[frost.jpg]
LOAN AGREEMENT
 

Borrower:  
Micropac Industries, Inc.
Lender:  
Frost Bank
Address:     
905 E. Walnut St.
Garland, Texas 75040
Address: 
P.O. Box 1600
San Antonio, Texas  78296

 
THIS LOAN AGREEMENT (this "Loan Agreement") is dated as of January 23, 2013 by
and between Borrower and Lender.
 
ARTICLE I

 
Definitions and Use of Terms
 
Section 1.01. Certain Definitions.  As used herein, the following terms have the
meanings indicated, unless the context otherwise requires:
 
“Accounts" means any right of Borrower to payment for goods sold or leased or
for services rendered, but shall not include interest or service charges.
 
"Advance" means a disbursement by Lender of any of the proceeds of a Loan.
 
"Affiliate" means any individual or entity directly or indirectly controlling,
controlled by, or under common control with, another individual or entity.
 
"Applicable Bankruptcy Law" means the United States Bankruptcy Code or any other
present or future insolvency, bankruptcy, liquidation, conservatorship,
reorganization or moratorium Governmental Requirement or other similar
Governmental Requirements.
 
"Business Day" means a day other than a Saturday, Sunday or a day on which
commercial banks in the State of Texas are authorized to be closed, or are in
fact closed.
 
"Closing Date" means the date of this Loan Agreement.
 
"Code" means the Internal Revenue Code of 1986, as amended, and the regulations
promulgated and rulings issued thereunder.
 
"Collateral" means any and all Property and rights and interests in or to
Property of Borrower and each of the Obligated Parties, whether tangible or
intangible, in which a Lien is granted or purported to be granted pursuant to
the Loan Documents.
 
"Deeds of Trust" means, collectively, mortgages, deeds to secure, deeds of
trust, leasehold mortgages, leasehold deeds to secure, leasehold deeds of trust
or other security documents or instruments of a similar nature which create a
Lien or security interest from time to time in, to or covering any real property
(together with any improvements thereon) of Borrower or any Obligated Party,
including any modifications, amendments, supplements, ratifications, and
restatements thereto.
 
 
 
 

--------------------------------------------------------------------------------

 
 
"Default" means any event or circumstance that constitutes an Event of Default
or, that with, the lapse of time, would (if not cured or otherwise remedied
during such time) constitute an Event of Default.
 
"Distributions" means all dividends and other distributions made by a Person to
its equityholders.
 
"Environmental Laws" means any and all Federal, state, local, and foreign
Governmental Requirements, judgments, permits, concessions, grants, franchises,
licenses, agreements or governmental restrictions relating to pollution and the
protection of health and the environment or the release of any materials into
the environment, including 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.
 
"ERISA Affiliate" means any trade or business (whether or not incorporated)
under common control with Borrower within the meaning of Section 414(b) or (c)
of the Code (and Sections 414(m) and (o) of the Code for purposes of provisions
relating to Section 412 of the Code).
 
"ERISA Event" means (a) a Reportable Event with respect to a Pension Plan; (b) a
withdrawal by Borrower or any ERISA Affiliate from a Pension Plan subject to
Section 4063 of ERISA during a Plan year in which it was a substantial employer
(as defined in Section 4001(a)(2) of ERISA) or a cessation of operations that is
treated as such a withdrawal under Section 4062(e) of ERISA; (c) a complete or
partial withdrawal by Borrower or any ERISA Affiliate from a Multiemployer Plan
or notification that a Multiemployer Plan is in reorganization; (d) the filing
of a notice of intent to terminate, the treatment of a Plan amendment as a
termination under Sections 4041 or 4041A of ERISA, or the commencement of
proceedings by the PBGC to terminate a Pension Plan or Multiemployer Plan; (e)
an event or condition which constitutes grounds under Section 4042 of ERISA for
the termination of, or the appointment of a trustee to administer, any Pension
Plan or Multiemployer Plan; or (f) the imposition of any liability under Title
IV of ERISA, other than for PBGC premiums due but not delinquent under Section
4007 of ERISA, upon Borrower or any ERISA Affiliate.
 
"Event of Default" has the meaning set forth in Article IX.
 
"Financial Statements" means financial information of Borrower, any Subsidiary
and any Obligated Party, as required and set forth in Section 6.01 as, at the
time in question, have been most recently furnished to Lender.
 
"GAAP" means generally accepted accounting principles in the United States set
forth in the statements and pronouncements of the Financial Accounting Standards
Board or such other principles as may be approved by a significant segment of
the accounting profession in the United States, that are applicable to the
circumstances as of the date of determination, consistently applied.
 
"Governmental Authority" means the United States, the state, the county, the
city or any other political subdivision in which the Property is located, and
any court or political subdivision, agency, or instrumentality having
jurisdiction over Borrower, its Subsidiaries, any Obligated Party or the
Property, domestic or foreign.
 
 
 
 

--------------------------------------------------------------------------------

 
 
"Governmental Requirements" means all constitutions, statutes, laws, ordinances,
rules, regulations, orders, writs, injunctions or decrees of any Governmental
Authority applicable to Borrower, its Subsidiaries, any Obligated Party or the
Property.
 
"Guarantee" means, as to any Person, (a) any obligation, contingent or
otherwise, of such Person guaranteeing or having the economic effect of
guaranteeing any Indebtedness or other obligation payable or performable by
another Person (the "primary obligor") in any manner, whether directly or
indirectly, and including any obligation of such Person, direct or indirect, (i)
to purchase or pay (or advance or supply funds for the purchase or payment of)
such Indebtedness or other obligation, (ii) to purchase or lease Property,
securities or services for the purpose of assuring the obligee in respect of
such Indebtedness or other obligation of the payment or performance of such
Indebtedness or other obligation, (iii) to maintain working capital, equity
capital or any other financial statement condition or liquidity or level of
income or cash flow of the primary obligor so as to enable the primary obligor
to pay such Indebtedness or other obligation, or (iv) entered into for the
purpose of assuring in any other manner the obligee in respect of such
Indebtedness or other obligation of the payment or performance thereof or to
protect such obligee against loss in respect thereof (in whole or in part), or
(b) any Lien on any assets of such Person securing any Indebtedness or other
obligation of any other Person, whether or not such Indebtedness or other
obligation is assumed by such Person.  The amount of any Guarantee will be
deemed to be an amount equal to the stated or determinable amount of the related
primary obligation, or portion thereof, in respect of which such Guarantee is
made or, if not stated or determinable, the maximum reasonably anticipated
liability in respect thereof.  The term "Guarantee" as a verb has a
corresponding meaning.
 
"Guarantor" collectively means each Person, if any, who executes a Guaranty or a
supplement thereto in favor of Lender. As of the date of this Loan Agreement,
there are no Guarantors.
 
"Guaranty" means a continuing guaranty of the Obligations executed by a
Guarantor, in form and substance satisfactory to Lender, as the same may be
amended, modified, restated, ratified, supplemented, or replaced from time to
time.
 
"Hazardous Materials" means all explosive or radioactive substances or wastes
and all hazardous or toxic substances, wastes or other pollutants, including
petroleum or petroleum distillates, asbestos or asbestos-containing materials,
polychlorinated biphenyls, radon gas, infectious or medical wastes and all other
substances or wastes of any nature regulated pursuant to any Environmental Law.
 
"Indebtedness" means, as to any Person at a particular time, without
duplication, all of the following, whether or not included as indebtedness or
liabilities in accordance with GAAP:  (a) all obligations of such Person for
borrowed money and all obligations of such Person evidenced by bonds,
debentures, notes, loan agreements or other similar instruments; (b) all direct
or contingent obligations of such Person arising under letters of credit
(including standby and commercial), bankers' acceptances, bank guaranties,
surety bonds and similar instruments; (c) net obligations of such Person under
any Interest Rate Protection Agreement; (d) all obligations of such Person to
pay the deferred purchase price of Property or services (other than trade
accounts payable in the ordinary course of business that are not past due); (e)
indebtedness (excluding prepaid interest thereon) secured by a Lien on Property
owned or being purchased by such Person (including indebtedness arising under
conditional sales or other title retention agreements), whether or not such
indebtedness will have been assumed by such Person or is limited in recourse;
(f) capital leases and Synthetic Lease Obligations; and (g) all Guarantees of
such Person in respect of any of the foregoing.  For all purposes hereof, the
Indebtedness of any Person will include the Indebtedness of any partnership or
joint venture (other than a joint venture that is itself a corporation or
limited liability company) in which such Person is a general partner or a joint
venturer, unless such Indebtedness is expressly made non-recourse to such
Person.
 
 
 
 

--------------------------------------------------------------------------------

 
 
"Interest Rate Protection Agreement" means any interest rate swap agreement,
interest rate exchange agreement, currency exchange agreement, foreign exchange
agreement, interest rate and currency exchange agreement, forward rate
agreement, rate floor agreement, interest rate protection agreement, interest
rate cap agreement, rate collar agreement, any option agreement respecting the
foregoing, International Swaps and Derivatives Association, Inc. (ISDA) Master
Agreement, or any similar agreement or arrangement and any schedule,
confirmation, exhibit, document or instrument evidencing any interest in a
transaction covered by any such agreement now existing or hereafter entered into
by a Person to hedge the risk of variable interest rate volatility or
fluctuations of interest rates, as the same may be modified, supplemented,
amended or revised and in effect from time to time.
 
"IRS" means the United States Internal Revenue Service.
 
"Letter of Credit" means any letter of credit issued by Lender or any of its
Affiliates for the account of Borrower pursuant to Article III.
 
"Letter of Credit Agreement" means an Application and Agreement for a Standby or
Commercial Letter of Credit, or an Amendment Request Form in each case properly
completed and signed by Borrower requesting issuance, amendment, renewal or
extension of a Letter of Credit, and any other document related to a Letter of
Credit, all in form and substance satisfactory to Lender.
 
"Letter of Credit Liabilities" means, at any time, the aggregate amount
available to be drawn under all outstanding Letters of Credit, plus the
aggregate amount of all disbursements made by Lender under the outstanding
Letters of Credit that have not yet been reimbursed by or on behalf of Borrower
at such time.
 
"Lien" means any mortgage, pledge, hypothecation, assignment, deposit
arrangement, encumbrance, lien (statutory or other), charge, or preference,
priority or other security interest or preferential arrangement of any kind or
nature whatsoever (including any conditional sale or other title retention
agreement, and any financing lease having substantially the same economic effect
as any of the foregoing).
 
"Loans" are defined in Section 2.01, each individually a "Loan".
 
"Loan Documents" means this Loan Agreement, the Notes, all Guaranties, all
Security Agreements, all Interest Rate Protection Agreements, all Letters of
Credit, all Letter of Credit Agreements, each Subordination Agreement, and such
other documents, instruments and agreements, evidencing, securing or pertaining
to the Obligations as will from time to time be executed and delivered to Lender
by Borrower, any Subsidiary, any Obligated Party, or any other party pursuant to
this Loan Agreement, and any future amendments, restatements, modifications,
ratifications, confirmations, extensions or supplements hereto or thereto.
 
 
 
 

--------------------------------------------------------------------------------

 
 
"Managerial Official" means, with respect to any Person, an officer or a
governing Person of such Person.
 
"Margin Stock" has the meaning given thereto in Section 221.2 of Regulation U,
promulgated by the Board of Governors of the Federal Reserve System, F.R.S. Reg.
U, 12 C.F.R. part 221 (January 1, 1983 revision), as amended from time to time.
 
"Material Adverse Change" means (a) a material adverse change in, or a material
adverse effect upon, the financial condition of Borrower or Borrower and its
Subsidiaries and the Obligated Parties, if any, taken as a whole; (b) a material
impairment of the ability of any Obligated Party to perform its Obligations
under any Loan Document to which it is a party; (c) a material adverse effect
upon the legality, validity, binding effect or enforceability against Borrower
or any Obligated Party of any Loan Document to which it is a party or the rights
of Lender under any Loan Document; or (d) a material adverse restatement or
revision of a previously submitted financial statement pursuant to an audit.
 
"Multiemployer Plan" means any employee benefit plan of the type described in
Section 4001(a)(3) of ERISA, to which Borrower, any Subsidiary, or any ERISA
Affiliate makes or is obligated to make contributions, or during the preceding
five plan years, has made or been obligated to make contributions.
 
"Notes" means, collectively, the Revolving Credit Note and each Specific Advance
Note, and any renewals, extensions, modifications, refinancings, consolidations
and substitutions thereof.
 
"Obligated Party" means any party other than Borrower who secures, guarantees
and/or is otherwise obligated to pay all or any portion of the Obligations
including each Guarantor, if any.
 
"Obligations" mean all present and future Indebtedness, obligations and
liabilities of Borrower to Lender arising pursuant to the Loans, this Loan
Agreement or any of the other Loan Documents or otherwise, and any renewals,
extensions, increases, or amendments thereof, or any part thereof, regardless of
whether such Indebtedness, obligations and liabilities are direct, indirect,
fixed, contingent, liquidated, unliquidated, joint, several or joint and several
and including interest and fees that accrue after the commencement by or against
Borrower of any proceeding under any Applicable Bankruptcy Law naming Borrower
as the debtor in such proceeding, regardless of whether such interest and fees
are allowed claims in such proceeding.
 
"Patriot Act" is defined in Section 5.16.
 
"Pension Plan" means any "employee pension benefit plan" (as such term is
defined in Section 3(2) of ERISA), other than a Multiemployer Plan, that is
subject to Title IV of ERISA and is sponsored or maintained by Borrower, any
Subsidiary, or any ERISA Affiliate or to which Borrower, any Subsidiary, or any
ERISA Affiliate contributes or has an obligation to contribute, or in the case
of a multiple employer or other plan described in Section 4064(a) of ERISA, has
made contributions at any time during the immediately preceding five plan years.
 
 
 
 

--------------------------------------------------------------------------------

 
 
“Permitted Purchase Money Liens” means Purchase Money Liens that: (a) are
limited to securing payment and performance of Indebtedness of the type
permitted in Section 7.07(c), incurred in the purchase or acquisition of the
asset to which they relate; and (b) only attach to the asset purchased or
acquired and the proceeds thereof; and (c) do not attach to the Property.
 
"Person" means any individual, firm, corporation, association, partnership,
joint venture, trust, entity, unincorporated organization or Governmental
Authority.
 
"Plan" means any "employee benefit plan" (as such term is defined in Section
3(3) of ERISA) established by Borrower, any Subsidiary, or, with respect to any
such plan that is subject to Section 412 of the Code or Title IV of ERISA, any
ERISA Affiliate.
 
"Property" means all property of Borrower and each Subsidiary (and the Obligated
Parties, if any), whether real or personal, tangible or intangible.
 
“Prospective Acquisition” is defined in Section 2.01(b)(i).
 
“Purchase Money Lien” means any security agreement, conditional sale contract,
lease agreement or other arrangement or understanding whereby a Lien in
property, materials, fixtures or equipment for the maintenance or operation of
the Property is retained by any Person or the right is reserved or accrues to
any Person to remove or repossess any property, materials, fixtures or equipment
utilized or intended to be utilized in such maintenance or operation.

 
"Reportable Event" means any of the events set forth in Section 4043(c) of
ERISA, other than events for which the 30 day notice period has been waived.
 
"Revolving Credit Commitment" is defined in Section 2.01(a).
 
"Revolving Credit Loans" is defined in Section 2.01(a).
 
"Revolving Credit Note" means a promissory note executed by Borrower and payable
to the order of Lender, evidencing the Revolving Credit Loans made by Lender, as
the same may be amended, restated, supplemented, modified, extended or increased
from time to time.
 
"Security Agreements" means, collectively, (a) the Security Agreement executed
by Borrower dated of even date herewith, in form and substance satisfactory to
Lender, creating a Lien in favor of Lender, (b) those Security Agreements
(herein so called) executed by each Subsidiary of Borrower, all in form and
substance satisfactory to Lender, creating a Lien in favor of Lender, (c) those
Security Agreements (herein so called) executed by the Obligated Parties, if
any, all in form and substance satisfactory to Lender, creating a Lien in favor
of Lender and (d) any security agreement executed by any Person in connection
with this Loan Agreement, as each may be amended, modified, ratified,
supplemented, restated or replaced from time to time.
 
 
 
 

--------------------------------------------------------------------------------

 
 
"Specific Advance Commitment" is defined in Section 2.01(b).
 
"Specific Advance Loans" is defined in Section 2.01(b).
 
"Specific Advance Note" means each promissory note executed by Borrower and
payable to the order of Lender substantially in the form attached hereto as
Exhibit A, evidencing a Specific Advance Loan made by Lender, as the same may be
amended, restated, supplemented, modified, extended or increased from time to
time.
 
"Subordinated Debt" means any unsecured Indebtedness owing by Borrower that is
incurred from seller financing provided to Borrower in connection with a
Prospective Acquisition, which must be subordinated by written agreement to all
Indebtedness now or hereafter owing by Borrower to Lender, such agreement to be
substantially in the form of Exhibit B attached hereto (with each such agreement
a “Subordination Agreement”).
 
"Subsidiary" of a Person means a corporation, partnership, joint venture,
limited liability company or other business entity of which a majority of the
shares of securities or other interests having ordinary voting power for the
election of directors or other governing body (other than securities or
interests having such power only by reason of the happening of a contingency)
are at the time beneficially owned, or the management of which is otherwise
controlled, directly, or indirectly through one or more intermediaries, or both,
by such Person.  Unless otherwise specified, all references herein to a
"Subsidiary" or to "Subsidiaries" will refer to a Subsidiary or Subsidiaries of
Borrower.
 
"Synthetic Lease Obligation" means the monetary obligation of a Person under (a)
a synthetic, off-balance sheet or tax retention lease, or (b) an agreement for
the use or possession of Property creating obligations that do not appear on the
balance sheet of such Person but which, upon the insolvency or bankruptcy of
such Person, would be characterized as the Indebtedness of such Person (without
regard to accounting treatment).
 
"Termination Date" means (a) with respect to the Revolving Credit Loans and the
Revolving Credit Commitment, two (2) years from the date of this Loan Agreement,
and (b) with respect to the Specific Advance Commitment, one (1) year from the
date of this Loan Agreement.
 
"UCC" means the Uniform Commercial Code of the State of Texas or of any other
state having jurisdiction with respect to any of the rights and remedies of
Lender under the Loan Documents, as amended.
 
"Unfunded Pension Liability" means the excess of a Pension Plan's benefit
liabilities under Section 4001(a)(16) of ERISA, over the current value of that
Pension Plan's assets, determined in accordance with the assumptions used for
funding the Pension Plan pursuant to Section 412 of the Code for the applicable
plan year.
 
Section 1.02. Headings.  The headings, captions, and arrangements used in any of
the Loan Documents are, unless specified otherwise, for convenience only and
will not be deemed to limit, amplify, or modify the terms of the Loan Documents
nor to affect the meaning thereof.
 
 
 
 

--------------------------------------------------------------------------------

 
 
Section 1.03. Number and Gender of Words.  Whenever herein the singular number
is used, the same will include the plural where appropriate, and words of any
gender will include each other gender where appropriate.
 
Section 1.04. Money.  Unless stipulated otherwise, all references herein or in
any of the Loan Documents to "Dollars," "money," "payments," or other similar
financial or monetary terms are references to currency of the United States of
America.
 
Section 1.05. Articles, Sections and Exhibits.  All references herein to
Articles and Sections are, unless specified otherwise, references to articles
and sections of this Loan Agreement.  All references herein to an "Exhibit,"
"Annex" or "Schedule" are references to exhibits, annexes or schedules attached
hereto, all of which are made a part hereof for all purposes, the same as if set
forth herein verbatim, it being understood that if any exhibit, annex or
schedule attached hereto, which is to be executed and delivered, contains
blanks, the same will be completed correctly and in accordance with the terms
and provisions contained and as contemplated herein prior to or at the time of
the execution and delivery thereof.  The words "herein," "hereof," "hereunder"
and other similar compounds of the word "here" when used in this Loan Agreement
will refer to the entire Loan Agreement and not to any particular provision or
section.
 
Section 1.06. Accounting Terms.  Unless otherwise specified, all accounting and
financial terms and covenants set forth above and in Article VIII are to be
determined according to GAAP.  If at any time any change in GAAP would affect
the computation of any financial ratio or requirement set forth in any Loan
Document, and either Borrower or Lender will so request, Lender and Borrower
will negotiate in good faith to amend such ratio or requirement to preserve the
original intent thereof in light of such change in GAAP (subject to the approval
of Lender), provided that, until so amended, (a) such ratio or requirement will
continue to be computed in accordance with GAAP prior to such change therein and
(b) Borrower will provide to Lender Financial Statements and other documents
required under this Loan Agreement or as reasonably requested hereunder setting
forth a reconciliation between calculations of such ratio or requirement made
before and after giving effect to such change in GAAP.
 
ARTICLE II

 
Loans
 
Section 2.01. Loans.  Subject to the terms and conditions set forth in this Loan
Agreement and the other Loan Documents, Lender hereby agrees to provide to
Borrower the following credit facilities:
 
(a) Revolving Credit Loans.  Lender agrees to lend to Borrower, on a revolving
basis from time to time during the period commencing on the Closing Date and
continuing through the Termination Date, such amounts as Borrower may request
hereunder (the "Revolving Credit Loans"); provided, however, the total principal
amount outstanding at any time will not exceed the sum of $6,000,000.00 (the
"Revolving Credit Commitment") minus the Letter of Credit Liabilities.  If at
any time the outstanding Revolving Credit Loans exceed an amount equal to the
Revolving Credit Commitment minus the Letter of Credit Liabilities, Borrower
shall immediately repay to Lender such excess amount, plus all accrued but
unpaid interest thereon.  Subject to the terms and conditions hereof, Borrower
may borrow, repay and reborrow hereunder.
 
 
 
 

--------------------------------------------------------------------------------

 
 
(b) Specific Advance Loans.  Lender agrees to lend to Borrower, on a
non-revolving basis from time to time during the period commencing on the
Closing Date and continuing through the Termination Date, an aggregate amount
not to exceed $7,500,000.00 (the "Specific Advance Commitment") in a single
Advance or in multiple Advances (collectively, the "Specific Advance Loans" and
each a “Specific Advance Loan”), as may be requested by Borrower from time to
time.  Borrower will not be allowed to re-borrow under the Specific Advance
Commitment after a repayment.  Lender's obligation to make Specific Advance
Loans will also be subject to the following additional conditions precedent:
 
(i) Specific Advance Loans may only be requested by Borrower and will only be
funded by Lender to fund Borrower’s acquisition(s) of: (A) all or substantially
all of the assets of, or the equity or other beneficial ownership interests in,
target companies in the same or substantially similar industry as Borrower as
reasonably determined by Lender, such determination to be communicated to
Borrower within 10 Business Days following Borrower’s request; provided,
however, that any equity or other beneficial ownership interests in any such
target company acquired by Borrower must be in such a percentage that would give
Borrower majority ownership of and voting control over the management and
policies of any such target company;  or (B) certain assets or product lines of
target companies in the same or substantially similar industry as Borrower as
reasonably determined by Lender, such determination to be communicated to
Borrower within 10 Business Days following Borrower’s request (each, a
“Prospective Acquisition”).  Each Specific Advance Loan must be in a minimum
amount of not less than $250,000.00;
 
(ii) Borrower must deliver to Lender in form and substance satisfactory to
Lender a true and correct detailed breakdown of the full acquisition cost of
each Prospective Acquisition including, without limitation, a detailed schedule
of the sources and uses of the acquisition funds related to any such Prospective
Acquisition (which delivery to Lender will constitute a representation and
warranty to Lender as to the matters set forth therein);
 
(iii) Lender must affirmatively consent in writing to any Prospective
Acquisition for which a request for Advance under the Specific Advance Loans has
been submitted if either (A) the aggregate acquisition costs related to such
Prospective Acquisition exceed the sum of $7,500,000.00, or (B) if the aggregate
acquisitions costs related to such Prospective Acquisition are to be funded with
one or more Specific Advance Loans in excess of the aggregate sum of
$5,000,000.00; and
 
(iv) any Subordinated Debt incurred by Borrower in connection with any such
Prospective Acquisition must be fully subordinated to all Indebtedness now or
hereafter owing by Borrower to Lender pursuant to a Subordination Agreement.
 
 
 
 
 

--------------------------------------------------------------------------------

 
 
All Revolving Credit Loans and all Specific Advance Loans will be collectively
called the "Loans".  Lender reserves the right to require Borrower to give
Lender not less than one (1) Business Day prior notice of each requested Advance
for a Revolving Credit Loan and not less than ten (10) Business Days prior
notice of each requested Advance for a Specific Advance Loan specifying (1) the
aggregate amount of such requested Advance, (2) whether such requested Advance
is a Revolving Credit Loan or Specific Advance Loan, (3) the requested date of
such Advance, and (4) the purpose for such Advance, with such Advances to be
requested in a form satisfactory to Lender.
 
Section 2.02. Promissory Notes.  The Loans will be evidenced by one or more
Notes.  Interest on the Notes will accrue at the rate set forth therein.  The
principal of and interest on the Notes will be due and payable in accordance
with the terms and conditions set forth in the Notes and in this Loan Agreement.
 
Section 2.03. Origination Fee.  Borrower shall pay Lender a non-refundable
origination fee on the date hereof equal to the sum of $13,500.00 for Lender’s
agreement to make the Revolving Credit Commitment and the Specific Advance
Commitment available to Borrower subject to the terms and conditions herein and
in the other Loan Documents. The origination fee is fully earned and is not
refundable in whole or in part.
 
