Finished Goods, valued at the lower of cost or market
value, determined on a first-in-first-out basis which represent 12 months of
supply based on sales from the last 12 months, at such time, plus (c) 80% of the CSV of
Eligible Life Insurance Policies, minus (d) Reserves.
Borrowing Base
Certificate means a certificate, signed and certified as accurate and
complete by a Financial Officer of Borrower, in substantially the form of Exhibit A
or another form which is acceptable to Lender in its sole discretion.
Borrowing Request
means a request by Borrower for a Revolving Borrowing in accordance with Section 2.03.
Business Day means
any day that is not a Saturday, Sunday or other day on which commercial banks
in New York City are authorized or required by law to remain closed; provided
that, when used in connection with a Eurodollar Loan, the term Business Day
shall also exclude any day on which banks are not open for dealings in dollar
deposits in the London interbank market.
Capital Lease
Obligations of any Person means the obligations of such Person to pay rent
or other amounts under any lease of (or other arrangement conveying the right
to use) real or personal property, or a combination thereof, which obligations
are required to be classified and accounted for as capital leases on a balance
sheet of such Person under GAAP, and the amount of such obligations shall be the
capitalized amount thereof determined in accordance with GAAP.
CB Floating Rate
means the Prime Rate; provided that the CB Floating Rate shall, on any
day, not be less than the Adjusted One Month LIBO Rate. The CB Floating Rate is
3
a variable rate and any change in the CB
Floating Rate due to any change in the Prime Rate or the Adjusted One Month
LIBO Rate is effective from and including the effective date of such change in
the Prime Rate or the Adjusted One Month LIBO Rate, respectively.
Change in Control
means (a) the acquisition of ownership, directly or indirectly,
beneficially or of record, by any Person or group (within the meaning of the
Securities Exchange Act of 1934 and the rules of the Securities and
Exchange Commission thereunder as in effect on the date hereof) other than the
Koss Family, of Equity Interests representing more than 25% of the aggregate
ordinary voting power represented by the issued and outstanding Equity
Interests of Borrower; (b) occupation of a majority of the seats (other
than vacant seats) on the board of directors of Borrower by Persons who were
neither (i) nominated by the board of directors of Borrower nor (ii) appointed
by directors so nominated; or (c) the acquisition of direct or indirect
Control of Borrower by any Person or group other than the Koss Family.
Change in Law means
(a) the adoption of any law, rule or regulation after the date of
this Agreement, (b) any change in any law, rule or regulation or in
the interpretation or application thereof by any Governmental Authority after
the date of this Agreement or (c) compliance by Lender (or, for purposes
of Section 2.14(b), by any lending office of Lender or by Lenders holding
company, if any) with any request, guideline or directive (whether or not
having the force of law) of any Governmental Authority made or issued after the
date of this Agreement.
Code means the
Internal Revenue Code of 1986, as amended from time to time.
Collateral has the
meaning set forth in the Security Agreement.
Collateral Access
Agreement has the meaning assigned to such term in the Security Agreement.
Collateral Documents
means, collectively, the Security Agreement and any other documents granting a
Lien upon the Collateral as security for payment of the Secured Obligations.
Control means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of a Person, whether through the
ability to exercise voting power, by contract or otherwise. Controlling and Controlled have meanings
correlative thereto.
CSV means, on each
date of determination, the sum of the amounts, as determined for each Eligible
Life Insurance Policy, equal to (a) the lesser of (i) the cash
surrender value of such Eligible Life Insurance Policy or (ii) the maximum
principal amount of policy loans which could be obtained with respect to such
policy minus (b) in either case, the
outstanding principal balance of, and all accrued interest on, all Indebtedness
incurred by the Borrower with respect to such Eligible Life Insurance Policy.
Current Ratio means
the relationship, expressed as a numerical ratio, between:
4
(a) the amount of all assets
which under GAAP would appear as current assets on the consolidated balance
sheet of the Borrower and its Subsidiaries, excluding prepaid expenses which
are not refundable on the date the determination is made; and
(b) the amount of all
liabilities which under GAAP would appear as current liabilities on such
balance sheet, including all indebtedness payable on demand or maturing (by
reason of specified maturity, fixed prepayments, sinking funds or accruals of
any kind, or otherwise) within 12 months of the relevant statement, including
all lease and rental obligations due in 12 months or less under leases, whether
or not Capital Lease Obligations, including customers advances and progress
billings on contracts, and including the Revolving Exposure.
Default means any
event or condition which constitutes an Event of Default or which upon notice,
lapse of time or both would, unless cured or waived, become an Event of
Default.
Disclosed Matters
means the actions, suits and proceedings and the environmental matters
disclosed in Schedule 3.06.
Document has the
meaning assigned to such term in the Security Agreement.
dollars or $
refers to lawful money of the United States of America.
EBITDA means, for
any period, Net Income for such period plus (a) without
duplication and to the extent deducted in determining Net Income for such
period, the sum of (i) Interest Expense for such period, (ii) income
tax expense for such period net of tax refunds, (iii) all amounts
attributable to depreciation and amortization expense for such period, (iv) any
extraordinary non-cash charges for such period, (v) any other non-cash
charges for such period (but excluding any non-cash charge in respect of an
item that was included in Net Income in a prior period), and (vi) any
losses, costs and expenses, including without limitation attorneys fees,
incurred by the Borrower in connection with the Fraud (provided, however, that
for all fiscal years commencing on or after July 1, 2011, the amount of
such costs and expenses incurred by the Borrower in connection with the Fraud
included in the calculation of EBITDA shall not exceed $250,000) minus (b) without duplication
and to the extent included in Net Income, (i) any cash payments made
during such period in respect of non-cash charges described in clause (a)(v) taken
in a prior period, (ii) any extraordinary gains and any non-cash items of
income for such period, all calculated for Borrower and its Subsidiaries on a
consolidated basis in accordance with GAAP, and (iii) any amounts
recovered by the Borrower in connection with the Fraud.
Effective Date
means the date on which the conditions specified in Section 4.01 are
satisfied (or waived in accordance with Section 8.02).
Eligible Accounts
means, at any time, the Accounts of Borrower which Lender determines in its
Permitted Discretion are eligible as the basis for the extension of Revolving
Loans and the issuance of Letters of Credit hereunder. Without limiting Lenders discretion provided
herein, Eligible Accounts shall not include any Account:
5
(a) which is not
subject to a first priority perfected security interest in favor of Lender;
(b) which is
subject to any Lien other than (i) a Lien in favor of Lender and (ii) a
Permitted Encumbrance which does not have priority over the Lien in favor of
Lender (except with respect to inchoate tax liens for taxes which are not yet
due);
(c) with is unpaid
more than 120 days after the date of the original invoice therefor or more than
60 days after the original due date, or which has been written off the books of
Borrower or otherwise designated as uncollectible;
(d) which is owing
by an Account Debtor for which more than 25% of the Accounts owing from such
Account Debtor and its Affiliates are ineligible, unless such Accounts are
backed by a letter of credit or other credit support acceptable to the Lender
in its sole discretion;
(e) [intentionally
deleted]
(f) which (i) does
not arise from the sale of goods or performance of services in the ordinary
course of business, (ii) is not evidenced by an invoice or other
documentation satisfactory to Lender which has been sent to the Account Debtor,
(iii) represents a progress billing, (iv) is contingent upon Borrowers
completion of any further performance, (v) represents a sale on a
bill-and-hold, guaranteed sale, sale-and-return, sale on approval, consignment,
cash-on-delivery or any other repurchase or return basis, or (vi) relates
to payments of interest;
(g) for which the
goods giving rise to such Account have not been shipped to the Account Debtor
or for which the services giving rise to such Account have not been performed
by Borrower or, if such Account was invoiced more than once, any duplicative
amount;
(h) with respect to
which any check or other instrument of payment has been returned uncollected
for any reason;
(i) which is 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 or federal bankruptcy laws, (iv) has
admitted in writing its inability, or is generally unable to, pay its debts as
they become due, (v) become insolvent, or (vi) ceased operation of
its business;
(j) which is owed
by any Account Debtor which has sold all or a substantially all of its assets;
6
(k) which is owed
by an Account Debtor which (i) does not maintain its chief executive
office in the U.S. or Canada or (ii) is not organized under applicable law
of the U.S., any state of the U.S., Canada, or any province of Canada unless,
in either case, such Account is backed by a Letter of Credit acceptable to
Lender which is in the possession of, and has been assigned to, Lender;
(l) which is owed
in any currency other than U.S. dollars;
(m) which is owed
by (i) the government (or any department, agency, public corporation, or
instrumentality thereof) of any country other than the U.S. unless such Account
is backed by a Letter of Credit acceptable to Lender which is in the possession
of Lender, or (ii) the government of the U.S., or any department, agency,
public corporation, or instrumentality thereof, in excess of $100,000 in the
aggregate, 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 Lender in such Account have been complied with
to Lenders satisfaction;
(n) which is owed
by any Affiliate, employee, officer, director, agent or stockholder of
Borrower;
(o) which is owed
by an Account Debtor or any Affiliate of such Account Debtor to which Borrower
is indebted, but only to the extent of such indebtedness or is subject to any
security, deposit, progress payment, retainage or other similar advance made by
or for the benefit of an Account Debtor, in each case to the extent thereof;
(p) which is
subject to any counterclaim, deduction, defense, setoff or dispute;
(q) which is
evidenced by any promissory note, chattel paper, or instrument;
(r) which is owed
by an Account Debtor located in any jurisdiction which requires filing of a Notice
of Business Activities Report or other similar report in order to permit
Borrower to seek judicial enforcement in such jurisdiction of payment of such
Account, unless Borrower has filed such report or qualified to do business in
such jurisdiction;
(s) with respect to
which Borrower has made any agreement with the Account Debtor for any reduction
thereof, other than discounts and adjustments given in the ordinary course of
business, or any Account which was partially paid and Borrower created a new
receivable for the unpaid portion of such Account;
(t) which does not
comply in all material respects with the requirements of all applicable laws
and regulations, whether Federal, state or local, including without limitation
the Federal Consumer Credit Protection Act, the Federal Truth in Lending Act
and Regulation Z of the Board;
7
(u) which is for
goods that have been sold under a purchase order or pursuant to the terms of a
contract or other agreement or understanding (written or oral) that indicates
or purports that any Person other than Borrower has or has had an ownership
interest in such goods, or which indicates any party other than Borrower as
payee or remittance party;
(v) which was
created on cash on delivery terms; or
(w) which Lender
determines may not be paid by reason of the Account Debtors inability to pay.
In the event that an Account
which was previously an Eligible Account ceases to be an Eligible Account
hereunder, Borrower shall notify Lender thereof on and at the time of
submission to Lender of the next Borrowing Base Certificate. In determining the amount of an Eligible
Account, the face amount of an Account may, in Lenders Permitted Discretion,
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 (including any amount that Borrower may be
obligated to rebate to an Account Debtor pursuant to the terms of any agreement
or understanding (written or oral)) and (ii) the aggregate amount of all
cash received in respect of such Account but not yet applied by Borrower to
reduce the amount of such Account.
Lender, in its Permitted Discretion, may from time to time adjust
advance rates or categories of ineligible Accounts, or impose additional
reserves, to reflect the results of field audits or other changes in Borrowers
business.
Eligible Finished Goods
means, Eligible Inventory constituting finished goods to be sold by Borrower in
the ordinary course of business of Borrower.
Eligible Inventory
means, at any time, the Inventory of Borrower which Lender determines in its
Permitted Discretion is eligible as the basis for the extension of Revolving
Loans, and the issuance of Letters of Credit hereunder. Without limiting Lenders discretion provided
herein, Eligible Inventory shall not include any Inventory:
(a) which is not
subject to a first priority perfected Lien in favor of Lender;
(b) which is
subject to any Lien other than (i) a Lien in favor of Lender and (ii) a
Permitted Encumbrance which does not have priority over the Lien in favor of
Lender;
(c) which is, in
Lenders opinion, slow moving (including inventory in excess of the last 12 months
of sales), obsolete, unmerchantable, defective, unfit for sale, not salable at
prices approximating at least the cost of such Inventory in the ordinary course
of business or unacceptable due to age, type, category and/or quantity;
(d) with respect to
which any covenant, representation, or warranty contained in this Agreement or
the Security Agreement has been breached or is not true and which does not
conform to all standards imposed by any Governmental Authority;
8
(e) in which any
Person other than Borrower shall (i) have any direct or indirect
ownership, interest or title to such Inventory or (ii) be indicated on any
purchase order or invoice with respect to such Inventory as having or
purporting to have an interest therein;
(f) which is not
finished goods or which constitutes work-in-process, raw materials, spare or
replacement parts, subassemblies, packaging and shipping material,
manufacturing supplies, samples, prototypes, displays or display items,
bill-and-hold goods, goods that are returned or marked for return, repossessed
goods, defective or damaged goods, goods held on consignment, or goods which
are not of a type held for sale in the ordinary course of business;
(g) which is not
located in the U.S. or is in transit with a common carrier from vendors and
suppliers;
(h) which is
located in any location leased by Borrower unless the lessor has delivered to
Lender a Collateral Access Agreement (provided that Borrower shall have a
period of 30 days after the date of this Agreement to provide a Collateral
Access Agreement for its leased facility located at 4129 North Port Washington
Road, Milwaukee, Wisconsin, and this clause (h) shall not cause inventory
located at such location to be ineligible unless Borrower fails to provide a
Collateral Access Agreement for such facility during such 30-day period);
(i) which is
located in any third party warehouse or is in the possession of a bailee (other
than a third party processor) and is not evidenced by a Document;
(j) which is being
processed offsite at a third party location or outside processor, or is in
transit to or from said third party location or outside processor;
(k) which is a
discontinued product or component thereof which is the subject of a consignment
by Borrower as consignor;
(l) which is
perishable;
(m) which contains
or bears any intellectual property rights licensed to Borrower unless Lender is
satisfied that it may sell or otherwise dispose of such Inventory without (i) infringing
the rights of such licensor, (ii) violating any contract with such
licensor, or (iii) incurring any liability with respect to payment of
royalties other than royalties incurred pursuant to sale of such Inventory
under the current licensing agreement;
(n) which is not
reflected in a current perpetual inventory report of Borrower; or
(o) for which
reclamation rights have been asserted by the seller.
9
In the event that Inventory
which was previously Eligible Inventory ceases to be Eligible Inventory
hereunder, Borrower shall notify Lender thereof on and at the time of
submission to Lender of the next Borrowing Base Certificate. Lender, in its Permitted Discretion, may from
time to time adjust advance rates or categories of ineligible Inventory, or
impose additional reserves, to reflect the results of field audits or other
changes in Borrowers business.
Eligible Life Insurance
Policy means any life insurance policy (excluding term life insurance or split-dollar
life insurance policies) owned by the Borrower (a) which is subject to a
first priority perfected Lien in favor of the Lender, (b) which is not
subject to a Lien in favor of any other person, (c) with respect to which
all premiums due have been paid in full, (d) the existence, cash surrender
value and current premium payment status of which have been certified in the
most recent Borrowing Base Certificate and (e) which is otherwise
acceptable to the Lender in its sole discretion. Any life insurance policy which ceases to
meet any of the foregoing qualifications shall cease to be an Eligible Life
Insurance Policy at such time and the Borrower shall notify the Lender thereof
on and at the time of submission to the Lender of the next Borrowing Base Certificate.
Environmental Laws
means all laws, rules, regulations, codes, ordinances, orders, decrees,
judgments, injunctions, notices or binding agreements issued, promulgated or
entered into by any Governmental Authority, relating in any way to the environment,
preservation or reclamation of natural resources, the management, release or
threatened release of any Hazardous Material or to health and safety matters.
Environmental Liability
means any liability, contingent or otherwise (including any liability for
damages, costs of environmental remediation, fines, penalties or indemnities),
of Borrower or any Subsidiary directly or indirectly resulting from or based
upon (a) violation of any Environmental Law, (b) the generation, use,
handling, transportation, storage, treatment or disposal of any Hazardous
Materials, (c) exposure to any Hazardous Materials, (d) the release
or threatened release of any Hazardous Materials into the environment or (e) any
contract, agreement or other consensual arrangement pursuant to which liability
is assumed or imposed with respect to any of the foregoing.
Equity Interests
means shares of capital stock, partnership interests, membership interests in a
limited liability company, beneficial interests in a trust or other equity
ownership interests in a Person, and any warrants, options or other rights
entitling the holder thereof to purchase or acquire any such equity interest.
ERISA means the
Employee Retirement Income Security Act of 1974, as amended from time to time.
ERISA Affiliate
means any trade or business (whether or not incorporated) that, together with
Borrower, is treated as a single employer under Section 414(b) or (c) of
the Code or, solely for purposes of Section 302 of ERISA and Section 412
of the Code, is treated as a single employer under Section 414 of the
Code.
10
ERISA Event means (a) any
reportable event, as defined in Section 4043 of ERISA or the regulations
issued thereunder with respect to a Plan (other than an event for which the
30-day notice period is waived); (b) the existence with respect to any
Plan of an accumulated funding deficiency (as defined in Section 412 of
the Code or Section 302 of ERISA), whether or not waived; (c) the
filing pursuant to Section 412(d) of the Code or Section 303(d) of
ERISA of an application for a waiver of the minimum funding standard with
respect to any Plan; (d) the incurrence by Borrower or any of its ERISA
Affiliates of any liability under Title IV of ERISA with respect to the
termination of any Plan; (e) the receipt by Borrower or any ERISA
Affiliate from the PBGC or a plan administrator of any notice relating to an
intention to terminate any Plan or Plans or to appoint a trustee to administer
any Plan; (f) the incurrence by Borrower or any of its ERISA Affiliates of
any liability with respect to the withdrawal or partial withdrawal from any
Plan or Multiemployer Plan; or (g) the receipt by Borrower or any ERISA
Affiliate of any notice, or the receipt by any Multiemployer Plan from Borrower
or any ERISA Affiliate of any notice, concerning the imposition of Withdrawal Liability
or a determination that a Multiemployer Plan is, or is expected to be,
insolvent or in reorganization, within the meaning of Title IV of ERISA.
Eurodollar, when
used in reference to any Loan or Borrowing, refers to whether such Loan, or the
Loans comprising such Borrowing, are bearing interest at a rate determined by
reference to the Adjusted LIBO Rate.
Event of Default
has the meaning assigned to such term in Article VII.
Excluded Taxes
means, with respect to Lender, or any other recipient of any payment to be made
by or on account of any obligation of Borrower hereunder, (a) income or
franchise taxes imposed on (or measured by) its net income by the United States
of America, or by the jurisdiction under the laws of which such recipient is
organized or in which its principal office is located or, in the case of
Lender, in which its applicable lending office is located, (b) any branch
profits taxes imposed by the United States of America or any similar tax
imposed by any other jurisdiction in which Borrower is located.
Federal Funds Effective
Rate means, for any day, the weighted average (rounded upwards, if
necessary, to the next 1/100 of 1%) of the rates on overnight Federal funds
transactions with members of the Federal Reserve System arranged by Federal
funds brokers, as published on the next succeeding Business Day by the Federal
Reserve Bank of New York, or, if such rate is not so published for any day that
is a Business Day, the average (rounded upwards, if necessary, to the next 1/100
of 1%) of the quotations for such day for such transactions received by Lender
from three Federal funds brokers of recognized standing selected by it.
Financial Officer
means the chief financial officer or principal accounting officer of Borrower.
Fraud means the
unauthorized transactions by Sujata Sachdeva, the Borrowers former Vice
President of Finance, as previously disclosed in Form 8-K Current Reports
filed with the U.S. Securities and Exchange Commission on December 21 and
24, 2009, and January 4, 7, 11, and 20, 2010, and any actions,
proceedings, or investigations, whether criminal, civil, or administrative,
arising out of or in connection therewith.
11
Funding Account
shall mean account number 885127381, maintained by Borrower with Lender.
GAAP means
generally accepted accounting principles in the United States of America.
Governmental Authority
means the government of the United States of America, any other nation or 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.
Guarantee of or by
any Person (the guarantor) means any obligation, contingent or
otherwise, of the guarantor guaranteeing or having the economic effect of
guaranteeing any Indebtedness or other obligation of any other Person (the primary
obligor) in any manner, whether directly or indirectly, and including any
obligation of the guarantor, direct or indirect, (a) to purchase or pay
(or advance or supply funds for the purchase or payment of) such Indebtedness
or other obligation or to purchase (or to advance or supply funds for the
purchase of) any security for the payment thereof, (b) to purchase or
lease property, securities or services for the purpose of assuring the owner of
such Indebtedness or other obligation of the payment thereof, (c) to
maintain working capital, equity capital or any other financial statement
condition or liquidity of the primary obligor so as to enable the primary
obligor to pay such Indebtedness or other obligation or (d) as an account
party in respect of any letter of credit or letter of guaranty issued to
support such Indebtedness or obligation; provided, that the term
Guarantee shall not include endorsements for collection or deposit in the
ordinary course of business.
Hazardous Materials
means all explosive or radioactive substances or wastes and all hazardous or
toxic substances, wastes or other pollutants, including petroleum or petroleum
distillates, asbestos or asbestos containing materials, polychlorinated
biphenyls, radon gas, infectious or medical wastes and all other substances or
wastes of any nature regulated pursuant to any Environmental Law.
Indebtedness of any
Person means, without duplication, (a) all obligations of such Person for
borrowed money or with respect to deposits or advances of any kind, (b) all
obligations of such Person evidenced by bonds, debentures, notes or similar
instruments, (c) all obligations of such Person upon which interest
charges are customarily paid, (d) all obligations of such Person under
conditional sale or other title retention agreements relating to property
acquired by such Person, (e) all obligations of such Person in respect of
the deferred purchase price of property or services (excluding current accounts
payable incurred in the ordinary course of business), (f) all Indebtedness
of others secured by (or for which the holder of such Indebtedness has an
existing right, contingent or otherwise, to be secured by) any Lien on property
owned or acquired by such Person, whether or not the Indebtedness secured
thereby has been assumed, (g) all Guarantees by such Person of
Indebtedness of others, (h) all Capital Lease Obligations of such Person, (i) all
obligations, contingent or otherwise, of such Person as an account party in
respect of letters of credit and letters of guaranty, (j) all obligations,
contingent or otherwise, of such Person in respect of bankers acceptances, (k) obligations
under any
12
liquidated earn-out and (l) obligations
of such Person to purchase securities or other property arising out of or in
connection with the sale of the same or substantially similar securities or
property or any other Off-Balance Sheet Liability. The Indebtedness of any Person shall include
the Indebtedness of any other entity (including any partnership in which such
Person is a general partner) to the extent such Person is liable therefor as a
result of such Persons ownership interest in or other relationship with such
entity, except to the extent the terms of such Indebtedness provide that such
Person is not liable therefor.
Indemnified Taxes
means Taxes other than Excluded Taxes.
Interest Election
Request means a request by Borrower to convert or continue a Revolving
Borrowing in accordance with Section 2.07.
Interest Expense
means, with reference to any period, the interest expense (including that
attributable to Capital Lease Obligations) of Borrower and its Subsidiaries for
such period with respect to all outstanding Indebtedness of Borrower and its Subsidiaries
(including all commissions, discounts and other fees and charges owed with
respect to letters of credit and bankers acceptance financing and net costs
under Swap Agreements in respect of interest rates to the extent such net costs
are allocable to such period in accordance with GAAP), calculated on a
consolidated basis for Borrower and its Subsidiaries for such period in
accordance with GAAP.
Interest Payment Date
means (a) with respect to any CB Floating Rate Loan, the first Business
Day of each calendar month and the Maturity Date, (b) with respect to any
Eurodollar Loan, the last day of the Interest Period applicable to the
Borrowing of which such Loan is a part and, in the case of a Eurodollar
Borrowing with an Interest Period of more than three months duration, each day
prior to the last day of such Interest Period that occurs at intervals of three
months duration after the first day of such Interest Period, and (c) the
Maturity Date.
Interest Period
means (a) with respect to any Eurodollar Borrowing, the period commencing
on the date of such Borrowing and ending on the numerically corresponding day
in the calendar month that is one, two or three months thereafter, as Borrower
may elect; provided, that (i) if any Interest Period would end on a
day other than a Business Day, such Interest Period shall be extended to the
next succeeding Business Day unless, in the case of a Eurodollar Borrowing
only, such next succeeding Business Day would fall in the next calendar month,
in which case such Interest Period shall end on the next preceding Business Day
and (ii) any Interest Period pertaining to a Eurodollar Borrowing that
commences on the last Business Day of a calendar month (or on a day for which
there is no numerically corresponding day in the last calendar month of such
Interest Period) shall end on the last Business Day of the last calendar month
of such Interest Period. For purposes
hereof, the date of a Borrowing initially shall be the date on which such
Borrowing is made and, in the case of a Revolving Borrowing, thereafter shall
be the effective date of the most recent conversion or continuation of such
Borrowing.
Inventory has the
meaning assigned to such term in the Security Agreement.
13
Koss Family means
John Koss, Sr., together with his lineal descendants and any trusts for
the benefit of, and estates of, any of the foregoing individuals.
LC Collateral Account
has the meaning assigned to such term in Section 2.05(h).
LC Disbursement
means a payment made by Lender pursuant to a Letter of Credit.
LC Exposure means,
at any time, the sum of (a) the aggregate undrawn amount of all
outstanding Letters of Credit at such time plus (b) the aggregate amount
of all LC Disbursements that have not yet been reimbursed by or on behalf of
Borrower at such time.
Lender means
JPMorgan Chase Bank, N.A.
Letter of Credit
means any letter of credit issued pursuant to this Agreement.
Letter of Credit
Sublimit means $2,000,000.
Leverage Ratio
means, on any date, the ratio of (a) Total Indebtedness on such date to (b) EBITDA
for the period of four consecutive fiscal quarters ended on such date (or, if
such date is not the last day of a fiscal quarter, ended on the last day of the
fiscal quarter most recently ended prior to such date).
LIBO Rate means,
with respect to any Eurodollar Borrowing for any Interest Period, the rate
appearing on Page 3750 of the Dow Jones Market Service (the Service)
(or on any successor or substitute page of such Service, or any successor
to or substitute for such Service, providing rate quotations comparable to
those currently provided on such page of such Service, as determined by
Lender from time to time for purposes of providing quotations of interest rates
applicable to dollar deposits in the London interbank market) (the Page)
at approximately 11:00 a.m., London time, two Business Days prior to the
commencement of such Interest Period, as the rate for dollar deposits with a
maturity comparable to such Interest Period.
In the event that such rate is not available at such time for any
reason, then the LIBO Rate with respect to such Eurodollar Borrowing
for such Interest Period shall be the rate at which dollar deposits of
$5,000,000 and for a maturity comparable to such Interest Period are offered by
the principal London office of Lender in immediately available funds in the
London interbank market at approximately 11:00 a.m., London time, two
Business Days prior to the commencement of such Interest Period.
Lien means, with
respect to any asset, (a) any mortgage, deed of trust, lien, pledge,
hypothecation, encumbrance, charge or security interest in, on or of such
asset, (b) the interest of a vendor or a lessor under any conditional sale
agreement, capital lease or title retention agreement (or any financing lease
having substantially the same economic effect as any of the foregoing) relating
to such asset and (c) in the case of securities, any purchase option, call
or similar right of a third party with respect to such securities.
Loan Documents
means this Agreement, any promissory notes issued pursuant to the Agreement,
any Letter of Credit applications, the Collateral Documents, and all other
14
agreements, instruments, documents and
certificates identified in Section 4.01 executed and delivered to, or in
favor of, Lender and including all other pledges, powers of attorney, consents,
assignments, contracts, notices, letter of credit agreements and all other
written matter whether heretofore, now or hereafter executed by or on behalf of
Borrower, and delivered to Lender in connection with the Agreement or the
transactions contemplated thereby. Any
reference in the Agreement or any other Loan Document to a Loan Document shall
include all appendices, exhibits or schedules thereto, and all amendments,
restatements, supplements or other modifications thereto, and shall refer to
the Agreement or such Loan Document as the same may be in effect at any and all
times such reference becomes operative.
Loans means the
loans and advances made by Lender pursuant to this Agreement, including
Protective Advances.
Material Adverse Effect
means a material adverse effect on (a) the business, assets, operations,
prospects or condition, financial or otherwise, of Borrower and the
Subsidiaries taken as a whole, (b) the ability of Borrower to perform any
of its obligations under the Loan Documents, (c) the Collateral, or Lenders
Liens on the Collateral or the priority of such Liens, or (d) the rights
of or benefits available to Lender thereunder.
Material Indebtedness
means Indebtedness (other than the Loans and Letters of Credit), or obligations
in respect of one or more Swap Agreements, of any one or more of Borrower and
its Subsidiaries in an aggregate principal amount exceeding $250,000. For purposes of determining Material
Indebtedness, the obligations of Borrower or any Subsidiary in respect of any
Swap Agreement at any time shall be the maximum aggregate amount (giving effect
to any netting agreements) that Borrower or such Subsidiary would be required
to pay if such Swap Agreement were terminated at such time.
Maturity Date means
July 31, 2013 or any earlier date on which the Revolving Commitment is
reduced to zero or otherwise terminated pursuant to the terms hereof.
Moodys means Moodys
Investors Service, Inc.
Multiemployer Plan
means a multiemployer plan as defined in Section 4001(a)(3) of ERISA.
