FACTORING AND INVENTORY ADVANCES AND SECURITY AGREEMENT

 

(g)                                  Except where specifically restricted, reference to any Person shall be construed to include such Person’s successors and permitted assigns.

 

(h)                                  Any and all terms used in this Agreement which are defined in the UCC shall be construed and defined in accordance with the meaning and definition ascribed to such terms under the UCC, unless otherwise defined herein.

 

(i)                                      The words “include”, “includes” and “including” shall be deemed to be followed by the phrase “without limitation”.  The word “will” shall be construed to have the same meaning and effect as the word “shall”.  Reference to any law, constitution, statute, treaty, regulation, rule or ordinance, including any section or other part thereof (each, for purposes of this paragraph (i), a “law”), shall refer to that law as amended from time to time and shall include any successor law.

 

1.3                                  Exhibits and Schedules .  All Exhibits and Schedules attached hereto are incorporated herein by reference and made a part hereof.

 

Section 2. Purchase & Sale of Accounts.

 

2.1  Purchase of Accounts .  Client hereby sells to Factor all of Client’s right, title and interest in and to all of Client’s Accounts.  Factor shall be the sole and exclusive owner of such Accounts with full power to collect and otherwise deal with such Accounts.  All Accounts shall be submitted to Factor on a Schedule of Accounts listing each Account separately.  The Schedule of Accounts shall be in such form as Factor may prescribe from time to time and shall be signed by an officer or authorized signer of the Client.  Client may submit such Accounts electronically, by facsimile, by mail or other delivery service of Client’s choosing that is approved by Factor.  Any Accounts submitted electronically shall be submitted in such electronic format as Factor may require.  At the time the Schedule of Accounts is presented, Client shall also deliver to Factor, if requested by Factor, one copy of an invoice for each Account together with evidence of shipment, furnishing and/or delivery of the Goods or rendition of service(s).

 

2.2          Credit Approval.

 

(a)  Client shall submit to Factor the credit requirements of Client’s Customers, a description of its selling terms and such other information as Factor may request.  Factor may, in its sole credit judgment, establish credit lines for sales by Client to its Customers on its normal selling terms or such other terms as Factor may approve (“Credit Lines”).  Client may also submit for credit approval specific orders from Customers and Factor may, in its sole credit judgment, approve such orders on a single order approval basis (“Single Order Approval”).  Accounts arising under the terms of Credit Lines or Single Order Approvals are hereinafter referred to as Approved Accounts; Accounts not arising under Credit Lines or Single Order Approvals are hereinafter referred to as Client Risk Accounts.  All Credit Approvals must be in writing to be effective. Credit Approval(s) shall be limited to the specific terms and amounts indicated in either the Credit Line or Single Order Approval.   If Goods are shipped or services are rendered based on a verbal approval, it is Client’s responsibility to ensure that such Credit Approval is received in writing.  Any Account for freight, samples, or miscellaneous sales (including the sale of Goods and/or in quantities not regularly sold by Client) shall always be a Client Risk Account, notwithstanding any written Credit Approval from Factor.  For purposes of determining Factor’s Credit Approval hereunder, the Account(s) balance due Factor from any given Customer shall be calculated as the aggregate amount owed by that Customer less any credits to which such Customer may be entitled, and is not to be construed to mean individual invoices owed by that Customer.

 

(b)  Credit Approval(s) may be withdrawn, either orally or in writing, in Factor’s sole discretion at any time before actual delivery of Goods or rendering of services. Credit Approval(s) are automatically rescinded and withdrawn if the terms of sale vary from the terms approved by Factor, or if the terms of sale are changed by Client without Factor’s prior written approval of the new terms, or if the Account is not assigned to Factor within ten days from the date of the invoice, or if the Goods are not delivered on or before the expiration of the Single Order Approval or if there is no expiration date if the Goods are not delivered within 30 days of the date of the Single Order Credit Approval.  If Accounts exceed either a Credit Line or Single Order Approval, only the amount in excess of the Credit Line or Single Order Approval shall be considered Client Risk Accounts, provided, however, that if Client ships Goods or

 

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provides services to a Customer who has outstanding Accounts owed to Client, and such Customer’s Credit Line and/or outstanding Single Order Approval(s) have been withdrawn by Factor, and the Accounts created by such shipment exceed ten percent (10%) of the total amount of Client’s Accounts outstanding, any Credit Approvals applying to those Accounts shall be deemed cancelled and all outstanding Accounts from that Customer are Client Risk Accounts for all purposes.

 

(c)  Factor shall have no liability of any kind for declining or refusing to give, or for withdrawing, revoking, or modifying, any Credit Approval pursuant to the terms of this Agreement, or for exercising or failing to exercise any rights or remedies Factor may have under this Agreement or otherwise.  In the event Factor declines to give Credit Approval on any order received by Client from a Customer and in advising Client of such decline Factor furnishes Client with information as to the credit standing of the Customer, such information shall be deemed to have been requested of Factor by Client and Factor’s advice containing such information is recognized as a privileged communication.  Client agrees that such information shall not be given to Client’s Customer or to Client’s sales representative(s).  If necessary, Client shall merely advise its Customer(s) that credit has been declined on the account and that any questions should be directed to Factor.

