REVOLVING CREDIT AND SECURITY AGREEMENT

Exhibit 10.1

REVOLVING CREDIT

 

AND

 

SECURITY AGREEMENT

 

PNC BANK, NATIONAL ASSOCIATION

 

WITH

 

FRANKLIN ELECTRONIC PUBLISHERS, INC.

FRANKLIN ELECTRONIC PUBLISHERS (EUROPE) LTD.

FRANKLIN ELECTRONIC PUBLISHERS (DEUTSCHLAND) GMBH

 

December 7, 2004

TABLE OF CONTENTS

 

 

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(continued)

 

 

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TABLE OF CONTENTS

(continued)

 

 

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TABLE OF CONTENTS

(continued)

 

 

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TABLE OF CONTENTS

(continued)

 

 

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List of Exhibits and Schedules

 

Exhibits

 

REVOLVING CREDIT

AND

SECURITY AGREEMENT

 

Revolving Credit and Security Agreement dated December 7, 2004 among FRANKLIN ELECTRONIC PUBLISHERS, INC., a corporation organized under the laws of the Commonwealth of Pennsylvania (“FRANKLIN INC.”), FRANKLIN ELECTRONIC PUBLISHERS (EUROPE) LTD., a corporation organized under the laws of the United Kingdom (“Franklin Ltd.”) and FRANKLIN ELECTRONIC PUBLISHERS (DEUTSCHLAND) GMBH, a corporation organized under the laws of Germany (“Franklin GmbH”) (Franklin Inc., Franklin Ltd. And Franklin GmbH, each a “Borrower” and collectively, “Borrowers”) and PNC BANK, NATIONAL ASSOCIATION (“PNC” or “Lender”).

 

IN CONSIDERATION of the mutual covenants and undertakings herein contained, Borrower and Lender hereby agree as follows:

 

I DEFINITIONS

 

1.1 Accounting Terms As used in this Agreement, the Note or any certificate, report or other document made or delivered pursuant to this Agreement, accounting terms not defined in Section 1.2 or elsewhere in this Agreement and accounting terms partly defined in Section 1.2 to the extent not defined, shall have the respective meanings given to them under GAAP; provided, however, whenever such accounting terms are used for the purposes of determining compliance with financial covenants in this Agreement, such accounting terms shall be defined in accordance with GAAP as to be applied in preparation of the audited financial statements of Borrowers for the fiscal year ended March 31, 2005.

 

1.2 General Terms For purposes of this Agreement the following terms shall have the following meanings:

 

“ Accountants ” shall have the meaning set forth in Section 9.7 hereof.

 

“ Advances ” shall mean and include the Revolving Advances.

 

“ Advance Rate ” shall have the meaning set forth in Section 2.1(a) hereof.

 

“ Affiliate ” of any Person shall mean (a) any Person which, directly or indirectly, is in control of, is controlled by, or is under common control with such Person, or (b) any Person who is a director or officer (i) of such Person, (ii) of any Subsidiary of such Person or (iii) of any Person described in clause (a) above. For purposes of this definition, control of a Person shall mean the power, direct or indirect, (x) to vote 5% or more of the securities having ordinary voting power for the election of directors of such Person, or (y) to direct or cause the direction of the management and policies of such Person whether by contract or otherwise.

 

“ Anti-Terrorism Laws ” shall mean any Laws relating to terrorism or money laundering, including Executive Order No. 13224, the USA Patriot Act, the Laws comprising or implementing the Bank Secrecy Act, and the Laws administered by the United States Treasury Department’s Office of Foreign Asset Control (as any of the foregoing Laws may from time to time be amended, renewed, extended, or replaced).

“ Assignment of Security Interest in Borrower’s Patent Collateral” shall mean the assignment dated the date hereof given by Franklin Inc. to Lender assigning its patent collateral.

 

“ Assignment of Security Interest in Borrower’s Trademark Collateral ” shall mean the assignment dated the date hereof given by Franklin Inc. to Lender assigning its trademark collateral.

 

“ Authority ” shall have the meaning set forth in Section 4.19(d).

 

“ Base Rate ” shall mean the base commercial lending rate of PNC as publicly announced to be in effect from time to time, such rate to be adjusted automatically, without notice, on the effective date of any change in such rate. This rate of interest is determined from time to time by PNC as a means of pricing some loans to its customers and is neither tied to any external rate of interest or index nor does it necessarily reflect the lowest rate of interest actually charged by PNC to any particular class or category of customers of PNC.

 

“ Blocked Accounts ” shall have the meaning set forth in Section 4.15(h).

 

“ Borrower ” and “ Borrowers ” shall have the meaning set forth in the preamble to this Agreement and shall extend to all permitted successors and assigns of such Person.

 

“ Borrowing Agent ” shall mean Franklin Electronic Publishers, Inc.

 

“ Borrowing Base Certificate ” shall mean a certificate duly executed by an officer of Borrowing Agent appropriately completed and in substantially the form of Exhibit A hereto.

 

“ Borrower’s Account ” shall have the meaning set forth in Section 2.8.

 

“ Business Day ” shall mean any day other than Saturday or Sunday or a legal holiday on which commercial banks are authorized or required by law to be closed for business in East Brunswick, New Jersey and, if the applicable Business Day relates to any LIBOR Rate Loans, such day must also be a day on which dealings are carried on in the London interbank market.

 

“ CERCLA ” shall mean the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, 42 U.S.C. §§9601 et seq.

 

“ Charges ” shall mean all taxes, charges, fees, imposts, levies or other assessments, including, without limitation, all net income, gross income, gross receipts, sales, use, ad valorem, value added, transfer, franchise, profits, inventory, capital stock, license, withholding, payroll, employment, social security, unemployment, excise, severance, stamp, occupation and property taxes, custom duties, fees, assessments, liens, claims and charges of any kind whatsoever, together with any interest and any penalties, additions to tax or additional amounts, imposed by any taxing or other authority, domestic or foreign (including, without limitation, the Pension Benefit Guaranty Corporation or any environmental agency or superfund), upon the Collateral, Borrowers or any of their Affiliates.

 

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“ Closing Date ” shall mean December 7, 2004 or such other date as may be agreed to by the parties hereto.

 

“ Code ” shall mean the Internal Revenue Code of 1986, as amended from time to time and the regulations promulgated thereunder.

 

“ Collateral ” shall mean and include:

 

(a) all Receivables;

 

(b) all Equipment;

 

(c) all General Intangibles;

 

(d) all Inventory;

 

(e) all Investment Property;

 

(f) all Real Property;

 

(g) the Leasehold Interests;

 

(h) all of each Borrower’s right, title and interest in and to (i) its respective goods and other property including, but not limited to, all merchandise returned or rejected by Customers, relating to or securing any of the Receivables; (ii) all of each Borrower’s rights as a consignor, a consignee, an unpaid vendor, mechanic, artisan, or other lienor, including stoppage in transit, setoff, detinue, replevin, reclamation and repurchase; (iii) all additional amounts due to any Borrower from any Customer relating to the Receivables; (iv) other property, including warranty claims, relating to any goods securing this Agreement; (v) all of each Borrower’s contract rights, rights of payment which have been earned under a contract right, instruments, documents, chattel paper, warehouse receipts, deposit accounts, money, securities and investment property; (vi) if and when obtained by any Borrower, all real and personal property of third parties in which each Borrower has been granted a lien or security interest as security for the payment or enforcement of Receivables; and (vii) any other goods, personal property or real property now owned or hereafter acquired in which any Borrower has expressly granted a security interest or may in the future grant a security interest to Lender hereunder, or in any amendment or supplement hereto or thereto, or under any other agreement between Lender and any Borrower;

 

(i) all of each Borrower’s ledger sheets, ledger cards, files, correspondence, records, books of account, business papers, computers, computer software (owned by any Borrower or in which it has an interest), computer programs, tapes, disks and documents relating to (a), (b), (c), (d), (e), (f), (g) or (h) of this Paragraph; and

 

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(j) all proceeds and products of (a), (b), (c), (d), (e), (f), (g), (h) and (i) in whatever form, including, but not limited to: cash, deposit accounts (whether or not comprised solely of proceeds), certificates of deposit, insurance proceeds (including hazard, flood and credit insurance), negotiable instruments and other instruments for the payment of money, chattel paper, security agreements, documents, eminent domain proceeds, condemnation proceeds and tort claim proceeds.

