Exhibit 10.1

 

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LOAN AGREEMENT

This Agreement dated as of February 13, 2009, is between Bank of America, N.A.
(the “Bank”) and Schmitt Industries, Inc. (the “Borrower”).

 

1. FACILITY NO. 1: LINE OF CREDIT AMOUNT AND TERMS

1.1 Line of Credit Amount.

 

(a) During the availability period described below, the Bank will provide a line
of credit to the Borrower. The amount of the line of credit (the “Facility No. 1
Commitment”) is One Million and 00/100 Dollars ($1,000,000.00).

 

(b) This is a revolving line of credit. During the availability period, the
Borrower may repay principal amounts and reborrow them.

 

(c) The Borrower agrees not to permit the principal balance outstanding to
exceed the Facility No. 1 Commitment. If the Borrower exceeds this limit, the
Borrower will immediately pay the excess to the Bank upon the Bank’s demand.

1.2 Availability Period. The line of credit is available between the date of
this Agreement and March 1, 2011, or such earlier date as the availability may
terminate as provided in this Agreement (the “Facility No. 1 Expiration Date”).

The availability period for this line of credit will be considered renewed if
and only if the Bank has sent to the Borrower a written notice of renewal for
the line of credit (the “Renewal Notice”). If this line of credit is renewed, it
will continue to be subject to all the terms and conditions set forth in this
Agreement except as modified by the Renewal Notice. If this line of credit is
renewed, the term “Expiration Date” shall mean the date set forth in the Renewal
Notice as the Expiration Date and the same process for renewal will apply to any
subsequent renewal of this line of credit. A renewal fee may be charged at the
Bank’s option. The amount of the renewal fee will be specified in the Renewal
Notice.

1.3 Repayment Terms.

 

(a) The Borrower will pay interest on March 1, 2009, and then on the same day of
each month thereafter until payment in full of any principal outstanding under
this facility.

 

(b) The Borrower will repay in full any principal, interest or other charges
outstanding under this facility no later than the Facility No. 1 Expiration
Date. Any interest period for an optional interest rate (as described below)
shall expire no later than the Facility No. 1 Expiration Date.

1.4 Interest Rate.

 

(a) The interest rate is a rate per year equal to the Bank’s Prime Rate.

 

(b) The Prime Rate is the rate of interest publicly announced from time to time
by the Bank as its Prime Rate. The Prime Rate is set by the Bank based on
various factors, including the Bank’s costs and desired return, general economic
conditions and other factors, and is used as a reference point for pricing some
loans. The Bank may price loans to its customers at, above, or below the Prime
Rate. Any change in the Prime Rate shall take effect at the opening of business
on the day specified in the public announcement of a change in the Bank’s Prime
Rate.

1.5 Optional Interest Rates. Instead of the interest rate based on the rate
stated in the paragraph entitled “Interest Rate” above, the Borrower may elect
the optional interest rates listed below for this Facility No. 1 during interest
periods agreed to by the Bank and the Borrower. The optional interest rates
shall be subject to the terms and conditions described later in this Agreement.
Any principal amount bearing interest at an optional rate under this Agreement
is referred to as a “Portion.” The following optional interest rates are
available:

 

(a) The LIBOR Rate plus 2.00 percentage point(s).

 

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2. OPTIONAL INTEREST RATES

2.1 Optional Rates. Each optional interest rate is a rate per year. Interest
will be paid on March 1, 2009, and then on the same day of each month thereafter
until payment in full of any principal outstanding under this Agreement. No
Portion will be converted to a different interest rate during the applicable
interest period. Upon the occurrence of an event of default under this
Agreement, the Bank may terminate the availability of optional interest rates
for interest periods commencing after the default occurs. At the end of each
interest period, the interest rate will revert to the rate stated in the
paragraph(s) entitled “Interest Rate” above, unless the Borrower has designated
another optional interest rate for the Portion.

2.2 LIBOR Rate. The election of LIBOR Rates shall be subject to the following
terms and requirements:

 

(a) The interest period during which the LIBOR Rate will be in effect will be
one month. The first day of the interest period must be a day other than a
Saturday or a Sunday on which banks are open for business in New York and London
and dealing in offshore dollars (a “LIBOR Banking Day”). The last day of the
interest period and the actual number of days during the interest period will be
determined by the Bank using the practices of the London inter-bank market.

 

(b) Each LIBOR Rate portion will be for an amount not less than One Hundred
Thousand and 00/100 Dollars ($100,000.00).

 

(c) A LIBOR Rate may be elected only for the entire principal amount outstanding
under the applicable facility.

 

(d) The “LIBOR Rate” means the interest rate determined by the following
formula. (All amounts in the calculation will be determined by the Bank as of
the first day of the interest period.)

 

LIBOR Rate =    London Inter-Bank Offered Rate       (1.00 - Reserve Percentage)
  

Where,

 

  (i) “London Inter-Bank Offered Rate” means for any applicable interest period,
the rate per annum equal to the British Bankers Association LIBOR Rate (“BBA
LIBOR”), as published by Reuters (or other commercially available source
providing quotations of BBA LIBOR as selected by the Bank from time to time) at
approximately 11:00 a.m. London time two (2) London Banking Days before the
commencement of the interest period for U.S. Dollar deposits (for delivery on
the first day of such interest period) with a term equivalent to such interest
period. If such rate is not available at such time for any reason then the rate
for that interest period will be determined by such alternate method as
reasonably selected by the Bank. A “London Banking Day” is a day on which banks
in London are open for business and dealing in offshore dollars.

