Exhibit 10.1

 

THIRD AMENDMENT TO CREDIT AND SECURITY AGREEMENT
AND WAIVER OF DEFAULTS

 

This THIRD AMENDMENT TO CREDIT AND SECURITY AGREEMENT, dated as of January 10,
2005, is made by and between AULT INCORPORATED, a Minnesota corporation (the
“Borrower”), and WELLS FARGO BUSINESS CREDIT, INC., a Minnesota corporation (the
“Lender”).

 

Recitals

 

The Borrower and the Lender are parties to a Credit and Security Agreement dated
as of December 4, 2003 (the “Credit Agreement”) as amended by that First
Amendment to Credit and Security Agreement dated as of April 2, 2004, as further
amended by that Second Amendment to Credit and Security Agreement dated as of
July 21, 2004 (as amended the “Credit Agreement”). Capitalized terms used in
these recitals have the meanings given to them in the Credit Agreement unless
otherwise specified.

 

The Borrower has requested that certain amendments be made to the Credit
Agreement, which the Lender is willing to make pursuant to the terms and
conditions set forth herein.

 

NOW, THEREFORE, in consideration of the premises and of the mutual covenants and
agreements herein contained, it is agreed as follows:

 

1.             DEFINED TERMS.  CAPITALIZED TERMS USED IN THIS AMENDMENT WHICH
ARE DEFINED IN THE CREDIT AGREEMENT SHALL HAVE THE SAME MEANINGS AS DEFINED
THEREIN, UNLESS OTHERWISE DEFINED HEREIN.  IN ADDITION, SECTION 1.1 OF THE
CREDIT AGREEMENT IS AMENDED BY ADDING, OR AMENDING, AS THE CASE MAY BE, THE
FOLLOWING DEFINITIONS:

 

“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
between the Borrower and the Lender, whether now in effect or hereafter entered
into and all Wells Fargo Bank Obligations.

 

“Prime Rate” means at any time the rate of interest most recently announced by
Wells Fargo Bank at its principal office as its Prime Rate, with the
understanding that the Prime Rate is one of Wells Fargo Bank’s base rates, and
serves as the basis upon which effective rates of interest are calculated for
those loans making reference thereto, and is evidenced by the recording thereof
in such internal publication or publications as Wells Fargo Bank may designate. 
Each change in the rate of interest shall become effective on the date each
Prime Rate change is announced by Wells Fargo Bank.

 

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“Wells Fargo Bank Obligations” means all obligations, liabilities, contingent
reimbursement obligations, fees, and expenses owing by the Borrower or its
Subsidiaries to Wells Fargo Bank with respect to Wells Fargo Bank Products,
whether for the payment of money, whether direct or indirect, absolute or
contingent, due or to become due, now existing or hereafter arising, whether or
not Borrower is obligated to reimburse said amounts to the Lender as a result of
the Lender purchasing participations from or agreeing to indemnify or reimburse
Wells Fargo Bank for any loss or indebtedness arising with respect to Wells
Fargo Bank Products provided to the Borrower or its Subsidiaries.

 

“Wells Fargo Bank Obligations Reserve” means, as of any date of determination,
the dollar amount that the Lender then determines is a reasonable determination
of the credit exposure with respect to Wells Fargo Bank Obligations and which is
available for payment of Wells Fargo Bank Obligations.

 

“Wells Fargo Bank Products” means any service or facility extended to the
Borrower or its Subsidiaries by Wells Fargo Bank including but not limited to:
(a) credit cards, (b) credit card processing services, (c) debit cards, (d)
purchase cards, (e) cash management or related services including the Automated
Clearing House processing of electronic funds transfers, (f) controlled
disbursement accounts or services, and (g) any agreement which provides for an
interest rate, credit, commodity or equity swap, cap, floor, collar, forward
foreign exchange transaction, currency swap, cross currency rate swap, currency
option, or any combination of, or option with respect to, these or similar
transactions, for the purpose of hedging the Borrower’s or its Subsidiaries’
exposure to fluctuations in interest or exchange rates, loan, credit exchange,
security or currency valuations or commodity prices.

 

“Wells Fargo Bank” means Wells Fargo Bank, National Association.