 

“ Consents ” shall mean all filings and all licenses, permits, consents, approvals, authorizations, qualifications and orders of governmental authorities and other third parties, domestic or foreign, necessary to carry on such Borrower’s business, including, without limitation, any Consents required under all applicable federal, state or other applicable law.

 

“ Controlled Group ” shall mean all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with Borrowers, are treated as a single employer under Section 414 of the Code.

 

“ Customer ” shall mean and include the account debtor with respect to any Receivable and/or the prospective purchaser of goods, services or both with respect to any contract or contract right, and/or any party who enters into or proposes to enter into any contract or other arrangement with such Borrower, pursuant to which such Borrower is to deliver any personal property or perform any services.

 

“ Current Maturities ” shall mean the scheduled payments of principal on all indebtedness of borrowed money having an original term of more than one year (including but not limited to amortization of capitalized lease obligations), as shown on the Borrowers’ financial statements as of one year prior to the date of determination.

 

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

 

“ Default Rate ” shall have the meaning set forth in Section 3.1 hereof.

 

“ Depository Accounts ” shall have the meaning set forth in Section 4.15(h) hereof.

 

“ Documents ” shall have the meaning set forth in Section 8.1(c) hereof.

 

“ Dollar ” and the sign “$” shall mean lawful money of the United States of America.

 

“ Domestic Rate Loan ” shall mean any Advance or Equipment Loan that bears interest based upon the Base Rate.

 

“ Early Termination Date ” shall have the meaning set forth in Section 13.1 hereof.

 

“ EBITDA ” shall mean net income plus interest expense plus income tax expense plus depreciation plus amortization.

 

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“ Eligible Inventory ” shall mean all Inventory of Franklin Inc. which is on hand and all Inventory in transit from vendors or to the third party assemblers and Inventory . Inventory shall not be deemed eligible unless such Inventory is subject to Lender’s first priority perfected security interest on no other Lien (other than Permitted Encumbrances) and provided further the maximum Eligible Inventory cap shall be $10,000,000. The following shall be exceptions to Eligible Inventory:

 

(a)

discontinued product line (Ebookman);

 

(b)

damaged merchandise returned from Customers that is deemed unsaleable;

 

(c)

Hong Kong inventory;

 

(d)

inventory located in the Borrower’s Real Property that is undergoing inspection;

 

(e)

non-inventory materials included on the Borrowers’ perpetual inventory;

 

(f)

inventory in transit to third party assemblers per perpetual which is not located in the United States;

 

(g)

inventory at third party assemblers per perpetual/components which is not located in the United States;

 

(h)

merchandise returned from customers that is to be refurbished and placed back into stock (of this refurbished inventory,  1 / 2 shall be deemed ineligible and  1 / 2 shall be deemed eligible).

 

“ Eligible Receivables ” shall mean and include with respect to each Borrower, each Receivable of Borrower arising in the ordinary course of such Borrower’s business and which Lender, in its sole credit judgment, shall deem to be an Eligible Receivable, based on such considerations as Lender may from time to time deem appropriate. A Receivable shall not be deemed eligible unless such Receivable is subject to Lender’s first priority perfected security interest and no other Lien (other than Permitted Encumbrances), and is evidenced by an invoice or other documentary evidence satisfactory to Lender. In addition, no Receivable shall be an Eligible Receivable if:

 

(a) it arises out of a sale made by such Borrower to an Affiliate of such Borrower or to a Person controlled by an Affiliate of such Borrower;

 

(b) it is due or unpaid more than ninety (90) days after the original invoice date, except German Receivables that are unpaid more than one hundred twenty (120) days after the original invoice date and except for United States Receivables that are seasonal exceptions from the following Customers: Office Max, Office Depot, Staples, Costco and Best Buy;

 

(c) thirty percent (30%) or more of the Receivables from such Customer are not deemed Eligible Receivables hereunder. Upon reasonable notice to Borrowers, such percentage may, in Lender’s sole discretion, be increased or decreased from time to time;

 

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(d) any covenant, representation or warranty contained in this Agreement with respect to such Receivable has been breached;

 

(e) the Customer shall (i) apply for, suffer, or consent to the appointment of, or the taking of possession by, a receiver, custodian, trustee or liquidator of itself or of all or a substantial part of its property or call a meeting of its creditors, (ii) admit in writing its inability, or be generally unable, to pay its debts as they become due or cease operations of its present business, (iii) make a general assignment for the benefit of creditors, (iv) commence a voluntary case under any state or federal bankruptcy laws (as now or hereafter in effect), (v) be adjudicated a bankrupt or insolvent, (vi) file a petition seeking to take advantage of any other law providing for the relief of debtors, (vii) acquiesce to, or fail to have dismissed, any petition which is filed against it in any involuntary case under such bankruptcy laws, or (viii) take any action for the purpose of effecting any of the foregoing;

 

(f) the sale is to a Customer outside the continental United States of America, unless the sale is on letter of credit, guaranty or acceptance terms, in each case acceptable to Lender in its sole discretion and except as set forth in subsection (q) of this definition and except to sales to Seiko Instruments International (SII) Japan.;

 

(g) the sale to the Customer is on a bill-and-hold, guaranteed sale, sale-and-return, sale on approval, consignment or any other repurchase or return basis or is evidenced by chattel paper;

 

(h) Lender believes, in its sole judgment, that collection of such Receivable is insecure or that such Receivable may not be paid by reason of the Customer’s financial inability to pay;

 

(i) the Customer is the United States of America, any state or any department, agency or instrumentality of any of them, unless such Borrower assigns its right to payment of such Receivable to Lender pursuant to the Assignment of Claims Act of 1940, as amended (31 U.S.C. Sub-Section 3727 et seq. and 41 U.S.C. Sub-Section 15 et seq.) or has otherwise complied with other applicable statutes or ordinances;

 

(j) the goods giving rise to such Receivable have not been shipped to the Customer or the services giving rise to such Receivable have not been performed by such Borrower or the Receivable otherwise does not represent a final sale;

 

(k) upon reasonable notice to Borrowers, the Receivables of the Customer exceed a credit limit determined by Lender, in its sole discretion, to the extent such Receivable exceeds such limit;

 

(l) to the extent of such offset, deduction, defense dispute or counterclaim, the Receivable is subject to any offset, deduction, defense, dispute, or counterclaim, the Customer is also a creditor or supplier of such Borrower or the Receivable is contingent in any respect or for any reason;

 

(m) Such Borrower has made any agreement with any Customer for any deduction therefrom, except for discounts or allowances made in the ordinary course of business for prompt payment, all of which discounts or allowances are reflected in the calculation of the face value of each respective invoice related thereto;

 

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(n) any return, rejection or repossession of the merchandise has occurred or the rendition of services has been disputed;

 

(o) such Receivable is not payable to such Borrower;

 

(p) such Receivable is not otherwise satisfactory to Lender as determined in good faith by Lender in the exercise of its discretion in a reasonable manner;

 

(q) such Receivable, in the case of each Franklin Ltd. and Franklin GmbH, are in amounts not to exceed $ 3,000,000 in the aggregate; or

 

(r) or such other factors as determined by Lender’s due diligence.

 

“ Environmental Complaint ” shall have the meaning set forth in Section 4.19(d) hereof.

 

“ Environmental Laws ” shall mean all federal, state and local environmental, land use, zoning, health, chemical use, safety and sanitation laws, statutes, ordinances and codes relating to the protection of the environment and/or governing the use, storage, treatment, generation, transportation, processing, handling, production or disposal of Hazardous Substances and the rules, regulations, policies, guidelines, interpretations, decisions, orders and directives of federal, state and local governmental agencies and authorities with respect thereto.

