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CREDIT AND SECURITY AGREEMENT
BY AND BETWEEN
INTERPHARM, INC.
AND
▇▇▇▇▇ FARGO BANK, NATIONAL ASSOCIATION,
Acting through its ▇▇▇▇▇ Fargo Business Credit operating division
February 9, 2006
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TABLE OF CONTENTS
ARTICLE I DEFINITIONS................................................1
Section 1.1 Definitions................................................1
Section 1.2 Other Definitional Terms; Rules of Interpretation..........2
ARTICLE II AMOUNT AND TERMS OF THE CREDIT FACILITY....................2
Section 2.1 Revolving Advances.........................................2
Section 2.2 Procedures for Requesting Advances.........................2
Section 2.3 LIBOR Advances.............................................2
Section 2.4 M&E Advances, Cap Ex and Real Estate Advance...............2
Section 2.5 Intentionally Omitted......................................2
Section 2.6 Interest; Default Interest Rate; Application of
Payments; Participations; Usury............................2
Section 2.7 Fees.......................................................2
Section 2.8 Time for Interest Payments; Payment on Non-Business
Days; Computation of Interest and Fees.....................2
Section 2.9 Lockbox and Collateral Account; Sweep of Funds.............2
Section 2.10 Voluntary Prepayment; Reduction of the Maximum Line
Amount; Termination of the Credit Facility by the
Borrower...................................................2
Section 2.11 Mandatory Prepayment.......................................2
Section 2.12 Revolving Advances to Pay Obligations......................2
Section 2.13 Use of Proceeds............................................2
Section 2.14 Liability Records..........................................2
ARTICLE III SECURITY INTEREST; OCCUPANCY; SETOFF.......................2
Section 3.1 Grant of Security Interest.................................2
Section 3.2 Notification of Account Debtors and Other Obligors.........2
Section 3.3 Assignment of Insurance....................................2
Section 3.4 Occupancy..................................................2
Section 3.5 License....................................................2
Section 3.6 Financing Statement........................................2
Section 3.7 Setoff.....................................................2
Section 3.8 Collateral.................................................2
ARTICLE IV CONDITIONS OF LENDING......................................2
Section 4.1 Conditions Precedent to the Initial Advances...............2
Section 4.2 Conditions Precedent to All Advances.......................2
ARTICLE V REPRESENTATIONS AND WARRANTIES.............................2
Section 5.1 Existence and Power; Name; Chief Executive Office;
Inventory and Equipment Locations; Federal Employer
Identification Number and Organizational
Identification Number......................................2
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Section 5.2 Capitalization.............................................2
Section 5.3 Authorization of Borrowing; No Conflict as to Law or
Agreements.................................................2
Section 5.4 Legal Agreements...........................................2
Section 5.5 Subsidiaries...............................................2
Section 5.6 Financial Condition; No Adverse Change.....................2
Section 5.7 Litigation.................................................2
Section 5.8 Regulation U...............................................2
Section 5.9 Taxes......................................................2
Section 5.10 Titles and Liens...........................................2
Section 5.11 Intellectual Property Rights...............................2
Section 5.12 Plans......................................................2
Section 5.13 Default....................................................2
Section 5.14 Environmental Matters......................................2
Section 5.15 Submissions to Lender......................................2
Section 5.16 Financing Statements.......................................2
Section 5.17 Rights to Payment..........................................2
Section 5.18 Financial Solvency.........................................2
ARTICLE VI COVENANTS..................................................2
Section 6.1 Reporting Requirements.....................................2
Section 6.2 Financial Covenants........................................2
Section 6.3 Permitted Liens; Financing Statements......................2
Section 6.4 Indebtedness...............................................2
Section 6.5 Guaranties.................................................2
Section 6.6 Investments and Subsidiaries...............................2
Section 6.7 Dividends and Distributions................................2
Section 6.8 Salaries...................................................2
Section 6.9 Intentionally Omitted......................................2
Section 6.10 Books and Records; Collateral Examination, Inspection
and Appraisals.............................................2
Section 6.11 Account Verification.......................................2
Section 6.12 Compliance with Laws.......................................2
Section 6.13 Payment of Taxes and Other Claims..........................2
Section 6.14 Maintenance of Properties..................................2
Section 6.15 Insurance..................................................2
Section 6.16 Preservation of Existence..................................2
Section 6.17 Delivery of Instruments, Etc...............................2
Section 6.18 Sale or Transfer of Assets; Suspension of Business
Operations.................................................2
Section 6.19 Consolidation and Merger; Asset Acquisitions...............2
Section 6.20 Sale and Leaseback.........................................2
Section 6.21 Restrictions on Nature of Business.........................2
Section 6.22 Accounting.................................................2
Section 6.23 Discounts, Etc.............................................2
Section 6.24 Plans......................................................2
Section 6.25 Place of Business; Name....................................2
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Section 6.26 Constituent Documents; S Corporation Status................2
Section 6.27 Performance by the Lender..................................2
ARTICLE VII EVENTS OF DEFAULT, RIGHTS AND REMEDIES.....................2
Section 7.1 Events of Default..........................................2
Section 7.2 Rights and Remedies........................................2
Section 7.3 Certain Notices............................................2
ARTICLE VIII MISCELLANEOUS..............................................2
Section 8.1 No Waiver; Cumulative Remedies; Compliance with Laws.......2
Section 8.2 Amendments, Etc............................................2
Section 8.3 Notices; Communication of Confidential Information;
Requests for Accounting....................................2
Section 8.4 Further Documents..........................................2
Section 8.5 Costs and Expenses.........................................2
Section 8.6 Indemnity..................................................2
Section 8.7 Participants...............................................2
Section 8.8 Execution in Counterparts; Telefacsimile Execution.........2
Section 8.9 Retention of Borrower's Records............................2
Section 8.10 Binding Effect; Assignment; Complete Agreement;
Sharing Information........................................2
Section 8.11 Severability of Provisions.................................2
Section 8.12 Headings...................................................2
Section 8.13 Governing Law; Jurisdiction, Venue; Waiver of Jury
Trial......................................................2
Section 8.14 Intentionally Omitted......................................2
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CREDIT AND SECURITY AGREEMENT
Dated as of February 9, 2006
Interpharm, Inc., a New York corporation (the "Borrower"), and ▇▇▇▇▇ FARGO
BANK, NATIONAL ASSOCIATION (the "Lender"), acting through its ▇▇▇▇▇ Fargo
Business Credit operating division, hereby agree as follows:
ARTICLE I
DEFINITIONS
Section 1.1.Definitions. Except as otherwise expressly provided in this
Agreement, the following terms shall have the meanings given them in this
Section:
"Accounts" shall have the meaning given it under the UCC.
"Accounts Advance Rate" means up to eighty-five percent (85%), or such
lesser rate as the Lender in its reasonable discretion may deem appropriate from
time to time; provided that, as of any date of determination, the Accounts
Advance Rate shall be reduced by one (1) percentage point for each percentage by
which Dilution is 5% or more.
"Advance" means a Revolving Advance, an M&E Advance, a Cap Ex Advance, or
a Real Estate Advance.
"Affiliate" or "Affiliates" means Holdings and any Subsidiary of Holdings
or any subsidiary of Borrower.
"Agreement" means this Credit and Security Agreement.
"ANDA Security Agreement" means that certain ANDA Security Agreement
between Borrower and Lender dated of even date herewith.
"Availability" means the amount, if any, by which the Borrowing Base
exceeds the sum of the outstanding principal balance of the Revolving Note.
"Blocked Account Agreement" means the Blocked Account Agreement by and
among the Borrower, the Lender, and North Fork Bank dated the same date as this
Agreement.
"Book Net Worth" means the aggregate of the common and preferred
shareholders' equity in the Borrower, determined in accordance with GAAP.
"Borrowing Base" means at any time the lesser of:
(a) The Maximum Line Amount; or
(b) Subject to change from time to time in the Lender's reasonable
discretion, the sum of:
(i) The product of the Accounts Advance Rate times Eligible
Accounts, plus
(ii) The lesser of (A) 50% (or such lesser rate as the Lender in its
reasonable discretion may deem appropriate from time to time) of the cost
of Eligible Inventory, or (B) 85% (or such lesser rate as the Lender in
its commercially reasonable discretion may deem appropriate from time to
time) of the Net Orderly Liquidation Value of Eligible Inventory, or (C)
100% (or such lesser rate as the Lender in its reasonable discretion may
deem appropriate from time to time) of the amount of availability from
b(i) above, or (D) $9,000,000, plus
(iii).The lesser of (A) 85% (or such lesser rate as the Lender in
its reasonable discretion may deem appropriate from time to time) of the
Value of NYSE Listed Securities that are owned and have been pledged and
collaterally assigned to the Lender by ▇▇▇▇▇ ▇▇▇▇▇▇▇, ▇▇▇▇ ▇▇▇▇▇▇▇ and ▇▇▇
▇. ▇▇▇▇▇▇▇, pursuant to a Collateral Pledge Agreement (the "Securities
Account"), and (B) the Securities Account Sublimit; provided that at all
times the Lender shall have an exclusive and perfected security interest
in all of such NYSE Listed Securities; less
(iv)..The Borrowing Base Reserve, less
(v)...Obligations that the Borrower owes to the Lender that have not
yet been advanced on the Revolving Note, and the dollar amount that the
Lender in its discretion believes is a reasonable determination of the
Borrower's credit exposure with respect to ▇▇▇▇▇ Fargo Affiliate
Obligations and obligations owed to ▇▇▇▇▇ Fargo Merchant Services, LLC.
"Borrowing Base Reserve" means, as of any date of determination, such
amounts (expressed as either a specified amount or as a percentage of a
specified category or item) as the Lender may from time to time establish and
adjust in reducing Availability (a) to reflect events, conditions, contingencies
or risks which, as determined by the Lender, do or may affect (i) the Collateral
or its value, (ii) the assets, business or prospects of the Borrower, or (iii)
the security interests and other rights of the Lender in the Collateral
(including the enforceability, perfection and priority thereof), or (b) to
reflect the Lender's judgment that any collateral report or financial
information furnished by or on behalf of the Borrower to the Lender is or may
have been incomplete, inaccurate or misleading in any material respect, (c) in
respect of any state of facts that the Lender determines constitutes a Default
or an Event of Default , or (d) the ▇▇▇▇▇ Fargo Affiliate Obligations Reserve.
In exercising the discretion afforded to it under this paragraph, the Lender
shall act in a commercially reasonable manner.
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"Business Day" means a day on which the Federal Reserve Bank of New York
is open for business and, if such day relates to a LIBOR Advance, a day on which
dealings are carried on in the London interbank eurodollar market.
"Cap Ex Advance" is defined in Section 2.4(b).
"Cap Ex Note" means the Borrower's promissory note payable to the order of
the Lender in substantially the form of Exhibit E hereto and any note or notes
issued in substitution therefor.
"Capital Expenditures" means for a period, any expenditure of money during
such period for the purchase or construction of assets, or for improvements or
additions thereto, which are capitalized on the Borrower's balance sheet.
"Change of Control" means the occurrence of any of the following events:
(a) The Majority Shareholders cease to own, directly or indirectly, at
least (i) 51% of voting rights in Holdings on or before June 30, 2007 or (ii)
35% of voting rights in Holdings after June 30, 2007;
(b) During any consecutive two-year period, individuals who at the
beginning of such period constituted the Board of Directors of the Borrower
cease for any reason to constitute a majority of the Board of Directors of the
Borrower then in office; or
(c) Both ▇▇▇▇▇▇▇ ▇▇▇▇ and ▇▇▇▇▇▇ ▇▇▇▇▇▇▇ shall cease to actively manage
the Borrower's day-to-day business activities.
"Collateral" means all of the Borrower's Accounts, chattel paper and
electronic chattel paper, deposit accounts, documents, Equipment, General
Intangibles, goods, instruments, Inventory, Investment Property,
letter-of-credit rights, letters of credit, all sums on deposit in any
Collateral Account, and any items in any Lockbox; together with (i) all
substitutions and 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 the Borrower that now or hereafter come into the possession,
custody, or control of the Lender; (vii) all sums on deposit in any account;
(viii) proceeds of any and all of the foregoing; (ix) books and records of the
Borrower, including all mail or electronic mail addressed to the Borrower; and
(x) all of the foregoing, whether now owned or existing or hereafter acquired or
arising or in which the Borrower now has or hereafter acquires any rights.
"Collateral Account" means the "Blocked Account" as defined in the Blocked
Account Agreement.
"Commitment" means the Lender's commitment to make Advances to the
Borrower.
3
"Constituent Documents" means with respect to any Person, as applicable,
such Person's certificate of incorporation, articles of incorporation, by-laws,
certificate of formation, articles of organization, limited liability company
agreement, management agreement, operating agreement, shareholder agreement,
partnership agreement or similar document or agreement governing such Person's
existence, organization or management or concerning disposition of ownership
interests of such Person or voting rights among such Person's owners.
"Credit Facility" means the credit facility under which Revolving Advances
may be made available to the Borrower by the Lender under Article II.
"Current Maturities of Long Term Debt" means during a period beginning and
ending on designated dates, the amount of the Borrower's long-term debt and
capitalized leases which became due during that period.
"Cut-off Time" means 12:00 p.m. Eastern Standard Time.
"Debt" means of a Person as of a given date, 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 for such Person
and 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 a Default
or Event of Default occurs and ending on the date identified by the Lender in
writing as the date that such Default or Event of Default has been cured or
waived.
"Default Rate" means an annual interest rate in effect during a Default
Period or following the Termination Date, which interest rate shall be equal to
one and one-half percent (1.5%) over the applicable Floating Rate or the LIBOR
Advance Rate, as the case may be, as such rate may change from time to time,
during the first three (3) months of a Default Period, only, thereafter to
become three percent (3%) over the applicable Floating Rate or the LIBOR Advance
Rate, as the case may be, as such rate may change from time to time.
"Dilution" means, as of any date of determination, a percentage, based
upon the experience of the trailing three (3) month period ending on the date of
determination, which is the result of dividing the Dollar amount of (a) actual
bad debt write-downs, discounts, advertising allowances, credits, or other
dilutive items with respect to the Accounts as determined by Lender in its
reasonable discretion during such period, by (b) Borrower's net sales during
such period (excluding extraordinary items) plus the amount of clause (a).
"Director" means a director if the Borrower is a corporation, a governor
or manager if the Borrower is a limited liability company, or a general partner
if the Borrower is a partnership.
4
"Eligible Accounts" means all unpaid Accounts arising from the sale or
lease of goods or the performance of services, net of any credits, but excluding
any such Accounts having any of the following characteristics:
(i) That portion of Accounts unpaid 60 days or more after the due
date, not to exceed 120 days after the invoice date;
(ii) That portion of Accounts related to goods or services with
respect to which the 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 the Borrower to the
customer, including progress ▇▇▇▇▇▇▇▇, and that portion of Accounts for
which an invoice has not been sent to the applicable account debtor;
(iv) Accounts constituting (i) proceeds of copyrightable material
unless such copyrightable material shall have been registered with the
United States Copyright Office, or (ii) proceeds of patentable inventions
unless such patentable inventions have been registered with the United
States Patent and Trademark Office;
(v) 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 the 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);
(vi) Accounts denominated in any currency other than United States
dollars;
(vii) Accounts owed by an account debtor located outside the United
States 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 reasonable discretion, or (B) covered by a
foreign receivables insurance policy acceptable to the Lender in its
reasonable discretion;
(viii) Accounts owed by an account debtor that is insolvent, the
subject of bankruptcy proceedings or has gone out of business;
(ix) Accounts owed by an Owner, Subsidiary, Affiliate, Officer or
employee of the Borrower;
(x) 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;
5
(xi) That portion of Accounts that has been restructured, extended,
amended or modified;
(xii) That portion of Accounts that constitutes advertising, finance
charges, service charges or sales or excise taxes;
(xiii) Accounts owed by an account debtor, other than AmeriSource
Bergen, McKesson, or Cardinal Health, regardless of whether otherwise
eligible, to the extent that the aggregate balance of such Accounts
exceeds 25% of the aggregate amount of all Eligible Accounts;
(xiv) Accounts owed by AmeriSource Bergen, McKesson, or Cardinal
Health, regardless of whether otherwise eligible, to the extent that the
aggregate balance of any such Accounts exceeds 30% of the aggregate amount
of all Eligible Accounts;
(xv) Accounts owed by an account debtor, regardless of whether
otherwise eligible, if 33% or more of the total amount of Accounts due
from such debtor is ineligible under clauses (i), (ii), or (x) above; and
(xvi) Accounts, or portions thereof, otherwise deemed ineligible by
the Lender in its reasonable discretion.
"Eligible Equipment" means Equipment designated by the Lender as eligible
from time to time in its reasonable 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; and
(viii) Equipment otherwise deemed unacceptable by the Lender in its
commercially reasonable discretion.
6
"Eligible Inventory" means all Inventory of the Borrower, valued at the
lower of cost or market in accordance with GAAP; but excluding any Inventory
having any of the following characteristics:
(i) Inventory that is: in-transit; located at any warehouse, job
site or other premises not approved by the Lender in writing; not subject
to a duly perfected first priority security interest in the Lender's
favor; subject to any lien or encumbrance that is subordinate to the
Lender's first priority security interest; covered by any negotiable or
non-negotiable warehouse receipt, ▇▇▇▇ of lading or other document of
title; on consignment from any Person; on consignment to any Person or
subject to any bailment unless such consignee or bailee has executed an
agreement with the Lender;
(ii) Supplies, packaging (with the exception of bottles and caps),
maintenance parts or sample Inventory, or customer supplied parts or
Inventory;
(iii) Inventory that is scheduled to expire within 4 months;
(iv) Inventory that is damaged, defective, obsolete, slow moving or
not currently saleable in the normal course of the Borrower's operations,
or the amount of such Inventory that has been reduced by shrinkage;
(v) Inventory that the 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;
(vii) Inventory manufactured by the Borrower pursuant to a license
unless the applicable licensor has agreed in writing to permit the Lender
to exercise its rights and remedies against such Inventory;
(viii) Inventory that is subject to a Lien in favor of any Person
other than the Lender;
(ix) Inventory stored at locations holding less than 10% of the
aggregate value of Borrower's Inventory; and
(x) Inventory otherwise deemed ineligible by the Lender in its
commercially reasonable discretion.
"Environmental Law" means any federal, state, local or other governmental
statute, regulation, law or ordinance dealing with the protection of human
health and the environment.
"Equipment" means all of the Borrower's equipment, as such term is defined
in the UCC, whether now owned or hereafter acquired, including all present and
future machinery, vehicles, furniture, fixtures, manufacturing equipment, shop
equipment, office and recordkeeping equipment, parts, tools, supplies, and
including specifically the goods described in any equipment schedule or list
herewith or hereafter furnished to the Lender by the Borrower.
7
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, and the regulations promulgated and rulings issued
thereunder.
"ERISA Affiliate" means any trade or business (whether or not
incorporated) that, together with the Borrower, is treated as a single employer
under Section 414 of the IRC.
"ERISA Event" means any Reportable Event, which the Lender determines in
good faith might constitute grounds for the termination of any Pension Plan or
for the appointment by the appropriate United States District Court of a trustee
to administer any Pension Plan, shall have occurred and be continuing 30 days
after written notice to such effect shall have been given to the Borrower by the
Lender; or a trustee shall have been appointed by an appropriate United States
District Court to administer any Pension Plan; or the Pension Benefit Guaranty
Corporation shall have instituted proceedings to terminate any Pension Plan or
to appoint a trustee to administer any Pension Plan; or the Borrower or any
ERISA Affiliate shall have filed for a distress termination of any Pension Plan
under Title IV of ERISA; or the Borrower or any ERISA Affiliate shall have
failed to make any quarterly contribution required with respect to any Pension
Plan under Section 412(m) of the IRC, which the Lender determines in good faith
may by itself, or in combination with any such failures that the Lender may
determine are likely to occur in the future, result in the imposition of a Lien
on the Borrower's assets in favor of the Pension Plan; or any withdrawal,
partial withdrawal, reorganization or other event occurs with respect to a
Multiemployer Plan which results or could reasonably be expected to result in a
material liability of the Borrower to the Multiemployer Plan under Title IV of
ERISA
"Event of Default" is defined in Section 7.1.
"Financial Covenants" means the covenants set forth in Section 6.2.
"Floating Rate" means an annual interest rate equal to the sum of the
Prime Rate less one-half of one percent (0.5%), which interest rate shall change
when and as the Prime Rate changes.
"Floating Rate Advance" means an Advance bearing interest at the Floating
Rate.
"Funding Date" is defined in Section 2.1.
"GAAP" means generally accepted accounting principles, applied on a basis
consistent with the accounting practices applied in the financial statements
described in Section 5.6.
"General Intangibles" shall have the meaning given it under the UCC.
"Guarantors" means ▇▇▇▇▇ ▇▇▇▇▇▇▇, ▇▇▇▇ ▇▇▇▇▇▇▇, ▇▇▇ ▇. ▇▇▇▇▇▇▇,
Interpharm Holdings, Inc. and any other Person now or in the future
guaranteeing all or a part of the Obligations.
"Guaranty" means each unconditional continuing guaranty or unconditional
continuing guaranty by corporation executed by a Guarantor in favor of the
Lender (collectively, the "Guaranties")
8
"Hazardous Substances" means pollutants, contaminants, hazardous
substances, hazardous wastes, petroleum and fractions thereof, and all other
chemicals, wastes, substances and materials listed in, regulated by or
identified in any Environmental Law.
"Holdings" means Interpharm Holdings, Inc.
"Indemnified Liabilities" is defined in Section 8.6.
"Indemnitees" is defined in Section 8.6.
"IRC" means the Internal Revenue Code of 1986, as amended from time to
time.
"Infringement" or "Infringing" when used with respect to Intellectual
Property Rights means any infringement or other violation of Intellectual
Property Rights.
"Intellectual Property Rights" means all actual or prospective rights
arising in connection with any intellectual property or other proprietary
rights, including all rights arising in connection with copyrights, patents,
service marks, trade dress, trade secrets, trademarks, trade names or mask
works.
"Interest Payment Date" is defined in Section 2.8(a).
"Interest Period" means the period that commences on (and includes) the
first calendar day of the month on which either a LIBOR Advance is made or
continued pursuant to Sections 2.2(a) or 2.3(b), or on which a Floating Rate
Advance is converted to a LIBOR Advance pursuant to Section 2.3(a), and ending
on the last calendar day of the month numerically corresponding to such date
that is one, two, three or six months thereafter as designated by the Borrower,
during which period the outstanding principal balance of the LIBOR Advance shall
bear interest at the LIBOR Advance Rate; provided, however, that:
(a) No Interest Period may be selected for an Advance for a
principal amount less than Five Hundred Thousand Dollars ($500,000), and
no more than five (5) different Interest Periods may be outstanding at any
one time;
(b) If an Interest Period would otherwise end on a day which is not
a Business Day, then the Interest Period shall end on the next Business
Day thereafter, unless that Business Day is the first Business Day of a
month, in which case the Interest Period shall end on the last Business
Day of the preceding month);
(c) No Interest Period applicable to a Revolving Advance may end
later than the Maturity Date; and
(d) In no event shall the Borrower select Interest Periods with
respect to Advances which, in the aggregate, would require payment of a
contracted funds breakage fee under Section 2.7(h) in order to make
required principal payments.
"Inventory" shall have the meaning given it under the UCC.
9
"Investment Property" shall have the meaning given it under the UCC.
"Leverage Ratio" means total liabilities less Subordinated Debt divided by
the sum of Book Net Worth plus Subordinated Debt.
"LIBOR" means the rate per annum (rounded upward, if necessary, to the
nearest whole 1/8 of 1%) determined pursuant to the following formula:
LIBOR = Base LIBOR
--------------------------------
100% - LIBOR Reserve Percentage
(i) "Base LIBOR" means the rate per annum for United States dollar
deposits quoted by the Lender as the Inter-Bank Market Offered Rate, with
the understanding that such rate is quoted by the Lender for the purpose
of calculating effective rates of interest for loans making reference
thereto, on the first day of a Interest Period for delivery of funds on
said date for a period of time approximately equal to the number of days
in such Interest Period and in an amount approximately equal to the
principal amount to which such Interest Period applies. The Borrower
understands and agrees that the Lender may base its quotation of the
Inter-Bank Market Offered Rate upon such offers or other market indicators
of the Inter-Bank Market as the Lender in its discretion deems appropriate
including the rate offered for U.S. dollar deposits on the London
Inter-Bank Market.
(ii) "LIBOR Reserve Percentage" means the reserve percentage
prescribed by the Board of Governors of the Federal Reserve System (or any
successor) for "Eurocurrency Liabilities" (as defined in Regulation D of
the Federal Reserve Board, as amended), adjusted by the Lender for
expected changes in such reserve percentage during the applicable Interest
Period.
"LIBOR Advance" means an Advance bearing interest at the LIBOR Advance
Rate.
"LIBOR Advance Rate" means an annual interest rate equal to the sum of
LIBOR plus two and one-half of one percent (2.5%).
"Licensed Intellectual Property" is defined in Section 5.11(c).
"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 subsequently acquired
and whether arising by agreement or operation of law.
"Loan Documents" means this Agreement, the Revolving Note, the Cap Ex
Note, the Real Estate Note, the M&E Note, the Guaranties, the Subordination
Agreement, and the Security Documents, together with every other agreement,
note, document, contract or instrument to which the Borrower now or in the
future may be a party and which is required by the Lender.
10
"Loan Year" is defined in Section 2.6(c).
