10-K 1 FORM 10-K - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED MARCH 31, 1997 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 0-14841 FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED (EXACT NAME OF THE REGISTRANT AS SPECIFIED IN ITS CHARTER) PENNSYLVANIA 22-2476703 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) ONE FRANKLIN PLAZA, BURLINGTON, NEW JERSEY 08016-4907 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (609) 386-2500 (REGISTRANT'S TELEPHONE NUMBER) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, NO PAR VALUE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. As of June 13, 1997, approximately 8,069,000 shares of common stock of the registrant were outstanding and the aggregate market value of common stock held by non-affiliates was approximately $66,630,000. The registrant's Proxy Statement for its 1997 annual meeting of stockholders is hereby incorporated by reference into Part III of this Form 10-K. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED INDEX TO ANNUAL REPORT ON FORM 10-K FILED WITH THE SECURITIES AND EXCHANGE COMMISSION YEAR ENDED MARCH 31, 1997 ITEMS IN FORM 10-K
PAGE ---- PART I Item 1. BUSINESS...................................................... 1 Item 2. PROPERTIES.................................................... 12 Item 3. LEGAL PROCEEDINGS............................................. 12 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........... 12 EXECUTIVE OFFICERS OF THE REGISTRANT.......................... 13 PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS...................................................... 14 Item 6. SELECTED FINANCIAL DATA....................................... 15 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................................... 16 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................... 20 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE..................................... 36 PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............ 36 Item 11. EXECUTIVE COMPENSATION........................................ 36 Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................................................... 36 Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................ 36 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K..................................................... 36 Signatures.............................................................. 38
PART I ITEM 1. BUSINESS Franklin Electronic Publishers, Incorporated ("Franklin" or the "Company") believes it is the world's largest designer, developer and publisher of electronic books, having sold more than fifteen million units since 1986. The Company's electronic books are hand-held, battery-powered devices that incorporate the text of a reference work or database and permit the user to read selected portions on a display screen. The Company owns or has licenses to publish in electronic hand-held format more than 200 titles, including monolingual and bilingual dictionaries (such as Merriam-Webster's Tenth Collegiate Dictionary), the Bible, encyclopedias (such as the Concise Columbia Encyclopedia), entertainment-oriented publications (such as Parker's Wine Guide), educational publications and medical publications (such as the Physicians' Desk Reference). The Company has recently begun to sell a line of personal information management electronic products, such as databanks and organizers, under its recently licensed ROLODEX(R) Electronics trademark. The Company marketed its first electronic book, the Spelling Ace(R), in 1986. The Company believes that the Spelling Ace was one of the first electronic books marketed in the United States. Beginning in 1987, Franklin began marketing increasingly sophisticated electronic book versions of thesauruses and dictionaries and, in 1989, the Holy Bible. Franklin's early lines of electronic books were marketed exclusively in a dedicated format, with each unit containing one built-in title. In 1992, the Company developed a more flexible platform, the Digital Book System(R) product. Instead of having built-in titles, the Digital Book System contained slots into which users could insert separate titles contained in integrated-circuit read-only memory ("IC-ROM") cartridges. Franklin began marketing its library of reference works in the IC-ROM card format to customers of this flexible platform and is still actively marketing its medical publications in this format. In January 1995, the Company introduced its flagship BOOKMAN(R) product line. Each BOOKMAN unit is a platform that contains a built-in database of one of the Company's more popular titles, such as a general purpose dictionary, a version of the Bible or an encyclopedia, and permits simultaneous access from the platform to a maximum of two additional reference works contained in razor-blade sized IC-ROM cartridges inserted into slots on the back of the unit. The Company now markets many of its electronic books in the IC-ROM cartridge format for insertion into the cartridge slots on the BOOKMAN platform. With the introduction and expansion of the BOOKMAN line, the Company has derived, and expects to continue to derive, an increasing proportion of its revenues from the sale of IC-ROM cartridges, which generally have higher gross profit margins than the Company's dedicated products. In October 1996, the Company acquired certain assets of the ROLODEX(R) Electronics product line and the associated trademark license for approximately $16 million in cash from Insilco Corporation ("Insilco"). Under the license, the Company acquired the right to build and market certain electronic products under the ROLODEX(R) Electronics mark, including databanks, organizers and telephones. The Company was incorporated in 1983 in the Commonwealth of Pennsylvania as the successor to a business commenced in 1981. The Company's principal executive offices are located at One Franklin Plaza, Burlington, New Jersey 08016-4907, and its telephone number is (609) 386-2500. COMPETITIVE ADVANTAGES The Company believes that it has the following competitive advantages: Strong Global Position The Company believes that it has a dominant market share in electronic book publishing in the United States, the United Kingdom, Canada and Australia. The Company has licensed from publishers the electronic 1 hand-held rights to more than 200 titles and actively seeks to add new titles. The Company believes that it has rights to more titles than any of its competitors in the electronic book market. The Company has obtained such licenses from a variety of publishers, including, among others, Liris Interactive, the wholly-owned multimedia publisher of the French publishing conglomerate CEP Communications ("Liris"), Bertelsmann Lexicon Verlag ("Bertelsmann"), the Columbia University Press, Harper/Collins Publishers Ltd. ("Harper/Collins"), Little, Brown and Co., Inc., McGraw-Hill, Inc., Merriam- Webster, Inc. ("Merriam-Webster"), the Oxford University Press and Simon & Schuster Consumer Group. The Company recently acquired exclusive rights to the trademark ROLODEX(R) Electronics for the sale of electronic products, such as databanks, organizers, and telephones. The Company believes that the ROLODEX(R) mark commands a high degree of brand recognition among consumers in the United States. The Company markets its products through a broad array of distribution channels. In the United States alone, Franklin's books are sold in over 30,000 retail establishments, including Radio Shack, Wal-Mart, K-mart, Service Merchandise, Office Max and Staples. Technological Leadership The Company believes its ability to compress data and to design systems that permit quick and efficient information retrieval has enabled it to maintain a strong market position. Additionally, Franklin's expertise in IC-ROM technology allows it to store more data in smaller, less expensive memory chips, thereby reducing the overall cost and size of its products while retaining the capacity for rapid retrieval of compressed data in a low power, low cost environment. As the chart below shows, the cost of IC-ROM has decreased steadily over the time that electronic books have been produced, allowing the Company the ability to bring down the price of its electronic books over time. [GRAPH APPEARS HERE]
Retail Price of Franklin Dictionary vs. Cost of I C ROM Calendar Years 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 Cost of 1 Megabyte of Memory 48.00 24.00 19.90 19.90 8.40 7.12 5.66 4.06 3.79 2.77 2.16 Retail Price of Franklin Dictionary 299.00 299.00 279.00 249.00 149.00 99.00 79.00 69.00 49.00 49.00 39.00
The Company commits substantial resources to technological innovation and product development. Since the introduction of the Spelling Ace in 1986, the Company has developed and introduced a number of variations 2 of its platforms, introduced its titles in new interchangeable cartridge format, and adapted certain personal computer application software programs to its platforms. The Company implements cost reduction programs for hardware platforms on which its books are published, including custom designs of very large scale integrated circuits ("VLSI"s). This permits the Company to offer cost-reduced platforms at increasingly lower prices while maintaining its gross margins. The combination of cost reduction and decreasing IC-ROM prices has allowed the Company to better compete with print versions of reference publications over the years that electronic books have been produced. New Rolodex(R) Electronics Products In 1997, Franklin began to ship its new line of organizers and databanks sold under the exclusive ROLODEX(R) Electronics brand name. The ROLODEX(R) Electronics product line is expected to include low priced databanks, which allow users to store and retrieve names and telephone numbers, and higher priced and more advanced personal organizers that can interface with desktop PC's and be expanded with BOOKMAN cartridges. New BOOKMAN Products The Company believes that BOOKMAN products have the potential to set an industry standard for hand-held electronic publishing. The advantages of the card format are flexibility of interchangeable databases incorporated in IC- ROM cards and the ability to update information contained in the IC-ROM cards. Additionally, the card format has economies that are important for smaller IC- ROM card production runs which enable the Company to publish profitable electronic versions of books that do not have mass market appeal, including commercial and technical books and proprietary publications commissioned by third parties. Brand Name Recognition and Reputation for Quality The Company believes that the proprietary BOOKMAN trademark and exclusive ROLODEX(R) Electronics mark provide advantages in the highly competitive domestic market for electronic reference books and personal information management products. The Company's electronic books enjoy a reputation for quality that results from their content, hardware design and easy-to-use applications. Franklin's products have won several awards including the Electronics Industries Association's Consumer Electronics Group Design and Engineering Award for 1993 and 1994 and the French Sippa d'Or Trophy for 1995 and 1996. The Company received the 1996 Transatlantic Entrepreneurial Business Award from the British-American Chamber of Commerce. The award recognizes Franklin's achievements in promoting trade between the United States and United Kingdom. The Company believes that the exclusive ROLODEX(R) Electronics mark provides an advantage in the highly competitive domestic market for personal information management products. BUSINESS STRATEGY The Company's strategy is to leverage its leading market position with new products and to expand further internationally. The principal elements of Franklin's strategy are as follows: Popularizing BOOKMAN Products The Company's sales and marketing emphasis will be on generating mass market interest in BOOKMAN products in order to achieve the Company's goal of making the BOOKMAN platform the industry standard for hand-held electronic book publishing. As part of this emphasis, the Company intends to use television advertising campaigns on cable networks and on spot TV, as well as a print advertising campaign, using a nationally recognized spokesperson in the near term. Product Expansion The Company intends to increase significantly the number of titles available for the BOOKMAN format by introducing new titles and by converting titles from its current library to the built-in BOOKMAN unit and IC-ROM cartridges for the BOOKMAN platform. A number of these titles will be aimed at international and certain 3 special markets, including educational, medical and industrial markets. A substantial portion of the Company's research and development expenditures will be used for the development of new titles on IC-ROM cartridges for the BOOKMAN platform. In addition, the Company plans to expand the applications for its BOOKMAN products by entering into joint ventures with developers of software and hardware products. The Company partnered with Starfish Software to develop that company's Sidekick(R) (organizer) application for use on a BOOKMAN unit. The acquisition of the ROLODEX(R) Electronics product line is expected to enable Franklin to offer a broader range of hand-held electronic products, which is expected to influence retailers to grant Franklin expanded shelf space. The Company believes that not only does the hand-held organizer market complement its existing businesses, but also that the potential exists for increasing the market share for the ROLODEX(R) Electronics business given Franklin's existing competitive strengths, such as reputation for quality and breadth of domestic distribution, as well as the high brand awareness of the ROLODEX(R) name in the domestic marketplace. International Expansion Historically, the Company's international sales were made exclusively through a network of independent distributors. Commencing in 1992, the Company began to market its products directly in selected international markets by establishing wholly-owned, local subsidiaries. The Company's United Kingdom subsidiary, established in 1992, markets and distributes British English versions of its books in the United Kingdom; its French and Canadian subsidiaries, which commenced operations in 1994, and its German and Australian subsidiaries, which commenced operations in 1995, market and distribute books from the Company's existing library of titles as well as new books developed for those markets. The Company initiated sales through its Mexican and Colombian subsidiaries in the past fiscal year and has recently commenced direct operations through a subsidiary in Italy. The Company is in the process of acquiring its former sales and marketing distribution company in the Benelux countries to sell its existing line of Dutch and French products, as well as new electronic books targeted for the Low Countries. The Company recently signed a joint venture agreement with Kinpo Electronics, a Taiwanese manufacturer of electronic products, to develop and sell Chinese/ English products in Asia and the rest of the world. The Company intends to expand the number of countries in which it markets and anticipates that its international sales will continue to grow as a percentage of total sales. Product Development for Special Markets In addition to distributing its books to a broad range of consumers through catalogs and department, specialty, chain and discount stores, the Company also attempts to market to specific industries and market segments. The Company has formed separate divisions to market its books in the medical and education markets. Franklin has successfully produced electronic books on an OEM basis for third parties. PROCESS OF PUBLISHING ELECTRONIC BOOKS The process of publishing electronic books is analogous in many ways to the process of publishing print books. For example, just as a traditional book publisher acquires a manuscript, the development of an electronic book normally commences with the Company's acquisition of rights to a reference work or database which it has identified for one or more proposed books. The Company generally licenses the use of such reference works or databases for IC-ROM electronic book format. Although databases are usually delivered to the Company in electronic form, the Company thoroughly reviews and cleans the data by removing errors in preparation for publication. This process is analogous to a traditional book publisher proofreading a manuscript. The data must then be analyzed and compressed to economically store it in as small an IC-ROM chip as possible and the Company must design systems to retrieve information quickly from its compressed state. Similar to a traditional book publisher editing a manuscript and preparing a detailed index, the Company then designs the user interface, which permits the user of a product to locate and read the desired data quickly and intuitively. The Company has developed proprietary software tools, utilities, custom databases and systems which substantially reduce the time involved in completing these tasks and aid in the more efficient development of semi-standard software systems embedded in the electronic work. 4 A prototype chip containing the compressed data and interface software is then carefully tested before IC-ROM chips are produced. To complete the product, the chips are assembled in a hardware platform or in an IC-ROM card, similar to a traditional book publisher printing and binding a hard copy book. TITLES Franklin currently markets more than 250 electronic books which includes books for its BOOKMAN or Digital Book System platforms or on IC-ROM cards for the BOOKMAN and Digital Book System platforms in various categories including thesauruses, dictionaries, bilingual dictionaries, the Bible, the Total Baseball Encyclopedia, the Concise Columbia Encyclopedia and educational and medical publications. Different versions of the Company's books use different databases and provide various levels of functionality. Dictionaries Franklin's electronic spelling books (the "Spelling Ace(R) line") operate as phonetic spelling error detectors and correctors, puzzle solvers, word list builders and word finders. These books permit the user to obtain the correct spelling of a word that the user does not know how to spell correctly. For example, if the user phonetically types in "krokodyl," the book will display a list of seven words including, as the first choice, "crocodile." The Company markets various versions in the Spelling Ace line incorporating different databases. The most popular version is based on a list of over 80,000 American English words licensed to the Company by Merriam-Webster, and a children's version is based on the word list from Webster's Elementary Dictionary. Several versions directed to children and the "English as a Second Language" ("ESL") markets have been sold with a companion hard copy dictionary to which the electronic book serves as an index. The Company's electronic thesaurus line (the "Wordmaster(R)") provides phonetic spelling features, and also acts as a thesaurus once a word is found. For example, if a user enters the word "baffled," the thesaurus will display eleven different synonyms, including "frustrated," "disappointed" and "foiled." The most popular version of the Wordmaster contains over 496,000 synonyms and 77,000 thesaurus definitions for each of the more than 80,000 entry words from Merriam-Webster's Collegiate Thesaurus. The Company's top-of-the-line electronic dictionary is the BOOKMAN Merriam- Webster's Collegiate(R) Dictionary which contains over 195,000 words and their definitions, parts of speech, hyphenation points and different word forms (inflections). All of the Company's electronic dictionaries provide phonetic spelling correction and many provide thesaurus features as well. The Company markets versions of its dictionaries that include speech synthesis circuitry (based on text to speech technology in which algorithms are used to convert text into sound) which allows the Company's products to pronounce, in computer generated speech, relevant words contained in the various databases. The Company also has developed and sold audible products that use digitally recorded and compressed speech, which sounds more like a human voice. The Company's line of products also includes bilingual dictionaries. Each contains more than 200,000 words in both English and either Spanish, French, German, Arabic, Hebrew or Korean, and each provides complete translations, definitions, verb conjugations and a gender guide, and plays a variety of language learning games to help teach the language. The Spanish/English dictionary is marketed in versions with and without speech synthesis for both Spanish and English words. Each of the other bilingual dictionaries is equipped with speech synthesis for the English words. The Company currently markets a French/German dictionary and currently is developing bilingual dictionaries for several other languages, including other language pairs that do not include English, such as German/Italian and French/Spanish. Franklin has a speaking dictionary designed to facilitate use by blind, visually impaired or learning disabled individuals, as well as others with special needs. This dictionary incorporates speech technology which pronounces every word at user adjustable volumes and speeds. In addition, this dictionary is equipped with full 5 audio feedback, which allows every key on the keyboard to speak its letter or function. Other features include a keyboard with high-contrast lettering and raised locator dots, a large high-contrast screen with adjustable fonts and headphones. The Bible Franklin's electronic Holy Bible is a hand-held edition of the entire text of the Bible, which allows for retrieval of text by searches based on single words, word groups or synonyms. For example, a search for the words "valley" and "shadow" will retrieve the Twenty-third Psalm. Because of its built-in ability to conduct full-text word searches, the Franklin Bible is a fully automated concordance. The Company sells the Bible on its BOOKMAN platform and on IC-ROM cards designed for use with its BOOKMAN platform. The Company sells both the King James and the New International versions of the Bible, as well as a children's version of the Bible, and markets a Bible question-and-answer IC-ROM card. The Company sells electronic versions of a Spanish language Bible, the Reina Valera edition, and a German language Bible that is commonly known as the Luther Bible. Medical Publications In 1992, the Company introduced the Digital Book System, a shirt-pocket sized electronic book platform with two empty slots that accept interchangeable IC-ROM cards. The Digital Book System has been successful in the medical market and the Company sells a number of medical books for the Digital Book System, such as the Pocket PDR containing data from the Physicians' Desk Reference. Franklin's Digital Book library includes other medical titles, including the Handbook of Adverse Drug Interactions, the Washington University Manual of Medical Therapeutics, Harrison's Principles of Internal Medicine Companion Handbook, The Merck Manual and the Guide to Antimicrobial Therapy. The Company has produced an electronic formulary for HIP/Rutgers Health Plan and intends to develop additional products for the managed health care business based on the model of that formulary. An electronic formulary offers physicians in a particular healthcare group instant access to drug information and disease management algorithms specific to that group in a hand-held unit. The Company has begun shipping a line of BOOKMAN products for use by nurses in the United States. The keystone of this line is a BOOKMAN platform having the popular Nursing Diagnoses and Classifications published by the North American Nursing Diagnosis Association, a reference text that classifies and defines medical conditions specific to nursing. The Company is currently shipping a BOOKMAN card containing Nursing '97 Drug Handbook published by Springhouse Corp. Other nursing publications under license to the Company are in development for BOOKMAN cards. The Company has developed products for the expanding consumer market for medical information by publishing general medical books in the BOOKMAN format. The Company publishes the Parents' Emergency Medical Guide and the PDR Family Guide to Prescription Drugs. Entertainment Titles Franklin's Total Baseball Encyclopedia provides year-by-year batting and pitching statistics for every team and player in the National and American Leagues from 1876 through the 1996 season. The Total Baseball Encyclopedia also provides year-by-year team batting and pitching totals, plus complete rosters and biographical information on every player. It also has the capacity, because of its database architecture, to create custom lists or ratios. The Company sells a Crossword Puzzle Solver electronic book which provides correct spelling for over 250,000 words and phrases from Merriam-Webster's Official Crossword Puzzle Dictionary for use by word puzzle enthusiasts. The Company has also produced The Official Scrabble Players' Dictionary, and Parker's Wine Guide, an authoritative guide to wines and vineyards. 6 The Concise Columbia Encyclopedia and Bartlett's Familiar Quotations The Company has developed and markets a hand-held general usage encyclopedia which contains the entire text of the Concise Columbia Encyclopedia. The electronic encyclopedia allows for rapid search of the entire text by single words, word groups or synonyms. Special features include phonetic-based spelling correction, hypertext, bookmarks to return quickly to often used entries, a filtering search feature that facilitates narrowing searches by subject, region or time period, and an assortment of factual quizzes. The Company has developed and markets a BOOKMAN card containing the 16th Edition of the renowned reference work Bartlett's Familiar Quotations under license from Little, Brown & Co. The BOOKMAN version of Bartlett's Familiar Quotations contains over 20,000 famous quotations by over 2,500 authors that are searchable by key word, time period, or author. International Titles Beginning in 1987, the Company developed and produced British English versions of its American English electronic books for international markets, particularly the United Kingdom and Australia, such as an electronic spelling book based on a list of over 70,000 words licensed from Harper/Collins and a children's dictionary incorporating a database from the Oxford Children's Dictionary. The Company has similarly developed monolingual electronic books for the French market. Franklin has also developed new electronic books for sale in the German-speaking market and a Spanish monolingual dictionary for Spain and South America. In addition, the Company has entered into an agreement pursuant to which Bertelsmann has granted the Company the right to publish electronic books based on a number of Bertelsmann's books. In February 1997, Liris executed an exclusive omnibus agreement with Franklin, by which the parties will jointly develop, publish, and distribute French titles in hand-held electronic platforms and ROM cards. Liris publishes dictionaries, thesauruses, encyclopedias and other works under the following well known French trademarks: Le Robert, Larousse, Nathan, Dalloz, Masson and Bouquins. The Company entered into a joint venture agreement in May 1997 with Kinpo Electronics, a manufacturer of electronic products in Taiwan, to develop, manufacture and sell hand-held electronic Chinese (all dialects) monolingual, bilingual, and multilingual reference products for China, Taiwan, Hong Kong, and other worldwide markets. The Company believes that it will derive a greater portion of its revenues from international sales in fiscal 1998 and beyond than in prior years. English as a Second Language Products The Company has produced bilingual electronic learners' dictionaries based on the Oxford Students' Dictionary of Current English that have English definitions in simplified language. These learners' dictionaries are intended to aid native Arabic, Hebrew, and Korean speakers to learn English as a second language. The Company produces Speak English!(TM), a hand-held electronic tutor that utilizes digitally recorded and compressed speech technology to pronounce a basic vocabulary of English words for the ESL student and provides identification of words through the use of graphic images. The user speaks into a microphone built into the electronic book, which records and plays back the user's pronunciation of a word as well as the proper pronunciation stored in the product, thereby allowing the user to compare the two pronunciations and correct his or her pronunciation as appropriate. The Chinese/English product to be produced under joint venture is intended to be sold into the worldwide ESL market of native Chinese speakers. Personal Information Management Products In 1996, Franklin launched the BOOKMAN Sidekick Palmtop Organizer line, products developed under license from Starfish Software, Inc. ("Starfish"). Sidekick(R) is a best selling personal organizer software package for use in desktop or laptop personal computers. This BOOKMAN organizer is sold with a connectivity package that includes a diskette-based software program that allows the user to upload and download data between the BOOKMAN platform and an application program running on a desktop personal computer. In 1997, the Company began to sell this line of organizers under the ROLODEX(R) Electronics trademark. The Company believes that not only does the hand-held organizer market complement its existing businesses but also that there is potential to improve the market share of the ROLODEX(R) Electronics business given Franklin's existing competitive strengths. The ROLODEX(R) Electronics product line includes low priced 7 databanks, which allow users to store and retrieve names and telephone numbers, and higher priced and more advanced personal organizers that can interface with desktop PC's and be expanded with BOOKMAN cartridges. Speech Recognition Products In May 1997, the Company acquired certain rights in speech recognition technology from Voice Powered Technology International, Inc. The acquired technology was developed for low cost, low power consumption, portable and compact applications in which an electronic device is controlled by spoken voice input. The technology is speaker-dependent in that a device utilizing the technology must be trained to recognize the speech pattern of the person controlling the device. The technology is not language dependent and consequently can be used in products targeted to be sold throughout the Company's chain of international sales and marketing subsidiaries and independent distributors. Initially, the Company intends to sell in the United States and in Europe a line of voice-controlled electronic organizers under its ROLODEX(R) Electronics brand name utilizing the acquired technology. Other Imprints The Company has lines of products targeted to sell at lower price points under the Next Century(R) and SYSTECH(TM) imprints. These products, which contain a single dedicated title, include spelling correctors and thesauruses for sale both in the domestic consumer market and in France, the United Kingdom and Australia. ACQUISITION OF DATABASES The Company maintains an active program to acquire, commission or develop internally databases that it believes are capable of being effectively adapted to the electronic book format and that can be positioned and marketed by it in the electronic book market. The Company also receives requests to develop books incorporating specific databases from third-party licensors and customers. The Company generally obtains a long-term license from the owner of the database and pays the owner a recoupable advance, followed by the payment of royalties based on sales. RESEARCH AND DEVELOPMENT The Company has a group of approximately 100 persons that performs research and development relating to new electronic books and personal information management products as well as improvements to existing books and products. The group also conducts ongoing research in connection with the development of new software for the Company's books and products, specifically with respect to more efficient ways to compress the information contained in the databases incorporated in the Company's electronic books into the smallest and least costly IC-ROM chips. The Company also focuses its development efforts on creating new hardware platforms for the Company's electronic books. For example, the BOOKMAN and Digital Book System technologies were developed by the Company's internal research and development group. The Company maintains a full-time internal development group of hardware and software engineers dedicated to the critical function of developing VLSIs that integrate both general purpose microprocessors and custom design circuits for electronic books. Through this extensive effort the Company is able to reduce the cost of components for its platforms and ROM cards on an ongoing basis. The Company regularly engages in programs to redesign its electronic book platforms and to develop new VLSIs for its products. The Company is currently developing products utilizing digitally recorded and compressed speech technology, which are intended to help the user learn proper English pronunciation. The Company intends to focus its efforts regarding these products in the ESL market. The Company has expertise in and has licensed rights to certain text-to-speech technology ("TTS"), which allows for the synthesis of audible voice through software. With the recent acquisition of speech recognition technology from VPTI, the Company is consolidating its efforts in speech-related technology into a research and development group targeted toward application of TTS, compressed digitally- recorded speech, voice recognition, and voice recording for use in a panoply of small, 8 low priced, electronic products, including electronic books and personal information management products. The Company's efforts in research and development of hardware and software focus on the Company's practice of customizing its hardware platform for use with specific content or particular software. This allows the Company to maximize the functionality of its products and reduce costs. During fiscal 1997, 1996 and 1995, the Company spent approximately $5.5 million, $5.5 million and $5.2 million, respectively, on research and development. MANUFACTURE AND DISTRIBUTION The Company arranges for the assembly of its books by placing purchase orders with established third-party manufacturers in China, Taiwan, Malaysia, Thailand, the Philippines and Indonesia. The Company believes that it could locate alternate manufacturers for its books if any of its current manufacturers is unable, for any reason, to meet the Company's needs. The Company designs certain custom integrated circuits, which are manufactured by third parties for use in the Company's electronic books. Franklin also creates the mechanical, electronic and product design for its hardware platforms and designs and owns the tools used in the manufacture of its books. The Company's electronic books are based on general purpose microprocessors, general purpose static random access memory chips and custom- designed IC-ROM chips. The Company designs VLSIs that integrate both general purpose microprocessors and custom-designed circuits in order to reduce the cost of the components in its platform. In order to minimize the effect of any supplier failing to meet the Company's needs, the Company generally attempts to source these parts from multiple manufacturers. In those cases where the Company chooses to use a single source for economic reasons, alternative suppliers are generally available. The Company utilizes its offices in Hong Kong and Tokyo to facilitate component procurement and manufacturing and to conduct on-site quality control inspection by Company personnel of electronic books. The Company's electronic books are generally shipped at the Company's expense to its facility in New Jersey, where the Company maintains inspection, quality control, packaging, warehousing, and repair operations for distribution in the United States, and to similar facilities in Europe and elsewhere for its foreign operations. SALES AND MARKETING Franklin's electronic books are marketed domestically through the Company's own sales and marketing force and through independent sales representative organizations, which are supervised by the Company's internal sales department. Consumer Sales Franklin's books are sold in over 30,000 retail establishments in the United States. These are comprised of mass market retailers, discount chains, bookstores, independent electronic stores, department stores and catalog companies such as The Sharper Image. Consumers can also order BOOKMAN products and cartridges directly from Franklin by calling 1-800-BOOKMAN or by visiting the Company's website at "http://www.franklin.com." The Company sells through several large retail chains, including Radio Shack, Wal-Mart, K-mart, Service Merchandise, Office Max and Staples. Franklin commonly participates in and provides financial assistance for its retailers' promotional efforts, such as in-store displays, catalog and general newspaper advertisements. The Company promotes its electronic books with advertisements in magazines and newspapers and on television and radio. The Company also displays its publications at trade shows, including the Consumer Electronics Show, and advertises in trade magazines. 9 The Company indirectly benefits from general market awareness of the databases incorporated in its books. In the 1998 fiscal year, the Company expects to conduct a television advertising campaign for its BOOKMAN line in order to expand brand awareness in the domestic consumer marketplace. International Sales The Company sells its electronic books worldwide through its wholly-owned, local subsidiaries and a network of independent distributors. International sales accounted for 37%, 30% and 28% of the Company's sales during fiscal 1997, 1996 and 1995 respectively. Franklin's subsidiary in the United Kingdom markets and distributes British English versions of its books in the United Kingdom. The Company's subsidiaries in France, Canada, Germany, and Australia, market and distribute the Company's books, including new books developed for these markets. In 1996, the Company commenced operations in Mexico and Colombia, and has recently begun wholly-owned subsidiary sales in Italy. In each of these countries, the Company marketed its products through distributors prior to direct marketing through subsidiaries. The Company entered into a joint venture agreement in May 1997 with Kinpo Electronics, a manufacturer of electronic products in Taiwan, to develop, manufacture and sell hand-held electronic Chinese (all dialects) monolingual, bilingual, and multilingual reference products for China, Taiwan, Hong Kong, and other worldwide markets. Medical Sales The Company's Medical Division focuses its development and sales efforts on the Digital Book System for the medical professional market which requires the delivery of massive, complicated information rapidly in a highly portable format. This Division has licensed databases from respected medical publishers for that purpose. Sales efforts of the Medical Division are augmented by co- marketing efforts with the Company's licensors of medical databases. The Company's Medical Division has developed products for the managed care business, such as an electronic formulary for HIP/Rutgers Health Plan. The Company is shipping a line of BOOKMAN products targeted for use by nurses in the United States, and is producing products for the consumer market for medical information such as the Parents' Emergency Medical Guide and the PDR Family Guide to Prescription Drugs. Education Sales The Company's Franklin Learning Resources division is dedicated to the sale of electronic books directly to educators and school systems throughout the United States. The Company's electronic books are in use in over 20,000 United States schools. In addition, custom curriculae are created around the books to meet school requirements. Custom Electronic Book Publishing Sales The Company has created commercial or industrial applications of the Digital Book System as a data delivery device for corporate information used by employees or customers of corporations, such as an electronic index of windshield wiper replacement blades for Pylon Manufacturing Corp. and the PocketView Digital Book developed and recently updated for Allen-Bradley Company. The Company produced for Societe Generale a custom electronic index to its popular Encyclopedie Bordas and has produced three updated versions of the index and one new product based on the encyclopedic work Memories of the Twentieth Century. The Company's development of the electronic formulary for HIP/Rutgers was the first custom publication undertaken by the Company in the medical arena. The Company continues to pursue opportunities for custom versions of its products. 10 PATENTS, TRADEMARKS AND COPYRIGHTS The Company owns more than twenty-five United States utility and design patents on its electronic books and a number of international patents on its products. The Company actively pursues the acquisition and enforcement of patent rights and, in furtherance thereof, maintains an ongoing program to apply for and prosecute patent applications and to enforce its rights in patents that issue therefrom. Franklin owns certain trademark rights, including "Franklin(R)", "BOOKMAN(R)", "Spelling Ace(R)", "Wordmaster(R)", "Digital Book System(R)", "Next Century(R)" and "Language Master" and has an exclusive license for the mark ROLODEX(R) Electronics in the United States and various foreign countries. Copyrights to certain word lists incorporated in the Company's electronic books are the property of the Company's licensors. The Company owns copyrights in certain programs and algorithms used in, as well as the compilations of, its electronic books. COMPETITION The Company is the market leader for hand-held, IC-ROM-based electronic books. The Company's main domestic competitor in the electronic book category is Seiko Instruments USA Inc., which markets spelling correctors, thesauruses, dictionaries and a Spanish translator. The Company believes it has various degrees of competition at different price points in the consumer market. The Company's major competitor, Seiko, focuses primarily on the modestly-priced end of the market. The Company's main international competitors are Lexibook and EuroTronics, which market French monolingual spelling correctors, thesauruses and dictionaries in France, and Hexaglot which markets German centric bilinguals and translators in Germany. A number of prominent electronics manufacturers, including Sharp Electronics Corporation, Casio, Apple Computer, Inc., Royal, Psion, U.S. Robotics, LG Electronics and Hewlett-Packard Company, market palmtop personal organizer products, personal digital assistants or general usage personal computers that offer varying degrees of electronic reference capabilities and personal information management functions. Competitive factors for electronic books are product quality and reliability, functionality, price, performance, speed of retrieval, quality of underlying databases, quality of spelling correction, portability, marketing and distribution capability, service and corporate reputation. The Company believes it is the leader in respect of each such factor. The Company's books enjoy a reputation for quality resulting from their content, hardware design and easy-to-use applications. The Company's books are characterized by their capacity to permit the user to define the kind of information being sought and to provide information responsive to the user's request. While the Company has used IC-ROM technology in its products for the past ten years, many manufacturers have recently commenced its use in personal digital assistants and lap-top computers. In addition, IC-ROM technology is now being used in digital film and audio recording. The Company believes that its experience and expertise in the use of IC-ROM technology in its electronic book products will position it for the use of that technology in other products as well. The Company is entering the highly competitive worldwide marketplace for personal information management products in which its competition will be, among others, Sharp Electronics Corporation, Casio, Royal, Psion, U.S. Robotics, and Hewlett-Packard Company. Many competitors in this market have greater capital, research and development, marketing and distribution resources than the Company and there can be no assurance that the Company can successfully compete in this market. 11 SOFTWARE LICENSING The Company designs linguistic software that performs spelling error detection and correction, thesaurus and dictionary functions in conjunction with databases of words in 20 languages and dialects. The Company's subsidiary, Proximity Technology Inc., markets this software for use in typewriters and word-processing and computer products, including CD-ROM and internet products. The Company competes with INSO, Inc. in respect of these software products. The Company's revenues from software licensing have been 2% to 3% of total revenues in recent years. EMPLOYEES As of June 13, 1997, the Company employed approximately 270 persons in the United States, approximately 23 persons in Asia, and approximately 65 persons in international sales and marketing subsidiaries. None of the Company's employees is represented by a union. The Company believes its relations with its employees are satisfactory. - -------- Merriam-Webster's is a trademark of Merriam-Webster, Inc.; Physicians' Desk Reference and Pocket PDR are trademarks of Medical Economics Data, a division of Medical Economics Company, Inc.; PocketView is a trademark of Allen-Bradley Company, Inc.; Sidekick is a trademark of Starfish Software, Inc.; and ROLODEX(R) is a registered trademark of Sterling Plastics Co., a division of Newell Co. Except for the historical information contained herein, the matters discussed in this report are forward looking statements that involve risks to and uncertainties in Franklin's business, including, among other things, the timely availability and acceptance of new electronic books and personal information management products, changes in technology, the impact of competitive electronic products, the management of inventories and growth, the company's dependence on third party component suppliers and manufacturers, including those that provide Franklin-specific parts, and other risks and uncertainties that may be detailed from time to time in the Company's reports filed with the Securities and Exchange Commission. ITEM 2. PROPERTIES In 1996, the Company completed the construction of its new 90,000 square foot corporate headquarters in Burlington, New Jersey. The Company believes this new facility will satisfy its foreseeable needs for office, laboratory and warehousing space. ITEM 3. LEGAL PROCEEDINGS The Company is subject to litigation from time to time arising in the ordinary course of its business. The Company does not believe that any such litigation is likely, individually or in the aggregate, to have a material adverse effect on the financial condition of the Company. The declaratory judgment action filed in April 1995 by Berkeley Speech Technologies against the Company in connection with one of Franklin's registered copyrights was resolved in April 1997 by way of a cross licensing arrangement between the parties related to that copyright and a stipulated dismissal with prejudice of all claims as ordered by the United States District Court for the Northern District of California. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS--NONE 12 EXECUTIVE OFFICERS OF THE REGISTRANT
NAME AGE POSITION ---- --- -------- Morton E. David 60 Chairman of the Board and Co-Chief Executive Officer; Director William H. Turner 57 President and Co-Chief Executive Officer; Director Michael Kemp 50 Managing Director, Franklin Europe Kenneth H. Lind 44 Vice President, Finance, and Treasurer Barry J. Lipsky 46 Vice President, Manufacturing Michael R. Strange 49 Executive Vice President; Director Toni M. Tracy 48 Vice President, Publisher Relations Gregory J. Winsky 47 Senior Vice President
Mr. David joined the Company in May 1984 as Chairman of the Board of Directors and Chief Executive Officer. Mr. David became Co-Chief Executive Officer upon Mr. Turner's joining the Company on October 1, 1996. Mr. David was Chairman and Chief Executive Officer of Mura Corporation, a manufacturer of portable audio products, cordless telephones and parts for the electronic industry from 1976 to 1984 and, prior thereto, was the chief financial officer of Dynamics Corp. of America, a diversified manufacturing company. Mr. Turner has been President and Co-Chief Executive Officer of the Company since October 1, 1996. Prior to joining the Company, he was Vice Chairman of The Chase Manhattan Bank. For more than the prior thirty years, Mr. Turner held a variety of positions at Chemical Banking Corporation prior to its merger with Chase Manhattan Bank. Mr. Turner is a director of Standard Motor Products, Inc. and The Park Avenue Bank, N.A. Mr. Kemp joined the Company in 1992 as Managing Director of its sales and marketing subsidiary in the United Kingdom, Franklin Electronic Publishers (UK) Ltd. He was named Managing Director of the Company's European Operations in 1994. From 1983 to 1991, he was Marketing Director of Venture Marketing Ltd., a marketer of consumer electronics products. Mr. Lind joined the Company in March 1983 and was elected Controller of the Company in May 1984, Treasurer in October 1984 and Vice President in January 1986. From 1977 to 1983, Mr. Lind was associated with Coopers & Lybrand. Mr. Lipsky joined the Company as Vice President in February 1985. From 1972 to 1985, Mr. Lipsky was Vice President of Manufacturing of Mura Corporation. Mr. Strange has been an executive officer of the Company since 1984 and Executive Vice President of the Company since 1985. From 1982 to 1983, Mr. Strange was Vice President of Manufacturing at Metrologic Instruments, a manufacturer of bar-code scanning equipment, and from 1979 to 1982 was the Director of Worldwide Operations of Excide, a manufacturer of large scale uninterruptible power supplies. Ms. Tracy joined the Company in February 1995 as Vice President of the Company's Medical Division and was elected Vice President, Publisher Relations, of the Company in May 1996. In September 1996, Ms. Tracy was named President of the Medical Division. From 1984 until 1995, Ms. Tracy was employed by Churchill Livingstone, the medical publishing subsidiary of Pearson plc, a British media conglomerate, in a variety of publishing positions and last held the position of Executive Vice President and Publisher of Churchill Livingstone International, an Anglo-American medical publishing enterprise. Mr. Winsky was elected Vice President and Secretary of the Company in June 1984 and was elected Senior Vice President in January 1993. From 1980 to 1984, Mr. Winsky was assistant counsel for SPS Technologies, Inc., a manufacturer of parts for the aircraft industry, and from 1978 to 1980, was an associate at the Philadelphia law firm of Schnader, Harrison, Segal & Lewis. 13 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock is traded on the New York Stock Exchange (the "NYSE") under the symbol "FEP." The following table sets forth the range of the high and low closing sales prices as reported by the NYSE for the last two fiscal years:
SALES --------------- QUARTER ENDED HIGH LOW ------------- ------- ------- June 30, 1995................................................ $32 $25 3/8 September 30, 1995........................................... 40 1/2 25 3/4 December 31, 1995............................................ 44 1/4 26 3/4 March 31, 1996............................................... 30 5/8 22 June 30, 1996................................................ $28 3/4 $20 September 30, 1996........................................... 20 1/8 12 5/8 December 31, 1996............................................ 14 1/2 11 3/8 March 31, 1997............................................... 13 3/8 11 3/8
The approximate number of holders of record of the common stock as of May 28, 1997 was 1,180. The Company has not declared cash dividends on the common stock and does not have any plans to pay any cash dividends on the common stock in the foreseeable future. The Board of Directors of the Company anticipates that any earnings that might be available to pay dividends on the common stock will be retained to finance the business of the Company and its subsidiaries. 14 ITEM 6. SELECTED FINANCIAL DATA The following tables should be read in conjunction with the consolidated financial statements of the Company and the notes thereto and the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section appearing elsewhere herein.
