LOAN AGREEMENT
by and between
CITY OF SPRINGDALE, ARKANSAS,
the City
and
ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.,
the Company
Related to:
$10,610,000
City of Springdale, Arkansas
Industrial Development Refunding Revenue Bonds
(Advanced Environmental Recycling Technologies, Inc. Project)
Series 2008
Dated as of February 1, 2008
     
 

 

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TABLE OF CONTENTS

                      Page ARTICLE I
 
           
DEFINITIONS
        2  
 
            ARTICLE II
 
            REPRESENTATIONS, WARRANTIES AND COVENANTS

 
           
Section 2.01.
  Representations, Warranties and Covenants by the City     2  
Section 2.02.
  Representations, Warranties and Covenants by the Company     3  
Section 2.03.
  Environmental Representations and Covenants     4  
 
            ARTICLE III

 
            SECURITY PROVISIONS: TERM OF THE LOAN AGREEMENT

 
           
Section 3.01.
  Security Provisions     5  
Section 3.02.
  Term     6  
Section 3.03.
  Patent Security     6  
Section 3.04.
  Deposit of Pledged Revenues: Deposit Account Control Agreement     7  
Section 3.05.
  Assignment of Weyerhaeuser Agreement     7  
 
            ARTICLE IV
 
            FINANCING THE COST OF THE FACILITIES: ISSUANCE OF THE SERIES 2008
BONDS

 
           
Section 4.01.
  [Intentionally Omitted]     8  
Section 4.02.
  Agreement to Issue the Bonds; Application of Bond Proceeds     8  
Section 4.03.
  [Intentionally Omitted]     8  
Section 4.04.
  [Intentionally Omitted]     8  
Section 4.05.
  Investment of Moneys     8  
Section 4.06.
  Arbitrage and Tax Matters     8  
 
            ARTICLE V

 
            OBLIGATIONS; PROVISIONS FOR PAYMENT

 
           
Section 5.01.
  Loan Payments and Other Amounts Payable     8  
Section 5.02.
  Payees of Payments     10  
Section 5.03.
  Obligations of Company Hereunder Unconditional     10  

 

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                      Page ARTICLE VI

 
            MAINTENANCE AND INSURANCE

 
           
Section 6.01.
  Maintenance and Modifications     11  
Section 6.02.
  Insurance     12  
 
            ARTICLE VII

 
            CASUALTY LOSS AND CONDEMNATION

 
           
Section 7.01.
  Insurance and Condemnation Proceeds     15  
 
            ARTICLE VIII

 
            SPECIAL COVENANTS

 
           
Section 8.01.
  No Warranty of Condition or Suitability by the City     15  
Section 8.02.
  Further Assurances     15  
Section 8.03.
  Annual Audit     16  
Section 8.04.
  Financial Statements     16  
Section 8.05.
  Release and Indemnification Covenants     16  
Section 8.06.
  Company Representative     17  
Section 8.07.
  Leases and Operating Contracts     17  
Section 8.08.
  No Default Certificate     18  
Section 8.09.
  [Intentionally Omitted]     18  
Section 8.10.
  Limitations on Creation of Liens     18  
Section 8.11.
  Limitations on Indebtedness     19  
Section 8.12.
  Subordinated Debt     19  
Section 8.13.
  Parity Indebtedness     22  
Section 8.14.
  Transfer of Assets     22  
Section 8.15.
  Consolidation, Merger, Sale or Conveyance     23  
Section 8.16.
  Financial Covenants     24  
Section 8.17.
  Reporting Extensions     25  
 
            ARTICLE IX

 
            ASSIGNMENT AND PLEDGING OF LOAN AGREEMENT; REDEMPTION OF BONDS

 
           
Section 9.01.
  Assignment by Company     25  
Section 9.02.
  Assignment and Pledge by the City     25  
Section 9.03.
  Redemption of Bonds     25  
 
            ARTICLE X

 
            EVENTS OF DEFAULT AND REMEDIES

 
           
Section 10.01.
  Events of Default Defined     26  

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                      Page
Section 10.02.
  Remedies on Default     27  
Section 10.03.
  No Remedy Exclusive     29  
Section 10.04.
  Agreement to Pay Attorneys’ Fees and Expenses     29  
Section 10.05.
  Waiver     30  
Section 10.06.
  Appointment of Receiver     30  
Section 10.07.
  Remedies Subject to Provisions of Law     30  
Section 10.08.
  Waiver of Appraisement, Valuation, Stay, and Execution Laws     31  
Section 10.09.
  Purchase of Property by Bondholder or Holder of Parity Indebtedness     31  
 
            ARTICLE XI

 
            PREPAYMENT OF THE LOAN

 
           