"Lockbox" means "Lockbox" as defined in the Blocked Account Agreement.
"M&E Advance" is defined in Section 2.4(a).
"M&E Note" means the Borrower's promissory note payable to the order of
the Lender in substantially the form of Exhibit D hereto and any note or notes
issued in substitution therefor.
"Majority Shareholders" means ▇▇▇ ▇▇▇▇▇▇▇, ▇▇▇▇ ▇▇▇▇▇▇▇, ▇▇▇ Holdings I,
LLC, ▇▇▇▇ ▇▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇ Holdings I, LLC, P&K Holdings, LLC,
and ▇▇▇▇▇ Holdings I, LLC, each current shareholders of Holdings.
"Material Adverse Effect" means any of the following:
(i) A material adverse effect on the business, operations, results
of operations, prospects, assets, liabilities or financial condition of
the Borrower;
(ii) A material adverse effect on the ability of the Borrower to
perform its obligations under the Loan Documents;
(iii) A material adverse effect on the ability of the Lender to
enforce the Obligations or to realize the intended benefits of the
Security Documents, including a material adverse effect on the validity or
enforceability of any Loan Document or of any rights against any
Guarantor, or on the status, existence, perfection, priority (subject to
Permitted Liens) or enforceability of any Lien securing payment or
performance of the Obligations; or
(iv) Any claim against the Borrower which if determined adversely to
the Borrower would cause the Borrower to be liable to pay an amount
exceeding $200,000 or would result in the occurrence of an event described
in clauses (i), (ii) and (iii) above, except that such claim will not have
such meaning if Lender has adequately established a reserve for such
claim.
"Maturity Date" means February 8, 2010.
"Maximum Line Amount" means $22,500,000 unless this amount is reduced
pursuant to Section 2.10, in which event it means such lower amount.
"▇▇▇▇▇▇▇ ▇▇▇▇▇ Pledged Collateral Account Control Agreement" means that
certain ▇▇▇▇▇▇▇ ▇▇▇▇▇ Pledged Collateral Account Control Agreement among
Borrower, Lender, and ▇▇▇▇▇▇▇ Lynch, Pierce, ▇▇▇▇▇▇ & ▇▇▇▇▇ Incorporated.
"Mortgage" means that certain Mortgage Consolidation, Modification and
Extension Agreement dated the date hereof executed by the Borrower in the
original principal amount of $12,000,000.
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"Multiemployer Plan" means a multiemployer plan (as defined in Section
4001(a)(3) of ERISA) to which the Borrower or any ERISA Affiliate contributes or
is obligated to contribute.
"Net Cash Flow" means for a period beginning and ending on designated
dates, Net Income plus (i) depreciation, (ii) amortization and (iii) deferred
income taxes, minus (i) Current Maturities of Long Term Debt, (ii) unfinanced
Capital Expenditures, and (iii) dividends other than non-cash dividends, plus
(x) the net proceeds from the raising of equity or Subordinated Debt (after
expenses), minus (y) 100% of the reduction in the Securities Account Sublimit if
such reduction is the result of the reduction of the Securities Account Sublimit
at the request of the Borrower or Guarantor. For fiscal year 2007 only, to the
extent that Net Cash Flow is greater than $(6,904,000), such excess shall be
added to Net Cash Flow for all periods during fiscal year 2007.
"Net Cash Proceeds" means in connection with any asset sale, the cash
proceeds (including any cash payments received by way of deferred payment
whether pursuant to a note, installment receivable or otherwise, but only as and
when actually received) from such asset sale, net of (i) attorneys' fees,
accountants' fees, investment banking fees, brokerage commissions and amounts
required to be applied to the repayment of any portion of the Debt secured by a
Lien not prohibited hereunder on the asset which is the subject of such sale,
and (ii) taxes paid or reasonably estimated to be payable as a result of such
asset sale.
"Net Income" means for a period beginning and ending on designated dates,
before tax net income from continuing operations, plus (i) non-cash effect of
expensing stock options and (ii) any other expenses of the Borrower that are
paid in stock, less extraordinary gains, all as determined in accordance with
GAAP.
"Net Income Before Tax and Research and Development Expenses" means for a
period beginning and ending on designated dates, Net Income excluding research
and development expenses, as determined in accordance with GAAP.
"Net Orderly Liquidation Value" means a professional opinion of the
estimated most probable Net Cash Proceeds which could typically be realized at a
properly advertised and professionally managed liquidation sale, conducted under
orderly sale conditions for an extended period of time (usually six to nine
months), under the economic trends existing at the time of the appraisal.
"NYSE Listed Security" means, on any date, any outstanding stock that is
issued by a company that is listed on the New York State Exchange on such date
and is acceptable to the Lender, in its sole discretion.
"Obligations" means the Revolving Note, the M&E Note, the Cap Ex Note, the
Real Estate Note, and each and every other debt, liability and obligation of
every type and description which the Borrower may now or at any time hereafter
owe to the Lender, whether such debt, liability or obligation now exists or is
hereafter created or incurred, whether it arises in a transaction involving the
Lender alone or in a transaction involving other creditors of the Borrower, and
whether it is direct or indirect, due or to become due, absolute or contingent,
primary or secondary, liquidated or unliquidated, or sole, joint, several or
joint and several, and including all indebtedness of the Borrower arising under
any Loan Document or guaranty between the Borrower and the Lender, whether now
in effect or subsequently entered into, and all ▇▇▇▇▇ Fargo Affiliate
Obligations and indebtedness owed by the Borrower to ▇▇▇▇▇ Fargo Merchant
Services, L.L.C.
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"Officer" means with respect to the Borrower, an officer if the Borrower
is a corporation, a manager if the Borrower is a limited liability company, or a
partner if the Borrower is a partnership.
"OFAC" is defined in Section 6.12(c).
"Overadvance" means the amount, if any, by which the outstanding principal
balance of the Revolving Note is in excess of the then-existing Borrowing Base.
"Owned Intellectual Property" is defined in Section 5.11(a).
"Owner" means with respect to Holdings, each Person having legal or
beneficial title to an ownership interest in Holdings or a right to acquire such
an interest.
"Pension Plan" means a pension plan (as defined in Section 3(2) of ERISA)
maintained for employees of the Borrower or any ERISA Affiliate and covered by
Title IV of ERISA.
"Permitted Lien" and "Permitted Liens" are defined in Section 6.3(a) .
"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 (as defined in Section 3(3) of
ERISA) maintained for employees of the Borrower or any ERISA Affiliate.
"Premises" means all locations where the Borrower conducts its business or
has any rights of possession, including the locations legally described in
Exhibit C attached hereto.
"Prime Rate" means at any time the rate of interest most recently
announced by the Lender Bank at its principal office as its Prime Rate, with the
understanding that the Prime Rate is one of the Lender's base rates, and serves
as the basis upon which effective rates of interest are calculated for those
loans making reference thereto, and is evidenced by the recording thereof in
such internal publication or publications as the Lender may designate. Each
change in the rate of interest shall become effective on the date each Prime
Rate change is announced by the Lender.
"Real Estate" means that certain property located at ▇▇ ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇,
▇▇▇▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇.
"Real Estate Advance" is defined in Section 2.4(c).
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"Real Estate Note" means the Borrower's promissory note payable to the
order of the Lender in substantially the form of Exhibit F hereto and any note
or notes issued in substitution therefor.
"Reportable Event" means a reportable event (as defined in Section 4043 of
ERISA), other than an event for which the 30-day notice requirement under ERISA
has been waived in regulations issued by the Pension Benefit Guaranty
Corporation.
"Revolving Advance" is defined in Section 2.1.
"Revolving Note" means the Borrower's revolving promissory note, payable
to the order of the Lender in substantially the form of Exhibit A hereto, as
same may be renewed and amended from time to time, and all replacements thereto.
"Securities Accounts" means, collectively, that certain brokerage
account maintained at ▇▇▇▇▇▇▇ ▇▇▇▇▇ in the name of ▇▇. ▇▇▇▇▇ ▇▇▇▇▇▇▇, Account
No. _____, that brokerage account maintained at ▇▇▇▇▇▇▇ ▇▇▇▇▇ in the name of
▇▇▇▇ ▇▇▇▇▇▇▇, Account No. _____, and that certain brokerage account
maintained at ▇▇▇▇▇▇▇ ▇▇▇▇▇ in the name of ▇▇▇ ▇. ▇▇▇▇▇▇▇, Account No. ____.
"Securities Account Sublimit" means $7,500,000 or such lesser amount as
Lender shall determine in its reasonable discretion.
"Security Documents" means this Agreement, the Blocked Account Agreement,
Collateral Pledge Agreements, ▇▇▇▇▇▇▇ ▇▇▇▇▇ Pledged Collateral Account Control
Agreement, Control Agreements, Mortgage, Security Agreement, ANDA Security
Agreement, and any other document delivered to the Lender from time to time to
secure the Obligations.
"Security Interest" is defined in Section 3.1.
"Subordinated Creditors" means any Person now or in the future who agrees
to subordinate indebtedness of Borrower held by that Person to the payment of
the Obligations.
"Subordinated Debt" means any debt of the Borrower, which has, pursuant to
a Subordination Agreement, been subordinated in right of payment and priority to
the Obligations, on terms and conditions satisfactory to the Lender in its
reasonable discretion.
"Subordination Agreement" means a subordination agreement executed by a
Subordinated Creditor in favor of the Lender and acknowledged by the Borrower
(together with any other subordination agreement that may be accepted by the
Lender from time to time, the "Subordination Agreements").
"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 board of 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 the Borrower, by
the Borrower and one or more other Subsidiaries, or by one or more other
Subsidiaries.
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"Termination Date" means the earliest of (i) the Maturity Date, (ii) the
date the Borrower terminates the Credit Facility, or (iii) the date the Lender
demands payment of the Obligations, following an Event of Default, pursuant to
Section 7.2.
"UCC" means the Uniform Commercial Code in effect in the state designated
in this Agreement 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 of this
Agreement.
"Unused Amount" is defined in Section 2.7(b).
"Value'" means, with respect to any NYSE Listed Security on any date (the
"Determination Date"), the closing price on the New York Stock Exchange for such
security on the Banking Day immediately preceding the Determination Date, as set
forth in the Wall Street Journal published on the Determination Date. For
purposes hereof, the Value of any NYSE Listed Security that is described by one
or more of the following, shall be deemed to be zero (-0-): (a) any NYSE Listed
Security with respect to which the Lender does not have possession or "control"
(as required by Sections 8-106 and 9-106 of the UCC), whether pursuant to a
Securities Account Control Agreement or otherwise; (b) any NYSE Listed Security
in which the Lender does not have an exclusive, first-priority security
interest; or (c) any NYSE Listed Security against which any Person has borrowed
funds or has otherwise been extended credit (whether on margin or otherwise)
other than from or by the Lender.
"▇▇▇▇▇ Fargo Affiliate Obligations" means all obligations, liabilities,
contingent reimbursement obligations, fees, and expenses owing by the Borrower
or its Subsidiaries to any Person that is owned in material part by the Lender,
and that relates to any service or facility extended to the Borrower or its
Subsidiaries, including: (a) credit cards, (b) credit card processing services,
(c) debit cards, (d) purchase cards, or (e) ▇▇▇▇▇ Fargo Bank Products, as well
as any other services or facilities from time to time specified by the Lender,
whether direct or indirect, absolute or contingent, due or to become due, and
whether existing now or in the future.
"▇▇▇▇▇ Fargo Affiliate Obligations Reserve" means, as of any date of
determination, the dollar amount that the Lender then determines is a reasonable
determination of the credit exposure with respect to ▇▇▇▇▇ Fargo Affiliate
Obligations and which is available for payment of ▇▇▇▇▇ Fargo Affiliate
Obligations.
"▇▇▇▇▇ Fargo Bank" means ▇▇▇▇▇ Fargo Bank, National Association, ▇▇▇▇▇
Fargo Bank Minnesota, or any affiliate or subsidiary thereof.
"▇▇▇▇▇ Fargo Bank Products" means the following products extended by ▇▇▇▇▇
Fargo Bank to the Borrower: (a) controlled disbursement accounts or services,
and (b) any agreement which provides for an interest rate, credit, commodity or
equity swap, cap, floor, collar, forward foreign exchange transaction, currency
swap, cross currency rate swap, currency option, or any combination of, or
option with respect to, these or similar transactions, for the purpose of
hedging the Borrower's exposure to fluctuations in interest or exchange rates,
loan, credit exchange, security or currency valuations or commodity prices.
15
Section 1.2.Other Definitional Terms; Rules of Interpretation. The words
"hereof", "herein" and "hereunder" and words of similar import when used in this
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 accordance with the terms hereof and the
other Loan Documents), except where 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 therefor. 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.
ARTICLE II
AMOUNT AND TERMS OF THE CREDIT FACILITY
Section 2.1.Revolving Advances. The Lender agrees, subject to the terms
and conditions of this Agreement, to make advances ("Revolving Advances") to the
Borrower from time to time from the date that all of the conditions set forth in
4.1 are satisfied (the "Funding Date") to and until (but not including) the
Termination Date in an amount not in excess of the Maximum Line Amount. The
Lender shall have no obligation to make a Revolving Advance to the extent that
the amount of the requested Revolving Advance exceeds Availability. The
Borrower's obligation to pay the Revolving Advances shall be evidenced by the
Revolving Note and shall be secured by the Collateral. Within the limits set
forth in this Section 2.1, the Borrower may borrow, prepay pursuant to Section
2.10, and reborrow.
Section 2.2.Procedures for Requesting Advances. The Borrower shall comply
with the following procedures in requesting Revolving Advances:
(a) Type of Advances. Each Advance shall be funded as either a Floating
Rate Advance or a LIBOR Advance, as the Borrower shall specify in a request
delivered to the Lender conforming to the requirements of Section 2.2(b);
Floating Rate Advances and LIBOR Advances may be outstanding at the same time.
Each request for a LIBOR Advance shall be in multiples of $100,000, with a
minimum request of at least $500,000. LIBOR Advances shall not be available
during Default Periods.
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(b) Time for Requests. The Borrower shall request each Advance not later
than the Cut-off Time on the Business Day on which the Advance is to be made.
Each request that conforms to the terms of this Agreement shall be effective
upon receipt by the Lender, shall be in writing or by telephone or telecopy
transmission, and shall be confirmed in writing by the Borrower if so requested
by the Lender, by (i) an Officer of the Borrower; or (ii) a Person designated as
the Borrower's agent by an Officer of the Borrower in a writing delivered to the
Lender; or (iii) a Person whom the Lender reasonably believes to be an Officer
of the Borrower or such a designated agent, which confirmation shall specify
whether the Advance shall be a Floating Rate Advance or a LIBOR Advance and,
with respect to any LIBOR Advance, shall specify the principal amount of the
LIBOR Advance and the Interest Period applicable thereto. The Borrower shall
repay all Advances even if the Lender does not receive such confirmation and
even if the Person requesting an Advance was not in fact authorized to do so.
Any request for an Advance, whether written or telephonic, shall be deemed to be
a representation by the Borrower that the conditions set forth in Section 4.2
have been satisfied as of the time of the request.
(c) Disbursement. Upon fulfillment of the applicable conditions set forth
in Article IV, the Lender shall disburse the proceeds of the requested Advance
by crediting the same to the Borrower's demand deposit account maintained with
HSBC Bank USA, National Association, unless the Lender and the Borrower shall
agree in writing to another manner of disbursement.
Section 2.3.LIBOR Advances.
(a) Converting Floating Rate Advances to LIBOR Advances; Procedures. So
long as no Default Period is in effect, the Borrower may convert all or any part
of the principal amount of any outstanding Floating Rate Advance into a LIBOR
Advance by requesting that the Lender convert same no later than the Cut-off
Time on the Business Day immediately preceding the last Business Day of the
prior month on which the Borrower wishes the conversion to become effective.
Each request that conforms to the terms of this Agreement shall be effective
upon receipt by the Lender and shall be confirmed in writing by the Borrower if
the Lender so requests by any Officer or designated agent identified in Section
2.2(b) or Person reasonably believed by the Lender to be such an Officer or
designated agent, which request shall specify the Business Day on which the
conversion is to occur, the total amount of the Floating Rate Advance to be
converted, and the applicable Interest Period. Each such conversion shall occur
on a Business Day, and the aggregate amount of Floating Rate Advances converted
to LIBOR Advances shall be in multiples of $100,000, with a minimum conversion
amount of at least $500,000.
(b) Procedures at End of an Interest Period. Unless the Borrower requests
a new LIBOR Advance in accordance with the procedures set forth below, or
prepays the principal of an outstanding LIBOR Advance at the expiration of an
Interest Period, the Lender shall automatically and without request of the
Borrower convert each LIBOR Advance to a Floating Rate Advance on the last day
of the relevant Interest Period. So long as no Default exists, the Borrower may
cause all or any part of any maturing LIBOR Advance to be renewed as a new LIBOR
Advance by requesting that the Lender continue the maturing Advance as a LIBOR
Advance no later than the Cut-off Time on the Business Day constituting the
first day of the new Interest Period. Each such request shall be confirmed in
writing by the Borrower upon the Lender's request by any Officer or designated
agent identified in Section 2.2(b), which confirmation shall be effective upon
receipt by the Lender, and which shall specify the amount of the expiring LIBOR
Advance to be continued and the applicable Interest Period. Each new Interest
Period shall begin on a Business Day and the amount of each LIBOR Advance shall
be in multiples of $100,000, with a minimum Advance of at least $500,000.
17
(c) Setting and Notice of Rates. The Lender shall, with respect to any
request for a LIBOR Advance under Section 2.2 or a conversion or renewal of a
LIBOR Advance under this Section 2.3, provide the Borrower with a LIBOR quote
for each Interest Period identified by the Borrower on the Business Day on which
the request was made, if the request is received by the Lender prior to the
Cut-off Time, or for requests received by the Lender after the Cut-off Time, on
the next Business Day or on the Business Day on which the Borrower has requested
that the LIBOR Advance be made effective. If the Borrower does not immediately
accept a LIBOR quote, the quoted rate shall expire and any subsequent request
from Borrower for a LIBOR quote shall be subject to redetermination by the
Lender of the applicable LIBOR for the LIBOR Advance.
(d) Taxes and Regulatory Costs. The Borrower shall pay the Lender with
respect to any Advance, upon demand and in addition to any other amounts due or
to become due hereunder, any and all (i) withholdings, interest equalization
taxes, stamp taxes or other taxes (except income and franchise taxes) imposed by
any domestic or foreign governmental authority and related in any manner to
LIBOR, and (ii) future, supplemental, emergency or other changes in the LIBOR
Reserve Percentage, assessment rates imposed by the Federal Deposit Insurance
Corporation, or similar requirements or costs imposed by any domestic or foreign
governmental authority or resulting from compliance by the Lender with any
request or directive (whether or not having the force of law) from any central
bank or other governmental authority and related in any manner to LIBOR to the
extent they are not included in the calculation of LIBOR. In determining which
of the foregoing are attributable to any LIBOR option available to the Borrower
hereunder, any reasonable allocation made by the Lender among its operations
shall be conclusive and binding upon the Borrower.
Section 2.4 M&E, Cap Ex, and Real Estate Advances.
(a) M&E.
(i) M&E Advances.
(A) The Lender agrees to make a single advance to the
Borrower on the Funding Date (the "M&E Advance") in the amount
of up to the lesser of (1) 76% of the Net Orderly Liquidation
Value of Eligible Equipment, or (2) $3,500,000. The Borrower's
obligations to pay the M&E Advance shall be evidenced by the
M&E Note and shall be secured by the Collateral as provided in
Article III.
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(B) Upon fulfillment of the applicable conditions set
forth in Article IV, the Lender shall deposit the proceeds of
the requested M&E Advance by crediting the same to the
Borrower's demand deposit account specified in Section 2.2(c)
unless the Lender and the Borrower shall agree in writing to
another manner of disbursement. Upon the Lender's request, the
Borrower shall promptly confirm the telephonic request for an
M&E Advance by executing and delivering an appropriate
confirmation certificate to the Lender. The Borrower shall be
obligated to repay all M&E Advances notwithstanding the
Lender's failure to receive such confirmation and
notwithstanding the fact that the person requesting the same
was not in fact authorized to do so. Any request for an M&E
Advance, whether written or telephonic, shall be deemed to be
a representation by the Borrower that the conditions set forth
in Section 4.2 have been satisfied as of the time of the
request.
(ii) Payment of M&E Note. The outstanding principal balance of
the M&E Note shall be due and payable as follows:
(A) In equal monthly principal installments of
$58,333.33, together with accrued but unpaid interest on the
unpaid principal balance thereof, beginning on March 1, 2006,
and on the first (1st) day of each month thereafter; and a
final installment of the entire unpaid principal balance plus
interest accrued thereon remaining unpaid on the earlier of
the Maturity Date or Termination Date.
(B) In addition, the Lender may obtain from time to
time, at the Borrower's expense, (but in any event no more
than once during any calendar year absent an Event of
Default), an appraisal of the Borrower's Eligible Equipment.
If the aggregate outstanding principal balance of the M&E Note
exceeds 85% of the Net Orderly Liquidation Value of the
Borrower's Eligible Equipment as shown on any such appraisal,
upon demand by the Lender, the Borrower shall immediately
prepay the M&E Note in the amount of such excess together with
any prepayment fee owed pursuant to Section 2.7(g).
(C) On the Termination Date, the entire unpaid principal
balance of the M&E Note, and all unpaid interest accrued
thereon, shall in any event be due and payable.
(iii) Refinance of M&E Note. If, within 180 days of the date
of Closing, the Borrower receives from a third party a commitment (a
"Commitment") to provide financing to or for the Borrower to
refinance the M&E Note in an amount higher than the original
principal amount of the M&E Note, the Borrower shall notify Lender
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of the Commitment in writing (including all material terms of the
Commitment) and Lender shall have thirty (30) calendar days after
receipt of such notice (the "Option Period") to agree to provide
similar financing in the place of such third party for the principal
amount set forth in the Offer. Lender shall notify Borrower in
writing of Lender's acceptance of the Offer pursuant hereto (the
"Acceptance Notice"), in which case the Borrower shall obtain such
financing from Lender and other than the principal amount of the M&E
Note, the terms and conditions of the M&E Loan shall remain the same
and Borrower shall not accept the Offer from such third party. If no
Acceptance Notice has been received from Lender within the Option
Period, Borrower may consummate the Offer with the other party on
the terms and conditions set forth in the Offer (the "Transaction")
without having to pay a Termination Fee on the M&E Loan being
repaid; provided, however, that none of foregoing or any failure by
Lender to issue an Acceptance Notice shall be construed as a waiver
of any of the terms, covenants or conditions of any of the Loan
Documents and provided that such third party enters into an
intercreditor agreement with the Lender, in form and substance
acceptable to the Lender in its reasonable discretion.
(b) Cap Ex.
(i) Cap Ex Advance
(A) The Lender shall make advances to the Borrower from
time to time from the Funding Date to the Termination Date
(each a "Cap Ex Advance") in an aggregate amount not exceeding
the lesser of up to $3,500,000 or up to 90% of the invoiced
cost (excluding taxes, delivery costs, installation costs, and
other costs and expenses) of Eligible Equipment to be
purchased by the Borrower or previously purchased by the
Borrower with the proceeds of a Revolving Advance. The
Borrower's obligation to pay the Cap Ex Advance shall be
evidenced by the Cap Ex Note and shall be secured by the
Collateral as provided in Article III.
(B) The Borrower shall comply with the following
procedures in requesting Cap Ex Advances:
(1) The Borrower shall make each request for an
Cap Ex Advance to the Lender before the Cut-off Time
five (5) Banking Days before the day of the requested
Cap Ex Advance. Requests may be made in writing or by
telephone, specifying the date of the requested Cap Ex
Advance and the amount thereof. The request shall be
made by an individual authorized pursuant to Section
2.2.
(2) Each Cap Ex Advance will be amortized over a
sixty (60) month period, maturing on the earlier of the
Maturity Date or the Termination Date.
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(3) The Cap Ex Advance shall be subject to
satisfactory compliance with the following terms,
conditions and requirements as determined by the Lender
in its reasonable discretion exercised in a commercially
reasonable manner: (1) the Borrower shall provide the
Lender with a copy of the invoice for the equipment to
be purchased or refinanced by the Borrower with the
proceeds of such Cap Ex Advance; (2) the Lender has not
given notice of the occurrence of a Default or an Event
of Default under this Agreement or any other agreement,
instrument or document by and between the Lender and the
Borrower or by and between the Lender and any Guarantor;
(3) the Lender and its counsel may require such
documentation and inspections as they deem appropriate
to consummate the Cap Ex Advances and to protect the
Lender and its interest in all collateral pledged as
security for the Cap Ex Advance; and (4) the minimum
amount of a request for a Cap Ex Advance shall be
$250,000.
(C) Upon fulfillment of the terms and conditions set
forth in this Agreement, including but not limited to the
terms and conditions contained in this Agreement, the Lender
shall deposit the proceeds of the requested Cap Ex Advance by
crediting the same to the Borrower's demand deposit account
specified in Section 2.2(c) or any other account designated by
the Borrower. Upon the Lender's request, the Borrower shall
promptly confirm each telephonic request for a Cap Ex Advance
by executing and delivering an appropriate confirmation
certificate to the Lender. The Borrower shall be obligated to
repay all Cap Ex Advances notwithstanding the Lender's failure
to receive such confirmation and notwithstanding the fact that
the person requesting the same was not in fact authorized to
do so. Any request for a Cap Ex Advance, whether written or
telephonic, shall be deemed to be a representation by the
Borrower that the conditions set forth in this Section and
this Agreement have been satisfied as of the time of the
request.
