THIRD AMENDED AND RESTATED CREDIT AND SECURITY AGREEMENT

 

THIRD AMENDED AND RESTATED
CREDIT AND SECURITY AGREEMENT

 

Dated as of December 30, 2005

 

HESKA CORPORATION, a Delaware corporation (“Heska”) and DIAMOND ANIMAL HEALTH, INC., an Iowa corporation (“Diamond”) (each of Heska and Diamond may be referred to herein individually as a “Borrower” and collectively as the “Borrowers”) and WELLS FARGO BANK, NATIONAL ASSOCIATION, acting through its Wells Fargo Business Credit operating division (the “Lender”), as successor in interest to Wells Fargo Business Credit, Inc., hereby agree as follows:

 

RECITALS

 

The Borrowers and Center Laboratories, Inc., a Delaware corporation (“Center”), and the Lender entered into a Second Amended and Restated Credit and Security Agreement dated as of June 14, 2000 (the “Former Credit Agreement”).

 

Shortly after the Former Credit Agreement was executed, Center was sold to an unrelated entity and is no longer a Borrower under the Former Credit Agreement or under this Agreement.

 

The Borrowers have requested that the Former Credit Agreement be amended and restated in its entirety as set forth herein.

 

NOW THEREFORE, in consideration of the premises and the mutual promises herein contained, the parties hereto agree that the Former Credit Agreement be amended and restated to read in its entirety as follows:

 

ARTICLE I

Definitions

 

Section 1.1              Definitions . For all purposes of this Agreement, except as otherwise expressly provided or unless the context otherwise requires:

 

(a)            the terms defined in this Article have the meanings assigned to them in this Article, and include the plural as well as the singular; and

 

(b)            all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with GAAP.

 

“Accounts” means all of the Borrowers’ accounts, as such term is defined in the UCC, including each and every right of the Borrowers to the payment of money, whether such right to payment now exists or hereafter arises, whether such right to payment arises

 

 

out of a sale, lease or other disposition of goods or other property, out of a rendering of services, out of a loan, out of the overpayment of taxes or other liabilities, or otherwise arises under any contract or agreement, whether such right to payment is created, generated or earned by the Borrowers or by some other person who subsequently transfers such person’s interest to the Borrowers, whether such right to payment is or is not already earned by performance, and howsoever such right to payment may be evidenced, together with all other rights and interests (including all Liens) which the Borrowers may at any time have by law or agreement against any account debtor or other obligor obligated to make any such payment or against any property of such account debtor or other obligor; all including but not limited to all present and future accounts, contract rights, loans and obligations receivable, chattel papers, bonds, notes and other debt instruments, tax refunds and rights to payment in the nature of general intangibles.

 

“Additional Capital” means any of the following received by a Borrower on or after June 30, 2005:  (a) net cash proceeds from issuance of Heska common stock, including common stock issued under an employee stock purchase plan or as a result of the exercise of options or warrants, (b) net cash proceeds from issuance of Heska preferred stock, (c) net cash proceeds from a Borrower’s issuance of debt instruments subject to a subordination agreement acceptable to Wells Fargo in its sole discretion, and (d) net cash proceeds from the licensing or sale of [***].

 

“Advance” means a Revolving Advance, an Equipment Advance, or a Term Loan B Advance.

 

“Affiliate” or “Affiliates”, for any Borrower, means any Person controlled by, controlling or under common control with such Borrower, including (without limitation) any Subsidiary of such Borrower. For purposes of this definition, “control,” when used with respect to any specified Person, means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise.

 

“Aggregate Borrowing Base” means at any time the lesser of (a) the Maximum Line or (b) the sum of each Borrower’s Borrowing Base.

 

“Aggregate L/C Amount” means at any time the sum of each Borrower’s L/C Amount.

 

“Agreement” means this Third Amended and Restated Credit and Security Agreement, as amended, supplemented or restated from time to time.

 

“Availability” for a Borrower means the difference of (i) such Borrower’s Borrowing Base and (ii) the sum of (A) the outstanding principal balance of such Borrower’s Revolving Note and (B) such Borrower’s L/C Amount.

 

“Banking Day” means a day other than a Saturday, Sunday or other day on which banks are generally not open for business in Denver, Colorado and Minneapolis, Minnesota.

 

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“Book Net Worth” of a Borrower means the aggregate of the common and preferred stockholders’ equity in such Borrower, determined in accordance with GAAP, but excluding (a) the non-cash impact of expensing options, restricted stock or other stock-based compensation under APB 25, SFAS 123, SFAS 123R and/or SFAS 148, and (b) the non-cash impact of income or expense relating to deferred tax assets and liabilities caused by the use of net loss carry-forwards, in each case after December 31, 2004.

 

“Borrower” means Heska or Diamond, and “Borrowers” means Heska and Diamond.

 

“Borrowing Base” for a Borrower means, at any time the lesser of:

 

(a)            the Maximum Line; or

 

(b)            subject to change from time to time in the Lender’s sole discretion:

 

(i)             85% of Eligible Accounts of such Borrower, plus

 

(ii)            During the Foreign Accounts Eligibility Period, the lesser of (A) 85% of Eligible Foreign Accounts or (B) the FREP Sublimit, plus

 

(iii)           the lesser of (A) the sum of (1) Eligible Inventory of such Borrower consisting of raw materials multiplied by the Raw Materials Advance Rate plus (2) 55% of Eligible Inventory of such Borrower consisting of finished goods, or (B) the difference of (1) $4,500,000 less (2) the aggregate amount of Advances made to all Borrowers other than such Borrower in reliance on Eligible Inventory.

 

“Capital” of a Borrower means the sum of Book Net Worth plus Subordinated Debt of such Borrower plus the lesser of (a) the amount of Debt that was formerly Subordinated Debt payable to Agri-Laboratories, Ltd. but that has been forgiven and is booked as a long-term liability, such as deferred revenue, or (b) $500,000.

 

“Capital Expenditures” for any Borrower for a period means the sum of (a) any expenditure of money for the purchase or construction of assets, or for improvements or additions thereto during such period, which are capitalized on such Borrower’s balance sheet, whether financed or unfinanced, but excluding expenditures to purchase Rental Inventory, plus (b) all expenditures of money to purchase [***] in excess of $1,500,000 during the fiscal year in which such period occurs.

 

“Cash” means instantly available cash and cash equivalents (including, without limitation, investments permitted by Section 7.4(a)(i) and the investments identified at item (i) on Schedule 7.4).

 

“Collateral” means all of the Borrowers’ Accounts, chattel paper, deposit accounts, documents, Equipment, General Intangibles, goods, instruments, Inventory, Investment Property, letter-of-credit rights, letter of credit, all sums on deposit in any Collateral Account, and any items in any Lockbox; together with (i) all substitutions and

 

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replacements for and products of any of the foregoing; (ii) in the case of all goods, all accessions; (iii) all accessories, attachments, parts equipment and repairs now or hereafter attached or affixed to or used in connection with any goods; (iv) all warehouse receipts, bills of lading and other documents of title now or hereafter covering such goods; (v) all collateral subject to the Lien of any Security Document; (vi) any money, or other assets of any Borrower that now or hereafter come into the possession, custody, or control of the Lender; (vii) all sums on deposit in the Special Account; and (viii) proceeds of any and all of the foregoing.