(IN THOUSANDS EXCEPT FOR PER SHARE DATA) YEAR ENDED MARCH 31, --------------------------------------------- 1997 1996 1995 1994 1993 -------- -------- ------- ------- ------- STATEMENT OF OPERATIONS DATA Sales.......................... $ 88,650 $100,823 $83,273 $66,149 $65,383 Cost of Sales ................. 46,074 53,666 46,745 38,454 39,323 -------- -------- ------- ------- ------- Gross Profit .................. 42,576 47,157 36,528 27,695 26,060 -------- -------- ------- ------- ------- Expenses: Sales and marketing.......... 17,621 17,237 12,822 10,075 10,464 Research and development..... 5,472 5,544 5,190 4,167 3,370 General and administrative... 8,534 8,125 7,185 4,905 4,264 Interest expense............. 775 36 12 442 653 Interest and investment income....................... (560) (505) (92) (455) (226) -------- -------- ------- ------- ------- Total expenses............. 31,842 30,437 25,117 19,134 18,525 -------- -------- ------- ------- ------- Income Before Income Taxes..... 10,734 16,720 11,411 8,561 7,535 Income Tax (Benefit) Provision. 4,079 6,354 (1,000) 471 393 -------- -------- ------- ------- ------- Net Income..................... $ 6,655 $ 10,366 $12,411 $ 8,090 $ 7,142 ======== ======== ======= ======= ======= Net Income Per Share Primary...................... $ .82 $ 1.25 $ 1.56 $ 1.06 $ .94 ======== ======== ======= ======= ======= Fully diluted ............... $ .82 $ 1.25 $ 1.52 $ 1.06 $ .92 ======== ======== ======= ======= ======= Pro Forma Net Income (1) Net Income .................. $ 6,655 $ 10,366 $ 7,075 $ 5,308 $ 4,672 ======== ======== ======= ======= ======= Net Income Per Share Primary...................... $ .82 $ 1.25 $ .89 $ .69 $ .62 ======== ======== ======= ======= ======= Fully diluted................ $ .82 $ 1.25 $ .87 $ .69 $ .60 ======== ======== ======= ======= ======= Weighted Average Common Shares and Common Equivalents: Primary...................... 8,123 8,281 7,974 7,661 7,563 ======== ======== ======= ======= ======= Fully diluted................ 8,124 8,284 8,154 7,662 7,747 ======== ======== ======= ======= ======= AT MARCH 31, --------------------------------------------- 1997 1996 1995 1994 1993 -------- -------- ------- ------- ------- BALANCE SHEET DATA Working Capital................ $ 77,796 $ 45,824 $38,839 $30,032 $24,190 Total Assets .................. 131,055 82,869 70,574 49,673 39,002 Long-term Debt................. 44,518 653 -- -- 3,157 Shareholders' Equity........... 73,603 65,538 53,973 39,703 29,367
- -------- (1) The Company recognized its remaining federal tax benefits applicable to future years in fiscal 1995 and, as a result, the Company's earnings beginning in fiscal 1996 are reported on a fully taxed basis. The pro forma net income and net income per share data for each of the periods presented reflect what such data would have been had the Company's earnings been fully taxed (at an assumed tax rate of approximately 38%) for such periods. 15 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW After five consecutive years of sales increases culminating in substantial increases in both domestic and international sales for fiscal 1995 and 1996, the Company's revenues declined in fiscal 1997 as the domestic market for small consumer electronics stagnated. The Company's domestic consumer sales decreased by 21.8% in the current fiscal year. International growth slowed in the 1997 fiscal year and only offset in part the domestic decline. International sales growth over the period was due to the Company's increased marketing efforts abroad, primarily in the United Kingdom, France and Canada, and the opening of new sales and marketing wholly-owned subsidiaries in Germany, Mexico, Colombia, and Australia. During the last three years, the Company benefitted from improvement in the price/performance of IC-ROM chips. Because IC-ROM chips are a significant part of the cost of Franklin electronic books, declining semiconductor prices allowed the Company to lower product prices significantly. Another factor enabling the Company to reduce its electronic book prices has been the Company's continued commitment to cost reduction. Management believes that lower prices, in turn, led to marked increases in domestic sales in both unit and dollar terms and the introduction of new titles and platforms contributed significantly to the Company's sales growth during the fiscal 1995 and 1996 and ameliorated the fiscal 1997 decline. The Company expects sales growth in the immediate future to be driven primarily by the sale of personal information management products to be produced under the recently licensed ROLODEX(R) Electronics trademark. Because the consumer brand awareness of the ROLODEX(R) mark is not as strong in international markets as in the United States, sales of personal information management products are expected to increase sales in the United States and reverse the recent trend in which Company-wide sales growth has been attributed primarily to international sales growth. Additional sales growth would be expected from domestic marketing initiatives geared toward increasing brand awareness for BOOKMAN products and to increasing international sales expected to be based in part on the opening of new markets by establishing additional wholly-owned sales and marketing subsidiaries in other countries. As the Company continues to introduce new foreign language books, bilingual electronic dictionaries and books targeted at the ESL market, management anticipates that the Company's international electronic publishing sales should increase as a percentage of total electronic publishing sales. Over the last three fiscal years, the Company's gross profit margins have increased primarily due to the decline in cost of IC-ROM chips and the Company's cost reduction efforts (which have enabled the Company to lower its product prices), and the introduction of new products which command higher gross margins. The Company expects that its gross margins will be negatively impacted by sales of personal information management products, which, not having licensed content found in the Company's electronic books, traditionally command lower margins in the highly competitive worldwide market for electronic databanks and organizers. Any improvements in gross margins in the future would need be driven by significant shifts in the Company's revenue mix toward the more profitable IC-ROM cartridges for its BOOKMAN products. Operating expenses as a percentage of sales remained relatively constant over fiscal 1995 and 1996, but in fiscal 1997 such expenses increased, primarily because sales decreased. The Company expects its research and development expenses to remain relatively constant in the near term. The recent increase in general and administrative expenses as a percentage of sales is primarily attributable to increased staff and the personnel needed to operate the Company's international subsidiaries and to product introductions in the ROLODEX(R) Electronics line of personal information management products. The Company anticipates that, as it furthers its strategy of popularizing BOOKMAN units by advertising and expanding its shelf space with the ROLODEX(R) Electronics line, its sales and marketing expenses, as a percentage of sales, will continue to increase. 16 Prior to the 1995 fiscal year, the Company's effective tax rate was minimal due to the realization of net operating loss carryforwards. During the year ended March 31, 1995, the Company recognized its remaining federal tax benefits applicable to future years as the Company believed that at that time it was probable that such benefits would be utilized. In subsequent fiscal years, the Company reported its earnings on a fully taxed basis. For comparison purposes in the financial tables presented herein, the Company has included pro forma net income to show what the Company's earnings in fiscal year 1995 would have been on a fully taxed basis at an assumed tax rate of 38%. RESULTS OF OPERATIONS The following table summarizes the Company's historical results of operations as a percentage of sales for fiscal 1997, 1996, and 1995: (DOLLARS IN THOUSANDS)
YEAR ENDED MARCH 31, -------------------------- 1997 1996 1995 ------- -------- ------- SALES: Domestic Sales.................................... $56,072 $ 70,220 $59,597 International Sales .............................. 32,578 30,603 23,676 ------- -------- ------- Total Sales ........................................ $88,650 $100,823 $83,273 ======= ======== ======= AS A PERCENTAGE OF TOTAL SALES: Domestic Sales.................................... 63.3% 69.6% 71.6% International Sales .............................. 36.7 30.4 28.4 ------- -------- ------- Total Sales ...................................... 100.0% 100.0% 100.0% Cost of Sales .................................... 52.0 53.2 56.1 ------- -------- ------- Gross Profit ..................................... 48.0 46.8 43.9 ------- -------- ------- Expenses: Sales and marketing ............................ 19.9 17.1 15.4 Research and development ....................... 6.2 5.5 6.2 General and administrative...................... 9.6 8.1 8.6 Interest expense................................ .8 * * Interest and investment income.................. (.6) (.5) (.1) ------- -------- ------- Total expenses ................................ 35.9 30.2 30.2 ------- -------- ------- Income Before Income Taxes........................ 12.1 16.6 13.7 Income Tax (Benefit) Provision ................... 4.6 6.3 ( 1.2) ------- -------- ------- Net Income........................................ 7.5% 10.3% 14.9% ======= ======== ======= Pro Forma Net Income (1).......................... 7.5% 10.3% 8.5% ======= ======== =======
- -------- 1) The pro forma net income and net income per share data for each of the periods presented reflect what such data would have been had the Company's earnings been fully taxed (at an assumed tax rate of approximately 38%) for such periods. * less than 0.1% Year Ended March 31, 1997 compared with Year Ended March 31, 1996 Sales of $88.7 million for the year ended March 31, 1997 were 12.1% lower than sales of $100.8 million one year earlier. The sales decrease is attributable to lower sales of electronic books in the domestic consumer market offset in part mainly by increases in sales outside of the United States and secondarily by the Company's sales of personal information management products in the ROLODEX(R) Electronics line. While international 17 sales increased 6.5% from year-to-year, this increase was less than in prior years and international growth slowed in the last quarter of the 1997 fiscal year. Because the consumer brand awareness of the ROLODEX(R) mark is not as strong in international markets as in the United States, sales of personal information management products are expected to increase sales in the United States and reverse the recent trend in which Company-wide sales growth has been attributed primarily to international sales growth. Foreign currency fluctuations did not have a significant effect on the Company's results of operations from year to year. Royalties from technology licensees were approximately 2% of sales, down from 3% of sales last year. Decreased sales primarily contributed to the decrease in gross profits from $47.2 million in fiscal 1996 to $42.6 million in fiscal 1997. Gross profit margins increased from 46.8% to 48.0% from year to year. Total expenses increased to $31.8 million in the current year as compared with $30.4 million last year. Sales and marketing expenses increased slightly from $17.2 million (17.1% of sales) in fiscal 1996 to $17.6 million (19.9% of sales) in fiscal 1997 as advertising increases were offset in part by decreases in variable expenses linked to sales volume. Research and development expenses were level over the two years at $5.5 million (5.5% of sales in the prior year as compared with 6.2% of sales in the most recent year). General and administrative expenses increased from $8.1 million (8.1% of sales) in fiscal 1996 to $8.5 million (9.6% of sales) in fiscal 1997 primarily because of increased expenses of international subsidiaries, both those newly organized and those continuing in their operations. Interest expense increased from year to year as the Company drew down $16,000,000 from its credit facility in October 1996 to finance the ROLODEX(R) Electronics acquisition. Year Ended March 31, 1996 compared with Year Ended March 31, 1995 Sales of $100.8 million in fiscal 1996 were 21.1% higher than sales of $83.3 million in fiscal 1995. Sales in the United States increased by 17.8% from $59.6 million to $70.2 million, due primarily to increased sales of electronic books through the Company's consumer channels. International sales increased by 29.3% from $23.7 million to $30.6 million, primarily due to increased sales in France and the United Kingdom and the opening of new subsidiaries in Germany and Australia. Gross profit increased from 43.9% of sales ($36.5 million) in fiscal 1995 to 46.8% of sales ($47.2 million) in fiscal 1996. The increase was attributable to sales of BOOKMAN cards and a greater proportion of higher gross margin products made possible by the Company's product cost reduction programs. Expenses remained constant as a percent of sales; the dollar increase from $25.1 million in fiscal 1995 to $30.4 million in fiscal 1996 is primarily due to increased sales and marketing and administrative expenses. Sales and marketing were up by $4.4 million from 15.4% of sales in fiscal 1995 to 17.1% of sales in fiscal 1996 in connection with the establishment of new subsidiaries and increased advertising. General and administrative expenses increased from $7.2 million (8.6% of sales) in fiscal 1995 to $8.1 million (8.1% of sales) in fiscal 1996 primarily due to the establishment of new foreign subsidiaries. Research and development expenses were relatively constant as a percentage of sales (decreasing slightly from 6.2% to 5.5%) even as the Company continued to develop new cards for the BOOKMAN platform. INFLATION AND CURRENCY TRANSACTIONS Inflation has had no significant effect on the operations of the Company for the three years ended March 31, 1997. However, competitive pressures and market conditions in the future may limit the Company's ability to increase prices to compensate for general inflation or increases in prices charged by suppliers. The Company's operating results may be affected by fluctuations in currency exchange rates. The Company enters into foreign exchange forward contracts with financial institutions to limit its exposure to losses on anticipated cash flows resulting from fluctuations in the currency markets. Anticipated transactions are comprised primarily of sales of the Company's products in currencies other than U.S. dollars made through the Company's subsidiaries. As of March 31, 1997 and 1996, the Company had approximately $15.9 million and $12.2 million, 18 respectively, of outstanding foreign exchange contracts in which foreign currencies were sold. The deferred gains and losses on such contracts were immaterial at March 31, 1997 and 1996. Such hedging has had no significant effect on the operations of the Company for the three years ended March 31, 1997. The duration of these anticipated hedging transactions generally does not exceed one year. SEASONALITY The Christmas selling season (October, November and December) and the "back to school" season (mid-August to mid-September) are the strongest selling periods for the Company's products. The timing of the publication of new books may also significantly affect revenues and cause quarterly revenues and earnings fluctuations. The following table sets forth unaudited net sales for each of the Company's last twelve fiscal quarters:
QUARTER ENDED QUARTER ENDED QUARTER ENDED QUARTER ENDED JUNE 30 SEPTEMBER 30 DECEMBER 31 MARCH 31 ------------- ------------- ------------- ------------- Fiscal 1997............. $15,071 $24,231 $31,986 $17,362 Fiscal 1996............. 18,619 27,077 34,451 20,676 Fiscal 1995............. 15,125 21,258 29,194 17,696
LIQUIDITY AND CAPITAL RESOURCES The Company's primary source of liquidity during the two years ended March 31, 1996 was cash flow from operations. On March 27, 1997, the Company completed the issuance to insurance companies in a private placement transaction of $40,000,000 in aggregate principal amount of 7.71% senior notes and contemporaneously entered into a new $20,000,000 revolving credit agreement with the Chase Manhattan Bank ("Chase") and Summit Bank ("Summit"). Management believes that the proceeds of the senior note offering, cash flow from operations, and the new revolving line of credit will be adequate to provide for the Company's liquidity and capital needs, including its proposed international expansion, for the foreseeable future. In order to accommodate seasonal inventory and accounts receivable buildup, prior to the issuance of the senior notes, the Company financed its day to day operations by drawing down advances, on an as needed basis, against its then existing credit facility with Chase. On October 4, 1996, the Company drew down approximately $16,000,000 under that facility in order to purchase from Insilco certain assets and a trademark license relating to the ROLODEX(R) Electronics business, which drawdown increased the Company's borrowings under that facility to approximately $19,000,000 at the beginning of its third fiscal quarter. The Company subsequently paid off such borrowings in full and, at March 31, 1997, there were no borrowings under the new revolving line of credit with Chase and Summit. Borrowings against the new line of credit bear interest at the bank's prime rate or 1% over LIBOR. The Company pays a commitment fee of 1/4 of 1% per annum on the unused portion of the line of credit. The Company expended approximately $6.5 million from available cash flow from operations for the construction and outfitting of its new corporate headquarters during fiscal 1995 and 1996. In June 1996, the Company obtained a loan of $4.3 million secured by a mortgage on its new corporate headquarters. The Company has no material commitments for capital expenditures in the next twenty-four months. 19 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS
PAGE ---- INDEPENDENT AUDITOR'S REPORT............................................... 21 CONSOLIDATED STATEMENT OF OPERATIONS Years ended March 31, 1997, 1996 and 1995................................. 22 CONSOLIDATED BALANCE SHEETS March 31, 1997 and 1996................................................... 23 CONSOLIDATED STATEMENT OF CASH FLOWS Years ended March 31, 1997, 1996 and 1995................................. 24 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY Years ended March 31, 1997, 1996 and 1995................................. 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended March 31, 1997, 1996 and 1995................................. 26
20 INDEPENDENT AUDITOR'S REPORT Shareholders and Directors Franklin Electronic Publishers, Incorporated Burlington, New Jersey 08016 We have audited the accompanying balance sheet of Franklin Electronic Publishers, Incorporated and subsidiaries as of March 31, 1997 and March 31, 1996 and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years ended March 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material aspects, the financial position of Franklin Electronic Publishers, Incorporated and subsidiaries as of March 31, 1997 and March 31, 1996, and the results of its operations and cash flows for each of the three years ended March 31, 1997 in conformity with generally accepted accounting principles. FELDMAN RADIN & CO., P.C. Certified Public Accountants New York, New York May 16, 1997 21 FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
YEAR ENDED MARCH 31, ----------------------------- 1997 1996 1995 -------- --------- -------- SALES.......................................... $ 88,650 $ 100,823 $ 83,273 COST OF SALES.................................. 46,074 53,666 46,745 -------- --------- -------- GROSS PROFIT................................... 42,576 47,157 36,528 -------- --------- -------- EXPENSES: Sales and marketing.......................... 17,621 17,237 12,822 Research and development..................... 5,472 5,544 5,190 General and administrative................... 8,534 8,125 7,185 Interest expense............................. 775 36 12 Interest and investment income............... (560) (505) (92) -------- --------- -------- Total expenses............................. 31,842 30,437 25,117 -------- --------- -------- INCOME BEFORE INCOME TAXES..................... 10,734 16,720 11,411 INCOME TAX (BENEFIT) PROVISION................. 4,079 6,354 (1,000) -------- --------- -------- NET INCOME..................................... $ 6,655 $ 10,366 $ 12,411 ======== ========= ======== NET INCOME PER SHARE: Primary...................................... $ .82 $ 1.25 $ 1.56 ======== ========= ======== Fully diluted................................ $ .82 $ 1.25 $ 1.52 ======== ========= ======== WEIGHTED AVERAGE COMMON SHARES AND COMMON EQUIVALENTS: Primary...................................... 8,123 8,281 7,974 ======== ========= ======== Fully diluted................................ 8,124 8,284 8,154 ======== ========= ========
See notes to consolidated financial statements. 22 FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31, ------------------ 1997 1996 -------- -------- ASSETS CURRENT ASSETS: Cash and cash equivalents (Note 3)....................... $ 45,040 $ 10,827 Accounts receivable, less allowance for doubtful accounts of $839 and $867......................................... 9,806 12,114 Inventories (Note 4)..................................... 30,617 34,890 Deferred income tax asset ............................... 2,122 1,723 Prepaids and other assets................................ 3,145 2,948 -------- -------- TOTAL CURRENT ASSETS..................................... 90,730 62,502 -------- -------- PROPERTY AND EQUIPMENT (Note 5)............................ 11,211 11,012 TRADEMARK, less accumulated amortization of $194 (Note 9).. 15,353 -- OTHER ASSETS............................................... 13,761 9,355 -------- -------- TOTAL ASSETS............................................... $131,055 $ 82,869 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES : Accounts payable and accrued expenses (Note 6)........... $ 12,650 $ 16,678 Current portion of mortgage note payable................. 284 -- -------- -------- TOTAL CURRENT LIABILITIES ............................... 12,934 16,678 -------- -------- LONG-TERM LIABILITIES (Note 7)............................. 44,518 653 -------- -------- SHAREHOLDERS' EQUITY: (Note 11) Preferred stock, $2.50 par value, authorized 10,000,000 shares, none issued or outstanding...................... -- -- Common stock, no par value, authorized 50,000,000 shares, issued and outstanding 8,060,133 and 7,861,715 shares... 50,235 48,599 Retained earnings........................................ 23,820 17,165 Foreign currency translation adjustment (Note 12)........ (452) (226) -------- -------- TOTAL SHAREHOLDERS' EQUITY............................... 73,603 65,538 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................. $131,055 $ 82,869 ======== ========
See notes to consolidated financial statements. 23 FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED MARCH 31, ------------------------- 1997 1996 1995 ------- ------- ------- CASH FLOWS FROM OPERATING ACTIVITIES: NET INCOME........................................ $ 6,655 $10,366 $12,411 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Depreciation and amortization................... 4,909 3,790 2,748 Provision for losses on accounts receivable..... 83 51 318 Loss on disposal of property and equipment...... 13 96 -- Write down of fixed assets...................... -- -- 350 Loss on sales of investment securities, net..... -- -- 101 Revaluation of investment securities to market.. -- -- 416 Deferred income tax benefit..................... (399) (101) (1,622) Source (use) of cash from change in operating assets and liabilities: Accounts receivable........................... 2,905 (2,239) (2,127) Inventories................................... 5,177 (13,974) (6,022) Prepaids and other assets..................... (116) (990) (583) Accounts payable and accrued expenses......... (4,298) 77 6,631 ------- ------- ------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES....................................... 14,929 (2,924) 12,621 CASH FLOWS FROM INVESTING ACTIVITIES: Investments (net) in investment securities...... -- -- 4,449 Purchase of property and equipment.............. (2,671) (5,624) (6,784) Proceeds from sale of property and equipment.... 107 471 -- Change in other assets.......................... (5,908) (3,852) (1,658) Acquisition of Systech GmbH, net of cash acquired....................................... (171) -- -- Acquisition of Rolodex(R) Electronics........... (17,355) -- -- ------- ------- ------- NET CASH USED IN INVESTING ACTIVITIES............. (25,998) (9,005) (3,993) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of Notes................. 40,000 -- -- Proceeds from mortgage.......................... 4,260 -- -- Principal payments of mortgage.................. (213) -- -- Other liabilities............................... 103 653 -- Proceeds from issuance of common shares and warrants....................................... 162 1,099 1,397 Income tax credit-stock options................. 1,196 -- -- ------- ------- ------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES....................................... 45,508 1,752 1,397 EFFECT OF EXCHANGE RATE CHANGES ON CASH............. (226) (14) (19) ------- ------- ------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.... 34,213 (10,191) 10,006 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.... 10,827 21,018 11,012 ------- ------- ------- CASH AND CASH EQUIVALENTS AT END OF PERIOD.......... $45,040 $10,827 $21,018 ======= ======= ======= SUPPLEMENTAL DATA: Cash paid during the year: Income taxes.................................... $ 3,472 $ 5,152 $ 288 Interest........................................ $ 741 $ 36 $ 13 SCHEDULE OF NON-CASH FINANCING ACTIVITIES: Retirement of treasury shares received under employee stock option plan and warrants exercised........................................ $ 1,582 $ 378 $ 1,044 Issuance of common shares related to acquisition of Systech GmbH.................................. $ 152 $ -- $ --
See notes to consolidated financial statements. 24 FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK RETAINED TOTAL ------------------ EARNINGS SHAREHOLDERS' SHARES AMOUNT (DEFICIT) OTHER EQUITY --------- ------- --------- ----- ------------- BALANCE--MARCH 31, 1994 7,442,832 $45,870 $(5,612) $(555) $39,703 Issuance of common shares under employee stock option plan.............. 290,611 2,441 -- -- 2,441 Issuance of shares and amortization of deferred compensation expense for shares issued for services (unearned portion $269)............ 11,700 119 -- -- 119 Purchase and retirement of treasury shares received under employee stock option plan.............. (34,993) (1,044) -- -- (1,044) Income for the period..... -- -- 12,411 -- 12,411 Valuation allowance for securities available for sale..................... -- -- -- 362 362 Foreign currency translation adjustment.... -- -- -- (19) (19) --------- ------- ------- ----- ------- BALANCE--MARCH 31, 1995..... 7,710,150 47,386 6,799 (212) 53,973 Issuance of common shares under employee stock option plan.............. 154,741 1,427 -- -- 1,427 Issuance of shares and amortization of deferred compensation expense for shares issued for services (unearned portion $118)............ (2,150) 114 -- -- 114 Issuance of common shares for warrants exercised... 7,692 50 -- -- 50 Purchase and retirement of treasury shares received under employee stock option plan.............. (8,718) (378) -- (378) Income for the period..... -- -- 10,366 -- 10,366 Foreign currency translation adjustment.... -- -- -- (14) (14) --------- ------- ------- ----- ------- BALANCE--MARCH 31, 1996..... 7,861,715 48,599 17,165 (226) 65,538 Issuance of common shares under employee stock option plan.............. 43,121 509 -- -- 509 Issuance of shares and amortization of deferred compensation expense for shares issued for services (unearned portion $290)............ 27,150 126 -- -- 126 Issuance of common shares for warrants exercised... 189,993 1,235 -- -- 1,235 Issuance of common shares related to acquisition of Systech GmbH............. 6,748 152 -- -- 152 Purchase and retirement of treasury shares received under employee stock option plan and warrants exercised................ (68,594) (1,582) -- -- (1,582) Income tax credit--stock options................... -- 1,196 -- -- 1,196 Income for the period..... -- -- 6,655 -- 6,655 Foreign currency translation adjustment.... -- -- -- (226) (226) --------- ------- ------- ----- ------- BALANCE--MARCH 31, 1997..... 8,060,133 $50,235 $23,820 $(452) $73,603 ========= ======= ======= ===== =======
See notes to consolidated financial statements. 25 FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. LINE OF BUSINESS Franklin Electronic Publishers, Incorporated and its wholly-owned subsidiaries (the "Company") design, develop, and publish electronic reference products and related software. Other activities represent less than 10% of sales, operating income and identifiable assets. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation: The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, after elimination of intercompany accounts and transactions. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Inventories: Inventories are valued at the lower of cost or market determined by the first-in, first-out method of accounting. Property and Equipment: Property and equipment are stated at cost and are depreciated using the straight-line method over the estimated useful lives of the assets, ranging from three to five years for furniture, equipment, tooling and computer software purchased and 40 years for building and improvements. Leasehold improvements are amortized over the term of the lease or the estimated life of the improvement, whichever is shorter. When assets are sold or retired, their cost and related accumulated depreciation are removed from the appropriate accounts. Any gains and losses on dispositions are recorded in current operations. Maintenance and minor repairs are charged to operations as incurred. Goodwill: The excess of the cost over the fair value of the net assets of purchased businesses is recorded as goodwill and amortized on a straight-line basis, over a 30 year period. Right of Return and Refurbishing Costs: The Company initiates special programs with customers to test market certain products, promotions or market segments. These arrangements normally require the customer to pay for the merchandise under normal terms. The Company defers the recognition of certain revenues from these programs until such time as the revenue recognition requirements of Statement of Financial Accounting Standard (SFAS) No. 48, "Revenue Recognition when Right of Return Exists", are met. The Company's sales are made with the right of exchange for defective products within one year from the original retail purchase. The Company provides for the cost of refurbishing such products. Price Protection: The Company maintains a policy of providing price protection to its dealers under which the Company issues credits in the event it reduces its prices. These credits are generally computed by multiplying either the number of units purchased within ninety days prior to the price reduction or the number of units on hand at retail at the time of the price reduction by the dollar amount of the price reduction. A provision for costs related to a reduction in prices is made at such time as the Company determines that a price reduction will be effective or is reasonably anticipated. 26 FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED Software Development Costs: The Company has capitalized software costs included in Other Assets which totaled $4,981,000 and $3,916,000, net of accumulated amortization, at March 31, 1997 and 1996, respectively. The capitalization of such costs and the related amortization is in accordance with SFAS No. 86. Software costs, which are capitalized after technological feasibility is established, totaled $2,440,000, $2,100,000, and $1,600,000 for the fiscal years ended March 31, 1997, 1996 and 1995, respectively. Amortization included in the accompanying Consolidated Statement of Operations for fiscal years ended March 31, 1997, 1996 and 1995 was $1,375,000, $1,089,000, and $793,000, respectively. Advertising Costs: Advertising costs are expensed as incurred except for direct response advertising, the costs of which are deferred and amortized over the period the related sales are recorded. Fair Value of Financial Instruments: Effective March 31, 1996, the Company adopted SFAS No. 107, "Disclosures About Fair Value of Financial Instruments", that requires disclosure of fair value information about financial instruments whether or not recognized in the balance sheet. The carrying amounts reported in the balance sheet for cash, trade receivables, accounts payable and accrued expenses approximate fair value based on the short-term maturity of these instruments. The carrying amount of the Company's borrowings under the Notes approximates fair value. Accounting for Long-Lived Assets: The Company reviews long-lived assets, certain identifiable assets and any goodwill related to those assets for impairment whenever circumstances and situations change such that there is an indication that the carrying amounts may not be recoverable. At March 31, 1997, the Company believes that there has been no impairment of its long-lived assets. Income Taxes: The Company utilizes the liability method of accounting for income taxes as set forth in SFAS 109, "Accounting for Income Taxes". Under the liability method, deferred taxes are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Earnings Per Share: Earnings per common share are computed by dividing net income by the weighted average number of shares outstanding during the period adjusted for common stock equivalents when such adjustment results in dilution of earnings per share. The computation assumes that the outstanding stock options and warrants were exercised and the proceeds used to purchase common shares of the Company. Under SFAS No. 128, "Earnings per Share", the disclosure of Primary Earnings per Share, giving effect to common stock equivalents, would no longer be presented. For the two years ended March 31, 1997 and 1996, earnings per share under the new Standard would be $.83 and $1.33, respectively. Stock Based Compensation: The Company accounts for stock transactions in accordance with APB Opinion No. 25, "Accounting For Stock Issued To Employees." Accordingly, no compensation is recorded on the issuance of employee stock options at fair market value. 27 FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED 3. CASH AND CASH EQUIVALENTS The Company classifies as cash equivalents highly liquid investments with maturities of less than ninety days totaling $42,537,000 and $6,857,000 at March 31, 1997 and 1996, respectively. At March 31, 1997, assets of $21,500,000 were invested in certificates of deposit at Chase Manhattan Bank and $9,675,000 in corporate commercial paper. 4. INVENTORIES Inventories consist of the following (in thousands):
MARCH 31, --------------- 1997 1996 ------- ------- Finished products........................................... $25,698 $23,949 Parts....................................................... 4,919 10,941 ------- ------- $30,617 $34,890 ======= =======
5. PROPERTY AND EQUIPMENT Property and equipment consist of the following (in thousands):
MARCH 31, --------------- 1997 1996 ------- ------- Land....................................................... $ 497 $ 497 Building and improvements.................................. 5,434 5,299 Furniture and equipment.................................... 6,562 5,775 Tooling.................................................... 5,327 4,288 Computer software purchased................................ 2,894 2,048 ------- ------- 20,714 17,907 Accumulated depreciation................................... 9,503 6,895 ------- ------- $11,211 $11,012 ======= =======
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses consist of the following (in thousands):
MARCH 31, --------------- 1997 1996 ------- ------- Trade accounts payable..................................... $ 4,496 $ 8,448 Accrued payroll, bonus, payroll benefits and taxes......... 2,955 3,077 Accrued royalties.......................................... 1,031 1,136 Accrued advertising........................................ 961 649 Advance payments by customers.............................. 656 623 Income taxes payable....................................... 1,296 1,503 Accrued expenses-other..................................... 1,255 1,242 ------- ------- $12,650 $16,678 ======= =======
28 FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED 7. LONG-TERM DEBT Long-term debt consists of the following (in thousands):
MARCH 31, --------------- 1997 1996 ------- ------- Notes payable............................................... $40,000 $ -- Mortgage note payable....................................... 4,047 -- Other....................................................... 755 653 ------- ------- 44,802 653 Less current portion........................................ 284 -- ------- ------- $44,518 $ 653 ======= =======
On March 27, 1997 the Company sold $40,000,000 of 10-year promissory notes (the "Notes") to institutional investors. The Notes, which mature on March 31, 2007, carry an interest rate of 7.71% per year. Principal payments are required over seven years starting at the end of the fourth year. The Note agreement contains normal financial covenants, including a restriction on dividends and other restricted payments in excess of $7,500,000, subject to adjustments for earnings and sales of common stock. The Note agreement contains a prepayment penalty and a provision for repurchase should there be a change of control, in addition to financial covenants. Also in connection with the Note offering, the Company reduced its Revolving Credit Agreement with a bank to $20,000,000. Repayment on borrowings is due on March 31, 2000. Interest on loan advances is payable at either the bank's prime rate (8.50% at March 31, 1997) or 1% over LIBOR. The Company also pays a commitment fee of one quarter of one percent per annum on the unused portion of the line of credit. The line of credit requires the Company to maintain minimum working capital levels and ratios in addition to normal bank covenants. As of March 31, 1997 and 1996, there were no amounts outstanding under this credit agreement. During the year ended March 31, 1997, the Company obtained a $4,260,000 mortgage on its new facility in Burlington, New Jersey. The mortgage carries an interest rate of 1% over LIBOR (5.7% at March 31, 1997) and matures on June 28, 2006. The Company has the option to convert the mortgage to a fixed interest rate. The maturities of long-term debt for the five years after March 31, 1997 are as follows: 1998-$284,000; 1999-$284,000; 2000-$284,000; 2001-$5,998,000; 2002-$5,998,000. 8. ADVERTISING AND MEDIA COSTS Advertising costs for the years ended March 31, 1997, 1996 and 1995 were $6,632,000, $6,625,000 and $4,657,000, respectively. Deferrals of direct response advertising were not material. The Company has sold certain products in exchange for credits entitling the Company to purchase media placements, travel and other items. Such products are expected to be sold so as not to compete with the Company's normal distribution. These credits have been recorded at their estimated fair market value, which is less than their face amount and approximates their cost to the Company. 9. ACQUISITIONS On October 4, 1996, the Company acquired the trademark license of the ROLODEX(R) Electronics product line and certain other assets from Insilco Corporation for approximately $16,000,000 cash and assumed certain commitments associated with the ROLODEX(R) Electronics product line. The purchase price exceeded the fair value of the net assets acquired by $15,547,000, which is being amortized over 40 years. 29 FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED 9. ACQUISITIONS--CONTINUED In April 1996, the Company acquired Systech GmbH, a German company, for 6,748 shares of the Company's common stock, plus up to 12,752 additional shares contingent on the performance of Systech. The acquisition has been treated as a purchase, with the operations of Systech included in consolidated operations from the date of acquisition. The effect on results of operations, had Systech been acquired as of the beginning of the proceeding years, would not have been material. 10. COMMITMENTS Lease Commitments: Rent expense under all operating leases was $858,000, $792,000 and $734,000 for the years ended March 31, 1997, 1996 and 1995, respectively. The future minimum rental payments to be made under noncancellable operating leases, principally for facilities, as of March 31, 1997 were as follows (in thousands):
YEARS ENDING MARCH 31, ----------------------------------------------------------------------- 1998................$609 2001................$229 1999................$434 2002................$174 2000................$355
Royalty Agreements: The Company acquires the rights to reference works and databases from various publishers under renewable contracts of varying terms. Royalties are based on a per unit charge or as a percentage of revenue from products utilizing such databases. Employment Agreement and Bonus Plan: The Company has an employment agreement with its chief executive officer providing for minimum annual compensation of $550,000 through March 31, 1999. During the year ended March 31, 1995, the company modified the employment agreement to provide for a retirement arrangement. The Company maintains a bonus plan approved by the Board of Directors whereby an aggregate of 8% of the Company's consolidated pretax earnings for the year are set aside for distribution pursuant to the employment agreement described above and to employees at the discretion of the Board. 11. SHAREHOLDERS' EQUITY Restricted Stock Plan and Unearned Portion of Common Stock Issued for Services: The Company maintains a Restricted Stock Plan which provides for the grant of shares of common stock for services. The shares are subject to a restriction on transfer which requires the holder to remain employed by the Company for up to three years in order to receive the shares. As of March 31, 1997, under the Plan, 17,800 shares of common stock were available for distribution by the Board of Directors. Employee Stock Options: The Company's Employee Stock Option Plan authorizes the Company to grant options to purchase shares of common stock to key employees, consultants and outside directors of the Company. 30 FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED 11. SHAREHOLDERS' EQUITY--CONTINUED The Plan provides for granting of options to purchase shares of common stock at not less than the fair market value on the date of grant for incentive stock options and at not less than 75% of the fair market value on the date of grant for non-incentive stock options. The Plan terminates no later than April 25, 1998. An option may not be granted for a period in excess of ten years from the date of grant. Options are not transferable by the optionee other than upon death. Under the terms of the Plan, an employee may deliver shares of the Company's common stock as payment for options being exercised. The shares are valued at the closing price on the date of exercise. Shares received by the Company as payment for options exercised were held by the employees for periods greater than six months; therefore, no compensation was recorded by the Company. The shares received by the Company have been retired. During the fiscal year ended March 31, 1997, under the Plan options to purchase 376,301 shares at $11.75 to $25.50 were granted to employees and outside directors of the Company. On August 1996, the Board of Directors approved a program allowing a "like-value exchange" of certain options previously awarded to employees. The Company calculated the relevant Black- Scholes values for both the options to be exchanged and the new options and determined the exchange ratios for each of the option grants included in the program. The exchange ratios were set such that the new options had the same value as the exchanged options. The net result was that the exercise price of the new options is lower than the exercise price of the options exchanged, but the number of shares of Common Stock underlying the options is reduced. The term of each of the new options is the same as the remaining term of the respective exchanged option. Optionees were given the opportunity to exchange options previously awarded with an option price of more than $19.00 per share for these new options. Options totaling 375,282 at option prices from $19.63 to $28.88 were exchanged for 290,575 options at $14.00. Accounting for Employee Stock Options: The Company accounts for its stock option plan under APB Opinion No. 25, "Accounting for Stock Issued to Employees," under which no compensation expense is recognized. In fiscal 1997, the Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation", for disclosure purposes; accordingly, no compensation expense has been recognized in the results of operations for its stock option plan as required by APB Opinion No. 25. For disclosure purposes the fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for stock options granted during the years ended March 31, 1997 and 1996, respectively: annual dividends of $0.00 for both years, expected volatility of 46.6% and 43.3%, risk-free interest rate of 6.0% and 6.5% and expected life of five years for all grants. The weighted-average fair value of the stock options granted during the years ended March 31, 1997 and 1996 was $9.48 and $13.33, respectively. If the Company recognized compensation cost for the employee stock option plan in accordance with SFAS No. 123, the Company's pro forma net income and earnings per share would have been $5.8 million and $0.72 in 1997 and $10.1 million and $1.22 in 1996. The SFAS No. 123 method of accounting does not apply to options granted prior to March 31, 1995 and, accordingly, the resulting pro forma compensation cost may not be representative of that to be expected in future years. 31 FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED 11. SHAREHOLDERS' EQUITY--CONTINUED The following table summarizes the changes in options and warrants outstanding and the related price ranges for shares of the Company's common stock:
STOCK OPTIONS WARRANTS ------------------------ ----------------------- WEIGHTED AVERAGE SHARES EXERCISE PRICE SHARES WARRANT PRICE -------- -------------- -------- ------------- Outstanding at March 31, 1994..................... 738,476 $ 9.89 197,685 $6.50 Granted................. 187,200 14.91 -- -- Exercised............... (290,611) 8.40 -- -- Expired or cancelled.... (1,702) 6.61 -- -- -------- -------- Outstanding at March 31, 1995..................... 633,363 12.07 197,685 6.50 Granted................. 234,250 28.59 -- -- Exercised............... (154,741) 9.22 (7,692) 6.50 Expired or cancelled.... (64,668) 20.54 -- -- -------- -------- Outstanding at March 31, 1996..................... 648,204 18.47 189,993 6.50 Granted................. 376,301 19.32 -- -- Exercised............... (43,121) 11.80 (189,993) 6.50 Expired or cancelled.... (39,543) 25.70 -- -- Adjustment due to "like- value exchange"........ (84,707) -- -- -- -------- -------- Outstanding at March 31, 1997..................... 857,134 $14.44 -- -- ======== ========
The following table summarizes information about stock options outstanding at March 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------- -------------------------- WEIGHTED AVERAGE WEIGHTED WEIGHTED RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE - --------------- ----------- ---------------- -------------- ----------- -------------- $ 3.00-$13.75........... 229,783 5.88 $ 9.28 171,612 $ 8.40 14.00- 15.75........... 314,851 8.30 14.06 78,904 14.20 16.25- 17.75........... 270,500 8.18 17.23 93,500 16.25 20.75- 31.63........... 42,000 8.39 27.66 42,000 27.66 ------- ------- $ 3.00-$31.63........... 857,134 386,016 ======= =======
Options exercisable and the weighted average exercise price at March 31, 1996 and March 31, 1995 were 297,486 options and $12.54, and 297,077 options and $8.99, respectively. 32 FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED 12. FOREIGN CURRENCY TRANSLATION Unrealized gains and losses resulting from translating foreign subsidiaries' assets and liabilities into U.S. dollars are deferred in an equity account on the balance sheet until such time as the subsidiary is sold or liquidated. The Company enters into foreign exchange forward contracts with financial institutions to limit its exposure to loss resulting from the fluctuations in the currency markets on anticipated cash flows associated with certain firmly committed transactions. Anticipated transactions are comprised primarily of sales of the Company's products in currencies other than the U.S. dollar made through the Company's subsidiaries. As of March 31, 1997 and 1996, the Company had approximately $15,900,000 and $12,200,000, respectively, of outstanding foreign exchange contracts in which foreign currencies were sold. The major currency exposures hedged were the British Pound, the French Franc, and the German Mark. The deferred gains and losses on such contracts were immaterial at March 31, 1997 and 1996. The duration of these hedging transactions generally does not exceed one year. Unrealized gains and losses on foreign exchange forward contracts designated as hedges are deferred and recognized in income in the same period as the hedged transactions. 13. INCOME TAXES During the year ended March 31, 1995, the Company determined that the realization of its net operating loss carryforwards, temporary differences and tax credit carryforwards was probable and, accordingly, recorded the tax asset expected to be recovered in future years. The components of the net deferred tax asset consist of the following (in thousands):
MARCH 31, ------------- 1997 1996 ------ ------ Temporary differences......................................... $1,668 $1,249 Foreign loss carryforward..................................... 454 474 ------ ------ Deferred tax asset............................................ $2,122 $1,723 ====== ======
Temporary differences primarily represent non-deductible intercompany profit eliminations and financial reporting allowances for uncollectibles and other non-deductible allowances. Undistributed earnings of affiliates intended to be reinvested indefinitely were immaterial. The income tax provision consists of the following (in thousands):
MARCH 31, ----------------------- 1997 1996 1995 ------ ------ ------- Current Federal.......................................... $3,978 $5,617 $ 228 State............................................ 369 838 394 Foreign.......................................... 131 -- -- ------ ------ ------- 4,478 6,455 622 ------ ------ ------- Deferred Federal.......................................... (383) 157 (1,292) State............................................ (36) 24 (138) Foreign.......................................... 20 (282) (192) ------ ------ ------- (399) (101) (1,622) ------ ------ ------- Provision for income taxes......................... $4,079 $6,354 $(1,000) ====== ====== =======
33 FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED 13. INCOME TAXES--CONTINUED Reconciliation of income taxes shown in the financial statements and amounts computed by applying the Federal income tax rate of 35% for the years ended March 31, 1997, 1996 and 1995 is as follows (in thousands):
MARCH 31, ----------------------- 1997 1996 1995 ------- ------- ------- Income before income taxes........................ $10,734 $16,720 $11,411 ======= ======= ======= Computed expected tax............................. $ 3,757 $ 5,852 $ 3,994 Benefit provided by net operating loss carryforward...................................... -- -- (3,994) Provision for alternative minimum tax............. -- -- 228 State tax provision............................... 322 502 394 Tax benefit of NOL recorded....................... -- -- (1,622) ------- ------- ------- Provision for income taxes........................ $ 4,079 $ 6,354 $(1,000) ======= ======= =======
14. OPERATIONS The Company and its foreign operations have the same business environment and operate primarily in one industry segment. Operating profit (loss) is net revenue less operating costs and expenses pertaining to specific geographic areas. Products sold by the U.S. company to the subsidiaries are accounted for based on established sales prices between the related companies. Identifiable assets are those assets used in the geographic area. For the years ended March 31, 1997, 1996 and 1995, the Company's foreign operations as conducted in Europe generated sales of $24,963,000, $22,074,000 and $16,117,000, and operating profits (losses) of $214,000, ($971,000) and ($222,000), respectively. Their identifiable assets were $16,833,000, $15,270,000 and $9,285,000 as of March 31, 1997, 1996 and 1995, respectively. Sales in the United States, including exports to non-affiliates, totaled $60,804,000, $76,393,000 and $65,816,000, and operating profits of $10,505,000, $17,049,000 and $11,460,000 for the years ended March 31, 1997, 1996 and 1995, respectively. Their identifiable assets totaled $121,554,000, $77,646,000 and $66,145,000 for the years ended March 31, 1997, 1996 and 1995, respectively. The remaining sales, profits and assets represent other locations, none of which is material. For the fiscal years ended 1997 and 1996, no customer accounted for more than 10% of the Company's revenues. One customer represented 10% of sales for the fiscal year ended March 31, 1995. 34 FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED 15. SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED) (IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
QUARTER ENDED ----------------------------------------- JUNE 30 SEPTEMBER 30 DECEMBER 31 MARCH 31 ------- ------------ ----------- -------- Fiscal 1997 - -------------------------------------- Net sales............................. $15,071 $24,231 $31,986 $17,362 Gross profit.......................... 7,135 11,748 15,531 8,162 Net income............................ 640 2,457 3,247 311 Net income per share: Primary............................. 0.08 0.30 0.40 0.04 Fully diluted....................... 0.08 0.30 0.40 0.04 Fiscal 1996 - -------------------------------------- Net sales............................. $18,619 $27,077 $34,451 $20,676 Gross profit.......................... 8,261 12,468 16,702 9,726 Net income............................ 1,408 3,246 4,168 1,544 Net income per share: Primary............................. 0.17 0.39 0.50 0.19 Fully diluted....................... 0.17 0.39 0.50 0.19 Fiscal 1995 - -------------------------------------- Net sales $15,125 $21,258 $29,194 $17,696 Gross profit.......................... 6,850 9,088 13,023 7,567 Net income............................ 1,629 3,589 5,113 2,080 Net income per share: Primary............................. 0.21 0.46 0.64 0.25 Fully diluted....................... 0.21 0.46 0.63 0.25
35 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE--NONE PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information called for by Item 10 is set forth under the heading "Election of Directors" in the Company's Proxy Statement for its 1997 annual meeting of stockholders (the "1997 Proxy Statement"), which is incorporated herein by this reference. ITEM 11. EXECUTIVE COMPENSATION Information called for by Item 11 is set forth under the heading "Executive Compensation" in the 1997 Proxy Statement, which is incorporated herein by this reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information called for by Item 12 is set forth under the heading "Security Ownership of Certain Beneficial Owners and Management" in the 1997 Proxy Statement, which is incorporated herein by this reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information called for by Item 13 is set forth under the heading "Certain Relationships and Related Transactions" in the 1997 Proxy Statement, which is incorporated herein by this reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K The Company did not file any reports on Form 8-K during the fourth quarter of the fiscal year ended March 31, 1997. Financial statements and schedules filed as a part of this report are listed on the "Index to Financial Statements" at page 20 herein. All other schedules are omitted because (i) they are not required under the instructions, (ii) they are inapplicable or (iii) the information is included in the financial statements. 36 EXHIBITS