(ii) Payment of the Cap Ex Note. The outstanding principal
balance of the Cap Ex Note shall be due and payable as follows:
(A) The Cap Ex Note shall be repaid in sixty (60)
monthly principal installments, together with accrued but
unpaid interest on the unpaid principal balance thereof,
beginning on the first day of the month after the initial Cap
Ex Advance is funded and on the first day of each month
thereafter or, if the Lender makes additional Cap Ex Advances,
the amount of each monthly installment will be increased to an
amount to reflect the repayment of the additional Cap Ex
Advances amortized over a sixty (60) month period, and a final
installment of the entire unpaid principal plus interest
accrued thereon remaining unpaid on the earlier of the
Maturity Date or the Termination Date.
21
(B) In addition, the Lender may obtain from time to
time, at the Borrower's expense, (but in any event no more
than once during any calendar year absent an Event of
Default), an appraisal of the Eligible Equipment whether or
not a Default Period exists. If the aggregate outstanding
principal balance of the Cap Ex Note exceeds eighty-five
percent (85%) of the Net Orderly Liquidation Value of the
Eligible Equipment as shown on any such appraisal (obtained at
Borrower's expense), then, upon demand by the Lender, the
Borrower shall immediately prepay the Cap Ex Note in the
amount of such excess.
(C) On the earlier of the Maturity Date or the
Termination Date, the entire unpaid principal balance of the
Cap Ex Note, and all unpaid interest accrued thereon, shall in
any event be due and payable.
(c) Real Estate.
(i) Real Estate Advances.
(A) The Lender agrees to make a single advance to the Borrower
on the Funding Date (the "Real Estate Advance") in the amount of up
to the lesser of (1) seventy-five percent (75%) of the fair market
value of the Real Estate, or (2) $12,000,000. The Borrower's
obligations to pay the Real Estate Advance shall be evidenced by the
Real Estate Note and shall be secured by the Collateral as provided
in Article III and the Real Estate.
(B) Upon fulfillment of the applicable conditions set forth in
this Section and in Article IV, the Lender shall deposit the
proceeds of the requested Real Estate Advance by crediting the same
to the Borrower's demand deposit account specified in Section 2.2(c)
unless the Lender and the Borrower shall agree in writing to another
manner of disbursement. Upon the Lender's request, the Borrower
shall promptly confirm the telephonic request for a Real Estate
Advance by executing and delivering an appropriate confirmation
certificate to the Lender. The Borrower shall be obligated to repay
all Real Estate Advances notwithstanding the Lender's failure to
receive such confirmation and notwithstanding the fact that the
person requesting the same was not in fact authorized to do so. Any
request for a Real Estate Advance, whether written or telephonic,
shall be deemed to be a representation by the Borrower that the
conditions set forth in Section 4.2 and in this Agreement have been
satisfied as of the time of the request.
(ii) Payment of Real Estate Note. The outstanding principal balance
of the Real Estate Note shall be due and payable on demand, and if no
demand is made, as follows:
(A) In equal monthly principal installments of $66,666.67,
together with accrued but unpaid interest on the unpaid principal
balance thereof, beginning on March 1, 2006, and on the first (1st)
day of each month thereafter; and a final installment of the entire
unpaid principal balance plus interest accrued thereon remaining
unpaid on the earlier of the Maturity Date or Termination Date.
22
(B) In addition, the Lender may obtain from time to time, at
the Borrower's expense, (but in any event no more than once during
any calendar year absent an Event of Default), an appraisal of the
Real Estate. If the aggregate outstanding principal balance of the
Real Estate Note exceeds seventy-five percent (75%) of the fair
market value of the Real Estate as shown on any such appraisal, upon
demand by the Lender, the Borrower shall immediately prepay the Real
Estate Note in the amount of such excess together with any
prepayment fee owed pursuant to Section 2.7(g).
(C) On the earlier of the Maturity Date or Termination Date,
the entire unpaid principal balance of the Real Estate Note, and all
unpaid interest accrued thereon, shall in any event be due and
payable.
Section 2.5.Intentionally Omitted.
Section 2.6 Interest; Default Interest Rate; Application of Payments;
Participations; Usury.
(a) Interest. Except as provided in Section 2.3, Section 2.6(d) and
Section 2.6(g), the principal amount of each Advance shall bear interest as a
Floating Rate Advance unless the Borrower has selected a LIBOR Advance in
accordance with the terms and conditions of this Agreement. If the Borrower
generates at least $1,000,000 in Net Income in any fiscal year, the Floating
Rate will be reduced to Prime Rate less three-quarters of one percent (0.75%)
and the LIBOR Rate will be reduced to LIBOR plus two and one-quarter of one
percent (2.25%). Reductions in the Interest Rates will be made only one time
within five calendar days following receipt of the Borrower's financial
statements and compliance certificates required under Section 6.1. Any change in
the Interest Rates shall become effective on the date of receipt of the
financial statements. Notwithstanding the foregoing, if the Borrower fails to
deliver the financial statements or compliance certificates required under
Section 6.1, the Lender may, by notice to the Borrower, not institute any
reductions in the Interest Rates. If amended or restated financial statements
change previously calculated Interest Rates, the Lender may reduce or increase
the Interest Rates from the date of receipt of such amended or restated
financial statements, as the Lender in its reasonable discretion deems
appropriate.
(b) Intentionally Omitted.
(c) Intentionally Omitted.
(d) Default Interest Rate. At any time during any Default Period or
following the Termination Date, in the Lender's commercially reasonable
discretion and without waiving any of its other rights or remedies, the
principal of the Revolving Note shall bear interest at the Default Rate or such
23
lesser rate as the Lender may determine, effective as of the first day of the
month in which any Default Period begins through the last day of such Default
Period, or any shorter time period that the Lender may determine. The decision
of the Lender to impose a rate that is less than the Default Rate or to not
impose the Default Rate for the entire duration of the Default Period shall be
made by the Lender in its reasonable discretion and shall not be a waiver of any
of its other rights and remedies, including its right to retroactively impose
the full Default Rate for the entirety of any such Default Period or following
the Termination Date.
(e) Application of Payments. Payments shall be applied to the Obligations
on the Business Day of receipt by the Lender in the Lender's general account,
but the amount of principal paid shall continue to accrue interest at the
interest rate applicable under the terms of this Agreement from the calendar day
the Lender receives the payment, and continuing through the end of the second
Business Day following receipt of the payment.
(f) Participations. If any Person shall acquire a participation in the
Advances or the Obligation of Reimbursement, the Borrower shall be obligated to
the Lender to pay the full amount of all interest calculated under this Section
2.6, 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 that calculated under this Section 2.6,
or otherwise elects to accept less than its pro rata 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.
Notwithstanding anything to the contrary contained in any Loan Document, all
agreements which either now are or which shall become agreements between the
Borrower and the Lender are hereby limited so that in no contingency or event
whatsoever shall the total liability for payments in the nature of interest,
additional interest and other charges exceed the applicable limits imposed by
any applicable usury laws. If any payments in the nature of interest, additional
interest and other charges made under any Loan Document are held to be in excess
of the limits imposed by any applicable usury laws, it is agreed that any such
amount held to be in excess shall be considered payment of principal hereunder,
and the indebtedness evidenced hereby shall be reduced by such amount so that
the total liability for payments in the nature of interest, additional interest
and other charges shall not exceed the applicable limits imposed by any
applicable usury laws, in compliance with the desires of the Borrower and the
Lender. This provision shall never be superseded or waived and shall control
every other provision of the Loan Documents and all agreements between the
Borrower and the Lender, or their successors and assigns.
Section 2.7 Fees.
(a) Origination Fee. The Borrower shall pay the Lender a fully earned and
non-refundable origination fee of $207,500, due and payable upon the execution
of this Agreement.
(b) Unused Line Fee. For the purposes of this Section 2.7(b), "Unused
Amount" means $15,000,000 reduced by outstanding Revolving Advances. The
Borrower agrees 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.
24
(c) Collateral Monitoring Fee. The Borrower shall pay to the Lender a
collateral monitoring fee of $1,000 per month, payable on the first day of each
month.
(d) Collateral Exam Fees. The Borrower shall pay the Lender fees in
connection with any collateral exams, audits or inspections conducted by or on
behalf of the Lender of any Collateral or the Borrower's operations or business
at the rates established from time to time by the Lender as its collateral exam
fees (which fees are currently $950 per day per collateral examiner), together
with all actual out-of-pocket costs and expenses incurred in conducting any such
collateral examination or inspection; provided, however, that except during
Default Periods, the Borrower shall not have to reimburse the Lender for such
fees, costs and expenses to the extent they exceed $20,000 per contract year.
(e) Intentionally Omitted.
(f) Intentionally Omitted.
(g) Termination and Line Reduction Fees. If (i) the Lender terminates the
Credit Facility during a Default Period, or if (ii) the Borrower terminates or
reduces the Credit Facility on a date prior to the Maturity Date, then the
Borrower shall pay the Lender as liquidated damages a termination fee in an
amount equal to a percentage of the Maximum Line Amount (or the reduction of the
Maximum Line Amount, as the case may be) calculated as follows: (A) three
percent (3%) if the termination or reduction occurs on or before the first
anniversary of the Funding Date; (B) two percent (2%) if the termination or
reduction occurs after the first anniversary of the Funding Date, but on or
before the second anniversary of the Funding Date; and (C) one percent (1%) if
the termination or reduction occurs after the second anniversary of the Funding
Date.
(h) Contracted Funds Breakage Fees. The Borrower may prepay the principal
amount of the Revolving Note at any time, whether voluntarily or by
acceleration, provided, however, that if the principal amount of any Revolving
Note LIBOR Advance is prepaid, the Borrower shall pay to the Lender immediately
upon demand a contracted funds breakage fee equal to the sum of the discounted
monthly differences for each month from the month of prepayment through the
month in which such Interest Period matures, calculated as follows for each such
month:
(i) Determine the amount of interest which would have accrued each month
on the amount prepaid at the interest rate applicable to such amount
had it remained outstanding until the last day of the applicable
Interest Period.
(ii) Subtract from the amount determined in (i) above the amount of
interest which would have accrued for the same month on the amount
prepaid for the remaining term of such Interest Period at LIBOR in
effect on the date of prepayment for new loans made for such term in
a principal amount equal to the amount prepaid.
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(iii) If the result obtained in (ii) for any month is greater than zero,
discount that difference by LIBOR used in (ii) above.
The Borrower acknowledges that a prepayment of the Revolving Note may
result in the Lender incurring additional costs, expenses or liabilities, and
that it is difficult to ascertain the full extent of such costs, expenses or
liabilities. The Borrower therefore agrees to pay the above-described contracted
funds breakage fee and agrees that this fee represents a reasonable estimate of
the contracted funds breakage costs, and any expenses or liabilities of the
Lender.
(i) Intentionally Omitted.
(j) CSI Fee. With respect to services to be provided by Collateral
Services, Inc. ("CSI") related to Borrower's accounts receivables and agings,
the Borrower shall pay to the Lender (i) a set-up fee of $850, which fee shall
be charged to the Borrower's account and shall be deemed fully earned and
payable on the date of Closing, and (ii) a monthly service fee of $100, payable
monthly on the first date of each month.
(k) Overadvance Fees. The Borrower shall pay an Overadvance fee in the
amount of $500.00 for each day or portion thereof during which an Overadvance
exists, regardless of how the Overadvance arises or whether or not the
Overadvance has been agreed to in advance by the Lender. The acceptance of
payment of an Overadvance fee by the Lender shall not be deemed to constitute
either consent to the Overadvance or a waiver of the resulting Event of Default,
unless the Lender specifically consents to the Overadvance in writing and waives
the Event of Default on whatever conditions the Lender deems appropriate.
Notwithstanding anything stated in this subparagraph (k), if Lender consents to
an Overadvance in writing, the Overadvance fee set forth in this subparagraph
(k) shall not be charged with respect to such Overadvance.
(l) Other Fees and Charges; Payment of Fees. The Lender may from time to
time impose additional fees and charges as consideration for Advances made in
excess of Availability or for other events that constitute an Event of Default
or a Default hereunder, including fees and charges for the administration of
Collateral by the Lender, and fees and charges for the late delivery of reports,
which may be assessed in the Lender's sole discretion on either an hourly,
periodic, or flat fee basis, and in lieu of imposing interest at the Default
Rate.
Section 2.8 Time for Interest Payments; Payment on Non-Business Days;
Computation of Interest and Fees.
(a) Time For Interest Payments. Accrued and unpaid interest accruing on
Floating Rate Advances shall be due and payable on the first day of each month
and on the Termination Date (each an "Interest Payment Date"), or if any such
day is not a Business Day, on the next succeeding Business Day. Interest will
accrue from the most recent date to which interest has been paid or, if no
interest has been paid, from the date of advance to the Interest Payment Date.
If an Interest Payment Date is not a Business Day, payment shall be made on the
next succeeding Business Day. Interest accruing on each LIBOR Advance shall be
due and payable on the last day of the applicable Interest Period; provided,
however, for Interest Periods that are longer than one month, interest shall
nevertheless be due and payable monthly on the last day of each month, and on
the last day of the Interest Period.
26
(b) Payment on Non-Business Days. Whenever any payment to be made
hereunder shall be stated to be due on a day which is not a Business Day, such
payment may be made on the next succeeding Business 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.
(c) Computation of Interest and Fees. 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.
Section 2.9 Lockbox and Collateral Account; Sweep of Funds.
(a) Lockbox and Collateral Account.
(i) The Borrower shall instruct all account debtors to pay all
Accounts directly to the Lockbox. If, notwithstanding such instructions,
the Borrower receives any payments on Accounts, the Borrower shall deposit
such payments into the Collateral Account. The Borrower shall also deposit
all other cash proceeds of Collateral regardless of source or nature
directly into the Collateral Account. Until so deposited, the Borrower
shall hold all such payments and cash proceeds in trust for and as the
property of the Lender and shall not commingle such property with any of
its other funds or property. All deposits in the Collateral Account shall
constitute proceeds of Collateral and shall not constitute payment of the
Obligations.
(ii) All items deposited in the Collateral Account shall be subject
to final payment. If any such item is returned uncollected, the Borrower
will immediately pay the Lender, or, for items deposited in the Collateral
Account, the bank maintaining such account, the amount of that item, or
such bank at its discretion may charge any uncollected item to the
Borrower's commercial account or other account. The Borrower shall be
liable as an endorser on all items deposited in the Collateral Account,
whether or not in fact endorsed by the Borrower.
(b) Sweep of Funds. The Lender shall from time to time, in accordance with
the Blocked Account Agreement, cause funds in the Collateral Account to be
transferred to the Lender's general account for payment of the Obligations.
Amounts deposited in the Collateral Account shall not be subject to withdrawal
by the Borrower, except after payment in full and discharge of all Obligations.
Section 2.10 Voluntary Prepayment; Reduction of the Maximum Line Amount;
Termination of the Credit Facility by the Borrower. Except as otherwise provided
herein, the Borrower may prepay the Advances in whole at any time or from time
to time in part. The Borrower may terminate the Credit Facility or reduce the
Maximum Line Amount at any time if it (i) gives the Lender at least 90 days'
advance written notice prior to the proposed Termination Date, and (ii) pays the
Lender applicable termination, prepayment and contracted funds breakage fees,
and Maximum Line Amount reduction fees in accordance with Section 2.7(g) and
27
Section 2.7(h). Any reduction in the Maximum Line Amount shall be in multiples
of $100,000, and with a minimum reduction of at least $500,000. If the Borrower
terminates the Credit Facility or reduces the Maximum Line Amount to zero, all
Obligations shall be immediately due and payable, and if the Borrower gives the
Lender less than the required 90 days advance written notice, then the interest
rate applicable to borrowings evidenced by Revolving Note shall be the Default
Rate for the period of time commencing 90 days prior to the proposed Termination
Date through the date that the Lender actually receives such written notice. If
the Borrower does not wish the Lender to consider renewal of the Credit Facility
on the next Maturity Date, then the Borrower shall give the Lender at least 90
days written notice prior to the Maturity Date that it will not be requesting
renewal. If the Borrower fails to give the Lender such timely notice, then the
interest rate applicable to borrowings evidenced by the Revolving Note shall be
the Default Rate for the period of time commencing 90 days prior to the Maturity
Date through the date that the Lender actually receives such written notice.
Section 2.11 Mandatory Prepayment. Without notice or demand, if the sum of
the outstanding principal balance of the Revolving Advances shall at any time
exceed the Borrowing Base, the Borrower shall (i) first, immediately prepay the
Revolving Advances to the extent necessary to eliminate such excess; and (ii) if
prepayment in full of the Revolving Advances is insufficient to eliminate such
excess, pay to the Lender in immediately available funds for deposit in the
Special Account an amount equal to the remaining excess. Any payment received by
the Lender hereunder or under Section 2.10 may be applied to the Obligations, in
such order and in such amounts as the Lender in its sole discretion may
determine from time to time.
Section 2.12 Revolving Advances to Pay Obligations. Notwithstanding the
terms of Section 2.1, the Lender may, in its discretion at any time or from time
to time, without the Borrower's request and even if the conditions set forth in
Section 4.2 would not be satisfied, make a Revolving Advance in an amount equal
to the portion of the Obligations from time to time due and payable, and may
deliver the proceeds of any such Revolving Advance to any affiliate of the
Lender in satisfaction of any ▇▇▇▇▇ Fargo Affiliate Obligations and may deliver
the proceeds of any such Revolving Advance to ▇▇▇▇▇ Fargo Merchant Services,
L.L.C. in satisfaction of any unpaid obligations due to that entity.
Section 2.13 Use of Proceeds. The Borrower shall use the proceeds of
Advances and each Letter of Credit for ordinary working capital purposes.
Section 2.14 Liability Records. The Lender may maintain from time to time,
at its discretion, records as to the Obligations. All entries made on any such
record shall be presumed correct until the Borrower establishes the contrary.
Upon the Lender's demand, the Borrower will admit and certify in writing the
exact principal balance of the Obligations that the Borrower then asserts to be
outstanding. Any billing statement or accounting rendered by the Lender shall be
conclusive and fully binding on the Borrower unless the Borrower gives the
Lender specific written notice of exception within 30 days after receipt.
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ARTICLE III
SECURITY INTEREST; OCCUPANCY; SETOFF
Section 3.1.Grant of Security Interest. The Borrower hereby pledges,
assigns and grants to the Lender, for the benefit of itself and as agent for
▇▇▇▇▇ Fargo Merchant Services, LLC and for the benefit of itself and as agent
for any affiliate of the Lender that may provide credit or services to the
Borrower that constitute ▇▇▇▇▇ Fargo Affiliate Obligations, a lien and security
interest (collectively referred to as the "Security Interest") in the
Collateral, as security for the payment and performance of the Obligations. Upon
request by the Lender, the Borrower will grant the Lender, for the benefit of
itself and as agent for ▇▇▇▇▇ Fargo Merchant Services, LLC and for the benefit
of itself and as agent for any affiliate of the Lender that may provide credit
or services to the Borrower that constitute ▇▇▇▇▇ Fargo Affiliate Obligations, a
security interest in all commercial tort claims that the Borrower may have
against any Person.
Section 3.2 Notification of Account Debtors and Other Obligors. The Lender
may at any time (whether or not a Default Period then exists) notify any account
debtor or other Person obligated to pay the amount due that such right to
payment has been assigned or transferred to the Lender for security and shall be
paid directly to the Lender. The Borrower will join in giving such notice if the
Lender so requests. At any time after the Borrower or the Lender gives such
notice to an account debtor or other obligor, the Lender may, but need not, in
the Lender's name or in the Borrower's name, demand, ▇▇▇ for, collect or receive
any money or property at any time payable or receivable on account of, or
securing, any such right to payment, or grant any extension to, make any
compromise or settlement with or otherwise agree to waive, modify, amend or
change the obligations (including collateral obligations) of any such account
debtor or other obligor. The Lender may, in the Lender's name or in the
Borrower's name, as the Borrower's agent and attorney-in-fact, notify the United
States Postal Service to change the address for delivery of the Borrower's mail
to any address designated by the Lender, otherwise intercept the Borrower's
mail, and receive, open and dispose of the Borrower's mail, applying all
Collateral as permitted under this Agreement and holding all other mail for the
Borrower's account or forwarding such mail to the Borrower's last known address.
Section 3.3.Assignment of Insurance. As additional security for the
payment and performance of the Obligations, the Borrower hereby assigns to the
Lender any and all monies (including proceeds of insurance and refunds of
unearned premiums) due or to become due under, and all other rights of the
Borrower with respect to, any and all policies of insurance now or at any time
hereafter covering the Collateral or any evidence thereof or any business
records or valuable papers pertaining thereto, and the Borrower hereby directs
the issuer of any such policy to pay all such monies directly to the Lender. At
any time, whether or not a Default Period then exists, the Lender may (but need
not), in the Lender's name or in the Borrower's name, execute and deliver proof
of claim, receive all such monies, endorse checks and other instruments
representing payment of such monies, and adjust, litigate, compromise or release
any claim against the issuer of any such policy. Any monies received as payment
for any loss under any insurance policy mentioned above (other than liability
insurance policies) or as payment of any award or compensation for condemnation
or taking by eminent domain, shall be paid over to the Lender to be applied, at
the option of the Lender, either to the prepayment of the Obligations or shall
be disbursed to the Borrower under staged payment terms reasonably satisfactory
to the Lender for application to the cost of repairs, replacements, or
restorations. Any such repairs, replacements, or restorations shall be effected
with reasonable promptness and shall be of a value at least equal to the value
of the items or property destroyed prior to such damage or destruction.
29
Section 3.4 Occupancy.
(a) The Borrower hereby irrevocably grants to the Lender (to the extent
Borrower has such rights) the right to take possession of the Premises at any
time during a Default Period without notice or consent. In exercising its rights
to occupancy under this subparagraph (a), Lender shall act in a reasonable
manner.
(b) The Lender may use the Premises only to hold, process, manufacture,
sell, use, store, liquidate, realize upon or otherwise dispose of goods that are
Collateral and for other purposes that the Lender may in good ▇▇▇▇▇ ▇▇▇▇ to be
related or incidental purposes.
(c) The Lender's right to hold the Premises shall cease and terminate upon
the earlier of (i) payment in full and discharge of all Obligations and
termination of the Credit Facility, and (ii) final sale or disposition of all
goods constituting Collateral and delivery of all such goods to purchasers.
(d) The Lender shall not be obligated to pay or account for any rent or
other compensation for the possession, occupancy or use of any of the Premises;
provided, however, that if the Lender does pay or account for any rent or other
compensation for the possession, occupancy or use of any of the Premises, the
Borrower shall reimburse the Lender promptly for the full amount thereof. In
addition, the Borrower will pay, or reimburse the Lender for, all taxes, fees,
duties, imposts, charges and expenses at any time incurred by or imposed upon
the Lender by reason of the execution, delivery, existence, recordation,
performance or enforcement of this Agreement or the provisions of this Section
3.4.
Section 3.5 License. Without limiting the generality of any other Security
Document, the Borrower hereby grants to the Lender a non-exclusive, worldwide
and royalty-free license to use or otherwise exploit all Intellectual Property
Rights of the Borrower for the purpose of: (a) completing the manufacture of any
in-process materials during any Default Period so that such materials become
saleable Inventory, all in accordance with the same quality standards previously
adopted by the Borrower for its own manufacturing and subject to the Borrower's
reasonable exercise of quality control; and (b) selling, leasing or otherwise
disposing of any or all Collateral during any Default Period.
Section 3.6 Financing Statement. The Borrower authorizes the Lender to
file from time to time, such financing statements against collateral described
as "all personal property" or "all assets" or describing specific items of
collateral including commercial tort claims as the Lender deems necessary or
useful to perfect the Security Interest. All financing statements filed before
the date hereof to perfect the Security Interest were authorized by the Borrower
and are hereby re-authorized. A carbon, photographic or other reproduction of
this Agreement or of any financing statements signed by the Borrower is
sufficient as a financing statement and may be filed as a financing statement in
any state to perfect the security interests granted hereby. For this purpose,
the Borrower represents and warrants that the following information is true and
correct:
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Name and address of Debtor:
Interpharm, Inc.
▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇
Federal Employer Identification No. ▇▇-▇▇▇▇▇▇▇
Name and address of Secured Party:
▇▇▇▇▇ Fargo Business Credit
▇▇▇ ▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇
▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇
Section 3.7 Setoff. The Lender may at any time or from time to time during
a Default Period, at its sole discretion and without demand and without notice
to anyone, setoff any liability owed to the Borrower by the Lender, whether or
not due, against any Obligation, whether or not due. In addition, each other
Person holding a participating interest in any Obligations shall have the right
to appropriate or setoff any deposit or other liability then owed by such Person
to the Borrower, whether or not due, and apply the same to the payment of said
participating interest, as fully as if such Person had lent directly to the
Borrower the amount of such participating interest.
Section 3.8 Collateral. This Agreement does not contemplate a sale of
accounts, contract rights or chattel paper, and, as provided by law, the
Borrower is entitled to any surplus and shall remain liable for any deficiency.
The Lender's duty of care with respect to Collateral in its possession (as
imposed by law) shall be deemed fulfilled if it exercises reasonable care in
physically keeping such Collateral, or in the case of Collateral in the custody
or possession of a bailee or other third Person, exercises reasonable care in
the selection of the bailee or other third Person, and the Lender need not
otherwise preserve, protect, insure or care for any Collateral. The Lender shall
not be obligated to preserve any rights the Borrower may have against prior
parties, to realize on the Collateral at all or in any particular manner or
order or to apply any cash proceeds of the Collateral in any particular order of
application. The Lender has no obligation to clean-up or otherwise prepare the
Collateral for sale. The Borrower waives any right it may have to require the
Lender to pursue any third Person for any of the Obligations.