Net Income means,
for any period, the consolidated net income (or loss) of Borrower and its
Subsidiaries, determined on a consolidated basis in accordance with GAAP; provided
that there shall be excluded (a) the income (or deficit) of any Person
accrued prior to the date it becomes a Subsidiary or is merged into or
consolidated with Borrower or any of its Subsidiaries, (b) the income (or
deficit) of any Person (other than a Subsidiary) in which Borrower or any of
its Subsidiaries has an ownership interest, except to the extent that any such
income is actually received by Borrower or such Subsidiary in the form of
dividends or similar distributions and (c) the undistributed earnings of
any Subsidiary to the extent that the declaration or payment of dividends or
similar distributions by such Subsidiary is not at the time permitted by the
terms of any contractual obligation (other than under any Loan Document) or
Requirement of Law applicable to such Subsidiary.
15
Net Proceeds means,
with respect to any event, (a) the cash proceeds received in respect of
such event including (i) any cash received in respect of any non-cash
proceeds (including any cash payments received by way of deferred payment of
principal pursuant to a note or installment receivable or purchase price
adjustment receivable or otherwise, but excluding any interest payments), but
only as and when received, (ii) in the case of a casualty, insurance
proceeds payable to the Company or to the Lender for the benefit of the Company
and (iii) in the case of a condemnation or similar event, condemnation
awards and similar payments payable to the Company or to the Lender for the
benefit of the Company, net of (b) the sum of (i) all reasonable fees
and out-of-pocket expenses paid to third parties (other than Affiliates) in
connection with such event, (ii) in the case of a sale, transfer or other
disposition of an asset (including pursuant to a sale and leaseback transaction
or a casualty or a condemnation or similar proceeding), the amount of all
payments required to be made as a result of such event to repay Indebtedness
(other than Loans) secured by such asset or otherwise subject to mandatory
prepayment as a result of such event and (iii) the amount of all taxes
paid (or reasonably estimated to be payable) and the amount of any reserves
established to fund contingent liabilities reasonably estimated to be payable,
in each case during the year that such event occurred or the next succeeding
year and that are directly attributable to such event (as determined reasonably
and in good faith by a Financial Officer).
Obligations means
all unpaid principal of and accrued and unpaid interest on the Loans, all LC
Exposure, all accrued and unpaid fees and all expenses, reimbursements,
indemnities and other obligations of Borrower or any Subsidiary to Lender or
any indemnified party arising under the Loan Documents. Obligations shall also include (i) all
Banking Services Obligations; and (ii) all Swap Obligations owing to
Lender or its Affiliates.
Off-Balance Sheet
Liability of a Person means (a) any repurchase obligation or
liability of such Person with respect to accounts or notes receivable sold by
such Person, (b) any indebtedness, liability or obligation under any sale
and leaseback transaction which is not a Capital Lease Obligation, or (c) any
indebtedness, liability or obligation under any so-called synthetic lease
transaction entered into by such Person, or (d) any indebtedness,
liability or obligation arising with respect to any other transaction which is
the functional equivalent of or takes the place of borrowing but which does not
constitute a liability on the balance sheets of such Person (other than
operating leases).
Other Taxes means
any and all present or future stamp or documentary taxes or any other excise or
property taxes, charges or similar levies arising from any payment made
hereunder or from the execution, delivery or enforcement of, or otherwise with
respect to, this Agreement.
Participant has the
meaning set forth in Section 8.04.
PBGC means the
Pension Benefit Guaranty Corporation referred to and defined in ERISA and any
successor entity performing similar functions.
Permitted Discretion
means a determination made in good faith and in the exercise of reasonable (from
the perspective of a secured asset-based lender) business judgment.
16
Permitted Encumbrances
means:
(a) Liens imposed
by law for taxes that are not yet due or are being contested in compliance with
Section 5.04;
(b) carriers,
warehousemens, mechanics, materialmens, repairmens and other like Liens
imposed by law, arising in the ordinary course of business and securing
obligations that are not overdue by more than 30 days or are being contested in
compliance with Section 5.04;
(c) pledges and
deposits made in the ordinary course of business in compliance with workers
compensation, unemployment insurance and other social security laws or
regulations;
(d) deposits to
secure the performance of bids, trade contracts, leases, statutory obligations,
surety and appeal bonds, performance bonds and other obligations of a like
nature, in each case in the ordinary course of business;
(e) judgment liens
in respect of judgments that do not constitute an Event of Default under clause
(k) of Article VII; and
(f) easements,
zoning restrictions, rights-of-way and similar encumbrances on real property
imposed by law or arising in the ordinary course of business that do not secure
any monetary obligations and do not materially detract from the value of the
affected property or interfere with the ordinary conduct of business of
Borrower or any Subsidiary;
provided that the term Permitted
Encumbrances shall not include any Lien securing Indebtedness.
Permitted Investments
means:
(a) direct
obligations of, or obligations the principal of and interest on which are
unconditionally guaranteed by, the United States of America (or by any agency
thereof to the extent such obligations are backed by the full faith and credit
of the United States of America), in each case maturing within one year from
the date of acquisition thereof;
(b) investments in
commercial paper maturing within 270 days from the date of acquisition thereof
and having, at such date of acquisition, the highest credit rating obtainable
from S&P or from Moodys;
(c) investments in
certificates of deposit, bankers acceptances and time deposits maturing within
180 days from the date of acquisition thereof issued or guaranteed by or placed
with, and money market deposit accounts issued or offered by, any domestic
office of any commercial bank organized under the laws of the United States of
America or any State thereof which has a combined capital and surplus and
undivided profits of not less than $500,000,000;
17
(d) fully
collateralized repurchase agreements with a term of not more than 30 days for
securities described in clause (a) above and entered into with a financial
institution satisfying the criteria described in clause (c) above;
(e) money market
funds that (i) comply with the criteria set forth in Securities and
Exchange Commission Rule 2a-7 under the Investment Company Act of 1940, (ii) are
rated AAA by S&P and Aaa by Moodys and (iii) have portfolio assets of
at least $5,000,000,000; and
(f) any other
investment agreed to in writing by the Bank in advance.
Person means any
natural person, corporation, limited liability company, trust, joint venture,
association, company, partnership, Governmental Authority or other entity.
Plan means any
employee pension benefit plan (other than a Multiemployer Plan) subject to the
provisions of Title IV of ERISA or Section 412 of the Code or Section 302
of ERISA, and in respect of which Borrower or any ERISA Affiliate is (or, if
such plan were terminated, would under Section 4069 of ERISA be deemed to
be) an employer as defined in Section 3(5) of ERISA.
Prepayment Event
means:
(a) any sale,
transfer or other disposition (including pursuant to a sale and leaseback
transaction) of any property or asset of the Borrower or any Subsidiary, other
than transfers or dispositions of cash and Permitted Investments and other
dispositions described in Sections 6.05(a), (c) or (g); or
(b) any casualty or
other insured damage to, or any taking under power of eminent domain or by
condemnation or similar proceeding of, any property or asset of Borrower or any
Subsidiary with a fair value immediately prior to such event equal to or
greater than $500,000; or
(c) the issuance by
Borrower or any Subsidiary of any Equity Interests, or the receipt by Borrower
of any capital contribution; or
(d) the incurrence
by Borrower or any Subsidiary of any Indebtedness, other than Indebtedness
permitted under Section 6.01.
Prime Rate means
the rate of interest per annum publicly announced from time to time by Lender
as its prime rate; each change in the Prime Rate shall be effective from and
including the date such change is publicly announced as being effective.
Projections has the
meaning assigned to such term in Section 5.01(f).
Protective Advance
has the meaning assigned to such term in Section 2.04.
18
Related Parties
means, with respect to any specified Person, such Persons Affiliates and the
respective directors, officers, employees, agents and advisors of such Person
and such Persons Affiliates.
Report means
reports prepared by Lender or another Person showing the results of appraisals,
field examinations or audits pertaining to Borrowers assets from information
furnished by or on behalf of Borrower, after Lender has exercised its rights of
inspection pursuant to this Agreement.
Requirement of Law: as to any Person, the Certificate of
Incorporation and By-Laws or other organizational or governing documents of
such Person, and any law, treaty, rule or regulation or determination of
an arbitrator or a court or other Governmental Authority, in each case
applicable to or binding upon such Person or any of its property or to which
such Person or any of its property is subject.
Reserves means any
and all reserves which Lender deems necessary, in its Permitted Discretion, to
maintain (including, without limitation, an availability reserve, reserves for
accrued and unpaid interest on the Secured Obligations, Banking Services
Reserves, reserves for rent at locations leased by Borrower or any Subsidiary
and for consignees, warehousemens and bailees charges, reserves for dilution
of Accounts, reserves for Inventory shrinkage, reserves for customs charges and
shipping charges related to any Inventory in transit, reserves for Swap
Obligations, reserves for contingent liabilities of Borrower or any Subsidiary,
reserves for uninsured losses of Borrower or any Subsidiary, reserves for
uninsured, underinsured, un indemnified or under indemnified liabilities or
potential liabilities with respect to any litigation and reserves for taxes,
fees, assessments, and other governmental charges) with respect to the
Collateral, Borrower or any Subsidiary.
Restricted Payment
means any dividend or other distribution (whether in cash, securities or other
property) with respect to any Equity Interests in Borrower or any Subsidiary,
or any payment (whether in cash, securities or other property), including any
sinking fund or similar deposit, on account of the purchase, redemption,
retirement, acquisition, cancellation or termination of any such Equity
Interests in Borrower or any option, warrant or other right to acquire any such
Equity Interests in Borrower.
Revolving Commitment
means the commitment of Lender to make Revolving Loans and issue Letters of
Credit, as such commitment may be reduced from time to time pursuant to Section 2.08. The initial amount of Lenders Revolving Commitment
is $8,000,000.
Revolving Exposure
means, at any time, the sum of the outstanding principal amount of Revolving
Loans and LC Exposure at such time.
Revolving Loan
means a Loan made pursuant to Section 2.01.
S&P means
Standard & Poors Ratings Services, a division of The McGraw Hill
Companies, Inc.
Secured Obligations
means all Obligations, together with all (i) Banking Services Obligations
and (ii) Swap Obligations owing to Lender or its Affiliates.
19
Security Agreement
means that certain Pledge and Security Agreement, dated as of the date hereof,
between Borrower and Lender, and any other pledge or security agreement entered
into, after the date of this Agreement by Borrower (as required by this
Agreement or any other Loan Document), or any other Person, as the same may be
amended, restated or otherwise modified from time to time.
Statutory Reserve Rate
means a fraction (expressed as a decimal), the numerator of which is the number
one and the denominator of which is the number one minus the aggregate of the
maximum reserve percentages (including any marginal, special, emergency or
supplemental reserves) expressed as a decimal established by the Board to which
Lender is subject with respect to the Adjusted LIBO Rate, for eurocurrency
funding (currently referred to as Eurocurrency Liabilities in Regulation D of
the Board). Such reserve percentages
shall include those imposed pursuant to such Regulation D. Eurodollar Loans shall be deemed to
constitute eurocurrency funding and to be subject to such reserve requirements
without benefit of or credit for proration, exemptions or offsets that may be
available from time to time to Lender under such Regulation D or any comparable
regulation. The Statutory Reserve Rate
shall be adjusted automatically on and as of the effective date of any change
in any reserve percentage.
subsidiary means,
with respect to any Person (the parent) at any date, any corporation,
limited liability company, partnership, association or other entity the
accounts of which would be consolidated with those of the parent in the parents
consolidated financial statements if such financial statements were prepared in
accordance with GAAP as of such date, as well as any other corporation, limited
liability company, partnership, association or other entity (a) of which
securities or other ownership interests representing more than 50% of the
equity or more than 50% of the ordinary voting power or, in the case of a
partnership, more than 50% of the general partnership interests are, as of such
date, owned, controlled or held, or (b) that is, as of such date,
otherwise Controlled, by the parent or one or more subsidiaries of the parent
or by the parent and one or more subsidiaries of the parent.
Subsidiary means
any direct or indirect subsidiary of Borrower.
Swap Agreement
means any agreement with respect to any swap, forward, future or derivative
transaction or option or similar agreement involving, or settled by reference
to, one or more rates, currencies, commodities, equity or debt instruments or
securities, or economic, financial or pricing indices or measures of economic,
financial or pricing risk or value or any similar transaction or any
combination of these transactions; provided that no phantom stock or similar
plan providing for payments only on account of services provided by current or
former directors, officers, employees or consultants of Borrower or the
Subsidiaries shall be a Swap Agreement.
Swap Obligations of
a Person means any and all obligations of such Person, whether absolute or
contingent and howsoever and whensoever created, arising, evidenced or acquired
(including all renewals, extensions and modifications thereof and substitutions
therefor), under (a) any and all Swap Agreements, and (b) any and all
cancellations, buy backs, reversals, terminations or assignments of any Swap
Agreement transaction.
20
Tangible Net Worth
means the total of all assets properly appearing on the consolidated balance
sheet of the Borrower and its Subsidiaries in accordance with GAAP, less the
sum of the following:
(a) the book amount
of all such assets which would be treated as intangibles under GAAP, including,
without limitation, all such items as good will, trademarks, trademark rights,
trade names, trade-name rights, brands, copyrights, patents, patent rights,
licenses, deferred charges and unamortized debt discount and expense;
(b) any write-up in
the book value of any such assets resulting from a revaluation thereof
subsequent to the date of this Agreement;
(c) all reserves,
including reserves for depreciation, obsolescence, depletion, insurance, and
inventory valuation, but excluding contingency reserves not allocated for any
particular purpose and not deducted from assets;
(d) the amount, if
any, at which any shares of stock of the Borrower or any Subsidiary appear on
the asset side of such consolidated balance sheet;
(e) all other
liabilities of the Borrower and its Subsidiaries shown on such balance sheet,
other than liabilities subordinated to obligations owed to the Bank by
subordination agreements in form and substance satisfactory to the Bank; and
(f) all investments
in foreign affiliates and nonconsolidated domestic affiliates.
Taxes means any and
all present or future taxes, levies, imposts, duties, deductions, charges or
withholdings imposed by any Governmental Authority.
Total Indebtedness
means, at any date, the aggregate principal amount of all Indebtedness of
Borrower and its Subsidiaries at such date, determined on a consolidated basis
in accordance with GAAP.
Transactions means
the execution, delivery and performance by Borrower of this Agreement, the
borrowing of Loans and other credit extensions, the use of the proceeds thereof
and the issuance of Letters of Credit hereunder.
UCC means the
Uniform Commercial Code as in effect from time to time in the State of
Wisconsin or any other state the laws of which are required to be applied in
connection with the issue of perfection of security interests.
Withdrawal Liability
means liability to a Multiemployer Plan as a result of a complete or partial
withdrawal from such Multiemployer Plan, as such terms are defined in Part I
of Subtitle E of Title IV of ERISA.
SECTION 1.02. Accounting Terms; GAAP. Except as otherwise expressly provided
herein, all terms of an accounting or financial nature shall be construed in
accordance with GAAP, as in effect from time to time; provided that, if
Borrower notifies Lender that
21
Borrower
requests an amendment to any provision hereof to eliminate the effect of any
change occurring after the date hereof in GAAP or in the application thereof on
the operation of such provision (or if Lender notifies Borrower that Lender
request an amendment to any provision hereof for such purpose), regardless of
whether any such notice is given before or after such change in GAAP or in the
application thereof, then such provision shall be interpreted on the basis of
GAAP as in effect and applied immediately before such change shall have become
effective until such notice shall have been withdrawn or such provision amended
in accordance herewith.
ARTICLE II
The Credits
SECTION 2.01. Commitment. Subject to the terms and conditions set forth
herein, Lender agrees to make Revolving Loans to Borrower from time to time
during the Availability Period in an aggregate principal amount that will not
result in the Revolving Exposure exceeding the lesser of (a) the Revolving
Commitment or (b) the Borrowing Base, subject to Lenders authority, in
its sole discretion, to make Protective Advances pursuant to the terms of Section 2.04,
by making immediately available funds available to the account designated by
Borrower in writing. Within the
foregoing limits and subject to the terms and conditions set forth herein,
Borrower may borrow, prepay and reborrow Revolving Loans.
SECTION 2.02. Loans and Borrowings. (a) Any Protective Advance shall be
made in accordance with the procedures set forth in Section 2.04.
(b) Subject to Section 2.13,
each Revolving Borrowing shall be comprised entirely of CB Floating Rate Loans
or Eurodollar Loans as Borrower may request in accordance herewith, provided
that all Borrowings made on the Effective Date must be made as CB Floating Rate
Borrowings.
(c) At the
commencement of each Interest Period for any Eurodollar Revolving Borrowing,
such Borrowing shall be in an aggregate amount that is not less than
$100,000. CB Floating Rate Revolving
Borrowings may be in any amount. There
shall not at any time be more than a total of 5 Eurodollar
Revolving Borrowings outstanding.
(d) Notwithstanding
any other provision of this Agreement, Borrower shall not be entitled to
request, or to elect to convert or continue, any Borrowing if the Interest
Period requested with respect thereto would end after the Maturity Date.
SECTION 2.03. Borrowing Procedures; Requests for
Revolving Borrowings.
(a) Notices by
Borrower to Lender of requests for Revolving Loans other than pursuant to
§2.03(a). To request
a Revolving Borrowing, Borrower shall notify Lender of such request by
telephone (a) in the case of a Eurodollar Borrowing, not later than 10:00 a.m.,
Milwaukee time, two Business Days before the date of the proposed Borrowing or (b) in
the case of an CB Floating Rate Borrowing, not later than noon, Milwaukee time,
on the date of the proposed Borrowing; provided that any such notice of
an CB Floating Rate Revolving Borrowing to finance the reimbursement of an LC
Disbursement as contemplated by Section
22
2.05(e) may be given
not later than 9:00 a.m., Milwaukee time, on the date of the proposed
Borrowing. Each such telephonic
Borrowing Request shall be irrevocable and shall be confirmed promptly by hand
delivery or facsimile to Lender of a written Borrowing Request in a form
approved by Lender and signed by Borrower.
Each such telephonic and written Borrowing Request shall specify the
following information in compliance with Section 2.01:
(i) the aggregate
amount of the requested Borrowing;
(ii) the date of
such Borrowing, which shall be a Business Day;
(iii) whether such
Borrowing is to be an CB Floating Rate Borrowing or a Eurodollar Borrowing; and
(iv) in the case of
a Eurodollar Borrowing, the initial Interest Period to be applicable thereto,
which shall be a period contemplated by the definition of the term Interest
Period.
If no election as to the
rate of interest applicable to the Revolving Borrowing is specified, then the
requested Revolving Borrowing shall be an CB Floating Rate Borrowing. If no Interest Period is specified with respect
to any requested Eurodollar Revolving Borrowing, then Borrower shall be deemed
to have selected an Interest Period of one months duration.
SECTION 2.04. Protective Advances. Subject to the
limitations set forth below, Lender is authorized by Borrower, from time to
time in Lenders sole discretion (but shall have absolutely no obligation to),
to make Loans to Borrower, which Lender, in its Permitted Discretion, deems
necessary or desirable (i) to preserve or protect the Collateral, or any
portion thereof, (ii) to enhance the likelihood of, or maximize the amount
of, repayment of the Loans and other Obligations, or (iii) to pay any
other amount chargeable to or required to be paid by Borrower pursuant to the
terms of this Agreement, including payments of principal, interest, LC
Disbursements, fees, premiums, reimbursable expenses (including costs, fees,
and expenses as described in Section 8.03) and other sums payable under
the Loan Documents (any of such Loans are herein referred to as Protective
Advances). Protective Advances may be
made even if the conditions precedent set forth in Section 4.02 have not
been satisfied. The Protective Advances
shall be secured by the Liens in favor of Lender in and to the Collateral and
shall constitute Obligations hereunder.
All Protective Advances shall be CB Floating Rate Borrowings. Unless an Event of Default shall have
occurred and be continuing, Lender shall provide Borrower with three (3) days
prior notice of its intention to make a Protective Advance.
SECTION 2.05. Letters of Credit. (a) General. Subject to the terms and conditions set forth
herein, Borrower may request the issuance of Letters of Credit for its own
account, in a form reasonably acceptable to Lender at any time and from time to
time during the Availability Period. In
the event of any inconsistency between the terms and conditions of this
Agreement and the terms and conditions of any form of letter of credit
application or other agreement submitted by Borrower to, or entered into by
Borrower with, Lender relating to any Letter of Credit, the terms and
conditions of this Agreement shall control.
(b) Notice of
Issuance, Amendment, Renewal, Extension; Certain Conditions. To request the issuance of a Letter of Credit
(or the amendment, renewal or extension of an
23
outstanding Letter of
Credit), Borrower shall hand deliver or facsimile (or transmit by electronic
communication, if arrangements for doing so have been approved by Lender) to
Lender (prior to 12:00 p.m., Milwaukee time, at least three Business Days
prior to the requested date of issuance, amendment, renewal or extension) a
notice requesting the issuance of a Letter of Credit, or identifying the Letter
of Credit to be amended, renewed or extended, and specifying the date of
issuance, amendment, renewal or extension (which shall be a Business Day), the
date on which such Letter of Credit is to expire (which shall comply with
paragraph (c) of this Section), the amount of such Letter of Credit, the
name and address of the beneficiary thereof and such other information as shall
be necessary to prepare, amend, renew or extend such Letter of Credit. If requested by Lender, Borrower also shall
submit a letter of credit application on Lenders standard form in connection
with any request for a Letter of Credit.
A Letter of Credit shall be issued, amended, renewed or extended only if
(and upon issuance, amendment, renewal or extension of each Letter of Credit
Borrower shall be deemed to represent and warrant that), after giving effect to
such issuance, amendment, renewal or extension (i) the LC Exposure shall
not exceed the Letter of Credit Sublimit and (ii) the total Revolving
Exposure shall not exceed the lesser of the total Revolving Commitment and the
Borrowing Base.
(c) Expiration Date. Each Letter of Credit shall expire at or
prior to the close of business on the earlier of (i) the date one year
after the date of the issuance of such Letter of Credit (or, in the case of any
renewal or extension thereof, one year after such renewal or extension) and (ii) the
date that is five Business Days prior to the Maturity Date; provided, however,
that notwithstanding any term herein to the contrary, prior to the Maturity
Date a Letter of Credit may be issued or extended with an expiry date extending
beyond the Maturity Date if, and to the extent that, the Borrower provides cash
collateral to the Lender not later than ten (10) days prior to the
Maturity Date in an amount equal to 105% of the maximum amount available to be
drawn under such Letter of Credit.
(d) Reimbursement. If Lender shall make any LC Disbursement in
respect of a Letter of Credit, Borrower shall reimburse such LC Disbursement by
paying to Lender an amount equal to such LC Disbursement not later than 11:00 a.m.,
Milwaukee time, on the date that such LC Disbursement is made, if Borrower
shall have received notice of such LC Disbursement prior to 9:00 a.m.,
Milwaukee time, on such date, or, if such notice has not been received by
Borrower prior to such time on such date, then not later than 11:00 a.m.,
Milwaukee time, on (i) the Business Day that Borrower receives such
notice, if such notice is received prior to 9:00 a.m., Milwaukee time, on
the day of receipt, or (ii) the Business Day immediately following the day
that Borrower receives such notice, if such notice is not received prior to
such time on the day of receipt; provided that Borrower may, subject to
the conditions to borrowing set forth herein, request in accordance with Section 2.03
that such payment be financed with an CB Floating Rate Revolving Borrowing in
an equivalent amount and, to the extent so financed, Borrowers obligation to
make such payment shall be discharged and replaced by the resulting CB Floating
Rate Revolving Borrowing.
(e) Obligations
Absolute. Borrowers
obligation to reimburse LC Disbursements as provided in paragraph (d) of
this Section shall be absolute, unconditional and irrevocable, and shall
be performed strictly in accordance with the terms of this Agreement under any
and all circumstances whatsoever and irrespective of (i) any lack of
validity or enforceability of any Letter of Credit or this Agreement, or any
term or provision therein, (ii) any draft or other
24
document presented under a
Letter of Credit proving to be forged, fraudulent or invalid in any respect or
any statement therein being untrue or inaccurate in any respect, (iii) payment
by Lender under a Letter of Credit against presentation of a draft or other
document that does not comply with the terms of such Letter of Credit, or (iv) any
other event or circumstance whatsoever, whether or not similar to any of the
foregoing, that might, but for the provisions of this Section, constitute a
legal or equitable discharge of, or provide a right of setoff against, Borrowers
obligations hereunder. Neither Lender
nor any of its Related Parties, shall have any liability or responsibility by
reason of or in connection with the issuance or transfer of any Letter of
Credit or any payment or failure to make any payment thereunder (irrespective
of any of the circumstances referred to in the preceding sentence), or any
error, omission, interruption, loss or delay in transmission or delivery of any
draft, notice or other communication under or relating to any Letter of Credit
(including any document required to make a drawing thereunder), any error in
interpretation of technical terms or any consequence arising from causes beyond
the control of Lender; provided that the foregoing shall not be
construed to excuse Lender from liability to Borrower to the extent of any
direct damages (as opposed to consequential damages, claims in respect of which
are hereby waived by Borrower to the extent permitted by applicable law)
suffered by Borrower that are caused by Lenders failure to exercise care when
determining whether drafts and other documents presented under a Letter of
Credit comply with the terms thereof.
The parties hereto expressly agree that, in the absence of gross negligence
or willful misconduct on the part of Lender (as finally determined by a court
of competent jurisdiction), Lender shall be deemed to have exercised care in
each such determination. In furtherance
of the foregoing and without limiting the generality thereof, the parties agree
that, with respect to documents presented which appear on their face to be in
substantial compliance with the terms of a Letter of Credit, Lender may, in its
sole discretion, either accept and make payment upon such documents without responsibility
for further investigation, regardless of any notice or information to the
contrary, or refuse to accept and make payment upon such documents if such
documents are not in strict compliance with the terms of such Letter of Credit.
(f) Disbursement
Procedures. Lender
shall, promptly following its receipt thereof, examine all documents purporting
to represent a demand for payment under a Letter of Credit. Lender shall promptly notify Borrower by
telephone (confirmed by facsimile) of such demand for payment and whether
Lender has made or will make an LC Disbursement thereunder; provided that any
failure to give or delay in giving such notice shall not relieve Borrower of
its obligation to reimburse Lender with respect to any such LC Disbursement.
(g) Interim
Interest. If Lender
shall make any LC Disbursement, then, unless Borrower shall reimburse such LC
Disbursement in full on the date such LC Disbursement is made, the unpaid
amount thereof shall bear interest, for each day from and including the date
such LC Disbursement is made to but excluding the date that Borrower reimburses
such LC Disbursement, at the rate per annum then applicable to CB Floating Rate
Revolving Loans; provided that, if Borrower fails to reimburse such LC
Disbursement when due pursuant to paragraph (e) of this Section, then Section 2.12(d) shall
apply. Interest accrued pursuant to this
paragraph shall be for the account of Lender.
(h) Cash
Collateralization. If any
Event of Default shall occur and be continuing, on the Business Day that
Borrower receives notice from Lender demanding the deposit of cash collateral
pursuant to this paragraph, Borrower shall deposit in an account with
25
Lender, in the name and for
the benefit of Lender (the LC Collateral Account), an amount in cash
equal to 105% of the LC Exposure as of such date plus accrued and unpaid
interest thereon; provided that the obligation to deposit such cash
collateral shall become effective immediately, and such deposit shall become
immediately due and payable, without demand or other notice of any kind, upon
the occurrence of any Event of Default with respect to Borrower described in
clause (h) or (i) of Article VII. Such deposit shall be held by Lender as collateral
for the payment and performance of the Secured Obligations. Lender shall have exclusive dominion and
control, including the exclusive right of withdrawal, over such account and
Borrower hereby grants Lender a security interest in the LC Collateral Account. Other than any interest earned on the
investment of such deposits, which investments shall be made at the option and
sole discretion of Lender and at Borrowers risk and expense, such deposits
shall not bear interest. Interest or
profits, if any, on such investments shall accumulate in such account. Moneys in such account shall be applied by
Lender for LC Disbursements for which it has not been reimbursed and, to the
extent not so applied, shall be held for the satisfaction of the reimbursement obligations
of Borrower for the LC Exposure at such time or, if the maturity of the Loans
has been accelerated, be applied to satisfy other Secured Obligations. If Borrower is required to provide an amount
of cash collateral hereunder as a result of the occurrence of an Event of
Default, such amount (to the extent not applied as aforesaid) shall be returned
to Borrower within three Business Days after all such Defaults have been cured
or waived.
SECTION 2.06. Funding of Borrowings. Lender shall make each Loan to be made by it
hereunder on the proposed date thereof available to Borrower by promptly
crediting the amounts in immediately available funds, to the Funding Account;
provided that CB Floating Rate Revolving Loans made to finance the reimbursement
of an LC Disbursement as provided in Section 2.05(e) or a Protective
Advance shall be retained by Lender.
SECTION 2.07. Interest Elections. (a) Each Revolving Borrowing initially
shall bear interest at the rate specified in the applicable Borrowing Request
and, in the case of a Eurodollar Revolving Borrowing, shall have an initial
Interest Period as specified in such Borrowing Request. Thereafter, Borrower may elect to convert
such Borrowing to a different interest rate or to continue such Borrowing and,
in the case of a Eurodollar Revolving Borrowing, may elect Interest Periods
therefor, all as provided in this Section.