EXHIBIT NO. ----------- 3.01 --Certificate of Incorporation of Franklin (Incorporated by reference to Exhibit 3.01 to the Company's Registration Statement on Form S-1, File No. 3-6612 (the "Company's 1986 S-1 Registration Statement")) 3.02 --Articles of Amendment to the Certificate of Incorporation of Franklin (Incorporated by reference to Exhibit 3.02 to the Company's 1990 report on Form 10-K for the year ended March 31, 1990 (the "Company's 1990 10-K")) 3.03 --By-laws of Franklin (Incorporated by reference to Exhibit 3.02 to the Company's 1986 S-1 Registration Statement) 3.04 --Amendment to By-laws of Franklin (Incorporated by reference to Exhibit A to the Company's Proxy Statement relating to the 1987 Annual Meeting of Shareholders) 3.05 --Amendment to By-laws of Franklin (Incorporated by reference to Exhibit 3.05 to the Company's 1990 10-K) 3.06 --Amendment to By-laws of Franklin (Incorporated by reference to Exhibit 3.06 to the Company's 1991 report on Form 10-K for the year ended March 31, 1991 (the "Company's 1991 10-K")) 4.1 --Note Purchase Agreement dated as of March 27, 1997 4.2 --Credit Agreement dated as of March 27, 1997 among Franklin and certain of its subsidiaries, Chase Manhattan Bank, and Summit Bank 10.01** --Employment Agreement, dated as of May 1, 1996, between the Company and Morton E. David. 10.02 --Standard form of Sales Representative Agreement (Incorporated by reference to Exhibit 10.07 to the Company's 1986 S-1 Registration Statement) 10.03** --Franklin Restricted Stock Plan, as amended (Incorporated by reference to Exhibit 10.13 to the Company's report on Form 10-K for the year ended March 31, 1987) 10.04** --Franklin Stock Option Plan as Amended and Restated effective as of July 24, 1996 (Incorporated by reference to the Company's Proxy Statement relating to the 1996 Annual Meeting of Shareholders) 10.05 --Asset Purchase Agreement between the Company and Insilco Corporation dated as of October 4, 1996 (Incorporated by reference to Exhibit 2 to the Company's Report on Form 8-K dated October 18, 1996) 11 --Statement regarding computation of per share earnings 21 --Subsidiaries of the Registrant 23 --Consent of independent auditors
- -------- ** Management contract or compensatory plan or arrangement required to be filed as an exhibit to this form pursuant to Item 14(c) of this report. 37 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED Dated: June 20, 1997 By /s/ Morton E. David ----------------------------------- Morton E. David Chief Executive Officer PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE AND TITLE DATE ------------------- ---- /s/ Edward H. Cohen June 20, 1997 - ------------------------------------ Edward H. Cohen Director /s/ Morton E. David June 20, 1997 - ------------------------------------ Morton E. David Director /s/ Bernard Goldstein June 20, 1997 - ------------------------------------ Bernard Goldstein Director /s/ Leonard M. Lodish June 20, 1997 - ------------------------------------ Leonard M. Lodish Director /s/ Howard L. Morgan June 20, 1997 - ------------------------------------ Howard L. Morgan Director /s/ Jerry R. Schubel June 20, 1997 - ------------------------------------ Jerry R. Schubel Director /s/ James H. Simons June 20, 1997 - ------------------------------------ James H. Simons Director /s/ Michael R. Strange June 20, 1997 - ------------------------------------ Michael R. Strange Director /s/ William H. Turner June 20, 1997 - ------------------------------------ William H. Turner Director /s/ Kenneth H. Lind June 20, 1997 - ------------------------------------ Kenneth H. Lind Vice President, Finance (Principal Financial and Accounting Officer)
38 EX-4.1 2 NOTE PURCHASE AGREEMENT ================================================================================ FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED $40,000,000 7.71% Senior Notes due March 31, 2007 ---------------- NOTE PURCHASE AGREEMENT ---------------- Dated as of March 27, 1997 ================================================================================ TABLE OF CONTENTS
Section Page - ------- ---- 1. AUTHORIZATION OF NOTES................................................. 1 2. SALE AND PURCHASE OF NOTES............................................. 1 3. CLOSING................................................................ 2 4. CONDITIONS TO CLOSING.................................................. 2 4.1. Representations and Warranties.................................. 2 4.2. Performance; No Default......................................... 2 4.3. Compliance Certificates......................................... 3 4.4. Opinions of Counsel............................................. 3 4.5. Purchase Permitted By Applicable Law, etc....................... 3 4.6. Sale of Other Notes............................................. 3 4.7. Payment of Special Counsel Fees................................. 4 4.8. Private Placement Number........................................ 4 4.9. Changes in Corporate Structure.................................. 4 4.10. New Credit Agreement............................................ 4 4.11. Proceedings and Documents....................................... 4 5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.......................... 4 5.1. Organization; Power and Authority............................... 4 5.2. Authorization, etc.............................................. 5 5.3. Disclosure...................................................... 5 5.4. Organization and Ownership of Shares of Subsidiaries; Affiliates 6 5.5. Financial Statements............................................ 6 5.6. Compliance with Laws, Other Instruments, etc.................... 7 5.7. Governmental Authorizations, etc................................ 7 5.8. Litigation; Observance of Agreements, Statutes and Orders....... 7 5.9. Taxes........................................................... 7 5.10. Title to Property; Leases....................................... 8 5.11. Licenses, Permits, etc.......................................... 8 5.12. Compliance with ERISA........................................... 8 5.13. Private Offering by the Company................................. 9 5.14. Use of Proceeds; Margin Regulations............................. 10 5.15. Existing Indebtedness; Future Liens............................. 10 5.16. Foreign Assets Control Regulations, etc......................... 11
5.17. Status under Certain Statutes.................................. 11 5.18. Environmental Matters.......................................... 11 6. REPRESENTATIONS OF THE PURCHASER...................................... 12 6.1. Purchase for Investment........................................ 12 6.2. Source of Funds................................................ 12 7. INFORMATION AS TO COMPANY............................................. 13 7.1. Financial and Business Information............................. 13 7.2. Officer's Certificate.......................................... 16 7.3. Inspection..................................................... 17 7.4. Maintenance of Records......................................... 18 8. PREPAYMENT OF THE NOTES............................................... 18 8.1. Required Prepayments........................................... 18 8.2. Optional Prepayments with Make-Whole Amount.................... 19 8.3. Allocation of Partial Prepayments.............................. 20 8.4. Maturity; Surrender, etc....................................... 20 8.5. Purchase of Notes.............................................. 20 8.6. Make-Whole Amount; Modified Make-Whole Amount.................. 21 9. AFFIRMATIVE COVENANTS................................................. 22 9.1. Compliance with Law............................................ 22 9.2. Insurance...................................................... 23 9.3. Maintenance of Properties...................................... 23 9.4. Payment of Taxes and Claims.................................... 23 9.5. Corporate Existence, etc....................................... 23 10. NEGATIVE COVENANTS.................................................... 24 10.1. Transactions with Affiliates................................... 24 10.2. Merger, Consolidation, etc..................................... 24 10.3. Sale of Assets................................................. 25 10.4. Liens.......................................................... 26 10.5. Negative Pledges............................................... 27 10.6. Indebtedness................................................... 27 10.7. Indebtedness and Preferred Stock of Subsidiaries............... 28 10.8. Interest Coverage.............................................. 28 10.9. Fixed Charge Ratio............................................. 28 10.10. Consolidated Net Worth......................................... 28 10.11. Restricted Payments............................................ 29 10.12. No Limitations on Subsidiaries................................. 29 10.13. Disposition of Stock of Subsidiaries........................... 30 10.14. Nature of Business............................................. 30
11. EVENTS OF DEFAULT..................................................... 30 12. REMEDIES ON DEFAULT, ETC.............................................. 32 12.1. Acceleration................................................... 32 12.2. Other Remedies................................................. 33 12.3. Rescission..................................................... 33 12.4. No Waivers or Election of Remedies, Expenses, etc.............. 34 13. REGISTRATION; EXCHANGE; SUBSTITUTION OF NOTES......................... 34 13.1. Registration of Notes.......................................... 34 13.2. Transfer and Exchange of Notes................................. 34 13.3. Replacement of Notes........................................... 35 14. PAYMENTS ON NOTES..................................................... 35 14.1. Place of Payment............................................... 35 14.2. Home Office Payment............................................ 36 15. EXPENSES, ETC......................................................... 36 15.1. Transaction Expenses........................................... 36 15.2. Survival....................................................... 37 16. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT.......... 37 17. AMENDMENT AND WAIVER.................................................. 37 17.1. Requirements................................................... 37 17.2. Solicitation of Holders of Notes............................... 37 17.3. Binding Effect, etc............................................ 38 17.4. Notes held by Company, etc..................................... 38 18. NOTICES............................................................... 38 19. REPRODUCTION OF DOCUMENTS............................................. 39 20. CONFIDENTIAL INFORMATION.............................................. 39 21. SUBSTITUTION OF PURCHASER............................................. 40 22. MISCELLANEOUS......................................................... 41 22.1. Successors and Assigns......................................... 41 22.2. Payments Due on Non-Business Days.............................. 41 22.3. Severability................................................... 41 22.4. Construction................................................... 41 22.5. Counterparts................................................... 41 22.6. Governing Law.................................................. 42
SCHEDULE A -- Information Relating to Purchasers SCHEDULE B -- Defined Terms SCHEDULE 4.9 -- Changes in Corporate Structure SCHEDULE 5.3 -- Disclosure Materials SCHEDULE 5.4 -- Organization and Ownership of Shares of Subsidiaries; Affiliates SCHEDULE 5.5 -- Financial Statements SCHEDULE 5.8 -- Certain Litigation SCHEDULE 5.11 -- Licenses, Permits, etc. SCHEDULE 5.14 -- Use of Proceeds SCHEDULE 5.15 -- Existing Indebtedness SCHEDULE 10.4 -- Existing Liens EXHIBIT 1 -- Form of Senior Note EXHIBIT 4.4(a) -- Forms of Opinion of Counsel for the Company EXHIBIT 4.4(b) -- Form of Opinion of Special Counsel for the Purchasers FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED One Franklin Plaza Burlington, NJ 08016-4907 (609) 386-2500 FAX: (609) 387-2666 7.71% Senior Notes due March 31, 2007 Dated as of March 27, 1997 TO EACH OF THE PURCHASERS LISTED IN THE ATTACHED SCHEDULE A: Ladies and Gentlemen: FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED, a Pennsylvania corporation (the "Company"), agrees with you as follows: 1. AUTHORIZATION OF NOTES. The Company has authorized the issue and sale of $40,000,000 aggregate principal amount of its 7.71% Senior Notes due March 31, 2007 (the "Notes", such term to include any such notes issued in substitution therefor pursuant to Section 13 of this Agreement or the Other Agreements (as hereinafter defined)). The Notes shall be substantially in the form set out in Exhibit 1, with such changes therefrom, if any, as may be approved by you and the Company. Certain capitalized terms used in this Agreement are defined in Schedule B; references to a "Schedule" or an "Exhibit" are, unless otherwise specified, to a Schedule or an Exhibit attached to this Agreement. 2. SALE AND PURCHASE OF NOTES. Subject to the terms and conditions of this Agreement, the Company will issue and sell to you and you will purchase from the Company, at the Closing provided for in Section 3, Notes in the principal amount specified opposite your name in Schedule A at the purchase price of 100% of the principal amount thereof. Contemporaneously with entering into this Agreement, the Company is entering into separate Note Purchase Agreements (the "Other Agreements") identical with this Agreement with each of the other purchasers named in Schedule A (the "Other Purchasers"), providing for the sale at such Closing to each of the Other Purchasers of Notes in the principal amount specified opposite its name in Schedule A. Your obligation hereunder and the obligations of the Other Purchasers under the Other Agreements are several and not joint obligations and you shall have no obligation under any Other Agreement and no liability to any Person for the performance or non-performance by any Other Purchaser thereunder. 3. CLOSING. The sale and purchase of the Notes to be purchased by you and the Other Purchasers shall occur at the offices of Gardner, Carton & Douglas, Quaker Tower, Suite 3400 Chicago, Illinois 60610 at 9:00 a.m., Chicago time, at a closing (the "Closing") on March 27, 1997 or on such other Business Day thereafter on or prior to April 15, 1997 as may be agreed upon by the Company and you and the Other Purchasers. At the Closing the Company will deliver to you the Notes to be purchased by you in the form of a single Note (or such greater number of Notes in denominations of at least $1,000,000 as you may request) dated the date of the Closing and registered in your name (or in the name of your nominee), against delivery by you to the Company or its order of immediately available funds in the amount of the purchase price therefor by wire transfer of immediately available funds for the account of the Company to account number 001-070851 at The Chase Manhattan Bank, 380 Madison Avenue, 18th Floor, New York, New York 10017, ABA number 021-00-00-21. If at the Closing the Company shall fail to tender such Notes to you as provided above in this Section 3, or any of the conditions specified in Section 4 shall not have been fulfilled to your satisfaction, you shall, at your election, be relieved of all further obligations under this Agreement, without thereby waiving any rights you may have by reason of such failure or such nonfulfillment. 4. CONDITIONS TO CLOSING. Your obligation to purchase and pay for the Notes to be sold to you at the Closing is subject to the fulfillment to your satisfaction, prior to or at the Closing, of the following conditions: 4.1. Representations and Warranties. The representations and warranties of the Company in this Agreement shall be correct when made and at the time of the Closing. 4.2. Performance; No Default. The Company shall have performed and complied with all agreements and conditions contained in this Agreement required to be performed or complied with by it prior to or at the Closing and after giving effect to the issue and sale of the Notes (and the application of the proceeds thereof as contemplated by Schedule 5.14) no Default or Event of Default shall have occurred and be continuing. Neither the Company nor any Subsidiary shall have entered into any transaction since the date of the Memorandum that would have been prohibited by Sections 10.1 through 10.14 had such Sections applied since such date. 2 4.3. Compliance Certificates. (a) Officer's Certificate. The Company shall have delivered to you an --------------------- Officer's Certificate, dated the date of the Closing, certifying that the conditions specified in Sections 4.1, 4.2 and 4.9 have been fulfilled. (b) Secretary's Certificate. The Company shall have delivered to you ----------------------- a certificate certifying as to the resolutions attached thereto and other corporate proceedings relating to the authorization, execution and delivery of the Notes and the Agreements. 4.4. Opinions of Counsel. You shall have received opinions in form and substance satisfactory to you, dated the date of the Closing (a) from Rosenman & Colin, counsel for the - Company, and from Gregory Winsky, General Counsel of the Company substantially in the form set forth in Exhibits 4.4(a)(i) and (ii) and covering such other matters incident to the transactions contemplated hereby as you or your counsel may reasonably request (and the Company instructs its counsel to deliver such opinions to you) and (b) from Gardner, Carton & Douglas, your special counsel in - connection with such transactions, substantially in the form set forth in Exhibit 4.4(b) and covering such other matters incident to such transactions as you may reasonably request. 4.5. Purchase Permitted By Applicable Law, etc. On the date of the Closing, your purchase of Notes shall (i) be - permitted by the laws and regulations of each jurisdiction to which you are subject, without recourse to provisions (such as Section 1405(a)(8) of the New York Insurance Law) permitting limited investments by insurance companies without restriction as to the character of the particular investment, (ii) not -- violate any applicable law or regulation (including, without limitation, Regulation G, T or X of the Board of Governors of the Federal Reserve System) and (iii) not subject you to any tax, penalty or liability under or pursuant to --- any applicable law or regulation, which law or regulation was not in effect on the date hereof. If requested by you, you shall have received an Officer's Certificate certifying as to such matters of fact as you may reasonably specify to enable you to determine whether such purchase is so permitted. 4.6. Sale of Other Notes. Contemporaneously with the Closing, the Company shall sell to the Other Purchasers and the Other Purchasers shall purchase the Notes to be purchased by them at the Closing as specified in Schedule A. 3 4.7. Payment of Special Counsel Fees. Without limiting the provisions of Section 15.1, the Company shall have paid on or before the Closing the fees, charges and disbursements of your special counsel referred to in Section 4.4 to the extent reflected in a statement of such counsel rendered to the Company at least one Business Day prior to the Closing. 4.8. Private Placement Number. A Private Placement number issued by Standard & Poor's CUSIP Service Bureau (in cooperation with the Securities Valuation Office of the National Association of Insurance Commissioners) shall have been obtained for the Notes. 4.9. Changes in Corporate Structure. Except as specified in Schedule 4.9, the Company shall not have changed its jurisdiction of incorporation or been a party to any merger or consolidation and shall not have succeeded to all or any substantial part of the liabilities of any other entity, at any time following the date of the most recent financial statements referred to in Schedule 5.5. 4.10. New Credit Agreement. The Company shall have entered into the New Credit Agreement on terms reasonably satisfactory to you. 4.11. Proceedings and Documents. All corporate and other proceedings in connection with the transactions contemplated by this Agreement and all documents and instruments incident to such transactions shall be satisfactory to you and your special counsel, and you and your special counsel shall have received all such counterpart originals or certified or other copies of such documents as you or they may reasonably request. 5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to you that: 5.1. Organization; Power and Authority. The Company is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, and is duly qualified as a foreign corporation and is in good standing in each jurisdiction in which such qualification is required by 4 law, other than those jurisdictions as to which the failure to be so qualified or in good standing could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. The Company has the corporate power and authority to own or hold under lease the properties it purports to own or hold under lease, to transact the business it transacts and proposes to transact, to execute and deliver this Agreement and the Other Agreements and the Notes and to perform the provisions hereof and thereof. 5.2. Authorization, etc. This Agreement and the Other Agreements and the Notes have been duly authorized by all necessary corporate action on the part of the Company, and this Agreement constitutes, and upon execution and delivery thereof each Note will constitute, a legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except as such enforceability may be limited by (i) applicable bankruptcy, insolvency, - reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and (ii) general principles of equity (regardless of -- whether such enforceability is considered in a proceeding in equity or at law). 5.3. Disclosure. The Company, through its agent, Chase Securities Inc., has delivered to you and each Other Purchaser a copy of a Confidential Private Placement Offering Memorandum, dated February 1997 (the "Memorandum"), relating to the transactions contemplated hereby. The Memorandum fairly describes, in all material respects, the general nature of the business and principal properties of the Company and its Subsidiaries. Except as disclosed in Schedule 5.3, this Agreement, the Memorandum, the documents, certificates or other writings delivered to you by or on behalf of the Company in connection with the transactions contemplated hereby and the financial statements listed in Schedule 5.5, taken as a whole, do not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading in light of the circumstances under which they were made. Except as disclosed in the Memorandum or as expressly described in Schedule 5.3, or in one of the documents, certificates or other writings identified therein, or in the financial statements listed in Schedule 5.5, since March 31, 1996, there has been no change in the financial condition, operations, business, properties or prospects of the Company or any Subsidiary except changes that individually or in the aggregate could not reasonably be expected to have a Material Adverse Effect. There is no fact known to the Company that could reasonably be expected to have a Material Adverse Effect that has not been set forth herein or in the Memorandum or in the other documents, certificates and other writings delivered to you by or on behalf of the Company specifically for use in connection with the transactions contemplated hereby. Notwithstanding the foregoing, you acknowledge, and the Company represents, that the projections furnished to you are good faith estimates of the Company based upon current information and assumptions believed by the Company to be reasonable, 5 5.4. Organization and Ownership of Shares of Subsidiaries; Affiliates (a) Schedule 5.4 contains (except as noted therein) complete and correct lists (i) of the Company's Subsidiaries, showing, as to each - Subsidiary, the correct name thereof, the jurisdiction of its organization, and the percentage of shares of each class of its capital stock or similar equity interests outstanding owned by the Company and each other Subsidiary, (ii) of the Company's Affiliates, other than -- Subsidiaries, and (iii) of the Company's directors and senior officers. --- (b) All of the outstanding shares of capital stock or similar equity interests of each Subsidiary shown in Schedule 5.4 as being owned by the Company and its Subsidiaries have been validly issued, are fully paid and nonassessable and are owned by the Company or another Subsidiary free and clear of any Lien (except as otherwise disclosed in Schedule 5.4). (c) Each Subsidiary identified in Schedule 5.4 is a corporation or other legal entity duly organized, validly existing and in good standing under the laws of its jurisdiction of organization, and is duly qualified as a foreign corporation or other legal entity and is in good standing in each jurisdiction in which such qualification is required by law, other than those jurisdictions as to which the failure to be so qualified or in good standing could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. Each such Subsidiary has the corporate or other power and authority to own or hold under lease the properties it purports to own or hold under lease and to transact the business it transacts and proposes to transact. (d) No Subsidiary is a party to, or otherwise subject to any legal restriction or any agreement (other than this Agreement, the agreements listed on Schedule 5.4 and customary limitations imposed by corporate law statutes) restricting the ability of such Subsidiary to pay dividends out of profits or make any other similar distributions of profits to the Company or any Subsidiary that owns outstanding shares of capital stock or similar equity interests of such Subsidiary. 5.5. Financial Statements. The Company has delivered to each Purchaser copies of the financial statements of the Company and its Subsidiaries listed on Schedule 5.5. All of said financial statements (including in each case the related schedules and notes) fairly present in all material respects the consolidated financial position of the Company and its Subsidiaries as of the respective dates specified in such Schedule and the consolidated results of their operations and cash flows for the respective periods so specified and have been prepared in accordance with GAAP consistently applied throughout the periods involved except as set forth in the notes thereto (subject, in the case of any interim financial statements, to normal year-end adjustments). 6 5.6. Compliance with Laws, Other Instruments, etc. The execution, delivery and performance by the Company of this Agreement and the Notes will not (i) contravene, result in any breach of, or - constitute a default under, or result in the creation of any Lien in respect of any property of the Company or any Subsidiary under, any indenture, mortgage, deed of trust, loan, purchase or credit agreement, lease, corporate charter or by-laws, or any other agreement or instrument to which the Company or any Subsidiary is bound or by which the Company or any Subsidiary or any of their respective properties may be bound or affected, (ii) conflict with or result in -- a breach of any of the terms, conditions or provisions of any order, judgment, decree, or ruling of any court, arbitrator or Governmental Authority applicable to the Company or any Subsidiary or (iii) violate any provision of any statute --- or other rule or regulation of any Governmental Authority applicable to the Company or any Subsidiary. 5.7. Governmental Authorizations, etc. No consent, approval or authorization of, or registration, filing or declaration with, any Governmental Authority is required in connection with the execution, delivery or performance by the Company of this Agreement or the Notes. 5.8. Litigation; Observance of Agreements, Statutes and Orders. (a) Except as disclosed in Schedule 5.8, there are no actions, suits or proceedings pending or, to the knowledge of the Company, threatened against or affecting the Company or any Subsidiary or any property of the Company or any Subsidiary in any court or before any arbitrator of any kind or before or by any Governmental Authority that, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect. (b) Neither the Company nor any Subsidiary is in default under any term of any agreement or instrument to which it is a party or by which it is bound, or any order, judgment, decree or ruling of any court, arbitrator or Governmental Authority or is in violation of any applicable law, ordinance, rule or regulation (including without limitation Environmental Laws) of any Governmental Authority, which default or violation, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect. 5.9. Taxes. The Company and its Subsidiaries have filed all tax returns that are required to have been filed in any jurisdiction, and have paid all taxes shown to be due and payable on such returns and all other taxes and assessments levied upon them or their properties, assets, income 7 or franchises, to the extent such taxes and assessments have become due and payable and before they have become delinquent, except for any taxes and assessments (i) the amount of which is not individually or in the aggregate - Material or (ii) the amount, applicability or validity of which is currently -- being contested in good faith by appropriate proceedings and with respect to which the Company or a Subsidiary, as the case may be, has established adequate reserves in accordance with GAAP. The Company knows of no basis for any other tax or assessment that could reasonably be expected to have a Material Adverse Effect. The charges, accruals and reserves on the books of the Company and its Subsidiaries in respect of Federal, state or other taxes for all fiscal periods are adequate. The statute of limitations for Federal income tax liabilities of the Company and its Subsidiaries has expired for all tax years up to and including the tax year ended March 31, 1993. 5.10. Title to Property; Leases. The Company and its Subsidiaries have good and sufficient title to their respective properties that individually or in the aggregate are Material, including all such properties reflected in the most recent audited balance sheet referred to in Section 5.5 or purported to have been acquired by the Company or any Subsidiary after said date (except as sold or otherwise disposed of in the ordinary course of business), in each case free and clear of Liens prohibited by this Agreement. All leases that individually or in the aggregate are Material are valid and subsisting and are in full force and effect in all material respects. 5.11. Licenses, Permits, etc. Except as disclosed in Schedule 5.11, (a) the Company and its Subsidiaries own or possess all licenses, permits, franchises, authorizations, patents, copyrights, service marks, trademarks and trade names, or rights thereto, that individually or in the aggregate are Material, without known conflict with the rights of others; (b) to the best knowledge of the Company, no product of the Company infringes in any material respect any license, permit, franchise, authorization, patent, copyright, service mark, trademark, trade name or other right owned by any other Person; and (c) to the best knowledge of the Company, there is no Material violation by any Person of any right of the Company or any Subsidiary with respect to any patent, copyright, service mark, trademark, trade name or other right owned or used by the Company or any Subsidiary. 8 5.12. Compliance with ERISA. (a) The Company and each ERISA Affiliate have operated and administered each Plan in compliance with all applicable laws except for such instances of noncompliance as have not resulted in and could not reasonably be expected to result in a Material Adverse Effect. Neither the Company nor any ERISA Affiliate has incurred any liability pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans (as defined in Section 3 of ERISA), and no event, transaction or condition has occurred or exists that could reasonably be expected to result in the incurrence of any such liability by the Company or any ERISA Affiliate, or in the imposition of any Lien on any of the rights, properties or assets of the Company or any ERISA Affiliate, in either case pursuant to Title I or IV of ERISA or to such penalty or excise tax provisions or to Section 401(a)(29) or 412 of the Code, other than such liabilities or Liens as would not be individually or in the aggregate Material. (b) The present value of the aggregate benefit liabilities under each of the Plans (other than Multiemployer Plans), determined as of the end of such Plan's most recently ended plan year on the basis of the actuarial assumptions specified for funding purposes in such Plan's most recent actuarial valuation report, did not exceed the aggregate current value of the assets of such Plan allocable to such benefit liabilities. The term "benefit liabilities" has the meaning specified in section 4001 of ERISA and the terms "current value" and "present value" have the meaning specified in section 3 of ERISA. (c) The Company and its ERISA Affiliates have not incurred withdrawal liabilities (and are not subject to contingent withdrawal liabilities) under section 4201 or 4204 of ERISA in respect of Multiemployer Plans that individually or in the aggregate are Material. (d) The expected postretirement benefit obligation (determined as of the last day of the Company's most recently ended fiscal year in accordance with Financial Accounting Standards Board Statement No. 106, without regard to liabilities attributable to continuation coverage mandated by section 4980B of the Code) of the Company and its Subsidiaries is not Material. (e) The execution and delivery of this Agreement and the issuance and sale of the Notes hereunder will not involve any transaction that is subject to the prohibitions of section 406 of ERISA or in connection with which a tax could be imposed pursuant to section 4975(c)(1)(A)-(D) of the Code. The representation by the Company in the first sentence of this Section 5.12(e) is made in reliance upon and subject to the accuracy of your representation in Section 6.2 as to the sources of the funds used to pay the purchase price of the Notes to be purchased by you. 9 5.13. Private Offering by the Company. Neither the Company nor anyone acting on its behalf has offered, directly or indirectly, the Notes or any similar securities for sale to, or solicited any offer to buy any of the same from, or otherwise approached or negotiated in respect thereof with, any person other than you, the Other Purchasers and not more than 72 other Institutional Investors, each of which has been offered the Notes at a private sale for investment. Neither the Company nor anyone acting on its behalf has taken, or will take, any action that would subject the issuance or sale of the Notes to the registration requirements of Section 5 of the Securities Act. 5.14. Use of Proceeds; Margin Regulations. The Company will apply the proceeds of the sale of the Notes as set forth in Schedule 5.14. No part of the proceeds from the sale of the Notes will be used, directly or indirectly, for the purpose of buying or carrying any margin stock within the meaning of Regulation G of the Board of Governors of the Federal Reserve System (12 CFR 207), or for the purpose of buying or carrying or trading in any securities under such circumstances as to involve the Company in a violation of Regulation X of said Board (12 CFR 224) or to involve any broker or dealer in a violation of Regulation T of said Board (12 CFR 220). Margin stock does not constitute more than 1.0% of the value of the consolidated assets of the Company and its Subsidiaries and the Company does not have any present intention that margin stock will constitute more than 1.0% of the value of such assets. As used in this Section, the terms "margin stock" and "purpose of buying or carrying" shall have the meanings assigned to them in said Regulation G. 5.15. Existing Indebtedness; Future Liens. (a) Except as described therein, Schedule 5.15 sets forth a complete and correct list of all outstanding Indebtedness of the Company and its Subsidiaries as of the date of Closing, since which date there has been no Material change in the amounts, interest rates, sinking funds, installment payments or maturities of the Indebtedness of the Company or its Subsidiaries. Neither the Company nor any Subsidiary is in default and no waiver of default is currently in effect, in the payment of any principal or interest on any Indebtedness of the Company or such Subsidiary and no event or condition exists with respect to any Indebtedness of the Company or any Subsidiary that would permit (or that with notice or the lapse of time, or both, would permit) one or more Persons to cause such Indebtedness to become due and payable before its stated maturity or before its regularly scheduled dates of payment. (b) Except as disclosed in Schedule 5.15, neither the Company nor any Subsidiary has agreed or consented to cause or permit in the future (upon the happening of a contingency or otherwise) any of its property, whether now owned or hereafter acquired, to be subject to a Lien not permitted by Section 10.4. 10 5.16. Foreign Assets Control Regulations, etc. Neither the sale of the Notes by the Company hereunder nor its use of the proceeds thereof will violate the Trading with the Enemy Act, as amended, or any of the foreign assets control regulations of the United States Treasury Department (31 CFR, Subtitle B, Chapter V, as amended) or any enabling legislation or executive order relating thereto. 5.17. Status under Certain Statutes. Neither the Company nor any Subsidiary is subject to regulation under the Investment Company Act of 1940, as amended, the Public Utility Holding Company Act of 1935, as amended, the Interstate Commerce Act, as amended, or the Federal Power Act, as amended. 5.18. Environmental Matters. Neither the Company nor any Subsidiary has knowledge of any claim or has received any notice of any claim, and no proceeding has been instituted raising any claim against the Company or any Subsidiary or any of their respective real properties now or formerly owned, leased or operated by any of them or other assets, alleging any damage to the environment or violation of any Environmental Laws, except, in each case, such as could not reasonably be expected to result in a Material Adverse Effect. Except as otherwise disclosed to you in writing, (a) neither the Company nor any Subsidiary has knowledge of any facts which would give rise to any claim, public or private, of violation of Environmental Laws or damage to the environment emanating from, occurring on or in any way related to real properties now or formerly owned, leased or operated by any of them or to other assets or their use, except, in each case, such as could not reasonably be expected to result in a Material Adverse Effect; (b) neither the Company nor any Subsidiary has stored any Hazardous Materials on real properties now or formerly owned, leased or operated by any of them and has not disposed of any Hazardous Materials in a manner contrary to any Environmental Laws in each case in any manner that could reasonably be expected to result in a Material Adverse Effect; and (c) all buildings on all real properties now owned, leased or operated by the Company or any Subsidiary are in compliance with applicable Environmental Laws, except where failure to comply could not reasonably be expected to result in a Material Adverse Effect. 11 6. REPRESENTATIONS OF THE PURCHASER. 6.1. Purchase for Investment. You represent that you are purchasing the Notes for your own account or for one or more separate accounts maintained by you or for the account of one or more pension or trust funds and not with a view to the distribution thereof, provided that the disposition of your or their property shall at all times be - -------- within your or their control. You understand that the Notes have not been registered under the Securities Act and may be resold only if registered pursuant to the provisions of the Securities Act or if an exemption from registration is available, except under circumstances where neither such registration nor such an exemption is required by law, and that the Company is not required to register the Notes. 6.2. Source of Funds. You represent that at least one of the following statements is an accurate representation as to each source of funds (a "Source") to be used by you to pay the purchase price of the Notes to be purchased by you hereunder: (a) if you are an insurance company, the Source does not include assets allocated to any separate account maintained by you in which any employee benefit plan (or its related trust) has any interest, other than a separate account that is maintained solely in connection with your fixed contractual obligations under which the amounts payable, or credited, to such plan and to any participant or beneficiary of such plan (including any annuitant) are not affected in any manner by the investment performance of the separate account; or (b) the Source is either (i) an insurance company pooled separate account, within the meaning of Prohibited Transaction Exemption ("PTE") 90-1 (issued January 29, 1990), or (ii) a bank collective investment fund, within the meaning of the PTE 91-38 (issued July 12, 1991) and, except as you have disclosed to the Company in writing pursuant to this paragraph (b), no employee benefit plan or group of plans maintained by the same employer or employee organization beneficially owns more than 10% of all assets allocated to such pooled separate account or collective investment fund; or (c) the Source constitutes assets of an "investment fund" (within the meaning of Part V of the QPAM Exemption) managed by a "qualified professional asset manager" or "QPAM" (within the meaning of Part V of the QPAM Exemption), no employee benefit plan's assets that are included in such investment fund, when combined with the assets of all other employee benefit plans established or maintained by the same employer or by an affiliate (within the meaning of Section V(c)(1) of the QPAM Exemption) of such employer or by the same employee organization and managed by such QPAM, exceed 20% of the total client assets managed by such QPAM, the conditions of Part I(c) 12 and (g) of the QPAM Exemption are satisfied, neither the QPAM nor a person controlling or controlled by the QPAM (applying the definition of "control" in Section V(e) of the QPAM Exemption) owns a 5% or more interest in the Company and (i) the identity of such QPAM and (ii) the - -- names of all employee benefit plans whose assets are included in such investment fund have been disclosed to the Company in writing pursuant to this paragraph (c); or (d) the Source is a governmental plan; or (e) the Source is one or more employee benefit plans, or a separate account or trust fund comprised of one or more employee benefit plans, each of which has been identified to the Company in writing pursuant to this paragraph (e); or (f) the Source does not include assets of any employee benefit plan, other than a plan exempt from the coverage of ERISA. (g) the Source is an "insurance company general account" as such term is defined in the Department of Labor Prohibited Transaction Class Exemption 95-60 (issued July 12, 1995) ("PTE 95-60") and as of the date of this Agreement there is no "employee benefit plan" with respect to which the aggregate amount of such general account's reserves and liabilities for the contracts held by or on behalf of such employee benefit plan and all other employee benefit plans maintained by the same employer (and affiliates thereof as defined in Section V(a)(1) of PTE 95- 60) or by the same employee organization (in each case determined in accordance with the provisions of PTE 95-60) exceeds 10% of the total reserves and liabilities of such general account (as determined under PTE 95-60) (exclusive of separate account liabilities) plus surplus as set forth in the National Association of Insurance Commissioners Annual Statement filed with the state of domicile of such Purchaser. As used in this Section 6.2, the terms "employee benefit plan", "governmental plan", "party in interest" and "separate account" shall have the respective meanings assigned to such terms in Section 3 of ERISA. 7. INFORMATION AS TO COMPANY. 7.1. Financial and Business Information The Company shall deliver to each holder of Notes that is an Institutional Investor: (a) Quarterly Statements -- within 45 days after the end of each -------------------- quarterly fiscal period in each fiscal year of the Company (other than the last quarterly fiscal period of each such fiscal year), duplicate copies of, 13 (i) a consolidated balance sheet of the Company and its Subsidiaries as at the end of such quarter, and (ii) consolidated statements of income, changes in shareholders' equity and cash flows of the Company and its Subsidiaries, for such quarter and (in the case of the second and third quarters) for the portion of the fiscal year ending with such quarter, setting forth in each case in comparative form the figures for the corresponding periods in the previous fiscal year, all in reasonable detail, prepared in accordance with GAAP applicable to quarterly financial statements generally, and certified by a Senior Financial Officer as fairly presenting, in all material respects, the financial position of the companies being reported on and their results of operations and cash flows, subject to changes resulting from year-end adjustments, provided that delivery within the time period specified above of copies of the Company's Quarterly Report on Form 10-Q prepared in compliance with the requirements therefor and filed with the Securities and Exchange Commission shall be deemed to satisfy the requirements of this Section 7.1(a); (b) Annual Statements -- within 90 days after the end of each fiscal ----------------- year of the Company, duplicate copies of, (i) a consolidated balance sheet of the Company and its Subsidiaries, as at the end of such year, and (ii) consolidated statements of income, changes in shareholders' equity and cash flows of the Company and its Subsidiaries, for such year, setting forth in each case in comparative form the figures for the previous fiscal year, all in reasonable detail, prepared in accordance with GAAP, and accompanied (A) by an opinion thereon of independent certified public accountants of recognized national standing, which opinion shall state that such financial statements present fairly, in all material respects, the financial position of the companies being reported upon and their results of operations and cash flows and have been prepared in conformity with GAAP, and that the examination of such accountants in connection with such financial statements has been made in accordance with generally accepted auditing standards, and that such audit provides a reasonable basis for such opinion in the circumstances, and (B) a certificate of such accountants stating that they have reviewed this Agreement and stating further whether, in making their audit, they have become aware of any condition or event that then constitutes a Default or an Event of Default, and, if they are aware that any such condition or event then exists, specifying the nature and period of 14 the existence thereof (it being understood that such accountants shall not be liable, directly or indirectly, for any failure to obtain knowledge of any Default or Event of Default unless such accountants should have obtained knowledge thereof in making an audit in accordance with generally accepted auditing standards or did not make such an audit), provided that the delivery within the time period specified above of the -------- Company's Annual Report on Form 10-K for such fiscal year (together with the Company's annual report to shareholders, if any, prepared pursuant to Rule 14a-3 under the Exchange Act) prepared in accordance with the requirements therefor and filed with the Securities and Exchange Commission, together with the accountant's certificate described in clause (B) above, shall be deemed to satisfy the requirements of this Section (b); (c) SEC and Other Reports -- promptly upon their becoming available, --------------------- one copy of (i) each financial statement, report, notice or proxy - statement sent by the Company or any Subsidiary to public securities holders generally, and (ii) each regular or periodic report, each -- registration statement (without exhibits except as expressly requested by such holder), and each prospectus and all amendments thereto filed by the Company or any Subsidiary with the Securities and Exchange Commission and of all press releases and other statements made available generally by the Company or any Subsidiary to the public concerning developments that are Material; (d) Notice of Default or Event of Default -- promptly, and in any ------------------------------------- event within five days after a Responsible Officer becoming aware of the existence of any Default or Event of Default or that any Person has given any notice or taken any action with respect to a claimed default hereunder or that any Person has given any notice or taken any action with respect to a claimed default of the type referred to in Section 11(f), a written notice specifying the nature and period of existence thereof and what action the Company is taking or proposes to take with respect thereto; (e) ERISA Matters -- promptly, and in any event within 5 days after ------------- a Responsible Officer becoming aware of any of the following, a written notice setting forth the nature thereof and the action, if any, that the Company or an ERISA Affiliate proposes to take with respect thereto: (i) with respect to any Plan, any reportable event, as defined in section 4043(b) of ERISA and the regulations thereunder, for which notice thereof has not been waived pursuant to such regulations as in effect on the date hereof; or (ii) the taking by the PBGC of steps to institute, or the threatening by the PBGC of the institution of, proceedings under section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan, or the 15 receipt by the Company or any ERISA Affiliate of a notice from a Multiemployer Plan that such action has been taken by the PBGC with respect to such Multiemployer Plan; or (iii) any event, transaction or condition that could result in the incurrence of any liability by the Company or any ERISA Affiliate pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans, or in the imposition of any Lien on any of the rights, properties or assets of the Company or any ERISA Affiliate pursuant to Title I or IV of ERISA or such penalty or excise tax provisions, if such liability or Lien, taken together with any other such liabilities or Liens then existing, could reasonably be expected to have a Material Adverse Effect; (f) Notices from Governmental Authority -- promptly, and in any event ----------------------------------- within 30 days of receipt thereof, copies of any notice to the Company or any Subsidiary from any Federal or state Governmental Authority relating to any order, ruling, statute or other law or regulation that could reasonably be expected to have a Material Adverse Effect; and (g) Requested Information -- with reasonable promptness, such other --------------------- data and information relating to the business, operations, affairs, financial condition, assets or properties of the Company or any Subsidiary or relating to the ability of the Company to perform its obligations hereunder and under the Notes as from time to time may be reasonably requested by any such holder of Notes. 7.2. Officer's Certificate Each set of financial statements delivered to a holder of Notes pursuant to Section 7.1(a) or Section 7.1(b) shall be accompanied by a certificate of a Senior Financial Officer setting forth: (a) Covenant Compliance -- the information (including detailed ------------------- calculations) required in order to establish whether the Company was in compliance with the requirements of Section 10.1 through Section 10.14, inclusive, during the quarterly or annual period covered by the statements then being furnished (including with respect to each such Section, where applicable, the calculations of the maximum or minimum amount, ratio or percentage, as the case may be, permissible under the terms of such Sections, and the calculation of the amount, ratio or percentage then in existence); and (b) Event of Default -- a statement that such officer has reviewed the ---------------- relevant terms hereof and has made, or caused to be made, under his or her supervision, a review of the transactions and conditions of the Company and its Subsidiaries from the beginning of the quarterly or annual period covered by the statements then being 16 furnished to the date of the certificate and that such review shall not have disclosed the existence during such period of any condition or event that constitutes a Default or an Event of Default or, if any such condition or event existed or exists (including, without limitation, any such event or condition resulting from the failure of the Company or any Subsidiary to comply with any Environmental Law), specifying the nature and period of existence thereof and what action the Company shall have taken or proposes to take with respect thereto. 7.3. Inspection The Company shall permit the representatives of each holder of Notes that is an Institutional Investor: (a) No Default -- if no Default or Event of Default then exists, at ---------- the expense of such holder and upon reasonable prior notice to the Company, to visit the principal executive office of the Company, to discuss the affairs, finances and accounts of the Company and its Subsidiaries with the Company's officers, and (with the consent of the Company, which consent will not be unreasonably withheld) its independent public accountants, and (with the consent of the Company, which consent will not be unreasonably withheld) to visit the other offices and properties of the Company and each Subsidiary, all at such reasonable times and as often as may be reasonably requested in writing; and (b) Default -- if a Default or Event of Default then exists, at the ------- expense of the Company to visit and inspect any of the offices or properties of the Company or any Subsidiary, to examine all their respective books of account, records, reports and other papers, to make copies and extracts therefrom, and to discuss their respective affairs, finances and accounts with their respective officers and independent public accountants (and by this provision the Company authorizes said accountants to discuss the affairs, finances and accounts of the Company and its Subsidiaries), all at such times and as often as may be requested. 17 7.4. Maintenance of Records. The Company will keep, and will cause each Subsidiary to keep, at all times proper books of record and account in which full, true and correct entries will be made of all dealings or transactions of or in relation to the business and affairs of the Company or such Subsidiary, in accordance with GAAP consistently applied throughout the period involved (except for such changes as are disclosed in such financial statements or in the notes thereto and concurred in by the Company's independent certified public accountants), and the Company will, and will cause each Subsidiary to, provide reasonable protection against loss or damage to such books of record and account. 