TABLE OF CONTENTS

 

Section 1 DEFINITIONS		1
1.1	Defined Terms	1
1.2	Accounting Terms	10
1.3	Other Terms Defined in UCC	10
1.4	Other Interpretive Provisions	10
Section 2 COMMITMENT OF THE BANK; BORROWING PROCEDURES; PAYMENTS		11
2.1	Commitments	11
2.2	Borrowing Procedures	12
2.3	Loan Account	15
2.4	Discretionary Disbursements	15
2.5	Notes	15
2.6	Revolving Loan Principal Payments	15
2.7	Taxes	16
2.8	Compliance with Bank Regulatory Requirements; Increased Costs	17
Section 3 INTEREST RATE, FEES AND EXPENSES		17
3.1	Interest Rates	17
3.2	Default Rate	17
3.3	Interest Payment Dates	17
3.4	Computations	18
3.5	Letter of Credit Fees	18
3.6	Non-Use Fee	18
3.7	Costs, Fees and Expenses	18
Section 4 CONDITIONS OF BORROWING		19
4.1	Loan Documents	19
4.2	Event of Default	20
4.3	Banking Relationship	20
4.4	Reimbursement of Expenses	20
4.5	Material Adverse Effect	20
4.6	Litigation	20
4.7	Representations and Warranties	20
Section 5 REPRESENTATIONS AND WARRANTIES		20
5.1	Borrower Organization and Name	20
5.2	Authorization	21
5.3	Validity and Binding Nature	21
5.4	Ownership of Properties; Liens	21
5.5	Equity Ownership	21
5.6	Intellectual Property	21
5.7	Financial Statements	21
5.8	Litigation and Contingent Liabilities	21
5.9	Event of Default	22
5.10	Adverse Circumstances	22
5.11	Environmental Laws and Hazardous Substances	22
5.12	Solvency, etc.	22
5.13	ERISA Obligations	22
5.14	Labor Relations	23

 

 

5.15	Lending Relationship	23
5.16	Business Loan	23
5.17	Taxes	23
5.18	Compliance with Regulation U	23
5.19	Governmental Regulation	23
5.20	Place of Business	24
5.21	Complete Information	24
Section 6 AFFIRMATIVE COVENANTS		24
6.1	Borrower Existence	24
6.2	Compliance With Laws	24
6.3	Payment of Taxes and Liabilities	25
6.4	Maintain Property	25
6.5	Maintain Insurance	25
6.6	ERISA Liabilities; Employee Plans	25
6.7	Intellectual Property	26
6.8	Notice of Proceedings	26
6.9	Notice of Event of Default or Material Adverse Effect	26
6.10	Environmental Matters	26
6.11	Further Assurances	27
6.12	Banking Relationship	27
6.13	Financial Statements and Books and Records	27
6.14	Reporting Requirements	27
6.15	Use of Proceeds	28
6.16	Other Reports	28
Section 7 NEGATIVE COVENANTS		28
7.1	Debt	28
7.2	Encumbrances	28
7.3	Transfer; Merger; Sales	29
7.4	Investments, Acquisitions, Loans and Advances	29
7.5	Intentionally Omitted	29
7.6	Transactions with Affiliates	29
7.7	Unconditional Purchase Obligations	29
7.8	Cancellation of Debt	29
7.9	Inconsistent Agreements	30
7.10	Use of Proceeds	30
7.11	Business Activities; Change of Legal Status and Organizational Documents	30
Section 8 FINANCIAL COVENANTS		30
8.1	Tangible Net Worth	30
8.2	Liabilities to Tangible Net Worth	30
8.3	Interest Coverage Ratio	30
Section 9 EVENTS OF DEFAULT		30
9.1	Nonpayment of Obligations	30
9.2	Misrepresentation	31
9.3	Nonperformance	31
9.4	Default under Loan Documents	31
9.5	Default under Other Debt	31

 

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9.6	Other Material Obligations	31
9.7	Bankruptcy, Insolvency, etc.	31
9.8	Judgments	32
9.9	Change in Control	32
9.10	Material Adverse Effect	32
Section 10 REMEDIES		32
10.1	Rights and Remedies	32
10.2	No Waiver	32
Section 11 MISCELLANEOUS		33
11.1	Entire Agreement	33
11.2	Amendments	33
11.3	Waiver of Defenses	33
11.4	Forum Selection and Consent to Jurisdiction	33
11.5	Waiver of Jury Trial	34
11.6	Assignability	34
11.7	Confidentiality	34
11.8	Binding Effect	35
11.9	Governing Law	35
11.10	Enforceability	35
11.11	Survival of Borrower Representations	35
11.12	Extensions of Bank’s Commitment	35
11.13	Time of Essence	36
11.14	Counterparts; Facsimile Signatures	36
11.15	Notices	36
11.16	Release of Claims Against Bank	37
11.17	Costs, Fees and Expenses	37
11.18	Indemnification	38
11.19	Revival and Reinstatement of Obligations	39
11.20	Customer Identification — USA PATRIOT Act Notice	39

 

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LOAN AGREEMENT

 

This LOAN AGREEMENT dated as of February 16, 2009 (the “ Agreement ”), is executed by and between KOSS CORPORATION, a Delaware corporation (the “ Borrower ”) which has its chief executive office located at 4129 North Port Washington Avenue, Milwaukee, Wisconsin 53212, and HARRIS N.A., a national banking association (the “ Bank ”), whose address is 111 West Monroe Street, Chicago, Illinois 60603.

 

RECITALS:

 

The Borrower desires to borrow funds and obtain other financial accommodations from the Bank.

 

Pursuant to the Borrower’s request, the Bank is willing to extend such financial accommodations to the Borrower under the terms and conditions set forth herein.

