Exhibit 10.5

 

 

SECOND AMENDED AND RESTATED CREDIT
AND SECURITY AGREEMENT

BY AND BETWEEN

NORTECH SYSTEMS INCORPORATED

AND

WELLS FARGO BANK,

NATIONAL ASSOCIATION

August 6, 2009

 

 

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TABLE OF CONTENTS

 

 

 

Page

 

 

ARTICLE I. DEFINITIONS

1

Section 1.1

Definitions

1

Section 1.2

Other Definitional Terms; Rules of Interpretation

12

 

 

 

ARTICLE II. AMOUNT AND TERMS OF THE CREDIT FACILITY

13

Section 2.1

Revolving Advances

13

Section 2.2

Procedures for Requesting Advances

13

Section 2.3

Increased Costs; Capital Adequacy; Funding Exceptions

14

Section 2.4

Letters of Credit

15

Section 2.5

Special Account

16

Section 2.6

Payment of Amounts Drawn Under Letters of Credit; Obligation of Reimbursement

16

Section 2.7

Obligations Absolute

17

Section 2.8

Term Advances

18

Section 2.9

Payments and Interest on Term Notes

18

Section 2.10

Interest; Default Interest; Participations; Usury

18

Section 2.11

Fees

18

Section 2.12

Time for Interest Payments; Payment on Non-Banking Days; Computation of Interest
and Fees

19

Section 2.13

Voluntary Prepayment; Reduction of the Maximum Line; Termination of the Credit
Facility by the Borrower

20

Section 2.14

Mandatory Prepayment

21

Section 2.15

Revolving Advances to Pay Obligations

20

Section 2.16

Use of Proceeds

20

Section 2.17

Liability Records

20

Section 2.18

Collateral Account and Sweep of Funds

21

 

 

 

ARTICLE III. SECURITY INTEREST; OCCUPANCY; SETOFF

21

Section 3.1

Grant of Security Interest

21

Section 3.2

Notification of Account Debtors and Other Obligors

21

Section 3.3

Assignment of Insurance

22

Section 3.4

Occupancy

22

Section 3.5

License

23

Section 3.6

Financing Statement

23

Section 3.7

Setoff

23

Section 3.8

Collateral

24

 

 

 

ARTICLE IV. CONDITIONS OF LENDING

24

Section 4.1

Conditions Precedent to the Initial Revolving Advance and Letter of Credit

24

 

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Section 4.2

Conditions Precedent to All Advances and Letters of Credit

26

 

 

 

ARTICLE V. REPRESENTATIONS AND WARRANTIES

26

Section 5.1

Existence and Power; Name; Chief Executive Office; Inventory and Equipment
Locations; Federal Employer Identification Number

26

Section 5.2

Capitalization

27

Section 5.3

Authorization of Borrowing; No Conflict as to Law or Agreements

27

Section 5.4

Legal Agreements

27

Section 5.5

Subsidiaries

27

Section 5.6

Financial Condition; No Adverse Change

27

Section 5.7

Litigation

27

Section 5.8

Regulation U

28

Section 5.9

Taxes

28

Section 5.10

Titles and Liens

28

Section 5.11

Intellectual Property Rights

28

Section 5.12

Plans

29

Section 5.13

Default

29

Section 5.14

Environmental Matters

29

Section 5.15

Submissions to Lender

30

Section 5.16

Financing Statements

30

Section 5.17

Rights to Payment

31

Section 5.18

Financial Solvency

31

 

 

 

ARTICLE VI. COVENANTS

31

Section 6.1

Reporting Requirements

32

Section 6.2

Financial Covenants

36

Section 6.3

Permitted Liens; Financing Statements

36

Section 6.4

Indebtedness

36

Section 6.5

Guaranties

37

Section 6.6

Investments and Subsidiaries

37

Section 6.7

Dividends and Distributions

37

Section 6.8

Salaries

37

Section 6.9

Grant of Security Interest Upon Request

38

Section 6.10

Books and Records; Inspection and Examination

38

Section 6.11

Account Verification

38

Section 6.12

Compliance with Laws

38

Section 6.13

Payment of Taxes and Other Claims

39

Section 6.14

Maintenance of Properties

39

Section 6.15

Insurance

39

Section 6.16

Preservation of Existence

40

Section 6.17

Delivery of Instruments, etc

40

Section 6.18

Sale or Transfer of Assets; Suspension of Business Operations

40

Section 6.19

Consolidation and Merger; Asset Acquisitions

40

Section 6.20

Sale and Leaseback

40

Section 6.21

Restrictions on Nature of Business

41

 

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Section 6.22

Accounting

41

Section 6.23

Discounts, etc

41

Section 6.24

Plans

41

Section 6.25

Place of Business; Name

41

Section 6.26

Constituent Documents

41

Section 6.27

Change in Senior Management

41

Section 6.28

Performance by the Lender

41

Section 6.29

Depository Accounts

42

 

 

 

ARTICLE VII. EVENTS OF DEFAULT, RIGHTS AND REMEDIES

42

Section 7.1

Events of Default

42

Section 7.2

Rights and Remedies

44

Section 7.3

Certain Notices

45

 

 

 

ARTICLE VIII. MISCELLANEOUS

45

Section 8.1

No Waiver; Cumulative Remedies; Compliance with Laws

45

Section 8.2

Amendments, Etc

46

Section 8.3

Addresses for Notices; Requests for Accounting

46

Section 8.4

Arbitration

46

Section 8.5

Further Documents

48

Section 8.6

Costs and Expenses

49

Section 8.7

Indemnity

49

Section 8.8

Participants

50

Section 8.9

Execution in Counterparts; Telefacsimile Execution

50

Section 8.10

Retention of Borrower’s Records

50

Section 8.11

Binding Effect; Assignment; Complete Agreement; Exchanging Information

50

Section 8.12

Severability of Provisions

50

Section 8.13

Headings

51

Section 8.14

Amendment and Restatement of Existing Credit Agreement

51

Section 8.15

Governing Law; Jurisdiction, Venue; Waiver of Jury Trial

51

Section 8.16

No Waiver under Existing Credit Agreement

51

Section 8.17

Release

51

 

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SECOND AMENDED AND RESTATED CREDIT AND SECURITY AGREEMENT

 

Dated as of August 6, 2009

 

This Second Amended and Restated Credit and Security Agreement (“Agreement”) is
entered into between NORTECH SYSTEMS INCORPORATED, a Minnesota corporation (the
“Borrower”), WELLS FARGO BANK, NATIONAL ASSOCIATION, a national banking
association (the “Lender”).

 

RECITALS

 

A.            The Borrower and Lender previously entered into that certain
Amended and Restated Credit and Security Agreement dated as of December 30, 2002
(the “Existing Credit Agreement”); pursuant to which Borrower has executed and
delivered the Existing Notes (as defined in Article I).

 

B.            The Borrower and Lender desire to completely amend, restate and
replace the Existing Credit Agreement pursuant to the terms and conditions set
forth herein.

 

NOW THEREFORE, the parties agree that the Existing Credit Agreement is amended
and restated in its entirety by this Agreement on the following terms and
conditions.

 

ARTICLE I.
DEFINITIONS

 

Section 1.1            Definitions. For all purposes of this Agreement, except
as otherwise expressly provided, the following terms have the meanings assigned
to them in this Section or in the Section referenced after such term:

 

“Accounts” means all of the Borrower’s accounts, as such term is defined in the
UCC, including each and every right of the Borrower to the payment of money,
whether such right to payment now exists or hereafter arises, whether such right
to payment arises out of a sale, lease or other disposition of goods or other
property, out of a rendering of services, out of a loan, out of the overpayment
of taxes or other liabilities, or otherwise arises under any contract or
agreement, whether such right to payment is created, generated or earned by the
Borrower or by some other person who subsequently transfers such person’s
interest to the Borrower, whether such right to payment is or is not already
earned by performance, and howsoever such right to payment may be evidenced,
together with all other rights and interests (including all Liens) which the
Borrower may at any time have by law or agreement against any account debtor or
other obligor obligated to make any such payment or against any property of such
account debtor or other obligor; all including but not limited to all present
and future accounts, contract rights, loans and obligations receivable, chattel
papers, bonds, notes and other debt instruments, tax refunds and rights to
payment in the nature of general intangibles.

 

“Advance” means a Revolving Advance or a Term Advance.

 

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“Affiliate” or “Affiliates” means Nortech Medical Services, Inc., a Minnesota
corporation, Myron Kunin and any other Person controlled by, controlling or
under common control with the Borrower, including any Subsidiary of the
Borrower. For purposes of this definition, “control,” when used with respect to
any specified Person, means the power to direct the management and policies of
such Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise.

 

“Agreement” means this Second Amended and Restated Credit and Security
Agreement.

 

“Availability” means the difference of (i) the Borrowing Base and (ii) the sum
of (A) the outstanding principal balance of the Revolving Note and (B) the L/C
Amount.

 

“Banking Day” means a day on which the Federal Reserve Bank of New York is open
for business.

 

“Base LIBOR” means the rate per annum for United States dollar deposits quoted
by Lender for the purpose of calculating effective rates of interest for loans
making reference to the Daily Three Month LIBOR Rate, as the Inter-Bank Market
Offered Rate in effect from time to time for delivery of funds for three
(3) months in amounts approximately equal to the principal amount of such
loans.  Borrower understands and agrees that Lender may base its quotation of
the Inter-Bank Market Offered Rate upon such offers or other market indicators
of the Inter-Bank Market as Lender in its discretion deems appropriate,
including but not limited to, the rate offered for U.S. dollar deposits on the
London Inter-Bank Market.

 

“Book Net Worth” means the aggregate of the common and preferred stockholders’
equity in any Person, determined in accordance with GAAP.

 

“Borrowing Base” means, at any time, an amount equal to the lesser of:

 

(A)           THE MAXIMUM LINE; OR

 

(B)           SUBJECT TO CHANGE IN THE LENDER’S SOLE DISCRETION, THE SUM OF:

 

(I)                                     80% OF ELIGIBLE ACCOUNTS; PLUS

 

(II)                                  THE LESSER OF: (1) $4,000,000 OR (2) 30%
OF ELIGIBLE INVENTORY; PROVIDED, HOWEVER, THAT PORTION OF ELIGIBLE INVENTORY
CONSISTING OF RAW MATERIAL SHALL NOT EXCEED THE LESSER OF $3,000,000 OR 20% OF
SUCH RAW MATERIAL INVENTORY; LESS

 

(C)           THE BORROWING BASE RESERVE, LESS

 

(D)           OBLIGATIONS THAT BORROWER OWES TO LENDER THAT HAVE NOT BEEN
ADVANCED ON THE REVOLVING NOTE, LESS

 

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(E)           OBLIGATIONS THAT ARE NOT OTHERWISE DESCRIBED IN THIS SECTION 1.1,
INCLUDING OBLIGATIONS THAT LENDER IN ITS SOLE DISCRETION FINDS ON THE DATE OF
DETERMINATION TO BE EQUAL TO LENDER’S NET CREDIT EXPOSURE WITH RESPECT TO ANY
SWAP (OR OTHER INTEREST RATE HEDGE), DERIVATIVE, FOREIGN EXCHANGE, DEPOSIT,
TREASURY MANAGEMENT, PURCHASING CARD OR SIMILAR TRANSACTION OR ARRANGEMENT
EXTENDED TO THE BORROWER BY LENDER.

 

“Borrowing Base Reserve” means, as of any date of determination, an amount or a
percent of a specified category or item that Lender establishes in its sole
discretion from time to time to reduce availability under the Borrowing Base
(a) to reflect events, conditions, contingencies or risks which affect the
assets, business or prospects of Borrower, or the Collateral or its value, or
the enforceability, perfection or priority of Lender’s Security Interest in the
Collateral, or (b) to reflect Lender’s judgment that any collateral report or
financial information relating to Borrower and furnished to Lender may be
incomplete, inaccurate or misleading in any material respect.

 

“Business Day” means any day except a Saturday, Sunday or any other day on which
commercial banks in Minnesota are authorized or required by law to close.

 

“Capital Expenditures” means for a period, any expenditure of money during such
period for the lease, purchase or other acquisition of any capital asset, or for
the lease of any other asset whether payable currently or in the future.

 

“Change of Control” means the occurrence of any of the following events:

 

(A)           ANY PERSON OR “GROUP” (AS SUCH TERM IS USED IN SECTIONS 13(D) AND
14(D) OF THE SECURITIES EXCHANGE ACT OF 1934) IS OR BECOMES THE “BENEFICIAL
OWNER” (AS DEFINED IN RULES 13D-3 AND 13D-5 UNDER THE SECURITIES EXCHANGE ACT OF
1934, EXCEPT THAT A PERSON WILL BE DEEMED TO HAVE “BENEFICIAL OWNERSHIP” OF ALL
SECURITIES THAT SUCH PERSON HAS THE RIGHT TO ACQUIRE, WHETHER SUCH RIGHT IS
EXERCISABLE IMMEDIATELY OR ONLY AFTER THE PASSAGE OF TIME), DIRECTLY OR
INDIRECTLY, OF MORE THAN 35% PERCENT OF THE VOTING POWER OF ALL CLASSES OF
VOTING STOCK OF THE BORROWER, EXCLUDING MYRON KUNIN.

 

(B)           DURING ANY CONSECUTIVE TWO-YEAR PERIOD, INDIVIDUALS WHO AT THE
BEGINNING OF SUCH PERIOD CONSTITUTED THE BOARD OF DIRECTORS OF THE BORROWER
(TOGETHER WITH ANY NEW DIRECTORS WHOSE ELECTION TO SUCH BOARD OF DIRECTORS, OR
WHOSE NOMINATION FOR ELECTION BY THE OWNERS OF THE BORROWER, WAS APPROVED BY A
VOTE OF 66-2/3% OF THE DIRECTORS THEN STILL IN OFFICE WHO WERE EITHER DIRECTORS
AT THE BEGINNING OF SUCH PERIOD OR WHOSE ELECTION OR NOMINATION FOR ELECTION WAS
PREVIOUSLY SO APPROVED) CEASE FOR ANY REASON TO CONSTITUTE A MAJORITY OF THE
BOARD OF DIRECTORS OF THE BORROWER THEN IN OFFICE.

 

(C)           MICHAEL DEGEN CEASES TO ACTIVELY MANAGE THE BORROWER’S DAY-TO-DAY
BUSINESS ACTIVITIES.

 

“Collateral” means all of the Borrower’s Accounts, chattel paper, deposit
accounts, documents, Equipment, General Intangibles, goods, instruments,
Inventory, Investment Property,

 

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letter-of-credit rights, letters of credit, all sums on deposit in any
Collateral Account, and any items in any Lockbox; together with (i) all
substitutions and replacements for and products of any of the foregoing; (ii) in
the case of all goods, all accessions; (iii) all accessories, attachments,
parts, equipment and repairs now or hereafter attached or affixed to or used in
connection with any goods; (iv) all warehouse receipts, bills of lading and
other documents of title now or hereafter covering such goods; (v) all
collateral subject to the Lien of any Security Document; (vi) any money, or
other assets of the Borrower that now or hereafter come into the possession,
custody, or control of the Lender; (vii) all sums on deposit in the Special
Account; and (viii) proceeds of any and all of the foregoing.

 

“Commitment”  means the Lender’s commitment to make Advances to, and to cause
the Issuer to issue Letters of Credit for the account of, the Borrower pursuant
to Article II.

 

“Constituent Documents” means with respect to any Person, as applicable, such
Person’s certificate of incorporation, articles of incorporation, by-laws,
certificate of formation, articles of organization, limited liability company
agreement, management agreement, operating agreement, shareholder agreement,
partnership agreement or similar document or agreement governing such Person’s
existence, organization or management or concerning disposition of ownership
interests of such Person or voting rights among such Person’s owners.

 

“Credit Facility” means the credit facility being made available to the Borrower
by the Lender under Article II.

 

“Daily Three Month LIBOR” means, for any day, the rate of interest equal to
LIBOR then in effect for delivery for a three (3) month period.  When interest
is determined in relation to Daily Three Month LIBOR, each change in the
interest rate shall become effective each Business Day that Lender determines
that Daily Three Month LIBOR has changed.

 

“Debt” means of a Person as of a given date, all items of indebtedness or
liability which in accordance with GAAP would be included in determining total
liabilities as shown on the liabilities side of a balance sheet for such Person
and shall also include the aggregate payments required to be made by such Person
at any time under any lease that is considered a capitalized lease under GAAP.

 

“Default” means an event that, with giving of notice or passage of time or both,
would constitute an Event of Default.

 

“Default Period” means any period of time beginning on the first day of any
month during which a Default or Event of Default has occurred and ending on the
date the Lender notifies the Borrower in writing that such Default or Event of
Default has been cured or waived.

 

“Default Rate” means an annual interest rate equal to three percent (3%) over
the Floating Rate, which interest rate shall change when and as the Floating
Rate changes.

 

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“Director” means a director if the Borrower is a corporation, a governor if the
Borrower is a limited liability company, or a partner if the Borrower is a
partnership.

 

“ERISA” means the Employee Retirement Income Security Act of 1974.

 

“ERISA Affiliate” means any trade or business (whether or not incorporated) that
is a member of a group which includes the Borrower and which is treated as a
single employer under Section 414 of the IRC.

 

“Eligible Accounts” means all unpaid Accounts arising from the sale or lease of
goods or the performance of services, net of any unapplied credits or deposits
from Account debtors, but excluding any such Accounts having any of the
following characteristics:

 

(i)

 

That portion of Accounts unpaid 90 days or more after the invoice date;

 

 

 

(ii)

 

That portion of Accounts that is disputed or subject to a claim of offset or a
contra account;

 

 

 

(iii)

 

That portion of Accounts not yet earned by the final delivery of goods or
rendition of services, as applicable, by the Borrower to the customer, including
progress billings, and that portion of Accounts for which an invoice has not
been sent to the applicable account debtor;

 

 

 

(iv)

 

That portion of Accounts owed by account debtors located in the states of New
Jersey, Indiana, or West Virginia (or any other state that requires a creditor
to file a business activity report or similar document in order to bring suit or
otherwise enforce its remedies against such account debtor in the courts or
through any judicial process of such state), unless the Borrower has qualified
to do business in such state, or has filed a notice of business activities
report with the applicable division of taxation, the department of revenue, or
with such other state offices, as appropriate, for the then-current year, or is
exempt from such filing requirement;

 

 

 

(v)

 

Accounts constituting (i) proceeds of copyrightable material unless such
copyrightable material shall have been registered with the United States
Copyright Office, or (ii) proceeds of patentable inventions unless such
patentable inventions have been registered with the United States Patent and
Trademark Office;

 

 

 

(vi)

 

Accounts owed by any unit of government, whether foreign or domestic (provided,
however, that there shall be included in Eligible Accounts that portion of
Accounts owed by such units of government for which the Borrower has provided
evidence satisfactory to the Lender that (A) the Lender has a first priority
perfected security interest and (B) such Accounts may be enforced by the Lender
directly against such unit of government under all applicable laws);

 

 

 

(vii)

 

Accounts owed by an account debtor located outside the United States which are
not: (A) backed by a bank letter of credit naming the Lender as beneficiary or

 

5

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assigned to the Lender, in the Lender’s possession or control, and with respect
to which a control agreement concerning the letter-of-credit rights is in
effect, and acceptable to the Lender in all respects, in its sole discretion, or
(B) covered by a foreign receivables insurance policy acceptable to the Lender
in its sole discretion;

 

 

 

(viii)

 

Accounts owed by an account debtor that is insolvent, the subject of bankruptcy
proceedings or has gone out of business;

 

 

 

(ix)

 

Accounts owed by an Owner, Subsidiary, Affiliate, Officer or employee of the
Borrower;

 

 

 

(x)

 

Accounts not subject to a duly perfected security interest in the Lender’s favor
or which are subject to any Lien in favor of any Person other than the Lender;

 

 

 

(xi)

 

That portion of Accounts that has been restructured, extended, amended or
modified;

 

 

 

(xii)

 

That portion of Accounts that constitutes advertising, finance charges, service
charges or sales or excise taxes;

 

 

 

(xiii)

 

Accounts owed by an Account debtor, regardless of whether otherwise eligible, to
the extent that the aggregate balance of such Accounts exceeds 15% of the
aggregate amount of all Accounts;

 

 

 

(xiv)

 

Accounts owed by an Account debtor, regardless of whether otherwise eligible, if
15% (or 25% with respect to Accounts owing by General Electric Company and its
affiliates, Semitool, Inc. and Northrop Grumman Corporation) or more of the
total amount due under Accounts from such debtor is ineligible under clauses
(i), (ii) or (xi) above;

 

 

 

(xv)

 

Accounts owed by an account debtor, regardless of whether otherwise eligible
Accounts denominated in any currency other than United States Dollars; and

 

 

 

(XVI)

 

ACCOUNTS, OR PORTIONS THEREOF, OTHERWISE DEEMED INELIGIBLE BY THE LENDER IN ITS
SOLE DISCRETION.

 

“Eligible Inventory” means all Inventory of the Borrower, at the lower of cost
or market value as determined in accordance with GAAP; but excluding any
Inventory having any of the following characteristics:

 

(i)

 

Inventory that is: in-transit; located at any warehouse, job site or other
premises not approved by the Lender in writing; located outside of the states,
or localities, as applicable, in which the Lender has filed financing statements
to perfect a first priority security interest in such Inventory; covered by any
negotiable or non-negotiable warehouse receipt, bill of lading or other document
of title; on consignment from any Person; on consignment to any Person or
subject to any

 

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bailment unless such consignee or bailee has executed an agreement with the
Lender;

 

 

 

(ii)

 

Supplies, packaging, parts or sample Inventory;

 

 

 

(iii)

 

Work-in-process Inventory;

 

 

 

(iv)

 

Inventory that is damaged, obsolete, slow moving (twelve-months or greater) or
not currently saleable in the normal course of the Borrower’s operations;

 

 

 

(v)

 

Inventory that the Borrower has returned, has attempted to return, is in the
process of returning or intends to return to the vendor thereof;

 

 

 

(vi)

 

Inventory that is perishable or live;

 

 

 

(vii)

 

Inventory purchased or manufactured by the Borrower pursuant to a license unless
the applicable licensor has agreed in writing to permit the Lender to exercise
its rights and remedies against such Inventory;

 

 

 

(viii)

 

Inventory that is subject to a Lien in favor of any Person other than the
Lender;

 

 

 

(ix)

 

All Inventory at any location other than the premises owned or leased by the
Borrower in Bemidji, Blue Earth, Fairmont and Merrifield, Minnesota and Augusta,
Wisconsin;

 

 

 

(x)

 

Inventory stored at any location: (a) holding less than 10% of the aggregate
value of Borrower’s Inventory, or (b) with an aggregate value of $500,000, or
less; and

 

 

 

(XI)

 

INVENTORY OTHERWISE DEEMED INELIGIBLE BY THE LENDER IN ITS SOLE DISCRETION.

 

“Environmental Law” means any federal, state, local or other governmental
statute, regulation, law or ordinance dealing with the protection of human
health and the environment.

 

“Equipment” means all of the Borrower’s equipment, as such term is defined in
the UCC, whether now owned or hereafter acquired, including but not limited to
all present and future machinery, vehicles, furniture, fixtures, manufacturing
equipment, shop equipment, office and recordkeeping equipment, parts, tools,
supplies, and including specifically the goods described in any equipment
schedule or list herewith or hereafter furnished to the Lender by the Borrower.

 

“Event of Default” has the meaning specified in Section 7.1.

 

“Existing Notes” means the Revolving Note and the Real Estate Term Note.

 

“Financial Covenants” means the covenants set forth in Section 6.2.

 

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“Floating Rate” means the Daily Three Month LIBOR plus five percent (5.0%) for
amounts owing under the Notes.

 

“Funding Date” has the meaning given in Section 2.1.

 

“GAAP” means generally accepted accounting principles, applied on a basis
consistent with the accounting practices applied in the financial statements
described in Section 5.6.

 

“General Intangibles” means all of the Borrower’s general intangibles, as such
term is defined in the UCC, whether now owned or hereafter acquired, including
all present and future Intellectual Property Rights, customer or supplier lists
and contracts, manuals, operating instructions, permits, franchises, the right
to use the Borrower’s name, and the goodwill of the Borrower’s business.

 

“Guarantor(s)” means any Person now or hereafter guarantying the Obligations.

 

“Hazardous Substances” means pollutants, contaminants, hazardous substances,
hazardous wastes, petroleum and fractions thereof, and all other chemicals,
wastes, substances and materials listed in, regulated by or identified in any
Environmental Law.

 

“IRC” means the Internal Revenue Code of 1986.

 

“Infringe” when used with respect to Intellectual Property Rights means any
infringement or other violation of Intellectual Property Rights.

 

“Intangible Assets” means as to any Person all intangible assets as determined
in accordance with GAAP and including Intellectual Property Rights, goodwill,
accounts due from Affiliates, Directors, Officers or employees, deposits,
deferred charges or treasury stock or any securities or Debt of such Person or
any other securities unless the same are readily marketable in the US or
entitled to be used as a credit against federal income tax liabilities,
non-compete agreements and any other assets designated from time to time by the
Lender, in its sole discretion.

 

“Intellectual Property Rights” means all actual or prospective rights arising in
connection with any intellectual property or other proprietary rights, including
all rights arising in connection with copyrights, patents, service marks, trade
dress, trade secrets, trademarks, trade names or mask works.

 

“Interest Expense” means for a fiscal year-to-date period, a Person’s total
gross interest expense during such period (excluding interest income), and shall
in any event include (i) interest expensed (whether or not paid) on all Debt,
(ii) the amortization of debt discounts, (iii) the amortization of all fees
payable in connection with the incurrence of Debt to the extent included in
interest expense, and (iv) the portion of any capitalized lease obligation
allocable to interest expense.

 

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“Inventory” means all of the Borrower’s inventory, as such term is defined in
the UCC, whether now owned or hereafter acquired, whether consisting of whole
goods, spare parts or components, supplies or materials, whether acquired, held
or furnished for sale, for lease or under service contracts or for manufacture
or processing, and wherever located.