 

2.             MINIMUM BOOK NET WORTH.  SECTION 6.2(A) OF THE CREDIT AGREEMENT
IS DELETED IN ITS ENTIRETY AND THE FOLLOWING IS SUBSTITUTED IN LIEU THEREOF:

 

(A)           MINIMUM BOOK NET WORTH.  THE BORROWER WILL MAINTAIN, DURING EACH
MONTHLY PERIOD DESCRIBED BELOW, ITS BOOK NET WORTH, DETERMINED AS AT THE END OF
SUCH MONTH, AT AN AMOUNT NOT LESS THAN THE AMOUNT SET FORTH OPPOSITE SUCH
PERIOD:

 

Month

 

Minimum Book
Net Worth

 

December, 2004

 

$

14,036,000

 

January, 2005

 

$

13,961,000

 

February, 2005

 

$

13,827,000

 

March, 2005

 

$

13,654,000

 

April, 2005

 

$

13,768,000

 

May, 2005

 

$

13,809,000

 

 

3.             MINIMUM EARNINGS BEFORE TAXES.  SECTION 6.2(B) OF THE CREDIT
AGREEMENT IS DELETED IN ITS ENTIRETY AND THE FOLLOWING IS SUBSTITUTED IN LIEU
THEREOF:

 

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(b)           Minimum Earnings Before Taxes.  The Borrower will achieve Earnings
Before Taxes, for the periods from June 1, 2004 to the last day of the month
indicated below, of not less than the amount set forth opposite such period
(numbers appearing between “( )” are negative):

 

Month

 

Minimum Earnings
Before Taxes

 

December 2004

 

$

(634,000

)

January, 2005

 

$

(709,000

)

February, 2005

 

$

(843,000

)

March, 2005

 

$

(727,000

)

April, 2005

 

$

(614,000

)

May, 2005

 

$

(573,000

)

 

4.             CAPITAL EXPENDITURES.  SECTION 6.2(C) OF THE CREDIT AGREEMENT IS
DELETED IN ITS ENTIRETY AND THE FOLLOWING IS SUBSTITUTED IN LIEU THEREOF:

 

(c)           Capital Expenditures.  The Borrower will not incur or contract to
incur Capital Expenditures, for the period from June 1, 2004 to the last day of
the month indicated below, of more than the amount set forth opposite such
period.

 

Month

 

Capital Expenditures

 

December. 2004

 

$

500,000

 

January, 2005

 

$

500,000

 

February, 2005

 

$

500,000

 

March, 2005

 

$

500,000

 

April, 2005

 

$

500,000

 

May, 2005

 

$

500,000

 

 

5.             EXIT COSTS.  SECTION 6.2(E) OF THE CREDIT AGREEMENT IS DELETED IN
ITS ENTIRETY AND THE FOLLOWING IS SUBSTITUTED IN LIEU THEREOF:

 

(e)           Exit Costs.  The Borrower will not incur total Exit Costs of more
than $1,400,000 in the aggregate during its fiscal year ending on May 31, 2005
of which no more than $0 shall constitute cash Exit Costs.

 

6.                                       GRANT OF SECURITY INTEREST. SECTION 3.1
OF THE CREDIT AGREEMENT IS AMENDED TO READ AS FOLLOWS:

 

Section 3.1             Grant of Security Interest.  The Borrower hereby
pledges, assigns and grants to the Lender, for the benefit of itself and Wells
Fargo Bank with respect to Wells Fargo Bank Obligations, 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

 

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request by the Lender, the Borrower will grant the Lender, for the benefit of
itself and Wells Fargo Bank, with respect to any Wells Fargo Bank Obligations, a
security interest in all commercial tort claims it may have against any Person.”

 

7.             PRIME RATE.  EACH REFERENCE IN THE CREDIT AGREEMENT TO “BASE
RATE” WILL BE DELETED AND REPLACED WITH THE NEWLY DEFINED TERM “PRIME RATE” SET
FORTH IN PARAGRAPH 1 OF THIS AMENDMENT.

 

8.             COMPLIANCE CERTIFICATE.  EXHIBIT B TO THE CREDIT AGREEMENT IS
HEREBY AMENDED TO READ AS SET FORTH ON EXHIBIT A ATTACHED TO THIS AMENDMENT
WHICH IS MADE A PART OF THE CREDIT AGREEMENT AS EXHIBIT B THERETO.

 

9.             NO OTHER CHANGES.  EXCEPT AS EXPLICITLY AMENDED BY THIS
AMENDMENT, ALL OF THE TERMS AND CONDITIONS OF THE CREDIT AGREEMENT SHALL REMAIN
IN FULL FORCE AND EFFECT AND SHALL APPLY TO ANY ADVANCE OR LETTER OF CREDIT
THEREUNDER.