 

(d)  Factor will assume the Credit Risk on Approved Accounts, i.e., if a Customer, after receiving and accepting the delivery of Goods or services (subject to all warranties herein) for which Factor has given written Credit Approval, fails to pay an Account when due, and such nonpayment is due solely to financial inability to pay, Factor shall bear any loss thereon up to the amount of the Credit Approval, subject to the terms and provisions stated herein or in the Credit Approval.  If Factor fails to collect an Approved Account within 120 Days of its maturity solely due to the Customer’s financial inability to pay, Factor will pay the Purchase Price of such Approved Account to Client on the Collection Date.  Specifically, Factor shall not be responsible for any nonpayment of a Credit Approved Account: (i) because of the assertion of any claim or Dispute by a Customer for any reason whatsoever, including, dispute as to price, terms of sales, delivery, quantity, quality, or other, or the exercise of any counterclaim or offset (whether or not such claim, counterclaim or offset relates to the specific Account); (ii) where nonpayment is a consequence of enemy attack, terrorism, natural disaster, civil commotion, strikes, lockouts, the act or restraint of public authorities, acts of God or force majeure; or (iii) if any representation or warranty made by Client to Factor in respect of such Account has been breached whether intentionally or unintentionally.  The assertion of a Dispute by a Customer shall have the effect of negating any Credit Approval on the affected Approved Account(s) and such Approved Account(s) shall be deemed a Client Risk Account until paid or otherwise cleared from Factor’s books.

 

(e)  Client shall bear the Credit Risk on all Client Risk Accounts; Factor shall have full recourse to Client for all Client Risk Accounts.  Upon demand by Factor, Client shall pay to Factor the full amount of a Client Risk Account, together with all expenses incurred by Factor up to the date of such payment, including reasonable attorney’s fees in attempting to collect or enforce such payment or payment of such Account(s).

 

(f)  If monies are owing from a Customer for both Approved Accounts and Client Risk Accounts, Client agrees that any payments or credits applying to any Account owing by such Customer will be applied:  first , to any Approved Accounts outstanding on Factor’s books and second , to any Client Risk Account outstanding on Factor’s books.  This order of payment applies regardless of the respective dates the sales occurred and regardless of any notations on payment items.

 

2.3          Purchase Price .

 

(a)  On the Collection Date applicable to an Account, Factor shall pay to Client the Purchase Price for such Account, less (i) any Reserve or credit balance that Factor, in Factor’s sole discretion, determines to hold, (ii) all Advances, moneys remitted, paid, or otherwise advanced by Factor to or on behalf of Client (including any amounts which Client may reasonably be obligated to pay in the future), (iii) any other charges provided for by this Agreement or otherwise due Factor by Client, and (iv) any deductions taken by the Customer in connection with such Account.

 

(b)          No discount, credit, allowance or deduction with respect to any Account in excess of $10,000 shall be granted or approved by Client to any Customer without the prior written consent of Factor unless

 

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such discount, credit, allowance or deduction is shown on the face of an invoice at the time such invoice is submitted to Factor.  Client agrees to give Factor notice of all discounts, credits, allowances or deductions in excess of $10,000.

 

(c)  Client shall pay to Factor or Factor may charge Client’s account with Factor or to the Reserve, the amount of any payment that Factor receives with respect to a Client Risk Account if Factor is subsequently required to return such payment, whether as a result of any proceeding in bankruptcy or otherwise.

 

(d)   Client agrees to repurchase (i) any Account upon the breach of any representations or warranties relating to such Account or upon a Default hereunder, (ii) any Client Risk Account at any time, and (iii) any Approved Account at any time after the assertion of a Dispute.

 

2.4 Reserve . Factor shall be entitled to withhold a Reserve, and may revise the Reserve at any time and from time to time if Factor deems it necessary to do so in order to protect Factor’s interests.  Factor may charge against the Reserve any amount for which Client may be obligated to Factor at any time, whether under the terms of this Agreement, or otherwise, including but not limited to the repayment of  any damages suffered by Factor as a result of Client’s breach of any provision hereof (whether intentional or unintentional), any adjustments due and any attorneys’ fees, costs and disbursements due.  Client recognizes that the Reserve represents bookkeeping entries only and not cash funds.  It is further agreed that with respect to the balance in the Reserve, Factor is authorized to withhold, without giving prior notice to Client, such payments and credits otherwise due to Client under the terms of this Agreement for reasonably anticipated claims or to adequately satisfy reasonably anticipated Obligation(s) Client may owe Factor.

 

2.5                                  Notice Of Purchase .  All invoices submitted to Customers by Client shall plainly state on their face that the amounts payable thereunder are payable at such lockbox address as Factor may designate to Client in writing from time to time.

 

Section 3.  Account Advances/Inventory Advances.

 

3.1 Account Advances.   In Factor’s sole discretion, subject to the terms and conditions of this Agreement, Factor may from time to time advance to Client up to eighty percent (80.0%) of the aggregate Net Invoice Amount of Accounts outstanding at the time any such Account Advance is made, with dilution of ten percent (10%) or less on a trailing 12 month basis, less: (1) Any such Accounts that are in Dispute; (2) any such Accounts that are not acceptable to Factor in its sole discretion; (3) the amount of the Reserve; and (4) any interest, fees and other items, actual or estimated, that are chargeable to the Reserve; or (5) the amount of any Letters of Credit not deducted pursuant to Section 3.2(a).  The Account Advances shall be reduced by a minimum of two percent (2%) for every one percent (1%) of dilution in excess of ten percent (10%).