ARTICLE IV
CONDITIONS OF LENDING
Section 4.1 Conditions Precedent to the Initial Advances. The Lender's
obligation to make the initial Advances shall be subject to the condition
precedent that the Lender shall have received all of the following, each
properly executed by the appropriate party and in form and substance
satisfactory to the Lender:
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(a) This Agreement.
(b) The Revolving Note, the M&E Note, the Cap Ex Note, and the Real Estate
Note.
(c) Intentionally Omitted.
(d) A true and correct copy of any and all leases pursuant to which the
Borrower is leasing the Premises, together with a landlord's disclaimer and
consent with respect to each such lease.
(e) A true and correct copy of any and all mortgages pursuant to which the
Borrower has mortgaged the Premises, together with a mortgagee's disclaimer and
consent with respect to each such mortgage.
(f) A true and correct copy of any and all agreements pursuant to which
the Borrower's property is in the possession of any Person other than the
Borrower, together with, in the case of any goods held by such Person for
resale, (i) a consignee's acknowledgment and waiver of Liens, (ii) UCC financing
statements sufficient to protect the Borrower's and the Lender's interests in
such goods, and (iii) UCC searches showing that no other secured party has filed
a financing statement against such Person and covering property similar to the
Borrower's other than the Borrower, or if there exists any such secured party,
evidence that each such secured party has received notice from the Borrower and
the Lender sufficient to protect the Borrower's and the Lender's interests in
the Borrower's goods from any claim by such secured party.
(g) An acknowledgment and waiver of Liens from each warehouse in which the
Borrower is storing Inventory.
(h) A true and correct copy of any and all agreements pursuant to which
the Borrower's property is in the possession of any Person other than the
Borrower, together with, (i) an acknowledgment and waiver of Liens from each
subcontractor who has possession of the Borrower's goods from time to time, (ii)
UCC financing statements sufficient to protect the Borrower's and the Lender's
interests in such goods, and (iii) UCC searches showing that no other secured
party has filed a financing statement covering such Person's property other than
the Borrower, or if there exists any such secured party, evidence that each such
secured party has received notice from the Borrower and the Lender sufficient to
protect the Borrower's and the Lender's interests in the Borrower's goods from
any claim by such secured party.
(i) Intentionally Omitted.
(j) Intentionally Omitted.
(k) The Blocked Account Agreement.
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(l) Control agreements with each bank at which the Borrower maintains
deposit accounts (the "Control Agreements").
(m) The ANDA Security Agreement.
(n) The ▇▇▇▇▇▇▇ ▇▇▇▇▇ Pledged Collateral Account Control Agreement.
(o) Intentionally Omitted.
(p) Intentionally Omitted.
(q) Current searches of appropriate filing offices showing that (i) no
Liens have been filed and remain in effect against the Borrower except Permitted
Liens or Liens held by Persons who have agreed in writing that upon receipt of
proceeds of the initial Advances, they will satisfy, release or terminate such
Liens in a manner satisfactory to the Lender, and (ii) the Lender has duly filed
all financing statements necessary to perfect the Security Interest, to the
extent the Security Interest is capable of being perfected by filing.
(r) A certificate of the Borrower's Secretary or Assistant Secretary
certifying that attached to such certificate are (i) the resolutions of the
Borrower's Directors and, if required, Owners, authorizing the execution,
delivery and performance of the Loan Documents, (ii) true, correct and complete
copies of the Borrower's Constituent Documents, and (iii) examples of the
signatures of the Borrower's Officers or agents authorized to execute and
deliver the Loan Documents and other instruments, agreements and certificates,
including Advance requests, on the Borrower's behalf.
(s) A current certificate issued by the Secretary of State of the State of
New York, certifying that the Borrower is in compliance with all applicable
organizational requirements of the State of New York.
(t) Evidence that the Borrower is duly licensed or qualified to transact
business in all jurisdictions where the character of the property owned or
leased or the nature of the business transacted by it makes such licensing or
qualification necessary.
(u) A certificate of an Officer of the Borrower confirming, in his
personal capacity, the representations and warranties set forth in Article V.
(v) Intentionally Omitted.
(w) Certificates of the insurance required hereunder, with all hazard
insurance containing a lender's loss payable endorsement in the Lender's favor
and with all liability insurance naming the Lender as an additional insured.
(x) The separate Guaranty of each Guarantor, pursuant to which each
Guarantor unconditionally guarantees the full and prompt payment of all or a
part of the Obligations.
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(y) A waiver of interest issued by the spouse of each individual
Guarantor, waiving any and all interest he or she may have in such Guarantor's
respective Securities Account.
(z) An opinion of counsel to each Guarantor, addressed to the Lender.
(aa) Payment of the fees and commissions due under Section 2.7 through the
date of the initial Advance or Letter of Credit and expenses incurred by the
Lender through such date and required to be paid by the Borrower under Section
8.5, including all legal expenses incurred through the date of this Agreement.
(bb) Evidence that after making the initial Revolving Advance, satisfying
all obligations owed to the Borrower's prior lender, satisfying all trade
payables older than 60 days from invoice date, book overdrafts and closing
costs, Availability shall be not less than $10,000,000.
(cc) A Customer Identification Information form and such other forms and
verification as the Lender may need to comply with the U.S.A. Patriot Act.
(dd) With respect to the real estate that is encumbered by the mortgage of
the Lender (i) an appraisal ordered by the Lender or its agent of said real
property and all improvements thereon, conforming to Uniform Standards of
Professional Appraisal Practice and issued by a real estate appraiser acceptable
to the Lender, reflecting values acceptable to the Lender in its discretion,
(ii) an American Land Title Association policy of title insurance, with such
endorsements as the Lender may require, issued by an insurer in such amounts as
the Lender may require, insuring the Lender's first priority lien on said real
estate, subject only to such exceptions as the Lender in its discretion may
approve, together with such evidence relating to the payment of liens or
potential liens as the Lender may require, and (iii) an American Land Title
Association survey certified to the Lender and to the title company that is
acceptable to the Lender.
(ee) With respect to the real estate that is encumbered by the mortgage of
the Lender (i) a current environmental site assessment indicating that the real
property is subject to no "recognized environmental conditions", as that term is
defined by the American Society for Testing and Materials, in its standards for
environmental due diligence, and is not in need of remedial action to avoid
subjecting its owner to any present or future liability or contingent liability
with respect to the release of toxic or hazardous wastes or substances.
(ff) With respect to the real estate that is encumbered by the mortgage of
the Lender (i) a flood hazard determination form, confirming whether or not the
parcel is in a flood hazard area and whether or not flood insurance must be
obtained, and, if the real estate is located in a flood hazard area, (ii) a
policy of flood insurance.
(gg) With respect to the real estate that is encumbered by the mortgage of
the Lender, copies of management services and maintenance contracts, fire,
health and safety reports, certificates of occupancy, leases and rent rolls, and
such other information relating to the real estate and the improvements thereon
that the Lender in its discretion deems necessary.
(hh) Intentionally Omitted.
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(ii) Such other documents as the Lender in its reasonable discretion may
require.
Section 4.2 Conditions Precedent to All Advances . The Lender's obligation
to make each Advance shall be subject to the further conditions precedent that:
(a) the representations and warranties contained in Article V are correct
on and as of the date of such Advance as though made on and as of such date,
except to the extent that such representations and warranties relate solely to
an earlier date; and
(b) no event has occurred and is continuing, or would result from such
Advance which constitutes a Default or an Event of Default.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
Except as set forth in the Disclosure Schedule annexed hereto, the
Borrower represents and warrants to the Lender as follows:
Section 5.1 Existence and Power; Name; Chief Executive Office; Inventory
and Equipment Locations; Federal Employer Identification Number and
Organizational Identification Number. The Borrower is a corporation, duly
organized, validly existing and in good standing under the laws of the State of
New York and is duly licensed or qualified to transact business in all
jurisdictions where the character of the property owned or leased or the nature
of the business transacted by it makes such licensing or qualification
necessary. The Borrower has all requisite power and authority to conduct its
business, to own its properties and to execute and deliver, and to perform all
of its obligations under, the Loan Documents. During its existence, the Borrower
has done business solely under the names set forth in Schedule 5.1. The
Borrower's chief executive office and principal place of business is located at
the address set forth in Schedule 5.1, and all of the Borrower's records
relating to its business or the Collateral are kept at that location. All
Inventory and Equipment is located at that location or at one of the other
locations listed in Schedule 5.1. The Borrower's federal employer identification
number and organization identification number are correctly set forth in Section
3.6.
Section 5.2 Capitalization. Schedule 5.2 constitutes a correct and
complete list of all all Persons holding ownership interests and rights to
acquire ownership interests which if fully exercised would cause such Person to
hold more than five percent (5%) of all ownership interests of the Borrower on a
fully diluted basis, and an organizational chart showing the ownership structure
of all Subsidiaries of the Borrower.
Section 5.3 Authorization of Borrowing; No Conflict as to Law or
Agreements. The execution, delivery and performance by the Borrower of the Loan
Documents and the borrowings from time to time hereunder have been duly
authorized by all necessary corporate action and do not and will not (i) require
any consent or approval of the Borrower's Owners; (ii) require any
authorization, consent or approval by, or registration, declaration or filing
with, or notice to, any governmental department, commission, board, bureau,
agency or instrumentality, domestic or foreign, or any third party, except such
35
authorization, consent, approval, registration, declaration, filing or notice as
has been obtained, accomplished or given prior to the date hereof; (iii) violate
any provision of any law, rule or regulation (including Regulation X of the
Board of Governors of the Federal Reserve System) or of any order, writ,
injunction or decree presently in effect having applicability to the Borrower or
of the Borrower's Constituent Documents; (iv) result in a material breach of or
constitute a default in any material respect under any indenture or loan or
credit agreement or any other material agreement, lease or instrument to which
the Borrower is a party or by which it or its properties may be bound or
affected; or (v) result in, or require, the creation or imposition of any Lien
(other than the Security Interest) upon or with respect to any of the properties
now owned or hereafter acquired by the Borrower.
Section ▇.▇.▇▇▇▇▇ Agreements. This Agreement constitutes and, upon due
execution by the Borrower, the other Loan Documents will constitute the legal,
valid and binding obligations of the Borrower, enforceable against the Borrower
in accordance with their respective terms.
Section 5.5 Subsidiaries. Except as set forth in Schedule 5.5 hereto, the
Borrower has no Subsidiaries.
Section 5.6 Financial Condition; No Adverse Change. The Borrower has
furnished to the Lender its audited financial statements for its fiscal year
ended June 30, 2005 and unaudited financial statements for the
fiscal-year-to-date period ended September 30, 2005 and those statements fairly
present the Borrower's financial condition on the dates thereof and the results
of its operations and cash flows for the periods then ended and were prepared in
accordance with GAAP, subject in the case of unaudited interim financial
statements to year-end adjustments. Since the date of the most recent financial
statements, there has been no change in the Borrower's business, properties or
condition (financial or otherwise) which has had a Material Adverse Effect,
except as set forth on Schedule 5.6.
Section 5.7 Litigation. There are no actions, suits or proceedings pending
or, to the Borrower's knowledge, threatened against or affecting the Borrower or
any of its Affiliates or the properties of the Borrower or any of its Affiliates
before any court or governmental department, commission, board, bureau, agency
or instrumentality, domestic or foreign, which, if determined adversely to the
Borrower or any of its Affiliates, would have a Material Adverse Effect on the
financial condition, properties or operations of the Borrower or any of its
Affiliates.
Section 5.8 Regulation U. The Borrower is not engaged in the business of
extending credit for the purpose of purchasing or carrying margin stock (within
the meaning of Regulation U of the Board of Governors of the Federal Reserve
System), and no part of the proceeds of any Advance will be used to purchase or
carry any margin stock or to extend credit to others for the purpose of
purchasing or carrying any margin stock.
Section 5.9 Taxes. The Borrower and its Affiliates have paid or caused to
be paid to the proper authorities when due all federal, state and local taxes
required to be withheld by each of them. The Borrower and its Affiliates have
filed all federal, state and local tax returns which to the knowledge of the
Officers of the Borrower or any Affiliate, as the case may be, are required to
be filed, except to the extent a request for an extension of time has been
granted, and the Borrower and its Affiliates have paid or caused to be paid to
the respective taxing authorities all taxes as shown on said returns or on any
assessment received by any of them to the extent such taxes have become due.
36
Section 5.10 Titles and Liens. The Borrower has good and absolute title to
all Collateral free and clear of all Liens other than Permitted Liens. No
financing statement naming the Borrower as debtor is on file in any office
except to perfect only Permitted Liens.
Section 5.11 Intellectual Property Rights.
(a) Owned Intellectual Property. Schedule 5.11 is a complete list of all
patents, applications for patents, trademarks, applications to register
trademarks, service marks, applications to register service marks, mask works,
trade dress and copyrights for which the Borrower is the owner of record (the
"Owned Intellectual Property"). Except as disclosed on Schedule 5.11, (i) the
Borrower owns the Owned Intellectual Property free and clear of all restrictions
(including covenants not to ▇▇▇ a third party), court orders, injunctions,
decrees, writs or Liens, whether by written agreement or otherwise, (ii) no
Person other than the Borrower owns or has been granted any right in the Owned
Intellectual Property, (iii) all Owned Intellectual Property is valid,
subsisting and enforceable and (iv) the Borrower has taken all commercially
reasonable action necessary to maintain and protect the Owned Intellectual
Property.
(b) Agreements with Employees and Contractors. The Borrower has entered
into a legally enforceable agreement with each of its Officers and key employees
and subcontractors obligating each such Person to assign to the Borrower,
without any additional compensation, any Intellectual Property Rights created,
discovered or invented by such Person in the course of such Person's employment
or engagement with the Borrower (except to the extent prohibited by law), and
further requiring such Person to cooperate with the Borrower, without any
additional compensation, in connection with securing and enforcing any
Intellectual Property Rights therein; provided, however, that the foregoing
shall not apply with respect to employees and subcontractors whose job
descriptions are of the type such that no such assignments are reasonably
foreseeable.
(c) Intellectual Property Rights Licensed from Others. Schedule 5.11 is a
complete list of all agreements under which the Borrower has licensed
Intellectual Property Rights from another Person ("Licensed Intellectual
Property") other than readily available, non-negotiated licenses of computer
software and other intellectual property used solely for performing accounting,
word processing and similar administrative tasks ("Off-the-shelf Software") and
a summary of any ongoing payments the Borrower is obligated to make with respect
thereto. Except as disclosed on Schedule 5.11 and in written agreements, copies
of which have been given to the Lender, the Borrower's licenses to use the
Licensed Intellectual Property are free and clear of all restrictions, Liens,
court orders, injunctions, decrees, or writs, whether by written agreement or
otherwise. Except as disclosed on Schedule 5.11, the Borrower is not obligated
or under any liability whatsoever to make any payments of a material nature by
way of royalties, fees or otherwise to any owner of, licensor of, or other
claimant to, any Intellectual Property Rights.
37
(d) Other Intellectual Property Needed for Business. Except for
Off-the-shelf Software and as disclosed on Schedule 5.11, the Owned Intellectual
Property and the Licensed Intellectual Property constitute all Intellectual
Property Rights used or necessary to conduct the Borrower's business as it is
presently conducted or as the Borrower reasonably foresees conducting it.
(e) Infringement. Except as disclosed on Schedule 5.11, the Borrower has
no knowledge of, and has not received any written claim or notice alleging, any
Infringement of another Person's Intellectual Property Rights (including any
written claim that the Borrower must license or refrain from using the
Intellectual Property Rights of any third party) nor, to the Borrower's
knowledge, is there any threatened claim or any reasonable basis for any such
claim.
Section 5.12 Plans. Except as disclosed to the Lender in writing prior to
the date hereof, neither the Borrower nor any ERISA Affiliate (i) maintains or
has maintained any Pension Plan, (ii) contributes or has contributed to any
Multiemployer Plan or (iii) provides or has provided post-retirement medical or
insurance benefits with respect to employees or former employees (other than
benefits required under Section 601 of ERISA, Section 4980B of the IRC or
applicable state law). Neither the Borrower nor any ERISA Affiliate has received
any notice or has any knowledge to the effect that it is not in full compliance
with any of the requirements of ERISA, the IRC or applicable state law with
respect to any Plan. No Reportable Event exists in connection with any Pension
Plan. Each Plan which is intended to qualify under the IRC is so qualified, and
no fact or circumstance exists which may have an adverse effect on the Plan's
tax-qualified status. Neither the Borrower nor any ERISA Affiliate has (i) any
accumulated funding deficiency (as defined in Section 302 of ERISA and Section
412 of the IRC) under any Plan, whether or not waived, (ii) any liability under
Section 4201 or 4243 of ERISA for any withdrawal, partial withdrawal,
reorganization or other event under any Multiemployer Plan or (iii) any
liability or knowledge of any facts or circumstances which could result in any
liability to the Pension Benefit Guaranty Corporation, the Internal Revenue
Service, the Department of Labor or any participant in connection with any Plan
(other than routine claims for benefits under the Plan).
Section 5.13 Default. The Borrower is in compliance with all provisions of
all agreements, instruments, decrees and orders to which it is a party or by
which it or its property is bound or affected, the breach or default of which
could have a Material Adverse Effect.
Section 5.14 Environmental Matters.
(a) Except as disclosed on Schedule 5.14, there are not present in, on or
under the Premises any Hazardous Substances in such form or quantity as to
create any material liability or obligation for either the Borrower or the
Lender under the common law of any jurisdiction or under any Environmental Law,
and no Hazardous Substances have ever been stored, buried, spilled, leaked,
discharged, emitted or released in, on or under the Premises in such a way as to
create any such material liability.
38
(b) Except as disclosed on Schedule 5.14, the Borrower has not disposed of
Hazardous Substances in such a manner as to create any material liability under
any Environmental Law.
(c) Except as disclosed on Schedule 5.14, there have not existed in the
past, nor are there any threatened or impending requests, claims, notices,
investigations, demands, administrative proceedings, hearings or litigation
relating in any way to the Premises or the Borrower, alleging material liability
under, violation of, or noncompliance with any Environmental Law or any license,
permit or other authorization issued pursuant thereto.
(d) Except as disclosed on Schedule 5.14, the Borrower's businesses are
and have in the past always been conducted in all material respects in
accordance with all Environmental Laws and all material licenses, permits and
other authorizations required pursuant to any Environmental Law and necessary
for the lawful and efficient operation of such businesses are in the Borrower's
possession and are in full force and effect, nor has the Borrower been denied
insurance on grounds related to potential environmental liability. No permit
required under any Environmental Law is scheduled to expire within 12 months and
there is no threat that any such permit will be withdrawn, terminated, limited
or materially changed.
(e) Except as disclosed on Schedule 5.14, the Premises are not and never
have been listed on the National Priorities List, the Comprehensive
Environmental Response, Compensation and Liability Information System or any
similar federal, state or local list, schedule, log, inventory or database.
(f) The Borrower has delivered to the Lender all environmental
assessments, audits, reports, permits, licenses and other documents describing
or relating in any way to the Premises or the Borrower's businesses.
Section 5.15 Submissions to Lender. All financial and other information
provided to the Lender by or on behalf of the Borrower in connection with the
Borrower's request for the credit facilities contemplated hereby is (i) is true
and correct in all material respects, (ii) does not omit any material fact
necessary to make such information not misleading and, (iii) as to projections,
valuations or proforma financial statements, presents a good faith opinion as to
such projections, valuations and proforma condition and results.
Section 5.16 Financing Statements. The Borrower has authorized the filing
of financing statements sufficient when filed to perfect the Security Interest
and the other security interests created by the Security Documents. When such
financing statements are filed in the offices noted therein, the Lender will
have a valid and perfected security interest in all Collateral which is capable
of being perfected by filing financing statements. None of the Collateral is or
will become a fixture on real estate, unless a sufficient fixture filing is in
effect with respect thereto.
Section 5.17 Rights to Payment. Each right to payment and each instrument,
document, chattel paper and other agreement constituting or evidencing
Collateral is (or, in the case of all future Collateral, will be when arising
or issued) the valid, genuine and legally enforceable obligation, subject to no
defense, setoff or counterclaim, of the account debtor or other obligor named
therein or in the Borrower's records pertaining thereto as being obligated to
pay such obligation.
39
Section 5.18 Financial Solvency. Both before and after giving effect to
the recapitalization and all of the transactions contemplated in the Loan
Documents, none of the Borrower or its Affiliates:
(a) Was or will be insolvent, as that term is used and defined in Section
101(32) of the United States Bankruptcy Code and Section 2 of the Uniform
Fraudulent Transfer Act;
(b) Has unreasonably small capital or is engaged or about to engage in a
business or a transaction for which any remaining assets of the Borrower or such
Affiliate are unreasonably small;
(c) By executing, delivering or performing its obligations under the Loan
Documents or other documents to which it is a party or by taking any action with
respect thereto, intends to, nor believes that it will, incur debts beyond its
ability to pay them as they mature;
(d) By executing, delivering or performing its obligations under the Loan
Documents or other documents to which it is a party or by taking any action with
respect thereto, intends to hinder, delay or defraud either its present or
future creditors; and
(e) At this time contemplates filing a petition in bankruptcy or for an
arrangement or reorganization or similar proceeding under any law of any
jurisdiction, nor, to the best knowledge of the Borrower, is the subject of any
actual, pending or threatened bankruptcy, insolvency or similar proceedings
under any law of any jurisdiction.
ARTICLE VI
COVENANTS
So long as the Obligations shall remain unpaid, or the Credit Facility
shall remain outstanding, the Borrower will comply with the following
requirements, unless the Lender shall otherwise consent in writing:
Section 6.1 Reporting Requirements. The Borrower will deliver, or cause to
be delivered, to the Lender each of the following, which shall be in form and
detail acceptable to the Lender:
(a) Annual Financial Statements. As soon as available, and in any event
within 90 days after the end of each fiscal year of the Borrower, the Borrower's
and Holdings' audited financial statements with the unqualified opinion of
independent certified public accountants selected by the Borrower and reasonably
acceptable to the Lender, which annual financial statements shall include the
Borrower's balance sheet as at the end of such fiscal year and the related
statements of the Borrower's income, retained earnings and cash flows for the
fiscal year then ended, prepared, if the Lender so requests, on a consolidating
and consolidated basis to include any Affiliates, all in reasonable detail and
prepared in accordance with GAAP, together with (i) copies of all management
letters prepared by such accountants; and (ii) a certificate of the Borrower's
chief financial officer stating that such financial statements have been
prepared in accordance with GAAP, fairly represent the Borrower's financial
position and the results of its operations, and whether or not such Officer has
knowledge of the occurrence of any Default or Event of Default and, if so,
stating in reasonable detail the facts with respect thereto.
40
(b) Monthly Financial Statements. As soon as available and in any event
within 30 days after the end of each month, an unaudited/internal balance sheet
and statements of income and retained earnings of the Borrower and Holdings as
at the end of and for such month and for the year to date period then ended,
prepared, if the Lender so requests, on a consolidating and consolidated basis
to include any Affiliates, in reasonable detail and stating in comparative form
the figures for the corresponding date and periods in the previous year, all
prepared in accordance with GAAP, subject to year-end audit adjustments and
which fairly represent the Borrower's financial position and the results of its
operations; and accompanied by a certificate of the Borrower's chief financial
officer, substantially in the form of Exhibit B hereto stating (i) that such
financial statements have been prepared in accordance with GAAP, subject to
year-end audit adjustments, and fairly represent the Borrower's financial
position and the results of its operations, (ii) whether or not such Officer has
knowledge of the occurrence of any Default or Event of Default not theretofore
reported and remedied and, if so, stating in reasonable detail the facts with
respect thereto, and (iii) all relevant facts in reasonable detail to evidence,
and the computations as to whether or not the Borrower is in compliance with the
Financial Covenants. Notwithstanding the foregoing, the Borrower shall not be
required to deliver to the Lender monthly financial statements required to be
delivered in this Section 6.1(b) for the months of February 2006 or March 2006.
In addition, the Borrower shall deliver monthly financial statements for April
2006 on or before June 15, 2006.
(c) Collateral Reports. Within 15 days after the end of each month or more
frequently if the Lender so requires, the Borrower's accounts receivable and its
accounts payable agings, a perpetual inventory report, an inventory
certification report, and a calculation of the Borrower's Accounts, Eligible
Accounts, Inventory and Eligible Inventory as at the end of such month or
shorter time period. Notwithstanding anything stated in this Section 6.1(c),
Borrower may provide a roll forward of the inventory for months ending January
31, 2006 and February 28, 2006.
(d) Projections. No later than May 31, 2007 and subsequently, no later
than 30 days prior to the last day of each fiscal year, the Borrower's and
Holdings' projected balance sheets, income statements, statements of cash flow
and projected Availability for each month of the succeeding fiscal year, each in
reasonable detail. Such items will be certified by the Officer who is the
Borrower's chief financial officer as being the most accurate projections
available and used by the Borrower for internal planning purposes and be
delivered with a statement of underlying assumptions and such supporting
schedules and information as the Lender may in its discretion require.