 

“ Equipment ” shall mean and include all of each Borrower’s goods (other than Inventory) whether now owned or hereafter acquired and wherever located including, without limitation, all equipment, machinery, apparatus, motor vehicles, fittings, furniture, furnishings, fixtures, parts, accessories and all replacements and substitutions therefor or accessions thereto.

 

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

 

“ Event of Default ” shall mean the occurrence of any of the events set forth in Article X hereof.

 

“ Fixed Charge Coverage Ratio ” shall mean (i) EBITDA, divided by (ii) the sum of Current Maturities plus interest expense plus cash taxes paid plus cash dividends plus Unfunded Capital Expenditures.

 

“ Formula Amount ” shall have the meaning set forth in Section 2.1(a).

 

“ Funded Debt ” shall mean all indebtedness for borrowed money including but not limited to capitalized lease obligations, reimbursement obligations in respect of letters of credit and guarantees of any such indebtedness.

 

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“ GAAP ” shall mean generally accepted accounting principles in the United States of America in effect from time to time.

 

“ General Intangibles ” shall mean and include as to each Borrower all of such Borrower’s general intangibles, whether now owned or hereafter acquired including, without limitation, all choses in action, causes of action, corporate or other business records, inventions, designs, patents, patent applications, equipment formulations, manufacturing procedures, quality control procedures, trademarks, service marks, trade secrets, goodwill, copyrights, design rights, registrations, licenses, franchises, customer lists, tax refunds, tax refund claims, computer programs, all claims under guaranties, security interests or other security held by or granted to such Borrower to secure payment of any of the Receivables by a Customer all rights of such indemnification and all other intangible property of every kind and nature (other than Receivables).

 

“ Governmental Body ” shall mean any nation or government, any state or other political subdivision thereof or any entity exercising the legislative, judicial, regulatory or administrative functions of or pertaining to a government.

 

“ Hazardous Discharge ” shall have the meaning set forth in Section 4.19(d) hereof.

 

“ Hazardous Substance ” shall mean, without limitation, any flammable explosives, radon, radioactive materials, asbestos, urea formaldehyde foam insulation, polychlorinated biphenyls, petroleum and petroleum products, methane, hazardous materials, Hazardous Wastes, hazardous or Toxic Substances or related materials as defined in CERCLA, the Hazardous Materials Transportation Act, as amended (49 U.S.C. Sections 1801, et seq.), RCRA, Articles 15 and 27 of the New Jersey State Environmental Conservation Law or any other applicable Environmental Law and in the regulations adopted pursuant thereto.

 

“ Hazardous Wastes ” shall mean all waste materials subject to regulation under CERCLA, RCRA or applicable state law, and any other applicable Federal and state laws now in force or hereafter enacted relating to hazardous waste disposal.

 

“ Indebtedness ” of a Person at a particular date shall mean all obligations of such Person which in accordance with GAAP would be classified upon a balance sheet as liabilities (except capital stock and surplus earned or otherwise) and in any event, without limitation by reason of enumeration, shall include all indebtedness, debt and other similar monetary obligations of such Person whether direct or guaranteed, and all premiums, if any, due at the required prepayment dates of such indebtedness, and all indebtedness secured by a Lien on assets owned by such Person, whether or not such indebtedness actually shall have been created, assumed or incurred by such Person. Any indebtedness of such Person resulting from the acquisition by such Person of any assets subject to any Lien shall be deemed, for the purposes hereof, to be the equivalent of the creation, assumption and incurring of the indebtedness secured thereby, whether or not actually so created, assumed or incurred.

 

“ Ineligible Security ” shall mean any security which may not be underwritten or dealt in by member banks of the Federal Reserve System under Section 16 of the Banking Act of 1933 (12 U.S.C. Section 24, Seventh), as amended.

 

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“ Interest Period ” shall mean the period provided for any LIBOR Rate Loan pursuant to Section 2.2(b).

 

“ Inventory ” shall mean and include as to each Borrower all of such Borrower’s now owned or hereafter acquired goods, merchandise and other personal property, wherever located, to be furnished under any contract of service or held for sale or lease, all raw materials, work in process, finished goods and materials and supplies of any kind, nature or description which are or might be used or consumed in such Borrower’s business or used in selling or furnishing such goods, merchandise and other personal property, and all documents of title or other documents representing them.

 

“ Investment Property ” shall mean and include as to each Borrower, all of such Borrower’s now owned or hereafter acquired securities (whether certificated or uncertificated), securities entitlements, securities accounts, commodities contracts and commodities accounts.

 

“ Law ” shall mean any law (including common law), constitution, statute, treaty, regulation, rule, ordinance, opinion, release, ruling, order, injunction, writ, decree, bond, judgment, authorization or approval, lien or award by or settlement agreement with any Governmental Body.

 

“ Lender ” shall have the meaning ascribed to such term in the preamble to this Agreement and shall include each Person which becomes a transferee, successor or assign of Lender.

 

“ LIBOR Rate ” shall mean for any LIBOR Rate Loan for the then current Interest Period relating thereto the interest rate per annum determined by PNC by dividing (the resulting quotient rounded upwards, if necessary, to the nearest 1/100th of 1% per annum) (i) the rate of interest determined by PNC in accordance with its usual procedures (which determination shall be conclusive absent manifest error) to be the average of the London interbank offered rates for U.S. Dollars quoted by the British Bankers’ Association as set forth on Dow Jones Markets Service (formerly known as Telrate) (or appropriate successor or, if British Banker’s Association or its successor ceases to provide such quotes, a comparable replacement determined by PNC) display page 3750 (or such other display page on the Dow Jones Markets Service system as may replace display page 3750) two (2) Business Days prior to the first day of such Interest Period for an amount comparable to such LIBOR Rate Loan and having a borrowing date and a maturity comparable to such Interest Period by (ii) a number equal to 1.00 minus the Reserve Percentage. The LIBOR Rate may also be expressed by the following formula:

 

 

“ LIBOR Rate Loan ” shall mean an Advance at any time that bears interest based on the Libor Rate.

 

“ Lien ” shall mean any mortgage, deed of trust, pledge, hypothecation, assignment, security interest, lien (whether statutory or otherwise), Charge, claim or encumbrance, or preference, priority or other security agreement or preferential arrangement

 

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held or asserted in respect of any asset of any kind or nature whatsoever including, without limitation, any conditional sale or other title retention agreement, any lease having substantially the same economic effect as any of the foregoing, and the filing of, or agreement to give, any financing statement under the Uniform Commercial Code or comparable law of any jurisdiction.

 

“ Material Adverse Effect ” shall mean a material adverse effect (a) on the condition, operations, assets, business or prospects of the applicable Borrowers, (b) such Borrower’s ability to pay the Obligations in accordance with the terms thereof, (c) the material value of the Collateral in the aggregate, or Lender’s Liens on the Collateral or the priority of any such Lien or (d) the practical realization of the benefits of Lender’s rights and remedies under this Agreement and the Other Documents.

 

“ Maximum Revolving Advance Amount ” shall mean $20,000,000 with a sublimit of $3,000,000 for acquisitions.

 

“ Mortgage ” shall mean the mortgage dated by the date hereof given by Franklin Inc. to Lender giving a first perfected mortgage on the Real Property.

 

“ Multiemployer Plan ” shall mean a “multiemployer plan” as defined in Sections 3(37) and 4001(a)(3) of ERISA.

 

“ Note ” shall mean the Revolving Credit Note.

