Document:

Exhibit 10.11

 

CERTAIN
INFORMATION (INDICATED BY “[***]”) IN THIS EXHIBIT HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.  CONFIDENTIAL TREATMENT HAS BEEN REQUESTED
WITH RESPECT TO THE OMITTED PORTIONS.

 

Settlement
Agreement and Amendment to

Development And Supply Agreement

 

This Settlement Parchment
and Amendment to the Development and Supply Agreement (“Amendment”) is
made this 12th day of January 2010 (“Amendment
Effective Date”) between Diablo Technologies, Inc., a Canadian
corporation having a principal place of business at 290 St. Joseph, Suite 200,
Gatineau, Quebec J8Y 3Y3 (“Diablo”) and Netlist, Inc., a Delaware
corporation having a principal place of business at 51 Discovery, Irvine, CA
92618 (“Netlist”).

 

R E C I T
A L S

 

Whereas, Netlist entered
into a Development and Supply Agreement with Diablo to have certain products
designed and manufactured by Diablo on September 10, 2008 (“Agreement”);
and

 

Whereas, in the course of
performing this Agreement, the parties have had disputes regarding the
obligations and performance under this Agreement, including the breaches
thereof;

 

WHEREAS, the parties have
agreed to compromise, settle and resolve all past disputes, liabilities and
obligations between them concerning or regarding the alleged breaches of the
Agreement;

 

WHEREAS, the parties
agree that the settlement and amendments embodied in this Agreement are made in
good faith and shall not constitute an admission of liability or other
admission against interest by any party hereto.

 

Now, therefore, in
consideration of the promises and the mutual agreements hereinafter set forth,
and intending to be legally bound, the parties hereto agree as follows:

 

A G R E E
M E N T S

 

1.                                       Purchase and Payment Obligations. 
Within five (5) business days of the Amendment Effective Date,
Netlist shall:

 

(a)                                  [***]

 

(b)                                 [***]

 

(c)                                  Provide to Diablo a delivery schedule for
all devices between now and September 2010;

 

1

 

(d)                                 Agree to provide Diablo a budget of $[***] US dollars for each Netlist Chipset qualification in
each Netlist density configuration added to the plan of record.  Diablo shall use these funds solely to 1)
purchase DIMMs from Netlist and 2) to purchase Netlist customer target systems
for in-system validation of the Netlist Chipset.

 

(e)                                  Agree to jointly initiate a cost benefit
analysis for development of a [***].  Should this analysis conclude a development
is necessary, Netlist shall initiate said development.

 

(f)                                    Receive from Diablo the items requested
below or a plan including a schedule to address the items requested below

 

[***]

 

2.                                       Release and Covenant Not to Sue.

 

(i)            Diablo hereby fully releases and forever
discharges Netlist, and its respective past, present and future officers,
directors, representatives, employees, agents, principals, shareholders,
attorneys, assigns, predecessors, successors, affiliates, and subsidiaries,
from any and all claims, causes of action, debts, liabilities, rights to
damages, collection, reimbursement, costs, expenses, attorneys’ fees, and
rights to injunctive relief, known or unknown, relating to any alleged breach
of this Agreement, by such party prior to the Amendment Effective Date,
including but not limited to any allegation by Diablo that Netlist made
improper use of any Diablo Confidential Information or any other technology
encompassed within Diablo’s Intellectual Property Rights.

 

(ii)           Diablo further covenants and agrees that
it will not assert any claim or take any action against Netlist or any customer
or business partner of Netlist, or claim that Netlist is not entitled to ship
products using chips procured from other suppliers, now or in the future, based
on Netlist’s marketing or sale of products that utilize chips procured from
companies other than Diablo, only with respect to the followings claims: 1) any
claim 

 

2

 

that Netlist or any
customer or business partner of Netlist is using any Confidential Information
of Diablo, provided that Netlist and Netlist’s customers and business partners
undertake reasonable precautions to maintain the confidentiality of Diablo’s
Confidential Information; 2) any claim for patent infringement based on an
invention arising as a consequence of work performed under this Agreement; or
3) that Netlist or its customers or business partners are otherwise using
technology developed by Diablo as a consequence of worked performed under this
Agreement.  Diablo hereby expressly
waives and releases any rights it may have at law or in equity to take any
legal action or other action as described in this paragraph against Netlist,
its customers or its business partners. 
The term “business partner” as used in this paragraph refers to third
parties working with Netlist in connection with Netlist products, and such
third parties are only entitled to the protections of this paragraph to the
extent of their work with Netlist.

 

(iii)          Diablo acknowledges that there is a risk
that subsequent to the execution of this Amendment, it may discover, incur or
suffer facts and/or claims which were unknown or unanticipated at the time this
Amendment is executed.  Diablo
acknowledges and agrees that by reason of the releases and covenants contained herein,
it is assuming the risk of such unknown facts and/or claims and agrees that
this Amendment applies thereto.  In
connection therewith, Diablo expressly waives the benefits of Section 1542
of the California Civil Code, which section provides as follows, and any laws
of similar affect applicable in any jurisdiction:

 

“A GENERAL RELEASE DOES
NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN
HIS OR HER FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM OR
HER MUST HAVE MATERIALLY AFFECTED HIS OR HER SETTLEMENT WITH THE DEBTOR.”

 

(iv)                              Release and Covenant Not to Sue by
Netlist

 

Netlist hereby fully
releases, forever discharges and covenants not to sue Diablo and its respective
past, present and future officers, directors, representatives, employees, agents,
principals, shareholders, attorneys, assigns, predecessors, successors,
affiliates, and subsidiaries, from any and all claims, causes of action, debts,
liabilities, rights to damages, collection, reimbursement, costs, expenses,
attorneys’ fees, and rights to injunctive relief, known or unknown, relating to
any alleged breach of this Agreement by such party prior to the Amendment
Effective Date.

 

(v)                                 The foregoing Releases and Covenants Not
to Sue are not intended to and do not alter or affect the obligations of either
Netlist or Diablo with respect to the Agreement or this Amendment, including
but not limited to Diablo’s obligations to provide an escrow deposit or to
indemnify Netlist pursuant to the terms of the Agreement.

 

A M E N D
M E N T S

 

9.                                       Market Share Commitment. 
The following Section 3(e) is hereby amended in its entirety
to read as follows:

 

3

 

“3(e)                      Market Share Commitment. 
Netlist shall allocate to Diablo the following percentages of Netlist Market
Share for the Netlist Chipsets unless Netlist Product using Netlist Chipsets
supplied by Diablo do not successfully complete required third party
qualification.  Netlist shall not bias
third party qualifications against Netlist Product using Diablo supplied
Netlist Chipsets.

 

“Netlist Market Share”:
shall mean the number of Netlist Chipsets shipped, invoiced or sold, as part of
a qualified memory module using Diablo supplied Netlist Chipsets or separately
as individual components, by Netlist to any third party.

 

The Market Share
Commitment shall not be capped at the minimum percentages indicated below.  Netlist shall cooperate and disclose the
status of and any feedback (whether positive or negative) to Diablo in
connection with Netlists’s qualification with any customers of the Netlist
Chipset.

 

Netlist agrees not to
renegotiate the purchase price of the Products to achieve or maintain this
percentage:

 

(i)                                     1st 6 Months of Netlist Production: [***]; Between 6th and 18th months of Netlist Production: [***]; After 18 month of Netlist Production: [***].

 

(ii)                                  In addition, all quantities of Netlist
Chipsets set forth in any Purchase Order issued by Netlist to Diablo and
confirmed by Diablo in accordance with this Agreement, but which Diablo is
completely unable to fulfill, shall be deemed to have been allocated to Diablo.

 

(iii)                               Audit.  Netlist will
maintain complete and accurate records for not less than three (3) years
after this Agreement expires or is terminated. 
Diablo may audit Netlist’s records in accordance with this Section,
twice per year, at its expense; provided that a nationally recognized
accounting firm retained by Diablo (“Auditor”) will pursuant to a
confidentiality agreement have access to such records solely for the purposes
of confirming that Netlist has fulfilled its obligations under Section (i) above.

 

(iv)                              If qualification requirements change in
the 12 months following signing this Amendment, Netlist will give Diablo notice
as soon as possible to allow Diablo to propose a remedy.  During this period, if the product does not
meet the customer requirements, Netlist shall make commercially reasonable
efforts to maintain Diablo’s market share by increasing shipments to other
customers.

 

9.1                                 Guaranteed Minimum Allocation

 

Notwithstanding section
3(e), Netlist shall allocate to Diablo a minimum of [***]%
of the Netlist total annual consumption of [***] provided
however such allocation shall be limited to a maximum of 100% of the Netlist
Market Share.

 

4

 

10.                                 Production Incentive.

 

[***]

 

11.                                 Term.  Section 11(a) is
hereby amended in its entirety to read as follows:

 

“(a)                            Term. 
This Agreement shall become effective on the Effective Date of this
Agreement and shall continue for a period of three (3) years (“Initial
Term”).  This Agreement shall be
extended automatically at the end of the initial term or subsequent terms for
an additional one (1) year term, unless terminated in accordance with this
Agreement or unless either party notifies the other party in writing of its
intent not to renew at least ninety (90) days prior to the expiration of the
Initial Term or subsequent term.”

 

16.                                 Section II (e) shall be amended
to include:

 

The obligations of Diablo
under Section 2 of this Amendment will survive, in accordance with the
terms hereof, the term and termination of this Agreement, and will remain in
full force and effect regardless of the cause of any termination and be binding
on any successors or assigns.

 

G E N E R
A L

 

17.                                 Except as set forth herein, all terms and
conditions of the Agreement shall remain in full force and effect.  Unless otherwise defined in this Amendment,
capitalized terms used in this Amendment shall have the same meaning as set
forth in the Agreement.  This Amendment,
together with the Agreement, constitute the entire agreement of the parties
with respect to the subject matter hereof, and supersedes any other agreements,
promises, representations or discussions, written or oral, concerning such
subject matter.

 

IN WITNESS WHEREOF, the
parties hereto have executed this Amendment effective as of the Amendment
Effective Date.

 

	
  Netlist, Inc.

  
	
   

  	
   

  	
   

  
	
  By:

  	
  /s/ Chun K. Hong

  	
   

  
	
  Name:

  	
  Chun K. Hong

  	
   

  
	
  Title:

  	
  President, CEO

  	
   

  

 

5

 

	
  Diablo Technologies, Inc.

  
	
   

  	
   

  	
   

  
	
  By:

  	
  /s/ Richard Badalone

  	
   

  
	
  Name:

  	
  Richard Badalone

  	
   

  
	
  Title:

  	
  President, CEO

  	
   

  

 

6Exhibit
10.12

 

EXECUTION VERSION

	
   

  

 

CREDIT AGREEMENT

 

 

DATED AS OF

 

 

MAY 12, 2010

 

 

BETWEEN

 

 

KOSS CORPORATION

 

 

AND

 

 

JPMORGAN CHASE BANK, N.A.

	
   

  

 

 

TABLE OF CONTENTS

 

	
   

  	
  Page

  
	
   

  	
   

  
	
  ARTICLE I

  	
   

  
	
   

  	
   

  
	
  Definitions

  	
   

  
	
   

  	
   

  
	
  SECTION 1.01.
  Defined Terms

  	
  1

  
	
  SECTION 1.02.
  Accounting Terms; GAAP

  	
  21

  
	
   

  	
   

  
	
  ARTICLE II

  	
   

  
	
   

  	
   

  
	
  The Credits

  	
   

  
	
   

  	
   

  
	
  SECTION 2.01.
  Commitment

  	
  22

  
	
  SECTION 2.02.
  Loans and Borrowings

  	
  22

  
	
  SECTION 2.03.
  Borrowing Procedures; Requests for Revolving Borrowings

  	
  22

  
	
  SECTION 2.04.
  Protective Advances

  	
  23

  
	
  SECTION 2.05.
  Letters of Credit

  	
  23

  
	
  SECTION 2.06.
  Funding of Borrowings

  	
  26

  
	
  SECTION 2.07.
  Interest Elections

  	
  26

  
	
  SECTION 2.08.
  Termination of Commitment

  	
  27

  
	
  SECTION 2.09.
  Repayment and Amortization of Loans; Evidence of Debt

  	
  28

  
	
  SECTION 2.10.
  Prepayment of Loans

  	
  28

  
	
  SECTION 2.11.
  Fees

  	
  30

  
	
  SECTION 2.12.
  Interest.

  	
  30

  
	
  SECTION 2.13.
  Alternate Rate of Interest

  	
  31

  
	
  SECTION 2.14.
  Increased Costs

  	
  31

  
	
  SECTION 2.15.
  Break Funding Payments

  	
  32

  
	
  SECTION 2.16.
  Taxes

  	
  33

  
	
  SECTION 2.17.
  Payments Generally; Allocation of Proceeds; Sharing of Set-offs

  	
  34

  
	
  SECTION 2.18.
  Indemnity for Returned Payments

  	
  35

  
	
   

  	
   

  
	
  ARTICLE III

  	
   

  
	
   

  	
   

  
	
  Representations and Warranties

  	
   

  
	
   

  	
   

  
	
  SECTION 3.01.
  Organization; Powers

  	
  35

  
	
  SECTION 3.02.
  Authorization; Enforceability

  	
  35

  
	
  SECTION 3.03.
  Governmental Approvals; No Conflicts

  	
  36

  
	
  SECTION 3.04.
  Financial Condition; No Material Adverse Change

  	
  36

  
	
  SECTION 3.05.
  Properties

  	
  36

  
	
  SECTION 3.06.
  Litigation and Environmental Matters

  	
  36

  
	
  SECTION 3.07.
  Compliance with Laws and Agreements

  	
  37

  
	
  SECTION 3.08.
  Investment Company Status

  	
  37

  
	
  SECTION 3.09.
  Taxes

  	
  37

  

 

i

 

	
  SECTION 3.10.
  ERISA

  	
  37

  
	
  SECTION 3.11.
  Disclosure

  	
  37

  
	
  SECTION 3.12.
  Material Agreements

  	
  38

  
	
  SECTION 3.13.
  Solvency

  	
  38

  
	
  SECTION 3.14.
  Insurance

  	
  38

  
	
  SECTION 3.15.
  Capitalization and Subsidiaries

  	
  38

  
	
  SECTION 3.16.
  Security Interest in Collateral

  	
  39

  
	
  SECTION 3.17.
  Employment Matters

  	
  39

  
	
   

  	
   

  
	
  ARTICLE IV

  	
   

  
	
   

  	
   

  
	
  Conditions

  	
   

  
	
   

  	
   

  
	
  SECTION 4.01.
  Effective Date

  	
  39

  
	
  SECTION 4.02.
  Each Credit Event

  	
  41

  
	
   

  	
   

  
	
  ARTICLE V

  	
   

  
	
   

  	
   

  
	
  Affirmative Covenants

  	
   

  
	
   

  	
   

  
	
  SECTION 5.01.
  Financial Statements; Borrowing Base and Other Information

  	
  41

  
	
  SECTION 5.02.
  Notices of Material Events

  	
  43

  
	
  SECTION 5.03.
  Existence; Conduct of Business

  	
  44

  
	
  SECTION 5.04.
  Payment of Obligations

  	
  44

  
	
  SECTION 5.05.
  Maintenance of Properties

  	
  44

  
	
  SECTION 5.06.
  Books and Records; Inspection Rights

  	
  44

  
	
  SECTION 5.07.
  Compliance with Laws

  	
  44

  
	
  SECTION 5.08.
  Use of Proceeds and Letters of Credit

  	
  44

  
	
  SECTION 5.09.
  Insurance

  	
  45

  
	
  SECTION 5.10.
  Casualty and Condemnation

  	
  45

  
	
  SECTION 5.11.
  Collateral Assessments and Appraisals

  	
  45

  
	
  SECTION 5.12.
  Depository Banks

  	
  45

  
	
  SECTION 5.13.
  Additional Collateral; Further Assurances

  	
  45

  
	
  SECTION 5.14.
  Dissolution of Koss Classics Ltd.

  	
  46

  
	
   

  	
   

  
	
  ARTICLE VI

  	
   

  
	
   

  	
   

  
	
  Negative Covenants

  	
   

  
	
   

  	
   

  
	
  SECTION 6.01.
  Indebtedness

  	
  46

  
	
  SECTION 6.02.
  Liens

  	
  47

  
	
  SECTION 6.03.
  Fundamental Changes

  	
  48

  
	
  SECTION 6.04.
  Investments, Loans, Advances, Guarantees and Acquisitions

  	
  48

  
	
  SECTION 6.05.
  Asset Sales

  	
  49

  
	
  SECTION 6.06.
  Sale and Leaseback Transactions

  	
  50

  
	
  SECTION 6.07.
  Swap Agreements

  	
  50

  
	
  SECTION 6.08.
  Restricted Payments; Certain Payments of Indebtedness

  	
  51

  

 

ii

 

	
  SECTION 6.09.
  Transactions with Affiliates

  	
  51

  
	
  SECTION 6.10.
  Restrictive Agreements

  	
  51

  
	
  SECTION 6.11.
  Amendment of Material Documents

  	
  52

  
	
  SECTION 6.12.
  Financial Covenants

  	
  52

  
	
  SECTION 6.13.
  ERISA Plans

  	
  52

  
	
   

  	
   

  
	
  ARTICLE VII

  	
   

  
	
  Events of Default

  	
   

  
	
   

  	
   

  
	
  ARTICLE VIII

  	
   

  
	
   

  	
   

  
	
  Miscellaneous

  	
   

  
	
   

  	
   

  
	
  SECTION 8.01.
  Notices

  	
  55

  
	
  SECTION 8.02.
  Waivers; Amendments

  	
  56

  
	
  SECTION 8.03.
  Expenses; Indemnity; Damage Waiver

  	
  57

  
	
  SECTION 8.04.
  Successors and Assigns

  	
  58

  
	
  SECTION 8.05.
  Survival

  	
  59

  
	
  SECTION 8.06.
  Counterparts; Integration; Effectiveness

  	
  60

  
	
  SECTION 8.07.
  Severability

  	
  60

  
	
  SECTION 8.08.
  Right of Setoff

  	
  60

  
	
  SECTION 8.09.
  Governing Law; Jurisdiction; Consent to Service of Process

  	
  60

  
	
  SECTION 8.10.
  WAIVER OF JURY TRIAL

  	
  61

  
	
  SECTION 8.11.
  Headings

  	
  61

  
	
  SECTION 8.12.
  Confidentiality

  	
  61

  
	
  SECTION 8.13.
  Nonreliance; Violation of Law

  	
  62

  
	
  SECTION 8.14.
  USA PATRIOT Act

  	
  62

  
	
  SECTION 8.15.
  Disclosure

  	
  62

  
	
  SECTION 8.16.
  Interest Rate Limitation

  	
  62

  

 

iii

 

This CREDIT AGREEMENT dated
as of May 12, 2010 (as it may be amended or modified from time to time,
this “Agreement”), is entered into by and between KOSS CORPORATION, a Delaware
corporation (“Borrower”), and JPMORGAN CHASE BANK, N.A (“Lender”).

 

The parties hereto agree as
follows:

 

ARTICLE I

 

Definitions

 

SECTION 1.01.  Defined Terms.  As used in this Agreement, the following
terms have the meanings specified below:

 

“Account” has the
meaning assigned to such term in the Security Agreement.

 

“Account Debtor”
means any Person obligated on an Account.

 

“Adjusted LIBO Rate”
means, with respect to any Eurodollar Borrowing for any Interest Period, an
interest rate per annum (rounded upwards, if necessary, to the next 1/16 of 1%)
equal to (a) the LIBO Rate for such Interest Period multiplied by (b) the
Statutory Reserve Rate.

 

“Adjusted One Month LIBO
Rate” means, with respect to a CB Floating Rate Loan for any date, an
interest rate equal to the sum of (a) 2.50% per annum plus (b) the
rate equal to (i) the interest rate determined by Lender by reference to
the Page to be the rate at approximately 11:00 am London time, on such
date or, if such date is not a Business Day, on the immediately preceding
Business Day for dollar deposits with a maturity equal to one month, multiplied
by (ii) the Statutory Reserve Rate applicable to dollar deposits in the
London interbank market with a maturity equal to one month.

 

“Affiliate” means,
with respect to a specified Person, another Person that directly, or indirectly
through one or more intermediaries, Controls or is Controlled by or is under
common Control with the Person specified.

 

“Applicable Rate”
means, for any day, with respect to any CB Floating Rate Loan or Eurodollar
Revolving Loan, or with respect to the commitment fees payable hereunder, as
the case may be, the applicable rate per annum set forth below under the
caption “CB Floating Rate Spread”, “Eurodollar Spread” or “Commitment Fee Rate”,
as the case may be, based upon Borrower’s Leverage Ratio as of the most recent
determination date, provided that until the delivery to Lender, pursuant
to Section 5.01, of Borrower’s consolidated financial information for
Borrower’s fiscal quarter ending September 30, 2010, the “Applicable Rate”
shall be the applicable rate per annum set forth below in Category 3:

 

 

	
  Leverage
  Ratio

  	
   

  	
  Revolver

  CB Floating Rate

  Spread

  	
   

  	
  Revolver

  Eurodollar
  Spread

  	
   

  	
  Commitment Fee

  Rate

  	
   

  
	
  Category 1

   

  Less than or equal to 1.00 to 1.00

  	
   

  	
   0.00

  	
  %

  	
   2.00

  	
  %

  	
   0.30

  	
  %

  
	
  Category 2

   

  Greater than 1.00 to 1.00 and less then or equal
  to 1.50 to 1.00

  	
   

  	
   0.25

  	
  %

  	
   2.25

  	
  %

  	
   0.35

  	
  %

  
	
  Category 3

   

  Greater than 1.50 to 1.00 but less than or equal
  to 2.00 to 1.00

  	
   

  	
   0.50

  	
  %

  	
   2.50

  	
  %

  	
   0.40

  	
  %

  
	
  Category 4

   

  Greater than 2.00 to 1.00

  	
   

  	
   0.75

  	
  %

  	
   3.00

  	
  %

  	
   0.45

  	
  %

  

 

For purposes of the foregoing,
(a) the Applicable Rate shall be determined as of the end of each fiscal
quarter of Borrower based upon Borrower’s annual or quarterly consolidated
financial statements delivered pursuant to Section 5.01 and (b) each
change in the Applicable Rate resulting from a change in the Leverage Ratio
shall be effective during the period commencing on and including the date of
delivery to Lender of such consolidated financial statements indicating such
change and ending on the date immediately preceding the effective date of the
next such change, provided that the Leverage Ratio shall be deemed to be
in Category 4 at the option of Lender if Borrower fails to deliver the annual
or quarterly consolidated financial statements required to be delivered by it
pursuant to Section 5.01, during the period from the expiration of the
time for delivery thereof until such consolidated financial statements are
delivered.

 

“Approved Fund” has
the meaning assigned to such term in Section 8.04(b).

 

“Availability” means,
at any time, an amount equal to (a) the lesser of the Revolving Commitment
and the Borrowing Base minus (b) the
Revolving Exposure.

 

“Available Revolving
Commitment” means, at any time, the Revolving Commitment then in effect minus the Revolving Exposure at such
time.

 

“Availability Period”
means the period from and including the Effective Date to but excluding the
earlier of the Maturity Date and the date of termination of the Revolving
Commitment.

 

“Banking Services”
means each and any of the following bank services provided to Borrower by
Lender or any of its Affiliates: (a) commercial credit cards, (b) stored
value cards and (c) treasury management services (including, without
limitation, controlled disbursement, 

 

2

 

automated clearinghouse transactions, return
items, overdrafts and interstate depository network services).

 

“Banking Services
Obligations” means any and all obligations of Borrower or any Subsidiary,
whether absolute or contingent and howsoever and whensoever created, arising,
evidenced or acquired (including all renewals, extensions and modifications
thereof and substitutions therefor) in connection with Banking Services.

