Exhibit 10.1
 
Credit Agreement

This agreement dated as of June 6, 2013 is between JPMorgan Chase Bank, N.A.
(together with its successors and assigns, the “Bank”), whose address is 395
North Service Rd., 3rd Floor, Melville, NY 11747, and FREQUENCY ELECTRONICS,
INC. (individually, the “Borrower” and if more than one, collectively, the
“Borrowers”), whose address is 55 Charles Lindbergh Boulevard, Uniondale, NY
11553.

1.  
Credit Facilities.

1.1  
Scope. This agreement, unless otherwise agreed to in writing by the Bank and the
Borrower or prohibited by any Legal Requirement (as hereafter defined), governs
the Credit Facilities as defined below. Advances under any Credit Facilities
shall be subject to the procedures established from time to time by the Bank.
Any procedures agreed to by the Bank with respect to obtaining advances,
including automatic loan sweeps, shall not vary the terms or conditions of this
agreement or the other Related Documents regarding the Credit Facilities.

1.2  
Revolving Credit Facility. During the term of this agreement, the Bank will
provide revolving credit facilities to the Borrower as set forth in Section 1.5
(Tranche A) and Section 1.6 (Tranche B) in an aggregate amount not exceeding
$25,000,000.00 (the “Credit Limit”); provided however that at no time will (a)
the principal amount outstanding under Tranche B exceed $15,000,000.00, and (b)
the principal amount outstanding under Tranche A plus the principal amount
outstanding under Tranche B exceed the Credit Limit.  The Borrower acknowledges
and agrees that the Credit Facilities granted herein are subject to the
performance and compliance by the Borrower of the terms contained in this
agreement or any Related Document, or in any other document or agreement
evidencing or securing the Credit Facilities.  Advances under either Tranche A
or Tranche B must be made in amounts not less than $500,000.00 (the “Minimum
Borrowing Limit”) except where the Borrower elects to advance amounts under
either Tranche A or Tranche B as an Alternate Rate Borrowing as set forth in
Section 1.7, in which case the minimum borrowing limit shall be $100,000.00 (the
“Alternate Borrowing Limit”). 

1.3  
Term.  The revolving credit facilities are available between the date of this
agreement and June 5, 2018 or such earlier date as provided for hereunder (the
“Maturity Date”).  Until the earliest to occur of the Maturity Date or an Event
of Default (as defined below) or any event that would constitute an Event of
Default but for the giving of notice, the lapse of time or both, the Borrower
may borrow, pay down and reborrow amounts under Tranche A and Tranche B.

1.4  
Use of Proceeds.  The proceeds from Tranche A and Tranche B will be used by the
Borrower for working capital and to finance acquisitions.

1.5  
Tranche A.  Subject to the satisfaction by Borrower of the conditions set forth
in Section 3 herein, upon receipt of Borrower’s written request in accordance
with Section 1.8, the Bank shall advance amounts to the Borrower under Tranche
A, from time to time, in an aggregate amount not exceeding (a) the lesser of (i)
the Credit Limit, or (ii) the Loan Value of the Pledged Investments as defined
below, less (b) the unpaid principal amount under Tranche B.  Amounts advanced
under this Section 1.5 will be due and payable from the Borrower to the Bank as
set forth in Section 1.9; provided, however, that in the event the principal
amounts outstanding under Tranche A exceed the Loan Value of the Pledged
Investments, the Borrower shall, at it’s option, (1) supplement the Pledged
Investments by delivering to the Bank additional Pledged Investments, or (2)
make, or cause to be made, payment in respect of Tranche A, or (3) liquidate
Pledged Investments, or (4) convert such excess to Tranche B borrowings to the
extent advances are available under Tranche B, or (5) any combination of the
actions described in clauses (1) to (4),  in each case, to the extent necessary
to ensure the Borrower’s compliance with this Section 1.5.

1.6  
Tranche B.  Subject to the satisfaction by Borrower of the conditions set forth
in Section 3 herein, upon receipt of Borrower’s written request in accordance
with Section 1.8, the Bank shall advance amounts to the Borrower under Tranche
B, from time to time, in an aggregate amount not exceeding the Borrowing
Base.  Amounts advanced under this Section 1.6 will be due and payable from the
Borrower to the Bank as set forth in Section 1.9.  The Borrower hereby agrees to
an inspection and audit, at its own expense, at any time the unpaid principal
amount under Tranche B are in excess of $2,000,000.00 for greater than twelve
(12) months; provided that so long as no Event of Default has occurred and is
continuing, such inspection and audit shall be limited to once per fiscal
year.  After such inspection and audit, the Bank reserves the right to revisit
the advance rates referenced in Section 2.1(C) below in determining the
Borrowing Base.

 
 
 

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1.7  
Interest.  The Borrower hereby agrees to pay interest as set forth under the
Notes.  Interest shall be computed on the basis of the actual number of days
elapsed in a year of 360 days.  The Borrower may elect to pay interest at an
alternate rate as set forth in the Note on any advance requested under either
Tranche A or Tranche B until such time as such advances are paid in full by the
Borrower (the “Alternate Rate Borrowing”).  The Alternate Borrowing Limit, not
the Minimum Borrowing Limit, shall apply to any advances made as an Alternate
Rate Borrowing.

1.8  
Notice of Advance. Whenever the Borrower desires to receive an advance under
either Tranche A or Tranche B, the Borrower will give the Bank at least three
(3) Business Days’ prior written notice (one (1) Business Day prior written
notice in the case of any Alternate Rate Borrowings) (or telephonic notice
promptly confirmed in writing) of the advance to be made hereunder, provided
that any such notice shall be deemed to have been given on a certain day only if
given before 12:00 Noon (New York time) on such day.  Each such written notice
or written confirmation of telephonic notice (each, a “Notice of Borrowing”)
shall be irrevocable and shall be given by or on behalf of the Borrower in the
form of Exhibit A, appropriately completed to specify:  (A) the aggregate
principal amount of the advance to be made, (B) the date of such advance (which
shall be a Business Day), (C) whether the advance will be made under Tranche A
or Tranche B, (D) whether the advance will be an made as an Alternate Rate
Borrowing, and (E) whether the advance will be used to finance an Acquisition,
as defined below.  In addition, the Borrower shall submit the Borrowing Base
Certificate at any time an advance is requested under Tranche B and there are no
amounts outstanding under Tranche B at the time of such request.  Without in any
way limiting the obligation of the Borrower to confirm in writing any telephonic
notice permitted to be given hereunder, the Bank may, prior to receipt of
written confirmation, act without liability upon the basis of such telephonic
notice, believed by the Bank in good faith to be from an authorized officer of
the Borrower.  In each such case, the Bank’s record of the terms of such
telephonic notice shall be conclusive evidence of the contents of such notice,
absent manifest error.

1.9  
Repayment Terms.  The Borrower will make monthly interest payments on Tranche A
and Tranche B with the initial interest payment due and payble on May 31, 2013
and, thereafter, on the last day of each succeeding calendar month until all
amount due hereunder are paid in full.  The Borrower will make payment in full
of the principal amounts outstanding under Tranche A and Tranche B, accrued
interest thereon and any other charges outstanding under this agreement no later
than the Maturity Date.

1.10  
Fees.   The Borrower hereby agrees to pay fees to the Bank equal to 0.10% per
annum on the unused portion of the Credit Limit, quarterly, in arrears, on the
last day of each calendar quarter, based on the actual number of days elapsed on
the basis of a year of 360 days.

2.  
Definitions and Interpretations.

2.1  
Definitions. As used in this agreement, the following terms have the following
respective meanings:

A. “Affiliate” means any Person which, directly or indirectly Controls or is
Controlled by or under common Control with, another Person.  The Bank is under
no circumstances to be deemed an Affiliate of the Borrower or any of its
Subsidiaries.

B. “Authorizing Documents” means certificates of authority to transact business,
certificates of good standing, borrowing resolutions, appointments, officer’s
certificates, certificates of incumbency, and other documents which empower and
authorize or evidence the power and authority of all Persons (other than the
Bank) executing any Related Document or their representatives to execute and
deliver the Related Documents and perform the Person’s obligations thereunder.

C. “Borrowing Base” means the lesser of (1) $15,000,000.00 or (2) the sum of, as
determined by the Bank from time to time, (i) 80% of the aggregate amount of
Eligible Accounts Receivable, plus (ii) 50% of the aggregate amount of Eligible
Raw Materials Inventory (not to exceed an aggregate amount of $5,500,000.00 with
respect to Eligible Raw Materials Inventory at any time of determination), plus
(iii) 35% of the aggregate amount of Eligible WIP and Finished Goods Inventory
(not to exceed an aggregate amount of $4,000,000.00 with respect to Eligible WIP
and Finished Goods Inventory at any time of determination), plus (iv) 80% of the
aggregate amount of Thales Alenia Receivables (not to exceed an aggregate amount
of $2,000,000.00 with respect to Thales Alenia Receivables at any time of
determination); provided, however, that the Bank may exclude Thales Alenia
Receivables from the Borrowing Base in the event (x) of the reorganization,
bankruptcy, insolvency, arrangement, readjustment of debt, dissolution or
liquidation proceeding, or insolvency of Thales Alenia Space, or (y) the Bank,
in its sole discretion, determines that the collection of such Thales Alenia
Receivables to be doubtful by reason of the financial condition of Thales Alenia
Space or the Thales Group, or deems the creditworthiness or financial condition
of Thales Alenia Space or the Thales Group to be unsatisfactory; provided
further that in each calendar year for at least one (1) continuous thirty (30)
day period during such calendar year, there shall be no amounts advanced
pursuant to clause (iii).
 