 

3.2 Inventory Advances .  (a)  In Factor’s sole discretion, subject to the terms and conditions of this Agreement, Factor may from time to time advance to Client up to the least of (i) fifty percent (50.0%) of the dollar value (determined at the lower of cost or market) of Eligible Inventory, (ii) $3,000,000, or (iii) seventy-five percent (75.0%) of net orderly liquidation value of Eligible Inventory as per the most recent approval (Inventory shall be appraised semi-annually by an appraiser acceptable to Factor), less the face amount of all Letters of Credit issued or guaranteed by Factor for or on behalf of the Client or such reserves as Factor shall establish from time to time in its sole discretion.   Borrowed amounts that are repaid may be reborrowed upon the terms and conditions of this Agreement.  Notwithstanding the foregoing, Advances will not be made against Eligible Inventory until Factor receives the initial appraisal of the Inventory and such appraisal is satisfactory to Factor.

 

(b)                                  Factor will determine eligibility and the loan value of the Eligible Inventory, in its sole discretion, consistent with Factor’s experience, prudent business judgment and standards of commercial reasonableness applicable to asset-based credits and in good faith.

 

(c)                             Client shall deliver to Factor an Inventory Certificate no less frequently than weekly (by the second Business Day of each week and determined as of the close of business on the last Business Day

 

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of the immediately preceding week), except when no borrowings against Inventory are made.  At times when no Advances are outstanding against Inventory, Client shall deliver to Factor an Inventory Certificate no less than monthly (by the tenth Business Day following the last day of the applicable month).

 

(d)                                  In no event shall the total of the outstanding Advances exceed the lesser of i) $10,000,000 or ii) the sum of Account Advance Availability plus Inventory Advance Availability and Client shall immediately pay to Factor any and all amounts necessary to reduce the aggregate outstanding Advances below such limit.

 

3.3  Letters of Credit.

 

(a)                                   Subject to the terms of this Agreement, and so long as no Default has occurred and is continuing, upon the request of Client and for Client’s account, Factor shall issue or shall cause to be issued one or more Letters of Credit for the purpose of facilitating the purchase of goods or services in the ordinary course of Client’s business. The aggregate face amount of all Letters of Credit shall be deducted from the amount of Inventory Advances available under Section 3.2 hereof and to the extent necessary, from the amount of Account Advances available under Section 3.2 hereof.  The aggregate face amount of all Letters of Credit outstanding at any time shall not exceed an amount equal to Eight Hundred Thousand No/100 Dollars ($800,000); provided, that, at no time shall the aggregate face amount of all Letters of Credit outstanding, plus the outstanding Account Advances and Inventory Advances, exceed the lesser of the $800,000 or the amounts available to be advanced/borrowed under Sections 3.1 and 3.2 [and if available and only to the extent of such availability, Section 3.4 hereof] hereof.  The expiration date of each Letter of Credit shall not be later than 365 days from the date of issuance of such Letter of Credit.   No Letter of Credit shall have any automatic or “evergreen” renewal provisions. No extensions, modifications or amendments to a Letter of Credit shall be made without Factor’s prior written consent.

 

(b)                                  In the event that Factor shall make any payment on or pursuant to any Letter of Credit, such payment shall then be deemed automatically to constitute first, an Inventory Advance, and second an Account Advance, hereunder.

 

(c)                                   Client shall pay to Factor, as compensation for the Letter of Credit Obligations incurred hereunder, immediately upon demand, all amounts necessary for Factor to meet all disbursements and payments of any kind or character, together with the Letter of Credit Fee, and any interest, commissions and other charges, which Factor has incurred or will incur or to which Factor is entitled in connection with the Letters of Credit or any draft drawn thereunder and any fees charged by any Bank issuing any Letters of Credit, all as set forth on Exhibit A.

 

(d)                                  Client shall give Factor at least five (5) business days’ prior written notice of a requested Letter of Credit.  The Letter of Credit shall be issued pursuant to a letter of credit application entered into by Client and Factor for the benefit of the Issuer, completed in a manner satisfactory to Factor and the Issuer. The terms and conditions set forth in such letter of credit application shall supplement the terms and conditions hereof, but if the terms of such letter of credit application and the terms of this Agreement are inconsistent, the terms hereof shall control.