Section 2.04. Capital Adequacy.  If after the Closing Date, Lender will have
determined that the adoption or implementation of any applicable Governmental
Requirement regarding capital adequacy or any change therein, or any change in
the interpretation or administration thereof by any central bank or other
Governmental Authority charged with the interpretation or administration
thereof, or compliance by Lender (or its parent) with any guideline, request, or
directive regarding capital adequacy (whether or not having the force of law) of
any such central bank or other Governmental Authority, has or would have the
effect of reducing the rate of return on Lender's (or its parent's) capital as a
consequence of its obligations hereunder or the transactions contemplated hereby
to a level below that which Lender (or its parent) could have achieved but for
such adoption, implementation, change, or compliance (taking into consideration
Lender's policies with respect to capital adequacy) by an amount deemed by
Lender to be material, then from time to time, Borrower will pay to Lender (or
its parent) such additional amount or amounts as will compensate Lender for such
reduction within 20 Business Days after demand by Lender and delivery to
Borrower of a certificate of Lender claiming compensation under this Section and
setting forth the additional amount or amounts to be paid to it hereunder will
be conclusive, provided that the determination thereof is made on a reasonable
basis.  A certificate of Lender claiming compensation under this Section and
setting forth the additional amount or amounts to be paid to it hereunder will
be conclusive, provided that the determination thereof is made on a reasonable
basis.  In determining such amount or amounts, Lender may use any reasonable
averaging and attribution methods.
 
 
ARTICLE III
 
Letters of Credit
 
Section 3.01. Letters of Credit.  Subject to the terms and conditions of this
Loan Agreement and the applicable Letter of Credit Agreement, Lender agrees to
issue, amend, renew or extend one or more Letters of Credit for the account of
Borrower from time to time from the Closing Date to and including the
Termination Date of the Revolving Credit Commitment; provided, however, that the
Letter of Credit Liabilities will not at any time exceed the lesser of (a)  the
sum of $250,000.00, or
 
 
 
 

--------------------------------------------------------------------------------

 
 
 
(b) an amount equal to the amount of the Revolving Credit Commitment, minus the
outstanding Revolving Credit Loans.  Each Letter of Credit (i)  will expire at
or prior to the close of business on the Expiration Date (as defined below),
(ii) will be payable in Dollars, (iii) will have a minimum face amount of
$25,000.00, (iv) must support a transaction that is entered into in the ordinary
course of Borrower's business, (v) must be satisfactory in form and substance to
Lender, and (vi) will be issued pursuant to such documents and instruments
(including, without limitation, the Letter of Credit Agreement) as Lender may
require. The “Expiration Date” shall mean the earlier to occur of (x) the date
one year after the date of the issuance of the Letter of Credit (or, in the case
of any renewal or extension thereof, one year after such renewal or extension)
and (y) unless otherwise agreed by Lender pursuant to the Letter of Credit
Agreement, the date that is five Business Days prior to the Termination Date of
the Revolving Credit Commitment, provided that any Letter of Credit with a one
year tenor may provide for the renewal thereof for additional one year periods
(which shall in no event extend beyond five Business Days prior to the
Termination Date of the Revolving Credit Commitment).
 
Section 3.02. Procedure for Issuing, Amending, Renewing and Extending Letters of
Credit.  Each request for issuance of a Letter of Credit will be made on at
least five Business Days prior notice from Borrower to Lender by means of a
written Letter of Credit request describing the transaction proposed to be
supported thereby and specifying (a) the requested date of issuance (which will
be a Business Day), (b) the face amount of the Letter of Credit, (c) the
expiration date of the Letter of Credit, (d) the name and address of the
beneficiary, and (e) the form of the draft and any other documents required to
be presented at the time of any drawing (such notice to set forth the exact
wording of such documents or to attach copies thereof). The Borrower shall also
submit and execute a Letter of Credit Agreement in connection with any request
for issuance of a Letter of Credit. Each request for amendment, renewal or
extension of an existing Letter of Credit shall be in writing, identifying the
applicable Letter of Credit by Letter of Credit number and specifying the date
of amendment, renewal or extension (which shall be a Business Day) and such
other information as shall be necessary to amend, renew or extend such Letter of
Credit. The Borrower shall also submit and execute a Letter of Credit Agreement
in connection with any request to amend, renew or extend an existing Letter of
Credit.  Lender is not obligated to amend, renew or extend any Letter of Credit.
Lender may refuse to issue, amend, extend or renew a Letter of Credit in the
event Lender would be prohibited from doing so under any applicable Governmental
Requirement.
 
Section 3.03. Payments Constitute Advances.  Each payment by Lender pursuant to
a drawing under a Letter of Credit will constitute and be deemed a Revolving
Credit Loan by Lender to Borrower under this Loan Agreement as of the day and
time such payment is made by Lender and in the amount of such payment.
 
Section 3.04. Letter of Credit Fee.  Borrower will pay to Lender (a) a letter of
credit commission payable on the date each Letter of Credit is issued in
accordance with Lender’s current fee schedule in effect at the time of issuance,
amendment, renewal or extension, as applicable, and (b) such other fees,
commissions, costs and out–of–pocket expenses charged or incurred by Lender with
respect to issuance, amendment, renewal or extension of any Letter of Credit.
 
 
 
 

--------------------------------------------------------------------------------

 
 
Section 3.05. Obligations Absolute.  The obligations of Borrower under this Loan
Agreement and the other Loan Documents to reimburse Lender for draws under any
Letter of Credit will be absolute, unconditional, and irrevocable, and will be
performed strictly in accordance with the terms of this Loan Agreement and the
other Loan Documents under all circumstances whatsoever, including without
limitation the following circumstances:
 
(a) Any lack of validity or enforceability of any Letter of Credit or any other
Loan Document;
 
(b) The existence of any claim, set-off, counterclaim, defense or other rights
which Borrower, its Subsidiaries, any Obligated Party, or any other Person may
have at any time against any beneficiary of any Letter of Credit, Lender, or any
other Person, whether in connection with this Loan Agreement or any other Loan
Document or any unrelated transaction;
 
(c) Any statement, draft, or other document presented under any Letter of Credit
proving to be forged, fraudulent, invalid, or insufficient in any respect or any
statement therein being untrue or inaccurate in any respect whatsoever;
 
(d) Payment by Lender under any Letter of Credit against presentation of a draft
or other document which does not comply with the terms of such Letter of Credit;
or
 
(e) Any other circumstance or happening whatsoever, whether or not similar to
any of the foregoing.
 
Section 3.06. Limitation of Liability.  Borrower assumes all risks of the acts
or omissions of any beneficiary of any Letter of Credit with respect to its use
of such Letter of Credit.  Neither Lender nor any of its officers or directors
will have any responsibility or liability to Borrower or any other Person
for:  (a) the failure of any draft to bear any reference or adequate reference
to any Letter of Credit, or the failure of any documents to accompany any draft
at negotiation, or the failure of any Person to surrender or to take up any
Letter of Credit or to send documents apart from drafts as required by the terms
of any Letter of Credit, or the failure of any Person to note the amount of any
instrument on any Letter of Credit, each of which requirements, if contained in
any Letter of Credit itself, it is agreed may be waived by Lender, (b) errors,
omissions, interruptions, or delays in transmission or delivery of any messages,
(c) the validity, sufficiency, or genuineness of any draft or other document, or
any endorsement(s) thereon, even if any such draft, document or endorsement
should in fact prove to be in any and all respects invalid, insufficient,
fraudulent, or forged or any statement therein is untrue or inaccurate in any
respect, (d) the payment by Lender to the beneficiary of any Letter of Credit
against presentation of any draft or other document that does not comply with
the terms of the Letter of Credit, or (e) any other circumstance whatsoever in
making or failing to make any payment under a Letter of Credit.  Borrower will
have a claim against Lender, and Lender will be liable to Borrower, to the
extent of any direct, but not consequential, damages suffered by Borrower which
Borrower proves in a final nonappealable judgment were caused by (i) Lender's
willful misconduct or gross negligence in determining whether documents
presented under any Letter of Credit complied with the terms thereof or
(ii)  Lender's willful failure to pay under any Letter of Credit after
presentation to it of documents strictly complying with the terms and conditions
of such Letter of Credit.  Lender may accept documents that appear on their face
to be in order, without responsibility for further investigation, regardless of
any notice or information to the contrary.
 
 
 
 

--------------------------------------------------------------------------------

 
 
Section 3.07. Additional Costs in Respect of Letters of Credit.  If as a result
of any regulatory change in Governmental Requirements there will be imposed,
modified, or deemed applicable any tax, reserve, special deposit, or similar
requirement against or with respect to or measured by reference to Letters of
Credit issued or to be issued hereunder or Lender's commitment to issue Letters
of Credit hereunder, and the result will be to increase the cost to Lender of
issuing or maintaining any Letter of Credit or its commitment to issue Letters
of Credit hereunder or reduce any amount receivable by Lender hereunder in
respect of any Letter of Credit (which increase in cost, or reduction in amount
receivable, will be the result of Lender's reasonable allocation of the
aggregate of such increases or reductions resulting from such event), then, upon
demand by Lender, Borrower agrees to pay Lender, from time to time as specified
by Lender, such additional amounts as will be sufficient to compensate Lender
for such increased costs or reductions in amount. A statement as to such
increased costs or reductions in amount incurred by Lender, submitted by Lender
to Borrower, will be conclusive as to the amount thereof, provided that the
determination thereof is made on a reasonable basis.
 
Section 3.08. Cash Collateral Pledge.  Borrower shall, upon Lender’s request,
cash collateralize the Letters of Credit in an amount equal to one hundred five
percent (105%) of: (a) the amount by which Lender has honored any drawing
request on any Letter of Credit issued hereunder to the extent such drawing
request was not paid by Borrower in accordance with the terms of this Agreement;
and (b) the amounts available to be drawn under the Letters of Credit according
to the records of the Lender, if (i) as of the Expiration Date any Letters of
Credit may remain outstanding and partially or wholly drawn, or (ii) upon the
occurrence of an Event of Default (and automatically without any requirement for
notice or request), so long as such Event of Default continues.  With respect to
Letters of Credit with an expiry date after the Expiration Date, Borrower shall
so cash collateralize such Letters of Credit fifteen Business Days prior to the
Expiration Date. Such cash collateral shall be pledged to Lender as a first and
prior perfected security interest in favor of Lender and Borrower shall execute
such further documents as required by Lender to perfect its Lien on the cash
collateral.
 
ARTICLE IV

 
Conditions Precedent
 
Section 4.01. Initial Extension of Credit.  The obligation of Lender to make the
initial Advances or issue the initial Letter of Credit is subject to the
condition precedent that Lender will have received on or before the day of such
Advances or issuance of such Letter of Credit all of the following, each dated
(unless otherwise indicated) the Closing Date, in form and substance
satisfactory to Lender:
 
(a) Resolutions.  Resolutions of the board of directors, members, partners or
other appropriate governing body of Borrower and each Obligated Party certified
by a Managerial Official of such Person, which resolutions authorize the
execution, delivery, and performance by such Person of this Loan Agreement and
the other Loan Documents to which it is a party;
 
 
 
 

--------------------------------------------------------------------------------

 
 
(b) Certificates of Borrower and Obligated Parties.  Certificates of each of
Borrower and Obligated Parties executed by a Managerial Official of such Person
certifying as to (i) the names of the officers of such Person authorized to sign
this Loan Agreement and each of the other Loan Documents to which it is a party
(including the certificates contemplated herein) together with specimen
signatures of such officers; (ii) original certified or file–stamped copies of
the certificate or articles of incorporation, articles of organization,
certificate of limited partnership, trust agreement or other similar
organizational document of such Person, certified as true, correct and complete
by the appropriate authority in their respective jurisdictions of organization
as of a date within 10Business Days prior to the Closing Date; (iii) bylaws,
limited partnership agreement, trust agreement, operating agreement or other
similar organizational document of such Person certified as true, correct, and
complete by such Managerial Official; and (iv) certificates of the appropriate
government officials as to the existence and good standing (if applicable) of
such Person in (A) their respective jurisdictions of organization and (B) each
other jurisdiction in which such Person is required to qualify to do business,
each dated within 10Business Days prior to the Closing Date;
 
(c) Notes.  The Notes executed by Borrower;
 
(d) Security Agreement. The Security Agreement executed by Borrower;
 
(e) [Reserved];
 
(f) Insurance Policies.  Copies of all insurance policies required by Section
6.06, together with mortgagee and additional insured endorsements, as applicable
in favor of Lender with respect to all insurance policies covering Collateral
and Borrower;
 
(g) UCC, Lien Search, etc..  The results of a Uniform Commercial Code, tax Lien
and judgment searches showing all financing statements and other documents or
instruments on file against Borrower and each Obligated Party with the
applicable authority in the jurisdiction of organization of such Person's
principal residence, place of business or chief executive office (as applicable)
and such other jurisdictions requested by Lender, such search to be as of a date
no more than 10 days prior to the Closing Date;
 
(h) [Reserved];
 
(i) [Reserved];
 
(j) Termination of Existing Indebtedness.  Evidence that (i) all existing
Indebtedness not otherwise permitted by Section 7.07 have been or concurrently
with the Closing Date are being terminated, and all outstanding amounts
thereunder have been paid in full and (ii) all Liens securing such Indebtedness
have been or concurrently with the Closing Date are being released;
 
(k) Compliance Certificate.  A duly completed compliance certificate as of the
end of the fiscal quarter of Borrower most recently ended prior to the Closing
Date, signed by a Managerial Official of Borrower, and certifying as to such
matters described in Section 6.01(c);
 
 
 
 

--------------------------------------------------------------------------------

 
 
(l) Attorneys' Fees and Expenses.  Evidence that the costs and expenses
(including reasonable attorneys' fees) referred to in Section 10.13, to the
extent incurred, will have been paid in full by Borrower; and
 
(m) Additional Documentation.  Lender will have received such additional
approvals, instruments or documents as Lender or its legal counsel may request.
 
Section 4.02. Conditions to all Advances.  The obligation of Lender to make any
Advance or issue any Letter of Credit is subject to the following conditions
precedent:
 
(a) The representations and warranties of Borrower contained in Article V or any
other Loan Document, or which are contained in any document furnished at any
time under or in connection herewith or therewith, will be true and correct on
and as of the date of such Advance or issuance of such Letter of Credit, except
to the extent that such representations and warranties specifically refer to an
earlier date, in which case they will be true and correct as of such earlier
date, and except that for purposes of this Section 4.02, the representations and
warranties contained in Section 5.06 will be deemed to refer to the most recent
statements furnished pursuant to Section 6.01.
 
(b) No Event of Default then exists and no Default will exist or would result
from such proposed Advance or issuance of Letter of Credit.
 
(c) Lender will have received a request for such Advance or issuance of Letter
of Credit in accordance with the requirements hereof.
 
(d) With respect to any Advance of a Specific Advance Loan, Borrower must have
fully complied with the conditions precedent set forth in Section 2.01(b) above.
 
Each request for Advance or issuance of Letter of Credit hereunder submitted by
Borrower will be deemed to be a representation and warranty that the conditions
specified in Sections 4.02(a) and (b) have been satisfied on and as of the date
of the applicable Advance or Letter of Credit.
 
ARTICLE V

 
Representations and Warranties
 
Borrower hereby represents and warrants, and upon each request for an Advance or
the issuance of a Letter of Credit further represents and warrants, to Lender as
follows:
 
Section 5.01. Existence, Power, Compliance with Governmental
Requirements.  Borrower and each of its Subsidiaries (a) is a corporation duly
organized, validly existing and in good standing, if applicable, under the
Governmental Requirements of the jurisdiction of its organization and all other
states where it is doing business if required by the Governmental Requirements
of such other states, (b) has all requisite power and authority to execute,
deliver and perform the Loan Documents to which it is a party, to own its
Property and to conduct its business and (c) is in compliance with all
Governmental Requirements.
 
 
 
 

--------------------------------------------------------------------------------

 
 
Section 5.02. Binding Obligations.  The execution, delivery, and performance of
this Loan Agreement and all of the other Loan Documents by Borrower, each of its
Subsidiaries and each Obligated Party have been duly authorized by all necessary
action by Borrower, its Subsidiaries, and the Obligated Parties and constitute
legal, valid and binding obligations of Borrower, its Subsidiaries, and the
Obligated Parties, enforceable in accordance with their respective terms, except
as enforcement of remedies may be limited by Applicable Bankruptcy Law.
 
Section 5.03. No Consent.  The execution, delivery and performance of this Loan
Agreement and the other Loan Documents, and the consummation of the transactions
contemplated hereby and thereby, do not (a) conflict with, result in a violation
of, or constitute a default under (i) any provision of its charter or
organizational documents, or other instrument binding upon Borrower, any of its
Subsidiaries, or any Obligated Party, (ii) any Governmental Requirements or
(iii) any material contract, agreement, document or instrument to which
Borrower, any of its Subsidiaries or any Obligated Party is a party or affecting
such Person or the Property of such Person, (b) require the consent, approval or
authorization of or notice to or filing with any third party, not otherwise
obtained and delivered to Lender or (c) result in creation or perfection of a
Lien other than Liens in the Collateral in favor of Lender.
 
Section 5.04. Taxes; Governmental Charges.  Borrower, each Subsidiary and each
Obligated Party have timely filed all federal, state and local tax reports and
returns required by any Governmental Requirement to be filed, including, without
limitation, all income, franchise, employment, property and sales tax returns,
and have duly paid all their respective liabilities for taxes, assessments,
governmental charges and levies that are due and payable.  The reserves
reflected on the balance sheet of Borrower, each Subsidiary and each Obligated
Party are adequate in amount for the payment of all tax liabilities for
Borrower, each Subsidiary, and each Obligated Party, as applicable, accrued
through the date of such balance sheet.  To the best of Borrower's knowledge,
there is no pending investigation or audit of Borrower, any Subsidiary or any
Obligated Party by any taxing authority.  Furthermore, to the best of Borrower's
knowledge, there is no pending but unassessed tax liability of Borrower, any
Subsidiary or any Obligated Party or any unresolved questions or claims
concerning any tax liability of Borrower, any Subsidiary or any Obligated Party.
 
Section 5.05. No Default.  Neither Borrower, any Subsidiary nor any Obligated
Party is in default under or with respect to any contractual obligation that
could, either individually or in the aggregate, reasonably be expected to have a
Material Adverse Change.  No Default has occurred and is continuing or would
result from the consummation of the transactions contemplated by this Loan
Agreement or any other Loan Document.
 
Section 5.06. Financial Statements.  The Financial Statements are (a) true,
correct and complete as of the dates specified therein, (b) fully and accurately
present the financial condition and results of operations for the period covered
thereby of Borrower, its Subsidiaries and Obligated Parties, as applicable, as
of the dates specified and (c) prepared in accordance with GAAP.  Since the date
of the Financial Statements, no Material Adverse Change has occurred, except as
heretofore disclosed in writing to Lender, nor has Borrower, any Subsidiary or
any Obligated Party incurred any material liability, direct or indirect, fixed
or contingent.  Each of Borrower and Obligated Parties is solvent.
 
 
 
 

--------------------------------------------------------------------------------

 
 
Section 5.07. Suits, Actions, Etc.  There are no investigations, actions, suits
or proceedings pending or to the knowledge of Borrower threatened before or by
any Governmental Authority or arbitration authority against or affecting
Borrower, any Subsidiary, any Obligated Party or the Collateral, or involving
the validity, enforceability or priority of any of the Loan Documents.  Neither
Borrower, any Subsidiary, nor any Obligated Party is, and the consummation of
the transactions contemplated hereby and the performance or satisfaction of any
of the terms or conditions hereof and of the other Loan Documents will not cause
Borrower, any Subsidiary, or any Obligated Party to be, in violation of or in
default with respect to any Governmental Requirement or in default (or provide
cause for acceleration of Indebtedness) under any mortgage, deed of trust,
lease, promissory note, loan agreement, credit agreement, partnership agreement
or other agreement or restriction to which Borrower, any Subsidiary, or any
Obligated Party is a party or by which Borrower, any Subsidiary, or any
Obligated Party or the Collateral may be bound or affected.
 
Section 5.08. Insurance.  Borrower, its Subsidiaries and Obligated Parties and
the Properties of Borrower, its Subsidiaries and Obligated Parties are insured
with financially sound and reputable insurance companies not Affiliates of
Borrower or any Obligated Party, in such amounts, with such deductibles and
covering such risks required by Lender and in the absence of such requirements,
as are customarily carried by companies engaged in similar businesses and owning
similar properties in localities where Borrower, the applicable Subsidiary or
the applicable Obligated Party operates.
 
Section 5.09. Subsidiaries.  Borrower (a) has no Subsidiaries as of the date
hereof other than those specifically disclosed on Schedule 5.09(a), (b) has no
equity investments or other interests convertible into equity in any other
corporation or entity other than those specifically disclosed in Schedule
5.09(b) and (c) has no, and does not transact business under any, assumed names
or trade names other than those specifically disclosed in Schedule 5.09(c).
 
Section 5.10. Ownership of Property; Liens.  Borrower, each Subsidiary and each
Obligated Party have good record and marketable title in fee simple to, or valid
leasehold interests in, all personal and real Property, including the
Collateral, necessary or used in the ordinary conduct of its business, except
for such defects in title as could not, individually or in the aggregate,
reasonably be expected to have a Material Adverse Change.  The Collateral is not
subject to any Lien other than Liens in favor of Lender and liens, security
interests and encumbrances expressly permitted under Section 7.06 below.  All
Property of Borrower is titled in Borrower's legal name, and Borrower has not
used any other name during the last five years other than the assumed names or
trade names listed on Schedule 5.09(c).
 
Section 5.11. Environmental Compliance.  Borrower and its Subsidiaries conduct
in the ordinary course of business a review of the effect of existing
Environmental Laws and claims alleging potential liability or responsibility for
violation of any Environmental Law on their respective businesses, operations
and properties, and as a result thereof Borrower has reasonably concluded that
such Environmental Laws and claims could not, individually or in the aggregate,
reasonably be expected to have a Material Adverse Change.
 
Section 5.12. ERISA Compliance.
 
 
 
 

--------------------------------------------------------------------------------

 
 
(a) Each Plan is in compliance in all material respects with the applicable
provisions of ERISA, the Code and other Governmental Requirements.  Each Plan
that is intended to qualify under Section 401(a) of the Code has received a
favorable determination letter from the IRS or an application for such a letter
is currently being processed by the IRS with respect thereto and, to the best
knowledge of Borrower, nothing has occurred which would prevent, or cause the
loss of, such qualification.  Borrower and each ERISA Affiliate have made all
required contributions to each Plan subject to Section 412 of the Code, and no
application for a funding waiver or an extension of any amortization period
pursuant to Section 412 of the Code has been made with respect to any Plan.
 
(b) There are no pending or, to the best knowledge of Borrower, threatened
claims, actions or lawsuits, or action by any Governmental Authority, with
respect to any Plan that could be reasonably be expected to have a Material
Adverse Change.  There has been no prohibited transaction or violation of the
fiduciary responsibility rules with respect to any Plan that has resulted or
could reasonably be expected to result in a Material Adverse Change.
 
(c) (i) No ERISA Event has occurred or is reasonably expected to occur; (ii) no
Pension Plan has any Unfunded Pension Liability; (iii) neither Borrower nor any
ERISA Affiliate has incurred, or reasonably expects to incur, any liability
under Title IV of ERISA with respect to any Pension Plan (other than premiums
due and not delinquent under Section 4007 of ERISA); (iv) neither Borrower nor
any ERISA Affiliate has incurred, or reasonably expects to incur, any liability
(and no event has occurred which, with the giving of notice under Section 4219
of ERISA, would result in such liability) under Sections 4201 or 4243 of ERISA
with respect to a Multiemployer Plan; and (v) neither Borrower nor any ERISA
Affiliate has engaged in a transaction that could be subject to Sections 4069 or
4212(c) of ERISA.
 
Section 5.13. Margin Regulations; Investment Company Act; Public Utility Holding
Company Act.
 
(a) Borrower is not engaged and will not engage, principally or as one of its
important activities, in the business of purchasing or carrying Margin Stock or
extending credit for the purpose of purchasing or carrying Margin Stock.
 
(b) None of Borrower, any Person controlling Borrower, or any Subsidiary (i) is
a "holding company," or a "subsidiary company" of a "holding company," or an
"affiliate" of a "holding company" or of a "subsidiary company" of a "holding
company," within the meaning of the Public Utility Holding Company Act of 1935,
or (ii) is or is required to be registered as an "investment company" under the
Investment Company Act of 1940.
 
Section 5.14. Disclosure.  Borrower has disclosed to Lender all agreements,
documents, instruments and organizational documents or other restrictions to
which it, any of its Subsidiaries, or any Obligated Party 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 Change.  No report,
financial statement, certificate or other information furnished (whether in
writing or orally) by or on behalf of Borrower, any Subsidiary, or any Obligated
Party to Lender in connection with the transactions contemplated hereby and the
negotiation of this Loan 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, Borrower represents only that such information was prepared in good
faith based upon assumptions believed to be reasonable at the time.
 
 
 
 

--------------------------------------------------------------------------------

 
 
Section 5.15. Intellectual Property.  Borrower, its Subsidiaries and Obligated
Parties own, or possess the right to use, all of the trademarks, service marks,
trade names, copyrights, patents, patent rights, franchises, licenses, slogans,
other advertising products and processes, and other intellectual property rights
that are reasonably necessary for the operation of their respective businesses,
without conflict with the rights of any other Person.  To the best knowledge of
Borrower, no slogan or other advertising product, process or other material now
used by Borrower, any Subsidiary or any Obligated Party infringes upon any
rights held by any other Person.
 