 
 

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D. “Borrowing Base Certificate” means a certificate signed by an officer of the
Borrower, substantially in the form of Exhibit B attached hereto and
appropriately completed.

E. “Business Day” means a day other than a Saturday, Sunday or any other day on
which national banking associations are authorized to be closed.

F. “Capital Lease Obligations” of any Person means the obligations of such
Person to pay rent or other amounts under any lease of (or other arrangement
conveying the right to use) real or personal property, or a combination thereof,
which obligations are required to be classified and accounted for as capital
leases on a balance sheet of such Person under GAAP, and the amount of such
obligations shall be the capitalized amount thereof determined in accordance
with GAAP.

G. “Collateral” means all Property, now or in the future subject to any Lien in
favor of the Bank, securing or intending to secure, any of the Liabilities.

H. “Control” as used with respect to any Person, means the power to direct or
cause the direction of, the management and policies of that Person, directly or
indirectly, whether through the ownership of Equity Interests, by contract, or
otherwise. “Controlling” and “Controlled” have meanings correlative thereto.

I. “Credit Facilities” means all extensions of credit from the Bank to the
Borrower, whether now existing or hereafter arising, including but not limited
to those described in Section 1, if any, and those extended contemporaneously
with this agreement.

J. “Distributions” means all dividends and other distributions made to any
Equity Owners, other than salary, bonuses, and other compensation for services
expended in the current accounting period.

K. “Eligible Accounts Receivable” means accounts receivable arising in the
ordinary course of Borrower’s business from the sale of goods or rendition of
services, which the Bank, in its reasonable judgment, shall deem eligible for
borrowing, based on such considerations as the Bank may from time to time deem
appropriate.  Eligible Accounts Receivable shall not include the following:

1. the Thales Alenia Receivables;
2. accounts receivable that the account debtor has failed to pay within one
hundred twenty (120) days of invoice date or accounts receivable which are not
due within one hundred twenty (120) days of the invoice date;
3. accounts receivable owed by an account debtor or its Affiliates where
twenty-five percent (25%) or more of all accounts owed by that account debtor
(or its Affiliates) are deemed ineligible under clause (2) above;
4. accounts receivable with respect to which the account debtor is an employee,
Affiliate, or agent of Borrower;
5. accounts receivable with respect to which goods are placed on consignment,
guaranteed sale, sale or return, sale on approval, bill and hold, or other terms
by reason of which the payment by the account debtor may be conditional;
6. accounts receivable that are not payable in U. S. Dollars or with respect to
which the account debtor: (i) does not maintain its chief executive office in
the United States, or (ii) is not organized under the laws of the United States
or any State thereof, or (iii) is the government of any foreign country or
sovereign state, or of any state, province, municipality, or other political
subdivision thereof, or of any department, agency, public corporation, or other
instrumentality thereof;
7. accounts receivable with respect to which the account debtor is a creditor of
Borrower, has or has asserted a right of setoff, has disputed its liability, or
has made any claim with respect to the accounts receivable;
 
 
 

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8. accounts receivable with respect to which the account debtor is subject to
any reorganization, bankruptcy, insolvency, arrangement, readjustment of debt,
dissolution or liquidation proceeding, or becomes insolvent, or goes out of
business;
9. accounts receivable the collection of which the Bank, in its sole discretion,
believes to be doubtful by reason of the account debtor’s financial condition or
which the Bank, in its sole discretion, deems the creditworthiness or financial
condition of the account debtor to be unsatisfactory;
10. accounts receivable with respect to which the goods giving rise to such
accounts receivable have not been shipped and billed to the account debtor, the
services giving rise to such accounts receivable have not been performed and
accepted by the account debtor, or the accounts receivable otherwise does not
represent a final sale, and, in each case, no progress payments are due from the
account debtor in respect of such accounts receivable;
11. accounts receivable with respect to which Borrower has designated as
“unapplied credits”  (i.e. payments received but not yet applied to a specific
account receivable);
12. accounts receivable which arise from the sale of goods which remain in the
Borrower’s possession or under the Borrower’s control (except to the extent
progress payments are required under the terms of the applicable contract);
13. accounts receivable which are evidenced by a promissory note or chattel
paper;
14. accounts receivable with respect to which the account debtor is located in
States where the Borrower is prohibited from bringing an action to enforce
payment of the account debtor’s obligation;
15. accounts receivable that represent progress payments or other advance
billings that are due prior to the completion of performance by the Borrower of
the subject contract for goods or services with respect to which the Borrower
failed to issue an original invoice applicable thereto (except to the extent
progress payments are required under the terms of the applicable contract);
16. accounts receivable with respect to which the Bank does not have a valid and
first priority, perfected lien or which are not free of all liens or other
claims (other than Permitted Liens) but excluding accounts receivable with
respect to which the account debtor is either (i) the United States or any
department, agency, or instrumentality of the United States, or (ii) any State
of the United States, which accounts receivable described in the foregoing
subclauses (i) and (ii) shall not be deemed ineligible pursuant to this clause
16;
17. accounts receivable with respect to which the terms and conditions thereof
prohibit or restrict assignment or collection rights;
18. retainages, holdbacks or finance charges with respect to any accounts
receivable; or
19. contra accounts receivable.

L. “Eligible Raw Materials Inventory” or “Eligible WIP and Finished Goods
Inventory” means, at any time, all of the Borrower’s raw materials inventory or
work-in-process and finished goods inventory, as the case may be, except:

1. inventory which is not owned by Borrower free and clear of all security
interests, liens, encumbrances, and claims (other than Permitted Liens) of third
parties;
2. inventory which the Bank, in its sole discretion, deems to be obsolete,
unsalable, unmerchantable, damaged, defective, or unfit for further processing;
3. inventory not owned by the Borrower (including any inventory consigned to the
Borrower) or with respect to which the Bank does not have a valid, perfected
first priority security interest;
4. inventory that is located outside of the United States of America or is in
transit; or
5. inventory that is on consignment.

M. “Equity Interests” means shares of capital stock, partnership interests,
membership interests in a limited liability company, beneficial interests in a
trust or other equity ownership interests in a Person, and any warrants, options
or other rights entitling the holder thereof to purchase or acquire any such
equity interest.

N. “Equity Owner” means a shareholder, partner, member, holder of a beneficial
interest in a trust or other owner of any Equity Interests.

O. “GAAP” means generally accepted accounting principles in effect from time to
time in the United States of America, consistently applied.

P. “Guarantor Subsidiary” means a Subsidiary of Borrower who is subject to the
provisions of either Section 4.13 or Section 4.14 hereunder.
 
 
 

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Q. “Legal Requirement” means any law, ordinance, decree, requirement, order,
judgment, rule, regulation (or interpretation of any of the foregoing) of any
foreign governmental authority, the United States of America, any state thereof,
any political subdivision of any of the foregoing or any agency, department,
commission, board, bureau, court or other tribunal having jurisdiction over the
Bank, any Pledgor or any Obligor or any of its Subsidiaries or their respective
Properties or any agreement by which any of them is bound.

R. “Liabilities” means all debts, obligations, indebtedness and liabilities of
every kind and character of the Borrower, whether individual, joint and several,
contingent or otherwise, now or hereafter existing, in favor of the Bank and its
Affiliates, including, without limitation, all liabilities, interest, costs and
fees, arising under or from any note, open account, overdraft, credit card,
lease, Rate Management Transaction, letter of credit application, endorsement,
surety agreement, guaranty, acceptance, foreign exchange contract or depository
service contract, whether payable to the Bank or to a third party and
subsequently acquired by the Bank, any monetary obligations (including interest)
incurred or accrued during the pendency of any bankruptcy, insolvency,
receivership or other similar proceedings, regardless of whether allowed or
allowable in such proceeding, and all renewals, extensions, modifications,
consolidations, rearrangements, restatements, replacements or substitutions of
any of the foregoing.

S. “Lien” means any mortgage, deed of trust, pledge, charge, encumbrance,
security interest, collateral assignment or other lien or similar restriction of
any kind.

T. “Loan Value” means the value assigned by the Bank from time to time, in its
sole reasonable discretion, to each item of the Pledged Investments.  The
initial Loan Value of the Pledged Investments is listed on Schedule 1.

U. “Notes” means all promissory notes, instruments and/or contracts now or
hereafter evidencing the Credit Facilities.

V. “Obligor” means any Borrower, guarantor, surety, co-signer, endorser, general
partner or other Person who may now or in the future be obligated to pay any of
the Liabilities.