 

“Banking Services
Reserves” means all Reserves which Lender from time to time establishes in
its Permitted Discretion for Banking Services then provided or outstanding.

 

“Board” means the
Board of Governors of the Federal Reserve System of the United States of
America.

 

“Borrower” means Koss
Corporation, a Delaware corporation.

 

“Borrowing” means (a) Revolving
Loans bearing interest by reference to the same rate, made, converted or
continued on the same date and, in the case of Eurodollar Loans, as to which a
single Interest Period is in effect and (b) a Protective Advance.

 

“Borrowing Base”
means, at any time, the sum of (a) 80% of Borrower’s Eligible Receivables
at such time, plus (b)  60% of
Borrower’s Eligible Finished Goods, valued at the lower of cost or market
value, determined on a first-in-first-out basis which represent 12 months of
supply based on sales from the last 12 months, at such time, plus (c) 80% of the CSV of
Eligible Life Insurance Policies, minus (d) Reserves.

 

“Borrowing Base
Certificate” means a certificate, signed and certified as accurate and
complete by a Financial Officer of Borrower, in substantially the form of Exhibit A
or another form which is acceptable to Lender in its sole discretion.

 

“Borrowing Request”
means a request by Borrower for a Revolving Borrowing in accordance with Section 2.03.

 

“Business Day” means
any day that is not a Saturday, Sunday or other day on which commercial banks
in New York City are authorized or required by law to remain closed; provided
that, when used in connection with a Eurodollar Loan, the term “Business Day”
shall also exclude any day on which banks are not open for dealings in dollar
deposits in the London interbank market.

 

“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.

 

“CB Floating Rate”
means the Prime Rate; provided that the CB Floating Rate shall, on any
day, not be less than the Adjusted One Month LIBO Rate.  The CB Floating Rate is 

 

3

 

a variable rate and any change in the CB
Floating Rate due to any change in the Prime Rate or the Adjusted One Month
LIBO Rate is effective from and including the effective date of such change in
the Prime Rate or the Adjusted One Month LIBO Rate, respectively.

 

“Change in Control”
means (a) the acquisition of ownership, directly or indirectly,
beneficially or of record, by any Person or group (within the meaning of the
Securities Exchange Act of 1934 and the rules of the Securities and
Exchange Commission thereunder as in effect on the date hereof) other than the
Koss Family, of Equity Interests representing more than 25% of the aggregate
ordinary voting power represented by the issued and outstanding Equity
Interests of Borrower; (b) occupation of a majority of the seats (other
than vacant seats) on the board of directors of Borrower by Persons who were
neither (i) nominated by the board of directors of Borrower nor (ii) appointed
by directors so nominated; or (c) the acquisition of direct or indirect
Control of Borrower by any Person or group other than the Koss Family.

 

“Change in Law” means
(a) the adoption of any law, rule or regulation after the date of
this Agreement, (b) any change in any law, rule or regulation or in
the interpretation or application thereof by any Governmental Authority after
the date of this Agreement or (c) compliance by Lender (or, for purposes
of Section 2.14(b), by any lending office of Lender or by Lender’s holding
company, if any) with any request, guideline or directive (whether or not
having the force of law) of any Governmental Authority made or issued after the
date of this Agreement.

 

“Code” means the
Internal Revenue Code of 1986, as amended from time to time.

 

“Collateral” has the
meaning set forth in the Security Agreement.

 

“Collateral Access
Agreement” has the meaning assigned to such term in the Security Agreement.

 

“Collateral Documents”
means, collectively, the Security Agreement and any other documents granting a
Lien upon the Collateral as security for payment of the Secured Obligations.

 

“Control” means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of a Person, whether through the
ability to exercise voting power, by contract or otherwise.  “Controlling” and “Controlled” have meanings
correlative thereto.

 

“CSV” means, on each
date of determination, the sum of the amounts, as determined for each Eligible
Life Insurance Policy, equal to (a) the lesser of (i) the cash
surrender value of such Eligible Life Insurance Policy or (ii) the maximum
principal amount of policy loans which could be obtained with respect to such
policy minus (b) in either case, the
outstanding principal balance of, and all accrued interest on, all Indebtedness
incurred by the Borrower with respect to such Eligible Life Insurance Policy.

 

“Current Ratio” means
the relationship, expressed as a numerical ratio, between:

 

4

 

(a)                                  the amount of all assets
which under GAAP would appear as current assets on the consolidated balance
sheet of the Borrower and its Subsidiaries, excluding prepaid expenses which
are not refundable on the date the determination is made; and

 

(b)                                 the amount of all
liabilities which under GAAP would appear as current liabilities on such
balance sheet, including all indebtedness payable on demand or maturing (by
reason of specified maturity, fixed prepayments, sinking funds or accruals of
any kind, or otherwise) within 12 months of the relevant statement, including
all lease and rental obligations due in 12 months or less under leases, whether
or not Capital Lease Obligations, including customer’s advances and progress
billings on contracts, and including the Revolving Exposure.

 

“Default” means any
event or condition which constitutes an Event of Default or which upon notice,
lapse of time or both would, unless cured or waived, become an Event of
Default.

 

“Disclosed Matters”
means the actions, suits and proceedings and the environmental matters
disclosed in Schedule 3.06.

 

“Document” has the
meaning assigned to such term in the Security Agreement.

 

“dollars” or “$”
refers to lawful money of the United States of America.

 

“EBITDA” means, for
any period, Net Income for such period plus (a) without
duplication and to the extent deducted in determining Net Income for such
period, the sum of (i) Interest Expense for such period, (ii) income
tax expense for such period net of tax refunds, (iii) all amounts
attributable to depreciation and amortization expense for such period, (iv) any
extraordinary non-cash charges for such period, (v) any other non-cash
charges for such period (but excluding any non-cash charge in respect of an
item that was included in Net Income in a prior period), and (vi) any
losses, costs and expenses, including without limitation attorney’s fees,
incurred by the Borrower in connection with the Fraud (provided, however, that
for all fiscal years commencing on or after July 1, 2011, the amount of
such costs and expenses incurred by the Borrower in connection with the Fraud
included in the calculation of EBITDA shall not exceed $250,000) minus (b) without duplication
and to the extent included in Net Income, (i) any cash payments made
during such period in respect of non-cash charges described in clause (a)(v) taken
in a prior period, (ii) any extraordinary gains and any non-cash items of
income for such period, all calculated for Borrower and its Subsidiaries on a
consolidated basis in accordance with GAAP, and (iii) any amounts
recovered by the Borrower in connection with the Fraud.

 

“Effective Date”
means the date on which the conditions specified in Section 4.01 are
satisfied (or waived in accordance with Section 8.02).

 

“Eligible Accounts”
means, at any time, the Accounts of Borrower which Lender determines in its
Permitted Discretion are eligible as the basis for the extension of Revolving
Loans and the issuance of Letters of Credit hereunder.  Without limiting Lender’s discretion provided
herein, Eligible Accounts shall not include any Account:

 

5

 

(a)                                  which is not
subject to a first priority perfected security interest in favor of Lender;

 

(b)                                 which is
subject to any Lien other than (i) a Lien in favor of Lender and (ii) a
Permitted Encumbrance which does not have priority over the Lien in favor of
Lender (except with respect to inchoate tax liens for taxes which are not yet
due);

 

(c)                                  with is unpaid
more than 120 days after the date of the original invoice therefor or more than
60 days after the original due date, or which has been written off the books of
Borrower or otherwise designated as uncollectible;

 

(d)                                 which is owing
by an Account Debtor for which more than 25% of the Accounts owing from such
Account Debtor and its Affiliates are ineligible, unless such Accounts are
backed by a letter of credit or other credit support acceptable to the Lender
in its sole discretion;

 

(e)                                  [intentionally
deleted]

 

(f)                                    which (i) does
not arise from the sale of goods or performance of services in the ordinary
course of business, (ii) is not evidenced by an invoice or other
documentation satisfactory to Lender which has been sent to the Account Debtor,
(iii) represents a progress billing, (iv) is contingent upon Borrower’s
completion of any further performance, (v) represents a sale on a
bill-and-hold, guaranteed sale, sale-and-return, sale on approval, consignment,
cash-on-delivery or any other repurchase or return basis, or (vi) relates
to payments of interest;

 

(g)                                 for which the
goods giving rise to such Account have not been shipped to the Account Debtor
or for which the services giving rise to such Account have not been performed
by Borrower or, if such Account was invoiced more than once, any duplicative
amount;

 

(h)                                 with respect to
which any check or other instrument of payment has been returned uncollected
for any reason;

 

(i)                                     which is owed
by an Account Debtor which has (i) applied for, suffered, or consented to
the appointment of any receiver, custodian, trustee, or liquidator of its
assets, (ii) has had possession of all or a material part of its property
taken by any receiver, custodian, trustee or liquidator, (iii) filed, or
had filed against it, any request or petition for liquidation, reorganization,
arrangement, adjustment of debts, adjudication as bankrupt, winding-up, or
voluntary or involuntary case under any state or federal bankruptcy laws, (iv) has
admitted in writing its inability, or is generally unable to, pay its debts as
they become due, (v) become insolvent, or (vi) ceased operation of
its business;

 

(j)                                     which is owed
by any Account Debtor which has sold all or a substantially all of its assets;

 

6

 

(k)                                  which is owed
by an Account Debtor which (i) does not maintain its chief executive
office in the U.S. or Canada or (ii) is not organized under applicable law
of the U.S., any state of the U.S., Canada, or any province of Canada unless,
in either case, such Account is backed by a Letter of Credit acceptable to
Lender which is in the possession of, and has been assigned to, Lender;

 

(l)                                     which is owed
in any currency other than U.S. dollars;

 

(m)                               which is owed
by (i) the government (or any department, agency, public corporation, or
instrumentality thereof) of any country other than the U.S. unless such Account
is backed by a Letter of Credit acceptable to Lender which is in the possession
of Lender, or (ii) the government of the U.S., or any department, agency,
public corporation, or instrumentality thereof, in excess of $100,000 in the
aggregate, unless the Federal Assignment of Claims Act of 1940, as amended (31
U.S.C. § 3727 et seq. and 41 U.S.C. § 15 et seq.), and any other steps
necessary to perfect the Lien of Lender in such Account have been complied with
to Lender’s satisfaction;

 

(n)                                 which is owed
by any Affiliate, employee, officer, director, agent or stockholder of
Borrower;

 

(o)                                 which is owed
by an Account Debtor or any Affiliate of such Account Debtor to which Borrower
is indebted, but only to the extent of such indebtedness or is subject to any
security, deposit, progress payment, retainage or other similar advance made by
or for the benefit of an Account Debtor, in each case to the extent thereof;

 

(p)                                 which is
subject to any counterclaim, deduction, defense, setoff or dispute;

 

(q)                                 which is
evidenced by any promissory note, chattel paper, or instrument;

 

(r)                                    which is owed
by an Account Debtor located in any jurisdiction which requires filing of a “Notice
of Business Activities Report” or other similar report in order to permit
Borrower to seek judicial enforcement in such jurisdiction of payment of such
Account, unless Borrower has filed such report or qualified to do business in
such jurisdiction;

 

(s)                                  with respect to
which Borrower has made any agreement with the Account Debtor for any reduction
thereof, other than discounts and adjustments given in the ordinary course of
business, or any Account which was partially paid and Borrower created a new
receivable for the unpaid portion of such Account;

 

(t)                                    which does not
comply in all material respects with the requirements of all applicable laws
and regulations, whether Federal, state or local, including without limitation
the Federal Consumer Credit Protection Act, the Federal Truth in Lending Act
and Regulation Z of the Board;

 

7

 

(u)                                 which is for
goods that have been sold under a purchase order or pursuant to the terms of a
contract or other agreement or understanding (written or oral) that indicates
or purports that any Person other than Borrower has or has had an ownership
interest in such goods, or which indicates any party other than Borrower as
payee or remittance party;

 

(v)                                 which was
created on cash on delivery terms; or

 

(w)                               which Lender
determines may not be paid by reason of the Account Debtor’s inability to pay.

 

In the event that an Account
which was previously an Eligible Account ceases to be an Eligible Account
hereunder, Borrower shall notify Lender thereof on and at the time of
submission to Lender of the next Borrowing Base Certificate.  In determining the amount of an Eligible
Account, the face amount of an Account may, in Lender’s Permitted Discretion,
be reduced by, without duplication, to the extent not reflected in such face
amount, (i) the amount of all accrued and actual discounts, claims,
credits or credits pending, promotional program allowances, price adjustments,
finance charges or other allowances (including any amount that Borrower may be
obligated to rebate to an Account Debtor pursuant to the terms of any agreement
or understanding (written or oral)) and (ii) the aggregate amount of all
cash received in respect of such Account but not yet applied by Borrower to
reduce the amount of such Account. 
Lender, in its Permitted Discretion, may from time to time adjust
advance rates or categories of ineligible Accounts, or impose additional
reserves, to reflect the results of field audits or other changes in Borrower’s
business.

 

“Eligible Finished Goods”
means, Eligible Inventory constituting finished goods to be sold by Borrower in
the ordinary course of business of Borrower.

 

“Eligible Inventory”
means, at any time, the Inventory of Borrower which Lender determines in its
Permitted Discretion is eligible as the basis for the extension of Revolving
Loans, and the issuance of Letters of Credit hereunder.  Without limiting Lender’s discretion provided
herein, Eligible Inventory shall not include any Inventory:

 

(a)                                  which is not
subject to a first priority perfected Lien in favor of Lender;

 

(b)                                 which is
subject to any Lien other than (i) a Lien in favor of Lender and (ii) a
Permitted Encumbrance which does not have priority over the Lien in favor of
Lender;

 

(c)                                  which is, in
Lender’s opinion, slow moving (including inventory in excess of the last 12 months
of sales), obsolete, unmerchantable, defective, unfit for sale, not salable at
prices approximating at least the cost of such Inventory in the ordinary course
of business or unacceptable due to age, type, category and/or quantity;

 

(d)                                 with respect to
which any covenant, representation, or warranty contained in this Agreement or
the Security Agreement has been breached or is not true and which does not
conform to all standards imposed by any Governmental Authority;

 

8

 

(e)                                  in which any
Person other than Borrower shall (i) have any direct or indirect
ownership, interest or title to such Inventory or (ii) be indicated on any
purchase order or invoice with respect to such Inventory as having or
purporting to have an interest therein;

 

(f)                                    which is not
finished goods or which constitutes work-in-process, raw materials, spare or
replacement parts, subassemblies, packaging and shipping material,
manufacturing supplies, samples, prototypes, displays or display items,
bill-and-hold goods, goods that are returned or marked for return, repossessed
goods, defective or damaged goods, goods held on consignment, or goods which
are not of a type held for sale in the ordinary course of business;

 

(g)                                 which is not
located in the U.S. or is in transit with a common carrier from vendors and
suppliers;

 

(h)                                 which is
located in any location leased by Borrower unless the lessor has delivered to
Lender a Collateral Access Agreement (provided that Borrower shall have a
period of 30 days after the date of this Agreement to provide a Collateral
Access Agreement for its leased facility located at 4129 North Port Washington
Road, Milwaukee, Wisconsin, and this clause (h) shall not cause inventory
located at such location to be ineligible unless Borrower fails to provide a
Collateral Access Agreement for such facility during such 30-day period);

 

(i)                                     which is
located in any third party warehouse or is in the possession of a bailee (other
than a third party processor) and is not evidenced by a Document;

 

(j)                                     which is being
processed offsite at a third party location or outside processor, or is in
transit to or from said third party location or outside processor;

 

(k)                                  which is a
discontinued product or component thereof which is the subject of a consignment
by Borrower as consignor;

 

(l)                                     which is
perishable;

 

(m)                               which contains
or bears any intellectual property rights licensed to Borrower unless Lender is
satisfied that it may sell or otherwise dispose of such Inventory without (i) infringing
the rights of such licensor, (ii) violating any contract with such
licensor, or (iii) incurring any liability with respect to payment of
royalties other than royalties incurred pursuant to sale of such Inventory
under the current licensing agreement;

 

(n)                                 which is not
reflected in a current perpetual inventory report of Borrower; or

 

(o)                                 for which
reclamation rights have been asserted by the seller.

 

9

 

In the event that Inventory
which was previously Eligible Inventory ceases to be Eligible Inventory
hereunder, Borrower shall notify Lender thereof on and at the time of
submission to Lender of the next Borrowing Base Certificate.  Lender, in its Permitted Discretion, may from
time to time adjust advance rates or categories of ineligible Inventory, or
impose additional reserves, to reflect the results of field audits or other
changes in Borrower’s business.

 

“Eligible Life Insurance
Policy” means any life insurance policy (excluding term life insurance or “split-dollar”
life insurance policies) owned by the Borrower (a) which is subject to a
first priority perfected Lien in favor of the Lender, (b) which is not
subject to a Lien in favor of any other person, (c) with respect to which
all premiums due have been paid in full, (d) the existence, cash surrender
value and current premium payment status of which have been certified in the
most recent Borrowing Base Certificate and (e) which is otherwise
acceptable to the Lender in its sole discretion.  Any life insurance policy which ceases to
meet any of the foregoing qualifications shall cease to be an Eligible Life
Insurance Policy at such time and the Borrower shall notify the Lender thereof
on and at the time of submission to the Lender of the next Borrowing Base Certificate.

 

“Environmental Laws”
means all laws, rules, regulations, codes, ordinances, orders, decrees,
judgments, injunctions, notices or binding agreements issued, promulgated or
entered into by any Governmental Authority, relating in any way to the environment,
preservation or reclamation of natural resources, the management, release or
threatened release of any Hazardous Material or to health and safety matters.

 

“Environmental Liability”
means any liability, contingent or otherwise (including any liability for
damages, costs of environmental remediation, fines, penalties or indemnities),
of Borrower or any Subsidiary directly or indirectly resulting from or based
upon (a) violation of any Environmental Law, (b) the generation, use,
handling, transportation, storage, treatment or disposal of any Hazardous
Materials, (c) exposure to any Hazardous Materials, (d) the release
or threatened release of any Hazardous Materials into the environment or (e) any
contract, agreement or other consensual arrangement pursuant to which liability
is assumed or imposed with respect to any of the foregoing.

 

“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.

 

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

 

“ERISA Affiliate”
means any trade or business (whether or not incorporated) that, together with
Borrower, is treated as a single employer under Section 414(b) or (c) of
the Code or, solely for purposes of Section 302 of ERISA and Section 412
of the Code, is treated as a single employer under Section 414 of the
Code.

 

10

 

“ERISA Event” means (a) any
“reportable event”, as defined in Section 4043 of ERISA or the regulations
issued thereunder with respect to a Plan (other than an event for which the
30-day notice period is waived); (b) the existence with respect to any
Plan of an “accumulated funding deficiency” (as defined in Section 412 of
the Code or Section 302 of ERISA), whether or not waived; (c) the
filing pursuant to Section 412(d) of the Code or Section 303(d) of
ERISA of an application for a waiver of the minimum funding standard with
respect to any Plan; (d) the incurrence by Borrower or any of its ERISA
Affiliates of any liability under Title IV of ERISA with respect to the
termination of any Plan; (e) the receipt by Borrower or any ERISA
Affiliate from the PBGC or a plan administrator of any notice relating to an
intention to terminate any Plan or Plans or to appoint a trustee to administer
any Plan; (f) the incurrence by Borrower or any of its ERISA Affiliates of
any liability with respect to the withdrawal or partial withdrawal from any
Plan or Multiemployer Plan; or (g) the receipt by Borrower or any ERISA
Affiliate of any notice, or the receipt by any Multiemployer Plan from Borrower
or any ERISA Affiliate of any notice, concerning the imposition of Withdrawal Liability
or a determination that a Multiemployer Plan is, or is expected to be,
insolvent or in reorganization, within the meaning of Title IV of ERISA.

 

“Eurodollar”, when
used in reference to any Loan or Borrowing, refers to whether such Loan, or the
Loans comprising such Borrowing, are bearing interest at a rate determined by
reference to the Adjusted LIBO Rate.

 

“Event of Default”
has the meaning assigned to such term in Article VII.

 

“Excluded Taxes”
means, with respect to Lender, or any other recipient of any payment to be made
by or on account of any obligation of Borrower hereunder, (a) income or
franchise taxes imposed on (or measured by) its net income by the United States
of America, or by the jurisdiction under the laws of which such recipient is
organized or in which its principal office is located or, in the case of
Lender, in which its applicable lending office is located, (b) any branch
profits taxes imposed by the United States of America or any similar tax
imposed by any other jurisdiction in which Borrower is located.

 

“Federal Funds Effective
Rate” means, for any day, the weighted average (rounded upwards, if
necessary, to the next 1/100 of 1%) of the rates on overnight Federal funds
transactions with members of the Federal Reserve System arranged by Federal
funds brokers, as published on the next succeeding Business Day by the Federal
Reserve Bank of New York, or, if such rate is not so published for any day that
is a Business Day, the average (rounded upwards, if necessary, to the next 1/100
of 1%) of the quotations for such day for such transactions received by Lender
from three Federal funds brokers of recognized standing selected by it.

 

“Financial Officer”
means the chief financial officer or principal accounting officer of Borrower.

 

“Fraud” means the
unauthorized transactions by Sujata Sachdeva, the Borrower’s former Vice
President of Finance, as previously disclosed in Form 8-K Current Reports
filed with the U.S. Securities and Exchange Commission on December 21 and
24, 2009, and January 4, 7, 11, and 20, 2010, and any actions,
proceedings, or investigations, whether criminal, civil, or administrative,
arising out of or in connection therewith.

 

11

 

“Funding Account”
shall mean account number 885127381, maintained by Borrower with Lender.

 

“GAAP” means
generally accepted accounting principles in the United States of America.

 

“Governmental Authority”
means the government of the United States of America, any other nation or any
political subdivision thereof, whether state or local, and any agency,
authority, instrumentality, regulatory body, court, central bank or other
entity exercising executive, legislative, judicial, taxing, regulatory or
administrative powers or functions of or pertaining to government.

 

“Guarantee” of or by
any Person (the “guarantor”) means any obligation, contingent or
otherwise, of the guarantor guaranteeing or having the economic effect of
guaranteeing any Indebtedness or other obligation of any other Person (the “primary
obligor”) in any manner, whether directly or indirectly, and including any
obligation of the guarantor, direct or indirect, (a) to purchase or pay
(or advance or supply funds for the purchase or payment of) such Indebtedness
or other obligation or to purchase (or to advance or supply funds for the
purchase of) any security for the payment thereof, (b) to purchase or
lease property, securities or services for the purpose of assuring the owner of
such Indebtedness or other obligation of the payment thereof, (c) to
maintain working capital, equity capital or any other financial statement
condition or liquidity of the primary obligor so as to enable the primary
obligor to pay such Indebtedness or other obligation or (d) as an account
party in respect of any letter of credit or letter of guaranty issued to
support such Indebtedness or obligation; provided, that the term
Guarantee shall not include endorsements for collection or deposit in the
ordinary course of business.

 

“Hazardous Materials”
means all explosive or radioactive substances or wastes and all hazardous or
toxic substances, wastes or other pollutants, including petroleum or petroleum
distillates, asbestos or asbestos containing materials, polychlorinated
biphenyls, radon gas, infectious or medical wastes and all other substances or
wastes of any nature regulated pursuant to any Environmental Law.