Borrower may elect different options with respect to different portions
of the affected Borrowing, and the Loans comprising each such portion shall be
considered a separate Borrowing. This Section shall
not apply to or Protective Advances, which may not be converted or continued.
(b) To make an
election pursuant to this Section, Borrower shall notify Lender of such
election by telephone by the time that a Borrowing Request would be required
under Section 2.03 if Borrower were requesting a Revolving Borrowing
bearing interest at the rate resulting from such election to be made on the
effective date of such election. Each
such telephonic Interest Election Request shall be irrevocable and shall be
confirmed promptly by hand delivery or facsimile to Lender of a written
Interest Election Request in a form approved by Lender and signed by Borrower.
(c) Each telephonic
and written Interest Election Request shall specify the following information
in compliance with Section 2.02:
26
(i) the Borrowing
to which such Interest Election Request applies and, if different options are
being elected with respect to different portions thereof, the portions thereof
to be allocated to each resulting Borrowing (in which case the information to
be specified pursuant to clauses (iii) and (iv) below shall be
specified for each resulting Borrowing);
(ii) the effective
date of the election made pursuant to such Interest Election Request, which
shall be a Business Day;
(iii) whether the
resulting Borrowing is to be an CB Floating Rate Borrowing or a Eurodollar
Borrowing; and
(iv) if the
resulting Borrowing is a Eurodollar Borrowing, the Interest Period to be
applicable thereto after giving effect to such election, which shall be a
period contemplated by the definition of the term Interest Period.
If any such Interest
Election Request requests a Eurodollar Borrowing but does not specify an
Interest Period, then Borrower shall be deemed to have selected an Interest
Period of one months duration.
(d) If Borrower
fails to deliver a timely Interest Election Request with respect to a
Eurodollar Revolving Borrowing prior to the end of the Interest Period
applicable thereto, then, unless such Borrowing is repaid as provided herein,
at the end of such Interest Period such Borrowing shall be converted to an CB
Floating Rate Borrowing. Notwithstanding
any contrary provision hereof, if an Event of Default has occurred and is
continuing and Lender so notifies Borrower, then, so long as an Event of
Default is continuing (i) no outstanding Revolving Borrowing may be
converted to or continued as a Eurodollar Borrowing and (ii) unless
repaid, each Eurodollar Revolving Borrowing shall be converted to an CB
Floating Rate Borrowing at the end of the Interest Period applicable thereto.
SECTION 2.08. Voluntary Reduction or Termination of
Commitment. (a) Unless
previously terminated, the Revolving Commitment shall terminate on the Maturity
Date.
(b) Borrower may at
any time terminate the Revolving Commitment upon (i) the payment in full
of all outstanding Loans, together with accrued and unpaid interest thereon and
on any Letters of Credit, (ii) the cancellation and return of all
outstanding Letters of Credit (or alternatively, with respect to each such
Letter of Credit, the furnishing to Lender of a cash deposit equal to 105% of
the LC Exposure as of such date), (iii) the payment in full of the accrued
and unpaid fees, and (iv) the payment in full of all reimbursable expenses
and other Obligations together with accrued and unpaid interest thereon.
(c) Borrower shall
notify Lender of any election to terminate the Revolving Commitment under
paragraph (b) of this Section at least five Business Days prior to
the effective date of such termination, specifying such election and the
effective date thereof. Each notice
delivered by Borrower pursuant to this Section shall be irrevocable; provided
that a notice of termination of the Revolving Commitment delivered by Borrower
may state that such notice is
27
conditioned upon the
effectiveness of other credit facilities, in which case such notice may be
revoked by Borrower (by notice to Lender on or prior to the specified effective
date) if such condition is not satisfied.
Any termination of the Revolving Commitment shall be permanent.
(d) Borrower may
permanently reduce the Revolving Commitment, upon at least 5 days prior
written notice to Lender, which notice shall specify the amount of the
reduction and shall be irrevocable once given.
Each reduction shall be in a minimum amount of $500,000, or an increment
of $100,000 in excess thereof. Borrower
may not reduce the Revolving Commitment to less than $5,000,000.
SECTION 2.09. Repayment and Amortization of Loans;
Evidence of Debt. (a) Borrower
hereby unconditionally promises to pay (i) to Lender for its account the
then unpaid principal amount of each Revolving Loan on the Maturity Date, and (ii) to
Lender the then unpaid amount of each Protective Advance on the earlier of the
Maturity Date and demand by Lender.
(b) Lender shall
maintain in accordance with its usual practice an account or accounts
evidencing the indebtedness of Borrower to Lender resulting from each Loan made
by Lender, including the amounts of principal and interest payable and paid to
Lender from time to time hereunder.
(c) Lender shall
maintain accounts in which it shall record (i) the amount of each Loan
made hereunder, the interest rate applicable thereto and the Interest Period
applicable thereto, (ii) the amount of any principal or interest due and
payable or to become due and payable from Borrower to Lender hereunder and (iii) the
amount of any sum received by Lender hereunder.
(d) The entries
made in the accounts maintained pursuant to paragraph (c) or (d) of
this Section shall be prima facie evidence of the existence
and amounts of the obligations recorded therein; provided that the
failure of Lender to maintain such accounts or any error therein shall not in
any manner affect the obligation of Borrower to repay the Loans in accordance
with the terms of this Agreement.
(e) Lender may
request that Loans made by it be evidenced by a promissory note. In such event, Borrower shall prepare,
execute and deliver to Lender a promissory note payable to the order of Lender
(or, if requested by Lender, to Lender and its registered assigns) and in a
form approved by Lender. Thereafter, the
Loans evidenced by such promissory note and interest thereon shall at all times
(including after assignment pursuant to Section 8.04) be represented by
one or more promissory notes in such form payable to the order of the payee
named therein (or, if such promissory note is a registered note, to such payee
and its registered assigns).
SECTION 2.10. Prepayment of Loans. (a) Borrower shall have the right at
any time and from time to time to prepay any Borrowing in whole or in part,
subject to prior notice in accordance with paragraph (e) of this Section.
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(b) In the event
and on such occasion that the Revolving Exposure exceeds the lesser of (a) the
Revolving Commitment or (b) the Borrowing Base, Borrower shall prepay the
Revolving Loans and LC Exposure in an aggregate amount equal to such excess.
(c) In the event
and on each occasion that any Net Proceeds are received by or on behalf of
Borrower in respect of any Prepayment Event, Borrower shall, immediately after
such Net Proceeds are received by Borrower, prepay the Obligations as set forth
in Section 2.10(d) below in an aggregate amount equal to 100% of such
Net Proceeds, provided that, in the case of any event described in
clause (a) or (b) of the definition of the term Prepayment Event,
if Borrower shall deliver to Lender a certificate of a Financial Officer to the
effect that Borrower intends to apply the Net Proceeds from such event (or a
portion thereof specified in such certificate), within 120 days after receipt
of such Net Proceeds, to acquire (or replace or rebuild) real property,
equipment or other tangible assets (excluding inventory) to be used in the
business of Borrower, and certifying that no Default has occurred and is
continuing, then no prepayment shall be required pursuant to this paragraph in
respect of the Net Proceeds specified in such certificate; provided that
to the extent of any such Net Proceeds therefrom that have not been so applied
by the end of such 90-day period, at which time a prepayment shall be required
in an amount equal to such Net Proceeds that have not been so applied; provided,
further that Borrower shall not be permitted to make elections to use Net
Proceeds to acquire (or replace or rebuild) real property, equipment or other
tangible assets (excluding inventory) with respect to Net Proceeds in any
fiscal year in an aggregate amount in excess of $100,000. Notwithstanding the foregoing, in the event
that any prepayment pursuant to this Section 2.10(c) would cause
Borrower to incur liability for breakfunding payments pursuant to Section 2.15,
Borrower may defer making such prepayment until the end of the relevant
Interest Period provided
that the funds equal to the amount required to make such prepayment are held in
an account of the Borrower with the Lender until such time.
(d) All such
amounts pursuant to Section 2.10(c) (as to any insurance or
condemnation proceeds, to the extent they arise from casualties or losses to
Equipment, Fixtures and real property) shall be applied, first to prepay
any Protective Advances that may be outstanding, pro rata and second to
prepay the Revolving Loans without a corresponding reduction in the Revolving
Commitment and to cash collateralize outstanding LC Exposure. All such amounts pursuant to Section 2.10(c) (as
to any insurance or condemnation proceeds, to the extent they arise from
casualties or losses to cash or Inventory) shall be applied, first to
prepay any Protective Advances that may be outstanding, pro rata, and second
to prepay the Revolving Loans without a corresponding reduction in the
Revolving Commitment and to cash collateralize outstanding LC Exposure. If the precise amount of insurance or
condemnation proceeds allocable to Inventory as compared to Equipment, Fixtures
and real property is not otherwise determined, the allocation and application
of those proceeds shall be determined by Lender, in its Permitted Discretion.
(e) Borrower shall
notify Lender by telephone (confirmed by facsimile) of any prepayment hereunder
(i) in the case of prepayment of a Eurodollar Revolving Borrowing, not
later than 10:00 a.m., Milwaukee time, three Business Days before the date
of prepayment, or (ii) in the case of prepayment of an CB Floating Rate
Revolving Borrowing, not later than 10:00 a.m., Milwaukee time, one
Business Day before the date of prepayment.
Each such notice shall be irrevocable and shall specify the prepayment
date and the principal amount of each Borrowing
29
or portion thereof to be
prepaid; provided that, if a notice of prepayment is given in connection
with a conditional notice of termination of the Revolving Commitment as
contemplated by Section 2.08, then such notice of prepayment may be
revoked if such notice of termination is revoked in accordance with Section 2.08. Each partial prepayment of any Revolving
Borrowing shall be in an amount that would be permitted in the case of an
advance of a Revolving Borrowing bearing interest at the same rate as provided
in Section 2.02. Prepayments shall
be accompanied by accrued interest to the extent required by Section 2.12.
SECTION 2.11. Fees.
(a) Borrower agrees to pay to Lender an commitment fee, which
shall accrue at the Applicable Rate on the average daily amount of the
Available Revolving Commitment of Lender during the period from and including
the Effective Date to but excluding the date on which Lenders Revolving
Commitment terminates. Accrued
commitment fees shall be payable in arrears on the last day of each calendar
month and on the date on which the Revolving Commitment terminates, commencing
on the first such date to occur after the date hereof. All commitment fees shall be computed on the
basis of a year of 360 days and shall be payable for the actual number of days
elapsed.
(b) Borrower agrees
to pay to Lender a Letter of Credit fee, which shall accrue at the same
Applicable Rate used to determine the interest rate applicable to Eurodollar
Revolving Loans on the average daily amount of Lenders LC Exposure during the
period from and including the Effective Date to but excluding the later of the
date on which Lenders Revolving Commitment terminates and the date on which
the Revolving Lender ceases to have any LC Exposure, as well as Lenders
standard fees with respect to the issuance, amendment, renewal or extension of
any Letter of Credit or processing of drawings thereunder. All such fees shall be payable on the date on
which the Revolving Commitment terminates and any such fees accruing after the
date on which the Revolving Commitment terminates shall be payable on
demand. Any other fees payable to Lender
pursuant to this paragraph shall be payable within 10 days after demand.
(c) All fees
payable hereunder shall be paid on the dates due, in immediately available
funds, to Lender. Fees paid shall not be
refundable under any circumstances.
SECTION 2.12. Interest. (a) The Loans
comprising each CB Floating Rate Borrowing shall bear interest at the CB
Floating Rate plus the Applicable Rate.
(b) The Loans
comprising each Eurodollar Borrowing shall bear interest at the Adjusted LIBO
Rate for the Interest Period in effect for such Borrowing plus the Applicable
Rate.
(c) Each Protective
Advance shall bear interest at the CB Floating Rate plus the Applicable Rate
for Revolving Loans plus 2%.
(d) Notwithstanding
the foregoing, during the occurrence and continuance of an Event of Default,
Lender may, at its option, by notice to Borrower, declare that (i) all
Loans shall bear interest at 2% plus the rate otherwise applicable to such
Loans as provided in the preceding paragraphs of this Section or (ii) in
the case of any other amount outstanding
30
hereunder, such amount shall
accrue at 2% plus the rate applicable to such fee or other obligation as
provided hereunder.
(e) Accrued
interest on each Loan (for CB Floating Rate Loans, accrued through the last day
of the prior calendar month) shall be payable in arrears on each Interest
Payment Date for such Loan and upon termination of the Revolving Commitment; provided
that (i) interest accrued pursuant to paragraph (d) of this Section shall
be payable on demand, (ii) in
the event of any repayment or prepayment of any Loan (other than a prepayment
of an CB Floating Rate Revolving Loan prior to the end of the Availability
Period), accrued interest on the principal amount repaid or prepaid shall be
payable on the date of such repayment or prepayment and (iii) in the event
of any conversion of any Eurodollar Loan prior to the end of the current
Interest Period therefor, accrued interest on such Loan shall be payable on the
effective date of such conversion.
(f) All interest
hereunder shall be computed on the basis of a year of 360 days, except that
interest computed by reference to the CB Floating Rate at times when the CB
Floating Rate is based on the Prime Rate shall be computed on the basis of a
year of 365 days (or 366 days in a leap year), and in each case shall be
payable for the actual number of days elapsed.
The applicable CB Floating Rate, Adjusted LIBO Rate or LIBO Rate shall
be determined by Lender, and such determination shall be conclusive absent
manifest error.
SECTION 2.13. Alternate Rate of Interest. If prior to the commencement of any Interest
Period for a Eurodollar Borrowing:
(a) Lender
determines (which determination shall be conclusive absent manifest error) that
adequate and reasonable means do not exist for ascertaining the Adjusted LIBO
Rate or the LIBO Rate, as applicable, for such Interest Period; or
(b) Lender
determines the Adjusted LIBO Rate or the LIBO Rate, as applicable, for such
Interest Period will not adequately and fairly reflect the cost to Lender of
making or maintaining their Loans (or its Loan) included in such Borrowing for
such Interest Period;
then Lender shall give
notice thereof to Borrower by telephone or facsimile as promptly as practicable
thereafter and, until Lender notifies Borrower that the circumstances giving
rise to such notice no longer exist, (i) any Interest Election Request
that requests the conversion of any Revolving Borrowing to, or continuation of
any Revolving Borrowing as, a Eurodollar Borrowing shall be ineffective, and (ii) if
any Borrowing Request requests a Eurodollar Revolving Borrowing, such Borrowing
shall be made as an CB Floating Rate Borrowing.
SECTION 2.14. Increased Costs. (a) If any Change in Law shall:
(i) impose, modify
or deem applicable any reserve, special deposit or similar requirement against
assets of, deposits with or for the account of, or credit extended by, Lender
(except any such reserve requirement reflected in the Adjusted LIBO Rate); or
31
(ii) impose on
Lender or the London interbank market any other condition affecting this
Agreement or Eurodollar Loans made by such Lender or any Letter of Credit or
participation therein;
and the result of any of the
foregoing shall be to increase the cost to such Lender of making or maintaining
any Eurodollar Loan (or of maintaining its obligation to make any such Loan) or
to increase the cost to Lender of participating in, issuing or maintaining any
Letter of Credit or to reduce the amount of any sum received or receivable by
Lender hereunder (whether of principal, interest or otherwise), then Borrower
will pay to Lender such additional amount or amounts as will compensate Lender
for such additional costs incurred or reduction suffered.
(b) If Lender
determines that any Change in Law regarding capital requirements has or would
have the effect of reducing the rate of return on Lenders capital or on the
capital of Lenders holding company, as a consequence of this Agreement or the
Loans made by, or Letters of Credit issued by Lender to a level below that
which Lender or Lenders holding company could have achieved but for such
Change in Law (taking into consideration Lenders policies and the policies of
Lenders holding company with respect to capital adequacy), then from time to
time Borrower will pay to Lender such additional amount or amounts as will
compensate Lender or Lenders holding company for any such reduction suffered.
(c) A certificate
of Lender setting forth the amount or amounts necessary to compensate Lender or
its holding company, as the case may be, as specified in paragraph (a) or (b) of
this Section shall be delivered to Borrower and shall be conclusive absent
manifest error. Borrower shall pay
Lender the amount shown as due on any such certificate within 10 days after
receipt thereof.
(d) Failure or
delay on the part of Lender to demand compensation pursuant to this Section shall
not constitute a waiver of Lenders right to demand such compensation; provided
that Borrower shall not be required to compensate a Lender pursuant to this Section for
any increased costs or reductions incurred more than 150 days prior to the date
that Lender notifies Borrower of the Change in Law giving rise to such
increased costs or reductions and of Lenders intention to claim compensation
therefor; provided further that, if the Change in Law giving rise to
such increased costs or reductions is retroactive, then the 150-day period
referred to above shall be extended to include the period of retroactive effect
thereof.
SECTION 2.15. Break Funding Payments. In the event of (a) the payment of any
principal of any Eurodollar Loan other than on the last day of an Interest
Period applicable thereto (including as a result of an Event of Default), (b) the
conversion of any Eurodollar Loan other than on the last day of the Interest
Period applicable thereto or (c) the failure to borrow, convert, continue
or prepay any Eurodollar Loan on the date specified in any notice delivered
pursuant hereto (regardless of whether such notice may be revoked under Section 2.08(c) and
is revoked in accordance therewith), then, in any such event, Borrower shall
compensate Lender for the loss, cost and expense attributable to such
event. In the case of a Eurodollar Loan,
such loss, cost or expense to Lender shall be deemed to include an amount
determined by Lender to be the excess, if any, of (i) the amount of
interest which would have accrued on the principal amount of such Loan had such
event not occurred, at the Adjusted LIBO Rate that would have been applicable
to such Loan, for the period from the date of such event to the last day of the
then
32
current
Interest Period therefor (or, in the case of a failure to borrow, convert or
continue, for the period that would have been the Interest Period for such
Loan), over (ii) the amount of interest which would accrue on such
principal amount for such period at the interest rate which Lender would bid
were it to bid, at the commencement of such period, for dollar deposits of a
comparable amount and period from other banks in the eurodollar market. A certificate of Lender setting forth any
amount or amounts that Lender is entitled to receive pursuant to this Section shall
be delivered to Borrower and shall be conclusive absent manifest error. Borrower shall pay Lender the amount shown as
due on any such certificate within 10 days after receipt thereof.
SECTION 2.16. Taxes.
(a) Any and all payments by or on account of any obligation of
Borrower hereunder shall be made free and clear of and without deduction for
any Indemnified Taxes or Other Taxes; provided that if Borrower shall be
required to deduct any Indemnified Taxes or Other Taxes from such payments,
then (i) the sum payable shall be increased as necessary so that after
making all required deductions (including deductions applicable to additional
sums payable under this Section) Lender (as the case may be) receives an amount
equal to the sum it would have received had no such deductions been made, (ii) Borrower
shall make such deductions and (iii) Borrower shall pay the full amount
deducted to the relevant Governmental Authority in accordance with applicable
law.
(b) In addition,
Borrower shall pay any Other Taxes to the relevant Governmental Authority in
accordance with applicable law.
(c) Borrower shall
indemnify Lender within 10 days after written demand therefor, for the full
amount of any Indemnified Taxes or Other Taxes paid by Lender on or with
respect to any payment by or on account of any obligation of Borrower hereunder
(including Indemnified Taxes or Other Taxes imposed or asserted on or
attributable to amounts payable under this Section) and any penalties, interest
and reasonable expenses arising therefrom or with respect thereto, whether or
not such Indemnified Taxes or Other Taxes were correctly or legally imposed or
asserted by the relevant Governmental Authority. A certificate as to the amount of such
payment or liability delivered to Borrower by Lender shall be conclusive absent
manifest error.
(d) As soon as
practicable after any payment of Indemnified Taxes or Other Taxes by Borrower
to a Governmental Authority, Borrower shall deliver to Lender the original or a
certified copy of a receipt issued by such Governmental Authority evidencing
such payment, a copy of the return reporting such payment or other evidence of
such payment reasonably satisfactory to Lender.
(e) If Lender
determines, in its sole discretion, that it has received a refund of any Taxes
or Other Taxes as to which it has been indemnified by Borrower or with respect
to which Borrower has paid additional amounts pursuant to this Section 2.16,
it shall pay over such refund to Borrower (but only to the extent of indemnity
payments made, or additional amounts paid, by Borrower under this Section 2.16
with respect to the Taxes or Other Taxes giving rise to such refund), net of
all out-of-pocket expenses of Lender and without interest (other than any
interest paid by the relevant Governmental Authority with respect to such
refund); provided, that Borrower, upon the request of Lender, agrees to repay
the amount paid over to Borrower (plus
33
any penalties, interest or
other charges imposed by the relevant Governmental Authority) to Lender in the
event Lender is required to repay such refund to such Governmental Authority.
This Section shall not be construed to require Lender to make available
its tax returns (or any other information relating to its taxes which it deems
confidential) to Borrower or any other Person.
SECTION 2.17. Payments Generally; Allocation of
Proceeds; Sharing of Set-offs. (a)
Borrower shall make each payment required to be made by it hereunder (whether
of principal, interest, fees or reimbursement of LC Disbursements, or of
amounts payable under Section 2.14, 2.15 or 2.16, or otherwise) prior to
2:00 p.m., Milwaukee time, on the date when due, in immediately available
funds, without set-off or counterclaim.
Any amounts received after such time on any date may, in the discretion
of Lender, be deemed to have been received on the next succeeding Business Day
for purposes of calculating interest thereon.
All such payments shall be made to Lender by wire transfer to its
account number 9008104359, or such other account as may be designated by Lender
in writing from time to time. If any
payment hereunder shall be due on a day that is not a Business Day, the date for
payment shall be extended to the next succeeding Business Day, and, in the case
of any payment accruing interest, interest thereon shall be payable for the
period of such extension. All payments
hereunder shall be made in dollars.
(b) Any proceeds of
Collateral received by Lender (i) not constituting either (a) a
specific payment of principal, interest, fees or other sum payable under the
Loan Documents (which shall be applied as specified by Borrower), or (b) a
mandatory prepayment (which shall be applied in accordance with Section 2.10)
or (ii) after an Event of Default has occurred and is continuing and
Lender so elects such funds shall be applied ratably first, to pay any
fees, indemnities, or expense reimbursements including amounts then due to Lender
from Borrower, second, to pay interest due in respect of the Protective
Advances, third, to pay the principal of the Protective Advances, fourth,
to pay interest then due and payable on the Loans (other than the Protective
Advances), fifth, to prepay principal on the Loans (other than the
Protective Advances) and unreimbursed LC Disbursements, sixth, to pay an
amount to Lender equal to one hundred five percent (105%) of the aggregate
undrawn face amount of all outstanding Letters of Credit and the aggregate
amount of any unpaid LC Disbursements, to be held as cash collateral for such
Obligations, seventh, to payment of any amounts owing with respect to
Banking Services and Swap Obligations, and eighth, to the payment of any
other Secured Obligation due to Lender by Borrower, and ninth, to
Borrower or such other party as may be legally entitled thereto.
Notwithstanding anything to the contrary contained in this Agreement, unless so
directed by Borrower, or unless a Default is in existence, Lender shall not apply
any payment which it receives to any Eurodollar Loan, except (a) on the
expiration date of the Interest Period applicable to any such Eurodollar Loan
or (b) in the event, and only to the extent, that there are no outstanding
CB Floating Rate Loans and, in any such event, Borrower shall pay the break
funding payment required in accordance with Section 2.15. Lender shall
have the continuing and exclusive right to apply and reverse and reapply any
and all such proceeds and payments to any portion of the Secured Obligations.
(c) At the election
of Lender, all payments of principal, interest, LC Disbursements, fees,
premiums, reimbursable expenses (including, without limitation, all
reimbursement for fees and expenses pursuant to Section 8.03), and other sums
payable under
34
the Loan Documents, may be
paid from the proceeds of Borrowings made hereunder whether made following a
request by Borrower pursuant to Section 2.03 or a deemed request as
provided in this Section or, upon the occurrence and continuance of an
Event of Default, may be deducted from any deposit account of Borrower
maintained with Lender. Borrower hereby
irrevocably authorizes (i) Lender to make a Borrowing for the purpose of
paying each payment of principal, interest and fees as it becomes due hereunder
or any other amount due under the Loan Documents and agrees that all such
amounts charged shall constitute Loans (but such a Borrowing may only
constitute a Protective Advance if it is to reimburse costs, fees and expenses
as described in and in accordance with Section 8.03) and that all such
Borrowings shall be deemed to have been requested pursuant to Sections 2.03 or
2.04, as applicable and (ii) upon the occurrence and continuance of an Event
of Default, Lender to charge any deposit account of Borrower maintained with
Lender for each payment of principal, interest and fees as it becomes due
hereunder or any other amount due under the Loan Documents.
SECTION 2.18. Indemnity for Returned Payments. If after receipt of any payment which is
applied to the payment of all or any part of the Obligations, Lender is for any
reason compelled to surrender such payment or proceeds to any Person because
such payment or application of proceeds is invalidated, declared fraudulent,
set aside, determined to be void or voidable as a preference, impermissible
setoff, or a diversion of trust funds, or for any other reason, then the
Obligations or part thereof intended to be satisfied shall be revived and continued
and this Agreement shall continue in full force as if such payment or proceeds
had not been received by Lender and Borrower shall be liable to pay to
Lender. The provisions of this Section 2.18
shall be and remain effective notwithstanding any contrary action which may
have been taken by Lender in reliance upon such payment or application of
proceeds. The provisions of this Section 2.18
shall survive the termination of this Agreement.
ARTICLE III
Representations and Warranties
Borrower represents and
warrants to Lender that:
SECTION 3.01. Organization; Powers. Borrower and each of its Subsidiaries is duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its organization, has all requisite power and authority to
carry on its business as now conducted and is qualified to do business in, and
is in good standing in, every jurisdiction where such qualification is
required.
SECTION 3.02. Authorization; Enforceability. The Transactions are within Borrowers corporate
powers and have been duly authorized by all necessary corporate and, if
required, stockholder action. The Loan
Documents have been duly executed and delivered by Borrower and constitute a
legal, valid and binding obligation of Borrower, enforceable in accordance with
its terms, subject to applicable bankruptcy, insolvency, reorganization,
moratorium or other laws affecting creditors rights generally and subject to
general principles of equity, regardless of whether considered in a proceeding
in equity or at law.
35
SECTION 3.03. Governmental Approvals; No Conflicts. The Transactions (a) do not require any
consent or approval of, registration or filing with, or any other action by,
any Governmental Authority, except such as have been obtained or made and are
in full force and effect and except for filings necessary to perfect Liens
created pursuant to the Loan Documents, (b) will not violate any
Requirement of Law applicable to Borrower or any of its Subsidiaries, (c) will
not violate or result in a default under any indenture, agreement or other
instrument binding upon Borrower or any of its Subsidiaries or its assets, or
give rise to a right thereunder to require any payment to be made by Borrower or
any of its Subsidiaries, and (d) will not result in the creation or
imposition of any Lien on any asset of Borrower or any of its Subsidiaries,
except Liens created pursuant to the Loan Documents.
SECTION 3.04. Financial Condition; No Material Adverse Change. (a) Borrower has heretofore furnished
to Lender (i) its restated consolidated balance sheet for the fiscal year
ended June 30, 2007, (ii) its restated consolidated balance sheet and
statements of income, stockholders equity and cash flows as of and for the
fiscal years ended June 30, 2008 and June 30, 2009, and (iii) its
restated consolidated balance sheet and statements of income, stockholders
equity and cash flows as of and for the fiscal quarter and the portion of the
fiscal year ended March 31, 2010, certified by its chief financial
officer. Such financial statements
present fairly, in all material respects, the financial position and results of
operations and cash flows of Borrower and its consolidated Subsidiaries as of
such dates and for such periods in accordance with GAAP, subject to year-end
audit adjustments and the absence of footnotes in the case of the statements
referred to in clause (ii) above.
(b) No event,
change or condition has occurred that has had, or could reasonably be expected
to have, a Material Adverse Effect, since March 31, 2010.
SECTION 3.05. Properties. (a) As of the date of this Agreement, Schedule
3.05 sets forth the address of each parcel of real property that is owned
or leased by Borrower. Each of such
leases and subleases is valid and enforceable in accordance with its terms and
is in full force and effect, and no material default by any party to any such
lease or sublease exists. Borrower and
each of its Subsidiaries has good and indefeasible title to, or valid leasehold
interests in, all its real and personal property, free of all Liens other than
those permitted by Section 6.02.
(b) Borrower and
each of its Subsidiaries owns, or is licensed to use, all trademarks,
tradenames, copyrights, patents and other intellectual property necessary to
its business as currently conducted (except where such a failure to own, or
maintain a license to use, could not reasonably be expected to have a Material
Adverse Effect), and the use thereof by Borrower and its Subsidiaries does not
infringe in any material respect upon the rights of any other Person, and the
rights of Borrower and its Subsidiaries thereto are not subject to any
licensing agreement or similar arrangement other than licenses granted to
distributors in the ordinary course of Borrowers business.
SECTION 3.06. Litigation and Environmental Matters. (a) There are no actions, suits or
proceedings by or before any arbitrator or Governmental Authority pending
against or, to the knowledge of Borrower, threatened against or affecting
Borrower or any of its Subsidiaries (i) as to which there is a reasonable
possibility of an adverse determination and that, if adversely
36
determined,
could reasonably be expected, individually or in the aggregate, to result in a
Material Adverse Effect (other than the Disclosed Matters) or (ii) that
involve this Agreement or the Transactions, except as listed on Schedule
3.06.