8. PREPAYMENT OF THE NOTES 8.1. Required Prepayments (a) On March 31, 2001, and on each March 31 thereafter to and including March 31, 2006, the Company will prepay $5,714,286 principal amount (or such lesser principal amount as shall then be outstanding) of the Notes at 100% of the principal amount prepaid and without payment of the Make-Whole Amount or any premium, provided that upon any partial -------- prepayment of the Notes pursuant to Section 8.1(b) or Section 8.2 or purchase of the Notes permitted by Section 8.5 the principal amount of each required prepayment of the Notes becoming due under this Section 8.1 on and after the date of such prepayment or purchase shall be reduced in the same proportion as the aggregate unpaid principal amount of the Notes is reduced as a result of such prepayment or purchase. (b) Upon the occurrence of a Change of Control Event, the Company, upon notice as provided below, shall offer to prepay the entire principal amount of the Notes at 100% of the principal amount thereof, plus the Modified Make-Whole Amount determined for the prepayment date with respect to such principal amount. The Company shall give notice of any offer to prepay the Notes to each holder of the Notes within 3 Business Days after any Responsible Officer has knowledge of a Change of Control Event. Such notice shall specify (i) the nature of the Change of Control Event, (ii) the date fixed for prepayment which, to the extent practicable, shall be not less than 30 or more than 60 calendar days after the date of such notice but in any event shall not be later than the Effective Date of the Change of Control, (iii) the estimated Effective Date of the Change of Control if it has not occurred, (iv) the interest to be paid on the prepayment date with respect to such principal amount being prepaid and (v) the date by which any holder of a Note that wishes to accept such offer must deliver notice thereof to the Company which shall not be later than 10 Business Days prior to the date fixed for prepayment. The notice shall be accompanied by a certificate of a Senior Financial Officer as to the estimated Modified Make-Whole Amount due in connection with such prepayment (calculated as if the date of such notice were the date of the prepayment), setting forth the details of such 18 computation. Failure by a holder of Notes to respond to an offer made pursuant to this Section 8.1(b) shall be deemed to constitute an acceptance of such offer by such holder. Not earlier than 7 Business Days prior to the date fixed for prepayment, the Company shall give written notice to each holder of the Notes of those holders who have given notices of acceptance of, or are deemed to have accepted, the Company's offer, and the principal amount of Notes held by each, and thereafter any holder may change its response to the Company's offer by written notice to such effect delivered to the Company not less than 3 Business Days prior to the date fixed for prepayment. Two Business Days prior to such prepayment, the Company shall deliver to each holder of Notes a certificate of a Senior Financial Officer specifying the calculation of the Modified Make-Whole Amount as of the specified prepayment date. If any holder of Notes objects to such calculation by written notice to the Company, the Make-Whole Amount calculated by such holder and specified in such notice shall be final and binding on the Company, absent manifest error, with respect to the prepayment of the Notes held by all holders. The obligation of the Company to prepay Notes pursuant to the offers required by, and accepted in accordance with, this paragraph (b) is subject to the effectiveness of the Change of Control Event in respect of which such offers and acceptances shall have been made. In the event that the Effective Date of the Change of Control does not occur on the proposed Prepayment Date in respect thereof, the prepayment shall be deferred until and shall be made on the Effective Date of the Change of Control. The Company shall keep each holder of Notes reasonably and timely informed of (i) any such deferral of the date of prepayment, (ii) the expected Effective Date of the Change of Control and (iii) any determination by the Company that efforts to consummate the change of control constituting the Change of Control Event have ceased or been abandoned (in which case the offers and acceptances made pursuant to this Section 8.1(b) shall be deemed rescinded). (c) If Excess Net Proceeds from Dispositions subject to Section 10.3 at any time exceed $5,000,000, the Company, upon notice as provided below, shall offer to prepay Notes in a principal amount equal to the amount of such Excess Net Proceeds at 100% of the principal amount thereof and without payment of the Make-Whole Amount or any premium. The Company shall give notice of any offer to prepay the Notes to each holder of the Notes within 3 Business Days after any Responsible Officer has knowledge that Excess Net Proceeds exceed $5,000,000. Such notice shall specify (i) the date fixed for prepayment which, to the extent practicable, shall be not less than 30 or more than 60 calendar days after the date of such notice, (ii) the interest to be paid on the prepayment date with respect to such principal amount being prepaid and (iii) the date by which any holder of a Note that wishes to accept such offer must deliver notice thereof to the Company which shall not be later than 10 Business Days prior to the date fixed for prepayment. Not earlier than 7 Business Days prior to the date fixed for prepayment, the Company shall give written notice to each holder of the Notes of those holders who have given notices of acceptance of the Company's offer, and the principal amount of Notes 19 held by each, and thereafter any holder may change its response to the Company's offer by written notice to such effect delivered to the Company not less than 3 Business Days prior to the date fixed for prepayment. 8.2. Optional Prepayments with Make-Whole Amount The Company may, at its option, upon notice as provided below, prepay at any time all, or from time to time any part of, the Notes, in a principal amount not less than $2,000,000 in the case of a partial prepayment, at 100% of the principal amount so prepaid, plus the Make-Whole Amount determined for the prepayment date with respect to such principal amount. The Company will give each holder of Notes written notice of each optional prepayment under this Section 8.2 not less than 30 days and not more than 60 days prior to the date fixed for such prepayment. Each such notice shall specify such date, the aggregate principal amount of the Notes to be prepaid on such date, the principal amount of each Note held by such holder to be prepaid (determined in accordance with Section 8.3), and the interest to be paid on the prepayment date with respect to such principal amount being prepaid, and shall be accompanied by a certificate of a Senior Financial Officer as to the estimated Make-Whole Amount due in connection with such prepayment (calculated as if the date of such notice were the date of the prepayment), setting forth the details of such computation. Two Business Days prior to such prepayment, the Company shall deliver to each holder of Notes a certificate of a Senior Financial Officer specifying the calculation of such Make-Whole Amount as of the specified prepayment date. If any holder of Notes objects to such calculation by written notice to the Company, the Make-Whole Amount calculated by such holder and specified in such notice shall be final and binding on the Company, absent manifest error, with respect to the prepayment of the Notes held by all holders. 8.3. Allocation of Partial Prepayments In the case of each partial prepayment of the Notes, the principal amount of the Notes to be prepaid shall be allocated among all of the Notes at the time outstanding in proportion, as nearly as practicable, to the respective unpaid principal amounts thereof not theretofore called for prepayment. 8.4. Maturity; Surrender, etc In the case of each prepayment of Notes pursuant to this Section 8, the principal amount of each Note to be prepaid shall mature and become due and payable on the date fixed for such prepayment, together with interest on such principal amount accrued to such date and the applicable Make- Whole Amount or Modified Make-Whole Amount, if any. From and after such date, unless the Company shall fail to pay such principal amount when so due and payable, together with the interest and the Make-Whole Amount or Modified Make- Whole Amount, if 20 any, as aforesaid, interest on such principal amount shall cease to accrue. Any Note paid or prepaid in full shall be surrendered to the Company and canceled and shall not be reissued, and no Note shall be issued in lieu of any prepaid principal amount of any Note. 8.5. Purchase of Notes The Company will not and will not permit any Affiliate to purchase, redeem, prepay or otherwise acquire, directly or indirectly, any of the outstanding Notes except upon the payment or prepayment of the Notes in accordance with the terms of this Agreement and the Notes. The Company will promptly cancel all Notes acquired by it or any Affiliate pursuant to any payment, prepayment or purchase of Notes pursuant to any provision of this Agreement and no Notes may be issued in substitution or exchange for any such Notes. 8.6. Make-Whole Amount. The term "Make-Whole Amount" and "Modified Make-Whole Amount" means, with respect to any Note, an amount equal to the excess, if any, of the Discounted Value of the Remaining Scheduled Payments with respect to the Called Principal of such Note over the amount of such Called Principal, provided that -------- neither the Make-Whole Amount nor the Modified Make-Whole Amount may in any event be less than zero. For the purposes of determining the Make-Whole Amount and Modified Make-Whole Amount, the following terms have the following meanings: "Called Principal" means, with respect to any Note, the principal of such Note that is to be prepaid pursuant to Section 8.1 or Section 8.2 or has become or is declared to be immediately due and payable pursuant to Section 12.1, as the context requires. "Discounted Value" means, with respect to the Called Principal of any Note, the amount obtained by discounting all Remaining Scheduled Payments with respect to such Called Principal from their respective scheduled due dates to the Settlement Date with respect to such Called Principal, in accordance with accepted financial practice and at a discount factor (applied on the same periodic basis as that on which interest on the Notes is payable) equal to the Reinvestment Yield with respect to such Called Principal. "Reinvestment Yield" means, with respect to the Called Principal of any Note, the sum of (i)(A) 0.50% if determining the Make-Whole Amount or (B) 1.20% if determining the Modified Make-Whole Amount, plus (ii) the yield to maturity implied by (y) the yields reported, as of 10:00 A.M. (New York City time) on the second Business Day preceding the Settlement Date with respect to such Called Principal, on the Bloomberg Financial Markets System (page USD) (or, if not available, any other nationally recognized trading screen reporting on-line intraday trading in United States 21 government securities) for actively traded United States Treasury securities having a maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date, or (z) if such yields are not - reported as of such time or the yields reported as of such time are not ascertainable, the Treasury Constant Maturity Series Yields reported, for the latest day for which such yields have been so reported as of the second Business Day preceding the Settlement Date with respect to such Called Principal, in Federal Reserve Statistical Release H.15 (519) (or any comparable successor publication) for actively traded U.S. Treasury securities having a constant maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date. Such implied yield will be determined, if necessary, by (a) converting U.S. Treasury bill - quotations to bond-equivalent yields in accordance with accepted financial practice and (b) interpolating linearly between (1) the actively traded - - U.S. Treasury security with the final maturity closest to and greater than the Remaining Average Life and (2) the actively traded U.S. Treasury - security with the final maturity closest to and less than the Remaining Average Life. "Remaining Average Life" means, with respect to any Called Principal, the number of years (calculated to the nearest one-twelfth year) obtained by dividing (i) such Called Principal into (ii) the sum of the - -- products obtained by multiplying (a) the principal component of each - Remaining Scheduled Payment with respect to such Called Principal by (b) - the number of years (calculated to the nearest one-twelfth year) that will elapse between the Settlement Date with respect to such Called Principal and the scheduled due date of such Remaining Scheduled Payment. "Remaining Scheduled Payments" means, with respect to the Called Principal of any Note, all payments of such Called Principal and interest thereon that would be due after the Settlement Date with respect to such Called Principal if no payment of such Called Principal were made prior to its scheduled due date, provided that if such Settlement Date is -------- not a date on which interest payments are due to be made under the terms of the Notes, then the amount of the next succeeding scheduled interest payment will be reduced by the amount of interest accrued to such Settlement Date and required to be paid on such Settlement Date pursuant to Section 8.1, 8.2 or 12.1. "Settlement Date" means, with respect to the Called Principal of any Note, the date on which such Called Principal is to be prepaid pursuant to Section 8.1 or 8.2 or has become or is declared to be immediately due and payable pursuant to Section 12.1, as the context requires. 9. AFFIRMATIVE COVENANTS The Company covenants that so long as any of the Notes are outstanding: 22 9.1. Compliance with Law The Company will and will cause each Subsidiary to comply with all laws, ordinances or governmental rules or regulations to which each of them is subject, including, without limitation, Environmental Laws, and will obtain and maintain in effect all licenses, certificates, permits, franchises and other governmental authorizations necessary to the ownership of their respective properties or to the conduct of their respective businesses, in each case to the extent necessary to ensure that non-compliance with such laws, ordinances or governmental rules or regulations or failures to obtain or maintain in effect such licenses, certificates, permits, franchises and other governmental authorizations could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. 9.2. Insurance The Company will and will cause each Subsidiary to maintain, with financially sound and reputable insurers, insurance with respect to their respective properties and businesses against such casualties and contingencies, of such types, on such terms and in such amounts (including deductibles, co- insurance and self-insurance, if adequate reserves are maintained with respect thereto) as is customary in the case of entities of established reputations engaged in the same or a similar business and similarly situated. 9.3. Maintenance of Properties The Company will and will cause each Subsidiary to maintain and keep, or cause to be maintained and kept, their respective properties in good repair, working order and condition (other than ordinary wear and tear), so that the business carried on in connection therewith may be properly conducted at all times, provided that this Section shall not prevent the Company or any -------- Subsidiary from discontinuing the operation and the maintenance of any of its properties if such discontinuance is desirable in the conduct of its business and the Company has concluded that such discontinuance could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. 9.4. Payment of Taxes and Claims The Company will and will cause each Subsidiary to file all tax returns required to be filed in any applicable jurisdiction and to pay and discharge all taxes shown to be due and payable on such returns and all other taxes, assessments, governmental charges, or levies imposed on them or any of their properties, assets, income or franchises, to the extent such taxes and assessments have become due and payable and before they have become delinquent and all claims for which sums have become due and payable that have or might become a Lien on properties or assets of the Company or any Subsidiary, provided -------- that neither the Company nor any Subsidiary need pay any such tax or assessment or claims if (i) the amount, applicability or validity thereof is contested by - the Company or such Subsidiary on a timely basis in good faith and in appropriate 23 proceedings, and the Company or a Subsidiary has established adequate reserves therefor in accordance with GAAP on the books of the Company or such Subsidiary or (ii) the nonpayment of all such taxes and assessments in the aggregate could not reasonably be expected to have a Material Adverse Effect. 9.5. Corporate Existence, etc. The Company will at all times preserve and keep in full force and effect its corporate existence. Subject to Sections 10.2 and 10.3, the Company will at all times preserve and keep in full force and effect the corporate existence of each Subsidiary (unless merged into the Company or a Subsidiary) and all rights and franchises of the Company and its Subsidiaries unless, in the good faith judgment of the Company, the termination of or failure to preserve and keep in full force and effect such corporate existence, right or franchise could not, individually or in the aggregate, have a Material Adverse Effect. 10. NEGATIVE COVENANTS. The Company covenants that so long as any of the Notes are outstanding: 10.1. Transactions with Affiliates. The Company will not, and will not permit any Subsidiary to, enter into, directly or indirectly, any transaction or Material group of related transactions (including the purchase, lease, sale or exchange of properties of any kind or the rendering of any service) with any Affiliate (other than the Company or another Subsidiary), except in the ordinary course and pursuant to the reasonable requirements of the Company's or such Subsidiary's business and upon fair and reasonable terms no less favorable to the Company or such Subsidiary than would be obtainable in a comparable arm's-length transaction with a Person not an Affiliate. 10.2. Merger, Consolidation, etc. The Company will not and will not permit any Subsidiary to consolidate with or merge with any other Person or convey, transfer, sell or lease all or substantially all of its assets in a single transaction or series of transactions to any Person except that: (a) the Company may consolidate with or merge with any other Person or convey, transfer, sell or lease all or substantially all of its assets in a single transaction or series of transactions to any Person other than a Subsidiary, provided that: (i) the successor formed by such consolidation or the survivor of such merger or the Person that acquires by conveyance, transfer, sale or lease all or substantially all of the assets of the Company as an entirety, as the case may be, shall be a solvent corporation organized and existing under the laws of the United 24 States or any State thereof (including the District of Columbia), and, if the Company is not such corporation, such corporation (x) shall have executed and delivered to each holder of any Notes its assumption of the due and punctual performance and observance of each covenant and condition of this Agreement and the Notes and (y) shall have caused to be delivered to each holder of any Notes an opinion of independent counsel reasonably satisfactory to the Required Holders, to the effect that all agreements or instruments effecting such assumption are enforceable in accordance with their terms and comply with the terms hereof; (ii) immediately before and after giving effect to such transaction, no Default or Event of Default shall exist; and (iii) after giving effect to such transaction, the Company or such successor corporation could incur at least $1.00 of additional Indebtedness pursuant to Section 10.6(e); and (b) Any Subsidiary may (i) merge into the Company (provided that the Company is the surviving corporation) or another Subsidiary or (ii) sell, transfer or lease all or any part of its assets to the Company or another Subsidiary, or (iii) merge with any Person which, as a result of such merger, becomes a Subsidiary; provided in each -------- instance set forth in clauses (i) through (iii) that the Company owns shares of Voting Stock in the surviving Subsidiary representing the same or greater percentage of the combined voting power of each outstanding class of Voting Stock as the Company owned in the Subsidiary that merges or disposes of its assets and that immediately before and after giving effect thereto there shall exist no Default or Event of Default and the Company could incur at least $1.00 of additional Indebtedness pursuant to Section 10.6(e). No such conveyance, transfer, sale or lease of all or substantially all of the assets of the Company shall have the effect of releasing the Company or any successor corporation that shall theretofore have become such in the manner prescribed in this Section 10.2 from its liability under this Agreement or the Notes. 10.3. Sale of Assets. Except as permitted by Section 10.2, the Company will not, and will not permit any Subsidiary to, sell, lease, transfer or otherwise (including by way of merger) dispose of (collectively a "Disposition") any assets, including any shares of capital stock of Subsidiaries, in one or a series of transactions, other than in the ordinary course of business, to any Person, except to the Company or a Wholly-Owned Subsidiary, unless (i) no Default or Event of Default has occurred and is continuing and (ii) (A) immediately after giving effect to such Disposition the Company could incur $1.00 of additional Indebtedness or (B) the net proceeds of such Disposition are (1) reinvested in productive assets of at least equivalent value to be used in a manner consistent with the business of the Company and its Subsidiaries as described in the 25 Memorandum, or (2) applied to reduce outstanding Indebtedness (other than Indebtedness that by its terms is subordinate to the Notes or Indebtedness owed to the Company or any Affiliate of the Company) of the Company or its Subsidiaries. If Net Proceeds of Dispositions not applied pursuant to clause (ii)(B) of the preceding sentence within 360 days of such Disposition ("Excess Net Proceeds") at any time exceed $5,000,000 on a cumulative basis, the Company shall offer to prepay the Notes pursuant to Section 8.1(c). If less than all of the Excess Net Proceeds are applied pursuant to Section 8.1(c) because holders of insufficient principal amount of the Notes accept such offer, the balance of such Excess Net Proceeds remaining shall cease to be deemed Excess Net Proceeds for any purpose and may be used by the Company for general corporate purposes. 10.4. Liens The Company will not, and will not permit any Subsidiary to, permit to exist, create, assume or incur, directly or indirectly, any Lien on its properties or assets, whether now owned or hereafter acquired, except: (a) Liens existing on property or assets of the Company or any Subsidiary as of the date of this Agreement that are described in Schedule 10.4; (b) Liens for taxes, assessments or governmental charges not then due and delinquent or the validity of which is being contested in good faith by appropriate proceedings and as to which the Company has established adequate reserves on its books in accordance with GAAP; (c) Liens arising in connection with court proceedings, provided the execution of such Liens is effectively stayed, such Liens are being contested in good faith by appropriate proceedings and as to which the Company has established adequate reserves on its books in accordance with GAAP; (d) Liens arising in the ordinary course of business and not incurred in connection with the borrowing of money (including, but not limited to, encumbrances in the nature of zoning restrictions, easements, rights and restrictions of record on the use of real property, defects in title and landlord's, lessor's, carrier's, warehousemen's, mechanics', materialmen's and other similar liens) that in the aggregate do not materially interfere with the conduct of the business of the Company and its Subsidiaries taken as a whole or materially impair the use or value of the property or assets subject thereto; (e) Liens securing Indebtedness of a Subsidiary to the Company or to a Wholly-Owned Subsidiary; (f) Liens (i) existing on property at the time of its acquisition by the Company or a Subsidiary and not created in contemplation thereof, whether or not the Indebtedness secured by such Lien is assumed by the Company or a Subsidiary; or (ii) on property 26 created contemporaneously with its acquisition or within 180 days of the acquisition or completion of construction thereof to secure or provide for all or a portion of the purchase price or cost of construction of such property; or (iii) existing on property of a Person at the time such Person is merged or consolidated with, or substantially all of its assets are acquired by, the Company or a Subsidiary and not created in contemplation thereof; provided that in the case of clauses (i), (ii) and (iii) such Liens do not extend to other property of the Company or any Subsidiary and that the aggregate principal amount of Indebtedness secured by each such Lien does not exceed 80% of the lesser of the fair market value or cost of acquisition or construction of the property subject thereto; (g) Additional Liens securing Indebtedness not otherwise permitted by paragraphs (a) through (f) above, provided that at the time of creation, assumption or incurrence thereof and immediately after giving effect thereto and to the application of the proceeds therefrom, the sum (without duplication) of the outstanding principal amount of Indebtedness of the Company and its Subsidiaries secured by Liens does not exceed 10% of Consolidated Net Worth; and (h) Liens resulting from extensions, renewals or replacements of Liens permitted by paragraphs (a) and (f), provided that there is no increase in the principal amount of Indebtedness secured thereby at the time of extension, renewal or replacement and any new Lien attaches only to the same property theretofore subject to such earlier Lien. 10.5. Negative Pledges. The Company will not, and will not permit any Subsidiary to, enter into any agreement other than this Agreement and the New Credit Agreement which prohibits or limits the ability of the Company or any Subsidiary to create, incur, assume or suffer to exist any Lien on its properties, assets or revenues, whether now owned or hereafter acquired; provided the Company may enter into -------- such an agreement in connection with the incurrence or assumption of a Lien permitted by Section 10.4(f) so long as the prohibitions and limitations of such agreement are limited by their terms to the property subject to such Lien. 10.6. Indebtedness. The Company will not, and will not permit any Subsidiary to, create, assume, incur or otherwise become liable for, directly or indirectly, any Indebtedness other than: (a) the Notes; (b) Indebtedness not exceeding $20,000,000 in aggregate principal amount from time to time outstanding under the New Credit Agreement; 27 (c) Consolidated Indebtedness of the Company and its Subsidiaries outstanding on the date of Closing and described in Schedule 5.15; (d) Indebtedness of a Subsidiary owed to the Company or another Wholly-Owned Subsidiary; (e) additional Indebtedness, provided that, (i) after giving effect thereto and to the application of the proceeds thereof and (ii) as of the end of each fiscal quarter of the Company thereafter, Consolidated Indebtedness does not exceed 55% of Consolidated Total Capitalization; and (f) renewals, extensions, substitutions, refinancings or replacements of Indebtedness permitted by paragraphs (a), (c) and (d) above, provided there is no increase in the principal amount of such Indebtedness at the time of such renewal, extension, substitution, refinancing or replacement. 10.7. Indebtedness and Preferred Stock of Subsidiaries. The Company will not permit any Subsidiary to create, assume, incur, issue, or in any manner be or become liable in respect of any Indebtedness or Preferred Stock, other than: (a) Indebtedness and Preferred Stock of Subsidiaries outstanding on the Closing Date and described in Schedule 5.15, and renewals, extensions, substitutions, refinancings or replacements thereof without materially more onerous terms and restrictions, provided there is no increase in the principal amount of such Indebtedness or liquidation value of such Preferred Stock at the time of such renewal, extension, substitution, refinancing or replacement; (b) Indebtedness or Preferred Stock owed or issued to the Company or another Wholly-Owned Subsidiary; and (c) Additional Indebtedness and Preferred Stock, provided that (i) such Indebtedness or Preferred Stock is permitted by Section 10.6(e) and (ii) the aggregate principal amount of Indebtedness and the aggregate liquidation value of Preferred Stock of Subsidiaries outstanding (other than Indebtedness and Preferred Stock referred to in paragraph (b)) does not exceed 10% of Consolidated Net Worth. 10.8. Interest Coverage. The Company will not at any time permit the ratio of EBITDA to Consolidated Interest Expense for the immediately preceding four fiscal quarters, ending on the last day of each fiscal quarter, to be less than 3.0 to 1.0. 28 10.9. Fixed Charge Ratio. The Company will not at any time permit the ratio of (i) EBITDA plus one-third of Consolidated Rental Expense to (ii) Consolidated Fixed Charges, for the immediately preceding four fiscal quarters ending on the last day of each fiscal quarter to be less than 2.50 to 1.00. 10.10. Consolidated Net Worth. The Company will not permit Consolidated Net Worth at any time to be less than $52,500,000 plus the cumulative sum of 50% of Consolidated Net Income (without reduction for any losses) for each fiscal quarter ending after March 31, 1996. 10.11. Restricted Payments. The Company will not: (a) Declare or pay any dividend (other than dividends payable solely in common stock of the Company); (b) Make any other distribution on or with respect to any class of the Company's capital stock (other than distributions consisting solely of common stock of the Company); or (c) Acquire, redeem or retire, or permit any Subsidiary to acquire, any shares of the Company's capital stock (unless acquired, redeemed or retired solely in exchange for common stock of the Company) (all such non-permitted declarations, payments, distributions, acquisitions, redemptions and retirements covered by foregoing clauses (a) through (c) being referred to as "Restricted Payments"); or (d) make, or permit any Subsidiary to make, any Restricted Investment; unless immediately after giving effect thereto (i) the sum of all Restricted Payments and Restricted Investments during the period from March 31, 1997 to and including the date of the Restricted Payment or Restricted Investment in question would not exceed the sum of: (A) $7,500,000, plus (B) 50% of cumulative Consolidated Net Income (or minus 100% of any deficit) for the period beginning on April 1, 1997 and ending on the date of such Restricted Payment or Restricted Investment, plus (C) the net cash proceeds from the issuance or sale of common stock of the Company after March 31, 1997, (ii) no Default or Event of Default exists or would exist, and (iii) the Company could incur at least $1.00 of additional Indebtedness pursuant to Section 10.6 (e). 10.12. No Limitations on Subsidiaries. The Company will not, and will not permit any Subsidiary to, directly or indirectly, create, incur or permit to exist any restriction of any kind (other than restrictions imposed by law) 29 on the ability of any Subsidiary to (i) pay dividends or make any other distribution to the Company or any other stockholder, (ii) pay any Indebtedness owed to the Company or any other Subsidiary, (iii) make loans or advances to the Company, (iv) transfer any of its property or assets to the Company or (v) merge or consolidate with the Company or liquidate. 10.13. Disposition of Stock of Subsidiaries. The Company will not, and will not permit any Subsidiary to, issue, sell or transfer capital stock of a Subsidiary to any Person other than the Company or a Wholly-Owned Subsidiary if such issuance, sale or transfer would cause it to cease to be a Subsidiary, unless (i) all shares of capital stock of such Subsidiary and all Indebtedness of such Subsidiary owned by the Company and by every other Subsidiary shall simultaneously be sold, transferred or otherwise disposed of, (ii) such Subsidiary does not thereafter own any shares of capital stock or Indebtedness of the Company or another Subsidiary and (iii) such sale would not be prohibited under Section 10.3. 10.14. Nature of Business. The Company will not, and will not permit any Subsidiary to, engage to any substantial extent in any business other than the businesses in which the Company and its Subsidiaries are engaged on the date of this Agreement as described in the Memorandum and businesses reasonably related thereto or in furtherance thereof. 11. EVENTS OF DEFAULT An "Event of Default" shall exist if any of the following conditions or events shall occur and be continuing: (a) the Company defaults in the payment of any principal or Make-Whole Amount or Modified Make-Whole Amount, if any, on any Note when the same becomes due and payable, whether at maturity or at a date fixed for prepayment or by declaration or otherwise; or (b) the Company defaults in the payment of any interest on any Note for more than five Business Days after the same becomes due and payable; or (c) the Company defaults in the performance of or compliance with any term contained in Section 7.1(d) or Sections 10.1 through 10.14, or (d) the Company defaults in the performance of or compliance with any term contained herein (other than those referred to in paragraphs (a), (b) and (c) of this Section 11) and such default is not remedied within 30 days after the earlier of (i) a Responsible Officer obtaining actual - knowledge of such default and (ii) the Company receiving written notice -- of such default from any holder of a Note; or 30 (e) any representation or warranty made in writing by or on behalf of the Company or by any officer of the Company in this Agreement or in any writing furnished in connection with the transactions contemplated hereby proves to have been false or incorrect in any material respect on the date as of which made; or (f) the Company or any Subsidiary is in default in the performance of or compliance with any term of the New Credit Agreement and such default continues beyond any period of grace provided with respect thereto or, in the case of a default in the payment of any principal of any loan or any letter of credit reimbursement obligation under the New Credit Agreement, such default continues for 2 days; or (g) (i) the Company or any Subsidiary is in default (as principal or - as guarantor or other surety) in the payment of any principal of or premium or make-whole amount or interest on any Indebtedness (other than Indebtedness under the New Credit Agreement) that is outstanding in an individual principal amount of at least $2,000,000 or in an aggregate principal amount of $3,000,000 beyond any period of grace provided with respect thereto, or (ii) the Company or any Subsidiary is in default in -- the performance of or compliance with any term of any evidence of any Indebtedness (other than the New Credit Agreement) in an individual outstanding principal amount of at least $2,000,000 or evidences of Indebtedness in an aggregate principal amount of $3,000,000, or of any mortgage, indenture or other agreement relating thereto or any other condition exists, and as a consequence of such default or condition such Indebtedness has become, or one or more Persons are entitled to declare such Indebtedness to be, due and payable before its stated maturity or before its regularly scheduled dates of payment, or (iii) as a --- consequence of the occurrence or continuation of any event or condition (other than the passage of time or the right of the holder of Indebtedness to convert such Indebtedness into equity interests), (x) the - Company or any Subsidiary has become obligated to purchase or repay Indebtedness before its regular maturity or before its regularly scheduled dates of payment in an individual outstanding principal amount of at least $2,000,000 or an aggregate outstanding principal amount of at least $3,000,000, or (y) one or more Persons have the right to require - the Company or any Subsidiary so to purchase or repay such Indebtedness; or (h) the Company or any Subsidiary (i) is generally not paying, or - admits in writing its inability to pay, its debts as they become due, (ii) files, or consents by answer or otherwise to the filing against it -- of, a petition for relief or reorganization or arrangement or any other petition in bankruptcy, for liquidation or to take advantage of any bankruptcy, insolvency, reorganization, moratorium or other similar law of any jurisdiction, (iii) makes an assignment for the benefit of its --- creditors, (iv) consents to the appointment of a custodian, receiver, -- trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, (v) is adjudicated as - insolvent or to be liquidated, or (vi) takes corporate action for the -- purpose of any of the foregoing; or 31 (i) a court or governmental authority of competent jurisdiction enters an order appointing, without consent by the Company or any Subsidiary, a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, or constituting an order for relief or approving a petition for relief or reorganization or any other petition in bankruptcy or for liquidation or to take advantage of any bankruptcy or insolvency law of any jurisdiction, or ordering the dissolution, winding-up or liquidation of the Company or any Subsidiary, or any such petition shall be filed against the Company or any Subsidiary and such petition shall not be dismissed within 60 days; or (j) a final judgment or judgments for the payment of money aggregating in excess of $2,500,000 are rendered against one or more of the Company and its Subsidiaries and which judgments are not, within 60 days after entry thereof, bonded, discharged or stayed pending appeal, or are not discharged within 60 days after the expiration of such stay; or (k) if (i) any Plan shall fail to satisfy the minimum funding --- standards of ERISA or the Code for any plan year or part thereof or a waiver of such standards or extension of any amortization period is sought or granted under section 412 of the Code, (ii) a notice of intent ---- to terminate any Plan shall have been or is reasonably expected to be filed with the PBGC or the PBGC shall have instituted proceedings under ERISA section 4042 to terminate or appoint a trustee to administer any Plan or the PBGC shall have notified the Company or any ERISA Affiliate that a Plan may become a subject of any such proceedings, (iii) the ----- aggregate "amount of unfunded benefit liabilities" (within the meaning of section 4001(a)(18) of ERISA) under all Plans, determined in accordance with Title IV of ERISA, shall be Material, (iv) the Company or any ERISA ---- Affiliate shall have incurred or is reasonably expected to incur any liability pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans, (v) the --- Company or any ERISA Affiliate withdraws from any Multiemployer Plan, or (vi) the Company or any Subsidiary establishes or amends any employee ---- welfare benefit plan that provides post-employment welfare benefits in a manner that would increase the liability of the Company or any Subsidiary thereunder; and any such event or events described in clauses (i) through (vi) above, either individually or together with any other such event or events, could reasonably be expected to have a Material Adverse Effect; or (l) there are substantial changes in senior management of the Company and the former senior managers have not been replaced by other senior managers acceptable to the Required Holders. As used in Section 11(k), the terms "employee benefit plan" and "employee welfare benefit plan" shall have the respective meanings assigned to such terms in Section 3 of ERISA. 32 12. REMEDIES ON DEFAULT, ETC. 12.1. Acceleration. (a) If an Event of Default with respect to the Company described in paragraph (h) or (i) of Section 11 (other than an Event of Default described in clause (i) of paragraph (h) or described in clause (vi) of paragraph (h) by virtue of the fact that such clause encompasses clause (i) of paragraph (h)) has occurred, all the Notes then outstanding shall automatically become immediately due and payable. (b) If any other Event of Default has occurred and is continuing, any holder or holders of more than 50% in principal amount of the Notes at the time outstanding may at any time at its or their option, by notice or notices to the Company, declare all the Notes then outstanding to be immediately due and payable. (c) If any Event of Default described in paragraph (a) or (b) of Section 11 has occurred and is continuing, any holder or holders of Notes at the time outstanding affected by such Event of Default may at any time, at its or their option, by notice or notices to the Company, declare all the Notes held by it or them to be immediately due and payable. Upon any Notes becoming due and payable under this Section 12.1, whether automatically or by declaration, such Notes will forthwith mature and the entire unpaid principal amount of such Notes, plus (x) all accrued and - unpaid interest thereon and (y) the Make-Whole Amount determined in respect of - such principal amount (to the full extent permitted by applicable law), shall all be immediately due and payable, in each and every case without presentment, demand, protest or further notice, all of which are hereby waived. The Company acknowledges, and the parties hereto agree, that each holder of a Note has the right to maintain its investment in the Notes free from repayment by the Company (except as herein specifically provided for) and that the provision for payment of a Make-Whole Amount by the Company in the event that the Notes are prepaid or are accelerated as a result of an Event of Default, is intended to provide compensation for the deprivation of such right under such circumstances. 12.2. Other Remedies. If any Default or Event of Default has occurred and is continuing, and irrespective of whether any Notes have become or have been declared immediately due and payable under Section 12.1, the holder of any Note at the time outstanding may proceed to protect and enforce the rights of such holder by an action at law, suit in equity or other appropriate proceeding, whether for the specific performance of any agreement contained herein or in any Note, or for an injunction against a violation of any of the terms hereof or thereof, or in aid of the exercise of any power granted hereby or thereby or by law or otherwise. 33 12.3. Rescission. At any time after any Notes have been declared due and payable pursuant to clause (b) or (c) of Section 12.1, the holders of at least 66-2/3% in principal amount of the Notes then outstanding, by written notice to the Company, may rescind and annul any such declaration and its consequences if (a) - the Company has paid all overdue interest on the Notes, all principal of and Make-Whole Amount or Modified Make-Whole Amount, if any, on any Notes that are due and payable and are unpaid other than by reason of such declaration, and all interest on such overdue principal and Make-Whole Amount or Modified Make-Whole Amount, if any, and (to the extent permitted by applicable law) any overdue interest in respect of the Notes, at the Default Rate, (b) all Events of Default - and Defaults, other than non-payment of amounts that have become due solely by reason of such declaration, have been cured or have been waived pursuant to Section 17, and (c) no judgment or decree has been entered for the payment of - any monies due pursuant hereto or to the Notes. No rescission and annulment under this Section 12.3 will extend to or affect any subsequent Event of Default or Default or impair any right consequent thereon. 12.4. No Waivers or Election of Remedies, Expenses, etc. No course of dealing and no delay on the part of any holder of any Note in exercising any right, power or remedy shall operate as a waiver thereof or otherwise prejudice such holder's rights, powers or remedies. No right, power or remedy conferred by this Agreement or by any Note upon any holder thereof shall be exclusive of any other right, power or remedy referred to herein or therein or now or hereafter available at law, in equity, by statute or otherwise. Without limiting the obligations of the Company under Section 15, the Company will pay to the holder of each Note on demand such further amount as shall be sufficient to cover all costs and expenses of such holder incurred in any enforcement or collection under this Section 12, including, without limitation, reasonable attorneys' fees, expenses and disbursements. 13. REGISTRATION; EXCHANGE; SUBSTITUTION OF NOTES. 13.1. Registration of Notes. The Company shall keep at its principal executive office a register for the registration and registration of transfers of Notes. The name and address of each holder of one or more Notes, each transfer thereof and the name and address of each transferee of one or more Notes shall be registered in such register. Prior to due presentment for registration of transfer, the Person in whose name any Note shall be registered shall be deemed and treated as the owner and holder thereof for all purposes hereof, and the Company shall not be affected by any notice or knowledge to the contrary. The Company shall give to any holder of a Note that is an Institutional Investor promptly upon request therefor, a complete and correct copy of the names and addresses of all registered holders of Notes. 34 13.2. Transfer and Exchange of Notes. Upon surrender of any Note at the principal executive office of the Company for registration of transfer or exchange (and in the case of a surrender for registration of transfer, duly endorsed or accompanied by a written instrument of transfer duly executed by the registered holder of such Note or his attorney duly authorized in writing and accompanied by the address for notices of each transferee of such Note or part thereof), the Company shall execute and deliver, at the Company's expense (except as provided below), one or more new Notes (as requested by the holder thereof) in exchange therefor, in an aggregate principal amount equal to the unpaid principal amount of the surrendered Note. Each such new Note shall be payable to such Person as such holder may request and shall be substantially in the form of Exhibit 1. Each such new Note shall be dated and bear interest from the date to which interest shall have been paid on the surrendered Note or dated the date of the surrendered Note if no interest shall have been paid thereon. The Company may require payment of a sum sufficient to cover any stamp tax or governmental charge imposed in respect of any such transfer of Notes. Notes shall not be transferred in denominations of less than $1,000,000, provided that if necessary -------- to enable the registration of transfer by a holder of its entire holding of Notes, one Note may be in a denomination of less than $1,000,000. Any transferee, by its acceptance of a Note registered in its name (or the name of its nominee), shall be deemed to have made the representation set forth in Section 6.2. 13.3. Replacement of Notes. Upon receipt by the Company of evidence reasonably satisfactory to it of the ownership of and the loss, theft, destruction or mutilation of any Note (which evidence shall be, in the case of an Institutional Investor, notice from such Institutional Investor of such ownership and such loss, theft, destruction or mutilation), and (a) in the case of loss, theft or destruction, of indemnity reasonably satisfactory to it (provided that if the holder of such Note -------- is, or is a nominee for, an original Purchaser or another holder of a Note that is an Institutional Investor, such Person's own unsecured agreement of indemnity shall be deemed to be satisfactory), or (b) in the case of mutilation, upon surrender and cancellation thereof, the Company at its own expense shall execute and deliver, in lieu thereof, a new Note, dated and bearing interest from the date to which interest shall have been paid on such lost, stolen, destroyed or mutilated Note or dated the date of such lost, stolen, destroyed or mutilated Note if no interest shall have been paid thereon. 35 14. PAYMENTS ON NOTES. 14.1. Place of Payment. Subject to Section 14.2, payments of principal, Make-Whole Amount or Modified Make-Whole Amount, if any, and interest becoming due and payable on the Notes shall be made in Burlington, New Jersey at the principal office of the Company in such jurisdiction. The Company may at any time, by notice to each holder of a Note, change the place of payment of the Notes so long as such place of payment shall be either the principal office of the Company in such jurisdiction or the principal office of a bank or trust company in such jurisdiction. 14.2. Home Office Payment. So long as you or your nominee shall be the holder of any Note, and notwithstanding anything contained in Section 14.1 or in such Note to the contrary, the Company will pay all sums becoming due on such Note for principal, Make-Whole Amount or Modified Make-Whole Amount, if any, and interest by the method and at the address specified for such purpose below your name in Schedule A, or by such other method or at such other address as you shall have from time to time specified to the Company in writing for such purpose, without the presentation or surrender of such Note or the making of any notation thereon, except that upon written request of the Company made concurrently with or reasonably promptly after payment or prepayment in full of any Note, you shall surrender such Note for cancellation, reasonably promptly after any such request, to the Company at its principal executive office or at the place of payment most recently designated by the Company pursuant to Section 14.1. Prior to any sale or other disposition of any Note held by you or your nominee you will, at your election, either endorse thereon the amount of principal paid thereon and the last date to which interest has been paid thereon or surrender such Note to the Company in exchange for a new Note or Notes pursuant to Section 13.2. The Company will afford the benefits of this Section 14.2 to any Institutional Investor that is the direct or indirect transferee of any Note purchased by you under this Agreement and that has made the same agreement relating to such Note as you have made in this Section 14.2. 15. EXPENSES, ETC. 15.1. Transaction Expenses. Whether or not the transactions contemplated hereby are consummated, the Company will pay all costs and expenses (including reasonable attorneys' fees of one special counsel and, if reasonably required, local or other counsel) incurred by you and each Other Purchaser or holder of a Note in connection with such transactions and in connection with any amendments, waivers or consents under or in respect of this Agreement or the Notes (whether or not such amendment, waiver or consent becomes effective), including, without limitation: (a) the costs and expenses incurred in enforcing or defending (or determining - whether or how to enforce or defend) any rights under this Agreement or the Notes or in responding to any subpoena or 36 other legal process or informal investigative demand issued in connection with this Agreement or the Notes, or by reason of being a holder of any Note, and (b) --- the costs and expenses, including financial advisors' fees, incurred in connection with the insolvency or bankruptcy of the Company or any Subsidiary or in connection with any work-out or restructuring of the transactions contemplated hereby and by the Notes. The Company will pay, and will save you and each other holder of a Note harmless from, all claims in respect of any fees, costs or expenses if any, of brokers and finders (other than those retained by you). 15.2. Survival The obligations of the Company under this Section 15 will survive the payment or transfer of any Note, the enforcement, amendment or waiver of any provision of this Agreement or the Notes, and the termination of this Agreement. 16. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT All representations and warranties contained herein shall survive the execution and delivery of this Agreement and the Notes, the purchase or transfer by you of any Note or portion thereof or interest therein and the payment of any Note, and may be relied upon by any subsequent holder of a Note, regardless of any investigation made at any time by or on behalf of you or any other holder of a Note. All statements contained in any certificate or other instrument delivered by or on behalf of the Company pursuant to this Agreement shall be deemed representations and warranties of the Company under this Agreement. Subject to the preceding sentence, this Agreement and the Notes embody the entire agreement and understanding between you and the Company and supersede all prior agreements and understandings relating to the subject matter hereof. 17. AMENDMENT AND WAIVER 17.1. Requirements This Agreement and the Notes may be amended, and the observance of any term hereof or of the Notes may be waived (either retroactively or prospectively), with (and only with) the written consent of the Company and the Required Holders, except that (a) no amendment or waiver of any of the - provisions of Section 1, 2, 3, 4, 5, 6 or 21 hereof, or any defined term (as it is used therein), will be effective as to you unless consented to by you in writing, and (b) no such amendment or waiver may, without the written consent of - the holder of each Note at the time outstanding affected thereby, (i) subject to - the provisions of Section 12 relating to acceleration or rescission, change the amount or time of any prepayment or payment of principal of, or reduce the rate or change the time of payment or method of computation of interest or of the Make-Whole Amount or Modified Make-Whole Amount on, the Notes, (ii) change the -- percentage of the principal amount of the Notes the holders of which are required to consent to any such amendment or waiver, or (iii) amend any of --- Sections 8, 11(a), 11(b), 12, 17 or 20. 37 17.2. Solicitation of Holders of Notes. (a) Solicitation. The Company will provide each holder of the Notes ------------ (irrespective of the amount of Notes then owned by it) with sufficient information, sufficiently far in advance of the date a decision is required, to enable such holder to make an informed and considered decision with respect to any proposed amendment, waiver or consent in respect of any of the provisions hereof or of the Notes. The Company will deliver executed or true and correct copies of each amendment, waiver or consent effected pursuant to the provisions of this Section 17 to each holder of outstanding Notes promptly following the date on which it is executed and delivered by, or receives the consent or approval of, the requisite holders of Notes. (b) Payment. The Company will not directly or indirectly pay or cause ------- to be paid any remuneration, whether by way of supplemental or additional interest, fee or otherwise, or grant any security, to any holder of Notes as consideration for or as an inducement to the entering into by any holder of Notes or any waiver or amendment of any of the terms and provisions hereof unless such remuneration is concurrently paid, or security is concurrently granted, on the same terms, ratably to each holder of Notes then outstanding even if such holder did not consent to such waiver or amendment. 17.3. Binding Effect, etc. Any amendment or waiver consented to as provided in this Section 17 applies equally to all holders of Notes and is binding upon them and upon each future holder of any Note and upon the Company without regard to whether such Note has been marked to indicate such amendment or waiver. No such amendment or waiver will extend to or affect any obligation, covenant, agreement, Default or Event of Default not expressly amended or waived or impair any right consequent thereon. No course of dealing between the Company and the holder of any Note nor any delay in exercising any rights hereunder or under any Note shall operate as a waiver of any rights of any holder of such Note. As used herein, the term "this Agreement" and references thereto shall mean this Agreement as it may from time to time be amended or supplemented. 