Section 11.01.
  General Option to Prepay the Loan     32  
Section 11.02.
  Prepayment Credits     32  
Section 11.03.
  Notice of Prepayment     32  
Section 11.04.
  Use of Prepayment Moneys     32  
 
            ARTICLE XII

 
            MISCELLANEOUS

 
           
Section 12.01.
  Notices     33  
Section 12.02.
  Binding Effect     33  
Section 12.03.
  Severability     33  
Section 12.04.
  Amounts Remaining in Funds     33  
Section 12.05.
  Amendments, Changes and Modifications     33  
Section 12.06.
  Execution in Counterparts     34  
Section 12.07.
  Governing Law     34  
Section 12.08.
  Cancellation at Expiration of Term of Agreement     34  
Section 12.09.
  Recording     34  
Section 12.10.
  No Pecuniary Liability of the City     34  
Section 12.11.
  Partial Release     34  
Section 12.12.
  General Release     35  
Section 12.13.
  Captions     35  
Section 12.14.
  Payments Due on Non-Business Day     35  
Section 12.15.
  Provision of General Application     35  
 
           
EXHIBIT A
  COSTS OF THE PROJECT        
EXHIBIT B
  PERMITTED EXCEPTIONS        

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LOAN AGREEMENT
     THIS LOAN AGREEMENT (this “Loan Agreement”), dated as of February 1, 2008,
by and between CITY OF SPRINGDALE, ARKANSAS (the “City”), a body corporate and
politic, and ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC. (the
“Company”), a corporation duly organized and existing under the laws of the
State of Delaware.
W I T N E S S E T H :
     WHEREAS, the Company had previously requested that the City finance and
refinance the cost of certain solid waste disposal facilities located within the
City, in accordance with that certain Mortgage and Loan Agreement, dated as of
October 1, 1999 (as amended, the “Original Loan Agreement”) between the City and
the Company; and
     WHEREAS, Title 14, Chapter 267 of the Arkansas Code of 1987, Annotated, and
Title 14, Chapter 164, Subchapter 2 of the Arkansas Code of 1987, Annotated (the
“Act”), authorizes the City to finance such costs; and
     WHEREAS, in order to finance and refinance such costs, the City issued its
City of Springdale, Arkansas Industrial Development Revenue Bonds (Advanced
Environmental Recycling Technologies, Inc. Project) Series 1999 (the
“Series 1999 Bonds”) pursuant to and secured by an Indenture of Trust, dated as
of October 1, 1999 (the “Original Indenture”), between the City and First
National Bank of Springdale, as trustee (as trustee under the Original
Indenture, the “Original Trustee”); and
     WHEREAS, the rights of the City in the Original Loan Agreement were
assigned by the City to the Original Trustee pursuant to an Assignment of
Mortgage, dated as of October 1, 1999; and
     WHEREAS, in order to provide funds to refund, redeem and discharge the
Series 1999 Bonds, the City issued its City of Springdale, Arkansas Industrial
Development Refunding Revenue Bonds (Advanced Environmental Recycling
Technologies, Inc. Project) Series 2003 (the “Series 2003 Bonds”); and
     WHEREAS, in order to provide funds to refund, redeem and discharge the
Series 2003 Bonds with the consent of the holders thereof, the City shall issue
its City of Springdale, Arkansas Industrial Development Refunding Revenue Bonds
(Advanced Environmental Recycling Technologies, Inc. Project) Series 2008 (the
“Bonds” or the “Series 2008 Bonds”) pursuant to and secured by an Indenture of
Trust, dated as of the date hereof (the “Indenture”), between the City and Bank
of Oklahoma, N.A., as trustee (the “Trustee”); and
     WHEREAS, the City proposes to loan to the Company and the Company desires
to borrow from the City the proceeds of the Bonds upon the terms and conditions
hereinafter in this Loan Agreement set forth.