 

10.           WAIVER OF DEFAULTS. THE BORROWER IS IN DEFAULT OF THE FOLLOWING
PROVISIONS OF THE CREDIT AGREEMENT (COLLECTIVELY, THE “EXISTING DEFAULTS”):

 

Section/Covenant

 

Required Performance

 

Actual Performance

 

6.2(b) Minimum Earnings Before Taxes period ending as of November 30, 2004

 

$

(110,000

)

$

(299,288

)

 

Upon the terms and subject to the conditions set forth in this Amendment, the
Lender hereby waives the Existing Defaults. This waiver shall be effective only
in this specific instance and for the specific purpose for which it is given,
and this waiver shall not entitle the Borrower to any other or further waiver in
any similar or other circumstances.

 

11.           WAIVER FEE. THE BORROWER SHALL PAY THE LENDER AS OF THE DATE
HEREOF A FULLY EARNED, NON-REFUNDABLE FEE IN THE AMOUNT OF $30,000 IN
CONSIDERATION OF THE LENDER’S EXECUTION AND DELIVERY OF THIS AMENDMENT AND FOR
THE WAIVERS SET FORTH IN SECTION 10.

 

12.           CONDITIONS PRECEDENT.  THIS AMENDMENT, SHALL BE EFFECTIVE WHEN THE
LENDER SHALL HAVE RECEIVED AN EXECUTED ORIGINAL HEREOF, TOGETHER WITH EACH OF
THE FOLLOWING, EACH IN SUBSTANCE AND FORM ACCEPTABLE TO THE LENDER IN ITS SOLE
DISCRETION:

 

(A)           A CERTIFICATE OF THE SECRETARY OF THE BORROWER CERTIFYING AS TO
(I) THE RESOLUTIONS OF THE BOARD OF DIRECTORS OF THE BORROWER APPROVING THE
EXECUTION AND DELIVERY OF THIS AMENDMENT, (II) THE FACT THAT THE ARTICLES OF
INCORPORATION AND BYLAWS OF THE BORROWER, WHICH WERE CERTIFIED AND DELIVERED TO
THE LENDER PURSUANT TO THE CERTIFICATE OF AUTHORITY OF THE BORROWER’S SECRETARY
OR ASSISTANT SECRETARY DATED AS OF

 

4

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DECEMBER 4, 2003 CONTINUE IN FULL FORCE AND EFFECT AND HAVE NOT BEEN AMENDED OR
OTHERWISE MODIFIED EXCEPT AS SET FORTH IN THE CERTIFICATE TO BE DELIVERED, AND
(III) CERTIFYING THAT THE OFFICERS AND AGENTS OF THE BORROWER WHO HAVE BEEN
CERTIFIED TO THE LENDER, PURSUANT TO THE CERTIFICATE OF AUTHORITY OF THE
BORROWER’S SECRETARY OR ASSISTANT SECRETARY DATED AS OF DECEMBER 4, 2003, AS
BEING AUTHORIZED TO SIGN AND TO ACT ON BEHALF OF THE BORROWER CONTINUE TO BE SO
AUTHORIZED OR SETTING FORTH THE SAMPLE SIGNATURES OF EACH OF THE OFFICERS AND
AGENTS OF THE BORROWER AUTHORIZED TO EXECUTE AND DELIVER THIS AMENDMENT AND ALL
OTHER DOCUMENTS, AGREEMENTS AND CERTIFICATES ON BEHALF OF THE BORROWER.

 

(B)           PAYMENT OF THE FEE DESCRIBED IN SECTION 11.

 

(C)           SUCH OTHER MATTERS AS THE LENDER MAY REASONABLY REQUIRE.

 

13.           REPRESENTATIONS AND WARRANTIES.  THE BORROWER HEREBY REPRESENTS
AND WARRANTS TO THE LENDER AS FOLLOWS:

 

(A)           THE BORROWER HAS ALL REQUISITE POWER AND AUTHORITY TO EXECUTE THIS
AMENDMENT AND TO PERFORM ALL OF ITS OBLIGATIONS HEREUNDER, AND THIS AMENDMENT
HAS BEEN DULY EXECUTED AND DELIVERED BY THE BORROWER AND CONSTITUTES THE LEGAL,
VALID AND BINDING OBLIGATION OF THE BORROWER, ENFORCEABLE IN ACCORDANCE WITH ITS
TERMS.