 

(e)                                   The Client hereby agrees to reimburse Factor for payments made with respect to any Letter of Credit Obligations and such obligation shall be absolute, unconditional and irrevocable, without necessity of presentment, demand, protest or other formalities. Client acknowledges that neither this Agreement nor any guaranty of a Letter of Credit by Factor pursuant to this Agreement shall in any way be construed to create any liability, obligation, warranty or representation on Factor’s part with respect to any matter other than Factor’s obligation to make payment of any Letter of Credit guarantied by Factor.  Neither Factor nor any Person issuing a Letter of Credit shall be responsible for: (a) verifying the existence of any act, condition or statement made by a beneficiary of a Letter of Credit in relation to its drawing or presentment under the Letter of Credit or for verifying or passing judgment on the reasonableness of any statement made by the beneficiary of the Letter of Credit; (b) the validity, sufficiency or genuineness of documents, even if such documents should in fact prove to be in any or all respects invalid, insufficient, fraudulent or forged; (c) the failure to give any notice; or (d) any breach of contract between the beneficiary of the Letter of Credit and Client.  Furthermore, neither Factor nor any Person issuing a Letter of Credit shall be responsible for errors, omissions, interruptions or delays in transmission or delivery of any

 

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messages, by mail, cable, telegraph or otherwise; and none of the above shall affect or impair any of Factor’s rights or powers hereunder.  In furtherance of the foregoing, Client agrees that, absent gross negligence or willful misconduct on Factor’s part, any action taken or not taken by Factor or by any Person issuing a Letter of Credit, under or in connection with a Letter of Credit or the related draft or documents shall be binding on Client and shall not make Factor liable to Client.

 

(f)                                     Factor shall not be obligated to issue or cause to be issued Letters of Credit for any purpose other than the sole purpose of allowing Client to purchase goods or services in the ordinary course of business.

 

(g)                                  Client shall indemnify Factor and hold Factor harmless from and against any and all liabilities, losses, costs, fees and expenses, including attorneys’ fees, that Factor may sustain or incur based upon, arising under, or in any way relating to any Letter of Credit.  Client’s obligation to reimburse and indemnify Factor shall be conclusive but shall not prejudice any rights Client may have against any other person in the event that Client disputes liability of any amounts owing under any Letter of Credit.

 

(h)                                  Whenever a draft is submitted under the Letter of Credit, Clients authorize Factor (regardless of whether a Default exists or whether Clients have sufficient borrowing availability hereunder) to make a Inventory Advance first and, to the extent necessary to cover the amount of such Letter of Credit, an Account Advance hereunder in the amount of such draft (plus any applicable fees of the Issuer associated therewith) and to apply the proceeds of such Inventory Advance or Account Advance thereto.  Such Inventory Advances and/or Account Advances shall bear interest and be repayable in accordance with, and be treated in all other respects pursuant to the terms hereof.

 

(i)                                      Clients’ obligations arising hereunder shall be absolute, unconditional and irrevocable, and shall be paid strictly in accordance with the terms of this Agreement under all circumstances whatsoever, including (without limitation) the following circumstances:

 

(A)                               any lack of validity or enforceability of the Letter of Credit or any other agreement or instrument relating thereto (collectively the “Related Documents”);

 

(B)                                 any amendment or waiver of or any consent to departure from all or any of the Related Documents;

 

(C)                                 the existence of any claim, setoff, defense or other right which any Client may have at any time, against any beneficiary or any transferee of the Letter of Credit or any other Person, whether in connection with this Agreement, the transactions contemplated herein or in the Related Documents or any unrelated transactions;

 

(D)                                any statement or any other document presented under the Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect whatsoever;

 

(E)                                  payment by or on behalf of the Issuer under the Letter of Credit against presentation of a draft or certificate which does not strictly comply with the terms of the Letter of Credit; and

 

(F)                                  any other circumstance or happening whatsoever, whether or not similar to any of the foregoing.

 

Section 4.  Collections/Repayment.

 

4.1 Collections.

 

(a)                                   Factor shall have the right at any time with or without notice to Client, to notify any or all Customers of the sale and assignment of the Accounts and pledge of the Collateral to Factor and to direct such Customers to make payment of all amounts due or to become due to Client directly to Factor.  Client agrees not to change any of such instructions or to give its Customers different instructions so long as this Agreement shall remain in effect.  To the extent there are no Obligations of Client owed to Factor hereunder and so long as Client is not in Default, Factor shall be deemed to have received any such proceeds of Accounts and other Collateral in excess of that which Factor is entitles as Owner of the Accounts or in repayment in full of the Obligations as a pure pass-through for and on account of Client.

 

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(b)          Factor, as the sole and absolute owner of the Accounts, shall have the sole and exclusive power and authority to collect each such Account, through legal action or otherwise, and Factor may, in its sole discretion, settle, compromise, or assign (in whole or in part) any of such Accounts, or otherwise exercise, to the maximum extent permitted by applicable law, any other right now existing or hereafter arising with respect to any of such Accounts.

 

(c)  Should Client receive payment of all or any portion of any Account or other Collateral, Client shall immediately notify Factor of the receipt of such payment, hold such payment in trust for Factor separate and apart from Client’s own property and funds, and shall deliver such payment to Factor without delay in the identical form in which received.  Should Client receive any check or other payment instrument with respect to any Account or other Collateral and fail to surrender and deliver to Factor such check or payment instrument within five (5) days, Factor shall be entitled to charge Client a Misdirected Payment Fee to compensate Factor for the additional administrative expenses that the parties acknowledge are likely to be incurred as a result of such breach.

 

(d) In the event any Goods, the sale of which gave rise to an Account, are returned to or repossessed by Client, such Goods shall be held by Client in trust for Factor, separate and apart from Client’s own property and subject to Factor’s sole direction and control.