 

“Investment Property” means all of the Borrower’s investment property, as such
term is defined in the UCC, whether now owned or hereafter acquired, including
but not limited to all securities, security entitlements, securities accounts,
commodity contracts, commodity accounts, stocks, bonds, mutual fund shares,
money market shares and U.S. Government securities.

 

“Issuer” means the issuer of any Letter of Credit.

 

“L/C Amount” means the sum of (i) the aggregate face amount of any issued and
outstanding Letters of Credit and (ii) the unpaid amount of the Obligation of
Reimbursement.

 

“L/C Application” means an application and agreement for letters of credit in a
form acceptable to the Issuer and the Lender.

 

“Letter of Credit” has the meaning specified in Section 2.4.

 

“LIBOR” means the rate per annum (rounded upward, if necessary, to the nearest
whole 1/8th of 1%) and determined pursuant to the following formula:

 

 

LIBOR Rate =  

Base LIBOR

 

 

 

100% - LIBOR Reserve Percentage

 

 

“LIBOR Reserve Percentage” means the reserve percentage prescribed by the Board
of Governors of the Federal Reserve System (or any successor) for “Eurocurrency
Liabilities” (as defined in Regulation D of the Federal Reserve Board, as
amended), adjusted by Wells Fargo for expected changes in such reserve
percentage during the applicable Interest Period.

 

“Licensed Intellectual Property” has the meaning given in Section 5.11(b).

 

“Lien” means any security interest, mortgage, deed of trust, pledge, lien,
charge, encumbrance, title retention agreement or analogous instrument or
device, including the interest of each lessor under any capitalized lease and
the interest of any bondsman under any payment or performance bond, in, of or on
any assets or properties of a Person, whether now owned or hereafter acquired
and whether arising by agreement or operation of law.

 

“Loan Documents” means this Agreement, the Notes, the Security Documents, any
L/C Application and any other agreement, document or instrument delivered by the
Borrower, or any guarantor or Affiliate to the Lender.

 

“Material Adverse Effect” means any of the following:

 

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(I)            A MATERIAL ADVERSE EFFECT ON THE BUSINESS, OPERATIONS, RESULTS OF
OPERATIONS, PROSPECTS, ASSETS, LIABILITIES OR FINANCIAL CONDITION OF THE
BORROWER;

 

(II)           A MATERIAL ADVERSE EFFECT ON THE ABILITY OF THE BORROWER TO
PERFORM ITS OBLIGATIONS UNDER THE LOAN DOCUMENTS;

 

(III)          A MATERIAL ADVERSE EFFECT ON THE ABILITY OF THE LENDER TO ENFORCE
THE OBLIGATIONS OR TO REALIZE THE INTENDED BENEFITS OF THE SECURITY DOCUMENTS,
INCLUDING A MATERIAL ADVERSE EFFECT ON THE VALIDITY OR ENFORCEABILITY OF ANY
LOAN DOCUMENT OR OF ANY RIGHTS AGAINST ANY GUARANTOR, OR ON THE STATUS,
EXISTENCE, PERFECTION, PRIORITY (SUBJECT TO PERMITTED LIENS) OR ENFORCEABILITY
OF ANY LIEN SECURING PAYMENT OR PERFORMANCE OF THE OBLIGATIONS; OR

 

(IV)          ANY CLAIM AGAINST THE BORROWER OR ANY AFFILIATE OR THREAT OF
LITIGATION WHICH IF DETERMINED ADVERSELY WOULD CAUSE THE BORROWER TO BE LIABLE
TO PAY AN AMOUNT EXCEEDING $200,000 OR WOULD BE AN EVENT DESCRIBED IN CLAUSES
(I), (II) AND (III) ABOVE.

 

“Maturity Date” means June 30, 2010 for the Revolving Note and May 31, 2012 for
the Real Estate Term Note.

 

“Maximum Line” means $12,000,000 unless said amount is reduced pursuant to
Section 2.13, in which event it means such lower amount.

 

“Mortgages” means (i) that Mortgage, Security Agreement, Fixture Financing
Statement and Assignment of Leases and Rents dated January 31, 2002; and
(ii) that certain combination Mortgage, Security Agreement, Fixture Financing
Statement and Assignment of Leases and Rents dated February 2, 2007, each as
executed by the Borrower, as mortgagor, in favor of the Lender, as mortgagee,
granting the Lender a first priority mortgage lien and assignment of leases and
rents in the Borrower’s facilities located in Bemidji, Fairmont and Merrifield,
Minnesota, and Eau Claire County, Wisconsin, respectively.

 

“Multiemployer Plan” means a multiemployer plan (as defined in
Section 4001(a)(3) of ERISA) to which the Borrower or any ERISA Affiliate
contributes or is obligated to contribute.

 

“Net Income” means for any period, the after-tax net income from continuing
operations, less extraordinary losses or losses from discontinued operations, as
determined in accordance with GAAP.

 

“Net Loss” means for any period, the pre-tax net loss from continuing
operations, including extraordinary losses or losses from discontinued
operations, as determined in accordance with GAAP.

 

“Note” means the Revolving Note, or the Real Estate Term Note, and “Notes” means
the Revolving Note, and the Real Estate Term Note.

 

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“Obligation of Reimbursement” has the meaning given in Section 2.6(a).

 

“Obligations” means each Note, the Obligation of Reimbursement and each and
every other debt, liability and obligation of every type and description which
the Borrower may now or at any time hereafter owe to the Lender, whether such
debt, liability or obligation now exists or is hereafter created or incurred,
whether it arises in a transaction involving the Lender alone or in a
transaction involving other creditors of the Borrower, and whether it is direct
or indirect, due or to become due, absolute or contingent, primary or secondary,
liquidated or unliquidated, or sole, joint, several or joint and several, and
including all indebtedness of the Borrower arising under any Loan Document or
guaranty between the Borrower and the Lender, whether now in effect or hereafter
entered into.

 

“Officer” means with respect to the Borrower, an officer if the Borrower is a
corporation, a manager if the Borrower is a limited liability company, or a
partner if the Borrower is a partnership.

 

“Owned Intellectual Property” has the meaning given in Section 5.11(a).

 

“Owner” means with respect to the Borrower, each Person having legal or
beneficial title to an ownership interest in the Borrower or a right to acquire
such an interest.

 

“Pension Plan” means a pension plan (as defined in Section 3(2) of ERISA)
maintained for employees of the Borrower or any ERISA Affiliate and covered by
Title IV of ERISA.

 

“Permitted Lien” has the meaning given in Section 6.3(a).

 

“Person” means any individual, corporation, partnership, joint venture, limited
liability company, association, joint-stock company, trust, unincorporated
organization or government or any agency or political subdivision thereof.

 

“Plan” means an employee benefit plan (as defined in Section 3(3) of ERISA)
maintained for employees of the Borrower or any ERISA Affiliate.

 

“Premises” means all premises where the Borrower conducts its business and has
any rights of possession, including the premises legally described in Exhibit C
attached hereto.

 

“Real Estate Term Note” means that certain Amended and Restated Real Estate Term
Note dated February 2, 2007 made payable by the Borrower to the order of the
Lender in the original principal amount of $3,348,750.00, and any note or notes
issued in substitution therefor.

 

“Reportable Event” means a reportable event (as defined in Section 4043 of
ERISA), other than an event for which the 30-day notice requirement under ERISA
has been waived in regulations issued by the Pension Benefit Guaranty
Corporation.

 

“Revolving Advance” has the meaning given in Section 2.1.

 

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“Revolving Note” means that certain Amended and Restated Revolving Note of even
date herewith made payable by the Borrower to the order of Lender in the
original principal amount of $12,000,000.00, and any note or notes issued in
substitution therefor.

 

“Security Documents” means this Agreement, the Mortgages, any Subordination
Agreement and any other document delivered to the Lender from time to time to
secure the Obligations.

 

“Security Interest” has the meaning given in Section 3.1.

 

“Special Account” means a specified cash collateral account maintained by a
financial institution acceptable to the Lender in connection with Letters of
Credit, as contemplated by Section 2.5.

 

“Subordination Agreement” means individually and collectively, each Debt
Subordination Agreement now or hereafter executed by any Person in the Lender’s
favor, acknowledged by the Borrower, and accepted by the Lender from time to
time.

 

“Subordinated Debt” means any indebtedness that has been subordinated to the
Obligations pursuant to a Subordination Agreement.

 

“Subsidiary” means any corporation of which more than 50% of the outstanding
voting equity interests or equity interests having general voting power under
ordinary circumstances to elect a majority of the board of directors, board of
governors or similar governing body of such entity, irrespective of whether or
not at the time interest of any other class or classes shall have or might have
voting power by reason of the happening of any contingency, is at the time
directly or indirectly owned by the Borrower, by the Borrower and one or more
other Subsidiaries, or by one or more other Subsidiaries.

 

“Term Advance” has the meaning specified in Section 2.8.

 

“Termination Date” means the earliest of (i) the Maturity Date, (ii) the date
the Borrower terminates the Credit Facility, or (iii) the date the Lender
demands payment of the Obligations after an Event of Default pursuant to
Section 7.2.

 

“UCC” means the Uniform Commercial Code as in effect in the state designated in
Section 8.15 as the state whose laws shall govern this Agreement, or in any
other state whose laws are held to govern this Agreement or any portion hereof.

 

Section 1.2            Other Definitional Terms; Rules of Interpretation. The
words “hereof”, “herein” and “hereunder” and words of similar import when used
in this Agreement shall refer to this Agreement as a whole and not to any
particular provision of this Agreement. All accounting terms not otherwise
defined herein have the meanings assigned to them in accordance with GAAP. All
terms defined in the UCC and not otherwise defined herein have the meanings
assigned to them in the UCC. References to Articles, Sections, subsections,
Exhibits, Schedules and the like, are to Articles, Sections and subsections of,
or Exhibits or Schedules

 

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attached to, this Agreement unless otherwise expressly provided. The words
“include”, “includes” and “including” shall be deemed to be followed by the
phrase “without limitation”. Unless the context in which used herein otherwise
clearly requires, “or” has the inclusive meaning represented by the phrase
“and/or”. Defined terms include in the singular number the plural and in the
plural number the singular. Reference to any agreement (including the Loan
Documents), document or instrument means such agreement, document or instrument
as amended or modified and in effect from time to time in accordance with the
terms thereof (and, if applicable, in accordance with the terms hereof and the
other Loan Documents), except where otherwise explicitly provided, and reference
to any promissory note includes any promissory note which is an extension or
renewal thereof or a substitute or replacement therefor. Reference to any law,
rule, regulation, order, decree, requirement, policy, guideline, directive or
interpretation means as amended, modified, codified, replaced or reenacted, in
whole or in part, and in effect on the determination date, including rules and
regulations promulgated thereunder.

 

ARTICLE II.
AMOUNT AND TERMS OF THE CREDIT FACILITY

 

Section 2.1                                   Revolving Advances. The Lender
agrees, on the terms and subject to the conditions herein set forth, to make
advances to the Borrower from time to time from the date all of the conditions
set forth in Section 4.1 are satisfied (the “Funding Date”) to the Termination
Date (the “Revolving Advances”). The Lender shall have no obligation to make a
Revolving Advance to the extent the amount of the requested Revolving Advance
exceeds Availability. The Borrower’s obligation to pay the Revolving Advances
shall be evidenced by the Revolving Note and shall be secured by the Collateral.
Within the limits set forth in this Section 2.1, the Borrower may borrow, prepay
pursuant to Section 2.13 and re-borrow.

 

The Borrower acknowledges that the amount of principal and accrued but unpaid
interest outstanding under the Revolving Note as of the date hereof is
$6,274,597.48 and that such existing indebtedness shall continue to be evidenced
by the Revolving Note.  The Borrower further acknowledges that the aggregate
face amount of all outstanding Letters of Credit as of the date hereof is $0.

 

Section 2.2                                   Procedures for Requesting
Advances. The Borrower shall comply with the following procedures in requesting
Revolving Advances:

 

(A)                                  TIME FOR REQUESTS. THE BORROWER SHALL
REQUEST EACH ADVANCE NOT LATER THAN 2:00 P.M., MINNEAPOLIS, MINNESOTA TIME ON
THE BANKING DAY THE ADVANCE IS TO BE MADE. EACH SUCH REQUEST SHALL BE EFFECTIVE
UPON RECEIPT BY THE LENDER, SHALL BE IN WRITING OR BY TELEPHONE OR TELECOPY
TRANSMISSION, TO BE CONFIRMED IN WRITING BY THE BORROWER IF SO REQUESTED BY THE
LENDER, SHALL BE BY (I) AN OFFICER OF THE BORROWER; OR (II) A PERSON DESIGNATED
AS THE BORROWER’S AGENT BY AN OFFICER OF THE BORROWER IN A WRITING DELIVERED TO
THE LENDER; OR (III) A PERSON WHOM THE LENDER REASONABLY BELIEVES TO BE AN
OFFICER OF THE BORROWER OR SUCH A DESIGNATED AGENT. THE BORROWER SHALL REPAY ALL
ADVANCES EVEN IF THE LENDER DOES NOT RECEIVE SUCH CONFIRMATION AND EVEN IF THE
PERSON REQUESTING AN ADVANCE WAS NOT IN FACT AUTHORIZED TO DO SO. ANY REQUEST
FOR AN ADVANCE, WHETHER WRITTEN OR

 

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TELEPHONIC, SHALL BE DEEMED TO BE A REPRESENTATION BY THE BORROWER THAT THE
CONDITIONS SET FORTH IN SECTION 4.2 HAVE BEEN SATISFIED AS OF THE TIME OF THE
REQUEST.

 

(B)                                 DISBURSEMENT. UPON FULFILLMENT OF THE
APPLICABLE CONDITIONS SET FORTH IN ARTICLE IV, THE LENDER SHALL DISBURSE THE
PROCEEDS OF THE REQUESTED ADVANCE BY CREDITING THE SAME TO THE BORROWER’S DEMAND
DEPOSIT ACCOUNT MAINTAINED WITH THE LENDER UNLESS THE LENDER AND THE BORROWER
SHALL AGREE IN WRITING TO ANOTHER MANNER OF DISBURSEMENT.

 

Section 2.3                                   Increased Costs; Capital Adequacy;
Funding Exceptions.

 

(A)           INCREASED COSTS; CAPITAL ADEQUACY. IF THE LENDER DETERMINES AT ANY
TIME THAT ITS RETURN HAS BEEN REDUCED AS A RESULT OF ANY RULE CHANGE, SUCH
LENDER MAY SO NOTIFY THE BORROWER AND REQUIRE THE BORROWER, BEGINNING FIFTEEN
(15) DAYS AFTER SUCH NOTICE, TO PAY IT THE AMOUNT NECESSARY TO RESTORE ITS
RETURN TO WHAT IT WOULD HAVE BEEN HAD THERE BEEN NO RULE CHANGE. FOR PURPOSES OF
THIS SECTION 2.3:

 

(I)            “CAPITAL ADEQUACY RULE” MEANS ANY LAW, RULE, REGULATION,
GUIDELINE, DIRECTIVE, REQUIREMENT OR REQUEST REGARDING CAPITAL ADEQUACY, OR THE
INTERPRETATION OR ADMINISTRATION THEREOF BY ANY GOVERNMENTAL OR REGULATORY
AUTHORITY, CENTRAL BANK OR COMPARABLE AGENCY, WHETHER OR NOT HAVING THE FORCE OF
LAW, THAT APPLIES TO ANY RELATED LENDER, INCLUDING RULES REQUIRING FINANCIAL
INSTITUTIONS TO MAINTAIN TOTAL CAPITAL IN AMOUNTS BASED UPON PERCENTAGES OF
OUTSTANDING LOANS, BINDING LOAN COMMITMENTS AND LETTERS OF CREDIT.

 

(II)           “L/C RULE” MEANS ANY LAW, RULE, REGULATION, GUIDELINE, DIRECTIVE,
REQUIREMENT OR REQUEST REGARDING LETTERS OF CREDIT, OR THE INTERPRETATION OR
ADMINISTRATION THEREOF BY ANY GOVERNMENTAL OR REGULATORY AUTHORITY, CENTRAL BANK
OR COMPARABLE AGENCY, WHETHER OR NOT HAVING THE FORCE OF LAW, THAT APPLIES TO
ANY RELATED LENDER, INCLUDING THOSE THAT IMPOSE TAXES, DUTIES OR OTHER SIMILAR
CHARGES, OR MANDATE RESERVES, SPECIAL DEPOSITS OR SIMILAR REQUIREMENTS AGAINST
ASSETS OF, DEPOSITS WITH OR FOR THE ACCOUNT OF, OR CREDIT EXTENDED BY ANY
RELATED LENDER, ON LETTERS OF CREDIT.

 

(III)          “RELATED LENDER” INCLUDES (BUT IS NOT LIMITED TO) THE LENDER, ANY
PARENT OF THE LENDER, ANY ASSIGNEE OF ANY INTEREST OF THE LENDER HEREUNDER AND
ANY PARTICIPANT IN THE CREDIT FACILITY.

 

(IV)          “RETURN”, FOR ANY PERIOD, MEANS THE PERCENTAGE DETERMINED BY
DIVIDING (I) THE SUM OF INTEREST AND ONGOING FEES EARNED BY THE LENDER UNDER
THIS AGREEMENT DURING SUCH PERIOD, BY (II) THE AVERAGE CAPITAL SUCH LENDER IS
REQUIRED TO MAINTAIN DURING SUCH PERIOD AS A RESULT OF ITS BEING A PARTY TO THIS
AGREEMENT, AS DETERMINED BY SUCH LENDER BASED UPON ITS TOTAL CAPITAL
REQUIREMENTS AND A REASONABLE ATTRIBUTION FORMULA THAT TAKES ACCOUNT OF THE
CAPITAL ADEQUACY RULES AND L/C RULES THEN IN EFFECT, COSTS OF ISSUING OR

 

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MAINTAINING ANY ADVANCE OR LETTER OF CREDIT AND AMOUNTS RECEIVED OR RECEIVABLE
UNDER THIS AGREEMENT OR THE NOTES WITH RESPECT TO ANY ADVANCE OR LETTER OF
CREDIT. RETURN MAY BE CALCULATED FOR EACH CALENDAR QUARTER AND FOR THE SHORTER
PERIOD BETWEEN THE END OF A CALENDAR QUARTER AND THE DATE OF TERMINATION IN
WHOLE OF THIS AGREEMENT.

 

(V)           “RULE CHANGE” MEANS ANY CHANGE IN ANY CAPITAL ADEQUACY RULE OR L/C
RULE OCCURRING AFTER THE DATE OF THIS AGREEMENT, OR ANY CHANGE IN THE
INTERPRETATION OR ADMINISTRATION THEREOF BY ANY GOVERNMENTAL OR REGULATORY
AUTHORITY, BUT THE TERM DOES NOT INCLUDE ANY CHANGES THAT AT THE FUNDING DATE
ARE SCHEDULED TO TAKE PLACE UNDER THE EXISTING CAPITAL ADEQUACY RULES OR L/C
RULES OR ANY INCREASES IN THE CAPITAL THAT THE LENDER IS REQUIRED TO MAINTAIN TO
THE EXTENT THAT THE INCREASES ARE REQUIRED DUE TO A REGULATORY AUTHORITY’S
ASSESSMENT OF THAT LENDER’S FINANCIAL CONDITION.

 

The initial notice sent by the Lender shall be sent as promptly as practicable
after such Lender learns that its Return has been reduced, shall include a
demand for payment of the amount necessary to restore such Lender’s Return for
the quarter in which the notice is sent, and shall state in reasonable detail
the cause for the reduction in its Return and its calculation of the amount of
such reduction. Thereafter, such Lender may send a new notice during each
calendar quarter setting forth the calculation of the reduced Return for that
quarter and including a demand for payment of the amount necessary to restore
its Return for that quarter. The Lender’s calculation in any such notice shall
be conclusive and binding absent demonstrable error.

 

Section 2.4                                   Letters of Credit.

 

(A)                                  THE LENDER AGREES, ON THE TERMS AND SUBJECT
TO THE CONDITIONS HEREIN SET FORTH, TO CAUSE AN ISSUER TO ISSUE, FROM THE
FUNDING DATE TO THE TERMINATION DATE, ONE OR MORE IRREVOCABLE STANDBY OR
DOCUMENTARY LETTERS OF CREDIT (EACH, A “LETTER OF CREDIT”) FOR THE BORROWER’S
ACCOUNT BY GUARANTEEING PAYMENT OF THE BORROWER’S OBLIGATIONS OR BEING A
CO-APPLICANT. THE LENDER SHALL HAVE NO OBLIGATION TO CAUSE AN ISSUER TO ISSUE
ANY LETTER OF CREDIT IF THE FACE AMOUNT OF THE LETTER OF CREDIT TO BE ISSUED
WOULD EXCEED THE LESSER OF:

 

(I)                                     $1,000,000 LESS THE L/C AMOUNT, OR

 

(II)                                  AVAILABILITY.

 

Each Letter of Credit, if any, shall be issued pursuant to a separate L/C
Application entered into between the Borrower and the Lender for the benefit of
the Issuer, completed in a manner satisfactory to the Lender and the Issuer. The
terms and conditions set forth in each such L/C Application shall supplement the
terms and conditions hereof, but if the terms of any such L/C Application and
the terms of this Agreement are inconsistent, the terms hereof shall control.

 

(B)                                 NO LETTER OF CREDIT SHALL BE ISSUED WITH AN
EXPIRY DATE LATER THAN THE TERMINATION DATE IN EFFECT AS OF THE DATE OF
ISSUANCE.

 

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(C)                                  ANY REQUEST TO CAUSE AN ISSUER TO ISSUE A
LETTER OF CREDIT SHALL BE DEEMED TO BE A REPRESENTATION BY THE BORROWER THAT THE
CONDITIONS SET FORTH IN SECTION 4.2 HAVE BEEN SATISFIED AS OF THE DATE OF THE
REQUEST.

 

Section 2.5                                   Special Account. If the Credit
Facility is terminated for any reason while any Letter of Credit is outstanding,
the Borrower shall thereupon pay the Lender in immediately available funds for
deposit in the Special Account an amount equal to the L/C Amount. The Special
Account shall be an interest bearing account maintained for the Lender by any
financial institution acceptable to the Lender. Any interest earned on amounts
deposited in the Special Account shall be credited to the Special Account. The
Lender may apply amounts on deposit in the Special Account at any time or from
time to time to the Obligations in the Lender’s sole discretion. The Borrower
may not withdraw any amounts on deposit in the Special Account as long as the
Lender maintains a security interest therein. The Lender agrees to transfer any
balance in the Special Account to the Borrower when the Lender is required to
release its security interest in the Special Account under applicable law.

 

Section 2.6                                   Payment of Amounts Drawn Under
Letters of Credit; Obligation of Reimbursement. The Borrower acknowledges that
the Lender, as co-applicant, will be liable to the Issuer for reimbursement of
any and all draws under Letters of Credit and for all other amounts required to
be paid under the applicable L/C Application. Accordingly, the Borrower shall
pay to the Lender any and all amounts required to be paid under the applicable
L/C Application, when and as required to be paid thereby, and the amounts
designated below, when and as designated:

 

(A)                                  THE BORROWER SHALL PAY TO THE LENDER ON THE
DAY A DRAFT IS HONORED UNDER ANY LETTER OF CREDIT A SUM EQUAL TO ALL AMOUNTS
DRAWN UNDER SUCH LETTER OF CREDIT PLUS ANY AND ALL REASONABLE CHARGES AND
EXPENSES THAT THE ISSUER OR THE LENDER MAY PAY OR INCUR RELATIVE TO SUCH DRAW
AND THE APPLICABLE L/C APPLICATION, PLUS INTEREST ON ALL SUCH AMOUNTS, CHARGES
AND EXPENSES AS SET FORTH BELOW (THE BORROWER’S OBLIGATION TO PAY ALL SUCH
AMOUNTS IS HEREIN REFERRED TO AS THE “OBLIGATION OF REIMBURSEMENT”).

 

(B)                                 WHENEVER A DRAFT IS SUBMITTED UNDER A LETTER
OF CREDIT, THE BORROWER AUTHORIZES THE LENDER TO MAKE A REVOLVING ADVANCE IN THE
AMOUNT OF THE OBLIGATION OF REIMBURSEMENT AND TO APPLY THE PROCEEDS OF SUCH
REVOLVING ADVANCE THERETO. SUCH REVOLVING ADVANCE SHALL BE REPAYABLE IN
ACCORDANCE WITH AND BE TREATED IN ALL OTHER RESPECTS AS A REVOLVING ADVANCE
HEREUNDER.

 

(C)                                  IF A DRAFT IS SUBMITTED UNDER A LETTER OF
CREDIT WHEN THE BORROWER IS UNABLE, BECAUSE A DEFAULT PERIOD EXISTS OR FOR ANY
OTHER REASON, TO OBTAIN A REVOLVING ADVANCE TO PAY THE OBLIGATION OF
REIMBURSEMENT, THE BORROWER SHALL PAY TO THE LENDER ON DEMAND AND IN IMMEDIATELY
AVAILABLE FUNDS, THE AMOUNT OF THE OBLIGATION OF REIMBURSEMENT TOGETHER WITH
INTEREST, ACCRUED FROM THE DATE OF THE DRAFT UNTIL PAYMENT IN FULL AT THE
DEFAULT RATE. NOTWITHSTANDING THE BORROWER’S INABILITY TO OBTAIN A REVOLVING
ADVANCE FOR ANY REASON, THE LENDER IS IRREVOCABLY AUTHORIZED, IN ITS SOLE
DISCRETION, TO

 

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MAKE A REVOLVING ADVANCE IN AN AMOUNT SUFFICIENT TO DISCHARGE THE OBLIGATION OF
REIMBURSEMENT AND ALL ACCRUED BUT UNPAID INTEREST THEREON.