(b) Except for the
Disclosed Matters (i) neither Borrower nor any of its Subsidiaries has
received notice of any claim with respect to any Environmental Liability or
knows of any basis for any Environmental Liability and (ii) and except
with respect to any other matters that, individually or in the aggregate, could
not reasonably be expected to result in a Material Adverse Effect, neither
Borrower nor any of its Subsidiaries (1) has failed to comply with any
Environmental Law or to obtain, maintain or comply with any permit, license or
other approval required under any Environmental Law or (2) has become
subject to any Environmental Liability.
(c) Since the date
of this Agreement, there has been no change in the status of the Disclosed
Matters that, individually or in the aggregate, has resulted in, or materially
increased the likelihood of, a Material Adverse Effect.
SECTION 3.07. Compliance with Laws and Agreements. Borrower and each of its Subsidiaries is in
compliance with all Requirements of Law applicable to it or its property and
all indentures, agreements and other instruments binding upon it or its
property, except where the failure to do so, individually or in the aggregate,
could not reasonably be expected to result in a Material Adverse Effect. No Default has occurred and is continuing.
SECTION 3.08. Investment Company Status. Neither Borrower nor any of its Subsidiaries
is an investment company as defined in, or subject to regulation under, the
Investment Company Act of 1940.
SECTION 3.09. Taxes.
Borrower and each of its Subsidiaries has timely filed or caused to be
filed all Tax returns and reports required to have been filed and has paid or
caused to be paid all Taxes required to have been paid by it, except Taxes in
an aggregate amount not in excess of $20,000 and Taxes that are being contested
in good faith by appropriate proceedings and for which Borrower or such
Subsidiary, as applicable, has set aside on its books adequate reserves in
accordance with GAAP. No tax liens have
been filed and no claims are being asserted with respect to any such taxes.
SECTION 3.10. ERISA.
No ERISA Event has occurred or is reasonably expected to occur that,
when taken together with all other such ERISA Events for which liability is
reasonably expected to occur, could reasonably be expected to result in a
Material Adverse Effect.
SECTION 3.11. Disclosure. Borrower has disclosed to Lender all
agreements, instruments and corporate or other restrictions to which it or any
Subsidiary is subject, and all other matters known to it, that, individually or
in the aggregate, could reasonably be expected to result in a Material Adverse
Effect. None of the reports, financial
statements, certificates or other information furnished by or on behalf of
Borrower or any Subsidiary to Lender in connection with the negotiation of this
Agreement or any other Loan Document (as modified or supplemented by other
information so furnished) contains any material misstatement of fact or
37
omits
to state any material fact necessary to make the statements therein, in the
light of the circumstances under which they were made, not misleading; provided
that, with respect to projected financial information, Borrower represents only
that such information was prepared in good faith based upon assumptions
believed to be reasonable at the time delivered and, if such projected
financial information was delivered prior to the Effective Date, as of the
Effective Date; provided, further, that to the extent any such information is
inaccurate or misleading as a result of the Fraud, Borrower has disclosed such
inaccuracies or misleading facts to Lender and such inaccuracy does not result
in a violation of any other provision of this Agreement.
SECTION 3.12. Material Agreements. All material agreements and contracts to
which Borrower or any Subsidiary is a party or is bound as of the date of this
Agreement are listed on Schedule 3.12.
Neither Borrower nor any Subsidiary is in default in the performance,
observance or fulfillment of any of the obligations, covenants or conditions
contained in (i) any material agreement to which it is a party or (ii) any
agreement or instrument evidencing or governing Indebtedness.
SECTION 3.13. Solvency. (a) Immediately after the consummation
of the Transactions to occur on the Effective Date, (i) the fair value of
the assets of Borrower and its consolidated Subsidiaries, taken as a whole, at
a fair valuation, will exceed their debts and liabilities, subordinated,
contingent or otherwise, (ii) the present fair saleable value of the
property of Borrower and its consolidated Subsidiaries, taken as a whole, will
be greater than the amount that will be required to pay the probable liability
of their debts and other liabilities, subordinated, contingent or otherwise, as
such debts and other liabilities become absolute and matured; (iii) Borrower
and each of its Subsidiaries will be able to pay its debts and liabilities,
subordinated, contingent or otherwise, as such debts and liabilities become
absolute and matured, and (iv) Borrower and each of its Subsidiaries will
not have unreasonably small capital with which to conduct the business in which
it is engaged as such business is now conducted and is proposed to be conducted
after the Effective Date.
(b) Borrower does not
intend to, and will not permit any of its Subsidiaries to, and does not believe
that it or any of its Subsidiaries will, incur debts beyond its ability to pay
such debts as they mature, taking into account the timing of and amounts of
cash to be received by it or any such Subsidiary and the timing of the amounts
of cash to be payable on or in respect of its Indebtedness or the Indebtedness
of any such Subsidiary.
SECTION 3.14. Insurance. Schedule 3.14 sets forth a description
of all insurance maintained by or on behalf of Borrower and the Subsidiaries as
of the Effective Date. As of the
Effective Date, all premiums in respect of such insurance have been paid. Borrower believes that the insurance
maintained by or on behalf of Borrower and the Subsidiaries is adequate.
SECTION 3.15. Capitalization and Subsidiaries. Schedule 3.15 sets forth (a) a
correct and complete list of the name and relationship to Borrower of each and
all of Borrowers Subsidiaries, (b) a true and complete listing of each
class of each of Borrowers authorized Equity Interests, of which all of such
issued shares are validly issued, outstanding, fully paid and non-assessable,
and (c) the type of entity of Borrower and each of its Subsidiaries. All of the issued and outstanding Equity
Interests owned by Borrower have been (to the extent such
38
concepts
are relevant with respect to such ownership interests) duly authorized and
issued and is fully paid and non-assessable.
SECTION 3.16. Security Interest in Collateral. The provisions of this Agreement and the
other Loan Documents create legal and valid Liens on all the Collateral in
favor of Lender, and such Liens constitute perfected and continuing Liens on
the Collateral, securing the Obligations, enforceable against Borrower and all
third parties, and having priority over all other Liens on the Collateral
except in the case of (a) Permitted Encumbrances, to the extent any such
Permitted Encumbrances would have priority over the Liens in favor of Lender
pursuant to any applicable law or agreement and (b) Liens perfected only
by possession (including possession of any certificate of title) to the extent
Lender has not obtained or does not maintain possession of such Collateral and
such possession cannot be obtained or restored upon Lenders request.
SECTION 3.17. Employment Matters. As of the Effective Date, there are no
strikes, lockouts or slowdowns against Borrower or any Subsidiary pending or,
to the knowledge of Borrower, threatened.
The hours worked by and payments made to employees of Borrower and the
Subsidiaries have not been in violation of the Fair Labor Standards Act or any
other applicable Federal, state, local or foreign law dealing with such
matters. All payments due from Borrower
or any Subsidiary, or for which any claim may be made against Borrower or any
Subsidiary, on account of wages and employee health and welfare insurance and
other benefits, have been paid or accrued as a liability on the books of
Borrower or such Subsidiary.
ARTICLE IV
Conditions
SECTION 4.01. Effective Date. The obligations of Lender to make Loans and
to issue Letters of Credit hereunder shall not become effective until the date
on which each of the following conditions is satisfied (or waived in accordance
with Section 8.02):
(a) Credit
Agreement and Loan Documents. Lender (or its counsel) shall have received (i) from
each party hereto a counterpart of this Agreement signed on behalf of such
party and (ii) duly executed copies of the Loan Documents and such other
certificates, documents, instruments and agreements as Lender shall reasonably
request in connection with the transactions contemplated by this Agreement and
the other Loan Documents, including a written opinion of counsel to Borrower,
addressed to Lender in form and substance satisfactory to Lender and its
counsel.
(b) Financial
Statements and Projections. Lender shall have received (i) consolidated
financial statements of Borrower for the 2007 through 2009 fiscal
years prepared by the Borrower (provided that the Borrower shall be permitted
to provide a balance sheet only for its 2007 fiscal year), (ii) unaudited
interim consolidated financial statements of Borrower for each fiscal month and
quarter ended after the date of the latest applicable financial statements
delivered pursuant to clause (i) of this paragraph as to which such
financial statements are available, and such financial statements shall not, in
the reasonable judgment of Lender, reflect any material adverse change in the
consolidated financial condition of Borrower, as reflected in
39
the financial statements or
projections furnished to Lender and (iii) satisfactory projections through
June 30, 2010.
(c) Closing
Certificates; Certified Certificate of Incorporation; Good Standing
Certificates. Lender
shall have received (i) a certificate of Borrower, dated the Effective
Date and executed by an officer of Borrower, which shall (a) certify the
resolutions of its Board of Directors, authorizing the execution, delivery and
performance of the Loan Documents, (b) identify by name and title and bear
the signatures of the Financial Officers and any other officers of Borrower
authorized to sign the Loan Documents, and (c) contain appropriate
attachments, including the certificate of incorporation of Borrower certified
by the Delaware Secretary of State as of a recent date and a true and correct
copy of its by-laws, and (ii) good standing certificates for Borrower from
the states of Delaware and Wisconsin.
(d) No Default
Certificate. Lender
shall have received a certificate, signed by the chief financial officer of
Borrower, on the initial Borrowing date (i) stating that no Default has
occurred and is continuing, (ii) stating that the representations and
warranties contained in Article III are true and correct as of such date,
and (iii) certifying any other factual matters as may be reasonably
requested by Lender.
(e) Fees. Lender shall have received all fees required
to be paid, and all expenses for which invoices have been presented (including
the reasonable fees and expenses of legal counsel), on or before the Effective
Date.
(f) Lien Searches. Lender shall have received the results of a
recent lien search in each of the jurisdictions where assets of Borrower are
located, and such search shall reveal no liens on any of the assets of Borrower
except for liens permitted by Section 6.02 or discharged on or prior to
the Effective Date pursuant to a pay-off letter or other documentation
satisfactory to Lender.
(g) Pay-Off Letter. Lender shall have received satisfactory
pay-off letters for all existing Indebtedness to be repaid from the proceeds
the initial Borrowing, confirming that all Liens upon any of the property of Borrower
constituting Collateral will be terminated concurrently with such payment and
all letters of credit issued or guaranteed as part of such Indebtedness shall
have been cash collateralized or supported by a Letter of Credit.
(h) Borrowing Base
Certificate. Lender
shall have received a Borrowing Base
Certificate which calculates the Borrowing Base as of March 31, 2010.
(i) Filings,
Registrations and Recordings. Each document (including any Uniform
Commercial Code financing statement) required by the Collateral Documents or
under law or reasonably requested by Lender to be filed, registered or recorded
in order to create in favor of Lender, a perfected Lien on the Collateral
described therein, prior and superior in right to any other Person (other than
with respect to Liens expressly permitted by Section 6.02), shall be in
proper form for filing, registration or recordation.
(j) Insurance. Lender shall have received evidence of
insurance coverage in form, scope, and substance reasonably satisfactory to
Lender and otherwise in compliance with the terms of Section 5.09.
40
(k) Other Documents. Lender shall have received such other
documents as Lender or its counsel may have reasonably requested.
SECTION 4.02. Each Credit Event. The obligation of Lender to make a Loan on
the occasion of any Borrowing, and to issue, amend, renew or extend any Letter
of Credit, is subject to the satisfaction of the following conditions:
(a) The representations and warranties of
Borrower set forth in this Agreement shall be true and correct on and as of the
date of such Borrowing or the date of issuance, amendment, renewal or extension
of such Letter of Credit, as applicable, except to the extent that any such
representation or warranty relates solely to an earlier date, and if they are
not true and correct Lender shall have determined not to make any make a Loan
or not to issue Letters of Credit as a result of the fact that such
representation or warranty is untrue or incorrect.
(b) At the time of and immediately after
giving effect to such Borrowing or the issuance, amendment, renewal or extension
of such Letter of Credit, as applicable, no Default shall have occurred and be
continuing and Lender shall have determined not to make such Borrowing or not
to issue such Letter of Credit as a result of such Default.
(c) After giving effect to any Borrowing
or the issuance of any Letter of Credit, Availability is not less than zero.
Each Borrowing and each
issuance, amendment, renewal or extension of a Letter of Credit shall be deemed
to constitute a representation and warranty by Borrower on the date thereof as
to the matters specified in paragraphs (a), (b) and (c) of this
Section.
ARTICLE
V
Affirmative Covenants
Until the Revolving
Commitment has expired or been terminated and the principal of and interest on
each Loan and all fees payable hereunder shall have been paid in full and all
Letters of Credit shall have expired or terminated and all LC Disbursements
shall have been reimbursed, Borrower covenants and agrees with Lender that:
SECTION 5.01. Financial Statements; Borrowing Base and Other
Information. Borrower will furnish
to Lender:
(a) within 120 days after the end of each
fiscal year of Borrower, its audited consolidated balance sheet and related
statements of operations, stockholders equity and cash flows as of the end of
and for such year, setting forth in each case in comparative form the figures
for the previous fiscal year, all reported on by independent public accountants
acceptable to Lender (without a going concern or like qualification or
exception and without any qualification or exception as to the scope of such
audit) to the effect that such consolidated financial statements present fairly
in all material respects the financial condition and results of operations of
Borrower and its consolidated Subsidiaries on a consolidated basis in
accordance with GAAP consistently applied, accompanied by any management letter
prepared by said accountants;
41
(b) within 30 days after the end of each
fiscal quarter of Borrower, its consolidated balance sheet and related
statements of operations, stockholders equity and cash flows as of the end of
and for such fiscal quarter and the then elapsed portion of the fiscal year,
setting forth in each case in comparative form the figures for the
corresponding period or periods of (or, in the case of the balance sheet, as of
the end of) the previous fiscal year, all certified by one of its Financial
Officers as presenting fairly in all material respects the financial condition
and results of operations of Borrower and its consolidated Subsidiaries on a
consolidated basis in accordance with GAAP consistently applied, subject to
normal year-end audit adjustments and the absence of footnotes;
(c) concurrently with any delivery of
financial statements under clause (a) or (b) above, a certificate of
a Financial Officer of Borrower in substantially the form of Exhibit B
(i) certifying, in the case of the financial statements delivered under
clause (b), as presenting fairly in all material respects the financial
condition and results of operations of Borrower and its consolidated
Subsidiaries on a consolidated basis in accordance with GAAP consistently
applied, subject to normal year-end audit adjustments and the absence of
footnotes, (ii) certifying as to whether a Default has occurred and, if a
Default has occurred, specifying the details thereof and any action taken or
proposed to be taken with respect thereto, (iii) setting forth reasonably
detailed calculations demonstrating compliance with Section 6.12 (iv) stating whether any change in GAAP or in the
application thereof has occurred since the date of the audited financial
statements referred to in Section 3.04 and, if any such change has
occurred, specifying the effect of such change on the financial statements
accompanying such certificate and (v) setting forth any right, title or
interest in registered Patents, Trademarks or Copyrights (each as defined in
the Security Agreement) acquired by the Borrower during such period;
(d) as soon as available, but in any
event by the end of each fiscal year of Borrower, a copy of the plan and
forecast (including a projected consolidated and consolidating balance sheet,
income statement and funds flow statement) of Borrower for each month of such
fiscal year (the Projections) in form reasonably satisfactory to
Lender;
(e) as soon as available but in any event
within 30 days of the end of each calendar month, and at such other times as
may be requested by Lender, as of the period then ended, a Borrowing Base
Certificate and supporting information in connection therewith, together with
any additional reports with respect to the Borrowing Base as Lender may
reasonably request, provided, however that Borrowing Base Certificates shall
not be required for any calendar month ending after October 31, 2010
provided that (i) the Borrowers Current Ratio is greater than 1.50 to
1.00 (based on the most recent financial statements delivered by the Company
pursuant to clause (c) above and (ii) no Event of Default shall have
occurred and be continuing;
(f) promptly after the same become
publicly available, copies of all periodic and other reports, proxy statements
and other materials filed by Borrower or any Subsidiary with the Securities and
Exchange Commission, or any Governmental Authority succeeding to any or all of
the functions of said Commission, or with any national securities exchange, or
distributed by Borrower to its shareholders generally, as the case may be;
42
(g) promptly following any request
therefor, such other information regarding the operations, business affairs and
financial condition of Borrower or any Subsidiary, or compliance with the terms
of this Agreement, as Lender may reasonably request;
(h) as soon as available, and in any
event no later than August 15, 2010, (i) an audited, restated,
consolidated balance sheet for the Borrowers fiscal year ended June 30,
2007 and (ii) audited, consolidated balance sheet and statements of
income, stockholders equity and cash flows as of and for the Borrowers fiscal
years ended June 30, 2008 and June 30, 2009, reported on by Baker
Tilly LLP, independent public accountants.
SECTION 5.02. Notices of Material Events. Borrower
will furnish to Lender prompt written notice of the following:
(a) the occurrence of any Event of
Default;
(b) receipt of any notice of any
governmental investigation or any litigation commenced or threatened against
Borrower or any Subsidiary, other than any existing investigation or litigation
referenced in Schedule 3.06, that (i) seeks damages in excess of $500,000,
(ii) seeks injunctive relief, (iii) is asserted or instituted against
any Plan, its fiduciaries or its assets, (iv) alleges criminal misconduct
by Borrower or any Subsidiary, (v) alleges the violation of any law
regarding, or seeks remedies in connection with, any Environmental Laws; (vi) contests
any tax, fee, assessment, or other governmental charge in excess of $500,000,
or (vii) involves any product recall;
(c) any Lien (other than Permitted
Encumbrances) or claim made or asserted against any of the Collateral;
(d) any loss, damage, or destruction to
the Collateral in the amount of $500,000 or more,
whether or not covered by insurance;
(e) any and all default notices received
under or with respect to any leased location or public warehouse where
Collateral is located (which shall be delivered within two Business Days after
receipt thereof);
(f) all material amendments to the lease
with respect to Borrowers leased facility at 4129 North Port Washington Road,
Milwaukee, Wisconsin, together with a copy of each such amendment;
(g) the fact that Borrower or any
Subsidiary has entered into a Swap Agreement or an amendment to a Swap
Agreement, together with copies of all agreements evidencing such Swap
Agreement or amendments thereto (which shall be delivered within two Business
Days); and
(h) any other development that results
in, or could reasonably be expected to result in, a Material Adverse Effect.
Each notice delivered under
this Section shall be accompanied by a statement of a Financial Officer or
other executive officer of Borrower setting forth the details of the event or
43
development requiring such
notice and any action taken or proposed to be taken with respect thereto.
SECTION 5.03. Existence; Conduct of Business. Borrower will, and will cause each Subsidiary
to, (a) do or cause to be done all things necessary to preserve, renew and
keep in full force and effect its legal existence and the rights,
qualifications, licenses, permits, franchises, governmental authorizations,
intellectual property rights, licenses and permits material to the conduct of
its business, and maintain all requisite authority to conduct its business in
each jurisdiction in which its business is conducted; provided that the
foregoing shall not prohibit any merger, consolidation, liquidation or
dissolution permitted under Section 6.03 and (b) carry on and conduct
its business in substantially the same manner and in substantially the same
fields of enterprise as it is presently conducted.
SECTION 5.04. Payment of Obligations. Borrower will, and will cause each Subsidiary
to, pay or discharge all Material Indebtedness and all other material
liabilities and obligations, including Taxes, before the same shall become
delinquent or in default, except where (a) the validity or amount thereof
is being contested in good faith by appropriate proceedings, (b) Borrower
or such Subsidiary has set aside on its books adequate reserves with respect
thereto in accordance with GAAP and (c) such liabilities would not result
in aggregate liabilities in excess of $50,000 and
none of the Collateral becomes subject to forfeiture or loss as a result of the
contest.
SECTION 5.05. Maintenance of Properties. Borrower will, and will cause each Subsidiary
to, keep and maintain all property material to the conduct of its business in
good working order and condition, ordinary wear and tear excepted.
SECTION 5.06. Books and Records; Inspection Rights. Borrower will, and will cause each Subsidiary
to, (i) keep proper books of record and account in which full, true and
correct entries are made of all dealings and transactions in relation to its
business and activities and (ii) permit any representatives designated by
Lender (including employees of Lender, or any consultants, accountants, lawyers
and appraisers retained by Lender, upon reasonable prior notice, to visit and
inspect its properties, to examine and make extracts from its books and
records, and to discuss its affairs, finances and condition with its officers
and independent accountants, all at such reasonable times and as often as
reasonably requested. Borrower acknowledge
that Lender, after exercising its rights of inspection, may prepare certain
Reports pertaining to Borrowers assets for internal use by Lender. Borrower
will permit Lender to conduct field audit examinations of Borrowers assets,
liabilities, books and records at a frequency not more than once in any 180-day
period; provided further that Borrower will permit Lender to conduct such
examinations at any time and with any reasonable frequency after an Event of
Default.
SECTION 5.07. Compliance with Laws. Borrower will, and will cause each Subsidiary
to, comply with all Requirements of Law applicable to it or its property.
SECTION 5.08. Use of Proceeds and Letters of Credit.
The proceeds of the Loans will be used, and Letters of Credit will be issued,
only for general corporate purposes of Borrower. No part of the proceeds of any Loan and no
Letter of Credit will be used, whether
44
directly
or indirectly, for any purpose that entails a violation of any of the
Regulations of the Board, including Regulations T, U and X.
SECTION 5.09. Insurance. Borrower will, and will cause each Subsidiary
to, maintain with financially sound and reputable carriers having a financial
strength rating of at least A+ by A.M. Best Company (a) insurance in
such amounts (with no greater risk retention) and against such risks (including
(i) loss or damage by fire and loss in transit; (ii) theft, burglary,
pilferage, larceny, embezzlement, and other criminal activities; (iii) business
interruption; (iv) general liability and (v) and such other hazards,
as is customarily maintained by companies of established repute engaged in the
same or similar businesses operating in the same or similar locations and (b) all
insurance required pursuant to the Collateral Documents. Borrower will furnish to Lender, information
in reasonable detail as to the insurance so maintained.
SECTION 5.10. Casualty and Condemnation. Borrower (a) will furnish to Lender
prompt written notice of any casualty or other insured damage to any material portion
of the Collateral or the commencement of any action or proceeding for the
taking of any material portion of the Collateral or interest therein under
power of eminent domain or by condemnation or similar proceeding and (b) will
ensure that the Net Proceeds of any such event (whether in the form of
insurance proceeds, condemnation awards or otherwise) are collected and applied
in accordance with the applicable provisions of this Agreement and the
Collateral Documents.
SECTION 5.11. Collateral Assessments and Appraisals. Upon Lenders request, Borrower, at its sole
cost and expense, will provide Lender with appraisals or updates thereof of its
Inventory and Equipment from an appraiser selected and engaged by Lender, and
prepared on a basis satisfactory to Lender, such appraisals and updates to
include, without limitation, information required by applicable law and
regulations; provided, however, that unless an Event of Default has occurred
and is continuing, Borrower shall not be required to bear the cost and expense
of such appraisals more than once in any 180-day period. At any time the Lender may conduct collateral
audits or field examinations at the sole expense of Borrower. The Lender agrees not to conduct such audits
or examinations more than one (1) time per year unless an Event of Default
shall have occurred and be continuing.
SECTION 5.12. Depository Banks. Within 120 days of
the Effective Date, Borrower shall have transitioned its principal accounts to
Lender and thereafter Borrower will maintain Lender as its principal depository
bank, including for the maintenance of operating, administrative, cash
management, collection activity, and other deposit accounts for the conduct of
its business.
SECTION 5.13. Additional Collateral; Further Assurances. (a) At Lenders request, Borrower shall
cause each of its domestic Subsidiaries formed or acquired before or after the
date of this Agreement to execute a guaranty of Borrowers obligations under
this Agreement.
(b) Borrower will cause 100% of the
issued and outstanding Equity Interests of each of its domestic Subsidiaries to
be subject at all times to a first priority, perfected Lien in favor of Lender
pursuant to the terms and conditions of the Loan Documents or other security
documents as Lender shall reasonably request.
45
(c) Without limiting the foregoing,
Borrower will, and will cause each Subsidiary to, execute and deliver, or cause
to be executed and delivered, to Lender such documents, agreements and
instruments, and will take or cause to be taken such further actions (including
the filing and recording of financing statements, fixture filings, mortgages,
deeds of trust and other documents and such other actions or deliveries of the
type required by Section 4.01, as applicable), which may be required by
law or which Lender may, from time to time, reasonably request to carry out the
terms and conditions of this Agreement and the other Loan Documents and to
ensure perfection and priority of the Liens created or intended to be created
by the Collateral Documents, all at the expense of Borrower.
(d) If any material assets (including any real property or
improvements thereto or any interest therein) are acquired by Borrower or any
Subsidiary after the Effective Date (other than assets constituting Collateral
under the Security Agreement that become subject to the Lien in favor of the
Security Agreement upon acquisition thereof), Borrower will notify Lender, and,
if requested by Lender, Borrower will cause such assets to be subjected to a
Lien securing the Secured Obligations and will take, and cause its Subsidiary
to take, such actions as shall be necessary or reasonably requested by Lender
to grant and perfect such Liens, including actions described in paragraph (c) of
this Section, all at the expense of Borrower.
SECTION 5.14. Dissolution of Koss Classics Ltd.
On or before June 30,
2010, Borrower shall either (a) cause Koss Classics Ltd. to be merged into
the Borrower or (b) cause Koss Classics Ltd. to execute and deliver to the
Lender a security agreement and guaranty of the Obligations, all on terms and
conditions satisfactory to the Lender in its sole discretion.
ARTICLE
VI
Negative Covenants
Until the Revolving
Commitment has expired or terminated and the principal of and interest on each
Loan and all fees, expenses and other amounts payable under any Loan Document
have been paid in full and all Letters of Credit have expired or terminated and
all LC Disbursements shall have been reimbursed, Borrower covenants and agrees
with Lender that:
SECTION 6.01. Indebtedness. Borrower will not, nor will it permit any
Subsidiary to, create, incur or suffer to exist any Indebtedness, except:
(a) the Secured Obligations;
(b) Indebtedness existing on the date
hereof and set forth in Schedule 6.01 and any amendments, restatements,
modifications, refinancing, or renewals thereof on substantially similar terms
and in an aggregate principal amount not to exceed the aggregate principal
amount as of the date hereof;
46
(c) Indebtedness of Borrower to any
Subsidiary and of any Subsidiary to Borrower or any other Subsidiary, provided that (i) Indebtedness
of any Subsidiary to Borrower shall be subject to Section 6.04 and (ii) Indebtedness
of Borrower to any Subsidiary shall be subordinated to the Secured Obligations
on terms reasonably satisfactory to Lender;
(d) Guarantees by Borrower of
Indebtedness of any Subsidiary and by any Subsidiary of Indebtedness of
Borrower or any other Subsidiary, provided that (i) the
Indebtedness so Guaranteed is permitted by this Section 6.01, and (ii) Guarantees
by Borrower of Indebtedness of any Subsidiary shall be subject to Section 6.04;
(e) Indebtedness of Borrower or any
Subsidiary incurred to finance the acquisition, construction or improvement of
any fixed or capital assets (whether or not constituting purchase money
Indebtedness), including Capital Lease Obligations and any Indebtedness assumed
in connection with the acquisition of any such assets or secured by a Lien on
any such assets prior to the acquisition thereof, and extensions, renewals and
replacements of any such Indebtedness; provided that (i) such
Indebtedness is incurred prior to or within 90 days after such acquisition or
the completion of such construction or improvement and (ii) the aggregate
principal amount of Indebtedness permitted by this clause (e) shall not
exceed $250,000 at any time outstanding;
(f) Indebtedness owed to any person
providing workers compensation, health, disability or other employee benefits
or property, casualty or liability insurance, pursuant to reimbursement or
indemnification obligations to such person, in each case incurred in the
ordinary course of business; and
(g) Indebtedness of Borrower or any
Subsidiary in respect of performance bonds, bid bonds, appeal bonds, surety
bonds and similar obligations, in each case provided in the ordinary course of
business.
SECTION 6.02. Liens.
Borrower will not, nor will it permit any Subsidiary to, create, incur,
assume or permit to exist any Lien on any property or asset now owned or
hereafter acquired by it, or assign or sell any income or revenues (including
accounts receivable) or rights in respect of any thereof, except:
(a) Liens created pursuant to any Loan
Document;
(b) Permitted Encumbrances;
(c) any Lien on any property or asset of
Borrower or any Subsidiary existing on the date hereof and set forth in Schedule
6.02; provided that (i) such Lien shall not apply to any other
property or asset of Borrower or Subsidiary and (ii) such Lien shall
secure only those obligations which it secures on the date hereof or any
renewals thereof in accordance with Section 6.01 above;
(d) Liens on fixed or capital assets
acquired, constructed or improved by Borrower or any Subsidiary; provided
that (i) such security interests secure Indebtedness permitted by clause (e) of
Section 6.01, (ii) such security interests and the Indebtedness
secured thereby are incurred prior to or within 90 days after such acquisition
or the completion of such
47
construction or improvement,
(iii) the Indebtedness secured thereby does not exceed the cost of
acquiring, constructing or improving such fixed or capital assets and (iv) such
security interests shall not apply to any other property or assets of Borrower
or Subsidiary;
(e) Liens of a collecting bank arising in
the ordinary course of business under Section 4-210 of the Uniform
Commercial Code in effect in the relevant jurisdiction covering only the items
being collected upon; and
(f) Liens arising out of sale and
leaseback transactions permitted by Section 6.06; and
(g) Liens granted by a Subsidiary in
favor of the in respect of Indebtedness owed by such Subsidiary.