 

  (ii) “Reserve Percentage” means the total of the maximum reserve percentages
for determining the reserves to be maintained by member banks of the Federal
Reserve System for Eurocurrency Liabilities, as defined in Federal Reserve Board
Regulation D, rounded upward to the nearest 1/100 of one percent. The percentage
will be expressed as a decimal, and will include, but not be limited to,
marginal, emergency, supplemental, special, and other reserve percentages.

 

(e) The Borrower shall irrevocably request a LIBOR Rate Portion no later than
12:00 noon Pacific time on the LIBOR Banking Day preceding the day on which the
London Inter-Bank Offered Rate will be set, as specified above. For example, if
there are no intervening holidays or weekend days in any of the relevant
locations, the request must be made at least three days before the LIBOR Rate
takes effect.

 

(f) The Bank will have no obligation to accept an election for a LIBOR Rate
Portion if any of the following described events has occurred and is continuing:

 

  (i) Dollar deposits in the principal amount, and for periods equal to the
interest period, of a LIBOR Rate Portion are not available in the London
inter-bank market; or

 

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  (ii) The LIBOR Rate does not accurately reflect the cost of a LIBOR Rate
Portion.

 

(g) Each prepayment of a LIBOR Rate Portion, whether voluntary, by reason of
acceleration or otherwise, will be accompanied by the amount of accrued interest
on the amount prepaid and a prepayment fee as described below. A “prepayment” is
a payment of an amount on a date earlier than the scheduled payment date for
such amount as required by this Agreement.

 

(h) The prepayment fee shall be in an amount sufficient to compensate the Bank
for any loss, cost or expense incurred by it as a result of the prepayment,
including any loss of anticipated profits and any loss or expense arising from
the liquidation or reemployment of funds obtained by it to maintain such Portion
or from fees payable to terminate the deposits from which such funds were
obtained. The Borrower shall also pay any customary administrative fees charged
by the Bank in connection with the foregoing. For purposes of this paragraph,
the Bank shall be deemed to have funded each Portion by a matching deposit or
other borrowing in the applicable interbank market, whether or not such Portion
was in fact so funded.

 

3. COLLATERAL

3.1 Personal Property. The personal property listed below now owned or owned in
the future by the parties listed below will secure the Borrower’s obligations to
the Bank under this Agreement. The collateral is further defined in security
agreement(s) executed by the owners of the collateral. In addition, all personal
property collateral owned by the Borrower securing this Agreement shall also
secure all other present and future obligations of the Borrower to the Bank
(excluding any consumer credit covered by the federal Truth in Lending law,
unless the Borrower has otherwise agreed in writing or received written notice
thereof). All personal property collateral securing any other present or future
obligations of the Borrower to the Bank shall also secure this Agreement.

 

(a) Inventory owned by the Borrower.

 

(b) Receivables owned by the Borrower.

 

4. FEES AND EXPENSES

4.1 Fees.

 

(a) Unused Commitment Fee. The Borrower agrees to pay a fee on any difference
between the Facility No. 1 Commitment and the amount of credit it actually uses,
determined by the average of the daily amount of credit outstanding during the
specified period. The fee will be calculated at 0.375% per year.

This fee is due on May 31, 2009, and on the last day of each following quarter
until the expiration of the availability period.

 

(b) Waiver Fee. If the Bank, at its discretion, agrees to waive or amend any
terms of this Agreement, the Borrower will, at the Bank’s option, pay the Bank a
fee for each waiver or amendment in an amount advised by the Bank at the time
the Borrower requests the waiver or amendment. Nothing in this paragraph shall
imply that the Bank is obligated to agree to any waiver or amendment requested
by the Borrower. The Bank may impose additional requirements as a condition to
any waiver or amendment.

 

(c) Late Fee. To the extent permitted by law, the Borrower agrees to pay a late
fee in an amount not to exceed four percent (4%) of any payment that is more
than fifteen (15) days late. The imposition and payment of a late fee shall not
constitute a waiver of the Bank’s rights with respect to the default.

4.2 Expenses. The Borrower agrees to immediately repay the Bank for expenses
that include, but are not limited to, filing, recording and search fees,
appraisal fees, title report fees, and documentation fees.

4.3 Reimbursement Costs.

 

(a) The Borrower agrees to reimburse the Bank for any expenses it incurs in the
preparation of this Agreement and any agreement or instrument required by this
Agreement. Expenses include, but are not limited to, reasonable attorneys’ fees,
including any allocated costs of the Bank’s in-house counsel to the extent
permitted by applicable law.

 

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(b) The Borrower agrees to reimburse the Bank for the cost of periodic field
examinations of the Borrower’s books, records and collateral, and appraisals of
the collateral, at such intervals as the Bank may reasonably require. The
actions described in this paragraph may be performed by employees of the Bank or
by independent appraisers.

 

5. DISBURSEMENTS, PAYMENTS AND COSTS

5.1 Disbursements and Payments.

 

(a) Each payment by the Borrower will be made in U.S. Dollars and immediately
available funds by debit to a deposit account as described in this Agreement or
otherwise authorized by the Borrower. For payments not made by direct debit,
payments will be made by mail to the address shown on the Borrower’s statement
or at one of the Bank’s banking centers in the United States, or by such other
method as may be permitted by the Bank.

 

(b) The Bank may honor instructions for advances or repayments given by the
Borrower (if an individual), or by any one of the individuals authorized to sign
loan agreements on behalf of the Borrower, or any other individual designated by
any one of authorized signers (each an “Authorized Individual”).

 

(c) For any payment under this Agreement made by debit to a deposit account, the
Borrower will maintain sufficient immediately available funds in the deposit
account to cover each debit. If there are insufficient immediately available
funds in the deposit account on the date the Bank enters such debit authorized
by this Agreement, the Bank may reverse the debit.