 

“Indebtedness” of any
Person means, without duplication, (a) all obligations of such Person for
borrowed money or with respect to deposits or advances of any kind, (b) all
obligations of such Person evidenced by bonds, debentures, notes or similar
instruments, (c) all obligations of such Person upon which interest
charges are customarily paid, (d) all obligations of such Person under
conditional sale or other title retention agreements relating to property
acquired by such Person, (e) all obligations of such Person in respect of
the deferred purchase price of property or services (excluding current accounts
payable incurred in the ordinary course of business), (f) all Indebtedness
of others secured by (or for which the holder of such Indebtedness has an
existing right, contingent or otherwise, to be secured by) any Lien on property
owned or acquired by such Person, whether or not the Indebtedness secured
thereby has been assumed, (g) all Guarantees by such Person of
Indebtedness of others, (h) all Capital Lease Obligations of such Person, (i) all
obligations, contingent or otherwise, of such Person as an account party in
respect of letters of credit and letters of guaranty, (j) all obligations,
contingent or otherwise, of such Person in respect of bankers’ acceptances, (k) obligations
under any 

 

12

 

liquidated earn-out and (l) obligations
of such Person to purchase securities or other property arising out of or in
connection with the sale of the same or substantially similar securities or
property or any other Off-Balance Sheet Liability.  The Indebtedness of any Person shall include
the Indebtedness of any other entity (including any partnership in which such
Person is a general partner) to the extent such Person is liable therefor as a
result of such Person’s ownership interest in or other relationship with such
entity, except to the extent the terms of such Indebtedness provide that such
Person is not liable therefor.

 

“Indemnified Taxes”
means Taxes other than Excluded Taxes.

 

“Interest Election
Request” means a request by Borrower to convert or continue a Revolving
Borrowing in accordance with Section 2.07.

 

“Interest Expense”
means, with reference to any period, the interest expense (including that
attributable to Capital Lease Obligations) of Borrower and its Subsidiaries for
such period with respect to all outstanding Indebtedness of Borrower and its Subsidiaries
(including all commissions, discounts and other fees and charges owed with
respect to letters of credit and bankers’ acceptance financing and net costs
under Swap Agreements in respect of interest rates to the extent such net costs
are allocable to such period in accordance with GAAP), calculated on a
consolidated basis for Borrower and its Subsidiaries for such period in
accordance with GAAP.

 

“Interest Payment Date”
means (a) with respect to any CB Floating Rate Loan, the first Business
Day of each calendar month and the Maturity Date, (b) with respect to any
Eurodollar Loan, the last day of the Interest Period applicable to the
Borrowing of which such Loan is a part and, in the case of a Eurodollar
Borrowing with an Interest Period of more than three months’ duration, each day
prior to the last day of such Interest Period that occurs at intervals of three
months’ duration after the first day of such Interest Period, and (c) the
Maturity Date.

 

“Interest Period”
means (a) with respect to any Eurodollar Borrowing, the period commencing
on the date of such Borrowing and ending on the numerically corresponding day
in the calendar month that is one, two or three months thereafter, as Borrower
may elect; provided, that (i) if any Interest Period would end on a
day other than a Business Day, such Interest Period shall be extended to the
next succeeding Business Day unless, in the case of a Eurodollar Borrowing
only, such next succeeding Business Day would fall in the next calendar month,
in which case such Interest Period shall end on the next preceding Business Day
and (ii) any Interest Period pertaining to a Eurodollar Borrowing that
commences on the last Business Day of a calendar month (or on a day for which
there is no numerically corresponding day in the last calendar month of such
Interest Period) shall end on the last Business Day of the last calendar month
of such Interest Period.  For purposes
hereof, the date of a Borrowing initially shall be the date on which such
Borrowing is made and, in the case of a Revolving Borrowing, thereafter shall
be the effective date of the most recent conversion or continuation of such
Borrowing.

 

“Inventory” has the
meaning assigned to such term in the Security Agreement.

 

13

 

“Koss Family” means
John Koss, Sr., together with his lineal descendants and any trusts for
the benefit of, and estates of, any of the foregoing individuals.

 

“LC Collateral Account”
has the meaning assigned to such term in Section 2.05(h).

 

“LC Disbursement”
means a payment made by Lender pursuant to a Letter of Credit.

 

“LC Exposure” means,
at any time, the sum of (a) the aggregate undrawn amount of all
outstanding Letters of Credit at such time plus (b) the aggregate amount
of all LC Disbursements that have not yet been reimbursed by or on behalf of
Borrower at such time.

 

“Lender” means
JPMorgan Chase Bank, N.A.

 

“Letter of Credit”
means any letter of credit issued pursuant to this Agreement.

 

“Letter of Credit
Sublimit” means $2,000,000.

 

“Leverage Ratio”
means, on any date, the ratio of (a) Total Indebtedness on such date to (b) EBITDA
for the period of four consecutive fiscal quarters ended on such date (or, if
such date is not the last day of a fiscal quarter, ended on the last day of the
fiscal quarter most recently ended prior to such date).

 

“LIBO Rate” means,
with respect to any Eurodollar Borrowing for any Interest Period, the rate
appearing on Page 3750 of the Dow Jones Market Service (the “Service”)
(or on any successor or substitute page of such Service, or any successor
to or substitute for such Service, providing rate quotations comparable to
those currently provided on such page of such Service, as determined by
Lender from time to time for purposes of providing quotations of interest rates
applicable to dollar deposits in the London interbank market) (the “Page”)
at approximately 11:00 a.m., London time, two Business Days prior to the
commencement of such Interest Period, as the rate for dollar deposits with a
maturity comparable to such Interest Period. 
In the event that such rate is not available at such time for any
reason, then the “LIBO Rate” with respect to such Eurodollar Borrowing
for such Interest Period shall be the rate at which dollar deposits of
$5,000,000 and for a maturity comparable to such Interest Period are offered by
the principal London office of Lender in immediately available funds in the
London interbank market at approximately 11:00 a.m., London time, two
Business Days prior to the commencement of such Interest Period.

 

“Lien” means, with
respect to any asset, (a) any mortgage, deed of trust, lien, pledge,
hypothecation, encumbrance, charge or security interest in, on or of such
asset, (b) the interest of a vendor or a lessor under any conditional sale
agreement, capital lease or title retention agreement (or any financing lease
having substantially the same economic effect as any of the foregoing) relating
to such asset and (c) in the case of securities, any purchase option, call
or similar right of a third party with respect to such securities.

 

“Loan Documents”
means this Agreement, any promissory notes issued pursuant to the Agreement,
any Letter of Credit applications, the Collateral Documents, and all other 

 

14

 

agreements, instruments, documents and
certificates identified in Section 4.01 executed and delivered to, or in
favor of, Lender and including all other pledges, powers of attorney, consents,
assignments, contracts, notices, letter of credit agreements and all other
written matter whether heretofore, now or hereafter executed by or on behalf of
Borrower, and delivered to Lender in connection with the Agreement or the
transactions contemplated thereby.  Any
reference in the Agreement or any other Loan Document to a Loan Document shall
include all appendices, exhibits or schedules thereto, and all amendments,
restatements, supplements or other modifications thereto, and shall refer to
the Agreement or such Loan Document as the same may be in effect at any and all
times such reference becomes operative.

 

“Loans” means the
loans and advances made by Lender pursuant to this Agreement, including
Protective Advances.

 

“Material Adverse Effect”
means a material adverse effect on (a) the business, assets, operations,
prospects or condition, financial or otherwise, of Borrower and the
Subsidiaries taken as a whole, (b) the ability of Borrower to perform any
of its obligations under the Loan Documents, (c) the Collateral, or Lender’s
Liens on the Collateral or the priority of such Liens, or (d) the rights
of or benefits available to Lender thereunder.

 

“Material Indebtedness”
means Indebtedness (other than the Loans and Letters of Credit), or obligations
in respect of one or more Swap Agreements, of any one or more of Borrower and
its Subsidiaries in an aggregate principal amount exceeding $250,000.  For purposes of determining Material
Indebtedness, the “obligations” of Borrower or any Subsidiary in respect of any
Swap Agreement at any time shall be the maximum aggregate amount (giving effect
to any netting agreements) that Borrower or such Subsidiary would be required
to pay if such Swap Agreement were terminated at such time.

 

“Maturity Date” means
July 31, 2013 or any earlier date on which the Revolving Commitment is
reduced to zero or otherwise terminated pursuant to the terms hereof.

 

“Moody’s” means Moody’s
Investors Service, Inc.

 

“Multiemployer Plan”
means a multiemployer plan as defined in Section 4001(a)(3) of ERISA.

 

“Net Income” means,
for any period, the consolidated net income (or loss) of Borrower and its
Subsidiaries, determined on a consolidated basis in accordance with GAAP; provided
that there shall be excluded (a) the income (or deficit) of any Person
accrued prior to the date it becomes a Subsidiary or is merged into or
consolidated with Borrower or any of its Subsidiaries, (b) the income (or
deficit) of any Person (other than a Subsidiary) in which Borrower or any of
its Subsidiaries has an ownership interest, except to the extent that any such
income is actually received by Borrower or such Subsidiary in the form of
dividends or similar distributions and (c) the undistributed earnings of
any Subsidiary to the extent that the declaration or payment of dividends or
similar distributions by such Subsidiary is not at the time permitted by the
terms of any contractual obligation (other than under any Loan Document) or
Requirement of Law applicable to such Subsidiary.

 

15

 

“Net Proceeds” means,
with respect to any event, (a) the cash proceeds received in respect of
such event including (i) any cash received in respect of any non-cash
proceeds (including any cash payments received by way of deferred payment of
principal pursuant to a note or installment receivable or purchase price
adjustment receivable or otherwise, but excluding any interest payments), but
only as and when received, (ii) in the case of a casualty, insurance
proceeds payable to the Company or to the Lender for the benefit of the Company
and (iii) in the case of a condemnation or similar event, condemnation
awards and similar payments payable to the Company or to the Lender for the
benefit of the Company, net of (b) the sum of (i) all reasonable fees
and out-of-pocket expenses paid to third parties (other than Affiliates) in
connection with such event, (ii) in the case of a sale, transfer or other
disposition of an asset (including pursuant to a sale and leaseback transaction
or a casualty or a condemnation or similar proceeding), the amount of all
payments required to be made as a result of such event to repay Indebtedness
(other than Loans) secured by such asset or otherwise subject to mandatory
prepayment as a result of such event and (iii) the amount of all taxes
paid (or reasonably estimated to be payable) and the amount of any reserves
established to fund contingent liabilities reasonably estimated to be payable,
in each case during the year that such event occurred or the next succeeding
year and that are directly attributable to such event (as determined reasonably
and in good faith by a Financial Officer).

 

“Obligations” means
all unpaid principal of and accrued and unpaid interest on the Loans, all LC
Exposure, all accrued and unpaid fees and all expenses, reimbursements,
indemnities and other obligations of Borrower or any Subsidiary to Lender or
any indemnified party arising under the Loan Documents.  Obligations shall also include (i) all
Banking Services Obligations; and (ii) all Swap Obligations owing to
Lender or its Affiliates.

 

“Off-Balance Sheet
Liability” of a Person means (a) any repurchase obligation or
liability of such Person with respect to accounts or notes receivable sold by
such Person, (b) any indebtedness, liability or obligation under any sale
and leaseback transaction which is not a Capital Lease Obligation, or (c) any
indebtedness, liability or obligation under any so-called “synthetic lease”
transaction entered into by such Person, or (d) any indebtedness,
liability or obligation arising with respect to any other transaction which is
the functional equivalent of or takes the place of borrowing but which does not
constitute a liability on the balance sheets of such Person (other than
operating leases).

 

“Other Taxes” means
any and all present or future stamp or documentary taxes or any other excise or
property taxes, charges or similar levies arising from any payment made
hereunder or from the execution, delivery or enforcement of, or otherwise with
respect to, this Agreement.

 

“Participant” has the
meaning set forth in Section 8.04.

 

“PBGC” means the
Pension Benefit Guaranty Corporation referred to and defined in ERISA and any
successor entity performing similar functions.

 

“Permitted Discretion”
means a determination made in good faith and in the exercise of reasonable (from
the perspective of a secured asset-based lender) business judgment.

 

16

 

“Permitted Encumbrances”
means:

 

(a)                                  Liens imposed
by law for taxes that are not yet due or are being contested in compliance with
Section 5.04;

 

(b)                                 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 in
compliance with Section 5.04;

 

(c)                                  pledges and
deposits made in the ordinary course of business in compliance with workers’
compensation, unemployment insurance and other social security laws or
regulations;

 

(d)                                 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;

 

(e)                                  judgment liens
in respect of judgments that do not constitute an Event of Default under clause
(k) of Article VII; and

 

(f)                                    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
Borrower or any Subsidiary;

 

provided that the term “Permitted
Encumbrances” shall not include any Lien securing Indebtedness.

 

“Permitted Investments”
means:

 

(a)                                  direct
obligations of, or obligations the principal of and interest on which are
unconditionally guaranteed by, the United States of America (or by any agency
thereof to the extent such obligations are backed by the full faith and credit
of the United States of America), in each case maturing within one year from
the date of acquisition thereof;

 

(b)                                 investments in
commercial paper maturing within 270 days from the date of acquisition thereof
and having, at such date of acquisition, the highest credit rating obtainable
from S&P or from Moody’s;

 

(c)                                  investments in
certificates of deposit, banker’s acceptances and time deposits maturing within
180 days from the date of acquisition thereof issued or guaranteed by or placed
with, and money market deposit accounts issued or offered by, any domestic
office of any commercial bank organized under the laws of the United States of
America or any State thereof which has a combined capital and surplus and
undivided profits of not less than $500,000,000;

 

17

 

(d)                                 fully
collateralized repurchase agreements with a term of not more than 30 days for
securities described in clause (a) above and entered into with a financial
institution satisfying the criteria described in clause (c) above;

 

(e)                                  money market
funds that (i) comply with the criteria set forth in Securities and
Exchange Commission Rule 2a-7 under the Investment Company Act of 1940, (ii) are
rated AAA by S&P and Aaa by Moody’s and (iii) have portfolio assets of
at least $5,000,000,000; and

 

(f)                                    any other
investment agreed to in writing by the Bank in advance.

 

“Person” means any
natural person, corporation, limited liability company, trust, joint venture,
association, company, partnership, Governmental Authority or other entity.

 

“Plan” means any
employee pension benefit plan (other than a Multiemployer Plan) subject to the
provisions of Title IV of ERISA or Section 412 of the Code or Section 302
of ERISA, and in respect of which Borrower or any ERISA Affiliate is (or, if
such plan were terminated, would under Section 4069 of ERISA be deemed to
be) an “employer” as defined in Section 3(5) of ERISA.

 

“Prepayment Event”
means:

 

(a)                                  any sale,
transfer or other disposition (including pursuant to a sale and leaseback
transaction) of any property or asset of the Borrower or any Subsidiary, other
than transfers or dispositions of cash and Permitted Investments and other
dispositions described in Sections 6.05(a), (c) or (g); or

 

(b)                                 any casualty or
other insured damage to, or any taking under power of eminent domain or by
condemnation or similar proceeding of, any property or asset of Borrower or any
Subsidiary with a fair value immediately prior to such event equal to or
greater than $500,000; or

 

(c)                                  the issuance by
Borrower or any Subsidiary of any Equity Interests, or the receipt by Borrower
of any capital contribution; or

 

(d)                                 the incurrence
by Borrower or any Subsidiary of any Indebtedness, other than Indebtedness
permitted under Section 6.01.

 

“Prime Rate” means
the rate of interest per annum publicly announced from time to time by Lender
as its prime rate; each change in the Prime Rate shall be effective from and
including the date such change is publicly announced as being effective.

 

“Projections” has the
meaning assigned to such term in Section 5.01(f).

 

“Protective Advance”
has the meaning assigned to such term in Section 2.04.

 

18

 

“Related Parties”
means, with respect to any specified Person, such Person’s Affiliates and the
respective directors, officers, employees, agents and advisors of such Person
and such Person’s Affiliates.

 

“Report” means
reports prepared by Lender or another Person showing the results of appraisals,
field examinations or audits pertaining to Borrower’s assets from information
furnished by or on behalf of Borrower, after Lender has exercised its rights of
inspection pursuant to this Agreement.

 

“Requirement of Law”:  as to any Person, the Certificate of
Incorporation and By-Laws or other organizational or governing documents of
such Person, and any law, treaty, rule or regulation or determination of
an arbitrator or a court or other Governmental Authority, in each case
applicable to or binding upon such Person or any of its property or to which
such Person or any of its property is subject.

 

“Reserves” means any
and all reserves which Lender deems necessary, in its Permitted Discretion, to
maintain (including, without limitation, an availability reserve, reserves for
accrued and unpaid interest on the Secured Obligations, Banking Services
Reserves, reserves for rent at locations leased by Borrower or any Subsidiary
and for consignee’s, warehousemen’s and bailee’s charges, reserves for dilution
of Accounts, reserves for Inventory shrinkage, reserves for customs charges and
shipping charges related to any Inventory in transit, reserves for Swap
Obligations, reserves for contingent liabilities of Borrower or any Subsidiary,
reserves for uninsured losses of Borrower or any Subsidiary, reserves for
uninsured, underinsured, un indemnified or under indemnified liabilities or
potential liabilities with respect to any litigation and reserves for taxes,
fees, assessments, and other governmental charges) with respect to the
Collateral, Borrower or any Subsidiary.

 

“Restricted Payment”
means any dividend or other distribution (whether in cash, securities or other
property) with respect to any Equity Interests in Borrower or any Subsidiary,
or any payment (whether in cash, securities or other property), including any
sinking fund or similar deposit, on account of the purchase, redemption,
retirement, acquisition, cancellation or termination of any such Equity
Interests in Borrower or any option, warrant or other right to acquire any such
Equity Interests in Borrower.

 

“Revolving Commitment”
means the commitment of Lender to make Revolving Loans and issue Letters of
Credit, as such commitment may be reduced from time to time pursuant to Section 2.08.  The initial amount of Lender’s Revolving Commitment
is $8,000,000.

 

“Revolving Exposure”
means, at any time, the sum of the outstanding principal amount of Revolving
Loans and LC Exposure at such time.

 

“Revolving Loan”
means a Loan made pursuant to Section 2.01.

 

“S&P” means
Standard & Poor’s Ratings Services, a division of The McGraw Hill
Companies, Inc.

 

“Secured Obligations”
means all Obligations, together with all (i) Banking Services Obligations
and (ii) Swap Obligations owing to Lender or its Affiliates.

 

19

 

“Security Agreement”
means that certain Pledge and Security Agreement, dated as of the date hereof,
between Borrower and Lender, and any other pledge or security agreement entered
into, after the date of this Agreement by Borrower (as required by this
Agreement or any other Loan Document), or any other Person, as the same may be
amended, restated or otherwise modified from time to time.

 

“Statutory Reserve Rate”
means a fraction (expressed as a decimal), the numerator of which is the number
one and the denominator of which is the number one minus the aggregate of the
maximum reserve percentages (including any marginal, special, emergency or
supplemental reserves) expressed as a decimal established by the Board to which
Lender is subject with respect to the Adjusted LIBO Rate, for eurocurrency
funding (currently referred to as “Eurocurrency Liabilities” in Regulation D of
the Board).  Such reserve percentages
shall include those imposed pursuant to such Regulation D.  Eurodollar Loans shall be deemed to
constitute eurocurrency funding and to be subject to such reserve requirements
without benefit of or credit for proration, exemptions or offsets that may be
available from time to time to Lender under such Regulation D or any comparable
regulation.  The Statutory Reserve Rate
shall be adjusted automatically on and as of the effective date of any change
in any reserve percentage.

 

“subsidiary” means,
with respect to any Person (the “parent”) at any date, any corporation,
limited liability company, partnership, association or other entity 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 such date, as well as any other corporation, limited
liability company, partnership, association or other entity (a) of which
securities or other ownership interests representing more than 50% of the
equity or more than 50% of the ordinary voting power or, in the case of a
partnership, more than 50% of the general partnership interests are, as of such
date, owned, controlled or held, or (b) that is, as of such date,
otherwise Controlled, by the parent or one or more subsidiaries of the parent
or by the parent and one or more subsidiaries of the parent.

 

“Subsidiary” means
any direct or indirect subsidiary of Borrower.

 

“Swap Agreement”
means any agreement with respect to any swap, forward, future or derivative
transaction or option or similar agreement involving, or settled by reference
to, one or more rates, currencies, commodities, equity or debt instruments or
securities, or economic, financial or pricing indices or measures of economic,
financial or pricing risk or value or any similar transaction or any
combination of these transactions; provided that no phantom stock or similar
plan providing for payments only on account of services provided by current or
former directors, officers, employees or consultants of Borrower or the
Subsidiaries shall be a Swap Agreement.

 

“Swap Obligations” of
a Person means any and all obligations of such Person, whether absolute or
contingent and howsoever and whensoever created, arising, evidenced or acquired
(including all renewals, extensions and modifications thereof and substitutions
therefor), under (a) any and all Swap Agreements, and (b) any and all
cancellations, buy backs, reversals, terminations or assignments of any Swap
Agreement transaction.

 

20

 

“Tangible Net Worth”
means the total of all assets properly appearing on the consolidated balance
sheet of the Borrower and its Subsidiaries in accordance with GAAP, less the
sum of the following:

 

(a)                                  the book amount
of all such assets which would be treated as intangibles under GAAP, including,
without limitation, all such items as good will, trademarks, trademark rights,
trade names, trade-name rights, brands, copyrights, patents, patent rights,
licenses, deferred charges and unamortized debt discount and expense;

 

(b)                                 any write-up in
the book value of any such assets resulting from a revaluation thereof
subsequent to the date of this Agreement;

 

(c)                                  all reserves,
including reserves for depreciation, obsolescence, depletion, insurance, and
inventory valuation, but excluding contingency reserves not allocated for any
particular purpose and not deducted from assets;

 

(d)                                 the amount, if
any, at which any shares of stock of the Borrower or any Subsidiary appear on
the asset side of such consolidated balance sheet;

 

(e)                                  all other
liabilities of the Borrower and its Subsidiaries shown on such balance sheet,
other than liabilities subordinated to obligations owed to the Bank by
subordination agreements in form and substance satisfactory to the Bank; and

 

(f)                                    all investments
in foreign affiliates and nonconsolidated domestic affiliates.

 

“Taxes” means any and
all present or future taxes, levies, imposts, duties, deductions, charges or
withholdings imposed by any Governmental Authority.

 

“Total Indebtedness”
means, at any date, the aggregate principal amount of all Indebtedness of
Borrower and its Subsidiaries at such date, determined on a consolidated basis
in accordance with GAAP.

 

“Transactions” means
the execution, delivery and performance by Borrower of this Agreement, the
borrowing of Loans and other credit extensions, the use of the proceeds thereof
and the issuance of Letters of Credit hereunder.

 

“UCC” means the
Uniform Commercial Code as in effect from time to time in the State of
Wisconsin or any other state the laws of which are required to be applied in
connection with the issue of perfection of security interests.

 

“Withdrawal Liability”
means liability to a Multiemployer Plan as a result of a complete or partial
withdrawal from such Multiemployer Plan, as such terms are defined in Part I
of Subtitle E of Title IV of ERISA.

 

SECTION 1.02.  Accounting Terms; GAAP.  Except as otherwise expressly provided
herein, all terms of an accounting or financial nature shall be construed in
accordance with GAAP, as in effect from time to time; provided that, if
Borrower notifies Lender that 

 

21

 

Borrower
requests an amendment to any provision hereof to eliminate the effect of any
change occurring after the date hereof in GAAP or in the application thereof on
the operation of such provision (or if Lender notifies Borrower that Lender
request an amendment to any provision hereof for such purpose), regardless of
whether any such notice is given before or after such change in GAAP or in the
application thereof, then such provision shall be interpreted on the basis of
GAAP as in effect and applied immediately before such change shall have become
effective until such notice shall have been withdrawn or such provision amended
in accordance herewith.

 

ARTICLE II

 

The Credits

 

SECTION 2.01.  Commitment.  Subject to the terms and conditions set forth
herein, Lender agrees to make Revolving Loans to Borrower from time to time
during the Availability Period in an aggregate principal amount that will not
result in the Revolving Exposure exceeding the lesser of (a) the Revolving
Commitment or (b) the Borrowing Base, subject to Lender’s authority, in
its sole discretion, to make Protective Advances pursuant to the terms of Section 2.04,
by making immediately available funds available to the account designated by
Borrower in writing.  Within the
foregoing limits and subject to the terms and conditions set forth herein,
Borrower may borrow, prepay and reborrow Revolving Loans.