41
(e) Supplemental Reports. Weekly, or more frequently if the Lender so
reasonably requires, the Borrower's "daily collateral report," credit memo
journals, collection journals, sales journals, and copies of invoices and signed
and dated shipment documents for goods sold to said account debtors in excess of
$50,000 (provided, however, that Borrower shall not be obligated to remit more
than two invoices or shipment documents, such as a ▇▇▇▇ of lading, per daily
collateral report unless an Event of Default has occurred). Daily reporting of
the Securities Accounts or online view access, to be received by Lender directly
from ▇▇▇▇▇▇▇ ▇▇▇▇▇.
(f) Litigation. Immediately after the commencement thereof, notice in
writing of all litigation and of all proceedings before any governmental or
regulatory agency affecting the Borrower (i) of the type described in Section
5.14(c) or (ii) which seek a monetary recovery against the Borrower or Holdings
in excess of $200,000.
(g) Defaults. When ▇▇▇▇▇▇ ▇▇▇▇▇▇▇, or the Chairman of the Board, Chief
Executive Officer, or Chief Financial Officer of either the Borrower or Holdings
becomes aware that any Default or Event of Default has occurred or has a
substantial likelihood of occurring, and no later than 3 days after ▇▇▇▇▇▇
▇▇▇▇▇▇▇, such Chairman, or such Officer becomes aware of such Default, Event of
Default, or likelihood thereof, notice of such occurrence, together with a
detailed statement by a responsible Officer of the Borrower of the steps being
taken by the Borrower to cure the effect thereof.
(h) Plans. As soon as possible, and in any event within 30 days after the
Borrower knows or has reason to know that any Reportable Event with respect to
any Pension Plan has occurred, a statement signed by the Officer who is the
Borrower's chief financial officer setting forth details as to such Reportable
Event and the action which the Borrower proposes to take with respect thereto,
together with a copy of the notice of such Reportable Event to the Pension
Benefit Guaranty Corporation. As soon as possible, and in any event within 10
days after the Borrower fails to make any quarterly contribution required with
respect to any Pension Plan under Section 412(m) of the IRC, the Borrower will
deliver to the Lender a statement signed by the Officer who is the Borrower's
chief financial officer setting forth details as to such failure and the action
which the Borrower proposes to take with respect thereto, together with a copy
of any notice of such failure required to be provided to the Pension Benefit
Guaranty Corporation. As soon as possible, and in any event within ten days
after the Borrower knows or has reason to know that it has or is reasonably
expected to have any liability under Sections 4201 or 4243 of ERISA for any
withdrawal, partial withdrawal, reorganization or other event under any
Multiemployer Plan, the Borrower will deliver to the Lender a statement of the
Borrower's chief financial officer setting forth details as to such liability
and the action which the Borrower proposes to take with respect thereto.
(i) Disputes. Promptly upon knowledge thereof, notice of (i) any disputes
or claims by the Borrower's customers; (ii) credit memos; and (iii) any goods
returned to or recovered by the Borrower, in each case involving an amount in
excess of $50,000.
(j) Officers and Directors. Promptly upon knowledge thereof, notice of any
change in the persons constituting the Borrower's or Holdings' Officers and
Directors.
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(k) Collateral. Promptly upon knowledge thereof, notice of any loss of or
material damage to any Collateral or of any substantial adverse change in any
Collateral or the prospect of payment thereof.
(l) Commercial Tort Claims. Promptly upon knowledge thereof, notice of any
commercial tort claims it may bring against any Person, including the name and
address of each defendant, a summary of the facts, an estimate of the Borrower's
or Holdings' damages, copies of any complaint or demand letter submitted by the
Borrower, and such other information as the Lender may request.
(m) Intellectual Property.
(i) Thirty (30) days' prior written notice of Borrower's or
Holdings' intent to acquire material Intellectual Property Rights; except
for transfers permitted under Section 6.18, the Borrower or Holdings will
give the Lender 30 days prior written notice of its intent to dispose of
material Intellectual Property Rights and upon request shall provide the
Lender with copies of all proposed documents and agreements concerning
such rights.
(ii) Promptly upon knowledge thereof, notice of (A) any Infringement
of its Intellectual Property Rights by others, (B) claims that the
Borrower is Infringing another Person's Intellectual Property Rights and
(C) any threatened cancellation, termination or material limitation of its
Intellectual Property Rights.
(iii) Promptly upon receipt, copies of all registrations and filings
with respect to its Intellectual Property Rights.
(n) Reports to Owners. Promptly upon their distribution, copies of all
financial statements, reports and proxy statements which the Borrower or
Holdings shall have sent to its Owners.
(o) SEC Filings. Promptly after the sending or filing thereof, copies of
all regular and periodic reports which Holdings shall file with the Securities
and Exchange Commission or any national securities exchange. All such SEC
filings shall be filed with the Securities and Exchange Commission on or before
the applicable deadlines. Quarterly 10-Q statements shall be delivered to Lender
no later than 45 days after the end of each quarter.
(p) Tax Returns of Borrower. As soon as possible, and in any event no
later than five days after they are due to be filed, copies of the state and
federal income tax returns and all schedules thereto of the Borrower and
Holdings.
(q) Intentionally Omitted.
(r) Violations of Law. Promptly upon knowledge thereof, notice of the
Borrower's or Holdings' violation of any law, rule or regulation, the
non-compliance with which could have a Material Adverse Effect on the Borrower.
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(s) Other Reports. From time to time, with reasonable promptness, any and
all receivables schedules, inventory reports, collection reports, deposit
records, equipment schedules, copies of invoices to account debtors, shipment
documents and delivery receipts for goods sold, and such other material,
reports, records or information as the Lender may reasonably request.
Section 6.2 Financial Covenants.
(a) Intentionally Omitted.
(b) Minimum Net Income Before Tax and Research and Development
Expenses.(1) Holdings will achieve for each period described below, Net Income
Before Tax and Research and Development Expenses of not less than the amount set
forth for each such period (numbers appearing between "< >" are negative):
Period Minimum Net Income
------ ------------------
July 1, 2005 through March 31, 2006 $3,886,000
July 1, 2005 through June 30, 2006 $4,062,000
July 1, 2006 through September 30, 2006 $1,400,000
July 1, 2006 through December 31, 2006 $2,500,000
July 1, 2006 through March 31, 2007 $4,000,000
July 1, 2006 through June 30, 2007 $6,000,000
(c) Minimum Net Income Before Tax. Holdings will achieve for each period
described below, Net Income Before Tax of not less than the amount set forth for
each such period (numbers appearing between "< >" are negative):
Period Minimum Net Income
------ ------------------
July 1, 2005 through March 31, 2006 <$4,000,000>
July 1, 2005 through June 30, 2006 <11,133,000>
(d) Leverage Ratio. Holdings will maintain, as of each fiscal quarter end,
during each period described below, a Leverage Ratio, determined as of the end
of each fiscal quarter, of not greater than the ratio set forth for each such
period:
-------------------
(1) Holdings is required to meet only one of either (b) or (c) above through
the period ending June 30, 2006, after which only the requirements of (b)
must be met.
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Period Leverage Ratio
------ --------------
March 31, 2006 1.80x
June 30, 2006 2.50x
September 30, 2006 3.50x
December 31, 2006 3.75x
March 31, 2007 3.85x
June 30, 2007 3.50x
(e) Net Cash Flow. Holdings will achieve Net Cash Flow during each period
described below of not less than the amount set forth for each such period
(numbers appearing between "< >" are negative):
Period Net Cash Flow
------ -------------
July 1, 2005 through March 31, 2006 <$6,456,000>
July 1, 2005 through June 30, 2006 <$6,904,000>
July 1, 2006 through September 30, 2006 <$6,732,000>
July 1, 2006 through December 31, 2006 <$8,694,000>
July 1, 2006 through March 31, 2007 <$8,921,000>
July 1, 2006 through June 30, 2007 <$5,954,000>
(f) Intentionally Omitted.
(g) Intentionally Omitted.
(h) Capital Expenditures. Neither Borrower nor Holdings will incur or
contract to incur unfinanced Capital Expenditures of more than $1,500,000 in the
aggregate during the second half of fiscal year 2006. In any fiscal year
thereafter, neither the Borrower nor Holdings will not incur or contract to
incur Capital Expenditures of more than $2,000,000 in the aggregate, of which no
more than $1,500,000 may be unfinanced.
(i) Intentionally Omitted.
(j) Future Covenants. Upon Lender's receipt of projections for fiscal year
ending June 30, 2008 and each fiscal year thereafter, satisfactory to Lender in
its commercially reasonable discretion, Holdings will be required to generate a
minimum of 90% of its projected Net Income Before Tax and Research and
Development Expenses and Net Cash Flow using the formulas above. Notwithstanding
the foregoing, if Holdings fails to provide such projections satisfactory to
Lender and showing reasonable improvement in financial performance, Holdings
shall be required to maintain, among other covenants, a Leverage Ratio of no
greater than 3.25x at the end of each fiscal quarter, commencing with September
2007 and each fiscal quarter thereafter.
(k) Securities Account. The aggregate Value of the Securities Account at
all times shall be in an amount of at least $7,500,000.
45
(l) Minimum Availability. The Borrower will maintain Availability of at
least $2,000,000, less the amount of ▇▇▇▇▇ Fargo Affiliate Obligations Reserve,
at all times.
(m) Additional Equity/Subordinated Debt.
(i) Borrower shall raise at least $7,000,000 (net after expenses) in
equity or Subordinated Debt by June 30, 2006.
(ii) Upon such time that the Borrower raises a minimum of $7,000,000
(net after expenses) in equity or Subordinated Debt, the proceeds of the
$7,000,000 (net after expenses) or such greater amount received by the
Borrower as equity or subordinated debt has been delivered to the Lender
to be applied to the Borrower's obligations under the Revolving Note.
(iii) To the extent such investment is in the form of Subordinated
Debt, the subordinated lender shall enter into a Subordination Agreement
in form and substance acceptable to the Lender in its reasonable
discretion, which Subordination Agreement shall include, but shall not be
limited to, terms and conditions as hereinafter set forth. No payment of
principal, interest or otherwise of the Subordinated Debt shall be made to
the subordinated lender until the following conditions have been met: (a)
no Default or Event of Default has occurred that has not been cured within
the applicable cure period or been waived in writing by the Lender, (b) no
Default or Event of Default will occur after giving effect to any payment
of principal, interest or otherwise on the Subordinated Debt; (c) the
Borrower shall have Availability of at least $2,000,000 after giving
effect to any payment on the Subordinated Debt based on a thirty (30) day
rolling period and after reserving for all accounts payable over ninety
(90) days from the invoice date; (d) the Borrower has generated at least
$800,000 in net cash flow in the preceding quarter; (e) the Borrower shall
not be permitted and subordinated lender may not accept more than $500,000
as payment of principal, interest or otherwise in any quarter; and (f) the
subordinated lender shall not take any action against the Borrower or the
Borrower's assets until the Lender has been paid in full and the Credit
Agreement has been terminated.
Section 6.3 Permitted Liens; Financing Statements.
(a) The Borrower will not create, incur or suffer to exist any Lien upon
or of any of its assets, now owned or hereafter acquired, to secure any
indebtedness; excluding, however, from the operation of the foregoing, the
following (each a "Permitted Lien"; collectively, "Permitted Liens"):
(i) In the case of any of the Borrower's property which is not
Collateral, covenants, restrictions, rights, easements and minor
irregularities in title which do not materially interfere with the
Borrower's business or operations as presently conducted;
(ii) Liens in existence on the date hereof and listed in Schedule
6.3 hereto, securing indebtedness for borrowed money permitted under
Section 6.4;
(iii) The Security Interest and Liens created by the Security
Documents; and
46
(iv) Purchase money Liens relating to the acquisition of machinery
and equipment of the Borrower not exceeding the lesser of cost or fair
market value thereof not exceeding $1,000,000 for any one purchase or
$2,500,000 in the aggregate during any fiscal year, and so long as no
Default Period is then in existence and none would exist immediately after
such acquisition.
(b) The Borrower will not amend any financing statements in favor of the
Lender except as permitted by law. Any authorization by the Lender to any Person
to amend financing statements in favor of the Lender shall be in writing.
Section 6.4 Indebtedness. The Borrower will not incur, create, assume or
permit to exist any indebtedness or liability on account of deposits or advances
or any indebtedness for borrowed money or letters of credit issued on the
Borrower's behalf, or any other indebtedness or liability evidenced by notes,
bonds, debentures or similar obligations, except:
(a) Indebtedness arising hereunder;
(b) Indebtedness of the Borrower in existence on the date hereof and
listed in Schedule 6.4 hereto;
(c) Intentionally Omitted.
(d) Indebtedness relating to Permitted Liens;
(e) Subordinated Debt subject to a Subordination Agreement acceptable to
Lender in its reasonable discretion.
Section 6.5 Guaranties. The Borrower will not assume, guarantee, endorse
or otherwise become directly or contingently liable in connection with any
obligations of any other Person, except:
(a) The endorsement of negotiable instruments by the Borrower for deposit
or collection or similar transactions in the ordinary course of business; and
(b) Guaranties, endorsements and other direct or contingent liabilities in
connection with the obligations of other Persons, in existence on the date
hereof and listed in Schedule 6.4 hereto.
Section 6.6 Investments and Subsidiaries. From the date hereof, the
Borrower will not make or permit to exist any loans or advances to, or make any
investment or acquire any interest whatsoever in, any other Person or Affiliate,
including any partnership or joint venture, nor purchase or hold beneficially
any stock or other securities or evidence of indebtedness of any other Person or
Affiliate, except:
(a) Investments in direct obligations of the United States of America or
any agency or instrumentality thereof whose obligations constitute full faith
and credit obligations of the United States of America having a maturity of one
47
year or less, commercial paper issued by U.S. corporations rated "A-1" or "A-2"
by Standard & Poor's Ratings Services or "P-1" or "P-2" by ▇▇▇▇▇'▇ Investors
Service or certificates of deposit or bankers' acceptances having a maturity of
one year or less issued by members of the Federal Reserve System having deposits
in excess of $100,000,000 (which certificates of deposit or bankers' acceptances
are fully insured by the Federal Deposit Insurance Corporation);
(b) Travel advances or loans to the Borrower's Officers and employees not
exceeding at any one time an aggregate of $15,000;
(c) Prepaid rent not exceeding one month or security deposits;
(d) Current investments in the Subsidiaries in existence on the date
hereof and listed in Schedule 5.5 hereto; and
(e) Investment in APR, LLC, but only to the extent (i) such investment is
paid in stock of Holdings, (ii) no Change of Control occurs; and (iii) Lender
obtains a first priority security interest in any such investment. Further,
Borrower may not finance operating expenses of APR, LLC or any Affiliate,
directly or indirectly, without Lender's prior written consent, which consent
shall not be unreasonably withheld.
Section 6.7 Dividends and Distributions. The Borrower will not declare or
pay any dividends (other than dividends payable solely in stock of the Borrower)
on any class of its common stock, or make any payment on account of the
purchase, redemption or other retirement of any shares of such common stock, or
other securities or evidence of its indebtedness or make any distribution in
respect thereof, either directly or indirectly. The Borrower may declare or pay
dividends on preferred stock provided that: (i) no Default or Event of Default
has occurred or will occur after giving effect to the declaration or payment of
such dividends; (ii) the Borrower has Availability of at least $2,000,000 after
giving effect to such payment and after reserving for all accounts payable over
90 days from the invoice date and outstanding checks; (iii) the Borrower has
generated at least $500,000 in Net Cash Flow in the preceding fiscal quarter;
and (iv) the maximum amount that can be paid in dividends in any fiscal quarter
is $100,000. Notwithstanding anything stated in this Section 6.7, absent an
Event of Default Borrower may pay dividends on series A-1 class of preferred
stock, not to exceed $50,000 in the aggregate per fiscal quarter. Further,
Borrower may make distributions to Holdings for ordinary operating expenses
consistent with past practices, so long as those expenses are reflected on
Holdings' financial statements.
Section 6.8 Salaries. The Borrower will not pay excessive or unreasonable
salaries, bonuses, commissions, consultant fees or other compensation; or
increase the salary, bonus, commissions, consultant fees or other compensation
of any Director, Officer or consultant, or any member of their families, by more
than 20% in any one year, for all such persons in the aggregate, or pay any such
increase from any source other than profits earned in the year of payment (with
the exception of fiscal years 2006 and 2007) unless otherwise approved in
writing by the Lender.
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Section 6.9 Intentionally Omitted.
Section 6.10 Books and Records; Collateral Examination, Inspection and
Appraisals.
(a) The Borrower will keep accurate books of record and account for
itself pertaining to the Collateral and pertaining to the Borrower's
business and financial condition and such other matters as the Lender may
from time to time request in which true and complete entries will be made
in accordance with GAAP and, upon the Lender's request, will permit any
officer, employee, attorney, accountant or other agent of the Lender to
audit, review, make extracts from or copy any and all company and
financial books and records of the Borrower at all times during ordinary
business hours, to send and discuss with account debtors and other
obligors requests for verification of amounts owed to the Borrower, and to
discuss the Borrower's affairs with any of its Directors, Officers,
employees or agents.
(b) The Borrower hereby irrevocably authorizes all accountants and
third parties to disclose and deliver to the Lender or its designated
agent, at the Borrower's expense, all financial information, books and
records, work papers, management reports and other information in their
possession regarding the Borrower.
(c) The Borrower will permit the Lender or its employees,
accountants, attorneys or agents, to examine and inspect any Collateral or
any other property of the Borrower at any time during ordinary business
hours.
(d) The Lender may also, from time to time, but, absent an Event of
Default, no more than one time each calendar year, obtain at the
Borrower's expense an appraisal of Inventory, Equipment, and Real Estate
by an appraiser acceptable to the Lender in its sole discretion.
Section 6.11 Account Verification.
(a) The Lender or its agent may at any time and from time to time
send or require the Borrower to send requests for verification of accounts
or notices of assignment to account debtors and other obligors. The Lender
or its agent may also at any time and from time to time telephone account
debtors and other obligors to verify accounts. In verifying such accounts,
Lender shall use its commercially reasonable efforts not to send requests
for verifications of accounts or telephone the same account debtors in
consecutive quarterly periods.
(b) The Borrower shall pay when due each account payable due to a
Person holding a Permitted Lien (as a result of such payable) on any
Collateral.
Section 6.12 Compliance with Laws.
(a) The Borrower shall (i) comply, and cause each Subsidiary to
comply, with the requirements of applicable laws and regulations, the
non-compliance with which would materially and adversely affect its
business or its financial condition and (ii) use and keep the Collateral,
and require that others use and keep the Collateral, only for lawful
purposes, without violation of any federal, state or local law, statute or
ordinance.
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(b) Without limiting the foregoing undertakings, the Borrower
specifically agrees that it will comply, and cause each Subsidiary to
comply, in all material respects with all applicable Environmental Laws
and obtain and comply with all material permits, licenses and similar
approvals required by any Environmental Laws, and will not generate, use,
transport, treat, store or dispose of any Hazardous Substances in such a
manner as to create any material liability or obligation under the common
law of any jurisdiction or any Environmental Law.
(c) The Borrower shall (i) ensure, and cause each Subsidiary to
ensure, that no Owner shall be listed on the Specially Designated
Nationals and Blocked Person List or other similar lists maintained by the
Office of Foreign Assets Control ("OFAC"), the Department of the Treasury
or included in any Executive Orders, (ii) not use or permit the use of the
proceeds of the Credit Facility or any other financial accommodation from
the Lender to violate any of the foreign asset control regulations of OFAC
or other applicable law, (iii) comply, and cause each Subsidiary to
comply, with all applicable Bank Secrecy Act laws and regulations, as
amended from time to time, and (iv) otherwise comply with the USA Patriot
Act as required by federal law and the Lender's policies and practices.
Section 6.13 Payment of Taxes and Other Claims. The Borrower will pay or
discharge, when due, (a) all taxes, assessments and governmental charges levied
or imposed upon it or upon its income or profits, upon any properties belonging
to it (including the Collateral) or upon or against the creation, perfection or
continuance of the Security Interest, prior to the date on which penalties
attach thereto, (b) all federal, state and local taxes required to be withheld
by it, and (c) all lawful claims for labor, materials and supplies which, if
unpaid, might by law become a Lien upon any properties of the Borrower;
provided, that the Borrower shall not be required to pay any such tax,
assessment, charge or claim whose amount, applicability or validity is being
contested in good faith by appropriate proceedings and for which proper reserves
have been made.
Section 6.14 Maintenance of Properties.
(a) The Borrower will keep and maintain the Collateral and all of
its other properties necessary or useful in its business in good
condition, repair and working order (normal wear and tear excepted) and
will from time to time replace or repair any worn, defective or broken
parts; provided, however, that nothing in this covenant shall prevent the
Borrower from discontinuing the operation and maintenance of any of its
properties if such discontinuance is, in the Borrower's judgment,
desirable in the conduct of the Borrower's business and not
disadvantageous in any material respect to the Lender. The Borrower will
take all commercially reasonable steps necessary to protect and maintain
its Intellectual Property Rights.
(b) The Borrower will defend the Collateral against all Liens,
claims or demands of all Persons (other than the Lender) claiming the
Collateral or any interest therein. The Borrower will keep all Collateral
free and clear of all Liens except Permitted Liens. The Borrower will take
all commercially reasonable steps necessary to prosecute any Person
Infringing its Intellectual Property Rights and to defend itself against
any Person accusing it of Infringing any Person's Intellectual Property
Rights.
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Section 6.15 Insurance. The Borrower will obtain and at all times maintain
insurance with insurers acceptable to the Lender, in such amounts, on such terms
(including any deductibles) and against such risks as may from time to time be
reasonably required by the Lender, but in all events in such amounts and against
such risks as is usually carried by companies engaged in similar business and
owning similar properties in the same general areas in which the Borrower
operates. Without limiting the generality of the foregoing, the Borrower will at
all times maintain business interruption insurance including coverage for force
majeure and keep all tangible Collateral insured against risks of fire
(including so-called extended coverage), theft, collision (for Collateral
consisting of motor vehicles) and such other risks and in such amounts as the
Lender may reasonably request, with any loss payable to the Lender to the extent
of its interest, and all policies of such insurance shall contain a lender's
loss payable endorsement for the Lender's benefit. All policies of liability
insurance required hereunder shall name the Lender as an additional insured.
Section 6.16 Preservation of Existence. The Borrower will preserve and
maintain its existence and all of its rights, privileges and franchises
necessary or desirable in the normal conduct of its business and shall conduct
its business in an orderly, efficient and regular manner.
Section 6.17 Delivery of Instruments, Etc. Upon request by the Lender, the
Borrower will promptly deliver to the Lender in pledge all instruments,
documents and chattel paper constituting Collateral, duly endorsed or assigned
by the Borrower.
Section 6.18 Sale or Transfer of Assets; Suspension of Business
Operations. The Borrower will not sell, lease, assign, transfer or otherwise
dispose of (i) the stock of any Subsidiary (unless such Subsidiary has been
inactive and has neither operated nor held assets for at least one continuous
year), (ii) all or a substantial part of its assets, or (iii) any Collateral or
any interest therein (whether in one transaction or in a series of transactions)
to any other Person other than the sale of Inventory in the ordinary course of
business and will not liquidate, dissolve or suspend business operations. The
Borrower will not transfer any part of its ownership interest in any
Intellectual Property Rights and will not permit any agreement under which it
has licensed Licensed Intellectual Property to lapse, except that the Borrower
may transfer such rights or permit such agreements to lapse if it shall have
reasonably determined that the applicable Intellectual Property Rights are no
longer useful in its business. If the Borrower transfers any Intellectual
Property Rights for value, the Borrower will pay over the proceeds to the Lender
for application to the Obligations. The Borrower will not license any other
Person to use any of the Borrower's Intellectual Property Rights, except that
the Borrower may grant licenses in the ordinary course of its business in
connection with sales of Inventory or provision of services to its customers.
Notwithstanding anything stated in this Section 6.18, Borrower may liquidate
assets with a net book value of less than $100,000, provided that (i) Borrower
provides five (5) Business Days' prior written notice to Lender; (ii) Lender has
not objected to such liquidation; and (iii) the proceeds of such liquidation are
remitted to Lender to apply to the Obligations.
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Section 6.19 Consolidation and Merger; Asset Acquisitions. The Borrower
will not consolidate with or merge into any Person, or permit any other Person
to merge into it, or acquire (in a transaction analogous in purpose or effect to
a consolidation or merger) all or substantially all the assets of any other
Person.
Section 6.20 Sale and Leaseback. The Borrower will not enter into any
arrangement, directly or indirectly, with any other Person whereby the Borrower
shall sell or transfer any real or personal property, whether now owned or
hereafter acquired, and then or thereafter rent or lease as lessee such property
or any part thereof or any other property which the Borrower intends to use for
substantially the same purpose or purposes as the property being sold or
transferred. Notwithstanding anything stated in this Section 6.20, Borrower may
enter into a sale and leaseback transaction pursuant to Section 2.4(a)(iii)
herein provided, however, that (i) such third party enters into an intercreditor
agreement with Lender on terms satisfactory to Lender in its sole discretion,
including, but not limited to, a minimum 360-day standstill period and notice to
Lender by such third party of any default and cure periods. If the Lender in its
sole discretion elects to use equipment subject to such sale and leaseback
transaction during such standstill period, the Lender shall pay the third party
the current principal and interest due on the equipment pro rated for the period
during which the Lender uses the equipment. Notwithstanding the foregoing, no
standstill period shall apply with respect to any equipment the Lender elects
not to use.
Section 6.21 Restrictions on Nature of Business. The Borrower will not
engage in any line of business materially different from that presently engaged
in by the Borrower and will not purchase, lease or otherwise acquire assets not
related to its business.