 

(d) Each disbursement by the Bank and each payment by the Borrower will be
evidenced by records kept by the Bank. In addition, the Bank may, at its
discretion, require the Borrower to sign one or more promissory notes.

 

(e) Prior to the date each payment of principal and interest and any fees from
the Borrower becomes due (the “Due Date”), the Bank will mail to the Borrower a
statement of the amounts that will be due on that Due Date (the “Billed
Amount”). The calculations in the bill will be made on the assumption that no
new extensions of credit or payments will be made between the date of the
billing statement and the Due Date, and that there will be no changes in the
applicable interest rate. If the Billed Amount differs from the actual amount
due on the Due Date (the “Accrued Amount”), the discrepancy will be treated as
follows:

 

  (i) If the Billed Amount is less than the Accrued Amount, the Billed Amount
for the following Due Date will be increased by the amount of the discrepancy.
The Borrower will not be in default by reason of any such discrepancy.

 

  (ii) If the Billed Amount is more than the Accrued Amount, the Billed Amount
for the following Due Date will be decreased by the amount of the discrepancy.

Regardless of any such discrepancy, interest will continue to accrue based on
the actual amount of principal outstanding without compounding. The Bank will
not pay the Borrower interest on any overpayment.

5.2 Telephone and Telefax Authorization.

 

(a) The Bank may honor telephone or telefax instructions for advances or
repayments or for the designation of optional interest rates given, or purported
to be given, by any one of the Authorized Individuals.

 

(b) Advances will be deposited in and repayments will be withdrawn from account
number OR-002801902675 owned by the Borrower or such other of the Borrower’s
accounts with the Bank as designated in writing by the Borrower.

 

(c) The Borrower will indemnify and hold the Bank harmless from all liability,
loss, and costs in connection with any act resulting from telephone or telefax
instructions the Bank reasonably believes are made by any Authorized Individual.
This paragraph will survive this Agreement’s termination, and will benefit the
Bank and its officers, employees, and agents.

 

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5.3 Direct Debit.

 

(a) The Borrower agrees that on the Due Date the Bank will debit the Billed
Amount from deposit account number OR-002801902675 owned by the Borrower or such
other of the Borrower’s accounts with the Bank as designated in writing by the
Borrower (the “Designated Account”).

 

(b) The Borrower may terminate this direct debit arrangement at any time by
sending written notice to the Bank at the address specified at the end of this
Agreement. If the Borrower terminates this arrangement, then the principal
amount outstanding under this Agreement will at the option of the Bank bear
interest at a rate per annum which is 0.5 percentage point(s) higher than the
rate of interest otherwise provided under this Agreement.

5.4 Banking Days. Unless otherwise provided in this Agreement, a banking day is
a day other than a Saturday, Sunday or other day on which commercial banks are
authorized to close, or are in fact closed, in the state where the Bank’s
lending office is located, and, if such day relates to amounts bearing interest
at an offshore rate (if any), means any such day on which dealings in dollar
deposits are conducted among banks in the offshore dollar interbank market. All
payments and disbursements which would be due on a day which is not a banking
day will be due on the next banking day. All payments received on a day which is
not a banking day will be applied to the credit on the next banking day.

5.5 Interest Calculation. Except as otherwise stated in this Agreement, all
interest and fees, if any, will be computed on the basis of a 360-day year and
the actual number of days elapsed. This results in more interest or a higher fee
than if a 365-day year is used. Installments of principal which are not paid
when due under this Agreement shall continue to bear interest until paid.

5.6 Default Rate. Upon the occurrence of any default or after maturity or after
judgment has been rendered on any obligation under this Agreement, all amounts
outstanding under this Agreement, including any interest, fees, or costs which
are not paid when due, will at the option of the Bank bear interest at a rate
which is 6.0 percentage point(s) higher than the rate of interest otherwise
provided under this Agreement. This may result in compounding of interest. This
will not constitute a waiver of any default.

 

6. CONDITIONS

Before the Bank is required to extend any credit to the Borrower under this
Agreement, it must receive any documents and other items it may reasonably
require, in form and content acceptable to the Bank, including any items
specifically listed below.

6.1 Authorizations. If the Borrower or any guarantor is anything other than a
natural person, evidence that the execution, delivery and performance by the
Borrower and/or such guarantor of this Agreement and any instrument or agreement
required under this Agreement have been duly authorized.

6.2 Governing Documents. If required by the Bank, a copy of the Borrower’s
organizational documents.

6.3 Security Agreements. Signed original security agreements covering the
personal property collateral which the Bank requires.

6.4 Perfection and Evidence of Priority. Evidence that the security interests
and liens in favor of the Bank are valid, enforceable, properly perfected in a
manner acceptable to the Bank and prior to all others’ rights and interests,
except those the Bank consents to in writing. All title documents for motor
vehicles which are part of the collateral must show the Bank’s interest.

6.5 Payment of Fees. Payment of all fees and other amounts due and owing to the
Bank, including without limitation payment of all accrued and unpaid expenses
incurred by the Bank as required by the paragraph entitled “Reimbursement
Costs.”

6.6 Good Standing. Certificates of good standing for the Borrower from its state
of formation and from any other state in which the Borrower is required to
qualify to conduct its business.