 

SECTION 2.02.  Loans and Borrowings.  (a)  Any Protective Advance shall be
made in accordance with the procedures set forth in Section 2.04.

 

(b)                                 Subject to Section 2.13,
each Revolving Borrowing shall be comprised entirely of CB Floating Rate Loans
or Eurodollar Loans as Borrower may request in accordance herewith, provided
that all Borrowings made on the Effective Date must be made as CB Floating Rate
Borrowings.

 

(c)                                  At the
commencement of each Interest Period for any Eurodollar Revolving Borrowing,
such Borrowing shall be in an aggregate amount that is not less than
$100,000.  CB Floating Rate Revolving
Borrowings may be in any amount.  There
shall not at any time be more than a total of 5  Eurodollar
Revolving Borrowings outstanding.

 

(d)                                 Notwithstanding
any other provision of this Agreement, Borrower shall not be entitled to
request, or to elect to convert or continue, any Borrowing if the Interest
Period requested with respect thereto would end after the Maturity Date.

 

SECTION 2.03.  Borrowing Procedures; Requests for
Revolving Borrowings.

 

(a)                                  Notices by
Borrower to Lender of requests for Revolving Loans other than pursuant to
§2.03(a).  To request
a Revolving Borrowing, Borrower shall notify Lender of such request by
telephone (a) in the case of a Eurodollar Borrowing, not later than 10:00 a.m.,
Milwaukee time, two Business Days before the date of the proposed Borrowing or (b) in
the case of an CB Floating Rate Borrowing, not later than noon, Milwaukee time,
on the date of the proposed Borrowing; provided that any such notice of
an CB Floating Rate Revolving Borrowing to finance the reimbursement of an LC
Disbursement as contemplated by Section 

 

22

 

2.05(e) may be given
not later than 9:00 a.m., Milwaukee time, on the date of the proposed
Borrowing.  Each such telephonic
Borrowing Request shall be irrevocable and shall be confirmed promptly by hand
delivery or facsimile to Lender of a written Borrowing Request in a form
approved by Lender and signed by Borrower. 
Each such telephonic and written Borrowing Request shall specify the
following information in compliance with Section 2.01:

 

(i)                                     the aggregate
amount of the requested Borrowing;

 

(ii)                                  the date of
such Borrowing, which shall be a Business Day;

 

(iii)                               whether such
Borrowing is to be an CB Floating Rate Borrowing or a Eurodollar Borrowing; and

 

(iv)                              in the case of
a Eurodollar Borrowing, the initial Interest Period to be applicable thereto,
which shall be a period contemplated by the definition of the term “Interest
Period.”

 

If no election as to the
rate of interest applicable to the Revolving Borrowing is specified, then the
requested Revolving Borrowing shall be an CB Floating Rate Borrowing.  If no Interest Period is specified with respect
to any requested Eurodollar Revolving Borrowing, then Borrower shall be deemed
to have selected an Interest Period of one month’s duration.

 

SECTION 2.04.  Protective Advances. Subject to the
limitations set forth below, Lender is authorized by Borrower, from time to
time in Lender’s sole discretion (but shall have absolutely no obligation to),
to make Loans to Borrower, which Lender, in its Permitted Discretion, deems
necessary or desirable (i) to preserve or protect the Collateral, or any
portion thereof, (ii) to enhance the likelihood of, or maximize the amount
of, repayment of the Loans and other Obligations, or (iii) to pay any
other amount chargeable to or required to be paid by Borrower pursuant to the
terms of this Agreement, including payments of principal, interest, LC
Disbursements, fees, premiums, reimbursable expenses (including costs, fees,
and expenses as described in Section 8.03) and other sums payable under
the Loan Documents (any of such Loans are herein referred to as “Protective
Advances”).  Protective Advances may be
made even if the conditions precedent set forth in Section 4.02 have not
been satisfied.  The Protective Advances
shall be secured by the Liens in favor of Lender in and to the Collateral and
shall constitute Obligations hereunder. 
All Protective Advances shall be CB Floating Rate Borrowings.  Unless an Event of Default shall have
occurred and be continuing, Lender shall provide Borrower with three (3) days
prior notice of its intention to make a Protective Advance.

 

SECTION 2.05.  Letters of Credit.  (a) General.  Subject to the terms and conditions set forth
herein, Borrower may request the issuance of Letters of Credit for its own
account, in a form reasonably acceptable to Lender at any time and from time to
time during the Availability Period.  In
the event of any inconsistency between the terms and conditions of this
Agreement and the terms and conditions of any form of letter of credit
application or other agreement submitted by Borrower to, or entered into by
Borrower with, Lender relating to any Letter of Credit, the terms and
conditions of this Agreement shall control.

 

(b)                                 Notice of
Issuance, Amendment, Renewal, Extension; Certain Conditions.  To request the issuance of a Letter of Credit
(or the amendment, renewal or extension of an 

 

23

 

outstanding Letter of
Credit), Borrower shall hand deliver or facsimile (or transmit by electronic
communication, if arrangements for doing so have been approved by Lender) to
Lender (prior to 12:00 p.m., Milwaukee time, at least three Business Days
prior to the requested date of issuance, amendment, renewal or extension) a
notice requesting the issuance of a Letter of Credit, or identifying the Letter
of Credit to be amended, renewed or extended, and specifying the date of
issuance, amendment, renewal or extension (which shall be a Business Day), the
date on which such Letter of Credit is to expire (which shall comply with
paragraph (c) of this Section), the amount of such Letter of Credit, the
name and address of the beneficiary thereof and such other information as shall
be necessary to prepare, amend, renew or extend such Letter of Credit.  If requested by Lender, Borrower also shall
submit a letter of credit application on Lender’s standard form in connection
with any request for a Letter of Credit. 
A Letter of Credit shall be issued, amended, renewed or extended only if
(and upon issuance, amendment, renewal or extension of each Letter of Credit
Borrower shall be deemed to represent and warrant that), after giving effect to
such issuance, amendment, renewal or extension (i) the LC Exposure shall
not exceed the Letter of Credit Sublimit and (ii) the total Revolving
Exposure shall not exceed the lesser of the total Revolving Commitment and the
Borrowing Base.

 

(c)                                  Expiration Date.  Each Letter of Credit shall expire at or
prior to the close of business on the earlier of (i) the date one year
after the date of the issuance of such Letter of Credit (or, in the case of any
renewal or extension thereof, one year after such renewal or extension) and (ii) the
date that is five Business Days prior to the Maturity Date; provided, however,
that notwithstanding any term herein to the contrary, prior to the Maturity
Date a Letter of Credit may be issued or extended with an expiry date extending
beyond the Maturity Date if, and to the extent that, the Borrower provides cash
collateral to the Lender not later than ten (10) days prior to the
Maturity Date in an amount equal to 105% of the maximum amount available to be
drawn under such Letter of Credit.

 

(d)                                 Reimbursement.  If Lender shall make any LC Disbursement in
respect of a Letter of Credit, Borrower shall reimburse such LC Disbursement by
paying to Lender an amount equal to such LC Disbursement not later than 11:00 a.m.,
Milwaukee time, on the date that such LC Disbursement is made, if Borrower
shall have received notice of such LC Disbursement prior to 9:00 a.m.,
Milwaukee time, on such date, or, if such notice has not been received by
Borrower prior to such time on such date, then not later than 11:00 a.m.,
Milwaukee time, on (i) the Business Day that Borrower receives such
notice, if such notice is received prior to 9:00 a.m., Milwaukee time, on
the day of receipt, or (ii) the Business Day immediately following the day
that Borrower receives such notice, if such notice is not received prior to
such time on the day of receipt; provided that Borrower may, subject to
the conditions to borrowing set forth herein, request in accordance with Section 2.03
that such payment be financed with an CB Floating Rate Revolving Borrowing in
an equivalent amount and, to the extent so financed, Borrower’s obligation to
make such payment shall be discharged and replaced by the resulting CB Floating
Rate Revolving Borrowing.

 

(e)                                  Obligations
Absolute.  Borrower’s
obligation to reimburse LC Disbursements as provided in paragraph (d) of
this Section shall be absolute, unconditional and irrevocable, and shall
be performed strictly in accordance with the terms of this Agreement under any
and all circumstances whatsoever and irrespective of (i) any lack of
validity or enforceability of any Letter of Credit or this Agreement, or any
term or provision therein, (ii) any draft or other 

 

24

 

document presented under a
Letter of Credit proving to be forged, fraudulent or invalid in any respect or
any statement therein being untrue or inaccurate in any respect, (iii) payment
by Lender under a Letter of Credit against presentation of a draft or other
document that does not comply with the terms of such Letter of Credit, or (iv) any
other event or circumstance whatsoever, whether or not similar to any of the
foregoing, that might, but for the provisions of this Section, constitute a
legal or equitable discharge of, or provide a right of setoff against, Borrower’s
obligations hereunder.  Neither Lender
nor any of its Related Parties, shall have any liability or responsibility by
reason of or in connection with the issuance or transfer of any Letter of
Credit or any payment or failure to make any payment thereunder (irrespective
of any of the circumstances referred to in the preceding sentence), or any
error, omission, interruption, loss or delay in transmission or delivery of any
draft, notice or other communication under or relating to any Letter of Credit
(including any document required to make a drawing thereunder), any error in
interpretation of technical terms or any consequence arising from causes beyond
the control of Lender; provided that the foregoing shall not be
construed to excuse Lender from liability to Borrower to the extent of any
direct damages (as opposed to consequential damages, claims in respect of which
are hereby waived by Borrower to the extent permitted by applicable law)
suffered by Borrower that are caused by Lender’s failure to exercise care when
determining whether drafts and other documents presented under a Letter of
Credit comply with the terms thereof. 
The parties hereto expressly agree that, in the absence of gross negligence
or willful misconduct on the part of Lender (as finally determined by a court
of competent jurisdiction), Lender shall be deemed to have exercised care in
each such determination.  In furtherance
of the foregoing and without limiting the generality thereof, the parties agree
that, with respect to documents presented which appear on their face to be in
substantial compliance with the terms of a Letter of Credit, Lender may, in its
sole discretion, either accept and make payment upon such documents without responsibility
for further investigation, regardless of any notice or information to the
contrary, or refuse to accept and make payment upon such documents if such
documents are not in strict compliance with the terms of such Letter of Credit.

 

(f)                                    Disbursement
Procedures.  Lender
shall, promptly following its receipt thereof, examine all documents purporting
to represent a demand for payment under a Letter of Credit.  Lender shall promptly notify Borrower by
telephone (confirmed by facsimile) of such demand for payment and whether
Lender has made or will make an LC Disbursement thereunder; provided that any
failure to give or delay in giving such notice shall not relieve Borrower of
its obligation to reimburse Lender with respect to any such LC Disbursement.

 

(g)                                 Interim
Interest.  If Lender
shall make any LC Disbursement, then, unless Borrower shall reimburse such LC
Disbursement in full on the date such LC Disbursement is made, the unpaid
amount thereof shall bear interest, for each day from and including the date
such LC Disbursement is made to but excluding the date that Borrower reimburses
such LC Disbursement, at the rate per annum then applicable to CB Floating Rate
Revolving Loans; provided that, if Borrower fails to reimburse such LC
Disbursement when due pursuant to paragraph (e) of this Section, then Section 2.12(d) shall
apply.  Interest accrued pursuant to this
paragraph shall be for the account of Lender.

 

(h)                                 Cash
Collateralization.  If any
Event of Default shall occur and be continuing, on the Business Day that
Borrower receives notice from Lender demanding the deposit of cash collateral
pursuant to this paragraph, Borrower shall deposit in an account with 

 

25

 

Lender, in the name and for
the benefit of Lender (the “LC Collateral Account”), an amount in cash
equal to 105% of the LC Exposure as of such date plus accrued and unpaid
interest thereon; provided that the obligation to deposit such cash
collateral shall become effective immediately, and such deposit shall become
immediately due and payable, without demand or other notice of any kind, upon
the occurrence of any Event of Default with respect to Borrower described in
clause (h) or (i) of Article VII.  Such deposit shall be held by Lender as collateral
for the payment and performance of the Secured Obligations.  Lender shall have exclusive dominion and
control, including the exclusive right of withdrawal, over such account and
Borrower hereby grants Lender a security interest in the LC Collateral Account.  Other than any interest earned on the
investment of such deposits, which investments shall be made at the option and
sole discretion of Lender and at Borrower’s risk and expense, such deposits
shall not bear interest.  Interest or
profits, if any, on such investments shall accumulate in such account.  Moneys in such account shall be applied by
Lender for LC Disbursements for which it has not been reimbursed and, to the
extent not so applied, shall be held for the satisfaction of the reimbursement obligations
of Borrower for the LC Exposure at such time or, if the maturity of the Loans
has been accelerated, be applied to satisfy other Secured Obligations.  If Borrower is required to provide an amount
of cash collateral hereunder as a result of the occurrence of an Event of
Default, such amount (to the extent not applied as aforesaid) shall be returned
to Borrower within three Business Days after all such Defaults have been cured
or waived.

 

SECTION 2.06.  Funding of Borrowings.  Lender shall make each Loan to be made by it
hereunder on the proposed date thereof available to Borrower by promptly
crediting the amounts in immediately available funds, to the Funding Account;
provided that CB Floating Rate Revolving Loans made to finance the reimbursement
of an LC Disbursement as provided in Section 2.05(e) or a Protective
Advance shall be retained by Lender.

 

SECTION 2.07.  Interest Elections.  (a)  Each Revolving Borrowing initially
shall bear interest at the rate specified in the applicable Borrowing Request
and, in the case of a Eurodollar Revolving Borrowing, shall have an initial
Interest Period as specified in such Borrowing Request.  Thereafter, Borrower may elect to convert
such Borrowing to a different interest rate or to continue such Borrowing and,
in the case of a Eurodollar Revolving Borrowing, may elect Interest Periods
therefor, all as provided in this Section. 
Borrower may elect different options with respect to different portions
of the affected Borrowing, and the Loans comprising each such portion shall be
considered a separate Borrowing.  This Section shall
not apply to or Protective Advances, which may not be converted or continued.

 

(b)                                 To make an
election pursuant to this Section, Borrower shall notify Lender of such
election by telephone by the time that a Borrowing Request would be required
under Section 2.03 if Borrower were requesting a Revolving Borrowing
bearing interest at the rate resulting from such election to be made on the
effective date of such election.  Each
such telephonic Interest Election Request shall be irrevocable and shall be
confirmed promptly by hand delivery or facsimile to Lender of a written
Interest Election Request in a form approved by Lender and signed by Borrower.

 

(c)                                  Each telephonic
and written Interest Election Request shall specify the following information
in compliance with Section 2.02:

 

26

 

(i)                                     the Borrowing
to which such Interest Election Request applies and, if different options are
being elected with respect to different portions thereof, the portions thereof
to be allocated to each resulting Borrowing (in which case the information to
be specified pursuant to clauses (iii) and (iv) below shall be
specified for each resulting Borrowing);

 

(ii)                                  the effective
date of the election made pursuant to such Interest Election Request, which
shall be a Business Day;

 

(iii)                               whether the
resulting Borrowing is to be an CB Floating Rate Borrowing or a Eurodollar
Borrowing; and

 

(iv)                              if the
resulting Borrowing is a Eurodollar Borrowing, the Interest Period to be
applicable thereto after giving effect to such election, which shall be a
period contemplated by the definition of the term “Interest Period”.

 

If any such Interest
Election Request requests a Eurodollar Borrowing but does not specify an
Interest Period, then Borrower shall be deemed to have selected an Interest
Period of one month’s duration.

 

(d)                                 If Borrower
fails to deliver a timely Interest Election Request with respect to a
Eurodollar Revolving Borrowing prior to the end of the Interest Period
applicable thereto, then, unless such Borrowing is repaid as provided herein,
at the end of such Interest Period such Borrowing shall be converted to an CB
Floating Rate Borrowing.  Notwithstanding
any contrary provision hereof, if an Event of Default has occurred and is
continuing and Lender so notifies Borrower, then, so long as an Event of
Default is continuing (i) no outstanding Revolving Borrowing may be
converted to or continued as a Eurodollar Borrowing and (ii) unless
repaid, each Eurodollar Revolving Borrowing shall be converted to an CB
Floating Rate Borrowing at the end of the Interest Period applicable thereto.

 

SECTION 2.08.  Voluntary Reduction or Termination of
Commitment.  (a)  Unless
previously terminated, the Revolving Commitment shall terminate on the Maturity
Date.

 

(b)                                 Borrower may at
any time terminate the Revolving Commitment upon (i) the payment in full
of all outstanding Loans, together with accrued and unpaid interest thereon and
on any Letters of Credit, (ii) the cancellation and return of all
outstanding Letters of Credit (or alternatively, with respect to each such
Letter of Credit, the furnishing to Lender of a cash deposit equal to 105% of
the LC Exposure as of such date), (iii) the payment in full of the accrued
and unpaid fees, and (iv) the payment in full of all reimbursable expenses
and other Obligations together with accrued and unpaid interest thereon.

 

(c)                                  Borrower shall
notify Lender of any election to terminate the Revolving Commitment under
paragraph (b)  of this Section at least five Business Days prior to
the effective date of such termination, specifying such election and the
effective date thereof.  Each notice
delivered by Borrower pursuant to this Section shall be irrevocable; provided
that a notice of termination of the Revolving Commitment delivered by Borrower
may state that such notice is 

 

27

 

conditioned upon the
effectiveness of other credit facilities, in which case such notice may be
revoked by Borrower (by notice to Lender on or prior to the specified effective
date) if such condition is not satisfied. 
Any termination of the Revolving Commitment shall be permanent.

 

(d)                                 Borrower may
permanently reduce the Revolving Commitment, upon at least 5 days’ prior
written notice to Lender, which notice shall specify the amount of the
reduction and shall be irrevocable once given. 
Each reduction shall be in a minimum amount of $500,000, or an increment
of $100,000 in excess thereof.  Borrower
may not reduce the Revolving Commitment to less than $5,000,000.

 

SECTION 2.09.  Repayment and Amortization of Loans;
Evidence of Debt.  (a) Borrower
hereby unconditionally promises to pay (i) to Lender for its account the
then unpaid principal amount of each Revolving Loan on the Maturity Date, and (ii) to
Lender the then unpaid amount of each Protective Advance on the earlier of the
Maturity Date and demand by Lender.

 

(b)                                 Lender shall
maintain in accordance with its usual practice an account or accounts
evidencing the indebtedness of Borrower to Lender resulting from each Loan made
by Lender, including the amounts of principal and interest payable and paid to
Lender from time to time hereunder.

 

(c)                                  Lender shall
maintain accounts in which it shall record (i) the amount of each Loan
made hereunder, the interest rate applicable thereto and the Interest Period
applicable thereto, (ii) the amount of any principal or interest due and
payable or to become due and payable from Borrower to Lender hereunder and (iii) the
amount of any sum received by Lender hereunder.

 

(d)                                 The entries
made in the accounts maintained pursuant to paragraph (c) or (d) of
this Section shall be prima  facie evidence of the existence
and amounts of the obligations recorded therein; provided that the
failure of Lender to maintain such accounts or any error therein shall not in
any manner affect the obligation of Borrower to repay the Loans in accordance
with the terms of this Agreement.

 

(e)                                  Lender may
request that Loans made by it be evidenced by a promissory note.  In such event, Borrower shall prepare,
execute and deliver to Lender a promissory note payable to the order of Lender
(or, if requested by Lender, to Lender and its registered assigns) and in a
form approved by Lender.  Thereafter, the
Loans evidenced by such promissory note and interest thereon shall at all times
(including after assignment pursuant to Section 8.04) be represented by
one or more promissory notes in such form payable to the order of the payee
named therein (or, if such promissory note is a registered note, to such payee
and its registered assigns).

 

SECTION 2.10.  Prepayment of Loans.  (a)  Borrower shall have the right at
any time and from time to time to prepay any Borrowing in whole or in part,
subject to prior notice in accordance with paragraph (e) of this Section.

 

28

 

(b)                                 In the event
and on such occasion that the Revolving Exposure exceeds the lesser of (a) the
Revolving Commitment or (b) the Borrowing Base, Borrower shall prepay the
Revolving Loans and LC Exposure in an aggregate amount equal to such excess.

 

(c)                                  In the event
and on each occasion that any Net Proceeds are received by or on behalf of
Borrower in respect of any Prepayment Event, Borrower shall, immediately after
such Net Proceeds are received by Borrower, prepay the Obligations as set forth
in Section 2.10(d) below in an aggregate amount equal to 100% of such
Net Proceeds, provided that, in the case of any event described in
clause (a) or (b) of the definition of the term “Prepayment Event”,
if Borrower shall deliver to Lender a certificate of a Financial Officer to the
effect that Borrower intends to apply the Net Proceeds from such event (or a
portion thereof specified in such certificate), within 120 days after receipt
of such Net Proceeds, to acquire (or replace or rebuild) real property,
equipment or other tangible assets (excluding inventory) to be used in the
business of Borrower, and certifying that no Default has occurred and is
continuing, then no prepayment shall be required pursuant to this paragraph in
respect of the Net Proceeds specified in such certificate; provided that
to the extent of any such Net Proceeds therefrom that have not been so applied
by the end of such 90-day period, at which time a prepayment shall be required
in an amount equal to such Net Proceeds that have not been so applied; provided,
further that Borrower shall not be permitted to make elections to use Net
Proceeds to acquire (or replace or rebuild) real property, equipment or other
tangible assets (excluding inventory) with respect to Net Proceeds in any
fiscal year in an aggregate amount in excess of $100,000.  Notwithstanding the foregoing, in the event
that any prepayment pursuant to this Section 2.10(c) would cause
Borrower to incur liability for breakfunding payments pursuant to Section 2.15,
Borrower may defer making such prepayment until the end of the relevant
Interest Period provided
that the funds equal to the amount required to make such prepayment are held in
an account of the Borrower with the Lender until such time.

 

(d)                                 All such
amounts pursuant to Section 2.10(c) (as to any insurance or
condemnation proceeds, to the extent they arise from casualties or losses to
Equipment, Fixtures and real property) shall be applied, first to prepay
any Protective Advances that may be outstanding, pro rata and second to
prepay the Revolving Loans without a corresponding reduction in the Revolving
Commitment and to cash collateralize outstanding LC Exposure.  All such amounts pursuant to Section 2.10(c) (as
to any insurance or condemnation proceeds, to the extent they arise from
casualties or losses to cash or Inventory) shall be applied, first to
prepay any Protective Advances that may be outstanding, pro rata, and second
to prepay the Revolving Loans without a corresponding reduction in the
Revolving Commitment and to cash collateralize outstanding LC Exposure.  If the precise amount of insurance or
condemnation proceeds allocable to Inventory as compared to Equipment, Fixtures
and real property is not otherwise determined, the allocation and application
of those proceeds shall be determined by Lender, in its Permitted Discretion.

 

(e)                                  Borrower shall
notify Lender by telephone (confirmed by facsimile) of any prepayment hereunder
(i) in the case of prepayment of a Eurodollar Revolving Borrowing, not
later than 10:00 a.m., Milwaukee time, three Business Days before the date
of prepayment, or (ii) in the case of prepayment of an CB Floating Rate
Revolving Borrowing, not later than 10:00 a.m., Milwaukee time, one
Business Day before the date of prepayment. 
Each such notice shall be irrevocable and shall specify the prepayment
date and the principal amount of each Borrowing 

 

29

 

or portion thereof to be
prepaid; provided that, if a notice of prepayment is given in connection
with a conditional notice of termination of the Revolving Commitment as
contemplated by Section 2.08, then such notice of prepayment may be
revoked if such notice of termination is revoked in accordance with Section 2.08.  Each partial prepayment of any Revolving
Borrowing shall be in an amount that would be permitted in the case of an
advance of a Revolving Borrowing bearing interest at the same rate as provided
in Section 2.02.  Prepayments shall
be accompanied by accrued interest to the extent required by Section 2.12.

