Exhibit 10.49
LOAN AGREEMENT
Dated as of January 16, 2006
between
ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.
a Delaware corporation
and
LIBERTY BANK OF ARKANSAS

 

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LOAN AGREEMENT
     THIS LOAN AGREEMENT (the “Agreement”), dated as of January 16, 2006, is
between ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC., a Delaware
corporation (the “Borrower”), and LIBERTY BANK OF ARKANSAS, an Arkansas state
chartered bank (the “Lender”).
RECITALS:
     The Borrower has requested that the Lender extend credit to the Borrower as
described in this Agreement. The Lender is willing to make such credit available
to the Borrower upon and subject to the provisions, terms and conditions
hereinafter set forth.
     NOW THEREFORE, in consideration of the premises and the mutual covenants
herein contained, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
     1.1 Definitions. As used in this Agreement, all exhibits, appendices and
schedules hereto and in any note, certificate, report or other Loan Documents
made or delivered pursuant to this Agreement, the following terms will have the
meanings given such terms in this Section 1 or in the provision, section or
recital referred to below:
          (a) “AAA” has the meaning for such term set forth in Section 11.20 of
the Agreement.
          (b) “Adjusted EBITDA” means an amount equal to (i) EBITDA less
(ii) taxes minus the sum of distributions, dividends and maintenance capital
expenditures.
          (c) “Advance” means an advance by the Lender to the Borrower pursuant
to Article II.
          (d) “Advance Request Form” means a certificate, in a form approved by
the Lender, properly completed and signed by the Borrower requesting a Revolving
Credit Advance.
          (e) “Affiliate” means, as to any Person, any other Person (i) that
directly or indirectly, through one or more intermediaries, controls or is
controlled by, or is under common control with, such Person; (ii) that directly
or indirectly beneficially owns or holds five percent (5%) or more of any class
of voting stock of such Person; or (iii) five percent (5%) or more of the voting
stock of which is directly or indirectly beneficially owned or held by the
Person in question. The term “control” means the possession, directly or
indirectly, of the power to direct or cause direction of the management and
policies of a Person, whether through the ownership of voting securities, by
contract, or otherwise; provided, however, in no event shall the Lender be
deemed an Affiliate of the Borrower.

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          (f) “Agreement” has the meaning set forth in the Introductory
Paragraph hereto, as the same may, from time to time, be amended, modified,
restated, renewed, waived, supplemented, or otherwise changed, and includes all
schedules, exhibits and appendices attached or otherwise identified therewith.
          (g) “Borrowing Base” means, at any time, an amount equal to the sum of
(i) eighty-five percent (85%) of the value of Eligible Accounts of which
Weyerhaeuser Company (“Weyerhaeuser”) is the account debtor, (ii) eighty-five
percent (85%) of the value of Eligible Accounts of which Therma-Tru Corporation
(“Therma-Tru”) is the account debtor, (iii) seventy-five percent (75%) of all
other Eligible Accounts, (iv) seventy-five percent (75%) of the value of
Eligible Inventory that constitutes finished goods, including Eligible Inventory
that is finished goods held in a Therma-Tru warehouse, and (v) fifty percent
(50%) of all other Eligible Inventory.
          (h) “Borrowing Base Report” means, as of any date of preparation, a
certificate setting forth the Borrowing Base (in a form acceptable to the Lender
in substantially the form of Exhibit A attached hereto) prepared by and
certified by the chief financial officer of the Borrower.
          (i) “Borrower” means the Person identified as such in the Introductory
Paragraph hereof, and its successors and assigns.
          (j) “Business Day” has the meaning assigned to it in the Note.
          (k) “Capital Expenditure” shall mean any expenditure by a Person for
(i) an asset which will be used in a year or years subsequent to the year in
which the expenditure is made and which asset is properly classified in relevant
financial statements of such Person as equipment, real property, a fixed asset
or a similar type of capitalized asset in accordance with GAAP or (ii) an asset
relating to or acquired in connection with an acquired business, and any and all
acquisition costs related to (i) or (ii) above.
          (l) “Capitalized Lease Obligation” shall mean the amount of Debt under
a lease of Property by a Person that would be shown as a liability on a balance
sheet of such Person prepared for financial reporting purposes in accordance
with GAAP.
          (m) “Code” means the Internal Revenue Code of 1986, as amended, and
the regulations promulgated and rulings issued thereunder.
          (n) “Collateral” has the meaning for such term set forth in
Section 4.1 of this Agreement.
          (o) “Commitment” means the obligation of the Lender to make Revolving
Credit Advances pursuant to Section 2.1 in an aggregate principal amount at any
time outstanding up to but not exceeding Fifteen Million and no/100 Dollars
($15,000,000.00), subject, however, to termination pursuant to Section 10.2.

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          (p) “Compliance Certificate” means a certificate, substantially in the
form of Exhibit B attached hereto, prepared by and executed by the chief
financial officer of the Borrower.
          (q) “Constituent Documents” means Borrower’s articles or certificate
of incorporation and bylaws.
          (r) “Consultant” means a firm or firms designated in a certificate of
the Borrower which is not, and no member, stockholder, director, officer,
trustee or employee of which is, an officer, director, trustee or employee of
the Borrower, and which is a professional management consultant of national
repute for having the skill and experience necessary to render the particular
report required by the Section 9.1 herein.
          (s) “Current Maturities of Long-Term Indebtedness” shall mean, in
respect of a Person and as of any applicable date of determination thereof, that
portion of Long-Term Indebtedness that should be classified as current in
accordance with GAAP.
          (t) “Current Ratio” means the ratio of current assets to current
liabilities. For purposes of calculating the Current Ratio, Borrower may include
as a current asset that certain Two Million and No/100 Dollars ($2,000,000.00)
debt service reserve fund created in connection with Borrower’s bond
indebtedness with Allstate Insurance Company.
          (u) “Debt” means as to any Person at any time (without duplication):
(i) all obligations of such Person for borrowed money, (ii) all obligations of
such Person evidenced by bonds, notes, debentures, or other similar instruments,
(iii) all obligations of such Person to pay the deferred purchase price of
property or services, except trade accounts payable of such Person arising in
the ordinary course of business that are not past due by more than ninety
(90) days, (iv) all Capital Lease Obligations of such Person, (v) all Debt or
other obligations of others Guaranteed by such Person, (vi) all obligations
secured by a Lien existing on property owned by such Person, whether or not the
obligations secured thereby have been assumed by such Person or are non-recourse
to the credit of such Person, (vii) any other obligation for borrowed money or
other financial accommodations which in accordance with GAAP would be shown as a
liability on the balance sheet of such Person, (viii) any repurchase obligation
or liability of a Person with respect to accounts, chattel paper or notes
receivable sold by such Person, (ix) any liability under a sale and leaseback
transaction that is not a Capital Lease Obligation, (x) any obligation under any
so called “synthetic leases”, (xi) any obligation arising with respect to any
other transaction that is the functional equivalent of borrowing but which does
not constitute a liability on the balance sheets of a Person, (xii) all
reimbursement obligations of such Person (whether contingent or otherwise) in
respect of letters of credit, bankers’ acceptances, surety or other bonds and
similar instruments, and (xiii) all liabilities of such Person in respect of
unfunded vested benefits under any Plan.
          (v) “Debt Service Coverage Ratio” shall mean, in respect of a Person
and for any period of determination, the ratio, computed on a rolling four
quarter basis, of (i) Adjusted EBITDA to (ii) Current Maturities of Long-Term
Indebtedness plus interest expense.

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          (w) “Default” means an Event of Default or the occurrence of an event
or condition which with notice or lapse of time or both would become an Event of
Default.
          (x) “Default Interest Rate” has the meaning assigned to it in the
Notes.
          (y) “Dispute” means any action, dispute, claim or controversy of any
kind, whether in contract or tort, statutory or common law, legal or equitable,
now existing or hereafter arising under or in connection with, or in any way
pertaining to, this Agreement and each other document, contract and instrument
required hereby or now or hereafter delivered to Lender in connection herewith,
or any past, present or future extensions of credit and other activities,
transactions or obligations of any kind related directly or indirectly to any of
the foregoing documents, including without limitation, any of the foregoing
arising in connection with the exercise of any self-help, ancillary or other
remedies pursuant to any of the foregoing documents.
          (z) “Disclosure Schedule” means the schedule of the same name attached
hereto.
          (aa) “Dollars” and “$” mean lawful money of the United States of
America.
          (bb) “EBITDA” means an amount equal to net income plus the sum of
interest, taxes, depreciation and amortization.
          (cc) “Eligible Accounts” means, at any time, all accounts receivable
of the Borrower created in the ordinary course of business that are acceptable
to the Lender and satisfy the following conditions:
               (i) The account complies with all applicable laws, rules, and
regulations, including, without limitation, usury laws, the Federal Truth in
Lending Act, and Regulation Z of the Board of Governors of the Federal Reserve
System;
               (ii) The account has not been outstanding for more than the
lesser of (1) sixty (60) days past the date the invoice was issued or the
underlying obligation was incurred and (2) thirty (30) days past the first date
the account was due;
               (iii) The account does not represent a commission and the account
was created in connection with (i) the sale of goods by the Borrower in the
ordinary course of business and such sale has been consummated and such goods
have been shipped and delivered and received by the account debtor (except for
goods that are normally and ordinarily shipped by rail, and which are
freight-on-board shipping point), or (ii) the performance of services by the
Borrower in the ordinary course of business and such services have been
completed and accepted by the account debtor;
               (iv) The account arises from an enforceable contract, the
performance of which has been completed by the Borrower;
               (v) The account does not arise from the sale of any good that is
on a guaranteed sale, sale-or-return, sale on approval, consignment, or any
other repurchase or return basis;

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               (vi) The Borrower has good and indefeasible title to the account
and the account is not subject to any Lien except Liens in favor of the Lender
(except for any permitted liens identified on the Disclosure Schedule);
               (vii) The account does not arise out of a contract with or order
from, an account debtor that, by its terms, prohibits or makes void or
unenforceable the grant of a security interest by the Borrower to the Lender in
and to such account;
               (viii) The account is not subject to any setoff, counterclaim,
defense, dispute, recoupment, or adjustment other than normal discounts for
prompt payment;
               (ix) The account debtor is not insolvent or the subject of any
bankruptcy or insolvency proceeding and has not made an assignment for the
benefit of creditors, suspended normal business operations, dissolved,
liquidated, terminated its existence, ceased to pay its debts as they become
due, or suffered a receiver or trustee to be appointed for any of its assets or
affairs;
               (x) The account is not evidenced by chattel paper or an
instrument;
               (xi) No default exists under the account by any party thereto;
               (xii) The account debtor has not returned or refused to retain,
or otherwise notified the Borrower of any dispute concerning, or claimed
nonconformity of, any of the goods from the sale of which the account arose;
               (xiii) The account is not owed by an Affiliate, employee,
officer, director or shareholder of the Borrower;
               (xiv) The account is payable in Dollars by the account debtor;
               (xv) The account is not owed by an account debtor whose accounts
the Lender in its sole discretion has chosen to exclude from Eligible Accounts;
               (xvi) The account shall be ineligible if the account debtor is
domiciled in any country other than the United States of America, Mexico, or
Canada;
               (xvii) The account shall be ineligible if the account debtor is
the United States of America or any department, agency, or instrumentality
thereof, and the Federal Assignment of Claims Act of 1940, as amended, shall not
have been complied with; and
               (xviii) The Account is otherwise acceptable in the sole good
faith discretion of the Lender; provided that the Lender shall have the right to
create and adjust eligibility standards and related reserves from time to time
in its good faith credit judgment.
     The amount of the Eligible Accounts owed by an account debtor to the
Borrower shall be reduced by the amount of all “contra accounts” and other
obligations owed by the Borrower to such account debtor.

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          (dd) “Eligible Inventory” means, at any time, or unless otherwise
stated in this Agreement, all inventory of raw materials, work in process and
finished goods then owned by (and in the possession or under the control of) the
Borrower and held for sale or disposition in the ordinary course of the
Borrower’s business, in which the Lender has a perfected, first priority
security interest, valued at the lower of actual cost or fair market value.
Except as otherwise provided in this Agreement, Eligible Inventory shall not
include (i) inventory that has been shipped or delivered to a customer on
consignment, a sale-or-return basis, or on the basis of any similar
understanding, (ii) inventory with respect to which a claim exists disputing the
Borrower’s title to or right to possession of such inventory, (iii) inventory
that is not in good condition or does not comply with any applicable law, rule,
or regulation or any standard imposed by any Governmental Authority with respect
to its manufacture, use, or sale, (iv) inventory that is damaged, obsolete or
otherwise not readily saleable, (v) inventory covered by negotiable warehouse or
other document of title (unless the same is in the possession of the Lender);
(vi) inventory held for rental or lease, (vii) inventory that the Lender, in its
sole discretion, has determined to be unmarketable, (viii) inventory subject to
third-party intellectual property agreements and (ix) inventory that requires
consent of a third-party for manufacture or sale.
          (ee) “Environmental Laws” means any and all federal, state, and local
laws, regulations, judicial decisions, orders, decrees, plans, rules, permits,
licenses, and other governmental restrictions and requirements pertaining to
health, safety, or the environment, including, without limitation, the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42
U.S.C. § 9601 et seq., the Resource Conservation and Recovery Act of 1976, 42
U.S.C. § 6901 et seq., the Occupational Safety and Health Act, 29 U.S.C. § 651
et seq., the Clean Air Act, 42 U.S.C. § 7401 et seq., the Clean Water Act, 33
U.S.C. § 1251 et seq., and the Toxic Substances Control Act, 15 U.S.C. § 2601 et
seq., as the same may be amended or supplemented from time to time.
          (ff) “Environmental Liabilities” means, as to any Person, all
liabilities, obligations, responsibilities, Remedial Actions, losses, damages,
punitive damages, consequential damages, treble damages, costs, and expenses,
(including, without limitation, all reasonable fees, disbursements and expenses
of counsel, expert and consulting fees and costs of investigation and
feasibility studies), fines, penalties, sanctions, and interest incurred as a
result of any claim or demand, by any Person, whether based in contract, tort,
implied or express warranty, strict liability, criminal or civil statute,
including any Environmental Law, permit, order or agreement with any
Governmental Authority or other Person, arising from environmental, health or
safety conditions or the Release or threatened Release of a Hazardous Material
into the environment, resulting from the past, present, or future operations of
such Person or its Affiliates.
          (gg) “ERISA” means the Employee Retirement Income Security Act of
1974, as amended from time to time, and the regulations and published
interpretations thereunder.
          (hh) “ERISA Affiliate” means any corporation or trade or business
which is a member of the same controlled group of corporations (within the
meaning of Section 414(b) of the Code) as the Borrower or is under common
control (within the meaning of Section 414(c) of the Code) with the Borrower.