6.7 Insurance. Evidence of insurance coverage, as required in the “Covenants”
section of this Agreement.

 

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7. REPRESENTATIONS AND WARRANTIES

When the Borrower signs this Agreement, and until the Bank is repaid in full,
the Borrower makes the following representations and warranties. Each request
for an extension of credit constitutes a renewal of these representations and
warranties as of the date of the request:

7.1 Formation. If the Borrower is anything other than a natural person, it is
duly formed and existing under the laws of the state or other jurisdiction where
organized.

7.2 Authorization. This Agreement, and any instrument or agreement required
hereunder, are within the Borrower’s powers, have been duly authorized, and do
not conflict with any of its organizational papers.

7.3 Enforceable Agreement. This Agreement is a legal, valid and binding
agreement of the Borrower, enforceable against the Borrower in accordance with
its terms, and any instrument or agreement required hereunder, when executed and
delivered, will be similarly legal, valid, binding and enforceable.

7.4 Good Standing. In each state in which the Borrower does business, it is
properly licensed, in good standing, and, where required, in compliance with
fictitious name statutes.

7.5 No Conflicts. This Agreement does not conflict with any law, agreement, or
obligation by which the Borrower is bound.

7.6 Financial Information. All financial and other information that has been or
will be supplied to the Bank is sufficiently complete to give the Bank accurate
knowledge of the Borrower’s (and any guarantor’s) financial condition, including
all material contingent liabilities. Since the date of the most recent financial
statement provided to the Bank, there has been no material adverse change in the
business condition (financial or otherwise), operations, properties or prospects
of the Borrower (or any guarantor). If the Borrower is comprised of the trustees
of a trust, the foregoing representations shall also pertain to the trustor(s)
of the trust.

7.7 Lawsuits. There is no lawsuit, tax claim or other dispute pending or
threatened against the Borrower which, if lost, would impair the Borrower’s
financial condition or ability to repay the loan, except as have been disclosed
in writing to the Bank.

7.8 Collateral. All collateral required in this Agreement is owned by the
grantor of the security interest free of any title defects or any liens or
interests of others, except those which have been approved by the Bank in
writing.

7.9 Permits, Franchises. The Borrower possesses all permits, memberships,
franchises, contracts and licenses required and all trademark rights, trade name
rights, patent rights, copyrights and fictitious name rights necessary to enable
it to conduct the business in which it is now engaged.

7.10 Other Obligations. The Borrower is not in default on any obligation for
borrowed money, any purchase money obligation or any other material lease,
commitment, contract, instrument or obligation, except as have been disclosed in
writing to the Bank.

7.11 Tax Matters. The Borrower has no knowledge of any pending assessments or
adjustments of its income tax for any year and all taxes due have been paid,
except as have been disclosed in writing to the Bank.

7.12 No Event of Default. There is no event which is, or with notice or lapse of
time or both would be, a default under this Agreement.

7.13 Insurance. The Borrower has obtained, and maintained in effect, the
insurance coverage required in the “Covenants” section of this Agreement.

 

8. COVENANTS

The Borrower agrees, so long as credit is available under this Agreement and
until the Bank is repaid in full:

8.1 Use of Proceeds.

 

(a) To use the proceeds of Facility No. 1 only for working capital.

 

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(b) The proceeds of the credit extended under this Loan Agreement may not be
used directly or indirectly to purchase or carry any “margin stock” as that term
is defined in Regulation U of the Board of Governors of the Federal Reserve
System, or extend credit to or invest in other parties for the purpose of
purchasing or carrying any such “margin stock,” or to reduce or retire any
indebtedness incurred for such purpose.

8.2 Financial Information. To provide the following financial information and
statements in form and content acceptable to the Bank, and such additional
information as requested by the Bank from time to time. The Bank reserves the
right, upon written notice to the Borrower, to require the Borrower to deliver
financial information and statements to the Bank more frequently than otherwise
provided below, and to use such additional information and statements to measure
any applicable financial covenants in this Agreement.

 

(a) Within one hundred fifty (150) days of the fiscal year end, the annual
financial statements of the Borrower. These financial statements must be audited
(with an opinion satisfactory to the Bank) by a Certified Public Accountant
acceptable to the Bank. The statements shall be prepared on a consolidated
basis.

 

(b) For the months of February, August and November, copies of the Form 10-Q
Report for the Borrower within forty five (45) days after the date of filing
with the Securities and Exchange Commission.

 

(c) Copies of the Form 10-K Annual Report for the Borrower within one hundred
fifty (150) days after the date of filing with the Securities and Exchange
Commission.

8.3 Bank as Principal Depository. To maintain the Bank as its principal
depository bank, including for the maintenance of business, cash management,
operating and administrative deposit accounts.

8.4 Other Debts. Not to have outstanding or incur any direct or contingent
liabilities or lease obligations (other than those to the Bank), or become
liable for the liabilities of others, without the Bank’s written consent. This
does not prohibit:

 

(a) Acquiring goods, supplies, or merchandise on normal trade credit.

 

(b) Endorsing negotiable instruments received in the usual course of business.

 

(c) Obtaining surety bonds in the usual course of business. (d) Liabilities,
lines of credit and leases in existence on the date of this Agreement disclosed
in writing to the Bank.

8.5 Other Liens. Not to create, assume, or allow any security interest or lien
(including judicial liens) on property the Borrower now or later owns, except:

 

(a) Liens and security interests in favor of the Bank.

 

(b) Liens for taxes not yet due.

 

(c) Liens outstanding on the date of this Agreement disclosed in writing to the
Bank.

8.6 Maintenance of Assets.

 

(a) Not to sell, assign, lease, transfer or otherwise dispose of any part of the
Borrower’s business or the Borrower’s assets except in the ordinary course of
the Borrower’s business.

 

(b) Not to sell, assign, lease, transfer or otherwise dispose of any assets for
less than fair market value, or enter into any agreement to do so.