W. “Organizational Documents” means, with respect to any Person, certificates of
existence or formation, documents establishing or governing the Person or
evidencing or certifying that the Person is duly organized and validly existing
in accordance with all applicable Legal Requirements, including all amendments,
restatements, supplements or modifications to such certificates and documents as
of the date of the Related Document referring to the Organizational Document and
any and all future modifications thereto approved by the Bank.

X. “Permitted Investments” means (a) readily marketable direct obligations of
the United States of America or any agency thereof with maturities of one year
or less from the date of acquisition; (b) fully insured (if issued by a bank
other than the Bank) certificates of deposit with maturities of one year or less
from the date of acquisition issued by any commercial bank operating in the
United States of America having capital and surplus in excess of
$500,000,000.00; (c) commercial paper of a domestic issuer if at the time of
purchase such paper is rated in one of the two highest rating categories of
Standard and Poor’s Corporation or Moody’s Investors Service; (d) the Pledged
Investments; (e) the Permitted Acquisitions; (f) intercompany loans and accounts
in the ordinary course of business among Borrower and the Guarantor
Subsidiaries; and (g) the Unrestricted Investments.

Y. “Person” means any individual, corporation, partnership, limited liability
company, joint venture, joint stock association, association, bank, business
trust, trust, unincorporated organization, any foreign governmental authority,
the United States of America, any state of the United States and any political
subdivision of any of the foregoing or any other form of entity.

Z. “Pledged Investments” means all of the Borrower’s “Investment Property” of
every type and description, described in the Control Agreement of even date
herewith among the Borrower, J.P. Morgan Securities LLC, and the Bank, and on
the customer statement, if any, attached to the Control Agreement which shall
include without limitation, all of the Borrower’s “Securities Accounts”,
“Securities Entitlements”, “Securities”, “Investment Property” and “Financial
Assets” (such terms being used herein are defined in the Uniform Commercial Code
of New York (“UCC”)) and which may now or hereafter be maintained, held in or
credited in any of the accounts with the account numbers described in the
Control Agreement (including any subaccounts and any successor account(s) and/or
subaccount(s), howsoever numbered), all substitutions, additions, renewals,
investments, reinvestments, free credit balances, cash proceeds, general
intangibles, insurance, products and supporting obligations including but not
limited to all interest, dividends, other proceeds, instruments and other
property now or hereafter received, receivable or otherwise distributed in
connection with the sale, lease, license, exchange or other disposition of any
Pledged Investments. The Borrower’s performance of its obligations under the
Credit Facilities is secured by a pledge of the Pledged Investments as
collateral pursuant to a Continuing Pledge Agreement of even date herewith by
the Borrower in favor of the Bank. The Bank retains the right to determine the
eligibility of the Pledged Investments.
 
 
 

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AA. “Pledgor” means any Person providing Collateral.

BB. “Property” means any interest in any kind of property or asset, whether
real, personal or mixed, tangible or intangible.
 
CC. “Rate Management Transaction” means (1) any transaction (including an
agreement with respect thereto) which is a rate swap, swap option, basis swap,
forward rate transaction, commodity swap, commodity option, equity or equity
index swap, equity or equity index option, bond option, interest rate option,
foreign exchange transaction, cap, floor, collar, currency swap, cross-currency
rate swap, currency option, credit protection transaction, credit swap, credit
default swap, credit default option, total return swap, credit spread,
repurchase transaction, reverse repurchase transaction, buy/sell-back
transaction, securities lending transaction, weather index transaction or
forward purchase or sale of a security, commodity or other financial instrument
or interest (including an option with respect to any of these transactions), or
(2) any type of transaction that is similar to any transaction referred to in
clause (1) above that is currently, or in the future becomes, recurrently
entered into in the financial markets and which is a forward, swap, future,
option or other derivative on one or more rates, currencies, commodities, equity
securities or other equity instruments, debt securities or other debt
instruments, economic indices or measures of economic risk or value, or other
benchmarks against which payments or deliveries are to be made, or any
combination of the foregoing transactions.

DD. “Related Documents” means this agreement, the Notes, applications for
letters of credit, all loan agreements, credit agreements, reimbursement
agreements, security agreements, mortgages, deeds of trust, pledge agreements,
assignments, guaranties, and any other instrument or document executed in
connection with this agreement or with any of the Liabilities.

EE. “Subsidiary” means, as to any particular Person (the “parent”), a Person the
accounts of which would be consolidated with those of the parent in the parent’s
consolidated financial statements if such financial statements were prepared in
accordance with GAAP as of the date of determination, as well as any other
Person of which fifty percent (50%) or more of the Equity Interests is at the
time of determination directly or indirectly owned, Controlled or held, by the
parent or by any Person or Persons Controlled by the parent, either alone or
together with the parent.

FF. “Thales Alenia Receivable” means any and all account receivables due from
Thales Alenia Space, a subsidiary of the Thales Group, excluding, however,
accounts receivable (1) which are more than 120 days from the invoice date; (2)
with respect to which goods are placed on consignment, guaranteed sale, sale or
return, sale on approval, bill and hold, or other terms by reason of which the
payment by Thales Alenia Space may be conditional; (3) with respect to which
Thales Alenia Space has or has asserted a right of setoff, has disputed its
liability, or has made any claim with respect to the accounts receivable; (4)
with respect to which the goods giving rise to such accounts receivable have not
been shipped and billed to Thales Alenia Space, the services giving rise to such
accounts receivable have not been performed and accepted by Thales Alenia Space,
or the accounts receivable otherwise does not represent a final sale, and, in
each case, no progress payments are due from the account debtor; (5) which arise
from the sale of goods which remain in the Borrower’s possession or under the
Borrower’s control; (6) which are evidenced by a promissory note or chattel
paper; (7) which represent progress payments or other advance billings that are
due prior to the completion of performance by the Borrower of the subject
contract for goods or services with respect to which the Borrower failed to
issue an original invoice applicable thereto; (8) which are retainages,
holdbacks or finance charges with respect to any accounts receivable or (9)
which are contra accounts receivable.

GG. “Unrestricted Investments” means all of the Borrower’s “Investment Property”
of every type and description other than Pledged Investments which shall include
without limitation, all of the Borrower’s “Securities Accounts”, “Securities
Entitlements”, “Securities”, “Investment Property” and “Financial Assets” (such
terms being used herein are defined in the UCC) and which may now or hereafter
be maintained, held in or credited in any account maintained in financial
institutions other than the Bank or its Affiliates, all substitutions,
additions, renewals, investments, reinvestments, free credit balances, cash
proceeds, general intangibles, insurance, products and supporting obligations
including but not limited to all interest, dividends, other proceeds,
instruments and other property now or hereafter received, receivable or
otherwise distributed in connection with the sale, lease, license, exchange or
other disposition of any Unrestricted Investments.
 
 
 

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2.2  
Interpretations. Whenever possible, each provision of the Related Documents
shall be interpreted in such manner as to be effective and valid under
applicable Legal Requirements. If any provision of this agreement cannot be
enforced, the remaining portions of this agreement shall continue in effect. In
the event of any conflict or inconsistency between this agreement and the
provisions of any other Related Documents, the provisions of this agreement
shall control. Use of the term “including” does not imply any limitation on (but
may expand) the antecedent reference. Any reference to a particular document
includes all modifications, supplements, replacements, renewals or extensions of
that document, but this rule of construction does not authorize amendment of any
document without the Bank’s consent. Section headings are for convenience of
reference only and do not affect the interpretation of this agreement. Except as
otherwise expressly provided herein, all terms of an accounting or financial
nature shall be construed in accordance with GAAP. Whenever the Bank’s
determination, consent, approval or satisfaction is required under this
agreement or the other Related Documents or whenever the Bank may at its option
take or refrain from taking any action under this agreement or the other Related
Documents, the decision as to whether or not the Bank makes the determination,
consents, approves, is satisfied or takes or refrains from taking any action,
shall be in the sole and exclusive discretion of the Bank, and the Bank’s
decision shall be final and conclusive.

3.  
Conditions Precedent to Extensions of Credit.

3.1  
Conditions Precedent to Initial Extension of Credit under each of the Credit
Facilities. Before the first extension of credit governed by this agreement and
any initial advance under any of the Credit Facilities, whether by disbursement
of a loan, issuance of a letter of credit, or otherwise, the Borrower shall
deliver to the Bank, in form and substance satisfactory to the Bank:

A. Loan Documents. The Notes, and as applicable, the security agreements, the
pledge agreements, financing statements, the guaranties, and any other documents
which the Bank may reasonably require to give effect to the transactions
described in this agreement or the other Related Documents;

B. Organizational and Authorizing Documents. The Organizational Documents and
Authorizing Documents of the Borrower and any other Persons (other than the Bank
or any Affiliate thereof) executing the Related Documents in form and substance
reasonably satisfactory to the Bank that at a minimum: (1) document the due
organization, valid existence and good standing of the Borrower and every other
Person (other than the Bank or any Affiliate thereof) that is a party to this
agreement or any other Related Document; (2) evidence that each Person (other
than the Bank or any Affiliate thereof) which is a party to this agreement or
any other Related Document has the power and authority to enter into the
transactions described therein; and (3) evidence that the Person signing on
behalf of each Person that is a party to the Related Documents (other than the
Bank or any Affiliate thereof) is duly authorized to do so; and

C. Liens. The termination, assignment or subordination, as determined by the
Bank, of all Liens (other than Permitted Liens) on the Collateral in favor of
any secured party (other than the Bank).