 

(D)                                 THE BORROWER’S OBLIGATION TO PAY ANY
REVOLVING ADVANCE MADE UNDER THIS SECTION 2.6, SHALL BE EVIDENCED BY THE
REVOLVING NOTE AND SHALL BEAR INTEREST AS PROVIDED IN SECTION 2.10.

 

Section 2.7                                   Obligations Absolute. The
Borrower’s obligations arising under Section 2.6 shall be absolute,
unconditional and irrevocable, and shall be paid strictly in accordance with the
terms of Section 2.6, under all circumstances whatsoever, including (without
limitation) the following circumstances:

 

(A)                                  ANY LACK OF VALIDITY OR ENFORCEABILITY OF
ANY LETTER OF CREDIT OR ANY OTHER AGREEMENT OR INSTRUMENT RELATING TO ANY LETTER
OF CREDIT (COLLECTIVELY THE “RELATED DOCUMENTS”);

 

(B)                                 ANY AMENDMENT OR WAIVER OF OR ANY CONSENT TO
DEPARTURE FROM ALL OR ANY OF THE RELATED DOCUMENTS;

 

(C)                                  THE EXISTENCE OF ANY CLAIM, SETOFF, DEFENSE
OR OTHER RIGHT WHICH THE BORROWER MAY HAVE AT ANY TIME, AGAINST ANY BENEFICIARY
OR ANY TRANSFEREE OF ANY LETTER OF CREDIT (OR ANY PERSONS OR ENTITIES FOR WHOM
ANY SUCH BENEFICIARY OR ANY SUCH TRANSFEREE MAY BE ACTING), OR OTHER PERSON OR
ENTITY, WHETHER IN CONNECTION WITH THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED
HEREIN OR IN THE RELATED DOCUMENTS OR ANY UNRELATED TRANSACTIONS;

 

(D)                                 ANY STATEMENT OR ANY OTHER DOCUMENT
PRESENTED UNDER ANY LETTER OF CREDIT PROVING TO BE FORGED, FRAUDULENT, INVALID
OR INSUFFICIENT IN ANY RESPECT OR ANY STATEMENT THEREIN BEING UNTRUE OR
INACCURATE IN ANY RESPECT WHATSOEVER;

 

(E)                                  PAYMENT BY OR ON BEHALF OF THE ISSUER UNDER
ANY LETTER OF CREDIT AGAINST PRESENTATION OF A DRAFT OR CERTIFICATE WHICH DOES
NOT STRICTLY COMPLY WITH THE TERMS OF SUCH LETTER OF CREDIT; OR

 

(F)                                    ANY OTHER CIRCUMSTANCE OR HAPPENING
WHATSOEVER, WHETHER OR NOT SIMILAR TO ANY OF THE FOREGOING.

 

Section 2.8                                   Term Advances.

 

(A)                                  THE BORROWER ACKNOWLEDGES THAT LENDER
PREVIOUSLY MADE A SINGLE ADVANCE TO THE BORROWER ON EACH OF JANUARY 31, 2002 AND
FEBRUARY 2, 2007 (THE “TERM ADVANCES”), THE FIRST IN THE AMOUNT OF $2,500,000.00
AND THE SECOND IN THE AMOUNT OF $1,668,194.51.  THE BORROWER’S OBLIGATION TO PAY
THE TERM ADVANCES IS EVIDENCED BY THE REAL ESTATE TERM NOTE AND IS SECURED BY
THE COLLATERAL AS PROVIDED IN ARTICLE III AND AS DESCRIBED IN ANY SECURITY
DOCUMENTS, INCLUDING BUT NOT LIMITED TO THE MORTGAGES.  THE

 

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BORROWER ACKNOWLEDGES THAT, AS OF THE DATE HEREOF, THE OUTSTANDING PRINCIPAL
BALANCE OF THE REAL ESTATE TERM NOTE IS $ 2,772,020.73.

 

Section 2.9                                   Payments and Interest on Term
Notes. The outstanding principal balance of the Term Notes shall continue to
accrue interest and be due and payable as specifically set forth in the Term
Notes and on the Termination Date, the entire unpaid principal balance of the
Term Notes, and all unpaid interest accrued thereon, shall in any event be due
and payable.  At the option of the Lender, it may on any date that principal and
interest is due on the Notes automatically deduct the amount of such payments,
or cause the same to be automatically deducted, from the Borrower’s deposit
accounts maintained with the Lender its Affiliates.

 

(A)                                  IF THE LENDER AT ANY TIME OBTAINS AN
APPRAISAL OF ANY THE REAL PROPERTY SUBJECT TO THE MORTGAGES AS PERMITTED UNDER
SECTION 6.10(D) HEREIN, AND THE APPRAISAL SHOWS THE AGGREGATE OUTSTANDING
PRINCIPAL BALANCE OF THE REAL ESTATE TERM NOTE TO EXCEED SEVENTY-FIVE PERCENT
(75%) OF THE “AS IS” MARKET VALUE AS VACANT OF SUCH FACILITIES, THEN THE
BORROWER, UPON DEMAND BY THE LENDER, SHALL IMMEDIATELY PREPAY THE REAL ESTATE
TERM NOTE IN THE AMOUNT OF SUCH EXCESS, TOGETHER WITH ANY APPLICABLE PREPAYMENT
FEE.

 

Section 2.10                            Interest; Default Interest;
Participations; Usury.

 

(A)                                  REVOLVING NOTE AND REAL ESTATE TERM NOTE
INTEREST RATES.  EXCEPT AS PROVIDED IN SUBSECTIONS 2.10 (B) AND (D) BELOW, THE
PRINCIPAL AMOUNT OF EACH ADVANCE EVIDENCED BY THE REVOLVING NOTE AND THE REAL
ESTATE TERM NOTE SHALL BEAR INTEREST AT THE FLOATING RATE.

 

(B)                                 DEFAULT INTEREST RATE. AT ANY TIME DURING
ANY DEFAULT PERIOD, IN THE LENDER’S SOLE DISCRETION AND WITHOUT WAIVING ANY OF
ITS OTHER RIGHTS AND REMEDIES, THE PRINCIPAL OF THE ADVANCES OUTSTANDING FROM
TIME TO TIME SHALL BEAR INTEREST AT THE DEFAULT RATE, EFFECTIVE FOR ANY PERIODS
DESIGNATED BY THE LENDER FROM TIME TO TIME DURING THAT DEFAULT PERIOD.

 

(C)                                  PARTICIPATIONS. IF ANY PERSON SHALL ACQUIRE
A PARTICIPATION IN THE ADVANCES UNDER THIS AGREEMENT, THE BORROWER SHALL BE
OBLIGATED TO THE LENDER TO PAY THE FULL AMOUNT OF ALL INTEREST CALCULATED UNDER
THIS SECTION, ALONG WITH ALL OTHER FEES, CHARGES AND OTHER AMOUNTS DUE UNDER
THIS AGREEMENT, REGARDLESS IF SUCH PERSON ELECTS TO ACCEPT INTEREST WITH RESPECT
TO ITS PARTICIPATION AT A LOWER RATE THAN THE FLOATING RATE, OR OTHERWISE ELECTS
TO ACCEPT LESS THAN ITS PRORATA SHARE OF SUCH FEES, CHARGES AND OTHER AMOUNTS
DUE UNDER THIS AGREEMENT.

 

(D)                                 USURY. IN ANY EVENT NO RATE CHANGE SHALL BE
PUT INTO EFFECT WHICH WOULD RESULT IN A RATE GREATER THAN THE HIGHEST RATE
PERMITTED BY LAW.

 

Section 2.11                            Fees.

 

(A)                                  LETTER OF CREDIT FEES.  BORROWER SHALL PAY
TO BANK (I) FEES UPON THE ISSUANCE OF EACH LETTER OF CREDIT EQUAL TO FOUR AND
ONE-HALF OF ONE PERCENT (4.50%) PER

 

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ANNUM (COMPUTED ON THE BASIS OF A 360-DAY YEAR, ACTUAL DAYS ELAPSED) OF THE FACE
AMOUNT THEREOF, AND (II) FEES UPON THE PAYMENT OR NEGOTIATION OF EACH DRAWING
UNDER ANY LETTER OF CREDIT AND FEES UPON THE OCCURRENCE OF ANY OTHER ACTIVITY
WITH RESPECT TO ANY LETTER OF CREDIT (INCLUDING WITHOUT LIMITATION, THE
TRANSFER, AMENDMENT OR CANCELLATION OF ANY LETTER OF CREDIT) DETERMINED IN
ACCORDANCE WITH BANK’S STANDARD FEES AND CHARGES THEN IN EFFECT FOR SUCH
ACTIVITY.

 

(B)                                 AUDIT FEES. THE BORROWER SHALL PAY THE
LENDER, ON DEMAND, AUDIT FEES IN CONNECTION WITH ANY AUDITS OR INSPECTIONS
CONDUCTED BY THE LENDER OF ANY COLLATERAL OR THE BORROWER’S OPERATIONS OR
BUSINESS AT THE RATES ESTABLISHED FROM TIME TO TIME BY THE LENDER AS ITS AUDIT
FEES (WHICH FEES ARE $125 PER HOUR PER AUDITOR), TOGETHER WITH ALL ACTUAL
OUT-OF-POCKET COSTS AND EXPENSES INCURRED IN CONDUCTING ANY SUCH AUDIT OR
INSPECTION.

 

(C)                                  TERMINATION AND LINE REDUCTION FEES.  IF
THE CREDIT FACILITY IS TERMINATED (I) BY THE LENDER DURING A DEFAULT PERIOD THAT
BEGINS BEFORE A MATURITY DATE, (II) BY THE BORROWER (A) AS OF A DATE OTHER THAN
A MATURITY DATE OR (B) AS OF A MATURITY DATE BUT WITHOUT THE LENDER HAVING
RECEIVED WRITTEN NOTICE OF SUCH TERMINATION AT LEAST 90 DAYS BEFORE SUCH
MATURITY DATE, OR IF THE BORROWER REDUCES THE MAXIMUM LINE, THE BORROWER SHALL
PAY TO THE LENDER A FEE IN AN AMOUNT EQUAL TO ONE PERCENT (1.0%) OF THE MAXIMUM
LINE (OR THE REDUCTION OF THE MAXIMUM LINE, AS THE CASE MAY BE).

 

(D)                                 WAIVER OF TERMINATION FEES.  THE BORROWER
WILL NOT BE REQUIRED TO PAY THE TERMINATION FEES OTHERWISE DUE UNDER SUBSECTION
(D) IF SUCH TERMINATION IS MADE BECAUSE OF REFINANCING BY AN AFFILIATE OF THE
LENDER.

 

(E)                                  UNUSED LINE FEE. THE BORROWER AGREES TO PAY
TO THE LENDER AN UNUSED LINE FEE AT THE RATE OF 0.50% PER ANNUM ON THE AVERAGE
DAILY UNUSED AMOUNT FROM THE DATE OF THIS AGREEMENT TO AND INCLUDING THE
TERMINATION DATE, DUE AND PAYABLE MONTHLY IN ARREARS ON THE FIRST DAY OF THE
MONTH AND ON THE TERMINATION DATE.  FOR THE PURPOSES OF THIS SECTION 2.11(E),
“UNUSED AMOUNT” MEANS THE MAXIMUM LINE REDUCED BY THE SUM OF (1) OUTSTANDING
REVOLVING ADVANCES AND (2) THE L/C AMOUNT.

 

(F)                                    OTHER FEES. THE LENDER MAY FROM TIME TO
TIME, UPON FIVE (5) DAYS PRIOR NOTICE TO THE BORROWER DURING A DEFAULT PERIOD,
CHARGE ADDITIONAL FEES FOR REVOLVING ADVANCES MADE IN EXCESS OF THE BORROWING
BASE, FOR LATE DELIVERY OF REPORTS, IN LIEU OF IMPOSING INTEREST AT THE DEFAULT
RATE, AND FOR OTHER REASONS. THE BORROWER’S REQUEST FOR A REVOLVING ADVANCE AT
ANY TIME AFTER SUCH NOTICE IS GIVEN AND SUCH FIVE (5) DAY PERIOD HAS ELAPSED
SHALL CONSTITUTE THE BORROWER’S AGREEMENT TO PAY THE FEES DESCRIBED IN SUCH
NOTICE.

 

Section 2.12                            Time for Interest Payments; Payment on
Non-Banking Days; Computation of Interest and Fees.

 

(A)                                  TIME FOR INTEREST PAYMENTS. INTEREST
ACCRUING ON ADVANCES SHALL BE DUE AND PAYABLE IN ARREARS ON THE LAST DAY OF EACH
MONTH AND ON THE TERMINATION DATE.

 

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(B)                                 PAYMENT ON NON-BANKING DAYS. WHENEVER ANY
PAYMENT TO BE MADE HEREUNDER SHALL BE STATED TO BE DUE ON A DAY WHICH IS NOT A
BANKING DAY, SUCH PAYMENT MAY BE MADE ON THE NEXT SUCCEEDING BANKING DAY, AND
SUCH EXTENSION OF TIME SHALL IN SUCH CASE BE INCLUDED IN THE COMPUTATION OF
INTEREST ON THE ADVANCES OR THE FEES HEREUNDER, AS THE CASE MAY BE.

 

(C)                                  COMPUTATION OF INTEREST AND FEES. INTEREST
ACCRUING ON THE OUTSTANDING PRINCIPAL BALANCE OF THE ADVANCES AND FEES HEREUNDER
OUTSTANDING FROM TIME TO TIME SHALL BE COMPUTED ON THE BASIS OF ACTUAL NUMBER OF
DAYS ELAPSED IN A YEAR OF 360 DAYS.

 

Section 2.13                            Voluntary Prepayment; Reduction of the
Maximum Line; Termination of the Credit Facility by the Borrower. Except as
otherwise provided herein, the Borrower may prepay the Advances in whole at any
time or from time to time in part. The Borrower may terminate the Credit
Facility or reduce the Maximum Line at any time if it (i) gives the Lender at
least 30 days’ prior written notice and (ii) pays the Lender termination or
Maximum Line reduction fees in accordance with Section 2.11(c).  Any reduction
in the Maximum Line must be in an amount of not less than $500,000 or an
integral multiple thereof. If the Borrower reduces the Maximum Line to zero, all
Obligations shall be immediately due and payable. Subject to termination of the
Credit Facility and payment and performance of all Obligations, the Lender
shall, at the Borrower’s expense, release or terminate the Security Interest and
the Security Documents to which the Borrower is entitled by law.

 

Section 2.14                            Mandatory Prepayment. Without notice or
demand, if the sum of the outstanding principal balance of the Revolving
Advances plus the L/C Amount shall at any time exceed the Borrowing Base, the
Borrower shall (i) first, immediately prepay the Revolving Advances to the
extent necessary to eliminate such excess; and (ii) if prepayment in full of the
Revolving Advances is insufficient to eliminate such excess, pay to the Lender
in immediately available funds for deposit in the Special Account an amount
equal to the remaining excess. Any payment received by the Lender under this
Section 2.14 or under Section 2.13 may be applied to the Obligations, in such
order and in such amounts as the Lender, in its discretion, may from time to
time determine.

 

Section 2.15                            Revolving Advances to Pay Obligations.
Notwithstanding anything in Section 2.1 to the contrary, the Lender may, in its
discretion at any time or from time to time, without the Borrower’s request and
even if the conditions set forth in Section 4.2 would not be satisfied, make a
Revolving Advance in an amount equal to the portion of the Obligations from time
to time due and payable.

 

Section 2.16                            Use of Proceeds. The Borrower shall use
the proceeds of Advances and each Letter of Credit for ordinary working capital
purposes.

 

Section 2.17                            Liability Records. The Lender may
maintain from time to time, at its discretion, records as to the Obligations.
All entries made on any such record shall be presumed correct until the Borrower
establishes the contrary. Upon the Lender’s demand, the Borrower will admit and
certify in writing the exact principal balance of the Obligations that the
Borrower then

 

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asserts to be outstanding. Any billing statement or accounting rendered by the
Lender shall be conclusive and fully binding on the Borrower unless the Borrower
gives the Lender specific written notice of exception within 30 days after
receipt.

 

SECTION 2.18                            COLLATERAL ACCOUNT AND SWEEP OF FUNDS.

 

(A)                                  IMPLEMENTATION OF COLLATERAL ACCOUNT.  AT
THE REQUEST OF LENDER, THE BORROWER SHALL EXECUTE AND DELIVER DOCUMENTATION
NECESSARY TO ESTABLISH A BANK ACCOUNT TO BE OPERATED AND MAINTAINED IN
BORROWER’S NAME EXCLUSIVELY FOR THE BENEFIT OF THE LENDER (THE “COLLATERAL
ACCOUNT”).  THE BORROWER UNDERSTANDS THAT IT SHALL HAVE NO RIGHT TO MAKE OR
COUNTERMAND WITHDRAWALS FROM THE COLLATERAL ACCOUNT.  AMOUNTS IN THE COLLATERAL
ACCOUNT SHALL NOT BEAR INTEREST AND BORROWER SHALL TAKE ALL NECESSARY STEPS TO
GRANT THE LENDER A FIRST PERFECTED SECURITY INTEREST IN ALL OF THE FUNDS ON
DEPOSIT IN THE COLLATERAL ACCOUNT FROM TIME TO TIME AND ALL PROCEEDS THEREOF, TO
SECURE THE OBLIGATIONS.

 

(B)                                 USE OF COLLATERAL ACCOUNT.  UPON THE
CREATION OF THE COLLATERAL ACCOUNT AT LENDER’S REQUEST, ALL AMOUNTS COLLECTED
THROUGH THE BORROWER’S LOCKBOX ARRANGEMENT SHALL BE DEPOSITED INTO THE
COLLATERAL ACCOUNT.  IN ADDITION, ANY FUNDS RECEIVED DIRECTLY BY THE BORROWER,
WHETHER AS PAYMENTS ON ACCOUNTS, OR OTHERWISE, SHALL BE DEPOSITED INTO THE
COLLATERAL ACCOUNT.  ALL DEPOSITS IN THE COLLATERAL ACCOUNT SHALL CONSTITUTE
PROCEEDS OF COLLATERAL AND SHALL NOT CONSTITUTE PAYMENT OF THE OBLIGATIONS.  ALL
ITEMS DEPOSITED IN THE COLLATERAL ACCOUNT SHALL BE SUBJECT TO FINAL PAYMENT.  IF
ANY SUCH ITEM IS RETURNED UNCOLLECTED, THE BORROWER WILL IMMEDIATELY PAY THE
LENDER, OR FOR ITEMS DEPOSITED IN THE COLLATERAL ACCOUNT, THE BANK MAINTAINING
SUCH ACCOUNT, THE AMOUNT OF THAT ITEM, OR SUCH BANK MAY CHARGE ANY UNCOLLECTED
ITEM TO THE BORROWER’S COMMERCIAL OR OTHER ACCOUNT.  THE BORROWER SHALL BE
LIABLE AS AN ENDORSER ON ALL ITEMS DEPOSITED IN THE COLLATERAL ACCOUNT, WHETHER
OR NOT IN FACT ENDORSED BY THE BORROWER.

 

(C)                                  SWEEP OF FUNDS.  THE LENDER SHALL FROM TIME
TO TIME, IN ACCORDANCE WITH AN AGREEMENT BETWEEN THE PARTIES, CAUSE FUNDS IN THE
COLLATERAL ACCOUNT TO BE TRANSFERRED TO THE LENDER’S GENERAL ACCOUNT FOR PAYMENT
OF THE OBLIGATIONS.  AMOUNTS DEPOSITED IN THE COLLATERAL ACCOUNT SHALL NOT BE
SUBJECT TO WITHDRAWAL BY THE BORROWER, EXCEPT AFTER PAYMENT IN FULL AND
DISCHARGE OF ALL OF THE OBLIGATIONS.

 

ARTICLE III.
SECURITY INTEREST; OCCUPANCY; SETOFF

 

Section 3.1                                   Grant of Security Interest. The
Borrower hereby pledges, assigns and grants to the Lender a lien and security
interest (collectively referred to as the “Security Interest”) in the
Collateral, as security for the payment and performance of the Obligations. Upon
request by the Lender, the Borrower will grant the Lender a security interest in
all commercial tort claims it may have against any Person.

 

Section 3.2                                   Notification of Account Debtors
and Other Obligors. The Lender may at any time (whether or not a Default Period
then exists) notify any account debtor or other

 

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person obligated to pay the amount due that such right to payment has been
assigned or transferred to the Lender for security and shall be paid directly to
the Lender. The Borrower will join in giving such notice if the Lender so
requests. At any time after the Borrower or the Lender gives such notice to an
account debtor or other obligor, the Lender may, but need not, in the Lender’s
name or in the Borrower’s name, (a) demand, sue for, collect or receive any
money or property at any time payable or receivable on account of, or securing,
any such right to payment, or grant any extension to, make any compromise or
settlement with or otherwise agree to waive, modify, amend or change the
obligations (including collateral obligations) of any such account debtor or
other obligor; and (b) as the Borrower’s agent and attorney-in-fact, notify the
United States Postal Service to change the address for delivery of the
Borrower’s mail to any address designated by the Lender, otherwise intercept the
Borrower’s mail, and receive, open and dispose of the Borrower’s mail, applying
all Collateral as permitted under this Agreement and holding all other mail for
the Borrower’s account or forwarding such mail to the Borrower’s last known
address.

 

Section 3.3                                   Assignment of Insurance. As
additional security for the payment and performance of the Obligations, the
Borrower hereby assigns to the Lender any and all monies (including proceeds of
insurance and refunds of unearned premiums) due or to become due under, and all
other rights of the Borrower with respect to, any and all policies of insurance
now or at any time hereafter covering the Collateral or any evidence thereof or
any business records or valuable papers pertaining thereto, and the Borrower
hereby directs the issuer of any such policy to pay all such monies directly to
the Lender. At any time, whether or not a Default Period then exists, the Lender
may (but need not), in the Lender’s name or in the Borrower’s name, execute and
deliver proof of claim, receive all such monies, endorse checks and other
instruments representing payment of such monies, and adjust, litigate,
compromise or release any claim against the issuer of any such policy.

 

Section 3.4                                   Occupancy.  In addition to and
without limiting the Lender’s rights under the Mortgages, the Borrower agrees to
and grants each of the following rights to the Lender.

 

(A)                                  THE BORROWER HEREBY IRREVOCABLY GRANTS TO
THE LENDER THE RIGHT TO TAKE EXCLUSIVE POSSESSION OF THE PREMISES AT ANY TIME
DURING A DEFAULT PERIOD.

 

(B)                                 THE LENDER MAY USE THE PREMISES ONLY TO
HOLD, PROCESS, MANUFACTURE, SELL, USE, STORE, LIQUIDATE, REALIZE UPON OR
OTHERWISE DISPOSE OF GOODS THAT ARE COLLATERAL AND FOR OTHER PURPOSES THAT THE
LENDER MAY IN GOOD FAITH DEEM TO BE RELATED OR INCIDENTAL PURPOSES.

 

(C)                                  THE LENDER’S RIGHT TO HOLD THE PREMISES
SHALL CEASE AND TERMINATE UPON THE EARLIER OF (I) PAYMENT IN FULL AND DISCHARGE
OF ALL OBLIGATIONS AND TERMINATION OF THE CREDIT FACILITY, AND (II) FINAL SALE
OR DISPOSITION OF ALL GOODS CONSTITUTING COLLATERAL AND DELIVERY OF ALL SUCH
GOODS TO PURCHASERS.

 

(D)                                 THE LENDER SHALL NOT BE OBLIGATED TO PAY OR
ACCOUNT FOR ANY RENT OR OTHER COMPENSATION FOR THE POSSESSION, OCCUPANCY OR USE
OF ANY OF THE PREMISES; PROVIDED,

 

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HOWEVER, THAT IF THE LENDER DOES PAY OR ACCOUNT FOR ANY RENT OR OTHER
COMPENSATION FOR THE POSSESSION, OCCUPANCY OR USE OF ANY OF THE PREMISES, THE
BORROWER SHALL REIMBURSE THE LENDER PROMPTLY FOR THE FULL AMOUNT THEREOF. IN
ADDITION, THE BORROWER WILL PAY, OR REIMBURSE THE LENDER FOR, ALL TAXES, FEES,
DUTIES, IMPOSTS, CHARGES AND EXPENSES AT ANY TIME INCURRED BY OR IMPOSED UPON
THE LENDER BY REASON OF THE EXECUTION, DELIVERY, EXISTENCE, RECORDATION,
PERFORMANCE OR ENFORCEMENT OF THIS AGREEMENT OR THE PROVISIONS OF THIS
SECTION 3.4.

 

Section 3.5                                   License. Without limiting the
generality of any other Security Document, the Borrower hereby grants to the
Lender a non-exclusive, worldwide and royalty-free license to use or otherwise
exploit all Intellectual Property Rights of the Borrower for the purpose of:
(a) completing the manufacture of any in-process materials during any Default
Period so that such materials become saleable Inventory, all in accordance with
the same quality standards previously adopted by the Borrower for its own
manufacturing and subject to the Borrower’s reasonable exercise of quality
control; and (b) selling, leasing or otherwise disposing of any or all
Collateral during any Default Period.

 

Section 3.6                                   Financing Statement. The Borrower
authorizes the Lender to file from time to time where permitted by law, such
financing statements against collateral described as “all personal property” as
the Lender deems necessary or useful to perfect the Security Interest. A carbon,
photographic or other reproduction of this Agreement or of any financing
statements signed by the Borrower is sufficient as a financing statement and may
be filed as a financing statement in any state to perfect the security interests
granted hereby. For this purpose, the following information is set forth:

 

Name and address of Debtor:

 

Nortech Systems, Incorporated

1120 Wayzata Blvd. East, Suite 201

Wayzata, MN 55391

Federal Employer Identification No. 41-1681094

 

Name and address of Secured Party:

 

Ann Spry

Wells Fargo Bank, N.A.