 

NOW THEREFORE, in consideration of the premises, and the mutual covenants and agreements set forth herein, the Borrower agrees to borrow from the Bank, and the Bank agrees to lend to the Borrower, subject to and upon the following terms and conditions:

 

AGREEMENTS:

 

Section 1                                              DEFINITIONS .

 

1.1                                  Defined Terms .  For the purposes of this Agreement, the following capitalized words and phrases shall have the meanings set forth below.

 

“ Affiliate ” of any person or entity shall mean (a) any other person or entity which, directly or indirectly, controls or is controlled by or is under common control with such person or entity, (b) any officer or director of such entity, and (c) with respect to the Bank, any entity administered or managed by the Bank, or an Affiliate or investment advisor thereof and which is engaged in making, purchasing, holding or otherwise investing in commercial loans.  A person or entity shall be deemed to be “controlled by” any other person or entity if such person or entity possesses, directly or indirectly, power to direct or cause the direction of the management and policies of such person or entity whether by contract, ownership of voting securities, membership interests or otherwise.

 

“ Applicable Interest Rate ” shall mean, as to the Revolving Loans, a per annum rate of interest equal to the Prime Rate (and with respect to each LIBOR Loan, such LIBOR Rate for the applicable Interest Period).

 

“ Applicable L/C Fee ” shall mean, one and one quarter percent (1.25%).

 

 

“ Applicable Non-Use Fee ” shall mean 0.15% per annum.

 

“ Bank Product Agreements ” shall mean those certain agreements entered into from time to time by the Borrower or any Subsidiary with the Bank or any Affiliate of the Bank concerning Bank Products.

 

“ Bank Product Obligations ” shall mean all obligations, liabilities, contingent reimbursement obligations, fees, and expenses owing by the Borrower or any Subsidiary to the Bank or any Affiliate of the Bank pursuant to or evidenced by the Bank Product Agreements and irrespective of whether for the payment of money, whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising.

 

“ Bank Products ” shall mean any service or facility extended to the Borrower or any Subsidiary by the Bank or any Affiliate of the Bank, including but not limited to:  (a) credit cards, (b) credit card processing services, (c) debit cards, (d) purchase cards, (e) ACH Transactions, (f) cash management, including controlled disbursement, accounts or services, or (g) Hedging Agreements.

 

“ Bankruptcy Code ” shall mean the United States Bankruptcy Code, as now existing or hereafter amended.

 

“ Business Day ” shall mean any day other than a Saturday, Sunday or a legal holiday on which banks are authorized or required to be closed for the conduct of commercial banking business in Chicago, Illinois.

 

“ Capital Lease ” shall mean a lease of any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible, by a lessee that is, or should be, in accordance with Financial Accounting Standards Board Statement No. 13, as amended from time to time, or, if such statement is not then in effect, such statement of GAAP as may be applicable, recorded as a “capital lease” on the financial statements of the lessee prepared in accordance with GAAP.

 

“ Capital Securities ” shall mean all shares, interests, participations or other equivalents (however designated, whether voting or non-voting) of capital, whether now outstanding or issued or acquired after the date hereof, including common shares, preferred shares, membership interests in a limited liability company, limited or general partnership interests in a partnership or any other equivalent of such ownership interest.

 

“ Capitalized Lease Obligations ” shall mean all rental obligations as lessee under a Capital Lease which are or will be required to be capitalized on the books of the lessee.

 

“ Change in Control ” “ Change in Control ” shall mean the occurrence of any of the following events: (a) the Control Group ceases to collectively own, directly or indirectly, legally and beneficially, at least 51% of the outstanding Capital Securities of the Borrower having voting rights in the election of directors under normal circumstances or (b) a majority of the members of the Board of Directors of the Borrower shall cease to be Continuing Members.

 

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“ Confidential Information ” shall mean all information provided by the Borrower or any of its Affiliates to the Bank including, without limitation, any and all financial information prepared on a pro forma basis, but excluding all information that is available to the Bank on a non-confidential basis prior to disclosure by the Borrower or any of its Affiliates or from any other natural or legal person on behalf of the Borrower.

 

“ Continuing Member ” shall mean a member of the Board of Directors of the Borrower who either (i) was member of the Borrower’s Board of Directors on the day before the date hereof and has been such continuously thereafter or (ii) became a member of such Board of Directors on or after the date hereof and whose election or nomination for election was approved by a vote of the majority of the Continuing Members then members of the Borrower’s Board of Directors.

 

“ Control Group ” shall mean (a) the Current Ownership; (b) spouses (including surviving spouses), lineal descendants and spouses (including surviving spouses) of lineal descendents of Current Ownership; (c) the estates or legal representatives of the natural or legal persons named in clauses (a) or (b); (d) any trust, custodianship or other fiduciary arrangement in respect of which one or more members of Current Ownership (i) are the principal beneficiaries and (ii) constitute a majority of the trustees, custodians or other fiduciaries with voting power over such trust, custodianship or other fiduciary arrangement; and (e) a voting trust, a majority of whose trustee(s) is (are) member(s) of the Current Ownership, if a majority of the holders of voting trust certificates are members of the Current Ownership.  For purposes of this definition, “lineal descendents” shall include adopted persons who are twelve years of age or under at the time of adoption.

 

“ Current Ownership ” shall mean the Person or Persons who, as of the date of this Agreement, collectively own and control, directly or indirectly, legally and beneficially, at least 50% of the outstanding Capital Securities of the Borrower having voting rights in the election of directors in normal circumstances.