 

“ Obligations ” shall mean and include any and all loans, advances, debts, liabilities, obligations, covenants and duties owing by each Borrower to Lender or to any other direct or indirect subsidiary or affiliate of Lender of any kind or nature, present or future (including, without limitation, any interest accruing thereon after maturity, or after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding relating to each Borrower, whether or not a claim for post-filing or post-petition interest is allowed in such proceeding), whether or not evidenced by any note, guaranty or other instrument, whether arising under any agreement, instrument or document, (including, without limitation, this Agreement and the Other Documents) whether or not for the payment of money, whether arising by reason of an extension of credit, opening of a letter of credit, loan, equipment lease or guarantee, under any interest or currency swap, future, option or other similar agreement, or in any other manner, whether arising out of overdrafts or deposit or other accounts or electronic funds transfers (whether through automated clearing houses or otherwise) or out of the Lender non-receipt of or inability to collect funds or otherwise not being made whole in connection with depository transfer check or other similar arrangements, whether direct or indirect (including those acquired by assignment or participation), absolute or contingent, joint or several, due or to become due, now existing or hereafter arising, contractual or tortious, liquidated or unliquidated, regardless of how such indebtedness or liabilities arise or by what agreement or instrument they may be evidenced or whether evidenced by any agreement or instrument, including, but not limited to, any and all of each Borrower’s Indebtedness and/or liabilities under this Agreement, the Other Documents or under any other agreement between Lender and each Borrower and any amendments, extensions, renewals or increases and all costs and expenses of Lender incurred in the documentation, negotiation, modification, enforcement, collection or otherwise in connection with any of the foregoing, including but not limited to reasonable attorneys’ fees and expenses and all obligations of each Borrower to Lender to perform acts or refrain from taking any action.

 

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“ Other Documents ” shall mean the Note, Mortgage, the Environmental Indemnity Agreement, the Assignment of Security Interest in Borrower’s Patent Collateral and the Assignment of Security Interest in Borrower’s Trademark Collateral and any and all other agreements, instruments and documents, including, without limitation, guaranties, pledges, powers of attorney, consents, and all other writings heretofore, now or hereafter executed by any Borrower and/or delivered to Lender in respect of the transactions contemplated by this Agreement.

 

“ Parent ” of any Person shall mean a corporation or other entity owning, directly or indirectly at least 50% of the shares of stock or other ownership interests having ordinary voting power to elect a majority of the directors of the Person, or other Persons performing similar functions for any such Person.

 

“ Payment Office ” shall mean initially Two Tower Center Boulevard, East Brunswick, New Jersey 08816; thereafter, such other office of Lender, if any, which it may designate by notice to Borrowing Agent to be the Payment Office.

 

“ PBGC ” shall mean the Pension Benefit Guaranty Corporation.

 

“ Permitted Encumbrances ” shall mean (a) Liens in favor of Lender; (b) Liens for taxes, assessments or other governmental charges not delinquent or being contested in good faith and by appropriate proceedings and with respect to which proper reserves have been taken by such Borrower; provided, that, the Lien shall have no effect on the priority of the Liens in favor of Lender or the value of the assets in which Lender has such a Lien and a stay of enforcement of any such Lien shall be in effect; (c) Liens disclosed in the financial statements referred to in Section 5.5, the existence of which Lender has consented to in writing; (d) deposits or pledges to secure obligations under worker’s compensation, social security or similar laws, or under unemployment insurance; (e) deposits or pledges to secure bids, tenders, contracts (other than contracts for the payment of money), leases, statutory obligations, surety and appeal bonds and other obligations of like nature arising in the ordinary course of such Borrower’s business; (f) judgment Liens that have been stayed or bonded and mechanics’, workers’, materialmen’s or other like Liens arising in the ordinary course of such Borrower’s business with respect to obligations which are not due or which are being contested in good faith by such Borrower; (g) Liens placed upon fixed assets hereafter acquired to secure a portion of the purchase price thereof, provided that (x) any such lien shall not encumber any other property of such Borrower and (y) the aggregate amount of Indebtedness secured by such Liens incurred as a result of such purchases during any fiscal year shall not exceed the amount provided for in Section 7.6; and (h) Liens disclosed on Schedule 1.2 .

 

“ Person ” shall mean any individual, sole proprietorship, partnership, corporation, business trust, joint stock company, trust, unincorporated organization, association, limited liability company, institution, public benefit corporation, joint venture, entity or government (whether Federal, state, county, city, municipal or otherwise, including any instrumentality, division, agency, body or department thereof).

 

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“ Plan ” shall mean any employee benefit plan within the meaning of Section 3(3) of ERISA, maintained for employees of any Borrower or any member of the Controlled Group or any such Plan to which any Borrower or any member of the Controlled Group is required to contribute on behalf of any of its employees.

 

“ RCRA ” shall mean the Resource Conservation and Recovery Act, 42 U.S.C. §§ 6901 et seq., as same may be amended from time to time.

 

“ Real Property ” shall mean all of Franklin Inc.’s right, title and interest in and to the owned premises located at One Franklin Plaza, Burlington, New Jersey, as more fully identified on Schedule A hereto.

 

“ Receivables ” shall mean and include, as to each Borrower, all of such Borrower’s accounts, contract rights, instruments (including those evidencing indebtedness owed to such Borrower by its Affiliates), documents, chattel paper, general intangibles relating to accounts, drafts and acceptances, and all other forms of obligations owing to such Borrower arising out of or in connection with the sale or lease of Inventory, the licensing of technology or the rendition of services, all guarantees and other security therefor, whether secured or unsecured, now existing or hereafter created, and whether or not specifically sold or assigned to Lender hereunder.

 

“ Receivables Advance Rate ” shall have the meaning set forth in Section 2.1(a)(y)(i) hereof.

 

“ Release ” shall have the meaning set forth in Section 5.7(c)(i) hereof.

 

“ Reportable Event ” shall mean a reportable event described in Section 4043(b) of ERISA or the regulations promulgated thereunder.

 

“ Reserve Percentage ” shall mean the maximum effective percentage in effect on any day as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the reserve requirements (including, without limitation, supplemental, marginal and emergency reserve requirements) with respect to eurocurrency funding.

 

“ Revolving Advances ” shall mean Advances made.

 

“ Revolving Credit Note ” shall mean the promissory note referred to in Section 2.1(a) hereof.

 

“ Revolving Interest Rate ” shall mean the interest rate determined on the pricing grid as follows (provided the Section 2.1(y)(iii) is not included in the Borrowing Base calculation):

 

 

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or, the interest rate determined on the pricing grid as follows when Section 2.1(y)(iii) (real estate as collateral) availability is included in the Borrowing Base calculations:

 

 

“ Section 20 Subsidiary ” shall mean the Subsidiary of the bank holding company controlling PNC, which Subsidiary has been granted authority by the Federal Reserve Board to underwrite and deal in certain Ineligible Securities.

 

“ Subsidiary ” shall mean a corporation or other entity of whose shares of stock or other ownership interests having ordinary voting power (other than stock or other ownership interests having such power only by reason of the happening of a contingency) to elect a majority of the directors of such corporation, or other Persons performing similar functions for such entity, are owned, directly or indirectly, by such Person.

 

“ Tangible Net Worth ” shall mean consolidated stockholder’s equity in the Borrowers less any advances to affiliated parties less all items properly classified as intangibles (which shall not include advance royalties), in accordance with GAAP, plus Subordinated Debt.

 

“ Term ” shall have the meaning set forth in Section 13.1 hereof.

 

“ Termination Event ” shall mean (i) a Reportable Event with respect to any Plan or Multiemployer Plan; (ii) the withdrawal of a Borrower or any member of the Controlled Group from a Plan or Multiemployer Plan during a plan year in which such entity was a “substantial employer” as defined in Section 4001(a)(2) of ERISA; (iii) the providing of notice of intent to terminate a Plan in a distress termination described in Section 4041(c) of ERISA; (iv) the institution by the PBGC of proceedings to terminate a Plan or Multiemployer Plan; (v) any event or condition (a) which might constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan or Multiemployer Plan, or (b) that may result in termination of a Multiemployer Plan pursuant to Section 4041A of ERISA; or (vi) the partial or complete withdrawal within the meaning of Sections 4203 and 4205 of ERISA, of Borrower or any member of the Controlled Group from a Multiemployer Plan.