 

 (e)  Client agrees to notify Factor promptly in writing of any credit loss, or anticipated credit loss, for Approved Accounts, such notice in any event to be received by Factor no longer than 120 days after the maturity date of the invoice (based on its longest optional terms).  Client’s failure to provide such notice to Factor within the 120 day period shall result in Client assuming the entire Credit Risk on such Account, and Factor shall be deemed free of any such Credit Risk.

 

4.2 Repayment .

 

(a)  Client hereby unconditionally promises to pay all Advances and all other Obligations. All Advances and Obligations shall bear interest at the rate set forth in subsection 5.1 below until paid in full.  All Advances and all other Obligations  shall be immediately due and payable upon termination of this Agreement for any reason.

 

(b)  The Purchase Price and all other amounts received by Factor will be paid to Client by crediting same to Client’s account with Factor on the Collection Date.  The Purchase Price and all other amounts so credited to Client’s account with Factor shall be applied first to all fees and expenses due Factor, next to accrued interest,  then to the Inventory Advances, then to Account Advances, provided, however, that the allocation of Credit Risk shall be governed by Section 2.2 hereof.

 

(c)  Client shall make each payment required hereunder or under any other Factoring Document without setoff, deduction or counterclaim.

 

(d)  Unless payment is otherwise timely made by Client, the becoming due of any amount required to be paid under this Agreement or any other Factoring Documents as principal, accrued interest, expenses or fees shall be deemed irrevocably to be a request by Client for an Account Advance or Inventory Advance on the due date of, and in the amount required to pay, such principal, accrued interest or fees or expenses and the proceeds of each such Account Advances or Inventory Advance if made by Factor, shall be disbursed by Factor by way of direct payment of such Obligation.

 

Section 5.  Interest and Fees.

 

5.1  Interest .

 

(a)   Client will pay Factor or, at Factor’s option, Factor may charge Client’s account with, interest on the average daily net principal amount of Obligations outstanding hereunder, calculated monthly and payable on the first day of each calendar month, at a rate (computed on the basis of the actual number of days elapsed over a year of 360 days) (the “Interest Rate”) equal to the sum of (i) LIBOR (as defined below), plus five and one-half percent (5.5%) (the “Interest Margin”), but in no event less than 7.75%.  The Interest Rate may not be the lowest or best rate at which Factor calculates interest or extends credit.  The

 

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Interest Rate for each calendar month shall be adjusted (if necessary) on the first day of such calendar month and shall be equal to the Interest Rate in effect as of the close of business on the last Business Day of the immediately preceding calendar month.

 

As used herein, the following terms shall have the following meanings:

 

 “ LIBOR ” means, at any time, an interest rate per annum equal to the interest rate per annum (rounded upwards, if necessary, to the nearest 1/100 th  of 1%) as published in the “Money Rates” section of The Wall Street Journal (or another national publication selected by the Factor) as the one month London Interbank Offered Rate for United States dollar deposits or such other language (or, if such page shall cease to be publicly available or, if the information/description contained on such page, in Factor’s sole judgment, shall cease to accurately reflect such London Interbank Offered Rate, then such rate as reported by any publicly available recognized source of similar market data selected by Factor that, in Factor’s reasonable judgment, accurately reflects such London Interbank Offered Rate).

 

(b)  Market Disruption Event . If, at any time, Factor determines (which determination shall be conclusive and binding) that (a) by reason of circumstances affecting the London interbank market generally, adequate and fair means do not exist for ascertaining LIBOR for the following month as provided in subsection (a) hereof, or (b) disruptions in the short term money markets have materially and adversely affected Factor’s cost of funds such that the interest rate hereunder does not adequately or fairly reflect Factor’s cost of making, funding or maintaining the loan hereunder, a “Market Disruption Event” will be deemed to have occurred and the Factor shall promptly notify the Client thereof. The rate of interest hereunder (the “Adjusted Rate of Interest”) shall be adjusted and shall thereafter be a rate equal to the sum of (x) the rate that Factor determines (which determination shall be conclusive and binding), expressed as a percentage rate per annum, to be the cost to Factor of funding the loan from whatever source it may reasonably elect, plus (y) the Interest Margin. Factor shall give prompt notice to Client of the Adjusted Rate of Interest.

 

Client shall begin to be charged interest at the Adjusted Rate of Interest effective as of the first day of the month following the month in which Factor provides notice thereof to Client, provided, however, that if Client is unwilling to accept the Adjusted Rate of Interest, it may terminate this Agreement and prepay all amounts due hereunder within thirty (30) days of the effective date of the Adjusted Rate of Interest without paying a prepayment fee.

 

(c)  If during any month, a net credit balance exists (i.e., the Reserve or credit balance exceeds outstanding Accounts), then Factor shall credit Client’s account as of the last day of each month with interest at a rate equal to the greater of zero percent (0%) or one percent (1%) below the LIBOR.

 

(d)   Interest upon the daily net balance of all of Client’s Inventory Advances shall be payable at a rate equal that described in 5.1(a) above.

 

(e)  Interest shall be charged to Client’s account with Factor as of the last day of each month and shall constitute Obligations.  Any adjustment in Factor’s interest rate, whether downward or upward will become effective on the first day of the month following the month.  All interest shall be computed for the actual number of days elapsed on the basis of a year consisting of 360 days.