 

“ Debt ” shall mean, as to any Person, without duplication, (a) all indebtedness of such Person; (b) all borrowed money of such Person (including principal, interest, fees and charges), whether or not evidenced by bonds, debentures, notes or similar instruments; (c) all obligations to pay the deferred purchase price of property or services; (d) all obligations, contingent or otherwise, with respect to the maximum face amount of all letters of credit (whether or not drawn), bankers’ acceptances and similar obligations issued for the account of such Person, and all unpaid drawings in respect of bankers’ acceptances and similar obligations; (e) all indebtedness secured by any Lien on any property owned by such Person, whether or not such indebtedness has been assumed by such Person (provided, however, if such Person has not assumed or otherwise become liable in respect of such indebtedness, such indebtedness shall be deemed to be in an amount equal to the fair market value of the property subject to such Lien at the time of determination); (f) the aggregate amount of all Capitalized Lease Obligations of such Person; (g) all Contingent Liabilities of such Person, whether or not reflected on its balance sheet; (h) all Hedging Obligations of such Person; (i) all Debt of any partnership of which such Person is a general partner; and (j) all monetary obligations of such Person under (i) a so-called synthetic, off-balance sheet or tax retention lease, or (ii) an agreement for the use or possession of property creating obligations that do not appear on the balance sheet of such Person but

 

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which, upon the insolvency or bankruptcy of such Person, would be characterized as the indebtedness of such Person (without regard to accounting treatment).  Notwithstanding the foregoing, Debt shall not include trade payables and accrued expenses incurred by such Person in accordance with customary practices and in the ordinary course of business of such Person.

 

“ Default Rate ” shall mean a per annum rate of interest equal to the Prime Rate plus two percent (2%).

 

“ Depreciation ” shall mean the total amounts added to depreciation, amortization, obsolescence, valuation and other proper reserves, as reflected on the Borrower’s financial statements and determined in accordance with GAAP.

 

“ EBITDA ” shall mean, for any period, (a) the sum for such period of: (i) Net Income, plus (ii) Interest Charges, plus (iii) federal and state income taxes, plus (iv) Depreciation, plus (v) non-cash management compensation expense, plus (vi) all other non-cash charges, minus (b) income or loss attributable to equity in any Subsidiary, in each case to the extent included in determining Net Income for such period.

 

“ Employee Plan ” includes any pension, stock bonus, employee stock ownership plan, retirement, profit sharing, deferred compensation, stock option, bonus or other incentive plan, whether qualified or nonqualified, or any disability, medical, dental or other health plan, life insurance or other death benefit plan, vacation benefit plan, severance plan or other employee benefit plan or arrangement, including, without limitation, those pension, profit-sharing and retirement plans of the Borrower described from time to time in the financial statements of the Borrower and any pension plan, welfare plan, Defined Benefit Pension Plans (as defined in ERISA) or any multi-employer plan, maintained or administered by the Borrower or to which the Borrower is a party or may have any liability or by which the Borrower is bound.

 

“ Environmental Laws ” shall mean all present or future federal, state or local laws, statutes, common law duties, rules, regulations, ordinances and codes, together with all administrative or judicial orders, consent agreements, directed duties, requests, licenses, authorizations and permits of, and agreements with, any governmental authority, in each case relating to any matter arising out of or relating to public health and safety, or pollution or protection of the environment or workplace, including any of the foregoing relating to the presence, use, production, generation, handling, transport, treatment, storage, disposal, distribution, discharge, emission, release, threatened release, control or cleanup of any Hazardous Substance.

 

“ ERISA ” shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time.

 

“ Event of Default ” shall mean any of the events or conditions which are set forth in Section 9 hereof.

 

“ GAAP ” shall mean generally accepted accounting principles set forth from time to time in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and statements and pronouncements of the Financial

 

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Accounting Standards Board (or agencies with similar functions of comparable stature and authority within the U.S. accounting profession), which are applicable to the circumstances as of the date of determination, provided, however, that interim financial statements or reports shall be deemed in compliance with GAAP despite the absence of footnotes and fiscal year-end adjustments as required by GAAP.

 

“ Hazardous Substances ” shall mean (a) any petroleum or petroleum products, radioactive materials, asbestos in any form that is or could become friable, urea formaldehyde foam insulation, dielectric fluid containing levels of polychlorinated biphenyls, radon gas and mold; (b) any chemicals, materials, pollutant or substances defined as or included in the definition of “hazardous substances”, “hazardous waste”, “hazardous materials”, “extremely hazardous substances”, “restricted hazardous waste”, “toxic substances”, “toxic pollutants”, “contaminants”, “pollutants” or words of similar import, under any applicable Environmental Law; and (c) any other chemical, material or substance, the exposure to, or release of which is prohibited, limited or regulated by any governmental authority or for which any duty or standard of care is imposed pursuant to, any Environmental Law.

 

“ Hedging Agreements ” shall mean any interest rate, currency or commodity swap agreement, cap agreement or collar agreement, and any other agreement or arrangement designed to protect against fluctuations in interest rates, currency exchange rates or commodity prices.

 

“ Hedging Obligation ” shall mean any liability under any Hedging Agreement.

 

“ Indemnified Party ” and “ Indemnified Parties ” shall mean, respectively, each of the Bank and any parent corporations, Affiliate or Subsidiary of the Bank, and each of their respective officers, directors, employees, attorneys and agents, and all of such parties and entities.

 

“ Intellectual Property ” shall mean the collective reference to all rights, priorities and privileges relating to intellectual property, whether arising under United States, multinational or foreign laws or otherwise, including copyrights, patents, service marks and trademarks, and all registrations and applications for registration therefor and all licensees thereof, trade names, domain names, technology, know-how and processes, and all rights to sue at law or in equity for any infringement or other impairment thereof, including the right to receive all proceeds and damages therefrom.