MAC N9305-198 90

South 7th Street, 19th Floor

Minneapolis, MN 55402

 

Section 3.7                                   Setoff. The Lender may at any time
or from time to time, at its sole discretion and without demand and without
notice to anyone, setoff any liability owed to the Borrower by the Lender,
whether or not due, against any Obligation, whether or not due. In addition,
each other Person holding a participating interest in any Obligations shall have
the right to appropriate or setoff any deposit or other liability then owed by
such Person to the Borrower, whether or not due, and apply the same to the
payment of said participating interest, as fully as if such Person had lent
directly to the Borrower the amount of such participating interest.

 

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Section 3.8                                   Collateral. This Agreement does
not contemplate a sale of accounts, contract rights or chattel paper, and, as
provided by law, the Borrower is entitled to any surplus and shall remain liable
for any deficiency. The Lender’s duty of care with respect to Collateral in its
possession (as imposed by law) shall be deemed fulfilled if it exercises
reasonable care in physically keeping such Collateral, or in the case of
Collateral in the custody or possession of a bailee or other third person,
exercises reasonable care in the selection of the bailee or other third person,
and the Lender need not otherwise preserve, protect, insure or care for any
Collateral. The Lender shall not be obligated to preserve any rights the
Borrower may have against prior parties, to realize on the Collateral at all or
in any particular manner or order or to apply any cash proceeds of the
Collateral in any particular order of application. The Lender has no obligation
to clean up or otherwise prepare the Collateral for sale. The Borrower waives
any right it may have to require the Lender to pursue any third person for any
of the Obligations.

 

ARTICLE IV.
CONDITIONS OF LENDING

 

Section 4.1                                   Conditions Precedent to the
Initial Revolving Advance and Letter of Credit. The Lender’s obligation to make
the initial Revolving Advance hereunder or to cause any Letters of Credit to be
issued shall be subject to the condition precedent that the Lender shall have
received all of the following, each in form and substance satisfactory to the
Lender:

 

(A)                                  THIS AGREEMENT, PROPERLY EXECUTED BY THE
BORROWER.

 

(B)                                 THE NOTES, PROPERLY EXECUTED BY THE
BORROWER.

 

(C)                                  A TRUE AND CORRECT COPY OF ANY AND ALL
LEASES PURSUANT TO WHICH THE BORROWER IS LEASING ANY OF THE PREMISES, TOGETHER
WITH A LANDLORD’S DISCLAIMER AND CONSENT WITH RESPECT TO EACH SUCH LEASE.

 

(D)                                 A TRUE AND CORRECT COPY OF ANY AND ALL
MORTGAGES PURSUANT TO WHICH THE BORROWER HAS MORTGAGED THE PREMISES, TOGETHER
WITH A MORTGAGEE’S DISCLAIMER AND CONSENT WITH RESPECT TO EACH SUCH MORTGAGE.

 

(E)                                  A TRUE AND CORRECT COPY OF ANY AND ALL
AGREEMENTS PURSUANT TO WHICH THE BORROWER’S PROPERTY IS IN THE POSSESSION OF ANY
PERSON OTHER THAN THE BORROWER, TOGETHER WITH, IN THE CASE OF ANY GOODS HELD BY
SUCH PERSON FOR RESALE, (I) A CONSIGNEE’S ACKNOWLEDGMENT AND WAIVER OF LIENS,
(II) UCC FINANCING STATEMENTS SUFFICIENT TO PROTECT THE BORROWER’S AND THE
LENDER’S INTERESTS IN SUCH GOODS, AND (III) UCC SEARCHES SHOWING THAT NO OTHER
SECURED PARTY HAS FILED A FINANCING STATEMENT AGAINST SUCH PERSON AND COVERING
PROPERTY SIMILAR TO THE BORROWER’S OTHER THAN THE BORROWER, OR IF THERE EXISTS
ANY SUCH SECURED PARTY, EVIDENCE THAT EACH SUCH SECURED PARTY HAS RECEIVED
NOTICE FROM THE BORROWER AND THE LENDER SUFFICIENT TO PROTECT THE BORROWER’S AND
THE LENDER’S INTERESTS IN THE BORROWER’S GOODS FROM ANY CLAIM BY SUCH SECURED
PARTY.

 

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(F)                                    AN ACKNOWLEDGMENT AND WAIVER OF LIENS
FROM EACH WAREHOUSE IN WHICH THE BORROWER IS STORING INVENTORY.

 

(G)                                 A TRUE AND CORRECT COPY OF ANY AND ALL
AGREEMENTS PURSUANT TO WHICH THE BORROWER’S PROPERTY IS IN THE POSSESSION OF ANY
PERSON OTHER THAN THE BORROWER, TOGETHER WITH, (I) AN ACKNOWLEDGMENT AND WAIVER
OF LIENS FROM EACH SUBCONTRACTOR WHO HAS POSSESSION OF THE BORROWER’S GOODS FROM
TIME TO TIME, (II) UCC FINANCING STATEMENTS SUFFICIENT TO PROTECT THE BORROWER’S
AND THE LENDER’S INTERESTS IN SUCH GOODS, AND (III) UCC SEARCHES SHOWING THAT NO
OTHER SECURED PARTY HAS FILED A FINANCING STATEMENT COVERING SUCH PERSON’S
PROPERTY OTHER THAN THE BORROWER, OR IF THERE EXISTS ANY SUCH SECURED PARTY,
EVIDENCE THAT EACH SUCH SECURED PARTY HAS RECEIVED NOTICE FROM THE BORROWER AND
THE LENDER SUFFICIENT TO PROTECT THE BORROWER’S AND THE LENDER’S INTERESTS IN
THE BORROWER’S GOODS FROM ANY CLAIM BY SUCH SECURED PARTY.

 

(H)                                 AN OPINION OF BORROWER’S OUTSIDE COUNSEL,
ADDRESSED TO LENDER.

 

(I)                                     SUPPORT AGREEMENT EXECUTED BY EACH OF
MICHAEL J. DEGEN AND RICHARD G. WASIELEWSKI IN HIS PERSONAL CAPACITY IN FAVOR OF
THE LENDER.

 

(J)                                     BANK AGENCY OR CONTROL AGREEMENTS,
PROPERLY EXECUTED BY THE BORROWER AND EACH BANK AT WHICH THE BORROWER MAINTAINS
DEPOSIT ACCOUNTS.

 

(K)                                  CURRENT SEARCHES OF APPROPRIATE FILING
OFFICES SHOWING THAT (I) NO LIENS HAVE BEEN FILED AND REMAIN IN EFFECT AGAINST
THE BORROWER EXCEPT PERMITTED LIENS OR LIENS HELD BY PERSONS WHO HAVE AGREED IN
WRITING THAT UPON RECEIPT OF PROCEEDS OF THE INITIAL ADVANCES, THEY WILL
SATISFY, RELEASE OR TERMINATE SUCH LIENS IN A MANNER SATISFACTORY TO THE LENDER,
AND (II) THE LENDER HAS DULY FILED ALL FINANCING STATEMENTS NECESSARY TO PERFECT
THE SECURITY INTEREST, TO THE EXTENT THE SECURITY INTEREST IS CAPABLE OF BEING
PERFECTED BY FILING.

 

(L)                                     A CERTIFICATE OF THE BORROWER’S
SECRETARY OR ASSISTANT SECRETARY CERTIFYING THAT ATTACHED TO SUCH CERTIFICATE
ARE (I) THE RESOLUTIONS OF THE BORROWER’S DIRECTORS AND, IF REQUIRED, OWNERS,
AUTHORIZING THE EXECUTION, DELIVERY AND PERFORMANCE OF THE LOAN DOCUMENTS,
(II) TRUE, CORRECT AND COMPLETE COPIES OF THE BORROWER’S CONSTITUENT DOCUMENTS,
AND (III) EXAMPLES OF THE SIGNATURES OF THE BORROWER’S OFFICERS OR AGENTS
AUTHORIZED TO EXECUTE AND DELIVER THE LOAN DOCUMENTS AND OTHER INSTRUMENTS,
AGREEMENTS AND CERTIFICATES, INCLUDING ADVANCE REQUESTS, ON THE BORROWER’S
BEHALF.

 

(M)                               A CURRENT CERTIFICATE ISSUED BY THE SECRETARY
OF STATE OF MINNESOTA, CERTIFYING THAT THE BORROWER IS IN COMPLIANCE WITH ALL
APPLICABLE ORGANIZATIONAL REQUIREMENTS OF THE STATE OF MINNESOTA.

 

(N)                                 EVIDENCE THAT THE BORROWER IS DULY LICENSED
OR QUALIFIED TO TRANSACT BUSINESS IN ALL JURISDICTIONS WHERE THE CHARACTER OF
THE PROPERTY OWNED OR LEASED OR THE NATURE OF THE BUSINESS TRANSACTED BY IT
MAKES SUCH LICENSING OR QUALIFICATION NECESSARY.

 

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(O)                                 A CERTIFICATE OF AN OFFICER OF THE BORROWER
CONFIRMING, IN HIS PERSONAL CAPACITY, THE REPRESENTATIONS AND WARRANTIES SET
FORTH IN ARTICLE V.

 

(P)                                 CERTIFICATES OF THE INSURANCE REQUIRED
HEREUNDER, WITH ALL HAZARD INSURANCE CONTAINING A LENDER’S LOSS PAYABLE
ENDORSEMENT IN THE LENDER’S FAVOR AND WITH ALL LIABILITY INSURANCE NAMING THE
LENDER AS AN ADDITIONAL INSURED.

 

(Q)                                 PAYMENT OF THE FEES AND COMMISSIONS DUE
UNDER SECTION 2.11 THROUGH THE DATE OF THE INITIAL ADVANCE OR LETTER OF CREDIT
AND EXPENSES INCURRED BY THE LENDER THROUGH SUCH DATE AND REQUIRED TO BE PAID BY
THE BORROWER UNDER SECTION 8.6, INCLUDING ALL LEGAL EXPENSES INCURRED THROUGH
THE DATE OF THIS AGREEMENT.

 

(R)                                    SUCH OTHER DOCUMENTS AS THE LENDER IN ITS
SOLE DISCRETION MAY REQUIRE.

 

Section 4.2                                   Conditions Precedent to All
Advances and Letters of Credit. The Lender’s obligation to make each Advance and
to cause each Letter of Credit to be issued shall be subject to the further
conditions precedent that:

 

(A)                                  THE REPRESENTATIONS AND WARRANTIES
CONTAINED IN ARTICLE V ARE CORRECT ON AND AS OF THE DATE OF SUCH ADVANCE OR
ISSUANCE OF A LETTER OF CREDIT AS THOUGH MADE ON AND AS OF SUCH DATE, EXCEPT TO
THE EXTENT THAT SUCH REPRESENTATIONS AND WARRANTIES RELATE SOLELY TO AN EARLIER
DATE; AND

 

(B)                                 NO EVENT HAS OCCURRED AND IS CONTINUING, OR
WOULD RESULT FROM SUCH ADVANCE OR ISSUANCE OF A LETTER OF CREDIT WHICH
CONSTITUTES A DEFAULT OR AN EVENT OF DEFAULT.

 

ARTICLE V.
REPRESENTATIONS AND WARRANTIES

 

The Borrower represents and warrants to the Lender as follows:

 

Section 5.1                                   Existence and Power; Name; Chief
Executive Office; Inventory and Equipment Locations; Federal Employer
Identification Number. The Borrower is a corporation, duly organized, validly
existing and in good standing under the laws of the State of Minnesota, and is
duly licensed or qualified to transact business in all jurisdictions where the
character of the property owned or leased or the nature of the business
transacted by it makes such licensing or qualification necessary. The Borrower
has all requisite power and authority to conduct its business, to own its
properties and to execute and deliver, and to perform all of its obligations
under, the Loan Documents. During its existence, the Borrower has done business
solely under the names set forth in Schedule 5.1 and all of the Borrower’s
records relating to its business or the Collateral are kept at that location.
The Borrower’s chief executive office and principal place of business is located
at the address set forth in Schedule 5.1. All Inventory and Equipment is located
at that location or at one of the other locations listed in Schedule 5.1. The
Borrower’s federal employer identification number is correctly set forth in
Section 3.6.

 

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Section 5.2                                   Capitalization. Schedule 5.2
constitutes a correct and complete list of all Persons holding ownership
interests and rights to acquire ownership interests which if fully exercised
would cause such Person to hold more than five percent (5%) of all ownership
interests of the Borrower on a fully diluted basis, and an organizational chart
showing the ownership structure of all Subsidiaries of the Borrower.

 

Section 5.3                                   Authorization of Borrowing; No
Conflict as to Law or Agreements. The execution, delivery and performance by the
Borrower of the Loan Documents and the borrowings from time to time hereunder
have been duly authorized by all necessary corporate action and do not and will
not (i) require any consent or approval of the Borrower’s Owners; (ii) require
any authorization, consent or approval by, or registration, declaration or
filing with, or notice to, any governmental department, commission, board,
bureau, agency or instrumentality, domestic or foreign, or any third party,
except such authorization, consent, approval, registration, declaration, filing
or notice as has been obtained, accomplished or given prior to the date hereof;
(iii) violate any provision of any law, rule or regulation (including
Regulation X of the Board of Governors of the Federal Reserve System) or of any
order, writ, injunction or decree presently in effect having applicability to
the Borrower or of the Borrower’s Constituent Documents; (iv) result in a breach
of or constitute a default under any indenture or loan or credit agreement or
any other material agreement, lease or instrument to which the Borrower is a
party or by which it or its properties may be bound or affected; or (v) result
in, or require, the creation or imposition of any Lien (other than the Security
Interest) upon or with respect to any of the properties now owned or hereafter
acquired by the Borrower.

 

Section 5.4                                   Legal Agreements. This Agreement
constitutes and, upon due execution by the Borrower, the other Loan Documents
will constitute the legal, valid and binding obligations of the Borrower,
enforceable against the Borrower in accordance with their respective terms.

 

Section 5.5                                   Subsidiaries. Except as set forth
in Schedule 5.5 hereto, the Borrower has no Subsidiaries.

 

Section 5.6                                   Financial Condition; No Adverse
Change. The Borrower has furnished to the Lender its audited financial
statements for its fiscal year ended December 31, 2008 and unaudited financial
statements for the fiscal-year-to-date period ended June 30, 2009, and those
statements fairly present the Borrower’s financial condition on the dates
thereof and the results of its operations and cash flows for the periods then
ended and were prepared in accordance with generally accepted accounting
principles. Since the date of the most recent financial statements, there has
been no change in the Borrower’s business, properties or condition (financial or
otherwise) which has had a Material Adverse Effect.

 

Section 5.7                                   Litigation. There are no actions,
suits or proceedings pending or, to the Borrower’s knowledge, threatened against
or affecting the Borrower or any of its Affiliates or the properties of the
Borrower or any of its Affiliates before any court or governmental department,
commission, board, bureau, agency or instrumentality, domestic or foreign,
which, if determined adversely to the Borrower or any of its Affiliates, would
have a Material Adverse Effect.

 

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Section 5.8                                   Regulation U. The Borrower is not
engaged in the business of extending credit for the purpose of purchasing or
carrying margin stock (within the meaning of Regulation U 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 any margin stock.

 

Section 5.9                                   Taxes. The Borrower and its
Affiliates have paid or caused to be paid to the proper authorities when due all
federal, state and local taxes required to be withheld by each of them. The
Borrower and its Affiliates have filed all federal, state and local tax returns
which to the knowledge of the Officers of the Borrower or any Affiliate, as the
case may be, are required to be filed, and the Borrower and its Affiliates have
paid or caused to be paid to the respective taxing authorities all taxes as
shown on said returns or on any assessment received by any of them to the extent
such taxes have become due.

 

Section 5.10                            Titles and Liens. The Borrower has good
and absolute title to all Collateral and the “Mortgaged Property” (as such term
is defined in the Mortgage) free and clear of all Liens other than Permitted
Liens and “Permitted Encumbrances” (as such term is defined in the Mortgage). No
financing statement naming the Borrower as debtor is on file in any office
except to perfect only Permitted Liens.

 

Section 5.11                            Intellectual Property Rights.

 

(A)                                  OWNED INTELLECTUAL PROPERTY. SCHEDULE 5.11
IS A COMPLETE LIST OF ALL PATENTS, APPLICATIONS FOR PATENTS, TRADEMARKS,
APPLICATIONS FOR TRADEMARKS, SERVICE MARKS, APPLICATIONS FOR SERVICE MARKS, MASK
WORKS, TRADE DRESS AND COPYRIGHTS FOR WHICH THE BORROWER IS THE REGISTERED OWNER
(THE “OWNED INTELLECTUAL PROPERTY”). EXCEPT AS DISCLOSED ON SCHEDULE 5.11,
(I) THE BORROWER OWNS THE OWNED INTELLECTUAL PROPERTY FREE AND CLEAR OF ALL
RESTRICTIONS (INCLUDING COVENANTS NOT TO SUE A THIRD PARTY), COURT ORDERS,
INJUNCTIONS, DECREES, WRITS OR LIENS, WHETHER BY WRITTEN AGREEMENT OR OTHERWISE,
(II) NO PERSON OTHER THAN THE BORROWER OWNS OR HAS BEEN GRANTED ANY RIGHT IN THE
OWNED INTELLECTUAL PROPERTY, (III) ALL OWNED INTELLECTUAL PROPERTY IS VALID,
SUBSISTING AND ENFORCEABLE AND (IV) THE BORROWER HAS TAKEN ALL COMMERCIALLY
REASONABLE ACTION NECESSARY TO MAINTAIN AND PROTECT THE OWNED INTELLECTUAL
PROPERTY.

 

(B)                                 INTELLECTUAL PROPERTY RIGHTS LICENSED FROM
OTHERS. SCHEDULE 5.11 IS A COMPLETE LIST OF ALL AGREEMENTS UNDER WHICH THE
BORROWER HAS LICENSED INTELLECTUAL PROPERTY RIGHTS FROM ANOTHER PERSON
(“LICENSED INTELLECTUAL PROPERTY”) OTHER THAN READILY AVAILABLE, NON-NEGOTIATED
LICENSES OF COMPUTER SOFTWARE AND OTHER INTELLECTUAL PROPERTY USED SOLELY FOR
PERFORMING ACCOUNTING, WORD PROCESSING AND SIMILAR ADMINISTRATIVE TASKS
(“OFF-THE-SHELF SOFTWARE”) AND A SUMMARY OF ANY ONGOING PAYMENTS THE BORROWER IS
OBLIGATED TO MAKE WITH RESPECT THERETO. EXCEPT AS DISCLOSED ON SCHEDULE 5.11 AND
IN WRITTEN AGREEMENTS COPIES OF WHICH HAVE BEEN GIVEN TO THE LENDER, THE
BORROWER’S LICENSES TO USE THE LICENSED INTELLECTUAL PROPERTY ARE FREE AND CLEAR
OF ALL RESTRICTIONS, LIENS, COURT ORDERS, INJUNCTIONS, DECREES, OR WRITS,
WHETHER BY WRITTEN AGREEMENT OR OTHERWISE. EXCEPT AS DISCLOSED ON SCHEDULE 5.11,
THE BORROWER IS NOT

 

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OBLIGATED OR UNDER ANY LIABILITY WHATSOEVER TO MAKE ANY PAYMENTS OF A MATERIAL
NATURE BY WAY OF ROYALTIES, FEES OR OTHERWISE TO ANY OWNER OF, LICENSOR OF, OR
OTHER CLAIMANT TO, ANY INTELLECTUAL PROPERTY RIGHTS.

 

(C)                                  OTHER INTELLECTUAL PROPERTY NEEDED FOR
BUSINESS. EXCEPT FOR OFF-THE-SHELF SOFTWARE AND AS DISCLOSED ON SCHEDULE 5.11,
THE OWNED INTELLECTUAL PROPERTY AND THE LICENSED INTELLECTUAL PROPERTY
CONSTITUTE ALL INTELLECTUAL PROPERTY RIGHTS USED OR NECESSARY TO CONDUCT THE
BORROWER’S BUSINESS AS IT IS PRESENTLY CONDUCTED OR AS THE BORROWER REASONABLY
FORESEES CONDUCTING IT.

 

(D)                                 INFRINGEMENT. EXCEPT AS DISCLOSED ON
SCHEDULE 5.11, THE BORROWER HAS NO KNOWLEDGE OF, AND HAS NOT RECEIVED ANY
WRITTEN CLAIM OR NOTICE ALLEGING, ANY INFRINGEMENT OF ANOTHER PERSON’S
INTELLECTUAL PROPERTY RIGHTS (INCLUDING ANY WRITTEN CLAIM THAT THE BORROWER MUST
LICENSE OR REFRAIN FROM USING THE INTELLECTUAL PROPERTY RIGHTS OF ANY THIRD
PARTY) NOR, TO THE BORROWER’S KNOWLEDGE, IS THERE ANY THREATENED CLAIM OR ANY
REASONABLE BASIS FOR ANY SUCH CLAIM.

 

Section 5.12                            Plans. Except as disclosed to the Lender
in writing prior to the date hereof, neither the Borrower nor any ERISA
Affiliate (i) maintains or has maintained any Pension Plan, (ii) contributes or
has contributed to any Multiemployer Plan or (iii) provides or has provided
post-retirement medical or insurance benefits with respect to employees or
former employees (other than benefits required under Section 601 of ERISA,
Section 4980B of the IRC or applicable state law). Neither the Borrower nor any
ERISA Affiliate has received any notice or has any knowledge to the effect that
it is not in full compliance with any of the requirements of ERISA, the IRC or
applicable state law with respect to any Plan. No Reportable Event exists in
connection with any Pension Plan. Each Plan which is intended to qualify under
the IRC is so qualified, and no fact or circumstance exists which may have an
adverse effect on the Plan’s tax-qualified status. Neither the Borrower nor any
ERISA Affiliate has (i) any accumulated funding deficiency (as defined in
Section 302 of ERISA and Section 412 of the IRC) under any Plan, whether or not
waived, (ii) any liability under Section 4201 or 4243 of ERISA for any
withdrawal, partial withdrawal, reorganization or other event under any
Multiemployer Plan or (iii) any liability or knowledge of any facts or
circumstances which could result in any liability to the Pension Benefit
Guaranty Corporation, the Internal Revenue Service, the Department of Labor or
any participant in connection with any Plan (other than routine claims for
benefits under the Plan).

 

Section 5.13                            Default. The Borrower is in compliance
with all provisions of all agreements, instruments, decrees and orders to which
it is a party or by which it or its property is bound or affected, the breach or
default of which could have a material adverse effect on the Borrower’s
financial condition, properties or operations a Material Adverse Effect.

 

Section 5.14                            Environmental Matters.

 

(A)                                  TO THE BORROWER’S BEST KNOWLEDGE, THERE ARE
NOT PRESENT IN, ON OR UNDER THE PREMISES ANY HAZARDOUS SUBSTANCES IN SUCH FORM
OR QUANTITY AS TO CREATE ANY MATERIAL

 

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LIABILITY OR OBLIGATION FOR EITHER THE BORROWER OR THE LENDER UNDER COMMON LAW
OF ANY JURISDICTION OR UNDER ANY ENVIRONMENTAL LAW, AND NO HAZARDOUS SUBSTANCES
HAVE EVER BEEN STORED, BURIED, SPILLED, LEAKED, DISCHARGED, EMITTED OR RELEASED
IN, ON OR UNDER THE PREMISES IN SUCH A WAY AS TO CREATE ANY SUCH MATERIAL
LIABILITY.

 

(B)                                 TO THE BORROWER’S BEST KNOWLEDGE, THE
BORROWER HAS NOT DISPOSED OF HAZARDOUS SUBSTANCES IN SUCH A MANNER AS TO CREATE
ANY MATERIAL LIABILITY UNDER ANY ENVIRONMENTAL LAW.

 

(C)                                  THERE ARE NOT AND THERE NEVER HAVE BEEN ANY
REQUESTS, CLAIMS, NOTICES, INVESTIGATIONS, DEMANDS, ADMINISTRATIVE PROCEEDINGS,
HEARINGS OR LITIGATION, RELATING IN ANY WAY TO THE PREMISES OR THE BORROWER,
ALLEGING MATERIAL LIABILITY UNDER, VIOLATION OF, OR NONCOMPLIANCE WITH ANY
ENVIRONMENTAL LAW OR ANY LICENSE, PERMIT OR OTHER AUTHORIZATION ISSUED PURSUANT
THERETO. TO THE BORROWER’S BEST KNOWLEDGE, NO SUCH MATTER IS THREATENED OR
IMPENDING.

 

(D)                                 TO THE BORROWER’S BEST KNOWLEDGE, THE
BORROWER’S BUSINESSES ARE AND HAVE IN THE PAST ALWAYS BEEN CONDUCTED IN
ACCORDANCE WITH ALL ENVIRONMENTAL LAWS AND ALL LICENSES, PERMITS AND OTHER
AUTHORIZATIONS REQUIRED PURSUANT TO ANY ENVIRONMENTAL LAW AND NECESSARY FOR THE
LAWFUL AND EFFICIENT OPERATION OF SUCH BUSINESSES ARE IN THE BORROWER’S
POSSESSION AND ARE IN FULL FORCE AND EFFECT. NO PERMIT REQUIRED UNDER ANY
ENVIRONMENTAL LAW IS SCHEDULED TO EXPIRE WITHIN 12 MONTHS AND THERE IS NO THREAT
THAT ANY SUCH PERMIT WILL BE WITHDRAWN, TERMINATED, LIMITED OR MATERIALLY
CHANGED.

 

(E)                                  TO THE BORROWER’S BEST KNOWLEDGE, THE
PREMISES ARE NOT AND NEVER HAVE BEEN LISTED ON THE NATIONAL PRIORITIES LIST, THE
COMPREHENSIVE ENVIRONMENTAL RESPONSE, COMPENSATION AND LIABILITY INFORMATION
SYSTEM OR ANY SIMILAR FEDERAL, STATE OR LOCAL LIST, SCHEDULE, LOG, INVENTORY OR
DATABASE.

 

(F)                                    THE BORROWER HAS DELIVERED TO LENDER ALL
ENVIRONMENTAL ASSESSMENTS, AUDITS, REPORTS, PERMITS, LICENSES AND OTHER
DOCUMENTS DESCRIBING OR RELATING IN ANY WAY TO THE PREMISES OR BORROWER’S
BUSINESSES.