 

“Collateral Account” for Diamond means (a) the Collateral Account, as defined in the Collateral Account Agreement and (b) the Deposit Account listed on Exhibit A of Diamond’s Deposit Account Control Agreement, and for Heska means (a) the “Lender Account” as defined in the Heska’s Lockbox Agreement and (b) the Deposit Account listed on Exhibit A of Heska’s Deposit Account Control Agreement.

 

“Collateral Account Agreement” means the Collateral Account Agreement dated as of October 16, 1997, by and among Diamond, the Lender, as successor in interest to Norwest Bank Iowa, NA, and the Lender.

 

“Commitment” means the Lender’s commitment to make Advances to or for the Borrowers’ account pursuant to Article II.

 

“Credit Facility” means the credit facility being made available to the Borrowers by the Lender pursuant to Article II.

 

“Debt” of any Person means all items of indebtedness or liability which in accordance with GAAP would be included in determining total liabilities as shown on the liabilities side of a balance sheet of that Person as at the date as of which Debt is to be determined. For purposes of determining a Person’s aggregate Debt at any time, “Debt” shall also include the aggregate payments required to be made by such Person at any time under any lease that is considered a capitalized lease under GAAP.

 

“Default” means an event that, with giving of notice or passage of time or both, would constitute an Event of Default.

 

“Default Period” means any period of time beginning on the day on which a Default or Event of Default has occurred and ending on the date the Lender notifies the Borrowers in writing that such Default or Event of Default has been cured or waived.

 

“Default Rate” means, (i) with respect to the Revolving Advances, an annual rate equal to three percent (3.0%) over the Revolving Floating Rate, which rate shall change when and as the Revolving Floating Rate changes, and (ii) with respect to the Term Advances, an annual rate equal to three percent (3.0%) over the Term Floating Rate, which rate shall change when and as the Term Floating Rate changes.

 

“Deposit Account Control Agreement” for a Borrower means the Deposit Account Control Agreement dated as of February 21, 2005, by and among such

 

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Borrower, the Lender, as successor in interest to Wells Fargo Business Credit, Inc., and the Lender.

 

“Diamond Equipment Note” means the Equipment Note (Diamond) dated as of July 26, 2005, payable to the order of the Lender in the original principal amount of $2,000,000, and any note or notes issued in substitution therefor, as the same may hereafter be amended, supplemented or restated from time to time.

 

“Diamond Revolving Note” means the Second Amended and Restated Revolving Note (Diamond Animal Health) dated as of March 26, 2004, payable to the order of the Lender in the original principal amount of $12,000,000, as the same may hereafter be amended, supplemented or restated from time to time.

 

“Director” means, with respect to any Borrower, a director if such Borrower is a corporation, a governor, manager, or managing member if such Borrower is a limited liability company, or a partner if such Borrower is a partnership.

 

“Discretionary Reduction” means any of the following that is unilaterally adopted by the Lender through the exercise of its sole discretion: (a) a reduction (in accordance with subsection (b) of the definition of Borrowing Base) in any advance rate under any Borrower’s Borrowing Base; (b) disqualification (in accordance with subsection (xiv) of the definition of Eligible Accounts) of any Account that would otherwise have been an Eligible Account; or (c) disqualification (in accordance with subsection (x) of the definition of Eligible Inventory) of any Inventory that would otherwise have been Eligible Inventory.

 

“Discretionary Reduction Date” means any date on which the Aggregate Borrowing Base is at least $3,000,000 less than it would have been had no Discretionary Reductions been adopted.

 

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended.

 

“Eligible Accounts” for a Borrower means all unpaid Accounts of such Borrower, net of any credits, except the following shall not in any event be deemed Eligible Accounts:

 

(i)             That portion of Accounts with terms of 60 days or less that are over 60 days past due, and all other Accounts over 90 days past the invoice date; provided , however , that certain Accounts which are billed pursuant to dated term invoices with payment terms of not greater than 180 days from the invoice date (“Dated Term Accounts”) which (A) do not remain unpaid more than 180 days from such Dated Term Account’s invoice date, (B) are not more than 30 days past due, and (C) are approved by the Lender in its sole discretion, shall, despite the terms of this subsection (i), be deemed Eligible Accounts;

 

(ii)            That portion of Accounts that is disputed or subject to a claim of offset or a contra account (up to the amount of such dispute), including that

 

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portion of Accounts due from customers who have made prepayments, up to the amount of the prepayment;

 

(iii)           That portion of Accounts not yet earned by the final delivery of goods or rendition of services, as applicable, by such Borrower to the customer;

 

(iv)           Accounts owed by any unit of government, whether foreign or domestic (provided, however, that there shall be included in Eligible Accounts that portion of Accounts owed by such units of government for which such Borrower has provided evidence satisfactory to the Lender that (A) the Lender has a first priority perfected security interest and (B) such Accounts may be enforced by the Lender directly against such unit of government under all applicable laws);

 

(v)            Accounts owed by an account debtor located outside the United States and Canada which are not (A) backed by a bank letter of credit naming the Lender as beneficiary or assigned to the Lender, in the Lender’s possession or control, and with respect to which a control agreement concerning the letter-of-credit rights is in effect, and acceptable to the Lender in all respects, in its sole discretion, or (B) covered by a foreign receivables insurance policy acceptable to the Lender in its sole discretion;

 

(vi)           Accounts owed by an account debtor that such Borrower has learned or has determined to be insolvent, is the subject of bankruptcy proceedings or has gone out of business;

 

(vii)          Accounts owed by an Owner, Subsidiary, Affiliate, officer or employee of any Borrower;

 

(viii)         Accounts not subject to a duly perfected security interest in the Lender’s favor or which are subject to any lien, security interest or claim in favor of any Person, other than Permitted Liens;

 

(ix)            That portion of Accounts that has been restructured, extended, amended or modified;

 

(x)             That portion of Accounts that constitutes advertising, finance charges, service charges or sales or excise taxes;

 

(xi)            Accounts owed by an account debtor, regardless of whether otherwise eligible, if 10% or more of the total amount due under Accounts from such debtor is ineligible under clauses (i), (ii) or (ix) above;

 

(xii)           That portion of the aggregate Accounts of a single customer owed to all Borrowers in the aggregate that exceeds 15% of all Accounts of all Borrowers in the aggregate; provided, however, that for the customers listed below, such limit shall instead be the greater of the foregoing or the amount set forth opposite such customer in the following table:

 

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(xiii)          That portion of Accounts that arises from research contracts;

 

(xiv)         Accounts, or portions thereof, otherwise deemed ineligible by the Lender in its sole discretion.

 

“Eligible Equipment” of a Borrower means Equipment owned by such Borrower and designated by the Lender as eligible from time to time in its sole discretion but excluding any Equipment having any of the following characteristics:

 

(i)             Equipment that is subject to any Lien other than in favor of the Lender;

 

(ii)            Equipment that has not been delivered to the Premises;

 

(iii)           Equipment in which the Lender does not hold a first priority security interest;

 

(iv)           Equipment that is obsolete or not currently saleable;

 

(v)            Equipment that is not covered by standard “all risk” insurance for an amount equal to its forced liquidation value;

 

(vi)           Equipment that requires proprietary software in order to operate in the manner in which it is intended when such software is not freely assignable to the Lender or any potential purchaser of such Equipment;

 

(vii)          Equipment consisting of computer hardware, software, tooling, or molds;

 

(viii)         Equipment consisting of Rental Inventory; and

 

(ix)            Equipment otherwise deemed unacceptable to Lender in its sole discretion.