 

“ Interest Charges ” shall mean, for any period, the sum of:  (a) all interest, charges and related expenses payable with respect to that fiscal period to a lender in connection with borrowed money or the deferred purchase price of assets that are treated as interest in accordance with GAAP, plus (b) the portion of Capitalized Lease Obligations with respect to that fiscal period that should be treated as interest in accordance with GAAP.

 

“ Interest Period ” shall mean successive one, two or three month periods, beginning and ending on the dates specified in the Revolving Note.

 

“ Letter of Credit ” and “ Letters of Credit ” shall mean, respectively, a letter of credit and all such letters of credit issued by the Bank, in its sole discretion, upon the execution and

 

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delivery by the Borrower and the acceptance by the Bank of a Master Letter of Credit Agreement and a Letter of Credit Application, as set forth in Section 2.1(b)  of this Agreement.

 

“ Letter of Credit Application ” shall mean, with respect to any request for the issuance of a Letter of Credit, a letter of credit application in the form being used by the Bank at the time of such request for the type of Letter of Credit requested.

 

“ Letter of Credit Commitment ” shall mean, at any time, an amount equal to the Revolving Loan Commitment minus the aggregate amount of all Revolving Loans outstanding.

 

“ Letter of Credit Maturity Date ” shall mean December 31, 2010.

 

“ Letter of Credit Obligations ” shall mean, at any time, an amount equal to the aggregate of the original face amounts of all Letters of Credit minus the sum of (i) the amount of any reductions in the original face amount of any Letter of Credit which did not result from a draw thereunder, (ii) the amount of any payments made by the Bank with respect to any draws made under a Letter of Credit for which the Borrower has reimbursed the Bank, (iii) the amount of any payments made by the Bank with respect to any draws made under a Letter of Credit which have been converted to a Revolving Loan as set forth in Section 2.1(b) , and (iv) the portion of any issued but expired Letter of Credit which has not been drawn by the beneficiary thereunder.  For purposes of determining the outstanding Letter of Credit Obligations at any time, the Bank’s acceptance of a draft drawn on the Bank pursuant to a Letter of Credit shall constitute a draw on the applicable Letter of Credit at the time of such acceptance.

 

“ Letter of Credit Sublimit ” shall mean, at any time, an amount equal to Ten Million Dollars ($10,000,000).

 

“ Liabilities ” shall mean at all times all liabilities of the Borrower that would be shown as such on a balance sheet of the Borrower prepared in accordance with GAAP.

 

“ LIBOR Loan ” or “ LIBOR Loans ” shall mean that portion, and collectively those portions, of the aggregate outstanding principal balance of the Loans that bear interest at the LIBOR Rate.

 

“ LIBOR Rate ” shall mean a rate of interest equal to (a) the per annum rate of interest at which United States dollar deposits for a period equal to the relevant Interest Period are offered in the London Interbank Eurodollar market at 11:00 a.m. (London time) two Business Days prior to the commencement of such Interest Period (or three Business Days prior to the commencement of such Interest Period if banks in London, England were not open and dealing in offshore United States dollars on such second preceding Business Day), as displayed in the Bloomberg Financial Markets system (or other authoritative source selected by the Bank in its sole discretion), divided by (b) a number determined by subtracting from 1.00 the then stated maximum reserve percentage for determining reserves to be maintained by member banks of the Federal Reserve System for Eurocurrency funding or liabilities as defined in Regulation D (or any successor category of liabilities under Regulation D), or as LIBOR is otherwise determined by the Bank in its sole and absolute discretion.  The Bank’s determination of the LIBOR Rate shall be conclusive, absent manifest error and shall remain fixed during such Interest Period.

 

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“ Loan Documents ” shall mean each of the agreements, documents, instruments and certificates set forth in Section 4.1 hereof, and any and all such other instruments, documents, certificates and agreements from time to time executed and delivered by the Borrower or any of its Subsidiaries for the benefit of the Bank pursuant to any of the foregoing, and all amendments, restatements, supplements and other modifications thereto.

 

“ Loans ” shall mean, collectively, all Revolving Loans made by the Bank to the Borrower and all Letter of Credit Obligations under and pursuant to this Agreement.

 

“ LIBOR Rate ” shall mean a per annum rate of interest equal to LIBOR for the relevant Interest Period, plus one and one quarter percent (1.25%), which LIBOR Rate shall remain fixed during such Interest Period.

 

“ Master Letter of Credit Agreement ” shall mean, at any time, with respect to the issuance of Letters of Credit, a Master Letter of Credit Agreement in the form being used by the Bank at such time.

 

“ Material Adverse Effect ” shall mean (a) a material adverse change in, or a material adverse effect upon, the assets, business, properties, prospects, condition (financial or otherwise) or results of operations of the Borrower taken as a whole, (b) a material impairment of the ability of the Borrower to perform any of the Obligations under any of the Loan Documents, or (c) a material adverse effect on (i) the legality, validity, binding effect or enforceability against the Borrower of any of the Loan Documents, (ii) under any Loan Document, or (iii) the rights or remedies of the Bank under any Loan Document.

 

“ Net Income ” shall mean, with respect to the Borrower and its Subsidiaries for any period, the consolidated net income (or loss) of the Borrower and its Subsidiaries for such period as determined in accordance with GAAP, excluding any gains from the disposition of assets, any extraordinary gains and any gains from discontinued operations.

 

“ Non-Excluded Taxes ” shall mean income, stamp or other taxes, levies, imposts, duties, charges, fees, deductions or withholdings, now or hereafter imposed, levied, collected, withheld or assessed by any governmental authority, excluding net income taxes and franchise taxes (imposed in lieu of net income taxes) imposed on the Bank as a result of a present or former connection between the Bank and the jurisdiction of the governmental authority imposing such tax or any political subdivision or taxing authority thereof or therein (other than any such connection arising solely from the Bank having executed, delivered or performed its obligations or received a payment under, or enforced, this Agreement or any other Loan Document).