3.2  
Conditions Precedent to Each Extension of Credit. Before any extension of credit
governed by this agreement, whether by disbursement of a loan, issuance of a
letter of credit or otherwise, the following conditions must be satisfied:

A. Representations. The representations of the Borrower and any other parties,
other than the Bank, in the Related Documents are true in all material respects
on and as of the date of the request for and funding of the extension of credit,
except to the extent that such representation specifically refers to an earlier
date, in which case they shall be true in all material respects as of such
earlier date;

B. No Event of Default. No Event of Default or event that would constitute an
Event of Default but for the giving of notice, the lapse of time (including but
not limited to the running of a cure period) or both, has occurred in any
provision of this agreement, the Notes or any other Related Documents and is
continuing or would result from the extension of credit; and

C. No Prohibition or Onerous Conditions. The making of the extension of credit
is not prohibited by and does not subject the Bank, any Obligor, or any
Subsidiary of the Borrower to any penalty or onerous condition under, any Legal
Requirement.

 
 

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4.  
Affirmative Covenants. The Borrower agrees to do, and cause each of its
Subsidiaries to do, each of the following:

4.1  
Insurance. Maintain insurance with financially sound and reputable insurers,
with such insurance and insurers to be reasonably satisfactory to the Bank,
covering its Property and business against those casualties and contingencies
and in the types and amounts as are in accordance with sound business and
industry practices, and furnish to the Bank, upon reasonable request of the
Bank, reports on each existing insurance policy showing such information as the
Bank may reasonably request.

4.2  
Existence. Maintain its existence and business operations as presently in effect
in accordance with all applicable Legal Requirements, pay its debts and
obligations when due under normal terms except to the extent any failure to pay
would not constitute an Event of Default, and pay on or before their due date,
all taxes, assessments, fees and other governmental monetary obligations, except
as they may be contested in good faith if they have been properly reflected on
its books and, at the Bank’s request, adequate funds or security has been
pledged or reserved to insure payment.

4.3  
Financial Records. Maintain proper books and records of account, in accordance
with GAAP, and consistent with financial statements previously submitted to the
Bank.

4.4  
Inspection. Permit the Bank, its agents and designees to: (A) inspect and
photograph its Property, to examine and copy files, books and records, and to
discuss its business, operations, prospects, assets, affairs and financial
condition with the Borrower’s or its Subsidiaries’ officers and accountants, at
times and intervals as the Bank reasonably determines; (B) perform audits or
other inspections of the Collateral, including the records and documents related
to the Collateral; and (C) confirm with any Person any obligations and
liabilities of the Person to the Borrower or its Subsidiaries. The Borrower
will, and will cause its Subsidiaries to cooperate with any inspection or audit.
The Borrower will pay (subject to the last sentence of this Section 4.4) the
Bank the reasonable costs and expenses of any audit or inspection of the
Borrower’s books and records, and of the Collateral (including fees and expenses
charged internally by the Bank for asset reviews) promptly after receiving the
invoice.  The Borrower hereby agrees to an inspection and audit, at its own
expense, at any time the unpaid principal amount under Tranche B are in excess
of $2,000,000.00 for greater than twelve (12) months; provided that so long as
no Event of Default has occurred and is continuing, such inspection and audit
shall be limited to once per fiscal year.

4.5  
Financial Reports.  Furnish to the Bank (A) audited annual 10K financial
statements within 120 days from the Borrower’s fiscal year end, (B) management
prepared 10Q financial statements within sixty (60) days of the Borrower’s
fiscal quarter end, (C) at any time there are amounts outstanding in respect of
Tranche B, (1) a Borrowing Base Certificate within twenty (20) days from each
month end, (2) an accounts receivable aging report within twenty (20) days from
each month end, and (3) an inventory summary reports within twenty (20) days
from each month end, (D) a contracts summary report within twenty (20) days from
each month end, and (E) whatever other information, statements, books and
records the Bank may from time to time reasonably request.

4.6  
Financial Covenants.  Comply with the following covenants and ratios:

A. Funded Debt/EBITDA Ratio.  Maintain, as of each fiscal quarter end, a Funded
Debt to EBITDA Ratio of not greater than 3.0 to 1.0. For purposes of this
Section 4.6(A), “Funded Debt” means aggregate unpaid principal amount owed under
the Credit Facilities plus all other debt owed to financing institutions
(including but not limited to capital leases), and “EBITDA” means earnings
before interest, taxes, depreciation and amortization, determined on a
consolidated basis in accordance with GAAP, for the four fiscal quarter period
then ended.

B. Interest Charge Coverage Ratio.  Maintain, as of each fiscal quarter end, an
Interest Charge Coverage Ratio of not less than 5.0 to 1.0. For purposes of this
Section 4.6(B), “Interest Charge Coverage Ratio” is defined as Available Cash
divided by Total Debt Service, “Available Cash” means EBITDA (as defined in
Section 4.6(A)) less capital expenditures less cash taxes less Restricted
Payments (as defined below), and “Total Debt Service” means the aggregate
interest expense paid on Funded Debt (as defined in Section 4.6(A)) for such
determination period; provided however that the covenant under this Section
4.6(B) shall apply only at such time as there are amounts outstanding under
Tranche B.
 
 
 

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4.7  
Notices of Claims, Litigation, Defaults, etc. Promptly inform the Bank in
writing of: (A) all existing and, to the knowledge of the Borrower, all
threatened litigation, claims, investigations, administrative proceedings and
similar actions or changes in Legal Requirements affecting it which could
materially affect its business, assets, affairs, prospects or financial
condition; (B) the occurrence of any event which gives rise to the Bank’s option
to terminate the Credit Facilities; (C) the institution of steps by it to
withdraw from, or the institution of any steps to terminate, any employee
benefit plan as to which it may have liability; (D) any reportable event or any
prohibited transaction in connection with any employee benefit plan; (E) any
additions to or changes in the locations of its businesses; and (6) any alleged
breach by the Bank of any provision of this agreement or of any other Related
Document.

4.8  
Other Agreements. Comply in all material respects with all terms and conditions
of all other material agreements, whether now or hereafter existing, between it
and any other Person.

4.9  
Title to Assets and Property. Maintain good and marketable title to all of its
material Properties, and defend them against all claims and demands of all
Persons at any time claiming any interest in them (except Permitted Liens).

4.10  
Additional Assurances. Promptly make, execute and deliver any and all
agreements, documents, instruments and other records that the Bank may
reasonably request to evidence any of the Credit Facilities, cure any defect in
the execution and delivery of any of the Related Documents, perfect any Lien,
comply with any Legal Requirement applicable to the Bank or the Credit
Facilities or describe more fully particular aspects of the agreements set forth
in any of the Related Documents.

4.11  
Employee Benefit Plans. Maintain each employee benefit plan as to which it may
have any liability, in compliance with all Legal Requirements.

4.12  
Banking Relationship. Establish and maintain its primary banking depository and
disbursement relationship with the Bank.

4.13  
Domestic Obligor.  Require each Subsidiary, other than an Inactive Subsidiary,
organized under the laws of the United States or any State thereof, now or
hereafter existing (each a “Domestic Obligor”), to (a) guarantee, jointly and
severally, the performance of the Borrower’s obligations for any and all
Liabilities (the “Guarantee”), (b) provide to the Bank a continuing security
interest in all of its property whether owned individually or jointly with
others, whether now owned or hereafter acquired, whether now existing or
hereafter arising, and wherever located to secure the payment and performance by
such Domestic Obligor of its obligations under the Guarantee, and (c) execute
any and all documents necessary to effectuate the provisions of this Section
4.13.  For purposes of this agreement, an “Inactive Subsidiary” is a Subsidiary
of Borrower who (a) has ceased to do business as of the beginning of the fiscal
year expiring immediately prior to the date of determination, and (b) does not
own assets with a fair market value in excess of $50,000.00, in the aggregate,
as of the date of determination.

4.14  
Pledge of Shares of Stock of Foreign Obligor.  Deliver to the Bank sixty-six and
⅔ percent (66⅔%) of the total outstanding and issued shares of common stock, on
a fully converted basis, of any first tier Subsidiary of the Borrower, now or
hereafter existing, that is not a Domestic Obligor (each, a “Foreign Obligor”)
whose Operating Profit plus the Operating Profit of all its Subsidiaries, as of
any determination period, constitutes at least ten percent (10%) of the
Borrower’s consolidated Operating Profit, as of such determination
period.  Borrower hereby agrees, and shall cause each Foreign Obligor, to
execute any and all documents necessary to effectuate the provision of this
Section 4.14.  For purposes of this Section 4.14, the term “Operating Profit”
means an amount equal to (a) total revenues, less (b) total cost of revenues,
less (c) total selling and administrative expenses, less (d) total research and
development expenses, as set forth in Borrower’s 10Q and 10K financial
statements, as the case may be.