Notwithstanding the
foregoing, none of the Liens permitted pursuant to this Section 6.02 may
at any time attach to Borrowers (1) Accounts, other than those permitted
under clause (a) of the definition of Permitted Encumbrance and clause (a) above
and (2) Inventory, other than those permitted under clauses (a) and (b) of
the definition of Permitted Encumbrance and clause (a) above.
SECTION 6.03. Fundamental Changes. (a) Borrower will not, nor will it
permit any Subsidiary to, merge into or consolidate with any other Person, or
permit any other Person to merge into or consolidate with it, or liquidate or
dissolve, except that, if at the time thereof and immediately after giving
effect thereto no Event of Default shall have occurred and be continuing (i) any
Subsidiary of Borrower may merge into Borrower in a transaction in which
Borrower is the surviving corporation, and (ii) any Subsidiary may liquidate or dissolve if
Borrower determines in good faith that such liquidation or dissolution is in
the best interests of Borrower and is not materially disadvantageous to Lender.
(b) Borrower will not, nor will it permit
any of its Subsidiaries to, engage in any business other than businesses of the
type conducted by Borrower and its Subsidiaries on the date of execution of
this Agreement and businesses reasonably related thereto.
SECTION 6.04. Investments, Loans, Advances, Guarantees
and Acquisitions. Borrower will not,
nor will it permit any Subsidiary to, purchase, hold or acquire (including pursuant
to any merger) any capital stock, evidences of indebtedness or other securities
(including any option, warrant or other right to acquire any of the foregoing)
of, make or permit to exist any loans or advances to, Guarantee any obligations
of, or make or permit to exist any investment or any other interest in, any
other Person, or purchase or otherwise acquire (in one transaction or a series
of transactions) any assets of any other Person constituting a business unit
(whether through purchase of assets, merger or otherwise), except:
(a) Permitted Investments, subject to
control agreements in favor of Lender or otherwise subject to a perfected
security interest in favor of Lender;
(b) investments in existence on the date
of this Agreement and described in Schedule 6.04 and any amendments,
restatements, modifications, reinvestments, or renewals
48
thereof on substantially
similar terms and in an aggregate principal amount not to exceed the aggregate
principal amount on the date hereof;
(c) investments by Borrower and the
Subsidiaries in Equity Interests in their respective Subsidiaries, provided
that (a) any such Equity Interests shall be pledged pursuant to the
Security Agreement (subject to the limitations applicable to common stock of a
Foreign Subsidiary referred to in Section 5.13) and (b) the aggregate
amount of investments by Borrower in its Subsidiaries (together with
outstanding intercompany loans permitted under clause (b) to the proviso
to Section 6.04(d) and outstanding Guarantees permitted under the
proviso to Section 6.04(e)) shall not exceed $250,000 at
any time outstanding (in each case determined without regard to any write-downs
or write-offs);
(d) loans or advances made by Borrower to
any Subsidiary and made by any Subsidiary to Borrower or any other Subsidiary, provided
that (a) any such loans and advances made by Borrower shall be evidenced
by a promissory note pledged pursuant to the Security Agreement and (b) the
amount of such loans and advances made by Borrower (together with outstanding
investments permitted under clause (b) to the proviso to Section 6.04(c) and
outstanding Guarantees permitted under the proviso to Section 6.04(e))
shall not exceed $250,000 at any time
outstanding (in each case determined without regard to any write-downs or
write-offs);
(e) Guarantees constituting Indebtedness
permitted by Section 6.01, provided that the aggregate principal
amount of Indebtedness of Subsidiaries that is Guaranteed by Borrower shall
(together with outstanding investments permitted under clause (b) to the
proviso to Section 6.04(c) and outstanding intercompany loans
permitted under clause (b) to the proviso to Section 6.04(d)) shall
not exceed $250,000 at any time
outstanding (in each case determined without regard to any write-downs or
write-offs);
(f) loans or advances made by Borrower
to its employees on an arms-length basis in the ordinary course of business
consistent with past practices for travel and entertainment expenses, relocation
costs and similar purposes up to a maximum of $10,000 to any employee and up to
a maximum of $100,000 in the
aggregate at any one time outstanding;
(g) investments in the form of Swap
Agreements permitted by Section 6.07;
(h) investments of any Person existing at
the time such Person becomes a Subsidiary of Borrower or consolidates or merges
with Borrower or any of the Subsidiaries
so long as such investments were not made in contemplation of such
Person becoming a Subsidiary or of such merger;
(i) investments received in connection
with the dispositions of assets permitted by Section 6.05; and
(j) investments constituting deposits
described in clauses (c) and (d) of the definition of the term Permitted
Encumbrances.
SECTION 6.05. Asset Sales. Borrower will not, nor will it permit any
Subsidiary to, sell, transfer, lease or otherwise dispose of any asset,
including any Equity Interest owned by
49
it,
nor will Borrower permit any Subsidiary to issue any additional Equity Interest
in such Subsidiary (other than to Borrower or another Subsidiary in compliance
with Section 6.04), except:
(a) sales, transfers and dispositions of (i) inventory
in the ordinary course of business and (ii) used, obsolete, worn out or
surplus equipment or property in the ordinary course of business;
(b) sales, transfers and dispositions to
Borrower or any Subsidiary, provided that any such sales, transfers or
dispositions involving a Subsidiary shall be made in compliance with Section 6.09;
(c) sales, transfers and dispositions of
accounts receivable in connection with the compromise, settlement or collection
thereof;
(d) sales, transfers and dispositions of
investments permitted by clauses (i) and (k) of Section 6.04;
(e) sale and leaseback transactions
permitted by Section 6.06;
(f) dispositions resulting from any
casualty or other insured damage to, or any taking under power of eminent
domain or by condemnation or similar proceeding of, any property or asset of
Borrower or any Subsidiary; and
(g) sales, transfers and other
dispositions of assets (other than Equity Interests in a Subsidiary unless all
Equity Interests in such Subsidiary are sold) that are not permitted by any
other paragraph of this Section, provided that the aggregate fair market
value of all assets sold, transferred or otherwise disposed of in reliance upon
this paragraph (g) shall not exceed $100,000 during any fiscal year of
Borrower;
provided that all
sales, transfers, leases and other dispositions permitted hereby (other than
those permitted by paragraphs (b) and (f) above) shall be made for
fair value.
SECTION 6.06. Sale and Leaseback Transactions. Borrower will not, nor will it permit any
Subsidiary to, enter into any arrangement, directly or indirectly, whereby it
shall sell or transfer any property, real or personal, used or useful in its
business, whether now owned or hereafter acquired, and thereafter rent or lease
such property or other property that it intends to use for substantially the
same purpose or purposes as the property sold or transferred, except for any
such sale of any fixed or capital assets by Borrower or any Subsidiary that is
made for cash consideration in an amount not less than the fair value of such
fixed or capital asset and is consummated within 90 days after Borrower or such
Subsidiary acquires or completes the construction of such fixed or capital
asset.
SECTION 6.07. Swap Agreements. Borrower will not, nor will it permit
any Subsidiary to, enter into any Swap
Agreement, except (a) Swap Agreements entered into to hedge or mitigate
risks to which Borrower or any Subsidiary has actual exposure (other than those
in respect of Equity Interests of Borrower or any of its Subsidiaries), and (b) Swap
Agreements entered into in order to effectively cap, collar or exchange
interest rates (from fixed
50
to
floating rates, from one floating rate to another floating rate or otherwise)
with respect to any interest-bearing liability or investment of Borrower or any
Subsidiary.
SECTION 6.08. Restricted Payments; Certain Payments of
Indebtedness. (a) Borrower
will not, nor will it permit any Subsidiary to, declare or make, or agree to
pay or make, directly or indirectly, any Restricted Payment, or incur any
obligation (contingent or otherwise) to do so, except (i) Borrower may
declare and pay dividends with respect to its common stock payable solely in
additional shares of its common stock, and, with respect to its preferred
stock, payable solely in additional shares of such preferred stock or in shares
of its common stock, (ii) Subsidiaries may declare and pay dividends
ratably with respect to their Equity Interests,
(iii) Borrower may make Restricted Payments pursuant to and in
accordance with stock option plans or other benefit plans for management or
employees of Borrower and its Subsidiaries and (iv) Borrower may make
Restricted Payments so long as no Event of Default has occurred and is
continuing and so long as the making of such Restricted Payment would not cause
an Event of Default.
(b) Borrower will not, nor will it permit
any Subsidiary to, make or agree to pay or make, directly or indirectly, any
payment or other distribution (whether in cash, securities or other property)
of or in respect of principal of or interest on any Indebtedness, or any
payment or other distribution (whether in cash, securities or other property),
including any sinking fund or similar deposit, on account of the purchase,
redemption, retirement, acquisition, cancellation or termination of any
Indebtedness in excess of $250,000, except (i) payment of Indebtedness
created under the Loan Documents; (ii) payment of regularly scheduled
interest and principal payments as and when due in respect of any Indebtedness;
and (iii) payment of secured Indebtedness that becomes due as a result of
the voluntary sale or transfer of the property or assets securing such
Indebtedness.
SECTION 6.09. Transactions with Affiliates. Borrower will not, nor will it permit any
Subsidiary to, sell, lease or otherwise transfer any property or assets to, or
purchase, lease or otherwise acquire any property or assets from, or otherwise
engage in any other transactions with, any of its Affiliates, except (a) transactions
that (i) are in the ordinary course of business and (ii) are at
prices and on terms and conditions not less favorable to Borrower or such
Subsidiary than could be obtained on an arms-length basis from unrelated third
parties, (b) transactions between Borrower and any other Affiliate, (c) any
investment permitted by Sections 6.04(c) or 6.04(d), (d) any
Indebtedness permitted under Section 6.01(c), (e) any Restricted
Payment permitted by Section 6.08, (f) loans or advances to employees
permitted under Section 6.04, (g) the payment of reasonable fees to
directors of Borrower or any Subsidiary who are not employees of Borrower or
any Subsidiary, and compensation and employee benefit arrangements paid to, and
indemnities provided for the benefit of, directors, officers or employees of
Borrower or its Subsidiaries in the ordinary course of business and (h) any
issuances of securities or other payments, awards or grants in cash, securities
or otherwise pursuant to, or the funding of, employment agreements, stock options
and stock ownership plans approved by Borrowers board of directors
SECTION 6.10. Restrictive Agreements. Borrower will not, nor will it permit any
Subsidiary to, directly or indirectly, enter into, incur or permit to exist any
agreement or other arrangement with a value or potential liabilities in excess
of $100,000 that prohibits,
51
restricts
or imposes any condition upon (a) the ability of Borrower or any of its
Subsidiaries to create, incur or permit to exist any Lien upon any of its
property or assets, or (b) the ability of any Subsidiary to pay dividends
or other distributions with respect to any shares of its capital stock or to
make or repay loans or advances to Borrower or any other Subsidiary or to
Guarantee Indebtedness of Borrower or any other Subsidiary; provided
that (i) the foregoing shall not apply to restrictions and conditions
imposed by law or by any Loan Document, (ii) the foregoing shall not apply
to restrictions and conditions existing on the date hereof identified on Schedule
6.10 (but shall apply to any extension or renewal of, or any amendment or
modification expanding the scope of, any such restriction or condition), (iii) the
foregoing shall not apply to customary restrictions and conditions contained in
agreements relating to the sale of a Subsidiary pending such sale, provided
such restrictions and conditions apply only to the Subsidiary that is to be
sold and such sale is permitted hereunder, (iv) clause (a) of the
foregoing shall not apply to restrictions or conditions imposed by any
agreement relating to secured Indebtedness permitted by this Agreement if such
restrictions or conditions apply only to the property or assets securing such
Indebtedness and (v) clause (a) of the foregoing shall not apply to
customary provisions in leases and other contracts restricting the assignment
thereof.
SECTION 6.11. Amendment of Material Documents. Borrower will not, nor will it permit any
Subsidiary to, amend, modify or waive any of its rights under its certificate
of incorporation, by-laws, operating, management or partnership agreement or
other organizational documents, to the extent any such amendment, modification
or waiver would be adverse to Lender.
SECTION 6.12. Financial Covenants.
(a) Current Ratio. Borrower will at all times maintain a Current
Ratio of at least 1.20 to 1.00.
(b) Minimum Tangible Net Worth. Borrower will maintain (a) at all times
prior to Lenders receipt of Borrowers audited annual financial statements for
the fiscal year ending June 30, 2010 pursuant to Section 5.01(a) hereof,
Tangible Net Worth of at least $9,000,000, and (b) at all times
thereafter, Tangible Net Worth of at least 75% of Borrowers actual Tangible
Net Worth calculated as of June 30, 2010, provided, however, that (i) in
the event that 75% of Borrowers Tangible Net Worth as of June 30, 2010 is
less than $8,000,000, Borrower shall be required to maintain Tangible Net Worth
of at least $8,000,000 at all times thereafter and (ii) in the event that
75% of Borrowers Tangible Net Worth as of June 30, 2010 is greater than
$11,000,000, Borrower shall be required to maintain Tangible Net Worth of at
least $11,000,000 at all times thereafter.
(c) Leverage Ratio. Borrower will not permit the Leverage Ratio,
determined for any period of four consecutive fiscal quarters ending on the
last day of each fiscal quarter of Borrower, to be less than 2.50 to 1.00.
SECTION 6.13. ERISA Plans.
Borrower will not, without
the prior written consent of the Lender, become party to any Plan.
52
ARTICLE
VII
Events of Default
If any of the following
events (Events of Default) shall occur:
(a) Borrower shall fail to pay any
principal of any Loan, any reimbursement obligation in respect of any LC
Disbursement, any interest on any loan or any fee or other amount payable under
this Agreement when and as the same shall become due and payable, whether at
the due date thereof or at a date fixed for prepayment thereof or otherwise;
(b) any representation or warranty made
or deemed made by or on behalf of Borrower or any Subsidiary in or in
connection with this Agreement or any Loan Document or any amendment or
modification thereof or waiver thereunder, or in any report, certificate,
financial statement or other document furnished pursuant to or in connection
with this Agreement or any Loan Document or any amendment or modification
thereof or waiver thereunder, shall prove to have been materially incorrect
when made or deemed made;
(c) Borrower shall fail to observe or
perform any covenant, condition or agreement contained in Section 5.02(a),
5.03 (solely with respect to existence) or 5.08 or in Article VI;
(d) Borrower shall fail to observe or
perform any covenant, condition or agreement contained in this Agreement (other
than those which constitute a default under another Section of this
Article), and such failure shall continue unremedied for a period of (i) 5
days after the earlier of knowledge of such breach or notice thereof from
Lender if such breach relates to terms or provisions of Section 5.01, 5.02
(other than Section 5.02(a)), 5.03 through 5.07, 5.09, 5.10 or 5.12 of
this Agreement or (ii) 15 days after the earlier of knowledge of such
breach or notice thereof from Lender if such breach relates to terms or
provisions of any other Section of this Agreement;
(e) Borrower or any Subsidiary shall fail
to make any payment (whether of principal or interest and regardless of amount)
in respect of any Material Indebtedness, when and as the same shall become due
and payable, after giving effect to any period of grace applicable to such
payment;
(f) any event or condition occurs that
results in any Material Indebtedness becoming due prior to its scheduled
maturity or that enables or permits (with or without the giving of notice, the
lapse of time or both) the holder or holders of any Material Indebtedness or
any trustee or agent on its or their behalf to cause any Material Indebtedness
to become due, or to require the prepayment, repurchase, redemption or
defeasance thereof, prior to its scheduled maturity; provided that this
clause (g) shall not apply to secured Indebtedness that becomes due as a
result of the voluntary sale or transfer of the property or assets securing
such Indebtedness;
(g) an involuntary proceeding shall be
commenced or an involuntary petition shall be filed seeking (i) liquidation,
reorganization or other relief in respect of Borrower or any Subsidiary or its
debts, or of a substantial part of its assets, under any Federal, state or
foreign bankruptcy, insolvency, receivership or similar law now or hereafter in
effect or (ii) the appointment of a receiver, trustee, custodian,
sequestrator, conservator or similar official for
53
Borrower or any Subsidiary
or for a substantial part of its assets, and, in any such case, such proceeding
or petition shall continue undismissed for 60 days or an order or decree
approving or ordering any of the foregoing shall be entered;
(h) Borrower or any Subsidiary shall (i) voluntarily
commence any proceeding or file any petition seeking liquidation,
reorganization or other relief under any Federal, state or foreign bankruptcy,
insolvency, receivership or similar law now or hereafter in effect, (ii) consent
to the institution of, or fail to contest in a timely and appropriate manner,
any proceeding or petition described in clause (h) of this Article, (iii) apply
for or consent to the appointment of a receiver, trustee, custodian,
sequestrator, conservator or similar official for Borrower or any Subsidiary or
for a substantial part of its assets, (iv) file an answer admitting the
material allegations of a petition filed against it in any such proceeding, (v) make
a general assignment for the benefit of creditors or (vi) take any action
for the purpose of effecting any of the foregoing;
(i) Borrower or any Subsidiary shall
become unable, admit in writing its inability or fail generally to pay its
debts as they become due;
(j) one or more judgments for the
payment of money in connection with the Fraud in an aggregate amount in excess
of $1,000,000 or any other one or more judgments for the payment of money in an
aggregate amount in excess of $250,000 which are not
covered by insurance shall be
rendered against Borrower, any Subsidiary or any combination thereof and the
same shall remain undischarged for a period of 30 consecutive days during which
execution shall not be effectively stayed, or any action shall be legally taken
by a judgment creditor to attach or levy upon any assets of Borrower or any Subsidiary
to enforce any such judgment or Borrower or any Subsidiary shall fail within 30
days to discharge one or more non-monetary judgments or orders which,
individually or in the aggregate, could reasonably be expected to have a
Material Adverse Effect, which judgments or orders, in any such case, are not
stayed on appeal or otherwise being appropriately contested in good faith by
proper proceedings diligently pursued;
(k) an ERISA Event shall have occurred
that, in the opinion of Lender, when taken together with all other ERISA Events
that have occurred, could reasonably be expected to result in a Material
Adverse Effect;
(l) a Change in Control shall occur;
(m) the occurrence of any default, as
defined in any Loan Document (other than this Agreement) or the breach of any
of the terms or provisions of any Loan Document (other than this Agreement),
which default or breach continues beyond any period of grace therein provided;
(n) any Collateral Document shall for any
reason fail to create a valid and perfected first priority security interest in
any Collateral purported to be covered thereby, except as permitted by the
terms of any Collateral Document, or any Collateral Document shall fail to
remain in full force or effect or any action shall be taken to discontinue or
to assert the invalidity or unenforceability of any Collateral Document, or
Borrower shall fail to comply with any of the terms or provisions of any
Collateral Document; or
54
(o) any material provision of any Loan
Document for any reason ceases to be valid, binding and enforceable in
accordance with its terms (or Borrower shall challenge the enforceability of
any Loan Document or shall assert in writing, or engage in any action or
inaction based on any such assertion, that any provision of any of the Loan
Documents has ceased to be or otherwise is not valid, binding and enforceable
in accordance with its terms); or
then, and in every such
event (other than an event with respect to Borrower described in clause (h) or
(i) of this Article), and at any time thereafter during the continuance of
such event, Lender may, by notice to Borrower, take either or both of the
following actions, at the same or different times: (i) terminate the Revolving Commitment,
and thereupon the Revolving Commitment shall terminate immediately, and (ii) declare
the Loans then outstanding to be due and payable in whole (or in part, in which
case any principal not so declared to be due and payable may thereafter be
declared to be due and payable), and thereupon the principal of the Loans so
declared to be due and payable, together with accrued interest thereon and all
fees and other obligations of Borrower accrued hereunder, shall become due and
payable immediately, without presentment, demand, protest or other notice of
any kind, all of which are hereby waived by Borrower; and in case of any event
with respect to Borrower described in clause (h) or (i) of this
Article, the Revolving Commitment shall automatically terminate and the
principal of the Loans then outstanding, together with accrued interest thereon
and all fees and other obligations of Borrower accrued hereunder, shall
automatically become due and payable, without presentment, demand, protest or
other notice of any kind, all of which are hereby waived by Borrower. Upon the occurrence and the continuance of an
Event of Default, Lender may increase the rate of interest applicable to the
Loans and other Obligations as set forth in this Agreement and exercise any rights
and remedies provided to Lender under the Loan Documents or at law or equity,
including all remedies provided under the UCC.
ARTICLE
VIII
Miscellaneous
SECTION 8.01. Notices. (a) Except in the case of notices and
other communications expressly permitted to be given by telephone (and subject
to paragraph (b) below), all notices and other communications provided for
herein shall be in writing and shall be delivered by hand or overnight courier
service, mailed by certified or registered mail or sent by facsimile, as
follows:
(i) if to Borrower
at:
Koss
Corporation
4129 North Port Washington Road
Milwaukee, Wisconsin 53212
Attention: David D. Smith
Facsimile No.: (414) 964-8615
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(ii) if to Lender,
to JPMorgan Chase Bank, N.A. at:
111
East Wisconsin Avenue
Milwaukee, Wisconsin 53201
Attention: Mark P. Bruss
Facsimile No.: (414) 977-6788
All such notices and other
communications (i) sent by hand or overnight courier service, or mailed by
certified or registered mail, shall be deemed to have been given when received
or (ii) sent by facsimile shall be deemed to have been given when sent, provided
that if not given during normal business hours for the recipient, shall be
deemed to have been given at the opening of business on the next Business Day
for the recipient.
(b) Notices and other communications to
Lender hereunder may be delivered or furnished by electronic communications
(including e-mail and internet or intranet websites) pursuant to procedures
approved by Lender; provided that the foregoing shall not apply to
notices pursuant to Article II or to compliance and no Event of Default
certificates delivered pursuant to Section 5.01(d) unless otherwise
agreed by Lender. Lender or Borrower
may, in its discretion, agree to accept notices and other communications to it
hereunder by electronic communications pursuant to procedures approved by it; provided
that approval of such procedures may be limited to particular notices or
communications. All such notices and other communications (i) sent to an
e-mail address shall be deemed received upon the senders receipt of an
acknowledgement from the intended recipient (such as by the return receipt
requested function, as available, return e-mail or other written
acknowledgement), provided that if not given during the normal business
hours of the recipient, such notice or communication shall be deemed to have
been given at the opening of business on the next Business Day for the
recipient, and (ii) posted to an Internet or intranet website shall be
deemed received upon the deemed receipt by the intended recipient at its e-mail
address as described in the foregoing clause (b)(i) of notification that
such notice or communication is available and identifying the website address
therefor.
(c) Any party hereto may change its
address or facsimile number for notices and other communications hereunder by
notice to the other parties hereto.
SECTION 8.02. Waivers; Amendments. (a) No failure or delay by Lender in exercising
any right or power hereunder or under any other Loan Document shall operate as
a waiver thereof, nor shall any single or partial exercise of any such right or
power, or any abandonment or discontinuance of steps to enforce such a right or
power, preclude any other or further exercise thereof or the exercise of any
other right or power. The rights and
remedies of Lender hereunder and under any other Loan Document are cumulative
and are not exclusive of any rights or remedies that they would otherwise
have. No waiver of any provision of any
Loan Document or consent to any departure by Borrower therefrom shall in any
event be effective unless the same shall be permitted by paragraph (b) of
this Section, and then such waiver or consent shall be effective only in the
specific instance and for the purpose for which given. Without limiting the generality of the
foregoing, the making of a Loan or issuance of a Letter of Credit shall not be
construed as a waiver of any Event of Default, regardless of whether Lender may
have had notice or knowledge of such Event of Default at the time.
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(b) Neither this Agreement nor any other
Loan Document nor any provision hereof or thereof may be waived, amended or
modified except pursuant to an agreement or agreements in writing entered into
by Borrower and Lender.
SECTION 8.03. Expenses; Indemnity; Damage Waiver. (a) Borrower shall pay (i) all
reasonable out-of-pocket expenses incurred by Lender and its Affiliates,
including the reasonable fees, charges and disbursements of counsel for Lender
(whether outside counsel or the allocated costs of its internal legal
department), in connection with the credit facilities provided for herein, the
preparation and administration of the Loan Documents or any amendments,
modifications or waivers of the provisions of the Loan Documents (whether or
not the transactions contemplated hereby or thereby shall be consummated), (ii) all
reasonable out-of-pocket expenses incurred by Lender in connection with the
issuance, amendment, renewal or extension of any Letter of Credit or any demand
for payment thereunder and (iii) all out-of-pocket expenses incurred by
Lender, including the fees, charges and
disbursements of any counsel for Lender (whether outside counsel or the
allocated costs of its internal legal department), in connection with the
enforcement, collection or protection of its rights in connection with the Loan
Documents, including its rights under this Section, or in connection with the
Loans made or Letters of Credit issued hereunder, including all such
out-of-pocket expenses incurred during
any workout, restructuring or negotiations in respect of such Loans or
Letters of Credit. Expenses being reimbursed by Borrower under this Section include,
without limiting the generality of the foregoing, (i) subject to Section 5.11,
costs and expenses incurred in connection with appraisals and insurance
reviews; (ii) subject to Sections 5.06 and 5.11 (as applicable), field
examinations and the preparation of Reports based on the fees charged by a
third party retained by Lender or the internally allocated fees for each Person
employed by Lender with respect to each field examination; taxes, fees and
other charges for lien searches, (iii) filing financing statements
and continuations, and other actions to perfect, protect, and continue Lenders
Liens; (iv) and sums paid or incurred to take any action required of
Borrower under the Loan Documents that Borrower fails to pay or take. All of the foregoing costs and expenses may
be charged to Borrower as Revolving Loans or to another deposit account, all as
described in Section 2.17(c).
(b) Borrower shall indemnify Lender, and
each Related Party of Lender (each such Person being called an Indemnitee)
against, and hold each Indemnitee harmless from, any and all losses, claims,
damages, penalties, liabilities and related expenses, including the fees,
charges and disbursements of any counsel for any Indemnitee, incurred by or
asserted against any Indemnitee arising out of, in connection with, or as a
result of (i) the execution or delivery of the Loan Documents or any
agreement or instrument contemplated thereby, the performance by the parties
hereto of their respective obligations thereunder or the consummation of the
Transactions or any other transactions contemplated hereby, (ii) any Loan
or Letter of Credit or the use of the proceeds therefrom (including any refusal
by Lender to honor a demand for payment under a Letter of Credit if the
documents presented in connection with such demand do not strictly comply with
the terms of such Letter of Credit), (iii) any actual or alleged presence
or release of Hazardous Materials on or from any property owned or operated by
Borrower or any of its Subsidiaries, or any Environmental Liability related in
any way to Borrower or any of its Subsidiaries, or (iv) any actual or
prospective claim, litigation, investigation or proceeding relating to any of
the foregoing, whether based on contract, tort or any other theory and
regardless of whether any Indemnitee is a party thereto; provided that
such indemnity shall not,
57
as to any Indemnitee, be
available to the extent that such losses, claims, damages, penalties, liabilities
or related expenses are determined by a court of competent jurisdiction by
final and nonappealable judgment to have resulted from the gross negligence or
willful misconduct of such Indemnitee.
(c) The relationship between Borrower on
the one hand and Lender on the other hand shall be solely that of debtor and
creditor. Lender (i) shall not have
any fiduciary responsibilities to Borrower or (ii) does not undertake any
responsibility to Borrower to review or inform Borrower of any matter in connection
with any phase of Borrowers business or operations. To the extent permitted by applicable law,
Borrower shall not assert, and hereby waives, any claim against any Indemnitee,
on any theory of liability, for special, indirect, consequential or punitive
damages (as opposed to direct or actual damages) arising out of, in connection
with, or as a result of, this Agreement or any agreement or instrument
contemplated hereby, the Transactions, any Loan or Letter of Credit or the use
of the proceeds thereof.
(d) All amounts due under this Section shall
be payable promptly after written demand therefor.
SECTION 8.04. Successors and Assigns. (a) The provisions of this Agreement
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns permitted hereby, except that Borrower may
not assign or otherwise transfer any of its rights or obligations hereunder
without the prior written consent of Lender (and any attempted assignment or
transfer by Borrower without such consent shall be null and void). Nothing in this Agreement, expressed or
implied, shall be construed to confer upon any Person (other than the parties
hereto, their respective successors and assigns permitted hereby and, to the
extent expressly contemplated hereby, the Related Parties of each of Lender)
any legal or equitable right, remedy or claim under or by reason of this
Agreement.