17.4. Notes held by Company, etc. Solely for the purpose of determining whether the holders of the requisite percentage of the aggregate principal amount of Notes then outstanding approved or consented to any amendment, waiver or consent to be given under this Agreement or the Notes, or have directed the taking of any action provided herein or in the Notes to be taken upon the direction of the holders of a specified percentage of the aggregate principal amount of Notes then outstanding, Notes directly or indirectly owned by the Company or any of its Affiliates shall be deemed not to be outstanding. 38 18. NOTICES. All notices and communications provided for hereunder shall be in writing and sent (a) by telecopy if the sender on the same day sends a - confirming copy of such notice by a recognized overnight delivery service (charges prepaid), or (b) by registered or certified mail with return receipt - requested (postage prepaid), or (c) by a recognized overnight delivery service - (with charges prepaid). Any such notice must be sent: (i) if to you or your nominee, to you or it at the address specified for such communications in Schedule A, or at such other address as you or it shall have specified to the Company in writing, (ii) if to any other holder of any Note, to such holder at such address as such other holder shall have specified to the Company in writing, or (iii) if to the Company, to the Company at its address set forth at the beginning hereof to the attention of Vice President, Finance, or at such other address as the Company shall have specified to the holder of each Note in writing, with a copy (provided that failure to provide such copy shall not impair such notice) to, Edward H. Cohen, Rosenman & Colin, 1301 Avenue of the Americas, New York, NY 10019. Notices under this Section 18 will be deemed given only when actually received. 19. REPRODUCTION OF DOCUMENTS. This Agreement and all documents relating thereto, including, without limitation, (a) consents, waivers and modifications that may hereafter be - executed, (b) documents received by you at the Closing (except the Notes - themselves), and (c) financial statements, certificates and other information - previously or hereafter furnished to you, may be reproduced by you by any photographic, photostatic, microfilm, microcard, miniature photographic or other similar process and you may destroy any original document so reproduced. The Company agrees and stipulates that, to the extent permitted by applicable law, any such reproduction shall be admissible in evidence as the original itself in any judicial or administrative proceeding (whether or not the original is in existence and whether or not such reproduction was made by you in the regular course of business) and any enlargement, facsimile or further reproduction of such reproduction shall likewise be admissible in evidence. This Section 19 shall not prohibit the Company or any other holder of Notes from contesting any such reproduction to the same extent that it could contest the original, or from introducing evidence to demonstrate the inaccuracy of any such reproduction. 39 20. CONFIDENTIAL INFORMATION. For the purposes of this Section 20, "Confidential Information" means written information delivered to you by or on behalf of the Company or any Subsidiary in connection with the transactions contemplated by or otherwise pursuant to this Agreement that is proprietary in nature and that was clearly marked or labeled or otherwise adequately identified when received by you as being confidential information of the Company or such Subsidiary, provided that -------- such term does not include information that (a) was publicly known or otherwise - known to you prior to the time of such disclosure, (b) subsequently becomes - publicly known through no act or omission by you or any person acting on your behalf, (c) otherwise becomes known to you other than through disclosure by the - Company or any Subsidiary or (d) constitutes financial statements delivered to - you under Section 7.1 that are otherwise publicly available. You will maintain the confidentiality of such Confidential Information in accordance with procedures adopted by you in good faith to protect confidential information of third parties delivered to you, provided that you may deliver or disclose -------- Confidential Information to (i) your trustees, directors, officers, employees, - agents, attorneys and affiliates (to the extent such disclosure reasonably relates to the administration of the investment represented by your Notes), (ii) -- your financial advisors and other professional advisors who agree to hold confidential the Confidential Information substantially in accordance with the terms of this Section 20, (iii) any other holder of any Note, (iv) any --- -- Institutional Investor to which you sell or offer to sell such Note or any part thereof or any participation therein (if such Person has agreed in writing prior to its receipt of such Confidential Information to be bound by the provisions of this Section 20), (v) any Person from which you offer to purchase any security - of the Company (if such Person has agreed in writing prior to its receipt of such Confidential Information to be bound by the provisions of this Section 20), (vi) any federal or state regulatory authority having jurisdiction over you, -- (vii) the National Association of Insurance Commissioners or any similar --- organization, or any nationally recognized rating agency that requires access to information about your investment portfolio or (viii) any other Person to which ---- such delivery or disclosure may be necessary or appropriate (w) to effect - compliance with any law, rule, regulation or order applicable to you, (x) in - response to any subpoena or other legal process, (y) in connection with any - litigation to which you are a party or (z) if an Event of Default has occurred - and is continuing, to the extent you may reasonably determine such delivery and disclosure to be necessary or appropriate in the enforcement or for the protection of the rights and remedies under your Notes and this Agreement. Each holder of a Note, by its acceptance of a Note, will be deemed to have agreed to be bound by and to be entitled to the benefits of this Section 20 as though it were a party to this Agreement. On reasonable request by the Company in connection with the delivery to any holder of a Note of information required to be delivered to such holder under this Agreement or requested by such holder (other than a holder that is a party to this Agreement or its nominee), such holder will enter into an agreement with the Company embodying the provisions of this Section 20. 40 21. SUBSTITUTION OF PURCHASER. You shall have the right to substitute any one of your Affiliates as the purchaser of the Notes that you have agreed to purchase hereunder, by written notice to the Company, which notice shall be signed by both you and such Affiliate, shall contain such Affiliate's agreement to be bound by this Agreement and shall contain a confirmation by such Affiliate of the accuracy with respect to it of the representations set forth in Section 6. Upon receipt of such notice, wherever the word "you" is used in this Agreement (other than in this Section 21), such word shall be deemed to refer to such Affiliate in lieu of you. In the event that such Affiliate is so substituted as a purchaser hereunder and such Affiliate thereafter transfers to you all of the Notes then held by such Affiliate, upon receipt by the Company of notice of such transfer, wherever the word "you" is used in this Agreement (other than in this Section 21), such word shall no longer be deemed to refer to such Affiliate, but shall refer to you, and you shall have all the rights of an original holder of the Notes under this Agreement. 22. MISCELLANEOUS. 22.1. Successors and Assigns. All covenants and other agreements contained in this Agreement by or on behalf of any of the parties hereto bind and inure to the benefit of their respective successors and assigns (including, without limitation, any subsequent holder of a Note) whether so expressed or not. 22.2. Payments Due on Non-Business Days. Anything in this Agreement or the Notes to the contrary notwithstanding, any payment of principal of or Make-Whole Amount or Modified Make-Whole Amount or interest on any Note that is due on a date other than a Business Day shall be made on the next succeeding Business Day without including the additional days elapsed in the computation of the interest payable on such next succeeding Business Day. 22.3. Severability. Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall (to the full extent permitted by law) not invalidate or render unenforceable such provision in any other jurisdiction. 22.4. Construction. Each covenant contained herein shall be construed (absent express provision to the contrary) as being independent of each other covenant contained herein, so that compliance with any one covenant shall not (absent such an express contrary provision) be deemed to excuse 41 compliance with any other covenant. Where any provision herein refers to action to be taken by any Person, or which such Person is prohibited from taking, such provision shall be applicable whether such action is taken directly or indirectly by such Person. 22.5. Counterparts This Agreement may be executed in any number of counterparts, each of which shall be an original but all of which together shall constitute one instrument. Each counterpart may consist of a number of copies hereof, each signed by less than all, but together signed by all, of the parties hereto. 22.6. Governing Law This Agreement shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the law of the State of New York excluding choice-of-law principles of the law of such State that would require the application of the laws of a jurisdiction other than such State. * * * * * 42 If you are in agreement with the foregoing, please sign the form of agreement on the accompanying counterpart of this Agreement and return it to the Company, whereupon the foregoing shall become a binding agreement between you and the Company. Very truly yours, FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED By: /s/ Kenneth H. Lind ---------------------------------------- Title: Vice President-Finance The foregoing is agreed to as of the date thereof. THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY By: /s/ J. Thomas Christofferson ------------------------------ Title: Vice President ALEXANDER HAMILTON LIFE INSURANCE COMPANY OF AMERICA By: /s/ James E. McDonald, Jr. ------------------------------ Title: Second Vice President PACIFIC MUTUAL LIFE INSURANCE COMPANY By: /s/ William R. Schmidt ------------------------------ Title: Assistant Vice President 43 SCHEDULE A ---------- INFORMATION RELATING TO PURCHASERS Principal Amount of Name and Address of Purchaser Notes to be Purchased - ----------------------------- --------------------- THE NORTHWESTERN MUTUAL LIFE $22,000,000.00 INSURANCE COMPANY (1) All payments by wire transfer of immediately available funds to: Bankers Trust Company 16 Wall Street Insurance Unit - 4th Floor New York, NY 10005 ABA #021-001-033 For the account of: The Northwestern Mutual Life Insurance Company with sufficient information to identify the source and application of such funds. (2) All confirmations of payments and wire transfers: The Northwestern Mutual Life Insurance Company 720 East Wisconsin Avenue Milwaukee, WI 53202 Attn: Investment Operations Fax Number: (414) 299-5714 (3) All other communications: The Northwestern Mutual Life Insurance Company 720 East Wisconsin Avenue Milwaukee, WI 53202 Attn: Securities Department Fax Number: (414) 299-7124 Tax Identification No. 39-0509570 Schedule A INFORMATION RELATING TO PURCHASERS Principal Amount of Name and Address of Purchaser Notes to be Purchased - ----------------------------- --------------------- ALEXANDER HAMILTON LIFE INSURANCE $10,000,000 COMPANY OF AMERICA (1) All payments by wire transfer of immediately available funds to: Alexander Hamilton Life Insurance of America c/o The Bank of New York ABA #021 000 018 BNF: IOC566 Attention P & I Department with sufficient information to identify the source and application of such funds. (2) All notices of payments and written confirmations of such wire transfers: Alexander Hamilton Life Insurance of America c/o The Bank of New York Attention: P & I Department P.O. Box 19266 Newark, New Jersey 07195 with a copy to the address specified in item (3) below (3) All other communications: Alexander Hamilton Life Insurance Company of America P.O. Box 21008 Greensboro, NC 27420 Attention: Securities Administration - 3630 (For hand delivery: 100 North Greene Street, Zip Code 27401) Tax Identification No. 56-1311063 2 Schedule A INFORMATION RELATING TO PURCHASERS Principal Amount of Name and Address of Purchaser Notes to be Purchased - ----------------------------- --------------------- PACIFIC MUTUAL LIFE INSURANCE COMPANY $8,000,000.00 (1) All payments by wire transfer of immediately available funds to: The Chase Manhattan Bank ABA#021-000-021 A/C 900-9-0022006 BBK=Chase Manhattan Bank/SSTO A/C Name: Pacific Mutual General Account Sub A/C#: 47363300 Ref: Security Description & PPN with sufficient information to identify the source and application of such funds. (2) All notices of payments and written confirmations of such wire transfers: The Chase Manhattan Bank P.O. Box 456 Wall Street Station New York, NY 10005 (3) All other communications: Pacific Mutual Life Insurance Company 700 Newport Center Drive Newport Beach, CA 92660-6397 Tax Identification No. 13-6065575 Note to be registered in the name of its nominee: Atwell & Co. 3 Schedule A SCHEDULE B ---------- DEFINED TERMS ------------- As used herein, the following terms have the respective meanings set forth below or set forth in the Section hereof following such term: "Affiliate" means, at any time, and with respect to any Person, (a) any other Person that at such time directly or indirectly through one or more intermediaries Controls, or is Controlled by, or is under common Control with, such first Person, and (b) any Person beneficially owning or holding, directly or indirectly, 10% or more of any class of voting or equity interests of the Company or any Subsidiary or any corporation of which the Company and its Subsidiaries beneficially own or hold, in the aggregate, directly or indirectly, 10% or more of any class of voting or equity interests. As used in this definition, "Control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise. Unless the context otherwise clearly requires, any reference to an "Affiliate" is a reference to an Affiliate of the Company. "Business Day" means (a) for the purposes of Section 8.6 only, any day - other than a Saturday, a Sunday or a day on which commercial banks in New York City are required or authorized to be closed, and (b) for the purposes of any - other provision of this Agreement, any day other than a Saturday, a Sunday or a day on which commercial banks in New York City, or Chicago are required or authorized to be closed. "Called Principal" is defined in Section 8.6. "Capital Lease" means, at any time, a lease with respect to which the lessee is required concurrently to recognize the acquisition of an asset and the incurrence of a liability in accordance with GAAP. "Capital Lease Obligation" means, with respect to any Person and a Capital Lease, the amount of the obligation of such Person as the lessee under such Capital Lease which would, in accordance with GAAP, appear as a liability on a balance sheet of such Person. "Change of Control Event" means, the (i) acquisition through purchase or otherwise by any Person, or group of Persons acting in concert, directly or indirectly, in one or more transactions, of beneficial ownership or control of securities representing more than 50% of the combined voting power of the Company's Voting Stock (including the agreement to act in concert by Persons who beneficially own or control securities representing more than 50% of the combined voting power of the Company's Voting Stock), (ii) expiration, without withdrawals reducing such percentage to 50% or less, of ten days following the date on which shares representing more than 50% of the combined voting power of the Company's Voting Stock have Schedule B been tendered pursuant to a tender offer by any Person for securities representing more than 50% of the combined voting power of the Company's Voting Stock, whether or not such securities are purchased pursuant to such tender offer, or (iii) entering into by the Company of a written agreement providing for or contemplating an acquisition described in clause (i) or (ii) hereof. The date on which an acquisition described in the first sentence hereof occurs is referred to as the "Effective Date of the Change of Control." "Closing" is defined in Section 3. "Code" means the Internal Revenue Code of 1986, as amended from time to time, and the rules and regulations promulgated thereunder from time to time. "Company" means Franklin Electronic Publishers, Inc., a Pennsylvania corporation. "Confidential Information" is defined in Section 20. "Consolidated Fixed Charges" means, for any period, the sum of (i) Consolidated Interest Expense for such period and (ii) one-third of Consolidated Rental Expense for such period. "Consolidated Indebtedness" means Indebtedness of the Company and its Subsidiaries determined on a consolidated basis in accordance with GAAP. "Consolidated Interest Expense" means, for any period, the consolidated interest expense (including imputed interest on Capitalized Lease Obligations) of the Company and its Subsidiaries for such period determined in accordance with GAAP. "Consolidated Net Income" means, for any period, the net income (or deficit) of the Company and its Subsidiaries for such period, determined on a consolidated basis in accordance with GAAP, but excluding in any event (a) - earnings or losses attributable to minority interests, (b) net losses or - undistributed net income of any Person (other than a Subsidiary) in which the Company has an ownership interest; (c) net losses or undistributed net income of - any Subsidiary accrued prior to the date it became a Subsidiary; (d) - extraordinary, unusual, or nonrecurring gains or losses; (e) gains or losses - resulting from the write-up or write down of assets other than in the ordinary course of business; (f) earnings of any Subsidiary unavailable for payment to - the Company; and (g) the amount of reversals of any contingency reserves not - created during such period. "Consolidated Rental Expense" means, for any period, the Rentals (other than Rentals under Capital Leases) of the Company and its Subsidiaries for such period, determined on a consolidated basis in accordance with GAAP. 2 Schedule B "Consolidated Net Worth" means the consolidated stockholders' equity of the Company and its Subsidiaries determined in accordance with GAAP. "Consolidated Total Capitalization" means, as of any date of determination, the sum of (i) Consolidated Indebtedness and (ii) Consolidated Net Worth, in each case as of the most recently completed fiscal quarter of the Company. "Default" means an event or condition the occurrence or existence of which would, with the lapse of time or the giving of notice or both, become an Event of Default. "Default Rate" means that rate of interest that is the greater of (i) 2.00% per annum above the rate of interest stated in clause (a) of the first - paragraph of the Notes or (ii) 2.00% over the rate of interest publicly -- announced by The Chase Manhattan Bank in New York City as its "base" or "prime" rate. "Discounted Value" is defined in Section 8.6. "EBITDA" means, for any period, Consolidated Net Income for such period, plus, to the extent deducted in determining such Consolidated Net Income, (i) depreciation and amortization expense, (ii) any other non-cash charges reduced by the amount of any cash payouts during such period of non-cash charges from prior periods, (iii) income tax expense, (iv) the amount of any extraordinary, unusual, or nonrecurring losses, and (v) the amount of any losses arising from the sale or other disposition of assets, other than in the ordinary course of business, less, to the extent added in determining such Consolidated Net Income, (y) the amount of any extraordinary, unusual, or nonrecurring gains and (z) the amount of any gains arising from the sale or other disposition of assets, other than in the ordinary course of business. "Environmental Laws" means any and all applicable Federal, state, local, and foreign statutes, laws, regulations, ordinances, rules, judgments, orders, decrees, permits, concessions, grants, franchises, licenses, agreements or governmental restrictions relating to pollution and the protection of the environment or the release of any materials into the environment, including but not limited to those related to hazardous substances or wastes, air emissions and discharges to waste or public systems. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the rules and regulations promulgated thereunder from time to time in effect. "ERISA Affiliate" means any trade or business (whether or not incorporated) that is treated as a single employer together with the Company under section 414 of the Code. "Event of Default" is defined in Section 11. "Exchange Act" means the Securities Exchange Act of 1934, as amended. 3 Schedule B "GAAP" means generally accepted accounting principles as in effect from time to time in the United States of America. "Governmental Authority" means (a) the government of (i) the United States of America or any State or other political subdivision thereof, or (ii) any jurisdiction in which the Company or any Subsidiary conducts all or any part of its business, or which asserts jurisdiction over any properties of the Company or any Subsidiary, or (b) any entity exercising executive, legislative, judicial, regulatory or administrative functions of, or pertaining to, any such government. "Guaranty" means, with respect to any Person, any obligation (except the endorsement in the ordinary course of business of negotiable instruments for deposit or collection) of such Person guaranteeing or in effect guaranteeing any indebtedness, dividend or other obligation of any other Person in any manner, whether directly or indirectly, including (without limitation) obligations incurred through an agreement, contingent or otherwise, by such Person: (a) to purchase such indebtedness or obligation or any property constituting security therefor; (b) to advance or supply funds (i) for the purchase or payment of such - indebtedness or obligation, or (ii) to maintain any working capital or -- other balance sheet condition or any income statement condition of any other Person or otherwise to advance or make available funds for the purchase or payment of such indebtedness or obligation; (c) to lease properties or to purchase properties or services primarily for the purpose of assuring the owner of such indebtedness or obligation of the ability of any other Person to make payment of the indebtedness or obligation; or (d) otherwise to assure the owner of such indebtedness or obligation against loss in respect thereof. In any computation of the indebtedness or other liabilities of the obligor under any Guaranty, the indebtedness or other obligations that are the subject of such Guaranty shall be assumed to be direct obligations of such obligor. 4 Schedule B "Hazardous Material" means any and all pollutants, toxic or hazardous wastes or any other substances that might pose a hazard to health or safety, the removal of which may be required or the generation, manufacture, refining, production, processing, treatment, storage, handling, transportation, transfer, use, disposal, release, discharge, spillage, seepage, or filtration of which is or shall be restricted, prohibited or penalized by any applicable law (including, without limitation, asbestos, urea formaldehyde foam insulation and polycholorinated biphenyls). "holder" means, with respect to any Note, the Person in whose name such Note is registered in the register maintained by the Company pursuant to Section 13.1. "Indebtedness" with respect to any Person means, at any time, without duplication, (a) its liabilities for borrowed money and its redemption obligations in respect of mandatorily redeemable Preferred Stock; (b) its liabilities for the deferred purchase price of property acquired by such Person (excluding accounts payable arising in the ordinary course of business but including all liabilities created or arising under any conditional sale or other title retention agreement with respect to any such property); (c) all liabilities appearing on its balance sheet in accordance with GAAP in respect of Capital Leases; (d) all liabilities for borrowed money secured by any Lien with respect to any property owned by such Person (whether or not it has assumed or otherwise become liable for such liabilities); (e) all its liabilities in respect of letters of credit or instruments serving a similar function issued or accepted for its account by banks and other financial institutions (whether or not representing obligations for borrowed money), except those representing performance guarantees; (f) Swaps of such Person; and (g) any Guaranty of such Person with respect to liabilities of a type described in any of clauses (a) through (f) hereof. Indebtedness of any Person shall include all obligations of such Person of the character described in clauses (a) through (g) to the extent such Person remains legally liable in respect thereof notwithstanding that any such obligation is deemed to be extinguished under GAAP. "Institutional Investor" means (a) any original purchaser of a Note, - (b) any holder of a Note holding more than 2.0% of the aggregate principal - amount of the Notes then 5 Schedule B outstanding, and (c) any bank, trust company, savings and loan association or - other financial institution, any pension plan, any investment company, any insurance company, any broker or dealer, or any other similar financial institution or entity, regardless of legal form. "Investment" means any investment made, in cash or by delivery of property, directly or indirectly, by any Person (i) in any other Person, whether by acquisition of shares of capital stock, Indebtedness or other obligations or securities or by loan, advance, capital contribution or otherwise, or (ii) in any property. "Lien" means, with respect to any Person, any mortgage, lien, pledge, charge, security interest or other encumbrance, or any interest or title of any vendor, lessor, lender or other secured party to or of such Person under any conditional sale or other title retention agreement or Capital Lease, upon or with respect to any property or asset of such Person (including in the case of stock, stockholder agreements, voting trust agreements and all similar arrangements). "Make-Whole Amount" is defined in Section 8.6. "Modified Make-Whole Amount" is defined in Section 8.6. "Material" means material in relation to the business, operations, affairs, financial condition, assets, properties, or prospects of the Company and its Subsidiaries taken as a whole. "Material Adverse Effect" means a material adverse effect on (a) the - business, operations, affairs, financial condition, assets or properties or prospects of the Company and its Subsidiaries taken as a whole, or (b) the - ability of the Company to perform its obligations under this Agreement and the Notes, or (c) the validity or enforceability of this Agreement or the Notes. - "Memorandum" is defined in Section 5.3. "Multiemployer Plan" means any Plan that is a "multiemployer plan" (as such term is defined in section 4001(a)(3) of ERISA). "Net Proceeds" means, in connection with any Disposition (including a sale and lease-back transaction) by the Company or any Subsidiary, the excess, if any, of the aggregate amount received in cash (including cash received by way of deferred payment pursuant to a note receivable, other noncash consideration or otherwise, but only as and when such cash is so received) over the sum of (i) the principal amount of and premium, if any, on any Indebtedness (other than Indebtedness that is assumed by the purchaser and the Notes) that is secured by or finances any asset subject to such Disposition and which is required to be and is repaid in connection with such Disposition, (ii) the out-of-pocket expenses incurred by the Company or any Subsidiary in connection with such Disposition and (iii) all taxes, including taxes measured by income, incurred as a result of such Disposition, calculated as if the Company and its Subsidiaries were a separate consolidated group for tax purposes and on the assumption that such Disposition 6 Schedule B was the only transaction in which the Company and its Subsidiaries engaged during the relevant period, without giving effect to any carryforwards, carrybacks or credits. "New Credit Agreement" means the Credit Agreement dated as of March 27, 1997 among the Company, the Lenders party thereto and The Chase Manhattan Bank, as Administrative Agent. "Notes" is defined in Section 1. "Officer's Certificate" means a certificate of a Senior Financial Officer or of any other officer of the Company whose responsibilities extend to the subject matter of such certificate. "Other Agreements" is defined in Section 2. "Other Purchasers" is defined in Section 2. "PBGC" means the Pension Benefit Guaranty Corporation referred to and defined in ERISA or any successor thereto. "Person" means an individual, partnership, corporation, limited liability company, association, trust, unincorporated organization, or a government or agency or political subdivision thereof. "Plan" means an "employee benefit plan" (as defined in section 3(3) of ERISA) that is or, within the preceding five years, has been established or maintained, or to which contributions are or, within the preceding five years, have been made or required to be made, by the Company or any ERISA Affiliate or with respect to which the Company or any ERISA Affiliate may have any liability. "Preferred Stock" means any class of capital stock of a corporation that is preferred over any other class of capital stock of such corporation as to the payment of dividends or the payment of any amount upon liquidation or dissolution of such corporation. "property" or "properties" means, unless otherwise specifically limited, real or personal property of any kind, tangible or intangible, choate or inchoate. "QPAM Exemption" means Prohibited Transaction Class Exemption 84-14 issued by the United States Department of Labor. "Reinvestment Yield" is defined in Section 8.6. "Rentals" means, as of the date of any determination thereof, all fixed payments (including all payments which the lessee is obligated to make to the lessor on termination of the 7 Schedule B lease or surrender of the property) payable by the Company or any Subsidiary, as lessee or sublessee under any lease of real or personal property, but exclusive of any amounts required to be paid (whether or not designated as rents or additional rents) on account of maintenance, repairs, insurance, taxes, assessments, amortization and similar charges. Fixed rents under any so-called "percentage leases" shall be computed on the basis of the actual rents paid by the lessee. "Required Holders" means, at any time, the holders of more than 50% in principal amount of the Notes at the time outstanding (exclusive of Notes then owned by the Company or any of its Affiliates). "Responsible Officer" means any Senior Financial Officer and any other officer of the Company with responsibility for the administration of the relevant portion of this agreement. "Restricted Investments" means any Investment of the Company and its Subsidiaries other than: (a) property or assets to be used or consumed in the ordinary course - of business; (b) current assets arising from the sale of goods and services in the - ordinary course of business; (c) Investments in Wholly-Owned Subsidiaries; - (d) Investments in a Person which, as a result thereof, becomes a - Wholly-Owned Subsidiary; (e) Advances not exceeding $1,000,000 in the aggregate at any time to - officers and employees in the ordinary course of business; (f) Investments in: - (i) commercial paper and loan participations maturing in 270 days - or less from the date of issuance which at the time of acquisition are rated in one of the top two rating classifications by at least one credit rating agency of recognized national standing; (ii) certificates of deposit or banker's acceptances maturing -- within two years from the date of acquisition issued by commercial banks (A) having capital, surplus and undistributed profits (or their equivalent) of at least $100,000,000, or (B) assets of at least $1,000,000,000; 8 Schedule B (iii) obligations maturing within two years from the date of --- acquisition (A) of or fully guaranteed by the United States of America or an agency thereof or (B) of a foreign government of at least comparable credit quality; (iv) repurchase agreements, having a term of not more than 90 -- days and fully collateralized with obligations of the type described in clause (iii), with a bank satisfying the requirements of clause (ii); --- -- (v) money market mutual funds primarily investing in Investments - described in foregoing clauses (i) through (iv); and - -- (g) Investments in addition to those described in paragraphs (a) - through (f), provided that the aggregate outstanding amount of such - Investments do not at any time exceed 15% of Consolidated Net Worth. For purposes of this Agreement, an Investment shall be valued at the lesser of (i) cost and (ii) the value at which such Investment is to be shown on the books - -- of the Company and its Subsidiaries in accordance with GAAP. "Restricted Payment" is defined in Section 10.11. "Securities Act" means the Securities Act of 1933, as amended from time to time. "Senior Financial Officer" means the chief financial officer, principal accounting officer, treasurer or comptroller of the Company. "Subsidiary" means, as to any Person, any corporation, association or other business entity in which such Person or one or more of its Subsidiaries or such Person and one or more of its Subsidiaries owns sufficient equity or voting interests to enable it or them (as a group) ordinarily, in the absence of contingencies, to elect a majority of the directors (or Persons performing similar functions) of such entity, and any partnership or joint venture if more than a 50% interest in the profits or capital thereof is owned by such Person or one or more of its Subsidiaries or such Person and one or more of its Subsidiaries (unless such partnership can and does ordinarily take major business actions without the prior approval of such Person or one or more of its Subsidiaries). Unless the context otherwise clearly requires, any reference to a "Subsidiary" is a reference to a Subsidiary of the Company. "Swaps" means, with respect to any Person, payment obligations with respect to interest rate swaps, currency swaps and similar obligations obligating such Person to make payments, whether periodically or upon the happening of a contingency. For the purposes of this Agreement, the amount of the obligation under any Swap shall be the amount determined in respect thereof as of the end of the then most recently ended fiscal quarter of such Person, based on the assumption that such Swap had terminated at the end of such fiscal quarter, and in making 9 Schedule B such determination, if any agreement relating to such Swap provides for the netting of amounts payable by and to such Person thereunder or if any such agreement provides for the simultaneous payment of amounts by and to such Person, then in each such case, the amount of such obligation shall be the net amount so determined. "Voting Stock" means capital stock of any class of a corporation having power to vote for the election of members of the board of directors of such corporation, or persons performing similar functions. "Wholly-Owned Subsidiary" means, at any time, any Subsidiary 100% of all of the equity interests (except directors' qualifying shares) and voting interests of which are owned by any one or more of the Company and the Company's other Wholly-Owned Subsidiaries at such time. 10 Schedule B EXHIBIT 1 --------- [FORM OF NOTE] FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED 7.71% SENIOR NOTE DUE MARCH 31, 2007 No. [_____] [Date] $_______________ PPN 353515 A* O FOR VALUE RECEIVED, the undersigned, FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED (herein called the "Company"), a corporation organized and existing under the laws of the State of Pennsylvania, hereby promises to pay to [name of purchaser] or registered assigns, the principal sum of _______________ DOLLARS on March 31, 2007, with interest (computed on the basis of a 360-day year of twelve 30-day months) (a) on the unpaid balance thereof at the rate of 7.71% per - annum from the date hereof, payable semiannually, on March 31 and September 30 of each year, commencing with the March 31 or September 30 next succeeding the date hereof (except that the first interest payment date shall be September 30, 1997), until the principal hereof shall have become due and payable and (b) to - the extent permitted by law on any overdue payment (including any overdue prepayment) of principal, any overdue payment of interest and any overdue payment of any Make-Whole Amount and Modified Make-Whole Amount (as defined in the Note Purchase Agreements referred to below), payable semiannually as aforesaid (or, at the option of the registered holder hereof, on demand), at a rate per annum from time to time equal to the greater of (i) 9.91% or (ii) 2%, - -- respectively over the rate of interest publicly announced by The Chase Manhattan Bank from time to time in New York City as its "base" or "prime" rate. Payments of principal of, interest on and any Make-Whole Amount or Modified Make Whole Amount with respect to this Note are to be made in lawful money of the United States of America at the principal office of the Company in Burlington, New Jersey or at such other place as the Company shall have designated by written notice to the holder of this Note as provided in the Note Purchase Agreements referred to below. This Note is one of a series of Senior Notes (herein called the "Notes") issued pursuant to separate Note Purchase Agreements, dated as of March 27, 1997 (as from time to time amended, the "Note Purchase Agreements"), between the Company and the respective Purchasers named therein and is entitled to the benefits thereof. Each holder of this Note will be deemed, by its acceptance hereof, (i) to have agreed to the confidentiality provisions set forth in - Section 20 of the Note Purchase Agreements and (ii) to have made the -- representation set forth in Section 6.2 of the Note Purchase Agreements. Exhibit 1 This Note is a registered Note and, as provided in the Note Purchase Agreements, upon surrender of this Note for registration of transfer, duly endorsed, or accompanied by a written instrument of transfer duly executed, by the registered holder hereof or such holder's attorney duly authorized in writing, a new Note for a like principal amount will be issued to, and registered in the name of, the transferee. Prior to due presentment for registration of transfer, the Company may treat the person in whose name this Note is registered as the owner hereof for the purpose of receiving payment and for all other purposes, and the Company will not be affected by any notice to the contrary. The Company will make required prepayments of principal on the dates and in the amounts specified in the Note Purchase Agreements. This Note is also subject to optional prepayment, in whole or from time to time in part, at the times and on the terms specified in the Note Purchase Agreements, but not otherwise. If an Event of Default, as defined in the Note Purchase Agreements, occurs and is continuing, the principal of this Note may be declared or otherwise become due and payable in the manner, at the price (including any applicable Make-Whole Amount and Modified Make-Whole Amount) and with the effect provided in the Note Purchase Agreements. This Agreement shall be construed and enforced in accordance with, and the rights of parties shall be governed by, the law of the State of New York excluding choice-of-law principles of such State that would require the application of the laws of a jurisdiction other than such State. FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED By: ----------------------------------- Name: ----------------------------------- Title: ----------------------------------- 2 Exhibit 1 EXHIBIT 4.4(a)(i) FORM OF OPINION OF COUNSEL TO THE COMPANY Exhibit 4.4(a) EXHIBIT 4.4(a)(ii) FORM OF OPINION OF COUNSEL TO THE COMPANY Exhibit 4.4(a) EXHIBIT 4.4(b) FORM OF OPINION OF SPECIAL COUNSEL TO THE PURCHASERS The opinion of Gardner, Carton & Douglas, special counsel to the Purchasers, shall be to the effect that: 1. The Company is a corporation validly existing in good standing under the laws of the Commonwealth of Pennsylvania, with all requisite corporate power and authority to enter into the Agreement and to issue and sell the Notes. 2. The Agreement and the Notes have been duly authorized by proper corporate action on the part of the Company, have been duly executed and delivered by an authorized officer of the Company, and constitute the legal, valid and binding agreements of the Company, enforceable in accordance with their terms, except to the extent that enforcement thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws of general application relating to or affecting the enforcement of the rights of creditors or by equitable principles, regardless of whether enforcement is sought in a proceeding in equity or at law. 3. Based upon the representations set forth in the Agreement, the offering, sale and delivery of the Notes do not require the registration of the Notes under the Securities Act of 1933, as amended, or the qualification of an indenture under the Trust Indenture Act of 1939, as amended. 4. The issuance and sale of the Notes and compliance with the terms and provisions of the Notes and the Agreement will not conflict with or result in any breach of any of the provisions of the Certificate of Incorporation or By- Laws of the Company. 5. No authorization, approval or consent of any governmental or regulatory body is necessary or required in connection with the lawful execution and delivery by the Company of the Agreement or the lawful offering, issuance and sale by the Company of the Notes, and no designation, filing, declaration, registration and/or qualification with any governmental authority is required in connection with the offer, issuance and sale of the Notes by the Company. The opinion of Gardner, Carton & Douglas also shall state that the legal opinion of Rosenman & Colin, counsel for the Company, delivered to you pursuant to the Agreement, is satisfactory in form and scope to it, and, in its opinion, the Purchasers and it are justified in relying thereon. Gardner, Carton & Douglas may rely, as to matters of New York law, on the opinion of Rosenman & Colin and, as to matters of Pennsylvania law, on the opinion of Gregory Winsky, Esq., General Counsel of the Company. 2 Exhibit 4.4(a) EX-4.2 3 CREDIT AGREEMENT ================================================================================ CREDIT AGREEMENT dated as of March 27, 1997 among FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED The Lenders Party Hereto and THE CHASE MANHATTAN BANK, as Administrative Agent ================================================================================ TABLE OF CONTENTS -----------------
ARTICLE I Definitions......................................................................... 1 SECTION 1.01. Defined Terms........................................... 1 SECTION 1.02. Classification of Loans and Borrowings.................. 12 SECTION 1.03. Terms Generally......................................... 12 SECTION 1.04. Accounting Terms; GAAP.................................. 13 ARTICLE II The Credits......................................................................... 13 SECTION 2.01. Commitments............................................. 13 SECTION 2.02. Loans and Borrowings.................................... 13 SECTION 2.03. Requests for Revolving Borrowings....................... 14 SECTION 2.04. Letters of Credit....................................... 15 (a) General............................................................. 15 (b) Notice of Issuance, Amendment, Renewal, Extension; Certain Conditions.......................................................... 15 (c) Expiration Date..................................................... 15 (d) Participations...................................................... 15 (e) Reimbursement....................................................... 16 (f) Obligations Absolute................................................ 16 (g) Disbursement Procedures............................................. 17 (h) Interim Interest.................................................... 18 (i) Replacement of the Issuing Bank..................................... 18 SECTION 2.05. Funding of Borrowings................................... 18 SECTION 2.06. Interest Elections...................................... 19 SECTION 2.07. Termination and Reduction of Commitments................ 20 SECTION 2.08. Repayment of Loans; Evidence of Debt.................... 20 SECTION 2.09. Prepayment of Loans..................................... 21 SECTION 2.10. Fees.................................................... 21 SECTION 2.11. Interest................................................ 22
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Page ---- SECTION 2.12. Alternate Rate of Interest................................ 23 SECTION 2.13. Increased Costs........................................... 23 SECTION 2.14. Break Funding Payments.................................... 24 SECTION 2.15. Taxes..................................................... 25 SECTION 2.16. Payments Generally; Pro Rata Treatment; Sharing of Set-offs.................................................. 25 SECTION 2.17. Mitigation Obligations; Replacement of Lenders............ 27 ARTICLE III Representations and Warranties........................................................ 27 SECTION 3.01. Organization; Powers...................................... 27 SECTION 3.02. Authorization; Enforceability............................. 27 SECTION 3.03. Governmental Approvals; No Conflicts...................... 28 SECTION 3.04. Financial Condition; No Material Adverse Change........... 28 SECTION 3.05. Properties................................................ 28 SECTION 3.06. Litigation and Environmental Matters...................... 28 SECTION 3.07. Compliance with Laws and Agreements....................... 29 SECTION 3.08. Investment and Holding Company Status..................... 29 SECTION 3.09. Taxes..................................................... 29 SECTION 3.10. ERISA..................................................... 29 SECTION 3.11. Use of Proceeds; and Board Regulations.................... 29 SECTION 3.12. Subsidiaries.............................................. 30 SECTION 3.13. Disclosure................................................ 30 ARTICLE IV Conditions............................................................................ 30 SECTION 4.01. Effective Date............................................ 30 SECTION 4.02. Each Credit Event......................................... 31 ARTICLE V Affirmative Covenants................................................................. 32 SECTION 5.01. Financial Statements and Other Information................ 32
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Page ---- SECTION 5.02. Notices of Material Events................................ 33 SECTION 5.03. Existence; Conduct of Business............................ 34 SECTION 5.04. Payment of Obligations.................................... 34 SECTION 5.05. Maintenance of Properties; Insurance...................... 34 SECTION 5.06. Books and Records; Inspection Rights...................... 34 SECTION 5.07. Compliance with Laws and Agreements....................... 34 SECTION 5.08. Environmental Laws........................................ 34 SECTION 5.09. Use of Proceeds and Letters of Credit..................... 35 ARTICLE VI Negative Covenants.................................................................... 35 SECTION 6.01. Indebtedness.............................................. 35 SECTION 6.02. Liens..................................................... 36 SECTION 6.03. Fundamental Changes....................................... 36 SECTION 6.04. Investments, Loans, Advances, Guarantees and Acquisitions.............................................. 37 SECTION 6.05. Hedging Agreements........................................ 38 SECTION 6.06. Restricted Payments....................................... 38 SECTION 6.07. Transactions with Affiliates.............................. 38 SECTION 6.08. Restrictive Agreements.................................... 39 SECTION 6.09. Limitation on Subsidiary Indebtedness..................... 39 SECTION 6.10. Sale and Leaseback; Sale of Assets........................ 39 SECTION 6.11. Compromise of Accounts Receivable......................... 40 SECTION 6.12. Prepayment................................................ 40 SECTION 6.13. Financial Covenants....................................... 40 ARTICLE VII Events of Default..................................................................... 40 ARTICLE VIII The Administrative Agent.............................................................. 43
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Page ---- ARTICLE IX Miscellaneous......................................................................... 45 SECTION 9.01. Notices................................................... 45 SECTION 9.02. Waivers; Amendments....................................... 45 SECTION 9.03. Expenses; Indemnity; Damage Waiver........................ 46 SECTION 9.04. Successors and Assigns.................................... 47 SECTION 9.05. Survival.................................................. 49 SECTION 9.06. Counterparts; Integration; Effectiveness.................. 50 SECTION 9.07. Severability.............................................. 50 SECTION 9.08. Right of Setoff........................................... 50 SECTION 9.09. Governing Law; Jurisdiction; Consent to Service of Process................................................... 50 SECTION 9.10. WAIVER OF JURY TRIAL...................................... 51 SECTION 9.11. Headings.................................................. 51 SECTION 9.12. Confidentiality........................................... 51 SECTION 9.13. Interest Rate Limitation.................................. 52