 

“ Toxic Substance ” shall mean and include any material present on the Real Property or the Leasehold Interests which has been shown to have significant adverse effect on human health or which is subject to regulation under the Toxic Substances Control Act (TSCA), 15 U.S.C. §§ 2601 et seq., applicable state law, or any other applicable Federal or state laws now in force or hereafter enacted relating to toxic substances. “Toxic Substance” includes but is not limited to asbestos, polychlorinated biphenyls (PCBs) and lead-based paints.

 

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“ Unfunded Capitalized Expenditures ” shall mean capital expenditures made from the Borrowers’ funds other than funds borrowed to finance such capital expenditures.

 

1.3 Uniform Commercial Code Terms All terms used herein and defined in the Uniform Commercial Code as adopted in the State of New Jersey shall have the meaning given therein unless otherwise defined herein.

 

1.4 Certain Matters of Construction The terms “herein”, “hereof” and “hereunder” and other words of similar import refer to this Agreement as a whole and not to any particular section, paragraph or subdivision. Any pronoun used shall be deemed to cover all genders. Wherever appropriate in the context, terms used herein in the singular also include the plural and vice versa. All references to statutes and related regulations shall include any amendments of same and any successor statutes and regulations. Unless otherwise provided, all references to any instruments or agreements to which Lender is a party, including, without limitation, references to any of the Other Documents, shall include any and all modifications or amendments thereto and any and all extensions or renewals thereof.

 

II ADVANCES, PAYMENTS

 

2.1 (a) Revolving Advances Subject to the terms and conditions set forth in this Agreement including, without limitation, Section 2.1(b), Lender, will make Revolving Advances to Borrower in aggregate amounts outstanding at any time equal to the lesser of (x) the Maximum Revolving Advance Amount or (y) an amount equal to the sum of:

 

(i) up to 80%, subject to the provisions of Section 2.1(b) hereof (“Receivables Advance Rate”), of Eligible Receivables, plus

 

(ii) up to the lesser of (A) 65% of Eligible Inventory, subject to the provisions of Section 2.1(b) hereof or (B) 85% of net orderly liquidation value of Eligible Inventory (with a maximum amount of $10,000,000), plus

 

(iii) up to the lesser of (A) 75% of the appraised fair market value of the Real Property or (B) $4,500,000 (subsections (i),(ii) and (iii) shall constitute the “Advance Rate”), minus

 

(iv) such reserves as Lender may reasonably deem proper and necessary from time to time.

 

The amount derived from the sum of Sections 2.1(a)(y)(i),(ii) and (iii) minus Section 2.1 (a)(y)(iv) at any time and from time to time shall be referred to as the “Formula Amount”. The Revolving Advances shall be evidenced by one or more secured promissory notes (collectively, the “Revolving Credit Note”) substantially in the form attached hereto as Exhibit 2.1(a) .

 

(b) Discretionary Rights The Advance Rate may be increased or decreased by Lender at any time and from time to time in the exercise of its reasonable discretion. Each Borrower consents to any such increases or decreases and acknowledges that decreasing the Advance Rate or increasing or imposing reserves may limit or restrict Advances requested by Borrowers. Lender shall give Borrowers five (5) days prior written notice of its intention to decrease the Advance Rate.

 

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2.2 Procedure for Revolving Advances Borrowing

 

(a) Borrowing Agent must notify Lender prior to 11:00 a.m. on a Business Day of Borrower’s request to incur, on that day, a Revolving Advance hereunder. Should any amount required to be paid as interest hereunder, or as fees or other charges under this Agreement or any other agreement with Lender, or with respect to any other Obligation, become due, same shall be deemed a request for a Revolving Advance as of the date such payment is due, in the amount required to pay in full such interest, fee, charge or Obligation under this Agreement or any other agreement with Lender, and such request shall be irrevocable.

 

(b) Notwithstanding the provisions of subsection (a) above, in the event Borrowing Agent desires to obtain a LIBOR Rate Loan, Borrowing Agent shall give Lender at least three (3) Business Days’ prior written notice, specifying (i) the date of the proposed borrowing (which shall be a Business Day), (ii) the type of borrowing and the amount on the date of such Advance to be borrowed, which amount shall be in a minimum amount of $100,000 and in integral multiples of $50,000 thereafter, and (iii) the duration of the first Interest Period therefor. Interest Periods for LIBOR Rate Loans shall be for 30, 60 or 90 days; provided , if an Interest Period would end on a day that is not a Business Day, it shall end on the next succeeding Business Day unless such day falls in the next succeeding calendar month in which case the Interest Period shall end on the next preceding Business Day. No LIBOR Rate Loan shall be made available to Borrowers during the continuance of a Default or an Event of Default.

 

(c) Each Interest Period of a LIBOR Rate Loan shall commence on the date such LIBOR Rate Loan is made and shall end on such date as Borrowing Agent may elect as set forth in subsection (b)(iii) above provided that the exact length of each Interest Period shall be determined in accordance with the practice of the interbank market for offshore Dollar deposits and no Interest Period shall end after the last day of the Term.

 

Borrowing Agent shall elect the initial Interest Period applicable to a LIBOR Rate Loan by its notice of LIBOR borrowing given to Lender pursuant to Section 2.2(b) or by its notice of conversion given to Lender pursuant to Section 2.2(d), as the case may be. Borrowing Agent shall elect the duration of each succeeding Interest Period by giving irrevocable written notice to Lender of such duration not less than three (3) Business Days prior to the last day of the then current Interest Period applicable to such LIBOR Rate Loan. If Lender does not receive timely notice of the Interest Period elected by Borrowing Agent, Borrowing Agent shall be deemed to have elected to convert to a Domestic Rate Loan subject to Section 2.2(d) hereinbelow.

 

(d) Provided that no Event of Default shall have occurred and be continuing, Borrower may, on the last Business Day of the then current Interest Period applicable to any outstanding LIBOR Rate Loan, or on any Business Day with respect to Domestic Rate Loans, convert any such loan into a loan of another type in the same aggregate principal amount provided that any conversion of a LIBOR Rate Loan shall be made only on the last Business Day of the then current Interest Period applicable to such LIBOR Rate Loan. If Borrowing Agent desires to convert a loan, Borrowing Agent shall give Lender not less than three (3) Business

 

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Days’ prior written notice to convert from a Domestic Rate Loan to a LIBOR Rate Loan or one (1) Business Day’s prior written notice to convert from a LIBOR Rate Loan to a Domestic Rate Loan, specifying the date of such conversion, the loans to be converted and if the conversion is from a Domestic Rate Loan to any other type of loan, the duration of the first Interest Period therefor.

 

(e) At its option and upon three (3) Business Days’ prior written notice, Borrowers may prepay the LIBOR Rate Loans in whole at any time or in part from time to time, without premium or penalty, but with accrued interest on the principal being prepaid to the date of such repayment. Borrowing Agent shall specify the date of prepayment of Advances which are LIBOR Rate Loans and the amount of such prepayment. In the event that any prepayment of a LIBOR Rate Loan is required or permitted on a date other than the last Business Day of the then current Interest Period with respect thereto, Borrowers shall indemnify Lender therefor in accordance with Section 2.2(f) hereof.

 

(f) Each Borrower shall indemnify Lender and hold Lender harmless from and against any and all losses or expenses that Lender may sustain or incur as a consequence of any prepayment, conversion of or any default by any Borrower in the payment of the principal of or interest on any LIBOR Rate Loan or failure by Borrowers to complete a borrowing of, a prepayment of or conversion of or to a LIBOR Rate Loan after notice thereof has been given, including, but not limited to, any interest payable by Lender to Lender of funds obtained by it in order to make or maintain its LIBOR Rate Loans hereunder. A certificate as to any additional amounts payable pursuant to the foregoing sentence submitted by Lender to Borrowers shall be conclusive absent manifest error.