 

“Eligible Foreign Accounts” for a Borrower means all Accounts due and owing by an account debtor located outside the United States to such Borrower; but excluding any Accounts having any of the following characteristics:

 

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(i)             That portion of Accounts (other than dated Accounts) unpaid 120 days or more after the invoice date, (B) that portion of dated Accounts unpaid more than 90 days after the stated due date, and (C) that portion of Accounts that do not provide for payment in full within 120 days after the shipment date;

 

(ii)            That portion of Accounts related to goods or services with respect to which such Borrower has received notice of a claim or dispute, which are subject to a claim of offset or a contra account, or which reflect a reasonable reserve for warranty claims or returns;

 

(iii)           That portion of Accounts not yet earned by the final delivery of goods or rendition of services, as applicable, by such Borrowers to the customer;

 

(iv)           That portion of Accounts for which an invoice has not been sent to the applicable account debtor;

 

(v)            Accounts owed by any unit of government;

 

(vi)           Accounts owed by an account debtor that is insolvent, the subject of bankruptcy proceedings or has gone out of business;

 

(vii)          Accounts owed by an Owner, Subsidiary, Affiliate, Officer or employee of any Borrower;

 

(viii)         Accounts not subject to a duly perfected security interest in the Lender’s favor or which are subject to any Lien in favor of any Person other than the Lender, other than Permitted Liens;

 

(ix)            That portion of Accounts that has been restructured, extended, amended or modified;

 

(x)             That portion of Accounts that constitutes advertising, finance charges, service charges or sales or excise taxes;

 

(xi)            That portion of Accounts owed by any one account debtor that would permit Revolving Advances supported by such account debtor’s Accounts to exceed $300,000 at any one time;

 

(xii)           Accounts denominated in any currency other than United States dollars, Canadian dollars, Swiss francs, Japanese yen, United Kingdom pounds sterling or European Union euros;

 

(xiii)          Accounts with respect to which the Borrower has not instructed the Account debtor to pay the Account to the Collateral Account;

 

(xiv)         Accounts owed by debtors located in countries not acceptable to the Lender in its sole discretion;

 

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(xv)          Accounts owed by an account debtor, regardless of whether otherwise eligible, if 10% or more of the total amount due under Accounts from such debtor is ineligible under clauses (i), (ii) or (ix) above;

 

(xvi)         Accounts otherwise deemed unacceptable to the Lender in its sole discretion.

 

“Eligible Inventory” for a Borrower means all Inventory of such Borrower, at the lower of cost or market value as determined in accordance with GAAP; provided, however, that the following shall not in any event be deemed Eligible Inventory:

 

(i)             Inventory that is:  in-transit; located at any warehouse, job site or other premises not approved by the Lender in writing; located outside of the states, or localities, as applicable, in which the Lender has filed financing statements to perfect a first priority security interest in such Inventory; covered by any negotiable or non-negotiable warehouse receipt, bill of lading or other document of title; on consignment from or to any Person or subject to any bailment unless such consignee or bailee has executed an agreement with the Lender;

 

(ii)            Supplies, packaging or parts Inventory;

 

(iii)           Work-in-process Inventory;

 

(iv)           Inventory that is damaged, obsolete, or not currently saleable in the normal course of such Borrower’s operations;

 

(v)            Inventory that such Borrower has returned, has attempted to return, is in the process of returning or intends to return to the vendor thereof;

 

(vi)           Inventory that is perishable or live; provided, however, that Inventory with an expiration date shall be deemed Eligible Inventory, up to 90 days before the expiration date of such Inventory;

 

(vii)          Inventory that is subject to a security interest in favor of any Person other than the Lender, except for Permitted Liens;

 

(vii)          Inventory manufactured by any Borrower pursuant to a license that (A) prohibits the Lender from exercising its rights against such Inventory or (B) restricts such Borrower’s ability to grant the Lender the right to sell such Inventory, in either case unless the applicable licensor has agreed in writing to permit the Lender to exercise its rights and remedies against such Inventory;

 

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(viii)         Sample Inventory;

 

(ix)            all Rental Inventory that has been delivered to, or is in transit to, a customer, and all Rental Inventory that is not substantially the same in functionality and quality as other Inventory carried for sale by such Borrower; and

 

(x)             Inventory otherwise deemed ineligible by the Lender in its sole discretion.

 

“Environmental Laws” has the meaning specified in Section 5.12.

 

“Equipment” of a Borrower means all of such Borrower’s equipment, as such term is defined in the UCC, whether now owned or hereafter acquired, including but not limited to all present and future machinery, vehicles, furniture, fixtures, manufacturing equipment, shop equipment, office and recordkeeping equipment, parts, tools, supplies, and including specifically (without limitation) the goods described in any equipment schedule or list herewith or hereafter furnished to the Lender by any Borrower.

 

“Equipment Advance” has the meaning given in Section 2.3.

 

“Equipment Note” means the Heska Equipment Note or the Diamond Equipment Note.

 

“Event of Default” has the meaning specified in Section 8.1.

 

“Existing Revolving Advances” has the meaning specified in Section 2.1.

 

“Excess Collateral Base” for a Borrower means the difference of (i) such Borrower’s Borrowing Base calculated without taking into account the limitation imposed by the Maximum Line, and (ii) the sum of (A) the outstanding principal balance of such Borrower’s Revolving Note and (B) such Borrower’s L/C Amount.

 

“Factory Mortgage” means the Combination Mortgage, Assignment of Rents and Fixture Financing Statement, executed by Diamond for the benefit of the Lender, dated as of September 8, 1998, concerning the Factory Mortgaged Property, as amended.

 

“Factory Mortgaged Property” means Mortgaged Property as defined in the Factory Mortgage.

 

“Farm Mortgage” means the Combination Mortgage, Assignment of Rents and Fixture Financing Statement, executed by Diamond for the benefit of the Lender, dated as of September 8, 1998, concerning the Farm Mortgaged Property, as amended.

 

“Farm Mortgaged Property” means Mortgaged Property as defined in the Farm Mortgage.

 

“Foreign Accounts Eligibility Period” means the period beginning on the first day of any month in which a Borrower requests in writing that Eligible Foreign Accounts be

 

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included in the Borrowing Base and ending on the last day of any month in which a Borrower requests in writing that Eligible Foreign Accounts no longer be included in the Borrowing Base; provided, however, that the Foreign Accounts Eligibility Period shall automatically terminate on the earlier of the Termination Date or on the first date on which (i) the Borrowers have failed to make any payment of the fee provided for in Section 2.9(e), or (ii) the foreign receivables eligibility program in which the Lender participates becomes unavailable to the Lender, or (iii) any Borrower’s foreign Accounts cease for any reason to be eligible for coverage under such foreign receivables eligibility program.

 

“Former Credit Agreement” has the meaning given in the Recitals.