SCHEDULES - --------- Schedule 2.01 Commitments Schedule 3.06 Litigation of Environmental Matters Schedule 3.12 Subsidiaries Schedule 6.01 Existing Indebtedness Schedule 6.02 Existing Liens Schedule 6.08 Existing Restrictive Agreements EXHIBITS - -------- Exhibit A Form of Assignment and Acceptance Exhibit B Opinion of Counsel for Borrower -v- CREDIT AGREEMENT dated as of March 27, 1997, among FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED, a Pennsylvania corporation, the LENDERS party hereto, and THE CHASE MANHATTAN BANK, as Administrative Agent. 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: "ABR", 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 Alternate Base Rate. "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. "Administrative Agent" means The Chase Manhattan Bank, in its capacity -------------------- as administrative agent for the Lenders hereunder, and any successor thereto in such capacity appointed pursuant to Article VIII. "Administrative Questionnaire" means an Administrative Questionnaire ---------------------------- in a form supplied by the Administrative Agent. "Affiliate" means, with respect to a specified Person, another Person --------- (i) that directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the Person specified, (ii) which beneficially owns 10% or more of the voting stock of the Person specified or a Subsidiary thereof, or (iii) of which 10% or more of the voting stock is owned or held by the specified Person or a Subsidiary thereof. "Alternate Base Rate" means, for any day, a rate per annum equal to ------------------- the greatest of (a) the Prime Rate in effect on such day, (b) the Base CD Rate in effect on such day plus 1% and (c) the Federal Funds Effective Rate in effect on such day plus 1/2 of 1%. Any change in the Alternate Base Rate due to a change in the Prime Rate, the Base CD Rate or the Federal Funds Effective Rate shall be effective from and including the effective date of such change in the Prime Rate, the Base CD Rate or the Federal Funds Effective Rate, respectively. "Applicable Percentage" means, with respect to any Lender, the --------------------- percentage of the total Commitments represented by such Lender's Commitment. If the Commitments have terminated or expired, the Applicable Percentages shall be determined based upon the Commitments most recently in effect, giving effect to any assignments. "Applicable Rate Margin" means, with respect to any ABR Loan, 0% per ---------------------- annum, and with respect to any Eurodollar Loan, 1% per annum. "Assessment Rate" means, for any day, the annual assessment rate in --------------- effect on such day that is payable by a member of the Bank Insurance Fund classified as "well-capitalized" and within supervisory subgroup "B" (or a comparable successor risk classification) within the meaning of 12 C.F.R. Part 327 (or any successor provision) to the Federal Deposit Insurance Corporation for insurance by such Corporation of time deposits made in dollars at the offices of such member in the United States; provided that if, as a result of -------- any change in any law, rule or regulation, it is no longer possible to determine the Assessment Rate as aforesaid, then the Assessment Rate shall be such annual rate as shall be determined by the Administrative Agent to be representative of the cost of such insurance to the Lenders. "Assignment and Acceptance" means an assignment and acceptance entered ------------------------- into by a Lender and an assignee (with the consent of any party whose consent is required by Section 9.04), and accepted by the Administrative Agent, in the form of Exhibit A or any other form approved by the Administrative Agent. --------- "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 Commitments. "Base CD Rate" means the sum of (a) the Three-Month Secondary CD Rate ------------ multiplied by the Statutory Reserve Rate plus (b) the Assessment Rate. "Board" means the Board of Governors of the Federal Reserve System of ----- the United States of America. "Borrower" means Franklin Electronic Publishers, Incorporated, a -------- Pennsylvania corporation. "Borrowing" means a group of Loans of the same Type, 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. "Borrowing Request" means a request by the 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 -2- 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. "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 any Lender or the Issuing Bank (or, for purposes of Section 2.13(b), by any lending office of such Lender or by such Lender's or the Issuing Bank'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. "Commitment" means, with respect to each Lender, such Lender's ---------- Revolving Credit Commitment, as such commitments may be (a) reduced from time to time pursuant to Section 2.07 and (b) reduced or increased from time to time pursuant to assignments by or to such Lender pursuant to Section 9.04. The initial amounts of each Lender's Commitments are set forth on Schedule 2.01, or ------------- in the Assignment and Acceptance pursuant to which such Lender shall have assumed its Commitments, as applicable. The initial aggregate amount of the Lenders' Commitments is $20,000,000. "Consolidated Indebtedness" of a Person means, as of the date of ------------------------- determination, all Indebtedness of the Person and its consolidated Subsidiaries, determined on a consolidated basis in accordance with GAAP. "Consolidated Interest Expense" of a Person means, for any period the ----------------------------- amount of interest expense, both expensed and capitalized, of the Person and its Consolidated Subsidiaries, determined on a consolidated basis in accordance with GAAP, for such period on the aggregate principal amount of their Indebtedness, determined on a consolidated basis in accordance with GAAP. "Consolidated Net Income" of a Person means, for any period, net ----------------------- income of the Person and its consolidated Subsidiaries, determined on a consolidated basis in accordance with GAAP, but excluding (i) earnings or losses attributable to minority interests; (ii) extraordinary gains or losses; (iii) net earnings and losses of any subsidiary accrued prior to date it became a Subsidiary; (iv) net earnings of any Person (other than a Subsidiary thereof) in which the Borrower or any of its subsidiaries has an ownership interest unless such net earnings shall have been received in the form of cash distributions; (v) any portion of net earnings of any Subsidiary which for any reason is unavailable for distribution to the Borrower; (vi) earnings or losses resulting from any write-up or write-down of assets other than in the ordinary course of business; and (vii) any reversal of any contingency reserve to the extent such contingency reserve was taken prior to the Effective Date. "Consolidated Net Worth" of a Person means, as of the date of ---------------------- determination, all items which in conformity with GAAP would be included under shareholders' equity on a consolidated balance sheet of the Person and its consolidated Subsidiaries at such date. -3- "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. ----------- ---------- "Current Revolving Credit Agreement" means the Revolving Credit ---------------------------------- Agreement dated as of November 13, 1992 among the Borrower, The Chase Manhattan Bank and Franklin Electronic Publishers (HK) Ltd. "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. ------------- "dollars" or "$" refers to lawful money of the United States of ------- - America. "EBITDA" of a Person means net income before income taxes plus ------ interest expense, plus depreciation and amortization or any other non-cash charge to the extent such charge reduces net income (and as reduced by an adjustment for the amount of cash payouts of non-cash charges from prior periods, if applicable), but excluding any all extraordinary gains (or losses) and or any gains (or losses) from the sale or disposition of assets other than in the ordinary course of business, all on a consolidated basis for such Person and its consolidated Subsidiaries and all calculated in accordance with GAAP. "Effective Date" means the date on which the conditions specified in -------------- Section 4.01 are satisfied (or waived in accordance with Section 9.02). "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 applicable to or having any jurisdiction over Borrower or any Subsidiary of Borrower, 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 the 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. "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 the Borrower, is treated as a single employer under Section 414(b) or (c) of -4- 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. "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 the 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 the 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 the 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 the Borrower or any ERISA Affiliate of any notice, or the receipt by any Multiemployer Plan from the 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 the Administrative Agent, any -------------- Lender, the Issuing Bank or any other recipient of any payment to be made by or on account of any obligation of the 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 any Lender, in which its applicable lending office is located and (b) any branch profits taxes imposed by the United States of America or any similar tax imposed by any other jurisdiction in which the 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 the Administrative Agent from three Federal funds brokers of recognized standing selected by it. "Financial Officer" means the chief financial officer, principal ----------------- accounting officer, treasurer or controller of the Borrower. "GAAP" means generally accepted accounting principles in the United ---- States of America. -5- "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. "Hedging Agreement" means any interest rate protection agreement, ----------------- foreign currency exchange agreement, commodity price protection agreement or other interest or currency exchange rate or commodity price hedging arrangement. The "principal amount" of the obligations of the Borrower or any of its Subsidiaries in respect of any Hedging Agreement at any time shall be the maximum aggregate amount (giving effect to any netting agreements) that the Borrower or such Subsidiary would be required to pay if such Hedging Agreement were terminated at such time. "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 accounts payable incurred in the ordinary course of business and on normal commercial terms), (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 and (k) all obligations of such Person under any Hedging Agreement. -6- 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 the Borrower to convert ------------------------- or continue a Borrowing in accordance with Section 2.06. "Interest Payment Date" means (a) with respect to any ABR Loan, the --------------------- last day of each March, June, September and December, and (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. "Interest Period" means 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, three or six months thereafter, as the 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 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 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, thereafter shall be the effective date of the most recent conversion or continuation of such Borrowing. "Issuing Bank" means The Chase Manhattan Bank, in its capacity as the ------------ issuer of Letters of Credit hereunder, and its successors in such capacity as provided in Section 2.04(i). The Issuing Bank may, in its discretion, arrange for one or more Letters of Credit to be issued by Affiliates of the Issuing Bank, in which case the term "Issuing Bank" shall include any such Affiliate with respect to Letters of Credit issued by such Affiliate. "LC Disbursement" means a payment made by the Issuing Bank 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 the Borrower at such time. The LC Exposure of any Lender at any time shall be its Applicable Percentage of the total LC Exposure at such time. "Lenders" means the Persons listed on Schedule 2.01 and any other ------- ------------- Person that shall have become a party hereto pursuant to an Assignment and Acceptance, other than any such Person that ceases to be a party hereto pursuant to an Assignment and Acceptance. -7- "Letter of Credit" means (i) any letter of credit issued pursuant to ---------------- this Agreement and (ii) the letters of credit issued by The Chase Manhattan Bank under the Current Revolving Credit Agreement. "LIBO Rate" means, with respect to any Eurodollar Borrowing for any --------- Interest Period, the rate appearing on Page 3750 of the Telerate 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 the Administrative Agent from time to time for purposes of providing quotations of interest rates applicable to dollar deposits in the London interbank market) 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 the Administrative Agent 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 delivered -------------- pursuant hereto, any applications for Letters of Credit, each as supplemented, amended or modified from time to time, and any document, instrument, or agreement supplementing, amending, or modifying, or waiving any provision of, any of the foregoing. "Loans" means the loans made by the Lenders to the Borrower pursuant ----- to this Agreement. "Material Adverse Effect" means a material adverse effect on (a) the ----------------------- business, assets, operations, prospects or condition, financial or otherwise, of the Borrower and its Subsidiaries taken as a whole, (b) the ability of the Borrower to perform any of its obligations under this Agreement or (c) the rights of or benefits available to the Lenders under this Agreement or any other Loan Document. "Maturity Date" means March 31, 2000. ------------- "Moody's" means Moody's Investors Service, Inc. ------- "Multiemployer Plan" means a multiemployer plan as defined in Section ------------------ 4001(a)(3) of ERISA. "Note Purchase Agreement" means the Note Purchase Agreement of even ----------------------- date herewith between the Borrower and the purchasers thereunder relating to the Notes. -8- "Notes" means the Borrower's unsecured notes issued March 27, 1997 due ----- March 31, 2007 in the initial aggregate principal amount of $40,000,000, and any renewals or refinancings thereof in an amount not to exceed the amount so renewed or refinanced. "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. "PBGC" means the Pension Benefit Guaranty Corporation referred to and ---- defined in ERISA and any successor entity performing similar functions. "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 90 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; and (e) easements, zoning restrictions, rights-of-way and similar encumbrances on real property imposed by law or arising in the ordinary course of business that do not secure any monetary obligations and do not materially detract from the value of the affected property or interfere with the ordinary conduct of business of the Borrower or any of its Subsidiaries; 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), or securities issued by foreign governments of comparable credit quality, in each case maturing within two years from the date of acquisition thereof; -9- (b) investments in commercial paper and loan participations maturing within 270 days from the date of acquisition thereof and having, at such date of acquisition, a credit rating of A-1 or better from S&P, or P-1 or better from Moody's; (c) investments in certificates of deposit, banker's acceptances and time deposits and other similar bank instruments maturing within two years 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 (i) a combined capital and surplus and undivided profits of not less than $100,000,000, or (ii) assets of at least $1,000,000,000 or the equivalent thereof, or foreign banks of comparable credit quality; (d) fully collateralized repurchase agreements with a term of not more than 90 days for securities described in clause (a) above and entered into with a financial institution satisfying the criteria described in clause (c) above; and (e) money market mutual funds investing principally in instruments of the type specified in (a), (b), (c) or (d) above. "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 the 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. "Prime Rate" means the rate of interest per annum publicly announced ---------- from time to time by The Chase Manhattan Bank as its prime rate in effect at its principal office in New York City; each change in the Prime Rate shall be effective from and including the date such change is publicly announced as being effective. "Register" has the meaning set forth in Section 9.04. -------- "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. "Required Lenders" means, at any time, Lenders having Total Exposures ---------------- and unused Commitments representing more than 50% of the sum of the Total Exposures and unused Commitments at such time. "Restricted Payment" has the meaning set forth in Section 6.06. ------------------ "Revolving Credit Commitment" means, with respect to each Lender, the --------------------------- commitment of each Lender to make Revolving Loans hereunder as set forth in Section 2.01, and to acquire participation in Letters of Credit as set forth in Section 2.04 as the same may -10- be (a) reduced from time to time pursuant to Section 2.07 and (b) reduced or increased from time to time pursuant to assignments by or to such Lender pursuant to Section 9.04. "Revolving Credit Exposure" means, with respect to any Lender at any -------------------------- time, the sum of the outstanding principal amount of such Lender's Revolving Loans and its LC Exposure at such time. "Revolving Loan" means a Loan made pursuant to Section 2.03. -------------- "S&P" means Standard & Poor's. --- "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 the Administrative Agent is subject (a) with respect to the Base CD Rate, for new negotiable nonpersonal time deposits in dollars of over $100,000 with maturities approximately equal to three months and (b) 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 any 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 are held by the parent or one or more Subsidiaries of the parent or, in the case of a partnership, the parent or one or more Subsidiaries of the parent is, at the date of determination, a general or limited partner of such partnership, but only if such person or such Subsidiary is entitled to receive more than 50% of the assets of such partnership upon its dissolution, 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. "Taxes" means any and all present or future taxes, levies, imposts, ----- duties, deductions, charges or withholdings imposed by any Governmental Authority. "Three-Month Secondary CD Rate" means, for any day, the secondary ----------------------------- market rate for three-month certificates of deposit reported as being in effect on such day (or, if such day is not a Business Day, the next preceding Business Day) by the Board through the public information telephone line of the Federal Reserve Bank of New York (which rate will, under the current practices of the Board, be published in Federal Reserve Statistical Release H.15(519) during the week following such day) or, if such rate is not so reported on such day or such next preceding Business Day, the average of the secondary market -11- quotations for three-month certificates of deposit of major money center banks in New York City received at approximately 10:00 a.m., New York City time, on such day (or, if such day is not a Business Day, on the next preceding Business Day) by the Administrative Agent from three negotiable certificate of deposit dealers of recognized standing selected by it. "Total Assets" means, with respect to any Person, all assets of such ------------ Person and its Subsidiaries as set forth on such Person's balance sheet as of the most recent fiscal year end, or quarterly statement date, as the case may be, on a consolidated basis in accordance with GAAP. "Total Capitalization" means, with respect to any Person, the sum of -------------------- (i) Consolidated Indebtedness and (ii) Consolidated Net Worth of such Person as of the most recent fiscal quarter. "Transactions" means the execution, delivery and performance by the ------------ Borrower of this Agreement, the borrowing of Loans, the use of the proceeds thereof and the issuance of Letters of Credit hereunder. "Type", when used in reference to any Loan or Borrowing, refers to ---- whether the rate of interest on such Loan, or on the Loans comprising such Borrowing, is determined by reference to the Adjusted LIBO Rate or the Alternate Base Rate. "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. Classification of Loans and Borrowings. For purposes of --------------------------------------- this Agreement, Loans may be classified and referred to by Character (e.g., a ---- "Revolving Loan") or by Type (e.g., a "Eurodollar Loan") or by Character and ---- Type (e.g., a "Eurodollar Revolving Loan"). Borrowings also may be classified ---- and referred to by Character (e.g., a "Revolving Borrowing") or by Type (e.g., a ---- ---- "Eurodollar Borrowing) or by Class and Type a "Eurodollar Revolving Borrowing"). SECTION 1.03. Terms Generally. The definitions of terms herein shall ---------------- apply equally to the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words "include", "includes" and "including" shall be deemed to be followed by the phrase "without limitation". The word "will" shall be construed to have the same meaning and effect as the word "shall". Unless the context requires otherwise (a) any definition of or reference to any agreement, instrument or other document herein shall be construed as referring to such agreement, instrument or other document as from time to time amended, supplemented or otherwise modified (subject to any restrictions on such amendments, supplements or modifications set forth herein), (b) any reference herein to any Person shall be construed to include such Person's successors and assigns, (c) the words "herein", "hereof" and "hereunder", and words of similar import, shall be construed to refer to this Agreement in its entirety and not to any particular provision hereof, (d) all references herein to Articles, Sections, Exhibits and Schedules shall be construed to refer to Articles and Sections of, and Exhibits and Schedules to, this Agreement and (e) the words "asset" and "property" shall be construed to have the same meaning and effect and to refer to any and all tangible and intangible assets and properties, including cash, securities, accounts and contract rights. -12- SECTION 1.04. 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 the Borrower notifies the Administrative Agent that the 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 the Administrative Agent notifies the Borrower that the Required Lenders 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. Commitments. Subject to the terms and conditions set forth ------------ herein, each Lender agrees to make Revolving Loans to the Borrower from time to time during the Availability Period in an aggregate principal amount that will not result in such Lender's Revolving Credit Exposure exceeding such Lender's Revolving Credit Commitment. Within the foregoing limits and subject to the terms and conditions set forth herein, the Borrower may borrow, prepay and reborrow Revolving Loans. SECTION 2.02. Loans and Borrowings. (a) Each Loan shall be made as part --------------------- of a Borrowing consisting of Loans made by the Lenders ratably in accordance with their respective Revolving Credit Commitments. The failure of any Lender to make any Loan required to be made by it shall not relieve any other Lender of its obligations hereunder; provided that the Commitments of the Lenders are -------- several and no Lender shall be responsible for any other Lender's failure to make Loans as required. (b) Subject to Section 2.12, (i) each Borrowing shall be comprised entirely of ABR Loans or Eurodollar Loans as the Borrower may request in accordance herewith. Each Lender at its option may make any Eurodollar Loan by causing any domestic or foreign branch or Affiliate of such Lender to make such Loan in lieu of making such Loan itself; provided that any exercise of such -------- option shall not affect the obligation of the Borrower to repay such Loan in accordance with the terms of this Agreement. (c) At the commencement of each Interest Period for any Eurodollar Borrowing, such Borrowing shall be in an aggregate amount that is an integral multiple of $100,000 and not less than $500,000. At the time that each ABR Revolving Borrowing is made, such Borrowing shall be in an aggregate amount that is an integral multiple of $100,000 and not less than $100,000; provided that an -------- ABR Revolving Borrowing may be in an aggregate amount that is equal to the entire unused balance of the total Revolving Credit Commitments or that is required to finance the reimbursement of an LC Disbursement as contemplated by Section 2.04(e). Borrowings of more than one Type may be outstanding at the same time; provided that there shall not at any time be more than a total of -------- five (5) Eurodollar Borrowings outstanding. -13- (d) Notwithstanding any other provision of this Agreement, the 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. Requests for Revolving Borrowings. To request a Revolving ---------------------------------- Borrowing, the Borrower shall notify the Administrative Agent of such request by telephone (a) in the case of a Eurodollar Borrowing, not later than 11:00 a.m., New York City time, three Business Days before the date of the proposed Borrowing, or (b) in the case of an ABR Borrowing, not later than 11:00 a.m., New York City time, one Business Day before the date of the proposed Borrowing; provided that any such notice of an ABR Revolving Borrowing to finance the - -------- reimbursement of an LC Disbursement as contemplated by Section 2.04(e) may be given not later than 10:00 a.m., New York City 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 telecopy to the Administrative Agent of a written Borrowing Request in a form approved by the Administrative Agent and signed by the Borrower. Each such telephonic and written Borrowing Request shall specify the following information in compliance with Section 2.02: (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 ABR Borrowing or a Eurodollar Borrowing; (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"; and (v) the location and number of the Borrower's account to which funds are to be disbursed, which shall comply with the requirements of Section 2.05. If no election as to the Type of Revolving Borrowing is specified, then the requested Revolving Borrowing shall be an ABR Borrowing. If no Interest Period is specified with respect to any requested Eurodollar Revolving Borrowing, then the Borrower shall be deemed to have selected an Interest Period of one month's duration. Promptly following receipt of a Borrowing Request in accordance with this Section, the Administrative Agent shall advise each Lender of the details thereof and of the amount of such Lender's Loan to be made as part of the requested Borrowing. SECTION 2.04. Letters of Credit. (a) General. Subject to the terms and ------------------ -------- conditions set forth herein, the Borrower may request the issuance of Letters of Credit for its own account, in a form reasonably acceptable to the Administrative Agent and the Issuing Bank, 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 the Borrower to, or entered into by the Borrower with, the Issuing Bank relating to any Letter of Credit, the terms and conditions of this Agreement shall control; provided that the failure by -14- either this Agreement or any such application to address an issue addressed by the other shall not be deemed to be an inconsistency. (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 outstanding Letter of Credit), the Borrower shall hand deliver or telecopy (or transmit by electronic communication, if arrangements for doing so have been approved by the Issuing Bank) to the Issuing Bank and the Administrative Agent (reasonably in advance of 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, the date of issuance, amendment, renewal or extension, 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 the Issuing Bank, the Borrower also shall submit a letter of credit application on the Issuing Bank'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 the 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 $3,000,000, and (ii) within such $3,000,000 sublimit, the LC Exposure with respect to Letters of Credit issued other than for the purpose of purchasing merchandise shall not exceed $500,000. (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 30 Business Days prior to the Maturity Date. (d) Participations. By the issuance of a Letter of Credit (or an --------------- amendment to a Letter of Credit increasing the amount thereof) and without any further action on the part of the Issuing Bank or the Lenders, and on the Effective Date with respect to each Letter of Credit outstanding under the Current Revolving Credit Agreement without further action on the part of the Issuing Bank or the Lenders, the Issuing Bank hereby grants to each Lender, and each Lender hereby acquires from the Issuing Bank, a participation in such Letter of Credit equal to such Lender's Applicable Percentage of the aggregate amount available to be drawn under such Letter of Credit. In consideration and in furtherance of the foregoing, each Lender hereby absolutely and unconditionally agrees to pay to the Administrative Agent, for the account of the Issuing Bank, such Lender's Applicable Percentage of each LC Disbursement made by the Issuing Bank and not reimbursed by the Borrower on the date due as provided in paragraph (e) of this Section, or of any reimbursement payment required to be refunded to the Borrower for any reason. Each Lender acknowledges and agrees that its obligation to acquire participations pursuant to this paragraph in respect of Letters of Credit is absolute and unconditional and shall not be affected by any circumstance whatsoever, including any amendment, renewal or extension of any Letter of Credit or the occurrence and continuance of a Default or reduction or termination of the Commitments, and that each such payment shall be made without any offset, abatement, withholding or reduction whatsoever. (e) Reimbursement. If the Issuing Bank shall make any LC Disbursement -------------- in respect of a Letter of Credit, the Borrower shall reimburse such LC Disbursement by paying to the Administrative Agent an amount equal to such LC -15- Disbursement not later than 12:00 noon, New York City time, on the date that such LC Disbursement is made, if the Borrower shall have received notice of such LC Disbursement prior to 10:00 a.m., New York City time, on such date, or, if such notice has not been received by the Borrower prior to such time on such date, then not later than 12:00 noon, New York City time, on (i) the Business Day that the Borrower receives such notice, if such notice is received prior to 10:00 a.m., New York City time, on the day of receipt, or (ii) the Business Day immediately following the day that the Borrower receives such notice, if such notice is not received prior to such time on the day of receipt; provided that, -------- if such LC Disbursement is not less than $100,000, the 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 ABR Revolving Borrowing in an equivalent amount and, to the extent so financed, the Borrower's obligation to make such payment shall be discharged and replaced by the resulting ABR Revolving Borrowing. If the Borrower fails to make such payment when due, the Administrative Agent shall notify each Lender of the applicable LC Disbursement, the payment then due from the Borrower in respect thereof and such Lender's Applicable Percentage thereof. Promptly following receipt of such notice, each Lender shall pay to the Administrative Agent its Applicable Percentage of the payment then due from the Borrower, in the same manner as provided in Section 2.05 with respect to Loans made by such Lender (and Section 2.05 shall apply, mutatis mutandis, to the payment obligations of the Lenders), and the - ------- -------- Administrative Agent shall promptly pay to the Issuing Bank the amounts so received by it from the Lenders. Promptly following receipt by the Administrative Agent of any payment from the Borrower pursuant to this paragraph, the Administrative Agent shall distribute such payment to the Issuing Bank or, to the extent that Lenders have made payments pursuant to this paragraph to reimburse the Issuing Bank, then to such Lenders and the Issuing Bank as their interests may appear. Any payment made by a Lender pursuant to this paragraph to reimburse the Issuing Bank for any LC Disbursement (other than the funding of ABR Revolving Loans as contemplated above) shall not constitute a Loan and shall not relieve the Borrower of its obligation to reimburse such LC Disbursement. (f) Obligations Absolute. The Borrower's obligation to reimburse LC -------------------- Disbursements as provided in paragraph (e) 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 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 the Issuing Bank 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, the Borrower's obligations hereunder. Neither the Administrative Agent, the Lenders nor the Issuing Bank, nor any of their 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 the Issuing Bank; provided that the foregoing shall not be construed to excuse the -------- Issuing Bank from liability to -16- the Borrower to the extent of any direct damages (as opposed to consequential damages, claims in respect of which are hereby waived by the Borrower to the extent permitted by applicable law) suffered by the Borrower that are caused by the Issuing Bank's failure to exercise care when determining whether drafts and other documents presented under a Letter of Credit comply with the terms thereof. 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, the Issuing Bank 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. The parties hereto expressly agree that, (i) in the absence of gross negligence or wilful misconduct on the part of the Issuing Bank (as finally determined by a court of competent jurisdiction), the Issuing Bank shall be deemed to have exercised care in each such determination made by it hereunder, (ii) nothing herein shall excuse the Issuing Bank (a) to the extent that its acts constitute gross negligence or wilful misconduct (as finally determined by a court of competent jurisdiction), or (b) from complying with an injunction issued by any such court, and (iii) in determining gross negligence hereunder, the conduct of Issuing Bank shall be measured by the normal conduct of large New York City commercial banks that regularly issue letters of credit. (g) Disbursement Procedures. The Issuing Bank shall, promptly ------------------------ following its receipt thereof, examine all documents purporting to represent a demand for payment under a Letter of Credit. The Issuing Bank shall promptly notify the Administrative Agent and the Borrower by telephone (confirmed by telecopy) of such demand for payment and whether the Issuing Bank has made or will make an LC Disbursement thereunder; provided that any failure to give or -------- delay in giving such notice shall not relieve the Borrower of its obligation to reimburse the Issuing Bank and the Lenders with respect to any such LC Disbursement. (h) Interim Interest. If the Issuing Bank shall make any LC ----------------- Disbursement, then, unless the 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 the Borrower reimburses such LC Disbursement, at the rate per annum then applicable to ABR Revolving Loans; provided that, if the Borrower fails to reimburse such LC Disbursement when due - -------- pursuant to paragraph (e) of this Section, then Section 2.11(e) shall apply. Interest accrued pursuant to this paragraph shall be for the account of the Issuing Bank, except that interest accrued on and after the date of payment by any Lender pursuant to paragraph (e) of this Section to reimburse the Issuing Bank shall be for the account of such Lender to the extent of such payment. (i) Replacement of the Issuing Bank. The Issuing Bank may be replaced -------------------------------- at any time by written agreement among the Borrower, the Administrative Agent, the replaced Issuing Bank and the successor Issuing Bank. The Administrative Agent shall notify the Lenders of any such replacement of the Issuing Bank. At the time any such replacement shall become effective, the Borrower shall pay all unpaid fees accrued for the account of the replaced Issuing Bank pursuant to Section 2.10(b). From and after the effective date of any such replacement, (i) the successor Issuing Bank shall have all the rights and obligations of the Issuing Bank under this Agreement with respect to Letters of Credit to be issued thereafter -17- and (ii) references herein to the term "Issuing Bank" shall be deemed to refer to such successor or to any previous Issuing Bank, or to such successor and all previous Issuing Banks, as the context shall require. After the replacement of an Issuing Bank hereunder, the replaced Issuing Bank shall remain a party hereto and shall continue to have all the rights and obligations of an Issuing Bank under this Agreement with respect to Letters of Credit issued by it prior to such replacement, but shall not be required to issue additional Letters of Credit. SECTION 2.05. Funding of Borrowings. (a) Each Lender shall make each Loan ---------------------- to be made by it hereunder on the proposed date thereof by wire transfer of immediately available funds by 12:00 noon, New York City time, to the account of the Administrative Agent most recently designated by it for such purpose by notice to the Lenders. The Administrative Agent will make such Loans available to the Borrower by promptly crediting the amounts so received, in like funds, to an account of the Borrower maintained with the Administrative Agent in New York City and designated by the Borrower in the applicable Borrowing Request; provided that ABR Revolving Loans made to finance the reimbursement of an LC - -------- Disbursement as provided in Section 2.04(e) shall be remitted by the Administrative Agent to the Issuing Bank. (b) Unless the Administrative Agent shall have received notice from a Lender prior to the proposed date of any Borrowing that such Lender will not make available to the Administrative Agent such Lender's share of such Borrowing, the Administrative Agent may assume that such Lender has made such share available on such date in accordance with paragraph (a) of this Section and may, in reliance upon such assumption, make available to the Borrower a corresponding amount. In such event, if a Lender has not in fact made its share of the applicable Borrowing available to the Administrative Agent, then the applicable Lender and the Borrower severally agree to pay to the Administrative Agent forthwith on demand such corresponding amount with interest thereon, for each day from and including the date such amount is made available to the Borrower to but excluding the date of payment to the Administrative Agent, at (i) in the case of such Lender, the greater of the Federal Funds Effective Rate and a rate determined by the Administrative Agent in accordance with banking industry rules on interbank compensation or (ii) in the case of the Borrower, the interest rate applicable to ABR Loans. If such Lender pays such amount to the Administrative Agent, then such amount shall constitute such Lender's Loan included in such Borrowing. SECTION 2.06. Interest Elections. (a) Each Borrowing initially shall be ------------------- of the Type specified in the applicable Borrowing Request and, in the case of a Eurodollar Borrowing, shall have an initial Interest Period as specified in such Borrowing Request. Thereafter, the Borrower may elect to convert such Borrowing to a different Type or to continue such Borrowing and, in the case of a Eurodollar Borrowing, may elect Interest Periods therefor, all as provided in this Section. The Borrower may elect different options with respect to different portions of the affected Borrowing, in which case each such portion shall be allocated ratably among the Lenders holding the Loans comprising such Borrowing, and the Loans comprising each such portion shall be considered a separate Borrowing. (b) To make an election pursuant to this Section, the Borrower shall notify the Administrative Agent of such election by telephone by the time that a Borrowing Request would be required under Section 2.03 if the Borrower were requesting a Revolving Borrowing of the Type resulting from such election to be made on the effective date of such election. Each such telephonic Interest Election Request shall be irrevocable and -18- shall be confirmed promptly by hand delivery or telecopy to the Administrative Agent of a written Interest Election Request in a form approved by the Administrative Agent and signed by the Borrower. (c) Each telephonic and written Interest Election Request shall specify the following information in compliance with Section 2.02: (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 ABR 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 the Borrower shall be deemed to have selected an Interest Period of one month's duration. (d) Promptly following receipt of an Interest Election Request, the Administrative Agent shall advise each Lender of the details thereof and of such Lender's portion of each resulting Borrowing. (e) If the Borrower fails to deliver a timely Interest Election Request with respect to a Eurodollar 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 ABR Borrowing. Notwithstanding any contrary provision hereof, if an Event of Default has occurred and is continuing, then, (i) no outstanding Borrowing may be converted to or continued as a Eurodollar Borrowing and (ii) unless repaid, each Eurodollar Borrowing shall be converted to an ABR Borrowing at the end of the Interest Period applicable thereto. SECTION 2.07. Termination and Reduction of Commitments. (a) Unless ----------------------------------------- previously terminated, the Revolving Credit Commitments shall terminate on the Maturity Date. (b) The Borrower may at any time terminate, or from time to time reduce, the Revolving Credit Commitments; provided that (i) each reduction of -------- the Revolving Credit Commitments shall be in an amount that is an integral multiple of $100,000 and not less than $1,000,000 and (ii) the Borrower shall not terminate or reduce the Revolving Credit Commitments if, after giving effect to any concurrent prepayment of the Revolving Loans in -19- accordance with Section 2.09, the sum of the Revolving Credit Exposures would exceed the total Revolving Credit Commitments. (c) The Borrower shall notify the Administrative Agent of any election to terminate or reduce the Revolving Credit Commitments under paragraph (b) of this Section at least three Business Days prior to the effective date of such termination or reduction, specifying such election and the effective date thereof. Promptly following receipt of any notice, the Administrative Agent shall advise the Lenders of the contents thereof. Each notice delivered by the Borrower pursuant to this Section shall be irrevocable. Any termination or reduction of the Revolving Credit Commitments shall be permanent. Each reduction of the Revolving Credit Commitments shall be made ratably among the Lenders in accordance with their respective Revolving Credit Commitments. SECTION 2.08. Repayment of Loans; Evidence of Debt. (a) The Borrower ------------------------------------- hereby unconditionally promises to pay to the Administrative Agent for the account of each Lender the then unpaid principal amount of each Revolving Loan on the Maturity Date. (b) Each Lender shall maintain in accordance with its usual practice an account or accounts evidencing the indebtedness of the Borrower to such Lender resulting from each Loan made by such Lender, including the amounts of principal and interest payable and paid to such Lender from time to time hereunder. (c) The Administrative Agent shall maintain accounts in which it shall record (i) the amount of each Loan made hereunder, the Character and Type thereof and the Interest Period applicable thereto, (ii) the amount of any principal or interest due and payable or to become due and payable from the Borrower to each Lender hereunder and (iii) the amount of any sum received by the Administrative Agent hereunder for the account of the Lenders and each Lender's share thereof. (d) The entries made in the accounts maintained pursuant to paragraph (b) or (c) of this Section shall be prima facie evidence of the existence and ----- ----- amounts of the obligations recorded therein absent manifest error; provided that -------- the failure of any Lender or the Administrative Agent to maintain such accounts or any error therein shall not in any manner affect the obligation of the Borrower to repay the Loans in accordance with the terms of this Agreement. (e) Any Lender may request that Loans made by it be evidenced by a promissory note. In such event, the Borrower shall prepare, execute and deliver to such Lender a promissory note payable to the order of such Lender (or, if requested by such Lender, to such Lender and its registered assigns) and in a form approved by the Administrative Agent, representing all of the Loans made and to be made by such lender hereunder. Thereafter, the Loans evidenced by such promissory note and interest thereon shall at all times (including after assignment pursuant to Section 9.04) be represented by a promissory note representing all Loans made by such Lender hereunder 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 2.09. Prepayment of Loans. (a) The 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 (b) of this Section. -20- (b) The Borrower shall notify the Administrative Agent by telephone (confirmed by telecopy) of any prepayment hereunder (i) in the case of prepayment of a Eurodollar Borrowing, not later than 11:00 a.m., New York City time, three Business Days before the date of prepayment, or (ii) in the case of prepayment of an ABR Borrowing, not later than 11:00 a.m., New York City 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 such Borrowing (or portion thereof) to be prepaid. Promptly following receipt of any such notice relating to a Borrowing, the Administrative Agent shall advise the Lenders of the contents thereof. Each partial prepayment of any Borrowing shall be in an amount that would be permitted in the case of an advance of a Borrowing of the same Type as provided in Section 2.02. Each prepayment of a Borrowing shall be applied ratably to the Loans included in the prepaid Borrowing. Prepayments shall be accompanied by accrued interest to the extent required by Section 2.11 and by any payments required pursuant to Section 2.14. SECTION 2.10. Fees. (a) The Borrower agrees to pay to the Administrative ----- Agent for the account of each Lender a commitment fee, which shall accrue at the rate of 1/4 of 1% per annum on the daily unused amount of the Revolving Credit Commitment of such Lender during the period from and including the Effective Date to but excluding the date on which such Revolving Credit Commitment terminates. solely for purposes of computing the fee hereunder, the issuance of a Letter of Credit will not be deemed to reduce the unused amount of the Revolving Credit Commitment. Accrued commitment fees shall be payable in arrears on the last day of March, June, September and December of each year and on the date on which the Revolving Credit Commitments terminate, commencing on the first such date to occur after the date hereof; provided that any commitment -------- fees accruing after the date on which the Revolving Credit Commitments terminate shall be payable on demand. 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 (including the first day but excluding the last day). (b) The Borrower agrees to pay to the Issuing Bank a fronting fee, which shall accrue at the rate or rates per annum separately agreed upon between the Borrower and the Issuing Bank on the average daily amount of the LC Exposure (excluding any portion thereof attributable to unreimbursed LC Disbursements) during the period from and including the Effective Date to but excluding the later of the date of termination of the Revolving Credit Commitments and the date on which there ceases to be any LC Exposure, as well as the Issuing Bank's standard fees with respect to the issuance, amendment, renewal or extension of any Letter of Credit or processing of drawings thereunder. Fronting fees accrued through and including the last day of March, June, September and December of each year shall be payable on the third Business Day following such last day, commencing on the first such date to occur after the Effective Date; provided that all such fees shall be payable on the date on which the Revolving - -------- Credit Commitments terminate and any such fees accruing after the date on which the Revolving Credit Commitments terminate shall be payable on demand. Any other fees payable to the Issuing Bank pursuant to this paragraph shall be payable within 10 days after demand. All fronting fees shall be computed on the basis of a year of 360 days and shall be payable for the actual number of days elapsed (including the first day but excluding the last day). (c) The Borrower agrees to pay to the Administrative Agent, for its own account, fees payable in the amounts and at the times separately agreed upon between the Borrower and the Administrative Agent. -21- (d) All fees payable hereunder shall be paid on the dates due, in immediately available funds, to the Administrative Agent (or to the Issuing Bank, in the case of fees payable to it) for distribution, in the case of commitment fees, to the Lenders. Fees paid shall not be refundable under any circumstances. SECTION 2.11. Interest. (a) The Loans comprising each ABR Borrowing shall --------- bear interest at the Alternate Base Rate plus the Applicable Rate Margin. (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 Margin. (c) Notwithstanding the foregoing, if any principal of or interest on any Loan or any fee or other amount payable by the Borrower hereunder is not paid when due, whether at stated maturity, upon acceleration or otherwise, such overdue amount shall bear interest, after as well as before judgment, at a rate per annum equal to (i) in the case of overdue principal of any Loan, 2% plus the rate otherwise applicable to such Loan as provided in the preceding paragraphs of this Section or (ii) in the case of any other amount, 2% plus the rate applicable to ABR Loans as provided in paragraph (a) of this Section. (d) Accrued interest on each Loan shall be payable in arrears on each Interest Payment Date for such Loan and, in the case of Revolving Loans, upon termination of the Revolving Credit Commitments; provided that (i) interest -------- accrued pursuant to paragraph (c) 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 ABR 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. (e) All interest hereunder shall be computed on the basis of a year of 360 days and in each case shall be payable for the actual number of days elapsed (including the first day but excluding the last day). The applicable Alternate Base Rate, or Adjusted LIBO Rate or LIBO Rate shall be determined by the Administrative Agent, and such determination shall be conclusive absent manifest error. SECTION 2.12. Alternate Rate of Interest. If prior to the commencement of --------------------------- any Interest Period for a Eurodollar Borrowing: (a) the Administrative Agent 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) the Administrative Agent is advised by the Required Lenders that the Adjusted LIBO Rate or the LIBO Rate, as applicable, for such Interest Period will not adequately and fairly reflect the cost to such Lenders (or Lender) of making or maintaining their Loans (or its Loan) included in such Borrowing for such Interest Period; -22- then the Administrative Agent shall give notice thereof to the Borrower and the Lenders by telephone or telecopy as promptly as practicable thereafter and, until the Administrative Agent notifies the Borrower and the Lenders that the circumstances giving rise to such notice no longer exist, (i) any Interest Election Request that requests the conversion of any Borrowing to, or continuation of any Borrowing as, a Eurodollar Borrowing shall be ineffective, and (ii) if any Borrowing Request requests a Eurodollar Borrowing, such Borrowing shall be made as an ABR Borrowing. SECTION 2.13. 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, any Lender (except any such reserve requirement reflected in the Adjusted LIBO Rate) or the Issuing Bank; or (ii) impose on any Lender or the Issuing Bank 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 such Lender or the Issuing Bank of participating in, issuing or maintaining any Letter of Credit or to reduce the amount of any sum received or receivable by such Lender or the Issuing Bank hereunder (whether of principal, interest or otherwise), then the Borrower will pay to such Lender or the Issuing Bank, as the case may be, such additional amount or amounts as will compensate such Lender or the Issuing Bank, as the case may be, for such additional costs incurred or reduction suffered. (b) If any Lender or the Issuing Bank determines that any Change in Law regarding capital requirements has or would have the effect of reducing the rate of return on such Lender's or the Issuing Bank's capital or on the capital of such Lender's or the Issuing Bank's holding company, if any, as a consequence of this Agreement or the Loans made by, or participations in Letters of Credit held by, such Lender, or the Letters of Credit issued by the Issuing Bank, to a level below that which such Lender or the Issuing Bank or such Lender's or the Issuing Bank's holding company could have achieved but for such Change in Law (taking into consideration such Lender's or the Issuing Bank's policies and the policies of such Lender's or the Issuing Bank's holding company with respect to capital adequacy), then from time to time the Borrower will pay to such Lender or the Issuing Bank, as the case may be, such additional amount or amounts as will compensate such Lender or the Issuing Bank or such Lender's or the Issuing Bank's holding company for any such reduction suffered. (c) A certificate of a Lender or the Issuing Bank setting forth the amount or amounts necessary to compensate such Lender or the Issuing Bank or its holding company, as the case may be, as specified in paragraph (a) or (b) of this Section shall be delivered to the Borrower and shall be conclusive absent manifest error. The Borrower shall pay such Lender or the Issuing Bank, as the case may be, the amount shown as due on any such certificate within 10 days after receipt thereof. -23- (d) Failure or delay on the part of any Lender or the Issuing Bank to demand compensation pursuant to this Section shall not constitute a waiver of such Lender's or the Issuing Bank's right to demand such compensation. SECTION 2.14. 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, (c) the failure to borrow, convert, continue or prepay any Loan on the date specified in any notice delivered pursuant hereto (d) the assignment of any Eurodollar Loan other than on the last day of the Interest Period applicable thereto as a result of a request by the Borrower pursuant to Section 2.17, then, in any such event, the Borrower shall compensate ---- each Lender for the loss, cost and expense attributable to such event. In the case of a Eurodollar Loan, such loss, cost or expense to any Lender shall be deemed to include an amount determined by such 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 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 such 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 any Lender setting forth any amount or amounts that such Lender is entitled to receive pursuant to this Section shall be delivered to the Borrower and shall be conclusive absent manifest error. The Borrower shall pay such Lender the amount shown as due on any such certificate within 10 days after receipt thereof. SECTION 2.15. Taxes. (a) Any and all payments by or on account of any ------ obligation of the Borrower hereunder shall be made free and clear of and without deduction for any Indemnified Taxes or Other Taxes; provided that if the -------- 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) the Administrative Agent, Lender or Issuing Bank (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions and (iii) the Borrower shall pay the full amount deducted to the relevant Governmental Authority in accordance with applicable law. (b) In addition, the Borrower shall pay any Other Taxes to the relevant Governmental Authority in accordance with applicable law. (c) The Borrower shall indemnify the Administrative Agent, each Lender and the Issuing Bank, within 10 days after written demand therefor, for the full amount of any Indemnified Taxes or Other Taxes paid by the Administrative Agent, such Lender or the Issuing Bank, as the case may be, on or with respect to any payment by or on account of any obligation of the 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 -24- liability delivered to the Borrower by a Lender or the Issuing Bank, or by the Administrative Agent on its own behalf or on behalf of a Lender or the Issuing Bank, shall be conclusive absent manifest error. (d) As soon as practicable after any payment of Indemnified Taxes or Other Taxes by the Borrower to a Governmental Authority, the Borrower shall deliver to the Administrative Agent the original or a certified copy of a receipt issued by such Governmental Authority evidencing such payment, and a copy of the return reporting such payment or other evidence of such payment reasonably satisfactory to the Administrative Agent. SECTION 2.16. Payments Generally; Pro Rata Treatment; Sharing of Set-offs. ----------------------------------------------------------- (a) The 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 2.13, 2.14, or 2.15, or otherwise) prior to 12:00 noon, New York City 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 the Administrative Agent, 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 the Administrative Agent at its offices at 270 Park Avenue, New York, New York, except payments to be made directly to the Issuing Bank as expressly provided herein and except that payments pursuant to Sections 2.13, 2.14, or 2.15, and 9.03 shall be made directly to the Persons entitled thereto. The Administrative Agent shall distribute any such payments received by it for the account of any other Person to the appropriate recipient promptly following receipt thereof. 