Section 5.16. Patriot Act.  All capitalized words and phrases and all defined
terms used in the USA Patriot Act of 2001, 107 Public Law 56 (October 26, 2001)
(the "Patriot Act") and in other statutes and all orders, rules and regulations
of the United States government and its various executive department, agencies
and offices related to the subject matter of the Patriot Act, including, but not
limited to, Executive Order 13224 effective September 24, 2001, are hereinafter
collectively referred to as the "Patriot Rules" and are incorporated into this
section of the Loan Agreement.  Borrower represents and warrants to Lender that
neither it nor any of its principals, shareholders, members, partners, or
Affiliates, as applicable, is a Person named as a Specially Designated National
and Blocked Person (as defined in Presidential Executive Order 13224) and that
it is not acting, directly or indirectly, for or on behalf of any such
Person.  Borrower further represents and warrants to Lender that Borrower and
its principals, shareholders, members, partners, or Affiliates, as applicable,
are not, directly or indirectly, engaged in, nor facilitating, the transactions
contemplated by this Loan Agreement on behalf of any Person named as a Specially
Designated National and Blocked Person.  Borrower hereby agrees to defend,
indemnify and hold harmless Lender from and against any and all claims, damages,
losses, risks, liabilities, and expenses (including reasonable attorneys' fees
and costs) arising from or related to any breach of the foregoing
representations and warranties.
 
ARTICLE VI

 
Affirmative Covenants
 
Until (i) all Obligations are fully paid and satisfied, (ii) the Revolving
Credit Commitment, the Specific Advance Commitment, and the commitment to issue
Letters of Credit have been terminated, and (iii) the termination or expiration
of all Letters of Credit, Borrower agrees and covenants that it will, and cause
each Subsidiary and any Obligated Party to:
 
Section 6.01. Furnish to Lender:
 
(a) Annual Financial Statements.  As soon as available and in any event within
120 days after the end of each fiscal year of Borrower, a consolidated and
consolidating balance sheet and related statements with detailed footnotes of
income or operations, shareholders' equity, and cash flows of Borrower and its
Subsidiaries as of the end of such fiscal year, in each case audited by
independent public accountants of recognized standing satisfactory to Lender,
accompanied by a report and opinion of such accountants, which report and
opinion shall be prepared in accordance with GAAP and shall not be subject to
any "going concern," "emphasis on going concern," or like qualification or
exception, or any qualification or exception as to the scope of such
audit.  Borrower (i) shall inform such independent public accountants that
Lender will rely on the results of such Financial Statements and any other
Financial Statements provided to Lender and (ii) grants Lender permission to
discuss with such accountants the results of any audit, the field work
undertaken, the Loans and any other matters related to Borrower, any Subsidiary
and any Obligated Party.
 
 
 
 

--------------------------------------------------------------------------------

 
 
(b) Interim Financial Statements.  As soon as available, and in any event within
45 days after the end of each fiscal quarter of each fiscal year of Borrower, a
consolidated and consolidating balance sheet and income statement, and statement
of contingent liabilities of Borrower and its Subsidiaries as of the end of such
fiscal quarter, all in form and substance and in reasonable detail satisfactory
to Lender and duly certified (subject to year-end review adjustments) by a
Managerial Official of Borrower (i) as being true and correct in all material
aspects to the best of his or her knowledge and (ii) as having been prepared in
accordance with GAAP.
 
(c) Compliance Certificate.  A certificate in form acceptable to Lender signed
by a Managerial Official of Borrower, within 45 days after the end of each
fiscal quarter of each fiscal year of Borrower, stating that Borrower is in full
compliance with all of its obligations under this Loan Agreement and all other
Loan Documents and is not in Default of any term or provisions hereof or
thereof, and demonstrating compliance with Article VIII.
 
(d) Accounts Aging.  An Accounts aging report signed by a Managerial Official of
Borrower within 30 days after the end of each calendar month, in form and detail
satisfactory to Lender.
 
(e) Payables Aging.  An accounts payable aging report signed by a Managerial
Official of Borrower within 30 days after the end of each calendar month, in
form and detail satisfactory to Lender.
 
(f) Inventory Listing.  A list of Borrower's inventory by location and type (to
include the following:  raw materials, work in process, finished goods and any
additional items Lender may reasonably request) within 30 days after the end of
each calendar month, in form and detail satisfactory to Lender.
 
(g) Tax Returns.  Copies of Borrower’s income tax returns (federal and state, if
any) within 30 days after the applicable filing date for the tax reporting
period thereof, prepared by a tax professional satisfactory to Lender.
 
Section 6.02. Notices.  Promptly notify Lender:
 
(a) of the occurrence of any Default;
 
(b) of any matter that has resulted or could reasonably be expected to result in
a Material Adverse Change, including (i) breach or non-performance of, or any
default under, a contractual obligation of Borrower, any Subsidiary or any
Obligated Party; (ii) any dispute, litigation, investigation, proceeding or
suspension between Borrower, any Subsidiary or any Obligated Party and any
Governmental Authority; or (iii) the commencement of, or any material
development in, any litigation or proceeding affecting Borrower, any Subsidiary
or any Obligated Party;
 
 
 
 

--------------------------------------------------------------------------------

 
 
(c) of the occurrence of any ERISA Event;
 
(d) of a change in name of Borrower or any Obligated Party or a change in the
location of Borrower, any Obligated Party, or any Collateral, in each case,
within 30 days prior to such change; and
 
(e) of any material change in accounting policies or financial reporting
practices by Borrower or any Subsidiary.
 
Each notice pursuant to this Section will be accompanied by a statement of a
Managerial Official of Borrower setting forth details of the occurrence referred
to therein and stating what action Borrower has taken and proposes to take with
respect thereto.  Each notice pursuant to this Section will describe with
particularity any and all provisions of this Loan Agreement and any other Loan
Document that have been breached or affected thereby.
 
Section 6.03. Accounts and Records.  Maintain its books and records in
accordance with GAAP.
 
Section 6.04. Preservation of Existence, Etc.  (a) Preserve, renew and maintain
in full force and effect its legal existence and good standing under the
Governmental Requirements of the jurisdiction of its organization and each state
in which it is qualified to do business; and (b) take all reasonable action to
maintain all rights, privileges, permits, licenses and franchises necessary or
desirable in the normal conduct of its business, except to the extent that
failure to do so could not reasonably be expected to have a Material Adverse
Change.
 
Section 6.05. Maintenance of Properties.  (a) Maintain, preserve and protect all
of its material properties and equipment necessary in the operation of its
business in good working order and condition, ordinary wear and tear excepted;
(b) make all necessary repairs thereto and renewals and replacements thereof
except where the failure to do so could not reasonably be expected to have a
Material Adverse Change; (c) use the standard of care typical in the industry in
the operation and maintenance of its facilities; and (d) preserve or renew all
of its registered patents, trademarks, trade names and service marks (including
licenses thereof), except to the extent that failure to do so could not
reasonably be expected to have a Material Adverse Change.
 
Section 6.06. Maintenance of Insurance.  Maintain with financially sound and
reputable insurance companies not Affiliates of Borrower, insurance with respect
to its properties and business against loss or damage of the kinds customarily
insured against by Persons engaged in the same or similar business, including
but not limited to, commercial property insurance, all risks property damage,
commercial general liability, worker's compensation, business interruption and
other insurance, of such types and in such amounts as are customarily carried
under similar circumstances by such other Persons and providing for not less
than 30 days' prior notice to Lender of termination, lapse or cancellation of
such insurance.  Each insurance policy will name Lender as "additional insured"
and "mortgagee", as applicable.  Borrower will, and will cause each Obligated
Party to, deliver to Lender upon Lender's request, originals or certified copies
of insurance policies or certificates of insurance, each in form and substance
satisfactory to Lender.
 
 
 
 

--------------------------------------------------------------------------------

 
 
Section 6.07. Right of Inspection.  Permit Lender to (a) visit its properties
and installations, (b) examine, audit and make and take away copies or
reproductions of its books and records, and (c) discuss with its respective
directors, partners, principal officers and independent auditors its respective
businesses, assets, liabilities, financial positions, results of operations, and
business prospects, during normal business hours and at all reasonable
times.  Borrower shall be responsible for the reasonable costs and expenses
associated with such inspection; provided, however, prior to the occurrence and
continuance of an Event of Default, Lender shall not conduct more than two such
inspections during any calendar year nor shall the costs and expenses associated
with such inspections exceed $5,000.00.  To the extent Borrower maintains any
records, including computer generated records and software programs for the
generation of such records in the possession of a third party, Borrower will, to
the extent such records constitute Collateral, (i) notify such third party of
Lender's Lien in such records, (ii) cause such party to grant access to Lender
to such records and (iii) provide Lender with copies of any records Lender may
request, all at Borrower's sole cost and expense.  In addition, permit Lender
and its designees from time to time to make such inspections and audits, and to
obtain such confirmations or other information, with respect to any of the
Unencumbered Liquid Assets as Lender deems necessary or desirable and shall
reimburse Lender on demand for all costs and expenses incurred by Lender in
connection with such inspections and audits.
 
Section 6.08. Right to Additional Information.  Furnish Lender with such
additional information and statements, lists of assets and liabilities,
statements of contingent liabilities, tax returns, and other reports and
certificates with respect to Borrower's, any Subsidiary's, or any Obligated
Party's financial condition, business operations and compliance with the terms
of the Loan Documents as Lender may reasonably request from time to time.
 
Section 6.09. Compliance with Governmental Requirements.  Conduct its business
in an orderly and efficient manner consistent with good business practices, and
perform and comply with all Governmental Requirements applicable to Borrower,
its Subsidiaries, and their businesses, operations and Property (including
without limitation, all applicable Environmental Laws).
 
Section 6.10. Taxes.  Timely pay and discharge when due all of its Indebtedness
and obligations, including without limitation, all assessments, taxes,
governmental charges, levies, Liens and claims, of every kind and nature,
imposed upon Borrower, its Subsidiaries or any of their properties, income, or
profits, prior to the earlier of the date on which such obligation would become
delinquent or the date penalties would attach, and all lawful claims that, if
unpaid, might become a Lien or charge upon any of Borrower's or its Subsidiary's
properties, income, or profits; provided, however, Borrower and its Subsidiaries
will not be required to pay and discharge any such assessment, tax, government
charge, levy, Lien or claim so long as (a) the legality of the same will be
contested in good faith by appropriate judicial, administrative or other legal
proceedings instituted with reasonable promptness and diligently conducted, and
(b) Borrower and its Subsidiaries will have established on their books adequate
reserves with respect to such contested assessment, tax, government charge,
levy, Lien or claim in accordance with GAAP.
 
 
 
 

--------------------------------------------------------------------------------

 
 
Section 6.11. Notice of Indebtedness.  Promptly inform Lender of the creation,
incurrence or assumption by Borrower or any Subsidiary of any actual or
contingent liabilities not permitted under this Loan Agreement or any other Loan
Document.
 
Section 6.12. Additional Documents.  Execute and deliver, or cause to be
executed and delivered, to Lender, from time to time as required by Lender, any
and all other agreements, instruments and documents which Lender may reasonably
request in order to provide the rights and remedies to Lender granted or
provided for by the Loan Documents or give effect to the transactions
contemplated under this Loan Agreement and the other Loan Documents.
 
Section 6.13. Lender as Principal Depository.  Maintain with Lender primary
deposit accounts, including business, cash management, operations and
administrative deposit accounts.
 
ARTICLE VII

 
Negative Covenants
 
Until (i) all Obligations are fully paid and satisfied, (ii) the Revolving
Credit Commitment, the Specific Advance Commitment, and the commitment to issue
Letters of Credit have been terminated in full, and (iii) the termination or
expiration of all Letters of Credit, Borrower will not, nor will it permit any
Subsidiary or any Obligated Party to, directly or indirectly:
 
Section 7.01. Nature of Business.  Make any material change in the nature of its
business as carried on as of the Closing Date.
 
Section 7.02. Liquidations, Mergers, Consolidations.  Become a party to a merger
or consolidation, or, except in connection with a Prospective Acquisition,
purchase or otherwise acquire all or a substantial part of the assets of any
Person or any shares or other evidence of beneficial ownership of any Person, or
dissolve, liquidate or cease operations.  Certain Prospective Acquisitions as
described in Section 2.01(b)(iii) above are subject to Lender’s affirmative
written consent.
 
Section 7.03. Sale of Assets.  Sell, lease, assign, transfer or otherwise
dispose of any of its assets or Properties, other than in the ordinary course of
business.
 
Section 7.04. Sale and Leaseback.  Enter into any arrangement with any Person
pursuant to which it leases from such Person real or personal Property that has
been or is to be sold or transferred, directly or indirectly, by it to such
Person.
 
Section 7.05. Prepayment of Indebtedness.  Prepay any Indebtedness, except the
Obligations in accordance with the terms of this Loan Agreement.
 
Section 7.06. Liens.  Create, incur or permit to exist any Lien or encumbrance
on any of its assets including, without limitation, any Deeds of Trust
encumbering any real property and/or improvements now owned or hereafter
acquired, other than (a) Liens and security interests securing Indebtedness
owing to Lender, (b) Liens for taxes, assessments or similar charges that are
(i) not yet due or (ii) being contested in good faith by appropriate proceedings
and for which Borrower has
 
 
 
 

--------------------------------------------------------------------------------

 
 
established adequate reserves, (c) Liens and security interests existing as of
the Closing Date which have been disclosed to and approved by Lender in writing,
(d) Permitted Purchase Money Liens; (e) deposits or pledges to secure bids,
tenders, contracts (other than contracts for the payment of money), leases,
statutory obligations, surety and appeal bonds and other obligations of like
nature arising in the ordinary course of business; (f) other Liens incidental to
the conduct of Borrower’s business or the ownership of its Property and assets
(including easements, restrictions and covenants affecting real property) which
were not incurred in connection with the borrowing of money or the obtaining of
advances or credit, and which do not in the aggregate materially detract from
Lender’s rights in and to the Collateral or the value of Borrower’s Property or
assets and which do not materially impair the use thereof in the operation of
Borrower’s business; and (g) deposits or Liens to secure payment of workers’
compensation, employment insurance, old-age pensions, social security and other
like obligations incurred in the ordinary course of business (other than Liens
imposed by ERISA).
 
Section 7.07. Indebtedness.  Create, incur, permit or assume any Indebtedness,
other than (a) Indebtedness to Lender, (b) Indebtedness outstanding on the
Closing Date which has been disclosed to and approved by Lender in writing, (c)
other Indebtedness in an aggregate amount not to exceed $150,000.00 at any one
time in the aggregate, and (d) Subordinated Debt incurred from seller financing
provided in connection with a Prospective Acquisition.
 
Section 7.08.  [Reserved]
 
Section 7.09. [Reserved]
 
Section 7.10. Loans and Investments.  Make any advance, loan, extension of
credit, or capital contribution to or investment in, or purchase any stock,
bonds, notes, debentures, or other securities of, any Person, except that,
notwithstanding the foregoing, this Section 7.10 shall not prohibit: (i) loans
by Borrower to its employees the aggregate principal amount of which does not
exceed $50,000; (ii) Prospective Acquisitions; or (ii) such advances, loans,
extensions of credit, capital contributions, investments, or purchases that
occur in the ordinary course of business and consistent with past practice.
 
Section 7.11. Transactions with Affiliates.  Enter into any transaction,
including, without limitation, the purchase, sale or exchange of Property or the
rendering of any service, with any Affiliate of Borrower or any Subsidiary,
except in the ordinary course of and pursuant to the reasonable requirements of
Borrower's and its Subsidiaries' business and upon fair and reasonable terms no
less favorable to Borrower or any Subsidiary than would be obtained in a
comparable arm's-length transaction with a Person not an Affiliate of Borrower
or any Subsidiary.
 
Section 7.12. Dividends.  Declare or pay any dividends on any shares of its
capital stock, make any other Distributions with respect to any payment on
account of the purchase, redemption, or other acquisition or retirement of any
shares of its capital stock, except that, notwithstanding the foregoing, this
Section 7.12 shall not prohibit (i) annual capital stock dividends or such
dividends that occur in the ordinary course of business; or (ii) purchases,
redemptions, acquisitions or retirement of Borrower’s capital stock; provided,
however, that with respect to the payment of dividends or purchases,
redemptions, acquisitions or retirement of Borrower’s capital stock otherwise
permitted by clauses (i) and (ii) foregoing, no Default or Event of Default
shall exist or would after giving effect to the payment of any such dividends or
the purchase, redemption, acquisition or retirement of any of Borrower’s capital
stock.
 
 
 
 

--------------------------------------------------------------------------------

 
 
Section 7.13. Use of Proceeds.  Use the proceeds for any purpose other than as
follows:  (a) the Revolving Credit Loans for general working capital needs, and
(b) the Specific Advance Loans for Prospective Acquisitions and, in each case
described in clauses (a) and (b) above, not in contravention of any Governmental
Requirement or of any Loan Document.
 
Section 7.14. Additional Subsidiaries.  Form or acquire any Subsidiary unless
such Subsidiary is formed or acquired in connection with a Prospective
Acquisition and Borrower shall have notified Lender at the time that any Person
becomes a Subsidiary, and promptly thereafter (and in any event within 30 days),
cause such Person to (a) become a Guarantor by executing and delivering to
Lender a Guaranty or such other document as Lender will deem appropriate for
such purpose, and (b) deliver to Lender an executed counterpart of the Security
Agreement or such other document as Lender will deem appropriate, and (c) such
other documents, instruments and agreements Lender will reasonably request.
Additionally, upon the request of Lender, Borrower shall execute and deliver to
Lender a pledge of the equity of such Subsidiary (together with blank stock
powers) covering one-hundred percent (100%) of the beneficial or other equity
interests in any such Subsidiary so formed or acquired.
 
ARTICLE VIII

 
Financial Covenants
 
As long as this Loan Agreement remains in effect, Borrower will, on a
consolidated basis with any and all Subsidiaries, directly or indirectly:
 
Section 8.01 Working Capital. Maintain at all times minimum Working Capital of
not less than $4,000,000.00, to be tested as of the end of each fiscal quarter
of Borrower.  As used herein, "Working Capital" shall be defined as: (a)
Borrower's current assets less (b) Borrower’s current liabilities which current
liabilities shall include, for the avoidance of doubt, current portions of
Borrower’s long term debt plus all outstanding Advances under the Revolving
Credit Commitment.

Section 8.02 Senior Operating Leverage.  Maintain at all times a ratio of (i)(a)
Senior Funded Debt less (b) Borrower’s balance sheet cash on hand to the extent
in excess of $2,000,000.00 to (ii) EBITDA of not more than 3.0 to 1.0, to be
tested  as of the end of each fiscal quarter  of Borrower. As used herein,
“Senior Funded Debt” shall be defined as (a) all outstanding amounts of the
Revolving Credit Loans, plus all outstanding amounts of the Specific Advance
Loans, plus the total outstanding balance of all capital leases.  As used
herein, "EBITDA" shall be defined as Borrower's earnings before interest
expense, income taxes, depreciation and amortization plus one-time non-recurring
expenses.  Additionally, as used herein, prior to the Advance of any Specific
Advance Loan, “EBITDA” will be calculated for the Borrower based on a trailing
twelve (12) month basis. Beginning with the first quarterly measurement date
following any Advance of any Specific Advance Loan, “EBITDA” will be calculated
for the Borrower based on a trailing twelve (12) month basis with respect to the
Borrower plus a projected twelve (12) month basis with respect to any
Prospective Acquisition. Actual EBITDA for such Prospective Acquisition will
replace such Prospective Acquisition’s projected EBITDA one calendar quarter at
a time (ie a three (3) month period of time) until EBITDA for the Prospective
Acquisition is similarly calculated on a trailing twelve (12) month basis
post-acquisition by Borrower.
 
 
 
 

--------------------------------------------------------------------------------

 

Section 8.03 Free Cash Flow Coverage.  Maintain at all times a ratio of Free
Cash Flow to Debt Service of not less than 1.2 to 1.0, to be tested as of the
end of each fiscal quarter of Borrower and calculated on a trailing twelve (12)
month basis.  As used herein, “Free Cash Flow” shall be defined as the sum of:
Borrower's (a) net income before taxes, plus (b) depreciation and amortization,
plus (c) interest expense, plus (d) one-time, non-recurring expenses, less (d)
cash taxes paid, less (e) non-financed capital expenditures if Borrower’s
balance sheet cash on hand is less than $2,000,000.00 as of the end of each such
fiscal quarter of Borrower, and less (f) dividends. As used herein, “Debt
Service” shall be defined as Borrower's (a) interest expense plus (b) scheduled
principal payments, all corresponding to the cash flow measurement period.
 
ARTICLE IX
 
Events of Default
 
Section 9.01. Events of Default.  Each of the following will constitute an
"Event of Default" under this Loan Agreement and the other Loan Documents:
 
(a) The failure, refusal or neglect of Borrower to pay when due any part of the
principal of, or interest on, the Notes or any other Obligations by Borrower
from time to time.
 
(b) The failure of Borrower, any Subsidiary, or any Obligated Party to timely
and properly observe, keep or perform any covenant, agreement or condition
required in Sections 6.01 and 6.02 and Articles VII and VIII.
 
(c) The failure of Borrower, any Subsidiary, or any Obligated Party to timely
and properly observe, keep or perform any covenant, agreement or condition
required herein (other than as specified in clauses (a) and (b) above) or in any
of the other Loan Documents and such failure continues for fifteen (15) or more
days.
 
(d) Any representation or warranty contained herein, in any of the other Loan
Documents or in any other document ever delivered or furnished by Borrower, any
Subsidiary or any Obligated Party to Lender in connection with the Obligations
is or proves to have been false, misleading, erroneous or breached in any
material respect.
 
(e) If Borrower, any Subsidiary or any Obligated Party: (i) becomes insolvent,
or makes a transfer in fraud of creditors, or makes an assignment for the
benefit of creditors, or admits in writing its inability to or is unable to pay
its debts as they become due; (ii) generally is not paying its debts as such
debts become due; (iii) has a receiver, trustee or custodian appointed for, or
take possession of, all or substantially all of the assets of such party, either
in a proceeding brought by such party or in a proceeding brought against such
party and such appointment is not discharged or such possession is not
terminated within 60 days after the effective date thereof or such party
consents to or acquiesces in such appointment or possession; (iv) files a
petition for relief under the Applicable Bankruptcy Laws or an involuntary
petition for relief is filed against such party under any Applicable Bankruptcy
Law, or an order for relief naming such party is entered under any Applicable
Bankruptcy Law, or any composition, rearrangement, extension, reorganization or
other relief of debtors now or hereafter existing is requested or consented to
by such party; (v) fails to have discharged within a period of 30 days any
attachment, sequestration or similar writ levied upon any Property of such
party; or (vi) fails to pay within 30 days any final money judgment against such
party.
 
 
 
 

--------------------------------------------------------------------------------

 
 
(f) A levy against the Collateral or any part thereof, or against any material
portion of Borrower's other property, or any execution, garnishment, attachment,
sequestration or other writ or similar proceeding which is not permanently
dismissed or discharged within 30 days after such levy.
 
(g) Abandonment of any portion of the Collateral or of any material portion of
any of the other property of Borrower or any Obligated Party except where – with
respect to Borrower’s (or any Obligated Party’s) intellectual property – the
abandonment is based on the good faith business judgment of Borrower or such
Obligated Party.
 
(h) The dissolution, liquidation, termination or forfeiture of right to do
business of Borrower, any Subsidiary or any Obligated Party, or if Borrower or
any Obligated Party is an individual, the death or disability of Borrower, any
Subsidiary or any Obligated Party.
 
(i) An inability of Borrower to satisfy any condition specified herein as
precedent to the obligation of Lender to make an Advance or issue any Letter of
Credit after an application for Advance or Letter of Credit Request Form has
been submitted by Borrower to Lender.
 
(j) Borrower, any Subsidiary or any Obligated Party will have (i) concealed,
removed, or permitted to be concealed or removed any part of its Property with
the intent to hinder, delay or defraud any of its creditors; or (ii) made or
suffered a transfer of any of its Property which may be fraudulent under any
bankruptcy, fraudulent conveyance or similar Governmental Requirement; or (iii)
suffered or permitted while insolvent (under any applicable definition of the
term) any creditor to obtain a Lien upon any of its Property through legal
proceedings or distraint which Lien is not permanently vacated within 30 days
from the Closing Date.
 
(k) The occurrence of any event or condition which results in, or with notice or
lapse of time or both could result in, a default in the payment of any
Indebtedness or performance of any obligation of Borrower, any Subsidiary or any
Obligated Party to any Person other than Lender, excluding any Indebtedness or
obligation not exceeding, individually or in the aggregate, $150,000.00.
 
(l) The occurrence of a Material Adverse Change.
 
(m) The occurrence of any material default under any lease covering any portion
of the Property or the repudiation, termination or attempted repudiation or
termination of any such lease.
 
(n) The issuance or entry of any attachment or other Lien (other than Lender's
Lien on the Collateral) against any of the Property of Borrower for an amount in
excess of $100,000.00, if undischarged, unbonded or undismissed within 30 days
after such entry.
 
 
 
 

--------------------------------------------------------------------------------

 
 
(o) The occurrence of an ERISA Event.
 
(p) Any Loan Document or any provision thereof ceases to be in full force and
effect; or Borrower or any Obligated Party or any other Person contests the
validity or enforceability of any Loan Document or any provision thereof; or
Borrower or any Obligated Party denies that it has any or further liability or
obligation under any Loan Document, or purports to revoke, terminate or rescind
any Loan Document or any provision thereof.
 
(q) If Mark W. King should cease to be involved in the day to day management and
operations of the Borrower other as a result of Mr. King’s death, disability, or
retirement.
 
(r) The occurrence and continuation of any Default or Event of Default under any
other Loan Document.
 