 

(B)           THE EXECUTION, DELIVERY AND PERFORMANCE BY THE BORROWER OF THIS
AMENDMENT HAVE BEEN DULY AUTHORIZED BY ALL NECESSARY CORPORATE ACTION AND DO NOT
(I) REQUIRE ANY AUTHORIZATION, CONSENT OR APPROVAL BY ANY GOVERNMENTAL
DEPARTMENT, COMMISSION, BOARD, BUREAU, AGENCY OR INSTRUMENTALITY, DOMESTIC OR
FOREIGN, (II) VIOLATE ANY PROVISION OF ANY LAW, RULE OR REGULATION OR OF ANY
ORDER, WRIT, INJUNCTION OR DECREE PRESENTLY IN EFFECT, HAVING APPLICABILITY TO
THE BORROWER, OR THE ARTICLES OF INCORPORATION OR BY-LAWS OF THE BORROWER, OR
(III) RESULT IN A BREACH OF OR CONSTITUTE A DEFAULT UNDER ANY INDENTURE OR LOAN
OR CREDIT AGREEMENT OR ANY OTHER AGREEMENT, LEASE OR INSTRUMENT TO WHICH THE
BORROWER IS A PARTY OR BY WHICH IT OR ITS PROPERTIES MAY BE BOUND OR AFFECTED.

 

(C)           ALL OF THE REPRESENTATIONS AND WARRANTIES CONTAINED IN ARTICLE V
OF THE CREDIT AGREEMENT ARE CORRECT ON AND AS OF THE DATE HEREOF AS THOUGH MADE
ON AND AS OF SUCH DATE, EXCEPT TO THE EXTENT THAT SUCH REPRESENTATIONS AND
WARRANTIES RELATE SOLELY TO AN EARLIER DATE.

 

14.           REFERENCES.  ALL REFERENCES IN THE CREDIT AGREEMENT TO “THIS
AGREEMENT” SHALL BE DEEMED TO REFER TO THE CREDIT AGREEMENT AS AMENDED HEREBY;
AND ANY AND ALL REFERENCES IN THE SECURITY DOCUMENTS TO THE CREDIT AGREEMENT
SHALL BE DEEMED TO REFER TO THE CREDIT AGREEMENT AS AMENDED HEREBY.

 

15.           NO OTHER WAIVER.   EXCEPT AS SET FORTH IN SECTION 10 HEREOF, THE
EXECUTION OF THIS AMENDMENT AND ACCEPTANCE OF ANY DOCUMENTS RELATED HERETO SHALL
NOT BE DEEMED TO BE A WAIVER OF ANY DEFAULT OR EVENT OF DEFAULT UNDER THE 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 AMENDMENT.

 

16.           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

 

5

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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 AMENDMENT, WHETHER SUCH CLAIMS, DEMANDS AND
CAUSES OF ACTION ARE MATURED OR UNMATURED OR KNOWN OR UNKNOWN.

 

17.           COSTS AND EXPENSES.  THE BORROWER HEREBY REAFFIRMS ITS AGREEMENT
UNDER THE CREDIT AGREEMENT TO PAY OR REIMBURSE THE LENDER ON DEMAND FOR ALL
COSTS AND EXPENSES INCURRED BY THE LENDER IN CONNECTION WITH THE LOAN DOCUMENTS,
INCLUDING WITHOUT LIMITATION ALL REASONABLE FEES AND DISBURSEMENTS OF LEGAL
COUNSEL.  WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, THE BORROWER
SPECIFICALLY AGREES TO PAY ALL FEES AND DISBURSEMENTS OF COUNSEL TO THE LENDER
FOR THE SERVICES PERFORMED BY SUCH COUNSEL IN CONNECTION WITH THE PREPARATION OF
THIS AMENDMENT AND THE DOCUMENTS AND INSTRUMENTS INCIDENTAL HERETO.  THE
BORROWER HEREBY AGREES THAT THE LENDER MAY, AT ANY TIME OR FROM TIME TO TIME IN
ITS SOLE DISCRETION AND WITHOUT FURTHER AUTHORIZATION BY THE BORROWER, MAKE A
LOAN TO THE BORROWER UNDER THE CREDIT AGREEMENT, OR APPLY THE PROCEEDS OF ANY
LOAN, FOR THE PURPOSE OF PAYING ANY SUCH FEES, DISBURSEMENTS, COSTS AND
EXPENSES.