4.15  
Authorization for Direct Payments (ACH Debits).  Authorize the Bank to effect
any payment due under the Credit Facilities through debit entries to Account
Number 202659306 maintained by the Borrower at the Bank (or such other account
numbers maintained by the Borrower with the Bank as agreed to by the Bank) and
to maintain such authorization, in full force and effect, until the Liabilities
have been paid in full.

4.16  
Compliance Certificate.  Execute and deliver to the Bank the compliance
certificate attached hereto as Exhibit C no later than twenty (20) days after
the end of each fiscal quarter.

4.17  
Additional Approvals, Opinions, and Documents.  Upon the Bank’s request, deliver
to the Bank any other approvals, opinions and documents as the Bank may
reasonably request.

 
 
 

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5.  
Negative Covenants.

5.1  
Unless otherwise noted, the financial requirements set forth in this section
will be computed in accordance with GAAP applied on a basis consistent with
financial statements previously submitted by the Borrower to the Bank.

5.2  
Without the written consent of the Bank, the Borrower will not and no Subsidiary
of the Borrower will:

A. Distributions. Redeem, retire, purchase or otherwise acquire, directly or
indirectly, any of its Equity Interests, return any contribution to an Equity
Owner or, other than stock dividends and dividends paid to the Borrower, declare
or pay any Distributions; provided, however, that if there is no existing
default under this agreement or any other Related Document and to do so will not
cause a default under any of such agreements, then the Borrower may (i) pay
Distributions to its Equity Owners and (ii) repurchase its Equity Interests;
provided further that if there are amounts outstanding under Tranche B six (6)
months prior or six (6) months after the date of such Distribution and/or
repurchase of Equity Interests, then (x) such Distributions shall not exceed
fifty percent (50%) of Borrower’s net income for the immediately preceding
fiscal year, as determined in accordance with GAAP (the “Restricted Payments”),
and (y) such repurchase shall not exceed $1,000,000.00, in the aggregate, of
Borrower’s Equity Interests for the period beginning May 1, 2012 and ending on
the date of such repurchase; provided further, that (A) Borrower or any
Guarantor Subsidiary may purchase, directly or indirectly, any Equity Interests
of any Subsidiary of Borrower, or (B) any Subsidiary of Borrower may declare or
pay any Distributions to Borrower or any Guarantor Subsidiary.

B. Sale of Equity Interests. Issue, sell or otherwise dispose of any Equity
Interests of any Subsidiary; provided, however, that (1) any Subsidiary of the
Borrower may issue Equity Interests to Borrower or any Guarantor Subsidiary and
(2) Borrower may sell or otherwise dispose of the Equity Interests of any
Subsidiary that is not a Guarantor Subsidiary so long as such sale or
disposition is for fair market value.

C. Debt. Incur, contract for, assume, or permit to remain outstanding,
indebtedness for borrowed money, installment obligations, or obligations under
capital leases or operating leases, other than (1) unsecured trade debt incurred
in the ordinary course of business, (2) indebtedness owing to the Bank, (3)
indebtedness reflected in its latest financial statement furnished to the Bank
prior to execution of this agreement and that is not to be paid with proceeds of
borrowings under the Credit Facilities, (4) indebtedness outstanding as of the
date hereof that has been disclosed to the Bank in writing and that is not to be
paid with proceeds of borrowings under the Credit Facilities, (5) indebtedness
of the Borrower or any Subsidiary incurred to finance the acquisition,
construction or improvement of any fixed or capital assets, including Capital
Lease Obligations, and any indebtedness assumed in connection with the
acquisition of any such assets or secured by a Lien on any such assets prior to
the acquisition thereof, and extensions, renewals and replacements of any such
indebtedness that do not increase the outstanding principal amount thereof;
provided that (i) such indebtedness is incurred prior to or within 90 days after
such acquisition or the completion of such construction or improvement and (ii)
the aggregate principal amount of indebtedness permitted by this clause (5)
shall not exceed $1,000,000 at any time outstanding, and (6) other unsecured
indebtedness in an aggregate principal amount not exceeding $2,000,000 at any
time outstanding.

D. Guaranties. Guarantee or otherwise become or remain secondarily liable on the
undertaking of another, except (a) in favor of the Bank, or (b) for endorsement
of drafts for deposit and collection in the ordinary course of business, or (c)
on behalf of any Guarantor Subsidiary for any undertaking by such Guarantor
Subsidiary that is not otherwise prohibited herein.

E. Liens. Create or permit to exist any Lien on any of its Property except for
Permitted Liens.  For purposes of this agreement and any of the Related
Documents, the term “Permitted Lien” means (1) any existing Lien known to and
approved by the Bank, (2) Liens in favor of the Bank or any of its Affiliates,
(3) Liens incurred in the ordinary course of business securing current
non-delinquent or protested liabilities for taxes, worker’s compensation,
unemployment insurance, social security and pension liabilities, (4) Liens on
fixed or capital assets acquired, constructed or improved by the Borrower or any
Subsidiary, including Capital Lease Obligations; provided that (i) such security
interests secure indebtedness permitted by clause (5) of Section 5.2(C), (ii)
such security interests and the indebtedness secured thereby are incurred prior
to or within 90 days after such acquisition or the completion of such
construction or improvement, (iii) the indebtedness secured thereby does not
exceed the cost of acquiring, constructing or improving such fixed or capital
assets and (iv) such security interests shall not apply to any other property or
assets of the Borrower or any Subsidiary, (6) carriers’, warehousemen’s,
mechanics’, materialmen’s, repairmen’s and other like Liens imposed by law,
arising in the ordinary course of business and securing obligations that are not
overdue by more than 30 days or are being contested; (7) deposits to secure the
performance of bids, trade contracts, leases, statutory obligations, surety and
appeal bonds, performance bonds and other obligations of a like nature, in each
case in the ordinary course of business; (8) easements, zoning restrictions,
rights-of-way and similar encumbrances on real property imposed by law or
arising in the ordinary course of business that do not secure any monetary
obligations and do not materially detract from the value of the affected
property or interfere with the ordinary conduct of business of the Borrower or
any Subsidiary; (9) customary Liens (including the right of set-off) in favor of
banking institutions encumbering deposits held by such banking institutions or
in favor of collecting banks incurred in the ordinary course of business; and
(10) judgment liens that do not cause an event of default under Section 7.1(J).
 
 
 

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F. Use of Proceeds. Use, or permit any proceeds of the Credit Facilities to be
used, directly or indirectly, for: (1) any personal, family or household
purpose; or (2) the purpose of “purchasing or carrying any margin stock” within
the meaning of Federal Reserve Board Regulation U.  At the Bank’s request, it
will furnish a completed Federal Reserve Board Form U-1.

G. Continuity of Operations. (1) Engage in any business activities substantially
different from those in which it is presently engaged; (2) cease operations,
dissolve, liquidate, merge, acquire or consolidate with any other Person, except
for (a) any Permitted Acquisition, (b) any merger or consolidation of a
Subsidiary of Borrower into (i) a Subsidiary other than a Guarantor Subsidiary,
or (ii) a Guarantor Subsidiary, where the Guarantor Subsidiary is the surviving
entity, or (c) any merger or consolidation of a Subsidiary of Borrower into
Borrower so long as the Borrower is the surviving entity; (3) change its name;
provided that the Bank’s consent thereto shall not be unreasonably withheld; (4)
lease, sell or otherwise convey any assets out of the ordinary course of
business, other than (a) sales of Unrestricted Investments, (b) sales of assets
that are substantially worn, damaged, or obsolete, and in each case, the
proceeds of such sale are used to purchase replacement assets, (c) sales of
Equity Interests permitted by Section 5.2(B), and (d) sales of assets not
otherwise permitted under this agreement so long as the aggregate fair market
value of all assets sold in reliance on this clause (d) during the term of this
agreement shall not exceed $500,000.00, in the aggregate, and are sold at such
assets’ fair market value; (5) lease, purchase or otherwise acquire a material
part of the assets of any other Person except in the ordinary course of business
or as otherwise permitted herein, (6) enter into any arrangement with any Person
providing for the leasing by it of Property which has been sold or transferred
by it to such Person; (7) change its business organization or the jurisdiction
under which its business organization is formed or organized, (8) change any
places of its businesses, provided however, Borrower may change the location of
its businesses to other locations in the Continental United States after giving
at least four (4) months prior written notice to the Bank; or (9) agree to do
any of the foregoing.

H. Limitation on Negative Pledge Clauses. Enter into any agreement with any
Person other than the Bank which prohibits or limits its ability to create or
permit to exist any Lien (other than Permitted Liens) on any of its Property,
whether now owned or hereafter acquired.

I. Conflicting Agreements. Enter into any agreement containing any provision
which would be violated or breached by the performance of its obligations under
this agreement or any of the other Related Documents.