 

“FREP Sublimit” means an amount from zero to $500,000, as adjusted from time to time in increments of $100,000 in the Borrowers’ discretion.

 

“GAAP” means generally accepted accounting principles, applied on a basis consistent with the accounting practices applied in the financial statements described in Section 5.5.

 

“General Intangibles” of a Borrower means all of such Borrower’s general intangibles, as such term is defined in the UCC, whether now owned or hereafter acquired, including (without limitation) all present and future patents, patent applications, copyrights, trademarks, trade names, trade secrets, customer or supplier lists and contracts, manuals, operating instructions, permits, franchises, the right to use the Borrower’s name, and the goodwill of the Borrower’s business.

 

“Guarantors” shall mean Diamond and any other Person who executes a guaranty of all or any part of the Obligations for the benefit of the Lender.

 

“Hazardous Substance” has the meaning given in Section 5.12.

 

“Heska Equipment Note” means the Equipment Note (Heska) dated as of July 26, 2005, payable to the order of the Lender in the original principal amount of $500,000, as the same may hereafter be amended, supplemented or restated from time to time.

 

“Heska Revolving Note” means the Second Amended and Restated Revolving Note (Heska) dated as of March 26, 2004, payable to the order of the Lender in the original principal amount of $12,000,000, as the same may hereafter be amended, supplemented or restated from time to time.

 

“Intellectual Property License” means a license owned by any Borrower, which license allows such Borrower the use of any patent, trademark, trade name, or copyrighted material owned by a Person that is not a Borrower.

 

“Inventory” of a Borrower means all of such Borrower’s inventory, as such term is defined in the UCC, whether now owned or hereafter acquired, whether consisting of whole goods, spare parts or components, supplies or materials, whether acquired, held or

 

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furnished for sale, for lease or under service contracts or for manufacture or processing, and wherever located, and including, without limitation, all Rental Inventory.

 

“Investment Property” of a Borrower means all of such Borrower’s investment property, as such term is defined in the UCC, whether now owned or hereafter acquired, including but not limited to all securities, security entitlements, securities accounts, commodity contracts, commodity accounts, stocks, bonds, mutual fund shares, money market shares and U.S. Government securities.

 

“L/C Amount” for a Borrower means the sum of (i) the Aggregate Face Amount of any issued and outstanding Letters of Credit for which such Borrower is the account party and (ii) the unpaid amount of the Obligation of Reimbursement with respect to such Letters of Credit.

 

“L/C Application” means an application and agreement for Letters of Credit in a form acceptable to the Lender.

 

“Letter of Credit” has the meaning given it in Section 2.18.

 

“Lien” means any security interest, mortgage, deed of trust, pledge, lien, charge, encumbrance, title retention agreement or analogous instrument or device, including the interest of each lessor under any capitalized lease and the interest of any bondsman under any payment or performance bond, in, of or on any assets or properties of a Person, whether now owned or hereafter acquired and whether arising by agreement or operation of law.

 

“Liquidity” means the sum of Cash (excluding Cash located in accounts outside the United States or owned by an entity not incorporated in the United States) plus Excess Collateral Base less Past Due Payables.

 

“Loan Documents” means this Agreement, the Notes and the Security Documents.

 

“Lockbox” for any Borrower has the meaning given in such Borrower’s Lockbox Agreement.

 

“Lockbox Agreement” for Diamond means the Agreement as to Lockbox Service by and among Diamond, the Lender, as successor in interest to Norwest Bank Iowa, NA, and the Lender, as successor in interest to Wells Fargo Business Credit, Inc., dated as of October 16, 1997, and for Heska means the Lockbox and Collection Account Agreement among Heska, Regulus West LLC (“Regulus”), the Lender, as successor in interest to Wells Fargo Business Credit, Inc., and the Lender, dated as of June 14, 2000.

 

“Maturity Date” means June 30, 2009.

 

“Maximum Line” means $12,000,000, unless said amount is reduced pursuant to Section 2.12, in which event it means the amount to which said amount is reduced.

 

“Minimum Interest Charge” has the meaning given in Section 2.8(d).

 

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“Net Income” for a Borrower means, for any period, after-tax net income from continuing operations (that is, not including extraordinary items, or gains or losses from unusual items or discontinued operations), in each case for such Borrower for such period, as determined in accordance with GAAP, but excluding (a) the non-cash impact of expensing options, restricted stock or other stock-based compensation under APB 25, SFAS 123, SFAS 123R and/or SFAS 148, and (b) the non-cash impact of income or expense relating to deferred tax assets and liabilities caused by the use of net loss carry-forwards.

 

“Non-Core IP” means intellectual property (including, without limitation, any patent, trademark, trade name, or copyrighted material) of any Borrower that is unrelated to the Borrowers’ veterinary product sales and [***] would not have a material adverse effect on any Borrower.

 

“Note” means a Revolving Note, an Equipment Note, or the Term Loan B Note, and “Notes” means the Revolving Notes, the Equipment Notes, and the Term Loan B Note.

 

“Obligation of Reimbursement” has the meaning given in Section 2.19.

 

“Obligations” means each and every debt, liability and obligation of every type and description which any Borrower may now or at any time hereafter owe to the Lender, related to the indebtedness arising under this Agreement, the Notes or any other agreement between any such Borrower and the Lender, entered into in connection with the Credit Facility, including without limitation the Obligation of Reimbursement.

 

“Owner” means with respect to a Borrower, each Person having legal or beneficial title to an ownership interest in such Borrower or a right to acquire such an interest.

 

“Past Due Payables” means accounts payable (other than accounts payable to Affiliates) that are 60 days or more past due.

 

“Permitted Lien” has the meaning given in Section 7.1.

 

“Person” means any individual, corporation, partnership, joint venture, limited liability company, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof.

 

“Plan” means an employee benefit plan or other plan maintained for any Borrower’s employees and covered by Title IV of ERISA.

 

“Premises” means all premises where any Borrower conducts its business and has any rights of possession, including (without limitation) the premises legally described in Exhibit A attached hereto.

 

“Prepayment Factor” means three percent (3%) at all times unless one of the following conditions applies:  (a) if Heska achieves, on a consolidated basis, Net Income greater than $0 for its fiscal year ending December 31, 2006, “Prepayment Factor” shall

 

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mean two percent (2%) from July 1, 2006 through and including June 30, 2007; and (b) if Heska achieves, on a consolidated basis, Net Income greater than $0 for its fiscal year ending December 31, 2007, “Prepayment Factor” shall mean two percent (2%) from July 1, 2007 through and including June 30, 2008; and (c) if Heska achieves, on a consolidated basis, Net Income greater than $0 for its fiscal year ending December 31, 2008, “Prepayment Factor” shall mean one percent (1%) from July 1, 2008 through and including June 30, 2009.

 

“Prime Rate” means the rate publicly announced from time to time by Wells Fargo Bank, N.A. as its “prime rate” or, if such bank ceases to announce a rate so designated, any similar successor rate designated by the Lender.

 

“Raw Materials Advance Rate” means 35%.