 

(f)  To the extent permitted by law and without limiting any other right or remedy of Factor hereunder, whenever there is a Default under this Agreement, the rate of interest on the Obligations shall, at the option of Factor, be increased to a default interest rate by adding five percent (5%) to the highest interest rate otherwise in effect hereunder.  Factor may charge such default interest rate retroactively beginning on the date the applicable Default first occurred or existed.  Client acknowledges that: (i) such additional rate is a material inducement to Factor to purchase Accounts and consider requests for Advances hereunder; (ii) Factor would not have made the Advances in the absence of the agreement of Client to pay such additional rate; (iii) such additional rate represents compensation for increased risk to Factor that Factor will not be repaid; and (iv) such rate is not a penalty and represents a reasonable estimate of (A) the cost to Factor in allocating its resources (both personnel and financial) to the ongoing review, monitoring, administration and collection of the Advances and Obligations, and (B) compensation to Factor for losses

 

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that are difficult to ascertain.  In the event of termination of this Agreement by either party hereto, Factor’s entitlement to this charge will continue until all Obligations are paid in full.

 

(g)  IT IS THE INTENTION OF THE PARTIES HERETO THAT AS TO ALL ACCOUNTS, THE TRANSACTIONS CONTEMPLATED HEREBY SHALL CONSTITUTE A TRUE PURCHASE AND SALE OF ACCOUNT(S) UNDER § 9-318 OF THE UCC AS IN EFFECT IN THE STATE OF CALIFORNIA AND AS SUCH, THE CLIENT SHALL HAVE NO LEGAL OR EQUITABLE INTEREST IN  SUCH PROPERTY SOLD.   NEVERTHELESS, IN THE EVENT ANY PORTION OF THIS TRANSACTION IS CHARACTERIZED AS A LOAN AND AS IT RELATES TO THE INVENTORY ADVANCE, THE PARTIES HERETO INTEND TO CONTRACT IN STRICT COMPLIANCE WITH APPLICABLE USURY LAW FROM TIME TO TIME IN EFFECT.  IN FURTHERANCE THEREOF SUCH PARTIES STIPULATE AND AGREE THAT NONE OF THE TERMS AND PROVISIONS CONTAINED IN THIS AGREEMENT SHALL EVER BE CONSTRUED TO CREATE A CONTRACT TO PAY, FOR THE USE, FORBEARANCE OR DETENTION OF MONEY, INTEREST IN EXCESS OF THE MAXIMUM RATE (AS HEREINAFTER DEFINED) FROM TIME TO TIME IN EFFECT.  NEITHER CLIENT, ANY PRESENT OR FUTURE GUARANTOR OR ANY OTHER PERSON HEREAFTER BECOMING LIABLE FOR THE PAYMENT OF THE OBLIGATIONS, SHALL EVER BE LIABLE FOR ANY OBLIGATION THAT MAY BE CHARACTERIZED AS UNEARNED INTEREST THEREON OR SHALL EVER BE REQUIRED TO PAY ANY OBLIGATION THAT MAY BE CHARACTERIZED AS INTEREST THEREON IN EXCESS OF THE MAXIMUM AMOUNT THAT MAY BE LAWFULLY CHARGED UNDER APPLICABLE LAW FROM TIME TO TIME IN EFFECT, AND THE PROVISIONS OF THIS SECTION SHALL CONTROL OVER ALL OTHER PROVISIONS OF THIS AGREEMENT WHICH MAY BE IN CONFLICT THEREWITH.  IF ANY INDEBTEDNESS OR OBLIGATION OWED BY CLIENT HEREUNDER IS DETERMINED TO BE IN EXCESS OF THE LEGAL MAXIMUM, OR FACTOR SHALL OTHERWISE COLLECT MONEYS WHICH ARE DETERMINED TO CONSTITUTE INTEREST WHICH WOULD OTHERWISE INCREASE THE INTEREST ON ALL OR ANY PART OF SUCH OBLIGATIONS TO AN AMOUNT IN EXCESS OF THAT PERMITTED TO BE CHARGED BY APPLICABLE LAW THEN IN EFFECT, THEN ALL SUCH SUMS DETERMINED TO CONSTITUTE INTEREST IN EXCESS OF SUCH LEGAL LIMIT SHALL, WITHOUT PENALTY, BE PROMPTLY APPLIED TO REDUCE THE THEN OUTSTANDING OBLIGATIONS OR, AT FACTOR’S OPTION, RETURNED TO CLIENT OR THE OTHER PAYOR THEREOF UPON SUCH DETERMINATION.  IF AT ANY TIME THE RATE AT WHICH INTEREST IS PAYABLE HEREUNDER EXCEEDS THE MAXIMUM RATE, THE AMOUNT OUTSTANDING HEREUNDER SHALL CEASE BEARING INTEREST UNTIL SUCH TIME AS THE TOTAL AMOUNT OF INTEREST ACCRUED HEREUNDER EQUALS (BUT DOES NOT EXCEED) THE MAXIMUM RATE APPLICABLE HERETO.   AS USED IN THIS SECTION, THE TERM “APPLICABLE LAW” MEANS THE LAWS OF THE STATE OF CALIFORNIA OR, IF DIFFERENT, THE LAWS OF THE STATE OR TERRITORY IN WHICH THE CLIENT RESIDES, WHICHEVER LAW ALLOWS THE GREATER RATE OF INTEREST, AS SUCH LAWS NOW EXIST OR MAY BE CHANGED OR AMENDED OR COME INTO EFFECT IN THE FUTURE AND THE TERM “MAXIMUM RATE” MEANS THE MAXIMUM NONUSURIOUS RATE OF INTEREST THAT FACTOR IS PERMITTED UNDER APPLICABLE LAW TO CONTRACT FOR, TAKE, CHARGE OR RECEIVE WITH RESPECT TO THE OBLIGATIONS.