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     NOW, THEREFORE, for and in consideration of the premises and the mutual
covenants hereinafter contained, the parties hereto formally covenant, agree and
bind themselves as follows:
ARTICLE I
DEFINITIONS
     All terms not defined herein shall have the meanings assigned to such terms
in Article I of the Indenture.
ARTICLE II
REPRESENTATIONS, WARRANTIES AND COVENANTS
     Section 2.01. Representations, Warranties and Covenants by the City. The
City represents, covenants and warrants for the benefit of the Company, the
Trustee and the Bondholders that:
     (a) the City is an independent public body politic and corporate
constituting a political subdivision, is duly organized and existing under the
laws of the State of Arkansas, is authorized pursuant to the Act to enter into
the transactions contemplated by this Loan Agreement and the Indenture and to
carry out its obligations hereunder and thereunder, and has duly authorized the
execution and delivery of this Loan Agreement and the Indenture;
     (b) consistent with the understanding between the City and the Company, the
City will loan the Company the proceeds of the Bonds to provide for the
refinancing of the Project;
     (c) the City hereby finds that the refinancing of the Project is in the
public interest;
     (d) to refinance the Project, the City will issue the Bonds in the
aggregate principal amount of $10,610,000. The Bonds shall mature, bear
interest, be subject to redemption prior to maturity, be secured and have such
other terms and conditions as are set forth in the Indenture;
     (e) neither the execution and delivery of this Loan Agreement or the
Indenture, the consummation of the transactions contemplated hereby or thereby
nor the fulfillment of or compliance with the terms and conditions of this Loan
Agreement or the Indenture conflicts with or results in a breach of any of the
terms, conditions or provisions of any restriction or any agreement or
instrument to which the City is now a party or by which it is bound or
constitutes a default under any of the foregoing or results in the creation or
imposition of any prohibited lien, charge or encumbrance of any nature
whatsoever upon any of the property or assets of the City under the terms of any
instrument or agreement;

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     (f) the City hereby acknowledges the Company’s estimate of the total Cost
of the Project set forth in Exhibit A hereto;
     (g) the Bonds are to be issued under and secured by the Indenture pursuant
to which certain of the City’s interest in this Loan Agreement will be pledged
and assigned to the Trustee as security for payment of the principal of,
premium, if any, and interest on the Bonds; and
     (h) the issuance of the Bonds was approved by the governmental unit on
behalf of which the Bonds were issued by the applicable elected representatives
thereof after a public hearing following reasonable public notice.
     Section 2.02. Representations, Warranties and Covenants by the Company. The
Company represents, warrants and covenants for the benefit of the City, the
Trustee and the Bondholders, that:
     (a) the Company is a corporation duly organized and in good standing under
the laws of the State of Delaware, is authorized by the laws of each state where
its facilities are located to own, provide and operate the applicable
facilities, has power to enter into and to perform and observe the covenants and
agreements on its part contained in this Loan Agreement and the Tax Certificates
and by proper action has duly authorized the execution and delivery of this Loan
Agreement, the Watts Mortgage, the Springdale Mortgage, the Lowell Mortgage, the
Junction Deed of Trust, the Weyerhaeuser Assignment Agreement, the Patent and
Trademark Security Agreement and the Tax Certificate;
     (b) neither the execution and delivery of this Loan Agreement and the Tax
Certificate, the consummation of the transactions contemplated hereby or thereby
nor the fulfillment of or compliance with the terms and conditions of this Loan
Agreement and the Tax Certificate violates any law or conflicts with or results
in a breach of any of the terms, conditions or provisions of any restriction or
any agreement or instrument to which the Company is now a party or by which it
is bound or constitutes a default under any of the foregoing or results in the
creation or imposition of any lien, charge or encumbrance of any nature
whatsoever upon any of the property or assets of the Company under the terms of
any instrument or agreement except for the Indenture and other Permitted Liens;
     (c) the total cost of refunding the Prior Bonds is hereby determined to be
not less than $10,610,000, and the refinancing of such cost by the City will
assist the Company in providing recycling and manufacturing facilities;
     (d) the Company intends to operate or to cause its facilities to be
operated and to use the improvements thereon in connection therewith to the
expiration of the term of this Loan Agreement pursuant to the Act;
     (e) as of the date of this Loan Agreement, there is no litigation or legal
or governmental action, proceeding, inquiry or investigation pending or
threatened by governmental authority or to which the Company is a party or of
which any property of