 

SECTION 2.11.  Fees. 
(a)  Borrower agrees to pay to Lender an commitment fee, which
shall accrue at the Applicable Rate on the average daily amount of the
Available Revolving Commitment of Lender during the period from and including
the Effective Date to but excluding the date on which Lender’s Revolving
Commitment terminates.  Accrued
commitment fees shall be payable in arrears on the last day of each calendar
month and on the date on which the Revolving Commitment terminates, commencing
on the first such date to occur after the date hereof.  All commitment fees shall be computed on the
basis of a year of 360 days and shall be payable for the actual number of days
elapsed.

 

(b)                                 Borrower agrees
to pay to Lender a Letter of Credit fee, which shall accrue at the same
Applicable Rate used to determine the interest rate applicable to Eurodollar
Revolving Loans on the average daily amount of Lender’s LC Exposure during the
period from and including the Effective Date to but excluding the later of the
date on which Lender’s Revolving Commitment terminates and the date on which
the Revolving Lender ceases to have any LC Exposure, as well as Lender’s
standard fees with respect to the issuance, amendment, renewal or extension of
any Letter of Credit or processing of drawings thereunder.  All such fees shall be payable on the date on
which the Revolving Commitment terminates and any such fees accruing after the
date on which the Revolving Commitment terminates shall be payable on
demand.  Any other fees payable to Lender
pursuant to this paragraph shall be payable within 10 days after demand.

 

(c)                                  All fees
payable hereunder shall be paid on the dates due, in immediately available
funds, to Lender.  Fees paid shall not be
refundable under any circumstances.

 

SECTION 2.12.    Interest. (a) The Loans
comprising each CB Floating Rate Borrowing shall bear interest at the CB
Floating Rate plus the Applicable Rate.

 

(b)                                 The Loans
comprising each Eurodollar Borrowing shall bear interest at the Adjusted LIBO
Rate for the Interest Period in effect for such Borrowing plus the Applicable
Rate.

 

(c)                                  Each Protective
Advance shall bear interest at the CB Floating Rate plus the Applicable Rate
for Revolving Loans plus 2%.

 

(d)                                 Notwithstanding
the foregoing, during the occurrence and continuance of an Event of Default,
Lender may, at its option, by notice to Borrower, declare that (i) all
Loans shall bear interest at 2% plus the rate otherwise applicable to such
Loans as provided in the preceding paragraphs of this Section or (ii) in
the case of any other amount outstanding 

 

30

 

hereunder, such amount shall
accrue at 2% plus the rate applicable to such fee or other obligation as
provided hereunder.

 

(e)                                  Accrued
interest on each Loan (for CB Floating Rate Loans, accrued through the last day
of the prior calendar month) shall be payable in arrears on each Interest
Payment Date for such Loan and upon termination of the Revolving Commitment; provided
that (i) interest accrued pursuant to paragraph (d) of this Section shall
be payable on demand,  (ii) in
the event of any repayment or prepayment of any Loan (other than a prepayment
of an CB Floating Rate Revolving Loan prior to the end of the Availability
Period), accrued interest on the principal amount repaid or prepaid shall be
payable on the date of such repayment or prepayment and (iii) in the event
of any conversion of any Eurodollar Loan prior to the end of the current
Interest Period therefor, accrued interest on such Loan shall be payable on the
effective date of such conversion.

 

(f)                                    All interest
hereunder shall be computed on the basis of a year of 360 days, except that
interest computed by reference to the CB Floating Rate at times when the CB
Floating Rate is based on the Prime Rate shall be computed on the basis of a
year of 365 days (or 366 days in a leap year), and in each case shall be
payable for the actual number of days elapsed. 
The applicable CB Floating Rate, Adjusted LIBO Rate or LIBO Rate shall
be determined by Lender, and such determination shall be conclusive absent
manifest error.

 

SECTION 2.13.  Alternate Rate of Interest.  If prior to the commencement of any Interest
Period for a Eurodollar Borrowing:

 

(a)                                  Lender
determines (which determination shall be conclusive absent manifest error) that
adequate and reasonable means do not exist for ascertaining the Adjusted LIBO
Rate or the LIBO Rate, as applicable, for such Interest Period; or

 

(b)                                 Lender
determines the Adjusted LIBO Rate or the LIBO Rate, as applicable, for such
Interest Period will not adequately and fairly reflect the cost to Lender of
making or maintaining their Loans (or its Loan) included in such Borrowing for
such Interest Period;

 

then Lender shall give
notice thereof to Borrower by telephone or facsimile as promptly as practicable
thereafter and, until Lender notifies Borrower that the circumstances giving
rise to such notice no longer exist, (i) any Interest Election Request
that requests the conversion of any Revolving Borrowing to, or continuation of
any Revolving Borrowing as, a Eurodollar Borrowing shall be ineffective, and (ii) if
any Borrowing Request requests a Eurodollar Revolving Borrowing, such Borrowing
shall be made as an CB Floating Rate Borrowing.

 

SECTION 2.14.  Increased Costs.  (a)  If any Change in Law shall:

 

(i)                                     impose, modify
or deem applicable any reserve, special deposit or similar requirement against
assets of, deposits with or for the account of, or credit extended by, Lender
(except any such reserve requirement reflected in the Adjusted LIBO Rate); or

 

31

 

(ii)                                  impose on
Lender or the London interbank market any other condition affecting this
Agreement or Eurodollar Loans made by such Lender or any Letter of Credit or
participation therein;

 

and the result of any of the
foregoing shall be to increase the cost to such Lender of making or maintaining
any Eurodollar Loan (or of maintaining its obligation to make any such Loan) or
to increase the cost to Lender of participating in, issuing or maintaining any
Letter of Credit or to reduce the amount of any sum received or receivable by
Lender hereunder (whether of principal, interest or otherwise), then Borrower
will pay to Lender such additional amount or amounts as will compensate Lender
for such additional costs incurred or reduction suffered.

 

(b)                                 If Lender
determines that any Change in Law regarding capital requirements has or would
have the effect of reducing the rate of return on Lender’s capital or on the
capital of Lender’s holding company, as a consequence of this Agreement or the
Loans made by, or Letters of Credit issued by Lender to a level below that
which Lender or Lender’s holding company could have achieved but for such
Change in Law (taking into consideration Lender’s policies and the policies of
Lender’s holding company with respect to capital adequacy), then from time to
time Borrower will pay to Lender such additional amount or amounts as will
compensate Lender or Lender’s holding company for any such reduction suffered.

 

(c)                                  A certificate
of Lender setting forth the amount or amounts necessary to compensate Lender or
its holding company, as the case may be, as specified in paragraph (a) or (b) of
this Section shall be delivered to Borrower and shall be conclusive absent
manifest error.  Borrower shall pay
Lender the amount shown as due on any such certificate within 10 days after
receipt thereof.

 

(d)                                 Failure or
delay on the part of Lender to demand compensation pursuant to this Section shall
not constitute a waiver of Lender’s right to demand such compensation; provided
that Borrower shall not be required to compensate a Lender pursuant to this Section for
any increased costs or reductions incurred more than 150 days prior to the date
that Lender notifies Borrower of the Change in Law giving rise to such
increased costs or reductions and of Lender’s intention to claim compensation
therefor; provided further that, if the Change in Law giving rise to
such increased costs or reductions is retroactive, then the 150-day period
referred to above shall be extended to include the period of retroactive effect
thereof.

 

SECTION 2.15.  Break Funding Payments.  In the event of (a) the payment of any
principal of any Eurodollar Loan other than on the last day of an Interest
Period applicable thereto (including as a result of an Event of Default), (b) the
conversion of any Eurodollar Loan other than on the last day of the Interest
Period applicable thereto or (c) the failure to borrow, convert, continue
or prepay any Eurodollar Loan on the date specified in any notice delivered
pursuant hereto (regardless of whether such notice may be revoked under Section 2.08(c) and
is revoked in accordance therewith), then, in any such event, Borrower shall
compensate Lender for the loss, cost and expense attributable to such
event.  In the case of a Eurodollar Loan,
such loss, cost or expense to Lender shall be deemed to include an amount
determined by Lender to be the excess, if any, of (i) the amount of
interest which would have accrued on the principal amount of such Loan had such
event not occurred, at the Adjusted LIBO Rate that would have been applicable
to such Loan, for the period from the date of such event to the last day of the
then 

 

32

 

current
Interest Period therefor (or, in the case of a failure to borrow, convert or
continue, for the period that would have been the Interest Period for such
Loan), over (ii) the amount of interest which would accrue on such
principal amount for such period at the interest rate which Lender would bid
were it to bid, at the commencement of such period, for dollar deposits of a
comparable amount and period from other banks in the eurodollar market.  A certificate of Lender setting forth any
amount or amounts that Lender is entitled to receive pursuant to this Section shall
be delivered to Borrower and shall be conclusive absent manifest error.  Borrower shall pay Lender the amount shown as
due on any such certificate within 10 days after receipt thereof.

 

SECTION 2.16.  Taxes. 
(a)  Any and all payments by or on account of any obligation of
Borrower hereunder shall be made free and clear of and without deduction for
any Indemnified Taxes or Other Taxes; provided that if Borrower shall be
required to deduct any Indemnified Taxes or Other Taxes from such payments,
then (i) the sum payable shall be increased as necessary so that after
making all required deductions (including deductions applicable to additional
sums payable under this Section) Lender (as the case may be) receives an amount
equal to the sum it would have received had no such deductions been made, (ii) Borrower
shall make such deductions and (iii) Borrower shall pay the full amount
deducted to the relevant Governmental Authority in accordance with applicable
law.

 

(b)                                 In addition,
Borrower shall pay any Other Taxes to the relevant Governmental Authority in
accordance with applicable law.

 

(c)                                  Borrower shall
indemnify Lender within 10 days after written demand therefor, for the full
amount of any Indemnified Taxes or Other Taxes paid by Lender on or with
respect to any payment by or on account of any obligation of Borrower hereunder
(including Indemnified Taxes or Other Taxes imposed or asserted on or
attributable to amounts payable under this Section) and any penalties, interest
and reasonable expenses arising therefrom or with respect thereto, whether or
not such Indemnified Taxes or Other Taxes were correctly or legally imposed or
asserted by the relevant Governmental Authority.  A certificate as to the amount of such
payment or liability delivered to Borrower by Lender shall be conclusive absent
manifest error.

 

(d)                                 As soon as
practicable after any payment of Indemnified Taxes or Other Taxes by Borrower
to a Governmental Authority, Borrower shall deliver to Lender the original or a
certified copy of a receipt issued by such Governmental Authority evidencing
such payment, a copy of the return reporting such payment or other evidence of
such payment reasonably satisfactory to Lender.

 

(e)                                  If Lender
determines, in its sole discretion, that it has received a refund of any Taxes
or Other Taxes as to which it has been indemnified by Borrower or with respect
to which Borrower has paid additional amounts pursuant to this Section 2.16,
it shall pay over such refund to Borrower (but only to the extent of indemnity
payments made, or additional amounts paid, by Borrower under this Section 2.16
with respect to the Taxes or Other Taxes giving rise to such refund), net of
all out-of-pocket expenses of Lender and without interest (other than any
interest paid by the relevant Governmental Authority with respect to such
refund); provided, that Borrower, upon the request of Lender, agrees to repay
the amount paid over to Borrower (plus 

 

33

 

any penalties, interest or
other charges imposed by the relevant Governmental Authority) to Lender in the
event Lender is required to repay such refund to such Governmental Authority.
This Section shall not be construed to require Lender to make available
its tax returns (or any other information relating to its taxes which it deems
confidential) to Borrower or any other Person.

 

SECTION 2.17.  Payments Generally; Allocation of
Proceeds; Sharing of Set-offs.  (a) 
Borrower shall make each payment required to be made by it hereunder (whether
of principal, interest, fees or reimbursement of LC Disbursements, or of
amounts payable under Section 2.14, 2.15 or 2.16, or otherwise) prior to
2:00 p.m., Milwaukee time, on the date when due, in immediately available
funds, without set-off or counterclaim. 
Any amounts received after such time on any date may, in the discretion
of Lender, be deemed to have been received on the next succeeding Business Day
for purposes of calculating interest thereon. 
All such payments shall be made to Lender by wire transfer to its
account number 9008104359, or such other account as may be designated by Lender
in writing from time to time.  If any
payment hereunder shall be due on a day that is not a Business Day, the date for
payment shall be extended to the next succeeding Business Day, and, in the case
of any payment accruing interest, interest thereon shall be payable for the
period of such extension.  All payments
hereunder shall be made in dollars.

 

(b)                                 Any proceeds of
Collateral received by Lender (i) not constituting either (a) a
specific payment of principal, interest, fees or other sum payable under the
Loan Documents (which shall be applied as specified by Borrower), or (b) a
mandatory prepayment (which shall be applied in accordance with Section 2.10)
or (ii) after an Event of Default has occurred and is continuing and
Lender so elects such funds shall be applied ratably first, to pay any
fees, indemnities, or expense reimbursements including amounts then due to Lender
from Borrower, second, to pay interest due in respect of the Protective
Advances, third, to pay the principal of the Protective Advances, fourth,
to pay interest then due and payable on the Loans (other than the Protective
Advances), fifth, to prepay principal on the Loans (other than the
Protective Advances) and unreimbursed LC Disbursements, sixth, to pay an
amount to Lender equal to one hundred five percent (105%) of the aggregate
undrawn face amount of all outstanding Letters of Credit and the aggregate
amount of any unpaid LC Disbursements, to be held as cash collateral for such
Obligations, seventh, to payment of any amounts owing with respect to
Banking Services and Swap Obligations, and eighth, to the payment of any
other Secured Obligation due to Lender by Borrower, and ninth, to
Borrower or such other party as may be legally entitled thereto.
Notwithstanding anything to the contrary contained in this Agreement, unless so
directed by Borrower, or unless a Default is in existence, Lender shall not apply
any payment which it receives to any Eurodollar Loan, except (a) on the
expiration date of the Interest Period applicable to any such Eurodollar Loan
or (b) in the event, and only to the extent, that there are no outstanding
CB Floating Rate Loans and, in any such event, Borrower shall pay the break
funding payment required in accordance with Section 2.15. Lender shall
have the continuing and exclusive right to apply and reverse and reapply any
and all such proceeds and payments to any portion of the Secured Obligations.

 

(c)                                  At the election
of Lender, all payments of principal, interest, LC Disbursements, fees,
premiums, reimbursable expenses (including, without limitation, all
reimbursement for fees and expenses pursuant to Section 8.03), and other sums
payable under 

 

34

 

the Loan Documents, may be
paid from the proceeds of Borrowings made hereunder whether made following a
request by Borrower pursuant to Section 2.03 or a deemed request as
provided in this Section or, upon the occurrence and continuance of an
Event of Default, may be deducted from any deposit account of Borrower
maintained with Lender.  Borrower hereby
irrevocably authorizes (i) Lender to make a Borrowing for the purpose of
paying each payment of principal, interest and fees as it becomes due hereunder
or any other amount due under the Loan Documents and agrees that all such
amounts charged shall constitute Loans (but such a Borrowing may only
constitute a Protective Advance if it is to reimburse costs, fees and expenses
as described in and in accordance with Section 8.03) and that all such
Borrowings shall be deemed to have been requested pursuant to Sections 2.03 or
2.04, as applicable and (ii) upon the occurrence and continuance of an Event
of Default, Lender to charge any deposit account of Borrower maintained with
Lender for each payment of principal, interest and fees as it becomes due
hereunder or any other amount due under the Loan Documents.

 

SECTION 2.18.  Indemnity for Returned Payments.  If after receipt of any payment which is
applied to the payment of all or any part of the Obligations, Lender is for any
reason compelled to surrender such payment or proceeds to any Person because
such payment or application of proceeds is invalidated, declared fraudulent,
set aside, determined to be void or voidable as a preference, impermissible
setoff, or a diversion of trust funds, or for any other reason, then the
Obligations or part thereof intended to be satisfied shall be revived and continued
and this Agreement shall continue in full force as if such payment or proceeds
had not been received by Lender and Borrower shall be liable to pay to
Lender.  The provisions of this Section 2.18
shall be and remain effective notwithstanding any contrary action which may
have been taken by Lender in reliance upon such payment or application of
proceeds.  The provisions of this Section 2.18
shall survive the termination of this Agreement.

 

ARTICLE III

 

Representations and Warranties

 

Borrower represents and
warrants to Lender that:

 

SECTION 3.01.  Organization; Powers.  Borrower and each of its Subsidiaries is duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its organization, has all requisite power and authority to
carry on its business as now conducted and is qualified to do business in, and
is in good standing in, every jurisdiction where such qualification is
required.

 

SECTION 3.02.  Authorization; Enforceability.  The Transactions are within Borrower’s corporate
powers and have been duly authorized by all necessary corporate and, if
required, stockholder action.  The Loan
Documents have been duly executed and delivered by Borrower and constitute a
legal, valid and binding obligation of Borrower, enforceable in accordance with
its terms, subject to applicable bankruptcy, insolvency, reorganization,
moratorium or other laws affecting creditors’ rights generally and subject to
general principles of equity, regardless of whether considered in a proceeding
in equity or at law.

 

35

 

SECTION 3.03.  Governmental Approvals; No Conflicts.  The Transactions (a) do not require any
consent or approval of, registration or filing with, or any other action by,
any Governmental Authority, except such as have been obtained or made and are
in full force and effect and except for filings necessary to perfect Liens
created pursuant to the Loan Documents, (b) will not violate any
Requirement of Law applicable to Borrower or any of its Subsidiaries, (c) will
not violate or result in a default under any indenture, agreement or other
instrument binding upon Borrower or any of its Subsidiaries or its assets, or
give rise to a right thereunder to require any payment to be made by Borrower or
any of its Subsidiaries, and (d) will not result in the creation or
imposition of any Lien on any asset of Borrower or any of its Subsidiaries,
except Liens created pursuant to the Loan Documents.

 

SECTION 3.04.  Financial Condition; No Material Adverse Change.  (a)  Borrower has heretofore furnished
to Lender (i) its restated consolidated balance sheet for the fiscal year
ended June 30, 2007, (ii) its restated consolidated balance sheet and
statements of income, stockholders equity and cash flows as of and for the
fiscal years ended June 30, 2008 and June 30, 2009, and (iii) its
restated consolidated balance sheet and statements of income, stockholders
equity and cash flows as of and for the fiscal quarter and the portion of the
fiscal year ended March 31, 2010, certified by its chief financial
officer.  Such financial statements
present fairly, in all material respects, the financial position and results of
operations and cash flows of Borrower and its consolidated Subsidiaries as of
such dates and for such periods in accordance with GAAP, subject to year-end
audit adjustments and the absence of footnotes in the case of the statements
referred to in clause (ii) above.

 

(b)                                 No event,
change or condition has occurred that has had, or could reasonably be expected
to have, a Material Adverse Effect, since March 31, 2010.

 

SECTION 3.05.  Properties.  (a)  As of the date of this Agreement, Schedule
3.05 sets forth the address of each parcel of real property that is owned
or leased by Borrower.  Each of such
leases and subleases is valid and enforceable in accordance with its terms and
is in full force and effect, and no material default by any party to any such
lease or sublease exists.  Borrower and
each of its Subsidiaries has good and indefeasible title to, or valid leasehold
interests in, all its real and personal property, free of all Liens other than
those permitted by Section 6.02.

 

(b)                                 Borrower and
each of its Subsidiaries owns, or is licensed to use, all trademarks,
tradenames, copyrights, patents and other intellectual property necessary to
its business as currently conducted (except where such a failure to own, or
maintain a license to use, could not reasonably be expected to have a Material
Adverse Effect), and the use thereof by Borrower and its Subsidiaries does not
infringe in any material respect upon the rights of any other Person, and the
rights of Borrower and its Subsidiaries thereto are not subject to any
licensing agreement or similar arrangement other than licenses granted to
distributors in the ordinary course of Borrower’s business.

 

SECTION 3.06.  Litigation and Environmental Matters.  (a) There are no actions, suits or
proceedings by or before any arbitrator or Governmental Authority pending
against or, to the knowledge of Borrower, threatened against or affecting
Borrower or any of its Subsidiaries (i) as to which there is a reasonable
possibility of an adverse determination and that, if adversely 

 

36

 

determined,
could reasonably be expected, individually or in the aggregate, to result in a
Material Adverse Effect (other than the Disclosed Matters) or (ii) that
involve this Agreement or the Transactions, except as listed on Schedule
3.06.

 

(b)                                 Except for the
Disclosed Matters (i) neither Borrower nor any of its Subsidiaries has
received notice of any claim with respect to any Environmental Liability or
knows of any basis for any Environmental Liability and (ii) and except
with respect to any other matters that, individually or in the aggregate, could
not reasonably be expected to result in a Material Adverse Effect, neither
Borrower nor any of its Subsidiaries (1) has failed to comply with any
Environmental Law or to obtain, maintain or comply with any permit, license or
other approval required under any Environmental Law or (2) has become
subject to any Environmental Liability.

 

(c)                                  Since the date
of this Agreement, there has been no change in the status of the Disclosed
Matters that, individually or in the aggregate, has resulted in, or materially
increased the likelihood of, a Material Adverse Effect.

 

SECTION 3.07.  Compliance with Laws and Agreements.  Borrower and each of its Subsidiaries is in
compliance with all Requirements of Law applicable to it or its property and
all indentures, agreements and other instruments binding upon it or its
property, except where the failure to do so, individually or in the aggregate,
could not reasonably be expected to result in a Material Adverse Effect.  No Default has occurred and is continuing.

 

SECTION 3.08.  Investment Company Status.  Neither Borrower nor any of its Subsidiaries
is an “investment company” as defined in, or subject to regulation under, the
Investment Company Act of 1940.

 

SECTION 3.09.  Taxes. 
Borrower and each of its Subsidiaries has timely filed or caused to be
filed all Tax returns and reports required to have been filed and has paid or
caused to be paid all Taxes required to have been paid by it, except Taxes in
an aggregate amount not in excess of $20,000 and Taxes that are being contested
in good faith by appropriate proceedings and for which Borrower or such
Subsidiary, as applicable, has set aside on its books adequate reserves in
accordance with GAAP.  No tax liens have
been filed and no claims are being asserted with respect to any such taxes.

 

SECTION 3.10.  ERISA. 
No ERISA Event has occurred or is reasonably expected to occur that,
when taken together with all other such ERISA Events for which liability is
reasonably expected to occur, could reasonably be expected to result in a
Material Adverse Effect.

 

SECTION 3.11.  Disclosure.  Borrower has disclosed to Lender all
agreements, instruments and corporate or other restrictions to which it or any
Subsidiary is subject, and all other matters known to it, that, individually or
in the aggregate, could reasonably be expected to result in a Material Adverse
Effect.  None of the reports, financial
statements, certificates or other information furnished by or on behalf of
Borrower or any Subsidiary to Lender in connection with the negotiation of this
Agreement or any other Loan Document (as modified or supplemented by other
information so furnished) contains any material misstatement of fact or 

 

37

 

omits
to state any material fact necessary to make the statements therein, in the
light of the circumstances under which they were made, not misleading; provided
that, with respect to projected financial information, Borrower represents only
that such information was prepared in good faith based upon assumptions
believed to be reasonable at the time delivered and, if such projected
financial information was delivered prior to the Effective Date, as of the
Effective Date; provided, further, that to the extent any such information is
inaccurate or misleading as a result of the Fraud, Borrower has disclosed such
inaccuracies or misleading facts to Lender and such inaccuracy does not result
in a violation of any other provision of this Agreement.