Section 6.22 Accounting. The Borrower will not adopt any material change
in accounting principles other than as required by GAAP. The Borrower will not
adopt, permit or consent to any change in its fiscal year.
Section 6.23 Discounts, Etc. Following an Event of Default, after notice
from the Lender, the Borrower will not grant any discount, credit or allowance
to any customer of the Borrower or accept any return of goods sold, except in
the ordinary course of business. Following an Event of Default, the Borrower
will not at any time modify, amend, subordinate, cancel or terminate the
obligation of any account debtor or other obligor of the Borrower.
Section 6.24 Plans. Unless disclosed to the Lender pursuant to Section
5.12, neither the Borrower nor any ERISA Affiliate will (i) adopt, create,
assume or become a party to any Pension Plan, (ii) incur any obligation to
contribute to any Multiemployer Plan, (iii) incur any obligation to provide
post-retirement medical or insurance benefits with respect to employees or
former employees (other than benefits required by law) or (iv) amend any Plan in
a manner that would materially increase its funding obligations.
Section 6.25 Place of Business; Name. The Borrower will not transfer its
chief executive office or principal place of business, or move, relocate, close
or sell any business location. The Borrower will not permit any tangible
Collateral or any records pertaining to the Collateral to be located in any
state or area in which, in the event of such location, a financing statement
covering such Collateral would be required to be, but has not in fact been,
filed in order to perfect the Security Interest. The Borrower will not change
its name or jurisdiction of organization.
52
Section 6.26 Constituent Documents. The Borrower will not amend its
Constituent Documents without Lender's prior written consent, which consent
shall not be unreasonably withheld.
Section 6.27 Performance by the Lender. If the Borrower at any time fails
to perform or observe any of the foregoing covenants contained in this Article
VI or elsewhere herein, and if such failure shall continue for a period of ten
calendar days after the Lender gives the Borrower written notice thereof (or in
the case of the agreements contained in Section 6.13 and Section 6.15,
immediately upon the occurrence of such failure, without notice or lapse of
time), the Lender may, but need not, perform or observe such covenant on behalf
and in the name, place and stead of the Borrower (or, at the Lender's option, in
the Lender's name) and may, but need not, take any and all other actions which
the Lender may reasonably deem necessary to cure or correct such failure
(including the payment of taxes, the satisfaction of Liens, the performance of
obligations owed to account debtors or other obligors, the procurement and
maintenance of insurance, the execution of assignments, security agreements and
financing statements, and the endorsement of instruments); and the Borrower
shall thereupon pay to the Lender on demand the amount of all monies expended
and all costs and expenses (including reasonable attorneys' fees and legal
expenses) reasonably incurred by the Lender in connection with or as a result of
the performance or observance of such agreements or the taking of such action by
the Lender, together with interest thereon from the date expended or incurred at
the Default Rate. To facilitate the Lender's performance or observance of such
covenants of the Borrower, the Borrower hereby irrevocably appoints the Lender,
or the Lender's delegate, acting alone, as the Borrower's attorney in fact
(which appointment is coupled with an interest) with the right (but not the
duty) from time to time to create, prepare, complete, execute, deliver, endorse
or file in the name and on behalf of the Borrower any and all instruments,
documents, assignments, security agreements, financing statements, applications
for insurance and other agreements and writings required to be obtained,
executed, delivered or endorsed by the Borrower hereunder.
ARTICLE VII
EVENTS OF DEFAULT, RIGHTS AND REMEDIES
Section ▇.▇.▇▇▇▇▇▇ of Default. "Events of Default," wherever used herein,
means any one of the following events:
(a) Default in the payment of the Obligations or on any portion of
the Obligations that otherwise becomes due and payable;
(b) Failure of Borrower to deliver collateral reports as required
pursuant to Section 6.1(c and e) of this Agreement which failure remains
uncured for a period of five (5) Business Days, provided, however that
such cure period shall not be available to Borrower more than three (3)
times per fiscal year;
53
(c) Failure of Borrower to deliver its monthly financial statements
as required pursuant to Section 6.1(b) of this Agreement or to deliver its
projections as required pursuant to Section 6.1(d) of this Agreement which
failure, in each case, remains uncured for a period of five (5) Business
Days;
(d) Failure of Borrower to comply with its obligations under
Sections 6.12, 6.14 or 6.16 of this Agreement which remains uncured for a
period of fifteen (15) days;
(e) Default in the performance, or breach, of any other covenant or
agreement of the Borrower contained in this Agreement;
(f) The existence of any Overadvance arising as the result of any
reduction in the Borrowing Base, or that arises in any manner and on terms
not otherwise approved of in advance by Lender, and which continues for a
period in excess of two (2) Business Days after notice from the Lender;
(g) A Change of Control shall have occurred;
(h) Intentionally Omitted;
(i) The Borrower or any Guarantor shall be or become insolvent, or
admit in writing its or his inability to pay its or his debts as they
mature, or make an assignment for the benefit of creditors; or the
Borrower or any Guarantor shall apply for or consent to the appointment of
any receiver, trustee, or similar officer for it or him or for all or any
substantial part of its or his property; or such receiver, trustee or
similar officer shall be appointed without the application or consent of
the Borrower or such Guarantor, as the case may be; or the Borrower or any
Guarantor shall institute (by petition, application, answer, consent or
otherwise) any bankruptcy, insolvency, reorganization, arrangement,
readjustment of debt, dissolution, liquidation or similar proceeding
relating to it or him under the laws of any jurisdiction; or any such
proceeding shall be instituted (by petition, application or otherwise)
against the Borrower or any such Guarantor; or any judgment, writ, warrant
of attachment or execution or similar process shall be issued or levied
against a substantial part of the property of the Borrower or any
Guarantor;
(j) A petition shall be filed by the Borrower or any Guarantor under
the United States Bankruptcy Code naming the Borrower or such Guarantor as
debtor or (ii) a petition shall be filed against the Borrower or any
Guarantor under the United States Bankruptcy Code naming the Borrower or
such Guarantor as debtor and is not dismissed within sixty (60) days;
(k) If the aggregate Value of the Securities Accounts is less than
$7,500,000, and (i) ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ has not provided a personal guaranty
to Lender (in the form attached hereto as Exhibit "G", in the amount that
the aggregate Value of the Securities Accounts is less than $7,500,000
within two (2) Business Days and (ii) ▇▇. ▇▇▇▇▇ ▇▇▇▇▇▇▇, ▇▇▇▇ ▇▇▇▇▇▇▇, and
▇▇▇ ▇. ▇▇▇▇▇▇▇ have not pledged additional cash or marketable securities
to Lender in the amount that the aggregate Value of the Securities
Accounts is less than $7,500,000 within five (5) Business Days;
54
(l) Any representation or warranty made by the Borrower in this
Agreement, by any Guarantor in any guaranty delivered to the Lender, or by
the Borrower (or any of its Officers) or any Guarantor in any agreement,
certificate, instrument or financial statement or other statement
contemplated by or made or delivered pursuant to or in connection with
this Agreement or any such guaranty shall prove to have been incorrect in
any material respect when deemed to be effective;
(m) The rendering against the Borrower of an arbitration award,
final judgment, decree or order for the payment of money in excess of
applicable insurance proceeds or reserves by more than $200,000 and the
continuance of such arbitration award, judgment, decree or order
unsatisfied and in effect for any period of 60 consecutive days without a
stay of execution;
(n) A default under any bond, debenture, note or other evidence of
material indebtedness of the Borrower owed to any Person other than the
Lender, or under any indenture or other material instrument under which
any such evidence of indebtedness has been issued or by which it is
governed, or under any material lease or other material contract, the
effect of which default (after any applicable notice and passage of time)
accelerates, or entitles any person to accelerate, any maturity thereof,
or results in the forfeiture by Borrower of any of its rights under such
evidence of material indebtedness, indenture, other material instrument,
lease, or contract, and which could have a Material Adverse Effect;
(o) An ERISA Event shall have occurred;
(p) There has occurred an event of default under any Security
Document;
(q) The Borrower shall liquidate, dissolve, terminate or suspend its
business operations or otherwise fail to operate its business in the
ordinary course, merge with another organization unless Borrower is the
surviving entity; or sell or attempt to sell all or substantially all of
its assets, without the Lender's prior written consent;
(r) Intentionally Omitted;
(s) Any Guarantor or person signing a support agreement in favor of
the Lender shall repudiate, purport to revoke or fail to perform his
obligations under such guaranty or support agreement in favor of the
Lender and the Lender does not receive a Guaranty in form and substance
acceptable to the Lender and a replacement pledge of collateral in an
amount and in form and substance acceptable to the Lender within five (5)
Business Days of the Lender receiving notice thereof, any individual
Guarantor shall die or any other Guarantor shall cease to exist, except
that no event of default under this subparagraph (s) shall be deemed to
have occurred following the death of an individual Guarantor if, within 45
days following the death of such individual Guarantor, Lender receives a
Guaranty in the form of Exhibit "__" hereto from one or more substitute
Guarantors acceptable satisfactory to Lender in its reasonable discretion;
55
(t) The Borrower shall take or participate in any action which would
be prohibited under the provisions of any Subordination Agreement or
Intercreditor Agreement or make any payment on the Subordinated
Indebtedness (as defined in the Subordination Agreement) that any Person
was not entitled to receive under the provisions of the Subordination
Agreement or the Intercreditor Agreement;
(u) The occurrence of any Material Adverse Effect and the Lender
shall believe in good faith that the prospect of payment of all or any
part of the Obligations or the performance by the Borrower under the Loan
Documents is impaired in any material respect;
(v) Any material breach, default or event of default by or
attributable to any Affiliate under any agreement between such Affiliate
and the Lender shall occur and continue uncured for a period of five (5)
Business Days;
(w) (i) The indictment of any Director, Officer, or senior manager
of Borrower for a felony offence under state or federal law, except that
Borrower may terminate such person as a Director, Officer, or senior
manager within 5 Business Days of such indictment, or (ii) the indictment
of any Guarantor for a felony offence under state or federal law resulting
in a forfeiture of assets pledged to Lender, except that Borrower may
pledge or cause a Person to pledge Collateral in form and substance
acceptable to Lender in its reasonable discretion, the amount of such
forfeited assets to Lender within 10 Business Days of such indictment;
(x) The failure of Borrower to raise at least $7,000,000 (net after
expenses) in equity or Subordinated Debt by June 30, 2006;
(y) Any breach, default or event of default by Borrower or any third
party lender/financier under any intercreditor agreement; or
(z) A default under Section 6.2(e) of this Agreement, except if,
within five (5) Business Days, Borrower pledges or causes a Person to
pledge as collateral to Lender (i) cash collateral in the amount of at
least 100% of the shortfall under Section 6.2(e) or (ii) NYSE Listed
Securities with a Value of at least 120% of the shortfall under Section
6.2(e), in which case the default under Section 6.2(e) shall not be
considered an Event of Default for the purpose under this Agreement. Such
collateral shall secure the entirety of the Obligations.
Section 7.2 Rights and Remedies. During any Default Period, the Lender
may exercise any or all of the following rights and remedies:
(a) The Lender may, by notice to the Borrower, declare the
Commitment to be terminated, whereupon the same shall forthwith terminate;
56
(b) The Lender may, by notice to the Borrower, declare the
Obligations to be forthwith due and payable, whereupon all Obligations
shall become and be forthwith due and payable, without presentment, notice
of dishonor, protest or further notice of any kind, all of which the
Borrower hereby expressly waives;
(c) The Lender may, without notice to the Borrower and without
further action, apply any and all money owing by the Lender to the
Borrower to the payment of the Obligations;
(d) The Lender may exercise and enforce any and all rights and
remedies available upon default to a secured party under the UCC,
including the right to take possession of Collateral, or any evidence
thereof, proceeding without judicial process or by judicial process
(without a prior hearing or notice thereof, which the Borrower hereby
expressly waives) and the right to sell, lease or otherwise dispose of any
or all of the Collateral (with or without giving any warranties as to the
Collateral, title to the Collateral or similar warranties), and, in
connection therewith, the Borrower will on demand assemble the Collateral
and make it available to the Lender at a place to be designated by the
Lender which is reasonably convenient to both parties;
(e) The Lender may make demand upon the Borrower and, forthwith upon
such demand, the Borrower will pay to the Lender in immediately available
funds for deposit in the Special Account pursuant to Section 2.5 an amount
equal to the aggregate maximum amount available to be drawn under all
Letters of Credit then outstanding, assuming compliance with all
conditions for drawing thereunder;
(f) The Lender may exercise and enforce its rights and remedies
under the Loan Documents;
(g) The Lender may without regard to any waste, adequacy of the
security or solvency of the Borrower, apply for the appointment of a
receiver of the Collateral, to which appointment the Borrower hereby
consents, whether or not foreclosure proceedings have been commenced under
the Security Documents and whether or not a foreclosure sale has occurred;
and
(h) The Lender may exercise any other rights and remedies available
to it by law or agreement.
Notwithstanding the foregoing, upon the occurrence of an Event of Default
described in Section 7.1(f) or (g), the Obligations shall be immediately due and
payable automatically without presentment, demand, protest or notice of any
kind. If the Lender sells any of the Collateral on credit, the Obligations will
be reduced only to the extent of payments actually received. If the purchaser
fails to pay for the Collateral, the Lender may resell the Collateral and shall
apply any proceeds actually received to the Obligations.
Section 7.3 Certain Notices. If notice to the Borrower of any intended
disposition of Collateral or any other intended action is required by law in a
particular instance, such notice shall be deemed commercially reasonable if
given (in the manner specified in Section 8.3) at least ten calendar days before
the date of intended disposition or other action.
57
ARTICLE VIII
MISCELLANEOUS
Section 8.1 No Waiver; Cumulative Remedies; Compliance with Laws. No
failure or delay by the Lender in exercising any right, power or remedy under
the Loan Documents shall operate as a waiver thereof; nor shall any single or
partial exercise of any such right, power or remedy preclude any other or
further exercise thereof or the exercise of any other right, power or remedy
under the Loan Documents. The remedies provided in the Loan Documents are
cumulative and not exclusive of any remedies provided by law. The Lender may
comply with any applicable state or federal law requirements in connection with
a disposition of the Collateral and such compliance will not be considered
adversely to affect the commercial reasonableness of any sale of the Collateral.
Section 8.2 Amendments, Etc. No amendment, modification, termination or
waiver of any provision of any Loan Document or consent to any departure by the
Borrower therefrom or any release of a Security Interest shall be effective
unless the same shall be in writing and signed by the Lender, and then such
waiver or consent shall be effective only in the specific instance and for the
specific purpose for which given. No notice to or demand on the Borrower in any
case shall entitle the Borrower to any other or further notice or demand in
similar or other circumstances.
Section 8.3.Notices; Communication of Confidential Information; Requests
for Accounting. Except as otherwise expressly provided herein, all notices,
requests, demands and other communications provided for under the Loan Documents
shall be in writing and shall be (a) personally delivered, (b) sent by first
class United States mail, (c) sent by overnight courier of national reputation,
(d) transmitted by telecopy, or (e) sent as electronic mail, in each case
delivered or sent to the party to whom notice is being given to the business
address, telecopier number, or e mail address set forth below next to its
signature or, as to each party, at such other business address, telecopier
number, or e mail address as it may hereafter designate in writing to the other
party pursuant to the terms of this Section. All such notices, requests, demands
and other communications shall be deemed to be an authenticated record
communicated or given on (a) the date received if personally delivered, (b) when
deposited in the mail if delivered by mail, (c) the date delivered to the
courier if delivered by overnight courier, or (d) the date of transmission if
sent by telecopy or by e mail, except that notices or requests delivered to the
Lender pursuant to any of the provisions of Article II shall not be effective
until received by the Lender. All notices, financial information, or other
business records sent by either party to this Agreement may be transmitted,
sent, or otherwise communicated via such medium as the sending party may deem
appropriate and commercially reasonable; provided, however, that the risk that
the confidentiality or privacy of such notices, financial information, or other
business records sent by either party may be compromised shall be borne
exclusively by the Borrower. All requests for an accounting under Section 9-210
of the UCC (i) shall be made in a writing signed by a Person authorized under
Section 2.2(b), (ii) shall be personally delivered, sent by registered or
certified mail, return receipt requested, or by overnight courier of national
reputation, (iii) shall be deemed to be sent when received by the Lender and
(iv) shall otherwise comply with the requirements of Section 9-210. The Borrower
requests that the Lender respond to all such requests which on their face appear
to come from an authorized individual and releases the Lender from any liability
for so responding. The Borrower shall pay the Lender the maximum amount allowed
by law for responding to such requests.
58
Section 8.4 Further Documents. The Borrower will from time to time
execute, deliver, endorse and authorize the filing of any and all instruments,
documents, conveyances, assignments, security agreements, financing statements,
control agreements and other agreements and writings that the Lender may
reasonably request in order to secure, protect, perfect or enforce the Security
Interest or the Lender's rights under the Loan Documents (but any failure to
request or assure that the Borrower executes, delivers, endorses or authorizes
the filing of any such item shall not affect or impair the validity, sufficiency
or enforceability of the Loan Documents and the Security Interest, regardless of
whether any such item was or was not executed, delivered or endorsed in a
similar context or on a prior occasion).
Section 8.5 Costs and Expenses. The Borrower shall pay on demand all costs
and expenses, including reasonable attorneys' fees, incurred by the Lender in
connection with the Obligations, this Agreement, the Loan Documents, any Letter
of Credit and any other document or agreement related hereto or thereto, and the
transactions contemplated hereby, including all such costs, expenses and fees
incurred in connection with the negotiation, preparation, execution, amendment,
administration, performance, collection and enforcement of the Obligations and
all such documents and agreements and the creation, perfection, protection,
satisfaction, foreclosure or enforcement of the Security Interest.
Section 8.6 Indemnity. In addition to the payment of expenses pursuant to
Section 8.6, the Borrower shall indemnify, defend and hold harmless the Lender,
and any of its participants, parent corporations, subsidiary corporations,
affiliated corporations, successor corporations, and all present and future
officers, directors, employees, attorneys and agents of the foregoing (the
"Indemnitees") from and against any of the following (collectively, "Indemnified
Liabilities"):
(a) Any and all transfer taxes, documentary taxes, assessments or
charges made by any governmental authority by reason of the execution and
delivery of the Loan Documents or the making of the Advances;
(b) Any claims, loss or damage to which any Indemnitee may be
subjected if any representation or warranty contained in Section 5.14
proves to be incorrect in any respect or as a result of any violation of
the covenant contained in Section 6.12(b) ; and
(c) Any and all other liabilities, losses, damages, penalties,
judgments, suits, claims, costs and expenses of any kind or nature
whatsoever (including the reasonable fees and disbursements of counsel) in
connection with the foregoing and any other investigative, administrative
or judicial proceedings, whether or not such Indemnitee shall be
designated a party thereto, which may be imposed on, incurred by or
asserted against any such Indemnitee, in any manner related to or arising
out of or in connection with the making of the Advances and the Loan
Documents or the use or intended use of the proceeds of the Advances.
59
If any investigative, judicial or administrative proceeding arising from any of
the foregoing is brought against any Indemnitee, upon such Indemnitee's request,
the Borrower, or counsel designated by the Borrower and satisfactory to the
Indemnitee, will resist and defend such action, suit or proceeding to the extent
and in the manner directed by the Indemnitee, at the Borrower's sole costs and
expense. Each Indemnitee will use its best efforts to cooperate in the defense
of any such action, suit or proceeding. If the foregoing undertaking to
indemnify, defend and hold harmless may be held to be unenforceable because it
violates any law or public policy, the Borrower shall nevertheless make the
maximum contribution to the payment and satisfaction of each of the Indemnified
Liabilities which is permissible under applicable law. The Borrower's obligation
under this Section 8.6 shall survive the termination of this Agreement and the
discharge of the Borrower's other obligations hereunder.
Section 8.7 Participants. The Lender and its participants, if any, are not
partners or joint venturers, and the Lender shall not have any liability or
responsibility for any obligation, act or omission of any of its participants.
All rights and powers specifically conferred upon the Lender may be transferred
or delegated to any of the Lender's participants, successors or assigns.
Section 8.8 Execution in Counterparts; Telefacsimile Execution. This
Agreement and other Loan Documents may be executed in any number of
counterparts, each of which when so executed and delivered shall be deemed to be
an original and all of which counterparts, taken together, shall constitute but
one and the same instrument. Delivery of an executed counterpart of this
Agreement by telefacsimile shall be equally as effective as delivery of an
original executed counterpart of this Agreement. Any party delivering an
executed counterpart of this Agreement by telefacsimile also shall deliver an
original executed counterpart of this Agreement but the failure to deliver an
original executed counterpart shall not affect the validity, enforceability, and
binding effect of this Agreement.
Section 8.9 Retention of Borrower's Records. The Lender shall have no
obligation to maintain any electronic records or any documents, schedules,
invoices, agings, or other papers delivered to the Lender by the Borrower or in
connection with the Loan Documents for more than 30 days after receipt by the
Lender. If there is a special need to retain specific records, the Borrower must
inform the Lender of its need to retain those records with particularity, which
must be delivered in accordance with the notice provisions of Section 8.3 within
30 days of the Lender taking control of same.
Section 8.10 Binding Effect; Assignment; Complete Agreement; Sharing
Information. The Loan Documents shall be binding upon and inure to the benefit
of the Borrower and the Lender and their respective successors and assigns,
except that the Borrower shall not have the right to assign its rights
thereunder or any interest therein without the Lender's prior written consent.
To the extent permitted by law, the Borrower waives and will not assert against
any assignee any claims, defenses or set-offs which the Borrower could assert
against the Lender. This Agreement shall also bind all Persons who become a
party to this Agreement as a borrower. This Agreement, together with the Loan
Documents, comprises the complete and integrated agreement of the parties on the
subject matter hereof and supersedes all prior agreements, written or oral, on
the subject matter hereof. To the extent that any provision of this Agreement
contradicts other provisions of the Loan Documents, this Agreement shall
control. Without limiting the Lender's right to share information regarding the
Borrower and its Affiliates with the Lender's participants, accountants, lawyers
and other advisors, the Lender and ▇▇▇▇▇ Fargo Bank may share any and all
information they may have in their possession regarding the Borrower and its
Affiliates, and the Borrower waives any right of confidentiality it may have
with respect to such sharing of information.
60
Section 8.11 Severability of Provisions. Any provision of this Agreement
which is prohibited or unenforceable shall be ineffective to the extent of such
prohibition or unenforceability without invalidating the remaining provisions
hereof.
Section 8.12 Headings. Article, Section and subsection headings in this
Agreement are included herein for convenience of reference only and shall not
constitute a part of this Agreement for any other purpose.
Section 8.13 Governing Law; Jurisdiction, Venue; Waiver of Jury Trial. The
Loan Documents shall be governed by and construed in accordance with the
substantive laws (other than conflict laws) of the State of New York. The
parties hereto hereby (i) consent to the personal jurisdiction of the state and
federal courts located in the State of New York in connection with any
controversy related to this Agreement; (ii) waive any argument that venue in any
such forum is not convenient; (iii) agree that any litigation initiated by the
Lender or the Borrower in connection with this Agreement or the other Loan
Documents may be venued in either the state or federal courts located in the
City of ▇▇▇ ▇▇▇▇, ▇▇▇▇▇▇ ▇▇ ▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇; and (iv) agree that a final
judgment in any such suit, action or proceeding shall be conclusive and may be
enforced in other jurisdictions by suit on the judgment or in any other manner
provided by law.
Section 8.14 Intentionally Omitted.
------------------------------------------------------------------------------
THE BORROWER AND THE LENDER WAIVE ANY RIGHT TO TRIAL BY JURY IN ANY ACTION AT
LAW OR IN EQUITY OR IN ANY OTHER PROCEEDING BASED ON OR PERTAINING TO THIS
AGREEMENT OR ANY OTHER LOAN DOCUMENT.
Borrower's Initials __________________; Lender's Initials __________________;
------------------------------------------------------------------------------
61
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized as of the date
first above written.
Interpharm, Inc. INTERPHARM, INC.
▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇
Telecopier: (▇▇▇) ▇▇▇-▇▇▇▇ By: /s/ ▇▇▇▇▇▇ ▇▇▇▇▇▇▇
Attention: ▇▇▇▇▇▇ ▇▇▇▇▇▇▇, Chief ------------------------------
Financial Officer ▇▇▇▇▇▇ ▇▇▇▇▇▇▇, Chief Financial
Officer
▇▇▇▇▇ Fargo Bank, National Association, ▇▇▇▇▇ FARGO BANK, NATIONAL
acting through its ▇▇▇▇▇ Fargo ASSOCIATION, acting through its ▇▇▇▇▇
Fargo Business Credit operating Business Credit operating
division division
▇▇▇ ▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇
▇▇▇ ▇▇▇▇, ▇▇ ▇▇▇▇▇
Telecopier: (▇▇▇) ▇▇▇-▇▇▇▇
Attention: Portfolio Manager for By: /s/ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇
Interpharm, Inc. ------------------------------
▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇, Assistant Vice
President
62
Table of Exhibits and Schedules
Exhibit A Form of Revolving Note
Exhibit B Compliance Certificate
Exhibit C Premises
Exhibit D Form of M&E Note
Exhibit E Form of Cap Ex Note
Exhibit F Form of Real Estate Note
Exhibit G Guaranty of ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇
Schedule 5.1 Trade Names, Chief Executive Office, Principal Place of
Business, and Locations of Collateral
Schedule 5.2 Capitalization and Organizational Chart
Schedule 5.3 Authorization of Borrowing; No Conflict as to Law or Agreements
Schedule 5.5 Subsidiaries
Schedule 5.6 Financial Condition; No Adverse Change
Schedule 5.7 Litigation Matters
Schedule 5.9 Taxes
Schedule 5.11 Intellectual Property Disclosures
Schedule 5.12 Pension Plan
Schedule 5.13 Default
Schedule 5.14 Environmental Matters
Schedule 5.18 Financial Solvency
Schedule 6.3 Permitted Liens
Schedule 6.4 Permitted Indebtedness and Guaranties
Exhibit A to Credit and Security Agreement
REVOLVING NOTE
$22,500,000.00 New York, New York
February 9, 2006
For value received, the undersigned, Interpharm, Inc., a New York
corporation (the "Borrower"), hereby promises to pay on the earlier of the
Maturity Date or the Termination Date under the Credit Agreement (defined
below), to the order of ▇▇▇▇▇ FARGO BANK, NATIONAL ASSOCIATION (the "Lender"),
acting through its ▇▇▇▇▇ Fargo Business Credit operating division, at its office
at ▇▇▇ ▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇, or at any other place
designated at any time by the holder hereof, in lawful money of the United
States of America and in immediately available funds, the principal sum of
Twenty-Two Million Five Hundred Thousand Dollars ($22,500,000.00) or the
aggregate unpaid principal amount of all Revolving Advances made by the Lender
to the Borrower under the Credit Agreement (defined below) together with
interest on the principal amount hereunder remaining unpaid from time to time,
computed on the basis of the actual number of days elapsed and a 360-day year,
from the date hereof until this Note is fully paid at the rate from time to time
in effect under the Credit and Security Agreement dated the same date as this
Note (the "Credit Agreement") by and between the Lender and the Borrower. The
principal hereof and interest accruing thereon shall be due and payable as
provided in the Credit Agreement. This Note may be prepaid only in accordance
with the Credit Agreement.
This Note is issued pursuant, and is subject, to the Credit Agreement,
which provides, among other things, for acceleration hereof. This Note is the
Revolving Note referred to in the Credit Agreement. This Note is secured, among
other things, pursuant to the Credit Agreement and the Security Documents as
therein defined, and may now or hereafter be secured by one or more other
security agreements, mortgages, deeds of trust, assignments or other instruments
or agreements.
The Borrower shall pay all costs of collection, including reasonable
attorneys' fees and legal expenses if this Note is not paid when due, whether or
not legal proceedings are commenced.
Presentment or other demand for payment, notice of dishonor and protest
are expressly waived.
INTERPHARM, INC.
By:
---------------------------------
▇▇▇▇▇▇ ▇▇▇▇▇▇▇, Chief Financial
Officer
A-1
Exhibit B to Credit and Security Agreement
COMPLIANCE CERTIFICATE
To: ▇▇▇▇▇ Fargo Business Credit
Date: _________________________
Subject: Financial Statements
In accordance with our Credit and Security Agreement dated as of February
9, 2006 (the "Credit Agreement"), attached are the financial statements of
Interpharm, Inc. (the "Borrower") as of and for _________________, 200__ (the
"Reporting Date") and the year-to-date period then ended (the "Current
Financials"). All terms used in this certificate have the meanings given in the
Credit Agreement.
I certify that the Current Financials have been prepared in accordance
with GAAP, subject to year-end audit adjustments, and fairly present the
Borrower's financial condition as of the date thereof.
I further hereby certify as follows: Events of Default. (Check one):
|_| The undersigned does not have knowledge of the occurrence of a
Default or Event of Default under the Credit Agreement except as
previously reported in writing to the Lender.
|_| The undersigned has knowledge of the occurrence of a Default or
Event of Default under the Credit Agreement not previously reported
in writing to the Lender and attached hereto is a statement of the
facts with respect to thereto. The Borrower acknowledges that
pursuant to 2.6(d) of the Credit Agreement, the Lender may impose
the Default Rate at any time during the resulting Default Period.
Material Adverse Change in Litigation Matters of the Borrower. I further
hereby certify as follows (check one):
|_| The undersigned has no knowledge of any material adverse change to
the litigation exposure of the Borrower or any of its Guarantors or
Affiliates.
|_| The undersigned has knowledge of material adverse changes to the
litigation exposure of the Borrower or any of its Guarantors or
Affiliates not previously disclosed in Schedule 5.7. Attached to
this Certificate is a statement of the facts with respect thereto.
B-1
Financial Covenants. I further hereby certify as follows (check and
complete each of the following):
1. Intentionally Omitted.
2. Minimum Net Income Before Tax and Research and Development Expenses.(2)
Pursuant to Section 6.2(b) of the Credit Agreement, as of the Reporting Date,
the Borrower's Minimum Net Income Before Tax and Research and Development
Expenses was $____________, which |_| satisfies |_| does not satisfy the
requirement that such amount be no less than the applicable amount set forth in
the table below on the Reporting Date:
Period Minimum Net Income
------ ------------------
July 1, 2005 through March 31, 2006 $3,886,000
July 1, 2005 through June 30, 2006 $4,062,000
July 1, 2006 through September 30, 2006 $1,400,000
July 1, 2006 through December 31, 2006 $2,500,000
July 1, 2006 through March 31, 2007 $4,000,000
July 1, 2006 through June 30, 2007 $6,000,000
3. Minimum Net Income Before Tax Pursuant to Section 6.2(c) of the Credit
Agreement, as of the Reporting Date, the Borrower's Minimum Net Income Before
Tax was $____________, which |_| satisfies |_| does not satisfy the requirement
that such amount be no less than the applicable amount set forth in the table
below on the Reporting Date:
Period Minimum Net Income
------ ------------------
July 1, 2005 through March 31, 2006 <$4,000,000>
July 1, 2005 through June 30, 2006 <11,133,000>
4. Leverage Ratio. Pursuant to Section 6.2(d) of the Credit Agreement, as
of the Reporting Date, the ratio of the Borrower's Leverage was _______ to
________, which |_| satisfies |_| does not satisfy the requirement that such
ratio be no more than the applicable ratio set forth in the table below on the
Reporting Date:
Period Leverage Ratio
------ --------------
March 31, 2006 1.80x
June 30, 2006 2.50x
September 30, 2006 3.50x
December 31, 2006 3.75x
March 31, 2007 3.85x
June 30, 2007 3.50x
-------------------
(2) Holdings is required to meet only one of either (b) or (c) above through
the period ending June 30, 2006, after which only the requirements of (b)
must be met.
B-2
5. Net Cash Flow. Pursuant to Section 6.2(e) of the Credit Agreement, the
Borrower's Net Cash Flow for the period ending on the Reporting Date, was
$_____________, which |_| satisfies |_| does not satisfy the requirement that
such amount be not less than the applicable amount set forth in the table below
(numbers appearing between "< >" are negative) on the Reporting Date:
Period Net Cash Flow
------ -------------
July 1, 2005 through March 31, 2006 <$6,456,000>
July 1, 2005 through June 30, 2006 <$6,904,000>
July 1, 2006 through September 30, 2006 <$6,732,000>
July 1, 2006 through December 31, 2006 <$8,694,000>
July 1, 2006 through March 31, 2007 <$8,921,000>
July 1, 2006 through June 30, 2007 <$5,954,000>
6. Intentionally Omitted.
7. Intentionally Omitted.
8. Capital Expenditures. Pursuant to Section 6.2(h) of the Credit
Agreement, for the year-to-date period ending on the Reporting Date, the
Borrower has expended or contracted to expend during the fiscal year ended
_______________, 200___, for unfinanced Capital Expenditures,
$___________________ in the aggregate, which |_| satisfies |_| does not satisfy
the requirement that such expenditures not exceed $1,500,000 in the aggregate
during the second half of 2006 and $2,000,000 in each fiscal year thereafter, of
which no more than $1,500,000 may be unfinanced.
9. Intentionally Omitted.
10. Future Covenants. Pursuant to Section 6.2(j) of the Credit Agreement,
on the Reporting Date, the Borrower has maintained Net Income Before Tax and
Research and Development Expenses and Net Cash Flow of $__________________,
which |_| satisfies |_| does not satisfy the requirement that the Borrower be
required to generate a minimum of 90% of its projected Net Income Before Tax and
Research and Development Expenses and Net Cash Flow using the formulas above.
Notwithstanding the foregoing, if Borrower fails to provide such projections
satisfactory to Lender and showing reasonable improvement in financial
performance, the Borrower shall be required to maintain, among other covenants,
a Leverage Ratio of no greater than 3.25x at the end of each fiscal quarter,
commencing with September 2007 and each fiscal quarter thereafter.
11. Intentionally Omitted.
12. Minimum Availability. Pursuant to Section 6.2(l) of the Credit
Agreement, on the Reporting Date, the Borrower has maintained excess
availability of $__________________, which |_| satisfies |_| does not satisfy
the requirement that the Borrower maintain excess availability of at least
$2,000,000 at all times.
B-3
13. Additional Equity/Subordinated Debt.
(i) Pursuant to Section 6.2(m)(i) of the Credit Agreement, on the
Reporting Date, the Borrower has Borrower has raised $_________________ in
equity or Subordinated Debt, which |_| satisfies |_| does not satisfy the
requirement that such amount be at least $7,000,000 (net after expenses)
by June 30, 2006.
(ii) Pursuant to Section 6.2(m)(ii) of the Credit Agreement, on the
Reporting Date, the Borrower has delivered to the Lender the proceeds of
the equity or Subordinated Debt, which |_| satisfies |_| does not satisfy
the requirement that such amount received by the Borrower as equity or
subordinated debt be applied to the Borrower's obligations under the
Revolving Note.
(iii) Pursuant to Section 6.2(m)(iii) of the Credit Agreement, on
the Reporting Date, the Borrower has entered into a Subordination
Agreement, which |_| satisfies |_| does not satisfy the requirement that
the Borrower enter into a Subordination Agreement in form and substance
acceptable to the Lender in its reasonable discretion, which Subordination
Agreement shall include, but shall not be limited to, terms and conditions
as hereinafter set forth.
14. Salaries. As of the Reporting Date, the Borrower has not paid
excessive or unreasonable salaries, bonuses, commissions, consultant fees or
other compensation, or increased the salary, bonus, commissions, consultant fees
or other compensation of any Director, Officer or consultant, or any member of
their families, by more than 20% over the amount paid in the Borrower's previous
fiscal year, for all such persons in the aggregate, and has not paid any
increase from any source other than profits earned in the year of payment, and
as a consequence |_| is |_| is not in compliance with Section 6.8 of the Credit
Agreement.
Attached hereto are all relevant facts in reasonable detail to evidence,
and the computations of the financial covenants referred to above. These
computations were made in accordance with GAAP.
INTERPHARM, INC.
By:
---------------------------------
▇▇▇▇▇▇ ▇▇▇▇▇▇▇, Chief Financial
Officer
B-4
Exhibit C to Credit and Security Agreement
PREMISES
The Premises referred to in the Credit and Security Agreement are legally
described as follows:
▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇
C-1
Exhibit D to Credit and Security Agreement
M&E TERM NOTE
$3,500,000.00 New York, New York
February 9, 2006
This M&E Term Note ("Note"), made by Interpharm, Inc., a New York
corporation, payable to the order of ▇▇▇▇▇ Fargo Bank, National Association,
acting through its ▇▇▇▇▇ Fargo Business Credit operating division, in the
principal amount of Three Million Five Hundred Thousand and No/100 Dollars
($3,500,000).
For value received, the undersigned, Interpharm, Inc., a New York
corporation (the "Borrower"), hereby promises to pay as provided in the Credit
Agreement (defined below), to the order of ▇▇▇▇▇ Fargo Bank, National
Association, acting through its ▇▇▇▇▇ Fargo Business Credit operating division,
successor in interest to ▇▇▇▇▇ Fargo Business Credit, Inc., (the "Lender"), at
its main office in Minneapolis, Minnesota, or at any other place designated at
any time by the holder hereof, in lawful money of the United States of America
and in immediately available funds, the principal sum of Three Million Five
Hundred Thousand Dollars ($3,500,000.00) together with interest on the principal
amount hereunder remaining unpaid from time to time, computed on the basis of
the actual number of days elapsed and a 360-day year, from the date hereof until
this Note is fully paid at the rate from time to time in effect under the Credit
and Security Agreement of even date herewith (as the same may hereafter be
amended, supplemented or restated from time to time, the "Credit Agreement") by
and between the Lender and the Borrower. The principal hereof and interest
accruing thereon shall be due and payable as provided in the Credit Agreement.
This Note may be prepaid only in accordance with the Credit Agreement.
This Note is issued pursuant, and is subject, to the Credit
Agreement, which provides, among other things, for acceleration hereof. This
Note is the Real Estate Term Note referred to in the Credit Agreement.
This Note is secured, among other things, pursuant to the Credit
Agreement and the Security Documents as therein defined, and may now or
hereafter be secured by one or more other security agreements, mortgages, deeds
of trust, assignments or other instruments or agreements.
The Borrower hereby agrees to pay all costs of collection, including
attorneys' fees and legal expenses in the event this Note is not paid when due,
whether or not legal proceedings are commenced.
Presentment or other demand for payment, notice of dishonor and
protest are expressly waived.
INTERPHARM, INC.
By:
---------------------------------------
▇▇▇▇▇▇ ▇▇▇▇▇▇▇, Chief Financial Officer
D-1
Exhibit E to Credit and Security Agreement
CAP EX NOTE
$3,500,000.00 New York, New York
February 9, 2006
This Cap Ex Term Note ("Note"), made by Interpharm, Inc., a New York
corporation, payable to the order of ▇▇▇▇▇ Fargo Bank, National Association,
acting through its ▇▇▇▇▇ Fargo Business Credit operating division, in the
principal amount of Three Million Five Hundred Thousand and No/100 Dollars
($3,500,000).
For value received, the undersigned, Interpharm, Inc., a New York
corporation (the "Borrower"), hereby promises to pay as provided in the Credit
Agreement (defined below), to the order of ▇▇▇▇▇ Fargo Bank, National
Association, acting through its ▇▇▇▇▇ Fargo Business Credit operating division,
successor in interest to ▇▇▇▇▇ Fargo Business Credit, Inc., (the "Lender"), at
its main office in Minneapolis, Minnesota, or at any other place designated at
any time by the holder hereof, in lawful money of the United States of America
and in immediately available funds, the principal sum of Three Million Five
Hundred Thousand Dollars ($3,500,000.00) together with interest on the principal
amount hereunder remaining unpaid from time to time, computed on the basis of
the actual number of days elapsed and a 360-day year, from the date hereof until
this Note is fully paid at the rate from time to time in effect under the Credit
and Security Agreement of even date herewith (as the same may hereafter be
amended, supplemented or restated from time to time, the "Credit Agreement") by
and between the Lender and the Borrower. The principal hereof and interest
accruing thereon shall be due and payable as provided in the Credit Agreement.
This Note may be prepaid only in accordance with the Credit Agreement.
This Note is issued pursuant, and is subject, to the Credit
Agreement, which provides, among other things, for acceleration hereof. This
Note is the Real Estate Term Note referred to in the Credit Agreement.
This Note is secured, among other things, pursuant to the Credit
Agreement and the Security Documents as therein defined, and may now or
hereafter be secured by one or more other security agreements, mortgages, deeds
of trust, assignments or other instruments or agreements.
The Borrower hereby agrees to pay all costs of collection, including
attorneys' fees and legal expenses in the event this Note is not paid when due,
whether or not legal proceedings are commenced.
Presentment or other demand for payment, notice of dishonor and
protest are expressly waived.
INTERPHARM, INC.
By:
---------------------------------------
▇▇▇▇▇▇ ▇▇▇▇▇▇▇, Chief Financial Officer
E-1
Exhibit F to Credit and Security Agreement
CONSOLIDATED REAL ESTATE TERM NOTE
Date of Note: February 9, 2006
Principal Amount: $12,000,000.00
Maturity Date: March 1, 2021
Interest Rate: A fluctuating interest rate from time to time in effect under
the Credit Agreement of even date herewith (as the same may be
hereafter amended, modified, extended, supplemented or
restated from time to time, the "Credit Agreement"). The
Interest Rate shall be computed on an actual/360 day basis
(i.e., interest for each day during which the Principal
Amount, or any part thereof, is outstanding shall be computed
at the Interest Rate divided by 360).
Business Day: Any day on which Lender is open for business.
FOR VALUE RECEIVED, Interpharm, Inc., a New York corporation (the "Borrower"),
having an address as indicated below, HEREBY PROMISES TO PAY to the order of
▇▇▇▇▇ Fargo Bank, National Association, acting through its ▇▇▇▇▇ Fargo Business
Credit operating division (hereinafter, together with its successors and
assigns, referred to as the "Lender") at its main office in Minneapolis,
Minnesota, or at such other place as the holder hereof may from time to time
designate in writing, in immediately available federal funds, the Principal
Amount, together with interest on the outstanding Principal Amount from time to
time at the Interest Rate from the date hereof until the Note is fully paid, in
accordance with the terms of the Credit Agreement.
This Note is issued pursuant to, and is subject to, the Credit Agreement, which
provides, among other things, for acceleration hereof. This Note is the Real
Estate Term Note referred to in the Credit Agreement.
This Note is secured by those certain mortgages in the aggregate principal sum
of this Note listed and described on Schedule A attached hereto (said mortgages
as spread, consolidated and modified by the Agreement (hereinafter defined)
together with all extensions, renewals or modifications thereof are herein
collectively referred to as the "Mortgage") described in, and consolidated,
combined and modified by, that certain Mortgage Consolidation, Modification and
Extension Agreement, dated the date hereof, between Borrower, as mortgagor, and
Lender, as mortgagee (the "Agreement"), encumbering the fee estate of Borrower
in the real property located at ▇▇ ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇, ▇▇▇▇▇▇▇, ▇▇▇ ▇▇▇▇, the
buildings, structures, fixtures, additions, enlargements, extensions,
modifications, repairs, replacements and improvements now or hereafter located
thereon and all other property described in the Mortgage (collectively, the
"Mortgaged Property").
F-1
Borrower agrees that if it fails to timely make any payment due under this Note
or upon the happening of any Event of Default under the Mortgage, the
outstanding Principal Amount, together with accrued interest and all other
expenses, including, reasonable attorneys' fees for legal services incurred by
the holder hereof in collecting or enforcing payment hereof whether or not suit
is brought, and if suit is brought, then through all appellate actions, shall
immediately become due and payable at the option of the holder of this Note,
notwithstanding the Maturity Date. From and after any Event of Default under the
Mortgage, the interest rate of this Note shall be the Default Rate (as defined
in the Credit Agreement).
In no event shall the total of all charges payable under this Note, the Mortgage
and any other documents executed and delivered in connection herewith and
therewith which are or could be held to be in the nature of interest exceed the
maximum rate permitted to be charged by applicable law. Should the Lender
receive any payment which is or would be in excess of that permitted to be
charged under any such applicable law, such payment shall have been, and shall
be deemed to have been, made in error and shall thereupon be applied to reduce
the principal balance outstanding on this Note.
Borrower waives demand, presentment for payment, notice of dishonor, protest and
notice of protest of this Note.
Any notice, demand or request relating to any matter set forth in this Note
shall be given in the manner provided for in the Mortgage.
Time is of the essence as to all dates set forth herein, provided, however, that
whenever any payment to be made under this Note shall be stated to be due on a
Saturday, Sunday or a public holiday or the equivalent for banks generally under
the laws of the State of New York such payment may be made on the next
succeeding Business Day, and such extension of time shall in such case be
included in the computations of payment of interest.
This Note may not be waived, changed, modified, terminated or discharged orally,
but only by an agreement in writing signed by the party against whom enforcement
of any such waiver, change, modification, termination or discharge is sought.
This Note may be prepaid only in accordance with the Credit Agreement.
BORROWER, AND BY ITS ACCEPTANCE HEREOF, LENDER, EACH HEREBY AGREE NOT TO ELECT A
TRIAL BY JURY OF ANY ISSUE TRIABLE OF RIGHT BY JURY, AND WAIVE ANY RIGHT TO
TRIAL BY JURY FULLY TO THE EXTENT THAT ANY SUCH RIGHT SHALL NOW OR HEREAFTER
EXIST WITH REGARD TO THIS NOTE, OR ANY CLAIM, COUNTERCLAIM OR OTHER ACTION
ARISING IN CONNECTION THEREWITH. THIS WAIVER OF RIGHT TO TRIAL BY JURY IS GIVEN
KNOWINGLY AND VOLUNTARILY BY BORROWER AND LENDER, AND IS INTENDED TO ENCOMPASS
INDIVIDUALLY EACH INSTANCE AND EACH ISSUE AS TO WHICH THE RIGHT TO A TRIAL BY
JURY WOULD OTHERWISE ACCRUE. BORROWER AND LENDER ARE EACH HEREBY AUTHORIZED TO
FILE A COPY OF THIS PARAGRAPH IN ANY PROCEEDING AS CONCLUSIVE EVIDENCE OF THIS
WAIVER.
F-2
BORROWER HEREBY EXPRESSLY AND UNCONDITIONALLY WAIVES, IN CONNECTION WITH ANY
SUIT, ACTION OR PROCEEDING BROUGHT BY OR ON BEHALF OF LENDER ON THIS NOTE, ANY
AND EVERY RIGHT BORROWER MAY HAVE TO (I) INJUNCTIVE RELIEF, (II) INTERPOSE ANY
COUNTERCLAIM THEREIN (OTHER THAN COMPULSORY COUNTERCLAIMS), AND (III) HAVE THE
SAME CONSOLIDATED WITH ANY OTHER OR SEPARATE SUIT, ACTION OR PROCEEDING. NOTHING
HEREIN CONTAINED SHALL PREVENT OR PROHIBIT BORROWER FROM INSTITUTING OR
MAINTAINING A SEPARATE ACTION AGAINST LENDER WITH RESPECT TO ANY ASSERTED CLAIM.
This Note is given in substitution for, and consolidates, modifies, amends and
restates, and as consolidated, modified, amended and restated replaces, the
certain notes, bonds and other agreements (collectively, the "Original Notes")
evidencing the debt secured by the mortgages listed and described on Schedule A
attached hereto. The Original Notes and the respective debts evidenced thereby
are hereby combined and coordinated to constitute one joint indebtedness in the
outstanding principal sum of $12,000,000.00.
This Note is not in payment, satisfaction or cancellation of the Original Notes,
or of the indebtedness evidenced and secured thereby, and such indebtedness is
hereby ratified and confirmed by the Borrower and Borrower represents, warrants
and covenants that there are no offsets, counterclaims or defenses against the
indebtedness or this Note. It is expressly understood and agreed that (i) this
Note is given in replacement of the Original Notes, and that no part of the
indebtedness evidenced by the Original Notes shall be discharged, cancelled or
impaired by the execution and delivery of this Note and (ii) the execution and
delivery of this Note shall not create any new or additional principal
indebtedness.
This Note and the rights and obligations of the parties hereunder shall in all
respects be governed by, and construed and enforced in accordance with, the laws
of the State of New York (without giving effect to New York's principles of
conflicts of law).
IN WITNESS WHEREOF, the Borrower has executed and delivered this Note on the
Date of Note.
Address: BORROWER:
▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇ INTERPHARM, INC.
▇▇▇▇▇▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇
By:
----------------------------------
▇▇▇▇▇▇ ▇▇▇▇▇▇▇, Chief Financial
Officer
F-3
Exhibit G to Credit and Security Agreement
GUARANTY
THIS GUARANTY, dated as of ____________, 2_____ is made by ▇▇▇▇▇▇▇▇
▇▇▇▇▇▇▇ (the "Guarantor") for the benefit of ▇▇▇▇▇ Fargo Bank, National
Association (with its participants, successors and assigns, the "Lender"),
acting through its ▇▇▇▇▇ Fargo Business Credit operating division.
The Lender and Interpharm, Inc., a New York corporation (the
"Borrower"), are parties to a Credit and Security Agreement of even date
herewith (as the same may be amended, supplemented or restated from time to
time, the "Credit Agreement") pursuant to which the Lender may make advances and
extend other financial accommodations to the Borrower.
As a condition to forbearing from declaring a default under the
Credit Agreement and continuing to extend such credit to the Borrower, the
Lender has required the execution and delivery of this Guaranty.
ACCORDINGLY, the Guarantor, in consideration of the premises and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, hereby agrees as follows:
1. Definitions. All terms defined in the Credit Agreement that are
not otherwise defined herein shall have the meanings given them in the Credit
Agreement.
2. Indebtedness Guaranteed. The Guarantor hereby absolutely and
unconditionally guarantees to the Lender the full and prompt payment when due,
whether at maturity or earlier by reason of acceleration or otherwise, of (i)
the Obligations and (ii) each and every other sum now or hereafter owing to the
Lender by the Borrower, including but not limited to, debts, liabilities and
obligations arising out of loans, credit transactions, financial accommodations,
discounts, purchases of property or other transactions with the Borrower or for
the Borrower's account or out of any other transaction or event, owed to the
Lender or owed to others by reason of participations granted to or interests
acquired or created for or sold to them by the Lender, in each case whether now
existing or hereafter arising, whether arising directly in a transaction or
event involving the Lender or acquired by the Lender from another by purchase or
assignment or as collateral security, whether owed by the Borrower as drawer,
maker, endorser, accommodation party, guarantor, principal, surety or as a
member of any partnership, syndicate, association or group or in any other
capacity, whether absolute or contingent, direct or indirect, primary or
secondary, sole, joint, several or joint and several, secured or unsecured, due
or not due, contractual, tortious or statutory, liquidated or unliquidated,
arising by agreement or imposed by law or otherwise (all of said sums being
hereinafter called the "Indebtedness").