 

“Receivables” of a Borrower means each and every right of such Borrower to the payment of money, whether such right to payment now exists or hereafter arises, whether such right to payment arises out of a sale, lease or other disposition of goods or other property, out of a rendering of services, out of a loan, out of the overpayment of taxes or other liabilities, or otherwise arises under any contract or agreement, whether such right to payment is created, generated or earned by such Borrower or by some other person who subsequently transfers such person’s interest to such Borrower, whether such right to payment is or is not already earned by performance, and howsoever such right to payment may be evidenced, together with all other rights and interests (including all liens and security interests) which such Borrower may at any time have by law or agreement against any account debtor or other obligor obligated to make any such payment or against any property of such account debtor or other obligor; all including but not limited to all present and future accounts, contract rights, loans and obligations receivable, chattel papers, bonds, notes and other debt instruments, tax refunds and rights to payment in the nature of general intangibles.

 

“Rental Inventory” of a Borrower means diagnostic and monitoring instruments purchased by such Borrower for the purpose of demonstrating, loaning, leasing or renting to customers, whether accounted for as equipment or as inventory.

 

“Reportable Event” shall have the meaning assigned to that term in Title IV of ERISA.

 

“Revolving Advance” has the meaning given in Section 2.2.

 

“Revolving Floating Rate” means an annual rate equal to the sum of the Prime Rate plus the Spread, which annual rate shall change when and as the Prime Rate changes.

 

“Revolving Note” means the Heska Revolving Note or the Diamond Revolving Note.

 

“Security Documents” means this Agreement, each Collateral Account Agreement, each Lockbox Agreement, each Deposit Account Control Agreement,the

 

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Factory Mortgage, the Farm Mortgage, and any other document delivered to the Lender from time to time to secure the Obligations, as the same may hereafter be amended, supplemented or restated from time to time.

 

“Security Interest” has the meaning given in Section 3.1.

 

“Special Account” means a specified cash collateral account maintained by a financial institution acceptable to the Lender in connection with Letters of Credit, as contemplated by Sections 2.20 and 3.8.

 

“Spread” has the meaning given in Section 2.7.

 

“Subordinated Debt” of a Borrower means all Debt of such Borrower that is subject to a Subordination Agreement.

 

“Subordination Agreement” means any subordination agreement accepted by the Lender from time to time.

 

“Subsidiary” means any Person of which more than 50% of the outstanding ownership interests having general voting power under ordinary circumstances to elect a majority of the directors or the equivalent of such Person, regardless of whether or not at the time ownership interests of any other class or classes shall have or might have voting power by reason of the happening of any contingency, is at the time directly or indirectly owned by a Borrower, by a Borrower and one or more other Subsidiaries, or by one or more other Subsidiaries.

 

“Tangible Net Worth” of a Borrower means the difference between (i) the tangible assets of such Borrower, which, in accordance with GAAP are tangible assets, after deducting adequate reserves in each case where, in accordance with GAAP, a reserve is proper and (ii) all Debt of such Borrower; provided, however, that notwithstanding the foregoing in no event shall there be included as such tangible assets patents, trademarks, trade names, copyrights, licenses, goodwill, receivables from Affiliates, directors, officers or employees, prepaid expenses, deposits, deferred charges or treasury stock or any securities or Debt of such Borrower or any other securities unless the same are readily marketable in the United States of America or entitled to be used as a credit against federal income tax liabilities, and any other assets designated from time to time by the Lender, in its reasonable discretion.

 

“Tax Expense” for a Borrower as of any date means state and federal income taxes recorded by such Borrower for the year-to-date period ending on such date.

 

“Term Advances” means the Equipment Advance and the Term Loan B Advances.

 

“Term Floating Rate” means an annual rate equal to the sum of the Prime Rate plus the Spread, which annual rate shall change when and as the Prime Rate changes.

 

“Term Loan B Advance” has the meaning specified in Section 2.5.

 

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“Term Loan B Note” means the Term Loan B Note of the Borrowers, dated as of June 14, 2000 and payable to the order of the Lender in the original principal amount of $2,062,500, and any note or notes issued in substitution therefor, as the same may hereafter be amended, supplemented or restated from time to time.

 

“Termination Date” means the earliest of (i) the Maturity Date, (ii) the date the Borrowers terminate the Credit Facility, or (iii) the date the Lender demands payment of the Obligations after an Event of Default pursuant to Section 8.2

 

“UCC” means the Uniform Commercial Code as in effect from time to time in the state designated in Section 9.15 as the state whose laws shall govern this Agreement, or in any other state whose laws are held to govern this Agreement or any portion hereof.

 

“Wells Fargo Bank” means Wells Fargo Bank West, National Association.

 

Section 1.2              Other Definitional Terms; Rules of Interpretation . The words ‘hereof’, ‘herein’ and ‘hereunder’ and words of similar import when used in the Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement. All accounting terms not otherwise defined herein have the meanings assigned to them in accordance with GAAP. All terms defined in the UCC and not otherwise defined herein have the meanings assigned to them in the UCC. References to Articles, Sections, subsections, Exhibits, Schedules and the like, are to Articles, Sections and subsections of, or Exhibits or Schedules attached to, this Agreement unless otherwise expressly provided. The words ‘include’, ‘includes’ and ‘including’ shall be deemed to be followed by the phrase ‘without limitation’. Unless the context in which used herein otherwise clearly requires, ‘or’ has the inclusive meaning represented by the phrase ‘and/or’. Defined terms include in the singular number the plural and in the plural number the singular. Reference to any agreement (including the Loan Documents), document or instrument means such agreement, document or instrument as amended or modified and in effect from time to time in accordance with the terms thereof (and, if applicable, in otherwise explicitly provided, and reference to any promissory note includes any promissory note which is an extension or renewal thereof or a substitute or replacement therefore. Reference to any law, rule, regulation, order, decree, requirement, policy, guideline, directive or interpretation means as amended, modified, codified, replaced or reenacted, in whole or in part, and in effect on the determination date, including rules and regulations promulgated thereunder.

 

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ARTICLE II

Amount and Terms of the Credit Facility

 

Section 2.1              Existing Revolving Advances . The Lender has made various revolving advances to the Borrowers (the “Existing Revolving Advances”) in accordance with the Former Credit Agreement. As of December 28, 2005, the outstanding principal balance of the Existing Revolving Advances to Heska was $8,545,126.50 and the outstanding principal balance of the Existing Revolving Advances to Diamond was $541,186.19. Upon execution and delivery of this Agreement, the Existing Revolving Advances shall be deemed to be Revolving Advances pursuant to Section 2.2.

 

Section 2.2              Revolving Advances . The Lender agrees, on the terms and subject to the conditions herein set forth, to make advances (the “Revolving Advances”) to any Borrower from time to time until the Termination Date, on the terms and subject to the conditions herein set forth. The Lender shall have no obligation to make a Revolving Advance to a Borrower if, after giving effect to such requested Revolving Advance, (a) the sum of the outstanding and unpaid Revolving Advances to such Borrower exceed such Borrower’s Borrowing Base, or (b) the sum of the outstanding and unpaid Revolving Advances would exceed the Aggregate Borrowing Base. Each Borrower’s obligation to pay the Revolving Advances shall be evidenced by such Borrower’s Revolving Note and shall be secured by the Collateral as provided in Article III and the Mortgaged Property as defined in each of the Factory Mortgage and the Farm Mortgage. Within the limits set forth in this Section 2.2, each Borrower may borrow, prepay pursuant to Section 2.12 and reborrow. Each Borrower agrees to comply with the following procedures in requesting Revolving Advances under this Section 2.2:

 

(a)            Such Borrower shall make each request for a Revolving Advance to the Lender before 11:00 a.m. (Denver time) of the day of the requested Revolving Advance. Requests may be made in writing or by telephone, specifying the date of the requested Revolving Advance and the amount thereof. Each request shall be by (i) any officer of such Borrower; or (ii) any person designated as such Borrower’s agent by any officer of such Borrower in a writing delivered to the Lender; or (iii) any person whom the Lender reasonably believes to be an officer of such Borrower or such a designated agent.