 

SECTION 3.12.  Material Agreements.  All material agreements and contracts to
which Borrower or any Subsidiary is a party or is bound as of the date of this
Agreement are listed on Schedule 3.12. 
Neither Borrower nor any Subsidiary is in default in the performance,
observance or fulfillment of any of the obligations, covenants or conditions
contained in (i) any material agreement to which it is a party or (ii) any
agreement or instrument evidencing or governing Indebtedness.

 

SECTION 3.13.  Solvency.  (a) Immediately after the consummation
of the Transactions to occur on the Effective Date, (i) the fair value of
the assets of Borrower and its consolidated Subsidiaries, taken as a whole, at
a fair valuation, will exceed their debts and liabilities, subordinated,
contingent or otherwise, (ii) the present fair saleable value of the
property of Borrower and its consolidated Subsidiaries, taken as a whole, will
be greater than the amount that will be required to pay the probable liability
of their debts and other liabilities, subordinated, contingent or otherwise, as
such debts and other liabilities become absolute and matured; (iii) Borrower
and each of its Subsidiaries will be able to pay its debts and liabilities,
subordinated, contingent or otherwise, as such debts and liabilities become
absolute and matured, and (iv) Borrower and each of its Subsidiaries will
not have unreasonably small capital with which to conduct the business in which
it is engaged as such business is now conducted and is proposed to be conducted
after the Effective Date.

 

(b)                                 Borrower does not
intend to, and will not permit any of its Subsidiaries to, and does not believe
that it or any of its Subsidiaries will, incur debts beyond its ability to pay
such debts as they mature, taking into account the timing of and amounts of
cash to be received by it or any such Subsidiary and the timing of the amounts
of cash to be payable on or in respect of its Indebtedness or the Indebtedness
of any such Subsidiary.

 

SECTION 3.14.  Insurance.  Schedule 3.14 sets forth a description
of all insurance maintained by or on behalf of Borrower and the Subsidiaries as
of the Effective Date.  As of the
Effective Date, all premiums in respect of such insurance have been paid.  Borrower believes that the insurance
maintained by or on behalf of Borrower and the Subsidiaries is adequate.

 

SECTION 3.15.  Capitalization and Subsidiaries.  Schedule 3.15 sets forth (a) a
correct and complete list of the name and relationship to Borrower of each and
all of Borrower’s Subsidiaries, (b) a true and complete listing of each
class of each of Borrower’s authorized Equity Interests, of which all of such
issued shares are validly issued, outstanding, fully paid and non-assessable,
and (c) the type of entity of Borrower and each of its Subsidiaries.  All of the issued and outstanding Equity
Interests owned by Borrower have been (to the extent such 

 

38

 

concepts
are relevant with respect to such ownership interests) duly authorized and
issued and is fully paid and non-assessable.

 

SECTION 3.16.  Security Interest in Collateral.  The provisions of this Agreement and the
other Loan Documents create legal and valid Liens on all the Collateral in
favor of Lender, and such Liens constitute perfected and continuing Liens on
the Collateral, securing the Obligations, enforceable against Borrower and all
third parties, and having priority over all other Liens on the Collateral
except in the case of (a) Permitted Encumbrances, to the extent any such
Permitted Encumbrances would have priority over the Liens in favor of Lender
pursuant to any applicable law or agreement and (b) Liens perfected only
by possession (including possession of any certificate of title) to the extent
Lender has not obtained or does not maintain possession of such Collateral and
such possession cannot be obtained or restored upon Lender’s request.

 

SECTION 3.17.  Employment Matters.  As of the Effective Date, there are no
strikes, lockouts or slowdowns against Borrower or any Subsidiary pending or,
to the knowledge of Borrower, threatened. 
The hours worked by and payments made to employees of Borrower and the
Subsidiaries have not been in violation of the Fair Labor Standards Act or any
other applicable Federal, state, local or foreign law dealing with such
matters.  All payments due from Borrower
or any Subsidiary, or for which any claim may be made against Borrower or any
Subsidiary, on account of wages and employee health and welfare insurance and
other benefits, have been paid or accrued as a liability on the books of
Borrower or such Subsidiary.

 

ARTICLE IV

 

Conditions

 

SECTION 4.01.  Effective Date.  The obligations of Lender to make Loans and
to issue Letters of Credit hereunder shall not become effective until the date
on which each of the following conditions is satisfied (or waived in accordance
with Section 8.02):

 

(a)                                  Credit
Agreement and Loan Documents.  Lender (or its counsel) shall have received (i) from
each party hereto a counterpart of this Agreement signed on behalf of such
party and (ii) duly executed copies of the Loan Documents and such other
certificates, documents, instruments and agreements as Lender shall reasonably
request in connection with the transactions contemplated by this Agreement and
the other Loan Documents, including a written opinion of counsel to Borrower,
addressed to Lender in form and substance satisfactory to Lender and its
counsel.

 

(b)                                 Financial
Statements and Projections.  Lender shall have received (i) consolidated
financial statements of Borrower for the 2007 through 2009  fiscal
years prepared by the Borrower (provided that the Borrower shall be permitted
to provide a balance sheet only for its 2007 fiscal year), (ii) unaudited
interim consolidated financial statements of Borrower for each fiscal month and
quarter ended after the date of the latest applicable financial statements
delivered pursuant to clause (i) of this paragraph as to which such
financial statements are available, and such financial statements shall not, in
the reasonable judgment of Lender, reflect any material adverse change in the
consolidated financial condition of Borrower, as reflected in 

 

39

 

the financial statements or
projections furnished to Lender and (iii) satisfactory projections through
June 30, 2010.

 

(c)                                  Closing
Certificates; Certified Certificate of Incorporation; Good Standing
Certificates.  Lender
shall have received (i) a certificate of Borrower, dated the Effective
Date and executed by an officer of Borrower, which shall (a) certify the
resolutions of its Board of Directors, authorizing the execution, delivery and
performance of the Loan Documents, (b) identify by name and title and bear
the signatures of the Financial Officers and any other officers of Borrower
authorized to sign the Loan Documents, and (c) contain appropriate
attachments, including the certificate of incorporation of Borrower certified
by the Delaware Secretary of State as of a recent date and a true and correct
copy of its by-laws, and (ii) good standing certificates for Borrower from
the states of Delaware and Wisconsin.

 

(d)                                 No Default
Certificate.  Lender
shall have received a certificate, signed by the chief financial officer of
Borrower, on the initial Borrowing date (i) stating that no Default has
occurred and is continuing, (ii) stating that the representations and
warranties contained in Article III are true and correct as of such date,
and (iii) certifying any other factual matters as may be reasonably
requested by Lender.

 

(e)                                  Fees.  Lender shall have received all fees required
to be paid, and all expenses for which invoices have been presented (including
the reasonable fees and expenses of legal counsel), on or before the Effective
Date.

 

(f)                                    Lien Searches.  Lender shall have received the results of a
recent lien search in each of the jurisdictions where assets of Borrower are
located, and such search shall reveal no liens on any of the assets of Borrower
except for liens permitted by Section 6.02 or discharged on or prior to
the Effective Date pursuant to a pay-off letter or other documentation
satisfactory to Lender.

 

(g)                                 Pay-Off Letter.  Lender shall have received satisfactory
pay-off letters for all existing Indebtedness to be repaid from the proceeds
the initial Borrowing, confirming that all Liens upon any of the property of Borrower
constituting Collateral will be terminated concurrently with such payment and
all letters of credit issued or guaranteed as part of such Indebtedness shall
have been cash collateralized or supported by a Letter of Credit.

 

(h)                                 Borrowing Base
Certificate.  Lender
shall have received a Borrowing Base
Certificate which calculates the Borrowing Base as of March 31, 2010.

 

(i)                                     Filings,
Registrations and Recordings.  Each document (including any Uniform
Commercial Code financing statement) required by the Collateral Documents or
under law or reasonably requested by Lender to be filed, registered or recorded
in order to create in favor of Lender, a perfected Lien on the Collateral
described therein, prior and superior in right to any other Person (other than
with respect to Liens expressly permitted by Section 6.02), shall be in
proper form for filing, registration or recordation.

 

(j)                                     Insurance.  Lender shall have received evidence of
insurance coverage in form, scope, and substance reasonably satisfactory to
Lender and otherwise in compliance with the terms of Section 5.09.

 

40

 

(k)           Other Documents.  Lender shall have received such other
documents as Lender or its counsel may have reasonably requested.

 

SECTION 4.02.  Each Credit Event.  The obligation of Lender to make a Loan on
the occasion of any Borrowing, and to issue, amend, renew or extend any Letter
of Credit, is subject to the satisfaction of the following conditions:

 

(a)           The representations and warranties of
Borrower set forth in this Agreement shall be true and correct on and as of the
date of such Borrowing or the date of issuance, amendment, renewal or extension
of such Letter of Credit, as applicable, except to the extent that any such
representation or warranty relates solely to an earlier date, and if they are
not true and correct Lender shall have determined not to make any make a Loan
or not to issue Letters of Credit as a result of the fact that such
representation or warranty is untrue or incorrect.

 

(b)           At the time of and immediately after
giving effect to such Borrowing or the issuance, amendment, renewal or extension
of such Letter of Credit, as applicable, no Default shall have occurred and be
continuing and Lender shall have determined not to make such Borrowing or not
to issue such Letter of Credit as a result of such Default.

 

(c)           After giving effect to any Borrowing
or the issuance of any Letter of Credit, Availability is not less than zero.

 

Each Borrowing and each
issuance, amendment, renewal or extension of a Letter of Credit shall be deemed
to constitute a representation and warranty by Borrower on the date thereof as
to the matters specified in paragraphs (a), (b) and (c) of this
Section.

 

ARTICLE
V

 

Affirmative Covenants

 

Until the Revolving
Commitment has expired or been terminated and the principal of and interest on
each Loan and all fees payable hereunder shall have been paid in full and all
Letters of Credit shall have expired or terminated and all LC Disbursements
shall have been reimbursed, Borrower covenants and agrees with Lender that:

 

SECTION 5.01.  Financial Statements; Borrowing Base and Other
Information.  Borrower will furnish
to Lender:

 

(a)           within 120 days after the end of each
fiscal year of Borrower, its audited consolidated balance sheet and related
statements of operations, stockholders’ equity and cash flows as of the end of
and for such year, setting forth in each case in comparative form the figures
for the previous fiscal year, all reported on by independent public accountants
acceptable to Lender (without a “going concern” or like qualification or
exception and without any qualification or exception as to the scope of such
audit) to the effect that such consolidated financial statements present fairly
in all material respects the financial condition and results of operations of
Borrower and its consolidated Subsidiaries on a consolidated basis in
accordance with GAAP consistently applied, accompanied by any management letter
prepared by said accountants;

 

41

 

(b)           within 30 days after the end of each
fiscal quarter of Borrower, its consolidated balance sheet and related
statements of operations, stockholders’ equity and cash flows as of the end of
and for such fiscal quarter and the then elapsed portion of the fiscal year,
setting forth in each case in comparative form the figures for the
corresponding period or periods of (or, in the case of the balance sheet, as of
the end of) the previous fiscal year, all certified by one of its Financial
Officers as presenting fairly in all material respects the financial condition
and results of operations of Borrower and its consolidated Subsidiaries on a
consolidated basis in accordance with GAAP consistently applied, subject to
normal year-end audit adjustments and the absence of footnotes;

 

(c)           concurrently with any delivery of
financial statements under clause (a) or (b) above, a certificate of
a Financial Officer of Borrower in substantially the form of Exhibit B
(i) certifying, in the case of the financial statements delivered under
clause (b), as presenting fairly in all material respects the financial
condition and results of operations of Borrower and its consolidated
Subsidiaries on a consolidated basis in accordance with GAAP consistently
applied, subject to normal year-end audit adjustments and the absence of
footnotes, (ii) certifying as to whether a Default has occurred and, if a
Default has occurred, specifying the details thereof and any action taken or
proposed to be taken with respect thereto, (iii) setting forth reasonably
detailed calculations demonstrating compliance with Section 6.12  (iv) stating whether any change in GAAP or in the
application thereof has occurred since the date of the audited financial
statements referred to in Section 3.04 and, if any such change has
occurred, specifying the effect of such change on the financial statements
accompanying such certificate and (v) setting forth any right, title or
interest in registered Patents, Trademarks or Copyrights (each as defined in
the Security Agreement) acquired by the Borrower during such period;

 

(d)           as soon as available, but in any
event by the end of each fiscal year of Borrower, a copy of the plan and
forecast (including a projected consolidated and consolidating balance sheet,
income statement and funds flow statement) of Borrower for each month of such
fiscal year (the “Projections”) in form reasonably satisfactory to
Lender;

 

(e)           as soon as available but in any event
within 30 days of the end of each calendar month, and at such other times as
may be requested by Lender, as of the period then ended, a Borrowing Base
Certificate and supporting information in connection therewith, together with
any additional reports with respect to the Borrowing Base as Lender may
reasonably request, provided, however that Borrowing Base Certificates shall
not be required for any calendar month ending after October 31, 2010
provided that (i) the Borrower’s Current Ratio is greater than 1.50 to
1.00 (based on the most recent financial statements delivered by the Company
pursuant to clause (c) above and (ii) no Event of Default shall have
occurred and be continuing;

 

(f)            promptly after the same become
publicly available, copies of all periodic and other reports, proxy statements
and other materials filed by Borrower or any Subsidiary with the Securities and
Exchange Commission, or any Governmental Authority succeeding to any or all of
the functions of said Commission, or with any national securities exchange, or
distributed by Borrower to its shareholders generally, as the case may be;

 

42

 

(g)           promptly following any request
therefor, such other information regarding the operations, business affairs and
financial condition of Borrower or any Subsidiary, or compliance with the terms
of this Agreement, as Lender may reasonably request;

 

(h)           as soon as available, and in any
event no later than August 15, 2010, (i) an audited, restated,
consolidated balance sheet for the Borrower’s fiscal year ended June 30,
2007 and (ii) audited, consolidated balance sheet and statements of
income, stockholders equity and cash flows as of and for the Borrower’s fiscal
years ended June 30, 2008 and June 30, 2009, reported on by Baker
Tilly LLP, independent public accountants.

 

SECTION 5.02.  Notices of Material Events.  Borrower 
will furnish to Lender prompt written notice of the following:

 

(a)           the occurrence of any Event of
Default;

 

(b)           receipt of any notice of any
governmental investigation or any litigation commenced or threatened against
Borrower or any Subsidiary, other than any existing investigation or litigation
referenced in Schedule 3.06, that (i) seeks damages in excess of $500,000,
(ii) seeks injunctive relief, (iii) is asserted or instituted against
any Plan, its fiduciaries or its assets, (iv) alleges criminal misconduct
by Borrower or any Subsidiary, (v) alleges the violation of any law
regarding, or seeks remedies in connection with, any Environmental Laws; (vi) contests
any tax, fee, assessment, or other governmental charge in excess of $500,000,
or (vii) involves any product recall;

 

(c)           any Lien (other than Permitted
Encumbrances) or claim made or asserted against any of the Collateral;

 

(d)           any loss, damage, or destruction to
the Collateral in the amount of $500,000  or more,
whether or not covered by insurance;

 

(e)           any and all default notices received
under or with respect to any leased location or public warehouse where
Collateral is located (which shall be delivered within two Business Days after
receipt thereof);

 

(f)            all material amendments to the lease
with respect to Borrower’s leased facility at 4129 North Port Washington Road,
Milwaukee, Wisconsin, together with a copy of each such amendment;

 

(g)           the fact that Borrower or any
Subsidiary has entered into a Swap Agreement or an amendment to a Swap
Agreement, together with copies of all agreements evidencing such Swap
Agreement or amendments thereto (which shall be delivered within two Business
Days); and

 

(h)           any other development that results
in, or could reasonably be expected to result in, a Material Adverse Effect.

 

Each notice delivered under
this Section shall be accompanied by a statement of a Financial Officer or
other executive officer of Borrower setting forth the details of the event or 

 

43

 

development requiring such
notice and any action taken or proposed to be taken with respect thereto.

 

SECTION 5.03.  Existence; Conduct of Business.  Borrower will, and will cause each Subsidiary
to, (a) do or cause to be done all things necessary to preserve, renew and
keep in full force and effect its legal existence and the rights,
qualifications, licenses, permits, franchises, governmental authorizations,
intellectual property rights, licenses and permits material to the conduct of
its business, and maintain all requisite authority to conduct its business in
each jurisdiction in which its business is conducted; provided that the
foregoing shall not prohibit any merger, consolidation, liquidation or
dissolution permitted under Section 6.03 and (b) carry on and conduct
its business in substantially the same manner and in substantially the same
fields of enterprise as it is presently conducted.

 

SECTION 5.04.  Payment of Obligations.  Borrower will, and will cause each Subsidiary
to, pay or discharge all Material Indebtedness and all other material
liabilities and obligations, including Taxes, before the same shall become
delinquent or in default, except where (a) the validity or amount thereof
is being contested in good faith by appropriate proceedings, (b) Borrower
or such Subsidiary has set aside on its books adequate reserves with respect
thereto in accordance with GAAP and (c) such liabilities would not result
in aggregate liabilities in excess of $50,000  and
none of the Collateral becomes subject to forfeiture or loss as a result of the
contest.

 

SECTION 5.05.  Maintenance of Properties.  Borrower will, and will cause each Subsidiary
to, keep and maintain all property material to the conduct of its business in
good working order and condition, ordinary wear and tear excepted.

 

SECTION 5.06.  Books and Records; Inspection Rights.  Borrower will, and will cause each Subsidiary
to, (i) keep proper books of record and account in which full, true and
correct entries are made of all dealings and transactions in relation to its
business and activities and (ii) permit any representatives designated by
Lender (including employees of Lender, or any consultants, accountants, lawyers
and appraisers retained by Lender, upon reasonable prior notice, to visit and
inspect its properties, to examine and make extracts from its books and
records, and to discuss its affairs, finances and condition with its officers
and independent accountants, all at such reasonable times and as often as
reasonably requested.  Borrower acknowledge
that Lender, after exercising its rights of inspection, may prepare certain
Reports pertaining to Borrower’s assets for internal use by Lender. Borrower
will permit Lender to conduct field audit examinations of Borrower’s assets,
liabilities, books and records at a frequency not more than once in any 180-day
period; provided further that Borrower will permit Lender to conduct such
examinations at any time and with any reasonable frequency after an Event of
Default.

 

SECTION 5.07.  Compliance with Laws.  Borrower will, and will cause each Subsidiary
to, comply with all Requirements of Law applicable to it or its property.

 

SECTION 5.08.  Use of Proceeds and Letters of Credit.
The proceeds of the Loans will be used, and Letters of Credit will be issued,
only for general corporate purposes of Borrower.  No part of the proceeds of any Loan and no
Letter of Credit will be used, whether

 

44

 

directly
or indirectly, for any purpose that entails a violation of any of the
Regulations of the Board, including Regulations T, U and X.

 

SECTION 5.09.  Insurance.  Borrower will, and will cause each Subsidiary
to, maintain with financially sound and reputable carriers having a financial
strength rating of at least A+ by A.M. Best Company (a) insurance in
such amounts (with no greater risk retention) and against such risks (including
(i) loss or damage by fire and loss in transit; (ii) theft, burglary,
pilferage, larceny, embezzlement, and other criminal activities; (iii) business
interruption; (iv) general liability and (v) and such other hazards,
as is customarily maintained by companies of established repute engaged in the
same or similar businesses operating in the same or similar locations and (b) all
insurance required pursuant to the Collateral Documents.  Borrower will furnish to Lender, information
in reasonable detail as to the insurance so maintained.

 

SECTION 5.10.  Casualty and Condemnation.  Borrower (a) will furnish to Lender
prompt written notice of any casualty or other insured damage to any material portion
of the Collateral or the commencement of any action or proceeding for the
taking of any material portion of the Collateral or interest therein under
power of eminent domain or by condemnation or similar proceeding and (b) will
ensure that the Net Proceeds of any such event (whether in the form of
insurance proceeds, condemnation awards or otherwise) are collected and applied
in accordance with the applicable provisions of this Agreement and the
Collateral Documents.

 

SECTION 5.11.  Collateral Assessments and Appraisals.  Upon Lender’s request, Borrower, at its sole
cost and expense, will provide Lender with appraisals or updates thereof of its
Inventory and Equipment from an appraiser selected and engaged by Lender, and
prepared on a basis satisfactory to Lender, such appraisals and updates to
include, without limitation, information required by applicable law and
regulations; provided, however, that unless an Event of Default has occurred
and is continuing, Borrower shall not be required to bear the cost and expense
of such appraisals more than once in any 180-day period.  At any time the Lender may conduct collateral
audits or field examinations at the sole expense of Borrower.  The Lender agrees not to conduct such audits
or examinations more than one (1) time per year unless an Event of Default
shall have occurred and be continuing.

 

SECTION 5.12.  Depository Banks. Within 120 days of
the Effective Date, Borrower shall have transitioned its principal accounts to
Lender and thereafter Borrower will maintain Lender as its principal depository
bank, including for the maintenance of operating, administrative, cash
management, collection activity, and other deposit accounts for the conduct of
its business.

 

SECTION 5.13.  Additional Collateral; Further Assurances.  (a)  At Lender’s request, Borrower shall
cause each of its domestic Subsidiaries formed or acquired before or after the
date of this Agreement to execute a guaranty of Borrower’s obligations under
this Agreement.

 

(b)           Borrower will cause 100% of the
issued and outstanding Equity Interests of each of its domestic Subsidiaries to
be subject at all times to a first priority, perfected Lien in favor of Lender
pursuant to the terms and conditions of the Loan Documents or other security
documents as Lender shall reasonably request.

 

45

 

(c)           Without limiting the foregoing,
Borrower will, and will cause each Subsidiary to, execute and deliver, or cause
to be executed and delivered, to Lender such documents, agreements and
instruments, and will take or cause to be taken such further actions (including
the filing and recording of financing statements, fixture filings, mortgages,
deeds of trust and other documents and such other actions or deliveries of the
type required by Section 4.01, as applicable), which may be required by
law or which Lender may, from time to time, reasonably request to carry out the
terms and conditions of this Agreement and the other Loan Documents and to
ensure perfection and priority of the Liens created or intended to be created
by the Collateral Documents, all at the expense of Borrower.

 

(d)           If any material assets (including any real property or
improvements thereto or any interest therein) are acquired by Borrower or any
Subsidiary after the Effective Date (other than assets constituting Collateral
under the Security Agreement that become subject to the Lien in favor of the
Security Agreement upon acquisition thereof), Borrower will notify Lender, and,
if requested by Lender, Borrower will cause such assets to be subjected to a
Lien securing the Secured Obligations and will take, and cause its Subsidiary
to take, such actions as shall be necessary or reasonably requested by Lender
to grant and perfect such Liens, including actions described in paragraph (c) of
this Section, all at the expense of Borrower.

 

SECTION 5.14.  Dissolution of Koss Classics Ltd.

 

On or before June 30,
2010, Borrower shall either (a) cause Koss Classics Ltd. to be merged into
the Borrower or (b) cause Koss Classics Ltd. to execute and deliver to the
Lender a security agreement and guaranty of the Obligations, all on terms and
conditions satisfactory to the Lender in its sole discretion.