 

“ Non-Use Fee ” shall have the meaning set forth in Section 3.6 hereto.

 

“ Obligations ” shall mean the Loans, all interest accrued thereon (including interest which would be payable as post-petition in connection with any bankruptcy or similar proceeding, whether or not permitted as a claim thereunder), any fees due the Bank hereunder, any expenses incurred by the Bank hereunder and any and all other liabilities and obligations of the Borrower to the Bank whether under this Agreement, under any other Loan Document or under any other document or instrument executed and delivered to the Bank by the Borrower, including, without

 

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limitation, all obligations of the Borrower with respect to any and loans or other extensions of the credit by the Bank to the Borrower, any reimbursement obligations of the Borrower in respect of Letters of Credit and surety bonds, all Hedging Obligations of the Borrower which are owed to the Bank or any Affiliate of the Bank, all Bank Product Obligations of the Borrower and all obligations of the Borrower under any guaranties in respect of obligations owed by any other party to the Bank, all in each case howsoever created, arising or evidenced, whether direct or indirect, absolute or contingent, now or hereafter existing, or due or to become due, together with any and all renewals or extensions thereof.

 

“ Obligor ” shall mean the Borrower, any accommodation endorser, third party pledgor, or any other party liable with respect to the Obligations.

 

“ Other Taxes ” shall mean any present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies which arise from the execution, delivery, enforcement or registration of, or otherwise with respect to, this Agreement or any of the other Loan Documents.

 

“ Permitted Liens ” shall mean (a) liens for taxes, assessments or other governmental charges not at the time delinquent or thereafter payable without penalty or being contested in good faith by appropriate proceedings and, in each case, for which it maintains adequate reserves in accordance with GAAP and in respect of which no lien has been filed; (c) liens and security interests granted from time to time in favor of the Bank; (d) purchase money liens on equipment securing Liabilities permitted under Section 7.1 of this Agreement; and (e) liens arising in the ordinary course of business (such as (i) liens of carriers, warehousemen, mechanics and materialmen and other similar liens imposed by law, and (ii) liens in the form of deposits or pledges incurred in connection with worker’s compensation, unemployment compensation and other types of social security (excluding liens arising under ERISA) or in connection with surety bonds, bids, performance bonds and similar obligations) for sums not overdue or being contested in good faith by appropriate proceedings and not involving any advances or borrowed money or the deferred purchase price of property or services, which do not in the aggregate materially detract from the value of the property or assets of the Borrower or materially impair the use thereof in the operation of the Borrower’s business and, in each case, for which it maintains adequate reserves in accordance with GAAP and in respect of which no lien has been filed.

 

“ Person ” shall means an individual, partnership, corporation, limited liability company, association, trust, unincorporated organization or any other entity or organization, including a government or agency or political subdivision thereof.

 

“ Prime Loan” or “Prime Loans ” shall mean that portion, and collectively, those portions of the aggregate outstanding principal balance of the Loans that bear interest at the Prime Rate.

 

“ Prime Rate ” shall mean the floating per annum rate of interest which at any time, and from time to time, shall be most recently publicly announced by the Bank as its Prime Rate, which is not intended to be the Bank’s lowest or most favorable rate of interest at any one time.  The effective date of any change in the Prime Rate shall for purposes hereof be the date the Prime Rate is changed by the Bank.  The Bank shall not be obligated to give notice of any change in the Prime Rate.

 

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“ Revolving Interest Rate ” shall mean the Borrower’s from time to time option of (i) the Prime-Based Rate, or (ii) the LIBOR Rate.

 

“ Revolving Loan ” and “ Revolving Loans ” shall mean, respectively, each direct advance and the aggregate of all such direct advances made by the Bank to the Borrower under and pursuant to this Agreement, as set forth in Section 2.2(a)  of this Agreement.

 

“ Revolving Loan Availability ” shall mean, at any time, an amount equal to the Revolving Loan Commitment minus the Letter of Credit Obligations.

 

“ Revolving Loan Commitment ” shall mean Ten Million and 00/100 Dollars ($10,000,000.00), which amount may be reduced from time to time in increments of One Million and 00/100 Dollars ($1,000,000.00) at the request of the Borrower with five (5) days’ written notice to Bank.

 

“ Revolving Loan Exposure ” shall mean, at any time, an amount equal to the aggregate principal balance of all Revolving Loans outstanding at any time plus the Letter of Credit Obligations.

 

“ Revolving Loan Maturity Date ” means January 29, 2010, unless extended by Bank pursuant to any modification, extension or renewal note executed by Borrower and accepted by Bank in its sole and absolute discretion in substitution for the Revolving Note.

 

“ Revolving Note ” shall mean a revolving note in the form attached as Exhibit A hereto, dated as of the date hereof, in the amount of the Revolving Loan Commitment and maturing on the Revolving Loan Maturity Date, duly executed by the Borrower and payable to the order of the Bank, together with any and all renewal, extension, modification or replacement notes executed by the Borrower and delivered to the Bank and given in substitution therefor.

 

“ Subsidiary ” and “ Subsidiaries ” shall mean each and all such corporations, partnerships, limited partnerships, limited liability companies, limited liability partnerships, joint ventures or other entities of which or in which the Borrower owns, directly or indirectly, such number of outstanding Capital Securities as have more than fifty percent (50.00%) of the ordinary voting power for the election of directors or other managers of such corporation, partnership, limited liability company or other entity.