 

(g) Notwithstanding any other provision hereof, if any applicable law, treaty, regulation or directive, or any change therein or in the interpretation or application thereof, shall make it unlawful for any Lender (for purposes of this subsection (g), the term “Lender” shall include any Lender and the office or branch where any Lender or any corporation or bank controlling such Lender makes or maintains any LIBOR Rate Loans) to make or maintain its LIBOR Rate Loans, the obligation of Lender to make LIBOR Rate Loans hereunder shall forthwith be cancelled and Borrowers shall, if any affected LIBOR Rate Loans are then outstanding, promptly upon request from Lender, either pay all such affected LIBOR Rate Loans or convert such affected LIBOR Rate Loans into loans of another type. If any such payment or conversion of any LIBOR Rate Loan is made on a day that is not the last day of the Interest Period applicable to such LIBOR Rate Loan, Borrowers shall pay Lender, upon Lender’s request, such amount or amounts as may be necessary to compensate Lender for any loss or expense sustained or incurred by Lender in respect of such LIBOR Rate Loan as a result of such payment or conversion, including (but not limited to) any interest or other amounts payable by Lender to Lender of funds obtained by Lender in order to make or maintain such LIBOR Rate Loan. A certificate as to any additional amounts payable pursuant to the foregoing sentence submitted by Lender to Borrowers shall be conclusive absent manifest error.

 

2.3 Disbursement of Advance Proceeds During the Term, Borrowers may use the Revolving Advances by borrowing, prepaying and reborrowing, all in accordance with the terms and conditions hereof. The proceeds of each Revolving Advance requested by Borrowing Agent or deemed to have been requested by Borrowing Agent under Section 2.2(a) hereof shall, with

 

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respect to requested Revolving Advances to the extent Lender make such Revolving Advances, be made available to Borrowing Agent on the day so requested by way of credit to Borrowing Agent’s operating account at the Lender, or such other bank as Borrowing Agent may designate following notification to Lender, in immediately available federal funds or other immediately available funds or, with respect to Revolving Advances deemed to have been requested by Borrowing Agent, be disbursed to Lender to be applied to the outstanding Obligations giving rise to such deemed request.

 

2.4 Maximum Advances The aggregate balance of Revolving Advances outstanding at any time shall not exceed the lesser of (a) the Maximum Revolving Advance Amount or (b) the Formula Amount.

 

2.5 Repayment of Advances

 

(a) The Revolving Advances shall be due and payable in full on the last day of the Term subject to earlier prepayment as herein provided.

 

(b) Borrowers recognize that the amounts evidenced by checks, notes, drafts or any other items of payment relating to and/or proceeds of Collateral may not be collectible by Lender on the date received. Lender is not, however, required to credit Borrower’s Account for the amount of item of payment which is unsatisfactory to Lender and Lender may charge Borrower’s Account for the amount of any item of payment which is returned to Lender unpaid.

 

(c) All payments of principal, interest and other amounts payable hereunder, or under any of the Other Documents shall be made to Lender at the Payment Office not later than 1:00 P.M. (New York time) on the due date therefor in lawful money of the United States of America in federal funds or other funds immediately available to Lender. Lender shall have the right to effectuate payment on any and all Obligations due and owing hereunder by charging Borrower’s Account or by making Advances as provided in Section 2.2 hereof.

 

(d) Borrowers shall pay principal, interest, and all other amounts payable hereunder, or under any related agreement, without any deduction whatsoever, including, but not limited to, any deduction for any setoff or counterclaim.

 

2.6 Letters of Credit and Acceptances . Subject to the terms and conditions hereof, Lender shall (a) issue or cause the issuance of Letters of Credit (“Letters of Credit”) on behalf of any Borrower or (b) accept, or cause to be accepted Acceptances; provided , however , that Agent will not be required to issue or cause to be issued any Letters of Credit or accept or cause to be accepted any Acceptances to the extent that the face amount of such Letters of Credit and Acceptances would then cause the sum of (i) the outstanding Revolving Advances plus (ii) outstanding Letters of Credit plus (iii) outstanding Acceptances to exceed the lesser of (x) the Maximum Revolving Advance Amount or (y) the Formula Amount. All disbursements or payments related to Letters of Credit and Acceptances shall be deemed to be Revolving Interest Rate for Domestic Rate Loans; Letters of Credit that have not been drawn upon shall not bear interest.

 

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2.7 Issuance of Letters of Credit; Creation of Acceptances .

 

(a) Borrowing Agent, may request Lender to issue or cause the issuance of a Letter of Credit by delivering to Agent at the Payment Office, Agent’s form of Letter of Credit Application (the “Letter of Credit Application”) completed to the satisfaction of Lender; and, such other certificates, documents and other papers and information as Lender may reasonably request. Borrowing Agent, also has the right to give instructions and make agreements with respect to any application, any applicable letter of credit and security agreement, any applicable letter of credit reimbursement agreement and/or any other applicable agreement, any letter of credit and the disposition of documents, disposition of any unutilized funds, and to agree with Agent upon any amendment, extension or renewal of any Letter of Credit.

 

(b) Each Letter of Credit shall, among other things, (i) provide for the payment of sight drafts or acceptances of usance drafts when presented for honor thereunder in accordance with the terms thereof and when accompanied by the documents described therein and (ii) have an expiry date not later than six (6) months after such Letter of Credit’s date of issuance and in no event later than the last day of the Term. Each Letter of Credit shall be subject to the Uniform Customs and Practice for Documentary Credits (1993 Revision), International Chamber of Commerce Publication No. 500, and any amendments or revision thereof adhered to by the Issuer and, to the extent not inconsistent therewith, the laws of the State of New Jersey.

 

(c) Lender shall have absolute discretion whether to accept any draft. Without in any way limiting Lender’s absolute discretion whether to accept any draft, Borrowers will not present for acceptance any draft, and Lender will generally not accept any drafts (i) that arise out of transactions involving the sale of goods by Borrowers not in the ordinary course of its business, (ii) that involve a sale to an Affiliate of Borrowers, (iii) that involve any purchase for which Lender has not received all related documents, instruments and forms requested by Lender, (iv) for which Lender is unable to locate a purchaser in the ordinary course of business on standard terms, or (v) that is not eligible for discounting with Federal Reserve Banks pursuant to paragraph 7 of Section 13 of the Federal Reserve Act, as amended.

 

(d) Subject to terms set by Lender from time to time in its discretion with respect to the acceptance of drafts generally, Borrowing Agent may request Acceptances on any Business Day, by delivering to Lender a request for an Acceptance and, upon demand, copies of all invoices, delivery receipts and related documents relating to that request that Lender might require. Provided that the request for Acceptance is received prior to 10:30 a.m. and approved by Lender, Lender shall make the net proceeds of the Acceptance available to the Borrowers by crediting the net amount of the Acceptance in lawful money of the United States and in immediately available funds to the Borrower’s Account. The net amount of the Acceptance shall be calculated by discounting the Acceptance at the Banker’s Acceptance Rate for the applicable maturity period upon the creation by Lender of an Acceptance.

 

(e) Borrowers shall pay to Lender the amount of any Acceptance on or before its maturity date. In addition, Lender is hereby irrevocably authorized, in its sole discretion, to make Revolving Advances from time to time, or to charge any account of Borrowers, to pay any Acceptance for which payment is due, or at any time after the occurrence of an Event of Default to fund cash collateral for any outstanding Acceptance.

 

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(f) Each Acceptance shall be payable in Dollars and shall be in the face amount of at least $50,000. The maturity of each Acceptance shall be in any 30 day increment equal to or greater than 30 and less than or equal to 180 days or, if such day is not a Business Day, on the next succeeding Business Day and, in any event, no later than the day preceding the expiration of the Term. This Section 2.09(g) will not apply to Acceptances created under Letters of Credit.