 

5.2 Commission.

 

(a)                                   For Factor’s services hereunder, Client shall pay and Factor shall be entitled to receive a factoring Commission equal to three-quarters of one percent (0.75%) of the gross invoice amount of each Account (“Commission”).  The Commission shall be due and payable to Factor on the date of creation of each Account and shall be chargeable to Client’s account with Factor.  Factor shall be entitled to receive a surcharge equal to two percent (2%) of the gross invoice amount of all Accounts arising out of sales to any Customer that is a debtor-in-possession.  All of the foregoing fees constitute compensation to Factor for services rendered and are not interest or a charge for the use of money.

 

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(b)                                  Factor’s Commission is based upon Client’s maximum selling terms of  ninety (90) days.  Client will not grant additional dating to any Customer without Factor’s prior written approval.   If Factor approves extended terms or additional dating, the rate of Commission shall be increased by one quarter of one percent (0.25%) of the gross invoice amount of each Account for each 30 days or portion thereof of extended or additional dating.

 

(c)                                   The minimum aggregate factoring commissions payable under this Agreement for each Contract Year or part thereof shall be One Hundred Fifty Thousand and no/100 Dollars ($150,000), which shall be payable at the rate of Twelve Thousand Five Hundred and no/100 Dollars ($12,500) per month or part thereof.  To the extent of any deficiency (after giving effect to commissions payable under the foregoing subsections), the difference between the minimum and the amount already charged shall be chargeable to Client’s account with Factor, or at Factor’s option, payable by Client on Factor’s demand

 

5.3  Fees.

 

(a)                                   All of the fees charged under this Agreement constitute compensation to Factor for services rendered and are not interest or a charge for the use of money.  Each installment of such fees shall be fully earned when due and payable and shall not be subject to refund or rebate.

 

(b)                                  It is agreed by and between Client and Factor that Factor should be compensated for maintaining available credit balances for Client.  Should Client fail to utilize the available credit line hereunder, Client agrees to pay to Factor, monthly, a fee of three-quarters of one percent (0.75%) of the difference between the available credit line and the average outstanding balance of Account advances.

 

(c)                                   It is agreed by and between Client and Factor that Client shall pay Factor a documentation fee in the amount of Ten Thousand and No/100 Dollars ($10,000.00).  Such fee shall be fully earned and payable on the date of this Agreement.

 

Section 6.  Collateral.

 

6.1 Security Interest .  In order to secure the payment of all Account Advances, Inventory Advances and Obligations of Client to Factor, Client hereby grants to Factor a security interest in and lien upon and assigns, mortgages and pledges to Factor all of Client’s right, title and interest in and to all of Client’s presently existing or hereafter arising Collateral wherever located.  Factor and Client acknowledge that all Factor Sub Accounts sold pursuant to the terms of the Factor Sub Factoring Agreement shall be sold free and of any lien or interest of Factor in such Factor Sub Accounts, but that Factor shall have a Lien on the Factor Sub Accounts Proceeds.

 

6.2 Perfection/Further Assurances . Client agrees to comply with all appropriate laws in order to perfect Factor’s security interest in and to the Collateral and to execute such documents as Factor may require from time to time.  Client authorizes Factor to file at such times and places as Factor may designate such financing statements, continuations and amendments thereto as are necessary or desirable to perfect Factor’s rights in and give notice of Factor’s purchase of the Accounts under the Uniform Commercial Code in effect in any applicable jurisdiction and Factor’s security interest in the Collateral.  Factor may at any time and from time to time file financing statements, continuation statements and amendments thereto that describe the Collateral as “all assets” of Client or words of similar effect and which contain any other information required by Part 5 of Article 9 of the applicable UCC for the sufficiency or filing office acceptance of any financing statement, continuation statement or amendment, including whether Client is an organization, the type of organization and any organization identification number issued to Client.  Client agrees to furnish any such information to Factor promptly upon request.  Any such financing statements, continuation statements or amendments may be signed by Factor on behalf of Client or filed by Factor without the signature of Client and may be filed at any time in any jurisdiction.  Client acknowledges that it is not authorized to file any financing statement or amendment or termination statement with respect to any financing statement naming Client as the debtor and Factor as the secured party without the prior written consent of Factor, and Client agrees that it shall not do so without the prior written consent of Factor.  Client hereby ratifies any UCC financing statements previously filed by Factor.