 

(c) Not to enter into any sale and leaseback agreement covering any of its fixed
assets.

 

(d) To maintain and preserve all rights, privileges, and franchises the Borrower
now has.

 

(e) To make any repairs, renewals, or replacements to keep the Borrower’s
properties in good working condition.

 

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8.7 Investments. Not to have any existing, or make any new, investments in any
individual or entity, or make any capital contributions or other transfers of
assets to any individual or entity, except for:

 

(a) Existing investments disclosed to the Bank in writing.

 

(b) Investments in the Borrower’s current subsidiaries.

 

(c) Investments in any of the following:

 

  (i) certificates of deposit;

 

  (ii) U.S. treasury bills and other obligations of the federal government;

 

  (iii) readily marketable securities (including commercial paper, but excluding
restricted stock and stock subject to the provisions of Rule 144 of the
Securities and Exchange Commission).

8.8 Loans. Not to make any loans, advances or other extensions of credit to any
individual or entity, except for:

 

(a) Existing extensions of credit disclosed to the Bank in writing.

 

(b) Extensions of credit to the Borrower’s current subsidiaries.

 

(c) Extensions of credit in the nature of accounts receivable or notes
receivable arising from the sale or lease of goods or services in the ordinary
course of business to non-affiliated entities.

8.9 Change of Management. Not to make any substantial change in the present
executive or management personnel of the Borrower.

8.10 Change of Ownership. Not to cause, permit, or suffer any change in capital
ownership such that there is a change of more than twenty-five percent (25%) in
the direct or indirect capital ownership of the Borrower.

8.11 Additional Negative Covenants. Not to, without the Bank’s written consent:

 

(a) Enter into any consolidation, merger, or other combination, or become a
partner in a partnership, a member of a joint venture, or a member of a limited
liability company.

 

(b) Acquire or purchase a business or its assets.

 

(c) Engage in any business activities substantially different from the
Borrower’s present business.

 

(d) Liquidate or dissolve the Borrower’s business.

8.12 Notices to Bank. To promptly notify the Bank in writing of:

 

(a) Any lawsuit over Two Hundred Fifty Thousand and 00/100 Dollars ($250,000.00)
against the Borrower or any Obligor.

 

(b) Any substantial dispute between any governmental authority and the Borrower
or any Obligor.

 

(c) Any event of default under this Agreement, or any event which, with notice
or lapse of time or both, would constitute an event of default.

 

(d) Any material adverse change in the Borrower’s Obligor’s business condition
(financial or otherwise), operations, properties or prospects, or ability to
repay the credit.

 

(e) Any change in the Borrower’s or any Obligor’s name, legal structure,
principal residence (for an individual), state of registration (for a registered
entity), place of business, or chief executive office if the Borrower or any
Obligor has more than one place of business.

 

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(f) Any actual contingent liabilities of the Borrower or any Obligor, and any
such contingent liabilities which are reasonably foreseeable.

For purposes of this Agreement, “Obligor” shall mean any guarantor, or any party
pledging collateral to the Bank, or, if the Borrower is comprised of the
trustees of a trust, any trustor.

8.13 Insurance.

 

(a) General Business Insurance. To maintain insurance satisfactory to the Bank
as to amount, nature and carrier covering property damage (including loss of use
and occupancy) to any of the Borrower’s properties, business interruption
insurance, public liability insurance including coverage for contractual
liability, product liability and workers’ compensation, and any other insurance
which is usual for the Borrower’s business. Each policy shall provide for at
least 30 days prior notice to the Bank of any cancellation thereof.

 

(b) Insurance Covering Collateral. To maintain all risk property damage
insurance policies (including without limitation windstorm coverage, and
hurricane coverage as applicable) covering the tangible property comprising the
collateral. Each insurance policy must be for the full replacement cost of the
collateral and include a replacement cost endorsement. The insurance must be
issued by an insurance company acceptable to the Bank and must include a
lender’s loss payable endorsement in favor of the Bank in a form acceptable to
the Bank.

 

(c) Evidence of Insurance. Upon the request of the Bank, to deliver to the Bank
a copy of each insurance policy, or, if permitted by the Bank, a certificate of
insurance listing all insurance in force.

8.14 Compliance with Laws. To comply with the laws (including any fictitious or
trade name statute), regulations, and orders of any government body with
authority over the Borrower’s business. The Bank shall have no obligation to
make any advance to the Borrower except in compliance with all applicable laws
and regulations and the Borrower shall fully cooperate with the Bank in
complying with all such applicable laws and regulations.

8.15 ERISA Plans. Promptly during each year, to pay and cause any subsidiaries
to pay contributions adequate to meet at least the minimum funding standards
under ERISA with respect to each and every Plan; file each annual report
required to be filed pursuant to ERISA in connection with each Plan for each
year; and notify the Bank within ten (10) days of the occurrence of any
Reportable Event that might constitute grounds for termination of any capital
Plan by the Pension Benefit Guaranty Corporation or for the appointment by the
appropriate United States District Court of a trustee to administer any Plan.
“ERISA” means the Employee Retirement Income Security Act of 1974, as amended
from time to time. Capitalized terms in this paragraph shall have the meanings
defined within ERISA.

8.16 Books and Records. To maintain adequate books and records.

8.17 Audits. To allow the Bank and its agents to inspect the Borrower’s
properties and examine, audit, and make copies of books and records at any
reasonable time. If any of the Borrower’s properties, books or records are in
the possession of a third party, the Borrower authorizes that third party to
permit the Bank or its agents to have access to perform inspections or audits
and to respond to the Bank’s requests for information concerning such
properties, books and records.