 

18.           MISCELLANEOUS.  THIS AMENDMENT MAY BE EXECUTED IN ANY NUMBER OF
COUNTERPARTS, EACH OF WHICH WHEN SO EXECUTED AND DELIVERED SHALL BE DEEMED AN
ORIGINAL AND ALL OF WHICH COUNTERPARTS, TAKEN TOGETHER, SHALL CONSTITUTE ONE AND
THE SAME INSTRUMENT.

 

[Remainder of page intentionally left blank.]

 

6

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IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly
executed as of the date first written above.

 

WELLS FARGO BUSINESS CREDIT, INC.

AULT INCORPORATED

 

 

 

 

 

 

By:

 

 

By:

 

Name:

Michael Guillou

Name:

Donald L. Henry

Its:

Assistant Vice President

Its:

Vice President and Chief Financial

 

 

Officer

 

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Exhibit A to Second Amendment to Credit and Security
Agreement and Exhibit B to Credit and Security Agreement

 

Compliance Certificate

 

To:

 

Michael L. Guillou

 

 

Wells Fargo Business Credit, Inc.

 

 

 

Date:

 

             , 200    

 

 

 

Subject:

 

 

 

 

 

Financial Statements

 

In accordance with our Credit and Security Agreement dated as of December 4,
2003 (the “Credit Agreement”), attached are the financial statements of Ault
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.

 

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(d) 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.             Minimum Book Net Worth.  Pursuant to Section 6.2(a) of the Credit
Agreement, as of the Reporting Date, the Borrower’s Book Net Worth was
$              which o satisfies o does not satisfy the requirement that such
amount be not less than $                   on the Reporting Date as set forth
in table below:

 

8

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Month

 

Minimum Book
Net Worth

 

December, 2004

 

$

14,036,000

 

January, 2005

 

$

13,961,000

 

February, 2005

 

$

13,827,000

 

March, 2005

 

$

13,654,000

 

April, 2005

 

$

13,768,000

 

May, 2005

 

$

13,809,000

 

 

2.             Minimum Earnings Before Taxes.  Pursuant to Section 6.2(b) of the
Credit Agreement, the Borrower’s Earnings Before Taxes on a fiscal year to date
basis for the monthly period ending on the Reporting Date, was
$                , which o satisfies o does not satisfy the requirement that
such amount be not less than $                     during such period as set
forth in table below (numbers appearing between “( )” are negative):

 

December 2004

 

$

(634,000

)

January, 2005

 

$

(709,000

)

February, 2005

 

$

(843,000

)

March, 2005

 

$

(727,000

)

April, 2005

 

$

(614,000

)

May, 2005

 

$

(573,000

)

 

3.             Capital Expenditures.  Pursuant to Section 6.2(c) of the Credit
Agreement, for the fiscal year-to-date period ending on the Reporting Date, the
Borrower has expended or contracted to expend during the fiscal year ended
                  , 200    , for Capital Expenditures, $                    in
the aggregate, which o satisfies o does not satisfy the requirement that such
expenditures not exceed $               in the aggregate during such period as
set forth in table below.

 

Month

 

Capital Expenditures

 

December, 2004

 

$

500,000

 

January, 2005

 

$

500,000

 

February, 2005

 

$

500,000

 

March, 2005

 

$

500,000

 

April, 2005

 

$

500,000

 

May, 2005

 

$

500,000

 

 

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4.             Availability.  Pursuant to Section 6.2(d) of the Credit
Agreement, since the last Compliance Certificate was delivered, the lowest
Availability was $                  , which o satisfies o does not satisfy the
requirement that Availability not be less than $400,000 at any time.

 

5.             Exit Costs.  Pursuant to Section 6.2(e) of the Credit Agreement,
for the fiscal year-to-date period ending on the Reporting Date, the Borrower
has expended during the fiscal year ended                    , 2005, for Exit
Costs, $                       in the aggregate, and cash Exit Costs of
$                   in the aggregate which o satisfies o does not satisfy the
requirement that such expenditures not exceed $1,400,000 in the aggregate during
such year and cash Exit Costs of $0 in the aggregate during such year.

 

6.             Salaries.  As of the Reporting Date, the Borrower o is o is not
in compliance with Section 6.8 of the Credit Agreement concerning salaries.

 

Attached hereto 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.

 

 

AULT INCORPORATED

 

 

 

By

 

 

 

Its Chief Financial Officer

 

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