 

Section 5.15                            Submissions to Lender. All financial and
other information provided to the Lender by or on behalf of the Borrower in
connection with the Borrower’s request for the credit facilities contemplated
hereby is (i) true and correct in all material respects, (ii) does not omit any
material fact necessary to make such information not misleading and, (iii) as to
projections, valuations or proforma financial statements, present a good faith
opinion as to such projections, valuations and proforma condition and results.

 

Section 5.16                            Financing Statements. The Borrower has
provided to the Lender signed financing statements and has authorized the filing
of financing statements sufficient when filed to perfect the Security Interest
and the other security interests created by the Security Documents. When such
financing statements are filed in the offices noted therein, the Lender will
have a valid and perfected security interest in all Collateral which is capable
of being perfected by filing

 

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financing statements. None of the Collateral is or will become a fixture on real
estate, unless a sufficient fixture filing is in effect with respect thereto.

 

Section 5.17                            Rights to Payment. Each right to payment
and each instrument, document, chattel paper and other agreement constituting or
evidencing Collateral is (or, in the case of all future Collateral, will be when
arising or issued) the valid, genuine and legally enforceable obligation,
subject to no defense, setoff or counterclaim, of the account debtor or other
obligor named therein or in the Borrower’s records pertaining thereto as being
obligated to pay such obligation.

 

Section 5.18                            Financial Solvency. Both before and
after giving effect to all of the transactions contemplated in the Loan
Documents, none of the Borrower or its Affiliates:

 

(A)                                  WAS OR WILL BE INSOLVENT, AS THAT TERM IS
USED AND DEFINED IN SECTION 101(32) OF THE UNITED STATES BANKRUPTCY CODE AND
SECTION 2 OF THE UNIFORM FRAUDULENT TRANSFER ACT;

 

(B)                                 HAS UNREASONABLY SMALL CAPITAL OR IS ENGAGED
OR ABOUT TO ENGAGE IN A BUSINESS OR A TRANSACTION FOR WHICH ANY REMAINING ASSETS
OF THE BORROWER OR SUCH AFFILIATE ARE UNREASONABLY SMALL;

 

(C)                                  BY EXECUTING, DELIVERING OR PERFORMING ITS
OBLIGATIONS UNDER THE LOAN DOCUMENTS OR OTHER DOCUMENTS TO WHICH IT IS A PARTY
OR BY TAKING ANY ACTION WITH RESPECT THERETO, INTENDS TO, NOR BELIEVES THAT IT
WILL, INCUR DEBTS BEYOND ITS ABILITY TO PAY THEM AS THEY MATURE;

 

(D)                                 BY EXECUTING, DELIVERING OR PERFORMING ITS
OBLIGATIONS UNDER THE LOAN DOCUMENTS OR OTHER DOCUMENTS TO WHICH IT IS A PARTY
OR BY TAKING ANY ACTION WITH RESPECT THERETO, INTENDS TO HINDER, DELAY OR
DEFRAUD EITHER ITS PRESENT OR FUTURE CREDITORS; AND

 

(E)                                  AT THIS TIME CONTEMPLATES FILING A PETITION
IN BANKRUPTCY OR FOR AN ARRANGEMENT OR REORGANIZATION OR SIMILAR PROCEEDING
UNDER ANY LAW ANY JURISDICTION, NOR, TO THE BEST KNOWLEDGE OF THE BORROWER, IS
THE SUBJECT OF ANY ACTUAL, PENDING OR THREATENED BANKRUPTCY, INSOLVENCY OR
SIMILAR PROCEEDINGS UNDER ANY LAW OF ANY JURISDICTION.

 

ARTICLE VI.
COVENANTS

 

So long as the Obligations shall remain unpaid, or the Credit Facility shall
remain outstanding, the Borrower will comply with the following requirements,
unless the Lender shall otherwise consent in writing:

 

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Section 6.1                                   Reporting Requirements. The
Borrower will deliver, or cause to be delivered, to the Lender each of the
following, which shall be in form and detail acceptable to the Lender:

 

(A)                                  ANNUAL FINANCIAL STATEMENTS. AS SOON AS
AVAILABLE, AND IN ANY EVENT WITHIN 120 DAYS AFTER THE END OF EACH FISCAL YEAR OF
THE BORROWER, THE BORROWER WILL DELIVER, OR CAUSE TO BE DELIVERED, TO THE
LENDER, THE BORROWER’S 10-K REPORT FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION AND PREPARED BY THE BORROWER AND CERTIFIED BY INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS SELECTED BY THE BORROWER AND ACCEPTABLE TO THE LENDER, FOR
THE FISCAL YEAR THEN ENDED, ALL IN REASONABLE DETAIL AND PREPARED IN ACCORDANCE
WITH GAAP, TOGETHER WITH (I) COPIES OF ALL MANAGEMENT LETTERS PREPARED BY SUCH
ACCOUNTANTS; (II) A REPORT SIGNED BY SUCH ACCOUNTANTS STATING THAT IN MAKING THE
INVESTIGATIONS NECESSARY FOR SAID OPINION THEY OBTAINED NO KNOWLEDGE, EXCEPT AS
SPECIFICALLY STATED, OF ANY DEFAULT OR EVENT OF DEFAULT AND ALL RELEVANT FACTS
IN REASONABLE DETAIL TO EVIDENCE, AND THE COMPUTATIONS AS TO, WHETHER OR NOT THE
BORROWER IS IN COMPLIANCE WITH THE FINANCIAL COVENANTS; AND (III) A CERTIFICATE
OF THE BORROWER’S CHIEF FINANCIAL OFFICER STATING THAT SUCH FINANCIAL STATEMENTS
HAVE BEEN PREPARED IN ACCORDANCE WITH GAAP AND WHETHER OR NOT SUCH OFFICER HAS
KNOWLEDGE OF THE OCCURRENCE OF ANY DEFAULT OR EVENT OF DEFAULT AND, IF SO,
STATING IN REASONABLE DETAIL THE FACTS WITH RESPECT THERETO.

 

(B)                                 QUARTERLY FINANCIAL STATEMENTS.  AS SOON AS
AVAILABLE AND IN ANY EVENT WITHIN 45 DAYS AFTER THE END OF EACH FISCAL QUARTER
OF THE BORROWER, THE BORROWER WILL DELIVER OR CAUSE TO BE DELIVERED TO THE
LENDER, THE BORROWER’S 10-Q REPORT FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION AND PREPARED BY THE BORROWER AND REVIEWED BY INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS SELECTED BY THE BORROWER AND ACCEPTABLE TO THE LENDER, FOR
THE FISCAL QUARTER THEN ENDED, ALL IN REASONABLE DETAIL AND PREPARED IN
ACCORDANCE WITH GAAP, TOGETHER WITH AND ACCOMPANIED BY A CERTIFICATE OF THE
BORROWER’S CHIEF FINANCIAL OFFICER, SUBSTANTIALLY IN THE FORM OF EXHIBIT A
HERETO STATING (I) THAT SUCH FINANCIAL STATEMENTS HAVE BEEN PREPARED IN
ACCORDANCE WITH GAAP, SUBJECT TO YEAR-END AUDIT ADJUSTMENTS, (II) WHETHER OR NOT
SUCH OFFICER HAS KNOWLEDGE OF THE OCCURRENCE OF ANY DEFAULT OR EVENT OF DEFAULT
NOT THERETOFORE REPORTED AND REMEDIED AND, IF SO, STATING IN REASONABLE DETAIL
THE FACTS WITH RESPECT THERETO, AND (III) ALL RELEVANT FACTS IN REASONABLE
DETAIL TO EVIDENCE, AND THE COMPUTATIONS AS TO, WHETHER OR NOT THE BORROWER IS
IN COMPLIANCE WITH THE FINANCIAL COVENANTS.

 

(C)                                  MONTHLY FINANCIAL STATEMENTS. AS SOON AS
AVAILABLE AND IN ANY EVENT WITHIN 30 DAYS AFTER THE END OF EACH MONTH, THE
BORROWER WILL DELIVER TO THE LENDER AN UNAUDITED/INTERNAL BALANCE SHEET AND
STATEMENTS OF INCOME AND RETAINED EARNINGS OF THE BORROWER AS AT THE END OF AND
FOR SUCH MONTH AND FOR THE YEAR TO DATE PERIOD THEN ENDED, PREPARED, IF THE
LENDER SO REQUESTS, ON A CONSOLIDATING AND CONSOLIDATED BASIS TO INCLUDE ANY
AFFILIATES, IN REASONABLE DETAIL AND STATING IN COMPARATIVE FORM THE FIGURES FOR
THE CORRESPONDING DATE AND PERIODS IN THE PREVIOUS YEAR, ALL PREPARED IN
ACCORDANCE WITH GAAP, SUBJECT TO YEAR-END AUDIT ADJUSTMENTS; AND ACCOMPANIED BY
A CERTIFICATE OF THE BORROWER’S CHIEF FINANCIAL OFFICER, OR OTHER AUTHORIZED
OFFICER OF THE BORROWER,

 

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SUBSTANTIALLY IN THE FORM OF EXHIBIT A HERETO STATING (I) THAT SUCH FINANCIAL
STATEMENTS HAVE BEEN PREPARED IN ACCORDANCE WITH GAAP, SUBJECT TO YEAR-END AUDIT
ADJUSTMENTS, AND (II) WHETHER OR NOT SUCH OFFICER HAS KNOWLEDGE OF THE
OCCURRENCE OF ANY DEFAULT OR EVENT OF DEFAULT NOT THERETOFORE REPORTED AND
REMEDIED AND, IF SO, STATING IN REASONABLE DETAIL THE FACTS WITH RESPECT
THERETO.

 

(D)                                 COLLATERAL REPORTS. WITHIN 30 DAYS AFTER THE
END OF EACH MONTH OR MORE FREQUENTLY IF THE LENDER SO REQUIRES, THE BORROWER
WILL DELIVER TO THE LENDER AGINGS OF THE BORROWER’S ACCOUNTS RECEIVABLE AND ITS
ACCOUNTS PAYABLE, AN INVENTORY CERTIFICATION REPORT, AND A BORROWING BASE
CERTIFICATE IN THE FORM ATTACHED HERETO AS EXHIBIT B, AS AT THE END OF EACH
MONTH OR SHORTER TIME PERIOD.

 

(E)                                  LISTING OF ACCOUNT DEBTORS. THE BORROWER
WILL DELIVER TO THE LENDER A LISTING OF THE NAMES AND ADDRESSES OF ACCOUNT
DEBTORS AS OF THE END OF EACH FISCAL YEAR WHOSE ACCOUNTS WILL BE DUE WITHIN 60
DAYS AFTER THE END OF EACH FISCAL YEAR.

 

(F)                                    LITIGATION. IMMEDIATELY AFTER THE
COMMENCEMENT THEREOF, THE BORROWER WILL DELIVER TO THE LENDER NOTICE IN WRITING
OF ALL LITIGATION AND OF ALL PROCEEDINGS BEFORE ANY GOVERNMENTAL OR REGULATORY
AGENCY AFFECTING THE BORROWER (I) OF THE TYPE DESCRIBED IN SECTION 5.14(C) OR
(II) WHICH SEEK A MONETARY RECOVERY AGAINST THE BORROWER IN EXCESS OF $100,000.

 

(G)                                 DEFAULTS. AS PROMPTLY AS PRACTICABLE (BUT IN
ANY EVENT NOT LATER THAN FIVE BUSINESS DAYS) AFTER AN OFFICER OF THE BORROWER
OBTAINS KNOWLEDGE OF THE OCCURRENCE OF ANY DEFAULT OR EVENT OF DEFAULT, THE
BORROWER WILL DELIVER TO THE LENDER NOTICE OF SUCH OCCURRENCE, TOGETHER WITH A
DETAILED STATEMENT BY A RESPONSIBLE OFFICER OF THE BORROWER OF THE STEPS BEING
TAKEN BY THE BORROWER TO CURE THE EFFECT THEREOF.

 

(H)                                 PLANS. AS SOON AS POSSIBLE, AND IN ANY EVENT
WITHIN 30 DAYS AFTER THE BORROWER KNOWS OR HAS REASON TO KNOW THAT ANY
REPORTABLE EVENT WITH RESPECT TO ANY PENSION PLAN HAS OCCURRED, THE BORROWER
WILL DELIVER TO THE LENDER A STATEMENT OF THE BORROWER’S CHIEF FINANCIAL OFFICER
SETTING FORTH DETAILS AS TO SUCH REPORTABLE EVENT AND THE ACTION WHICH THE
BORROWER PROPOSES TO TAKE WITH RESPECT THERETO, TOGETHER WITH A COPY OF THE
NOTICE OF SUCH REPORTABLE EVENT TO THE PENSION BENEFIT GUARANTY CORPORATION. AS
SOON AS POSSIBLE, AND IN ANY EVENT WITHIN 10 DAYS AFTER THE BORROWER FAILS TO
MAKE ANY QUARTERLY CONTRIBUTION REQUIRED WITH RESPECT TO ANY PENSION PLAN UNDER
SECTION 412(M) OF THE IRC, THE BORROWER WILL DELIVER TO THE LENDER A STATEMENT
OF THE BORROWER’S CHIEF FINANCIAL OFFICER SETTING FORTH DETAILS AS TO SUCH
FAILURE AND THE ACTION WHICH THE BORROWER PROPOSES TO TAKE WITH RESPECT THERETO,
TOGETHER WITH A COPY OF ANY NOTICE OF SUCH FAILURE REQUIRED TO BE PROVIDED TO
THE PENSION BENEFIT GUARANTY CORPORATION. AS SOON AS POSSIBLE, AND IN ANY EVENT
WITH 10 DAYS AFTER THE BORROWER KNOWS OR HAS REASON TO KNOW THAT IT HAS OR IS
REASONABLY EXPECTED TO HAVE ANY LIABILITY UNDER SECTION 4201 OR 4243 OF ERISA
FOR ANY WITHDRAWAL, PARTIAL WITHDRAWAL, REORGANIZATION OR OTHER EVENT UNDER ANY
MULTIEMPLOYER PLAN, THE BORROWER WILL DELIVER TO THE LENDER A STATEMENT OF THE

 

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BORROWER’S CHIEF FINANCIAL OFFICER SETTING FORTH DETAILS AS TO SUCH LIABILITY
AND THE ACTION WHICH BORROWER PROPOSES TO TAKE WITH RESPECT THERETO.

 

(I)                                     DISPUTES. PROMPTLY UPON KNOWLEDGE
THEREOF, THE BORROWER WILL DELIVER TO THE LENDER NOTICE OF (I) ANY DISPUTES OR
CLAIMS BY THE BORROWER’S CUSTOMERS EXCEEDING $50,000 INDIVIDUALLY OR $100,000 IN
THE AGGREGATE DURING ANY FISCAL YEAR; (II) CREDIT MEMOS; (III) ANY GOODS
RETURNED TO OR RECOVERED BY THE BORROWER.

 

(J)                                     OFFICERS AND DIRECTORS. PROMPTLY UPON
KNOWLEDGE THEREOF, THE BORROWER WILL DELIVER TO THE LENDER NOTICE ANY CHANGE IN
THE PERSONS CONSTITUTING THE BORROWER’S OFFICERS AND DIRECTORS.

 

(K)                                  COLLATERAL. PROMPTLY UPON KNOWLEDGE
THEREOF, THE BORROWER WILL DELIVER TO THE LENDER NOTICE OF ANY LOSS OF OR
MATERIAL DAMAGE TO ANY COLLATERAL OR OF ANY SUBSTANTIAL ADVERSE CHANGE IN ANY
COLLATERAL OR THE PROSPECT OF PAYMENT THEREOF.

 

(L)                                     COMMERCIAL TORT CLAIMS. PROMPTLY UPON
KNOWLEDGE THEREOF, THE BORROWER WILL DELIVER TO THE LENDER NOTICE OF ANY
COMMERCIAL TORT CLAIMS IT MAY BRING AGAINST ANY PERSON, INCLUDING THE NAME AND
ADDRESS OF EACH DEFENDANT, A SUMMARY OF THE FACTS, AN ESTIMATE OF THE BORROWER’S
DAMAGES, COPIES OF ANY COMPLAINT OR DEMAND LETTER SUBMITTED BY THE BORROWER, AND
SUCH OTHER INFORMATION AS THE LENDER MAY REQUEST.

 

(M)         INTELLECTUAL PROPERTY.

 

(I)            THE BORROWER WILL GIVE THE LENDER 30 DAYS PRIOR WRITTEN NOTICE OF
ITS INTENT TO ACQUIRE OR TO GRANT MATERIAL INTELLECTUAL PROPERTY RIGHTS AND UPON
REQUEST SHALL PROVIDE THE LENDER WITH COPIES OF ALL PROPOSED DOCUMENTS AND
AGREEMENTS CONCERNING SUCH RIGHTS.

 

(II)           PROMPTLY UPON KNOWLEDGE THEREOF, THE BORROWER WILL DELIVER TO THE
LENDER NOTICE OF (A) ANY INFRINGEMENT OF ITS INTELLECTUAL PROPERTY RIGHTS BY
OTHERS, (B) CLAIMS THAT THE BORROWER IS INFRINGING ANOTHER PERSON’S INTELLECTUAL
PROPERTY RIGHTS AND (C) ANY THREATENED CANCELLATION, TERMINATION OR MATERIAL
LIMITATION OF ITS INTELLECTUAL PROPERTY RIGHTS.

 

(III)          PROMPTLY UPON RECEIPT, THE BORROWER WILL GIVE THE LENDER COPIES
OF ALL REGISTRATIONS AND FILINGS WITH RESPECT TO ITS INTELLECTUAL PROPERTY
RIGHTS.

 

(N)                                 REPORTS TO OWNERS. PROMPTLY UPON THEIR
DISTRIBUTION, THE BORROWER WILL DELIVER TO THE LENDER COPIES OF ALL FINANCIAL
STATEMENTS, REPORTS AND PROXY STATEMENTS WHICH THE BORROWER SHALL HAVE SENT TO
ITS OWNERS.

 

(O)                                 SEC FILINGS. PROMPTLY AFTER THE SENDING OR
FILING THEREOF, THE BORROWER WILL DELIVER TO THE LENDER COPIES OF ALL REGULAR
AND PERIODIC REPORTS WHICH THE BORROWER SHALL FILE WITH THE SECURITIES AND
EXCHANGE COMMISSION OR ANY NATIONAL SECURITIES EXCHANGE.

 

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(P)                                 VIOLATIONS OF LAW. PROMPTLY UPON KNOWLEDGE
THEREOF, THE BORROWER WILL DELIVER TO THE LENDER NOTICE OF THE BORROWER’S
VIOLATION OF ANY LAW, RULE OR REGULATION, THE NON-COMPLIANCE WITH WHICH COULD
MATERIALLY AND ADVERSELY AFFECT THE BORROWER’S BUSINESS OR ITS FINANCIAL
CONDITION.

 

(Q)                                 OTHER REPORTS. FROM TIME TO TIME, WITH
REASONABLE PROMPTNESS, THE BORROWER WILL DELIVER TO THE LENDER ANY AND ALL
RECEIVABLES SCHEDULES, COLLECTION REPORTS, DEPOSIT RECORDS, EQUIPMENT SCHEDULES,
COPIES OF INVOICES TO ACCOUNT DEBTORS, SHIPMENT DOCUMENTS AND DELIVERY RECEIPTS
FOR GOODS SOLD, AND SUCH OTHER MATERIAL, REPORTS, RECORDS OR INFORMATION AS THE
LENDER MAY REQUEST.

 

(R)                                    PROJECTIONS.  NO LATER THAN
DECEMBER 15TH OF EACH FISCAL YEAR, THE BORROWER WILL DELIVER TO THE LENDER THE
PROJECTED BALANCE SHEETS, INCOME STATEMENTS, STATEMENTS OF CASH FLOW AND
PROJECTED AVAILABILITY FOR EACH MONTH OF THE SUCCEEDING FISCAL YEAR, EACH IN
REASONABLE DETAIL.  SUCH ITEMS WILL BE CERTIFIED BY THE OFFICER WHO IS THE
BORROWER’S CHIEF FINANCIAL OFFICER AS BEING THE MOST ACCURATE PROJECTIONS
AVAILABLE AND IDENTICAL TO THE PROJECTIONS USED BY THE BORROWER FOR INTERNAL
PLANNING PURPOSES AND BE DELIVERED WITH A STATEMENT OF UNDERLYING ASSUMPTIONS
AND SUCH SUPPORTING SCHEDULES AND INFORMATION AS THE LENDER MAY IN ITS
DISCRETION REQUIRE.

 

Section 6.2                                   Financial Covenants. 
Notwithstanding anything to the contrary contained herein, the parties agree
that effective as of June 30, 2009, the following financial covenants shall be
applicable:

 

(A)                                  MAXIMUM NET LOSS. THE BORROWER SHALL NOT
INCUR A NET LOSS, DETERMINED ON A CONSOLIDATED BASIS AS AT THE END OF EACH
FISCAL PERIOD SET FORTH BELOW, IN EXCESS OF THE AMOUNT SET FORTH OPPOSITE SUCH
FISCAL PERIOD:

 

Measurement Date

 

Maximum Net Loss

June 30, 2009

 

<$5,800,000>

July 31, 2009

 

<$6,100,000>

August 31, 2009

 

<$6,300,000>

September 30, 2009

 

<$6,600,000>

October 31, 2009

 

<$6,500,000>

November 30, 2009

 

<$6,400,000>

December 31, 2009

 

<$6,400,000>

January 31, 2010

 

<$500,000>

February 29, 2010

 

<$500,000>

 

(B)                                 CAPITAL EXPENDITURES. BORROWER WILL NOT
INCUR OR CONTRACT TO INCUR CAPITAL EXPENDITURES OF MORE THAN $1,200,000 FOR THE
FISCAL YEAR ENDING DECEMBER 31, 2009; AND $150,000 IN THE AGGREGATE AS AT THE
END OF EACH FISCAL QUARTER THEREAFTER WITHOUT THE LENDER’S WRITTEN APPROVAL FOR
CAPITAL ITEMS, INCLUDING WITHOUT LIMITATION FOR NEW BUILDING AND BUILDING
EXPANSION PROJECTS, NEW BUSINESS ACQUISITION AND OR MAJOR UNPLANNED EQUIPMENT
PROJECTS; PROVIDED, HOWEVER, THAT BORROWER MAY INCUR NO MORE THAN

 

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$600,000 (OF THE $1,200,000 AGGREGATE LIMIT) FOR THE ROOF REPLACEMENT PROJECT AT
THE BLUE EARTH, MINNESOTA FACILITY DURING THE FISCAL YEAR ENDING DECEMBER 31,
2009, IN ACCORDANCE WITH THE PROVISIONS OF THAT CERTAIN LETTER OF CREDIT AND
REIMBURSEMENT AGREEMENT DATED JUNE 28, 2006 (AS AMENDED THE “REIMBURSEMENT
AGREEMENT”).

 

Section 6.3                                   Permitted Liens; Financing
Statements.

 

(A)                                  THE BORROWER WILL NOT, AND SHALL CAUSE EACH
OF ITS SUBSIDIARIES NOT TO, CREATE, INCUR OR SUFFER TO EXIST ANY LIEN UPON OR OF
ANY OF ITS ASSETS, NOW OWNED OR HEREAFTER ACQUIRED, TO SECURE ANY INDEBTEDNESS;
EXCLUDING, HOWEVER, FROM THE OPERATION OF THE FOREGOING, THE FOLLOWING
(COLLECTIVELY, “PERMITTED LIENS”):

 

(I)            IN THE CASE OF ANY OF THE BORROWER’S PROPERTY WHICH IS NOT
COLLATERAL, COVENANTS, RESTRICTIONS, RIGHTS, EASEMENTS AND MINOR IRREGULARITIES
IN TITLE WHICH DO NOT MATERIALLY INTERFERE WITH THE BORROWER’S BUSINESS OR
OPERATIONS AS PRESENTLY CONDUCTED;

 

(II)           LIENS IN EXISTENCE ON THE DATE HEREOF AND LISTED IN SCHEDULE 6.3
HERETO, SECURING INDEBTEDNESS FOR BORROWED MONEY PERMITTED UNDER SECTION 6.4;

 

(III)          THE SECURITY INTEREST AND LIENS CREATED BY THE SECURITY
DOCUMENTS; AND

 

(IV)          PURCHASE MONEY LIENS RELATING TO THE ACQUISITION OF MACHINERY AND
EQUIPMENT OF THE BORROWER NOT EXCEEDING THE LESSER OF COST OR FAIR MARKET VALUE
THEREOF AND SO LONG AS NO DEFAULT PERIOD IS THEN IN EXISTENCE AND NONE WOULD
EXIST IMMEDIATELY AFTER SUCH ACQUISITION.

 

(B)           THE BORROWER WILL NOT AMEND ANY FINANCING STATEMENTS IN FAVOR OF
THE LENDER EXCEPT AS PERMITTED BY LAW.

 

Section 6.4                                   Indebtedness. The Borrower will
not, and shall cause each of its Subsidiaries not to, incur, create, assume or
permit to exist any indebtedness or liability on account of deposits or advances
or any indebtedness for borrowed money or letters of credit issued on the
Borrower’s behalf, or any other indebtedness or liability evidenced by notes,
bonds, debentures or similar obligations, except:

 

(A)                                  INDEBTEDNESS ARISING HEREUNDER;

 

(B)                                 INDEBTEDNESS OF THE BORROWER IN EXISTENCE ON
THE DATE HEREOF AND LISTED IN SCHEDULE 6.4 HERETO; AND

 

(C)                                  AFTER THE DATE HEREOF, ADDITIONAL
INDEBTEDNESS OF THE BORROWER, INCLUSIVE OF INDEBTEDNESS RELATING TO PERMITTED
LIENS, NOT TO EXCEED $300,000.