J. Reserved.

K. Limitation on Loans, Advances to and Investments in Others and Receivables
from Others. Purchase, hold or acquire any Equity Interest or evidence of
indebtedness of, make or permit to exist any loans or advances to, permit to
exist any receivable from, or make or permit to exist any investment or acquire
any interest whatsoever in, any Person, except: (1) extensions of trade credit
to customers in the ordinary course of business on ordinary terms; (2) Permitted
Investments; (3) Permitted Acquisitions; and (4) loans, advances, investments
and receivables existing as of the date of this agreement that have been
disclosed to and approved by the Bank in writing and that are not to be paid
with proceeds of borrowings under the Credit Facilities.

L. Organizational Documents. Alter, amend or modify any of its Organizational
Documents where such alteration, amendment or modification may adversely affect
the rights of the Bank under this agreement or any of the Related Documents, or
to the Collateral.  Borrower shall provide thirty (30) days’ prior written
notice to the Bank of any alteration, amendment or modification to the
Organizational Documents of Borrower or its Subsidiaries not otherwise
prohibited by this Section 5.2(L) made by Borrower or its Subsidiaries.

M. Government Regulation. (1) Be or become subject at any time to any Legal
Requirement or list of any government agency (including, without limitation, the
U.S. Office of Foreign Asset Control list) that prohibits or limits the Bank
from making any advance or extension of credit to it or from otherwise
conducting business with it, or (2) fail to provide documentary and other
evidence of its identity as may be requested by the Bank at any time to enable
the Bank to verify its identity or to comply with any applicable Legal
Requirement, including, without limitation, Section 326 of the USA Patriot Act
of 2001, 31 U.S.C. Section 5318.
 
 
 

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N. Acquisitions.  Acquire any business (each, an “Acquisition”), whether through
a reorganization, merger, consolidation, combination, the purchase of all or
substantially all of the assets of any entity or otherwise, other than a
Permitted Acquisition.  For purposes of this agreement, “Permitted Acquisition”
means the purchase or acquisition (whether in one or a series of related
transactions) by the Borrower of (a) more than 50% of the Equity Interests with
ordinary voting power of another Person or (b) all or substantially all of the
Property (other than Equity Interests) of another Person or division or line of
business or business unit of another Person, whether or not involving a merger
or consolidation with such Person; provided that (i) at the time thereof and
after giving effect thereto, no event of default shall have occurred and be
continuing or would result from such acquisition or purchase, (ii) the acquired
Person is organized under the laws of the United States or any State thereof,
(iii) if there are amounts outstanding under Tranche B six (6) months prior or
six (6) months after the date of such Acquisition, use more than (x)
$7,500,000.00, in one transaction or a series of related transactions, of
amounts advanced hereunder in such Acquisition, or (y) $15,000,000.00, in the
aggregate, of amounts advanced hereunder for all Acquisitions made during the
term of this agreement, (iv) the primary business of the acquired Person is in
the same general line of business as the Borrower, and (v) such Acquisition is
accomplished by coming to an agreement with the acquired Person’s management,
and not by going directly to the acquired Person’s shareholders or fighting to
replace the acquired Person’s management in order to get the Acquisition
approved.  Borrower shall provide prior written notice to the Bank of any
Acquisition not otherwise prohibited by this Section 5.2(N) made by Borrower or
its Subsidiaries.

6.  
Representations.

6.1  
Representations and Warranties by the Borrower. To induce the Bank to enter into
this agreement and to extend credit or other financial accommodations under the
Credit Facilities, the Borrower represents and warrants as of the date of this
agreement and as of the date of each request for credit under the
Credit Facilities that each of the following statements is and shall remain true
and correct in all material respects throughout the term of this agreement,
except to the extent that such representations and warranties specifically refer
to an earlier date, in which case they shall be true and correct in all material
respects as of such earlier date, and until all Credit Facilities and all
Liabilities under the Notes and other Related Documents are paid in full: (a)
its principal residence or chief executive office is at the address shown above
or such other address as specified in writing by Borrower to Bank, (b) its name
as it appears in this agreement is its exact name as it appears in its
Organizational Documents or as otherwise specified in writing by Borrower to
Bank, (c) the execution and delivery of this agreement and the other Related
Documents to which it is a party, and the performance of the obligations they
impose, do not violate any Legal Requirement, conflict with any agreement by
which it is bound, or require the consent or approval of any other Person, (d)
this agreement and the other Related Documents have been duly authorized,
executed and delivered by all parties thereto (other than the Bank) and are
valid and binding agreements of those Persons, enforceable according to their
terms, except as may be limited by bankruptcy, insolvency or other laws
affecting the enforcement of creditors’ rights generally and by general
principles of equity, (e) all balance sheets, profit and loss statements, and
other financial statements and other information furnished to the Bank in
connection with the Liabilities are accurate and fairly reflect the financial
condition of the Persons to which they apply on their effective dates, including
contingent liabilities of every type, which financial condition has not changed
materially and adversely since those dates, (f) no litigation, claim,
investigation, administrative proceeding or similar action (including those for
unpaid taxes) is pending or, to the knowledge of the Borrower, threatened
against it, and no other event has occurred which may in any one case or in the
aggregate, materially adversely affect it or any of its Subsidiaries’ financial
condition, properties, business, affairs or operations, other than litigation,
claims, or other events, if any, that have been disclosed to and acknowledged by
the Bank in writing, (g) all of its tax returns and reports that are or were
required to be filed, have been filed, and all taxes, assessments and other
governmental charges due and owing have been paid in full, except those
presently being contested by it in good faith and for which adequate reserves
have been provided, (h) it is not an “investment company” or a company
“controlled” by an “investment company”, within the meaning of the Investment
Company Act of 1940, as amended, (i) it is not a “holding company”, or a
“subsidiary company” of a “holding company” or an “affiliate” of a “holding
company” or of a “subsidiary company” of a “holding company” within the meaning
of the Public Utility Holding Company Act of 1935, as amended, (j) there are no
defenses or counterclaims, offsets or adverse claims, demands or actions of any
kind, personal or otherwise, that it could assert with respect to this agreement
or the Credit Facilities, (k) it owns, or is licensed to use, all trademarks,
trade names, copyrights, technology, know-how and processes reasonably necessary
for the conduct of its business as currently conducted, and (l) the execution
and delivery of this agreement and the other Related Documents to which it is a
party and the performance of the obligations they impose, if the Borrower is
other than a natural Person (i) are within its powers, (ii) have been duly
authorized by all necessary action of its governing body, and (iii) do not
contravene the terms of its Organizational Documents or other agreement or
document governing its affairs.

 
 
 

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7.  
Default/Remedies.

7.1  
Events of Default/Acceleration. If any of the following events occurs, the Notes
shall become due immediately, without notice, at the Bank’s option:

A. Any Obligor fails to pay when due any principal, interest, fees, or other
amounts due under any Note.

B. Any Obligor fails to pay when due any other Liabilities owed by Borrower to
the Bank under this agreement or any other Related Document, in each case within
the applicable cure period, if any.

C. Any Obligor or any Pledgor: (i) fails to observe or perform or otherwise
violates or defaults on any other term, covenant, condition or agreement of any
of the Related Documents or under any agreement, now or hereafter in effect,
with the Bank, its Affiliate, or their respective successors and assigns, and
such failure, violation or default shall continue unremedied for a period of ten
(10) or more days; (ii) makes any materially incorrect or misleading
representation, warranty, or certificate to the Bank; (iii) makes any materially
incorrect or misleading representation in any financial statement or other
information delivered to the Bank; or (iv) defaults under the terms of any
agreement or instrument relating to any debt for borrowed money (other than the
debt evidenced by the Related Documents) in excess of $500,000.00.

D. In the event any Obligor terminates or revokes or purports to terminate or
revoke its guaranty or any Obligor’s guaranty becomes unenforceable in whole or
in part.

E. There is any loss, theft, damage, or destruction of any Inventory not covered
by insurance in excess of $500,000.00 (including any applicable out-of-pocket
deductibles) in the aggregate during the term of this agreement.

F. Any event occurs that would permit the Pension Benefit Guaranty Corporation
to terminate any employee benefit plan of any Obligor or any Subsidiary of any
Obligor.

G. Any Obligor or any of its Subsidiaries or any Pledgor: (i) becomes insolvent
or unable to pay its debts as they become due; (ii) makes an assignment for the
benefit of creditors; (iii) consents to the appointment of a custodian,
receiver, or trustee for itself or for a substantial part of its Property; (iv)
voluntarily commences any proceeding under any bankruptcy, reorganization,
liquidation, insolvency or similar laws; (v) conceals or removes any of its
Property, with intent to hinder, delay or defraud any of its creditors; (vi)
makes or permits a transfer of any of its Property, which may be fraudulent
under any bankruptcy, fraudulent conveyance or similar law; or (vii) makes a
transfer of any of its Property to or for the benefit of a creditor at a time
when other creditors similarly situated have not been paid.

H. A custodian, receiver, or trustee is appointed for any Obligor or any of its
Subsidiaries or any Pledgor or for a substantial part of their respective
Property.