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          (ii) “Event of Default” has the meaning specified in Section 10.1.
          (jj) “Funded Debt” means Debt described in clauses (i), (ii), (iv),
(vii), (ix), (x) and (xi) of the definition of “Debt.”
          (kk) “GAAP” means generally accepted accounting principles, applied on
a consistent basis, as set forth in Opinions of the Accounting Principles Board
of the American Institute of Certified Public Accountants and/or in statements
of the Financial Accounting Standards Board and/or their respective successors
and which are applicable in the circumstances as of the date in question.
Accounting principles are applied on a “consistent basis” when the accounting
principles applied in a current period are comparable in all material respects
to those accounting principles applied in a preceding period.
          (ll) “Governmental Authority” means any nation or government, any
state or political subdivision thereof and any entity exercising executive,
legislative, judicial, regulatory, or administrative functions of or pertaining
to government.
          (mm) “Guarantee” by any Person means any obligation, contingent or
otherwise, of such Person directly or indirectly guaranteeing any Debt or other
obligation of any other Person as well as any obligation or liability, direct or
indirect, contingent or otherwise, of such Person (i) to purchase or pay (or
advance or supply funds for the purchase or payment of) such Debt or other
obligation or liability (whether arising by virtue of partnership arrangements,
by agreement to keep-well, to purchase assets, goods, securities or services, to
operate Property, to take-or-pay, or to maintain net worth or working capital or
other financial statement conditions or otherwise) or (ii) entered into for the
purpose of indemnifying or assuring in any other manner the obligee of such Debt
or other obligation or liability of the payment thereof or to protect the
obligee against loss in respect thereof (in whole or in part), provided that the
term Guarantee shall not include endorsements for collection or deposit in the
ordinary course of business. The term “Guarantee” used as a verb has a
corresponding meaning.
          (nn) “Guarantor” means any Person who from time to time guarantees all
or any part of the Obligations, including Marjorie S. Brooks.
          (oo) “Guaranty” means a written guaranty of each Guarantor in favor of
the Lender, in form and substance satisfactory to Lender, as the same may be
amended, modified, restated, renewed, replaced, extended, supplemented or
otherwise changed from time to time.
          (pp) “Hazardous Material” means any substance, product, waste,
pollutant, material, chemical, contaminant, constituent, or other material which
is or becomes listed, regulated, or addressed under any Environmental Law,
including, without limitation, asbestos, petroleum, and polychlorinated
biphenyls.
          (qq) “Leverage Ratio” means, at any particular time, the ratio of
Consolidated Liabilities to Consolidated Tangible Net Worth.
          (rr) “Liabilities” means, at any particular time, all amounts which,
in conformity with GAAP, would be included as liabilities on a balance sheet of
a Person.

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          (ss) “Lien” means any lien, mortgage, security interest, tax lien,
pledge, charge, hypothecation, assignment, preference, priority, or other
encumbrance of any kind or nature whatsoever (including, without limitation, any
conditional sale or title retention agreement), whether arising by contract,
operation of law, or otherwise.
          (tt) “Loan Documents” means this Agreement and all promissory notes,
security agreements, deeds of trust, assignments, letters of credit, guaranties,
and other instruments, documents, and agreements executed and delivered pursuant
to or in connection with this Agreement, as such instruments, documents, and
agreements may be amended, modified, renewed, restated, extended, supplemented,
replaced, consolidated, substituted, or otherwise changed from time to time.
          (uu) “Long-Term Indebtedness” shall mean, in respect of a Person and
as of any applicable date of determination thereof, all Debt (other than the
aggregate outstanding principal balance of the Revolving Credit Note) which
should be classified as “funded indebtedness” or “long term indebtedness” on a
balance sheet of such Person as of such date in accordance with GAAP and
Long-Term Indebtedness includes Capital Lease Obligations.
          (vv) “Maximum Lawful Rate” means, at any time, the maximum rate of
interest which may be charged, contracted for, taken, received or reserved by
the Lender in accordance with applicable Arkansas law (or applicable United
States federal law to the extent that such law permits Lender to charge,
contract for, receive or reserve a greater amount of interest than under
Arkansas law). The Maximum Lawful Rate shall be calculated in a manner that
takes into account any and all fees, payments, and other charges in respect of
the Loan Documents that constitute interest under applicable law. Each change in
any interest rate provided for herein based upon the Maximum Lawful Rate
resulting from a change in the Maximum Lawful Rate shall take effect without
notice to the Borrower at the time of such change in the Maximum Lawful Rate.
          (ww) “Multiemployer Plan” means a multiemployer plan defined as such
in Section 3(37) of ERISA to which contributions have been made by the Borrower
or any ERISA Affiliate and which is covered by Title IV of ERISA.
          (xx) “Note” means any promissory note executed at any time by the
Borrower and payable to the order of the Lender, as amended, renewed, replaced,
extended, supplemented, consolidated, restated, modified, otherwise changed
and/or increased from time to time.
          (yy) “Obligated Party” means the Guarantor or any other Person who is
or becomes party to any agreement that guarantees or secures payment and
performance of the Obligations or any part thereof.
          (zz) “Obligations” means all obligations, indebtedness, and
liabilities of the Borrower, each Guarantor and any other Obligated Party to the
Lender or Affiliates of the Lender, or both, now existing or hereafter arising,
whether direct, indirect, related, unrelated, fixed, contingent, liquidated,
unliquidated, joint, several, or joint and several, including, without
limitation, the obligations, indebtedness, and liabilities under this Agreement,
any Swap Contract, the other Loan Documents, any cash management or treasury
services agreements and

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all interest accruing thereon (whether a claim for post-filing or post-petition
interest is allowed in any insolvency, reorganization or similar proceeding) and
all attorneys’ fees and other expenses incurred in the enforcement or collection
thereof.
          (aaa) “Operating Lease” means any lease (other than a lease
constituting a Capital Lease Obligation) of real or personal Property.
          (bbb) “PBGC” means the Pension Benefit Guaranty Corporation or any
entity succeeding to all or any of its functions under ERISA.
          (ccc) “Person” means any individual, corporation, limited liability
company, business trust, association, company, partnership, joint venture,
Governmental Authority, or other entity, and shall include such Person’s heirs,
administrators, personal representatives, executors, successors and assigns.
          (ddd) “Plan” means any employee benefit or other plan established or
maintained by the Borrower or any ERISA Affiliate and which is covered by Title
IV of ERISA.
          (eee) “Principal Office” means the principal office of the Lender,
presently located at 4706 South Thompson, Suite 101, Springdale, Arkansas 72764.
          (fff) “Prohibited Transaction” means any transaction set forth in
Section 406 of ERISA or Section 4975 of the Code.
          (ggg) “Property” of a Person means any and all property, whether real,
personal, tangible, intangible or mixed, of such Person, or any other assets
owned, operated or leased by such Person.
          (hhh) “Related Indebtedness” has the meaning set forth in
Section 11.21 of this Agreement.
          (iii) “Release” means, as to any Person, any release, spill, emission,
leaking, pumping, injection, deposit, disposal, disbursement, leaching, or
migration of Hazardous Materials into the indoor or outdoor environment or into
or out of property owned by such Person, including, without limitation, the
movement of Hazardous Materials through or in the air, soil, surface water,
ground water, or property.
          (jjj) “Remedial Action” means all actions required to (i) clean up,
remove, treat, or otherwise address Hazardous Materials in the indoor or outdoor
environment, (ii) prevent the Release or threat of Release or minimize the
further Release of Hazardous Materials so that they do not migrate or endanger
or threaten to endanger public health or welfare or the indoor or outdoor
environment, or (iii) perform pre-remedial studies and investigations and
post-remedial monitoring and care.
          (kkk) “Reportable Event” means any of the events set forth in
Section 4043 of ERISA.

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          (lll) “Revolving Credit Advance” means any Advance made by the Lender
to the Borrower pursuant to Section 2.1(a) of this Agreement.
          (mmm) “Revolving Credit Note” means the promissory note of the
Borrower payable to the order of the Lender, in substantially the form of
Exhibit C hereto, and all amendments, extensions, renewals, replacements, and
modifications thereof.
          (nnn) “Security Agreement” means the Security Agreement of the
Borrower in favor of the Lender, in form and substance satisfactory to the
Lender, as the same may be amended, restated, supplemented, modified, or changed
from time to time.
          (ooo) “Security Documents” means each and every Security Agreement,
Guaranty, pledge, mortgage, deed of trust or other collateral security agreement
required by or delivered to the Lender from time to time to secure the
Obligations or any portion thereof.
          (ppp) “Senior Funded Debt” means Funded Debt minus Subordinated Debt.
          (qqq) “Subordinated Debt” means any Debt of the Borrower (other than
the Obligations) that has been subordinated to the Obligations by written
agreement, in form and content satisfactory to the Lender.
          (rrr) “Subsidiary” means (i) any corporation of which at least a
majority of the outstanding shares of stock having by the terms thereof ordinary
voting power to elect a majority of the board of directors of such corporation
(irrespective of whether or not at the time stock of any other class or classes
of such corporation shall have or might have voting power by reason of the
happening of any contingency) is at the time directly or indirectly owned or
controlled by the Borrower or one or more of the Subsidiaries or by the Borrower
and one or more of the Subsidiaries; and (ii) any other entity (1) of which at
least a majority of the ownership, equity or voting interest is at the time
directly or indirectly owned or controlled by one or more of the Borrower and
the Subsidiaries and (2) which is treated as a subsidiary in accordance with
GAAP.
          (sss) “Swap Contract” means any agreement (including related
confirmations and schedules) between the Borrower and the Lender or any
Affiliate of the Lender now existing or hereafter entered into which is, or
relates to, a rate swap, basis swap, forward rate transaction, cap transaction,
floor transaction, collar transaction or any other similar transactions
(including any option with respect to any of these transactions) or any
combination thereof.
          (ttt) “Tangible Net Worth” means, at any particular time, all amounts
which, in conformity with GAAP, would be included as stockholders’ equity on a
balance sheet of a Person; provided, however, there shall be excluded therefrom:
(i) any amount at which the equity of such Person appears as an asset on such
Person’s balance sheet, (ii) goodwill, including any amounts, however
designated, that represent the excess of the purchase price paid for assets or
stock over the value assigned thereto, (iii) patents, trademarks, trade names,
and copyrights, (iv) deferred expenses, (v) loans and advances to any
stockholder, director, officer, or employee of the Person or any Affiliate of
Person, Borrower, and (vi) all other assets which are properly classified as
intangible assets.

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          (uuu) “Termination Date” means 11:00 A.M. Springdale, Arkansas time on
January 16, 2007, or such earlier date on which the Commitment terminates as
provided in this Agreement.
          (vvv) “UCC” means the Uniform Commerce Code as enacted in any State or
jurisdiction which may govern the liens and security interests granted to
Lender, as amended from time to time.
          (www) “Working Capital” means, at any particular time, the amount by
which Current Assets exceed Current Liabilities.
     1.2 Accounting Matters. Any accounting term used in this Agreement or the
other Loan Documents shall have, unless otherwise specifically provided therein,
the meaning customarily given such term in accordance with GAAP, and all
financial computations thereunder shall be computed, unless otherwise
specifically provided therein, in accordance with GAAP consistently applied;
provided, that all financial covenants and calculations in the Loan Documents
shall be made in accordance with GAAP as in effect on the date of this Agreement
unless the Borrower and the Lender shall otherwise specifically agree in
writing. That certain items or computations are explicitly modified by the
phrase “in accordance with GAAP” shall in no way be construed to limit the
foregoing.
     1.3 Other Definitional Provisions. All definitions contained in this
Agreement are equally applicable to the singular and plural forms of the terms
defined. The words “hereof”, “herein”, and “hereunder” and words of similar
import referring to this Agreement refer to this Agreement as a whole and not to
any particular provision of this Agreement. Unless otherwise specified, all
Article and Section references pertain to this Agreement. Terms used herein that
are defined in the UCC, unless otherwise defined herein, shall have the meanings
specified in the UCC.
ARTICLE II
ADVANCES
     2.1 Revolving Credit Advances. Subject to the terms and conditions of this
Agreement, the Lender agrees to make one or more Revolving Credit Advances to
the Borrower from time to time from the date hereof to and including the
Termination Date in an aggregate principal amount at any time outstanding up to
but not exceeding the amount of the Commitment, provided that the aggregate
amount of all Revolving Credit Advances at any time outstanding shall not exceed
the lesser of (i) the amount of the Commitment or (ii) the Borrowing Base.
Subject to the foregoing limitations, and the other terms and provisions of this
Agreement, the Borrower may borrow, repay, and reborrow hereunder.
          (a) The Revolving Credit Note. The obligation of the Borrower to repay
the Revolving Credit Advances and interest thereon shall be evidenced by the
Revolving Credit Note executed by the Borrower, payable to the order of the
Lender, in the principal amount of the Commitment as originally in effect, and
dated the date hereof.