 

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Section 6.5            Guaranties. The Borrower will not, and shall cause each
of its Subsidiaries not to, assume, guarantee, endorse or otherwise become
directly or contingently liable in connection with any obligations of any other
Person, except:

 

(A)           THE ENDORSEMENT OF NEGOTIABLE INSTRUMENTS BY THE BORROWER FOR
DEPOSIT OR COLLECTION OR SIMILAR TRANSACTIONS IN THE ORDINARY COURSE OF
BUSINESS; AND

 

(B)           GUARANTIES, ENDORSEMENTS AND OTHER DIRECT OR CONTINGENT
LIABILITIES IN CONNECTION WITH THE OBLIGATIONS OF OTHER PERSONS, IN EXISTENCE ON
THE DATE HEREOF AND LISTED IN SCHEDULE 6.4 HERETO.

 

Section 6.6            Investments and Subsidiaries. The Borrower will not, and
shall cause each of its Subsidiaries not to, purchase or hold beneficially any
stock or other securities or evidences of indebtedness of, make or permit to
exist any loans or advances to, or make any investment or acquire any interest
whatsoever in, any other Person, including any partnership or joint venture,
except:

 

(A)           INVESTMENTS IN DIRECT OBLIGATIONS OF THE UNITED STATES OF AMERICA
OR ANY AGENCY OR INSTRUMENTALITY THEREOF WHOSE OBLIGATIONS CONSTITUTE FULL FAITH
AND CREDIT OBLIGATIONS OF THE UNITED STATES OF AMERICA HAVING A MATURITY OF ONE
YEAR OR LESS, COMMERCIAL PAPER ISSUED BY U.S. CORPORATIONS RATED “A-1” OR “A-2”
BY STANDARD & POORS CORPORATION OR “P-1” OR “P-2” BY MOODY’S INVESTORS SERVICE
OR CERTIFICATES OF DEPOSIT OR BANKERS’ ACCEPTANCES HAVING A MATURITY OF ONE YEAR
OR LESS ISSUED BY MEMBERS OF THE FEDERAL RESERVE SYSTEM HAVING DEPOSITS IN
EXCESS OF $100,000,000 (WHICH CERTIFICATES OF DEPOSIT OR BANKERS’ ACCEPTANCES
ARE FULLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION);

 

(B)           TRAVEL ADVANCES OR LOANS TO THE BORROWER’S OR ANY SUBSIDIARY’S
OFFICERS AND EMPLOYEES NOT EXCEEDING AT ANY ONE TIME AN AGGREGATE OF $50,000;

 

(C)           ADVANCES IN THE FORM OF PROGRESS PAYMENTS, PREPAID RENT NOT
EXCEEDING TWO (2) MONTHS OR SECURITY DEPOSITS; AND

 

(D)           CURRENT INVESTMENTS IN THE SUBSIDIARIES IN EXISTENCE ON THE DATE
HEREOF AND LISTED IN SCHEDULE 5.5 HERETO AND LOAN ADVANCES OR CAPITAL
CONTRIBUTIONS TO NORTECH MEDICAL SERVICES IN AN AMOUNT NOT TO EXCEED $20,000 PER
MONTH TO FUND SUCH SUBSIDIARIES’ ACTUAL OPERATING EXPENSES.

 

Section 6.7            Dividends and Distributions.  Except as set forth in this
Section 6.7, the Borrower will not declare or pay any dividends (other than
dividends payable solely in stock of the Borrower) on any class of its stock, or
make any payment on account of the purchase, redemption or other retirement of
any shares of such stock or other securities or evidence of its indebtedness or
make any distribution in respect thereof, either directly or indirectly.

 

Section 6.8            Salaries. The Borrower will not pay excessive or
unreasonable salaries, bonuses, commissions, consultant fees or other
compensation; or increase the salary, bonus,

 

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commissions, consultant fees or other compensation of any Director, Officer or
consultant, or any member of their families, either individually or for all such
persons in the aggregate, or pay any such increase from any source other than
profits earned in the year of payment.

 

Section 6.9            Grant of Security Interest Upon Request. Borrower
acknowledges and agrees that upon request by the Lender, it shall cause its
wholly-owned subsidiary, Manufacturing Assembly Solutions of Monterrey, Inc., a
Mexican corporation, to grant the Lender a security interest in all of its
assets and execute any and all documents necessary to evidence and perfect the
same.

 

Section 6.10         Books and Records; Inspection and Examination.

 

(A)           THE BORROWER WILL, AND WILL CAUSE EACH OF ITS SUBSIDIARIES TO,
KEEP ACCURATE BOOKS OF RECORD AND ACCOUNT FOR ITSELF PERTAINING TO THE
COLLATERAL AND PERTAINING TO THE BUSINESS AND FINANCIAL CONDITION AND SUCH OTHER
MATTERS AS THE LENDER MAY FROM TIME TO TIME REQUEST IN WHICH TRUE AND COMPLETE
ENTRIES WILL BE MADE IN ACCORDANCE WITH GAAP AND, UPON THE LENDER’S REQUEST,
WILL PERMIT ANY OFFICER, EMPLOYEE, ATTORNEY OR ACCOUNTANT FOR THE LENDER TO
AUDIT, REVIEW, MAKE EXTRACTS FROM OR COPY ANY AND ALL SUCH COMPANY AND FINANCIAL
BOOKS AND RECORDS AT ALL TIMES DURING ORDINARY BUSINESS HOURS, TO SEND AND
DISCUSS WITH ACCOUNT DEBTORS AND OTHER OBLIGORS REQUESTS FOR VERIFICATION OF
AMOUNTS OWED TO THE BORROWER OR ANY SUBSIDIARY, AND TO DISCUSS THE BORROWER’S
AND ANY SUBSIDIARY’S AFFAIRS WITH ANY OF ITS DIRECTORS, OFFICERS, EMPLOYEES OR
AGENTS.

 

(B)           THE BORROWER HEREBY IRREVOCABLY AUTHORIZES ALL ACCOUNTANTS AND
THIRD PARTIES TO DISCLOSE AND DELIVER TO LENDER, AT THE BORROWER’S EXPENSE, ALL
FINANCIAL INFORMATION, BOOKS AND RECORDS, WORK PAPERS, MANAGEMENT REPORTS AND
OTHER INFORMATION IN THEIR POSSESSION REGARDING THE BORROWER OR ANY SUBSIDIARY.

 

(C)           THE BORROWER WILL PERMIT THE LENDER, OR ITS EMPLOYEES,
ACCOUNTANTS, ATTORNEYS OR AGENTS, TO EXAMINE AND INSPECT ANY COLLATERAL OR ANY
OTHER PROPERTY OF THE BORROWER OR ANY SUBSIDIARY AT ANY TIME DURING ORDINARY
BUSINESS HOURS.

 

(D)           LENDER MAY OBTAIN AT BORROWER’S EXPENSE, AN APPRAISAL OR
APPRAISALS OF THE COLLATERAL AND/OR MORTGAGED PROPERTY BY AN APPRAISER
ACCEPTABLE TO THE LENDER IN ITS SOLE DISCRETION.

 

Section 6.11         Account Verification. The Lender may at any time and from
time to time send or require the Borrower to send requests for verification of
accounts or notices of assignment to account debtors and other obligors. The
Lender may also at any time and from time to time telephone account debtors and
other obligors to verify accounts.

 

Section 6.12         Compliance with Laws.

 

(A)           THE BORROWER WILL (I) COMPLY WITH THE REQUIREMENTS OF APPLICABLE
LAWS AND REGULATIONS, THE NON-COMPLIANCE WITH WHICH WOULD MATERIALLY AND
ADVERSELY AFFECT ITS BUSINESS OR ITS FINANCIAL CONDITION AND (II) USE AND KEEP
THE COLLATERAL, AND REQUIRE THAT

 

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OTHERS USE AND KEEP THE COLLATERAL, ONLY FOR LAWFUL PURPOSES, WITHOUT VIOLATION
OF ANY FEDERAL, STATE OR LOCAL LAW, STATUTE OR ORDINANCE.

 

(B)           WITHOUT LIMITING THE FOREGOING UNDERTAKINGS, THE BORROWER
SPECIFICALLY AGREES THAT IT WILL COMPLY WITH ALL APPLICABLE ENVIRONMENTAL LAWS
AND OBTAIN AND COMPLY WITH ALL PERMITS, LICENSES AND SIMILAR APPROVALS REQUIRED
BY ANY ENVIRONMENTAL LAWS, AND WILL NOT GENERATE, USE, TRANSPORT, TREAT, STORE
OR DISPOSE OF ANY HAZARDOUS SUBSTANCES IN SUCH A MANNER AS TO CREATE ANY
MATERIAL LIABILITY OR OBLIGATION UNDER THE COMMON LAW OF ANY JURISDICTION OR ANY
ENVIRONMENTAL LAW.

 

Section 6.13         Payment of Taxes and Other Claims. The Borrower will, and
shall cause each of its Subsidiaries to, pay or discharge, when due, (a) all
taxes, assessments and governmental charges levied or imposed upon it or upon
its income or profits, upon any properties belonging to it (including the
Collateral) or upon or against the creation, perfection or continuance of the
Security Interest, prior to the date on which penalties attach thereto, (b) all
federal, state and local taxes required to be withheld by it, and (c) all lawful
claims for labor, materials and supplies which, if unpaid, might by law become a
Lien upon any properties of the Borrower or any Subsidiary; provided, that the
Borrower or applicable Subsidiary shall not be required to pay any such tax,
assessment, charge or claim whose amount, applicability or validity is being
contested in good faith by appropriate proceedings and for which proper reserves
have been made.

 

Section 6.14         Maintenance of Properties.

 

(A)           THE BORROWER WILL KEEP AND MAINTAIN THE COLLATERAL AND ALL OF ITS
OTHER PROPERTIES NECESSARY OR USEFUL IN ITS BUSINESS IN GOOD CONDITION, REPAIR
AND WORKING ORDER (NORMAL WEAR AND TEAR EXCEPTED) AND WILL FROM TIME TO TIME
REPLACE OR REPAIR ANY WORN, DEFECTIVE OR BROKEN PARTS; PROVIDED, HOWEVER, THAT
NOTHING IN THIS SECTION 6.14 SHALL PREVENT THE BORROWER FROM DISCONTINUING THE
OPERATION AND MAINTENANCE OF ANY OF ITS PROPERTIES IF SUCH DISCONTINUANCE IS, IN
THE BORROWER’S JUDGMENT, DESIRABLE IN THE CONDUCT OF THE BORROWER’S BUSINESS AND
NOT DISADVANTAGEOUS IN ANY MATERIAL RESPECT TO THE LENDER. THE BORROWER WILL
TAKE ALL COMMERCIALLY REASONABLE STEPS NECESSARY TO PROTECT AND MAINTAIN ITS
INTELLECTUAL PROPERTY RIGHTS.

 

(B)           THE BORROWER WILL DEFEND THE COLLATERAL AGAINST ALL LIENS, CLAIMS
OR DEMANDS OF ALL PERSONS (OTHER THAN THE LENDER) CLAIMING THE COLLATERAL OR ANY
INTEREST THEREIN. THE BORROWER WILL KEEP ALL COLLATERAL FREE AND CLEAR OF ALL
LIENS EXCEPT PERMITTED LIENS. THE BORROWER WILL TAKE ALL COMMERCIALLY REASONABLE
STEPS NECESSARY TO PROSECUTE ANY PERSON INFRINGING ITS INTELLECTUAL PROPERTY
RIGHTS AND TO DEFEND ITSELF AGAINST ANY PERSON ACCUSING IT OF INFRINGING ANY
PERSON’S INTELLECTUAL PROPERTY RIGHTS.

 

Section 6.15         Insurance. The Borrower will obtain and at all times
maintain insurance with insurers believed by the Borrower to be responsible and
reputable, in such amounts and against such risks as may from time to time be
required by the Lender, but in all events in such amounts and against such risks
as is usually carried by companies engaged in similar business

 

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and owning similar properties in the same general areas in which the Borrower
operates. Without limiting the generality of the foregoing, the Borrower will at
all times maintain business interruption insurance including coverage for force
majeure and keep all tangible Collateral insured against risks of fire
(including so-called extended coverage), theft, collision (for Collateral
consisting of motor vehicles) and such other risks and in such amounts as the
Lender may reasonably request, with any loss payable to the Lender to the extent
of its interest, and all policies of such insurance shall contain a lender’s
loss payable endorsement for the Lender’s benefit. All policies of liability
insurance required hereunder shall name the Lender as an additional insured.

 

Section 6.16         Preservation of Existence. The Borrower will preserve and
maintain its existence and all of its rights, privileges and franchises
necessary or desirable in the normal conduct of its business and shall conduct
its business in an orderly, efficient and regular manner.

 

Section 6.17         Delivery of Instruments, etc. Upon request by the Lender,
the Borrower will promptly deliver to the Lender in pledge all instruments,
documents and chattel paper constituting Collateral, duly endorsed or assigned
by the Borrower.

 

Section 6.18         Sale or Transfer of Assets; Suspension of Business
Operations. The Borrower will not, and shall cause each of its Subsidiaries not
to, sell, lease, assign, transfer or otherwise dispose of (i) the stock of any
Subsidiary, (ii) all or a substantial part of its assets, or (iii) any
Collateral or any interest therein (whether in one transaction or in a series of
transactions) to any other Person other than the sale of Inventory in the
ordinary course of business and will not liquidate, dissolve or suspend business
operations. The Borrower will not transfer any part of its ownership interest in
any Intellectual Property Rights and will not permit any agreement under which
it has licensed Licensed Intellectual Property to lapse, except that the
Borrower may transfer such rights or permit such agreements to lapse if it shall
have reasonably determined that the applicable Intellectual Property Rights are
no longer useful in its business. If the Borrower transfers any Intellectual
Property Rights for value, the Borrower will pay over the proceeds to the Lender
for application to the Obligations. The Borrower will not license any other
Person to use any of the Borrower’s Intellectual Property Rights, except that
the Borrower may grant licenses in the ordinary course of its business in
connection with sales of Inventory or provision of services to its customers.

 

Section 6.19         Consolidation and Merger; Asset Acquisitions. The Borrower
will not, and will not permit any of its Subsidiaries to, consolidate with or
merge into any Person, or permit any other Person to merge into it, or acquire
(in a transaction analogous in purpose or effect to a consolidation or merger)
all or substantially all the assets of any other Person.

 

Section 6.20         Sale and Leaseback. The Borrower will not, and will not
permit any of its Subsidiaries to, enter into any arrangement, directly or
indirectly, with any other Person whereby the Borrower or any Subsidiary shall
sell or transfer any real or personal property, whether now owned or hereafter
acquired, and then or thereafter rent or lease as lessee such property or any
part thereof or any other property which the Borrower or any Subsidiary intends
to use for substantially the same purpose or purposes as the property being sold
or transferred.

 

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Section 6.21         Restrictions on Nature of Business. The Borrower will not
engage in any line of business materially different from that presently engaged
in by the Borrower and will not purchase, lease or otherwise acquire assets not
related to its business.

 

Section 6.22         Accounting. The Borrower will not adopt any material change
in accounting principles other than as required by GAAP. The Borrower will not
adopt, permit or consent to any change in its fiscal year.

 

Section 6.23         Discounts, etc. After notice from the Lender, the Borrower
will not grant any discount, credit or allowance to any customer of the Borrower
or accept any return of goods sold. The Borrower will not at any time modify,
amend, subordinate, cancel or terminate the obligation of any account debtor or
other obligor of the Borrower.

 

Section 6.24         Plans. Unless disclosed to the Lender pursuant to
Section 5.12, neither the Borrower nor any ERISA Affiliate will (i) adopt,
create, assume or become a party to any Pension Plan, (ii) incur any obligation
to contribute to any Multiemployer Plan, (iii) incur any obligation to provide
post-retirement medical or insurance benefits with respect to employees or
former employees (other than benefits required by law) or (iv) amend any Plan in
a manner that would materially increase its funding obligations.

 

Section 6.25         Place of Business; Name. The Borrower will not transfer its
chief executive office or principal place of business, or move, relocate, close
or sell any business location. The Borrower will not permit any tangible
Collateral or any records pertaining to the Collateral to be located in any
state or area in which, in the event of such location, a financing statement
covering such Collateral would be required to be, but has not in fact been,
filed in order to perfect the Security Interest. The Borrower will not change
its name or jurisdiction of organization.

 

Section 6.26         Constituent Documents. The Borrower will not amend its
Constituent Documents.

 

Section 6.27         Change in Senior Management.  The Borrower represents and
warrants to Lender that the current chief executive officer for the Borrower is
Michael J. Degen and the Borrower agrees that it will not make any change in
such senior management position or terminate any such senior manager without the
prior written consent of the Lender.

 

Section 6.28         Performance by the Lender. If the Borrower at any time
fails to perform or observe any of the foregoing covenants contained in this
Article VI or elsewhere herein, and if such failure shall continue for a period
of ten calendar days after the Lender gives the Borrower written notice thereof
(or in the case of the agreements contained in Section 6.13 and 6.15,
immediately upon the occurrence of such failure, without notice or lapse of
time), the Lender may, but need not, perform or observe such covenant on behalf
and in the name, place and stead of the Borrower (or, at the Lender’s option, in
the Lender’s name) and may, but need not, take any and all other actions which
the Lender may reasonably deem necessary to cure or correct such failure
(including the payment of taxes, the satisfaction of Liens, the performance of

 

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obligations owed to account debtors or other obligors, the procurement and
maintenance of insurance, the execution of assignments, security agreements and
financing statements, and the endorsement of instruments); and the Borrower
shall thereupon pay to the Lender on demand the amount of all monies expended
and all costs and expenses (including reasonable attorneys’ fees and legal
expenses) incurred by the Lender in connection with or as a result of the
performance or observance of such agreements or the taking of such action by the
Lender, together with interest thereon from the date expended or incurred at the
Default Rate. To facilitate the Lender’s performance or observance of such
covenants of the Borrower, the Borrower hereby irrevocably appoints the Lender,
or the Lender’s delegate, acting alone, as the Borrower’s attorney in fact
(which appointment is coupled with an interest) with the right (but not the
duty) from time to time to create, prepare, complete, execute, deliver, endorse
or file in the name and on behalf of the Borrower any and all instruments,
documents, assignments, security agreements, financing statements, applications
for insurance and other agreements and writings required to be obtained,
executed, delivered or endorsed by the Borrower under this Section 6.28.

 

Section 6.29         Depository Accounts.  The Borrower agrees to maintain its
depository accounts with the Lender or any financial institution  affiliated
with the Lender.

 

Section 6.30         Turnaround Consultant.  At the Lender’s request, Borrower
shall (at its own expense) retain a turnaround consultant acceptable to the
Lender in its sole discretion to assist the Borrower in its financial and/or
operational restructuring.

 

ARTICLE VII.
EVENTS OF DEFAULT, RIGHTS AND REMEDIES

 

Section 7.1            Events of Default. “Event of Default”, wherever used
herein, means any one of the following events:

 

(A)           DEFAULT IN THE PAYMENT OF ANY OBLIGATIONS WHEN THEY BECOME DUE AND
PAYABLE;

 

(B)           DEFAULT IN THE PERFORMANCE, OR BREACH, OF ANY COVENANT OR
AGREEMENT OF THE BORROWER CONTAINED IN THIS AGREEMENT OR ANY OTHER LOAN
DOCUMENT;

 

(C)           A CHANGE OF CONTROL SHALL OCCUR;

 

(D)           ANY FINANCIAL COVENANT SHALL BECOME INAPPLICABLE DUE TO THE LAPSE
OF TIME AND THE FAILURE TO AMEND ANY SUCH COVENANT TO COVER FUTURE PERIODS;

 

(E)           THE BORROWER, ANY SUBSIDIARY OF THE BORROWER OR ANY GUARANTOR
SHALL BE OR BECOME INSOLVENT, OR ADMIT IN WRITING ITS OR HIS INABILITY TO PAY
ITS OR HIS DEBTS AS THEY MATURE, OR MAKE AN ASSIGNMENT FOR THE BENEFIT OF
CREDITORS; OR THE BORROWER OR ANY GUARANTOR SHALL APPLY FOR OR CONSENT TO THE
APPOINTMENT OF ANY RECEIVER, TRUSTEE, OR SIMILAR OFFICER FOR IT OR HIM OR FOR
ALL OR ANY SUBSTANTIAL PART OF ITS OR HIS PROPERTY; OR SUCH RECEIVER, TRUSTEE OR
SIMILAR OFFICER SHALL BE APPOINTED WITHOUT THE APPLICATION OR CONSENT OF

 

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THE BORROWER OR SUCH GUARANTOR, AS THE CASE MAY BE; OR THE BORROWER OR ANY
GUARANTOR SHALL INSTITUTE (BY PETITION, APPLICATION, ANSWER, CONSENT OR
OTHERWISE) ANY BANKRUPTCY, INSOLVENCY, REORGANIZATION, ARRANGEMENT, READJUSTMENT
OF DEBT, DISSOLUTION, LIQUIDATION OR SIMILAR PROCEEDING RELATING TO IT OR HIM
UNDER THE LAWS OF ANY JURISDICTION; OR ANY SUCH PROCEEDING SHALL BE INSTITUTED
(BY PETITION, APPLICATION OR OTHERWISE) AGAINST THE BORROWER OR ANY SUCH
GUARANTOR; OR ANY JUDGMENT, WRIT, WARRANT OF ATTACHMENT OR EXECUTION OR SIMILAR
PROCESS SHALL BE ISSUED OR LEVIED AGAINST A SUBSTANTIAL PART OF THE PROPERTY OF
THE BORROWER OR ANY GUARANTOR;

 

(F)            A PETITION SHALL BE FILED BY OR AGAINST THE BORROWER, ANY
SUBSIDIARY OF THE BORROWER, OR ANY GUARANTOR UNDER THE UNITED STATES BANKRUPTCY
CODE NAMING THE BORROWER OR SUCH GUARANTOR AS DEBTOR;

 

(G)           ANY REPRESENTATION OR WARRANTY MADE BY THE BORROWER IN THIS
AGREEMENT, BY ANY GUARANTOR IN ANY GUARANTY DELIVERED TO THE LENDER, OR BY THE
BORROWER (OR ANY OF ITS OFFICERS) OR ANY GUARANTOR IN ANY AGREEMENT,
CERTIFICATE, INSTRUMENT OR FINANCIAL STATEMENT OR OTHER STATEMENT CONTEMPLATED
BY OR MADE OR DELIVERED PURSUANT TO OR IN CONNECTION WITH THIS AGREEMENT OR ANY
SUCH GUARANTY SHALL PROVE TO HAVE BEEN INCORRECT IN ANY MATERIAL RESPECT WHEN
DEEMED TO BE EFFECTIVE;

 

(H)           THE RENDERING AGAINST THE BORROWER OF AN ARBITRATION AWARD, FINAL
JUDGMENT, DECREE OR ORDER FOR THE PAYMENT OF MONEY IN EXCESS OF $200,000 AND THE
CONTINUANCE OF SUCH ARBITRATION AWARD, JUDGMENT, DECREE OR ORDER UNSATISFIED AND
IN EFFECT FOR ANY PERIOD OF 30 CONSECUTIVE DAYS WITHOUT A STAY OF EXECUTION;

 

(I)            A DEFAULT UNDER ANY BOND, DEBENTURE, NOTE OR OTHER EVIDENCE OF
MATERIAL INDEBTEDNESS OF THE BORROWER OWED TO ANY PERSON OTHER THAN THE LENDER,
OR UNDER ANY INDENTURE OR OTHER INSTRUMENT UNDER WHICH ANY SUCH EVIDENCE OF
INDEBTEDNESS HAS BEEN ISSUED OR BY WHICH IT IS GOVERNED, OR UNDER ANY MATERIAL
LEASE OR OTHER CONTRACT, AND THE EXPIRATION OF THE APPLICABLE PERIOD OF GRACE,
IF ANY, SPECIFIED IN SUCH EVIDENCE OF INDEBTEDNESS, INDENTURE, OTHER INSTRUMENT,
LEASE OR CONTRACT;

 

(J)            ANY REPORTABLE EVENT, WHICH THE LENDER DETERMINES IN GOOD FAITH
MIGHT CONSTITUTE GROUNDS FOR THE TERMINATION OF ANY PENSION PLAN OR FOR THE
APPOINTMENT BY THE APPROPRIATE UNITED STATES DISTRICT COURT OF A TRUSTEE TO
ADMINISTER ANY PENSION PLAN, SHALL HAVE OCCURRED AND BE CONTINUING 30 DAYS AFTER
WRITTEN NOTICE TO SUCH EFFECT SHALL HAVE BEEN GIVEN TO THE BORROWER BY THE
LENDER; OR A TRUSTEE SHALL HAVE BEEN APPOINTED BY AN APPROPRIATE UNITED STATES
DISTRICT COURT TO ADMINISTER ANY PENSION PLAN; OR THE PENSION BENEFIT GUARANTY
CORPORATION SHALL HAVE INSTITUTED PROCEEDINGS TO TERMINATE ANY PENSION PLAN OR
TO APPOINT A TRUSTEE TO ADMINISTER ANY PENSION PLAN; OR THE BORROWER OR ANY
ERISA AFFILIATE SHALL HAVE FILED FOR A DISTRESS TERMINATION OF ANY PENSION PLAN
UNDER TITLE IV OF ERISA; OR THE BORROWER OR ANY ERISA AFFILIATE SHALL HAVE
FAILED TO MAKE ANY QUARTERLY CONTRIBUTION REQUIRED WITH RESPECT TO ANY PENSION
PLAN UNDER SECTION 412(M) OF THE IRC, WHICH THE LENDER DETERMINES IN GOOD FAITH
MAY BY ITSELF, OR IN COMBINATION WITH ANY SUCH FAILURES THAT THE LENDER MAY
DETERMINE ARE LIKELY TO OCCUR IN THE FUTURE, RESULT IN

 

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THE IMPOSITION OF A LIEN ON THE BORROWER’S ASSETS IN FAVOR OF THE PENSION PLAN;
OR ANY WITHDRAWAL, PARTIAL WITHDRAWAL, REORGANIZATION OR OTHER EVENT OCCURS WITH
RESPECT TO A MULTIEMPLOYER PLAN WHICH RESULTS OR COULD REASONABLY BE EXPECTED TO
RESULT IN A MATERIAL LIABILITY OF THE BORROWER TO THE MULTIEMPLOYER PLAN UNDER
TITLE IV OF ERISA.