Nothing contained in this Loan Agreement will be construed to limit the events
of default enumerated in any of the other Loan Documents and all such events of
default will be cumulative.
 
Section 9.02. Remedies.  Upon the occurrence of any Event of Default, so long as
such Event of Default continues, (a) the entire unpaid balance of principal of
the Notes, together with all accrued but unpaid interest thereon, and all other
Indebtedness owing to Lender by Borrower at such time will, at the option of
Lender, become immediately due and payable without further notice, demand,
presentation, notice of dishonor, notice of intent to accelerate, notice of
acceleration, protest or notice of protest of any kind, all of which are
expressly waived by Borrower, (b) Lender may, at its option, cease further
Advances under any of the Notes, (c) reduce any claim to judgment, and (d)
exercise any and all rights and remedies afforded by any of the Loan Documents,
or by law or equity or otherwise, as Lender will deem appropriate.  All rights
and remedies of Lender set forth in this Loan Agreement and in any of the other
Loan Documents may be exercised by Lender at its option and in its sole
discretion, upon the occurrence of an Event of Default.
 
Section 9.03. Right of Setoff. If an Event of Default shall have occurred and be
continuing, Lender and its Affiliates are hereby authorized at any time and from
time to time, to the fullest extent not prohibited by applicable Governmental
Requirements, to set off and apply any and all deposits (general or special,
time or demand, provisional or final, in whatever currency) at any time held and
other obligations (in whatever currency) at any time owing by Lender or any such
Affiliate to or for the credit or the account of Borrower or any Obligated Party
against any and all of the Obligations or the obligations of any Obligated Party
now or hereafter existing under this Loan Agreement or any other Loan Document,
irrespective of whether or not Lender shall have made any demand under this Loan
Agreement or any other Loan Document and although the Obligations or such
obligations of such Obligated Party may be contingent or unmatured or are owed
to a branch or office of Lender different from the branch or office holding such
deposit or obligated on such Indebtedness.  The rights of Lender and its
Affiliates under this Section are in addition to other rights and remedies
(including other rights of setoff) that Lender or its Affiliates may have.
 
 
 
 

--------------------------------------------------------------------------------

 
 
Section 9.04. Performance by Lender.  Should any covenant, duty, or agreement of
any Obligated Party fail to be performed in accordance with the terms of the
Loan Documents, Lender may, at its option, perform, or attempt to perform, such
covenant, duty or agreement on behalf of any Obligated Party.  In such event,
Borrower will pay to Lender on demand any amount expended by Lender in such
performance or attempted performance, together with interest thereon at the rate
provided in the Notes for past-due payments from the date of such expenditure by
Lender until paid.  Notwithstanding the foregoing, it is expressly understood
that Lender does not assume and will never have any liability or responsibility
for the performance of any duties of Borrower hereunder.  Without limiting the
generality of the foregoing, upon the occurrence of an Event of Default, Lender
will have the right, in addition to any other right of Lender, but not the
obligation, in its own name or in the name of Borrower, to enter into possession
of the Property.
 
Section 9.05. Rights Cumulative; Election of Remedies.  All rights and remedies
of Lender under the terms of this Loan Agreement will be cumulative of, and in
addition to, the rights and remedies of Lender under any and all other
agreements between Borrower and Lender (including, but not limited to, the other
Loan Documents), and not in substitution or diminution of any rights and
remedies now or hereafter held by Lender under the terms of any other
agreement.  Such rights and remedies may be pursued separately, successively or
concurrently against Borrower, or any Obligated Party or any Property covered
under the Loan Documents at the sole discretion of Lender.  The exercise or
failure to exercise any of the same will not constitute a waiver or release
thereof or of any other right or remedy, and the same will be nonexclusive.
 
Section 9.06. Waiver of Deficiency Statute.  In the event an interest in any of
the Collateral is foreclosed upon pursuant to a judicial or nonjudicial
foreclosure sale, Borrower agrees, notwithstanding the provisions of Sections
51.003, 51.004 and 51.005 of the Texas Property Code (as the same may be amended
from time to time), and to the extent not prohibited by Governmental
Requirements, that Lender shall be entitled to seek a deficiency judgment from
Borrower and any Obligated Party equal to the difference between the Obligations
and the amount for which the Collateral was sold pursuant to judicial or
nonjudicial foreclosure sale.  Borrower acknowledges and agrees that this waiver
creates an irrebuttable presumption that the foreclosure sale price is equal to
the fair market value of the Collateral for purposes of calculating deficiencies
owed by Borrower, Obligated Parties and others against whom recovery of a
deficiency is sought.
 
ARTICLE X

 
Miscellaneous
 
Section 10.01. Waiver and Agreement.  Neither the failure nor any delay on the
part of Lender to exercise any right, remedy, power or privilege herein or under
any of the other Loan Documents will operate as a waiver thereof, nor will any
single or partial exercise of such right, remedy, power or privilege preclude
any other or further exercise thereof or the exercise of any other right,
remedy, power or privilege.  No waiver of any provision in this Loan Agreement
or in any of the other Loan Documents and no departure by any Obligated Party
therefrom will be effective unless the same will be in writing and signed by
Lender, and then will be effective only in the specific instance and for the
purpose for which given and to the extent specified in such writing.  No
modification or amendment to this Loan Agreement or to any of the other Loan
Documents will be valid or effective unless the same is signed by the party
against whom it is sought to be enforced.
 
 
 
 

--------------------------------------------------------------------------------

 
 
Section 10.02. Benefits.  This Loan Agreement will be binding upon and inure to
the benefit of Lender and Borrower, and their respective successors and assigns,
provided, however, that Borrower may not, without the prior written consent of
Lender, assign or encumber any interests, rights, remedies, powers, duties or
obligations under this Loan Agreement or any of the other Loan Documents.
 
Section 10.03. Notices.
 
(a) All notices, requests, demands or other communications required or permitted
to be given pursuant to this Loan Agreement shall be in writing and given by (i)
personal delivery, (ii) expedited delivery service with proof of delivery, or
(iii) United States mail, postage prepaid, registered or certified mail, return
receipt requested, sent to the intended addressee at the address set forth on
the first page hereof and will be deemed to have been received either, in the
case of personal delivery, as of the time of personal delivery, in the case of
expedited delivery service, as of the date of first attempted delivery at the
address and in the manner provided herein, or in the case of mail, three (3)
days deposit in a depository receptacle under the care and custody of the United
States Postal Service.  Either party will have the right to change its address
for notice hereunder to any other location within the continental United States
by notice to the other party of such new address at least 30 days prior to the
effective date of such new address.
 
(b) Borrower and Lender agree that no notices or other communications by
electronic means between such parties or their representatives in connection
with this Loan Agreement or any instrument executed in connection herewith shall
constitute a transaction, agreement, contract or electronic signature under the
Electronic Signatures in Global and National Commerce Act, any version of the
Uniform Electronic Transactions Act or any other statute governing electronic
transactions, unless otherwise specifically agreed to in writing.
 
Section 10.04. Continuation and Survival.  All covenants, agreements,
representations and warranties made in or pursuant to this Loan Agreement and
the other Loan Documents will be deemed continuing and made at and as of the
date of this Loan Agreement and at and as of all times thereafter.  All
statements contained in any certificate, financial statement, legal opinion or
other instrument delivered by or on behalf of Borrower, its Subsidiaries, or
Obligated Parties pursuant to or in connection with any of the Loan Documents
will constitute additional representations and warranties made under this Loan
Agreement of the facts asserted in such certificate, financial statement, legal
opinion or other instrument.  All covenants, agreements, representations and
warranties made in or pursuant to this Loan Agreement and the other Loan
Documents will survive until payment in full of all sums owing and performance
of all other obligations hereunder by Borrower to Lender and will not be waived
by the execution and delivery of this Loan Agreement, any Advance or issuance of
Letter of Credit hereunder, any investigation by Lender or any other event
except a specific written waiver by Lender.
 
 
 
 

--------------------------------------------------------------------------------

 
 
Section 10.05. Controlling Agreement.  The parties hereto intend to conform
strictly to the applicable usury Governmental Requirements.  In no event,
whether by reason of demand for payment or acceleration of the maturity of the
Obligations or otherwise, will the interest contracted for, charged or received
by Lender hereunder or otherwise exceed the maximum amount permissible under
applicable Governmental Requirements.  If, from any circumstance whatsoever,
interest would otherwise be payable to Lender in excess of the maximum lawful
amount, the interest payable to Lender will be reduced automatically to the
maximum amount permitted under applicable Governmental Requirements.  If Lender
will ever receive anything of value deemed interest under applicable
Governmental Requirements which would apart from this provision be in excess of
the maximum lawful amount, an amount equal to any amount which would have been
excessive interest will be applied to the reduction of the principal amount
owing on the Obligations in the inverse order of its maturity and not to the
payment of interest, or if such amount which would have been excessive interest
exceeds the unpaid principal balance of the Obligations, such excess will be
refunded to Borrower.  The interest and any other amounts that would have been
payable in respect of any portion of the Obligations or during any period but
were not payable as a result of the operation of this Section shall be cumulated
and the interest and other amounts on any other portion of the Obligations or
periods shall be increased (but not above the maximum amount permitted under
applicable Governmental Requirement) until such cumulated amount shall have been
received by Lender.  All interest paid or agreed to be paid to Lender will, to
the extent permitted by applicable Governmental Requirements, be amortized,
prorated, allocated and spread throughout the full stated term (including  any
renewal or extension) of such Obligations so that the amount of interest on
account of such Obligations does not exceed the maximum permitted by applicable
Governmental Requirements.  The provisions of this Section will control all
existing and future agreements between Borrower and Lender.
 
Section 10.06. No Third Party Beneficiary.  This Loan Agreement is for the sole
benefit of Lender and Borrower and is not for the benefit of any third party.
 
Section 10.07. Lender's Consent or Approval.  Except where otherwise expressly
provided in the Loan Documents, in any instance where the approval, consent or
the exercise of judgment of Lender is required, the granting or denial of such
approval or consent and the exercise of such judgment will be (a) within the
sole discretion of Lender; and (b) deemed to have been given only by a specific
writing intended for the purpose and executed by Lender.  Each provision for
consent, approval, inspection, review, or verification by Lender is for Lender's
own purposes and benefit only.
 
Section 10.08. Applicable Governmental Requirements.  This Loan Agreement and
the other Loan Documents have been executed and delivered in the State of Texas,
are performable in Bexar County, Texas, and will be governed by and construed in
accordance with the Governmental Requirements of the State of Texas and the
Governmental Requirements of the United States applicable to transactions within
the State of Texas.  Except to the extent that the Governmental Requirements of
the United States may apply to the terms hereof, the substantive Governmental
Requirements of the State of Texas shall govern the validity, construction,
enforcement and interpretation of this Loan Agreement and the other Loan
Documents.  In the event of a dispute involving this Loan Agreement, any other
Loan Document or any other instrument executed in connection herewith, Borrower
irrevocably agrees that venue for such dispute shall lie in any court of
competent jurisdiction in Bexar County, Texas.  To the extent that Chapter 303
of the Texas Finance Code is applicable to any Loan, any Advance or any Loan
Document, the "weekly ceiling" specified in such article is the applicable
ceiling; provided that, if any applicable Governmental Requirement permits
greater interest, the Governmental Requirement permitting the greatest interest
will apply.
 
 
 
 

--------------------------------------------------------------------------------

 
 
Section 10.09. Loan Agreement Governs.  This Loan Agreement, together with the
other Loan Documents, comprise the complete and integrated agreement of the
parties on the subject matter hereof and thereof and supersedes all prior
agreements, written or oral, on such subject matter.  In the event of any
conflict between the terms of this Loan Agreement and any terms of any other
Loan Document, the terms of this Loan Agreement will govern; provided, that the
inclusion of supplemental rights or remedies in favor of Lender in any other
Loan Document will not be deemed a conflict with this Loan Agreement.  Each Loan
Document was drafted with the joint participation of the respective parties
thereto and will be construed neither against nor in favor of any party, but
rather in accordance with the fair meaning thereof.
 
Section 10.10. Time of Essence.  Time will be of the essence in this Loan
Agreement.
 
Section 10.11. Patriot Act Notice.  Lender hereby notifies Borrower that
pursuant to the requirements of the Patriot Act, it is required to obtain,
verify and record information that identifies Borrower, which information
includes the name and address of Borrower and other information that will allow
Lender to identify Borrower in accordance with the Act.
 
Section 10.12. Invalid Provisions.  If any provision of this Loan Agreement or
any of the other Loan Documents is held to be illegal, invalid or unenforceable
under present or future Governmental Requirements, such provision will be fully
severable and the remaining provisions of this Loan Agreement or any of the
other Loan Documents will remain in full force and effect and will not be
affected by the illegal, invalid or unenforceable provision or by its severance.
 
Section 10.13. Expenses of Lender.  Borrower shall pay to Lender on demand:  (a)
all costs and expenses incurred by Lender in connection with the preparation,
negotiation, execution and administration of this Loan Agreement and the other
Loan Documents and any and all amendments, modifications, renewals, extensions,
increases, and supplements thereof and thereto, including, without limitation,
the reasonable fees and expenses of Lender's legal counsel and professionals,
(b) all costs and expenses incurred by Lender in connection with the
enforcement, workout or restructure of this Loan Agreement or any other Loan
Document, including, without limitation, the reasonable fees and expenses of
Lender's legal counsel and professionals, and (c) all other costs and expenses
incurred by Lender in connection with this Loan Agreement or any other Loan
Document, including, without limitation, all costs, expenses, taxes,
assessments, filing fees, and other charges levied by a Governmental Authority
or otherwise payable in respect of this Loan Agreement or any other Loan
Document.
 
Section 10.14. INDEMNIFICATION OF LENDER.  BORROWER SHALL INDEMNIFY AND HOLD
LENDER, ITS AFFILIATES AND LENDER'S SUCCESSORS AND ASSIGNS (EACH SUCH PERSON
HEREIN REFERRED TO AS AN "INDEMNITEE") ABSOLUTELY HARMLESS FROM AND AGAINST ALL
CLAIMS, LIABILITIES, LOSSES, DAMAGES, OBLIGATIONS OR RELATED EXPENSES INCURRED
BY OR IMPOSED UPON OR ALLEGED TO BE DUE OF INDEMNITEE IN CONNECTION WITH (A) THE
EXECUTION OR DELIVERY OF THIS LOAN AGREEMENT, ANY OTHER LOAN DOCUMENT OR ANY
OTHER AGREEMENT OR INSTRUMENT CONTEMPLATED HEREBY OR THEREBY, THE PERFORMANCE BY
THE PARTIES HERETO OF THEIR RESPECTIVE OBLIGATIONS HEREUNDER OR THEREUNDER, THE
CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, OR, IN THE
 
 
 
 

--------------------------------------------------------------------------------

 
 
CASE OF LENDER, THE ADMINISTRATION OF THIS LOAN AGREEMENT AND THE OTHER LOAN
DOCUMENTS, (B) ANY LOAN OR LETTER OF CREDIT OR THE USE OR PROPOSED USE OF THE
PROCEEDS THEREFROM (INCLUDING ANY REFUSAL BY LENDER TO HONOR A DEMAND FOR
PAYMENT UNDER A LETTER OF CREDIT IF THE DOCUMENTS PRESENTED IN CONNECTION WITH
SUCH DEMAND DO NOT STRICTLY COMPLY WITH THE TERMS OF SUCH LETTER OF CREDIT), (C)
ANY ACTUAL OR ALLEGED PRESENCE OR RELEASE OF HAZARDOUS MATERIALS ON OR FROM ANY
PROPERTY OWNED OR OPERATED BY BORROWER, ANY SUBSIDIARY OR ANY OBLIGATED PARTY,
OR ANY ENVIRONMENTAL LIABILITY RELATED IN ANY WAY TO BORROWER, ANY SUBSIDIARY OR
ANY OBLIGATED PARTY, OR (d) ANY ACTUAL OR PROSPECTIVE CLAIM, LITIGATION,
INVESTIGATION OR PROCEEDING RELATING TO ANY OF THE FOREGOING, WHETHER BASED ON
CONTRACT, TORT OR ANY OTHER THEORY, WHETHER BROUGHT BY A THIRD PARTY OR BY
BORROWER OR ANY OBLIGATED PARTY, AND REGARDLESS OF WHETHER ANY INDEMNITEE IS A
PARTY THERETO, IN ALL CASES, WHETHER OR NOT CAUSED BY OR ARISING, IN WHOLE OR IN
PART, OUT OF THE COMPARATIVE, CONTRIBUTORY OR SOLE NEGLIGENCE OF THE INDEMNITEE;
PROVIDED THAT SUCH INDEMNITY SHALL NOT, AS TO ANY INDEMNITEE, BE AVAILABLE TO
THE EXTENT THAT SUCH CLAIMS, LIABILITIES, LOSSES, DAMAGES, OBLIGATIONS OR
RELATED EXPENSES ARE DETERMINED BY A COURT OF COMPETENT JURISDICTION IN A FINAL
AND NONAPPEALABLE JUDGMENT TO HAVE RESULTED FROM (I) GROSS NEGLIGENCE OR WILLFUL
MISCONDUCT OF SUCH INDEMNITEE, OR (II) A CLAIM BROUGHT BY BORROWER OR ANY
OBLIGATED PARTY AGAINST AN INDEMNITEE FOR BREACH IN BAD FAITH OF SUCH
INDEMNITEE'S OBLIGATIONS HEREUNDER OR ANY OTHER LOAN DOCUMENT. IN THE EVENT OF
COURT ACTION IN CONNECTION WITH ANY SUCH CLAIM OR DEMAND, BORROWER WILL ASSUME,
TO THE EXTENT REQUESTED BY LENDER, THE RESPONSIBILITY FOR THE DEFENSE OF ANY
SUCH ACTION AND WILL IMMEDIATELY SATISFY AND DISCHARGE ANY FINAL DECREE OR
JUDGMENT RENDERED THEREIN.  LENDER MAY, IN ITS SOLE DISCRETION, MAKE ANY
PAYMENTS SUSTAINED OR INCURRED BY REASON OF ANY OF THE FOREGOING, AND BORROWER
WILL IMMEDIATELY REPAY TO LENDER IN CASH THE AMOUNT OF SUCH PAYMENT, WITH
INTEREST THEREON AT THE RATE SPECIFIED IN THE NOTES TO BE APPLICABLE TO PAST-DUE
PRINCIPAL.  LENDER WILL HAVE THE RIGHT TO JOIN BORROWER AND ITS SUBSIDIARIES AS
PARTIES DEFENDANT IN ANY LEGAL ACTION BROUGHT AGAINST LENDER, AND BORROWER
HEREBY CONSENTS TO THE ENTRY OF AN ORDER MAKING BORROWER AND ITS SUBSIDIARIES AS
PARTIES DEFENDANT TO ANY SUCH ACTION.
 
Section 10.15. Participation of the Loans.  Borrower agrees that Lender may, at
its option, sell interests in the Loans and its rights and remedies under this
Loan Agreement to one or more financial institutions or other Person acceptable
to Lender and, in connection with each such sale, Lender may disclose any
financial and other information available to Lender concerning Borrower or any
Obligated Party to each prospective purchaser; provided, however, that at no
time prior to the existence of an Event of Default will Lender sell, assign or
transfer all or a portion of any Loan to an industry competitor of Borrower.
 
 
 
 

--------------------------------------------------------------------------------

 
 
Section 10.16. Counterparts; Facsimile Documents and Signatures.  This Loan
Agreement may be separately executed in any number of counterparts, each of
which will be an original, but all of which, taken together, will be deemed to
constitute one and the same instrument.  For purposes of negotiating and
finalizing this Loan Agreement, if this document or any document executed in
connection with it is transmitted by facsimile machine, electronic mail or other
electronic transmission, it will be treated for all purposes as an original
document.  Additionally, the signature of any party on this document transmitted
by way of a facsimile machine or electronic mail will be considered for all
purposes as an original signature.  Any such transmitted document will be
considered to have the same binding legal effect as an original document.  At
the request of any party, any faxed or electronically transmitted document will
be re-executed by each signatory party in an original form.
 
Section 10.17. Imaging of Documents.  Borrower understands and agrees that (a)
Lender's document retention policy may involve the electronic imaging of
executed Loan Documents and the destruction of the paper originals, and (b)
Borrower waives any right that it may have to claim that the imaged copies of
the Loan Documents are not originals.
 
Section 10.18. No Oral Agreements.  The term "WRITTEN AGREEMENT" will include
this Loan Agreement, together with each and every other document relating to
and/or securing the Obligations, regardless of the date of execution. THIS
WRITTEN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT
BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES.  THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE
PARTIES.
 
Section 10.19. WAIVER OF RIGHT TO TRIAL BY JURY. EACH PARTY HERETO HEREBY
IRREVOCABLY WAIVES, TO THE FULLEST EXTENT NOT PROHIBITED BY APPLICABLE
GOVERNMENTAL REQUIREMENT, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL
PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS LOAN
AGREEMENT OR ANY OTHER LOAN DOCUMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR
THEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY).  EACH PARTY
HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER
PERSON HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PERSON 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 LOAN AGREEMENT AND THE OTHER LOAN DOCUMENTS BY, AMONG OTHER THINGS,
THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION.
 
Section 10.20.  Amendment and Restatement.  This Loan Agreement is given in
amendment and restatement (in its entirety), but not in extinguishment, of the
Indebtedness of Borrower under that certain Promissory Note  dated as of May 31,
2011 in the original principal amount of $6,000,000.00 by and between Borrower
and Lender, as the same has been amended, restated or modified from time to
time.
 
 
 
 

--------------------------------------------------------------------------------

 
 
Section 10.21. Confidentiality. Unless otherwise required to be disclosed by
applicable law, other Governmental Requirements or a Governmental Authority,
Lender shall hold all non-public information regarding Borrower, its
Subsidiaries, each Obligated Party and their businesses delivered by Borrower to
Lender pursuant to the requirements hereof and expressly marked as confidential
in conspicuous lettering in accordance with Lender’s customary procedures for
handling confidential information of such nature.
 
[Remainder of Page Intentionally Left Blank]
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

--------------------------------------------------------------------------------

 
 
Executed as of the date first written above.
 
 

 
BORROWER:
      MICROPAC INDUSTRIES, INC.,    a Delaware corporation           
By:     /s/ Mark W. King
 
Name:  Mark W. King
 
Title:    CEO
         
LENDER:
     
FROST BANK,
 
a Texas state bank
         
By:      /s/ Jason Purser
 
Name:  Jason Purser
 
Title:    Vice President

 

 
 
 

--------------------------------------------------------------------------------

 

EXHIBIT A

[Form of Specific Advance Note Follows This Cover Page]
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 
 
 

--------------------------------------------------------------------------------

 
 
FORM OF PROMISSORY NOTE
(this “Note”)
 
 

 

$[________________________]   ___________________, 20____ 

 
                                                     

For value received, MICROPAC INDUSTRIES, INC., a Delaware corporation, as
principal ("Borrower"), promises to pay to the order of FROST BANK, a Texas
state bank ("Lender") at P.O. Box 34746, San Antonio, Texas  78265, or at such
other address as Lender shall from time to time specify in writing, the
principal sum of ____________________________ AND ____/100 DOLLARS
($_________________), in legal and lawful money of the United States of America,
with interest on the outstanding principal from the date advanced until paid at
the rate set out below.  Interest shall be computed on a per annum basis of a
year of 360 days and for the actual number of days elapsed, unless such
calculation would result in a rate greater than the highest rate permitted by
applicable law, in which case interest shall be computed on a per annum basis of
a year of 365 days or 366 days in a leap year, as the case may be. This Note has
been executed and delivered pursuant to the Loan Agreement (hereafter defined),
is one of the “Specific Advance Notes” referred to therein, and reflects one of
the “Specific Advance Loans” made under the “Specific Advance Commitment” set
forth in the Loan Agreement.

1.           Payment Terms.

(a) Interest only shall be due and payable monthly as it accrues on the 1st day
of each and every calendar month, beginning ________, 20__, and continuing
regularly and for 5 months thereafter until _____, 20__ (the “Last Interest Only
Payment Date”)[Six Month Interest Only Period]; interest being calculated on the
unpaid principal each day principal is outstanding and all payments made
credited to any collection costs and late charges, to the discharge of the
interest accrued and to the reduction of the principal, in such order as Lender
shall determine.

(b) Thereafter, principal and interest shall be due and payable in level monthly
installments, payable on the 1st day of each calendar month, beginning on the
1st day of the calendar month following the Last Interest Only Payment Date, and
continuing regularly thereafter, on the 1st day of each of the 56 succeeding
calendar months, and in one final installment, on the 58th month following the
Last Interest Only Payment Date [58 Months from the end of the Interest Only
Period] (“Maturity Date”), the entire amount hereof, principal and interest then
remaining unpaid, shall be then due and payable; interest being calculated on
the unpaid principal each day principal is outstanding and all payments made
credited to any collection costs and late charges, to the discharge of the
interest accrued and to the reduction of the principal, in such order as Lender
shall determine.  The amount of the level monthly installment of principal and
interest for such period shall be determined by Lender on the Last Interest Only
Payment Date  [Last day of the Interest Only Period], calculated on the basis of
a mortgage amortization of the unpaid principal balance of this Note on the Last
Interest Only Payment Date  [Last day of the Interest Only Period] over a period
of fifty-eight (58) months (the “Amortization Period”) and using the then
existing Variable Rate or Fixed Rate (as such terms are defined below) depending
on Borrower’s interest rate selection described in Section 3 hereof.
 