 

(b)            Upon fulfillment of the applicable conditions set forth in Article IV, the Lender shall disburse the proceeds of the requested Revolving Advance by crediting the same to such Borrower’s demand deposit account maintained with Wells Fargo Bank unless the Lender and such Borrower shall agree in writing to another manner of disbursement. Upon the Lender’s request, such Borrower shall promptly confirm each telephonic request for an Advance by executing and delivering an appropriate confirmation certificate to the Lender. Each Borrower shall repay all such Advances even if the Lender does not receive such confirmation and even if the person requesting such Advance was not in fact authorized to do so. Any request for an Advance by a Borrower, whether written or telephonic, shall be deemed to be a representation by such Borrower that the conditions set forth in Section 4.2 have been satisfied as of the time of the request.

 

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Section 2.3              Equipment Advances . On July 28, 2005, the Lender made an Equipment Advance to Heska in the amount of $500,000 and an Equipment Advance to Diamond in the amount of $2,000,000, each in accordance with the Former Credit Agreement. As of December 28, 2005, the outstanding principal balance of the Equipment Advance to Heska was $500,000, and the outstanding principal balance of the Equipment Advance to Diamond was $2,000,000. Each Borrower’s obligation to pay the Equipment Advances shall be evidenced by such Borrower’s Equipment Note and shall be secured by the Collateral as provided in Article III and the Mortgaged Property as defined in each of the Factory Mortgage and the Farm Mortgage.

 

Section 2.4              Payment of Equipment Note . The outstanding principal balance of each Equipment Note shall be due and payable as follows:

 

(a)            On February 1, 2006, and the first day of each month thereafter, Diamond shall pay monthly installments of $37,037.04

 

(b)            On February 1, 2006, and the first day of each month thereafter, Heska shall pay monthly installments of $9,259.26; and

 

(c)            On the Maturity Date, the entire unpaid principal balance of each Equipment Note, and all unpaid interest accrued thereon, shall in any event be due and payable.

 

Section 2.5              Term Loan B Advances . The Lender has previously made advances to Diamond in the amount of $2,250,000 (the “Term Loan B Advances”). As of December 28, 2005, the outstanding principal balance of the Term Loan B Advances was $904,738.00. The Borrowers’ obligation to pay the Term Loan B Advances shall be evidenced by the Term Loan B Note and shall be secured by the Collateral as provided in Article III and the Mortgaged Property as defined in each of the Factory Mortgage and the Farm Mortgage.

 

Section 2.6              Payment of Term Loan B Note . The outstanding principal balance of the Term Loan B Note shall be due and payable as follows:

 

(a)            On June 1, 2000 and the first day of each month thereafter, in monthly installments of $17,658; and

 

(b)            On the Maturity Date, the entire unpaid principal balance of the Term Loan B Note, and all unpaid interest accrued thereon, shall in any event be due and payable.

 

Section 2.7              Spread . The spread (the “Spread”) means the percentage set forth in the table below opposite the applicable prior-fiscal-year Net Income of the Borrowers, which percentage shall change annually effective as of the first day of the month following the month in which the Borrowers delivers to the Lender their audited financial statements for the prior fiscal year; provided, however, that so long as no Default Period then exists, if Heska raises Additional Capital of not less than [***], the “Spread” shall be decreased by 0.75% below the otherwise-applicable rate, effective as of the first day of the month following the month in which such Additional Capital is raised; and provided further that if Heska does not raise at least [***] of Additional Capital on or before January 1, 2006, the “Spread” shall be increased

 

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by 0.25% above the otherwise-applicable rate, effective as of January 1, 2006; and provided further that if Heska does not raise at least [***] of Additional Capital on or before July 1, 2006, the “Spread” shall be increased by 0.75% (including, and not in addition to, the 0.25% increase described in the proviso above) above the otherwise-applicable rate, effective as of July 1, 2006; and provided further that in no case shall any decrease in the Spread occur during the Default Period:

 

Prior Fiscal Year Net Income		Spread
Less than $0		2.75	%
Greater than or equal to $0 but less than $2,500,000		1.75	%
Greater than or equal to $2,500,000		0.75	%

 

Section 2.8              Interest; Minimum Interest Charge; Default Interest; Participations; Usury . Interest accruing on the Notes shall be due and payable in arrears on the first day of each month.

 

(a)            Revolving Note. Except as set forth in Sections 2.8(e), 2.8(f) and 2.8(g), the outstanding principal balance of the Revolving Note shall bear interest at the Revolving Floating Rate.

 

(b)            Equipment Note. Except as set forth in Sections 2.8(e), 2.8(f) and 2.8(g), the outstanding principal balance of the Equipment Note shall bear interest at the Term Floating Rate.

 

(c)            Term Loan B Note. Except as set forth in Sections 2.8(e), 2.8(f) and 2.8(g), the outstanding principal balance of the Term Loan B Note shall bear interest at the Term Floating Rate.

 

(d)            Minimum Interest Charge . Notwithstanding Sections 2.8(a), 2.8(b), 2.8(c) and 2.8(e), the Borrowers shall pay to the Lender interest of not less than $100,000 per calendar year (the “Minimum Interest Charge”) during the term of this Agreement, and the Borrowers shall pay any deficiency between the Minimum Interest Charge and the amount of interest otherwise calculated under Sections 2.8(a), 2.8(b), or 2.8(c) on the date and in the manner provided in Section 2.10; provided, however, that if the period for which the Minimum Interest Charge is being calculated is shorter than one year, such amount shall be prorated on a per diem basis for such shorter period.

 

(e)            Default Interest Rate . At any time during any Default Period, in the Lender’s sole discretion and without waiving any of its other rights and remedies, the principal of the Advances outstanding from time to time shall bear interest at the Default Rate, effective for any periods designated by the Lender from time to time during that Default Period.

 

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(f)             Participations . If any Person shall acquire a participation in the Advances under this Agreement, the Borrowers shall be obligated to the Lender to pay the full amount of all interest calculated under this Section 2.8, along with all other fees, charges and other amounts due under this Agreement, regardless if such Person elects to accept interest with respect to its participation at a lower rate than the Revolving Floating Rate or the Term Floating Rate, or otherwise elects to accept less than its prorata share of such fees, charges and other amounts due under this Agreement.

 

(g)            Usury . In any event no rate change shall be put into effect which would result in a rate greater than the highest rate permitted by law.

 

Section 2.9              Fees .