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          (b) Repayment of Revolving Credit Advances. The Borrower shall repay
the unpaid principal amount of all Advances on the Termination Date, unless
sooner due by reason of acceleration by the Lender as provided in this
Agreement.
          (c) Interest. The unpaid principal amount of the Revolving Credit Note
shall, subject to the following sentence, bear interest as provided in the
Revolving Credit Note. If at any time the rate of interest specified in the
Revolving Credit Note would exceed the Maximum Lawful Rate but for the
provisions thereof limiting interest to the Maximum Lawful Rate, then any
subsequent reduction shall not reduce the rate of interest on the Revolving
Credit Advances below the Maximum Lawful Rate until the aggregate amount of
interest accrued on the Revolving Credit Advances equals the aggregate amount of
interest which would have accrued on the Revolving Credit Advances if the
interest rate had not been limited by the Maximum Lawful Rate. Accrued and
unpaid interest on the Revolving Credit Advances shall be payable as provided in
the Revolving Credit Note and on the Termination Date.
          (d) Borrowing Procedure. The Borrower shall give the Lender notice of
each Revolving Credit Advance by means of an Advance Request Form containing the
information required therein and delivered (by hand or by mechanically confirmed
facsimile) to the Lender no later than 1:00 p.m. (Springdale, Arkansas time) on
the day on which the Revolving Credit Advance is desired to be funded. There
shall not be a minimum amount for any advance hereunder. The Lender at its
option may accept telephonic requests for such Advances, provided that such
acceptance shall not constitute a waiver of the Lender’s right to require
delivery of an Advance Request Form in connection with subsequent Advances. Any
telephonic request for a Revolving Credit Advance by the Borrower shall be
promptly confirmed by submission of a properly completed Advance Request Form to
the Lender, but failure to deliver an Advance Request Form shall not be a
defense to payment of the Advance. The Lender shall have no liability to the
Borrower for any loss or damage suffered by the Borrower as a result of the
Lender’s honoring of any requests, execution of any instructions, authorizations
or agreements or reliance on any reports communicated to it telephonically, by
facsimile or electronically and purporting to have been sent to the Lender by
the Borrower and the Lender shall have no duty to verify the origin of any such
communication or the identity or authority of the Person sending it. Subject to
the terms and conditions of this Agreement, each Revolving Credit Advance shall
be made available to the Borrower by depositing the same, in immediately
available funds, in an account of the Borrower designated by an agent or
representative of Borrower (such agent or representative being Bob Thayer, Steve
Brooks, Doug Brooks, or Joe Brooks) maintained with the Lender at the Principal
Office.
     2.2 General Provisions Regarding Interest; Etc.
          (a) Any outstanding principal of any Advance and (to the fullest
extent permitted by law) any other amount payable by the Borrower under this
Agreement or any other Loan Document that is not paid in full when due (whether
at stated maturity, by acceleration, or otherwise) shall bear interest at the
Default Interest Rate for the period from and including the due date thereof to
but excluding the date the same is paid in full. Additionally, upon the
occurrence of an Event of Default (and from the date of such occurrence) all
outstanding and unpaid principal amounts of all of the Obligations shall, to the
extent permitted by law, bear interest at the Default Interest Rate until such
time as the Lender shall waive in writing the

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application of the Default Interest Rate to such Event of Default situation.
Interest payable at the Default Interest Rate shall be payable from time to time
on demand.
          (b) Interest on the Advances and all other amounts payable by the
Borrower hereunder shall be computed on the basis of a year of 360 days and the
actual number of days elapsed (including the first day but excluding the last
day) unless such calculation would result in a usurious rate, in which case
interest shall be calculated on the basis of a year of 365 or 366 days, as the
case may be.
     2.3 Unused Facility Fee. [Intentionally omitted.]
     2.4 Use of Proceeds. The proceeds of the Revolving Credit Advances shall be
used by the Borrower for working capital in the ordinary course of business.
ARTICLE III
PAYMENTS
     3.1 Method of Payment. All payments of principal, interest, and other
amounts to be made by the Borrower under this Agreement and the other Loan
Documents shall be made to the Lender at the Principal Office in Dollars and
immediately available funds, without setoff, deduction, or counterclaim, and
free and clear of all taxes at the time and in the manner provided in the Notes.
     3.2 Prepayments.
          (a) Voluntary Prepayments. The Borrower may prepay all or any portion
of the Revolving Credit Note to the extent and in the manner provided for
therein.
          (b) Mandatory Prepayment. The Borrower must pay on DEMAND the amount
by which at any time the unpaid principal balance of the Revolving Credit Note
exceeds the Borrowing Base.
     3.3 Lockbox and Account Collections. The Borrower will maintain under such
written agreements as the Lender requires, as security for the Obligations, a
lockbox (“Lockbox”) and depository account in the name of the Lender
(“Depository Account”). All payments from account debtors of the Borrower will
be deposited directly into the Depository Accounts, and the Lender is authorized
to transfer to the Depository Account any funds which are account debtor
payments but which have been deposited into any other depository account of the
Borrower at the Lender. The Borrower agrees that the Lender will have all right,
title and interest in and to all items and funds from time to time in the
Depository Account. Checks received into the Depository Account will not be
considered good funds until the Lender’s depository bank has effected final
settlement with respect thereto by irrevocable credit to the Lender. The Lender
is authorized to apply any and all funds in the Depository Account at any time,
and from time to time, to the Obligations in any order the Lender may elect.
     Upon written notice to the Borrower from the Lender, the Borrower will
advise all of its Account debtors to direct their payments to the Lockbox, at
the address established by the

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Lockbox arrangements. All payments received into the Lockbox will be deposited
into the Depository Account for disposition as set forth above in this section.
ARTICLE IV
SECURITY
     4.1 Collateral. To secure full and complete payment and performance of the
Obligations, the Borrower shall execute and deliver or cause to be executed and
delivered all of the Security Documents required by the Lender covering the
Property and collateral described in such Security Documents (which, together
with any other Property and collateral described in the Security Agreement, and
any other property which may now or hereafter secure the Obligations or any part
thereof, is sometimes herein called the “Collateral”). The Borrower shall
execute and cause to be executed (or, to the extent applicable, hereby
authorizes Lender to execute and/or file) such further documents and
instruments, including without limitation, Uniform Commercial Code financing
statements, as the Lender, in its sole discretion, deems necessary or desirable
to create, evidence, preserve, and perfect its liens and security interests in
the Collateral.
     4.2 Setoff. If an Event of Default shall have occurred and be continuing,
the Lender shall have the right to set off and apply against the Obligations in
such manner as the Lender may determine, at any time and without notice to the
Borrower, any and all deposits (general or special, time or demand, provisional
or final) or other sums at any time credited by or owing from the Lender to the
Borrower whether or not the Obligations are then due. As further security for
the Obligations, the Borrower hereby grants to the Lender a security interest in
all money, instruments, and other property of the Borrower now or hereafter held
by the Lender, including, without limitation, property held in safekeeping. In
addition to the Lender’s right of setoff and as further security for the
Obligations, the Borrower hereby grants to the Lender a security interest in all
deposits (general or special, time or demand, provisional or final) and other
accounts of the Borrower now or hereafter on deposit with or held by the Lender
and all other sums at any time credited by or owing from the Lender to the
Borrower. The rights and remedies of the Lender hereunder are in addition to
other rights and remedies (including, without limitation, other rights of
setoff) which the Lender may have.
ARTICLE V
CONDITIONS PRECEDENT
     5.1 Initial Extension of Credit. The obligation of the Lender to make the
initial Advance under the Revolving Credit Note is subject to the condition
precedent that the Lender shall have received on or before the day of such
Advance all of the following, each dated (unless otherwise indicated) the date
hereof, in form and substance satisfactory to the Lender:
          (a) Resolutions. Resolutions of the Board of Directors (or other
governing body) of the Borrower certified by the Secretary or an Assistant
Secretary (or other custodian of records) of the Borrower which authorize the
execution, delivery, and performance by the Borrower of this Agreement and the
other Loan Documents to which the Borrower is or is to be a party;

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          (b) Incumbency Certificate. A certificate of incumbency certified by
an authorized officer or representative certifying the names of the individuals
or other Persons authorized to sign this Agreement and each of the other Loan
Documents to which the Borrower is or is to be a party (including the
certificates contemplated herein) on behalf of the Borrower together with
specimen signatures of such Persons;
          (c) Constituent Documents. The Constituent Documents for the Borrower
as of a date acceptable to the Lender;
          (d) Governmental Certificates. Certificates of the appropriate
government officials of the state of incorporation or organization of the
Borrower as to the existence and good standing of the Borrower, each dated
within ten (10) days prior to the date of the initial Advance;
          (e) Revolving Credit Note. The Revolving Credit Note executed by the
Borrower;
          (f) Security Documents. The Security Documents executed by the
Borrower and other Obligated Parties;
          (g) Financing Statements. Uniform Commercial Code financing statements
covering such Collateral as the Lender may request;
          (h) Guaranty. The Guaranty executed by the Guarantor;
          (i) Landlord Waivers. Landlord waivers executed by any landlord of
Borrower identified by Lender in its sole and reasonable discretion; provided,
however, pending receipt by Lender of all such waiver and/or subordination
agreements and provided that all other conditions herein have been satisfied,
Lender may make Advances hereunder based on a Borrowing Base composed only of
Eligible Accounts;
          (j) Insurance Matters. Copies of insurance certificates describing all
insurance policies required by Section 7.5, together with loss payable and
lender endorsements in favor of the Lender with respect to all insurance
policies covering Collateral;
          (k) UCC Search. The results of a Uniform Commercial Code search
showing all financing statements and other documents or instruments on file
against the Borrower in the office of the Secretaries of State of Delaware,
Arkansas, and any other jurisdiction deemed necessary in the discretion of
Lender, such search to be as of a date no more than ten (10) days prior to the
date of the initial Advance;
          (l) Opinion of Counsel. A favorable opinion of Hahn, Smith, Walsh &
Mancuso, P.C., legal counsel to the Borrower and the Guarantor, as to such other
matters as the Lender may reasonably request;
          (m) Attorneys’ Fees and Expenses. Evidence that the costs and expenses
(including reasonable attorneys’ fees) referred to in Section 11.1, to the
extent incurred, shall have been paid in full by the Borrower; and

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          (n) Additional Items. The additional items, if any, set forth on
Schedule 5.1(n).
     5.2 All Extensions of Credit. The obligation of the Lender to make any
Advance (including the initial Advance) is subject to the following additional
conditions precedent:
          (a) Request for Advance. The Lender shall have received in accordance
with this Agreement, as the case may be, an Advance Request Form pursuant to the
Lender’s requirements dated the date of such Advance and executed by an
authorized officer of the Borrower;
          (b) No Default, Etc. No Default or material adverse change or effect
shall have occurred and be continuing, or would result from or after giving
effect to such Advance or Letter of Credit;
          (c) Representations and Warranties. All of the representations and
warranties contained in Article VI hereof and in the other Loan Documents shall
be true and correct on and as of the date of such Advance with the same force
and effect as if such representations and warranties had been made on and as of
such date; and
          (d) Additional Documentation. The Lender shall have received such
additional approvals, opinions, or documents as the Lender or its legal counsel
may reasonably request.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES
     To induce the Lender to enter into this Agreement, and except as set forth
on the Disclosure Schedule, the Borrower represents and warrants to the Lender
that:
     6.1 Corporate Existence. The Borrower (a) is a corporation duly organized,
validly existing, and in good standing under the laws of the jurisdiction of its
incorporation or formation; (b) has all requisite power and authority to own its
assets and carry on its business as now being or as proposed to be conducted;
and (c) is qualified to do business in all jurisdictions in which the nature of
its business makes such qualification necessary and where failure to so qualify
would have a material adverse effect on its business, condition (financial or
otherwise), operations, prospects, or properties. The Borrower has the power and
authority to execute, deliver, and perform its obligations under this Agreement
and the other Loan Documents to which it is or may become a party.
     6.2 Financial Statements; Etc. The Borrower has delivered to the Lender
audited financial statements of the Borrower as at and for the fiscal year ended
December 31, 2004 and such other unaudited financial statements of the Borrower
requested by Lender. Such financial statements are true and correct, have been
prepared in accordance with GAAP, and fairly and accurately present the
financial condition of the Borrower and its Subsidiaries as of the respective
dates indicated therein and the results of operations for the respective periods
indicated therein. The Borrower does not have any material contingent
liabilities, liabilities for

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taxes, unusual forward or long-term commitments, or unrealized or anticipated
losses from any unfavorable commitments except as referred to or reflected in
such financial statements. There has been no material adverse change in the
business, condition (financial or otherwise), operations, prospects, or
properties of the Borrower since the effective date of the most recent financial
statements referred to in this Section. All projections delivered by the
Borrower to the Lender have been prepared in good faith, with care and diligence
and use assumptions that are reasonable under the circumstances at the time such
projections were prepared and delivered to the Lender and all such assumptions
are disclosed in the projections.
     6.3 Action; No Breach. The execution, delivery, and performance by the
Borrower of this Agreement and the other Loan Documents to which the Borrower is
or may become a party and compliance with the terms and provisions hereof and
thereof have been duly authorized by all requisite action on the part of the
Borrower and do not and will not (a) violate or conflict with, or result in a
breach of, or require any consent under (i) Constituent Documents of the
Borrower, (ii) any applicable law, rule, or regulation or any order, writ,
injunction, or decree of any Governmental Authority or arbitrator, or (iii) any
agreement or instrument to which the Borrower is a party or by which any of them
or any of their Properties is bound or subject, or (b) constitute a default
under any such agreement or instrument, or result in the creation or imposition
of any Lien upon any of the revenues or assets of the Borrower.
     6.4 Operation of Business. The Borrower possess all licenses, permits,
franchises, patents, copyrights, trademarks, and tradenames, or rights thereto,
necessary to conduct its business substantially as now conducted and as
presently proposed to be conducted, and the Borrower is not in violation of any
valid rights of others with respect to any of the foregoing.
     6.5 Litigation and Judgments. There is no action, suit, investigation, or
proceeding before or by any Governmental Authority or arbitrator pending, or to
the knowledge of the Borrower, threatened against or affecting the Borrower,
that would, if adversely determined, have a material adverse effect on the
business, condition (financial or otherwise), operations, prospects, or
properties of the Borrower or the ability of the Borrower to pay and perform the
Obligations. There are no outstanding judgments against the Borrower of the
Borrower.
     6.6 Rights in Properties; Liens. The Borrower has good and indefeasible
title to or valid leasehold interests in their respective Properties, including
the Properties reflected in the financial statements described in Section 6.2,
and none of the Properties of the Borrower or any Subsidiary is subject to any
Lien, except as permitted by Section 8.2.
     6.7 Enforceability. This Agreement constitutes, and the other Loan
Documents to which the Borrower is party, when delivered, shall constitute
legal, valid, and binding obligations of the Borrower, enforceable against the
Borrower in accordance with their respective terms, except as limited by
bankruptcy, insolvency, or other laws of general application relating to the
enforcement of creditors’ rights.
     6.8 Approvals. No authorization, approval, or consent of, and no filing or
registration with, any Governmental Authority or third party is or will be
necessary for the execution, delivery, or performance by the Borrower of this
Agreement and the other Loan Documents to which the Borrower is or may become a
party or the validity or enforceability thereof.