 

“ Tangible Net Worth ” shall mean, at any time the same is to be determined, the total shareholders equity (including capital stock, additional paid-in capital and retained earnings after deducting treasury stock) which would appear on the balance sheet of the Borrower determined in accordance with generally accepted accounting principles, less the sum of (a) all notes receivable from officers and employees of the Borrower, (b) the aggregate book value of all assets which would be classified as intangible assets under GAAP, including, without limitation, goodwill, patents, trademarks, trade names, copyrights, franchises and deferred charges (including, without limitation, unamortized debt discount and expense, organization costs and deferred research and development expense) and similar assets, and (c) the write-up of assets above cost.

 

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“ UCC ” shall mean the Uniform Commercial Code in effect in the state of Illinois from time to time.

 

“ Unmatured Event of Default ” shall mean any event which, with the giving of notice, the passage of time or both, would constitute an Event of Default.

 

“ Voidable Transfer ” shall have the meaning set forth in Section 11.18 hereof.

 

1.2           Accounting Terms .  Any accounting terms used in this Agreement which are not specifically defined herein shall have the meanings customarily given them in accordance with GAAP.  Calculations and determinations of financial and accounting terms used and not otherwise specifically defined hereunder and the preparation of financial statements to be furnished to the Bank pursuant hereto shall be made and prepared, both as to classification of items and as to amount, in accordance with sound accounting practices and GAAP as used in the preparation of the financial statements of the Borrower on the date of this Agreement.  If any changes in accounting principles or practices from those used in the preparation of the financial statements are hereafter occasioned by the promulgation of rules, regulations, pronouncements and opinions by or required by the Financial Accounting Standards Board or the American Institute of Certified Public Accountants (or any successor thereto or agencies with similar functions), which results in a material change in the method of accounting in the financial statements required to be furnished to the Bank hereunder or in the calculation of financial covenants, standards or terms contained in this Agreement, the parties hereto agree to enter into good faith negotiations to amend such provisions so as equitably to reflect such changes to the end that the criteria for evaluating the financial condition and performance of the Borrower will be the same after such changes as they were before such changes; and if the parties fail to agree on the amendment of such provisions, the Borrower will furnish financial statements in accordance with such changes, but shall provide calculations, which are reviewed and certified by the Borrower’s accountants, for all financial covenants, shall perform all financial covenants and shall otherwise observe all financial standards and terms in accordance with applicable accounting principles and practices in effect immediately prior to such changes. Calculations with respect to financial covenants required to be stated in accordance with applicable accounting principles and practices in effect immediately prior to such changes shall be reviewed and certified by the Borrower’s accountants.

 

1.3           Other Terms Defined in UCC .  All other capitalized words and phrases used herein and not otherwise specifically defined herein shall have the respective meanings assigned to such terms in the UCC, to the extent the same are used or defined therein.

 

1.4           Other Interpretive Provisions .

 

(a)           The meanings of defined terms are equally applicable to the singular and plural forms of the defined terms.  Whenever the context so requires, the neuter gender includes the masculine and feminine, the single number includes the plural, and vice versa, and in particular the word “Borrower” shall be so construed.

 

(b)           Section and Schedule references are to this Agreement unless otherwise specified.  The words “hereof”, “herein” and “hereunder” and words of similar import

 

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when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement.

 

(c)           The term “including” is not limiting, and means “including, without limitation”.

 

(d)           In the computation of periods of time from a specified date to a later specified date, the word “from” means “from and including”; the words “to” and “until” each mean “to but excluding”, and the word “through” means “to and including”.

 

(e)           Unless otherwise expressly provided herein, (i) references to agreements (including this Agreement and the other Loan Documents) and other contractual instruments shall be deemed to include all subsequent amendments, restatements, supplements and other modifications thereto, but only to the extent such amendments, restatements, supplements and other modifications are not prohibited by the terms of any Loan Document, and (ii) references to any statute or regulation shall be construed as including all statutory and regulatory provisions amending, replacing, supplementing or interpreting such statute or regulation.

 

(f)            To the extent any of the provisions of the other Loan Documents are inconsistent with the terms of this Agreement, the provisions of this Agreement shall govern.

 

(g)           This Agreement and the other Loan Documents may use several different limitations, tests or measurements to regulate the same or similar matters.  All such limitations, tests and measurements are cumulative and each shall be performed in accordance with its terms.

 

Section 2                                              COMMITMENT OF THE BANK; BORROWING PROCEDURES ; PAYMENTS

 

2.1           Commitments .  Subject to the terms and conditions of this Agreement and the other Loan Documents, and in reliance upon the representations and warranties of the Borrower set forth herein and in the other Loan Documents:

 

(a)           Revolving Loan Commitment.  The Bank agrees to make such Revolving Loans at such times as the Borrower may from time to time request until, but not including, the Revolving Loan Termination Date, and in such amounts as the Borrower may from time to time request, provided, however, that the Revolving Loan Exposure shall not exceed the Revolving Loan Commitment.  Revolving Loans made by the Bank may be repaid and, subject to the terms and conditions hereof, borrowed again up to, but not including the Revolving Loan Termination Date.  The Revolving Loans shall be used by the Borrower for working capital, to refinance existing indebtedness, stock repurchase and general corporate purposes.