8.18 Perfection of Liens. To help the Bank perfect and protect its security
interests and liens, and reimburse it for related costs it incurs to protect its
security interests and liens.

8.19 Cooperation. To take any action reasonably requested by the Bank to carry
out the intent of this Agreement.

 

9. DEFAULT AND REMEDIES

If any of the following events of default occurs, the Bank may do one or more of
the following: declare the Borrower in default, stop making any additional
credit available to the Borrower, and require the Borrower to repay its entire
debt immediately and without prior notice. If an event which, with notice or the
passage of time, will constitute an event of default has occurred and is
continuing, the Bank has no obligation to make advances or extend additional
credit under this Agreement. In addition, if any event of default occurs, the
Bank shall have all rights, powers and remedies available under any instruments
and agreements required by or executed in connection with this Agreement, as
well as all rights and remedies available at law or in equity. If an event of
default occurs under the paragraph entitled “Bankruptcy,” below, with respect to
the Borrower, then the entire debt outstanding under this Agreement will
automatically be due immediately.

 

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9.1 Failure to Pay. The Borrower fails to make a payment under this Agreement
when due.

9.2 Other Bank Agreements. Any default occurs under any other agreement the
Borrower (or any Obligor) or any of the Borrower’s related entities or
affiliates has with the Bank or any affiliate of the Bank.

9.3 Cross-default. Any default occurs under any agreement in connection with any
credit the Borrower (or any Obligor) or any of the Borrower’s related entities
or affiliates has obtained from anyone else or which the Borrower (or any
Obligor) or any of the Borrower’s related entities or affiliates has guaranteed.

9.4 False Information. The Borrower or any Obligor has given the Bank false or
misleading information or representations.

9.5 Bankruptcy. The Borrower, any Obligor, or any general partner of the
Borrower or of any Obligor files a bankruptcy petition, a bankruptcy petition is
filed against any of the foregoing parties, or the Borrower, any Obligor, or any
general partner of the Borrower or of any Obligor makes a general assignment for
the benefit of creditors.

9.6 Receivers. A receiver or similar official is appointed for a substantial
portion of the Borrower’s or any Obligor’s business, or the business is
terminated, or, if any Obligor is anything other than a natural person, such
Obligor is liquidated or dissolved.

9.7 Lien Priority. The Bank fails to have an enforceable first lien (except for
any prior liens to which the Bank has consented in writing) on or security
interest in any property given as security for this Agreement (or any guaranty).

9.8 Judgments. Any judgments or arbitration awards are entered against the
Borrower or any Obligor, or the Borrower or any Obligor enters into any
settlement agreements with respect to any litigation or arbitration, in an
aggregate amount of Two Hundred Fifty Thousand and 00/100 Dollars ($250,000.00)
or more in excess of any insurance coverage.

9.9 Material Adverse Change. A material adverse change occurs, or is reasonably
likely to occur, in the Borrower’s (or any Obligor’s) business condition
(financial or otherwise), operations, properties or prospects, or ability to
repay the credit; or the Bank determines that it is insecure for any other
reason.

9.10 Government Action. Any government authority takes action that the Bank
believes materially adversely affects the Borrower’s or any Obligor’s financial
condition or ability to repay.

9.11 Default under Related Documents. Any default occurs under any guaranty,
subordination agreement, security agreement, deed of trust, mortgage, or other
document required by or delivered in connection with this Agreement or any such
document is no longer in effect, or any guarantor purports to revoke or disavow
the guaranty.

9.12 ERISA Plans. Any one or more of the following events occurs with respect to
a Plan of the Borrower subject to Title IV of ERISA, provided such event or
events could reasonably be expected, in the judgment of the Bank, to subject the
Borrower to any tax, penalty or liability (or any combination of the foregoing)
which, in the aggregate, could have a material adverse effect on the financial
condition of the Borrower:

 

(a) A reportable event shall occur under Section 4043(c) of ERISA with respect
to a Plan.

 

(b) Any Plan termination (or commencement of proceedings to terminate a Plan) or
the full or partial withdrawal from a Plan by the Borrower or any ERISA
Affiliate.

9.13 Other Breach Under Agreement. A default occurs under any other term or
condition of this Agreement not specifically referred to in this Article. This
includes any failure or anticipated failure by the Borrower (or any other party
named in the Covenants section) to comply with the financial covenants set forth
in this Agreement, whether such failure is evidenced by financial statements
delivered to the Bank or is otherwise known to the Borrower or the Bank.

 

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10. ENFORCING THIS AGREEMENT; MISCELLANEOUS

10.1 GAAP. Except as otherwise stated in this Agreement, all financial
information provided to the Bank and all financial covenants will be made under
generally accepted accounting principles, consistently applied.

10.2 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of Oregon. To the extent that the Bank has greater
rights or remedies under federal law, whether as a national bank or otherwise,
this paragraph shall not be deemed to deprive the Bank of such rights and
remedies as may be available under federal law.

10.3 Successors and Assigns. This Agreement is binding on the Borrower’s and the
Bank’s successors and assignees. The Borrower agrees that it may not assign this
Agreement without the Bank’s prior consent. The Bank may sell participations in
or assign this loan, and may exchange information about the Borrower (including,
without limitation, any information regarding any hazardous substances) with
actual or potential participants or assignees. If a participation is sold or the
loan is assigned, the purchaser will have the right of set-off against the
Borrower.

10.4 Dispute Resolution Provision. This paragraph, including the subparagraphs
below, is referred to as the “Dispute Resolution Provision.” This Dispute
Resolution Provision is a material inducement for the parties entering into this
agreement.