 
 
 

--------------------------------------------------------------------------------

 

(c) It is intended by Lender and Borrower that, after the Last Interest Only
Payment Date, the payments hereon shall always be sufficient to pay all accrued
interest and some principal on this Note.  In order to maintain the present
amortization schedule on this Note in the event that Borrower exercises its
option to have the Variable Rate apply to this Note, Lender shall have the
option, in its sole discretion, to adjust the payment amount every year during
the term hereof, beginning on the first anniversary of the Last Interest Only
Payment Date  [One calendar year following the last day of the Interest Only
Period], to an amount satisfactory, in Lender’s sole discretion, to cover (i)
all accrued, unpaid interest hereon, (ii) the principal reduction required to
fully amortize the unpaid principal balance hereof in equal monthly payments
over the then remaining portion of the Amortization Period, and (iii) all
interest anticipated to accrue on this Note during the one-year period following
a payment adjustment.  Lender may choose not to change the payments on this Note
in any year throughout the term hereof.

2.           Late Charge.  If a payment is made more than 10 days after it is
due, Borrower will be charged, in addition to interest, a delinquency charge of
(i) 5% of the unpaid portion of the regularly scheduled payment, or (ii)
$250.00, whichever is less.   Additionally, upon maturity of this Note, if the
outstanding principal balance (plus all accrued but unpaid interest) is not paid
within 10 days of the maturity date, Borrower will be charged a delinquency
charge of (i) 5% of the sum of the outstanding principal balance (plus all
accrued but unpaid interest), or (ii) $250.00, whichever is less. Borrower
agrees with Lender that the charges set forth herein are reasonable compensation
to Lender for the handling of such late payments.

3.           Interest Rate.

(a) Interest on the outstanding and unpaid principal balance hereof shall be
computed at a per annum rate equal to the lesser of (x) at Borrower’s option,
the Variable Rate or the Fixed Rate (both as defined below), or (y) the highest
rate permitted by applicable law, but in no event shall interest contracted for,
charged or received hereunder plus any other charges in connection herewith
which constitute interest exceed the maximum interest permitted by applicable
law. The option described herein above shall be exercised by Borrower in writing
on or before the effective date of this Note and shall be irrevocable for the
full term of this Note; provided, however, if such option is not made by
Borrower on or before the effective date of this Note, the Variable Rate shall
apply to the full term of this Note.
 
 
 
 

--------------------------------------------------------------------------------

 

(b) As used herein, the term “Variable Rate” means a per annum rate equal to The
Wall Street Journal London Interbank Offered Rate (as defined below) plus two
and one-half percent (2.50%) per annum, with said rate to be adjusted daily to
reflect any change in The Wall Street Journal London Interbank Offered Rate at
the time of any such change.  As used herein, for any date, The Wall Street
Journal London Interbank Offered Rate" shall mean the London Interbank Offered
Rate (LIBOR) for 90-days quoted in the most recently published issue of The Wall
Street Journal (Central Edition) in the "Money Rates" column.  Borrower
acknowledges that (i) if more than one London Interbank Offered Rate  is
published at any time by The Wall Street Journal, the highest of such London
Interbank Offered Rate shall constitute the London Interbank Offered Rate
hereunder, and (ii) if at any time The Wall Street Journal ceases to publish a
London Interbank Offered Rate, Lender shall have the right to select a
substitute rate that Lender determines, in the exercise of its reasonable
commercial discretion, to be comparable to such LIBOR rate, and the substituted
rate as so selected, upon the sending of written notice thereof to Borrower,
shall constitute the London Interbank Offered Rate hereunder.  The Wall Street
Journal London Interbank Offered Rate is a reference rate and does not
necessarily represent the lowest or best rate actually charged to any
customer.  Each determination by Lender of the LIBOR shall be conclusive and
binding absent manifest error, and may be computed using any reasonable
averaging and attribution method.

(c) As used herein, the term “Fixed Rate” means the Secure Connect Amortizing
Rate for a maturity of five (5) years with a sixty (60) month amortization
established by the Federal Home Loan Bank of Dallas in its listing of advanced
pricing rates, plus two and one-half percent (2.50%).  In the event the Federal
Home Loan Bank of Dallas ceases to publish the foregoing interest rate, then
Lender shall substitute a comparable index in its reasonable discretion.

4.           Default Rate.  For so long as any Event of Default exists under
this Note or under any of the other Loan Documents (defined below), regardless
of whether or not there has been an acceleration of the indebtedness evidenced
by this Note, and at all times after the maturity of the indebtedness evidenced
by this Note (whether by acceleration or otherwise), and in addition to all
other rights and remedies of Lender hereunder, interest shall accrue at the rate
stated above plus five percent (5%) per annum, but in no event in excess of the
highest rate permitted by applicable law, and such accrued interest shall be
immediately due and payable.  Borrower acknowledges that it would be extremely
difficult or impracticable to determine Lender's actual damages resulting from
any event of default, and such accrued interest is a reasonable estimate of
those damages and does not constitute a penalty.
 
 
 
 

--------------------------------------------------------------------------------

 

5.           Prepayment.

(a) If the Variable Rate is selected or deemed selected by Borrower pursuant to
Section 3 above, then Borrower reserves the right to prepay, prior to maturity,
all or any part of the principal of this Note without penalty.  Any prepayments
shall be applied first to accrued interest and then to principal.  Borrower will
provide written notice to the holder of this Note of any such prepayment of all
or any part of the principal at the time thereof.  All payments and prepayments
of principal or interest on this Note shall be made in lawful money of the
United States of America in immediately available funds, at the address of
Lender indicated above, or such other place as the holder of this Note shall
designate in writing to Borrower.  All partial prepayments of principal shall be
applied to the last installments payable in their inverse order of maturity.

(b) If the Fixed Rate is selected by Borrower pursuant to Section 3 above, then
Borrower may prepay, prior to maturity, all or any part of the principal of this
Note without penalty (and the other prepayment provisions set forth in Section
5(a) above will also apply) , unless any such prepayment is made as part of a
refinancing of all or any part of the principal of this Note with a party other
than Lender (or any of its affiliates) whereupon: Borrower shall have the right
to prepay the Note only if (i) such prepayment is in full payment of the
outstanding balance and all accrued but unpaid interest on the Note, (ii)
Borrower shall provide written notice to Lender not less than thirty (30) days
prior to the date of such prepayment, and (iii) Borrower shall pay to Lender a
prepayment premium in accordance with the following:

In consideration of Lender offering to make the loan as a fixed rate loan,
Borrower agrees that if Borrower prepays the Note (including prepayment as a
result of an event of default), Borrower shall pay all accrued interest on the
Note and a prepayment premium equal to the product of (x) the principal balance
of the Note times (y) the Prepayment Factor times (z) the number of months
remaining from the prepayment date to the termination date of the fixed interest
rate period of the Note (with any fraction of a month counted as a month),
discounted to net present value at the Discount Rate on a monthly basis.

    “Prepayment Factor” means A minus B divided by 12, where

A = The sum of (i) the Treasury Rate for the Determination Date plus (ii) one
half of one percent (½%); and

B = The Treasury Rate for the Prepayment Date.
 
 
 
 

--------------------------------------------------------------------------------

 

“H.15” means “Statistical Release H.15, Selected Interest Rates” of the Board of
Governors of the Federal Reserve System, or any successor publication; “Treasury
Rate for the Determination Date” means, for any date, the Treasury constant
maturity nominal yield value displayed for the date in question in H.15 for the
maturity closest in length to the term of the fixed interest rate period of the
Note; “Determination Date” means the start date of the fixed interest rate
period of the Note; “Treasury Rate for the Prepayment Date” means, for any date,
the Treasury constant maturity nominal yield value displayed for the date in
question in H.15 for the maturity closest in length to the remaining term of the
fixed interest rate period of the Note; “Discount Rate” means the Treasury Rate
for the Prepayment Date.

Lender shall deliver to Borrower a statement setting forth the amount and manner
of determining such prepayment premium, which statement shall be conclusive and
binding upon Borrower for all purposes, absent manifest error. Borrower agrees
to pay such prepayment to Lender within three (3) calendar days after receipt of
such statement. If no Treasury Rate is displayed in H.15 for the Determination
Date or the prepayment date, Lender shall use the Treasury Rate for the next
preceding date for which it is displayed. If, in the case of any prepayment,
Lender determines B in the Prepayment Factor to equal or exceed A, then no
prepayment premium shall be due. Failure by Lender to collect or demand such a
premium at the time of a prepayment shall not be deemed a waiver of Lender’s
right to such premium or to any future premium.

The prepayment premium provided above shall be due, to the extent permitted by
applicable law, under any and all circumstances where all or any portion of the
Note is paid prior to the maturity date of this Note, whether such prepayment is
voluntary or involuntary, even if such prepayment results from Lender's exercise
of its rights upon the occurrence and continuation of an Event of Default (as
defined in the Loan Agreement or the other Loan Documents, which terms are
defined below) and acceleration of the maturity date of this Note (irrespective
of whether or not foreclosure proceedings or any other proceedings against
Borrower, the collateral property or any guarantor have been commenced), and
shall be in addition to any other sums due under this Note, the Loan Agreement,
or under any of the other Loan Documents.  No tender of a prepayment of this
Note with respect to which a prepayment premium is due shall be effective unless
and until such prepayment is accompanied by the applicable prepayment premium.

6.           Default.  It is expressly provided that upon the occurrence of an
Event of Default specified in the Loan Agreement or any of the other Loan
Documents, so long as such Event of Default continues, the holder of this Note
may, at its option, without further notice or demand, (i) declare the
outstanding principal balance of and accrued but unpaid interest on this Note at
once due and payable, (ii) refuse to advance any additional amounts under this
Note, (iii) foreclose all liens securing payment hereof, (iv) pursue any and all
other rights, remedies and recourses available to the holder hereof, including
but not limited to any such rights, remedies or recourses under the Loan
Documents, at law or in equity, or (v) pursue any combination of the foregoing;
and in the event default is made in the prompt payment of this Note when due or
declared due, and the same is placed in the hands of an attorney for collection,
or suit is brought on same, or the same is collected through probate, bankruptcy
or other judicial proceedings, then the Borrower agrees and promises to pay all
costs of collection, including reasonable attorney's fees.
 
 
 
 

--------------------------------------------------------------------------------

 

7.           Joint and Several Liability; Waiver.  Each maker, signer, surety
and endorser hereof, as well as all heirs, successors and legal representatives
of said parties, shall be directly and primarily, jointly and severally, liable
for the payment of all indebtedness hereunder.  Lender may release or modify the
obligations of any of the foregoing persons or entities, or guarantors hereof,
in connection with this Note without affecting the obligations of  the
others.  All such persons or entities expressly waive presentment and demand for
payment, notice of default, notice of intent to accelerate maturity, notice of
acceleration of maturity, protest, notice of protest, notice of dishonor, and
all other notices and demands for which waiver is not prohibited by law, and
diligence in the collection hereof; and agree to all renewals, extensions,
indulgences, partial payments, releases or exchanges of collateral, or taking of
additional collateral, with or without notice, before or after maturity.  No
delay or omission of Lender in exercising any right hereunder shall be a waiver
of such right or any other right under this Note.

8.           No Usury Intended; Usury Savings Clause.  In no event shall
interest contracted for, charged or received hereunder, plus any other charges
in connection herewith which constitute interest, exceed the maximum interest
permitted by applicable law.  The amounts of such interest or other charges
previously paid to the holder of the Note in excess of the amounts permitted by
applicable law shall be applied by the holder of the Note to reduce the
principal of the indebtedness evidenced by the Note, or, at the option of the
holder of the Note, be refunded.  To the extent permitted by applicable law,
determination of the legal maximum amount of interest shall at all times be made
by amortizing, prorating, allocating and spreading in equal parts during the
period of the full stated term of the loan and indebtedness, all interest at any
time contracted for, charged or received from the Borrower hereof in connection
with the loan and indebtedness evidenced hereby, so that the actual rate of
interest on account of such indebtedness is uniform throughout the term hereof.

9.           Security.  This Note has been executed and delivered pursuant to
that certain Loan Agreement dated as of January 23, 2012 by and between Borrower
and Lender (as amended from time to time, the "Loan Agreement"), and is secured
by, inter alia, a Security Agreement dated of even date with the Loan Agreement,
given by Borrower in favor of Lender (as amended and supplemented from time to
time, the “Security Agreement”), covering certain collateral as more
particularly described therein. This Note is one of the “Specific Advance Notes”
described in and issued pursuant to the Loan Agreement. This Note, the Loan
Agreement, the Security Agreement, and all other documents evidencing, securing,
governing, guaranteeing and/or pertaining to this Note, including but not
limited to those documents described above, are collectively referred to as the
"Loan Documents."  The holder of this Note is entitled to the benefits and
security provided in the Loan Documents.
 
 
 
 

--------------------------------------------------------------------------------

 

10.           Texas Finance Code.  In no event shall Chapter 346 of the Texas
Finance Code (which regulates certain revolving loan accounts and revolving
tri-party accounts) apply to this Note.  To the extent that Chapter 303 of the
Texas Finance Code is applicable to this Note, the "weekly ceiling" specified in
such article is the applicable ceiling; provided that, if any applicable law
permits greater interest, the law permitting the greatest interest shall apply.

11.           Governing Law, Venue. This Note is being executed and delivered,
and is intended to be performed in the State of Texas.  Except to the extent
that the laws of the United States may apply to the terms hereof, the
substantive laws of the State of Texas shall govern the validity, construction,
enforcement and interpretation of this Note.  In the event of a dispute
involving this Note or any other instruments executed in connection herewith,
the undersigned irrevocably agrees that venue for such dispute shall lie in any
court of competent jurisdiction in Bexar County, Texas.

12.           Purpose of Loan.  Borrower agrees that no advances under this Note
shall be used for personal, family or household purposes, and that all advances
hereunder shall be used solely for business, commercial, investment, or other
similar purposes.

13.           Captions.  The captions in this Note are inserted for convenience
only and are not to be used to limit the terms herein.

14.           Reference to Loan Agreement. This Note has been executed and
delivered pursuant to the Loan Agreement.  In the event of any conflict between
the terms of this Note and the Loan Agreement, the terms of the Loan Agreement
shall control.
 
 

 

 
BORROWER:
      MICROPAC INDUSTRIES, INC.,    
a Delaware corporation
         
By : _________________________________
 
Name: _______________________________
 
Title: ________________________________

 

 
 

--------------------------------------------------------------------------------

 

EXHIBIT B

[Form of Subordination Agreement Follows This Cover Page]

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

--------------------------------------------------------------------------------

 
 
FORM OF SUBORDINATION AGREEMENT
 
This Subordination Agreement (this “Agreement”) is executed and made effective
as of ________________, 20__, by and among MICROPAC INDUSTRIES, INC., a Delaware
corporation (“Borrower”), [_________________] (the “Subordinate Lender”), and
FROST BANK, a Texas State bank (together with its successors and/or assigns,
“Senior Lender”).
 
WITNESSETH:
 
WHEREAS, Borrower has issued to Subordinate Lender that certain Promissory Note
(the “Subordinate Note”), dated of even date herewith, in the original principal
amount of $[______________] (a copy of which is attached hereto as Exhibit A),
pursuant to which Subordinate Lender has made an unsecured loan or has extended
other unsecured financial accommodations to Borrower (the “Subordinate Loan”);
 
WHEREAS, pursuant to various loan documents, now and hereafter existing,
including without limitation that certain Loan Agreement dated as of [_______],
2012, by and between Borrower and Senior Lender (the “Loan Agreement”), Senior
Lender has provided, and may in the future additionally provide, extensions of
credit to Borrower (collectively, the “Senior Loan”);
 
WHEREAS, Borrower, Senior Lender, and Subordinate Lender desire to make the
Subordinate Obligations (as defined below) junior and subordinate in right of
payment and right of priority to the Senior Obligations as provided below; and
 
WHEREAS, Borrower, Subordinate Lender, and Senior Lender are entering into this
Agreement to govern, among other things, Borrower’s ability to make payments on
the Subordinate Loan;
 
NOW THEREFORE, in consideration of the premises, mutual covenants contained
herein and other good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the parties hereto stipulate and agree as follows:
 
1. Certain Definitions.  Capitalized terms used in this Agreement shall have the
respective meanings set forth below or in the part of this Agreement where first
used, and capitalized terms used but not otherwise defined herein shall have the
meanings given to such terms in the Loan Agreement:
 
“Collateral Property” means all assets, property and property rights, of any
kind or nature, tangible or intangible, now or hereafter existing, in which
Borrower owns, asserts or maintains an interest.
 
“Enforcement” means for Subordinate Lender to commence the judicial or
non-judicial enforcement of any of its rights and remedies with respect to the
Subordinate Obligations under the Subordinate Loan Documents, any related
agreements, or applicable law.
 
 
 
 

--------------------------------------------------------------------------------

 
 
“Finally Paid” or “Final Payment,” when used in connection with the Senior
Obligations means the full, final and indefeasible payment of all of the Senior
Obligations and the irrevocable termination of Senior Lender’s obligation to
make loans or other advances under the Senior Loan Documents.
 
“Proceeding” means (a) any insolvency or bankruptcy case or proceeding, or any
receivership, liquidation, reorganization or other similar case or proceeding in
connection therewith, relative to Borrower, its creditors, as such, or to its
assets; (b) any liquidation, dissolution or other winding up of Borrower,
whether voluntary or involuntary and whether or not involving insolvency or
bankruptcy; or (c) any assignment for the benefit of creditors or any other
marshaling of assets and liabilities of Borrower.
 
“Senior Loan Documents” means all documents which evidence, secure, guarantee,
and/or pertain to the Senior Loan, now and hereafter existing, plus all
amendments, modifications, increases, renewals and extensions of the foregoing.
 
“Senior Obligations” means all loans, advances, liabilities, debit balances,
covenants, guaranties and duties at any time owed by Borrower to Senior Lender
or its successors or assigns, now existing or hereafter arising under, or
pursuant to, Senior Loan Documents, and all deferrals, modifications, renewals,
extensions, and refinancings by Senior Lender, in whole or in part, of any of
the foregoing.
 
“Subordinate Loan Documents” means the Subordinate Note and all other documents
which evidence, secure, guarantee and/or pertain to the Subordinate Loan, plus
all amendments, modifications and substitutions of the foregoing.
 
“Subordinate Obligations” means all present and future obligations of Borrower
to Subordinate Lender, together with all amendments, renewals, and extensions
thereof, arising under or pursuant to the Subordinate Loan Documents, including,
without limitation, all obligations to pay principal and interest on the
Subordinate Loan and all obligations to make installment payments and to pay
costs, fees and expenses under the Subordinate Loan Documents.
 
2. Subordination.
 
(a) Subordinate Lender hereby postpones and subordinates, to the extent and in
the manner provided in this Agreement, all of the Subordinate Obligations to the
Final Payment of all of the Senior Obligations.  Subordinate Lender hereby
agrees that all claims and rights of any kind Subordinate Lender may now have or
hereafter acquire against the Borrower, any Subsidiary of Borrower, and any
Collateral Property (if any and subject to Section 6 below) resulting from the
Subordinate Obligations shall be subordinate and subject to the Senior Lender’s
claims and rights against the Borrower, any Subsidiary of Borrower, and/or the
Collateral Property arising from or out of the Senior Obligations, to the extent
and in the manner set forth in this Agreement.  The Subordinate Note shall bear
a conspicuous legend that it is subordinated to the Senior Obligations in
accordance with the terms of this Agreement.
 
 
 
 

--------------------------------------------------------------------------------

 
 
(b) Subject to Section 6 below, each of Borrower and Subordinate Lender hereby
agrees that any liens, security interests, claims, and rights of any kind
Subordinate Lender may presently have or hereafter acquire against Borrower or
any of the Collateral Property shall be subordinate and subject to the liens,
security interests, claims, and rights of Senior Lender against Borrower and the
Collateral Property arising from or out of the Senior Obligations and the Senior
Loan Documents, regardless of the order or time as of which any liens or
security interests attach to any of the Collateral Property, the order or time
of UCC filings or any other filings or recordings, the order or time of granting
of any such liens or security interests, or the physical possession of any of
the Collateral Property, in each case unless and until this Agreement is
terminated in accordance with Section 19 of this Agreement.  Subject to Section
6 below, if Borrower or Subordinate Lender executes, files, or records any
agreement, document, or instrument granting, creating, or otherwise evidencing
any lien, each such agreement, document, or instrument shall bear a conspicuous
legend that it is subordinated to the liens of Senior Lender in accordance with
the terms of this Agreement.
 
(c) Except as expressly permitted pursuant to Section 3(b) below, Subordinate
Lender agrees not to initiate or pursue any Enforcement until the Senior
Obligations and all other obligations created under the Senior Loan Documents
have been Finally Paid.  Subordinate Lender agrees to execute and deliver to
Senior Lender (and authorizes Senior Lender to execute and deliver on behalf of
Subordinate Lender) such UCC-3 financing statement amendments and such other
documents and instruments as Senior Lender may reasonably request from time to
time to evidence the subordination contained herein.
 
3. Permitted Payments on Subordinate Obligations.  Except as provided below,
nothing contained in this Agreement shall prevent Borrower from making regularly
scheduled principal and interest payments on the Subordinate Obligations as and
when required pursuant to the terms of the Subordinate Note; provided, however:
 
(a) Upon default in the payment of all or any portion of any Senior Obligations
when due (a “Payment Default”), and upon receipt by Subordinated Lender of
written notice from Senior Lender of such Payment Default, no direct or indirect
payment in cash, property or securities, by set-off, realization upon any of
Borrower’s property or otherwise (including any Collateral Property and subject
to Section 6 below), shall be made or agreed to be made by Borrower or accepted
by Subordinate Lender on account of the principal of, premium or interest on any
of the Subordinate Obligations or any other amounts due under the Subordinate
Loan Documents or in respect of any redemption, retirement or acquisition of any
of the indebtedness evidencing or due under the Subordinate Loan Documents and
no Enforcement will be commenced, undertaken or prosecuted by Subordinate
Lender, unless and until (i) such Payment Default has been cured or has been
waived in writing by Senior Lender or (ii) the Senior Indebtedness is Finally
Paid.
 
 
 
 

--------------------------------------------------------------------------------

 
 
(b) Upon the occurrence and during the continuance of a Default or an Event of
Default under any of the Senior Loan Documents, other than a Payment Default,
and upon receipt by Subordinate Lender of written notice (the “Default Notice”)
from Senior Lender, no direct or indirect payment in cash, property or
securities, by setoff, realization upon Borrower’s property or otherwise
(including any Collateral Property and subject to Section 6 below), shall be
made or agreed to be made by Borrower or accepted by Subordinate Lender on
account of the principal of, premium or interest on any of the Subordinate
Obligations or any other amounts due under the Subordinate Loan Documents or in
respect of any redemption, retirement or acquisition of any of the indebtedness
evidencing or due under the Subordinate Loan Documents, and no Enforcement will
be commenced, undertaken or prosecuted by Subordinate Lender, unless and until
the earlier of the following to occur has occurred: (i) Subordinate Lender has
received a written notice from Senior Lender that the Default or Event of
Default referred to in such Default Notice has been cured or has been waived by
Senior Lender, or (ii) the expiration of 180 days following the giving of the
Default Notice (the period from the date the Default Notice is given to the
earlier to occur of the events described in clauses (i) and (ii) immediately
preceding shall be referred to as the “Standstill Period”); provided that within
the first 90 days following the expiration of any Standstill Period, the
Subordinate Lender’s Enforcement shall exclude any attempt to realize upon, or
exercise any rights of any nature with respect to any of Borrower’s property
(including any Collateral Property) securing the Subordinated Indebtedness (if
any and subject to Section 6 below); and provided further, that the Subordinate
Lender will discontinue any Enforcement commenced pursuant to this clause upon
the occurrence of any Payment Default or the commencement of any subsequent
Standstill Period.  Any Enforcement by Subordinate Lender pursuant to this
Section 3(b) will be subject at all times to the payment subordination and lien
subordination provisions as forth in this Agreement.
 
(c) In the event that any failure of Borrower to make or Subordinate Lender to
receive any payment with respect to any Subordinate Obligations as a result of
the provisions of this Section 3 shall be deemed a default or event of default
under any of the Subordinate Loan Documents, such event shall not give rise to
any right of Subordinate Lender to exercise any Enforcement, any provision of
Subordinate Loan Documents to the contrary notwithstanding.
 
 
 
 

--------------------------------------------------------------------------------

 
 
(d) Subordinate Lender shall provide Senior Lender with written notice of the
occurrence of any default or event of default which occurs under the Subordinate
Loan Documents promptly after acquiring knowledge thereof.  Subordinate Lender
shall deliver to Senior Lender a duplicate copy of any notice of default or
event of default under the Subordinate Loan Documents that Subordinate Lender
delivers to Borrower (such duplicate copy to be delivered to Senior Lender
simultaneously with the delivery of the original thereof to Borrower).
 
4. Limitation on Amendments and Interest Rate.  Subordinate Lender and Borrower
agree that the Subordinate Loan Documents may not be amended or modified in any
respect which adversely affects, or could reasonably be expected to adversely
affect, Senior Lender or violates the terms of the Senior Loan Documents without
the prior written consent of Senior Lender; provided, however, Subordinate
Lender agrees that it will not, without the prior written consent of Senior
Lender, increase the rate of interest or the amount of any regular payment
installment with respect to the Subordinate Obligations, or increase the amount
of fees or chargers payable with respect to the Subordinate Obligations.
 
5. No Enforcement or Proceeding.  Until the Senior Obligations have been Finally
Paid, and Senior Lender has no further commitment to lend to Borrower under the
Senior Loan Documents, Subordinate Lender agrees (a) not to commence, undertake,
or prosecute any Enforcement unless expressly permitted by Section 3(b) above,
and (b) not to commence or initiate any Proceeding.
 