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     6.9 Debt. Except as identified on Schedule 6.9.1, the Borrower has no Debt.
     6.10 Taxes. The Borrower has filed all tax returns (federal, state, and
local) required to be filed, including all income, franchise, employment,
property, and sales tax returns, and has paid all of its respective liabilities
for taxes, assessments, governmental charges, and other levies that are due and
payable. The Borrower knows of no pending investigation of the Borrower by any
taxing authority or of any pending but unassessed tax liability of the Borrower.
     6.11 Use of Proceeds; Margin Securities. The Borrower is not engaged
principally, or as one of its important activities, in the business of extending
credit for the purpose of purchasing or carrying margin stock (within the
meaning of Regulations G, T, U, or X of the Board of Governors of the Federal
Reserve System), and no part of the proceeds of any Advance will be used to
purchase or carry any margin stock or to extend credit to others for the purpose
of purchasing or carrying margin stock.
     6.12 ERISA. The Borrower is in compliance in all material respects with all
applicable provisions of ERISA. Neither a Reportable Event nor a Prohibited
Transaction has occurred and is continuing with respect to any Plan. No notice
of intent to terminate a Plan has been filed, nor has any Plan been terminated.
No circumstances exist which constitute grounds entitling the PBGC to institute
proceedings to terminate, or appoint a trustee to administer, a Plan, nor has
the PBGC instituted any such proceedings. Neither the Borrower nor any ERISA
Affiliate has completely or partially withdrawn from a Multiemployer Plan. The
Borrower and each ERISA Affiliate have met their minimum funding requirements
under ERISA with respect to all of their Plans, and the present value of all
vested benefits under each Plan do not exceed the fair market value of all Plan
assets allocable to such benefits, as determined on the most recent valuation
date of the Plan and in accordance with ERISA. Neither the Borrower nor any
ERISA Affiliate has incurred any liability to the PBGC under ERISA.
     6.13 Disclosure. No statement, information, report, representation, or
warranty made by the Borrower in this Agreement or in any other Loan Document or
furnished to the Lender in connection with this Agreement, including any and all
filings with the Securities and Exchange Commission, or any of the transactions
contemplated hereby contains any untrue statement of a material fact or omits to
state any material fact necessary to make the statements herein or therein not
misleading. There is no fact known to the Borrower which has a material adverse
effect, or which might in the future have a material adverse effect, on the
business, condition (financial or otherwise), operations, prospects, or
properties of the Borrower or any Subsidiary that has not been disclosed in
writing to the Lender.
     6.14 Subsidiaries, Ventures, Etc. The Borrower has no Subsidiaries,
Affiliates or joint ventures or partnerships other than those listed on the
Disclosure Schedule and the Disclosure Schedule sets forth the jurisdiction of
incorporation or organization of each such Person and the percentage of the
Borrower’s ownership interest in such Person. All of the outstanding capital
stock or other ownership interest of Person described in the Disclosure Schedule
has been validly issued, is fully paid, and is nonassessable.
     6.15 Agreements. The Borrower is not a party to any indenture, loan, or
credit agreement, or to any lease or other agreement or instrument, or subject
to any charter or

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corporate or other organizational restriction which could have a material
adverse effect on the business, condition (financial or otherwise), operations,
prospects, or properties of the Borrower or any Subsidiary, or the ability of
the Borrower to pay and perform its obligations under the Loan Documents to
which it is a party. The Borrower is not in default in any respect in the
performance, observance, or fulfillment of any of the obligations, covenants, or
conditions contained in any agreement or instrument material to its business to
which it is a party.
     6.16 Compliance with Laws. The Borrower is not in violation in any material
respect of any law, rule, regulation, order, or decree of any Governmental
Authority or arbitrator.
     6.17 Inventory. All inventory of the Borrower has been and will hereafter
be produced in compliance with all applicable laws, rules, regulations, and
governmental standards, including, without limitation, the minimum wage and
overtime provisions of the Fair Labor Standards Act, as amended (29 U.S.C. §§
201-219), and the regulations promulgated thereunder.
     6.18 Investment Company Act. The Borrower is not an “investment company”
within the meaning of the Investment Company Act of 1940, as amended.
     6.19 Public Utility Holding Company Act. The Borrower is not a “holding
company” or a “subsidiary company” of a “holding company” or an “affiliate” of a
“holding company” or a “public utility” within the meaning of the Public Utility
Holding Company Act of 1935, as amended.
     6.20 Environmental Matters.
          (a) The Borrower and all of its respective properties, assets, and
operations are in full compliance with all Environmental Laws. The Borrower is
not aware of, nor has the Borrower received notice of, any past, present, or
future conditions, events, activities, practices, or incidents which may
interfere with or prevent the compliance or continued compliance of the Borrower
and the Subsidiaries with all Environmental Laws;
          (b) The Borrower has obtained all permits, licenses, and
authorizations that are required under applicable Environmental Laws, and all
such permits are in good standing and the Borrower is in compliance with all of
the terms and conditions of such permits;
          (c) No Hazardous Materials exist on, about, or within or have been
used, generated, stored, transported, disposed of on, or Released from any of
the properties or assets of the Borrower. The use which the Borrower makes and
intends to make of its respective properties and assets will not result in the
use, generation, storage, transportation, accumulation, disposal, or Release of
any Hazardous Material on, in, or from any of their properties or assets;
          (d) The Borrower nor any of its respective currently or previously
owned or leased properties or operations is subject to any outstanding or
threatened order from or agreement with any Governmental Authority or other
Person or subject to any judicial or docketed administrative proceeding with
respect to (i) failure to comply with Environmental Laws, (ii) Remedial Action,
or (iii) any Environmental Liabilities arising from a Release or threatened
Release;

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          (e) There are no conditions or circumstances associated with the
currently or previously owned or leased properties or operations of the Borrower
that could reasonably be expected to give rise to any Environmental Liabilities;
          (f) The Borrower is not a treatment, storage, or disposal facility
requiring a permit under the Resource Conservation and Recovery Act, 42 U.S.C. §
6901 et seq., regulations thereunder or any comparable provision of state law.
The Borrower is in compliance with all applicable financial responsibility
requirements of all Environmental Laws;
          (g) The Borrower has not filed or failed to file any notice required
under applicable Environmental Law reporting a Release; and
          (h) No Lien arising under any Environmental Law has attached to any
property or revenues of the Borrower.
     6.21 Intellectual Property. All material Intellectual Property owned or
used by the Borrower, or any Obligated Party is listed, together with
application or registration numbers, where applicable, in the Disclosure
Schedule. Each Person identified on the Disclosure Schedule owns, or is licensed
to use, all Intellectual Property necessary to conduct its business as currently
conducted except for such Intellectual Property the failure of which to own or
license could not reasonably be expected to have a material adverse effect. Each
Person identified on the Disclosure Schedule will maintain the patenting and
registration of all Intellectual Property with the United States Patent and
Trademark Office, the United States Copyright Office, or other appropriate
Governmental Authority and each Person identified on the Disclosure Schedule
will promptly notify the Lender in writing five (5) Business Days prior to
filing any such new patent or registration.
     6.22 Depository Relationship. To induce the Lender to establish the
interest rates provided for in the Revolving Credit Note, the Borrower will use
the Lender as its principal depository bank and, except as otherwise disclosed
on the Disclosure Schedule, the Borrower covenants and agrees to maintain the
Lender as its principal depository bank, including for the maintenance of
business, cash management, operating and administrative deposit accounts.
ARTICLE VII
AFFIRMATIVE COVENANTS
     The Borrower covenants and agrees that, as long as the Obligations or any
part thereof are outstanding or the Lender has any Commitment hereunder, the
Borrower will perform and observe the following positive covenants, unless the
Lender shall otherwise consent in writing:
     7.1 Reporting Requirements. The Borrower will furnish to the Lender:
          (a) Annual Financial Statements. As soon as available, and in any
event within ninety (90) days after the end of each fiscal year of the Borrower
unless (i) otherwise consented to in writing by Lender or (ii) Borrower receives
an extension of the applicable filing date from the Securities and Exchange
Commission, in which case such reports shall be provided to Lender
contemporaneous with the provision of the same to the Securities and Exchange

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Commission, beginning with the fiscal year ending December 31, 2005, (x) a copy
of the audited annual financial statements of Borrower and its 10-K report filed
with the Securities and Exchange Commission for such fiscal year containing
balance sheets and statements of income, retained earnings, and cash flow as at
the end of such fiscal year and for the 12-month period then ended, in each case
setting forth in comparative form the figures for the preceding fiscal year, all
in reasonable detail and audited and certified by the independent auditors of
Borrower, Tullius Taylor Sartain and Sartain LLP, or other independent certified
public accountants of recognized standing acceptable to the Lender, to the
effect that such report has been prepared in accordance with GAAP and containing
no material qualifications or limitations on scope; and (y) a certificate of
such independent certified public accountants to the Lender (A) stating that to
their knowledge no Default has occurred and is continuing, or if in their
opinion a Default has occurred and is continuing, a statement as to the nature
thereof, and (B) confirming the calculations set forth in the officer’s
certificate delivered simultaneously therewith;
          (b) Quarterly Financial Statements. As soon as available, and in any
event within forty-five (45) days after the end of each of the quarters of each
fiscal year of the Borrower, unless (i) otherwise consented to in writing by
Lender or (ii) Borrower receives an extension of the applicable filing date from
the Securities and Exchange Commission, in which case such reports shall be
provided to Lender contemporaneous with the provision of the same to the
Securities and Exchange Commission, a copy of an unaudited financial report of
the Borrower and a copy of Borrower’s 10-Q report filed with the Securities and
Exchange Commission for the same period as of the end of such fiscal quarter and
for the portion of the fiscal year then ended, containing balance sheets and
statements of income, and cash flow, in each case setting forth in comparative
form the figures for the corresponding period of the preceding fiscal year, all
in reasonable detail certified by the chief financial officer of the Borrower to
have been prepared in accordance with GAAP and to fairly and accurately present
(subject to year-end audit adjustments) the financial condition and results of
operations of the Borrower and its Subsidiaries at the date and for the periods
indicated therein;
          (c) Other Filings with the Securities and Exchange Commission. As soon
as available, and in any event within ten (10) days after the filing of the
same, a copy of any and all documents, statements, reports, or any other filing
with the Securities and Exchange Commission, or a state equivalent or
counterpart to the same within the state of Borrower’s incorporation or any
state in which it conducts business.
          (d) Monthly Financial Statements. As soon as available, and in any
event within thirty (30) days after the end of each month of each fiscal year of
the Borrower, a copy of an unaudited statement of income which shall be in
reasonable detail certified by the chief financial officer of the Borrower to
have been prepared in accordance with GAAP and to fairly and accurately present
(subject to year-end audit adjustments) the financial condition and results of
operations of the Borrower at the date and for the periods indicated therein;
          (e) Borrowing Base Report. Along with the submission of each Advance
Request Form and within forty-five (45) days after the end of each of the
quarters of each fiscal year of the Borrower, a Borrowing Base Report, in a form
identical to the same annexed hereto as Exhibit A, certified by the chief
financial officer of the Borrower;

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          (f) Compliance Certificate. Concurrently with the delivery of each of
the financial statements referred to in subsections 8.1(a) and 8.1(b), a
certificate of the chief financial officer of the Borrower identical to the form
annexed hereto as Exhibit B (i) stating that to the best of such officer’s
knowledge, no Default has occurred and is continuing, or if a Default has
occurred and is continuing, a statement as to the nature thereof and the action
which is proposed to be taken with respect thereto, and (ii) showing in
reasonable detail the calculations demonstrating compliance with Article IX;
          (g) Management Letters. Promptly upon receipt thereof, a copy of any
management letter or written report submitted to the Borrower by independent
certified public accountants with respect to the business, condition (financial
or otherwise), operations, prospects, or properties of the Borrower;
          (h) Notice of Litigation. Promptly after the commencement thereof,
notice of all actions, suits, and proceedings before any Governmental Authority
or arbitrator affecting the Borrower which, if determined adversely to the
Borrower, could have a material adverse effect on the business, condition
(financial or otherwise), operations, prospects, or properties of the Borrower;
          (i) Notice of Default. As soon as possible and in any event within
three (3) days after the occurrence of each Default, a written notice setting
forth the details of such Default and the action that the Borrower has taken and
proposes to take with respect thereto;
          (j) ERISA Reports. Promptly after the filing or receipt thereof,
copies of all reports, including annual reports, and notices which the Borrower
files with or receives from the PBGC or the U.S. Department of Labor under
ERISA; and as soon as possible and in any event within five (5) days after the
Borrower knows or has reason to know that any Reportable Event or Prohibited
Transaction has occurred with respect to any Plan or that the PBGC or the
Borrower has instituted or will institute proceedings under Title IV of ERISA to
terminate any Plan, a certificate of the chief financial officer of the Borrower
setting forth the details as to such Reportable Event or Prohibited Transaction
or Plan termination and the action that the Borrower proposes to take with
respect thereto;
          (k) Reports to Other Creditors. Promptly after the furnishing thereof,
copies of any statement or report furnished to any other party pursuant to the
terms of any indenture, loan, or credit or similar agreement and not otherwise
required to be furnished to the Lender pursuant to any other clause of this
Section;
          (l) Notice of Material Adverse Change. As soon as possible and in any
event within five (5) days after the occurrence thereof, written notice of any
matter that could have a material adverse effect on the business, condition
(financial or otherwise), operations, prospects, or properties of the Borrower
or any Subsidiary;
          (m) Accounts Receivable and Accounts Payable Aging. Along with the
submission of each Advance Request Form and within forty-five (45) days after
the end of each of the quarters of each fiscal year of the Borrower, an account
receivable aging, classifying the Borrower’s domestic and export accounts
receivable in categories of 0-30, 31-60, 61-90 and over

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90 days from date of invoice, and in such form and detail as the Lender shall
require, and account payable aging by categories of 0-30, 31-60 and over 60,
from date of invoice, also in such detail as the Lender shall reasonably
require, and in each case certified by the chief financial officer of the
Borrower;
          (n) Inventory Report. Along with the submission of each Advance
Request Form and within forty-five (45) days after the end of each of the
quarters of each fiscal year of the Borrower, an inventory report, in such form
and detail as the Lender shall reasonably require, certified by the chief
financial officer of the Borrower;
          (o) Contracts in Progress. Within forty-five (45) days after the end
of each of the quarters of each fiscal year of the Borrower, a contracts in
progress report, in such form and detail as the Lender shall require, certified
by the chief financial officer of the Borrower;
          (p) Guarantor Financial Statement. Guarantor shall provide an annual
financial statement, in such form and detail as the Lender shall reasonably
require, within one hundred twenty (120) days after the end of each calendar
year and a copy of the Guarantor’s filed tax return, within thirty (30) days of
the day it is filed with the Internal Revenue Service;
          (q) Proxy Statements, Etc. As soon as available, one copy of each
financial statement, report, notice or proxy statement sent by the Borrower to
its stockholders generally and one copy of each regular, periodic or special
report, registration statement, or prospectus filed by the Borrower with any
securities exchange or the Securities and Exchange Commission or any successor
agency; and
          (r) General Information. Promptly, such other information concerning
the Borrower or any Subsidiary as the Lender may from time to time reasonably
request.
     7.2 Maintenance of Existence; Conduct of Business. The Borrower will
preserve and maintain its existence and all of its leases, privileges, licenses,
permits, franchises, qualifications, and rights that are necessary or desirable
in the ordinary conduct of its business. The Borrower will conduct its business
in an orderly and efficient manner in accordance with good business practices.
Without limitation, the Borrower will not make any material change in its credit
collection policies if such change would materially impair the collectibility of
any Account, nor will it rescind, cancel or modify any Account except in the
ordinary course of business.
     7.3 Maintenance of Properties. The Borrower will maintain, keep, and
preserve all of its Properties (tangible and intangible) necessary or useful in
the proper conduct of its business in good working order and condition.
     7.4 Taxes and Claims. The Borrower will pay or discharge at or before
maturity or before becoming delinquent (a) all taxes, levies, assessments, and
governmental charges imposed on it or its income or profits or any of its
property, and (b) all lawful claims for labor, material, and supplies, which, if
unpaid, might become a Lien upon any of its property; provided, however, that
the Borrower shall not be required to pay or discharge any tax, levy,
assessment, or governmental charge which is being contested in good faith by
appropriate proceedings diligently pursued, and for which adequate reserves have
been established.