 

(b)           Letter of Credit Commitment.  Upon the execution and delivery by the Borrower, and the acceptance by the Bank, in its sole and absolute discretion, of the

 

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Master Letter of Credit Agreement and a Letter of Credit Application, the Bank agrees to issue for the account of Borrower from time to time up to, but not including, the Revolving Loan Termination Date, such Letters of Credit in the standard form of the Bank and otherwise in form and substance acceptable to the Bank, provided that (i) the Letter of Credit Obligations may not at any time exceed the Letter of Credit Sublimit, and (ii) no Letter of Credit shall have an expiration date later than the earlier of (1) one year from its date of issuance, and (2) the Letter of Credit Maturity Date.  The amount of any payments made by the Bank with respect to draws made by a beneficiary under a Letter of Credit for which the Borrower has failed to reimburse the Bank upon the earlier of (i) the Bank’s demand for repayment, or (ii) one (1) day from the date of such payment to such beneficiary by the Bank, shall be deemed to have been converted to a Revolving Loan as of the date such payment was made by the Bank to such beneficiary.  Upon the occurrence of an Event of a Default and at the option of the Bank, all Letter of Credit Obligations shall be converted to Revolving Loans consisting of Prime Loans, all without demand, presentment, protest or notice of any kind, all of which are hereby waived by the Borrower.  To the extent the provisions of the Master Letter of Credit Agreement differ from, or are inconsistent with, the terms of this Agreement, the provisions of this Agreement shall govern.

 

2.2           Borrowing Procedures .

 

(a)           Borrowing Procedures.  Each Revolving Loan may be advanced either as a Prime Loan or a LIBOR Loan, provided, however, that at any time, the Borrower may identify no more than six (6) Revolving Loans which may be LIBOR Loans.  Each Loan shall be made available to the Borrower upon any written, verbal, electronic, telephonic or facsimile loan request which the Bank in good faith believes to emanate from a properly authorized representative of the Borrower, whether or not that is in fact the case.  Each such request shall be effective upon receipt by the Bank, shall be irrevocable, and shall specify the date, amount and type of borrowing and, in the case of a LIBOR Loan, the initial Interest Period therefor.  The Borrowers shall select Interest Periods so as not to require a payment or prepayment of any LIBOR Loan during an Interest Period for such LIBOR Loan.  The final Interest Period must be such that its expiration occurs on or before the maturity or termination date of such Loan.  A request for a Prime Loan must be received by the Bank no later than 11:00 a.m. Chicago, Illinois time, on the day it is to be funded.  A request for a LIBOR Loan must be (i) received by the Bank no later than 11:00 a.m. Chicago, Illinois time, three days before the day it is to be funded, and (ii) in an amount equal to One Hundred Thousand and 00/100 Dollars ($100,000.00) or a higher integral multiple of One Hundred Thousand and 00/100 Dollars ($100,000.00).  The proceeds of each Loan shall be made available at the office of the Bank by credit to the account of a Borrower or by other means requested by the Borrowers and acceptable to the Bank.  The Borrower hereby irrevocably confirms, ratifies and approves all such advances by the Bank and does hereby indemnify the Bank against losses and expenses (including court costs, attorneys’ and paralegals’ fees) and shall hold the Bank harmless with respect thereto.

 

(b)           LIBOR Conversion and Continuation Procedures.  Each LIBOR Loan shall automatically renew for the Interest Period specified in the initial request received

 

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by the Bank pursuant to Section 2.2(a), at the then current LIBOR Rate unless the Borrower, pursuant to a subsequent written notice received by the Bank, shall elect a different Interest Period or the conversion of all or a portion of such LIBOR Loan to a Prime Loan.  Each Interest Period occurring after the initial Interest Period with respect to any LIBOR Loan shall commence on the same day of each applicable month as the first day of the initial Interest Period.  Whenever the last day of any Interest Period with respect to any LIBOR Loan would otherwise occur on a day other than a Business Day, the last day of such Interest Period shall be extended to occur on the next succeeding Business Day.  Whenever an Interest Period with respect to any LIBOR Loan would otherwise end on a day of a month for which there is no numerically corresponding day in the calendar month, such Interest Period shall end on the last day of such calendar month, unless such day is not a Business Day, in which event such Interest Period shall be extended to end on the next Business Day.  Upon receipt by the Bank of such subsequent notice, the Borrower may, subject to the terms and conditions of this Agreement, elect, as of the last day of the applicable Interest Period, to continue any LIBOR Loan having an Interest Period expiring on such day for a different Interest Period, or to convert any such LIBOR Loan to a Prime Loan.  Such notice shall, in the case of a conversion to a Prime Loan, be given before 11:00 a.m., Chicago time, on the proposed date of such conversion, and in the case of conversion to a LIBOR Loan having a different Interest Period, be given before 11:00 a.m., Chicago time, at least three Business Days prior to the proposed date of such conversion, specifying: (i) the proposed date of conversion; (ii) the aggregate amount of Loans to be converted; (iii) the type of Loans resulting from the proposed conversion; and (iv) the duration of the requested Interest Period.  The Borrower may not elect a LIBOR Rate, and an Interest Period for a LIBOR Loan shall not automatically renew, with respect to any principal amount which is scheduled to be repaid before the last day of the applicable Interest Period, and any such amounts shall bear interest at the Applicable Interest Rate for Prime Loans until repaid.

 

(c)           LIBOR Loan Prepayments.  Notwithstanding anything to the contrary contained herein, the principal balance of any LIBOR Loan may not be prepaid in whole or in part at any time, unless such prepayment is accompanied by the applicable LIBOR Loan breakage fees as set forth below.  If, for any reason, a LIBOR Loan is paid prior to the last Business Day of any Interest Period, whether voluntary, involuntary, by reason of acceleration or otherwise, each such prepayment of a LIBOR Loan will be accompanied by the amount of accrued interest on the amount prepaid, plus the greater of (x) $250 and (y) the amount, if any, by which (i) the additional interest which would have been payable during the Interest Period on the LIBOR Loan prepaid had it not been prepaid, exceeds (ii) the interest which would have been recoverable by the Bank by placing the amount prepaid on deposit in the domestic certificate of deposit market, the eurodollar deposit market, or other appropriate money market selected by the Bank, for a period starting on the date on which it was prepaid and ending on the last day of the Interest Period for such LIBOR Loan.  The amount of any such loss or expense payable by the Borrowers to the Bank under this section shall be determined in the Bank’s sole discretion based upon the assumption that the Bank funded its loan commitment for LIBOR Loans in the London Interbank Eurodollar market and using any reasonable

 

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attribution or averaging methods which the Bank deems appropriate and practical, provided, however, that the Bank is not obligated to accept a deposit in the London Interbank Eurodollar market in order to charge interest on a LIBOR Loan at the LIBOR Rate.