I. Proceedings are commenced under any bankruptcy, reorganization, liquidation,
or similar laws against any Obligor or any of its Subsidiaries or any Pledgor
and remain undismissed for sixty (60) days after commencement; or any Obligor or
any of its Subsidiaries or any Pledgor consents to the commencement of those
proceedings.

J. Any judgment for the payment of money in an amount in excess of $500,000.00,
individually or in the aggregate, (exclusive of amounts covered by insurance) is
entered against any Obligor or any of its Subsidiaries, or any attachment,
seizure, sequestration, levy, or garnishment is issued against any Property of
any Obligor or any of its Subsidiaries or of any Pledgor or any Collateral, and
such condition continues sixty (60) days or more (or if stayed pursuant to any
order or agreement, then sixty (60) days or more following the expiration of
such stay).

K. Any individual Obligor or Pledgor dies, or a guardian or conservator is
appointed for any individual Obligor or Pledgor or all or any portion of their
respective Property, or the Collateral.
 
 
 

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L. Any material adverse change occurs in: (i) the reputation, Property,
financial condition, business, assets, affairs, prospects, liabilities, or
operations of any Obligor or any of its Subsidiaries; (ii) any Obligor’s or
Pledgor’s ability to perform its obligations under the Related Documents; or
(iii) the Collateral.

7.2  
Remedies. Upon an Event of Default and at any time during the continuance of an
Event of Default, the Bank may do one or more of the following: (a) cease
permitting the Borrower to incur any Liabilities; (b) terminate any commitment
of the Bank evidenced by any of the Notes; (c) declare any of the Notes to be
immediately due and payable, without notice of acceleration, presentment and
demand or protest or notice of any kind, all of which are hereby expressly
waived; (d) exercise all rights of setoff that the Bank may have contractually,
by law, in equity or otherwise; and (e) exercise any and all other rights
pursuant to any of the Related Documents, at law, in equity or otherwise.

A. Generally. The rights of the Bank under this agreement and the other Related
Documents are in addition to other rights (including without limitation, other
rights of setoff) the Bank may have contractually, by law, in equity or
otherwise, all of which are cumulative and hereby retained by the Bank. Each
Obligor agrees to stand still with regard to the Bank’s enforcement of its
rights, including taking no action to delay, impede or otherwise interfere with
the Bank’s rights to realize on any Collateral.

B. Expenses. To the extent not prohibited by applicable Legal Requirements
and whether or not the transactions contemplated by this agreement are
consummated, the Borrower is liable to the Bank and agrees to pay on demand all
reasonable costs and expenses of every kind incurred (or charged by internal
allocation) in connection with the negotiation, preparation, execution, filing,
recording, modification, supplementing and waiver of the Related Documents, the
making, servicing and collection of the Credit Facilities and the realization on
any Collateral and any other amounts owed under the Related Documents, including
without limitation reasonable attorneys’ fees (including counsel for the Bank
that are employees of the Bank or its Affiliates) and court costs. These costs
and expenses include without limitation any costs or expenses incurred by the
Bank in any bankruptcy, reorganization, insolvency or other similar proceeding
involving any Obligor, Pledgor, or Property of any Obligor, Pledgor, or
Collateral. The obligations of the Borrower under this section shall survive the
termination of this agreement.

C. Bank’s Right of Setoff. The Borrower grants to the Bank a security interest
in the Deposits, and the Bank is authorized to setoff and apply, all Deposits,
Securities and Other Property, and Bank Debt against any and all Liabilities.
This right of setoff may be exercised at any time from time to time after the
occurrence of any default, without prior notice to or demand on the Borrower and
regardless of whether any Liabilities are contingent, unmatured or unliquidated.
In this paragraph: (a) the term “Deposits” means any and all accounts and
deposits of the Borrower (whether general, special, time, demand, provisional or
final) at any time held by the Bank (including all Deposits held jointly with
another, but excluding any IRA or Keogh Deposits, or any trust Deposits in which
a security interest would be prohibited by any Legal Requirement); (b) the term
“Securities and Other Property” means any and all securities and other personal
Property of the Borrower in the custody, possession or control of the Bank,
JPMorgan Chase & Co. or their respective Subsidiaries and Affiliates (other than
Property held by the Bank in a fiduciary capacity); and (c) the term “Bank Debt”
means all indebtedness at any time owing by the Bank, to or for the credit or
account of the Borrower and any claim of the Borrower (whether individual, joint
and several or otherwise) against the Bank now or hereafter existing.

8.  
Miscellaneous.

8.1  
Notice. Any notices and demands under or related to this agreement shall be in
writing and delivered to the intended party (a) at its mailing address stated in
this agreement, and if to the Bank, at its main office if no other address of
the Bank is specified in this agreement, by one of the following means: (1) by
hand; (2) by a nationally recognized overnight courier service; or (3) by
certified mail, postage prepaid, with return receipt requested or (b) by
electronic communication at its email address or facsimile number stated in this
agreement. Notice delivered pursuant to clause (a) of this Section 8.1 shall be
deemed given: (x) upon receipt if delivered by hand; (y) on the Delivery Day
after the day of deposit with a nationally recognized courier service; or (z) on
the third Delivery Day after the notice is deposited in the mail. Notice
delivered pursuant to clause (b) of this Section 8.1 shall be deemed given when
sent (except that, if not sent during normal business hours for the recipient,
shall be deemed to have been given at the opening of business on the next
Delivery Day). “Delivery Day” means a day other than a Saturday, a Sunday or any
other day on which national banking associations are authorized to be closed.
Any party may change its address for purposes of the receipt of notices and
demands by giving notice of the change in the manner provided in this provision.

 
 
 

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8.2  
No Waiver. No delay on the part of the Bank in the exercise of any right or
remedy waives that right or remedy. No single or partial exercise by the Bank of
any right or remedy precludes any other future exercise of it or the exercise of
any other right or remedy. The making of an advance during the existence of any
default or subsequent to the occurrence of a default or when all conditions
precedent have not been met shall not constitute a waiver of the default or
condition precedent. No waiver or indulgence by the Bank of any default is
effective unless it is in writing and signed by the Bank, nor shall a waiver on
one occasion bar or waive that right on any future occasion.

8.3  
Integration; Severability. This agreement, the Notes, and the other Related
Documents embody the entire agreement and understanding between the Borrower and
the Bank and supersede all prior agreements and understandings relating to their
subject matter. If any one or more of the obligations of the Borrower under this
agreement, the Notes, or the other Related Documents or any provision thereof is
held to be invalid, illegal or unenforceable in any jurisdiction, the validity,
legality and enforceability of the remaining obligations of the Borrower and the
remaining provisions shall not in any way be affected or impaired; and the
invalidity, illegality or unenforceability in one jurisdiction shall not affect
the validity, legality or enforceability of such obligations or provisions in
any other jurisdiction.

8.4  
Joint and Several Liability. Each party executing this agreement as the Borrower
is individually, jointly and severally liable under this agreement.

8.5  
Governing Law and Venue. This agreement shall be governed by and construed in
accordance with the laws of the State of New York (without giving effect to its
laws of conflicts). The Borrower agrees that any legal action or proceeding with
respect to any of its obligations under this agreement may be brought by the
Bank in any state or federal court located in the State of New York, as the Bank
in its sole discretion may elect. By the execution and delivery of this
agreement, the Borrower submits to and accepts, for itself and in respect of its
property, generally and unconditionally, the non-exclusive jurisdiction of those
courts. The Borrower waives any claim that the State of New York is not a
convenient forum or the proper venue for any such suit, action or proceeding.

8.6  
Survival of Representations and Warranties. The Borrower understands and agrees
that in extending the Credit Facilities, the Bank is relying on all
representations, warranties, and covenants made by the Borrower in this
agreement or in any certificate or other instrument delivered by the Borrower to
the Bank under this agreement or in any of the other Related Documents. The
Borrower further agrees that regardless of any investigation made by the Bank,
all such representations, warranties and covenants will survive the making of
the Credit Facilities and delivery to the Bank of this agreement, shall be
continuing in nature, and shall remain in full force and effect until such time
as the Liabilities shall be paid in full.

8.7  
Non-Liability of the Bank. The relationship between the Borrower on one hand and
the Bank on the other hand shall be solely that of borrower and lender. The Bank
shall have no fiduciary responsibilities to the Borrower. The Bank undertakes no
responsibility to the Borrower to review or inform the Borrower of any matter in
connection with any phase of the Borrower’s business or operations.

8.8  
Indemnification of the Bank. The Borrower agrees to indemnify, defend and hold
the Bank, its parent companies, Subsidiaries, Affiliates, their respective
successors and assigns and each of their respective shareholders, directors,
officers, employees and agents (collectively, the “Indemnified Persons”)
harmless from any and against any and all loss, liability, obligation, damage,
penalty, judgment, claim, deficiency, expense, interest, penalties, reasonable
attorneys’ fees (including the reasonable fees and expenses of any attorneys
engaged by the Indemnified Person at the Indemnified Person’s reasonable
discretion) and amounts paid in settlement (“Claims”) to which any Indemnified
Person may become subject arising out of or relating to the Credit Facilities,
the Liabilities under this agreement or any other Related Documents or the
Collateral, except to the limited extent that the Claims are proximately caused
by the Indemnified Person’s gross negligence or willful misconduct. The
indemnification provided for in this paragraph shall survive the termination of
this agreement and shall not be affected by the presence, absence or amount of
or the payment or nonpayment of any claim under, any insurance.