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     7.5 Insurance. The Borrower will maintain insurance with financially sound
and reputable insurance companies in such amounts and covering such risks as is
usually carried by corporations engaged in similar businesses and owning similar
properties in the same general areas in which the Borrower operates, provided
that in any event the Borrower will maintain workmen’s compensation insurance,
property insurance, comprehensive general liability insurance, products
liability insurance, and business interruption insurance reasonably satisfactory
to the Lender. Each insurance policy covering Collateral shall name the Lender
as loss payee and shall provide that such policy will not be cancelled or
reduced without thirty (30) days prior written notice to the Lender.
     7.6 Inspection Rights. At any reasonable time and from time to time, the
Borrower will permit representatives of the Lender to examine the Collateral and
conduct Collateral audits, to examine, copy, and make extracts from its books
and records, to visit and inspect its properties, and to discuss its business,
operations, and financial condition with its officers, employees, and
independent certified public accountants.
     7.7 Keeping Books and Records. The Borrower will maintain proper books of
record and account in which full, true, and correct entries in conformity with
GAAP shall be made of all dealings and transactions in relation to its business
and activities.
     7.8 Compliance with Laws. The Borrower will comply in all material respects
with all applicable laws, rules, regulations, orders, and decrees of any
Governmental Authority or arbitrator.
     7.9 Compliance with Agreements. The Borrower will comply in all material
respects with all agreements, contracts, and instruments binding on it or
affecting its properties or business.
     7.10 Further Assurances. The Borrower will execute and deliver such further
agreements and instruments and take such further action as may be requested by
the Lender to carry out the provisions and purposes of this Agreement and the
other Loan Documents and to create, preserve, and perfect the Liens of the
Lender in the Collateral.
     7.11 ERISA. The Borrower will comply with all minimum funding requirements,
and all other material requirements, of ERISA, if applicable, so as not to give
rise to any liability thereunder.
ARTICLE VIII
NEGATIVE COVENANTS
     The Borrower covenants and agrees that, as long as the Obligations or any
part thereof are outstanding or the Lender has any Commitment hereunder, the
Borrower will perform and observe the following negative covenants, unless the
Lender shall otherwise consent in writing:
     8.1 Debt. The Borrower will not incur, create, assume, or permit to exist,
any Debt, except:

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          (a) Debt to the Lender;
          (b) Existing Debt described on the Disclosure Schedule hereto;
          (c) Subordinated Debt; and
          (d) Purchase money Debt not to exceed $250,000.00 in the aggregate.
     8.2 Limitation on Liens. The Borrower will not incur, create, assume, or
permit to exist, any Lien upon any of its property, assets, or revenues, whether
now owned or hereafter acquired, except:
          (a) Liens disclosed on the Disclosure Schedule hereto;
          (b) Liens in favor of the Lender;
          (c) Encumbrances consisting of minor easements, zoning restrictions,
or other restrictions on the use of real property that do not (individually or
in the aggregate) materially affect the value of the assets encumbered thereby
or materially impair the ability of the Borrower to use such assets in its
business, and none of which is violated in any material respect by existing or
proposed structures or land use;
          (d) Liens for taxes, assessments, or other governmental charges which
are not delinquent or which are being contested in good faith and for which
adequate reserves have been established;
          (e) Liens of mechanics, materialmen, warehousemen, carriers, or other
similar statutory Liens securing obligations that are not yet due and are
incurred in the ordinary course of business;
          (f) Liens resulting from good faith deposits to secure payments of
workmen’s compensation or other social security programs or to secure the
performance of tenders, statutory obligations, surety and appeal bonds, bids, or
contracts (other than for payment of Debt), or leases made in the ordinary
course of business;
          (g) Liens on specific property to secure Subordinated Debt to the
extent permitted by Section 8.1(c); and
          (h) Purchase money Liens on specific property to secure Debt used to
acquire such property to the extent permitted in Section 8.1(d).
     8.3 Mergers, Etc. The Borrower will not become a party to a merger or
consolidation, or purchase or otherwise acquire all or any part of the assets of
any Person or any shares or other evidence of beneficial ownership of any
Person, or wind-up, dissolve, or liquidate.
     8.4 Restricted Payments. The Borrower will not declare or pay any dividends
or make any other payment or distribution (in cash, property, or obligations) on
account of its

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equity interests, or redeem, purchase, retire, or otherwise acquire any of its
equity interests, or set apart any money for a sinking or other analogous fund
for any dividend or other distribution on its equity interests or for any
redemption, purchase, retirement, or other acquisition of any of its equity
interests.
     8.5 Loans and Investments. The Borrower will not 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:
          (a) readily marketable direct obligations of the United States of
America or any agency thereof with maturities of one year or less from the date
of acquisition;
          (b) fully insured certificates of deposit with maturities of one year
or less from the date of acquisition issued by any commercial bank operating in
the United States of America having capital and surplus in excess of
$50,000,000.00; and
          (c) commercial paper of a domestic issuer if at the time of purchase
such paper is rated in one of the two highest rating categories of Standard and
Poor’s Corporation or Moody’s Investors Service.
     8.6 Limitation on Issuance of Equity. [Intentionally omitted].
     8.7 Transactions With Affiliates. The Borrower will not enter into any
transaction, including, without limitation, the purchase, sale, or exchange of
property or the rendering of any service, with any Affiliate of the Borrower,
except in the ordinary course of and pursuant to the reasonable requirements of
the Borrower’s business and upon fair and reasonable terms no less favorable to
the Borrower than would be obtained in a comparable arm’s-length transaction
with a Person not an Affiliate of the Borrower.
     8.8 Disposition of Assets. The Borrower will not sell, lease, assign,
transfer, or otherwise dispose of any of its assets, except (a) dispositions of
inventory in the ordinary course of business or (b) dispositions, for fair
value, of worn-out and obsolete equipment not necessary or useful to the conduct
of business.
     8.9 Sale and Leaseback. The Borrower will not 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.
     8.10 Prepayment of Debt. The Borrower will not prepay any Debt, except the
Obligations.
     8.11 Nature of Business. The Borrower will not engage in any business other
than the businesses in which it is engaged as of the date hereof.
     8.12 Environmental Protection. The Borrower will not, (a) use (or permit
any tenant to use) any of its properties or assets for the handling, processing,
storage, transportation, or disposal of any Hazardous Material, (b) generate any
Hazardous Material, (c) conduct any activity that is likely to cause a Release
or threatened Release of any Hazardous Material, or (d)

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otherwise conduct any activity or use any of their respective properties or
assets in any manner that is likely to violate any Environmental Law or create
any Environmental Liabilities for which the Borrower would be responsible.
     8.13 Accounting. The Borrower will not change its fiscal year or make any
change (a) in accounting treatment or reporting practices, except as required by
GAAP and disclosed to the Lender, or (b) in tax reporting treatment, except as
required by law and disclosed to the Lender; provided, however, Borrower has
disclosed to Lender that it shall be changing its tax reporting fiscal year and
Lender has consented to the same.
     8.14 No Negative Pledge. The Borrower will not enter into or permit to
exist any arrangement or agreement, other than pursuant to this Agreement or any
Loan Document, which directly or indirectly prohibits the Borrower from creating
or incurring a Lien on any of its assets.
ARTICLE IX
FINANCIAL COVENANTS
     The Borrower covenants and agrees that, as long as the Obligations or any
part thereof are outstanding or the Lender has any Commitment hereunder, the
Borrower will, at all times, observe and perform the following financial
covenants, unless the Lender shall otherwise consent in writing.
     9.1 The Borrower shall calculate quarterly the Debt Service Coverage Ratio
for the four quarters prior to the date of any such calculation, and shall
provide a copy of such calculation for such period to the Lender at the time of
delivery of the quarterly financial statements delivered in accordance with
Section 7.1(b) hereof. If the Debt Service Coverage Ratio computation delivered
at the time of delivery of any such statement indicates that the Debt Service
Coverage Ratio of the Borrower for such previous four fiscal quarters shall be
less than 2.00 to 1.00, the Borrower covenants to retain a Consultant at the
expense of the Borrower, within 30 days, to make recommendations to increase
such Debt Service Coverage Ratio in the fiscal year following delivery of such
recommendations to such level or, if in the opinion of the Consultant the
attainment of such level is impracticable, to the highest level attainable in
such fiscal year. Any Consultant so retained shall be required to submit such
recommendations to the Lender within 90 days after being so retained. The
Borrower agrees that it will, to the extent permitted by law, follow the
recommendations of the Consultant. The Borrower shall not be obligated to retain
such a Consultant more often than once during any twenty-four month period.
     (b) The Borrower covenants and agrees that it shall maintain a Current
Ratio, calculated as of the last day of each calendar quarter, of not less than
1.00 to 1.00. The Borrower shall provide a copy of such calculation to the
Lender at the time of delivery of the quarterly financial statements delivered
in accordance with Section 7.1(b) hereof.
     (d) The Borrower covenants and agrees that not more than 10% of its
accounts payable (for the deferred purchase price of property or services) from
time to time incurred in the ordinary course of operations and activities shall
be in excess of 75 day past the invoice or billing date, or, if greater than
75 days, are being contested in good faith by the Borrower.

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     (e) The Borrower covenants and agrees that not more than 20% of its
accounts receivable (for the deferred purchase price of property or services)
from time to time shall be in excess of 90 day past the invoice or billing date,
excluding from such calculation (i) amounts being contested in good faith by the
obligated party, and (ii) amounts which the Borrower has determined, in good
faith, are not likely to be collected and are to be treated as losses in
accordance with generally accepted accounting principles.
ARTICLE X
DEFAULT
     10.1 Events of Default. Each of the following shall be deemed an “Event of
Default”:
          (a) The Borrower shall fail to pay the Obligations or any part thereof
shall not be paid within ten (10) days of when due or declared due.
          (b) The Borrower shall fail to provide to the Lender timely any notice
of Default as required by Section 7.1(i) of this Agreement or the Borrower shall
breach any provision of Article VIII or Article IX of this Agreement.
          (c) Any representation or warranty made or deemed made by the Borrower
or any Obligated Party (or any of their respective officers) in any Loan
Document or in any certificate, report, notice, or financial statement furnished
at any time in connection with this Agreement shall be false, misleading, or
erroneous in any material respect when made or deemed to have been made.
          (d) Unless otherwise provided herein, the Borrower or any Obligated
Party shall fail to perform, observe, or comply with any covenant, agreement, or
term contained in this Agreement or any other Loan Document (other than as
covered by Section 10.1(a) and (b) above), and such failure continues for more
than 30 days following the date that is the earlier to occur of (i) notice
thereof provided by Borrower to Lender and (ii) notice thereof provided by
Lender to Borrower.
          (e) The Borrower or any Obligated Party shall commence a voluntary
proceeding seeking liquidation, reorganization, or other relief with respect to
itself or its debts under any bankruptcy, insolvency, or other similar law now
or hereafter in effect or seeking the appointment of a trustee, receiver,
liquidator, custodian, or other similar official of it or a substantial part of
its property or shall consent to any such relief or to the appointment of or
taking possession by any such official in an involuntary case or other
proceeding commenced against it or shall make a general assignment for the
benefit of creditors or shall generally fail to pay its debts as they become due
or shall take any corporate action to authorize any of the foregoing.
          (f) The Borrower or any Obligated Party shall fail to pay when due any
principal of or interest on any Debt (other than the Obligations), or the
maturity of any such Debt shall have been accelerated, or any such Debt shall
have been required to be prepaid prior to the stated maturity thereof, or any
event shall have occurred that permits (or, with the giving of notice or lapse
of time or both, would permit) any holder or holders of such Debt or any Person

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acting on behalf of such holder or holders to accelerate the maturity thereof or
require any such prepayment.
          (g) This Agreement or any other Loan Document shall cease to be in
full force and effect or shall be declared null and void or the validity or
enforceability thereof shall be contested or challenged by the Borrower or any
Obligated Party or any of their respective shareholders, or the Borrower or any
Obligated Party shall deny that it has any further liability or obligation under
any of the Loan Documents, or any lien or security interest created by the Loan
Documents shall for any reason cease to be a valid, first priority perfected
security interest in and lien upon any of the Collateral purported to be covered
thereby.
          (h) Any of the following events shall occur or exist with respect to
the Borrower or any ERISA Affiliate: (i) any Prohibited Transaction involving
any Plan; (ii) any Reportable Event with respect to any Plan; (iii) the filing
under Section 4041 of ERISA of a notice of intent to terminate any Plan or the
termination of any Plan; (iv) any event or circumstance that might constitute
grounds entitling the PBGC to institute proceedings under Section 4042 of ERISA
for the termination of, or for the appointment of a trustee to administer, any
Plan, or the institution by the PBGC of any such proceedings; or (v) complete or
partial withdrawal under Section 4201 or 4204 of ERISA from a Multiemployer Plan
or the reorganization, insolvency, or termination of any Multiemployer Plan; and
in each case above, such event or condition, together with all other events or
conditions, if any, have subjected or could in the reasonable opinion of the
Lender subject the Borrower to any tax, penalty, or other liability to a Plan, a
Multiemployer Plan, the PBGC.
          (i) The Guarantor or any other Obligated Party shall have died or have
been declared incompetent by a court of proper jurisdiction and a replacement
Guarantor or Obligated Party has not been accepted by Lender in its reasonable
discretion; or if the Guarantor or any other Obligated Party is a corporation,
partnership or other entity, such Person shall be the subject of a bankruptcy or
receivership proceeding or shall have dissolved, liquidated or otherwise ceased
doing business.
          (j) Thirty (30) days following the date any of Borrower’s officers
and/or directors shall cease to be active in the management of the Borrower,
unless Borrower shall have appointed a successor acceptable to Lender, in
Lender’s sole and reasonable discretion.
          (k) The Borrower or any Obligated Party, or any of their properties,
revenues, or assets, shall become subject to an order of forfeiture, seizure, or
divestiture (whether under RICO or otherwise) and the same shall not have been
discharged within thirty (30) days from the date of entry thereof.
          (l) More than a ten percent (10%) reduction in the aggregate record or
beneficial ownership of the Borrower held by Joe G. Brooks, Stephen W. Brooks,
J. Douglas Brooks, and Marjorie S. Brooks (collectively, the “Brooks
Shareholders”) shall have been transferred, assigned or hypothecated to any
Person (other than a Brooks Shareholder), when compared to such ownership as of
the date of this Agreement.