(b) Lender may assign to one or more
assignees all or a portion of its rights and obligations under this Agreement
(including all or a portion of its Revolving Commitment and the Loans at the
time owing to it); provided that, except in the case of an assignment to
an Affiliate of Lender or an Approved Fund, Borrower must give its prior
written consent to such assignment (which consent shall not be unreasonably
withheld); and provided further that any consent of Borrower
otherwise required under this paragraph shall not be required if an Event of
Default under clause (h) or (i) of Article VII has occurred and
is continuing. Subject to notification
of an assignment, the assignee shall be a party hereto and, to the extent of
the interest assigned, have the rights and obligations of Lender under this
Agreement, and Lender shall, to the extent of the interest assigned, be
released from its obligations under this Agreement (and, in the case of an
assignment covering all of Lenders rights and obligations under this
Agreement, Lender shall cease to be a party hereto but shall continue to be
entitled to the benefits of Sections 2.14, 2.15, 2.16 and 8.03). Borrower hereby agrees to execute any
amendment and/or any other document that may be necessary to effectuate such an
assignment, including an amendment to this Agreement to provide for multiple
lenders and an administrative agent to act on behalf of such lenders. Any assignment or transfer by Lender of
rights or obligations under this Agreement that does not comply with this
paragraph shall be treated for purposes of this Agreement as a sale by Lender
of a participation in such rights and obligations in accordance with paragraph (c) of
this Section.
58
For the purposes of this Section 8.04(b),
the term Approved Fund has the following meaning:
Approved Fund means
any Person (other than a natural person) that is engaged in making, purchasing,
holding or investing in bank loans and similar extensions of credit in the
ordinary course of its business and that is administered or managed by (a) Lender,
(b) an Affiliate of Lender or (c) an entity or an Affiliate of an
entity that administers or manages Lender.
(c) Lender may, without the consent of
Borrower, sell participations to one or more banks or other entities (a Participant)
in all or a portion of Lenders rights and obligations under this Agreement
(including all or a portion of its Revolving Commitment and the Loans owing to
it); provided that (i) Lenders obligations under this Agreement
shall remain unchanged, (ii) Lender shall remain solely responsible to the
other parties hereto for the performance of such obligations and (iii) Borrower
shall continue to deal solely and directly with Lender in connection with
Lenders rights and obligations under this Agreement. Subject to paragraph (d) of this
Section, Borrower agrees that each Participant shall be entitled to the
benefits of Sections 2.14, 2.15 and 2.16 to the same extent as if it were
Lender and had acquired its interest by assignment pursuant to paragraph (b) of
this Section.
(d) A Participant shall not be entitled
to receive any greater payment under Section 2.14 or 2.15 than Lender
would have been entitled to receive with respect to the participation sold to
such Participant, unless the sale of the participation to such Participant is
made with Borrowers prior written consent.
(e) Lender may at any time pledge or
assign a security interest in all or any portion of its rights under this
Agreement to secure obligations of Lender, including any pledge or assignment
to secure obligations to a Federal Reserve Lender, and this Section shall
not apply to any such pledge or assignment of a security interest; provided
that no such pledge or assignment of a security interest shall release Lender
from any of its obligations hereunder or substitute any such pledgee or assignee
for Lender as a party hereto.
SECTION 8.05. Survival. All covenants, agreements, representations
and warranties made by Borrower in the Loan Documents and in the certificates
or other instruments delivered in
connection with or pursuant to this Agreement or any other Loan Document shall
be considered to have been relied upon by the other parties hereto and shall
survive the execution and delivery of the Loan Documents and the making of any
Loans and issuance of any Letters of Credit, regardless of any investigation
made by any such other party or on its behalf and notwithstanding that Lender
may have had notice or knowledge of any Event of Default or incorrect
representation or warranty at the time any credit is extended hereunder, and
shall continue in full force and effect as long as the principal of or any
accrued interest on any Loan or any fee or any other amount payable under this
Agreement is outstanding and unpaid or any Letter of Credit is outstanding and
so long as the Revolving Commitment has not expired or terminated. The provisions of Sections 2.14, 2.15, 2.16
and Article VIII shall survive and remain in full force and effect
regardless of the consummation of the transactions contemplated hereby, the
repayment of the Loans, the expiration or termination of the Letters of Credit
and the Revolving Commitment or the termination of this Agreement or any
provision hereof.
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SECTION 8.06. Counterparts; Integration; Effectiveness. This Agreement may be executed in
counterparts (and by different parties hereto on different counterparts), each
of which shall constitute an original, but all of which when taken together
shall constitute a single contract. This
Agreement, the other Loan Documents and any separate letter agreements with
respect to fees payable to Lender constitute the entire contract among the
parties relating to the subject matter hereof and supersede any and all
previous agreements and understandings, oral or written, relating to the
subject matter hereof. Except as
provided in Section 4.01, this Agreement shall become effective when it
shall have been executed by Lender and when Lender shall have received
counterparts hereof which, when taken together, bear the signatures of each of
the other parties hereto, and thereafter shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and assigns. Delivery of an executed counterpart of a
signature page of this Agreement by facsimile shall be effective as
delivery of a manually executed counterpart of this Agreement.
SECTION 8.07. Severability. Any provision of any Loan Document held to be
invalid, illegal or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such invalidity, illegality or
unenforceability without affecting the validity, legality and enforceability of
the remaining provisions thereof; and the invalidity of a particular provision
in a particular jurisdiction shall not invalidate such provision in any other
jurisdiction.
SECTION 8.08. Right of Setoff. If an Event of Default shall have occurred
and be continuing, Lender and each of its Affiliates is hereby authorized at
any time and from time to time, to the fullest extent permitted by law, to set
off and apply any and all deposits (general or special, time or demand,
provisional or final) at any time held and other obligations at any time owing
by such Lender or Affiliate to or for the credit or the account of Borrower
against any of and all the Secured Obligations held by such Lender,
irrespective of whether or not such Lender shall have made any demand under the
Loan Documents and although such obligations may be unmatured. The rights of each Lender under this Section are
in addition to other rights and remedies (including other rights of setoff)
which such Lender may have.
SECTION 8.09. Governing Law; Jurisdiction; Consent to
Service of Process. (a) The
Loan Documents shall be governed by and construed in accordance with the
internal laws of the State of Wisconsin, but giving effect to federal laws
applicable to national banks.
(b) Borrower hereby irrevocably and
unconditionally submits, for itself and its property, to the nonexclusive
jurisdiction of any U.S. Federal or Wisconsin State court sitting in Milwaukee,
Wisconsin in any action or proceeding arising out of or relating to any Loan
Documents, or for recognition or enforcement of any judgment, and each of the
parties hereto hereby irrevocably and unconditionally agrees that all claims in
respect of any such action or proceeding may be heard and determined in such
Wisconsin State or, to the extent permitted by law, in such Federal court. Each of the parties hereto agrees that a final
judgment in any such action or proceeding shall be conclusive and may be
enforced in other jurisdictions by suit on the judgment or in any other manner
provided by law. Nothing in this
Agreement or any other Loan Document shall affect any right that Lender may
otherwise have to bring any action or proceeding relating to this Agreement or
any other Loan Document against Borrower or its properties in the courts of any
jurisdiction.
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(c) Borrower hereby irrevocably and
unconditionally waives, to the fullest extent it may legally and effectively do
so, any objection which it may now or hereafter have to the laying of venue of
any suit, action or proceeding arising out of or relating to this Agreement or
any other Loan Document in any court referred to in paragraph (b) of this
Section. Each of the parties hereto
hereby irrevocably waives, to the fullest extent permitted by law, the defense
of an inconvenient forum to the maintenance of such action or proceeding in any
such court.
(d) Each party to this Agreement
irrevocably consents to service of process in the manner provided for notices
in Section 8.01. Nothing in this
Agreement or any other Loan Document will affect the right of any party to this
Agreement to serve process in any other manner permitted by law.
SECTION 8.10. WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY WAIVES, TO THE
FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A
TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR
RELATING TO THIS AGREEMENT, ANY OTHER LOAN DOCUMENT OR THE TRANSACTIONS
CONTEMPLATED THEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER
THEORY). EACH PARTY HERETO (a) CERTIFIES
THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED,
EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF
LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (b) ACKNOWLEDGES THAT
IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT
BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION.
SECTION 8.11. Headings. Article and Section headings and
the Table of Contents used herein are for convenience of reference only, are
not part of this Agreement and shall not affect the construction of, or be
taken into consideration in interpreting, this Agreement.
SECTION 8.12. Confidentiality. Lender agrees to maintain the confidentiality
of the Information (as defined below), except that Information may be disclosed
(a) to its and its Affiliates directors, officers, employees and agents,
including accountants, legal counsel and other advisors (it being understood
that the Persons to whom such disclosure is made will be informed of the
confidential nature of such Information and instructed to keep such Information
confidential), (b) to the extent requested by any regulatory authority, (c) to
the extent required by applicable laws or regulations or by any subpoena or
similar legal process, (d) to any other party to this Agreement, (e) in
connection with the exercise of any remedies hereunder or any suit, action or
proceeding relating to this Agreement or any other Loan Document or the
enforcement of rights hereunder or thereunder, (f) subject to an agreement
containing provisions substantially the same as those of this Section, to (i) any
assignee of or Participant in, or any prospective assignee of or Participant
in, any of its rights or obligations under this Agreement or (ii) any
actual or prospective counterparty (or its advisors) to any swap or derivative
transaction relating to Borrower and its obligations, (g) with the consent
of Borrower or (h) to the extent such Information (i) becomes
publicly available other than as a result of a breach of this Section or (ii) becomes
available to Lender on a non-confidential basis from a source other than
Borrower. For the purposes of this
Section, Information means all information received from Borrower or
61
any
third party subject to confidentiality restrictions relating to Borrower or its
business, other than any such information that is available to Lender on a
non-confidential basis prior to disclosure by Borrower or such third parties; provided
that, in the case of information received from Borrower or any such third
parties after the date hereof, such information is clearly identified at the
time of delivery as confidential. Any
Person required to maintain the confidentiality of Information as provided in
this Section shall be considered to have complied with its obligation to
do so if such Person has exercised the same degree of care to maintain the
confidentiality of such Information as such Person would accord to its own
confidential information.
SECTION 8.13. Nonreliance; Violation of Law. Lender hereby represents that it is not
relying on or looking to any margin stock for the repayment of the Borrowings
provided for herein. Anything contained
in this Agreement to the contrary notwithstanding, Lender shall not be
obligated to extend credit to Borrower in violation of any limitation or
prohibition provided by any applicable statute or regulation.
SECTION 8.14. USA PATRIOT Act. Lender is subject to the requirements of the
USA Patriot Act (Title III of Pub. L. 107-56 (signed into law October 26,
2001)) (the Act) and hereby notifies Borrower that pursuant to the
requirements of the Act, it is required to obtain, verify and record
information that identifies Borrower, which information includes the name and
address of Borrower and other information that will allow such Lender to
identify Borrower in accordance with the Act.
SECTION 8.15. Disclosure. Borrower hereby acknowledges and agrees that
Lender and/or its Affiliates from time to time may hold investments in, make
other loans to or have other relationships with Borrower and its Affiliates.
SECTION 8.16. Interest Rate Limitation. Notwithstanding anything herein to the
contrary, if at any time the interest rate applicable to any Loan, together
with all fees, charges and other amounts which are treated as interest on such
Loan under applicable law (collectively the Charges), shall exceed the
maximum lawful rate (the Maximum Rate) which may be contracted for,
charged, taken, received or reserved by Lender holding such Loan in accordance
with applicable law, the rate of interest payable in respect of such Loan
hereunder, together with all Charges payable in respect thereof, shall be
limited to the Maximum Rate and, to the extent lawful, the interest and Charges
that would have been payable in respect of such Loan but were not payable as a
result of the operation of this Section shall be cumulated and the
interest and Charges payable to such Lender in respect of other Loans or
periods shall be increased (but not above the Maximum Rate therefor) until such
cumulated amount, together with interest thereon at the Federal Funds Effective
Rate to the date of repayment, shall have been received by Lender.
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IN WITNESS WHEREOF, the
parties hereto have caused this Agreement to be duly executed by their
respective authorized officers as of the day and year first above written.
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KOSS CORPORATION
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By:
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Name:
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Title:
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JPMORGAN CHASE BANK, N.A.
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By:
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Name:
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Title:
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[Signature
Page to Credit Agreement]
EXHIBIT
A
BORROWING BASE CERTIFICATE
[Form attached]
Exhibit
A
EXHIBIT
B
COMPLIANCE
CERTIFICATE
To: JPMorgan Chase Bank, N.A.
This Compliance Certificate
is furnished pursuant to that certain Credit Agreement dated as of May 12,
2010 (as amended, modified, renewed or extended from time to time, the Agreement)
between Koss Corporation, a Delaware corporation (the Borrower), and JPMorgan
Chase Bank, N.A., as Lender. Unless
otherwise defined herein, capitalized terms used in this Compliance Certificate
have the meanings ascribed thereto in the Agreement.
THE UNDERSIGNED HEREBY
CERTIFIES THAT:
1. I am the duly
elected
of Borrower;
2. I have reviewed the
terms of the Agreement and I have made, or have caused to be made under my
supervision, a detailed review of the transactions and conditions of Borrower
and its Subsidiaries during the accounting period covered by the attached
financial statements [for quarterly financial
statements add: and such financial statements present fairly in all
material respects the financial condition and results of operations of Borrower
and its consolidated Subsidiaries on a consolidated basis in accordance with
GAAP consistently applied, subject to normal year-end audit adjustments and the
absence of footnotes];
3. The examinations
described in paragraph 2 did not disclose, except as set forth below, and I
have no knowledge of (i) the existence of any condition or event which
constitutes a Default during or at the end of the accounting period covered by
the attached financial statements or as of the date of this Certificate or (ii) any
change in GAAP or in the application thereof that has occurred since the date
of the audited financial statements referred to in Section 3.04 of the
Agreement;
4. I hereby certify,
in my capacity as
,
that the Borrower has not changed (i) its name, (ii) its chief
executive office, (iii) principal place of business, (iv) the type of
entity it is or (v) its state of incorporation or organization without
having given the Lender the notice required by the Security Agreement;
5. Schedule I
attached hereto sets forth financial data and computations evidencing Borrowers
compliance with certain covenants of the Agreement, all of which data and
computations are true, complete and correct; and
6. Schedule II
hereto sets forth the computations necessary to determine the Applicable Rate
commencing on the Business Day this certificate is delivered.
Described below are the
exceptions, if any, to paragraph 3 by listing, in detail, the (i) nature
of the condition or event, the period during which it has existed and the
action which Borrower has taken, is taking, or proposes to take with respect to
each such condition or event or (i) the change in GAAP or the application
thereof and the effect of such change on the attached financial statements:
1
7. Except as set forth
on Schedule III hereto, the Borrower has not acquired any additional
right, title or interest in any registered Patents, Trademarks or Copyrights.
The foregoing
certifications, together with the computations set forth in Schedule I and
Schedule II hereto, the information set forth on Schedule III hereto, and the
financial statements delivered with this Certificate in support hereof, are
made and delivered this
day of .
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KOSS CORPORATION
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By:
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Name:
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Title:
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2
Exhibit
10.13
EXECUTION VERSION
PLEDGE AND SECURITY AGREEMENT
THIS PLEDGE AND SECURITY AGREEMENT (as it may
be amended or modified from time to time, the Security Agreement) is
entered into as of May 12, 2010 by and between KOSS CORPORATION, a Delaware
corporation (the Grantor), as debtor, and JPMorgan Chase Bank, N.A.
(the Lender), as secured party.
PRELIMINARY
STATEMENT
The Grantor and the Lender are entering into
a Credit Agreement dated as of the date hereof (as it may be amended or
modified from time to time, the Credit Agreement). The Grantor is entering into this Security
Agreement in order to induce the Lender to enter into and extend credit to the
Grantor under the Credit Agreement.
ACCORDINGLY, the Grantor and the Lender,
hereby agree as follows:
ARTICLE I
DEFINITIONS
1.1. Terms Defined in Credit Agreement. All capitalized terms used herein and not
otherwise defined shall have the meanings assigned to such terms in the Credit
Agreement.
1.2. Terms Defined in UCC. Terms defined in the UCC which are not
otherwise defined in this Security Agreement are used herein as defined in the
UCC.
1.3. Definitions of Certain Terms Used
Herein. As used in this Security
Agreement, in addition to the terms defined in the Preliminary Statement, the
following terms shall have the following meanings:
Accounts shall have the meaning set
forth in Article 9 of the UCC.
Article means a numbered article of
this Security Agreement, unless another document is specifically referenced.
Chattel Paper shall have the meaning
set forth in Article 9 of the UCC.
Collateral shall have the meaning
set forth in Article II.
Collateral Access Agreement means
any landlord waiver or other agreement, in form and substance satisfactory to
the Lender, between the Lender and any third party (including any bailee,
consignee, customs broker, or other similar Person) in possession of any
Collateral or any landlord of the Grantor for any real property where any
Collateral is located, as such landlord waiver or other agreement may be
amended, restated, or otherwise modified from time to time.
Collateral Deposit Account shall
have the meaning set forth in Section 7.1.
Collateral Report means any
certificate (including any Borrowing Base Certificate), report or other
document delivered by the Grantor to the Lender with respect to the Collateral
pursuant to any Loan Document.
Commercial Tort Claims means the
existing commercial tort claims of the Grantor set forth on Exhibit A.
Control shall have the meaning set
forth in Article 8 or, if applicable, in Section 9-104, 9-105, 9-106
or 9-107 of Article 9 of the UCC.
Copyrights means, with respect to
any Person, all of such Persons right, title, and interest in and to the
following: (a) all copyrights, rights
and interests in copyrights, works protectable by copyright, copyright
registrations, and copyright applications; (b) all renewals of any of the
foregoing; (c) all income, royalties, damages, and payments now or
hereafter due and/or payable under any of the foregoing, including, without
limitation, damages or payments for past or future infringements for any of the
foregoing; (d) the right to sue for past, present, and future
infringements of any of the foregoing; and (e) all rights corresponding to
any of the foregoing throughout the world.
Default means any event or condition
which constitutes an Event of Default or which upon notice, lapse of time or
both would, unless cured or waived, become an Event of Default.
Deposit Account Control Agreement
means an agreement, in form and substance satisfactory to the Lender, among
Grantor, a banking institution holding Grantors funds, and the Lender with
respect to collection and control of all deposits and balances held in a
deposit account maintained by Grantor with such banking institution.
Deposit Accounts shall have the
meaning set forth in Article 9 of the UCC.
Documents shall have the meaning set
forth in Article 9 of the UCC.
Effective Date shall have the
meaning set forth in the Credit Agreement.
Equipment shall have the meaning set
forth in Article 9 of the UCC.
Event of Default means an event
described in Section 5.1.
Exhibit refers to a specific exhibit
to this Security Agreement, unless another document is specifically referenced.
Fixtures shall have the meaning set
forth in Article 9 of the UCC.
General Intangibles shall have the
meaning set forth in Article 9 of the UCC.
Goods shall have the meaning set
forth in Article 9 of the UCC.
Instruments shall have the meaning
set forth in Article 9 of the UCC.
Inventory shall have the meaning set
forth in Article 9 of the UCC.
2
Investment Property shall have the
meaning set forth in Article 9 of the UCC.
Letter-of-Credit Rights shall have
the meaning set forth in Article 9 of the UCC.
Licenses means, with respect to any
Person, all of such Persons right, title, and interest in and to (a) any
and all licensing agreements or similar arrangements in and to its Patents,
Copyrights, or Trademarks, (b) all income, royalties, damages, claims, and
payments now or hereafter due or payable under and with respect thereto,
including, without limitation, damages and payments for past and future
breaches thereof, and (c) all rights to sue for past, present, and future
breaches thereof.
Patents means, with respect to any
Person, all of such Persons right, title, and interest in and to: (a) any and all patents and patent
applications; (b) all inventions and improvements described and claimed
therein; (c) all reissues, divisions, continuations, renewals, extensions,
and continuations-in-part thereof; (d) all income, royalties, damages,
claims, and payments now or hereafter due or payable under and with respect
thereto, including, without limitation, damages and payments for past and
future infringements thereof; (e) all rights to sue for past, present, and
future infringements thereof; and (f) all rights corresponding to any of
the foregoing throughout the world.
Pledged Collateral means all
Instruments, Securities and other Investment Property of the Grantor, whether
or not physically delivered to the Lender pursuant to this Security Agreement.
Receivables means the Accounts,
Chattel Paper, Documents, Investment Property, Instruments and any other rights
or claims to receive money which are General Intangibles or which are otherwise
included as Collateral.
Section means a numbered section of
this Security Agreement, unless another document is specifically referenced.
Security has the meaning set forth
in Article 8 of the UCC.
Stock Rights means all dividends,
instruments or other distributions and any other right or property which the
Grantor shall receive or shall become entitled to receive for any reason whatsoever
with respect to, in substitution for or in exchange for any Equity Interest
constituting Collateral, any right to receive an Equity Interest and any right
to receive earnings, in which the Grantor now has or hereafter acquires any
right, issued by an issuer of such Equity Interest.
Supporting Obligations shall have
the meaning set forth in Article 9 of the UCC.
Trademarks means, with respect to
any Person, all of such Persons right, title, and interest in and to the
following: (a) all trademarks
(including service marks), trade names, trade dress, and trade styles and the
registrations and applications for registration thereof and the goodwill of the
business symbolized by the foregoing; (b) all licenses of the foregoing,
whether as licensee or licensor; (c) all renewals of the foregoing; (d) all
income, royalties, damages, and payments now or hereafter due or payable with
respect thereto, including, without limitation, damages, claims, and payments
for past and future infringements thereof; (e) all rights to sue for
3
past, present, and future
infringements of the foregoing, including the right to settle suits involving
claims and demands for royalties owing; and (f) all rights corresponding
to any of the foregoing throughout the world.
UCC means the Uniform Commercial
Code, as in effect from time to time, of the State of Wisconsin or of any other
state the laws of which are required as a result thereof to be applied in
connection with the attachment, perfection or priority of, or remedies with
respect to, Lenders Lien on any Collateral.
The foregoing definitions shall be equally
applicable to both the singular and plural forms of the defined terms.
ARTICLE II
GRANT OF SECURITY INTEREST
The Grantor hereby pledges, assigns and
grants to the Lender, a security interest in all of its right, title and
interest in, to and under all personal property and other assets, whether now
owned by or owing to, or hereafter acquired by or arising in favor of the
Grantor (including under any trade name or derivations thereof), and whether
owned or consigned by or to, or leased from or to, the Grantor, and regardless
of where located (all of which will be collectively referred to as the Collateral),
including:
(i) all Accounts;
(ii) all Chattel Paper;
(iii) all Copyrights,
Patents and Trademarks;
(iv) all Documents;
(v) all Equipment;
(vi) all Fixtures;
(vii) all General
Intangibles;
(viii) all Goods;
(ix) all Instruments;
(x) all Inventory;
(xi) all Investment
Property;
(xii) all cash or cash
equivalents;
(xiii) all letters of
credit, Letter-of-Credit Rights and Supporting Obligations;
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(xiv) all Deposit Accounts
with any bank or other financial institution;
(xv) all Commercial Tort
Claims;
(xvi) and all accessions
to, substitutions for and replacements, proceeds (including Stock Rights),
insurance proceeds and products of the foregoing, together with all books and
records, customer lists, credit files, computer files, programs, printouts and
other computer materials and records related thereto and any General
Intangibles at any time evidencing or relating to any of the foregoing;
to secure the prompt and
complete payment and performance of the Secured Obligations.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
The Grantor represents and warrants to the
Lender that:
3.1. Title, Perfection and Priority. The Grantor has good and valid rights in or
the power to transfer the Collateral and title to the Collateral with respect
to which it has purported to grant a security interest hereunder, free and
clear of all Liens except for Liens permitted under Section 4.1(e), and
has full power and authority to grant to the Lender the security interest in
such Collateral pursuant hereto. When
financing statements have been filed in the appropriate offices against the
Grantor in the locations listed on Exhibit H, the Lender will have
a fully perfected first priority security interest in that Collateral in which
a security interest may be perfected by filing, subject only to Liens permitted
under Section 4.1(e).
3.2. Type and Jurisdiction of
Organization, Organizational and Identification Numbers. The type of entity of the Grantor, its state
of organization, the organizational number issued to it by its state of
organization and its federal employer identification number are set forth on Exhibit A.
3.3. Principal Location. The Grantors mailing address and the
location of its place of business (if it has only one) or its chief executive
office (if it has more than one place of business), are disclosed in Exhibit A;
the Grantor has no other places of business except those set forth in Exhibit A.
3.4. Collateral Locations. All of Grantors locations where Collateral
is located are listed on Exhibit A.
All of said locations are either (i) leased by the Grantor as
lessee and designated in Part VII(b) of Exhibit A,
or (ii) locations at which Inventory is held in a public warehouse or
is otherwise held by a bailee or on consignment as designated in Part VII(c) of
Exhibit A.
3.5. Deposit Accounts. All of the Grantors Deposit Accounts are
listed on Exhibit B.
3.6. Exact Names. The Grantors name in which it has executed
this Security Agreement is the exact name as it appears in the Grantors
organizational documents, as amended, as filed with the Grantors jurisdiction
of organization. The Grantor has not,
during
5
the past five years, been
known by or used any other corporate or fictitious name, or been a party to any
merger or consolidation, or been a party to any acquisition.
3.7. Letter-of-Credit Rights and Chattel
Paper. Exhibit C lists
all Letter-of-Credit Rights and Chattel Paper of the Grantor. All action by the Grantor necessary or
desirable to protect and perfect the Lenders Lien on each item listed on Exhibit C
(including the delivery of all originals and the placement of a legend on all
Chattel Paper as required hereunder) has been duly taken. The Lender will have
a fully perfected first priority security interest in the Collateral listed on Exhibit C,
subject only to Liens permitted under Section 4.1(e).
3.8. Accounts and Chattel Paper.
(a) The names of the obligors, amounts
owing, due dates and other information with respect to the Accounts and Chattel
Paper are and will be correctly stated in all records of the Grantor relating
thereto and in all invoices and Collateral Reports with respect thereto
furnished to the Lender by the Grantor from time to time. As of the time when each Account or each item
of Chattel Paper arises, the Grantor shall be deemed to have represented and
warranted that such Account or Chattel Paper, as the case may be, and all
records relating thereto, are genuine and in all respects what they purport to
be.
(b) Intentionally Deleted.
(c) In addition, with respect to all
Accounts, (i) the amounts shown on all invoices, statements and Collateral
Reports with respect thereto are actually and absolutely owing to the Grantor
as indicated thereon and are not in any way contingent; and (ii) to the Grantors knowledge, all
Account Debtors have the capacity to contract.
3.9. Inventory. With respect to any Inventory scheduled or
listed on the most recent Collateral Report, (a) such Inventory (other
than Inventory in transit) is located at one of the Grantors locations set
forth on Exhibit A, (b) no Inventory (other than Inventory in transit) is now, or
shall at any time or times hereafter be stored at any other location except as
permitted by Section 4.1(g), (c) the Grantor has good, indefeasible
and merchantable title to such Inventory and such Inventory is not subject to
any Lien or security interest or document whatsoever except for the Lien
granted to the Lender, and except for Liens permitted by Section 6.02 of
the Credit Agreement, (d) except as specifically disclosed in the most
recent Collateral Report, such Inventory is Eligible Inventory of good and
merchantable quality, free from any defects, (e) such Inventory is not
subject to any licensing, patent, royalty, trademark, trade name or copyright
agreements with any third parties which would require any consent of any third
party upon sale or disposition of that Inventory or the payment of any monies
to any third party upon such sale or other disposition, (f) such Inventory
has been produced in accordance with the Federal Fair Labor Standards Act of
1938, as amended, and all rules, regulations and orders thereunder and (g) the
completion of manufacture, sale or other disposition of such Inventory by the
Lender following an Event of Default shall not require the consent of any
Person and shall not constitute a breach or default under any contract or
agreement to which the Grantor is a party or to which such property is subject.
6
3.10. Intellectual Property. This
Security Agreement is effective to create a valid and continuing Lien and, upon
filing of appropriate financing statements in the offices listed on Exhibit H,
fully perfected first priority security interests in favor of the Lender on the
Grantors Patents, Trademarks and Copyrights, such perfected security interests
are enforceable as such as against any and all creditors of and purchasers from
the Grantor; and all action necessary or desirable to protect and perfect the
Lenders Lien on the Grantors Patents, Trademarks or Copyrights shall have
been duly taken. Without limiting the
foregoing, Grantor will take such actions as the Lender may require for the
purpose of recording its interest in the Grantors Patents and Trademarks with
the United States Patent and Trademark Office from time to time upon Lenders
receipt of the initial schedule of Borrowers Patents and Trademarks, and any
updates thereto, each as required pursuant to the terms of the Credit
Agreement.
3.11. Filing Requirements. None of the Equipment is covered by any
certificate of title, except for the vehicles described in Part I of Exhibit E. None of the Collateral is of a type for which
security interests or liens may be perfected by filing under any federal
statute or any state statute other than Article 9 of the Uniform
Commercial Code as in effect in the relevant state except for the vehicles
described in Part II of Exhibit E. The legal description, county and street
address of each property on which any Fixtures are located is set forth in Exhibit F
together with the name and address of the record owner of each such property.
3.12. No Financing Statements, Security
Agreements. No financing statement
or security agreement describing all or any portion of the Collateral which has
not lapsed or been terminated naming the Grantor as debtor has been filed or is
of record in any jurisdiction except (a) for financing statements or
security agreements naming the Lender as the secured party and (b) as
permitted by Section 4.1(e).