 

2.8 Requirements For Issuance of Letters of Credit and Acceptances .

 

(a) In connection with the issuance of any Letter of Credit or Acceptance, each Borrower shall indemnify, save and hold Lender harmless from any loss, cost, expense or liability, including, without limitation, payments made by Lender and expenses and reasonable attorneys’ fees incurred by Lender arising out of, or in connection with, any Letter of Credit or Acceptance to be issued or created for any Borrower. Each Borrower shall be bound by Lender’s regulations and good faith interpretations of any Letter of Credit or Acceptance issued or created for Borrower’s Account, although this interpretation may be different from its own; and, neither Lender nor any of its correspondents shall be liable for any error, negligence, or mistakes, whether of omission or commission, in following Borrowing Agent’s instructions or those contained in any Letter of Credit, Acceptance or of any modifications, amendments or supplements thereto or in issuing or paying any Letter of Credit or Acceptance, except for Lender’s or such correspondents’ willful misconduct

 

(b) Each Borrower shall authorize and direct any Issuer to name such Borrower as the “Applicant” or “Account Party” of each Letter of Credit. If Lender is not the Issuer of any Letter of Credit, such Borrower shall authorize and direct the Issuer to deliver to Agent all instruments, documents, and other writings and property received by the Issuer pursuant to the Letter of Credit or any Acceptance related thereto and to accept and rely upon Lender’s instructions and agreements with respect to all matters arising in connection with the Letter of Credit, the application therefor or any Acceptance therefor.

 

(c) In connection with all Letters of Credit and Acceptances issued or caused to be issued or created by Lender under this Agreement, Borrowers hereby appoint Lender, or its designee, as its attorney, with full power and authority if an Event of Default or Default shall have occurred, (i) to sign and/or endorse such Borrower’s name upon any warehouse or other receipts, letter of credit applications and acceptances; (ii) to sign such Borrower’s name on bills of lading; (iii) to clear Inventory through the United States of America Customs Department (“Customs”) in the name of such Borrower or Lender or Lender’s designee, and to sign and deliver to Customs officials powers of attorney in the name of such Borrower for such purpose; and (iv) to complete in such Borrower’s name or Lender’s, or in the name of Lender’s designee, any order, sale or transaction, obtain the necessary documents in connection therewith, and collect the proceeds thereof. Neither Lender nor its attorneys will be liable for any acts or omissions nor for any error of judgment or mistakes of fact or law, except for Lender’s or its attorney’s willful misconduct or gross negligence. This power, being coupled with an interest, is irrevocable as long as any Letters of Credit or Acceptances remain outstanding.

 

2.9 Repayment of Excess Advances The aggregate balance of Advances outstanding at any time in excess of the maximum amount of Advances permitted hereunder shall be immediately due and payable without the necessity of any demand, at the Payment Office, whether or not a Default or Event of Default has occurred.

 

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2.10 Statement of Account Lender shall maintain, in accordance with its customary procedures, a loan account (“Borrower’s Account”) in the name of Franklin Inc., on behalf of the Borrowers, in which shall be recorded the date and amount of each Advance made by Lender and the date and amount of each payment in respect thereof; provided, however, the failure by Lender to record the date and amount of any Advance shall not adversely affect Lender. Each month, Lender shall send to Borrowing Agent a statement showing the accounting for the Advances made, payments made or credited in respect thereof, and other transactions between Lender and Borrowers, during such month. The monthly statements shall be deemed correct and binding upon Borrowers in the absence of manifest error and shall constitute an account stated between Lender and Borrowers unless Lender receives a written statement of such Borrower’s specific exceptions thereto within thirty (30) days after such statement is received by Borrower. The records of Lender with respect to the loan account shall be conclusive evidence absent manifest error of the amounts of Advances and other charges thereto and of payments applicable thereto.

 

2.11 Additional Payments Any sums expended by Lender due to any Borrower’s failure to perform or comply with its obligations under this Agreement or any Other Document including, without limitation, any Borrower’s obligation under Sections 4.2, 4.4, 4.12, 4.13, 4.14 and 6.1 hereof, may be charged to Borrower’s Account as a Revolving Advance and added to the Obligations.

 

2.12 Use of Proceeds Borrowers shall apply the proceeds of Advances to (i) repay existing indebtedness owed to Wells Fargo Foothill, Inc., (ii) pay fees and expenses relating to this transaction, (iii) to provide for its working capital needs and other reasonable needs for corporate purposes and (iv) provide cash advance not to exceed $3,000,000 to be used for acquisitions.

 

III INTEREST AND FEES

 

3.1 Interest Interest on Advances shall be payable in arrears on the first day of each month with respect to Domestic Rate Loans and, with respect to LIBOR Rate Loans, at the end of each Interest Period. Interest charges shall be computed on the actual principal amount of Advances outstanding during the month at a rate per annum equal to with respect to Revolving Advances, the applicable Revolving Interest Rate (as applicable, the “Contract Rate”). Whenever, subsequent to the date of this Agreement, the Base Rate is increased or decreased, the applicable Contract Rate for Domestic Rate Loans shall be similarly changed without notice or demand of any kind by an amount equal to the amount of such change in the Base Rate during the time such change or changes remain in effect. The LIBOR Rate shall be adjusted with respect to LIBOR Rate Loans without notice or demand of any kind on the effective date of any change in the Reserve Percentage as of such effective date. Upon and after the occurrence of an Event of Default, and during the continuation thereof, the Obligations shall bear interest at the applicable Contract Rate for Domestic Rate Loans plus three percent (3%) per annum.

 

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3.2 Letter of Credit and Acceptance Fees . Borrowers shall pay (x) to Lender, fees for each Letter of Credit for the period from and excluding the date of issuance of same to and including the date of expiration or termination, based on the fee schedule then in effect with the Lender and (y) to the Issuer, any and all fees and expenses as agreed upon by the Issuer and the Borrowers in connection with any Letter of Credit, including, without limitation, in connection with the opening, amendment or renewal of any such Letter of Credit and any acceptances created thereunder and shall reimburse Lender for any and all fees and expenses, if any, paid by Lender to the Issuer (all of the foregoing fees, the “Letter of Credit and Acceptance Fees”). All such charges shall be deemed earned in full on the date when the same are due and payable hereunder and shall not be subject to rebate or proration upon the termination of this Agreement for any reason. Any such charge in effect at the time of a particular transaction shall be the charge for that transaction, notwithstanding any subsequent change in the Issuer’s prevailing charges for that type of transaction. All Letter of Credit Fees and Acceptance Fees payable hereunder shall be deemed earned in full on the date when the same are due and payable hereunder and shall not be subject to rebate or proration upon the termination of this Agreement for any reason.

 

3.3 Computation of Interest and Fees Interest and fees hereunder shall be computed on the basis of a year of 360 days and for the actual number of days elapsed. If any payment to be made hereunder becomes due and payable on a day other than a Business Day, the due date thereof shall be extended to the next succeeding Business Day and interest thereon shall be payable at the applicable Contract Rate for Domestic Rate Loans during such extension.

 

3.4 Maximum Charges In no event whatsoever shall interest and other charges charged hereunder exceed the highest rate permissible under law. In the event interest and other charges as computed hereunder would otherwise exceed the highest rate permitted under law, such excess amount shall be first applied to any unpaid principal balance owed by Borrowers, and if the then remaining excess amount is greater than the previously unpaid principal balance, Lender shall promptly refund such excess amount to Borrowers and the provisions hereof shall be deemed amended to provide for such permissible rate.

 

3.5 Increased Costs In the event that any applicable law, treaty or governmental regulation, or any change therein or in the interpretation or application thereof, or compliance by any Lender (for purposes of this Section 3.5, the term “Lender” shall include any corporation or bank controlling Lender) with any request or directive (whether or not having the force of law) from any central bank or other financial, monetary or other authority, shall:

 

(a) subject Lender to any tax of any kind whatsoever with respect to this Agreement or any Other Document or change the basis of taxation of payments to Lender of principal, fees, interest or any other amount payable hereunder or under any Other Documents (except for changes in the rate of tax on the overall net income of Lender by the jurisdiction in which it maintains its principal office);

 

(b) impose, modify or hold applicable any reserve, special deposit, assessment or similar requirement against assets held by, or deposits in or for the account of, advances or loans by, or other credit extended by, any office of Lender, including (without limitation) pursuant to Regulation D of the Board of Governors of the Federal Reserve System; or

 

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(c) impose on Lender any other condition with respect to this Agreement or any Other Document;

 

and the result of any of the foregoing is to increase the cost to Lender of making, renewing or maintaining its Advances hereunder by an amount that Lender deems to be material or to reduce the amount of any payment (whether of principal, interest or otherwise) in respect of any of the Advances by an amount that Lender deems to be material, then, in any case Borrowers shall promptly pay Lender, upon its demand, such additional amount as will compensate Lender for such additional cost or such reduction, as the case may be, provided that the foregoing shall not apply to increased costs which are reflected in the LIBOR Rate, as the case may be. Lender shall certify the amount of such additional cost or reduced amount to Borrowers, and such certification shall be conclusive absent manifest error.