 

(a)            Unused Line Fee . For the purposes of this Section 2.9(a), “Unused Amount” means the Maximum Line reduced by (i) outstanding Revolving Advances and (ii) the L/C Amount. The Borrowers agree to pay to the Lender an unused line fee at the rate of one-quarter of one percent (0.25%) per annum on the average daily Unused Amount from the date of this Agreement to and including the Termination Date, due and payable monthly in arrears on the first day of the month and on the Termination Date.

 

(b)            Audit Fees . The Borrowers hereby agree to pay the Lender, on demand, audit fees in connection with any audits or inspections conducted by the Lender of any Collateral or any Borrower’s operations or business at the rates established from time to time by the Lender as its audit fees (which fees are currently $100 per hour per auditor), together with all actual out-of-pocket costs and expenses incurred in conducting any such audit or inspection, such audits shall be conducted, at the least, on a quarterly basis.

 

(c)            Letter of Credit Fees. Each Borrower agrees to pay the Lender a fee with respect to each Letter of Credit issued for such Borrower’s account, if any, accruing on a daily basis and computed at the annual rate of two and one-half percent (2.5%) of the aggregate amount that may then be drawn on all outstanding Letters of Credit issued for such Borrower’s account, assuming compliance with all conditions for drawing thereunder (the “Aggregate Face Amount”), from and including the date of issuance of such Letter of Credit until such date as such Letter of Credit shall terminate by its terms or be returned to the Lender, due and payable monthly in arrears on the first day of each month and on the Termination Date; provided, however that during Default Periods, in the Lender’s sole discretion and without waiving any of its other rights and remedies, such fee shall increase to five and one-half percent (5.5%) of the Aggregate Face Amount. The foregoing fee shall be in addition to any and all fees, commissions and charges imposed by Lender with respect to or in connection with such Letter of Credit.

 

(d)            Letter of Credit Administrative Fees. Each Borrower shall pay all administrative fees charged by the Lender in connection with the honoring of drafts under any Letter of Credit issued for such Borrower’s account, amendments thereto, transfers thereof and all other activity with respect to the Letters of Credit at the then-current rates published by the Lender for such services rendered on behalf of customers of the Lender generally.

 

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(e)            Foreign Receivables Eligibility Program Fee . The Borrowers agree to pay to the Lender during the Foreign Accounts Eligibility Period, a monthly fee in an amount equal to one-twelfth of two-and-one-half percent (2.50%) of the FREP Sublimit, due and payable monthly in advance on the first day of the month.

 

(f)             Amendment Fee. The Borrowers shall pay the Lender as of the date hereof a fully earned, non-refundable fee in the amount of $10,000 in consideration of the Lender’s execution and delivery of this Agreement.

 

Section 2.10            Computation of Interest and Fees; When Interest Due and Payable . Interest accruing on the outstanding principal balance of the Advances and fees hereunder outstanding from time to time shall be computed on the basis of actual number of days elapsed in a year of 360 days. Interest shall be payable in arrears on the first day of each month and on the Termination Date.

 

Section 2.11            Capital Adequacy . If any Related Lender determines at any time that its Return has been reduced as a result of any Rule Change, such Related Lender may require any Borrower to pay it the amount necessary to restore its Return to what it would have been had there been no Rule Change. For purposes of this Section 2.11:

 

(a)            “Capital Adequacy Rule” means any law, rule, regulation, guideline, directive, requirement or request regarding capital adequacy, or the interpretation or administration thereof by any governmental or regulatory authority, central bank or comparable agency, whether or not having the force of law, that applies to any Related Lender. Such rules include rules requiring financial institutions to maintain total capital in amounts based upon percentages of outstanding loans, binding loan commitments and letters of credit.

 

(b)            “L/C Rule” means any law, rule, regulation, guideline, directive, requirement or request regarding letters of credit, or the interpretation or administration thereof by any governmental or regulatory authority, central bank or comparable agency, whether or not having the force of law, that applies to any Related Lender. Such rules include rules imposing taxes, duties or other similar charges, or mandating reserves, special deposits or similar requirements against assets of, deposits with or for the account of, or credit extended by any Related Lender, on letters of credit.

 

(c)            “Related Lender” includes (but is not limited to) the Lender, any parent corporation of the Lender and any assignee of any interest of the Lender hereunder and any participant in the loans made hereunder.

 

(d)            “Return” for any period, means the return as determined by a Related Lender on the Advances and Letters of Credit based upon its total capital requirements and a reasonable attribution formula that takes account of the Capital Adequacy Rules and the L/C Rules then in effect, costs of issuing or maintaining any Letter of Credit and amounts received or receivable under this Agreement or the Notes with respect to any Advance or Letter of Credit. Return may be calculated for each calendar quarter and for

 

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the shorter period between the end of a calendar quarter and the date of termination of whole of this Agreement.

 

(e)            “Rule Change” means any change in any Capital Adequacy Rule or L/C Rule occurring after the date of this Agreement, but the term does not include any changes in applicable requirements that at the Closing Date are scheduled to take place under the existing capital Adequacy Rules or L/C Rules or any increases in the capital that any Related Lender is required to maintain to the extent that the increases are required due to a regulatory authority’s assessment of the financial condition of such Related Lender.

 

The Lender will promptly notify the Borrowers of any event of which it has knowledge, occurring after the date hereof, which will entitle the Lender to compensation pursuant to this Section 2.11. Certificates of any Related Lender sent to any Borrower from time to time claiming compensation under this Section 2.11, stating the reason therefor and setting forth in reasonable detail the calculation of the additional amount or amounts to be paid to the Related Lender hereunder to restore its Return shall be conclusive absent manifest error. In determining such amounts, the Related Lender may use any reasonable averaging and attribution methods.

 

Section 2.12            Voluntary Prepayment; Reduction of the Maximum Line; Termination of the Credit Facility by the Borrowers . Except as otherwise provided herein, each Borrower may prepay the Revolving Advances made to it in whole at any time or from time to time in part. Diamond may prepay the Equipment Advances (other than in accordance with Section 2.4) or prepay the Term Loan B Advances (other than in accordance with Section 2.6), or the Borrowers may terminate the Credit Facility or reduce the Maximum Line at any time if it (i) gives the Lender at least 30 days’ prior written notice and (ii) pays the Lender the prepayment, termination or line reduction fees in accordance with Section 2.13. Any prepayment of the Equipment Advances (other than in accordance with Section 2.4), any prepayment of the Term Loan B Advances (other than in accordance with Section 2.6), or reduction in the Maximum Line must be in an amount not less than $250,000 or an integral multiple thereof. If the Borrowers reduce the Maximum Line to zero, all Obligations shall be immediately due and payable. Any partial prepayments of the Equipment Note (other than in accordance with Section 2.4), and any partial prepayments of the Term Loan B Note (other than in accordance with Section 2.6), shall be applied to principal payments due and owing in inverse order of their maturities. Upon termination of the Credit Facility and payment and performance of all Obligations, the Lender shall release or terminate the Security Interest and the Security Documents to which the Borrowers are entitled by law.

 

Section 2.13            Termination, Line Reduction and Prepayment Fees; Waiver of Termination, Prepayment and Line Reduction Fees .