3.13. Pledged Collateral.
(a) Exhibit G sets forth a
complete and accurate list of all of the Pledged Collateral. The Grantor is the direct, sole beneficial
owner and sole holder of record of the Pledged Collateral listed on Exhibit G
as being owned by it, free and clear of any Liens, except for the security
interest granted to the Lender hereunder and as otherwise permitted by Section 6.02
of the Credit Agreement. The Grantor further
represents and warrants that (i) all Pledged Collateral constituting an
Equity Interest has been (to the extent such concepts are relevant with respect
to such Pledged Collateral) duly authorized, validly issued, are fully paid and
non-assessable, (ii) with respect to any certificates delivered to the
Lender representing an Equity Interest, either such certificates are Securities
as defined in Article 8 of the UCC as a result of actions by the issuer or
otherwise, or, if such certificates are not Securities, the Grantor has so
informed the Lender so that the Lender may take steps to perfect its security
interest therein as a General Intangible, (iii) all Pledged Collateral
held by a securities intermediary is covered by a control agreement among the Grantor,
the securities intermediary and the Lender pursuant to which the Lender has
Control and (iv) all Pledged Collateral which represents Indebtedness owed
to the Grantor has been duly authorized, authenticated or issued and delivered
by the issuer of such Indebtedness, is the legal, valid and binding obligation
of such issuer and such issuer is not in default thereunder.
7
(b) In addition, (i) none of the
Pledged Collateral has been issued or transferred in violation of the
securities registration, securities disclosure or similar laws of any
jurisdiction to which such issuance or transfer may be subject, (ii) there
are existing no options, warrants, calls or commitments of any character
whatsoever relating to the Pledged Collateral or which obligate the issuer of
any Equity Interest included in the Pledged Collateral to issue additional
Equity Interests, and (iii) no consent, approval, authorization, or other
action by, and no giving of notice, filing with, any governmental authority or
any other Person is required for the pledge by the Grantor of the Pledged
Collateral pursuant to this Security Agreement or for the execution, delivery
and performance of this Security Agreement by the Grantor, or for the exercise
by the Lender of the voting or other rights provided for in this Security
Agreement or for the remedies in respect of the Pledged Collateral pursuant to
this Security Agreement, except as may be required in connection with such
disposition by laws affecting the offering and sale of securities generally.
(c) Except as set forth in Exhibit G,
the Grantor owns 100% of the issued and outstanding Equity Interests which constitute Pledged
Collateral and none of the Pledged Collateral which represents Indebtedness
owed to the Grantor is subordinated in right of payment to other Indebtedness
or subject to the terms of an indenture.
ARTICLE IV
COVENANTS
From the date of this Security Agreement, and
thereafter until this Security Agreement is terminated, the Grantor agrees
that:
4.1. General.
(a) Collateral Records. The Grantor will maintain complete and
accurate books and records with respect to the Collateral, and furnish to the
Lender, such reports relating to the Collateral as the Lender shall from time
to time request.
(b) Authorization to File Financing
Statements; Ratification. The
Grantor hereby authorizes the Lender to file, and if requested will deliver to
the Lender, all financing statements and other documents and take such other
actions as may from time to time be requested by the Lender in order to
maintain a first perfected security interest in and, if applicable, Control of,
the Collateral. Any financing statement
filed by the Lender may be filed in any filing office in any UCC jurisdiction
and may (i) indicate the Collateral (1) as all assets of the Grantor
or words of similar effect, regardless of whether any particular asset
comprised in the Collateral falls within the scope of Article 9 of the UCC
or such jurisdiction, or (2) by any other description which reasonably
approximates the description contained in this Security Agreement, and (ii) contain
any other information required by part 5 of Article 9 of the UCC for the
sufficiency or filing office acceptance of any financing statement or
amendment, including (a) whether the Grantor is an organization, the type
of organization and any organization identification number issued to the
Grantor, and (b) in the case of a financing statement filed as a fixture
filing or indicating Collateral as as-extracted collateral or timber to be cut,
a sufficient description of real property to which the Collateral relates. The Grantor also agrees to furnish any such
information to the Lender promptly upon request. The Grantor also ratifies its
8
authorization for the Lender
to have filed in any UCC jurisdiction any initial financing statements or
amendments thereto if filed prior to the date hereof.
(c) Further Assurances. The Grantor will, if so requested by the
Lender, furnish to the Lender, as often as the Lender requests, statements and
schedules further identifying and describing the Collateral and such other
reports and information in connection with the Collateral as the Lender may
reasonably request, all in such detail as the Lender may specify. The Grantor also agrees to take any and all
actions necessary to defend title to the Collateral against all persons and to
defend the security interest of the Lender in the Collateral and the priority thereof
against any Lien not expressly permitted hereunder.
(d) Disposition of Collateral. The Grantor will not sell, lease or otherwise
dispose of the Collateral except for dispositions specifically permitted
pursuant to the Credit Agreement.
(e) Liens. The Grantor will not create, incur, or suffer
to exist any Lien on the Collateral except (i) the security interest
created by this Security Agreement, and (ii) other Liens permitted under Section 6.02
of the Credit Agreement.
(f) Other Financing Statements. The Grantor will not authorize the filing of
any financing statement naming it as debtor covering all or any portion of the
Collateral, except as permitted by Section 4.1(e). The Grantor
acknowledges that it is not authorized to file any financing statement or
amendment or termination statement with respect to any financing statement
naming the Lender as secured party or that is not expressly permitted by Section 6.02
of the Credit Agreement without the prior written consent of the Lender,
subject to the Grantors rights under Section 9-509(d)(2) of the UCC.
(g) Locations. The Grantor will
not (i) maintain any Collateral at any location other than those locations
listed on Exhibit A, (ii) otherwise change, or add to, such
locations without the Lenders prior written consent as required by the Credit
Agreement (and if the Lender gives such consent, the Grantor will concurrently
therewith obtain a Collateral Access Agreement for each such location to the
extent required by the Credit Agreement), or (iii) change its principal
place of business or chief executive office from the location identified on Exhibit A,
other than as permitted by the Credit Agreement.
(h) Compliance with Terms. The Grantor will perform and comply in all
material respects with all obligations in respect of the Collateral and all
agreements to which it is a party or by which it is bound relating to the
Collateral.
4.2. Receivables.
(a) Certain Agreements on Receivables. The Grantor will not make or agree to make
any discount, credit, rebate or other reduction in the original amount owing on
a Receivable or accept in satisfaction of a Receivable less than the original
amount thereof, except that, prior to the occurrence of an Event of Default,
the Grantor may reduce the amount of Accounts arising from the sale of
Inventory in accordance with its present policies and in the ordinary course of
business.
9
(b) Collection of Receivables. Except for write-offs of Receivables deemed
unrecoverable in accordance with its present policies and in the ordinary
course of business or as otherwise provided in this Security Agreement, the
Grantor will collect and enforce, at the Grantors sole expense, all amounts
due or hereafter due to the Grantor under the Receivables.
(c) Delivery of Invoices. The Grantor will deliver to the Lender
immediately upon its request after the occurrence and during the continuation
of an Event of Default duplicate invoices with respect to each Account bearing
such language of assignment as the Lender shall specify.
(d) Intentionally Deleted.
(e) Electronic Chattel Paper. The Grantor shall take all steps necessary to
grant the Lender Control of all electronic chattel paper in accordance with the
UCC and all transferable records as defined in each of the Uniform Electronic
Transactions Act and the Electronic Signatures in Global and National Commerce
Act.
4.3. Inventory and Equipment.
(a) Maintenance of Goods. The Grantor will do all things necessary to
maintain, preserve, protect and keep the Inventory and the Equipment in good
repair and working and saleable condition, except for damaged or defective
goods arising in the ordinary course of the Grantors business and except for
ordinary wear and tear in respect of the Equipment.
(b) Returned Inventory. In the event any Account Debtor returns
Inventory to the Grantor when an Event of Default exists, the Grantor, upon the
request of the Lender, shall: (i) hold the returned Inventory in trust for
the Lender; (ii) segregate all returned Inventory from all of its other
property; (iii) dispose of the returned Inventory solely according to the
Lenders written instructions; and (iv) not issue any credits or
allowances with respect thereto without the Lenders prior written
consent. All returned Inventory shall be
subject to the Lenders Liens thereon.
Whenever any Inventory is returned, the related Account shall be deemed
ineligible to the extent of the amount owing by the Account Debtor with respect
to such returned Inventory and such returned Inventory shall not be Eligible
Inventory.
(c) Inventory Count. The Grantor will conduct a physical count of
the Inventory at least once per Fiscal Year, and after and during the
continuation of an Event of Default, at such other times as the Lender
requests. The Grantor, at its own expense, shall deliver to the Lender the
results of each physical verification, which the Grantor has made, or has
caused any other Person to make on its behalf, of all or any portion of its
Inventory.
(d) Equipment. The Grantor shall promptly inform the Lender
of any additions to or deletions from the Equipment which individually exceed
$250,000. The Grantor shall not permit
any Equipment to become a fixture with respect to real property or to become an
accession with respect to other personal property with respect to which real or
personal property the Lender either does not have a Lien or has not otherwise
entered into a Collateral Access Agreement.
The Grantor will not, without the Lenders prior written consent, alter
or remove any identifying symbol or number on any of the Grantors Equipment
constituting Collateral.
10
(e) Titled Vehicles. The Grantor will give the Lender notice of
its acquisition of any vehicle covered by a certificate of title with a value
in excess of $50,000, and deliver to the Lender, upon request, the original of
any vehicle title certificate and provide and/or file all other documents or
instruments necessary to have the Lien of the Lender noted on any such
certificate or with the appropriate state office.
4.4. Delivery of Instruments,
Securities, Chattel Paper and Documents. The Grantor will (a) deliver
to the Lender immediately upon execution of this Security Agreement the
originals of all Chattel Paper, certificated Securities and Instruments
constituting Collateral (if any then exist), (b) hold in trust for the
Lender upon receipt and immediately thereafter deliver to the Lender any
Chattel Paper, certificated Securities and Instruments constituting Collateral,
(c) upon the Lenders request, deliver to the Lender (and thereafter hold
in trust for the Lender upon receipt and immediately deliver to the Lender) any
Document evidencing or constituting Collateral and (d) upon the Lenders
request, deliver to the Lender a duly executed amendment to this Security
Agreement, in the form of Exhibit I hereto (the Amendment),
pursuant to which the Grantor will pledge such additional Collateral. The Grantor hereby authorizes the Lender to
attach each Amendment to this Security Agreement and agrees that all additional
Collateral set forth in such Amendments shall be considered to be part of the
Collateral.
4.5. Uncertificated Pledged Collateral.
The Grantor will permit the Lender from
time to time to cause the appropriate issuers (and, if held with a securities
intermediary, such securities intermediary) of uncertificated securities or
other types of Pledged Collateral not represented by certificates to mark their
books and records with the numbers and face amounts of all such uncertificated
securities or other types of Pledged Collateral not represented by certificates
and all rollovers and replacements therefor to reflect the Lien of the Lender
granted pursuant to this Security Agreement.
The Grantor will take any actions necessary to cause (a) the
issuers of uncertificated securities which are Pledged Collateral and (b) any
securities intermediary which is the holder of any Pledged Collateral, to cause
the Lender to have and retain Control over such Pledged Collateral. Without limiting the foregoing, the Grantor
will, with respect to Pledged Collateral held with a securities intermediary,
cause such securities intermediary to enter into a control agreement with the
Lender, in form and substance satisfactory to the Lender, giving the Lender
Control.
4.6. Pledged Collateral.
(a) Changes in Capital Structure of
Issuers. Except as expressly permitted or required by the Credit Agreement,
the Grantor will not (i) permit or suffer any issuer of an Equity Interest
constituting Pledged Collateral to dissolve, merge, liquidate, retire any of
its Equity Interests or other Instruments or Securities evidencing ownership,
reduce its capital, sell or encumber all or substantially all of its assets
(except for Liens permitted under Section 6.02 of the Credit Agreement and
sales of assets permitted pursuant to Section 4.1(d)) or merge or
consolidate with any other entity, or (ii) vote any Pledged Collateral in
favor of any of the foregoing.
(b) Issuance of Additional Securities. The Grantor will not permit or suffer the
issuer of an Equity Interest constituting Pledged Collateral to issue
additional Equity Interests, any right to receive the same or any right to
receive earnings, except to the Grantor.
11
(c) Registration of Pledged Collateral. During the continuation of an Event of
Default, Grantor will permit any registerable Pledged Collateral to be
registered in the name of the Lender or its nominee at any time at the option
of the Lender.
(d) Exercise of Rights in Pledged
Collateral.
(i) Without in any way
limiting the foregoing and subject to clause (ii) below, the Grantor shall
have the right to exercise all voting rights or other rights relating to the
Pledged Collateral for all purposes not inconsistent with this Security
Agreement, the Credit Agreement or any other Loan Document; provided however, that no vote or other right shall be
exercised or action taken which would have the effect of impairing the rights
of the Lender in respect of the Pledged Collateral.
(ii) The Grantor will
permit the Lender or its nominee at any time after the occurrence of an Event
of Default, without notice, to exercise all voting rights or other rights
relating to Pledged Collateral, including, without limitation, exchange,
subscription or any other rights, privileges, or options pertaining to any
Equity Interest or Investment Property constituting Pledged Collateral as if it
were the absolute owner thereof.
(iii) The Grantor shall
be entitled to collect and receive for its own use all cash dividends and
interest paid in respect of the Pledged Collateral to the extent not in violation
of the Credit Agreement other than any of the following distributions
and payments (collectively referred to as the Excluded Payments): (a) dividends
and interest paid or payable other than in cash in respect of any Pledged
Collateral, and instruments and other property received, receivable or
otherwise distributed in respect of, or in exchange for, any Pledged
Collateral; (b) dividends and other
distributions paid or payable in cash in respect of any Pledged Collateral in
connection with a partial or total liquidation or dissolution or in connection
with a reduction of capital, capital surplus or paid-in capital of an issuer;
and (c) cash paid, payable or otherwise distributed, in respect of
principal of, or in redemption of, or in exchange for, any Pledged Collateral; provided however, that until actually paid, all rights to
such distributions shall remain subject to the Lien created by this Security
Agreement; and
(iv) All Excluded
Payments and all other distributions in respect of any of the Pledged
Collateral, whenever paid or made, shall be delivered to the Lender to hold as
Pledged Collateral and shall, if received by the Grantor, be received in trust
for the benefit of the Lender, be segregated from the other property or funds
of the Grantor, and be forthwith delivered to the Lender as Pledged Collateral
in the same form as so received (with any necessary endorsement).
4.7. Intellectual Property.
(a) The Grantor will use its best efforts
to secure all consents and approvals necessary or appropriate for the
assignment to or benefit of the Lender of any License held by the Grantor and
to enforce the security interests granted hereunder. Within 30 days of the date hereof, the
Grantor will deliver to the Lender a schedule of any interest in, or any title
to, any
12
registered Patent, Trademark
or Copyright in the form of Exhibit D. The Grantor further agrees to provide the
Lender, within 30 days hereof, such Patent, Trademark, and/or Copyright Security
Agreements as the Lender may require to be filed with the United States Patent
and Trademark Office to evidence the Lien granted herein.
(b) The Grantor shall notify the Lender
immediately if it knows or has reason to know that any application or
registration relating to any Patent, Trademark or Copyright (now or hereafter
existing) that is material to the conduct of Grantors business may become
abandoned or dedicated, or of any adverse determination or development
(including the institution of, or any such determination or development in, any
proceeding in the United States Patent and Trademark Office, the United States
Copyright Office or any court) regarding the Grantors ownership of any Patent,
Trademark or Copyright, its right to register the same, or to keep and maintain
the same.
(c) Upon the filing of an application for
the registration of any Patent, Trademark or Copyright with the United States
Patent and Trademark Office, the United States Copyright Office or any similar
office or agency, the Grantor shall execute and deliver any and all security
agreements as the Lender may request to evidence the Lenders first priority
security interest on such Patent, Trademark or Copyright, and the General
Intangibles of the Grantor relating thereto or represented thereby.
(d) The Grantor shall take all actions
necessary or requested by the Lender to maintain and pursue each application,
to obtain the relevant registration and to maintain the registration of each of
the Patents, Trademarks and Copyrights (now or hereafter existing), including
the filing of applications for renewal, affidavits of use, affidavits of
noncontestability and opposition and interference and cancellation proceedings,
unless the Grantor shall determine that such Patent, Trademark or Copyright is
not material to the conduct of its business.
(e) The Grantor shall, unless it shall
reasonably determine that such Patent, Trademark or Copyright is in no way
material to the conduct of its business or operations, promptly sue for infringement,
misappropriation or dilution and to recover any and all damages for such
infringement, misappropriation or dilution, and shall take such other actions
as the Lender shall deem appropriate under the circumstances to protect such
Patent, Trademark or Copyright. In the
event that the Grantor institutes suit because any of the Patents, Trademarks
or Copyrights constituting Collateral is infringed upon, or misappropriated or
diluted by a third party, the Grantor shall comply with Section 4.8.
4.8. Commercial Tort Claims. The Grantor shall promptly, and in any event
within two Business Days after the same is acquired by it, notify the Lender of
any commercial tort claim (as defined in the UCC) acquired by it and, unless
the Lender otherwise consents, the Grantor shall enter into an amendment to
this Security Agreement, in the form of Exhibit I hereto, granting
to Lender a first priority security interest in such commercial tort claim.
4.9. Letter-of-Credit Rights. If the Grantor is or becomes the beneficiary
of any letters of credit with an aggregate face amount in excess of $50,000,
the Grantor shall promptly, and in any event within two Business Days after
becoming a beneficiary, notify the Lender thereof and,
13
upon Lenders request, cause
the issuer and/or confirmation bank to consent to the assignment of any
Letter-of-Credit Rights to the Lender.
4.10. Federal, State or Municipal Claims. The Grantor will promptly notify the Lender
of any Collateral which constitutes a claim against the United States
government or any state or local government or any instrumentality or agency
thereof, the assignment of which claim is restricted by federal, state or
municipal law.
4.11. No Interference. The Grantor agrees that it will not interfere
with any right, power and remedy of the Lender provided for in this Security
Agreement or now or hereafter existing at law or in equity or by statute or
otherwise, or the exercise or beginning of the exercise by the Lender of any
one or more of such rights, powers or remedies.
4.12. Insurance.
(a) All insurance policies required
hereunder or under Section 5.09 of the Credit Agreement shall name the
Lender as an additional insured or as loss payee, as applicable, and shall
contain loss payable clauses or mortgagee clauses, through endorsements in form
and substance satisfactory to the Lender, which provide that: (i) all
proceeds thereunder with respect to any Collateral shall be payable to the
Lender; (ii) no such insurance shall be affected by any act or neglect of
the insured or owner of the property described in such policy; and (iii) that
the insurer will endeavor to provide at least thirty days prior written notice
to the Lender that any such policy and loss payable or mortgagee clauses may be
canceled, amended or terminated; provided, that, in the event that any insurer
fails to give such thirty days prior written notice, the Borrower shall be
required to give such notice..
(b) All premiums on such insurance shall
be paid when due by the Grantor, and copies of the policies delivered to the
Lender promptly upon Lenders request.
If the Grantor fails to obtain any insurance as required by this
Section, the Lender may obtain such insurance at the Grantors expense. By purchasing such insurance, the Lender
shall not be deemed to have waived any Default arising from the Grantors
failure to maintain such insurance or pay any premiums therefor.
4.13. Collateral Access Agreements. The Grantor shall use commercially reasonable
efforts to obtain a Collateral Access Agreement, from the lessor of each leased
property, mortgagee of owned property or bailee or consignee with respect to
any warehouse, processor or converter facility or other location where
Collateral is stored or located, which agreement or letter shall provide access
rights, contain a waiver or subordination of all Liens or claims that the
landlord, mortgagee, bailee or consignee may assert against the Collateral at
that location, and shall otherwise be reasonably satisfactory in form and
substance to the Lender. With respect to such locations or warehouse space
leased as of the Effective Date and thereafter, if the Lender has not received
a Collateral Access Agreement as of the Effective Date (or, if later, as of the
date such location is acquired or leased), Grantors Eligible Inventory at that
location shall be excluded from the Borrowing Base. After the Effective Date, no real property or
warehouse space shall be leased by the Grantor and no Inventory shall be
shipped to a processor or converter under arrangements established after the
Effective Date, unless and until a
satisfactory Collateral Access Agreement shall first have been obtained with
respect to such location and if it
14
has not been obtained,
Grantors Eligible Inventory at that location shall be excluded from the
Borrowing Base. The Grantor shall timely
and fully pay and perform its obligations under all leases and other agreements
with respect to each leased location or third party warehouse where any
Collateral is or may be located.
4.14. Deposit Account Control Agreements. The Grantor will provide to the Lender upon
the Lenders request, a Deposit Account Control Agreement duly executed on behalf
of each financial institution holding a deposit account of the Grantor as set
forth in the Security Agreement.
4.15. Change of Name or Location; Change of
Fiscal Year. The Grantor shall not (a) change
its name as it appears in official filings in the state of its incorporation or
organization, (b) change its chief executive office, principal place of
business, mailing address, corporate offices or warehouses or locations at
which Collateral is held or stored, or the location of its records concerning
the Collateral as set forth in the Security Agreement, (c) change the type
of entity that it is, (d) change its organization identification number,
if any, issued by its state of incorporation or other organization, or (e) change
its state of incorporation or organization, in each case, unless the Lender
shall have received at least thirty days prior written notice of such change
and the Lender shall have acknowledged in writing that either (1) such
change will not adversely affect the validity, perfection or priority of the
Lenders security interest in the Collateral, or (2) any reasonable action
requested by the Lender in connection therewith has been completed or taken
(including any action to continue the perfection of any Liens in favor of the
Lender in any Collateral), provided that, any new location shall be in the
continental U.S. The Grantor shall not
change its fiscal year which currently ends on June 30.
ARTICLE
V
EVENTS OF DEFAULT AND REMEDIES
5.1. Events of Default. The occurrence of any one or more of the
following events shall constitute an Event of Default hereunder:
(a) Any representation or warranty made
by or on behalf of the Grantor under or in connection with this Security
Agreement shall be materially false as of the date on which made.
(b) The breach by the Grantor of any of
the terms or provisions of Article IV or Article VII.
(c) The breach by the Grantor (other than
a breach which constitutes an Event of Default under any other Section of
this Article V) of any of the terms or provisions of this Security
Agreement which is not remedied within ten days after such breach.
(d) The occurrence of any Event of
Default under, and as defined in, the Credit Agreement.
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5.2. Remedies.
(a) Upon the occurrence of an Event of
Default, the Lender may exercise any or all of the following rights and
remedies:
(i) those rights and
remedies provided in this Security Agreement, the Credit Agreement, or any
other Loan Document; provided that,
this Section 5.2(a) shall not be understood to limit any rights or
remedies available to the Lender prior to an Event of Default;
(ii) those rights and
remedies available to a secured party under the UCC (whether or not the UCC
applies to the affected Collateral) or under any other applicable law
(including, without limitation, any law governing the exercise of a banks
right of setoff or bankers lien) when a debtor is in default under a security
agreement;
(iii) give notice of sole
control or any other instruction under any Deposit Account Control Agreement or
and other control agreement with any securities intermediary and take any
action therein with respect to such Collateral;
(iv) without notice
(except as specifically provided in Section 8.1 or elsewhere herein),
demand or advertisement of any kind to Grantor or any other Person, enter the
premises of the Grantor where any Collateral is located (through self-help and
without judicial process) to collect, receive, assemble, process, appropriate,
sell, lease, assign, grant an option or options to purchase or otherwise
dispose of, deliver, or realize upon, the Collateral or any part thereof in one
or more parcels at public or private sale or sales (which sales may be
adjourned or continued from time to time with or without notice and may take
place at the Grantors premises or elsewhere), for cash, on credit or for
future delivery without assumption of any credit risk, and upon such other
terms as the Lender may deem commercially reasonable; and
(v) concurrently with
written notice to the Grantor, transfer and register in its name or in the name
of its nominee the whole or any part of the Pledged Collateral, to exchange
certificates or instruments representing or evidencing Pledged Collateral for
certificates or instruments of smaller or larger denominations, to exercise the
voting and all other rights as a holder with respect thereto, to collect and
receive all cash dividends, interest, principal and other distributions made
thereon and to otherwise act with respect to the Pledged Collateral as though
the Lender was the outright owner thereof.
(b) The Lender may comply with any
applicable state or federal law requirements in connection with a disposition
of the Collateral and compliance will not be considered to adversely affect the
commercial reasonableness of any sale of the Collateral.
(c) The Lender shall have the right upon
any such public sale or sales and, to the extent permitted by law, upon any
such private sale or sales, to purchase for the benefit of the Lender, the
whole or any part of the Collateral so sold, free of any right of equity
redemption, which equity redemption the Grantor hereby expressly releases.
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(d) Until the Lender is able to effect a
sale, lease, or other disposition of Collateral, the Lender shall have the
right to hold or use Collateral, or any part thereof, to the extent that it
deems appropriate for the purpose of preserving Collateral or its value or for
any other purpose deemed appropriate by the Lender. The Lender may, if it so
elects, seek the appointment of a receiver or keeper to take possession of
Collateral and to enforce any of the Lenders remedies, with respect to such
appointment without prior notice or hearing as to such appointment.
(e) If, after the Credit Agreement has
terminated by its terms and all of the Obligations have been paid in full,
there remain Swap Obligations outstanding, the Lender may exercise the remedies
provided in this Section 5.2 upon the occurrence of any event which would
allow or require the termination or acceleration of any Swap Obligations
pursuant to the terms of the Swap Agreement.
(f) Notwithstanding the foregoing, the
Lender shall not be required to (i) make any demand upon, or pursue or
exhaust any of their rights or remedies against, the Grantor, any other
obligor, guarantor, pledgor or any other Person with respect to the payment of
the Secured Obligations or to pursue or exhaust any of their rights or remedies
with respect to any Collateral therefor or any direct or indirect guarantee
thereof, (ii) marshal the Collateral or any guarantee of the Secured
Obligations or to resort to the Collateral or any such guarantee in any
particular order, or (iii) effect a public sale of any Collateral.
(g) The Grantor recognizes that the
Lender may be unable to effect a public sale of any or all the Pledged
Collateral and may be compelled to resort to one or more private sales thereof
in accordance with clause (a) above. The Grantor also acknowledges that any
private sale may result in prices and other terms less favorable to the seller
than if such sale were a public sale and, notwithstanding such circumstances,
agrees that any such private sale shall not be deemed to have been made in a
commercially unreasonable manner solely by virtue of such sale being
private. The Lender shall be under no
obligation to delay a sale of any of the Pledged Collateral for the period of
time necessary to permit the Grantor or the issuer of the Pledged Collateral to
register such securities for public sale under the Securities Act of 1933, as
amended, or under applicable state securities laws, even if the Grantor and the
issuer would agree to do so.
5.3. Grantors Obligations Upon Default. Upon the request of the Lender after the
occurrence of a Default, the Grantor will:
(a) assemble and make available to the
Lender the Collateral and all books and records relating thereto at any place
or places specified by the Lender, whether at the Grantors premises or
elsewhere;
(b) permit the Lender, by the Lenders
representatives and agents, to enter, occupy and use any premises where all or any part of the
Collateral, or the books and records relating thereto, or both, are located, to
take possession of all or any part of the Collateral or the books and records
relating thereto, or both, to remove all or any part of the Collateral or the
books and records relating thereto, or both, and to conduct sales of the
Collateral, without any obligation to pay the Grantor for such use and
occupancy;
17
(c) prepare and file, or cause an issuer
of Pledged Collateral to prepare and file, with the Securities and Exchange
Commission or any other applicable government agency, registration statements,
a prospectus and such other documentation in connection with the Pledged
Collateral as the Lender may request, all in form and substance satisfactory to
the Lender, and furnish to the Lender, or cause an issuer of Pledged Collateral
to furnish to the Lender, any information regarding the Pledged Collateral in
such detail as the Lender may specify;
(d) take, or cause an issuer of Pledged
Collateral to take, any and all actions necessary to register or qualify the
Pledged Collateral to enable the Lender to consummate a public sale or other
disposition of the Pledged Collateral; and
(e) at its own expense, cause the
independent certified public accountants then engaged by the Grantor to prepare
and deliver to the Lender, at any time, and from time to time, promptly upon
the Lenders request, the following reports with respect to the Grantor: (i) a
reconciliation of all Accounts; (ii) an aging of all Accounts; (iii) trial
balances; and (iv) a test verification of such Accounts.
5.4. Grant of Intellectual Property
License. For the purpose of enabling
the Lender to exercise the rights and remedies under this Article V
at such time as the Lender shall be lawfully entitled to exercise such rights
and remedies, the Grantor hereby (a) grants to the Lender an irrevocable,
nonexclusive license (exercisable without payment of royalty or other
compensation to the Grantor) to use, license or sublicense any Intellectual
Property Rights now owned or hereafter acquired by the Grantor, and wherever the
same may be located, and including in such license access to all media in which
any of the licensed items may be recorded or stored and to all computer
software and programs used for the compilation or printout thereof and (b) irrevocably
agrees that the Lender may sell any of the Grantors Inventory directly to any
person, including without limitation persons who have previously purchased the
Grantors Inventory from the Grantor and in connection with any such sale or
other enforcement of the Lenders rights under this Security Agreement, may
sell Inventory which bears any Trademark owned by or licensed to the Grantor
and any Inventory that is covered by any Copyright owned by or licensed to the
Grantor and the Lender may finish any work in process and affix any Trademark
owned by or licensed to the Grantor and sell such Inventory as provided herein.