 

(a) This Dispute Resolution Provision concerns the resolution of any
controversies or claims between the parties, whether arising in contract, tort
or by statute, including but not limited to controversies or claims that arise
out of or relate to: (i) this agreement (including any renewals, extensions or
modifications); or (ii) any document related to this agreement (collectively a
“Claim”). For the purposes of this Dispute Resolution Provision only, the term
“parties” shall include any parent corporation, subsidiary or affiliate of the
Bank involved in the servicing, management or administration of any obligation
described or evidenced by this agreement.

 

(b) At the request of any party to this agreement, any Claim shall be resolved
by binding arbitration in accordance with the Federal Arbitration Act (Title 9,
U.S. Code) (the “Act”). The Act will apply even though this agreement provides
that it is governed by the law of a specified state.

 

(c) Arbitration proceedings will be determined in accordance with the Act, the
then-current rules and procedures for the arbitration of financial services
disputes of the American Arbitration Association or any successor thereof
(“AAA”), and the terms of this Dispute Resolution Provision. In the event of any
inconsistency, the terms of this Dispute Resolution Provision shall control. If
AAA is unwilling or unable to (i) serve as the provider of arbitration or
(ii) enforce any provision of this arbitration clause, the Bank may designate
another arbitration organization with similar procedures to serve as the
provider of arbitration.

 

(d) The arbitration shall be administered by AAA and conducted, unless otherwise
required by law, in any U.S. state where real or tangible personal property
collateral for this credit is located or if there is no such collateral, in the
state specified in the governing law section of this agreement. All Claims shall
be determined by one arbitrator; however, if Claims exceed Five Million Dollars
($5,000,000), upon the request of any party, the Claims shall be decided by
three arbitrators. All arbitration hearings shall commence within ninety
(90) days of the demand for arbitration and close within ninety (90) days of
commencement and the award of the arbitrator(s) shall be issued within thirty
(30) days of the close of the hearing. However, the arbitrator(s), upon a
showing of good cause, may extend the commencement of the hearing for up to an
additional sixty (60) days. The arbitrator(s) shall provide a concise written
statement of reasons for the award. The arbitration award may be submitted to
any court having jurisdiction to be confirmed and have judgment entered and
enforced.

 

(e) The arbitrator(s) will give effect to statutes of limitation in determining
any Claim and may dismiss the arbitration on the basis that the Claim is barred.
For purposes of the application of any statutes of limitation, the service on
AAA under applicable AAA rules of a notice of Claim is the equivalent of the
filing of a lawsuit. Any dispute concerning this arbitration provision or
whether a Claim is arbitrable shall be determined by the arbitrator(s), except
as set forth at subparagraph (h) of this Dispute Resolution Provision. The
arbitrator(s) shall have the power to award legal fees pursuant to the terms of
this agreement.

 

(f) This paragraph does not limit the right of any party to: (i) exercise
self-help remedies, such as but not limited to, setoff; (ii) initiate judicial
or non-judicial foreclosure against any real or personal property collateral;
(iii) exercise any judicial or power of sale rights, or (iv) act in a court of
law to obtain an interim remedy, such as but not limited to, injunctive relief,
writ of possession or appointment of a receiver, or additional or supplementary
remedies.

 

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(g) The filing of a court action is not intended to constitute a waiver of the
right of any party, including the suing party, thereafter to require submittal
of the Claim to arbitration.

 

(h) Any arbitration or trial by a judge of any Claim will take place on an
individual basis without resort to any form of class or representative action
(the “Class Action Waiver”). Regardless of anything else in this Dispute
Resolution Provision, the validity and effect of the Class Action Waiver may be
determined only by a court and not by an arbitrator. The parties to this
Agreement acknowledge that the Class Action Waiver is material and essential to
the arbitration of any disputes between the parties and is nonseverable from the
agreement to arbitrate Claims. If the Class Action Waiver is limited, voided or
found unenforceable, then the parties’ agreement to arbitrate shall be null and
void with respect to such proceeding, subject to the right to appeal the
limitation or invalidation of the Class Action Waiver. The Parties acknowledge
and agree that under no circumstances will a class action be arbitrated.

10.5 Severability; Waivers. If any part of this Agreement is not enforceable,
the rest of the Agreement may be enforced. The Bank retains all rights, even if
it makes a loan after default. If the Bank waives a default, it may enforce a
later default. Any consent or waiver under this Agreement must be in writing.

10.6 Attorneys’ Fees. The Borrower shall reimburse the Bank for any reasonable
costs and attorneys’ fees incurred by the Bank in connection with the
enforcement or preservation of any rights or remedies under this Agreement and
any other documents executed in connection with this Agreement, and in
connection with any amendment, waiver, “workout” or restructuring under this
Agreement. In the event of a lawsuit or arbitration proceeding, the prevailing
party is entitled to recover costs and reasonable attorneys’ fees incurred in
connection with the lawsuit or arbitration proceeding, as determined by the
court or arbitrator. In the event that any case is commenced by or against the
Borrower under the Bankruptcy Code (Title 11, United States Code) or any similar
or successor statute, the Bank is entitled to recover costs and reasonable
attorneys’ fees incurred by the Bank related to the preservation, protection, or
enforcement of any rights of the Bank in such a case. As used in this paragraph,
“attorneys’ fees” includes the allocated costs of the Bank’s in-house counsel.