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          (m) An involuntary proceeding shall be commenced against the Borrower
or any Obligated Party seeking liquidation, reorganization, or other relief with
respect to it or its debts under any bankruptcy, insolvency, or other similar
law now or hereafter in effect or seeking the appointment of a trustee,
receiver, liquidator, custodian, or other similar official for it or a
substantial part of its property, and such involuntary proceeding shall remain
undismissed and unstayed for a period of thirty (30) days.
          (n) The Borrower or any Obligated Party shall fail to discharge within
a period of thirty (30) days after the commencement thereof any attachment,
sequestration, or similar proceeding or proceedings involving an aggregate
amount in excess of one hundred thousand and no/100 Dollars ($100,000.00)
against any of its assets or properties.
          (o) A final judgment or judgments for the payment of money in excess
of one hundred thousand and no/100 Dollars ($100,000.00) in the aggregate shall
be rendered by a court or courts against the Borrower or any Obligated Party and
the same shall not be discharged (or provision shall not be made for such
discharge), or a stay of execution thereof shall not be procured, within thirty
(30) days from the date of entry thereof and the Borrower or Obligated Party
shall not, within said period of thirty (30) days, or such longer period during
which execution of the same shall have been stayed, appeal therefrom and cause
the execution thereof to be stayed during such appeal.
          (p) Guarantor delivers a Cessation Notice (as defined in the Guaranty)
to Lender, or if for any other reason Guarantor is no longer obligated to
guaranty any portion of the Loan.
     10.2 Remedies Upon Default. If any Event of Default shall occur and be
continuing past any applicable cure period, the Lender may after notice
terminate the Commitment and declare the Obligations or any part thereof to be
immediately due and payable, and the same shall thereupon become immediately due
and payable, without notice, demand, presentment, notice of dishonor, notice of
acceleration, notice of intent to accelerate, notice of intent to demand,
protest, or other formalities of any kind, all of which are hereby expressly
waived by the Borrower; provided, however, that upon the occurrence of an Event
of Default under Section 10.1(e), Section 10.1(m), or Section 10.1(p) the
Commitment shall automatically terminate, and the Obligations shall become
immediately due and payable without notice, demand, presentment, notice of
dishonor, notice of acceleration, notice of intent to accelerate, notice of
intent to demand, protest, or other formalities of any kind, all of which are
hereby expressly waived by the Borrower. If any Event of Default shall occur and
be continuing, the Lender may exercise all rights and remedies available to it
in law or in equity, under the Loan Documents, or otherwise.
     10.3 Performance by the Lender. If the Borrower shall fail to perform any
covenant or agreement contained in any of the Loan Documents, the Lender may
perform or attempt to perform such covenant or agreement on behalf of the
Borrower. In such event, the Borrower shall, at the request of the Lender,
promptly pay any amount expended by the Lender in connection with such
performance or attempted performance to the Lender, together with interest
thereon at the Default Rate from and including the date of such expenditure to
but excluding the date such expenditure is paid in full. Notwithstanding the
foregoing, it is expressly agreed that

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the Lender shall not have any liability or responsibility for the performance of
any obligation of the Borrower under this Agreement or any other Loan Document.
ARTICLE XI
MISCELLANEOUS
     11.1 Expenses. The Borrower hereby agrees to pay on demand: (a) all costs,
expenses, and attorneys’ fees of the Lender in connection with the preparation,
negotiation, execution, and delivery of this Agreement and the other Loan
Documents and any and all amendments, modifications, renewals, extensions, and
supplements thereof and thereto, including, without limitation, the reasonable
fees and expenses of legal counsel, advisors, consultants, and auditors for the
Lender, (b) all costs and expenses of the Lender in connection with any Default
and the enforcement of this Agreement or any other Loan Document, including,
without limitation, the fees and expenses of legal counsel, advisors,
consultants, and auditors for the Lender, (c) all transfer, stamp, documentary,
or other similar taxes, assessments, or charges levied by any Governmental
Authority in respect of this Agreement or any of the other Loan Documents,
(d) all costs, expenses, assessments, and other charges incurred in connection
with any filing, registration, recording, or perfection of any security interest
or Lien contemplated by this Agreement or any other Loan Document, and (e) all
other costs and expenses incurred by the Lender in connection with this
Agreement or any other Loan Document, any litigation, dispute, suit, proceeding
or action; the enforcement of its rights and remedies, protection of its
interests in bankruptcy, insolvency or other legal proceedings, including,
without limitation, all costs, expenses, and other charges (including the
Lender’s internal charges) incurred in connection with evaluating, observing,
collecting, examining, auditing, appraising, selling, liquidating, or otherwise
disposing of the Collateral or other assets of the Borrower.
     11.2 INDEMNIFICATION. THE BORROWER SHALL INDEMNIFY THE LENDER AND EACH
AFFILIATE THEREOF AND THEIR RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES,
ATTORNEYS, AND AGENTS FROM, AND HOLD EACH OF THEM HARMLESS AGAINST, ANY AND ALL
LOSSES, LIABILITIES, CLAIMS, DAMAGES, PENALTIES, JUDGMENTS, DISBURSEMENTS,
COSTS, AND EXPENSES (INCLUDING ATTORNEYS’ FEES) TO WHICH ANY OF THEM MAY BECOME
SUBJECT WHICH DIRECTLY OR INDIRECTLY ARISE FROM OR RELATE TO (A) THE
NEGOTIATION, EXECUTION, DELIVERY, PERFORMANCE, ADMINISTRATION, OR ENFORCEMENT OF
ANY OF THE LOAN DOCUMENTS, (B) ANY OF THE TRANSACTIONS CONTEMPLATED BY THE LOAN
DOCUMENTS, (C) ANY BREACH BY THE BORROWER OF ANY REPRESENTATION, WARRANTY,
COVENANT, OR OTHER AGREEMENT CONTAINED IN ANY OF THE LOAN DOCUMENTS, (D) THE
PRESENCE, RELEASE, THREATENED RELEASE, DISPOSAL, REMOVAL, OR CLEANUP OF ANY
HAZARDOUS MATERIAL LOCATED ON, ABOUT, WITHIN, OR AFFECTING ANY OF THE PROPERTIES
OR ASSETS OF THE BORROWER OR ANY SUBSIDIARY, (E) THE USE OR PROPOSED USE OF ANY
LETTER OF CREDIT, (F) ANY AND ALL TAXES, LEVIES, DEDUCTIONS, AND CHARGES IMPOSED
ON THE LENDER OR ANY OF THE LENDER’S CORRESPONDENTS IN RESPECT OF ANY LETTER OF
CREDIT, OR (G) ANY INVESTIGATION, LITIGATION, OR OTHER PROCEEDING, INCLUDING,
WITHOUT LIMITATION, ANY THREATENED INVESTIGATION,

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LITIGATION, OR OTHER PROCEEDING, RELATING TO ANY OF THE FOREGOING. WITHOUT
LIMITING ANY PROVISION OF THIS AGREEMENT OR OF ANY OTHER LOAN DOCUMENT, IT IS
THE EXPRESS INTENTION OF THE PARTIES HERETO THAT EACH PERSON TO BE INDEMNIFIED
UNDER THIS SECTION SHALL BE INDEMNIFIED FROM AND HELD HARMLESS AGAINST ANY AND
ALL LOSSES, LIABILITIES, CLAIMS, DAMAGES, PENALTIES, JUDGMENTS, DISBURSEMENTS,
COSTS, AND EXPENSES (INCLUDING ATTORNEYS’ FEES) ARISING OUT OF OR RESULTING FROM
THE SOLE CONTRIBUTORY OR ORDINARY NEGLIGENCE OF SUCH PERSON.
     11.3 Limitation of Liability. Neither the Lender nor any Affiliate,
officer, director, employee, attorney, or agent of the Lender shall have any
liability with respect to, and the Borrower hereby waives, releases, and agrees
not to sue any of them upon, any claim for any special, indirect, incidental, or
consequential damages suffered or incurred by the Borrower in connection with,
arising out of, or in any way related to, this Agreement or any of the other
Loan Documents, or any of the transactions contemplated by this Agreement or any
of the other Loan Documents. The Borrower hereby waives, releases, and agrees
not to sue the Lender or any of the Lender’s Affiliates, officers, directors,
employees, attorneys, or agents for punitive damages in respect of any claim in
connection with, arising out of, or in any way related to, this Agreement or any
of the other Loan Documents, or any of the transactions contemplated by this
Agreement or any of the other Loan Documents.
     11.4 No Duty. All attorneys, accountants, appraisers, and other
professional Persons and consultants retained by the Lender shall have the right
to act exclusively in the interest of the Lender and shall have no duty of
disclosure, duty of loyalty, duty of care, or other duty or obligation of any
type or nature whatsoever to the Borrower or any of the Borrower’s shareholders
or any other Person.
     11.5 Lender Not Fiduciary. The relationship between the Borrower and the
Lender is solely that of debtor and creditor, and the Lender has no fiduciary or
other special relationship with the Borrower, and no term or condition of any of
the Loan Documents shall be construed so as to deem the relationship between the
Borrower and the Lender to be other than that of debtor and creditor.
     11.6 Equitable Relief. The Borrower recognizes that in the event the
Borrower fails to pay, perform, observe, or discharge any or all of the
Obligations, any remedy at law may prove to be inadequate relief to the Lender.
The Borrower therefore agrees that the Lender, if the Lender so requests, shall
be entitled to temporary and permanent injunctive relief in any such case
without the necessity of proving actual damages.
     11.7 No Waiver; Cumulative Remedies. No failure on the part of the Lender
to exercise and no delay in exercising, and no course of dealing with respect
to, any right, power, or privilege under this Agreement shall operate as a
waiver thereof, nor shall any single or partial exercise of any right, power, or
privilege under this Agreement preclude any other or further exercise thereof or
the exercise of any other right, power, or privilege. The rights and remedies
provided for in this Agreement and the other Loan Documents are cumulative and
not exclusive of any rights and remedies provided by law.

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     11.8 Successors and Assigns. This Agreement is binding upon and shall inure
to the benefit of the Lender and the Borrower and their respective successors
and assigns, except that the Borrower may not assign or transfer any of its
rights or obligations under this Agreement without the prior written consent of
the Lender.
     11.9 Survival. All representations and warranties made in this Agreement or
any other Loan Document or in any document, statement, or certificate furnished
in connection with this Agreement shall survive the execution and delivery of
this Agreement and the other Loan Documents, and no investigation by the Lender
or any closing shall affect the representations and warranties or the right of
the Lender to rely upon them. Without prejudice to the survival of any other
obligation of the Borrower hereunder, the obligations of the Borrower under
Sections 11.1, and 11.2 shall survive repayment of the Note and termination of
the Commitment.
     11.10 ENTIRE AGREEMENT; AMENDMENT. THIS AGREEMENT, THE NOTE, AND THE OTHER
LOAN DOCUMENTS REFERRED TO HEREIN EMBODY THE FINAL, ENTIRE AGREEMENT AMONG THE
PARTIES HERETO AND SUPERSEDE ANY AND ALL PRIOR COMMITMENTS, AGREEMENTS,
REPRESENTATIONS, AND UNDERSTANDINGS, WHETHER WRITTEN OR ORAL, RELATING TO THE
SUBJECT MATTER HEREOF AND MAY NOT BE CONTRADICTED OR VARIED BY EVIDENCE OF
PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OR DISCUSSIONS OF THE
PARTIES HERETO. THERE ARE NO ORAL AGREEMENTS AMONG THE PARTIES HERETO. The
provisions of this Agreement and the other Loan Documents to which the Borrower
is a party may be amended or waived only by an instrument in writing signed by
the parties hereto.
     11.11 Notices. Unless otherwise expressly provided herein, all notices and
other communications provided for hereunder shall be in writing (including by
facsimile transmission) and mailed, faxed or delivered, to the address,
facsimile number or subject to the last sentence hereof electronic mail address
specified for notices below the signatures hereon or to such other address as
shall be designated by such party in a notice to the other parties. All such
other notices and other communications shall be deemed to have been given or
made upon the earliest to occur of (i) actual receipt by the intended recipient
or (ii) (A) if delivered by hand or courier, when signed for by the designated
recipient; (B) if delivered by mail, four business days after deposit in the
mail, postage prepaid; (C) if delivered by facsimile when sent and receipt has
been confirmed by telephone; and (D) if delivered by electronic mail (which form
of delivery is subject to the provisions of the last sentence below) when
delivered; provided, however, that notices and other communications pursuant to
Article II shall not be effective until actually received by the Lender.
Electronic mail and intranet websites may be used only to distribute only
routine communications, such as financial statements and other information, and
to distribute Loan Documents for execution by the parties thereto, and may not
be used for any other purpose.
     11.12 Governing Law; Venue; Service of Process. This Agreement shall be
governed by and construed in accordance with the laws of the State of Arkansas
and the applicable laws of the United States of America. This Agreement has been
entered into in Washington County, Arkansas, and it shall be performable for all
purposes in Washington County, Arkansas. Any action or proceeding against the
Borrower under or in connection with any of the Loan