 

(K)           AN EVENT OF DEFAULT SHALL OCCUR UNDER ANY SECURITY OR OTHER LOAN
DOCUMENT;

 

(L)            THE BORROWER SHALL LIQUIDATE, DISSOLVE, TERMINATE OR SUSPEND ITS
BUSINESS OPERATIONS OR OTHERWISE FAIL TO OPERATE ITS BUSINESS IN THE ORDINARY
COURSE, OR SELL OR ATTEMPT TO SELL ALL OR SUBSTANTIALLY ALL OF ITS ASSETS,
WITHOUT THE LENDER’S PRIOR WRITTEN CONSENT;

 

(M)          DEFAULT IN THE PAYMENT OF ANY AMOUNT OWED BY THE BORROWER TO THE
LENDER OTHER THAN ANY INDEBTEDNESS ARISING HEREUNDER;

 

(N)           ANY GUARANTOR OR PERSON SIGNING A SUPPORT AGREEMENT IN FAVOR OF
THE LENDER SHALL REPUDIATE, PURPORT TO REVOKE OR FAIL TO PERFORM HIS OBLIGATIONS
UNDER HIS GUARANTY OR SUPPORT AGREEMENT IN FAVOR OF THE LENDER, ANY INDIVIDUAL
GUARANTOR SHALL DIE OR ANY OTHER GUARANTOR SHALL CEASE TO EXIST;

 

(O)           THE BORROWER SHALL TAKE OR PARTICIPATE IN ANY ACTION WHICH WOULD
BE PROHIBITED UNDER OR VIOLATE THE PROVISIONS OF THE INTERCREDITOR AGREEMENT,
ANY SUBORDINATION AGREEMENT OR MAKE ANY PAYMENT ON THE SUBORDINATED INDEBTEDNESS
(AS DEFINED IN THE SUBORDINATION AGREEMENT) THAT ANY PERSON WAS NOT ENTITLED TO
RECEIVE UNDER THE PROVISIONS OF THE SUBORDINATION AGREEMENT;

 

(P)           ANY EVENT OR CIRCUMSTANCE WITH RESPECT TO THE BORROWER SHALL OCCUR
SUCH THAT THE LENDER SHALL BELIEVE IN GOOD FAITH THAT THE PROSPECT OF PAYMENT OF
ALL OR ANY PART OF THE OBLIGATIONS OR THE PERFORMANCE BY THE BORROWER UNDER THE
LOAN DOCUMENTS IS IMPAIRED OR ANY MATERIAL ADVERSE CHANGE IN THE BUSINESS OR
FINANCIAL CONDITION OF THE BORROWER SHALL OCCUR; OR

 

(Q)           ANY BREACH, DEFAULT OR EVENT OF DEFAULT BY OR ATTRIBUTABLE TO ANY
AFFILIATE UNDER ANY AGREEMENT BETWEEN SUCH AFFILIATE AND THE LENDER SHALL OCCUR.

 

Section 7.2            Rights and Remedies. During any Default Period, the
Lender may exercise any or all of the following rights and remedies:

 

(A)           THE LENDER MAY, BY NOTICE TO THE BORROWER, DECLARE THE COMMITMENT
TO BE TERMINATED, WHEREUPON THE SAME SHALL FORTHWITH TERMINATE;

 

(B)           THE LENDER MAY, BY NOTICE TO THE BORROWER, DECLARE THE OBLIGATIONS
TO BE FORTHWITH DUE AND PAYABLE, WHEREUPON ALL OBLIGATIONS SHALL BECOME AND BE
FORTHWITH DUE AND PAYABLE, WITHOUT PRESENTMENT, NOTICE OF DISHONOR, PROTEST OR
FURTHER NOTICE OF ANY KIND, ALL OF WHICH THE BORROWER HEREBY EXPRESSLY WAIVES;

 

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(C)           THE LENDER MAY, WITHOUT NOTICE TO THE BORROWER AND WITHOUT FURTHER
ACTION, APPLY ANY AND ALL MONEY OWING BY THE LENDER TO THE BORROWER TO THE
PAYMENT OF THE OBLIGATIONS;

 

(D)           THE LENDER MAY EXERCISE AND ENFORCE ANY AND ALL RIGHTS AND
REMEDIES AVAILABLE UPON DEFAULT TO A SECURED PARTY UNDER THE UCC, INCLUDING THE
RIGHT TO TAKE POSSESSION OF COLLATERAL, OR ANY EVIDENCE THEREOF, PROCEEDING
WITHOUT JUDICIAL PROCESS OR BY JUDICIAL PROCESS (WITHOUT A PRIOR HEARING OR
NOTICE THEREOF, WHICH THE BORROWER HEREBY EXPRESSLY WAIVES) AND THE RIGHT TO
SELL, LEASE OR OTHERWISE DISPOSE OF ANY OR ALL OF THE COLLATERAL (WITH OR
WITHOUT GIVING ANY WARRANTIES AS TO THE COLLATERAL, TITLE TO THE COLLATERAL OR
SIMILAR WARRANTIES), AND, IN CONNECTION THEREWITH, THE BORROWER WILL ON DEMAND
ASSEMBLE THE COLLATERAL AND MAKE IT AVAILABLE TO THE LENDER AT A PLACE TO BE
DESIGNATED BY THE LENDER WHICH IS REASONABLY CONVENIENT TO BOTH PARTIES;

 

(E)           THE LENDER MAY MAKE DEMAND UPON THE BORROWER AND, FORTHWITH UPON
SUCH DEMAND, THE BORROWER WILL PAY TO THE LENDER IN IMMEDIATELY AVAILABLE FUNDS
FOR DEPOSIT IN THE SPECIAL ACCOUNT PURSUANT TO SECTION 2.14 AN AMOUNT EQUAL TO
THE AGGREGATE MAXIMUM AMOUNT AVAILABLE TO BE DRAWN UNDER ALL LETTERS OF CREDIT
THEN OUTSTANDING, ASSUMING COMPLIANCE WITH ALL CONDITIONS FOR DRAWING
THEREUNDER;

 

(F)            THE LENDER MAY EXERCISE AND ENFORCE ITS RIGHTS AND REMEDIES UNDER
THE LOAN DOCUMENTS; AND

 

(G)           THE LENDER MAY EXERCISE ANY OTHER RIGHTS AND REMEDIES AVAILABLE TO
IT BY LAW OR AGREEMENT.

 

Notwithstanding the foregoing, upon the occurrence of an Event of Default
described in subsections (e) or (f) of Section 7.1, the Obligations shall be
immediately due and payable automatically without presentment, demand, protest
or notice of any kind. If the Lender sells any of the Collateral on credit, the
Obligations will be reduced only to the extent of payments actually received. If
the purchaser fails to pay for the Collateral, the Lender may resell the
Collateral and shall apply any proceeds actually received to the Obligations.

 

Section 7.3            Certain Notices. If notice to the Borrower of any
intended disposition of Collateral or any other intended action is required by
law in a particular instance, such notice shall be deemed commercially
reasonable if given (in the manner specified in Section 8.3) at least ten
calendar days before the date of intended disposition or other action.

 

ARTICLE VIII.
MISCELLANEOUS

 

Section 8.1            No Waiver; Cumulative Remedies; Compliance with Laws. No
failure or delay by the Lender in exercising any right, power or remedy under
the Loan Documents shall operate as a waiver thereof; nor shall any single or
partial exercise of any such right, power or remedy preclude any other or
further exercise thereof or the exercise of any other right, power or

 

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remedy under the Loan Documents. The remedies provided in the Loan Documents are
cumulative and not exclusive of any remedies provided by law. The Lender may
comply with any applicable state or federal law requirements in connection with
a disposition of the Collateral and such compliance will not be considered
adversely to affect the commercial reasonableness of any sale of the Collateral.

 

Section 8.2                                   Amendments, Etc. No amendment,
modification, termination or waiver of any provision of any Loan Document or
consent to any departure by the Borrower therefrom or any release of a Security
Interest shall be effective unless the same shall be in writing and signed by
the Lender, and then such waiver or consent shall be effective only in the
specific instance and for the specific purpose for which given. No notice to or
demand on the Borrower in any case shall entitle the Borrower to any other or
further notice or demand in similar or other circumstances.

 

Section 8.3                                   Addresses for Notices; Requests
for Accounting. Except as otherwise expressly provided herein, all notices,
requests, demands and other communications provided for under the Loan Documents
shall be in writing and shall be (a) personally delivered, (b) sent by first
class United States mail, (c) sent by overnight courier of national reputation,
or (d) transmitted by telecopy, in each case addressed or telecopied to the
party to whom notice is being given at its address or telecopier number as set
forth below next to its signature or, as to each party, at such other address or
telecopier number as may hereafter be designated by such party in a written
notice to the other party complying as to delivery with the terms of this
Section. All such notices, requests, demands and other communications shall be
deemed to have been given on (a) the date received if personally delivered,
(b) when deposited in the mail if delivered by mail, (c) the date sent if sent
by overnight courier, or (d) the date of transmission if delivered by telecopy,
except that notices or requests to the Lender pursuant to any of the provisions
of Article II shall not be effective until received by the Lender. All requests
under Section 9-210 of the UCC (i) shall be made in a writing signed by a person
authorized under Section 2.2(b), (ii) shall be personally delivered, sent by
registered or certified mail, return receipt requested, or by overnight courier
of national reputation (iii) shall be deemed to be sent when received by the
Lender and (iv) shall otherwise comply with the requirements of Section 9-210.
The Borrower requests that the Lender respond to all such requests which on
their face appear to come from an authorized individual and releases the Lender
from any liability for so responding. The Borrower shall pay Lender the maximum
amount allowed by law for responding to such requests.

 

Section 8.4                                   Arbitration.

 

(A)                                  ARBITRATION.  THE PARTIES HERETO AGREE,
UPON DEMAND BY ANY PARTY, TO SUBMIT TO BINDING ARBITRATION ALL CLAIMS, DISPUTES
AND CONTROVERSIES BETWEEN OR AMONG THEM (AND THEIR RESPECTIVE EMPLOYEES,
OFFICERS, DIRECTORS, ATTORNEYS, AND OTHER AGENTS), WHETHER IN TORT, CONTRACT OR
OTHERWISE ARISING OUT OF OR RELATING TO IN ANY WAY (I) THE LOAN AND RELATED LOAN
DOCUMENTS WHICH ARE THE SUBJECT OF THIS AGREEMENT AND ITS NEGOTIATION,
EXECUTION, COLLATERALIZATION, ADMINISTRATION, REPAYMENT, MODIFICATION,
EXTENSION, SUBSTITUTION, FORMATION, INDUCEMENT, ENFORCEMENT, DEFAULT OR
TERMINATION; OR (II) REQUESTS FOR ADDITIONAL CREDIT.

 

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(B)                                 GOVERNING RULES.  ANY ARBITRATION PROCEEDING
WILL (I) PROCEED IN A LOCATION IN MINNESOTA SELECTED BY THE AMERICAN ARBITRATION
ASSOCIATION (“AAA”); (II) BE GOVERNED BY THE FEDERAL ARBITRATION ACT (TITLE 9 OF
THE UNITED STATES CODE), NOTWITHSTANDING ANY CONFLICTING CHOICE OF LAW PROVISION
IN ANY OF THE DOCUMENTS BETWEEN THE PARTIES; AND (III) BE CONDUCTED BY THE AAA,
OR SUCH OTHER ADMINISTRATOR AS THE PARTIES SHALL MUTUALLY AGREE UPON, IN
ACCORDANCE WITH THE AAA’S COMMERCIAL DISPUTE RESOLUTION PROCEDURES, UNLESS THE
CLAIM OR COUNTERCLAIM IS AT LEAST $1,000,000.00 EXCLUSIVE OF CLAIMED INTEREST,
ARBITRATION FEES AND COSTS IN WHICH CASE THE ARBITRATION SHALL BE CONDUCTED IN
ACCORDANCE WITH THE AAA’S OPTIONAL PROCEDURES FOR LARGE, COMPLEX COMMERCIAL
DISPUTES (THE COMMERCIAL DISPUTE RESOLUTION PROCEDURES OR THE OPTIONAL
PROCEDURES FOR LARGE, COMPLEX COMMERCIAL DISPUTES TO BE REFERRED TO, AS
APPLICABLE, AS THE “RULES”).  IF THERE IS ANY INCONSISTENCY BETWEEN THE TERMS
HEREOF AND THE RULES, THE TERMS AND PROCEDURES SET FORTH HEREIN SHALL CONTROL. 
ANY PARTY WHO FAILS OR REFUSES TO SUBMIT TO ARBITRATION FOLLOWING A DEMAND BY
ANY OTHER PARTY SHALL BEAR ALL COSTS AND EXPENSES INCURRED BY SUCH OTHER PARTY
IN COMPELLING ARBITRATION OF ANY DISPUTE.  NOTHING CONTAINED HEREIN SHALL BE
DEEMED TO BE A WAIVER BY ANY PARTY THAT IS A BANK OF THE PROTECTIONS AFFORDED TO
IT UNDER 12 U.S.C. §91 OR ANY SIMILAR APPLICABLE STATE LAW.

 

(C)                                  NO WAIVER OF PROVISIONAL REMEDIES,
SELF-HELP AND FORECLOSURE.  THE ARBITRATION REQUIREMENT DOES NOT LIMIT THE RIGHT
OF ANY PARTY TO (I) FORECLOSE AGAINST REAL OR PERSONAL PROPERTY COLLATERAL;
(II) EXERCISE SELF-HELP REMEDIES RELATING TO COLLATERAL OR PROCEEDS OF
COLLATERAL SUCH AS SETOFF OR REPOSSESSION; OR (III) OBTAIN PROVISIONAL OR
ANCILLARY REMEDIES SUCH AS REPLEVIN, INJUNCTIVE RELIEF, ATTACHMENT OR THE
APPOINTMENT OF A RECEIVER, BEFORE DURING OR AFTER THE PENDENCY OF ANY
ARBITRATION PROCEEDING.  THIS EXCLUSION DOES NOT CONSTITUTE A WAIVER OF THE
RIGHT OR OBLIGATION OF ANY PARTY TO SUBMIT ANY DISPUTE TO ARBITRATION OR
REFERENCE HEREUNDER, INCLUDING THOSE ARISING FROM THE EXERCISE OF THE ACTIONS
DETAILED IN SECTIONS (I), (II) AND (III) OF THIS PARAGRAPH.

 

(D)                                 ARBITRATOR QUALIFICATIONS AND POWERS.  ANY
ARBITRATION PROCEEDING IN WHICH THE AMOUNT IN CONTROVERSY IS $5,000,000.00 OR
LESS WILL BE DECIDED BY A SINGLE ARBITRATOR SELECTED ACCORDING TO THE RULES, AND
WHO SHALL NOT RENDER AN AWARD OF GREATER THAN $5,000,000.00.  ANY DISPUTE IN
WHICH THE AMOUNT IN CONTROVERSY EXCEEDS $5,000,000.00 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.  THE
ARBITRATOR WILL BE A NEUTRAL ATTORNEY LICENSED IN THE STATE OF MINNESOTA OR A
NEUTRAL RETIRED JUDGE OF THE STATE OR FEDERAL JUDICIARY OF THE STATE OF
MINNESOTA, IN EITHER CASE WITH A MINIMUM OF TEN YEARS EXPERIENCE IN THE
SUBSTANTIVE LAW APPLICABLE TO THE SUBJECT MATTER OF THE DISPUTE TO BE
ARBITRATED.  THE ARBITRATOR WILL DETERMINE WHETHER OR NOT AN ISSUE IS
ARBITRATABLE AND WILL GIVE EFFECT TO THE STATUTES OF LIMITATION IN DETERMINING
ANY CLAIM.  IN ANY ARBITRATION PROCEEDING THE ARBITRATOR WILL DECIDE (BY
DOCUMENTS ONLY OR WITH A HEARING AT THE ARBITRATOR’S DISCRETION) ANY PRE-HEARING
MOTIONS WHICH ARE SIMILAR TO MOTIONS TO DISMISS FOR FAILURE TO STATE A CLAIM OR
MOTIONS FOR SUMMARY ADJUDICATION.  THE ARBITRATOR SHALL RESOLVE ALL DISPUTES IN
ACCORDANCE WITH THE SUBSTANTIVE LAW OF MINNESOTA AND MAY GRANT ANY REMEDY OR
RELIEF THAT A COURT OF SUCH STATE COULD ORDER OR GRANT WITHIN

 

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THE SCOPE HEREOF AND SUCH ANCILLARY RELIEF AS IS NECESSARY TO MAKE EFFECTIVE ANY
AWARD.  THE ARBITRATOR SHALL ALSO HAVE THE POWER TO AWARD RECOVERY OF ALL COSTS
AND FEES, TO IMPOSE SANCTIONS AND TO TAKE SUCH OTHER ACTION AS THE ARBITRATOR
DEEMS NECESSARY TO THE SAME EXTENT A JUDGE COULD PURSUANT TO THE FEDERAL
RULES OF CIVIL PROCEDURE, THE MINNESOTA RULES OF CIVIL PROCEDURE OR OTHER
APPLICABLE LAW.  JUDGMENT UPON THE AWARD RENDERED BY THE ARBITRATOR MAY BE
ENTERED IN ANY COURT HAVING JURISDICTION.  THE INSTITUTION AND MAINTENANCE OF AN
ACTION FOR JUDICIAL RELIEF OR PURSUIT OF A PROVISIONAL OR ANCILLARY REMEDY SHALL
NOT CONSTITUTE A WAIVER OF THE RIGHT OF ANY PARTY, INCLUDING THE PLAINTIFF, TO
SUBMIT THE CONTROVERSY OR CLAIM TO ARBITRATION IF ANY OTHER PARTY CONTESTS SUCH
ACTION FOR JUDICIAL RELIEF.

 

(E)                                  DISCOVERY.  IN ANY ARBITRATION PROCEEDING
DISCOVERY WILL BE PERMITTED IN ACCORDANCE WITH THE RULES.  ALL DISCOVERY SHALL
BE EXPRESSLY LIMITED TO MATTERS DIRECTLY RELEVANT TO THE DISPUTE BEING
ARBITRATED AND MUST BE COMPLETED NO LATER THAN 20 DAYS BEFORE THE HEARING DATE
AND WITHIN 180 DAYS OF THE FILING OF THE DISPUTE WITH THE AAA.  ANY REQUESTS FOR
AN EXTENSION OF THE DISCOVERY PERIODS, OR ANY DISCOVERY DISPUTES, WILL BE
SUBJECT TO FINAL DETERMINATION BY THE ARBITRATOR UPON A SHOWING THAT THE REQUEST
FOR DISCOVERY IS ESSENTIAL FOR THE PARTY’S PRESENTATION AND THAT NO ALTERNATIVE
MEANS FOR OBTAINING INFORMATION IS AVAILABLE.

 

(F)                                    CLASS PROCEEDINGS AND CONSOLIDATIONS. 
THE RESOLUTION OF ANY DISPUTE ARISING PURSUANT TO THE TERMS OF THIS AGREEMENT
SHALL BE DETERMINED BY A SEPARATE ARBITRATION PROCEEDING AND SUCH DISPUTE SHALL
NOT BE CONSOLIDATED WITH OTHER DISPUTES OR INCLUDED IN ANY CLASS PROCEEDING.

 

(G)                                 PAYMENT OF ARBITRATION COSTS AND FEES.  THE
ARBITRATOR SHALL AWARD ALL COSTS AND EXPENSES OF THE ARBITRATION PROCEEDING.

 

(H)                                 MISCELLANEOUS.  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 OR BY APPLICABLE LAW OR REGULATION.  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 LOAN DOCUMENTS OR THE SUBJECT
MATTER OF THE DISPUTE SHALL CONTROL.  THIS ARBITRATION PROVISION SHALL SURVIVE
TERMINATION, AMENDMENT OR EXPIRATION OF ANY OF THE LOAN DOCUMENTS OR ANY
RELATIONSHIP BETWEEN THE PARTIES.

 

Section 8.5                                   Further Documents. The Borrower
will from time to time execute and deliver or endorse any and all instruments,
documents, conveyances, assignments, security agreements, financing statements,
control agreements and other agreements and writings that the Lender may
reasonably request in order to secure, protect, perfect or enforce the Security
Interest or the Lender’s rights under the Loan Documents (but any failure to
request or assure that the Borrower executes, delivers or endorses any such item
shall not affect or impair the validity,

 

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sufficiency or enforceability of the Loan Documents and the Security Interest,
regardless of whether any such item was or was not executed, delivered or
endorsed in a similar context or on a prior occasion).

 

Section 8.6                                   Costs and Expenses. The Borrower
shall pay on demand all costs and expenses, including reasonable attorneys’
fees, incurred by the Lender in connection with the Obligations, this Agreement,
the Loan Documents, any Letter of Credit and any other document or agreement
related hereto or thereto, and the transactions contemplated hereby, including
all such costs, expenses and fees incurred in connection with the negotiation,
preparation, execution, amendment, administration, performance, collection and
enforcement of the Obligations and all such documents and agreements and the
creation, perfection, protection, satisfaction, foreclosure or enforcement of
the Security Interest.

 

Section 8.7                                   Indemnity. In addition to the
payment of expenses pursuant to Section 8.6, the Borrower shall indemnify,
defend and hold harmless the Lender, and any of its participants, parent
corporations, subsidiary corporations, affiliated corporations, successor
corporations, and all present and future officers, directors, employees,
attorneys and agents of the foregoing (the “Indemnitees”) from and against any
of the following (collectively, “Indemnified Liabilities”):

 

(I)            ANY AND ALL TRANSFER TAXES, DOCUMENTARY TAXES, ASSESSMENTS OR
CHARGES MADE BY ANY GOVERNMENTAL AUTHORITY BY REASON OF THE EXECUTION AND
DELIVERY OF THE LOAN DOCUMENTS OR THE MAKING OF THE ADVANCES;

 

(II)           ANY CLAIMS, LOSS OR DAMAGE TO WHICH ANY INDEMNITEE MAY BE
SUBJECTED IF ANY REPRESENTATION OR WARRANTY CONTAINED IN SECTION 5.14 PROVES TO
BE INCORRECT IN ANY RESPECT OR AS A RESULT OF ANY VIOLATION OF THE COVENANT
CONTAINED IN SECTION 6.12(B); AND

 

(III)          ANY AND ALL OTHER LIABILITIES, LOSSES, DAMAGES, PENALTIES,
JUDGMENTS, SUITS, CLAIMS, COSTS AND EXPENSES OF ANY KIND OR NATURE WHATSOEVER
(INCLUDING THE REASONABLE FEES AND DISBURSEMENTS OF COUNSEL) IN CONNECTION WITH
THE FOREGOING AND ANY OTHER INVESTIGATIVE, ADMINISTRATIVE OR JUDICIAL
PROCEEDINGS, WHETHER OR NOT SUCH INDEMNITEE SHALL BE DESIGNATED A PARTY THERETO,
WHICH MAY BE IMPOSED ON, INCURRED BY OR ASSERTED AGAINST ANY SUCH INDEMNITEE, IN
ANY MANNER RELATED TO OR ARISING OUT OF OR IN CONNECTION WITH THE MAKING OF THE
ADVANCES AND THE LOAN DOCUMENTS OR THE USE OR INTENDED USE OF THE PROCEEDS OF
THE ADVANCES.

 

If any investigative, judicial or administrative proceeding arising from any of
the foregoing is brought against any Indemnitee, upon such Indemnitee’s request,
the Borrower, or counsel designated by the Borrower and satisfactory to the
Indemnitee, will resist and defend such action, suit or proceeding to the extent
and in the manner directed by the Indemnitee, at the Borrower’s sole costs and
expense. Each Indemnitee will use its best efforts to cooperate in the defense
of any such action, suit or proceeding. If the foregoing undertaking to
indemnify, defend

 

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and hold harmless may be held to be unenforceable because it violates any law or
public policy, the Borrower shall nevertheless make the maximum contribution to
the payment and satisfaction of each of the Indemnified Liabilities which is
permissible under applicable law. The Borrower’s obligation under this
Section 8.7 shall survive the termination of this Agreement and the discharge of
the Borrower’s other obligations hereunder.

 

Section 8.8                                   Participants. The Lender and its
participants, if any, are not partners or joint venturers, and the Lender shall
not have any liability or responsibility for any obligation, act or omission of
any of its participants. All rights and powers specifically conferred upon the
Lender may be transferred or delegated to any of the Lender’s participants,
successors or assigns.

 

Section 8.9                                   Execution in Counterparts;
Telefacsimile Execution. This Agreement and other Loan Documents may be executed
in any number of counterparts, each of which when so executed and delivered
shall be deemed to be an original and all of which counterparts, taken together,
shall constitute but one and the same instrument. Delivery of an executed
counterpart of this Agreement by telefacsimile shall be equally as effective as
delivery of an original executed counterpart of this Agreement. Any party
delivering an executed counterpart of this Agreement by telefacsimile also shall
deliver an original executed counterpart of this Agreement but the failure to
deliver an original executed counterpart shall not affect the validity,
enforceability, and binding effect of this Agreement.

 

Section 8.10                            Retention of Borrower’s Records. The
Lender shall have no obligation to maintain any electronic records or any
documents, schedules, invoices, agings, or other papers delivered to the Lender
by the Borrower or in connection with the Loan Documents for more than four
months after receipt by the Lender.