 

(a)            Termination and Line Reduction Fees. If the Credit Facility is terminated for any reason as of a date other than the Maturity Date, or the Borrowers reduce the Maximum Line, the Borrowers shall pay the Lender a fee in an amount equal to the Prepayment Factor multiplied by the Maximum Line (or the reduction, as the case may be).

 

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(b)            Prepayment Fees. If the Equipment Note is prepaid for any reason except in accordance with Section 2.4, the Borrowers shall pay to the Lender a fee in an amount equal to the Prepayment Factor multiplied by the amount prepaid. If the Term Loan B Note is prepaid for any reason except in accordance with Section 2.6, the Borrowers shall pay to the Lender a fee in an amount equal to one percent (1%) of the amount prepaid.

 

(c)            Waiver of Termination and Line Reduction Fees . The Borrowers will not be required to pay the termination or line reduction fees otherwise due under this Section 2.13 if such termination or line reduction is made (i) because of refinancing of the Borrowers by another division of the Lender, (ii) within 60 days after any demand for payment upon any Borrower in accordance with Section 2.11, or (iii) within 60 days after any Discretionary Reduction Date.

 

Section 2.14            Mandatory Prepayment . Without notice or demand, if the outstanding principal balance of the Revolving Advances made to a Borrower shall at any time exceed such Borrower’s Borrowing Base, such Borrower shall immediately (or, to the extent such condition is a result of a Discretionary Reduction, within 5 Business Days) prepay the Revolving Advances to the extent necessary to eliminate such excess. Any payment received by the Lender under Section 2.12 may be applied to the Obligations, in such order and in such amounts as the Lender, in its discretion, may from time to time determine; provided that any prepayment under Section 2.12 which a Borrower designates as a payment of the Revolving Advances, shall be applied to such Borrower’s Revolving Advances; provided, further, that any prepayment under Section 2.12 which a Borrower designates as a partial prepayment of the Equipment Note or the Term Loan B Note, shall be applied to principal installments of the Equipment Note or the Term Loan B Note respectively, in inverse order of maturity.

 

Section 2.15            Payment . All payments to the Lender shall be made in immediately available funds and shall be applied to the Obligations upon receipt by the Lender. The Lender may hold all payments not constituting immediately available funds for three (3) days before applying them to the Obligations. Notwithstanding anything in Section 2.2, each Borrower hereby authorizes the Lender, in its discretion at any time or from time to time without such Borrower’s request and even if the conditions set forth in Section 4.2 would not be satisfied, to make a Revolving Advance in an amount equal to the portion of the Obligations from time to time due and payable.

 

Section 2.16            Payment on Non-Banking Days . Whenever any payment to be made hereunder shall be stated to be due on a day which is not a Banking Day, such payment may be made on the next succeeding Banking Day, and such extension of time shall in such case be included in the computation of interest on the Advances or the fees hereunder, as the case may be.

 

Section 2.17            Liability Records . The Lender may maintain from time to time, at its discretion, liability records as to the Obligations. All entries made on any such record shall be presumed correct until a Borrower establishes the contrary. Upon the Lender’s demand, each Borrower will admit and certify in writing the exact principal balance of the Obligations that such Borrower then asserts to be outstanding. Any billing statement or accounting rendered by

 

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the Lender shall be conclusive and fully binding on the Borrowers unless the Borrowers give the Lender specific written notice of exception within 30 days after receipt.

 

Section 2.18            Issuance of Letters of Credit .

 

(a)            Upon any Borrower’s Request the Lender shall issue, from time to time until the Termination Date, one or more documentary or standby letters of credit (each, a “Letter of Credit”) for such Borrower’s account, provided that:

 

(i)             The Lender shall have no obligation to issue any Letter of Credit for the benefit of a Borrower if (A) a Default Period exists, or (B) the face amount of the Letter of Credit to be issued would exceed the lesser of:

 

(1)            $1,000,000 less the Aggregate L/C Amount, or

 

(2)            such Borrower’s Availability.

 

Each Letter of Credit, if any, shall be issued pursuant to a separate L/C Application entered by the applicable Borrower and the Lender, completed in a manner satisfactory to the Lender. The terms and conditions set forth in each such L/C Application shall supplement the terms and conditions hereof, but if the terms of any such L/C Application and the terms of this Agreement are inconsistent, the terms hereof shall control.

 

(b)            No Letter of Credit shall be issued with an expiry date later than the Maturity Date.

 

(c)            Any request for the issuance of a Letter of Credit under this Section 2.18 shall be deemed to be a representation by the requesting Borrower that the statements set forth in Section 4.2 hereof are correct as of the time of the request.

 

Section 2.19            Payment of Amounts Drawn Under Letters of Credit . Each Borrower agrees to pay to the Lender any and all amounts required to be paid under the applicable L/C Application, when and as required to be paid thereby, and the amounts designated below, when and as designated:

 

(a)            Each Borrower hereby agrees to pay the Lender on the day a draft is honored under any Letter of Credit a sum equal to all amounts drawn under such Letter of Credit plus any and all reasonable charges and expenses that the Lender may pay or incur relative to such draw, plus interest on all such amounts, charges and expenses as set forth below (all such amounts are hereinafter referred to as the “Obligation of Reimbursement”).

 

(b)            Each Borrower hereby agrees to pay the Lender on demand interest on all amounts, charges and expenses payable by such Borrower to the Lender under this Section 2.19, accrued from the date any such draft, charge or expense is paid by the Lender until payment in full by such Borrower at the Revolving Floating Rate.

 

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If a Borrower fails to pay to the Lender promptly the amount of its Obligation of Reimbursement in accordance with the terms hereof and the L/C Application pursuant to which such Letter of Credit was issued, the Lender is hereby irrevocably authorized and directed, in its sole discretion, to make a Revolving Advance in an amount sufficient to discharge the Obligation of Reimbursement, including all interest accrued thereon but unpaid at the time of such Revolving Advance, and such Revolving Advance shall be evidenced by the Revolving Note and shall bear interest as provided in Section 2.8 hereof.

 

Section 2.20                                 Special Account . If this Credit Facility is terminated for any reason whatsoever, while any Letter of Credit is outstanding for any Borrower’s account, such Borrower shall thereupon pay the Lender in immediately available funds for deposit in the Special Account an amount equal to the maximum aggregate amount available to be drawn under all Letters of Credit then outstanding for such Borrower’s account, assuming compliance with all conditions for drawing thereunder. The Special Account shall be maintained for the Lender by any financial institution acceptable to the Lender. Any interest earned on amounts deposited in the Special Account shall be credited to the Special Account. Amounts on deposit in the Special Account may be applied by the Lender at any time or from time to time to such Borrower’s Obligation of Reimbursement or any other Obligations, in the Lender’s sole discretion, and shall not be subject to withdrawal by any Borrower so long as the Lender maintains a security interest therein. The Lender agrees to transfer any balance in the Special Account to such Borrower at such time as the Lender is required to release its security interest in the Special Account under applicable law.

 

Section 2.21                                 Obligations Absolute . The obligations of each Borrower arising under Section 2.18 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 any Letter of Credit or any other agreement or instrument relating to any Letter of Credit (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 Borrower may have at any time, against any beneficiary or any transferee of any Letter of Credit (or any persons or entities for whom any such beneficiary or any such transferee may be acting), or other person or entit