3. Unconditional Guaranty. No act or thing need occur to establish
the liability of the Guarantor hereunder, and no act or thing, except full
payment and discharge of all of the Indebtedness, shall in any way exonerate the
Guarantor hereunder or modify, reduce, limit or release the Guarantor's
liability hereunder. This is an absolute, unconditional and continuing guaranty
of payment of the Indebtedness and shall continue to be in force and be binding
upon the Guarantor, whether or not all of the Indebtedness is paid in full,
until this Guaranty is revoked prospectively as to future transactions, by
written notice actually received by the Lender, and such revocation shall not be
effective as to the amount of Indebtedness existing or committed for at the time
of actual receipt of such notice by the Lender, or as to any renewals,
extensions, refinancings or refundings thereof. The death or incompetence of the
Guarantor shall not revoke this Guaranty, except upon actual receipt of written
notice thereof by the Lender and only prospectively, as to future transactions,
as herein set forth.
G-1
4. Death or Insolvency of Guarantor. If the Guarantor shall die or
shall be or become insolvent (however defined), then the Lender shall have the
right to declare immediately due and payable, and the Guarantor will forthwith
pay to the Lender, the full amount of all of the Indebtedness whether due and
payable or unmatured. If the Guarantor voluntarily commences or there is
commenced involuntarily against the Guarantor a case under the United States
Bankruptcy Code, the full amount of all of the Indebtedness, whether due and
payable or unmatured, shall be immediately due and payable without demand or
notice thereof.
5. Limited Guaranty. Notwithstanding the aggregate amount of the
Indebtedness which may from time to time be outstanding, the liability of the
Guarantor hereunder shall be limited to a principal amount of $_______________,
plus accrued interest thereon and all attorneys' fees, collection costs and
enforcement expenses referable thereto. The Indebtedness may be created and
continued in any amount, whether or not in excess of such principal amount,
without affecting or impairing the Guarantor's liability hereunder, and the
Lender may pay (or allow for the payment of) the excess out of any sums received
by or available to the Lender on account of the Indebtedness from the Borrower
or any other person (except the Guarantor), from their properties, out of any
collateral security or from any other source, and such payment (or allowance)
shall not reduce, affect or impair the Guarantor's liability hereunder. Any
payment made by the Guarantor under this Guaranty shall be effective to reduce
or discharge such liability only if accompanied by a written transmittal
document, received by the Lender, advising the Lender that such payment is made
under this Guaranty for such purpose.
6. Subrogation, etc. The Guarantor hereby waives all rights that the
Guarantor may now have or hereafter acquire, whether by subrogation,
contribution, reimbursement, recourse, exoneration, contract or otherwise, to
recover from the Borrower or from any property of the Borrower any sums paid
under this Guaranty. The Guarantor will not exercise or enforce any right of
contribution to recover any such sums from any person who is a co-obligor with
the Borrower or a guarantor or surety of the Indebtedness or from any property
of any such person until all of the Indebtedness shall have been fully paid and
discharged.
7. Enforcement Expenses. The Guarantor will pay or reimburse the
Lender for all costs, expenses and reasonable attorneys' fees paid or incurred
by the Lender in endeavoring to collect and enforce the Indebtedness and in
enforcing this Guaranty.
G-2
8. Lender's Rights. The Lender shall not be obligated by reason of
its acceptance of this Guaranty to engage in any transactions with or for the
Borrower. Whether or not any existing relationship between the Guarantor and the
Borrower has been changed or ended and whether or not this Guaranty has been
revoked, the Lender may enter into transactions resulting in the creation or
continuance of the Indebtedness and may otherwise agree, consent to or suffer
the creation or continuance of any of the Indebtedness, without any consent or
approval by the Guarantor and without any prior or subsequent notice to the
Guarantor. The Guarantor's liability shall not be affected or impaired by any of
the following acts or things (which the Lender is expressly authorized to do,
omit or suffer from time to time, both before and after revocation of this
Guaranty, without consent or approval by or notice to the Guarantor): (i) any
acceptance of collateral security, guarantors, accommodation parties or sureties
for any or all of the Indebtedness; (ii) one or more extensions or renewals of
the Indebtedness (whether or not for longer than the original period) or any
modification of the interest rates, maturities, if any, or other contractual
terms applicable to any of the Indebtedness or any amendment or modification of
any of the terms or provisions of any loan agreement or other agreement under
which the Indebtedness or any part thereof arose; (iii) any waiver or indulgence
granted to the Borrower, any delay or lack of diligence in the enforcement of
the Indebtedness or any failure to institute proceedings, file a claim, give any
required notices or otherwise protect any of the Indebtedness; (iv) any full or
partial release of, compromise or settlement with, or agreement not to ▇▇▇, the
Borrower or any guarantor or other person liable in respect of any of the
Indebtedness; (v) any release, surrender, cancellation or other discharge of any
evidence of the Indebtedness or the acceptance of any instrument in renewal or
substitution therefor; (vi) any failure to obtain collateral security (including
rights of setoff) for the Indebtedness, or to see to the proper or sufficient
creation and perfection thereof, or to establish the priority thereof, or to
preserve, protect, insure, care for, exercise or enforce any collateral
security; or any modification, alteration, substitution, exchange, surrender,
cancellation, termination, release or other change, impairment, limitation, loss
or discharge of any collateral security; (vii) any collection, sale, lease or
disposition of, or any other foreclosure or enforcement of or realization on,
any collateral security; (viii) any assignment, pledge or other transfer of any
of the Indebtedness or any evidence thereof; (ix) any manner, order or method of
application of any payments or credits upon the Indebtedness; and (x) any
election by the Lender under Section 1111(b) of the United States Bankruptcy
Code. The Guarantor waives any and all defenses and discharges available to a
surety, guarantor or accommodation co-obligor.
9. Waivers by Guarantor. The Guarantor waives any and all defenses,
claims, setoffs and discharges of the Borrower, or any other obligor, pertaining
to the Indebtedness, except the defense of discharge by payment in full. Without
limiting the generality of the foregoing, the Guarantor will not assert, plead
or enforce against the Lender any defense of waiver, release, discharge or
disallowance in bankruptcy, statute of limitations, res judicata, statute of
frauds, anti-deficiency statute, fraud, incapacity, minority, usury, illegality
or unenforceability which may be available to the Borrower or any other person
liable in respect of any of the Indebtedness, or any setoff available against
the Lender to the Borrower or any other such person, whether or not on account
of a related transaction. The Guarantor expressly agrees that the Guarantor
G-3
shall be and remain liable for any deficiency remaining after foreclosure of any
mortgage or security interest securing the Indebtedness, whether or not the
liability of the Borrower or any other obligor for such deficiency is discharged
pursuant to statute or judicial decision. The liability of the Guarantor shall
not be affected or impaired by any voluntary or involuntary liquidation,
dissolution, sale or other disposition of all or substantially all the assets,
marshalling of assets and liabilities, receivership, insolvency, bankruptcy,
assignment for the benefit of creditors, reorganization, arrangement,
composition or readjustment of, or other similar event or proceeding affecting,
the Borrower or any of its assets. The Guarantor will not assert, plead or
enforce against the Lender any claim, defense or setoff available to the
Guarantor against the Borrower. The Guarantor waives presentment, demand for
payment, notice of dishonor or nonpayment and protest of any instrument
evidencing the Indebtedness. The Lender shall not be required first to resort
for payment of the Indebtedness to the Borrower or other persons, or their
properties, or first to enforce, realize upon or exhaust any collateral security
for the Indebtedness, before enforcing this Guaranty.
10. If Payments Set Aside, etc. If any payment applied by the Lender
to the Indebtedness is thereafter set aside, recovered, rescinded or required to
be returned for any reason (including, without limitation, the bankruptcy,
insolvency or reorganization of the Borrower or any other obligor), the
Indebtedness to which such payment was applied shall for the purpose of this
Guaranty be deemed to have continued in existence, notwithstanding such
application, and this Guaranty shall be enforceable as to such Indebtedness as
fully as if such application had never been made.
11. Additional Obligation of Guarantor. The Guarantor's liability
under this Guaranty is in addition to and shall be cumulative with all other
liabilities of the Guarantor to the Lender as guarantor, surety, endorser,
accommodation co-obligor or otherwise of any of the Indebtedness or obligation
of the Borrower, without any limitation as to amount, unless the instrument or
agreement evidencing or creating such other liability specifically provides to
the contrary.
12. Intentionally Omitted.
13. No Duties Owed by Lender. The Guarantor acknowledges and agrees
that the Lender (i) has not made any representations or warranties with respect
to, (ii) does not assume any responsibility to the Guarantor for, and (iii) has
no duty to provide information to the Guarantor regarding, the enforceability of
any of the Indebtedness or the financial condition of the Borrower or any
guarantor. The Guarantor has independently determined the creditworthiness of
the Borrower and the enforceability of the Indebtedness and until the
Indebtedness is paid in full will independently and without reliance on the
Lender continue to make such determinations.
14. Termination of Guaranty. This Guaranty shall terminate upon the
Borrower's or any Guarantor's (as defined in the Credit Agreement) pledging to
Lender collateral in an amount necessary to meet the Securities Account Sublimit
(as defined in the Credit Agreement) in form and substance acceptable to the
Lender. Such termination of this Guaranty does not waive Lender's rights or
otherwise release Guarantor from his obligations under the Credit Agreement to
provide a subsequent Guaranty in form and substance as herein in the event that
there is a subsequent default under Section 7.1(k) of the Credit Agreement.
G-4
15. Miscellaneous. This Guaranty shall be effective upon delivery to
the Lender, without further act, condition or acceptance by the Lender, shall be
binding upon the Guarantor and the heirs, representatives, successors and
assigns of the Guarantor and shall inure to the benefit of the Lender and its
participants, successors and assigns. Any invalidity or unenforceability of any
provision or application of this Guaranty shall not affect other lawful
provisions and application thereof, and to this end the provisions of this
Guaranty are declared to be severable. This Guaranty may not be waived,
modified, amended, terminated, released or otherwise changed except by a writing
signed by the Guarantor and the Lender. This Guaranty shall be governed by and
construed in accordance with the substantive laws (other than conflict laws) of
the State of New York. The Guarantor hereby (i) consents to the personal
jurisdiction of the state and federal courts located in the State of New York in
connection with any controversy related to this Guaranty; (ii) waives any
argument that venue in any such forum is not convenient, (iii) agrees that any
litigation initiated by the Lender or the Guarantor in connection with this
Guaranty may be venued in the state or federal courts located in New York, New
York; and (iv) agrees that a final judgment in any such suit, action or
proceeding shall be conclusive and may be enforced in other jurisdictions by
suit on the judgment or in any other manner provided by law.
15. Waiver of Jury Trial. THE GUARANTOR HEREBY IRREVOCABLY WAIVES
ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING
OUT OF, BASED ON OR PERTAINING TO THIS GUARANTY.
IN WITNESS WHEREOF, this Guaranty has been duly executed by the
Guarantor as of the date first written above.
------------------------------------
▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇
Address:
---------------------------------
---------------------------------
---------------------------------
Soc. Sec. No.:
-------------------
G-5
STATE OF )
---------------------
) ss.:
COUNTY OF )
--------------------
On the _____ day of ________, in the year ____, before me, the
undersigned, personally appeared ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇, personally known to me or
proved to me on the basis of satisfactory evidence to be the individual whose
name is subscribed to the within instrument and acknowledged to me that he
executed the same in his capacity, and that by his signature on the instrument,
the individual, or the person upon behalf of which the individual acted,
executed the instrument.
----------------------------
Notary Public
G-6
Schedule 5.1 to Credit and Security Agreement
TRADE NAMES, CHIEF EXECUTIVE OFFICE, PRINCIPAL PLACE OF BUSINESS,
AND LOCATIONS OF COLLATERAL
TRADE NAMES
Interpharm, Inc.
CHIEF EXECUTIVE OFFICE/PRINCIPAL PLACE OF BUSINESS
▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇
OTHER INVENTORY AND EQUIPMENT LOCATIONS
▇▇ ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇
▇▇▇▇▇▇▇, ▇▇▇ ▇▇▇▇
S-5.1-1
Schedule 5.2 to Credit and Security Agreement
CAPITALIZATION AND ORGANIZATIONAL CHART
(1) Capitalization.
As of February 8, 2006, the total number of common shares outstanding
and the number of common shares potentially issuable upon exercise of all
outstanding stock options and conversion of preferred stocks (including
contingent conversions) is as follows:
No. of shares (after
exercise of all rights
Type of Rights/Stock to acquire shares)
-------------------- ---------------
Common stock 32,463,607
Series A 1,522
Series A-1 (maximum 4,855,389
contingent
conversion) (a)
Series B 292
Series C 5,584
Series K (b) 31,373,875
------------ ----------
Total (c) 81,229,139
(a) Series A-1 shares are convertible only if the Company reaches $150
million in annual sales or upon a merger, consolidation, sale of assets or
similar transaction.
(b) June 4, 2006 and on each anniversary date thereof, through June 4,
2010, 292,913 Series K shares will automatically convert into 6,274,775 shares
of the Company's common stock. The shareholders of the Series K Preferred are as
follows:
=============================
▇▇▇ ▇▇▇▇▇▇▇ 410,078
-----------------------------
▇▇▇▇ ▇▇▇▇▇▇▇ 292,913
-----------------------------
▇▇▇▇▇ ▇▇▇▇▇▇▇ 234,331
-----------------------------
▇▇▇▇ ▇▇▇▇▇▇▇ 234,331
=============================
Total 1,171,653
=============================
(c) Assuming no further issuance of equity instruments, or changes to the
equity structure of the Company, this total represents the maximum number of
shares of common stock that could be outstanding through December 31, 2011 (the
end of the current vesting and conversion periods).
S-5.2-1
5% Owners (including officers and directors) as of November 9, 2005:
Amount and
Name and Nature of
Address of Title of Beneficial Percent of
Beneficial Owner Class Ownership Class
---------------- -------- --------- ----------
▇▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇(2) Common Stock 343,500 1.05%
▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
▇▇▇ ▇▇▇▇▇▇▇(3) Common Stock 6,951,198 21.30%
▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇ Series K Preferred 512,599 35.00%
Common and Series K
Combined 7,463,797 21.96%
Voting Power
▇▇▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇(4) Common Stock 204,000 0.63%
▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇ Common Stock 3,987,971 12.29%
and ▇▇▇▇ ▇▇▇▇▇▇▇ (5)
▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇ Series K Preferred 292,913 20.00%
Common and Series K
Combined 4,280,884 12.62%
Voting Power
Dr. ▇▇▇▇ ▇▇▇▇▇▇▇ (6) Common Stock 100,000 *
▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
▇▇▇▇▇ ▇▇▇▇▇▇ (7) Common Stock 17,500 *
▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇(8) Common Stock 17,500 *
▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
S-5.2-2
▇▇▇▇ ▇▇▇▇▇▇▇ Common Stock 4,361,443 13.49%
▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇ Series K Preferred 366,141 25.00%
Common and Series K
Combined 4,654,356 13.77%
Voting Power
▇▇▇▇▇ ▇▇▇▇▇▇▇(9) Common Stock 4,073,051 12.60%
▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇ Series K Preferred 292,913 20.00%
Common and Series K
Combined 4,365,964 12.92%
Voting Power
▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ Common Stock 27,500 *
▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
▇▇▇▇▇▇▇ ▇▇▇▇ (10) Common Stock 2,000,000 5.82%
▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
▇▇▇▇▇▇ ▇▇▇▇▇▇▇ (11) Common Stock 275,000 *
▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
All Directors and Total Voting Power 23,312,501 68.77%
Officers as a
Group (9 persons)
(1) Computed based upon a total of 32,463,607 shares of common stock and
1,464,567 shares of Series K Preferred Stock outstanding as of November 7,
2005 and 7,438 shares of common stock into which the Series, A, B and C
Preferred Stock are convertible.
(2) The foregoing figure reflects the ownership of 43,500 shares of common
stock and vested options to acquire 300,000 shares. It does not include
non-vested options to acquire 900,000 shares of common stock, 350,000
options held by his spouse and 1,873,900 shares of Series A-1 Preferred
Stock held by an annuity he controls.
(3) The foregoing figure includes vested options to acquire 187,500
shares, but does not include non-vested options to acquire 562,500 shares
of common stock or his beneficial interest in Series A-1 Preferred Stock
held by a trust of which he is a beneficiary.
S-5.2-3
(4) The foregoing figure includes vested options to acquire 200,000
shares, but does not include non-vested options to acquire 600,000 shares
of common stock and 400,000 options held by his spouse.
(5) The foregoing includes vested options to acquire 112,500 shares., but
does not include non-vested options held by ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇ to acquire
337,500 shares of common stock or ▇▇▇▇ ▇▇▇▇▇▇▇'▇ beneficial interest in
Series A-1 Preferred Stock held by her and by a trust of which she is a
beneficiary.
(6) The foregoing figure includes 47,500 shares owned by ▇▇. ▇▇▇▇▇▇▇'▇
wife. ▇▇. ▇▇▇▇▇▇▇ has been granted a power of attorney to sell such
shares.
(7) The foregoing figure includes vested options to acquire 17,500, but
excludes non-vested options to acquire 5,000 shares of common stock.
(8) The foregoing figure includes 17,500 shares of common stock which may
be acquired upon exercise of currently exercisable options and excludes
non-vested options to acquire an additional 5,000 shares of common stock.
(9) The foregoing figure does not include his beneficial interest in
Series A-1 Preferred Stock held by a trust of which he is a beneficiary.
(10) The foregoing figure does not include 1,000,000 non-vested options to
purchase common stock. ▇▇. ▇▇▇▇'▇ options have an exercise price of $3.97
per share and will not vest until out common stock trades at $15 per share
for six months.
(11) The foregoing figure includes vested options to acquire 275,000
shares, but excludes non-vested options to acquire 125,000 shares of
common stock.
S-5.2-4
(2) Attach organizational chart showing the ownership structure of all
Subsidiaries of the Holdings and Borrower.
[GRAPHIC OMITTED]
S-5.2-5
Schedule 5.3 to Credit and Security Agreement
AUTHORIZATION OF BORROWING; NO CONFLICT AS TO LAW OR AGREEMENTS.
The execution, delivery and performance of the Loan Documents will
violate that certain credit facility agreement between the Borrower and HongKong
Shanghai Bank Corporation ("HSBC") and required HSBC's consent. HSBC's consent
was obtained and the HSBC loan will be paid off at the Closing.
S-5.3-1
Schedule 5.5 to Credit and Security Agreement
SUBSIDIARIES
Interpharm Holdings, Inc.
------------------------------------ ----------------- -----------------------------------
Name of Subsidiary Jurisdiction Ownership Percentage
------------------------------------ ----------------- -----------------------------------
Interpharm, Inc. New York 100%
------------------------------------ ----------------- -----------------------------------
Micro Computer Store, Inc. New York 100%
------------------------------------ ----------------- -----------------------------------
Innovative Business Micros, Inc. New York 100%
--------------------------------------------------------------------------------------------------
Logix Solutions, Inc. Colorado 90%
Saturn Chemical, LLC New York 100%
Interpharm Realty, LLC New York 100%
--------------------------------------------------------------------------------------------------
Interpharm, Inc. Subsidiaries
Saturn Chemical, LLC
S-5.5-1
Schedule 5.6 to Credit and Security Agreement
FINANCIAL CONDITION; NO ADVERSE CHANGE
Since September 30, 2005 (the most recent financial statements provided by
the Borrower to the Lender), the Borrower was delayed in launching its
stearified estrogen product being produced pursuant to its agreement with
Centrix Pharmaceutical, Inc.
S-5.6-1
Schedule 5.7 to Credit and Security Agreement
LITIGATION MATTERS
▇▇▇▇ ▇▇▇▇▇▇▇ v. Interpharm Holdings, Inc., Advanced Technology Solutions
Group, Inc. (d/b/a ATEC GROUP), Gunnallen Financial, Inc., ▇▇▇▇▇ ▇▇▇▇▇▇▇,
▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇ and ▇▇▇▇ ▇▇▇▇▇▇▇▇▇
In this lawsuit commenced on January 28, 2004, Plaintiff ▇▇▇▇ ▇▇▇▇▇▇▇
("▇▇▇▇▇▇▇"), a former employee of Advanced Technology Solutions Group, Inc.
("Atec") alleges that he was wrongfully precluded from exercising stock options
that expired on August 28, 2003.
▇▇▇▇▇▇▇ commenced this lawsuit on or about January 28, 2004 and in
addition to his claims against the corporate defendants, Atec and Interpharm, he
asserts claims against ▇▇▇▇▇ ▇▇▇▇▇▇▇ and ▇▇▇▇▇▇ ▇▇▇▇▇▇▇, two officers who acted
in their corporate capacities at all times. ▇▇▇▇▇▇▇ also asserts claims against
the broker and brokerage firm through which he exercised his claimed options.
The complaint variously alleges claims against the corporate and
individual defendants for fraud, fraudulent inducement, gross negligence,
negligent misrepresentation, breach of contract, breach of fiduciary duty and
unjust enrichment. The damages alleged are for the full value of the 16,700
shares at issue at the stock's highest price on August 12, 2003 ($7.64/share),
the day ▇▇▇▇▇▇▇ alleges that he would have exercised his options. This amounts
to $127,588 in claimed damages. ▇▇▇▇▇▇▇ also alleges punitive damages and
attorneys' fees; however, he fails to quantify this aspect of his purported
damages.
The Company believes it has meritorious defenses to the allegations in the
complaint and intends to vigorously defend the case.
S-5.7-1
Schedule 5.9 to Credit and Security Agreement
TAXES
None
S-5.9-1
Schedule 5.11 to Credit and Security Agreement
INTELLECTUAL PROPERTY DISCLOSURES
(a) Owned Intellectual Property.
None.
(b) Agreement with Employees and Contractors.
The Borrower has entered into an employment agreement with each of its
executive officers under which the officers assign to the Borrower any
Intellectual Property Rights created in the course of employment.
(c) Intellectual Property Rights Licensed from Others.
Other than off-the-shelf software licenses, the Borrower has no Licensed
Intellectual Property. Borrower has two agreements with Tris Pharma, Inc.
entered into in February, 2005, pursuant to which it has the right to license
any and all intellectual property developed by Tris pursuant to the agreements.
(d) Other Intellectual Property Needed for Business.
None.
(e) Infringement.
None.
S-5.11-1
Schedule 5.12 to Credit and Security Agreement
PENSION PLAN
The Borrower and Holdings maintain 401(k) plan.
S-5.12-1
Schedule 5.13 to Credit and Security Agreement
DEFAULT
The Borrower is currently in default under its HSBC credit facility, which
was waived in exchange for a personal guarantee from Holdings Chairman.
S-5.13-1
Schedule 5.14 to Credit and Security Agreement
ENVIRONMENTAL MATTERS
None
S-5.14-1
Schedule 5.18 to Credit and Security Agreement
FINANCIAL SOLVENCY
The following inactive subsidiaries of the Borrower and Holdings
are insolvent: Micro Computer Store, Inc., Innovative Business Micros, Inc.,
Logix Solutions, Inc., Saturn Chemical, LLC.
S-5.18-1
Schedule 6.3 to Credit and Security Agreement
PERMITTED LIENS
The Borrower has provided a lien search report to the Lender.
Creditor Collateral Jurisdiction Filing Date Filing No.
-------- ---------- ------------ ----------- ----------
▇▇▇▇▇▇▇ Freight install NY July 14, 2005 200507140792975
Leasing ▇▇▇▇▇▇▇ SACSR30T
Corporation 04027 HOBART
750H3-24 205CS27907
DEKA 24D125-13
1495EO TRAINING
▇▇▇▇▇▇▇ ▇▇▇▇▇▇ D R 40C40QM NY July 14, 2005 200507140792987
Leasing 08614
Corporation Freight/Install
HOBART 1050H3-18
205CS28622 DEKA
18D125-17 1342LN
Leiner Health One Fette P3200 CA December 5, 2005 200512051286470
Products, LLC Tablet Press-Serial
No. 0713, 61 Stations
IPT 19, B Tolling
General Biotech Equipment CT December 5, 2005 200512301380865
Electric as further
Capital described on
Corporation Schedule A attached
to the UCC-1, plus
all other
attachments,
accessories,
accession,
additions,
replacements,
exchanges and
substitutions now or
hereafter made a
part of the
equipment or
attached thereto,
and any and all
insurance and other
proceeds thereof
under a True Lease
transaction between
Borrower and GE
S-6.3-1
Creditor Collateral Jurisdiction Filing Date Filing No.
-------- ---------- ------------ ----------- ----------
Xerox One XEROX 2101ST TX Jan 13, 2006 200601135041903
Corporation and one XEROX WCP65
together with all
parts, attachments,
additions,
replacements and
repairs
incorporated in or
affixed thereto
S-6.3-2
Schedule 6.4 to Credit and Security Agreement
PERMITTED INDEBTEDNESS AND GUARANTIES
INDEBTEDNESS
Creditor Principal Amount Maturity Date Monthly Payment Collateral
-------- ------ ------------- ------- ----------
Tris Pharma, Inc. Cost of two The balance on one
combined agreement of $2.75M could
agreements with be paid within 3 years; the
Tris is balance on the 2nd
approximately agreement of $2.2M is
$6.75M scheduled to be paid within
2 years
GUARANTIES
----------
Primary Obligor Amount and Description of Obligation Beneficiary of Guaranty
Guaranteed
N/A
S-6.4-1