6. Collateral for Subordinate Obligations.  The Subordinate Obligations are
unsecured as of the date of this Agreement and will remain unsecured until the
Senior Obligations are Finally Paid and Senior Lender has no further obligation
to extend any credit under the Senior Loan Documents to Borrower.
 
7. Parties in Interest.  The provisions of this Agreement are intended solely
for the purpose of defining the relative rights of Subordinate Lender, on the
one hand, and Senior Lender, on the other hand; provided that this Agreement
shall be binding on and inure to the benefit of the respective heirs, personal
representatives, successors and assigns of Subordinate Lender and Senior
Lender.  Nothing contained in this Agreement is intended to or shall impair, as
between Borrower, its creditors (other than Subordinate Lender), and Senior
Lender the obligations of Borrower, which are absolute and unconditional, or to
pay Subordinate Lender the Subordinate Obligations as and when the same shall
become due and payable in accordance with their terms as modified by and subject
to this Agreement.  Nothing in this Agreement is intended to or shall affect the
relative rights against Borrower of the Subordinate Lender on the one hand and
creditors of Borrower (other than Senior Lender) on the other hand.
 
 
 
 

--------------------------------------------------------------------------------

 
 
8. Distributions of Borrower’s Assets.  Subordinate Lender agrees that in the
event of any distribution, division, or application, partial or complete,
voluntary or involuntary, through a Proceeding, which shall be payable or
deliverable upon or with respect to any indebtedness of Borrower to Subordinate
Lender under the Subordinate Obligations shall be paid or delivered directly to
Senior Lender for application by Senior Lender to the Senior Obligations until
the Senior Obligations have been Finally Paid.  Subordinate Lender hereby
irrevocably authorizes and empowers Senior Lender to demand, sue for, collect,
and receive every such payment or distribution and to file claims and take such
other proceedings in Senior Lender’s own name or in the name of Subordinate
Lender or otherwise as Senior Lender may deem necessary or advisable for the
enforcement of this Agreement if Senior Lender has requested Subordinate Lender
to take any such action and Subordinate Lender has failed to promptly comply
with such request; and Subordinate Lender hereby agrees to execute and deliver
to Senior Lender such powers of attorney, assignments, or other instruments as
may be requested by Senior Lender in order to enable Senior Lender to enforce
any and all claims upon or with respect to any and all indebtedness of Borrower
to Subordinate Lender and to collect and receive any and all payments or
distributions which may be payable or deliverable at any time upon or with
respect to any such indebtedness of Borrower to Subordinate Lender.
 
9. Distributions Delivered to Senior Lender.  Except for payments which are
expressly allowed by Section 3 of this Agreement to be received and retained by
Subordinate Lender, should any payment or distribution or security or proceeds
thereof be received by Subordinate Lender upon or with respect to any
indebtedness of Borrower to Subordinate Lender under the Subordinate Obligations
prior to the Final Payment of all the Senior Obligations, Subordinate Lender
will immediately deliver the same to Senior Lender in precisely the form
received (except for the endorsement or assignment of Subordinate Lender where
necessary) for application by Senior Lender to the Senior Obligations, and,
until so delivered to Senior Lender, the same will be held in trust by
Subordinate Lender as property of Senior Lender.  In the event of failure of
Subordinate Lender to make any such endorsement or assignment, Senior Lender, or
any of its officers or employees in behalf of Senior Lender, is hereby
irrevocably authorized to make the same.
 
10. Assignment.  Subordinate Lender shall not transfer to a third party all or
any portion of the Subordinate Obligations while any of the Senior Obligations
remain unpaid unless such assignment or transfer is made expressly subject to
this Agreement.
 
 
 
 

--------------------------------------------------------------------------------

 
 
11. GOVERNING LAW AND VENUE.  THIS AGREEMENT IS BEING EXECUTED AND DELIVERED,
AND IS INTENDED TO BE PERFORMED, IN DALLAS COUNTY, TEXAS AND THE LAWS (EXCLUDING
CHOICE OF LAW PROVISIONS) OF SUCH STATE SHALL GOVERN THE VALIDITY, CONSTRUCTION,
ENFORCEMENT AND INTERPRETATION OF THIS AGREEMENT, EXCEPT TO THE EXTENT FEDERAL
LAWS OTHERWISE GOVERN THE VALIDITY, CONSTRUCTION, ENFORCEMENT AND INTERPRETATION
OF ALL OR ANY PART OF THIS AGREEMENT.  ALL LEGAL ACTIONS RELATED TO THIS
AGREEMENT SHALL BE BROUGHT IN THE APPROPRIATE COURT OF LAW LOCATED IN DALLAS
COUNTY, TEXAS, TO THE EXCLUSION OF ALL OTHER VENUES.
 
12. Notices.  All notices, requests and other communications to any party
hereunder shall be in writing (including telex, telecopy or similar writing) and
shall be given to such party at its address, telex or telecopy number set forth
on the signature pages hereof or such other address, telex or telecopy number as
such party may hereafter specify for that purpose by notice to the other
party.  Each such notice, request or other communication shall be effective and
deemed received (a) if given by telex or telecopy, when such telex or telecopy
is transmitted to the appropriate telex or telecopy number and the appropriate
answer back is received or receipt is otherwise confirmed, (b) if given by mail,
three (3) business days after deposit in the mails with first class postage
prepaid, addressed as aforesaid, or (c) if given by any other means, when
actually received at the appropriate address by such party.
 
13. Multiple Counterparts.  This Agreement may be executed in a number of
identical counterparts, each of which for all purposes is to be deemed an
original, and all of which constitute collectively, one Agreement; but in making
proof of this Agreement, it shall not be necessary to produce or account for
more than one such counterpart.  It is not necessary that each party hereto
execute the same counterpart so long as identical counterparts are executed by
each such party hereto.
 
14. No Waiver.  No course of dealing between Senior Lender and Subordinate
Lender, nor any failure to exercise, nor any delay in exercising on the part of
Senior Lender any right hereunder or under the Senior Loan Documents shall
operate as a waiver hereof or thereof; nor shall any single or partial exercise
of any right hereunder or thereunder preclude any other or further exercise
thereof or the exercise of any other right.
 
15. Amendments and Modifications.  This Agreement shall be modified or amended
only in a written document, signed by Senior Lender and Subordinate Lender;
provided, however, as long as the Senior Obligations are outstanding, this
Agreement is a continuing agreement of subordination and is not revocable by
Subordinate Lender.
 
 
 
 

--------------------------------------------------------------------------------

 
 
16. Effect of Bankruptcy.  This Agreement shall be applicable both before and
after filing of any petition by or against Borrower under the federal bankruptcy
code, and all references herein to Borrower shall be deemed to apply to a
trustee for Borrower and Borrower as debtor-in-possession, and all allocations
of payments between the Senior Lender and the Subordinate Lender shall be as set
forth herein.
 
17. Default Under Agreement.  The failure or refusal of Subordinate Lender to
punctually and properly perform, observe, and comply with any covenant,
agreement, or condition contained in this Agreement will constitute a default
under this Agreement and a default and Event of Default under each and every
instrument evidencing all or any part of the Senior Obligations.
 
18. Covenant Not to Challenge.  This Agreement has been negotiated by the
parties with the expectation and in reliance upon the assumption that the
instruments and documents evidencing the Senior Obligations are valid and
enforceable.  In determining whether to enter into this Agreement, Subordinate
Lender has assumed such validity and enforceability, and has agreed to the
provisions contained herein, without relying upon any reservation of a right to
challenge or call into question such validity or enforceability.  As between
Senior Lender and Subordinate Lender, Subordinate Lender hereby covenants and
agrees that it shall not initiate in any proceeding a challenge to the validity
or enforceability of the documents and instruments evidencing and securing the
Senior Obligations, nor shall Subordinate Lender instigate other parties to
raise any such challenges, nor shall Subordinate Lender participate in or
otherwise assert any such challenges which are raised by other parties.
 
19. Termination of Subordination.  This Agreement shall continue and shall be
irrevocable until the date all of the Senior Obligations have been Finally Paid
by Borrower or otherwise discharged and released by the Senior Lender.
 
20. FINAL AGREEMENT.  THIS AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE
PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR
SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.  THERE ARE NO ORAL AGREEMENTS BETWEEN
THE PARTIES.
 
[Signature Page Follows]
 
 
 
 
 

--------------------------------------------------------------------------------

 
 
Executed and delivered as of the date and year first above written.
 

 

 
SENIOR LENDER:
     
FROST BANK
          By: __________________________   
Name: Jason Purser
 
Title: Vice President
         
Address for Notices:
     
2727 N. Harwood, 10th Floor
Dallas, Texas 75201
Fax No.: 214.515.4955
Telephone No.: 214.515.4923
Attention: Jason Purser
e-mail: Jason.purser@frostbank.com

 

 
[Signatures Continue on Following Page]
 
 
 
 

--------------------------------------------------------------------------------

 
 

 

 
SUBORDINATE LENDER:

[_______________________]

By: __________________________
Name: ________________________
Title: _________________________
 
Address for Notices:

________________
________________
Fax No.:
Telephone No.:
Attention:
e-mail:

 

 

[Signatures Continue on Following Page]
 
 
 
 

--------------------------------------------------------------------------------

 
 

 

 
BORROWER:

 
MICROPAC INDUSTRIES, INC.,
a Delaware corporation
 
By: ________________________________
       Name: ________________________
       Title: _________________________

 

Address for Notices:

905 E. Walnut Street
Garland, Texas 75040
Fax No.:
Telephone No.: 972.272.3571
Attention:
e-mail:

 
 
 

 
 
 

--------------------------------------------------------------------------------

 

SECURITY AGREEMENT
 

Borrower:  
Micropac Industries, Inc.
Lender/Secured Party:
Frost Bank
Address:     
905 E. Walnut St.
Garland, Texas 75040
Address: 
P.O. Box 1600
San Antonio, Texas  78296

THIS SECURITY AGREEMENT (this "Agreement") is dated as of January 23, 2013, and
is given by Borrower (“Borrower”) in favor of Lender (“Secured Party”).

1.           Definitions.  As used in this Agreement, the following terms shall
have the meanings indicated below:

(a)
The term "Code" shall mean the Uniform Commercial Code as in effect in the State
of Texas or of any other state having jurisdiction with respect to any of the
rights and remedies of Secured Party on the date of this Agreement or as it may
hereafter be amended from time to time.

(b)
The term "Collateral" shall mean all of the personal property of Grantor as set
forth below (as indicated), wherever located, and now owned or hereafter
acquired:

(i)  
All “accounts”, as defined in the Code (including health-care-insurance
receivables), together with any and all books of account, customer lists and
other records relating in any way to the foregoing (including, without
limitation, computer software, whether on tape, disk, card, strip, cartridge or
any other form), and in any case where an account arises from the sale of goods,
the interest of Grantor in such goods.

(ii)  
All “inventory” as defined in the Code, and all records relating in any way to
the foregoing (including, without limitation, any computer software, whether on
tape, disk, card, strip, cartridge or any other form).

(iii)  
All “chattel paper” as defined in the Code, and all records relating in any way
to the foregoing (including, without limitation, any computer software, whether
on tape, disk, card, strip, cartridge or any other form).

(iv)  
All “equipment” as defined in the Code, of whatsoever kind and character now or
hereafter possessed, held, acquired, leased or owned by Grantor and used or
usable in Grantor's business, and in any event shall include, but shall not be
limited to, all machinery, tools, computer software, office equipment,
furniture, appliances, furnishings, fixtures, vehicles, motor vehicles, together
with all replacements, accessories, additions, substitutions and accessions to
all of the foregoing, and all manuals, instructions and records relating in any
way to the foregoing (including, without limitation, any computer software,
whether on tape, disk, card, strip, cartridge or any other form).  To the extent
that the foregoing property is located on, attached to, annexed to, related to,
or used in connection with, or otherwise made a part of, and is or shall become
fixtures upon, real property, such real property and the record owner thereof
(if other than Grantor) is described on Exhibit A attached hereto and made a
part hereof.

 
 
 
 

--------------------------------------------------------------------------------

 

 
(v)  
All “instruments” as defined in the Code (including promissory notes), and all
records relating in any way to the foregoing (including, without limitation, any
computer software, whether on tape, disk, card, strip, cartridge or any other
form).

(vi)  
All “investment property” as defined in the Code, and all records relating in
any way to the foregoing (including, without limitation, any computer software,
whether on tape, disk, card, strip, cartridge or any other form).

(vii)  
All “documents” as defined in the Code, and all records relating in any way to
the foregoing (including, without limitation, any computer software, whether on
tape, disk, card, strip, cartridge or any other form).

(viii)  
All “deposit accounts” as defined in the Code, and all records relating in any
way to the foregoing (including, without limitation, any computer software,
whether on tape, disk, card, strip, cartridge or any other form).

(ix)  
All “letter of credit rights” as defined in the Code, and all records relating
in any way to the foregoing (including, without limitation, any computer
software, whether on tape, disk, card, strip, cartridge or any other form).

(x)  
All “general intangibles” as defined in the Code, and all records relating in
any way to the foregoing (including, without limitation, any computer software,
whether on tape, disk, card, strip, cartridge or any other form), including all
permits, regulatory approvals, copyrights, patents, trademarks, service marks,
trade names, mask works, goodwill, licenses and all other intellectual property
owned by Grantor or used in Grantor's business.

(xi)  
Grantor's now existing or hereafter acquired equity or other beneficial
ownership interests in each entity now owned or hereafter acquired by Grantor,
together with all now existing or hereafter arising rights of Grantor to receive
distributions or payments from such entities, whether in cash or in kind, and
whether such distributions or payments are on account of Grantor's interest as a
partner, creditor or otherwise.

 
 
 
 

--------------------------------------------------------------------------------

 

 
(xii)  
All “supporting obligations” as defined in the Code, and all records relating in
any way to the foregoing (including, without limitation, any computer software,
whether on tape, disk, card, strip, cartridge or any other form).

The term Collateral, as used herein, shall also include all PRODUCTS and
PROCEEDS of all of the foregoing (including without limitation, insurance
payable by reason of loss or damage to the foregoing property) and any property,
securities, guaranties or monies of Grantor which may at any time come into the
possession of Secured Party.  The designation of proceeds does not authorize
Grantor to sell, transfer or otherwise convey any of the foregoing property
except finished goods intended for sale in the ordinary course of Grantor's
business or as otherwise provided herein.

(c)           The term "Grantor" shall mean Borrower, a corporation, whose
organization number is 0704525 and who is organized in the State of Delaware.

(d)          The term "Indebtedness" shall mean (i) all indebtedness,
obligations and liabilities of Borrower to Secured Party of any kind or
character, now existing or hereafter arising, whether direct, indirect, related,
unrelated, fixed, contingent, liquidated, unliquidated, joint, several or joint
and several, and regardless of whether such indebtedness, obligations and
liabilities may, prior to their acquisition by Secured Party, be or have been
payable to or in favor of a third party and subsequently acquired by Secured
Party (it being contemplated that Secured Party may make such acquisitions from
third parties), including without limitation all indebtedness, obligations and
liabilities of Borrower to Secured Party now existing or hereafter arising by
note, draft, acceptance, guaranty, endorsement, letter of credit, assignment,
purchase, overdraft, discount, indemnity agreement, Interest Rate Protection
Agreement (as hereafter defined) or otherwise, including, without limitation
that one certain Revolving Promissory Note dated of even date herewith, in the
principal amount of $6,000,000.00 executed by Borrower and payable to the order
of Secured Party issued pursuant to that certain Loan Agreement dated of even
date herewith by and between Borrower and Lender (the “Loan Agreement”), and
each Specific Advance Note executed by Borrower from time to time pursuant to
the terms and conditions of the Loan Agreement, (ii) all accrued but unpaid
interest on any of the indebtedness described in (i) above, (iii) all
obligations of Borrower and each other Obligated Party (as hereafter defined) to
Secured Party under any documents evidencing, securing, governing and/or
pertaining to all or any part of the indebtedness described in (i) and (ii)
above, (iv) all costs and expenses incurred by Secured Party in connection with
the collection and administration of all or any part of the indebtedness and
obligations described in (i), (ii) and (iii) above or the protection or
preservation of, or realization upon, the collateral securing all or any part of
such indebtedness and obligations, including without limitation all reasonable
attorneys' fees, and (v) all renewals, extensions, modifications and
rearrangements of the indebtedness and obligations described in (i), (ii), (iii)
and (iv) above.

 
 

--------------------------------------------------------------------------------

 
 
(e)           The term "Interest Rate Protection Agreement" shall mean any
interest rate swap agreement, interest rate exchange agreement, forward rate
agreement, rate floor agreement, interest rate protection agreement, interest
rate cap agreement, rate collar agreement, any option agreement respecting the
foregoing, International Swaps and Derivatives Association, Inc. (ISDA) Master
Agreement, or any similar agreement or arrangement and any schedule,
confirmation, exhibit, document or instrument evidencing any interest in a
transaction covered by any such agreement, now existing or hereafter entered
into by Borrower and Secured Party or an affiliate of Secured Party in
connection with any Indebtedness to hedge the risk of variable interest rate
volatility or fluctuations of interest rates, as any such agreement or
arrangement may be modified, supplemented, amended or revised and in effect from
time to time.

(f)            The term "Loan Documents" shall mean the Loan Agreement, this
Agreement, and all instruments and other documents evidencing, securing,
governing, guaranteeing and/or pertaining to the Indebtedness.

(g)           The term "Obligated Party" shall mean any party other than
Borrower who secures, guarantees and/or is otherwise obligated to pay all or any
portion of the Indebtedness.

All words and phrases used herein which are expressly defined in Section 1.201
or Chapter 9 of the Code shall have the meaning provided for therein.  Other
words and phrases defined elsewhere in the Code shall have the meaning specified
therein except to the extent such meaning is inconsistent with a definition in
Section 1.201 or Chapter 9 of the Code.

2.           Security Interest.  As security for the Indebtedness, Grantor, for
value received, hereby pledges and grants to Secured Party a continuing security
interest in the Collateral.

3.           Representations and Warranties.  In addition to any representations
and warranties of Grantor set forth in the Loan Documents, which are
incorporated herein by this reference, Grantor hereby represents and warrants
the following to Secured Party:

(a)   Authority.  The execution, delivery and performance of this Agreement and
all of the other Loan Documents by Grantor have been duly authorized by all
necessary corporate action of Grantor, to the extent Grantor is a corporation,
by all necessary partnership action, to the extent Grantor is a partnership, by
all necessary company action, to the extent Grantor is a limited liability
company, or by the provisions of the trust documents to the extent the Grantor
is a trust.

(b)   Accuracy of Information.  All information heretofore, herein or hereafter
supplied to Secured Party by or on behalf of Grantor with respect to the
Collateral is true and correct.  The exact legal name and organization number of
Grantor is correctly shown above.
 
 
 
 

--------------------------------------------------------------------------------

 
 

(c)   Enforceability.  This Agreement and the other Loan Documents constitute
legal, valid and binding obligations of Grantor, enforceable in accordance with
their respective terms, except as limited by bankruptcy, insolvency or similar
laws of general application relating to the enforcement of creditors' rights and
except to the extent specific remedies may generally be limited by equitable
principles.

(d)   Ownership and Liens.  Grantor has good and marketable title to the
Collateral, free and clear of all liens, security interests, encumbrances or
adverse claims, except for the security interest created by this Agreement or
the other Loan Documents and liens, security interests and encumbrances
expressly permitted by Section 7.06 of the Loan Agreement.  No dispute, right of
setoff, counterclaim or defense exists with respect to all or any part of the
Collateral.  Grantor has not executed any other security agreement currently
affecting the Collateral (except for liens and security interests expressly
permitted under Section 7.06 of the Loan Agreement) and no effective financing
statement or other instrument similar in effect covering all or any part of the
Collateral is on file in any recording office except as may have been executed
or filed in favor of Secured Party or in favor of any beneficiary of liens,
security interests and encumbrances expressly permitted under Section 7.06 of
the Loan Agreement.

(e)   No Conflicts or Consents.  Neither the ownership, the intended use of the
Collateral by Grantor, the grant of the security interest by Grantor to Secured
Party herein nor the exercise by Secured Party of its rights or remedies
hereunder, will (i) conflict with any provision of (A) any domestic or foreign
law, statute, rule or regulation applicable to the Collateral, (B) the articles
or certificate of incorporation, charter, bylaws, partnership agreement,
articles or certificate of organization, or regulations, trust agreement as the
case may be, of Grantor, or (C) any agreement, judgment, license, order or
permit applicable to or binding upon Grantor, or (ii) result in or require the
creation of any lien, charge or encumbrance upon any assets or properties of
Grantor or of any person except as may be expressly contemplated in the Loan
Documents.  Except as expressly contemplated in the Loan Documents, no consent,
approval, authorization or order of, and no notice to or filing with, any court,
governmental authority or third party is required in connection with the grant
by Grantor of the security interest herein or the exercise by Secured Party of
its rights and remedies hereunder.

(f)   Security Interest.  Grantor has and will have at all times full right,
power and authority to grant a security interest in the Collateral to Secured
Party in the manner provided herein, free and clear of any lien, security
interest or other charge or encumbrance.  This Agreement creates a legal, valid
and binding security interest in favor of Secured Party in the Collateral
securing the Indebtedness.  To the extent permitted in the Code, possession by
Secured Party of all certificates, instruments and cash constituting Collateral
from time to time and/or the filing of the financing statements delivered prior
hereto and/or concurrently herewith by Grantor to Secured Party will perfect and
establish the first priority of Secured Party's security interest hereunder in
the Collateral, subject to liens, security interests and encumbrances expressly
permitted under Section 7.06 of the Loan Agreement.
 
 
 
 

--------------------------------------------------------------------------------

 
 
(g)   Location/Identity.  Grantor's principal residence or place of business and
chief executive office (as those terms are used in the Code), as the case may be
is located at the address set forth herein.  Except as specified elsewhere
herein, all Collateral and records concerning the Collateral shall be kept at
such address and such other addresses as may be listed in Schedule 1 attached
hereto and made a part hereof. Grantor’s organizational structure, state of
organization, and organizational number (the “Organizational Information”) are
as set forth in Section 1(c) above.  Except as specified herein, the
Organizational Information shall not change.

(h)   Solvency of Grantor.  As of the date hereof, and after giving effect to
this Agreement and the completion of all other transactions contemplated by
Grantor at the time of the execution of this Agreement, (i) Grantor is and will
be solvent, (ii) the fair saleable value of Grantor's assets exceeds and will
continue to exceed Grantor's liabilities (both fixed and contingent),
(iii) Grantor is paying and will continue to be able to pay its debts as they
mature, and (iv) if Grantor is not an individual, Grantor has and will have
sufficient capital to carry on Grantor's businesses and all businesses in which
Grantor is about to engage.

(i)   Exclusion of Certain Collateral.  Unless otherwise agreed by Secured
Party, the Collateral does not include any aircraft, watercraft or vessels,
railroad cars, railroad equipment, locomotives or other rolling stock intended
for a use related to interstate commerce.

(j)           Compliance with Environmental Laws.  Except as disclosed in
writing to Secured Party: (i) Grantor is conducting Grantor's businesses in
material compliance with all applicable federal, state and local laws, statutes,
ordinances, rules, regulations, orders, determinations and court decisions,
including without limitation, those pertaining to health or environmental
matters such as the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980, as amended by the Superfund Amendments and
Reauthorization Act of 1986 (collectively, together with any subsequent
amendments, hereinafter called "CERCLA"), the Resource Conservation and Recovery
Act of 1976, as amended by the Used Oil Recycling Act of 1980, the Solid Waste
Disposal Act Amendments of 1980, and the Hazardous Substance Waste Amendments of
1984 (collectively, together with any subsequent amendments, hereinafter called
"RCRA"), the Texas Water Code and the Texas Solid Waste Disposal Act; (ii) none
of the operations of Grantor is the subject of a federal, state or local
investigation evaluating whether any material remedial action is needed to
respond to a release or disposal of any toxic or hazardous substance or solid
waste into the environment; (iii) Grantor has not filed any notice under any
federal, state or local law indicating that Grantor is responsible for the
release into the environment, the disposal on any premises in which Grantor is
conducting its businesses or the improper storage, of any material amount of any
toxic or hazardous substance or solid waste or that any such toxic or hazardous
substance or solid waste has been released, disposed of or is improperly stored,
upon any premise on which Grantor is conducting its businesses; and (iv) Grantor
otherwise does not have any known material contingent liability in connection
with the release into the environment, disposal or the improper storage, of any
such toxic or hazardous substance or solid waste.  The terms "hazardous
substance" and "release", as used herein, shall have the meanings specified in
CERCLA, and the terms "solid waste" and "disposal", as used herein, shall have
the meanings specified in RCRA; provided, however, that to the extent that the
laws of the State of Texas establish meanings for such terms which are broader
than that specified in either CERCLA or RCRA, such broader meanings shall apply.
 
 
 
 

--------------------------------------------------------------------------------

 

(k)   Inventory.  The security interest in the inventory shall continue through
all stages of manufacture and shall, without further action, attach to the
accounts or other proceeds resulting from the sale or other disposition thereof
and to all such inventory as may be returned to Grantor by its account Grantors.

(l)   Accounts.  Each account represents the valid and legally binding
indebtedness of a bona fide account debtor arising from the sale or lease by
Grantor of goods or the rendition by Grantor of services and is not subject to
contra accounts, setoffs, defenses or counterclaims by or available to account
debtors obligated on the accounts except as disclosed by Grantor to Secured
Party from time to time in writing.  The amount shown as to each account on
Grantor's books is the true and undisputed amount owing and unpaid thereon,
subject only to discounts, allowances, rebates, credits and adjustments to which
the account debtor has a right and which have been disclosed to Secured Party in
writing.