10.7 Set-Off.

 

(a) In addition to any rights and remedies of the Bank provided by law, upon the
occurrence and during the continuance of any event of default under this
Agreement, the Bank is authorized, at any time, to set off and apply any and all
Deposits of the Borrower or any Obligor held by the Bank against any and all
Obligations owing to the Bank. The set-off may be made irrespective of whether
or not the Bank shall have made demand under this Agreement or any guaranty, and
although such Obligations may be contingent or unmatured or denominated in a
currency different from that of the applicable Deposits.

 

(b) The set-off may be made without prior notice to the Borrower or any other
party, any such notice being waived by the Borrower (on its own behalf and on
behalf of each Obligor) to the fullest extent permitted by law. The Bank agrees
promptly to notify the Borrower after any such set-off and application;
provided, however, that the failure to give such notice shall not affect the
validity of such set-off and application.

 

(c) For the purposes of this paragraph, “Deposits” means any deposits (general
or special, time or demand, provisional or final, individual or joint) and any
instruments owned by the Borrower or any Obligor which come into the possession
or custody or under the control of the Bank. “Obligations” means all
obligations, now or hereafter existing, of the Borrower to the Bank under this
Agreement and under any other agreement or instrument executed in connection
with this Agreement, and the obligations to the Bank of any Obligor.

10.8 One Agreement. This Agreement and any related security or other agreements
required by this Agreement, collectively:

 

(a) represent the sum of the understandings and agreements between the Bank and
the Borrower concerning this credit;

 

(b) replace any prior oral or written agreements between the Bank and the
Borrower concerning this credit; and

 

(c) are intended by the Bank and the Borrower as the final, complete and
exclusive statement of the terms agreed to by them.

 

   - 12 -         

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In the event of any conflict between this Agreement and any other agreements
required by this Agreement, this Agreement will prevail. Any reference in any
related document to a “promissory note” or a “note” executed by the Borrower and
dated as of the date of this Agreement shall be deemed to refer to this
Agreement, as now in effect or as hereafter amended, renewed, or restated.

10.9 Indemnification. The Borrower will indemnify and hold the Bank harmless
from any loss, liability, damages, judgments, and costs of any kind relating to
or arising directly or indirectly out of (a) this Agreement or any document
required hereunder, (b) any credit extended or committed by the Bank to the
Borrower hereunder, and (c) any litigation or proceeding related to or arising
out of this Agreement, any such document, or any such credit. This indemnity
includes but is not limited to attorneys’ fees (including the allocated cost of
in-house counsel). This indemnity extends to the Bank, its parent, subsidiaries
and all of their directors, officers, employees, agents, successors, attorneys,
and assigns. This indemnity will survive repayment of the Borrower’s obligations
to the Bank. All sums due to the Bank hereunder shall be obligations of the
Borrower, due and payable immediately without demand.

10.10 Notices. Unless otherwise provided in this Agreement or in another
agreement between the Bank and the Borrower, all notices required under this
Agreement shall be personally delivered or sent by first class mail, postage
prepaid, or by overnight courier, to the addresses on the signature page of this
Agreement, or sent by facsimile to the fax numbers listed on the signature page,
or to such other addresses as the Bank and the Borrower may specify from time to
time in writing. Notices and other communications shall be effective (i) if
mailed, upon the earlier of receipt or five (5) days after deposit in the U.S.
mail, first class, postage prepaid, (ii) if telecopied, when transmitted, or
(iii) if hand-delivered, by courier or otherwise (including telegram, lettergram
or mailgram), when delivered.

10.11 Headings. Article and paragraph headings are for reference only and shall
not affect the interpretation or meaning of any provisions of this Agreement.

10.12 Counterparts. This Agreement may be executed in as many counterparts as
necessary or convenient, and by the different parties on separate counterparts
each of which, when so executed, shall be deemed an original but all such
counterparts shall constitute but one and the same agreement.

10.13 Borrower Information; Reporting to Credit Bureaus. The Borrower authorizes
the Bank at any time to verify or check any information given by the Borrower to
the Bank, check the Borrower’s credit references, verify employment, and obtain
credit reports. The Borrower agrees that the Bank shall have the right at all
times to disclose and report to credit reporting agencies and credit rating
agencies such information pertaining to the Borrower and/or all guarantors as is
consistent with the Bank’s policies and practices from time to time in effect.

10.14 Prior Agreement Superseded. This Agreement supersedes the Business Loan
Agreement and the Promissory Note entered into as of May 12, 2005, between the
Bank and the Borrower, and any credit outstanding thereunder shall be deemed to
be outstanding under this Agreement.

 

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This Agreement is executed as of the date stated at the top of the first page.

 

Borrower:     Bank: Schmitt Industries, Inc.     Bank of America, N.A. By:      
  By:     Name:         Authorized Signer Title:         By:           Name:    
    Title:         Address where notices to Schmitt Industries, Inc. are to be
sent:     Address where notices to the Bank are to be sent:

2765 Northwest Nicolai Street

Portland, OR 97210

   

Bank of America, N.A.

Global Product Solutions

1075 Main Street, 2nd Floor

Waltham, MA 02451

Telephone:   ______________    Facsimile: (866) 495-4535 Facsimile:  
______________   

Federal law requires Bank of America, N.A. (the “Bank”) to provide the following
notice. The notice is not part of the foregoing agreement or instrument and may
not be altered. Please read the notice carefully.

 

(1) USA PATRIOT ACT NOTICE

Federal law requires all financial institutions to obtain, verify and record
information that identifies each person who opens an account or obtains a loan.
The Bank will ask for the Borrower’s legal name, address, tax ID number or
social security number and other identifying information. The Bank may also ask
for additional information or documentation or take other actions reasonably
necessary to verify the identity of the Borrower, guarantors or other related
persons.

 

   - 14 -