 

ARTICLE
VI

 

Negative Covenants

 

Until the Revolving
Commitment has expired or terminated and the principal of and interest on each
Loan and all fees, expenses and other amounts payable under any Loan Document
have been paid in full and all Letters of Credit have expired or terminated and
all LC Disbursements shall have been reimbursed, Borrower covenants and agrees
with Lender that:

 

SECTION 6.01.  Indebtedness.  Borrower will not, nor will it permit any
Subsidiary to, create, incur or suffer to exist any Indebtedness, except:

 

(a)           the Secured Obligations;

 

(b)           Indebtedness existing on the date
hereof and set forth in Schedule 6.01 and any amendments, restatements,
modifications, refinancing, or renewals thereof on substantially similar terms
and in an aggregate principal amount not to exceed the aggregate principal
amount as of the date hereof;

 

46

 

(c)           Indebtedness of Borrower to any
Subsidiary and of any Subsidiary to Borrower or any other  Subsidiary, provided that (i) Indebtedness
of any Subsidiary to Borrower shall be subject to Section 6.04 and (ii) Indebtedness
of Borrower to any Subsidiary shall be subordinated to the Secured Obligations
on terms reasonably satisfactory to Lender;

 

(d)           Guarantees by Borrower of
Indebtedness of any Subsidiary and by any Subsidiary of Indebtedness of
Borrower or any other Subsidiary, provided that (i) the
Indebtedness so Guaranteed is permitted by this Section 6.01, and (ii) Guarantees
by Borrower of Indebtedness of any Subsidiary shall be subject to Section 6.04;

 

(e)           Indebtedness of Borrower or any
Subsidiary incurred to finance the acquisition, construction or improvement of
any fixed or capital assets (whether or not constituting purchase money
Indebtedness), 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; 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 (e) shall not
exceed $250,000 at any time outstanding;

 

(f)            Indebtedness owed to any person
providing workers’ compensation, health, disability or other employee benefits
or property, casualty or liability insurance, pursuant to reimbursement or
indemnification obligations to such person, in each case incurred in the
ordinary course of business; and

 

(g)           Indebtedness of Borrower or any
Subsidiary in respect of performance bonds, bid bonds, appeal bonds, surety
bonds and similar obligations, in each case provided in the ordinary course of
business.

 

SECTION 6.02.  Liens. 
Borrower will not, nor will it permit any Subsidiary to, create, incur,
assume or permit to exist any Lien on any property or asset now owned or
hereafter acquired by it, or assign or sell any income or revenues (including
accounts receivable) or rights in respect of any thereof, except:

 

(a)           Liens created pursuant to any Loan
Document;

 

(b)           Permitted Encumbrances;

 

(c)           any Lien on any property or asset of
Borrower or any Subsidiary existing on the date hereof and set forth in Schedule
6.02; provided that (i) such Lien shall not apply to any other
property or asset of Borrower or Subsidiary and (ii) such Lien shall
secure only those obligations which it secures on the date hereof or any
renewals thereof in accordance with Section 6.01 above;

 

(d)           Liens on fixed or capital assets
acquired, constructed or improved by Borrower or any Subsidiary; provided
that (i) such security interests secure Indebtedness permitted by clause (e) of
Section 6.01, (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 

 

47

 

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 Borrower
or Subsidiary;

 

(e)           Liens of a collecting bank arising in
the ordinary course of business under Section 4-210 of the Uniform
Commercial Code in effect in the relevant jurisdiction covering only the items
being collected upon; and

 

(f)            Liens arising out of sale and
leaseback transactions permitted by Section 6.06; and

 

(g)           Liens granted by a Subsidiary in
favor of the in respect of Indebtedness owed by such Subsidiary.

 

Notwithstanding the
foregoing, none of the Liens permitted pursuant to this Section 6.02 may
at any time attach to Borrower’s (1) Accounts, other than those permitted
under clause (a) of the definition of Permitted Encumbrance and clause (a) above
and (2) Inventory, other than those permitted under clauses (a) and (b) of
the definition of Permitted Encumbrance and clause (a) above.

 

SECTION 6.03.  Fundamental Changes.  (a) Borrower will not, nor will it
permit any Subsidiary to, merge into or consolidate with any other Person, or
permit any other Person to merge into or consolidate with it, or liquidate or
dissolve, except that, if at the time thereof and immediately after giving
effect thereto no Event of Default shall have occurred and be continuing (i) any
Subsidiary of Borrower may merge into Borrower in a transaction in which
Borrower is the surviving corporation, and (ii) any  Subsidiary may liquidate or dissolve if
Borrower determines in good faith that such liquidation or dissolution is in
the best interests of Borrower and is not materially disadvantageous to Lender.

 

(b)           Borrower will not, nor will it permit
any of its Subsidiaries to, engage in any business other than businesses of the
type conducted by Borrower and its Subsidiaries on the date of execution of
this Agreement and businesses reasonably related thereto.

 

SECTION 6.04.  Investments, Loans, Advances, Guarantees
and Acquisitions.  Borrower will not,
nor will it permit any Subsidiary to, purchase, hold or acquire (including pursuant
to any merger) any capital stock, evidences of indebtedness or other securities
(including any option, warrant or other right to acquire any of the foregoing)
of, make or permit to exist any loans or advances to, Guarantee any obligations
of, or make or permit to exist any investment or any other interest in, any
other Person, or purchase or otherwise acquire (in one transaction or a series
of transactions) any assets of any other Person constituting a business unit
(whether through purchase of assets, merger or otherwise), except:

 

(a)           Permitted Investments, subject to
control agreements in favor of Lender or otherwise subject to a perfected
security interest in favor of Lender;

 

(b)           investments in existence on the date
of this Agreement and described in Schedule 6.04 and any amendments,
restatements, modifications, reinvestments, or renewals 

 

48

 

thereof on substantially
similar terms and in an aggregate principal amount not to exceed the aggregate
principal amount on the date hereof;

 

(c)           investments by Borrower and the
Subsidiaries in Equity Interests in their respective Subsidiaries, provided
that (a) any such Equity Interests shall be pledged pursuant to the
Security Agreement (subject to the limitations applicable to common stock of a
Foreign Subsidiary referred to in Section 5.13) and (b) the aggregate
amount of investments by Borrower in its Subsidiaries (together with
outstanding intercompany loans permitted under clause (b) to the proviso
to Section 6.04(d) and outstanding Guarantees permitted under the
proviso to Section 6.04(e)) shall not exceed $250,000  at
any time outstanding (in each case determined without regard to any write-downs
or write-offs);

 

(d)           loans or advances made by Borrower to
any Subsidiary and made by any Subsidiary to Borrower or any other Subsidiary, provided
that (a) any such loans and advances made by Borrower shall be evidenced
by a promissory note pledged pursuant to the Security Agreement and (b) the
amount of such loans and advances made by Borrower (together with outstanding
investments permitted under clause (b) to the proviso to Section 6.04(c) and
outstanding Guarantees permitted under the proviso to Section 6.04(e))
shall not exceed $250,000  at any time
outstanding (in each case determined without regard to any write-downs or
write-offs);

 

(e)           Guarantees constituting Indebtedness
permitted by Section 6.01, provided that the aggregate principal
amount of Indebtedness of Subsidiaries that is Guaranteed by Borrower shall
(together with outstanding investments permitted under clause (b) to the
proviso to Section 6.04(c) and outstanding intercompany loans
permitted under clause (b) to the proviso to Section 6.04(d)) shall
not exceed $250,000  at any time
outstanding (in each case determined without regard to any write-downs or
write-offs);

 

(f)            loans or advances made by Borrower
to its employees on an arms-length basis in the ordinary course of business
consistent with past practices for travel and entertainment expenses, relocation
costs and similar purposes up to a maximum of $10,000 to any employee and up to
a maximum of $100,000  in the
aggregate at any one time outstanding;

 

(g)           investments in the form of Swap
Agreements permitted by Section 6.07;

 

(h)           investments of any Person existing at
the time such Person becomes a Subsidiary of Borrower or consolidates or merges
with Borrower or any of the Subsidiaries 
so long as such investments were not made in contemplation of such
Person becoming a Subsidiary or of such merger;

 

(i)            investments received in connection
with the dispositions of assets permitted by Section 6.05; and

 

(j)            investments constituting deposits
described in clauses (c) and (d) of the definition of the term “Permitted
Encumbrances.”

 

SECTION 6.05.  Asset Sales.  Borrower will not, nor will it permit any
Subsidiary to, sell, transfer, lease or otherwise dispose of any asset,
including any Equity Interest owned by 

 

49

 

it,
nor will Borrower permit any Subsidiary to issue any additional Equity Interest
in such Subsidiary (other than to Borrower or another Subsidiary in compliance
with Section 6.04), except:

 

(a)           sales, transfers and dispositions of (i) inventory
in the ordinary course of business and (ii) used, obsolete, worn out or
surplus equipment or property in the ordinary course of business;

 

(b)           sales, transfers and dispositions to
Borrower or any Subsidiary, provided that any such sales, transfers or
dispositions involving a Subsidiary shall be made in compliance with Section 6.09;

 

(c)           sales, transfers and dispositions of
accounts receivable in connection with the compromise, settlement or collection
thereof;

 

(d)           sales, transfers and dispositions of
investments permitted by clauses (i) and (k) of Section 6.04;

 

(e)           sale and leaseback transactions
permitted by Section 6.06;

 

(f)            dispositions resulting from any
casualty or other insured damage to, or any taking under power of eminent
domain or by condemnation or similar proceeding of, any property or asset of
Borrower or any Subsidiary; and

 

(g)           sales, transfers and other
dispositions of assets (other than Equity Interests in a Subsidiary unless all
Equity Interests in such Subsidiary are sold) that are not permitted by any
other paragraph of this Section, provided that the aggregate fair market
value of all assets sold, transferred or otherwise disposed of in reliance upon
this paragraph (g) shall not exceed $100,000 during any fiscal year of
Borrower;

 

provided that all
sales, transfers, leases and other dispositions permitted hereby (other than
those permitted by paragraphs (b) and (f) above) shall be made for
fair value.

 

SECTION 6.06.  Sale and Leaseback Transactions.  Borrower will not, nor will it permit any
Subsidiary to, enter into any arrangement, directly or indirectly, whereby it
shall sell or transfer any property, real or personal, used or useful in its
business, whether now owned or hereafter acquired, and thereafter rent or lease
such property or other property that it intends to use for substantially the
same purpose or purposes as the property sold or transferred, except for any
such sale of any fixed or capital assets by Borrower or any Subsidiary that is
made for cash consideration in an amount not less than the fair value of such
fixed or capital asset and is consummated within 90 days after Borrower or such
Subsidiary acquires or completes the construction of such fixed or capital
asset.

 

SECTION 6.07.  Swap Agreements.  Borrower will not, nor will it permit
any  Subsidiary to, enter into any Swap
Agreement, except (a) Swap Agreements entered into to hedge or mitigate
risks to which Borrower or any Subsidiary has actual exposure (other than those
in respect of Equity Interests of Borrower or any of its Subsidiaries), and (b) Swap
Agreements entered into in order to effectively cap, collar or exchange
interest rates (from fixed 

 

50

 

to
floating rates, from one floating rate to another floating rate or otherwise)
with respect to any interest-bearing liability or investment of Borrower or any
Subsidiary.

 

SECTION 6.08.  Restricted Payments; Certain Payments of
Indebtedness.  (a)  Borrower
will not, nor will it permit any Subsidiary to, declare or make, or agree to
pay or make, directly or indirectly, any Restricted Payment, or incur any
obligation (contingent or otherwise) to do so, except (i) Borrower may
declare and pay dividends with respect to its common stock payable solely in
additional shares of its common stock, and, with respect to its preferred
stock, payable solely in additional shares of such preferred stock or in shares
of its common stock, (ii) Subsidiaries may declare and pay dividends
ratably with respect to their Equity Interests, 
(iii) Borrower may make Restricted Payments pursuant to and in
accordance with stock option plans or other benefit plans for management or
employees of Borrower and its Subsidiaries and (iv) Borrower may make
Restricted Payments so long as no Event of Default has occurred and is
continuing and so long as the making of such Restricted Payment would not cause
an Event of Default.

 

(b)           Borrower will not, nor will it permit
any Subsidiary to, make or agree to pay or make, directly or indirectly, any
payment or other distribution (whether in cash, securities or other property)
of or in respect of principal of or interest on any Indebtedness, or any
payment or other distribution (whether in cash, securities or other property),
including any sinking fund or similar deposit, on account of the purchase,
redemption, retirement, acquisition, cancellation or termination of any
Indebtedness in excess of $250,000, except (i) payment of Indebtedness
created under the Loan Documents; (ii) payment of regularly scheduled
interest and principal payments as and when due in respect of any Indebtedness;
and (iii) payment of secured Indebtedness that becomes due as a result of
the voluntary sale or transfer of the property or assets securing such
Indebtedness.

 

SECTION 6.09.  Transactions with Affiliates.  Borrower will not, nor will it permit any
Subsidiary to, sell, lease or otherwise transfer any property or assets to, or
purchase, lease or otherwise acquire any property or assets from, or otherwise
engage in any other transactions with, any of its Affiliates, except (a) transactions
that (i) are in the ordinary course of business and (ii) are at
prices and on terms and conditions not less favorable to Borrower or such
Subsidiary than could be obtained on an arm’s-length basis from unrelated third
parties, (b) transactions between Borrower and any other Affiliate, (c) any
investment permitted by Sections 6.04(c) or 6.04(d), (d) any
Indebtedness permitted under Section 6.01(c), (e) any Restricted
Payment permitted by Section 6.08, (f) loans or advances to employees
permitted under Section 6.04, (g) the payment of reasonable fees to
directors of Borrower or any Subsidiary who are not employees of Borrower or
any Subsidiary, and compensation and employee benefit arrangements paid to, and
indemnities provided for the benefit of, directors, officers or employees of
Borrower or its Subsidiaries in the ordinary course of business and (h) any
issuances of securities or other payments, awards or grants in cash, securities
or otherwise pursuant to, or the funding of, employment agreements, stock options
and stock ownership plans approved by Borrower’s board of directors

 

SECTION 6.10.  Restrictive Agreements.  Borrower will not, nor will it permit any
Subsidiary to, directly or indirectly, enter into, incur or permit to exist any
agreement or other arrangement with a value or potential liabilities in excess
of $100,000 that prohibits, 

 

51

 

restricts
or imposes any condition upon (a) the ability of Borrower or any of its
Subsidiaries to create, incur or permit to exist any Lien upon any of its
property or assets, or (b) the ability of any Subsidiary to pay dividends
or other distributions with respect to any shares of its capital stock or to
make or repay loans or advances to Borrower or any other Subsidiary or to
Guarantee Indebtedness of Borrower or any other Subsidiary; provided
that (i) the foregoing shall not apply to restrictions and conditions
imposed by law or by any Loan Document, (ii) the foregoing shall not apply
to restrictions and conditions existing on the date hereof identified on Schedule
6.10 (but shall apply to any extension or renewal of, or any amendment or
modification expanding the scope of, any such restriction or condition), (iii) the
foregoing shall not apply to customary restrictions and conditions contained in
agreements relating to the sale of a Subsidiary pending such sale, provided
such restrictions and conditions apply only to the Subsidiary that is to be
sold and such sale is permitted hereunder, (iv) clause (a) of the
foregoing shall not apply to restrictions or conditions imposed by any
agreement relating to secured Indebtedness permitted by this Agreement if such
restrictions or conditions apply only to the property or assets securing such
Indebtedness and (v) clause (a) of the foregoing shall not apply to
customary provisions in leases and other contracts restricting the assignment
thereof.

 

SECTION 6.11.  Amendment of Material Documents.  Borrower will not, nor will it permit any
Subsidiary to, amend, modify or waive any of its rights under its certificate
of incorporation, by-laws, operating, management or partnership agreement or
other organizational documents, to the extent any such amendment, modification
or waiver would be adverse to Lender.

 

SECTION 6.12.  Financial Covenants.

 

(a)           Current Ratio.  Borrower will at all times maintain a Current
Ratio of at least 1.20 to 1.00.

 

(b)           Minimum Tangible Net Worth.  Borrower will maintain (a) at all times
prior to Lender’s receipt of Borrower’s audited annual financial statements for
the fiscal year ending June 30, 2010 pursuant to Section 5.01(a) hereof,
Tangible Net Worth of at least $9,000,000, and (b) at all times
thereafter, Tangible Net Worth of at least 75% of Borrower’s actual Tangible
Net Worth calculated as of June 30, 2010, provided, however, that (i) in
the event that 75% of Borrower’s Tangible Net Worth as of June 30, 2010 is
less than $8,000,000, Borrower shall be required to maintain Tangible Net Worth
of at least $8,000,000 at all times thereafter and (ii) in the event that
75% of Borrower’s Tangible Net Worth as of June 30, 2010 is greater than
$11,000,000, Borrower shall be required to maintain Tangible Net Worth of at
least $11,000,000 at all times thereafter.

 

(c)           Leverage Ratio.  Borrower will not permit the Leverage Ratio,
determined for any period of four consecutive fiscal quarters ending on the
last day of each fiscal quarter of Borrower, to be less than 2.50 to 1.00.

 

SECTION 6.13.  ERISA Plans.

 

Borrower will not, without
the prior written consent of the Lender, become party to any Plan.

 

52

 

ARTICLE
VII

Events of Default

 

If any of the following
events (“Events of Default”) shall occur:

 

(a)           Borrower shall fail to pay any
principal of any Loan, any reimbursement obligation in respect of any LC
Disbursement, any interest on any loan or any fee or other amount payable under
this Agreement when and as the same shall become due and payable, whether at
the due date thereof or at a date fixed for prepayment thereof or otherwise;

 

(b)           any representation or warranty made
or deemed made by or on behalf of Borrower or any Subsidiary in or in
connection with this Agreement or any Loan Document or any amendment or
modification thereof or waiver thereunder, or in any report, certificate,
financial statement or other document furnished pursuant to or in connection
with this Agreement or any Loan Document or any amendment or modification
thereof or waiver thereunder, shall prove to have been materially incorrect
when made or deemed made;

 

(c)           Borrower shall fail to observe or
perform any covenant, condition or agreement contained in Section 5.02(a),
5.03 (solely with respect to existence) or 5.08 or in Article VI;

 

(d)           Borrower shall fail to observe or
perform any covenant, condition or agreement contained in this Agreement (other
than those which constitute a default under another Section of this
Article), and such failure shall continue unremedied for a period of (i) 5
days after the earlier of knowledge of such breach or notice thereof from
Lender if such breach relates to terms or provisions of Section 5.01, 5.02
(other than Section 5.02(a)), 5.03 through 5.07, 5.09, 5.10 or 5.12 of
this Agreement or (ii) 15 days after the earlier of knowledge of such
breach or notice thereof from Lender if such breach relates to terms or
provisions of any other Section of this Agreement;

 

(e)           Borrower or any Subsidiary shall fail
to make any payment (whether of principal or interest and regardless of amount)
in respect of any Material Indebtedness, when and as the same shall become due
and payable, after giving effect to any period of grace applicable to such
payment;

 

(f)            any event or condition occurs that
results in any Material Indebtedness becoming due prior to its scheduled
maturity or that enables or permits (with or without the giving of notice, the
lapse of time or both) the holder or holders of any Material Indebtedness or
any trustee or agent on its or their behalf to cause any Material Indebtedness
to become due, or to require the prepayment, repurchase, redemption or
defeasance thereof, prior to its scheduled maturity; provided that this
clause (g) shall not apply to secured Indebtedness that becomes due as a
result of the voluntary sale or transfer of the property or assets securing
such Indebtedness;

 

(g)           an involuntary proceeding shall be
commenced or an involuntary petition shall be filed seeking (i) liquidation,
reorganization or other relief in respect of Borrower or any Subsidiary or its
debts, or of a substantial part of its assets, under any Federal, state or
foreign bankruptcy, insolvency, receivership or similar law now or hereafter in
effect or (ii) the appointment of a receiver, trustee, custodian,
sequestrator, conservator or similar official for 

 

53

 

Borrower or any Subsidiary
or for a substantial part of its assets, and, in any such case, such proceeding
or petition shall continue undismissed for 60 days or an order or decree
approving or ordering any of the foregoing shall be entered;

 

(h)           Borrower or any Subsidiary shall (i) voluntarily
commence any proceeding or file any petition seeking liquidation,
reorganization or other relief under any Federal, state or foreign bankruptcy,
insolvency, receivership or similar law now or hereafter in effect, (ii) consent
to the institution of, or fail to contest in a timely and appropriate manner,
any proceeding or petition described in clause (h) of this Article, (iii) apply
for or consent to the appointment of a receiver, trustee, custodian,
sequestrator, conservator or similar official for Borrower or any Subsidiary or
for a substantial part of its assets, (iv) file an answer admitting the
material allegations of a petition filed against it in any such proceeding, (v) make
a general assignment for the benefit of creditors or (vi) take any action
for the purpose of effecting any of the foregoing;

 

(i)            Borrower or any Subsidiary shall
become unable, admit in writing its inability or fail generally to pay its
debts as they become due;

 

(j)            one or more judgments for the
payment of money in connection with the Fraud in an aggregate amount in excess
of $1,000,000 or any other one or more judgments for the payment of money in an
aggregate amount in excess of $250,000  which are not
covered by insurance  shall be
rendered against Borrower, any Subsidiary or any combination thereof and the
same shall remain undischarged for a period of 30 consecutive days during which
execution shall not be effectively stayed, or any action shall be legally taken
by a judgment creditor to attach or levy upon any assets of Borrower or any Subsidiary
to enforce any such judgment or Borrower or any Subsidiary shall fail within 30
days to discharge one or more non-monetary judgments or orders which,
individually or in the aggregate, could reasonably be expected to have a
Material Adverse Effect, which judgments or orders, in any such case, are not
stayed on appeal or otherwise being appropriately contested in good faith by
proper proceedings diligently pursued;

 

(k)           an ERISA Event shall have occurred
that, in the opinion of Lender, when taken together with all other ERISA Events
that have occurred, could reasonably be expected to result in a Material
Adverse Effect;

 

(l)            a Change in Control shall occur;

 

(m)          the occurrence of any “default”, as
defined in any Loan Document (other than this Agreement) or the breach of any
of the terms or provisions of any Loan Document (other than this Agreement),
which default or breach continues beyond any period of grace therein provided;

 

(n)           any Collateral Document shall for any
reason fail to create a valid and perfected first priority security interest in
any Collateral purported to be covered thereby, except as permitted by the
terms of any Collateral Document, or any Collateral Document shall fail to
remain in full force or effect or any action shall be taken to discontinue or
to assert the invalidity or unenforceability of any Collateral Document, or
Borrower shall fail to comply with any of the terms or provisions of any
Collateral Document; or

 

54

 

(o)           any material provision of any Loan
Document for any reason ceases to be valid, binding and enforceable in
accordance with its terms (or Borrower shall challenge the enforceability of
any Loan Document or shall assert in writing, or engage in any action or
inaction based on any such assertion, that any provision of any of the Loan
Documents has ceased to be or otherwise is not valid, binding and enforceable
in accordance with its terms); or

 

then, and in every such
event (other than an event with respect to Borrower described in clause (h) or
(i) of this Article), and at any time thereafter during the continuance of
such event, Lender may, by notice to Borrower, take either or both of the
following actions, at the same or different times:  (i) terminate the Revolving Commitment,
and thereupon the Revolving Commitment shall terminate immediately, and (ii) declare
the Loans then outstanding to be due and payable in whole (or in part, in which
case any principal not so declared to be due and payable may thereafter be
declared to be due and payable), and thereupon the principal of the Loans so
declared to be due and payable, together with accrued interest thereon and all
fees and other obligations of Borrower accrued hereunder, shall become due and
payable immediately, without presentment, demand, protest or other notice of
any kind, all of which are hereby waived by Borrower; and in case of any event
with respect to Borrower described in clause (h) or (i) of this
Article, the Revolving Commitment shall automatically terminate and the
principal of the Loans then outstanding, together with accrued interest thereon
and all fees and other obligations of Borrower accrued hereunder, shall
automatically become due and payable, without presentment, demand, protest or
other notice of any kind, all of which are hereby waived by Borrower.  Upon the occurrence and the continuance of an
Event of Default, Lender may increase the rate of interest applicable to the
Loans and other Obligations as set forth in this Agreement and exercise any rights
and remedies provided to Lender under the Loan Documents or at law or equity,
including all remedies provided under the UCC.