(m)   Chattel Paper, Documents and Instruments.  The chattel paper, documents
and instruments of Grantor pledged hereunder have only one original counterpart
and no party other than Grantor or Secured Party is in actual or constructive
possession of any such chattel paper, documents or instruments.

4.           Affirmative Covenants.  In addition to all covenants and agreements
of Grantor set forth in the Loan Documents, which are incorporated herein by
this reference, Grantor will comply with the covenants contained in this
Section 4 at all times during the period of time this Agreement is effective
unless Secured Party shall otherwise consent in writing.

(a)   Ownership and Liens.  Grantor will maintain good and marketable title to
all Collateral free and clear of all liens, security interests, encumbrances or
adverse claims, except for the security interest created by this Agreement and
the liens, security interests and encumbrances expressly permitted herein or by
the other Loan Documents.  Grantor will not permit any dispute, right of setoff,
counterclaim or defense to exist with respect to all or any part of the
Collateral.  Grantor will cause any financing statement or other security
instrument with respect to the Collateral to be terminated, except as may exist
on the date hereof or as may have been filed in favor of Secured Party or in
favor of any
 
 
 
 

--------------------------------------------------------------------------------

 
 
beneficiary of liens, security interests and encumbrances expressly permitted
under Section 7.06 of the Loan Agreement. Grantor hereby irrevocably appoints
Secured Party as Grantor's attorney-in-fact, such power of attorney being
coupled with an interest, with full authority in the place and stead of Grantor
and in the name of Grantor or otherwise, for the purpose of terminating any
financing statements currently filed with respect to the Collateral.  Grantor
will defend at its expense Secured Party's right, title and security interest in
and to the Collateral against the claims of any third party.

(b)   Further Assurances.  Grantor will from time to time at its expense
promptly execute and deliver all further instruments and documents and take all
further action necessary or appropriate or that Secured Party may request in
order (i) to perfect and protect the security interest created or purported to
be created hereby and the first priority of such security interest (subject to
liens, security interests and encumbrances expressly permitted under Section
7.06 of the Loan Agreement), (ii) to enable Secured Party to exercise and
enforce its rights and remedies hereunder in respect of the Collateral following
the occurrence and continuance of an Event of Default, and (iii) to otherwise
effect the purposes of this Agreement, including without limitation:
(A) executing (if requested) and filing such financing or continuation
statements, or amendments thereto; and (B) furnishing to Secured Party from time
to time statements and schedules further identifying and describing the
Collateral and such other reports in connection with the Collateral, all in
reasonable detail satisfactory to Secured Party.

(c)   Inspection of Collateral.  Grantor will keep adequate records concerning
the Collateral and will permit Secured Party and all representatives and agents
appointed by Secured Party to inspect any of the Collateral and the books and
records of or relating to the Collateral at any time during normal business
hours, to make and take away photocopies, photographs and printouts thereof and
to write down and record any such information.

(d)   Payment of Taxes.  Grantor (i) will timely pay all property and other
taxes, assessments and governmental charges or levies imposed upon the
Collateral or any part thereof, (ii) will timely pay all lawful claims which, if
unpaid, might become a lien or charge upon the Collateral or any part thereof,
and (iii) will maintain appropriate accruals and reserves for all such
liabilities in a timely fashion in accordance with generally accepted accounting
principles.  Grantor may, however, delay paying or discharging any such taxes,
assessments, charges, claims or liabilities so long as the validity thereof is
contested in good faith by proper proceedings and provided Grantor has set aside
on Grantor's books adequate reserves therefor; provided, however, Grantor
understands and agrees that in the event of any such delay in payment or
discharge and upon Secured Party's written request following the occurrence of
an Event of Default, so long as such Event of Default continues, Grantor will
establish with Secured Party an escrow acceptable to Secured Party adequate to
cover the payment of such taxes, assessments and governmental charges with
interest, costs and penalties and a reasonable additional sum to cover possible
costs, interest and penalties (which escrow shall be returned to Grantor upon
payment of such taxes, assessments, governmental charges, interests, costs and
penalties or disbursed in accordance with the resolution of the contest to the
claimant) or furnish Secured Party with an indemnity bond secured by a deposit
in cash or other security acceptable to Secured Party.  Notwithstanding any
other provision contained in this Subsection, Secured Party may at its
discretion exercise its rights under Subsection 6(c) at any time to pay such
taxes, assessments, governmental charges, interest, costs and penalties.
 
 
 
 

--------------------------------------------------------------------------------

 

(e)   Mortgagee's and Landlord's Waivers.  Upon Lender’s request, Grantor shall
cause each mortgagee of real property owned by Grantor and each landlord of real
property leased by Grantor to execute and deliver agreements satisfactory in
form and substance to Secured Party by which such mortgagee or landlord waives
or subordinates any rights it may have in the Collateral.

(f)   Control Agreements.  Grantor will cooperate with Secured Party in
obtaining a control agreement in form and substance satisfactory to Secured
Party with respect to Collateral consisting of:

(i) Deposit Accounts;

(ii) Investment Property;

(iii) Letter-of-credit rights; and

(iv) Electronic chattel paper.

(g)   Condition of Goods.  Grantor will maintain, preserve, protect and keep all
Collateral which constitutes goods in good condition, repair and working order
and will cause such Collateral to be used and operated in good and workmanlike
manner, in accordance with applicable laws and in a manner which will not make
void or cancelable any insurance with respect to such Collateral.  Grantor will
promptly make or cause to be made all repairs, replacements and other
improvements to or in connection with the Collateral which Secured Party may
request from time to time in order to comply with the terms of the Loan
Agreement or this Agreement.

(h)   Insurance.  Grantor will, at its own expense, maintain insurance with
respect to all Collateral which constitutes goods in such amounts, against such
risks, in such form and with such insurers, as shall be satisfactory to Secured
Party from time to time.  If requested by Secured Party, each policy for
property damage insurance shall provide for all losses to be paid directly to
Secured Party.  If requested by Secured Party, each policy of insurance
maintained by Grantor shall (i) name Secured Party as additional insured
thereunder (without any representation or warranty by or obligation upon Secured
Party), (ii) contain the agreement by the insurer that any loss thereunder shall
be payable to Secured Party notwithstanding any action, inaction or breach of
representation or warranty by Grantor, (iii) provide that there shall be no
recourse against Secured Party for payment of premiums or other amounts with
respect thereto, and
 
 
 
 

--------------------------------------------------------------------------------

 
 
(iv) provide that at least thirty (30) days prior written notice of cancellation
or of lapse shall be given to Secured Party by the insurer.  Grantor will, if
requested by Secured Party, deliver to Secured Party original or duplicate
policies of such insurance and, as often as Secured Party may reasonably
request, a report of a reputable insurance broker with respect to such
insurance.  Grantor will also, at the request of Secured Party, duly execute and
deliver instruments of assignment of such insurance policies and cause the
respective insurers to acknowledge notice of such assignment. All insurance
payments in respect of loss of or damage to any Collateral shall be paid to
Secured Party and applied by Secured Party to the Indebtedness as Secured Party
in its sole discretion deems appropriate.

(i)   Accounts and General Intangibles.  Grantor will, except as otherwise
provided in Subsection 6(e), collect, at Grantor's own expense, all amounts due
or to become due under each of the accounts and general intangibles.  In
connection with such collections, Grantor may and, at Secured Party's direction,
will take such action not otherwise forbidden by Subsection 5(e) as Grantor or
Secured Party may deem necessary or advisable to enforce collection or
performance of each of the accounts and general intangibles.  Grantor will also
duly perform and cause to be performed all of its obligations with respect to
the goods or services, the sale or lease or rendition of which gave rise or will
give rise to each account and all of its obligations to be performed under or
with respect to the general intangibles.  Grantor also covenants and agrees to
take any action and/or execute any documents that Secured Party may request in
order to comply with the Federal Assignment of Claims Act, as amended.

(j)   Chattel Paper, Documents and Instruments.  Grantor will take such action
as may be requested by Secured Party in order to cause any chattel paper,
documents or instruments to be valid and enforceable and will cause all chattel
paper to have only one original counterpart.  Upon request by Secured Party,
Grantor will deliver to Secured Party all originals of chattel paper, documents
or instruments and will mark all chattel paper with a legend indicating that
such chattel paper is subject to the security interest granted hereunder.

5.           Negative Covenants.  Grantor will comply with the covenants
contained in this Section 5 at all times during the period of time this
Agreement is effective, unless Secured Party shall otherwise consent in writing.

(a)   Transfer or Encumbrance.  Grantor will not (i) sell, assign (by operation
of law or otherwise), transfer, exchange, lease or otherwise dispose of any of
the Collateral, (ii) grant a lien or security interest in or execute, authorize,
file or record any financing statement or other security instrument with respect
to the Collateral to any party other than Secured Party or any beneficiary of
liens or security interests and other encumbrances expressly permitted under
Section 7.06 of the Loan Agreement, or (iii) deliver actual or constructive
possession of any of the Collateral to any party other than Secured Party,
provided, however, that this Section 5(a) shall not prohibit (A) sales and
leases of inventory in the
 
 
 
 

--------------------------------------------------------------------------------

 
 
ordinary course of business, and (B) the sale or other disposal of any item of
equipment which is worn out or obsolete and which has been replaced by an item
of equal suitability and value, owned by Grantor and made subject to the
security interest under this Agreement, but which is otherwise free and clear of
any lien, security interest, encumbrance or adverse claim except as expressly
permitted under Section 7.06 of the Loan Agreement; provided, further, the
exceptions permitted in clauses (A) and (B) above shall automatically terminate
upon the occurrence of an Event of Default.

(b)   Impairment of Security Interest.  Grantor will not take or fail to take
any action which would in any manner impair the value or enforceability of
Secured Party's security interest in any Collateral.

(c)           Possession of Collateral.  Grantor will not cause or permit the
removal of any Collateral from its possession, control and risk of loss, nor
will Grantor cause or permit the removal of any Collateral (or records
concerning the Collateral) from the address on the first page hereof and the
addresses specified on Schedule 1 to this Agreement other than (i) as permitted
by Subsection 5(a), or (ii) in connection with the possession of any Collateral
by Secured Party or by its bailee.  If any Collateral is in the possession of a
third party, Grantor will join with Secured Party in notifying the third party
of Secured Party's security interest therein and obtaining an acknowledgment
from the third party that it is holding the Collateral for the benefit of
Secured Party.

(d)   Goods.  Grantor will not permit any Collateral which constitutes goods to
at any time (i) be covered by any document except documents in the possession of
the Secured Party, (ii) become so related to, attached to or used in connection
with any particular real property so as to become a fixture upon such real
property, or (iii) be installed in or affixed to other goods so as to become an
accession to such other goods unless such other goods are subject to a perfected
first priority security interest under this Agreement.

(e)   Compromise of Collateral.  Grantor will not adjust, settle, compromise,
amend or modify any Collateral, except an adjustment, settlement, compromise,
amendment or modification in good faith and in the ordinary course of business;
provided, however, this exception shall automatically terminate upon the
occurrence of an Event of Default or upon Secured Party's written
request.  Grantor shall provide to Secured Party such information concerning
(i) any adjustment, settlement, compromise, amendment or modification of any
Collateral, and (ii) any claim asserted by any account Grantor for credit,
allowance, adjustment, dispute, setoff or counterclaim, as Secured Party may
request from time to time.

(f)   Financing Statement Filings.  Grantor recognizes that financing statements
pertaining to the Collateral have been or may be filed in one or more of the
following jurisdictions:  the location of Grantor’s principal residence, the
location of Grantor’s place of business, the location of Grantor’s chief
executive office, or other such place as the Grantor may be “located” under the
provisions of the Code; where Grantor maintains any Collateral, or has its
records
 
 
 
 

--------------------------------------------------------------------------------

 
 
concerning any Collateral, as the case may be.  Without limitation of any other
covenant herein, Grantor will neither cause or permit any change in the location
of (i) any Collateral, (ii) any records concerning any Collateral, or
(iii) Grantor’s principal residence, the location of Grantor’s place of
business, or the location of Grantor’s chief executive office, as the case may
be, to a jurisdiction other than as represented in Subsection 3(g), nor will
Grantor change its name or the Organizational Information as represented in
Subsection 3(g), unless Grantor shall have notified Secured Party in writing of
such change at least thirty (30) days prior to the effective date of such
change, and shall have first taken all action required by Secured Party for the
purpose of further perfecting or protecting the security interest in favor of
Secured Party in the Collateral.  In any written notice furnished pursuant to
this Subsection, Grantor will expressly state that the notice is required by
this Agreement and contains facts that may require additional filings of
financing statements or other notices for the purpose of continuing perfection
of Secured Party's security interest in the Collateral. Without limiting Secured
Party’s rights hereunder, Grantor authorizes Secured Party to file financing
statements and amendments thereto under the provisions of the Code as amended
from time to time.

(g)   Marking of Chattel Paper.  Grantor will not create any Chattel Paper
without placing a legend on the Chattel Paper acceptable to Secured Party
indicating that Secured Party has a security interest in the Chattel Paper.

6.           Rights of Secured Party.  Secured Party shall have the rights
contained in this Section 6 at all times during the period of time this
Agreement is effective.

(a)   Additional Financing Statements Filings.  Grantor hereby authorizes
Secured Party to file, without the signature of Grantor, one or more financing
or continuation statements, and amendments thereto, relating to the
Collateral.  Grantor further agrees that a carbon, photographic or other
reproduction of this Security Agreement or any financing statement describing
any Collateral is sufficient as a financing statement and may be filed in any
jurisdiction Secured Party may deem appropriate.

(b)   Power of Attorney.  Grantor hereby irrevocably appoints Secured Party as
Grantor's attorney-in-fact, such power of attorney being coupled with an
interest, with full authority in the place and stead of Grantor and in the name
of Grantor or otherwise, that Secured Party may, after the occurrence of an
Event of Default, so long as such Event of Default continues, take any action
and to execute any instrument which Secured Party may deem necessary or
appropriate to accomplish the purposes of this Agreement, including without
limitation:  (i) to obtain and adjust insurance required by Secured Party
hereunder; (ii) to demand, collect, sue for, recover, compound, receive and give
acquittance and receipts for moneys due and to become due under or in respect of
the Collateral; (iii) to receive, endorse and collect any drafts or other
instruments, documents and chattel paper in connection with clause (i) or (ii)
above; and (iv) to file any claims or take any action or institute any
proceedings which Secured Party may deem necessary or appropriate for the
collection and/or preservation of the Collateral or otherwise to enforce the
rights of Secured Party with respect to the Collateral.
 
 
 
 

--------------------------------------------------------------------------------

 

(c)   Performance by Secured Party.  If Grantor fails to perform any agreement
or obligation provided herein, Secured Party may itself perform, or cause
performance of, such agreement or obligation, and the expenses of Secured Party
incurred in connection therewith shall be a part of the Indebtedness, secured by
the Collateral and payable by Grantor on demand.

(d)   Grantor's Receipt of Proceeds.  All amounts and proceeds (including
instruments and writings) received by Grantor in respect of such accounts or
general intangibles shall be received in trust for the benefit of Secured Party
hereunder and, upon request of Secured Party following the occurrence of an
Event of Default (so long as such Event of Default continues), shall be
segregated from other property of Grantor and shall be forthwith delivered to
Secured Party in the same form as so received (with any necessary endorsement)
and applied to the Indebtedness in such manner as Secured Party deems
appropriate in its sole discretion.

(e)   Notification of Account Debtors.  Following the occurrence of an Event of
Default, so long as such Event of Default continues, Secured Party may at its
discretion from time to time notify any or all borrowers and/or debtors under
any accounts or general intangibles (i) of Secured Party's security interest in
such accounts or general intangibles and direct such borrowers and/or debtors to
make payment of all amounts due or to become due to Grantor thereunder directly
to Secured Party, and (ii) to verify the accounts or general intangibles with
such borrowers and/or debtors.  Following the occurrence of an Event of Default,
so long as such Event of Default continues, Secured Party shall have the right,
at the expense of Grantor, to enforce collection of any such accounts or general
intangibles and to adjust, settle or compromise the amount or payment thereof,
in the same manner and to the same extent as Grantor.

7.           Events of Default.  Each of the following constitutes an "Event of
Default" under this Agreement:

(a)   Default Under other Loan Documents.  The occurrence of an Event of Default
under the Loan Agreement or any of the other Loan Documents; or

(b)   Execution on Collateral.  The Collateral or any portion thereof is taken
on execution or other process of law in any action against Grantor; or

(c)   Abandonment.  Grantor abandons the Collateral or any portion thereof
except for such abandonments permitted herein or by the other Loan Documents; or
 
 
 
 

--------------------------------------------------------------------------------

 

(d)   Action by Other Lienholder.  The holder of any lien or security interest
on any of the assets of Grantor, including without limitation, the Collateral
(without hereby implying the consent of Secured Party to the existence or
creation of any such lien or security interest on the Collateral), declares a
default thereunder or institutes foreclosure or other proceedings for the
enforcement of its remedies thereunder; or

(e)   Search Report.  Secured Party shall receive at any time following the
execution of this Agreement a search report indicating that Secured Party's
security interest is not prior to all other security interests or other
interests reflected in the report except for liens, security interests and
encumbrances expressly permitted under Section 7.06 of the Loan Agreement.

8.           Remedies and Related Rights.  If an Event of Default shall have
occurred, so long as such Event of Default continues, and without limiting any
other rights and remedies provided herein, under any of the other Loan Documents
or otherwise available to Secured Party, Secured Party may exercise one or more
of the rights and remedies provided in this Section.

(a)   Remedies.  Secured Party may from time to time at its discretion, without
limitation and without notice except as expressly provided in any of the Loan
Documents:

(i)   exercise in respect of the Collateral all the rights and remedies of a
secured party under the Code (whether or not the Code applies to the affected
Collateral);

(ii)            require Grantor to, and Grantor hereby agrees that it will at
its expense and upon request of Secured Party, assemble the Collateral as
directed by Secured Party and make it available to Secured Party at a place to
be designated by Secured Party which is reasonably convenient to both parties;

(iii)           reduce its claim to judgment or foreclose or otherwise enforce,
in whole or in part, the security interest granted hereunder by any available
judicial procedure;

(iv)           sell or otherwise dispose of, at its office, on the premises of
Grantor or elsewhere, the Collateral, as a unit or in parcels, by public or
private proceedings, and by way of one or more contracts (it being agreed that
the sale or other disposition of any part of the Collateral shall not exhaust
Secured Party's power of sale, but sales or other dispositions may be made from
time to time until all of the Collateral has been sold or disposed of or until
the Indebtedness has been paid and performed in full), and at any such sale or
other disposition it shall not be necessary to exhibit any of the Collateral;
 
(v)            buy the Collateral, or any portion thereof, at any public sale;
 
 
 
 

--------------------------------------------------------------------------------

 

(vi)           buy the Collateral, or any portion thereof, at any private sale
if the Collateral is of a type customarily sold in a recognized market or is of
a type which is the subject of widely distributed standard price quotations;

(vii)          apply for the appointment of a receiver for the Collateral, and
Grantor hereby consents to any such appointment; and

(viii)         at its option, retain the Collateral in satisfaction of the
Indebtedness whenever the circumstances are such that Secured Party is entitled
to do so under the Code or otherwise, to the full extent permitted by the Code,
Secured Party shall be permitted to elect whether such retention shall be in
full or partial satisfaction of the Indebtedness.

In the event Secured Party shall elect to sell the Collateral, Secured Party may
sell the Collateral without giving any warranties as and shall be permitted to
specifically disclaim any warranties of title or the like.  Further, if Secured
Party sells any of the Collateral on credit, Grantor will be credited only with
payments actually made by the purchaser, received by Secured Party and applied
to the Indebtedness.  In the event the purchaser fails to pay for the
Collateral, Secured Party may resell the Collateral and Grantor shall be
credited with the proceeds of the sale.  Grantor agrees that in the event
Grantor or any Borrower is entitled to receive any notice under the Code, as it
exists in the state governing any such notice, of the sale or other disposition
of any Collateral, reasonable notice shall be deemed given when such notice is
deposited in a depository receptacle under the care and custody of the United
States Postal Service, postage prepaid, at such party's address set forth on the
first page hereof, ten (10) days prior to the date of any public sale, or after
which a private sale, of any of such Collateral is to be held.  Secured Party
shall not be obligated to make any sale of Collateral regardless of notice of
sale having been given.  Secured Party may adjourn any public or private sale
from time to time by announcement at the time and place fixed therefor, and such
sale may, without further notice, be made at the time and place to which it was
so adjourned.

(b)   Application of Proceeds.  If any Event of Default shall have occurred, so
long as such Event of Default continues, Secured Party may at its discretion
apply or use any cash held by Secured Party as Collateral, and any cash proceeds
received by Secured Party in respect of any sale or other disposition of,
collection from, or other realization upon, all or any part of the Collateral as
follows in such order and manner as Secured Party may elect:

(i)   to the repayment or reimbursement of the reasonable costs and expenses
(including, without limitation, reasonable attorneys' fees and expenses)
incurred by Secured Party in connection with (A) the administration of the Loan
Documents, (B) the custody, preservation, use or operation of, or the sale of,
collection from, or other realization upon, the Collateral, and (C) the exercise
or enforcement of any of the rights and remedies of Secured Party hereunder;
 
 
 
 

--------------------------------------------------------------------------------

 

(ii)            to the payment or other satisfaction of any liens and other
encumbrances upon the Collateral;

(iii)           to the satisfaction of the Indebtedness;

(iv)           by holding such cash and proceeds as Collateral;

(v)            to the payment of any other amounts required by applicable law
(including without limitation, Section 9.615(a)(3) of the Code or any other
applicable statutory provision); and
 
(vi)           by delivery to Grantor or any other party lawfully entitled to
receive such cash or proceeds whether by direction of a court of competent
jurisdiction or otherwise.

(c)   Deficiency.  In the event that the proceeds of any sale of, collection
from, or other realization upon, all or any part of the Collateral by Secured
Party are insufficient to pay all amounts to which Secured Party is legally
entitled, Borrower and any party who guaranteed or is otherwise obligated to pay
all or any portion of the Indebtedness shall be liable for the deficiency,
together with interest thereon as provided in the Loan Documents, to the full
extent permitted by the Code.

(d)   Non-Judicial Remedies.  In granting to Secured Party the power to enforce
its rights hereunder without prior judicial process or judicial hearing, Grantor
expressly waives, renounces and knowingly relinquishes any legal right which
might otherwise require Secured Party to enforce its rights by judicial
process.  Grantor recognizes and concedes that non-judicial remedies are
consistent with the usage of trade, are responsive to commercial necessity and
are the result of a bargain at arm's length.  Nothing herein is intended to
prevent Secured Party or Grantor from resorting to judicial process at either
party's option.

(e)   Other Recourse.  Grantor waives any right to require Secured Party to
proceed against any third party, exhaust any Collateral or other security for
the Indebtedness, or to have any third party joined with Grantor in any suit
arising out of the Indebtedness or any of the Loan Documents, or pursue any
other remedy available to Secured Party.  Grantor further waives any and all
notice of acceptance of this Agreement and of the creation, modification,
rearrangement, renewal or extension of the Indebtedness.  Grantor further waives
any defense arising by reason of any disability or other defense of any third
party or by reason of the cessation from any cause whatsoever of the liability
of any third party.  Until all of the Indebtedness shall have been paid in full,
Grantor shall have no right of subrogation and Grantor waives the right to
enforce any remedy which Secured Party has or may hereafter have against any
third party,
 
 
 
 

--------------------------------------------------------------------------------

 
 
and waives any benefit of and any right to participate in any other security
whatsoever now or hereafter held by Secured Party.  Grantor authorizes Secured
Party, and without notice or demand and without any reservation of rights
against Grantor and without affecting Grantor's liability hereunder or on the
Indebtedness to (i) take or hold any other property of any type from any third
party as security for the Indebtedness, and exchange, enforce, waive and release
any or all of such other property, (ii) apply such other property and direct the
order or manner of sale thereof as Secured Party may in its discretion
determine, (iii) renew, extend, accelerate, modify, compromise, settle or
release any of the Indebtedness or other security for the Indebtedness,
(iv) waive, enforce or modify any of the provisions of any of the Loan Documents
executed by any third party, and (v) release or substitute any third party.
 