8.9  
Counterparts. This agreement may be executed in multiple counterparts, each of
which, when so executed, shall be deemed an original, but all such counterparts,
taken together, shall constitute one and the same agreement.

8.10  
Advice of Counsel. The Borrower acknowledges that it has been advised by
counsel, or had the opportunity to be advised by counsel, in the negotiation,
execution and delivery of this agreement and any other Related Documents.

 
 
 

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8.11  
Recovery of Additional Costs. If the imposition of or any change in any Legal
Requirement, or the interpretation or application of any thereof by any court or
administrative or governmental authority (including any request or policy not
having the force of law) shall impose, modify, or make applicable any taxes
(except federal, state, or local income or franchise taxes imposed on the Bank),
reserve requirements, liquidity requirements, capital adequacy requirements,
Federal Deposit Insurance Corporation (FDIC) deposit insurance premiums or
assessments, or other obligations which would (A) increase the cost to the Bank
for extending, maintaining or funding the Credit Facilities, (B) reduce the
amounts payable to the Bank under the Credit Facilities, or (C) reduce the rate
of return on the Bank’s capital as a consequence of the Bank’s obligations with
respect to the Credit Facilities, then the Borrower agrees to pay the Bank such
additional amounts as will compensate the Bank therefor, within five (5) days
after the Bank’s written demand for such payment. The Bank’s demand shall be
accompanied by an explanation of such imposition or charge and a calculation in
reasonable detail of the additional amounts payable by the Borrower, which
explanation and calculations shall be conclusive in the absence of manifest
error.

8.12  
Expenses. The Borrower agrees to pay or reimburse the Bank for all its
out-of-pocket costs and expenses and reasonable attorneys’ fees (including the
fees of in-house counsel) incurred in connection with the preparation and
execution of this agreement, any amendment, supplement, or modification thereto,
and any other Related Documents.

8.13  
Reinstatement. The Borrower agrees that to the extent any payment or transfer is
received by the Bank in connection with the Liabilities, and all or any part of
the payment or transfer is subsequently invalidated, declared to be fraudulent
or preferential, set aside or required to be repaid or transferred by the Bank
or paid or transferred over to a trustee, receiver or any other entity, whether
under any proceeding or otherwise (any of those payments or transfers is
hereinafter referred to as a “Preferential Payment”), then this agreement and
the Notes shall continue to be effective or shall be reinstated, as the case may
be, even if all those Liabilities have been paid in full and whether or not the
Bank is in possession of the Notes and whether any of the Notes has been marked,
paid, released or cancelled, or returned to the Borrower and, to the extent of
the payment, repayment or other transfer by the Bank, the Liabilities or part
intended to be satisfied by the Preferential Payment shall be revived and
continued in full force and effect as if the Preferential Payment had not been
made. The obligations of the Borrower under this section shall survive the
termination of this agreement.

8.14  
Assignments. The Borrower agrees that the Bank may provide any information or
knowledge the Bank may have about the Borrower or about any matter relating to
the Notes or the other Related Documents to JPMorgan Chase & Co., or any of its
Subsidiaries or Affiliates or their successors, or to any one or more purchasers
or potential purchasers of the Notes or the Related Documents. The Borrower
agrees that the Bank may at any time sell, assign or transfer one or more
interests or participations in all or any part of its rights and obligations in
the Notes to one or more purchasers whether or not related to the Bank.  The
Bank shall use its commercially reasonable efforts to provide the Borrower with
notice of any such sale, assignment or transfer.

8.15  
Waivers. To the maximum extent not prohibited by applicable Legal Requirements,
each Obligor waives (a) any right to receive notice of the following matters
before the Bank enforces any of its rights: (i) any demand, diligence,
presentment, dishonor and protest, or (ii) any action that the Bank takes
regarding any Person, any Collateral, or any of the Liabilities, that it might
be entitled to by law or under any other agreement; (b) any right to require the
Bank to proceed against the Borrower, any other Obligor or any Collateral, or
pursue any remedy in the Bank’s power to pursue; (c) any defense based on any
claim that any Obligor’s obligations exceed or are more burdensome than those of
the Borrower; (d) the benefit of any statute of limitations affecting liability
of any Obligor or the enforcement hereof; (e) any defense arising by reason of
any disability or other defense of the Borrower or by reason of the cessation
from any cause whatsoever (other than payment in full) of the obligation of the
Borrower for the Liabilities; and (f) any defense based on or arising out of any
defense that the Borrower may have to the payment or performance of the
Liabilities or any portion thereof. Each Obligor consents to any extension or
postponement of time of its payment without limit as to the number or period, to
any substitution, exchange or release of all or any part of any Collateral, to
the addition of any other party, and to the release or discharge of, or
suspension of any rights and remedies against, any Obligor. The Bank may waive
or delay enforcing any of its rights without losing them. Any waiver affects
only the specific terms and time period stated in the waiver. No modification or
waiver of any provision of the Notes is effective unless it is in writing and
signed by the Person against whom it is being enforced.

8.16  
Time is of the Essence. Time is of the essence under this agreement and in the
performance of every term, covenant and obligation contained herein.

 
 
 

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9.  
USA PATRIOT ACT NOTIFICATION. The following notification is provided to the
Borrower pursuant to Section 326 of the USA Patriot Act of 2001, 31 U.S.C.
Section 5318:

IMPORTANT INFORMATION ABOUT PROCEDURES FOR OPENING A NEW ACCOUNT. To help the
government fight the funding of terrorism and money laundering activities,
Federal law requires all financial institutions to obtain, verify, and record
information that identifies each Person that opens an account, including any
deposit account, treasury management account, loan, other extension of credit,
or other financial services product. What this means for the Borrower: When the
Borrower opens an account, if it is an individual the Bank will ask for its
name, taxpayer identification number, residential address, date of birth, and
other information that will allow the Bank to identify it, and, if it is not an
individual the Bank will ask for its name, taxpayer identification number,
business address, and other information that will allow the Bank to identify it.
The Bank may also ask, if the Borrower is an individual, to see its driver’s
license or other identifying documents, and if it is not an individual, to see
its Organizational Documents or other identifying documents.

10.  
WAIVER OF SPECIAL DAMAGES. THE BORROWER WAIVES, TO THE MAXIMUM EXTENT NOT
PROHIBITED BY LAW, ANY RIGHT THE BORROWER MAY HAVE TO CLAIM OR RECOVER FROM THE
BANK IN ANY LEGAL ACTION OR PROCEEDING ANY SPECIAL, EXEMPLARY, PUNITIVE OR
CONSEQUENTIAL DAMAGES.

11.  
JURY WAIVER. TO THE MAXIMUM EXTENT NOT PROHIBITED BY APPLICABLE LAW, THE
BORROWER AND THE BANK (BY ITS ACCEPTANCE HEREOF) HEREBY VOLUNTARILY, KNOWINGLY,
IRREVOCABLY AND UNCONDITIONALLY WAIVE ANY RIGHT TO HAVE A JURY PARTICIPATE IN
RESOLVING ANY DISPUTE (WHETHER BASED ON CONTRACT, TORT, OR OTHERWISE) BETWEEN
THE BORROWER AND THE BANK ARISING OUT OF OR IN ANY WAY RELATED TO THIS AGREEMENT
OR THE OTHER RELATED DOCUMENTS. THIS PROVISION IS A MATERIAL INDUCEMENT TO THE
BANK TO PROVIDE THE FINANCING DESCRIBED HEREIN.

12.  
VOLUNTARY TERMINATION. Borrower may terminate this agreement at any time upon at
least ten (10) days’ prior written notice to the Bank.  On the date specified in
such notice, termination will be effective, so long as Borrower has paid to the
Bank, in same day funds, all amounts due under the Liabilities, including but
not limited to the aggregate principal amount outstanding on such date, together
with accrued interest and fees thereon

[signature page immediately follows]
 
 
 
 
 
 
 
 
 
 
 
 

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Address(es) for Notices:
Borrower:
55 Charles Lindbergh Boulevard
Uniondale, NY 11553
 
FREQUENCY ELECTRONICS, INC.
 
Attn:
   
By:
/s/ Alan Miller
         
Alan Miller
Secretary Treasurer and CFO
         
Printed Name
Title
       
Date Signed:
       June 6, 2013
 

Address for Notices:
 
Bank:
395 North Service Rd., 3rd Floor
Melville, NY 11747
 
JPMorgan Chase Bank, N.A.
Attn:
   
By:
/s/ Gina Franceschini
       
Gina Franceschini
       Authorized Officer
       
Printed Name
Title
     
Date Signed:
June 6, 2013

Outside Counsel Prepared
 
 
 
 
 
 
 

 
 

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