ARTICLE
VI
ACCOUNT VERIFICATION; ATTORNEY IN FACT; PROXY
6.1. Account Verification. The Lender may, at any time after an Event of
Default, in the Lenders own name, in the name of a nominee of the Lender, or
in the name of the Grantor communicate (by mail, telephone, facsimile or
otherwise) with the Account Debtors of such Grantor, parties to contracts with
the Grantor and obligors in respect of Instruments of the Grantor to verify
with such Persons, to the Lenders satisfaction, the existence, amount, terms
of, and any other matter relating to, Accounts, Instruments, Chattel Paper,
payment intangibles and/or other Receivables.
18
6.2. Authorization for Secured Party to
Take Certain Action.
(a) The Grantor irrevocably authorizes
the Lender at any time and from time to time in the sole discretion of the
Lender and appoints the Lender as its attorney in fact (i) to execute on
behalf of the Grantor as debtor and to file financing statements necessary or
desirable in the Lenders sole discretion to perfect and to maintain the
perfection and priority of the Lenders security interest in the Collateral, (ii) to
endorse and collect any cash proceeds of the Collateral, (iii) to file a
carbon, photographic or other reproduction of this Security Agreement or any
financing statement with respect to the Collateral as a financing statement and
to file any other financing statement or amendment of a financing statement
(which does not add new collateral or add a debtor) in such offices as the
Lender in its sole discretion deems necessary or desirable to perfect and to
maintain the perfection and priority of the Lenders security interest in the
Collateral, (iv) to contact and enter into one or more agreements with the
issuers of uncertificated securities which are Pledged Collateral or with
securities intermediaries holding Pledged Collateral as may be necessary or
advisable to give the Lender Control over such Pledged Collateral, (v) to
apply the proceeds of any Collateral received by the Lender to the Secured
Obligations as provided in Section 7.3, (vi) to discharge past due
taxes, assessments, charges, fees or Liens on the Collateral (except for such
Liens as are specifically permitted hereunder), (vii) during the
continuation of an Event of Default to contact Account Debtors for any reason, (viii) to
demand payment or enforce payment of the Receivables in the name of the Lender
or the Grantor and to endorse any and all checks, drafts, and other instruments
for the payment of money relating to the Receivables, (ix) to sign the
Grantors name on any invoice or bill of lading relating to the Receivables,
drafts against any Account Debtor of the Grantor, assignments and verifications
of Receivables, (x) to exercise all of the Grantors rights and remedies
with respect to the collection of the Receivables and any other Collateral,
(xi) to settle, adjust, compromise, extend or renew the Receivables, (xii) to
settle, adjust or compromise any legal proceedings brought to collect
Receivables, (xiii) to prepare, file and sign the Grantors name on a proof of
claim in bankruptcy or similar document against any Account Debtor of the
Grantor, (xiv) to prepare, file and sign the Grantors name on any notice of
Lien, assignment or satisfaction of Lien or similar document in connection with
the Receivables, (xv) to change the address for delivery of mail addressed to
the Grantor to such address as the Lender may designate and to receive, open
and dispose of all mail addressed to the Grantor, and (xvi) to do all other
acts and things necessary to carry out this Security Agreement; and the Grantor
agrees to reimburse the Lender on demand for any payment made or any expense
incurred by the Lender in connection with any of the foregoing; provided that, this authorization shall not relieve the
Grantor of any of its obligations under this Security Agreement or under the
Credit Agreement.
(b) All acts of said attorney or designee
made in accordance herewith are hereby ratified and approved. The powers
conferred on the Lender, under this Section 6.2 are solely to protect the
Lenders interests in the Collateral and shall not impose any duty upon the
Lender to exercise any such powers. The
Lender agrees that, except for the powers granted in Section 6.2(a)(i)-(vi) and
Section 6.2(a)(xvi), it shall not exercise any power or authority granted
to it unless an Event of Default has occurred and is continuing.
6.3. Proxy. THE GRANTOR HEREBY
IRREVOCABLY CONSTITUTES AND APPOINTS THE LENDER AS THE PROXY AND
ATTORNEY-IN-FACT (AS SET FORTH IN SECTION 6.2 ABOVE) OF THE GRANTOR WITH
RESPECT TO THE PLEDGED COLLATERAL, INCLUDING THE RIGHT TO VOTE SUCH PLEDGED
COLLATERAL IN
19
ACCORDANCE HEREWITH, WITH
FULL POWER OF SUBSTITUTION TO DO SO. IN ADDITION TO THE RIGHT TO VOTE ANY SUCH
PLEDGED COLLATERAL, THE APPOINTMENT OF THE LENDER AS PROXY AND ATTORNEY-IN-FACT
SHALL INCLUDE THE RIGHT TO EXERCISE ALL OTHER RIGHTS, POWERS, PRIVILEGES AND
REMEDIES TO WHICH A HOLDER OF SUCH PLEDGED COLLATERAL WOULD BE ENTITLED
(INCLUDING GIVING OR WITHHOLDING WRITTEN CONSENTS OF SHAREHOLDERS, CALLING
SPECIAL MEETINGS OF SHAREHOLDERS AND VOTING AT SUCH MEETINGS). SUCH PROXY SHALL
BE EFFECTIVE, AUTOMATICALLY AND WITHOUT THE NECESSITY OF ANY ACTION (INCLUDING
ANY TRANSFER OF ANY SUCH PLEDGED COLLATERAL ON THE RECORD BOOKS OF THE ISSUER
THEREOF) BY ANY PERSON (INCLUDING THE ISSUER OF SUCH PLEDGED COLLATERAL OR ANY
OFFICER OR AGENT THEREOF), UPON THE OCCURRENCE OF A DEFAULT.
6.4. Nature of Appointment; Limitation
of Duty. THE APPOINTMENT OF THE
LENDER AS PROXY AND ATTORNEY-IN-FACT IN THIS ARTICLE VI IS COUPLED WITH AN
INTEREST AND SHALL BE IRREVOCABLE UNTIL THE DATE ON WHICH THIS SECURITY
AGREEMENT IS TERMINATED IN ACCORDANCE WITH SECTION 8.14. NOTWITHSTANDING
ANYTHING CONTAINED HEREIN, NEITHER THE LENDER NOR ANY OF ITS RESPECTIVE
AFFILIATES, OFFICERS, DIRECTORS, EMPLOYEES, AGENTS OR REPRESENTATIVES SHALL
HAVE ANY DUTY TO EXERCISE ANY RIGHT OR POWER GRANTED HEREUNDER OR OTHERWISE OR
TO PRESERVE THE SAME AND SHALL NOT BE LIABLE FOR ANY FAILURE TO DO SO OR FOR
ANY DELAY IN DOING SO, EXCEPT IN RESPECT
OF DAMAGES ATTRIBUTABLE SOLELY TO THEIR OWN GROSS NEGLIGENCE OR WILLFUL
MISCONDUCT AS FINALLY DETERMINED BY A COURT OF COMPETENT JURISDICTION; PROVIDED
THAT, IN NO EVENT SHALL THEY BE LIABLE FOR ANY PUNITIVE, EXEMPLARY, INDIRECT OR
CONSEQUENTIAL DAMAGES.
ARTICLE
VII
COLLECTION AND APPLICATION OF COLLATERAL PROCEEDS; DEPOSIT ACCOUNTS
7.1. Collection of Receivables. If required by Lender after an Event of
Default, the Grantor shall execute and deliver to the Lender Deposit Account
Control Agreements for each Deposit Account maintained by the Grantor into
which all cash, checks or other similar payments relating to or constituting
payments made in respect of Receivables will be deposited (a Collateral
Deposit Account), which Collateral Deposit Accounts are identified as such
on Exhibit B.
7.2. Covenant Regarding New Deposit
Accounts. After the occurrence of an
Event of Default, the Grantor shall (a) obtain the Lenders consent in
writing before opening or replacing any Collateral Deposit Account or other
Deposit Account to the opening of such Deposit Account, and (b) cause each
bank or financial institution in which it seeks to open a Deposit Account, to
enter into a Deposit Account Control Agreement with the Lender in order to give
the Lender Control of such Deposit Account.
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7.3. Application of
Proceeds; Deficiency. The Lender
may require, at any time after the occurrence of an Event of Default, that all
cash proceeds of the Collateral which are not required to be applied to the
Obligations pursuant to Section 2.10 of the Credit Agreement be deposited
in a special non-interest bearing cash collateral account with the Lender and
held there as security for the Secured Obligations. The Grantor shall have no control whatsoever
over said cash collateral account. Any
such proceeds of the Collateral shall be applied in the order set forth in Section 2.17
of the Credit Agreement unless a court of competent jurisdiction shall
otherwise direct. The balance, if any,
after all of the Secured Obligations have been satisfied, shall be deposited by
the Lender into the Grantors general operating account with the Lender. The
Grantor shall remain liable for any deficiency if the proceeds of any sale or
disposition of the Collateral are insufficient to pay all Secured Obligations,
including any attorneys fees and other expenses incurred by the Lender or any
Lender to collect such deficiency.
ARTICLE
VIII
GENERAL PROVISIONS
8.1. Waivers. The Grantor hereby waives notice of the time
and place of any public sale or the time after which any private sale or other
disposition of all or any part of the Collateral may be made. To the extent such notice may not be waived
under applicable law, any notice made shall be deemed reasonable if sent to the
Grantor, addressed as set forth in Article IX, at least ten days prior to (i) the
date of any such public sale or (ii) the time after which any such private
sale or other disposition may be made.
To the maximum extent permitted by applicable law, the Grantor waives
all claims, damages, and demands against the Lender arising out of the
repossession, retention or sale of the Collateral, except such as arise solely
out of the gross negligence or willful misconduct of the Lender as finally
determined by a court of competent jurisdiction. To the extent it may lawfully
do so, the Grantor absolutely and irrevocably waives and relinquishes the
benefit and advantage of, and covenants not to assert against the Lender, any
valuation, stay, appraisal, extension, moratorium, redemption or similar laws
and any and all rights or defenses it may have as a surety now or hereafter
existing which, but for this provision, might be applicable to the sale of any
Collateral made under the judgment, order or decree of any court, or privately
under the power of sale conferred by this Security Agreement, or
otherwise. Except as otherwise
specifically provided herein, the Grantor hereby waives presentment, demand,
protest or any notice (to the maximum extent permitted by applicable law) of
any kind in connection with this Security Agreement or any Collateral.
8.2. Limitation on
the Lenders Duty with Respect to the Collateral. The Lender shall have no obligation to
clean-up or otherwise prepare the Collateral for sale. The Lender shall use
reasonable care with respect to the Collateral in its possession or under its
control. The Lender shall not have any
other duty as to any Collateral in its possession or control or in the
possession or control of any agent or nominee of the Lender, or any income
thereon or as to the preservation of rights against prior parties or any other
rights pertaining thereto. To the extent that applicable law imposes duties on
the Lender to exercise remedies in a commercially reasonable manner, the
Grantor acknowledges and agrees that it is commercially reasonable for the
Lender (i) to fail to incur expenses deemed significant by the Lender to
prepare Collateral for disposition or otherwise to transform raw material or
work in process into finished goods or other finished products for disposition,
(ii) to fail to obtain third party consents for access to Collateral to be
disposed of, or to obtain or, if not required by other law, to fail to obtain
governmental or third
21
party consents for the collection or
disposition of Collateral to be collected or disposed of, (iii) to fail to
exercise collection remedies against Account Debtors or other Persons obligated
on Collateral or to remove Liens on or any adverse claims against Collateral, (iv) to
exercise collection remedies against Account Debtors and other Persons
obligated on Collateral directly or through the use of collection agencies and
other collection specialists, (v) to advertise dispositions of Collateral
through publications or media of general circulation, whether or not the
Collateral is of a specialized nature, (vi) to contact other Persons,
whether or not in the same business as the Grantor, for expressions of interest
in acquiring all or any portion of such Collateral, (vii) to hire one or
more professional auctioneers to assist in the disposition of Collateral,
whether or not the Collateral is of a specialized nature, (viii) to
dispose of Collateral by utilizing internet sites that provide for the auction
of assets of the types included in the Collateral or that have the reasonable
capacity of doing so, or that match buyers and sellers of assets, (ix) to
dispose of assets in wholesale rather than retail markets, (x) to disclaim
disposition warranties, such as title, possession or quiet enjoyment, (xi) to
purchase insurance or credit enhancements to insure the Lender against risks of
loss, collection or disposition of Collateral or to provide to the Lender a
guaranteed return from the collection or disposition of Collateral, or (xii) to
the extent deemed appropriate by the Lender, to obtain the services of other
brokers, investment bankers, consultants and other professionals to assist the
Lender in the collection or disposition of any of the Collateral. The Grantor acknowledges that the purpose of
this Section 8.2 is to provide non-exhaustive indications of what actions
or omissions by the Lender would be
commercially reasonable in the Lenders exercise of remedies against the
Collateral and that other actions or omissions by the Lender shall not be
deemed commercially unreasonable solely on account of not being indicated in
this Section 8.2. Without
limitation upon the foregoing, nothing contained in this Section 8.2 shall
be construed to grant any rights to the Grantor or to impose any duties on the
Lender that would not have been granted or imposed by this Security Agreement
or by applicable law in the absence of this Section 8.2.
8.3. Compromises and
Collection of Collateral. The
Grantor and the Lender recognize that setoffs, counterclaims, defenses and
other claims may be asserted by obligors with respect to certain of the
Receivables, that certain of the Receivables may be or become uncollectible in
whole or in part and that the expense and probability of success in litigating
a disputed Receivable may exceed the amount that reasonably may be expected to
be recovered with respect to a Receivable.
In view of the foregoing, the Grantor agrees that the Lender may at any
time and from time to time, if an Event of Default has occurred and is continuing,
compromise with the obligor on any Receivable, accept in full payment of any
Receivable such amount as the Lender in its sole discretion shall determine or
abandon any Receivable, and any such action by the Lender shall be commercially
reasonable so long as the Lender acts in good faith based on information known
to it at the time it takes any such action.
8.4. Secured Party
Performance of Debtor Obligations. Without having any obligation to do so, the
Lender may perform or pay any obligation which the Grantor has agreed to
perform or pay in this Security Agreement and the Grantor shall reimburse the
Lender for any amounts paid by the Lender pursuant to this Section 8.4. The Grantors obligation to reimburse the
Lender pursuant to the preceding sentence shall be a Secured Obligation payable
on demand.
8.5. Specific
Performance of Certain Covenants. The Grantor acknowledges and agrees that a
breach of any of the covenants contained in Sections 4.1(d), 4.1(e), 4.4, 4.6,
4.7,
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4.8, 4.9, 4.10, 4.12, 4.13, 4.14, 4.15, 5.3,
or 8.7 or in Article VII will cause irreparable injury to the Lender, that
the Lender has no adequate remedy at law in respect of such breaches and
therefore agrees, without limiting the right of the Lender to seek and obtain
specific performance of other obligations of the Grantor contained in this
Security Agreement, that the covenants of the Grantor contained in the Sections
referred to in this Section 8.5 shall be specifically enforceable against
the Grantor.
8.6. Dispositions
Not Authorized. The Grantor
is not authorized to sell or otherwise dispose of the Collateral except as set
forth in Section 4.1(d) and notwithstanding any course of dealing
between the Grantor and the Lender or other conduct of the Lender, no
authorization to sell or otherwise dispose of the Collateral (except as set
forth in Section 4.1(d)) shall be binding upon the Lender unless such
authorization is in writing signed by the Lender.
8.7. No Waiver; Amendments;
Cumulative Remedies. No delay or omission of the Lender to exercise any
right or remedy granted under this Security Agreement shall impair such right
or remedy or be construed to be a waiver of any Default or an acquiescence
therein, and any single or partial exercise of any such right or remedy shall
not preclude any other or further exercise thereof or the exercise of any other
right or remedy. No waiver, amendment or other variation of the terms,
conditions or provisions of this Security Agreement whatsoever shall be valid
unless in writing signed by the Lender and then only to the extent in such
writing specifically set forth. All
rights and remedies contained in this Security Agreement or by law afforded
shall be cumulative and all shall be available to the Lender until the Secured
Obligations have been paid in full.
8.8. Limitation by
Law; Severability of Provisions. All rights, remedies and powers provided in
this Security Agreement may be exercised only to the extent that the exercise
thereof does not violate any applicable provision of law, and all the
provisions of this Security Agreement are intended to be subject to all
applicable mandatory provisions of law that may be controlling and to be
limited to the extent necessary so that they shall not render this Security
Agreement invalid, unenforceable or not entitled to be recorded or registered,
in whole or in part. Any provision in
any this Security Agreement that is held to be inoperative, unenforceable, or
invalid in any jurisdiction shall, as to that jurisdiction, be inoperative,
unenforceable, or invalid without affecting the remaining provisions in that
jurisdiction or the operation, enforceability, or validity of that provision in
any other jurisdiction, and to this end the provisions of this Security
Agreement are declared to be severable.
8.9. Reinstatement. This Security Agreement shall remain in full
force and effect and continue to be effective should any petition be filed by
or against the Grantor for liquidation or reorganization, should the Grantor
become insolvent or make an assignment for the benefit of any creditor or
creditors or should a receiver or trustee be appointed for all or any
significant part of the Grantors assets, and shall continue to be effective or
be reinstated, as the case may be, if at any time payment and performance of
the Secured Obligations, or any part thereof, is, pursuant to applicable law,
rescinded or reduced in amount, or must otherwise be restored or returned by
any obligee of the Secured Obligations, whether as a voidable preference, fraudulent
conveyance, or otherwise, all as though such payment or performance had not
been made. In the event that any
payment, or any part thereof, is rescinded, reduced, restored or
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returned, the Secured Obligations shall be
reinstated and deemed reduced only by such amount paid and not so rescinded,
reduced, restored or returned.
8.10. Benefit of
Agreement. The terms
and provisions of this Security Agreement shall be binding upon and inure to
the benefit of the Grantor, the Lender and their respective successors and
assigns (including all persons who become bound as a debtor to this Security
Agreement), except that the Grantor shall not have the right to assign its
rights or delegate its obligations under this Security Agreement or any
interest herein, without the prior written consent of the Lender. No sales of participations, assignments,
transfers, or other dispositions of any agreement governing the Secured
Obligations or any portion thereof or interest therein shall in any manner
impair the Lien granted to the Lender hereunder.
8.11. Survival of
Representations. All
representations and warranties of the Grantor contained in this Security Agreement
shall survive the execution and delivery of this Security Agreement.
8.12. Taxes and
Expenses. Any taxes
(including income taxes) payable or ruled payable by Federal or State authority
in respect of this Security Agreement shall be paid by the Grantor, together
with interest and penalties, if any. The
Grantor shall reimburse the Lender for any and all out-of-pocket expenses and
internal charges (including reasonable attorneys, auditors and accountants
fees and reasonable time charges of attorneys, paralegals, auditors and
accountants who may be employees of the Lender) paid or incurred by the Lender
in connection with the preparation, execution, delivery, administration,
collection and enforcement of this Security Agreement and, subject to the terms
and conditions set forth in the Credit Agreement, in the audit, analysis,
administration, collection, preservation or sale of the Collateral (including
the expenses and charges associated with any periodic or special audit of the
Collateral). Any and all costs and
expenses incurred by the Grantor in the performance of actions required
pursuant to the terms hereof shall be borne solely by the Grantor.
8.13. Headings. The title of and section headings in this
Security Agreement are for convenience of reference only, and shall not govern
the interpretation of any of the terms and provisions of this Security
Agreement.
8.14. Termination. This Security Agreement shall continue in
effect (notwithstanding the fact that from time to time there may be no Secured
Obligations outstanding) until (i) the Credit Agreement has terminated
pursuant to its express terms and (ii) all of the Secured Obligations have
been indefeasibly paid and performed in full (except with respect to any
outstanding Letters of Credit for which a cash deposit or Supporting Letter of
Credit has been delivered to the Lender as required by the Credit Agreement or
with respect to any other contingent obligations that survive termination of
the Credit Agreement) and no commitments of the Lender which would give rise to
any Secured Obligations are outstanding.
8.15. Entire
Agreement. This
Security Agreement embodies the entire agreement and understanding between the
Grantor and the Lender relating to the Collateral and supersedes all prior
agreements and understandings between the Grantor and the Lender relating to
the Collateral.
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8.16. CHOICE
OF LAW. THIS
SECURITY AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE
INTERNAL LAWS (AND NOT THE LAW OF CONFLICTS) OF THE STATE OF WISCONSIN, BUT
GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO NATIONAL BANKS.
8.17. CONSENT
TO JURISDICTION. THE
GRANTOR HEREBY IRREVOCABLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF ANY
U.S. FEDERAL OR WISCONSIN STATE COURT SITTING IN WISCONSIN IN ANY ACTION OR
PROCEEDING ARISING OUT OF OR RELATING TO THIS SECURITY AGREEMENT OR ANY OTHER
LOAN DOCUMENT AND THE GRANTOR HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN
RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY
SUCH COURT AND IRREVOCABLY WAIVES ANY OBJECTION IT MAY NOW OR HEREAFTER
HAVE AS TO THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH A
COURT OR THAT SUCH COURT IS AN INCONVENIENT FORUM. NOTHING HEREIN SHALL LIMIT THE RIGHT OF THE
LENDER TO BRING PROCEEDINGS AGAINST THE GRANTOR IN THE COURTS OF ANY OTHER
JURISDICTION. ANY JUDICIAL PROCEEDING BY
THE GRANTOR AGAINST THE LENDER OR ANY AFFILIATE OF THE LENDER INVOLVING,
DIRECTLY OR INDIRECTLY, ANY MATTER IN ANY WAY ARISING OUT OF, RELATED TO, OR
CONNECTED WITH THIS SECURITY AGREEMENT OR ANY OTHER LOAN DOCUMENT SHALL BE
BROUGHT ONLY IN A COURT IN MILWAUKEE, WISCONSIN.
8.18. WAIVER
OF JURY TRIAL. THE GRANTOR AND THE LENDER HEREBY WAIVE
TRIAL BY JURY IN ANY JUDICIAL PROCEEDING INVOLVING, DIRECTLY OR INDIRECTLY, ANY
MATTER (WHETHER SOUNDING IN TORT, CONTRACT OR OTHERWISE) IN ANY WAY ARISING OUT
OF, RELATED TO, OR CONNECTED WITH THIS SECURITY AGREEMENT OR ANY OTHER LOAN
DOCUMENT OR THE RELATIONSHIP ESTABLISHED THEREUNDER.
8.19. Indemnity. The Grantor hereby agrees to indemnify the
Lender, and its successors, assigns, agents and employees, from and against any
and all liabilities, damages, penalties, suits, costs, and expenses of any kind
and nature (including, without limitation, all expenses of litigation or
preparation therefor whether or not the Lender is a party thereto) imposed on,
incurred by or asserted against the Lender, or its successors, assigns, agents
and employees, in any way relating to or arising out of this Security
Agreement, or the manufacture, purchase, acceptance, rejection, ownership,
delivery, lease, possession, use, operation, condition, sale, return or other
disposition of any Collateral (including, without limitation, latent and other
defects, whether or not discoverable by the Lender or the Grantor, and any
claim for Patent, Trademark or Copyright infringement).
8.20. Counterparts. This Security Agreement may be executed in
any number of counterparts, all of which taken together shall constitute one
agreement, and any of the parties hereto may execute this Security Agreement by
signing any such counterpart.
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ARTICLE
IX
NOTICES
9.1. Sending Notices. Any notice required or permitted to be given
under this Security Agreement shall be sent in
accordance with Section 8.01 of the Credit Agreement.
9.2. Change in
Address for Notices. Each of the
Grantor and the Lender may change the address for service of notice upon it by
a notice in writing to the other parties.
[Signatures appear on
following page]
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IN WITNESS WHEREOF, the Grantor and the Lender have
executed this Security Agreement as of the date first above written.
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GRANTOR:
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KOSS CORPORATION
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By:
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Name:
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Title:
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JPMORGAN CHASE BANK, N.A., as Lender
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By:
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Name:
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Title:
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[Signature
Page to Security Agreement]
EXHIBIT A
(See Sections 3.2, 3.3, 3.4, 3.9 and 9.1 of
Security Agreement)
GRANTORS INFORMATION AND
COLLATERAL LOCATIONS
I. Name of
Grantor:
II. State
of Incorporation or Organization:
III. Type of
Entity:
IV. Organizational
Number assigned by State of Incorporation or Organization:
V. Federal
Identification Number:
VI. Place
of Business (if it has only one) or Chief
Executive Office (if more than one place of business) and Mailing Address:
Attention:
VII. Locations
of Collateral:
(a) Properties Owned by the
Grantor:
None.
(b) Properties Leased by the
Grantor (Include Landlords Name):
(c) Public Warehouses or other
Locations pursuant to Bailment or Consignment Arrangements (include name
of Warehouse Operator or other Bailee or Consignee):
VIII. Commercial
Tort Claims:
(a)
(b)
EXHIBIT B
(See Section 3.5 of Security Agreement)
DEPOSIT ACCOUNTS
Name
of Institution
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Account Number
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Check here if Deposit
Account is a Collateral
Deposit Account
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Description of Deposit
Account if not a
Collateral Deposit
Account
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EXHIBIT C
(See Section 3.7 of Security Agreement)
LETTER OF CREDIT RIGHTS
CHATTEL PAPER
EXHIBIT
D
(See Section 3.10 and 3.11 of Security
Agreement)
INTELLECTUAL PROPERTY RIGHTS
PATENTS
Patent Description
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Patent Number
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Issue Date
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PATENT APPLICATIONS
Patent Application
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Application Filing Date
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Application Serial Number
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TRADEMARKS
Trademark
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Registration Date
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Registration Number
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TRADEMARKS APPLICATIONS
Trademark Application
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Application Filing Date
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Application Serial Number
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COPYRIGHTS
Copyright
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Registration Date
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Registration Number
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COPYRIGHT APPLICATIONS
Copyright Application
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Application Filing Date
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Application Serial Number
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INTELLECTUAL PROPERTY
LICENSES
Name of Agreement
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Date of Agreement
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Parties to Agreement
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EXHIBIT
E
(See Section 3.11 of Security Agreement)
TITLE DOCUMENTS
I. Vehicles
subject to certificates of title:
Description
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Title Number
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State Where Issued
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II. Aircraft/engines/parts,
ships, railcars and other vehicles governed by federal statute:
Description
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Registration Number
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EXHIBIT
F
(See Section 3.11 of Security Agreement)
FIXTURES
III. Legal
description, county and street address of property on which Fixtures are
located:
IV. Name and
Address of Record Owner:
EXHIBIT
G
(See Section 3.13 of Security Agreement
and Definition of Pledged Collateral)
LIST OF PLEDGED COLLATERAL,
SECURITIES AND OTHER INVESTMENT PROPERTY
STOCKS
Issuer
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Certificate
Number(s)
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Number of Shares
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Class of Stock
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Percentage of
Outstanding
Shares
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BONDS
Issuer
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Number
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Face Amount
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Coupon Rate
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Maturity
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GOVERNMENT SECURITIES
Issuer
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Number
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Type
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Face Amount
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Coupon Rate
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Maturity
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OTHER SECURITIES OR OTHER
INVESTMENT PROPERTY
(CERTIFICATED AND UNCERTIFICATED)
Issuer
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Description of Collateral
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Percentage Ownership Interest
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[Add
description of custody accounts or arrangements with securities intermediary,
if applicable]
EXHIBIT
H
(See Section 3.1 of Security Agreement)
OFFICES IN WHICH FINANCING
STATEMENTS HAVE BEEN FILED
EXHIBIT
I
(See Section 4.4 and 4.8 of Security
Agreement)
AMENDMENT
This Amendment, dated ,
is delivered pursuant to Section 4.4 of the
Security Agreement referred to below.
All defined terms herein shall have the meanings ascribed thereto or
incorporated by reference in the Security Agreement. The undersigned hereby certifies that the
representations and warranties in Article III of the Security Agreement
are and continue to be true and correct.
The undersigned further agrees that this Amendment may be attached to
that certain Pledge and Security Agreement, dated
, , between
the undersigned, as the Grantor, and JPMorgan Chase Bank, N.A., as the Lender,
(the Security Agreement) and that the Collateral listed on Schedule
I to this Amendment shall be and become a part of the Collateral referred
to in said Security Agreement and shall secure all Secured Obligations referred
to in said Security Agreement.
SCHEDULE
I TO AMENDMENT
STOCKS
Issuer
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Certificate
Number(s)
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Number of Shares
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Class of Stock
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Percentage of
Outstanding
Shares
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BONDS
Issuer
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Number
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Face Amount
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Coupon Rate
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Maturity
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GOVERNMENT SECURITIES
Issuer
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Number
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Type
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Face Amount
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Coupon Rate
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Maturity
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OTHER SECURITIES OR OTHER
INVESTMENT PROPERTY
(CERTIFICATED AND UNCERTIFICATED)
Issuer
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Description of Collateral
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Percentage Ownership Interest
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[Add description of custody accounts or arrangements
with securities intermediary, if applicable]
COMMERCIAL TORT CLAIMS
Description of Claim
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Parties
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Case Number; Name of Court
where Case was Filed
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