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Documents may be brought in any state or federal court in Washington County,
Arkansas. The Borrower hereby irrevocably (a) submits to the nonexclusive
jurisdiction of such courts, and (b) waives any objection it may now or
hereafter have as to the venue of any such action or proceeding brought in any
such court or that any such court is an inconvenient forum. The Borrower agrees
that service of process upon it may be made by certified or registered mail,
return receipt requested, at its address specified or determined in accordance
with the provisions of Section 11.11. Nothing herein or in any of the other Loan
Documents shall affect the right of the Lender to serve process in any other
manner permitted by law or shall limit the right of the Lender to bring any
action or proceeding against the Borrower or with respect to any of its property
in courts in other jurisdictions. Any action or proceeding by the Borrower
against the Lender shall be brought only in a court located in Washington
County, Arkansas.
     11.13 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
     11.14 Severability. Any provision of this Agreement held by a court of
competent jurisdiction to be invalid or unenforceable shall not impair or
invalidate the remainder of this Agreement and the effect thereof shall be
confined to the provision held to be invalid or illegal.
     11.15 Headings. The headings, captions, and arrangements used in this
Agreement are for convenience only and shall not affect the interpretation of
this Agreement.
     11.16 Participations; Etc. The Lender shall have the right at any time and
from time to time to grant participations in, and sell and transfer, the
Obligations and any Loan Documents. Each actual or proposed participant or
assignee, as the case may be, shall be entitled to receive all information
received by the Lender regarding the Borrower, including, without limitation,
information required to be disclosed to a participant or assignee pursuant to
Banking Circular 181 (Rev., August 2, 1984), issued by the Comptroller of the
Currency (whether the actual or proposed participant or assignee is subject to
the circular or not).
     11.17 Construction. The Borrower and the Lender acknowledge that each of
them has had the benefit of legal counsel of its own choice and has been
afforded an opportunity to review this Agreement and the other Loan Documents
with its legal counsel and that this Agreement and the other Loan Documents
shall be construed as if jointly drafted by the Borrower and the Lender.
     11.18 Independence of Covenants. All covenants hereunder shall be given
independent effect so that if a particular action or condition is not permitted
by any of such covenants, the fact that it would be permitted by an exception
to, or be otherwise within the limitations of, another covenant shall not avoid
the occurrence of a Default if such action is taken or such condition exists.
     11.19 WAIVER OF JURY TRIAL. TO THE FULLEST EXTENT PERMITTED BY APPLICABLE
LAW, BORROWER HEREBY IRREVOCABLY AND EXPRESSLY WAIVES ALL RIGHT TO A TRIAL BY
JURY IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM (WHETHER BASED UPON CONTRACT,
TORT, OR OTHERWISE)

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ARISING OUT OF OR RELATING TO ANY OF THE LOAN DOCUMENTS OR THE TRANSACTIONS
CONTEMPLATED THEREBY OR THE ACTIONS OF LENDER IN THE NEGOTIATION,
ADMINISTRATION, OR ENFORCEMENT THEREOF.
     11.20 Arbitration.
          (a) Upon the demand of any party, any dispute shall be resolved by
binding arbitration (except as set forth in Section 11.20(e) below) in
accordance with the terms of this Agreement or the other Loan Documents. Any
party may by summary proceedings bring an action in court to compel arbitration
of a Dispute. Any party who fails or refuses to submit to arbitration following
a lawful demand by any other party shall bear all costs and expenses incurred by
such other party in compelling arbitration of any Dispute.
          (b) Arbitration proceedings shall be administered by the American
Arbitration Association (“AAA”) or such other administrator as the parties shall
mutually agree upon in accordance with the AAA Commercial Arbitration Rules. All
Disputes submitted to arbitration shall be resolved in accordance with the
Federal Arbitration Act (Title 9 of the United States Code), notwithstanding any
conflicting choice of law provision in any of the foregoing documents. The
arbitration shall be conducted at a location in Arkansas selected by the AAA or
other administrator. If there is any inconsistency between the terms hereof and
any such rules, the terms and procedures set forth herein shall control. All
statutes of limitation applicable to any Dispute shall apply to any arbitration
proceeding. All discovery activities shall be expressly limited to matters
directly relevant to the Dispute being arbitrated. Judgment upon any award
rendered in an arbitration may be entered in any court having jurisdiction;
provided however, that nothing contained herein shall be deemed to be a waiver
by any party that is a bank of the protections afforded to it under Section 91
of Title 12 of the United States Code or any similar applicable state law.
          (c) No provision hereof shall limit the right of any party to exercise
self-help remedies such as setoff, foreclosure against or sale of any real or
personal property collateral or security, or to obtain provisional or ancillary
remedies, including without limitation, injunctive relief, sequestration,
attachment, garnishment or the appointment of a receiver from a court of
competent jurisdiction before, after or during the pendency of any arbitration
or other proceeding. The exercise of any such remedy shall not waive the right
of any party to compel arbitration hereunder.
          (d) Arbitrators must be active members of the Arkansas State Bar with
expertise in the substantive law applicable to the subject matter of the
Dispute. Arbitrators are empowered to resolve Disputes by summary rulings in
response to motions filed prior to the final arbitration hearing. Arbitrators
(i) shall resolve all Disputes in accordance with the substantive law of the
State of Arkansas, (ii) may grant any remedy or relief that a court of the State
of Arkansas could order or grant within the scope hereof and such ancillary
relief as is necessary to make effective any award, and (iii) shall have the
power to award recovery of all costs and fees, to impose sanctions and to take
such other actions as they deem necessary to the same extent a judge could
pursuant to the Federal Rules of Civil Procedure, the Arkansas Rules of Civil
Procedure or other applicable law. Any Dispute in which the amount in
controversy is $5,000,000 or less shall be decided by a single arbitrator who
shall not render an award of

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greater than $5,000,000 (including damages, costs, fees and expenses). By
submission to a single arbitrator, each party expressly waives any right or
claim to recover more than $5,000,000. Any Dispute in which the amount in
controversy exceeds $5,000,000 shall be decided by majority vote of a panel of
three arbitrators; provided however, that all three arbitrators must actively
participate in all hearings and deliberations.
          (e) Notwithstanding anything herein to the contrary, in any
arbitration in which the amount in controversy exceeds $25,000,000, the
arbitrators shall be required to make specific, written findings of fact and
conclusions of law. In such arbitrations (i) the arbitrators shall not have the
power to make any award which is not supported by substantial evidence or which
is based on legal error, (ii) an award shall not be binding upon the parties
unless the findings of fact are supported by substantial evidence and the
conclusions of law are not erroneous under the substantive law of the State of
Arkansas, and (iii) the parties shall have in addition to the grounds referred
to in the Federal Arbitration Act for vacating, modifying or correcting an award
the right to judicial review of (1) whether the findings of fact rendered by the
arbitrators are supported by substantial evidence, and (2) whether the
conclusions of law are erroneous under the substantive law of the State of
Arkansas. Judgment confirming an award in such a proceeding may be entered only
if a court determines the award is supported by substantial evidence and not
based on legal error under the substantive law of the State of Arkansas.
          (f) To the maximum extent practicable, the AAA, the arbitrators and
the parties shall take all action required to conclude any arbitration
proceeding within 180 days of the filing of the Dispute with the AAA. No
arbitrator or other party to an arbitration proceeding may disclose the
existence, content or results thereof, except for disclosures of information by
a party required in the ordinary course of its business, by applicable law or
regulation, or to the extent necessary to exercise any judicial review rights
set forth herein. If more than one agreement for arbitration by or between the
parties potentially applies to a Dispute, the arbitration provision most
directly related to the foregoing documents or the subject matter of the Dispute
shall control. If any provision of this Agreement shall be held to be prohibited
by or invalid under applicable law, such provision shall be ineffective only to
the extent of such prohibition or invalidity, without invalidating the remainder
of such provision or any remaining provisions of this Agreement. This
arbitration provision shall survive termination, amendment or expiration of any
of the foregoing documents or any relationship between the parties.
          (g) Lender and Borrower hereby agree to keep all Disputes and
arbitration proceedings strictly confidential, provided, however, that Lender
and Borrower may disclose such confidential information as is necessary in any
litigation between Lender and Borrower or as required by applicable law and, on
a confidential basis, to accountants, attorneys and other consultants in the
ordinary course of business.
     11.21 Additional Interest Provision. It is expressly stipulated and agreed
to be the intent of the Borrower and the Lender at all times to comply strictly
with the applicable Arkansas law governing the maximum rate or amount of
interest payable on the indebtedness evidenced by any Note, any Loan Document,
and the Related Indebtedness (or applicable United States federal law to the
extent that it permits the Lender to contract for, charge, take, reserve or
receive a greater amount of interest than under Arkansas law). If the applicable
law is ever judicially interpreted

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so as to render usurious any amount (i) contracted for, charged, taken, reserved
or received pursuant to any Note, any of the other Loan Documents or any other
communication or writing by or between the Borrower and the Lender related to
the transaction or transactions that are the subject matter of the Loan
Documents, (ii) contracted for, charged, taken, reserved or received by reason
of the Lender’s exercise of the option to accelerate the maturity of any Note
and/or any and all indebtedness paid or payable by the Borrower to the Lender
pursuant to any Loan Document other than any Note (such other indebtedness being
referred to in this Section as the “Related Indebtedness”), or (iii) the
Borrower will have paid or the Lender will have received by reason of any
voluntary prepayment by the Borrower of any Note and/or the Related
Indebtedness, then it is the Borrower’s and the Lender’s express intent that all
amounts charged in excess of the Maximum Lawful Rate shall be automatically
canceled, ab initio, and all amounts in excess of the Maximum Lawful Rate
theretofore collected by the Lender shall be credited on the principal balance
of any Note and/or the Related Indebtedness (or, if any Note and all Related
Indebtedness have been or would thereby be paid in full, refunded to the
Borrower), and the provisions of any Note and the other Loan Documents shall
immediately be deemed reformed and the amounts thereafter collectible hereunder
and thereunder reduced, without the necessity of the execution of any new
document, so as to comply with the applicable law, but so as to permit the
recovery of the fullest amount otherwise called for hereunder and thereunder;
provided, however, if any Note has been paid in full before the end of the
stated term of any such Note, then the Borrower and the Lender agree that the
Lender shall, with reasonable promptness after the Lender discovers or is
advised by the Borrower that interest was received in an amount in excess of the
Maximum Lawful Rate, either refund such excess interest to the Borrower and/or
credit such excess interest against such Note and/or any Related Indebtedness
then owing by the Borrower to the Lender. The Borrower hereby agrees that as a
condition precedent to any claim seeking usury penalties against the Lender, the
Borrower will provide written notice to the Lender, advising the Lender in
reasonable detail of the nature and amount of the violation, and the Lender
shall have sixty (60) days after receipt of such notice in which to correct such
usury violation, if any, by either refunding such excess interest to the
Borrower or crediting such excess interest against the Note to which the alleged
violation relates and/or the Related Indebtedness then owing by the Borrower to
the Lender. All sums contracted for, charged, taken, reserved or received by the
Lender for the use, forbearance or detention of any debt evidenced by any Note
and/or the Related Indebtedness shall, to the extent permitted by applicable
law, be amortized or spread, using the actuarial method, throughout the stated
term of such Note and/or the Related Indebtedness (including any and all renewal
and extension periods) until payment in full so that the rate or amount of
interest on account of any Note and/or the Related Indebtedness does not exceed
the Maximum Lawful Rate from time to time in effect and applicable to such Note
and/or the Related Indebtedness for so long as debt is outstanding.
Notwithstanding anything to the contrary contained herein or in any of the other
Loan Documents, it is not the intention of the Lender to accelerate the maturity
of any interest that has not accrued at the time of such acceleration or to
collect unearned interest at the time of such acceleration.
[Remainder of page intentionally left blank; Signatures to follow.]

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     IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as
of the day and year first above written.

                  BORROWER:    
 
                Advanced Environmental Recycling Technologies, Inc.    
 
           
 
       By:        
 
     
 
Stephen W. Brooks, Co-CEO and Member of Board    
 
      of Directors    

Address for Notices:
Post Office Box 1237
Springdale, Arkansas 72765

                  LENDER:    
 
                Liberty Bank of Arkansas    
 
           
 
       By:        
 
     
 
P. Douglas Lynch, President    

Address for Notices:
4706 South Thompson
Suite 101
Springdale, Arkansas 72764

 

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INDEX TO EXHIBITS

                  Exhibit   Description of Exhibit   Section    
A
  Borrowing Base Report     1.1      
B
  Compliance Certificate     1.1      
C
  Revolving Credit Note     2.1      

INDEX TO SCHEDULES

                  Description of Schedules   Article/Section
 
  Conditions Precedent     5.1 (h)
 
  Debt     6.9.1  
 
  Disclosure Schedule   VI

 

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EXHIBIT A
BORROWING BASE REPORT
FOR MONTH ENDED                                                             (THE
“SUBJECT MONTH”)

     
LENDER:
  Liberty Bank of Arkansas
 
   
BORROWER:
  Advanced Environmental Recycling Technologies, Inc.

     This certificate is delivered under the Loan Agreement (the “Agreement”)
dated as of January 16, 2006, between Borrower and Lender. Capitalized terms
used in this certificate shall, unless otherwise indicated, have the meanings
set forth in the Agreement. On behalf of Borrower, the undersigned certifies to
Lender on the date hereof that (a) no Default or Event of Default has occurred
and is continuing, (b) a review of the activities of Borrower during the Subject
Month has been made under my supervision with a view to determining the amount
of the current Borrowing Base, (c) the accounts receivable and inventory
included in the Borrowing Base below meet all conditions to qualify for
inclusion therein as set forth in the Agreement, and all representations and
warranties set forth in the Agreement with respect thereto are true and correct
in all material respects, and (d) the information set forth below hereto is true
and correct as of the last day of the Subject Month.

         
1.
      ACCOUNTS RECEIVABLE (Less Discounts)
 
       
 
  a.   Total Accounts Receivable (less discounts) of which Weyerhaeuser is the
account debtor
 
       
 
  b.   Total Accounts Receivable (less discounts) of which Therma-Tru is the
account debtor
 
       
 
  c.   Total Other Accounts Receivable (less discounts)
 
       
 
  d.   TOTAL ACOUNTS RECEIVABLE
 
       
2.
      Less Ineligible Accounts:
 
       
 
  a.   Accounts that have been outstanding for more than the lesser of (1) sixty
(60) days past the original date of invoice or the date the obligation was
incurred and (2) thirty (30) days past the first date the Account was due
 
       
 
  b.   Accounts not in compliance with applicable laws, rules, and regulations
 
       
 
  c.   Accounts for consignments and non final sales
 
       
 
  d.   Accounts evidenced by chattel paper or an instrument
 
       
 
  e.   Foreign accounts
 
       
 
  f.   Accounts due from the U.S. Government or

 

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      subdivision thereof (with respect to which the Federal Assignment of
Claims Act of 1940 has not been complied with)
 
       
 
  g.   Accounts subject to specific assignment restrictions
 
       
 
  h.   Accounts representing commissions or not created in the ordinary course
of business or not arising from an enforceable contract, the performance of
which has been completed by the Borrower
 
       
 
  i.   Accounts to which the Borrower does not have good and indefeasible title
or which are subject to any Lien except Liens in favor of the Lender
 
       
 
  j.   Accounts subject to setoff, counterclaim, defense, dispute, recoupment,
or adjustment other than normal discounts for prompt payment
 
       
 
  k.   Accounts with respect to which the account debtor is insolvent or the
subject of any bankruptcy or insolvency proceeding or has made an assignment for
the benefit of creditors, suspended normal business operations, dissolved,
liquidated, terminated its existence, ceased to pay its debts as they become
due, or suffered a receiver or trustee to be appointed for any of its assets or
affairs
 
       
 
  l.   Accounts with respect to which any default exists
 
       
 
  m.   Accounts with respect to which the account debtor has returned or refused
to retain, or otherwise notified the Borrower of any dispute concerning, or
claimed nonconformity of, any of the goods from the sale of which the account
arose
 
       
 
  n.   Accounts owed by an Affiliate, employee, officer, director or shareholder
of the Borrower
 
       
 
  o.   Accounts not payable in Dollars
 
       
 
  p.   The amount of all “contra accounts” and other obligations owed by the
Borrower to account debtors
 
       
 
  q.   Other Ineligible Accounts disallowed by Lender in its sole discretion
 
       
3.
       