 

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6.3  Collateral Representations, Warranties and Covenants

 

(a)  Client is the sole owner and holder of all Collateral and there is no security interest, Lien, judgment or other encumbrance in or affecting such Accounts or any of the other Collateral except for Permitted Liens;

 

(b)  The Collateral is located at the locations set forth on Schedule 6.3 (b) hereof and at no other location.  Client shall provide written notice to Factor of any change in the locations at which it keeps its Collateral at least thirty (30) days prior to any such change. Client shall obtain from any landlord, warehouseman, or other third party operator of premises on which any Collateral is located an acceptable lien waiver or subordination agreement in Factor’s favor with respect to such Collateral.  In the event that any Collateral, including proceeds, is evidenced by or consists of Negotiable Collateral, Client shall, immediately endorse and assign such Negotiable Collateral over to Factor and deliver actual physical possession of the Negotiable Collateral to Factor.  Client shall at any time and from time to time take such steps as Factor may request for Factor (i) to obtain an acknowledgment, in form and substance satisfactory to Factor, of any bailee having possession of any of the Collateral that such bailee holds such Collateral for Factor, (ii) to obtain “control” of any investment property, deposit accounts, letter-of-credit rights or electronic chattel paper in accordance with Article 9 of the UCC, with any agreements establishing control to be in form and substance satisfactory to Factor, and (iii) otherwise to insure the continued perfection and priority of Factor’s security interest in the Collateral and of the preservation of its rights therein other than the Inventory in Mexico.

 

(c)  Accounts.  The Accounts are a valid, bona fide account, representing an undisputed indebtedness incurred by the named Customer for goods actually sold and delivered or for services completely rendered; Other than those discounts, allowances and deductions set forth on the face of the invoice at the time it was created, there are and shall be no set-offs, allowances, discounts, deductions, counterclaims, or disputes with respect to any Account.  Client shall inform Factor, in writing, immediately upon learning that there exists any Dispute.  Client shall accept no returns and shall grant no allowance or credit to any Customer without prior written notice to Factor.  If required by Factor, Client shall submit to Factor credit memos itemized on a separate Schedule of Accounts for all returns and allowances made during the previous week.  At Factor’s option, Factor may require that Client pay Factor for the amount of such credit memos, or in Factor’s sole and exclusive discretion, Factor may agree to accept the Schedule of Accounts and apply same to Client’s Reserve.

 

(d)  Inventory.  Client will maintain Inventory at the locations set forth on Schedule 6.3 (b) hereof subject to a perfected, first-priority Lien in favor of Factor (other than Inventory located in Mexico).  Sales of Inventory will be made in compliance with all material requirements of applicable law.  Client covenants and agrees:

 

(i)                                      To notify Factor immediately of any event causing loss or depreciation in the value of Inventory and the amount of such loss or depreciation;

 

(ii)                                   To keep correct current stock, cost and sales records of Client’s Inventory, accurately and sufficiently itemizing and describing the kinds, type, and quantities of Inventory and the cost and selling prices thereof, all of which records shall be continuously available to Factor for inspection, and Factor shall at all reasonable times have access to and the right to inspect and draw off data from any of Client’s other books and records for the purposes of checking and verifying all such statements, stock, cost and sales records;

 

(iii)                                At all reasonable times and from time to time, by or through any of Client’s officers, agents, attorneys, or accountants, permit Factor to examine or inspect the Inventory wherever located and, for such purposes, to enter upon Client’s premises or wherever any of the Inventory may be found; and

 

(iv)                               Until Default, Client may use the Inventory in any lawful manner not inconsistent with this Agreement or with the terms or conditions of any policy of insurance thereon, may use and consume any raw materials or supplies, the use and consumption of which is necessary in order to carry on Client’s business, and may also sell the Inventory in the ordinary course of business.  (A sale in the ordinary course

 

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of business does not include a transfer in partial or total satisfaction of a debt owing by Client to any person other than Factor.)

 

(e)  Equipment.  Client will maintain all Equipment used or useful in Client’s business in good and workable condition, ordinary wear and tear excepted, subject to a perfected, first-priority security interest in Factor’s favor and free and clear of all other Liens except Permitted Liens at one of the locations set forth on Schedule 6.3(b).

 

(f)  Defense of Title.  All Collateral will at all times be owned by Client, and Client will defend Client’s title to the Collateral against the claims of third parties.  Client will at all times keep accurate and complete records of the Collateral.

 

(g) Insurance.  Client will obtain and maintain in full force and effect insurance covering the Collateral against all risks to which the Collateral is exposed, including loss, damage, fire, theft, and all other such risks, in such amounts, with such companies, under such policies and in such form as will be satisfactory to Factor, which policies will name Factor as an additional insured and provide that loss thereunder will be payable to Factor as Factor’s interests may appear upon a loss payee endorsement acceptable to Factor.  All proceeds of any such insurance will be paid over to Factor directly, and Factor may apply such proceeds to payment of the Obligations, whether or not due, in such order of application as Factor determines or, in Factor’s sole discretion, apply such proceeds, in whole or in part, to the replacement, restoration or rebuilding of the lost or damaged property.  Client will provide to Factor from time to time certificates showing such coverage in effect and, at Factor’s request, the underlying policies.

 

(h) Commercial Tort Claims.  If Client shall