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) If at any time insufficient funds are received by and available to the Administrative Agent to pay fully all amounts of principal, unreimbursed LC Disbursements, interest and fees then due hereunder, such funds shall be applied (i) first, towards payment of interest and fees then due hereunder, ratably among the parties entitled thereto in accordance with the amounts of interest and fees then due to such parties, and (ii) second, towards payment of principal and unreimbursed LC Disbursements then due hereunder, ratably among the parties entitled thereto in accordance with the amounts of principal and unreimbursed LC Disbursements then due to such parties. (c) If any Lender shall, by exercising any right of set-off or counterclaim or otherwise, obtain payment in respect of any principal of or interest on any of its Loans or participations in LC Disbursements resulting in such Lender's receiving payment of a greater proportion of the aggregate amount of its Loans and participations in LC Disbursements and accrued interest thereon than the proportion received by any other Lender, then the Lender receiving such greater proportion shall purchase (for cash at face value) participations in the Loans and participations in LC Disbursements of other Lenders to the extent necessary so that the benefit of all such payments shall be shared by the Lenders ratably in accordance with the aggregate amount of principal of and accrued interest on their respective Loans and participations in LC Disbursements; provided that (i) if any such participations are purchased and -------- all or any portion of the payment giving rise thereto is recovered, such participations shall be rescinded and the purchase price restored to the extent -25- of such recovery, without interest, and (ii) the provisions of this paragraph shall not be construed to apply to any payment made by the Borrower pursuant to and in accordance with the express terms of this Agreement or any payment obtained by a Lender as consideration for the assignment of or sale of a participation in any of its Loans or participations in LC Disbursements to any assignee or participant, other than to the Borrower or any Subsidiary or Affiliate thereof (as to which the provisions of this paragraph shall apply). The Borrower consents to the foregoing and agrees, to the extent it may effectively do so under applicable law, that any Lender acquiring a participation pursuant to the foregoing arrangements may exercise against the Borrower rights of set-off and counterclaim with respect to such participation as fully as if such Lender were a direct creditor of the Borrower in the amount of such participation. (d) Unless the Administrative Agent shall have received notice from the Borrower prior to the date on which any payment is due to the Administrative Agent for the account of the Lenders or the Issuing Bank hereunder that the Borrower will not make such payment, the Administrative Agent may assume that the Borrower has made such payment on such date in accordance herewith and may, in reliance upon such assumption, distribute to the Lenders or the Issuing Bank, as the case may be, the amount due. In such event, if the Borrower has not in fact made such payment, then each of the Lenders or the Issuing Bank, as the case may be, severally agrees to repay to the Administrative Agent forthwith on demand the amount so distributed to such Lender or Issuing Bank with interest thereon, for each day from and including the date such amount is distributed to it to but excluding the date of payment to the Administrative Agent, at the greater of the Federal Funds Effective Rate and a rate determined by the Administrative Agent in accordance with banking industry rules on interbank compensation. (e) If any Lender shall fail to make any payment required to be made by it pursuant to Section 2.04(d) or (e), 2.05(b) or paragraph (d) of this Section, then the Administrative Agent may, in its discretion (notwithstanding any contrary provision hereof), apply any amounts thereafter received by the Administrative Agent for the account of such Lender to satisfy such Lender's obligations under such Sections until all such unsatisfied obligations are fully paid. SECTION 2.17. Mitigation Obligations; Replacement of Lenders. If any ----------------------------------------------- Lender requests compensation under Section 2.13, or if the Borrower is required to pay any additional amount to any Lender or any Governmental Authority for the account of any Lender pursuant to Section 2.15, then such Lender shall use reasonable efforts to designate a different lending office for funding or booking its Loans hereunder or to assign its rights and obligations hereunder to another of its offices, branches or affiliates, if, in the judgment of such Lender, such designation or assignment (i) would eliminate or reduce amounts payable pursuant to Section 2.13 or 2.15, as the case may be, in the future and (ii) would not subject such Lender to any unreimbursed cost or expense and would not otherwise be disadvantageous to such Lender. The Borrower hereby agrees to pay all reasonable costs and expenses incurred by any Lender in connection with any such designation or assignment. -26- ARTICLE III Representations and Warranties ------------------------------ The Borrower represents and warrants to the Lenders that: SECTION 3.01. Organization; Powers. Each of the Borrower and 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 own its properties and carry on its business as now conducted and, except where the failure to do so, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect, 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 ------------------------------ the Borrower's corporate powers and have been duly authorized by all necessary corporate and, if required, stockholder action. This Agreement has been duly executed and delivered by the Borrower and constitutes a legal, valid and binding obligation of the 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. 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, (b) will not violate any applicable law or regulation or the charter, by-laws or other organizational documents of the Borrower or any of its Subsidiaries or any order of any Governmental Authority, (c) will not violate or result in a default under any indenture, agreement or other instrument binding upon the Borrower or any of its Subsidiaries or any of their respective assets, or give rise to a right thereunder to require any payment to be made by the Borrower or any of its Subsidiaries, and (d) will not result in the creation or imposition of any Lien on any asset of the Borrower or any of its Subsidiaries. SECTION 3.04. Financial Condition; No Material Adverse Change. (a) The ------------------------------------------------ Borrower has heretofore furnished to the Lenders its consolidated balance sheet and statements of income, stockholders equity and cash flows (i) as of and for the fiscal year ended March 31, 1996 reported on by Feldman Radin & Co., P.C., independent public accountants, and (ii) as of and for the fiscal quarter and the portion of the fiscal year ended December 31, 1996, 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 the 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) Since December 31, 1996, there has been no material adverse change in the business, assets, operations, prospects or condition, financial or otherwise, of the Borrower and its Subsidiaries, taken as a whole. SECTION 3.05. Properties. (a) Each of the Borrower and its Subsidiaries ----------- has good title to, or valid leasehold interests in, all its real and personal property material to its -27- business, except for minor defects in title that do not interfere with its ability to conduct its business as currently conducted or to utilize such properties for their intended purposes or have a Material Adverse Effect. (b) Each of the Borrower and its Subsidiaries owns, or is licensed to use, all trademarks, tradenames, copyrights, patents, trade styles, service marks and all applications, registrations and recordings relating to any of the foregoing, and all other intellectual property material to its business, and the use thereof by the Borrower and its Subsidiaries does not infringe upon the rights of any other Person, except for any such infringements that, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect. 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 the Borrower, threatened against or affecting the Borrower or any of its Subsidiaries (i) that, if adversely 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. (b) Except for the Disclosed Matters 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 the Borrower nor any of its Subsidiaries (i) 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, (ii) has become subject to any Environmental Liability, (iii) has received notice of any claim with respect to any Environmental Liability or (iv) knows of any basis for 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. Each of the Borrower ------------------------------------ and its Subsidiaries is in compliance with all laws, regulations and orders of any Governmental Authority 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. Neither the Company nor any of its Subsidiaries is a party to any indenture, agreement or other instrument, any charter or other corporate restriction or any law, regulation or order of any Governmental Authority which could reasonably be expected to result in a Material Adverse Effect. No Default has occurred and is continuing. SECTION 3.08. Investment and Holding Company Status. Neither the Borrower -------------------------------------- nor any of its Subsidiaries is (a) an "investment company" as defined in, or subject to regulation under, the Investment Company Act of 1940 or (b) a "holding company" as defined in, or subject to regulation under, the Public Utility Holding Company Act of 1935. SECTION 3.09. Taxes. Each of the Borrower and 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 (a) Taxes that are being contested in good faith by appropriate proceedings and for which the Borrower or such -28- Subsidiary, as applicable, has set aside on its books adequate reserves or (b) to the extent that the failure to do so could not reasonably be expected to result in a Material Adverse Effect. 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. The present value of all accumulated benefit obligations under each Plan (based on the assumptions used for purposes of Statement of Financial Accounting Standards No. 87) did not, as of the date of the most recent financial statements reflecting such amounts, exceed the fair market value of the assets of such Plan, and the present value of all accumulated benefit obligations of all underfunded Plans (based on the assumptions used for purposes of Statement of Financial Accounting Standards No. 87) did not, as of the date of the most recent financial statements reflecting such amounts, exceed the fair market value of the assets of all such underfunded Plans. SECTION 3.11. Use of Proceeds; and Board Regulations. --------------------------------------- (a) The Borrower and its Subsidiaries are not engaged principally in, nor have as one of their important activities, the business of extending credit for the purpose of or carrying any "margin stock" (within the meaning of Regulation U of the Board as amended to the date hereof). If requested by the Bank, the Borrower or any Subsidiary will furnish to the Bank such a statement on Board Form U-1. (b) The proceeds of each Loan will be used by the Borrower for working capital in the ordinary course of business. No part of the proceeds of any Loan will be used, whether directly or indirectly, and whether immediately, incidental or ultimately, (i) to purchase or to carry margin stock or to extend credit to others for the purpose of purchasing or carrying margin stock, or to refund indebtedness originally incurred for such purpose, or (ii) for any purpose which violates or is inconsistent with the provisions of Regulations G, T, U or X of the Board. SECTION 3.12. Subsidiaries. Schedule 3.12 to this Agreement has a ------------- ------------- complete and correct list of each of the Borrower's Subsidiaries, showing as to each such Subsidiary its name, the jurisdiction of its incorporation and the number and percentages of outstanding shares of such Subsidiary owned by the Borrower and other Subsidiaries, respectively. SECTION 3.13. Disclosure. The Borrower has disclosed to the Lenders all ----------- agreements, instruments and corporate or other restrictions to which it or any of its Subsidiaries 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 the Borrower to the Administrative Agent or any Lender in connection with the negotiation of this Agreement or delivered hereunder (as modified or supplemented by other information so furnished) contains any material misstatement of fact or 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, the Borrower represents only that such information was prepared in good faith based upon assumptions believed to be reasonable at the time. -29- ARTICLE IV Conditions ---------- SECTION 4.01. Effective Date. The obligations of the Lenders to make --------------- Loans and of the Issuing Bank 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 9.02): (a) The Administrative Agent (or its counsel) shall have received from each party hereto either (i) a counterpart of this Agreement signed on behalf of such party or (ii) written evidence satisfactory to the Administrative Agent (which may include telecopy transmission of a signed signature page of this Agreement) that such party has signed a counterpart of this Agreement. (b) The Administrative Agent shall have received a favorable written opinion (addressed to the Administrative Agent and the Lenders and dated the Effective Date) of counsel for the Borrower, acceptable to the Required Lenders, substantially in the form of Exhibit B, and covering such --------- other matters relating to the Borrower, this Agreement or the Transactions as the Required Lenders shall reasonably request. The Borrower hereby requests such counsel to deliver such opinion. (c) The Administrative Agent shall have received such documents and certificates as the Administrative Agent or its counsel may reasonably request relating to the organization, existence and good standing of the Borrower, the authorization of the Transactions and any other legal matters relating to the Borrower, this Agreement or the Transactions, all in form and substance satisfactory to the Administrative Agent and its counsel. (d) The closing of the private placement of the Notes shall have been consummated. (e) All liabilities and obligations of the Borrower and its Subsidiaries under the Current Revolving Credit Agreement shall have been paid in full and all security interests hereunder shall have been terminated. (f) The Administrative Agent shall have received a certificate, dated the Effective Date and signed by the President, a Vice President or a Financial Officer of the Borrower, confirming compliance with the conditions set forth in paragraphs (a) and (b) of Section 4.02. (g) The Administrative Agent shall have received all fees and other amounts due and payable on or prior to the Effective Date, including, to the extent invoiced, reimbursement or payment of all out-of-pocket expenses required to be reimbursed or paid by the Borrower hereunder. The Administrative Agent shall notify the Borrower and the Lenders of the Effective Date, and such notice shall be conclusive and binding. Notwithstanding the foregoing, the obligations of the Lenders to make Loans and of the Issuing Bank to issue Letters of Credit -30- hereunder shall not become effective unless each of the foregoing conditions is satisfied (or waived pursuant to Section 9.02) at or prior to 3:00 p.m., New York City time, on March 31, 1997 (and, in the event such conditions are not so satisfied or waived, the Commitments shall terminate at such time). SECTION 4.02. Each Credit Event. The obligation of each Lender to make a ------------------ Loan on the occasion of any Borrowing, and of the Issuing Bank 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 the 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. (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 (including without limitation the non-payment of any amount under the Note Purchase Agreement which would, but for the two day grace period provided in Article VII subparagraph (g) constitute an Event of Default hereunder). Each Borrowing and each issuance, amendment, renewal or extension of a Letter of Credit shall be deemed to constitute a representation and warranty by the Borrower on the date thereof as to the matters specified in paragraphs (a) and (b) of this Section. ARTICLE V Affirmative Covenants --------------------- Until the Commitments have 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, the Borrower covenants and agrees with the Lenders that: SECTION 5.01. Financial Statements and Other Information. The Borrower ------------------------------------------- will furnish to the Administrative Agent and each Lender: (a) within 90 days after the end of each fiscal year of the 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, and unaudited consolidating financial statements, all setting forth in each case in comparative form the figures for the previous fiscal year, all reported on by Feldman Radin & Co., P.C., or by independent public accountants of recognized national standing (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 the Borrower and its consolidated Subsidiaries on a consolidated basis in accordance with GAAP consistently applied; -31- (b) within 45 days after the end of each of the first three fiscal quarters of each fiscal year of the Borrower, its consolidated and consolidating 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 the 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, the form of such financial statements and certification to be reasonably satisfactory to the Administrative Agent; (c) concurrently with any delivery of financial statements under clause (a) or (b) above, a certificate of a Financial Officer of the Borrower (i) 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, (ii) setting forth reasonably detailed calculations demonstrating compliance with Sections 6.01, 6.04, 6.06, 6.09 and 6.14 and (iii) 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; (d) concurrently with any delivery of financial statements under clause (a) above, a certificate of the accounting firm that reported on such financial statements stating whether they obtained knowledge during the course of their examination of such financial statements of any Default (which certificate may be limited to the extent required by accounting rules or guidelines); (e) promptly after the same become publicly available, copies of all periodic and other reports, proxy statements and other materials (including without limitation Forms 10-K, 10-Q and 8-K and Proxy Statements and Annual Reports) filed by the 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 the Borrower to its shareholders generally, as the case may be; and (f) promptly following any request therefor, such other information regarding the operations, business affairs and financial condition of the Borrower or any Subsidiary, or compliance with the terms of this Agreement, as the Administrative Agent or any Lender may reasonably request. SECTION 5.02. Notices of Material Events. The Borrower will furnish to --------------------------- the Administrative Agent written notice of the following: (a) the occurrence of any Default, or of any default under any other agreement which could reasonably be expected to have a Material Adverse Effect; -32- (b) the filing or commencement of any action, suit or proceeding by or before any arbitrator or Governmental Authority against or affecting the Borrower or any Affiliate thereof that, if adversely determined, could reasonably be expected to result in a Material Adverse Effect; (c) the occurrence of any ERISA Event that, alone or together with any other ERISA Events that have occurred, could reasonably be expected to result in liability of the Borrower and its Subsidiaries; (d) any information which indicates that any financial statements which are the subject of any representation contained in this Agreement, or which are furnished to the Administrative Agent or any Lender, fail in any material respect to represent fairly the financial condition of results of operations purported to be presented therein; and (e) 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 the Borrower setting forth the details of the event or development requiring such notice and any action taken or proposed to be taken with respect thereto. SECTION 5.03. Existence; Conduct of Business. The Borrower will, and will ------------------------------- cause each of its Subsidiaries to, 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, licenses, permits, privileges and franchises material to the conduct of its business; provided that the foregoing shall not prohibit any merger, -------- consolidation, liquidation or dissolution permitted under Section 6.03. SECTION 5.04. Payment of Obligations. The Borrower will, and will cause ----------------------- each of its Subsidiaries to, pay its obligations, including Tax liabilities, that, if not paid, could result in a Material Adverse Effect 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) the Borrower or such Subsidiary has set aside on its books adequate reserves with respect thereto in accordance with GAAP and (c) the failure to make payment pending such contest could not reasonably be expected to result in a Material Adverse Effect. SECTION 5.05. Maintenance of Properties; Insurance. The Borrower will, ------------------------------------- and will cause each of its Subsidiaries to, (a) keep and maintain all property material to the conduct of its business in good working order and condition, ordinary wear and tear excepted, and (b) maintain, with financially sound and reputable insurance companies, insurance in such amounts and against such risks as are customarily maintained by companies engaged in the same or similar businesses operating in the same or similar locations. SECTION 5.06. Books and Records; Inspection Rights. The Borrower will, ------------------------------------- and will cause each of its Subsidiaries to, 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. The Borrower will, and will cause each of its Subsidiaries to, permit any representatives designated by the Administrative Agent or any Lender, upon reasonable -33- 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. SECTION 5.07. Compliance with Laws and Agreements. The Borrower will, and ------------------------------------ will cause each of its Subsidiaries to, comply with all laws, rules, regulations and orders of any Governmental Authority 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. SECTION 5.08. Environmental Laws. The Borrower will, and will cause each ------------------- of its Subsidiaries to, comply with all Environmental Laws and upon request provide to the Administrative Agent or any Lender all documentation in connection with such compliance as may be reasonably requested. SECTION 5.09. Use of Proceeds and Letters of Credit. The proceeds of the -------------------------------------- Loans will be used only for the purposes represented in Section 3.11. No part of the proceeds of any Loan will be used, whether directly or indirectly, for any purpose that entails a violation of any of the Regulations of the Board, including Regulations G, T, U and X. Letters of Credit will be issued only in the ordinary course of Business of the Borrower and its Subsidiaries. ARTICLE VI Negative Covenants ------------------ Until the Commitments have expired or terminated and the principal of and interest on each Loan and all fees payable hereunder have been paid in full and all Letters of Credit have expired or terminated and all LC Disbursements shall have been reimbursed, the Borrower covenants and agrees with the Lenders that: SECTION 6.01. Indebtedness. The Borrower will not, and will not permit ------------- any of its Subsidiaries to, create, incur, assume or permit to exist any Indebtedness, except: (a) Indebtedness created hereunder; (b) Indebtedness under the Notes; (c) Indebtedness existing on the date hereof and set forth in Schedule 6.01, and extensions, renewals or replacements of any such ------------- Indebtedness that do not increase the outstanding principal amount thereof; (d) Indebtedness of the Borrower to any wholly-owned Subsidiary and of any Subsidiary of the Borrower to the Borrower or any other wholly- owned Subsidiary of the Borrower; (e) Guarantees by the Borrower of Indebtedness of any wholly- owned Subsidiary of the Borrower and by any Subsidiary of the Borrower of -34- Indebtedness of the Borrower or any other wholly-owned Subsidiary of the Borrower; and (f) Additional Indebtedness, provided that at the time of incurrence thereof and after giving effect thereto and to the application of proceeds thereof, on a pro forma basis and calculated at the end of each --- ----- quarterly fiscal period, Consolidated Indebtedness does not exceed 55% of the Borrower's Total Capitalization. SECTION 6.02. Liens. The Borrower will not, and will not permit any of ------ its Subsidiaries 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) Permitted Encumbrances; (b) any Lien on any property or asset of the Borrower or any of its Subsidiaries 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 the Borrower or any such Subsidiary and (ii) such Lien shall secure only those obligations which it secures on the date hereof and extensions, renewals and replacements thereof that do not increase the outstanding principal amount thereof; (c) any Lien existing on any property or asset prior to the acquisition thereof by the Borrower or any of its Subsidiaries or existing on any property or asset of any Person that becomes a Subsidiary of the Borrower after the date hereof prior to the time such Person becomes a Subsidiary of the Borrower; provided that (i) such Lien is not created in -------- contemplation of or in connection with such acquisition or such Person becoming a Subsidiary of the Borrower, as the case may be, (ii) such Lien shall not apply to any other property or assets of the Borrower or any of its Subsidiaries and (iii) such Lien shall secure only those obligations which it secures on the date of such acquisition or the date such Person becomes a Subsidiary of the Borrower, as the case may be and extensions, renewals and replacements thereof that do not increase the outstanding principal amount thereof; (d) Liens on fixed or capital assets acquired, constructed or improved by the Borrower or any of its Subsidiaries; provided that (i) such -------- security interests secure Indebtedness permitted by clause (f) 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 construction or improvement, (iii) the Indebtedness secured thereby does not exceed 80% of the lesser of the fair market value, or the cost of acquiring, constructing or improving, such fixed or capital assets and (iv) such security interests shall not apply to any other property or assets of the Borrower or any of its Subsidiaries; (e) Liens granted by the Borrower to any wholly-owned Subsidiary of the Borrower, or by any Subsidiary of the Borrower to the Borrower or any wholly-owned Subsidiary of the Borrower; and -35- (f) Other liens covering assets having a value not in excess of 10% of the Borrower's Consolidated Net Worth. SECTION 6.03. Fundamental Changes. (a) The Borrower will not, and will -------------------- not permit any of its Subsidiaries 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 Default shall have occurred and be continuing (i) any Subsidiary of the Borrower may merge into the Borrower in a transaction in which the Borrower is the surviving corporation, (ii) any Subsidiary of the Borrower may merge into any other Subsidiary of the Borrower in a transaction in which the surviving entity is a Subsidiary of the Borrower, (iii) any Subsidiary of the Borrower may sell, transfer, lease or otherwise dispose of its assets to the Borrower or to another Subsidiary of the Borrower and (iv) any Subsidiary of the Borrower may liquidate or dissolve if the Borrower determines in good faith that such liquidation or dissolution is in the best interests of the Borrower and is not materially disadvantageous to the Lenders; provided that any such merger -------- involving a Person that is not a wholly-owned Subsidiary immediately prior to such merger shall not be permitted unless also permitted by Section 6.04. (b) The Borrower will not, and will not permit any of its Subsidiaries to, engage to any material extent in any business other than businesses of the type conducted by the Borrower and its Subsidiaries on the date of execution of this Agreement and businesses reasonably related thereto or in furtherance thereof. SECTION 6.04. Investments, Loans, Advances, Guarantees and Acquisitions. ---------------------------------------------------------- The Borrower will not, and will not permit any of its Subsidiaries to, purchase, hold or acquire (including pursuant to any merger with any Person that was not a wholly-owned Subsidiary of the Borrower prior to such 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, except: (a) Permitted Investments; (b) investments by the Borrower existing on the date hereof in its Subsidiaries; (c) loans or advances made by the Borrower to any wholly-owned Subsidiary of the Borrower or made by any Subsidiary of the Borrower to the Borrower or any other wholly-owned Subsidiary of the Borrower; (d) Guarantees constituting Indebtedness permitted by Section 6.01; (e) Investments in addition to those permitted by clauses (a) through (d) above, provided that the aggregate amount of such additional investments shall not exceed 15% of Consolidated Net Worth; and further provided, that any such investments shall permanently reduce the amount permitted under this paragraph (e) whether or not such investment is subsequently sold or otherwise realized on; -36- (f) Other investments at any time in an amount not to exceed the amount of the Restricted Payments Basket provided pursuant to Section 6.06 at such time, provided that the Restricted Payments Basket shall be reduced by the amount of any such investment; (g) Up to an aggregate of $1,000,000 at any one time outstanding in loans to employees of the Borrower and its Subsidiaries; and (h) Acquisitions of Persons who will be, immediately after such investment, a wholly-owned Subsidiary of the Borrower; provided that prior to the consummation of any investment by the Borrower or any Subsidiary in a Person which, as a result thereof, becomes a wholly-owned Subsidiary of the Borrower, the Borrower will be required to demonstrate to the satisfaction of the Administrative Agent in its sole discretion that the covenants set forth in Section 6.01(f) and Section 6.13 are satisfied, and will thereafter until the Maturity Date be satisfied, on a proforma basis after giving effect to each such investment. SECTION 6.05. Hedging Agreements. The Borrower will not, and will not ------------------- permit any of its Subsidiaries to, enter into any Hedging Agreement, other than Hedging Agreements entered into in the ordinary course of business to hedge or mitigate risks to which the Borrower or any Subsidiary is exposed in the conduct of its business or the management of its liabilities. SECTION 6.06. Restricted Payments. The Borrower will not: -------------------- (a) Declare or pay any dividend (other than dividends payable solely in common stock of the Borrower); (b) Make any other payment or distribution on or with respect to any class of the Borrower's capital stock (other than distributions consisting solely of common stock of the Borrower); or (c) Acquire, redeem or retire, or permit any Subsidiary to acquire, any shares of the Borrower's capital stock or any option, warrant or other right to acquire shares of capital stock of the Borrower, including payments into a sinking fund or other similar deposit, (unless acquired, redeemed or retired solely in exchange for common stock of the Borrower) (all such non-permitted declarations, payments, distributions, acquisitions, redemptions and retirements covered by foregoing clauses (a) through (c) being referred to as "Restricted Payments"): unless immediately after giving effect thereto (i) the sum of all Restricted Payments during the period from March 31, 1997 to and including the date of the Restricted Payment in question would not exceed the sum of: (A) $7,500,000, plus (B) 50% of the cumulative Consolidated Net Income (or minus 100% of any deficit) for the period beginning on April 1, 1997 and ending on the date of such Restricted Payment, plus (C) the net cash proceeds from the issuance or sale of common stock of the Company after March 31, 1997 (the sum of (A), (B) and (C), the "Restricted Payments Basket"), (ii) no Default or Event of Default exists or would exist, and (iii) the Company could incur at least $1.00 of additional Indebtedness pursuant to Section 6.01. -37- SECTION 6.07. Transactions with Affiliates. The Borrower will not, and ----------------------------- will not permit any of its Subsidiaries 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) in the ordinary course of business at prices and on terms and conditions not less favorable to the Borrower or such Subsidiary than could be obtained on an arm's-length basis from unrelated third parties, (b) transactions between or among the Borrower and its wholly owned Subsidiaries not involving any other Affiliate and (c) any Restricted Payment permitted by Sections 6.06(c)and (d). SECTION 6.08. Restrictive Agreements. The Borrower will not, and will not ----------------------- permit any of its Subsidiaries to, directly or indirectly, enter into, incur or permit to exist any agreement or other arrangement that prohibits, restricts or imposes any condition upon (a) the ability of the 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 such 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 the Borrower or any other of its Subsidiaries or to Guarantee Indebtedness of the Borrower or any such Subsidiary or to transfer any of its property or assets to the Borrower or any other Subsidiary; provided that (i) the foregoing shall not apply to restrictions and conditions - -------- imposed by law, by this Agreement or by the Note Purchase Agreement as in effect on the Effective Date, (ii) the foregoing shall not apply to restrictions and conditions existing on the date hereof identified on Schedule 6.08 (but shall ------------- apply to any extension or renewal of, or any amendment or modification expanding the scope of, any such restriction or condition), (iii) 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 (iv) clause (a) of the foregoing shall not apply to customary provisions in leases and other contracts restricting the assignment thereof. SECTION 6.09. Limitation on Subsidiary Indebtedness. The Borrower will -------------------------------------- not permit any of its Subsidiaries to create, assume or incur, or in any manner be or become liable in respect of, any Indebtedness, or issue any preferred stock, except for (i) Indebtedness or preferred stock of such Subsidiary outstanding as of the Effective Date and disclosed pursuant to Section 6.01, or any refinancing, extension, renewal or refunding of any such Indebtedness or preferred stock without materially more onerous covenants and restrictions and without increase in the aggregate principal amount thereof as of the date of any such refinancing, extension, renewal or refunding; (ii) Indebtedness or preferred stock of any such Subsidiary issued to the Borrower or to a wholly- owned Subsidiary of the Borrower; and (iii) other Indebtedness or preferred stock of any such Subsidiary, which when combined with outstanding Indebtedness or the aggregate liquidation value of preferred stock of all of the Borrower's Subsidiaries previously incurred and outstanding under this paragraph (other than Indebtedness incurred under Clause (ii) above), does not exceed 10% of the Consolidated Net Worth of the Borrower's Subsidiaries. SECTION 6.10. Sale and Leaseback; Sale of Assets. Borrower will not, and ---------------------------------- will not permit any of its Subsidiaries to, enter into any arrangement, directly or indirectly, with any Person whereby it shall sell, assign, lease, or otherwise transfer and dispose of, whether in one transaction or in a series of related transactions, any substantial portion of their properties, business or assets (including without limitation trade receivables and leasehold interest, but excluding cash and cash equivalents, or inventory), whether now owned or hereafter acquired, provided that it may dispose of assets (i) if the book value of assets are -38- sold or disposed of in any period of 12 consecutive months shall not exceed 5% of Consolidated Assets of the Borrower as of the beginning of such 12-month period, (ii) if the book value of assets are sold or disposed of in any 36 consecutive month period shall not exceed 10% of Consolidated Assets of the Borrower as of the beginning of such 36-month period, or (iii) pursuant to transactions among the Borrower and its wholly-owned Subsidiaries. The Borrower shall not enter into, or permit any of its Subsidiaries to enter into, any sale and leaseback arrangement. SECTION 6.11. Compromise of Accounts Receivable. The Borrower will not, ---------------------------------- and will not allow any of its Subsidiaries to, compromise or adjust accounts receivable other than in the ordinary course of their business. SECTION 6.12. Prepayment. The Borrower will not, and will not permit any ----------- of its Subsidiaries to, make any optional payment or prepayment or redemption, defeasance, purchase of the Notes (other than Indebtedness under this Agreement) or make any mandatory prepayment of the Notes except for regularly scheduled mandatory prepayments under the Note Purchase Agreement in effect on the Effective Date (any such mandatory payment, a "Non-scheduled Mandatory Prepayment"), provided that the Borrower may make optional prepayments or Non- Scheduled Mandatory Prepayments of the Notes so long as no proceeds of Loans hereunder are used to make such optional prepayments or Non-Scheduled Mandatory Prepayments. SECTION 6.13. Financial Covenants. The Borrower will not: -------------------- (a) for each period consisting of four consecutive fiscal quarters, allow EBITDA of the Borrower to be less than 300% of the sum of Consolidated Interest Expense on the last day of each such fiscal quarter; (b) allow Consolidated Net Worth of the Borrower to be less than $52,500,000, plus 50% of Consolidated Net Income of the Borrower (excluding losses) subsequent to March 31, 1996, calculated at the end of each quarterly fiscal period; (c) allow there to be any Loans outstanding under this Agreement for a period of at least 30 consecutive days during each fiscal year. ARTICLE VII Events of Default ----------------- If any of the following events ("Events of Default") shall occur: ----------------- (a) the Borrower shall fail to pay any principal of any Loan or any reimbursement obligation in respect of any LC Disbursement 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) the Borrower shall fail to pay any interest on any Loan or any fee or any other amount (other than an amount referred to in clause (a) of this Article) -39- payable under this Agreement, when and as the same shall become due and payable, and such failure shall continue unremedied for a period of five days; (c) any representation or warranty made or deemed made by or on behalf of the Borrower or any of its Subsidiaries in or in connection with this Agreement or any amendment or modification hereof or waiver hereunder, or in any report, certificate, financial statement or other document furnished pursuant to or in connection with this Agreement or any amendment or modification hereof or waiver hereunder, shall prove to have been incorrect in any material respect when made or deemed made; (d) the Borrower shall fail to observe or perform any covenant, condition or agreement contained in Section 5.02, 5.03 (with respect to the Borrower's existence) or 5.08 or in Article VI; (e) the Borrower shall fail to observe or perform any covenant, contained in Article V of this Agreement (other than those specified in clause (a), (b) or (d) of this Article), and such failure shall continue unremedied for a period of 30 days after notice thereof from the Administrative Agent to the Borrower (which notice will be given at the request of any Lender); (f) the Borrower shall fail to observe and perform any covenant, condition or agreement contained in this Agreement (other than those specified in Clause (a), (b), (d) or (e) of this Article), and such failure shall continue unremedied for a period of thirty (30) days after notice thereof from the Administrative Agent to the Borrower of (which notice will be given at the request of any Lender); (g) (i) the Borrower or any of its Subsidiaries shall fail to make any payment (whether of principal or interest and regardless of amount) in respect of any Indebtedness in an individual principal amount of $2,000,000 or in an aggregate principal amount of $3,000,000, when and as the same shall become due and payable or (ii) the Borrower or any of its Subsidiaries is in default in the performance or compliance with any term in the Note Purchase Agreement and such default continues beyond any period of grace provided with respect thereto, or, in the case of a default in the payment of any principal or Make-Whole Amount or Modified Make-Whole Amount (as such terms are defined in the Note Purchase Agreement) on any Note, such default continues for 2 days; (h) any event or condition occurs that results in any Indebtedness in an individual principal amount of $2,000,000 or in an aggregate principal amount of $3,000,000 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 such Indebtedness or any trustee or agent on its or their behalf to cause any such Indebtedness to become due, or to require the prepayment, repurchase, redemption or defeasance thereof, prior to its scheduled maturity; provided -------- that this clause (h) 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; (i) an involuntary proceeding shall be commenced or an involuntary petition shall be filed seeking (i) liquidation, reorganization or other relief -40- in respect of the Borrower or any of its Subsidiaries 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 the Borrower or any of its Subsidiaries or for a substantial part of its assets, and, in any such case, such proceeding or petition shall continue undismissed for 30 days or an order or decree approving or ordering any of the foregoing shall be entered; (j) the Borrower or any of its Subsidiaries 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 the Borrower or any of its Subsidiaries 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; (k) the Borrower or any of its Subsidiaries shall become unable, admit in writing or fail generally to pay its debts as they become due; (l) one or more judgments for the payment of money in an aggregate amount in excess of $2,500,000 shall be rendered against the Borrower, any of its Subsidiaries or any combination thereof and the same shall remain undischarged for a period of 60 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 the Borrower or any of its Subsidiaries to enforce any such judgment; (m) an ERISA Event shall have occurred that, in the opinion of the Required Lenders, when taken together with all other ERISA Events that have occurred, could reasonably be expected to result in a Material Adverse Effect; (n) any material provision of any Loan Document is declared null and void or the enforceability thereof is contested by the Borrower or any of its Subsidiaries or any Governmental authority; or (o) there are substantial changes in senior management of the Borrower and the former senior managers have not been replaced by other senior managers acceptable to the Required Lenders; then, and in every such event (other than an event with respect to the Borrower described in clause (i) or (j) of this Article), and at any time thereafter during the continuance of such event, the Administrative Agent may, and at the request of the Required Lenders (or with respect to Paragraphs (a), (b) or (c) above, at the request of any Lender) shall, by notice to the Borrower, take either or both of the following actions, at the same or different times: (i) terminate the Commitments, and thereupon the Commitments shall terminate immediately, and (ii) declare the Loans then outstanding to be due and payable in whole (or in -41- 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 the 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 the Borrower; and in case of any event with respect to the Borrower described in clause (i) or (j) of this Article, the Commitments shall automatically terminate and the principal of the Loans then outstanding, together with accrued interest thereon and all fees and other obligations of the 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 the Borrower. ARTICLE VIII The Administrative Agent ------------------------ Each of the Lenders and the Issuing Bank hereby irrevocably appoints the Administrative Agent as its agent and authorizes the Administrative Agent to take such actions on its behalf and to exercise such powers as are delegated to the Administrative Agent by the terms hereof, together with such actions and powers as are reasonably incidental thereto. The bank serving as the Administrative Agent hereunder shall have the same rights and powers in its capacity as a Lender as any other Lender and may exercise the same as though it were not the Administrative Agent, and such bank and its Affiliates may accept deposits from, lend money to and generally engage in any kind of business with the Borrower or any Subsidiary or other Affiliate thereof as if it were not the Administrative Agent hereunder. The Administrative Agent shall not have any duties or obligations except those expressly set forth herein. Without limiting the generality of the foregoing, (a) the Administrative Agent shall not be subject to any fiduciary or other implied duties, regardless of whether a Default has occurred and is continuing, (b) the Administrative Agent shall not have any duty to take any discretionary action or exercise any discretionary powers, except discretionary rights and powers expressly contemplated hereby that the Administrative Agent is required to exercise in writing by the Required Lenders (or such other number or percentage of the Lenders as shall be necessary under the circumstances as provided in Section 9.02), and (c) except as expressly set forth herein, the Administrative Agent shall not have any duty to disclose, and shall not be liable for the failure to disclose, any information relating to the Borrower or any of its Subsidiaries that is communicated to or obtained by the bank serving as Administrative Agent or any of its Affiliates in any capacity. The Administrative Agent shall not be liable for any action taken or not taken by it with the consent or at the request of the Required Lenders (or such other number or percentage of the Lenders as shall be necessary under the circumstances as provided in Section 9.02) or in the absence of its own gross negligence or wilful misconduct. The Administrative Agent shall be deemed not to have knowledge of any Default unless and until written notice thereof is given to the Administrative Agent by the Borrower or a Lender, and the Administrative Agent shall not be responsible for or have any duty to ascertain or inquire into (i) any statement, warranty or representation made in or in connection with this Agreement, (ii) the contents of any certificate, report or other document delivered hereunder or in connection herewith, (iii) the -42- performance or observance of any of the covenants, agreements or other terms or conditions set forth herein, (iv) the validity, enforceability, effectiveness or genuineness of this Agreement or any other agreement, instrument or document, or (v) the satisfaction of any condition set forth in Article IV or elsewhere herein, other than to confirm receipt of items expressly required to be delivered to the Administrative Agent. The Administrative Agent shall be entitled to rely upon, and shall not incur any liability for relying upon, any notice, request, certificate, consent, statement, instrument, document or other writing believed by it to be genuine and to have been signed or sent by the proper Person. The Administrative Agent also may rely upon any statement made to it orally or by telephone and believed by it to be made by the proper Person, and shall not incur any liability for relying thereon. The Administrative Agent may consult with legal counsel (who may be counsel for the Borrower), independent accountants and other experts selected by it, and shall not be liable for any action taken or not taken by it in accordance with the advice of any such counsel, accountants or experts. The Administrative Agent may perform any and all its duties and exercise its rights and powers by or through any one or more sub-agents appointed by the Administrative Agent. The Administrative Agent and any such sub-agent may perform any and all its duties and exercise its rights and powers through their respective Related Parties. The exculpatory provisions of the preceding paragraphs shall apply to any such sub-agent and to the Related Parties of the Administrative Agent and any such sub-agent, and shall apply to their respective activities in connection with the syndication of the credit facilities provided for herein as well as activities as Administrative Agent. Subject to the appointment and acceptance of a successor Administrative Agent as provided in this paragraph, the Administrative Agent may resign at any time by notifying the Lenders, the Issuing Bank and the Borrower. Upon any such resignation, the Required Lenders shall have the right, in consultation with the Borrower, to appoint a successor. If no successor shall have been so appointed by the Required Lenders and shall have accepted such appointment within 30 days after the retiring Administrative Agent gives notice of its resignation, then the retiring Administrative Agent may, on behalf of the Lenders and the Issuing Bank, appoint a successor Administrative Agent which shall be a bank with an office in New York, New York, or an Affiliate of any such bank. Upon the acceptance of its appointment as Administrative Agent hereunder by a successor, such successor shall succeed to and become vested with all the rights, powers, privileges and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations hereunder. The fees payable by the Borrower to a successor Administrative Agent shall be the same as those payable to its predecessor unless otherwise agreed between the Borrower and such successor. After the Administrative Agent's resignation hereunder, the provisions of this Article and Section 9.03 shall continue in effect for the benefit of such retiring Administrative Agent, its sub-agents and their respective Related Parties in respect of any actions taken or omitted to be taken by any of them while it was acting as Administrative Agent. Each Lender acknowledges that it has, independently and without reliance upon the Administrative Agent or any other Lender and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance upon the Administrative Agent or any other Lender and based on such documents and -43- information as it shall from time to time deem appropriate, continue to make its own decisions in taking or not taking action under or based upon this Agreement, any related agreement or any document furnished hereunder or thereunder. ARTICLE IX Miscellaneous ------------- SECTION 9.01. Notices. Except in the case of notices and other -------- communications expressly permitted to be given by telephone, 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 telecopy, as follows: (a) if to the Borrower, to it at One Franklin Plaza, Burlington, N.J. 08016-4907, Attention of Gregory Winsky (Telecopy No. (609) 386-2666), with a copy to Rosenman & Colin LLP, 575 Madison Avenue, New York, N.Y. 10022, Attention: Edmund H. Cohen, Esq., (Telecopy No. (212) 940-8776); (b) if to the Administrative Agent, to The Chase Manhattan Bank, 380 Madison Avenue, New York, NY 10017-2591, Attention Franklin Electronic Publishers, Incorporated Relationship Manager (Telecopy No. (212) 622- 4406); (c) if to the Issuing Bank, to it at The Chase Manhattan Bank, 380 Madison Avenue, New York, NY 10017-2591, Attention Franklin Electronic Publishers, Incorporated Relationship Manager (Telecopy No. (212) 622- 4406); (d) if to any other Lender, to it at its address (or telecopy number) set forth in its Administrative Questionnaire. Any party hereto may change its address or telecopy number for notices and other communications hereunder by notice to the other parties hereto. All notices and other communications given to any party hereto in accordance with the provisions of this Agreement shall be deemed to have been given on the date of receipt. SECTION 9.02. Waivers; Amendments. (a) No failure or delay by the -------------------- Administrative Agent, the Issuing Bank or any Lender in exercising any right or power hereunder 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 the Administrative Agent, the Issuing Bank and the Lenders hereunder are cumulative and are not exclusive of any rights or remedies that they would otherwise have. No waiver of any provision of this Agreement or consent to any departure by the 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 Default, regardless of whether the Administrative Agent, any Lender or the Issuing Bank may have had notice or knowledge of such Default at the time. -44- (b) Neither this Agreement nor any provision hereof may be waived, amended or modified except pursuant to an agreement or agreements in writing entered into by the Borrower and the Required Lenders or by the Borrower and the Administrative Agent with the consent of the Required Lenders; provided that no -------- such agreement shall (i) increase the Commitment of any Lender without the written consent of such Lender, (ii) increase the aggregate amount of all Lenders' Commitments, (iii) reduce the principal amount of any Loan or LC Disbursement or reduce the rate of interest thereon, or reduce any fees payable hereunder, without the written consent of each Lender affected thereby, (iv) postpone the scheduled date of payment of the principal amount of any Loan or LC Disbursement, or any interest thereon, or any fees payable hereunder, or reduce the amount of, waive or excuse any such payment, or postpone the scheduled date of expiration of any Commitment, without the written consent of each Lender affected thereby, (v) change Section 2.16(b) or (c) in a manner that would alter the pro rata sharing of payments required thereby, without the written consent of each Lender, (vi) consent to an amendment to or waiver of Sections 6.01, 6.03, 6.04, 6.06, 6.07 or 6.13, or (vii) change any of the provisions of this Section or the definition of "Required Lenders" or any other provision hereof specifying the number or percentage of Lenders required to waive, amend or modify any rights hereunder or make any determination or grant any consent hereunder, without the written consent of each Lender; provided further that no -------- ------- such agreement shall amend, modify or otherwise affect the rights or duties of the Administrative Agent or the Issuing Bank hereunder without the prior written consent of the Administrative Agent or the Issuing Bank, as the case may be. SECTION 9.03. Expenses; Indemnity; Damage Waiver. (a) The Borrower shall ----------------------------------- pay (i) all reasonable out-of-pocket expenses incurred by the Administrative Agent and its Affiliates, including the reasonable fees, charges and disbursements of counsel for the Administrative Agent, in connection with the syndication of the credit facilities provided for herein, the preparation and administration of this Agreement or any amendments, modifications or waivers of the provisions hereof (whether or not the transactions contemplated hereby or thereby shall be consummated), (ii) all reasonable out-of-pocket expenses incurred by the Issuing Bank 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 the Administrative Agent, the Issuing Bank or any Lender, including the fees, charges and disbursements of any counsel for the Administrative Agent, the Issuing Bank or any Lender, in connection with the enforcement or protection of its rights in connection with this Agreement, 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. (b) The Borrower shall indemnify the Administrative Agent, the Issuing Bank and each Lender, and each Related Party of any of the foregoing Persons (each such Person being called an "Indemnitee") against, and hold each ---------- Indemnitee harmless from, any and all losses, claims, damages, 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 this Agreement or any agreement or instrument contemplated hereby, the performance by the parties hereto of their respective obligations hereunder 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 the -45- Issuing Bank 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 the Borrower or any of its Subsidiaries, or any Environmental Liability related in any way to the 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, as to any Indemnitee, be available to the extent that such losses, claims, damages, 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 wilful misconduct of such Indemnitee. (c) To the extent that the Borrower fails to pay any amount required to be paid by it to the Administrative Agent or the Issuing Bank under paragraph (a) or (b) of this Section, each Lender severally agrees to pay to the Administrative Agent or the Issuing Bank, as the case may be, such Lender's Applicable Percentage (determined as of the time that the applicable unreimbursed expense or indemnity payment is sought) of such unpaid amount; provided that the unreimbursed expense or indemnified loss, claim, damage, - -------- liability or related expense, as the case may be, was incurred by or asserted against the Administrative Agent or the Issuing Bank in its capacity as such. (d) To the extent permitted by applicable law, the 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. (e) All amounts due under this Section shall be payable promptly after written demand therefor. SECTION 9.04. 