9.           INDEMNITY.  GRANTOR (AND BORROWER, IF BORROWER IS NOT THE GRANTOR)
HEREBY INDEMNIFIES AND AGREES TO HOLD HARMLESS SECURED PARTY, AND ITS OFFICERS,
DIRECTORS, EMPLOYEES, AGENTS AND REPRESENTATIVES (EACH AN "INDEMNIFIED PERSON")
FROM AND AGAINST ANY AND ALL LIABILITIES, OBLIGATIONS, CLAIMS, LOSSES, DAMAGES,
PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS, EXPENSES OR DISBURSEMENTS OF ANY
KIND OR NATURE (COLLECTIVELY, THE "CLAIMS") WHICH MAY BE IMPOSED ON, INCURRED
BY, OR ASSERTED AGAINST, ANY INDEMNIFIED PERSON ARISING IN CONNECTION WITH THE
LOAN DOCUMENTS, THE INDEBTEDNESS OR THE COLLATERAL (INCLUDING WITHOUT
LIMITATION, THE ENFORCEMENT OF THE LOAN DOCUMENTS AND THE DEFENSE OF ANY
INDEMNIFIED PERSON'S ACTIONS AND/OR INACTIONS IN CONNECTION WITH THE LOAN
DOCUMENTS); PROVIDED THAT SUCH INDEMNITY SHALL NOT, AS TO ANY INDEMNIFIED
PERSON, BE AVAILABLE TO THE EXTENT THAT SUCH CLAIMS, LOSSES, DAMAGES, PENALTIES,
ACTIONS, JUDGMENTS, SUITS, COSTS, EXPENSES OR DISBURSEMENTS ARE DETERMINED BY A
COURT OF COMPETENT JURISDICTION IN A FINAL AND NONAPPEALABLE JUDGMENT TO HAVE
RESULTED FROM (I) GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF SUCH INDEMNIFIED
PERSON, OR (II) A CLAIM BROUGHT BY BORROWER OR ANY OBLIGATED PARTY AGAINST AN
INDEMNITEE FOR BREACH IN BAD FAITH OF SUCH INDEMNIFIED PERSON’S OBLIGATIONS
HEREUNDER OR ANY OTHER LOAN DOCUMENT.  THE INDEMNIFICATION PROVIDED FOR IN THIS
SECTION SHALL SURVIVE THE TERMINATION OF THIS AGREEMENT AND SHALL EXTEND AND
CONTINUE TO BENEFIT EACH INDIVIDUAL OR ENTITY WHO IS OR HAS AT ANY TIME BEEN AN
INDEMNIFIED PERSON HEREUNDER.

10.           Miscellaneous.

(a)   Entire Agreement.  This Agreement contains the entire agreement of Secured
Party and Grantor with respect to the Collateral.  If the parties hereto are
parties to any prior agreement, either written or oral, relating to the
Collateral, the terms of this Agreement shall amend and supersede the terms of
such  prior  agreements as to transactions on or after the effective date of
this Agreement, but all security agreements, financing statements, guaranties,
other contracts and notices for the benefit of Secured Party shall continue in
full force and effect to secure the Indebtedness unless Secured Party
specifically releases its rights thereunder by separate release.
 
 
 
 

--------------------------------------------------------------------------------

 

(b)   Amendment.  No modification, consent or amendment of any provision of this
Agreement or any of the other Loan Documents shall be valid or effective unless
the same is authenticated by the party against whom it is sought to be enforced,
except to the extent of amendments specifically permitted by the Code without
authentication by the Grantor or Borrower.

(c)   Actions by Secured Party.  The lien, security interest and other security
rights of Secured Party hereunder shall not be impaired by (i) any renewal,
extension, increase or modification with respect to the Indebtedness, (ii) any
surrender, compromise, release, renewal, extension, exchange or substitution
which Secured Party may grant with respect to the Collateral, or (iii) any
release or indulgence granted to any endorser, guarantor or surety of the
Indebtedness.  The taking of additional security by Secured Party shall not
release or impair the lien, security interest or other security rights of
Secured Party hereunder or affect the obligations of Grantor hereunder.

(d)   Waiver by Secured Party.  Secured Party may waive any Event of Default
without waiving any other prior or subsequent Event of Default.  Secured Party
may remedy any default without waiving the Event of Default remedied.  Neither
the failure by Secured Party to exercise, nor the delay by Secured Party in
exercising, any right or remedy upon any Event of Default shall be construed as
a waiver of such Event of Default or as a waiver of the right to exercise any
such right or remedy at a later date.  No single or partial exercise by Secured
Party of any right or remedy hereunder shall exhaust the same or shall preclude
any other or further exercise thereof, and every such right or remedy hereunder
may be exercised at any time.  No waiver of any provision hereof or consent to
any departure by Grantor therefrom shall be effective unless the same shall be
in writing and signed by Secured Party and then such waiver or consent shall be
effective only in the specific instances, for the purpose for which given and to
the extent therein specified.  No notice to or demand on Grantor in any case
shall of itself entitle Grantor to any other or further notice or demand in
similar or other circumstances.

(e)   Costs and Expenses.  Grantor will upon demand pay to Secured Party the
amount of any and all costs and expenses (including without limitation,
reasonable attorneys' fees and expenses), which Secured Party may incur in
connection with (i) the transactions which give rise to the Loan Documents,
(ii) the preparation of this Agreement and the perfection and preservation of
the security interests granted under the Loan Documents, (iii) the
administration of the Loan Documents, (iv) the custody, preservation, use or
operation of, or the sale of, collection from, or other realization upon, the
Collateral, (v) the exercise or enforcement of any of the rights of Secured
Party under the Loan Documents following the occurrence of an Event of Default,
so long as such Event of Default continues, or (vi) the failure by Grantor to
perform or observe any of the provisions hereof.
 
 
 
 

--------------------------------------------------------------------------------

 

(f)   Controlling Law; Venue.  This Agreement is executed and delivered as an
incident to a lending transaction negotiated and consummated in Bexar County,
Texas, and shall be governed by and construed in accordance with the laws of the
State of Texas. Grantor (and Borrower, if Borrower is not the Grantor), for
itself and its successors and assigns, hereby irrevocably (a) submits to the
nonexclusive jurisdiction of the state and federal courts in Texas, (b) waives,
to the fullest extent permitted by law, and objection that it may now or in the
future have to the laying of venue of any litigation arising out of or in
connection with any Loan Document brought in the District Court of Bexar County,
Texas, or in the United States District Court for the Western District of Texas,
San Antonio, Division, (c) waives any objection it may now or hereafter have as
to the venue of any such action or proceeding brought in such court or that such
court is an inconvenient forum, (d) agrees that any legal proceeding against any
party to any Loan Document arising out of or in connection with any of the Loan
Documents may be brought in one of the foregoing courts, and (e) agrees that
service of process upon it may be made by certified or registered mail, return
receipt requested, at its address specified herein.  Nothing herein shall affect
the right of Lender to serve process in any other manner permitted by law or
shall limit the right of Lender to bring any action or proceeding against
Grantor (and Borrower, if Borrower is not the Grantor) or with respect to any of
Grantor's (or Borrower’s, if Borrower is not the Grantor) property in courts in
other jurisdictions.  The scope of each of the foregoing waivers is intended to
be all encompassing of any and all disputes that may be filed in any court and
that relate to the subject matter of this transaction, including, without
limitation, contract claims, tort claims, breach of duty claims, and all other
common law and statutory claims. Grantor (and Borrower, if Borrower is not the
Grantor) acknowledges that these waivers are a material inducement to Lender's
agreement to enter into agreements and obligations evidenced by the Loan
Documents, that Lender has already relied on these waivers and will continue to
rely on each of these waivers in related future dealings.  The waivers in this
section are irrevocable, meaning that they may not be modified either orally or
in writing, and these waivers apply to any future renewals, extensions,
amendments, modifications, or replacements in respect of the applicable Loan
Document. In connection with any litigation, this Agreement may be filed as a
written consent to a trial by the court.

(g)   Severability.  If any provision of this Agreement is held by a court of
competent jurisdiction to be illegal, invalid or unenforceable under present or
future laws, such provision shall be fully severable, shall not impair or
invalidate the remainder of this Agreement and the effect thereof shall be
confined to the provision held to be illegal, invalid or unenforceable.

(h)   No Obligation.  Nothing contained herein shall be construed as an
obligation on the part of Secured Party to extend or continue to extend credit
to Borrower.
 
 
 
 

--------------------------------------------------------------------------------

 

(i)   Notices.  All notices, requests, demands or other communications required
or permitted to be given pursuant to this Agreement shall be in writing and
given by (i) personal delivery,  (ii) expedited delivery service with proof of
delivery, or (iii) United States mail, postage prepaid, registered or certified
mail, return receipt requested, sent to the intended addressee at the address
set forth on the first page hereof or to such different address as the addressee
shall have designated by written notice sent pursuant to the terms hereof and
shall be deemed to have been received either, in the case of personal delivery,
at the time of personal delivery, in the case of expedited delivery service, as
of the date of first attempted delivery at the address and in the manner
provided herein, or in the case of mail, three (3) days following deposit in a
depository receptacle under the care and custody of the United States Postal
Service.  Either party shall have the right to change its address for notice
hereunder to any other location within the continental United States by notice
to the other party of such new address at least thirty (30) days prior to the
effective date of such new address.

(j)   Binding Effect and Assignment.  This Agreement (i) creates a continuing
security interest in the Collateral, (ii) shall be binding on Grantor and the
heirs, executors, administrators, personal representatives, successors and
assigns of Grantor (and Borrower, if Borrower is not the Grantor), and
(iii) shall inure to the benefit of Secured Party and its successors and
assigns.  Without limiting the generality of the foregoing, Secured Party may
pledge, assign or otherwise transfer the Indebtedness and its rights under this
Agreement and any of the other Loan Documents to any other party.  Grantor's
(and Borrower’s, if Borrower is not the Grantor) rights and obligations
hereunder may not be assigned or otherwise transferred without the prior written
consent of Secured Party.

(k)    Termination. It is contemplated by the parties hereto that from time to
time there may be no outstanding Indebtedness, but notwithstanding such
occurrences, this Agreement shall remain valid and shall be in full force and
effect as to subsequent outstanding Indebtedness.  Secured Party shall deliver
to Grantor Secured Party’s written release of this Agreement, and the security
interests created hereby shall terminate upon (i) the satisfaction in full of
the Indebtedness, (ii) the termination or expiration of any commitment of
Secured Party to extend credit to Borrower, and (iii) written request for the
termination hereof delivered by Grantor to Secured Party.  Upon termination of
this Agreement and Grantor's written request, Secured Party will, at Grantor's
sole cost and expense, return to Grantor such of the Collateral as shall not
have been sold or otherwise disposed of or applied pursuant to the terms hereof
and execute and deliver to Grantor such documents as Grantor shall reasonably
request to evidence such termination.

(l)   Cumulative Rights.  All rights and remedies of Secured Party hereunder are
cumulative of each other and of every other right or remedy which Secured Party
may otherwise have at law or in equity or under any of the other Loan Documents,
and the exercise of one or more of such rights or remedies shall not prejudice
or impair the concurrent or subsequent exercise of any other rights or
remedies.  Further, except as specifically noted as a waiver herein, no
provision of this Agreement is intended by the parties to this Agreement to
waive any rights, benefits or protection afforded to Secured Party under the
Code.
 
 
 
 

--------------------------------------------------------------------------------

 

(m)   Gender and Number.  Within this Agreement, words of any gender shall be
held and construed to include the other gender, and words in the singular number
shall be held and construed to include the plural and words in the plural number
shall be held and construed to include the singular, unless in each instance the
context requires otherwise.

(n)   Descriptive Headings.  The headings in this Agreement are for convenience
only and shall in no way enlarge, limit or define the scope or meaning of the
various and several provisions hereof.

11.  Confidentiality.  Unless otherwise required to be disclosed by applicable
law, other Governmental Requirements or a Governmental Authority, Secured Party
shall hold all non-public information regarding Borrower (and Grantor, if
Grantor is not the Borrower) and their businesses delivered by Borrower (or
Grantor, if Grantor is not the Borrower) to Lender pursuant to the requirements
hereof and the other Loan Documents and expressly marked as confidential in
conspicuous lettering in accordance with Secured Party’s customary procedures
for handling confidential information of such nature. Following the occurrence
of an Event of Default, so long as such Event of Default continues, Borrower
(and Grantor, if Grantor is not the Borrower) authorizes and consents to the
disclosure by Secured Party to Borrower’s account debtors that their accounts
are pledged as Collateral subject to a security interest granted herein,
information regarding the name of the Borrower, and the amount, date and
maturity of the promissory notes included within the Loan Documents, the payment
and performance of which is secured by this Agreement.

12.              Counterparts; Facsimile Documents and Signatures. This
Agreement may be separately executed in any number of counterparts, each of
which will be an original, but all of which, taken together, will be deemed to
constitute one and the same instrument.  For purposes of negotiating and
finalizing this Agreement, if this document or any document executed in
connection with it is transmitted by facsimile machine, electronic mail or other
electronic transmission, it will be treated for all purposes as an original
document.  Additionally, the signature of any party on this document transmitted
by way of a facsimile machine or electronic mail will be considered for all
purposes as an original signature.  Any such transmitted document will be
considered to have the same binding legal effect as an original document.  At
the request of any party, any faxed or electronically transmitted document will
be re-executed by each signatory party in an original form.
 
13.              Imaging of Documents. Grantor (and Borrower, if Borrower is not
the Grantor) understands and agrees that (a) Lender's document retention policy
may involve the electronic imaging of executed Loan Documents and the
destruction of the paper originals, and (b) Grantor (and Borrower, if Borrower
is not the Grantor) waives any right that it may have to claim that the imaged
copies of the Loan Documents are not originals.
 
 
 
 

--------------------------------------------------------------------------------

 

14.              Reference to Loan Agreement. This Note has been executed and
delivered pursuant to the Loan Agreement.  In the event of any conflict between
the terms of this Note and the Loan Agreement, the terms of the Loan Agreement
shall control.

EXECUTED as of the date first written above.

BORROWER:
 
MICROPAC INDUSTRIES, INC.,
a Delaware corporation
 
 
By:     /s/ Mark W. King
Printed Name:  Mark W. King
Title: CEO
 

 
 
 
 
 

--------------------------------------------------------------------------------

 
 
SCHEDULE 1
TO
SECURITY AGREEMENT
DATED JANUARY 23, 2013
BY AND BETWEEN
FROST BANK
AND
MICROPAC INDUSTRIES, INC.

The other addresses referenced in Subsection 3(g) are as follows:
 
1
903 E. Walnut St. Garland TX 75040
FRONT END/TEST BUILDING
2
905 E. Walnut St. Garland TX 75040
MICRO BUILDING AND CORPORATE OFFICE
3
725 E. Walnut St. Garland TX 75040
OPTO BUILDING
4
912 E. Walnut St. Garland TX 75040
ASSEMBLY BUILDING
5
1137 E. Walnut St. Garland TX 75040
OFFSITE STORAGE
6
1100 Placid Avenue Plano TX 75074
OFFSITE STORAGE
7
480 S. Honduras CD, Juraez, Mexico
MEXICO LOCATION (Contract Manufacturing)

 
 
 
 
 
 
 
 
 
 
 
 
 

--------------------------------------------------------------------------------

 
 
 
 
 
EXHIBIT A
TO
SECURITY AGREEMENT
DATED JANUARY 23, 2013
BY AND BETWEEN
FROST BANK
AND
MICROPAC INDUSTRIES, INC.

Location:

Reference is hereby made to scheduled item 4 on Schedule 1 preceding.

Owner of Record:

Nicholas Nadolsky
706 Winterwood Court
Garland, Texas 75044

 
 

--------------------------------------------------------------------------------

 

REVOLVING PROMISSORY NOTE
(this “Note”)
 
 

$6,000,000.00    January 23, 2013

 
For value received, MICROPAC INDUSTRIES, INC., a Delaware corporation
("Borrower", whether one or more), does hereby promise to pay to the order of
FROST BANK, a Texas state bank ("Lender"), at P.O. Box 34746, San Antonio, Texas
78265, or at such other address as Lender shall from time to time specify in
writing, in lawful money of the United States of America, the sum of SIX MILLION
AND NO/100 DOLLARS ($6,000,000.00), or so much thereof as from time to time may
be disbursed by Lender to Borrower under the terms of that certain Loan
Agreement dated of even date herewith between Borrower and Lender (as amended
from time to time, the "Loan Agreement"), and be outstanding, together with
interest from date hereof on the principal balance outstanding from time to time
as hereinafter provided. Interest shall be computed on a per annum basis of a
year of 360 days and for the actual number of days elapsed, unless such
calculation would result in a rate greater than the highest rate permitted by
applicable law, in which case interest shall be computed on a per annum basis of
a year of 365 days or 366 days in a leap year, as the case may be.  This Note
has been executed and delivered pursuant to the Loan Agreement and is the
“Revolving Credit Note” referred to therein.
 
Payment Terms.  Interest only on amounts outstanding hereunder shall be due and
payable quarterly as it accrues, on the first (1st) day of each and every
calendar quarter (ie each and every three (3) calendar month period), beginning
April 1, 2013, and continuing regularly and quarterly thereafter until January
23, 2015, when the entire amount hereof, principal and accrued interest then
remaining unpaid, shall be then due and payable; interest being calculated on
the unpaid principal each day principal is outstanding and all payments made
credited to any collection costs and late charges, to the discharge of the
interest accrued and to the reduction of the principal, in such order as Lender
shall determine.
 
Late Charge.  If a payment is made more than 10 days after it is due, Borrower
will be charged, in addition to interest, a delinquency charge of (i) 5% of the
unpaid portion of the regularly scheduled payment, or (ii) $250.00, whichever is
less.   Additionally, upon maturity of this Note, if the outstanding principal
balance (plus all accrued but unpaid interest) is not paid within 10 days of the
maturity date, Borrower will be charged a delinquency charge of (i) 5% of the
sum of the outstanding principal balance (plus all accrued but unpaid interest),
or (ii) $250.00, whichever is less. Borrower agrees with Lender that the charges
set forth herein are reasonable compensation to Lender for the handling of such
late payments.
 
Interest Rate.  Interest on the outstanding and unpaid principal balance hereof
shall be computed at a per annum rate equal to the lesser of (a) a rate equal to
the Prime Rate, with said rate to be adjusted to reflect any change in said
Prime Rate at the time of any such change or (b) the highest rate permitted by
applicable law, but in no event shall interest contracted for, charged or
received hereunder plus any other charges in connection herewith which
constitute interest exceed the maximum interest permitted by applicable law,
said rate to be effective prior to maturity (however such maturity is brought
about).  The "Prime Rate" shall mean for any day a fluctuating rate of interest
equal to the highest rate published from time to time in the “Money Rates”
section of The Wall Street Journal as the Prime Rate for such day (or, if such
source is not available, such alternate source as determined by Lender). The
Prime Rate is a reference rate and does not necessarily represent the lowest or
best rate actually charged to any of Lender’s customers.
 
 
 
 

--------------------------------------------------------------------------------

 
 
Default Rate.  For so long as any Event of Default exists under this Note or
under any of the other Loan Documents (as defined below), regardless of whether
or not there has been an acceleration of the indebtedness evidenced by this
Note, and at all times after the maturity of the indebtedness evidenced by this
Note (whether by acceleration or otherwise), and in addition to all other rights
and remedies of Lender hereunder, interest shall accrue at the rate stated above
plus five percent (5%) per annum, but in no event in excess of the highest rate
permitted by applicable law, and such accrued interest shall be immediately due
and payable.  Borrower acknowledges that it would be extremely difficult or
impracticable to determine Lender's actual damages resulting from any event of
default, and such accrued interest is a reasonable estimate of those damages and
does not constitute a penalty.
 
Revolving Line of Credit.  Subject to the terms of the Loan Agreement, Borrower
may request advances and make payments hereunder from time to time, provided
that it is understood and agreed that the aggregate principal amount outstanding
from time to time hereunder shall not at any time exceed $6,000,000.00.  The
unpaid balance of this Note shall increase and decrease with each new advance or
payment hereunder, as the case may be.  This Note shall not be deemed terminated
or canceled prior to the date of its maturity, although the entire principal
balance hereof may from time to time be paid in full.  Borrower may borrow,
repay and re-borrow hereunder. All payments and prepayments of principal or
interest on this Note shall be made in lawful money of the United States of
America in immediately available funds, at the address of Lender indicated
above, or such other place as the holder of this Note shall designate in writing
to Borrower.  If any payment of principal or interest on this Note shall become
due on a day which is not a Business Day (as hereinafter defined), such payment
shall be made on the next succeeding Business Day and any such extension of time
shall be included in computing interest in connection with such payment.  As
used herein, the term "Business Day" shall mean any day other than a Saturday,
Sunday or any other day on which commercial banks in the State of Texas are
authorized to close or are in fact closed.  The books and records of Lender
shall be prima facie evidence of all outstanding principal of and accrued and
unpaid interest on this Note.
 
Prepayment.  Borrower reserves the right to prepay, prior to maturity, all or
any part of the principal of this Note without penalty.  Any prepayments shall
be applied first to accrued interest and then to principal.  Borrower will
provide written notice to the holder of this Note of any such prepayment of all
or any part of the principal at the time thereof.  All payments and prepayments
of principal or interest on this Note shall be made in lawful money of the
United States of America in immediately available funds, at the address of
Lender indicated above, or such other place as the holder of this Note shall
designate in writing to Borrower.  All partial prepayments of principal shall be
applied to the last installments payable in their inverse order of maturity.
 
Default.  It is expressly provided that upon the occurrence of an Event of
Default specified in the Loan Agreement or any of the other Loan Documents, so
long as such Event of Default continues, the holder of this Note may, at its
option, without further notice or demand, (i) declare the outstanding principal
balance of and accrued but unpaid interest on this Note at once due and payable,
(ii) refuse to advance any additional amounts under this Note, (iii) foreclose
all liens securing payment hereof, (iv) pursue any and all other rights,
remedies and recourses available to the holder hereof, including but not limited
to any such rights, remedies or recourses under the Loan Documents, at law or in
equity, or (v) pursue any combination of the foregoing; and in the event default
is made in the prompt payment of this Note when due or declared due, and the
same is placed in the hands of an attorney for collection, or suit is brought on
same, or the same is collected through probate, bankruptcy or other judicial
proceedings, then the Borrower agrees and promises to pay all costs of
collection, including reasonable attorney's fees.
 
 
 
 

--------------------------------------------------------------------------------

 
 
No Usury Intended; Usury Savings Clause.  In no event shall interest contracted
for, charged or received hereunder, plus any other charges in connection
herewith which constitute interest, exceed the maximum interest permitted by
applicable law.  The amounts of such interest or other charges previously paid
to the holder of the Note in excess of the amounts permitted by applicable law
shall be applied by the holder of the Note to reduce the principal of the
indebtedness evidenced by the Note, or, at the option of the holder of the Note,
be refunded.  To the extent permitted by applicable law, determination of the
legal maximum amount of interest shall at all times be made by amortizing,
prorating, allocating and spreading in equal parts during the period of the full
stated term of the loan and indebtedness, all interest at any time contracted
for, charged or received from the Borrower hereof in connection with the loan
and indebtedness evidenced hereby, so that the actual rate of interest on
account of such indebtedness is uniform throughout the term hereof.
 
Security.  This Note has been executed and delivered pursuant the Loan
Agreement, and is secured by, inter alia, a Security Agreement of even date
herewith (as may be amended or supplemented from time to time, the “Security
Agreement”), given by Borrower in favor of Lender, covering certain collateral
as more particularly described therein. This Note, the Loan Agreement, the
Security Agreement, and all other documents evidencing, securing, governing,
guaranteeing and/or pertaining to this Note, including but not limited to the
Security Agreement, are collectively referred to as the "Loan Documents."  The
holder of this Note is entitled to the benefits and security provided in the
Loan Documents.
 
Joint and Several Liability; Waiver.  Each maker, signer, surety and endorser
hereof, as well as all heirs, successors and legal representatives of said
parties, shall be directly and primarily, jointly and severally, liable for the
payment of all indebtedness hereunder.  Lender may release or modify the
obligations of any of the foregoing persons or entities, or guarantors hereof,
in connection with this Note without affecting the obligations of the
others.  All such persons or entities expressly waive presentment and demand for
payment, notice of default, notice of intent to accelerate maturity, notice of
acceleration of maturity, protest, notice of protest, notice of dishonor, and
all other notices and demands for which waiver is not prohibited by law, and
diligence in the collection hereof; and agree to all renewals, extensions,
indulgences, partial payments, releases or exchanges of collateral, or taking of
additional collateral, with or without notice, before or after maturity.  No
delay or omission of Lender in exercising any right hereunder shall be a waiver
of such right or any other right under this Note.
 
Texas Finance Code.  In no event shall Chapter 346 of the Texas Finance Code
(which regulates certain revolving loan accounts and revolving tri-party
accounts) apply to this Note.  To the extent that Chapter 303 of the Texas
Finance Code is applicable to this Note, the "weekly ceiling" specified in such
article is the applicable ceiling; provided that, if any applicable law permits
greater interest, the law permitting the greatest interest shall apply.
 
 
 
 

--------------------------------------------------------------------------------

 
 
 
Governing Law, Venue. This Note is being executed and delivered, and is intended
to be performed in the State of Texas.  Except to the extent that the laws of
the United States may apply to the terms hereof, the substantive laws of the
State of Texas shall govern the validity, construction, enforcement and
interpretation of this Note.  In the event of a dispute involving this Note or
any other instruments executed in connection herewith, the undersigned
irrevocably agrees that venue for such dispute shall lie in any court of
competent jurisdiction in Bexar County, Texas.
 
Purpose of Loan.  Borrower agrees that no advances under this Note shall be used
for personal, family or household purposes, and that all advances hereunder
shall be used solely for business, commercial, investment, or other similar
purposes.
 
Captions.  The captions in this Note are inserted for convenience only and are
not to be used to limit the terms herein.
 
Amendment and Restatement.  This Note is given in amendment and restatement (in
its entirety), but not extinguishment, of the Indebtedness (as such term is
defined in the Loan Agreement) of Borrower under that certain Promissory Note
dated as of May 31, 2011 executed and delivered by Borrower and payable to the
order of Lender in the original principal amount of $6,000,000.00.
 
Reference to Loan Agreement. This Note has been executed and delivered pursuant
to the Loan Agreement.  In the event of any conflict between the terms of this
Note and the Loan Agreement, the terms of the Loan Agreement shall control.
 

(Signature Page Follows.)

 
 

--------------------------------------------------------------------------------

 

 
 
 

 
BORROWER:

MICROPAC INDUSTRIES, INC.,
a Delaware corporation

By : /s/ Mark W. King
Name: Mark W. King
Title: CEO

 
 
 
 
 
 

 
 

--------------------------------------------------------------------------------