 
       
 
  a.   Net Total Ineligible Accounts of Which Weyherhauser is the Account Debtor
 
       
 
  b.   Net Total Ineligible Accounts of Which Therma-Tru is the Account Debtor

 

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  c.   Net Total Other Ineligible Accounts
 
       
 
  d.   NET TOTAL INELIGIBLE ACCOUNTS (Sum of Lines 3(a) through 3(c))
 
       
4.
       
 
       
 
  a.   Total Eligible Accounts of Which Weyherhauser is the Account Debtor,
multiplied by 85%
 
       
 
  b.   Total Eligible Accounts of Which Therma-Tru is the Account Debtor,
multiplied by 85%
 
       
 
  c.   Total Other Eligible Accounts, multiplied by 75%
 
       
 
  d.   TOTAL ACCOUNTS COMPONENT OF BORROWING BASE (Sum of Lines 4(a) through
4(c)
 
       
 
      INVENTORY
 
       
5.
      Total Finished Goods Inventory, Including Finished Goods Inventory Held at
Therma-Tru Facility
 
       
 
      Less the following:
 
       
 
  a.   Finished Goods Inventory not in the possession or under the control of
the Borrower
 
       
 
  b.   Finished Goods Inventory not subject to a perfected, first priority
security interest in favor of the Lender
 
       
 
  c.   Finished Goods Inventory that has been shipped or delivered to a customer
on consignment, a sale-or-return basis, or on the basis of any similar
understanding
 
       
 
  d.   Finished Goods Inventory with respect to which a claim exists disputing
the Borrower’s title to or right to possession of such inventory
 
       
 
  e.   Finished Goods Inventory that is not in good condition or does not comply
with any applicable law, rule, or regulation or any standard imposed by any
Governmental Authority with respect to its manufacture, use, or sale
 
       
 
  f.   Other Finished Goods Inventory disallowed by Lender in its sole
discretion
 
       
 
  g.   TOTAL NET ELIGIBLE FINISHED GOODS INVENTORY (Sum of Lines 5(a) through
5(f)), multiplied by 75%
 
       
6.
      Total Other Inventory
 
       
 
      Less the following:
 
       
 
  a.   Inventory not in the possession or under the control of the Borrower
 
       
 
  b.   Inventory not subject to a perfected, first priority security interest in
favor of the Lender
 
       
 
  c.   Inventory that has been shipped or delivered to a

 

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      customer on consignment, a sale-or-return basis, or on the basis of any
similar understanding
 
       
 
  d.   Inventory with respect to which a claim exists disputing the Borrower’s
title to or right to possession of such inventory
 
       
 
  e.   Inventory that is not in good condition or does not comply with any
applicable law, rule, or regulation or any standard imposed by any Governmental
Authority with respect to its manufacture, use, or sale
 
       
 
  f.   Other Inventory disallowed by Lender in its sole discretion
 
       
 
  g.   TOTAL NET OTHER ELIGIBLE INVENTORY (Sum of Lines 6(a) through 6(f)),
multiplied by 50%
 
       
7.
      BORROWING BASE (Sum of Lines 4(d), 5(g), and 6(g))
 
       
8.
      AMOUNT OF COMMITMENT
 
       
9.
      PRINCIPAL BALANCE OF OUTSTANDING REVOLVING CREDIT ADVANCES
 
       
10.
      LESSOR OF LINE 7 OR 8
 
       
11.
      AMOUNT AVAILABLE FOR REVOLVING CREDIT ADVANCES IF POSITIVE, OR AMOUNT TO
BE REPAID, IF NEGATIVE (Line 10 minus Line 9)

                      BORROWER:    
 
                    Advanced Environmental Recycling Technologies, Inc    
 
               
 
  By:                          
 
      Print Name:        
 
         
 
            Title: Chief Financial Officer    

 

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EXHIBIT B
COMPLIANCE CERTIFICATE
FOR MONTH/QUARTER
ENDED                                                                                
(THE “SUBJECT PERIOD”)
LENDER:      Liberty Bank of Arkansas
BORROWER:  Advanced Environmental Recycling Technologies, Inc.
     This certificate is delivered under the Loan Agreement (the “Agreement”)
dated as of January 16, 2006, between Borrower and Lender. Capitalized terms
when used in this certificate shall, unless otherwise indicated, have the
meanings set forth in the Agreement. I certify to Lender that, on the date of
this certificate, (a) the financial Statements of Borrower attached to this
certificate were prepared in accordance with GAAP, and present fairly the
financial condition and results of operations of Borrower as of the end of and
for the Subject Period, (b) no Default or Event of Default currently exists or
has occurred which has not been cured or waived by Lender, and (c) the status of
compliance by Borrower with certain covenants of the Agreement at the end of the
Subject Period is as set forth below:

                      In Compliance as of         End of Subject Period        
(Please Indicate)
1.
  Financial Statements and Reports        
 
                        (a) Provide annual audited FYE financial statements
within 90 days after the last day of each year, or when otherwise due.   Yes  
No
 
                        (b) Provide quarterly financial statements within
45 days after the last day of each quarter.   Yes   No
 
                        (c) Provide monthly statement of income within 30 days
after the last day of each month.   Yes   No
 
                        (d) Provide a monthly Compliance Certificate, Borrowing
Base Report, and summary accounts receivable aging, within 45 days after the
last day of each quarter.   Yes   No
 
                        (e) Provide other required reporting timely.   Yes   No
 
           
2.
  Subsidiaries        
 
  None except as listed on Disclosure Schedule   Yes   No

 

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                      In Compliance as of         End of Subject Period        
(Please Indicate)
3.
  Additional Indebtedness        
 
  None, except Indebtedness permitted by Section 8.1 of the Agreement.   Yes  
No
 
           
4.
  Liens and Encumbrances; Negative Pledge Agreements        
 
  None at any time, except Liens permitted by Section 8.2 of the Agreement.  
Yes   No
 
           
5.
  Limitation of Acquisitions and Mergers        
 
  None except those permitted by Section 8.3 of the Agreement.   Yes   No
 
           
6.
  Dividends and Stock Repurchase        
 
  None, except as permitted by Section 8.4 of the Agreement.   Yes   No
 
           
7.
  Loans and Investments        
 
  None, except those permitted by Section 8.5 of the Agreement.   Yes   No
 
           
8.
  Issuance of Equity        
 
  None, except issuances permitted by Section 8.6 of the Agreement.   Yes   No
 
           
9.
  Affiliate Transactions        
 
  None, except issuances permitted by Section 8.7 of the Agreement.   Yes   No
 
           
10.
  Disposal of Assets other than in the Ordinary Course of Business        
 
  (Section 8.8 of the Agreement). None at any time without prior        
 
  written consent of Lender.   Yes   No
 
           
11.
  Sale and Leaseback Transactions (Section 8.9 of the Agreement).        
 
  None at any time without prior written consent of Lender.   Yes   No
 
           
12.
  Prepayment of Debt (Section 8.10 of the Agreement).        
 
  None at any time without prior written consent of Lender.   Yes   No
 
           
13.
  Changes in Nature of Business (Section 8.11 of the Agreement).        
 
  None at any time without prior written consent of Lender.   Yes   No
 
           
14.
  Environmental Laws (Section 8.12 of the Agreement).        
 
  No activity likely to cause violations.   Yes   No
 
           
15.
  Changes in Fiscal Year; Accounting Practices        
 
  (Section 8.13 of the Agreement).        
 
  None at any time without prior written consent of Lender.   Yes   No
 
           
16.
  No Negative Pledge (Section 8.14 of the Agreement).        
 
  None.   Yes   No

 

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                      In Compliance as of         End of Subject Period        
(Please Indicate)
18.
  Compliance with all Financial Covenants (Article IX):   Yes   No
 
  (if “No”, explain)        

                      BORROWER:    
 
                    Advanced Environmental Recycling Technologies, Inc    
 
               
 
            By:                          
 
      Print Name:        
 
         
 
            Title: Chief Financial Officer    

 

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SCHEDULE 6.9.1
SECURED INDEBTEDNESS SCHEDULE (PREPARED BY BORROWER)
The $14,400,000 City of Springdale, Arkansas Industrial Development Refunding
Revenue Bonds (Advanced Environmental Recycling Technologies, Inc. Project)
Series 2003 (the “Series 2003 Bonds”) were issued to refund the outstanding City
of Springdale, Arkansas Industrial Development Revenue Bonds (Advanced
Environmental Recycling Technologies, Inc. Project) Series 1999A (the
“Series 1999 Bonds”). The Series 2003 Bonds are issued and secured pursuant to
an Indenture of Trust (the “Indenture”), dated as of October 1, 2003, by and
between the City of Springdale, Arkansas (the “Issuer”) and Regions Bank, as
trustee (the “Trustee”). The proceeds received from the sale of the Series 2003
Bonds were loaned by the Issuer to Advanced Environmental Recycling
Technologies, Inc., pursuant to the terms of a Mortgage and Loan Agreement,
dated as of October 1, 2003 (the “Loan Agreement”), between AERT and the Issuer.
The Bonds are held by Allstate Insurance Company.
At substantially the same time as the issuance of the Bonds, the Company
delivered a Promissory Note (the “Taxable Note”) to Allstate in the principal
amount of $2,600,000 and bearing interest at the rate of 19.75%,. Proceeds of
the Taxable Note shall be applied to the repayment of certain related-party
indebtedness of the Company and to the payment of certain capital improvements
of the Company.
In order to secure the payment of the Bonds, the Company granted to the City a
mortgage and security interest in the real property of the Company in
Springdale, Arkansas (the “Site”) and the improvements located thereon (the
“Improvements”) and any fixtures or appurtenances now or hereafter erected
thereon. The Company also granted a security interest in all rents and leases,
profits, royalties, minerals, geothermal resources, oil and gas rights and
profits, easements and access rights, used, belonging to, or in any way
connected with the Property, the property of the Company in Lowell, Arkansas and
the property of the Company in Junction, Texas and in Company revenues, and in
all of its right, title and interest, if any, in the trust accounts referred to
in the Loan Agreement or in the Indenture, in all tangible personal property,
furniture, machinery and equipment of the Company, owned by the Company as of
the date of the Loan Agreement and located on the Site, the Lowell Property or
the Junction Property (the “Equipment”), and in inventory of the Company located
on the Site the Lowell Property or the Junction Property. The mortgage and
security interest of the City were assigned to the Trustee pursuant to the
Assignment and the Indenture. The Company also grants a security interest to the
Trustee in all patents, trademarks and similar properties, pursuant to the
Patent and Trademark Security Agreement
In December 2001, the Company executed a supply contract with Weyerhaeuser for
the purchase of ChoiceDek ® product over a three-year period (the “Weyerhaeuser
Agreement”). As additional security for the Bonds, the Company executed a
collateral assignment of the Weyerhaeuser Agreement for the benefit of the
Trustee.
To secure the Taxable Note, the Company provided subordinate lien instruments in
all collateral pledged for the benefit of the Bonds.
The Company has also executed a Promissory Note for the benefit of Liberty Bank
with respect to and secured by certain Springdale property.

 

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DISCLOSURE SCHEDULE TO LOAN AGREEMENT

I.   Subsidiaries – AERT has no subsidiaries.   II.   Intellectual property –
All AERT patents are listed below:

      Patent No.   Title
6,526,712
  Extruded composite interlocking corner assembly
 
   
6,149,012
  System and method for cleaning and recovering plastic from coated fiber
polywaste
 
   
5,540,244
  Method and apparatus for cleaning and recycling post-consumer plastic films
 
   
5,351,895
  Separating device for cellulosic and thin plastic materials
 
   
5,285,973
  Close tolerance shredder
 
   
5,277,758
  Method for recycling plastic coated paper product waste and polymeric film
 
   
5,268,074
  Method for recycling polymeric film
 
   
5,213,021
  Reciprocating cutter assembly
 
   
5,100,545
  Separation tank
 
   
5,096,406
  Extruder assembly for composite materials
 
   
5,096,046
  System and process for making synthetic wood products from recycled materials
 
   
5,088,910
  System for making synthetic wood products from recycled materials
 
   
5,084,135
  Recycling plastic coated paper product waste
 
   
5,082,605
  Method for making composite material

III.   Existing debt

                      Note Amount         Note Holder   Availability   Maturity
Date   Collateral
Brooks Investment Company
  $ 1,146,775     Due on demand   Unsecured
 
               
JRF
    53,071     August 5, 2006   Insurance policies
 
               
JRF
    146,757     February 5, 2006   Insurance policies
 
               
Liberty Bank
    1,932,000     September 28, 2009   Real estate and equipment
 
               
Regions Bank
    2,000,000     March 1, 2006   Equipment
 
               
Ford Motor Credit
    66,777     Various   Vehicles
 
               
Allstate — Note
    2,600,000     October 1, 2017   Subordinated interest in the collateral
securing the bonds payable
 
               
Regions/Allstate — Bonds
    12,900,000     October 1, 2017   All real estate and improvements, fixed
assets and inventory not pledged under a separate loan, patents and trademarks,
pledged revenues, personal guarantee of Marjorie Brooks

 

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IV.   Depository Banks

     
First Security Bank
  PO Box 1009, 314 North Spring, Searcy, AR 72143
 
   
First State Bank
  2002 Main, PO Box 105, Junction, TX 76849
 
   
Regions Bank
  400 West Capitol, 7th Floor, Little Rock, AR 72201
 
   
Liberty Bank of Arkansas
  PO Box 7514, Jonesboro, AR 72403