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 (including any Affiliate of the Issuing Bank that issues any Letter of Credit), except that the Borrower may not assign or otherwise transfer any of its rights or obligations hereunder without the prior written consent of each Lender (and any attempted assignment or transfer by the 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 (including any Affiliate of the Issuing Bank that issues any Letter of Credit) and, to the extent expressly contemplated hereby, the Related Parties of each of the Administrative Agent, the Issuing Bank and the Lenders) any legal or equitable right, remedy or claim under or by reason of this Agreement. (b) Any 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 Commitment and the Loans at the time owing to it); provided that (i) except -------- in the case of an assignment to a Lender or an Affiliate of a Lender, each of the Borrower and the Administrative Agent (and, in the case of an assignment of all or a portion of a Commitment or any Lender's obligations in respect of its LC Exposure, the Issuing Bank) must give their -46- prior written consent to such assignment (which consent shall not be unreasonably withheld), (ii) except in the case of an assignment to a Lender or an Affiliate of a Lender or an assignment of the entire remaining amount of the assigning Lender's Commitment, the amount of the Commitment of the assigning Lender subject to each such assignment (determined as of the date the Assignment and Acceptance with respect to such assignment is delivered to the Administrative Agent) shall not be less than $5,000,000 unless each of the Borrower and the Administrative Agent otherwise consent, (iii) each partial assignment shall be made as an assignment of a proportionate part of all the assigning Lender's rights and obligations under this Agreement, (iv) the parties to each assignment shall execute and deliver to the Administrative Agent an Assignment and Acceptance, together with a processing and recordation fee of $3,500, and (v) the assignee, if it shall not be a Lender, shall deliver to the Administrative Agent an Administrative Questionnaire; and provided further that ---------------- any consent of the Borrower otherwise required under this paragraph shall not be required if an Event of Default under clause (i) or (j) of Article VII has occurred and is continuing. Subject to acceptance and recording thereof pursuant to paragraph (d) of this Section, from and after the effective date specified in each Assignment and Acceptance the assignee thereunder shall be a party hereto and, to the extent of the interest assigned by such Assignment and Acceptance, have the rights and obligations of a Lender under this Agreement, and the assigning Lender thereunder shall, to the extent of the interest assigned by such Assignment and Acceptance, be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all of the assigning Lender's rights and obligations under this Agreement, such Lender shall cease to be a party hereto but shall continue to be entitled to the benefits of Sections 2.15, 2.16, 2.17 and 9.03). Any assignment or transfer by a 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 such Lender of a participation in such rights and obligations in accordance with paragraph (e) of this Section. (c) The Administrative Agent, acting for this purpose as an agent of the Borrower, shall maintain at one of its offices in The City of New York a copy of each Assignment and Acceptance delivered to it and a register for the recordation of the names and addresses of the Lenders, and the Commitment of, and principal amount of the Loans and LC Disbursements owing to, each Lender pursuant to the terms hereof from time to time (the "Register"). The entries in -------- the Register shall be conclusive, and the Borrower, the Administrative Agent, the Issuing Bank and the Lenders may treat each Person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement, notwithstanding notice to the contrary. The Register shall be available for inspection by the Borrower, the Issuing Bank and any Lender, at any reasonable time and from time to time upon reasonable prior notice. (d) Upon its receipt of a duly completed Assignment and Acceptance executed by an assigning Lender and an assignee, the assignee's completed Administrative Questionnaire (unless the assignee shall already be a Lender hereunder), the processing and recordation fee referred to in paragraph (b) of this Section and any written consent to such assignment required by paragraph (b) of this Section, the Administrative Agent shall accept such Assignment and Acceptance and record the information contained therein in the Register. No assignment shall be effective for purposes of this Agreement unless it has been recorded in the Register as provided in this paragraph. (e) Any Lender may, without the consent of the Borrower, the Administrative Agent or the Issuing Bank, sell participations to one or more banks or other -47- entities (a "Participant") in all or a portion of such Lender's rights and ----------- obligations under this Agreement (including all or a portion of its Commitment and the Loans owing to it); provided that (i) such Lender's obligations under -------- this Agreement shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations and (iii) the Borrower, the Administrative Agent, the Issuing Bank and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement. Any agreement or instrument pursuant to which a Lender sells such a participation shall provide that such Lender shall retain the sole right to enforce this Agreement and to approve any amendment, modification or waiver of any provision of this Agreement; provided that such agreement or instrument may provide that -------- such Lender will not, without the consent of the Participant, agree to any amendment, modification or waiver described in the first proviso to Section 9.02(b) that affects such Participant. Subject to paragraph (f) of this Section, the Borrower agrees that each Participant shall be entitled to the benefits of Sections 2.15, 2.16 and 2.17 to the same extent as if it were a Lender and had acquired its interest by assignment pursuant to paragraph (b) of this Section. To the extent permitted by law, each Participant also shall be entitled to the benefits of Section 9.08 as though it were a Lender, provided such Participant agrees to be subject to Section 2.16(c) as though it were a Lender. (f) A Participant shall not be entitled to receive any greater payment under Section 2.15 or 2.17 than the applicable 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 the Borrower's prior written consent. (g) Any 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 such Lender, including any pledge or assignment to secure obligations to a Federal Reserve Bank, 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 a Lender from any of its obligations hereunder or substitute any such pledgee or assignee for such Lender as a party hereto. SECTION 9.05. Survival. All covenants, agreements, representations and --------- warranties made by the Borrower herein and in the certificates or other instruments delivered in connection with or pursuant to this Agreement shall be considered to have been relied upon by the other parties hereto and shall survive the execution and delivery of this Agreement 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 the Administrative Agent, the Issuing Bank or any Lender may have had notice or knowledge of any 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 Commitments have not expired or terminated. The provisions of Sections 2.15, 2.16, 2.17 and 9.03 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 Commitments or the termination of this Agreement or any provision hereof. SECTION 9.06. Counterparts; Integration; Effectiveness. This Agreement ----------------------------------------- may be executed in counterparts (and by different parties hereto on different counterparts), each of -48- which shall constitute an original, but all of which when taken together shall constitute a single contract. This Agreement and any separate letter agreements with respect to fees payable to the Administrative Agent 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 the Administrative Agent and when the Administrative Agent 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 telecopy shall be effective as delivery of a manually executed counterpart of this Agreement. SECTION 9.07. Severability. Any provision of this Agreement 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 hereof; and the invalidity of a particular provision in a particular jurisdiction shall not invalidate such provision in any other jurisdiction. SECTION 9.08. Right of Setoff. If an Event of Default shall have occurred ---------------- and be continuing, each 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 the Borrower against any of and all the obligations of the Borrower now or hereafter existing under this Agreement held by such Lender, irrespective of whether or not such Lender shall have made any demand under this Agreement 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 9.09. Governing Law; Jurisdiction; Consent to Service of Process. ----------------------------------------------------------- (a) This Agreement shall be construed in accordance with and governed by the law of the State of New York. (b) The Borrower hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of the Supreme Court of the State of New York sitting in New York County and of the United States District Court of the Southern District of New York, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement, 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 New York 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 shall affect any right that the Administrative Agent, the Issuing Bank or any Lender may otherwise have to bring any action or proceeding relating to this Agreement against the Borrower or its properties in the courts of any jurisdiction. -49- (c) The 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 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 9.01, provided that service of process by telecopy is not consented to by any party hereto. Nothing in this Agreement will affect the right of any party to this Agreement to serve process in any other manner permitted by law. SECTION 9.10. 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 OR THE TRANSACTIONS CONTEMPLATED HEREBY (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 9.11. Headings. Article and Section headings 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 9.12. Confidentiality. Each of the Administrative Agent, the ---------------- Issuing Bank and the Lenders agrees to maintain the confidentiality of the Information (as defined below), except that Information may be disclosed (a) to its and its Affiliates' Related Parties (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 the enforcement of rights hereunder, (f) subject to an agreement containing provisions substantially the same as those of this Section, to any assignee of or Participant in, or any prospective assignee of or Participant in, any of its rights or obligations under this Agreement, (g) with the consent of the 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 the Administrative Agent, the Issuing Bank or any Lender on a nonconfidential basis from a source other than the Borrower. For the purposes of this Section, "Information" means all information received from the Borrower relating to the - ------------ Borrower or its business, other than any such information that is available to the Administrative Agent, the Issuing Bank or any Lender on a nonconfidential basis prior to -50- disclosure by the Borrower; provided that, in the case of information received -------- from the Borrower 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 9.13. 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 the 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 such Lender. -51- 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. FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED By ----------------------------------------- Name: Title: THE CHASE MANHATTAN BANK, individually and as Administrative Agent, By ----------------------------------------- Name: Title: SUMMIT BANK By ----------------------------------------- Name: Title: -52- EXHIBIT A [FORM OF] ASSIGNMENT AND ACCEPTANCE Reference is made to the Credit Agreement dated as of March 27, 1997 (as amended and in effect on the date hereof, the "Credit Agreement"), among FRANKLIN ELECTRONIC PUBLISHERS, INC., the Lenders named therein and The Chase Manhattan Bank, as Administrative Agent for the Lenders. Terms defined in the Credit Agreement are used herein with the same meanings. The Assignor named on the reverse hereof hereby sells and assigns, without recourse, to the Assignee named on the reverse hereof, and the Assignee hereby purchases and assumes, without recourse, from the Assignor, effective as of the Assignment Date set forth on the reverse hereof, the interests set forth on the reverse hereof (the "Assigned Interest") in the Assignor's rights and obligations under the Credit Agreement, including, without limitation, the interests set forth on the reverse hereof in the Commitment of the Assignor on the Assignment Date and Revolving Loans owing to the Assignor which are outstanding on the Assignment Date, together with the participations in Letters of Credit and LC Disbursements held by the Assignor on the Assignment Date, but excluding accrued interest and fees to and excluding the Assignment Date. The Assignee hereby acknowledges receipt of a copy of the Credit Agreement. From and after the Assignment Date (i) the Assignee shall be a party to and be bound by the provisions of the Credit Agreement and, to the extent of the Assigned Interest, have the rights and obligations of a Lender thereunder and (ii) the Assignor shall, to the extent of the Assigned Interest, relinquish its rights and be released from its obligations under the Credit Agreement. This Assignment and Acceptance is being delivered to the Administrative Agent together with, if the Assignee is not already a Lender under the Credit Agreement, an Administrative Questionnaire in the form supplied by the Administrative Agent, duly completed by the Assignee. The [Assignee/Assignor] shall pay the fee payable to the Administrative Agent pursuant to Section 9.04(b) of the Credit Agreement. This Assignment and Acceptance shall be governed by and construed in accordance with the laws of the State of New York. Date of Assignment: Legal Name of Assignor: Legal Name of Assignee: Assignee's Address for Notices: Effective Date of Assignment ("Assignment Date"): -53- ========================================================================================= Facility - --------- Principal Amount Assigned Percentage Assigned of (and identifying information Facility/Commitment (set as to individual Competitive forth, to at least 8 ----------- decimals, as a percentage Loans of the Facility and the ----- aggregate Commitments of all Lenders thereunder) ---------- Commitment Assigned: $ % - ----------------------------------------------------------------------------------------- Revolving Loans: - ----------------------------------------------------------------------------------------- Competitive Loans: =========================================================================================
The terms set forth above and on the reverse side hereof are hereby agreed to: [Name of Assignor] , as Assignor ------------------ By: -------------------------------- Name: Title: [Name of Assignee] , as Assignee ------------------ By: --------------------------------- Name: Title: -54- The undersigned hereby consent to the within assignment: 8/ - [Name of Borrower], The Chase Manhattan Bank, as Administrative Agent, By: By: ---------------------- ------------------------ Name: Name: Title: Title: The Chase Manhattan Bank, as Issuing Bank By: ------------------------ Name: Title: - ---------------------- / / Consents to be included to the extent required by Section 9.04(b) of the Credit Agreement. -i- EX-10.01 4 EMPLOYMENT AGREEMENT AMENDED AND RESTATED EMPLOYMENT AGREEMENT, effective as of May 1, 1996, by and between FRANKLIN ELECTRONIC PUBLISHERS, INC. ("Franklin"), a Pennsylvania corporation with its office at One Franklin Plaza, Burlington, New Jersey 08016, and MORTON E. DAVID ("Employee"), an individual residing at 33 Stonebridge Road, Montclair, New Jersey 07042. BACKGROUND ---------- Franklin wishes to assure itself of the continued services of Employee for the period provided in this Employment Agreement, and Employee is willing to serve in the employ of Franklin for said period, subject to and upon the terms hereinafter provided. TERMS OF EMPLOYMENT ------------------- The parties agree as follows: 1. Employment. ---------- A. Franklin hereby employs Employee as its Chief Executive Officer for the period (the "Employment Period") commencing on April 1, 1996 and ending on March 31, 2001, unless sooner terminated in accordance with this Employment Agreement. Employee hereby accepts such employment, agrees to be responsible for the overall management and supervision of all of the operations and activities of Franklin and its subsidiaries, agrees to perform such other services of a senior executive nature concomitant with his positions and offices as shall from time to time be assigned to him by or pursuant to authorization of the Board of Directors of Franklin and agrees, subject to paragraph B of this section 1, diligently and competently to devote all of his business time, efforts, skill and attention to such services. B. Franklin acknowledges that Employee has and may in the future acquire other business interests and that, subject to the restrictions set forth in section 10 hereof, Employee may devote a portion of his business time and attention to such interests. In addition, Franklin acknowledges that Employee may devote a portion of his business time and attention to activities having a charitable, educational or other public interest, purpose. Employee agrees that the portion of his business time and attention devoted to such interests and activities will not exceed 20% of his business time and attention. C. As Chief Executive Officer of Franklin, Employee shall report to and be responsible to only the Board of Directors of Franklin. D. During the Employment Period, Employee shall be nominated by the Board of Directors of Franklin for election as a director at each meeting of its stockholders at which the class of directors to which Employee is assigned is to be elected and, so long as Employee shall be a director of Franklin, Employee shall be elected to and shall serve on such committees of the Board of Directors of Franklin as Employee shall so determine and on such other committees thereof as the Board of Directors of Franklin shall determine; provided, however, that -------- ------- Employee shall not be elected to and shall not serve on the Audit Committee and/or the Compensation and Stock Option Committee of the Board of Directors of Franklin. E. If Franklin shall so request, Employee shall become and shall, during such portion of the Employment Period as Franklin shall request, act as a director and/or officer of any subsidiaries of Franklin without any compensation other than that provided for in section 2 hereof. F. Franklin will provide Employee during the Employment Period with an office, an executive secretary reasonably acceptable to him and other support reasonably appropriate to his duties hereunder. Employee shall not be required to be absent from his office on business more than thirty (30) working days in any year or more than ten (10) consecutive working days at any one time. G. Employee shall be entitled to five (5) weeks vacation in each year during the Employment Period. 2. Compensation. ------------- A. Franklin shall pay to Employee, and Employee shall accept from Franklin, for his services hereunder, a base salary ("Salary"), payable in accordance with Franklin's executive payroll policy as in effect from time to time, for each of the one year periods 2 beginning on April 1, 1996, of no less than $550,000 per annum. B. Franklin shall pay to Employee, as additional compensation for Employee's services hereunder, an amount ("Bonus") equal to two percent (2%) of Franklin's "Net Income Before Taxes" with respect to each fiscal year which shall end during the Employment Period. For the purposes hereof, Franklin's "Net Income Before Taxes" with respect to a fiscal year shall mean the consolidated net income of Franklin and its subsidaries before income, franchise and similar taxes of any jurisdiction, whether federal, state, municipal or foreign, for such fiscal year as included in the financial statements examined and reported upon by Franklin's independent certified public accountants and determined in accordance with generally accepted accounting principles applied on a basis consistent with prior years; provided, however, that (a) all acquisitions of -------- ------- subsidaries or divisions during such fiscal year shall be accounted for on a so- called "purchase" basis regardless of the accounting method used in Franklin's financial statements,(b) any income (or loss) due to a change in the accounting treatment of an item shall not be taken into account in arriving at "Net Income Before Taxes" if in the sole discretion of the Compensation and Stock Option Committee to the Board of Directors of Franklin it so determines, and (c) sales, use and similar taxes shall not be considered as franchise taxes. In connection with each fiscal year of Franklin for which Employee was employed by Franklin on the last day of such fiscal year, Franklin shall pay Bonus to Employee, or on his earlier death, to his estate, within ninety (90) days after the end of such fiscal year notwithstanding any termination of the employment of Employee subsequent to the end of such fiscal year for any reason. C. Franklin shall make available to Employee, to the extent he satisfies the eligibility requirements thereof and to the extent permitted by law, any fringe benefit program in which senior corporate officers are eligible to participate. Fringe benefit programs include, but are not limited to, pension, stock purchase, savings, life insurance, health insurance, hospitalization and other plans and policies authorized now or in the future. Notwithstanding the foregoing, Employee shall not participate in any profit sharing or bonus plan, except for any so-called 401K Plan that may be provided by the Company and except as otherwise provided in this Employment Agreement. 3 D. In addition to any other benefits provided to Employee hereunder, Franklin shall provide Employee with the following: (i) a current model of a luxury automobile (such as a Mercedes Benz, or a similar vehicle) and all related insurance, operating and maintenance expenses; (ii) all reasonable club dues for clubs and other similar organizations which he uses for business purposes; (iii) an annual physical examination; (iv) reasonable consultations with financial and tax advisors or counselors; (v) reimbursement for reasonable legal fees in connection with the execution of this Employment Agreement; and (vi) such other benefits and perquisites as are currently being provided to Employee by Franklin. E. Franklin shall reimburse Employee for all reasonable out-of-pocket expenses incurred by him in connection with the performance of his duties hereunder upon the presentation of appropriate documentation therefor in accordance with Franklin's regular procedures. F. During the Employment Period, Franklin shall cause to be maintained for the benefit of Employee insurance coverage having an aggregate of $1 million face amount on the life of Employee, exclusive of any coverage provided under any group program instituted by Franklin or any of its subsidiaries. Such insurance policy or policies shall be purchased from a life insurance company which shall be acceptable to Employee, which insurance company shall have received such a Best rating of A+ for its most recent rating period prior to the date of Franklin's purchase of such insurance policy or policies. Such insurance policy or policies shall be in the form of guaranteed renewable term life insurance requiring annual premium payments fixed for a term of not more than five years, as determined by Franklin in its sole and absolute discretion. Employee shall be the owner of such policy or policies and shall have the right to designate and change beneficiaries, which right shall be unrestricted except as provided by law. G. On February 1, 1997 and on each February 1 thereafter through and including the February 1 occurring in the calendar year following the calendar year in which the 4 Employment Period shall terminate, Franklin shall pay to Employee, in addition to all other compensation payable to him hereunder, an additional amount equal to the product of (i) the amount reported as income by Franklin on Employee's Form W-2 for the preceding calendar year which is attributable to Franklin's purchase of the life insurance policy or policies pursuant to the provisions of paragraph F of this section 2, (ii) the combined effective federal, state and local tax rate of Employee for such preceding calendar year, and (iii) a fraction the numerator of which shall be one and the denominator of which shall be one minus the combined effective federal, state and local tax rate of Employee for such preceding calendar year. 3. Supplemental Executive Retirement Plan. -------------------------------------- A. If Employee's employment by Franklin shall terminate other than by reason of his death, then, Franklin shall pay to Employee, as additional compensation for his services to Franklin, on the first day of the calendar month following the calendar month in which his employment by Franklin shall terminate and on the first day of each calendar month thereafter, through and including the calendar month in which his death shall occur, an amount ("Monthly Payment") equal to the product of $52.08 and the number of full months of Employee's employment by Franklin which for purposes hereof commenced as of May 1, 1984. For these purposes, employment does not include months, if any, during which Employee receives from Franklin Continuation Pay, as defined in section 6 hereof, or any consulting fees under section 4 hereof; provided, however, that -------- ------- for purposes of calculation of the Monthly Payment, in the case in which Franklin is merged or acquired and Termination Pay is paid to Employee under paragraph C of section 7 hereof, or in the case in which Employee is terminated without cause and Termination Pay is paid to Employee under paragraph B of section 7 hereof, the number of full months of Employee's employment by Franklin shall be increased by the number of months in the remaining term of the Employment Period that are included in the calculation of such Termination Pay, but in no case shall Employee's employment be so increased by more than twenty-four months. B. If Employee has become entitled under the provisions of paragraph A of this 5 section 3 to payments, then, in the event of Employee's death, Franklin shall pay to Employee's beneficiaries named in a writing provided to Franklin, or, if none, to his surviving spouse, or, if none, to his surviving children, per capita, or, if none, to his estate ("Beneficiaries"), as additional compensation for Employee's services to Franklin, on the first day of the calender month following the calendar month in which his death shall occur, and on the first day of each calendar month thereafter, the Monthly Payment. C. If Employee's employment by Franklin shall terminate by reason of Employee's death, then Franklin shall pay to Beneficiaries, as additional compensation for Employee's services to Franklin, on the first day of the calendar month following the calendar month in which his death shall occur, and on the first day of each calendar month thereafter, the Monthly Payment. D. Nothwithstanding the provisions of paragraphs B and C of this section 3, no Monthly Payment under said paragraphs B or C of this section 3 shall be made by Franklin after the later to occur of the date of Employee's death or the date on which one hundred and twenty (120) Monthly Payments have been made pursuant to paragraphs A, B, and/or C of this section 3 to Employee and/or Beneficiaries, E. During the period for which Monthly Payments are paid by Franklin to Employee under this section 3, Franklin shall provide to Employee and/or beneficiaries without charge all family health care benefits then generally being provided to its executives. F. The sole interest of Employee (or, in the event of his death, Beneficiaries) under this section 3 shall be to secure the payments provided for hereunder as and when the same shall become due and payable in accordance with the terms hereof, and neither Employee nor any persons claiming under or through him shall have any right, title or interest in or to any of the assets of Franklin. All amounts payable hereunder shall be paid solely from the general assets of Franklin and Franklin shall not maintain any separate fund or account to provide any payments hereunder. Nothing contained in this Employment Agreement shall be construed to prohibit or to restrict Franklin from paying both the Monthly Payment and any other payment hereunder, including, but not limited to, consulting fees, Continuation Pay, or the Bonus, to Employee or Beneficiaries in connection with any given month during the Employment Period or thereafter. 4. Consulting Period. ----------------- Upon expiration of the Employment Period for any reason other than death, disability or for cause, Franklin agrees to retain Employee as a consultant to Franklin for a sixty (60) month period (the "Consulting Period"), during which Franklin shall pay to Employee $2,000 per month and provide to Employee all fringe benefits, including, but not limited to, all health care benefits, that were provided to Employee under this Employment Agreement except those set forth in subparagraphs (i) through (v) of paragraph D of section 2 hereof. Employee hereby accepts such retention, subject to Employee's right to terminate immediately the Consulting Period at any time on written notice to Franklin. Franklin agrees that any employee stock options theretofore granted to Employee which have not expired on the date that the Consulting Period begins shall remain exercisable through the earlier to occur of the normal expiration date of such options or the end of the Consulting Period. 5. Notice of Breach. ---------------- Franklin and Employee agree that, prior to the termination of the employment of Employee hereunder by reason of the material and continued breach of his obligations under this Employment Agreement, or the material and continued misconduct or gross negligence with respect to his obligations hereunder, or in the case of a claim by Employee of diminution of authority under paragraph C of section 7 hereof, the injured party will give the other party written notice specifying such breach or misconduct or gross negligence or diminution and permitting the party to cure such breach or misconduct or gross negligence or diminution within a period of thirty (30) days after receipt of such notice. 6. Disability or Death. ------------------- (a) If Employee shall be unable substantially to perform the duties required of him pursuant to his office and the provisions of this Employment Agreement due to any injury, illness or disease, as determined by an independent physician mutually acceptable 7 to Franklin and Employee, and such inability shall continue for a period of six (6) consecutive months, either party shall have the right to terminate Employee's employment pursuant to this Employment Agreement on thirty (30) days written notice. On any such termination, Franklin shall (i) continue to pay to Employee the Salary during the remaining term of the Employment Period and a monthly payment related to Bonus (which monthly payment shall be calculated as one-twelfth of the average of the two Bonus payments accrued for the benefit of or paid to Employee for Franklin's two fiscal years preceding the date of such termination ("the Monthly Bonus")) (hereinafter such Salary and the Monthly Bonus shall be collectively referred to as the "Continuation Pay"); provided, -------- however, that any amounts payable under any disability insurance policy or - ------- policies maintained by Franklin shall be credited toward such Continuation Pay; and (ii) pay to Employee, within ninety (90) days of the end of the fiscal year of Franklin in which such termination occurs, a payment related to Bonus equal to two percent (2%) of Franklin's "Net Income Before Taxes" for such fiscal year multiplied by the fraction whose numerator is the number of full or partial months in such fiscal year prior to the date of such termination and whose denominator is twelve(12) (which payment related to Bonus shall be referred to herein as the "Partial Year Bonus Payment"). (b) Upon the termination of the employment of Employee hereunder due to his death prior to the end of the Employment Period, Franklin shall pay Continuation Pay to the estate of Employee during the remaining term of the Employment Period and, within ninety (90) days of the end of the fiscal year of Franklin in which such death occurs, the Partial Year Bonus Payment. 7. Termination. ----------- A. Franklin shall have just and legal cause to terminate the employment of Employee under this Employment Agreement only upon a good faith determination by a majority vote of the members of the Board of Directors of Franklin that the termination of such employment is necessary and in the best interests of Franklin by reason of: (i) the conviction of Employee of a felony under state or federal law, or the equivalent under foreign law; 8 (ii) the material and continued breach by Employee of his obligations under this Employment Agreement, after compliance with the notice provisions of section 5 hereof; or (iii) the material and continued misconduct or gross negligence of Employee with respect to his obligations under this Employment Agreement, after compliance with the notice provisions of section 5 hereof. Notwithstanding the foregoing, no termination of Employee's employment under this Employment Agreement shall diminish or affect in any way Employee's rights to the payments provided for in section 2 and section 3 hereof which have accrued or are accruable to and including the date of such termination, except that no Bonus (or Partial Year Bonus Payment) shall be payable in connection with any fiscal year during which the employment of Employee is terminated by Franklin under this paragraph A of this section 7. B Franklin shall have the right to terminate the employment of Employee under this Employment Agreement in its sole and absolute discretion and without cause, in which case Franklin shall pay to Employee, with no mitigation duty in Employee and no offset with regard to any amounts that the Employee may otherwise earn thereafter, (i) the Salary for the number of months in the remaining term of the Employment Period and a payment related to Bonus, which payment, for purposes of this section 7, shall be calculated as the product of the Monthly Bonus and the number of months in the remaining term of the Employment Period on the date of such termination (hereinafter such Salary component and such Bonus component are collectively referred to as the "Termination Pay"); provided, however, that the number of months remaining in -------- ------- the term of the Employment Period shall be limited to twenty-four (24) months for purposes of this paragraph B of this section 7: and (ii) within ninety (90) days of the end of the fiscal year of Franklin in which such termination occurs, the Partial Year Bonus Payment. Franklin shall pay the Termination Pay to Employee in a lump sum payment within thirty (30) days of such termination except in the case in which Franklin's pro forma current ratio (defined as the ratio of its then current assets to current liabilities after giving effect to the lump sum 9 payment by reducing current assets by such amount) is less than 1:1, in which case the Termination Pay shall be paid on a monthly basis to Employee with monthly payments calculated by dividing the Termination Pay by the number of full months remaining in the Employment Period on the date of such Termination, but not in excess of twenty-four (24) months; provided, however, that should -------- ------- Franklin's pro forma current ratio at any time thereafter equal or exceed 1:1, Franklin shall immediately pay the remainder of the Termination Pay to Employee in a lump sum. C. Employee shall have the right to terminate his employment under this Employment Agreement, after compliance with the notice provisions of section 5 hereof, on the condition that Employee suffers a diminution in his authority in connection with his employment hereunder (which diminution in authority shall be deemed to occur, without Franklin's ability to cure, should Franklin be acquired by or merged into any other entity), in which case Franklin shall pay to Employee, with no mitigation duty in Employee and no offset with regard to any amounts that Employee may otherwise earn thereafter, (i) an amount equal to the Termination Pay, payable in a lump sum within thirty (30) days of such termination; provided, however, that in no case shall the Termination Pay be -------- ------- based on a remaining term of the Employment Period of less than one year, and (ii) within ninety (90) days of the end of the fiscal year of Franklin in which such termination occurs, the Partial Year Bonus Payment. D. In the case of any termination under the provisions of paragraphs B or C of this section 7, all unexercised employee stock options granted to Employee by Franklin shall immediately become exercisable in full and shall remain exercisable until the earlier to occur of (i) the expiration of six (6) months after such termination or (ii) the date specified in the applicable option agreement or option certificate. E. (i) In the event that, as a result of any of the payments or other consideration provided for in paragraphs B and C of this section 7 or otherwise, a tax (an "Excise Tax") shall be imposed upon or threatened to be imposed upon Employee by virtue of the application of section 4999(a) of the Internal Revenue code of 1986 as now in effect or as the same may at any time or from time to time be amended (the "Code") or any similar provisions of state or local tax law, Franklin shall indemnify and hold Employee harmless 10 from and against any and all such taxes (including additions to tax, penalties and interest and additional Excise Taxes, whether applicable to payments made pursuant to paragraph B or C of this section 7 or otherwise) incurred by, or imposed upon, Employee and all expenses arising therefrom. Each indemnity payment to be made by Franklin hereunder shall be increased by the amount of all federal, state and local tax liabilities (including additions to tax, penalties and interest and Excise Taxes) incurred by, or imposed upon, Employee so that (a) the effect of receiving all such payments will be such that Employee shall be held harmless on an after-tax basis from the amount of all Excise Taxes imposed upon payments made pursuant to paragraph B or C of this section 7 or otherwise and all taxes, penalties and interest and Excise Taxes with respect to payments under this paragraph E under the laws of all federal, state and local taxing authorities and (b) Employee shall not incur any out-of-pocket cost or expenses of any kind or nature on account of the Excise Tax and the receipt of the indemnity payments to be made by Franklin. (ii) Each indemnity payment to be made pursuant to this paragraph E shall be payable within fifteen (15) business days of delivery by Employee of a written request (a "Request") for such payment to Franklin (which Request may be made prior to the time Employee is required to file a tax return showing a liability for an Excise Tax or other tax). A request shall set forth the amount of the indemnity payment due to Employee and the manner in which such amount was calculated and Employee shall thereafter submit such other evidence of the indemnity to which Employee is entitled as Franklin shall reasonably request. All such information shall, if Franklin shall so request, be set forth in a statement signed by a prominent accounting firm or a partner thereof and Franklin shall pay all fees and expenses of such accounting firm incurred in the preparation thereof. (iii) Employee agrees to notify Franklin (a) within fifteen (15) business days of being informed by a representative of the Internal Revenue Service (the "Service") or any state or local taxing authority that the Service or such authority intends to assert that an Excise Tax is or may be payable, (b) within fifteen (15) business days of Employee's receipt of a Revenue Agent's report (or similar document) notifying him that 11 an Excise Tax may be imposed and (c) within fifteen (15) business days of Employee's receipt of a Notice of Deficiency under Section 6212 of the Code or similar provision under state or local law which is based in whole or in part upon an Excise Tax and/or a payment made to Employee hereunder. (iv) After receiving any of the aforementioned notices, and subject to Employee's right to control any and all administrative and judicial proceedings with respect to, or arising out of, the examination of Employee's tax returns, except as such proceedings relate to an Excise Tax, Franklin shall have the right (a) to examine all records, files and other information and documentation in Employee's possession or under his control, (b) to be present and to participate, to the extent desired, in all administrative and judicial proceedings with respect to an Excise Tax, including the right to appear and act for Employee at such proceedings in resisting any contentions made by the Service or a state or local taxing authority with respect to an Excise Tax and to file any and all written responses in connection therewith, (c) to forego any and all administrative appeals, proceedings, hearings and conferences with the Service or a state or local taxing authority with respect to an Excise Tax, (d) to compromise or settle any tax examination, audit, contest or litigation in respect to an Excise Tax on Employee's behalf, and (e) to pay any tax increase on Employee's behalf and to control all administrative and judicial proceedings with respect to a claim for refund from the Service or a state or local taxing authority with respect to such tax increase. (v) Franklin shall be solely responsible for all reasonable legal and accounting or other expenses (whether of Employee's representative or of Franklin's representative) incurred in connection with any such administrative or judicial proceedings insofar as they relate to an Excise Tax or other tax increases resulting therefrom and Employee agrees to execute and file, or cause to be executed and filed, such instruments and documents, including, without limitation, waivers, consents and Powers of Attorneys, as Franklin shall reasonably deem necessary or desirable in order to enable it to exercise the rights granted to it hereunder. (vi) Franklin's liability shall not be affected by Employee's failure to give any notice provided for hereunder unless such failure materially prejudices its ability to 12 defend itself as provided for hereunder. Employee may not compromise or settle a claim which is indemnified against hereunder without Franklin's consent, unless Employee can establish by a preponderance of the evidence that Franklin's decision was not made in the good faith belief that a materially more favorable result could be obtained by continuing to defend against the claim (or prosecute a claim for refund). 8. Confidentiality. --------------- Employee agrees, during and after the Employment Period, to keep secret and confidential all information heretofore or hereafter acquired by him concerning Franklin's business and affairs and/or the business and affairs of any of its subsidiaries, and further agrees that he will at no time during the Employment Period or thereafter disclose any such information to any person, firm or corporation, other than to Franklin's directors, officers, employees, auditors and legal advisors, or use the same in any manner other than in connection with Franklin's business and affairs or the business and affairs of any subsidiaries, except (i) as may be required by law, (ii) in connection with Employee's enforcement of his rights under this Employment Agreement, (iii) as to such information as may already have become publicly known other than through Employee in violation of this section 8, and (iv) with Franklin's consent. 9. Inventions. ---------- Employee agrees for no additional consideration to assign to Franklin, immediately upon making or acquiring them, and whether or not conceived or developed during Employee's working hours, any and all inventions, processes, patent rights, letters patent, copyrights, trademarks, trade names, other intangibles and applications therefore, in the United States and all other countries, and any and all rights and interests in, to and under the same which he may legally transfer, now possessed by him or acquired by him prior to or during the Employment Period or during the Consulting Period, relating in any way to the business and activities of, or the equipment, devices, processes and formula connected with, Franklin's business (including businesses and products in the development or research stage) or any other business conducted by Franklin and any 13 subsidiaries and agrees that, upon request, Employee will promptly make all disclosures, execute all instruments and papers and perform all acts reasonably necessary or desired by Franklin to vest and confirm in it, its successors, assigns and nominees, fully and completely, all rights created or contemplated by this section 9 and which may be necessary to enable Franklin, its successors, assigns and nominees to secure and enjoy the full benefits and advantages thereof, it being understood that all such rights are the sole property of Franklin. 10. Noncompete. ---------- A. Employee agrees that, to the extent permitted by law, he shall not, during the Employment Period and for a period of three (3) years commencing on the latter of the date of termination of the Employment Period or the end of the Consulting Period (the "Noncompete Period"), directly or indirectly, own, manage, operate, join or control, or participate in the ownership, management, operation or control of, or be an officer, director or employee of, or a consultant to, or authorize the use of his name by, or be connected in any manner with, any business, firm or corporation, in any town, city, county or state of the United States of America or of any country in the world, which at the time or at any time during the Noncompete Period manufactures, sells, leases or distributes products competitive with any products of Franklin or any subsidiaries, including any products in the research and development stage at Franklin, on the date of the termination of such employment; provided, however, -------- ------- that the Noncompete Period shall be reduced by one month for each month of the Consulting Period, but in no case shall the Noncompete Period be reduced by more than twelve (12) months. B. In the event that any court finds that the territory set forth in paragraph A of this section 10 is too broad in which to enforce this covenant, the territory will be limited to the United States of America. C. In the event that any court finds that the territory set forth in paragraph B of this section 10 is too broad in which to enforce this covenant, the territory will be limited to the portion of the United States of America east of the Mississippi River. D. In the event that any court finds that the territory set forth in paragraph 14 C of this section 10 is too broad in which to enforce this covenant, the territory will be limited to the State of New Jersey. E. The provisions of this section 10 shall not apply to investments by Employee in shares of stock traded on a national securities exchange or on the national over- the-counter market which shall constitute less than three percent (3%) of the outstanding shares of such stock. 11. Equitable Relief. ---------------- Employee acknowledges and agrees that, because of the unique and extraordinary nature of his services, any breach or threatened breach of the provisions of sections 8, 9, or 10 hereof will cause irreparable injury and incalculable harm to Franklin and that Franklin shall, accordingly, be entitled to injunctive or other equitable relief. The foregoing, however, shall not be deemed to waive or to limit in any respect any other right or remedy which Franklin may have with respect to such breach. 12. Indemnification. --------------- Franklin will indemnify Employee (and his legal representatives or other successors) to the fullest extent permitted by the laws of the Commonwealth of Pennsylvania and Franklin's existing certificate of incorporation and by-laws, as the same any be amended from time to time, and Employee shall be entitled to the protection of any insurance policies of self- insurance reserves Franklin may elect to maintain generally for the benefit of its directors and officers, against all costs, charges and expenses whatsoever incurred or sustained by him or his legal representatives in connection with any action, suit or proceeding to which he (or his legal representatives or other successors) may be made a party by reason of his being or having been a director or officer of Franklin and any subsidiaries; provided, however, that Employee -------- ------- shall not be entitled to indemnification hereunder in the event of his fraud or the reckless disregard of his duties hereunder. 15 13. Jurisdiction and Venue. ---------------------- The parties hereby irrevocably consent to the personal jurisdiction of and the propriety of venue in the courts of the State of New Jersey and of any federal court located in such state in connection with any action or proceeding arising out of or relating to this Employment Agreement, any document or instrument delivered pursuant to, in connection with, or simultaneously with this Employment Agreement, or a breach of this Employment Agreement or any such document or instrument. 14. Notices. ------- All notices hereunder shall be in writing and shall be sent by registered or certified mail, return receipt requested, if intended for Franklin, shall be addressed to it, attention of its General Counsel, at the address above, and if intended for Employee, shall be addressed to him at the address above, or at such other address of which Franklin or Employee shall have given notice to the other in the manner herein provided. 15. Entire Agreement. ---------------- The Employment Agreement constitutes the entire understanding between the parties with respect to the matters referred to herein and no waiver or modification to the terms hereof shall be valid unless in writing signed by the party to be charged and only to the extent therein set forth. All prior and contemporaneous agreements and understandings between the parties with respect to the subject matter of this Employment Agreement are superseded by this Employment. 16. Severability. ------------ If any provision in this Employment Agreement is invalid, illegal or unenforceable, the balance of this Employment Agreement shall remain in effect, and if any provision is inapplicable to any person or circumstance, it shall nevertheless remain applicable to all other persons and circumstances. 17. Non-Assignability. ----------------- This Employment Agreement shall be binding upon and inure to the benefit of the parties hereto, their respective heirs, administrators, executors, personal representatives, successors and assigns; provided, however, -------- ------- that this Employment Agreement may not be 16 assigned by any of the parties hereto other than by and among Franklin and any subsidiaries and/or affiliates. 18. Law. ---- This Employment Agreement shall be governed by and construed in accordance with the laws of the State of New Jersey. 19. Withholding. ------------ All payments hereunder shall be subject to withholding and to such other deductions as shall at the time of such payment be required pursuant to any income tax or other law, whether of the United States or any other jurisdiction, and, in the case of payments to the executors or administrators of the Employee's estate, the delivery to Franklin of all necessary tax waivers and other documents. IN WITNESS WHEREOF, the parties hereto have executed this Employment Agreement as of the dates below. FRANKLIN ELECTRONIC PUBLISHERS, INC. BY:_________________________________________________ Gregory J. Winsky, Senior Vice President Date: June 6, 1996 ________________________________________________ Morton E. David Date: June 6, 1996 17 EX-11 5 COMPUTATION OF EARNINGS PER SHARE EXHIBIT 11 FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE
Year Ended March 31, ------------------------------------ 1997 1996 1995 ---------- ----------- ----------- Net income.............................. $6,655,000 $10,366,000 $12,411,000 ========== =========== =========== Earnings Per Share Computation- Primary: Weighted Average Number of Shares Outstanding........................... 8,005,578 7,798,773 7,546,387 Effect of Common Shares issuable Upon Exercise of Dilutive Stock Options and Warrants Net of Shares Assumed to be Repurchasable (at the Average Market Price) out of Exercise Proceeds.............................. 117,782 482,619 427,563 --------- ----------- ----------- Shares Used for Computation............. 8,123,360 8,281,392 7,973,950 ========== =========== =========== Net Income Per Share: Primary................................. $ .82 $ 1.25 $ 1.56 ========== =========== =========== Earnings Per Share Computation- Assuming Full Dilution: Weighted Average Number of Shares Out- standing.............................. 8,005,578 7,798,773 7,546,387 Effect of Common Shares issuable Upon Exercise of Dilutive Stock Options and Warrants Net of Shares Assumed to be Repurchasable (at the Higher of the Last or Average Market Price) out of Exercise Proceeds..................... 118,684 485,151 607,739 ---------- ----------- ----------- Shares Used for Computation............. 8,124,262 8,283,924 8,154,126 ========== =========== =========== Net Income Per Share: Fully Diluted........................... $ .82 $ 1.25 $ 1.52 ========== =========== ===========
EX-21 6 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 22 Subsidiaries of the Registrant Proximity Technology Inc., a Delaware corporation, 100 percent. Proximity Technology International, Inc., a Delaware corporation, 100 percent. Franklin Electronic Publishers (HK) Ltd., a Hong Kong corporation, 100 percent. Franklin Electronic Publishers Euro-Holdings B.V., a corporation organized under the laws of the Netherlands, 100 percent. Franklin Electronic Publishers (Europe) Ltd., a corporation organized under the laws of England, 100 percent. Franklin Electronic Publishers (France) S.A.R.L., a corporation organized under the laws of the country of France, 100 percent. Franklin Electronic Publishers S.r.l., a corporation organized under the laws of Italy, 100 percent. * Franklin Electronic Publishers (Deutschland) GmbH, a company organized under the laws of Germany, 100 percent. Systech GmbH, a company organized under the laws of Germany, 100 percent. Franklin Electronic Publishers Benelux N.V., a company organized under the laws of Belgium, 100 percent. Franklin Electronic Publishers, Ltd., a Canadian corporation, 100 percent. Franklin Electronic Publishers (Aust) Pty Ltd., an Australian corporation, 100 percent. Franklin Electronic Publishers de Mexico, S.A. de C.V., a company organized under the laws of Mexico, 100 percent. * Franklin Electronic Publishers de Colombia Ltd., a corporation organized under the laws of the Republic of Colombia, 100 percent. * * In compliance with local mandate requiring multiple shareholders, a minor equity position is held in trust for the company by an officer of the company. 50 EX-23 7 CONSENT OF INDEPENDENT AUDITORS EXHIBIT 24 CONSENT OF INDEPENDENT AUDITOR ------------------------------ We consent to the incorporation by reference in Post-Effective Amendment No. 1 to the Registration Statement on Form S-8 (No. 33-37038), Post-Effective Amendment No. 2 to the Registration Statement on Form S-8 (No. 33-23117) and Post Effective Amendment No. 3 to the Registration Statement on Form S-8 (No. 33-16688) of Franklin Electronic Publishers, Inc. of our report dated May 16, 1997 relating to the consolidated financial statements of Franklin Electronic Publishers, Inc. included in this Annual Report for the year ended March 31,1997. FELDMAN RADIN & CO., P.C. Certified Public Accountants June 27, 1997 New York, New York 51 EX-27 8 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENT OF FRANKLIN ELECTRONIC PUBLISHERS, INCORPORATED AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS MAR-31-1997 APR-01-1996 MAR-31-1997 45,040 0 10,645 839 30,617 90,730 11,211 9,503 131,055 12,934 0 0 0 50,235 23,368 131,055 88,650 88,650 46,074 46,074 0 0 775 10,734 4,079 6,655 0 0 0 6,655 .82 .82