 

(d)           LIBOR Unavailability.  If the Bank determines in good faith (which determination shall be conclusive, absent manifest error) prior to the commencement of any Interest Period that (i) the making or maintenance of any LIBOR Loan would violate any applicable law, rule, regulation or directive, whether or not having the force of law, (ii) United States dollar deposits in the principal amount, and for periods equal to the Interest Period for funding any LIBOR Loan are not available in the London Interbank Eurodollar market in the ordinary course of business, (iii) by reason of circumstances affecting the London Interbank Eurodollar market, adequate and fair means do not exist for ascertaining the LIBOR Rate to be applicable to the relevant LIBOR Loan, or (iv) the LIBOR Rate does not accurately reflect the cost to the Bank of a LIBOR Loan, the Bank shall promptly notify the Borrowers thereof and, so long as the foregoing conditions continue, none of the Loans may be advanced as a LIBOR Loan thereafter.  In addition, at the Borrowers’ option, each existing LIBOR Loan shall be immediately (i) converted to a Prime Loan on the last Business Day of the then existing Interest Period, or (ii) due and payable on the last Business Day of the then existing Interest Period, without further demand, presentment, protest or notice of any kind, all of which are hereby waived by the Borrowers.

 

(e)           Regulatory Change.  In addition, if, after the date hereof, a Regulatory Change shall, in the reasonable determination of the Bank, make it unlawful for the Bank to make or maintain the LIBOR Loans, then the Bank shall promptly notify the Borrowers and none of the Loans may be advanced as a LIBOR Loan thereafter.  In addition, at the Borrowers’ option, each existing LIBOR Loan shall be immediately (i) converted to a Prime Loan on the last Business Day of the then existing Interest Period or on such earlier date as required by law, or (ii) due and payable on the last Business Day of the then existing Interest Period or on such earlier date as required by law, all without further demand, presentment, protest or notice of any kind, all of which are hereby waived by the Borrowers.

 

(f)            LIBOR Indemnity.  If any Regulatory Change, or compliance by the Bank or any Person controlling the Bank with any request or directive of any governmental authority, central bank or comparable agency (whether or not having the force of law) shall (a) impose, modify or deem applicable any assessment, reserve, special deposit or similar requirement against assets held by, or deposits in or for the account of or loans by, or any other acquisition of funds or disbursements by, the Bank; (b) subject the Bank or any LIBOR Loan to any tax, duty, charge, stamp tax or fee or change the basis of taxation of payments to the Bank of principal or interest due from the Borrowers to the Bank hereunder (other than a change in the taxation of the overall net income of the Bank); or (c) impose on the Bank any other condition regarding such LIBOR Loan or the Bank’s funding thereof, and the Bank shall determine (which determination shall be conclusive, absent manifest error) that the result of the foregoing is to increase the cost to, or to impose a cost on, the Bank or such controlling Person of making or maintaining such

 

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LIBOR Loan or to reduce the amount of principal or interest received by the Bank hereunder, then the Borrowers shall pay to the Bank or such controlling Person, on demand, such additional amounts as the Bank shall, from time to time, determine are sufficient to compensate and indemnify the Bank for such increased cost or reduced amount.

 

2.3           Loan Account .  The Bank shall maintain a loan account (the “Loan Account”) on its books in which shall be recorded (i) all disbursements and advances made by the Bank to Borrower pursuant to this Agreement, (ii) all payments made by Borrower on all such Loans and advances and (iii) all other appropriate debits and credits as provided in this Agreement, including, without limitation, all interest, fees, charges and expenses.  All entries in the Loan Account shall be made in accordance with the Bank’s customary accounting practices as in effect from time to time.  All amounts recorded in the Loan Account shall be, absent manifest error, prima facie evidence of (i) the principal amount of the Loans advanced hereunder and the amount of all Letter of Credit Obligations, (ii) any accrued and unpaid interest owing on the Loans, and (iii) all amounts repaid on the Loans or the Letter of Credit Obligations; provided, however, the failure to record any such amount or any error in recording such amounts shall not limit or otherwise affect the obligations of the Borrower under this Agreement to repay the principal amount of the Loans, together with all interest accruing thereon.  The Borrower hereby authorizes and directs the Bank, at the Bank’s option, to (a) debit the amount of the then due Obligations to any ordinary deposit account of  Borrower, or (b) make a Revolving Loan hereunder to pay the amount of the Obligations, however, the Bank may, in its sole and absolute discretion, elect to bill the Borrower the amount of any then due Obligations in which case the amount shall be immediately due and payable with interest thereon as provided herein.  Not less than ten (10) days after the last day of each month, the Bank shall render to the Borrower a statement setting forth the balance of the Loan Account, including principal, interest, expenses and fees.

 

2.4           Discretionary Disbursements .  The Bank, in its sole and absolute discretion, may immediately upon notice to the Borrower, disburse any or all proceeds of the Loans made or available to the Borrower pursuant to this Agreement to pay any fees, costs, expenses or other amou