 

Section 8.11                            Binding Effect; Assignment; Complete
Agreement; Exchanging Information. The Loan Documents shall be binding upon and
inure to the benefit of the Borrower and the Lender and their respective
successors and assigns, except that the Borrower shall not have the right to
assign its rights thereunder or any interest therein without the Lender’s prior
written consent. To the extent permitted by law, the Borrower waives and will
not assert against any assignee any claims, defenses or set-offs which the
Borrower could assert against the Lender. This Agreement shall also bind all
Persons who become a party to this Agreement as a borrower. This Agreement,
together with the Loan Documents, comprises the complete and integrated
agreement of the parties on the subject matter hereof and supersedes all prior
agreements, written or oral, on the subject matter hereof. Without limiting the
Lender’s right to share information regarding the Borrower and its Affiliates
with the Lender’s participants, accountants, lawyers and other advisors, the
Lender, Wells Fargo & Company, and all direct and indirect subsidiaries of Wells
Fargo & Company, may exchange any and all information they may have in their
possession regarding the Borrower and its Affiliates, and the Borrower waives
any right of confidentiality it may have with respect to such exchange of such
information.

 

Section 8.12                            Severability of Provisions. Any
provision of this Agreement which is prohibited or unenforceable shall be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof.

 

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Section 8.13                            Headings. Article, Section and
subsection headings in this Agreement are included herein for convenience of
reference only and shall not constitute a part of this Agreement for any other
purpose.

 

Section 8.14                            Amendment and Restatement of Existing
Credit Agreement.  This Agreement completely amends, restates and replaces the
Existing Credit Agreement, which is no longer of any force or effect.

 

Section 8.15                            Governing Law; Jurisdiction, Venue;
Waiver of Jury Trial. The Loan Documents shall be governed by and construed in
accordance with the substantive laws (other than conflict laws) of the State of
Minnesota. The parties hereto hereby (i) consent to the personal jurisdiction of
the state and federal courts located in the State of Minnesota in connection
with any controversy related to compelling arbitration, enforcing an arbitration
award related to this Agreement; or the Lender’s exercise of any of its rights
under Subsection 8.4(c), above; (ii) waive any argument that venue in any such
forum is not convenient, (iii) agree that any litigation initiated by the Lender
or the Borrower in connection with and permitted by this Agreement or the other
Loan Documents may be venued in either the State or Federal courts located in
Hennepin County, Minnesota; (iv) agree that a final judgment in any such suit,
action or proceeding shall be conclusive and may be enforced in other
jurisdictions by suit on the judgment or in any other manner provided by law. 
Notwithstanding the foregoing, nothing shall prevent or prohibit the Lender from
bringing any action or seeking jurisdiction against the Borrower in any other
court or venue as may be required by applicable law.

 

THE PARTIES WAIVE ANY RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED
ON OR PERTAINING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT.

 

Section 8.16                            No Waiver under Existing Credit
Agreement.  The execution of this Agreement and any documents related hereto
shall not be deemed to be a waiver of any Default or Event of Default under the
Existing Credit Agreement or breach, default or event of default under any
Security Document or other document held by the Lender, whether or not known to
the Lender and whether or not existing on the date of this Agreement.

 

Section 8.17                            Release.  The Borrower hereby absolutely
and unconditionally releases and forever discharges the Lender, and any and all
participants, parent corporations, subsidiary corporations, affiliated
corporations, insurers, indemnitors, successors and assigns thereof, together
with all of the present and former directors, officers, agents and employees of
any of the foregoing, from any and all claims, demands or causes of action of
any kind, nature or description, whether arising in law or equity or upon
contract or tort or under any state or federal law or otherwise, which the
Borrower has had, now has or has made claim to have against any such person for
or by reason of any act, omission, matter, cause or thing whatsoever arising
from the beginning of time to and including the date of this Agreement, whether
such claims, demands and causes of action are matured or unmatured or known or
unknown.

 

[Signature Page Follows]

 

51

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

 

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

 

Nortech Systems Incorporated

NORTECH SYSTEMS INCORPORATED

1120 Wayzata Boulevard East

By

/s/ Richard G. Wasielewski

Suite 201

 

Richard G. Wasielewski

Wayzata, MN 55391

 

Its Chief Financial Officer

Telecopier: 952-449-0442

 

Attention: Michael J. Degen

 

e-mail: mdegen@nortechsys.com

 

 

 

Wells Fargo Bank, N.A.

WELLS FARGO BANK,

MAC N9305-198

NATIONAL ASSOCIATION

90 South Seventh Street, 19th Floor

By

/s/ Ann Spry

Minneapolis, MN 55402

 

Ann Spry

Telecopier: (612) 316-1853

 

Its Vice President

Attention: Ann Spry

 

e-mail: ann.m.spry@wellsfargo.com

 

 

 

[Signature Page to Second Amended and Restated
Credit and Security Agreement dated August 6, 2009]

 

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

 

Table of Exhibits and Schedules

 

Exhibit A

Compliance Certificate

Exhibit B

Borrowing Base Certificate

Exhibit C

Premises

Schedule 5.1

Trade Names, Chief Executive Office, Principal Place of Business, and Locations
of Collateral

Schedule 5.2

Capitalization and Organizational Chart

Schedule 5.5

Subsidiaries

Schedule 5.11

Intellectual Property Disclosures

Schedule 6.3

Permitted Liens

Schedule 6.4

Permitted Indebtedness and Guaranties

 

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

 

Exhibit A to Second Amended and Restated Credit and Security Agreement

 

Compliance Certificate

 

To:

Anny Spry

 

Wells Fargo Bank, N.A.

Date:

                         , 200     

Subject:

Nortech Systems Incorporated Financial Statements

 

In accordance with our Second Amended and Restated Credit and Security Agreement
dated as of August 6, 2009, and as amended from time to time (as amended, the
“Credit Agreement”), attached are the financial statements of Nortech Systems
Incorporated (the “Borrower”) as of and for                                 ,
200       (the “Reporting Date”) and the year-to-date period then ended (the
“Current Financials”). All terms used in this certificate have the meanings
given in the Credit Agreement.

 

As of each quarterly reporting period, I certify that the Current Financials
have been prepared in accordance with GAAP, subject to year-end audit
adjustments, and fairly present the Borrower’s financial condition as of the
date thereof.

 

Events of Default. (Check one):

 

o                                    The undersigned does not have knowledge of
the occurrence of a Default or Event of Default under the Credit Agreement
except as previously reported in writing to the Lender.

 

o                                    The undersigned has knowledge of the
occurrence of a Default or Event of Default under the Credit Agreement not
previously reported in writing to the Lender and attached hereto is a statement
of the facts with respect to thereto. The Borrower acknowledges that pursuant to
Section 2.10(b) of the Credit Agreement, the Lender may impose the Default Rate
at any time during the resulting Default Period.

 

Financial Covenants. I further hereby certify as follows:

 

1.                                       Maximum Net Loss. Pursuant to
Section 6.2(a) of the Credit Agreement, as of the Reporting Date, Borrower’s
fiscal year-to-date Net Loss, determined on a consolidated basis, was
                                         which o satisfies o does not satisfy
the requirement that such Net Loss be no more than the applicable amount set
forth in the table below on the Reporting Date.

 

June 30, 2009

 

<$5,800,000>

 

July 31, 2009

 

<$6,100,000>

 

August 31, 2009

 

<$6,300,000>

 

September 30, 2009

 

<$6,600,000>

 

October 31, 2009

 

<$6,500,000>

 

November 30, 2009

 

<$6,400,000>

 

December 31, 2009

 

<$6,400,000>

 

January 31, 2010

 

<$500,000>

 

February 29, 2010

 

<$500,000>

 

 

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

 

2.                                       Capital Expenditures.  Pursuant to
Section 6.2(b) of the Credit Agreement:

 

(a)                                  For the year to date period for fiscal year
2009,  the fiscal quarter to date period ending on the Reporting Date, Borrower
has expended or contracted to expend during such fiscal year to date for Capital
Expenditures $                       in the aggregate, which  o satisfies o does
not satisfy the requirement that such expenditures not exceed $1,200,000 for the
fiscal year ending December 31, 2009.  As of the Reporting Date, Borrower has
expended or contracted to expend $                       in accordance with the
Reimbursement Agreement for Capital Expenditures related to the roof project at
the Blue Earth, Minnesota Facility, which o satisfies o does not satisfy the
requirement that Borrower expend no more than $600,000 (of the $1,200,000
aggregate limit) during fiscal year 2009 to complete such project.

 

(b)                                 Borrower has expended or contracted to
expend during such fiscal quarter ending               ,     , 200    for
Capital Expenditures $                       in the aggregate, which  o
satisfies o does not satisfy the requirement that such expenditures not exceed
$150,000 in the aggregate for any one fiscal quarter after December 31, 2009.

 

Attached to are all relevant facts in reasonable detail to evidence, and the
computations of the financial covenants referred to above. These computations
were made in accordance with GAAP.

 

 

 

NORTECH SYSTEMS INCORPORATED

 

 

 

By

 

 

 

Name:

 

 

 

Its Chief Financial Officer

 

A-2

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

 

Exhibit B to Second Amended and Restated Credit and Security Agreement

 

BORROWING BASE CERTIFICATE

 

As of:                   

 

NORTECH SYSTEMS, INC. (the “Borrower”) certifies that the following computation
of the Borrowing Base was performed in accordance with the borrowing definitions
set forth in the Credit Agreement between Wells Fargo Bank, N.A. and the
Borrower dated August 6, 2009, as amended from time to time:

 

Total Accounts Receivable

 

$

 

 

 

 

Less:

 

 

 

 

 

1)       Greater than 90 days past invoice date

 

 

 

 

 

2)       Disputed Accounts, Contra Accounts or Accounts subject to a claim of
offset

 

 

 

 

 

3)       Progress Billings

 

 

 

 

 

4)       Accounts owed by Account debtors, where Borrower is not qualified to do
business

 

 

 

 

 

5)       Proceeds of unregistered intellectual property

 

 

 

 

 

6)       Government Accounts

 

 

 

 

 

7)       Foreign Accounts

 

 

 

 

 

8)       Accounts owing by bankrupt or insolvent account debtor

 

 

 

 

 

9)       Related Party Accounts

 

 

 

 

 

10)     Accounts not subject to a perfect security interest in favor of Lender

 

 

 

 

 

11)     Restructured or modified Accounts

 

 

 

 

 

12)     Accounts constituting advertising, finance charges

 

 

 

 

 

13)     Accounts to the extent they exceed 15% of total Accounts

 

 

 

 

 

14)     25% Cross Age — GE, Semitool, Northrop Grumman 15% Cross-Age — All other
Accounts

 

 

 

 

 

15)     Accounts dominated in currency other than U.S. $ 

 

 

 

 

 

16)     Unapplied Credits

 

 

 

 

 

17)     Customer Deposits

 

 

 

 

 

Eligible Accounts Receivable

 

$

 

 

 

 

80% of Eligible Accounts Receivable

 

 

 

(A) $

 

 

 

 

 

 

 

 

Total Raw Materials Inventory:

 

 

 

 

 

Bemidji, Blue Earth, Fairmont, Merrifield and Augusta

 

$

 

 

 

 

Less: Ineligible Raw Materials Inventory

 

 

 

 

 

Eligible Raw Materials Inventory

 

 

 

 

 

20% of Eligible Raw Materials Inventory

 

(B)$

 

 

 

 

(Not to exceed $3,000,000)

 

 

 

 

 

Total Finished Goods Inventory:

 

 

 

 

 

Bemidji, Blue Earth, Fairmont, Merrifield and Augusta

 

$

 

 

 

 

Less: Ineligible Finished Goods Inventory

 

 

 

 

 

Eligible Finished Goods Inventory

 

 

 

 

 

30% Less of Eligible Finished Goods Inventory

 

(C)$

 

 

 

 

 

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

 

The LESSOR of (B) + (C), or $4,000,000

 

 

 

(D)$

 

 

 

 

 

 

 

 

 

TOTAL BORROWING BASE (The lessor of (A) + (D), or $12,000,000)

 

 

 

$

 

 

LESS: Borrowing Base Reserve, if any

 

 

 

$

 

 

LESS: Reserve for Purchasing Card Credit Limit

 

 

 

$

 

 

LESS: Reserve for Swap Exposure

 

 

 

$

 

 

LESS: Total Letters of Credit Outstanding

 

 

 

$

 

 

LESS: Total Line of Credit Advances Outstanding

 

 

 

$

 

 

 

 

 

 

 

 

 

TOTAL EXCESS/DEFICIT

 

 

 

$

 

 

 

NORTECH SYSTEMS, INC.

 

 

By:

 

 

Date:

 

 

Its:

 

 

 

 

B-2

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

 

Exhibit C to Second Amended and Restated Credit and Security Agreement

 

Premises

 

The Premises referred to in the Credit and Security Agreement are legally
described as follows:

 

1)                                      WAYZATA:  1120 Wayzata Blvd, Suite 200 &
201, Wayzata, MN  55391

 

2)                                      AUGUSTA:  A parcel of land located in
Eau Claire County, State of Wisconsin, described as follows: Lot 1 of Eau Claire
County certified survey map number 1358 filed March 14, 1997, in volume 7 of
Certified Survey Maps, pages 137-139 in the office of the Register of Deeds for
Eau Claire County Wisconsin.

 

3)                                      BEMIDJI:  That part of Government Lot 2,
also with that part of the Northwest Quarter of the Southeast Quarter,
Section 36, Township 147, Range 34, described as follows:

Commencing at a cast iron monument known as B-12 on the Northerly right-of-way
line of Trunk Highway No. 2, said monument being the most Northerly point of the
plat of Minnesota Department of Transportation right-of-way Plat No. 04-5,
according to the recorded plat thereof, assuming said Northerly right-of-way
line bears North 68 degrees 32 minutes 14 seconds West along said Northerly
right-of-way line 1023.92 feet to the point of beginning; thence continuing
North 68 degrees 32 minutes 14 seconds West along said Northerly right-of-way
line1167.81 feet; thence North 74 degrees 29 minutes 01 seconds East 701.36
feet; thence South 68 degrees 32 minutes 14 seconds East, parallel to said
Northerly right-of-way line 462.30 feet to a point on a 100.00 feet radius
curve, the center of circle of said curve bears South 54 degrees 10 minutes 06
seconds East from said point, said point also being on the right-of-way line of
a road; thence Southeasterly along said curve and said right-of-way line 194.28
feet; central angle 111 degrees 18 minutes 46 seconds; thence South 14 degrees
21 minutes 08 seconds West along the prolongation of a radial line of said curve
300.00 feet to the point of beginning.

 

Beltrami County, Minnesota

 

Abstract Property

 

5)                                      FAIRMONT:  Parcel A:  Lot Two (2), Block
One (1), of the Hodgman Business Addition to the City of Fairmont, according to
the map or plat thereof on file and of record in the office of the County
Recorder in and for Martin County, Minnesota. Parcel B:  Lot Two (2), Block One
(1), of the First Northeast Addition to the City of Fairmont, according to the
plat thereof on file and of record in the Office of the Register of Deeds in and
for Martin County, Minnesota, and that portion of Lot Three (3), Block One (1),
First Northeast Addition aforesaid described as follows:

 

Commencing at the Southwest corner of the aforementioned Lot Three (3) in Block
One (1) of the First Northeast Addition to the City of Fairmont, Minnesota,
thence

 

C-1

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

 

East along the South line of said Lot Three (3) for a distance of 163.35 feet,
thence deflecting 90 degrees 21 minutes left for a distance of 30.00 feet,
thence deflecting 89 degrees 39 minutes left for a distance of 163.35 feet to a
point on the West line of said Lot Three (3), thence South along said West line
of Lot Three (3) for a distance of 30.00 feet to the point of beginning.

 

Parcel C:  Lots Four (4) and Five (5), Block Two (2), First Northeast Addition
to the City of Fairmont, as per map or plat thereof on file and of record in the
Office of the County Recorder in and for Martin County, Minnesota.

 

Abstract Property

 

6)                                      MERRIFIELD:  That part of Govt. Lot 6,
Sec. 36, Twp. 135, Rge. 28, described as follows:  Beginning at the Northeast
corner of said Govt. Lot 6; thence South 00 degrees 59 minutes 20 seconds West,
assumed bearing, 579.89 feet along the East line  of said Govt. Lot 6; thence
North 82 degrees 38 minutes 21 seconds West 114.59 feet; thence South 81 degrees
39 minutes 36 seconds West 374.51 feet to the Easterly line of a 66 foot
easement; thence North 70 degrees 11 minutes 23 seconds West 19.60 feet along
said Easterly line of the 66 foot road easement; thence Northeasterly 44.66 feet
along a tangential curve, concave to the Northeast, central angle 64 degrees 10
minutes 00 seconds and radius 39.88 feet continuing along said Easterly line of
the 66 foot road easement; thence North 06 degrees 01 minutes 23 seconds West,
along tangential of the last described curve, 24.02 feet continuing along said
Easterly line of the 66 foot road easement; thence North 00 degrees 59 minutes
20 seconds East 565 feet, more or less, to the North line of said Govt. Lot 6;
thence Easterly 600 feet, more or less, along the North line of said Govt. Lot 6
to the point of beginning.  AND that part of Govt. Lot 6, Sect. 36, Twp. 135,
Rge. 28, described as follows:  Commencing at the Northeast corner of said Govt.
Lot 6; thence South 00 degrees 59 minutes 20 seconds West, assumed bearing,
579.89 feet along the East line of said Govt. Lot 6; thence North 82 degrees 38
minutes 21 seconds West 114.59 feet; thence South 81 degrees 39 minutes 36
seconds West 374.51 feet to the Easterly line of a 66 foot road easement; thence
Northwesterly 44.66 feet along a tangential curve concave to the Northeast,
central angle 64 degrees 10 minutes 00 seconds, radius 39.88 feet, continuing
along said Easterly line of the 66 foot wide road easement; thence North 6
degrees 01 minutes 23 seconds West, along the tangent to the last described
curve, 24.02 feet continuing along said Easterly line of the 66 foot road
easement; thence South 83 degrees 58 minutes 37 seconds West 66.00 feet along
the North line of said 66 foot road easement; thence North 00 degrees 59 minutes
20 seconds East 33.25 feet to the point of beginning of the tract to be
described; thence South 83 degrees 58 minutes 37 seconds West 725 feet, more or
less, to the West line of said Govt. Lot 6; thence Northerly 591 feet, more or
less, along said West line of Govt. Lot 6 to the Northwest corner of said Govt.
Lot 6; thence Easterly 716 feet, more or less, along the North line of said
Govt. Lot 6 to the line bearing North 00 degrees 59 minutes 20

 

C-2

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

 

seconds East from the point of beginning; thence South 00 degrees 59 minutes 20
seconds West 523 feet, more or less, to the point of beginning.

 

Crow Wing Count, Minnesota

 

Abstract Property

 

7)                  BLUE EARTH, MINNESOTA:  Commencing at the Southwest corner
of the Southwest Quarter of Section 7 in Township 102 North, Range 27, West of
the 5th Principal Meridian in the County of Faribault and State of Minnesota;
thence North along the West line of the Southwest Quarter of said Section 7, a
distance of 680 feet; thence East parallel with the South line of the Southwest
Quarter of said Section 7, a distance of 765 feet; thence South parallel with
the West line of the Southwest Quarter of said Section 7, a distance of 680
feet; thence West along the South line of the Southwest Quarter of said
Section 7, a distance of 765 feet to the point of beginning;

 

Except a tract of land in the Southwest Quarter of Section 7, Township 102
North, Range 27 West in the City of Blue Earth, Faribault County, Minnesota,
described as follows:  Commencing at the Southwest corner of said Section 7;
thence North 89 degrees 04 minutes 19 seconds East, (assumed bearing) along the
south line of the Southwest Quarter of said Section 7, a distance of 765.00
feet; thence North 00 degrees 00 minutes 00 seconds East, parallel with the West
line of the Southwest Quarter of said Section 7, a distance of 78.10 feet to the
northerly right-of-way line of County State Aid Highway No. 16 and the point of
beginning; thence continuing North 00 degrees 00 minutes 00 seconds East, a
distance of 60.00 feet; thence South 89 degrees 04 minutes 19 seconds West, a
distance of 20.00 feet; thence South 00 degrees 00 minutes 00 seconds West, a
distance of 59.71 feet to said north highway right-of-way line; thence North 89
degrees 54 minutes 45 seconds East, along said highway right-of-way line, a
distance of 20.00 feet to the point of beginning.

 

Together with an easement over that part of the West Half of the Southwest
Quarter of said Section 7, excepting the tract described above, that lies
between a line running parallel to but 10 feet North of the North right of way
line of U.S. Trunk Highway No. 16 and the North right of way line of said Trunk
Highway No. 16 as now located.

 

Faribault County, Minnesota.

 

C-3

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

 

Schedule 5.1 to Credit and Security Agreement

 

Trade Names, Chief Executive Office, Principal Place of Business,
and Locations of Collateral

 

Trade Names

Intercon One

 

Chief Executive Office/Principal Place of Business

 

1120 Wayzata Boulevard East, Suite 201, Wayzata, MN 55391

 

Other Inventory and Equipment Locations

 

1)                                      750 Industrial Drive, Augusta, WI  54722

2)                                      1007 East 10th Street, Fairmont, MN 
55603

3)                                      926 East 10th Street, Fairmont, MN 
55603

4)                                      1030 Fairview Avenue, Fairmont, MN 
55603

5)                                      12136 Crystal Lake Road, Merrifield, MN
56465

6)                                      1120 Wayzata Blvd, Ste 200 & 201,
Wayzata, MN 55391

7)                                      4050 Norris Court NW, Bemidji, MN 56601

8)                                      1930 West First Street, Blue Earth,
Minnesota 56013

 

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

 

Schedule 5.2 to Credit and Security Agreement

 

Capitalization and Organizational Chart

 

Holder

 

Type of Rights/Stock

 

No. of shares (after
exercise of all rights
to acquire shares)

 

Percent interest on a
fully diluted basis

 

Publicly Held

 

Common Stock

 

2,738,955

 

n/a

 

Publicly Held

 

Preferred Stock

 

250,000

 

n/a

 

 

Attach organizational chart showing the ownership structure of all Subsidiaries
of the Borrower.

 

[g185521kg11i001.jpg]

 

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

 

Schedule 5.5  to Credit and Security Agreement

 

Subsidiaries

 

1.             Nortech Medical Services, Inc. (Inactive)

 

2.             Manufacturing Assembly Solutions of Monterrey, Inc.

 

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

 

Schedule 5.11 to Credit and Security Agreement

 

Intellectual Property Disclosures

 

None

 

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

 

Schedule 6.3 to Credit and Security Agreement

 

Permitted Liens

 

 

 

Original

 

Original
Filing

 

Lapse

 

 

Secured Party

 

Filing #

 

Date

 

Date

 

Collateral/Comments

Northwest Minnesota Foundation

 

20023439564

 

3/18/2002

 

3/18/2012

 

All Assets (Terminated on 2/1/2007)

Wells Fargo Equipment Finance, Inc.

 

200412663289

 

7/26/2004

 

7/26/2009

 

Specific Equipment Located in Merrifield, Bemidji, Fairmont and Augusta

Great America Leasing Corporation

 

200412663289

 

7/27/2004

 

7/27/2009

 

Specific Equipment

Demag Plastics Group

 

200412721907

 

7/30/2004

 

7/30/2009

 

PMSI (Terminated on 2/1/07)

Great America Leasing Corporation

 

200515247574

 

2/16/2005

 

2/16/2010

 

Lease Filing - Mailing Equipment

Wells Fargo Equipment Finance, Inc.

 

200517515660

 

8/4/2005

 

8/4/2010

 

Specific Equipment Located in Merrifield, Bemidji, Fairmont and Augusta

Wells Fargo Equipment Finance, Inc.

 

200611340371

 

4/6/2006

 

4/6/2011

 

Specific Equipment Located in Merrifield, Bemidji and Fairmont

Arrow Electronics, Inc.

 

200612304176

 

6/12/2006

 

6/12/2011

 

Consignment Inventory and Products Sold to Debtor Pursuant to Consigned
Inventory Agreement dated 4/11/06.

Arrow Electronics, Inc.

 

200614885330

 

12/29/2006

 

12/29/2011

 

Consignment Inventory and Products Sold to Debtor Pursuant to Consigned
Inventory Agreement dated 12/6/06.

Bell Microproducts Inc.

 

200715644660

 

2/22/2007

 

2/22/2012

 

Consignment inventory including all proceeds, products and accessories and
anything it is assembled or added to.

Banc of America Leasing & Capital LLC

 

20071666830

 

5/7/2007

 

5/7/2012

 

Lease Filing- Specific Equipment manufactured by Mydata Automation, Inc.

Marlin Leasing Corp

 

200716427337

 

4/19/2007

 

4/19/2012

 

Lease Filing - Copier Equipment

Arrow Electronics, Inc.

 

200718099911

 

9/5/2007

 

9/5/2012

 

Consignment Inventory and Products Sold to Debtor Pursuant to Consigned
Inventory Agreement dated 5/8/07.

Wells Fargo Equipment Finance/Providence Capital

 

200718990862

 

11/16/2007

 

11/16/2012

 

Specific Equpment - Stirling Stone & Tile

Arrow Electronics, Inc.

 

200810873217

 

3/7/2008

 

3/7/2013

 

Consignment Inventory and Products Sold to Debtor Pursuant to Consigned
Inventory Agreement dated 2/9/07.

Wells Fargo Equipment Finance, Inc.

 

200814387268

 

12/30/2008

 

12/30/2013

 

Specific Equipment Located in Fairmont, Augusta and Merrifield

Wells Fargo Equipment Finance, Inc.

 

200915015295

 

2/18/2009

 

2/18/2014

 

Specific Equipment Located in Garner, IA

E.O. Johnson Co. Inc.

 

200915138100

 

2/27/2009

 

2/27/2014

 

Office Equipment

 

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

 

Schedule 6.4 to Credit and Security Agreement

 

Permitted Indebtedness and Guaranties

 

Indebtedness

 

Creditor

 

Principal
Amount

 

Maturity
Date

 

Monthly
Payment

 

Collateral

 

 

 

 

 

 

 

 

 

None

 

Guaranties

 

Primary Obligor

 

Amount and Description of
Obligation Guaranteed

 

Beneficiary of Guaranty

 

 

 

 

 

 

 

None

 

 

 

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