 

ARTICLE
VIII

 

Miscellaneous

 

SECTION 8.01.  Notices.  (a) Except in the case of notices and
other communications expressly permitted to be given by telephone (and subject
to paragraph (b) below), all notices and other communications provided for
herein shall be in writing and shall be delivered by hand or overnight courier
service, mailed by certified or registered mail or sent by facsimile, as
follows:

 

(i)                                     if to Borrower
at:

 

Koss
Corporation

4129 North Port Washington Road

Milwaukee, Wisconsin 53212

Attention:  David D. Smith

Facsimile No.:  (414) 964-8615

 

55

 

(ii)                                  if to Lender,
to JPMorgan Chase Bank, N.A. at:

 

111
East Wisconsin Avenue

Milwaukee, Wisconsin 53201

Attention:  Mark P. Bruss

Facsimile No.:  (414) 977-6788

 

All such notices and other
communications (i) sent by hand or overnight courier service, or mailed by
certified or registered mail, shall be deemed to have been given when received
or (ii) sent by facsimile shall be deemed to have been given when sent, provided
that if not given during normal business hours for the recipient, shall be
deemed to have been given at the opening of business on the next Business Day
for the recipient.

 

(b)           Notices and other communications to
Lender hereunder may be delivered or furnished by electronic communications
(including e-mail and internet or intranet websites) pursuant to procedures
approved by Lender; provided that the foregoing shall not apply to
notices pursuant to Article II or to compliance and no Event of Default
certificates delivered pursuant to Section 5.01(d) unless otherwise
agreed by Lender.  Lender or Borrower
may, in its discretion, agree to accept notices and other communications to it
hereunder by electronic communications pursuant to procedures approved by it; provided
that approval of such procedures may be limited to particular notices or
communications. All such notices and other communications (i) sent to an
e-mail address shall be deemed received upon the sender’s receipt of an
acknowledgement from the intended recipient (such as by the “return receipt
requested” function, as available, return e-mail or other written
acknowledgement), provided that if not given during the normal business
hours of the recipient, such notice or communication shall be deemed to have
been given at the opening of business on the next Business Day for the
recipient, and (ii) posted to an Internet or intranet website shall be
deemed received upon the deemed receipt by the intended recipient at its e-mail
address as described in the foregoing clause (b)(i) of notification that
such notice or communication is available and identifying the website address
therefor.

 

(c)           Any party hereto may change its
address or facsimile number for notices and other communications hereunder by
notice to the other parties hereto.

 

SECTION 8.02.  Waivers; Amendments.  (a)  No failure or delay by Lender in exercising
any right or power hereunder or under any other Loan Document shall operate as
a waiver thereof, nor shall any single or partial exercise of any such right or
power, or any abandonment or discontinuance of steps to enforce such a right or
power, preclude any other or further exercise thereof or the exercise of any
other right or power.  The rights and
remedies of Lender hereunder and under any other Loan Document are cumulative
and are not exclusive of any rights or remedies that they would otherwise
have.  No waiver of any provision of any
Loan Document or consent to any departure by Borrower therefrom shall in any
event be effective unless the same shall be permitted by paragraph (b) of
this Section, and then such waiver or consent shall be effective only in the
specific instance and for the purpose for which given.  Without limiting the generality of the
foregoing, the making of a Loan or issuance of a Letter of Credit shall not be
construed as a waiver of any Event of Default, regardless of whether Lender may
have had notice or knowledge of such Event of Default at the time.

 

56

 

(b)           Neither this Agreement nor any other
Loan Document nor any provision hereof or thereof may be waived, amended or
modified except pursuant to an agreement or agreements in writing entered into
by Borrower and Lender.

 

SECTION 8.03.  Expenses; Indemnity; Damage Waiver.  (a)  Borrower shall pay (i) all
reasonable out-of-pocket expenses incurred by Lender and its Affiliates,
including the reasonable fees, charges and disbursements of counsel for Lender
(whether outside counsel or the allocated costs of its internal legal
department), in connection with the credit facilities provided for herein, the
preparation and administration of the Loan Documents or any amendments,
modifications or waivers of the provisions of the Loan Documents (whether or
not the transactions contemplated hereby or thereby shall be consummated), (ii) all
reasonable out-of-pocket expenses incurred by Lender in connection with the
issuance, amendment, renewal or extension of any Letter of Credit or any demand
for payment thereunder and (iii) all out-of-pocket expenses incurred by
Lender,  including the fees, charges and
disbursements of any counsel for Lender (whether outside counsel or the
allocated costs of its internal legal department), in connection with the
enforcement, collection or protection of its rights in connection with the Loan
Documents, including its rights under this Section, or in connection with the
Loans made or Letters of Credit issued hereunder, including all such
out-of-pocket expenses incurred during 
any workout, restructuring or negotiations in respect of such Loans or
Letters of Credit. Expenses being reimbursed by Borrower under this Section include,
without limiting the generality of the foregoing, (i) subject to Section 5.11,
costs and expenses incurred in connection with appraisals and insurance
reviews; (ii) subject to Sections 5.06 and 5.11 (as applicable), field
examinations and the preparation of Reports based on the fees charged by a
third party retained by Lender or the internally allocated fees for each Person
employed by Lender with respect to each field examination; taxes, fees and
other charges for lien searches, (iii) filing financing statements
and continuations, and other actions to perfect, protect, and continue Lender’s
Liens; (iv) and sums paid or incurred to take any action required of
Borrower under the Loan Documents that Borrower fails to pay or take.  All of the foregoing costs and expenses may
be charged to Borrower as Revolving Loans or to another deposit account, all as
described in Section 2.17(c).

 

(b)           Borrower shall indemnify Lender, and
each Related Party of Lender (each such Person being called an “Indemnitee”)
against, and hold each Indemnitee harmless from, any and all losses, claims,
damages, penalties, liabilities and related expenses, including the fees,
charges and disbursements of any counsel for any Indemnitee, incurred by or
asserted against any Indemnitee arising out of, in connection with, or as a
result of (i) the execution or delivery of the Loan Documents or any
agreement or instrument contemplated thereby, the performance by the parties
hereto of their respective obligations thereunder or the consummation of the
Transactions or any other transactions contemplated hereby, (ii) any Loan
or Letter of Credit or the use of the proceeds therefrom (including any refusal
by Lender to honor a demand for payment under a Letter of Credit if the
documents presented in connection with such demand do not strictly comply with
the terms of such Letter of Credit), (iii) any actual or alleged presence
or release of Hazardous Materials on or from any property owned or operated by
Borrower or any of its Subsidiaries, or any Environmental Liability related in
any way to Borrower or any of its Subsidiaries, or (iv) any actual or
prospective claim, litigation, investigation or proceeding relating to any of
the foregoing, whether based on contract, tort or any other theory and
regardless of whether any Indemnitee is a party thereto; provided that
such indemnity shall not, 

 

57

 

as to any Indemnitee, be
available to the extent that such losses, claims, damages, penalties, liabilities
or related expenses are determined by a court of competent jurisdiction by
final and nonappealable judgment to have resulted from the gross negligence or
willful misconduct of such Indemnitee.

 

(c)           The relationship between Borrower on
the one hand and Lender on the other hand shall be solely that of debtor and
creditor.  Lender (i) shall not have
any fiduciary responsibilities to Borrower or (ii) does not undertake any
responsibility to Borrower to review or inform Borrower of any matter in connection
with any phase of Borrower’s business or operations.  To the extent permitted by applicable law,
Borrower shall not assert, and hereby waives, any claim against any Indemnitee,
on any theory of liability, for special, indirect, consequential or punitive
damages (as opposed to direct or actual damages) arising out of, in connection
with, or as a result of, this Agreement or any agreement or instrument
contemplated hereby, the Transactions, any Loan or Letter of Credit or the use
of the proceeds thereof.

 

(d)           All amounts due under this Section shall
be payable promptly after written demand therefor.

 

SECTION 8.04.  Successors and Assigns.  (a)  The provisions of this Agreement
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns permitted hereby, except that Borrower may
not assign or otherwise transfer any of its rights or obligations hereunder
without the prior written consent of Lender (and any attempted assignment or
transfer by Borrower without such consent shall be null and void).  Nothing in this Agreement, expressed or
implied, shall be construed to confer upon any Person (other than the parties
hereto, their respective successors and assigns permitted hereby and, to the
extent expressly contemplated hereby, the Related Parties of each of Lender)
any legal or equitable right, remedy or claim under or by reason of this
Agreement.

 

(b)           Lender may assign to one or more
assignees all or a portion of its rights and obligations under this Agreement
(including all or a portion of its Revolving Commitment and the Loans at the
time owing to it); provided that, except in the case of an assignment to
an Affiliate of Lender or an Approved Fund, Borrower must give its prior
written consent to such assignment (which consent shall not be unreasonably
withheld); and provided  further that any consent of Borrower
otherwise required under this paragraph shall not be required if an Event of
Default under clause (h) or (i) of Article VII has occurred and
is continuing.  Subject to notification
of an assignment, the assignee shall be a party hereto and, to the extent of
the interest assigned, have the rights and obligations of Lender under this
Agreement, and Lender shall, to the extent of the interest assigned, be
released from its obligations under this Agreement (and, in the case of an
assignment covering all of Lender’s rights and obligations under this
Agreement, Lender shall cease to be a party hereto but shall continue to be
entitled to the benefits of Sections 2.14, 2.15, 2.16 and 8.03).  Borrower hereby agrees to execute any
amendment and/or any other document that may be necessary to effectuate such an
assignment, including an amendment to this Agreement to provide for multiple
lenders and an administrative agent to act on behalf of such lenders.  Any assignment or transfer by Lender of
rights or obligations under this Agreement that does not comply with this
paragraph shall be treated for purposes of this Agreement as a sale by Lender
of a participation in such rights and obligations in accordance with paragraph (c) of
this Section.

 

58

 

For the purposes of this Section 8.04(b),
the term “Approved Fund” has the following meaning:

 

“Approved Fund” means
any Person (other than a natural person) that is engaged in making, purchasing,
holding or investing in bank loans and similar extensions of credit in the
ordinary course of its business and that is administered or managed by (a) Lender,
(b) an Affiliate of Lender or (c) an entity or an Affiliate of an
entity that administers or manages Lender.

 

(c)           Lender may, without the consent of
Borrower, sell participations to one or more banks or other entities (a “Participant”)
in all or a portion of Lender’s rights and obligations under this Agreement
(including all or a portion of its Revolving Commitment and the Loans owing to
it); provided that (i) Lender’s obligations under this Agreement
shall remain unchanged, (ii) Lender shall remain solely responsible to the
other parties hereto for the performance of such obligations and (iii) Borrower
shall continue to deal solely and directly with Lender in connection with
Lender’s rights and obligations under this Agreement.   Subject to paragraph (d) of this
Section, Borrower agrees that each Participant shall be entitled to the
benefits of Sections 2.14, 2.15 and 2.16 to the same extent as if it were
Lender and had acquired its interest by assignment pursuant to paragraph (b) of
this Section.

 

(d)           A Participant shall not be entitled
to receive any greater payment under Section 2.14 or 2.15 than Lender
would have been entitled to receive with respect to the participation sold to
such Participant, unless the sale of the participation to such Participant is
made with Borrower’s prior written consent.

 

(e)           Lender may at any time pledge or
assign a security interest in all or any portion of its rights under this
Agreement to secure obligations of Lender, including any pledge or assignment
to secure obligations to a Federal Reserve Lender, and this Section shall
not apply to any such pledge or assignment of a security interest; provided
that no such pledge or assignment of a security interest shall release Lender
from any of its obligations hereunder or substitute any such pledgee or assignee
for Lender as a party hereto.

 

SECTION 8.05.  Survival.  All covenants, agreements, representations
and warranties made by Borrower in the Loan Documents and in the certificates
or other instruments  delivered in
connection with or pursuant to this Agreement or any other Loan Document shall
be considered to have been relied upon by the other parties hereto and shall
survive the execution and delivery of the Loan Documents and the making of any
Loans and issuance of any Letters of Credit, regardless of any investigation
made by any such other party or on its behalf and notwithstanding that Lender
may have had notice or knowledge of any Event of Default or incorrect
representation or warranty at the time any credit is extended hereunder, and
shall continue in full force and effect as long as the principal of or any
accrued interest on any Loan or any fee or any other amount payable under this
Agreement is outstanding and unpaid or any Letter of Credit is outstanding and
so long as the Revolving Commitment has not expired or terminated.  The provisions of Sections 2.14, 2.15, 2.16
and Article VIII shall survive and remain in full force and effect
regardless of the consummation of the transactions contemplated hereby, the
repayment of the Loans, the expiration or termination of the Letters of Credit
and the Revolving Commitment or the termination of this Agreement or any
provision hereof.

 

59

 

SECTION 8.06.  Counterparts; Integration; Effectiveness.  This Agreement may be executed in
counterparts (and by different parties hereto on different counterparts), each
of which shall constitute an original, but all of which when taken together
shall constitute a single contract.  This
Agreement, the other Loan Documents and any separate letter agreements with
respect to fees payable to Lender constitute the entire contract among the
parties relating to the subject matter hereof and supersede any and all
previous agreements and understandings, oral or written, relating to the
subject matter hereof.  Except as
provided in Section 4.01, this Agreement shall become effective when it
shall have been executed by Lender and when Lender shall have received
counterparts hereof which, when taken together, bear the signatures of each of
the other parties hereto, and thereafter shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and assigns.  Delivery of an executed counterpart of a
signature page of this Agreement by facsimile shall be effective as
delivery of a manually executed counterpart of this Agreement.

 

SECTION 8.07.  Severability.  Any provision of any Loan Document held to be
invalid, illegal or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such invalidity, illegality or
unenforceability without affecting the validity, legality and enforceability of
the remaining provisions thereof; and the invalidity of a particular provision
in a particular jurisdiction shall not invalidate such provision in any other
jurisdiction.

 

SECTION 8.08.  Right of Setoff.  If an Event of Default shall have occurred
and be continuing, Lender and each of its Affiliates is hereby authorized at
any time and from time to time, to the fullest extent permitted by law, to set
off and apply any and all deposits (general or special, time or demand,
provisional or final) at any time held and other obligations at any time owing
by such Lender or Affiliate to or for the credit or the account of Borrower
against any of and all the Secured Obligations held by such Lender,
irrespective of whether or not such Lender shall have made any demand under the
Loan Documents and although such obligations may be unmatured.  The rights of each Lender under this Section are
in addition to other rights and remedies (including other rights of setoff)
which such Lender may have.

 

SECTION 8.09.  Governing Law; Jurisdiction; Consent to
Service of Process.  (a)  The
Loan Documents shall be governed by and construed in accordance with the
internal laws of the State of Wisconsin, but giving effect to federal laws
applicable to national banks.

 

(b)           Borrower hereby irrevocably and
unconditionally submits, for itself and its property, to the nonexclusive
jurisdiction of any U.S. Federal or Wisconsin State court sitting in Milwaukee,
Wisconsin in any action or proceeding arising out of or relating to any Loan
Documents, or for recognition or enforcement of any judgment, and each of the
parties hereto hereby irrevocably and unconditionally agrees that all claims in
respect of any such action or proceeding may be heard and determined in such
Wisconsin State or, to the extent permitted by law, in such Federal court.  Each of the parties hereto agrees that a final
judgment in any such 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.  Nothing in this
Agreement or any other Loan Document shall affect any right that Lender may
otherwise have to bring any action or proceeding relating to this Agreement or
any other Loan Document against Borrower or its properties in the courts of any
jurisdiction.

 

60

 

(c)           Borrower hereby irrevocably and
unconditionally waives, to the fullest extent it may legally and effectively do
so, any objection which it may now or hereafter have to the laying of venue of
any suit, action or proceeding arising out of or relating to this Agreement or
any other Loan Document in any court referred to in paragraph (b) of this
Section.  Each of the parties hereto
hereby irrevocably waives, to the fullest extent permitted by law, the defense
of an inconvenient forum to the maintenance of such action or proceeding in any
such court.

 

(d)           Each party to this Agreement
irrevocably consents to service of process in the manner provided for notices
in Section 8.01.  Nothing in this
Agreement or any other Loan Document will affect the right of any party to this
Agreement to serve process in any other manner permitted by law.

 

SECTION 8.10.  WAIVER OF JURY TRIAL.  EACH PARTY HERETO HEREBY WAIVES, TO THE
FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A
TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR
RELATING TO THIS AGREEMENT, ANY OTHER LOAN DOCUMENT OR THE TRANSACTIONS
CONTEMPLATED THEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER
THEORY).  EACH PARTY HERETO (a) CERTIFIES
THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED,
EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF
LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (b) ACKNOWLEDGES THAT
IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT
BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION.

 

SECTION 8.11.  Headings.  Article and Section headings and
the Table of Contents used herein are for convenience of reference only, are
not part of this Agreement and shall not affect the construction of, or be
taken into consideration in interpreting, this Agreement.

 

SECTION 8.12.  Confidentiality.  Lender agrees to maintain the confidentiality
of the Information (as defined below), except that Information may be disclosed
(a) to its and its Affiliates’ directors, officers, employees and agents,
including accountants, legal counsel and other advisors (it being understood
that the Persons to whom such disclosure is made will be informed of the
confidential nature of such Information and instructed to keep such Information
confidential), (b) to the extent requested by any regulatory authority, (c) to
the extent required by applicable laws or regulations or by any subpoena or
similar legal process, (d) to any other party to this Agreement, (e) in
connection with the exercise of any remedies hereunder or any suit, action or
proceeding relating to this Agreement or any other Loan Document or the
enforcement of rights hereunder or thereunder, (f) subject to an agreement
containing provisions substantially the same as those of this Section, to (i) any
assignee of or Participant in, or any prospective assignee of or Participant
in, any of its rights or obligations under this Agreement or (ii) any
actual or prospective counterparty (or its advisors) to any swap or derivative
transaction relating to Borrower and its obligations, (g) with the consent
of Borrower or (h) to the extent such Information (i) becomes
publicly available other than as a result of a breach of this Section or (ii) becomes
available to Lender on a non-confidential basis from a source other than
Borrower.  For the purposes of this
Section, “Information” means all information received from Borrower or 

 

61

 

any
third party subject to confidentiality restrictions relating to Borrower or its
business, other than any such information that is available to Lender on a
non-confidential basis prior to disclosure by Borrower or such third parties; provided
that, in the case of information received from Borrower or any such third
parties after the date hereof, such information is clearly identified at the
time of delivery as confidential.  Any
Person required to maintain the confidentiality of Information as provided in
this Section shall be considered to have complied with its obligation to
do so if such Person has exercised the same degree of care to maintain the
confidentiality of such Information as such Person would accord to its own
confidential information.

 

SECTION 8.13.  Nonreliance; Violation of Law.  Lender hereby represents that it is not
relying on or looking to any margin stock for the repayment of the Borrowings
provided for herein.  Anything contained
in this Agreement to the contrary notwithstanding, Lender shall not be
obligated to extend credit to Borrower in violation of any limitation or
prohibition provided by any applicable statute or regulation.

 

SECTION 8.14.  USA PATRIOT Act.  Lender is subject to the requirements of the
USA Patriot Act (Title III of Pub. L. 107-56 (signed into law October 26,
2001)) (the “Act”) and hereby notifies Borrower that pursuant to the
requirements of the Act, it is required to obtain, verify and record
information that identifies Borrower, which information includes the name and
address of Borrower and other information that will allow such Lender to
identify Borrower in accordance with the Act.

 

SECTION 8.15.  Disclosure.  Borrower hereby acknowledges and agrees that
Lender and/or its Affiliates from time to time may hold investments in, make
other loans to or have other relationships with Borrower and its Affiliates.

 

SECTION 8.16.  Interest Rate Limitation.  Notwithstanding anything herein to the
contrary, if at any time the interest rate applicable to any Loan, together
with all fees, charges and other amounts which are treated as interest on such
Loan under applicable law (collectively the “Charges”), shall exceed the
maximum lawful rate (the “Maximum Rate”) which may be contracted for,
charged, taken, received or reserved by Lender holding such Loan in accordance
with applicable law, the rate of interest payable in respect of such Loan
hereunder, together with all Charges payable in respect thereof, shall be
limited to the Maximum Rate and, to the extent lawful, the interest and Charges
that would have been payable in respect of such Loan but were not payable as a
result of the operation of this Section shall be cumulated and the
interest and Charges payable to such Lender in respect of other Loans or
periods shall be increased (but not above the Maximum Rate therefor) until such
cumulated amount, together with interest thereon at the Federal Funds Effective
Rate to the date of repayment, shall have been received by Lender.

 

62

 

IN WITNESS WHEREOF, the
parties hereto have caused this Agreement to be duly executed by their
respective authorized officers as of the day and year first above written.

 

	
   

  	
  KOSS CORPORATION

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  JPMORGAN CHASE BANK, N.A.

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  

 

[Signature
Page to Credit Agreement]

 

 

 

EXHIBIT
A

 

BORROWING BASE CERTIFICATE

 

[Form attached]

 

Exhibit
A

 

 

EXHIBIT
B

 

COMPLIANCE
CERTIFICATE

 

To:          JPMorgan Chase Bank, N.A.

 

This Compliance Certificate
is furnished pursuant to that certain Credit Agreement dated as of May 12,
2010 (as amended, modified, renewed or extended from time to time, the “Agreement”)
between Koss Corporation, a Delaware corporation (the “Borrower”), and JPMorgan
Chase Bank, N.A., as Lender.  Unless
otherwise defined herein, capitalized terms used in this Compliance Certificate
have the meanings ascribed thereto in the Agreement.

 

THE UNDERSIGNED HEREBY
CERTIFIES THAT:

 

1.             I am the duly
elected
                                        
of Borrower;

 

2.             I have reviewed the
terms of the Agreement and I have made, or have caused to be made under my
supervision, a detailed review of the transactions and conditions of Borrower
and its Subsidiaries during the accounting period covered by the attached
financial statements [for quarterly financial
statements add: and such financial statements present fairly in all
material respects the financial condition and results of operations of Borrower
and its consolidated Subsidiaries on a consolidated basis in accordance with
GAAP consistently applied, subject to normal year-end audit adjustments and the
absence of footnotes];

 

3.             The examinations
described in paragraph 2 did not disclose, except as set forth below, and I
have no knowledge of (i) the existence of any condition or event which
constitutes a Default during or at the end of the accounting period covered by
the attached financial statements or as of the date of this Certificate or (ii) any
change in GAAP or in the application thereof that has occurred since the date
of the audited financial statements referred to in Section 3.04 of the
Agreement;

 

4.             I hereby certify,
in my capacity as
                            ,
that the Borrower has not changed (i) its name, (ii) its chief
executive office, (iii) principal place of business, (iv) the type of
entity it is or (v) its state of incorporation or organization without
having given the Lender the notice required by the Security Agreement;

 

5.             Schedule I
attached hereto sets forth financial data and computations evidencing Borrower’s
compliance with certain covenants of the Agreement, all of which data and
computations are true, complete and correct; and

 

6.             Schedule II
hereto sets forth the computations necessary to determine the Applicable Rate
commencing on the Business Day this certificate is delivered.

 

Described below are the
exceptions, if any, to paragraph 3 by listing, in detail, the (i) nature
of the condition or event, the period during which it has existed and the
action which Borrower has taken, is taking, or proposes to take with respect to
each such condition or event or (i) the change in GAAP or the application
thereof and the effect of such change on the attached financial statements:

 

1

 

7.             Except as set forth
on Schedule III hereto, the Borrower has not acquired any additional
right, title or interest in any registered Patents, Trademarks or Copyrights.

 

The foregoing
certifications, together with the computations set forth in Schedule I and
Schedule II hereto, the information set forth on Schedule III hereto, and the
financial statements delivered with this Certificate in support hereof, are
made and delivered this
              
day of                                       .

 

	
   

  	
  KOSS CORPORATION

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  

 

2

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