 

3.6 Basis For Determining Interest Rate Inadequate or Unfair In the event that Lender shall have determined that:

 

(a) reasonable means do not exist for ascertaining the LIBOR Rate for any Interest Period; or

 

(b) Dollar deposits in the relevant amount and for the relevant maturity are not available in the London interbank LIBOR market, with respect to an outstanding LIBOR Rate Loan, a proposed LIBOR Rate Loan, or a proposed conversion of a Domestic Rate Loan into a LIBOR Rate Loan,

 

then Lender shall give Borrowing Agent prompt written, telephonic or telegraphic notice of such determination. If such notice is given, (i) any such requested LIBOR Rate Loan shall be made as a Domestic Rate Loan, unless Borrowing Agent shall notify Lender no later than 10:00 a.m. (New York City time) two (2) Business Days prior to the date of such proposed borrowing, that its request for such borrowing shall be cancelled or made as an unaffected type of LIBOR Rate Loan, (ii) any Domestic Rate Loan or LIBOR Rate Loan which was to have been converted to an affected type of LIBOR Rate Loan shall be continued as or converted into a Domestic Rate Loan, or, if Borrowing Agent shall notify Lender, no later than 10:00 a.m. (New York City time) two (2) Business Days prior to the proposed conversion, shall be maintained as an unaffected type of LIBOR Rate Loan, and (iii) any outstanding affected LIBOR Rate Loans shall be converted into a Domestic Rate Loan, or, if Borrowing Agent shall notify Lender, no later than 10:00 a.m. (New York City time) two (2) Business Days prior to the last Business Day of the then current Interest Period applicable to such affected LIBOR Rate Loan, shall be converted into an unaffected type of LIBOR Rate Loan, on the last Business Day of the then current Interest Period for such affected LIBOR Rate Loans. Until such notice has been withdrawn, Lender shall have no obligation to make an affected type of LIBOR Rate Loan or maintain outstanding affected LIBOR Rate Loans and Borrowing Agent shall not have the right to convert a Domestic Rate Loan or an unaffected type of LIBOR Rate Loan into an affected type of LIBOR Rate Loan.

 

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3.7 Capital Adequacy

 

(a) In the event that Lender shall have determined that any applicable law, rule, regulation or guideline regarding capital adequacy, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by Lender (for purposes of this Section 3.7, the term “Lender” shall include Lender and any corporation or bank controlling Lender) with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on Lender’s capital as a consequence of its obligations hereunder to a level below that which Lender could have achieved but for such adoption, change or compliance (taking into consideration Lender’s policies with respect to capital adequacy) by an amount deemed by Lender to be material, then, from time to time, Borrowers shall pay upon demand to Lender such additional amount or amounts as will compensate Lender for such reduction. In determining such amount or amounts, Lender may use any reasonable averaging or attribution methods. The protection of this Section 3.7 shall be available to Lender regardless of any possible contention of invalidity or inapplicability with respect to the applicable law, regulation or condition.

 

(b) A certificate of Lender setting forth such amount or amounts as shall be necessary to compensate Lender with respect to Section 3.7(a) hereof when delivered to Borrowers shall be conclusive absent manifest error.

 

IV COLLATERAL: GENERAL TERMS

 

4.1 Security Interest in the Collateral . To secure the prompt payment and performance to Lender of the Obligations, each Borrower hereby assigns, pledges and grants to Lender a continuing security interest in and to all of its Collateral, whether now owned or existing or hereafter acquired or arising and wheresoever located. Each Borrower shall mark its books and records as may be necessary or appropriate to evidence, protect and perfect Lender’s security interest and shall cause its financial statements to reflect such security interest.

 

4.2 Perfection of Security Interest . Each Borrower shall take all action that may be necessary or desirable, or that Lender may request, so as at all times to maintain the validity, perfection, enforceability and priority of Lender’s security interest in the Collateral or to enable Lender to protect, exercise or enforce its rights hereunder and in the Collateral, including, but not limited to, (i) immediately discharging all Liens other than Permitted Encumbrances, (ii) obtaining landlords’ or mortgagees’ lien waivers, (iii) delivering to Lender, endorsed or accompanied by such instruments of assignment as Lender may specify, and stamping or marking, in such manner as Lender may specify, any and all chattel paper, instruments, letters of credits and advices thereof and documents evidencing or forming a part of the Collateral, (iv) entering into warehousing, lockbox and other custodial arrangements satisfactory to Lender, and (v) executing and delivering financing statements, instruments of pledge, mortgages, notices and assignments, in each case in form and substance satisfactory to Lender, relating to the creation, validity, perfection, maintenance or continuation of Lender’s security interest under the Uniform Commercial Code or other applicable law. Lender is hereby authorized to file financing statements signed by Lender instead of such Borrower in accordance with Section 9-402(2) of the Uniform Commercial Code as adopted in the State of New Jersey. All charges, expenses and fees Lender may incur in doing any of the foregoing, and any local taxes relating thereto,

 

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shall be charged to Borrower’s Account as a Revolving Advance of a Domestic Rate Loan and added to the Obligations, or, at Lender’s option, shall be paid to Lender immediately upon demand.

 

4.3 Disposition of Collateral . Each Borrower will safeguard and protect all Collateral for Lender’s general account and make no disposition thereof whether by sale, lease or otherwise except (a) the sale of Inventory in the ordinary course of business and (b) the disposition or transfer of obsolete and worn-out Equipment in the ordinary course of business and only to the extent that (i) the proceeds of any such disposition are used to acquire replacement Equipment which is subject to Lender’s first priority security interest or (ii) the proceeds of which are remitted to Lender to be applied pursuant to Section 2.6.

 

4.4 Ownership of Collateral . With respect to the Collateral, at the time the Collateral becomes subject to Lender’s security interest: (a) each Borrower shall be the sole owner of and fully authorized and able to sell, transfer, pledge and/or grant a first priority security interest in each and every item of the its respective Collateral to Lender; and, except for Permitted Encumbrances the Collateral shall be free and clear of all Liens and encumbrances whatsoever; (b) each document and agreement executed by such Borrower or delivered to Lender in connection with this Agreement shall be true and correct in all respects; (c) all signatures and endorsements of each Borrower that appear on such documents and agreements shall be genuine and such Borrower shall have full capacity to execute same; and (d) such Borrower’s Equipment and Inventory shall be located as set forth on Schedule 4.4 and shall not be removed from such location(s) without the prior written consent of Lender except with respect to the sale of Inventory in the ordinary course of business and Equipment to the extent permitted in Section 4.3 hereof.

 

4.5 Defense of Lender’s Interests . Until (a) payment and performance in full of all of the Obligations and (b) termination of this Agreement, Lender’s interests in the Collateral shall continue in full force and effect. During such period Borrowers shall not, without Lender’s prior written consent, pledge, sell (except Inventory in the ordinary course of business and Equipment to the extent permitted in Section 4.3 hereof), assign, transfer, create or suffer to exist a Lien upon or encumber or allow or suffer to be encumbered in any way except for Permitted Encumbrances, any part of the Collateral. Each Borrower shall defend Lender’s interests in the Collateral against any and all Persons whatsoever. At any time following demand by Lender for payment of all Obligations, Lender shall have the right to take possession of the indicia of the Collateral and the Collateral in whatever