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the Company is subject, which would, if determined adversely to the Company,
materially adversely affect the transactions contemplated hereby;
     (f) the Company has or shall have good and marketable title to the
Springdale Property, the Lowell Property and the Junction Property, and a valid
leasehold interest in the Watts Property, free from all encumbrances except
Permitted Liens and such title shall remain in the Company so long as the Bonds
remain Outstanding, except as otherwise provided herein;
     (g) the Company has obtained, or will obtain on or before the date required
therefor, all licenses, authorizations, permits and approvals from applicable
local, state and federal governmental agencies necessary to operate its
Facilities as plastic waste reclamation and recycling facilities contemplated by
this Loan Agreement. The Company knows of no reasons that such licenses,
authorizations, permits and approvals will not be issued or issued in a timely
manner;
     (h) the Company is in possession of Phase One Environmental Assessments
which were performed on the Springdale Property, the Lowell Property, the
Junction Property and the Watts Property, and such assessments have not revealed
any contamination of the Springdale Property, the Lowell Property, the Junction
Property or the Watts Property or any violation of any rules or regulations of
the Environmental Protection Agency or any other environmental protection rule
or regulation of any federal, state or local agency;
     (i) no improvements located or to be located in the building set-back shown
on the ALTA/ATSM Land Title Surveys prepared with respect to the Springdale
Property, the Lowell Property, the Junction Property or the Watts Property are
used or shall be used in the business operations of the Company.
     Section 2.03. Environmental Representations and Covenants. Except as may be
described in (i) the Phase I Environmental Site Assessment dated September 2003,
prepared by ENVIRON International Corporation with respect to the Site, or
(ii) the Phase I Environmental Site Assessment dated September 2003, prepared by
ENVIRON International Corporation with respect to the Junction Property
        , or (iii) the limited environmental review dated September 12, 2003,
prepared by ENVIRON International Corporation with respect to the Lowell
Property, or (iv) the Phase I Environmental Site Assessment Report, dated
October 1, 2002, prepared by B&F Engineering, Inc., with respect to the Lowell
Property or (iv) the Phase I Environmental Site Assessment dated October 25,
2007, prepared by Terracon Consultants, Inc. with respect to the Watts Property,
neither the Company nor, to the Company’s knowledge, any other Person has ever
caused or permitted any Hazardous Material to be placed, held, located or
disposed of on, under or at the Springdale Property, the Lowell Property, the
Junction Property or the Watts Property or any part thereof except in compliance
with Environmental Laws. The Company hereby warrants and represents that, to the
best of its knowledge, it has complied and, in the future, will comply in all
material respects with all applicable Environmental Laws. None of the Springdale
Property, the Lowell Property, the Junction Property or the Watts Property has
previously contained, and none of such properties now contain, any underground
storage tanks (other than in compliance with all applicable Environmental Laws)
and none has ever been used

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by the Company or by any other Person as a temporary or permanent storage or
disposal site for any Hazardous Material. The Company has delivered to the
Trustee all environmental reports, studies, audits and other data and
information in the possession or control of the Company relating to the
Springdale Property, the Lowell Property, the Junction Property or the Watts
Property.
     If the City or the Trustee reasonably suspects that any violation of the
Environmental Laws is occurring involving the Springdale Property, the Lowell
Property, the Junction Property or the Watts Property, or if an Event of Default
shall have occurred and be continuing which, with the passage of time or the
giving of notice, or both, would constitute an Event of Default, the City and
the Trustee shall have the right, but no obligation, to conduct any tests or
inspections of the Springdale Property, the Lowell Property, the Junction
Property and the Watts Property at the Company’s expense (including, without
limitation, soil and other tests, borings, sampling and monitoring) in order to
determine compliance with Environmental Laws or the presence thereon or therein
of Hazardous Material and to have access to the Springdale Property, the Lowell
Property, the Junction Property and the Watts Property for such purposes.
ARTICLE III
SECURITY PROVISIONS: TERM OF THE LOAN AGREEMENT
     Section 3.01. Security Provisions. In order to secure the payment of the
Bonds and Parity Indebtedness, on a pro rata basis, and payment of all sums
advanced under this Loan Agreement, including advances which may be made in the
future and to secure the performance by the Company of all the covenants
expressed or implied by this Loan Agreement (a) the Company does hereby grant,
bargain, sell, convey and mortgage unto the City (for the benefit of the
Bondholders and holders of Parity Indebtedness, pro rata) its interest in the
real property described in the Watts Mortgage, the Springdale Mortgage, the
Lowell Mortgage and the Junction Deed of Trust and any fixtures or appurtenances
now or hereafter erected thereon; together with all rents and leases, profits,
royalties, minerals, geothermal resources, oil and gas rights and profits,
easements and access rights, now owned or hereafter acquired by the Company,
used, belonging to, or in any way connected with the Watts Property, the
Springdale Property, the Lowell Property or the Junction Property, all of which
are declared to be a part of said Watts Property, Springdale Property, Lowell
Property or Junction Property, as applicable, and all the rights, privileges,
benefits, hereditaments and appurtenances in any way belonging, incidental or
appertaining to said Watts Property, Springdale Property, Lowell Property or
Junction Property (other than equipment hereafter acquired), subject to
Permitted Liens as described in Section 8.10 hereof; and (b) the Company hereby
pledges to and grants to the City a present security interest, within the
meaning of the Arkansas Uniform Commercial Code and to the extent permitted by
law; in (i) the Pledged Revenues; (ii) all of its right, title and interest, if
any, in the Funds (other than the Rebate Fund); (iii) any trust accounts
referred to in this Loan Agreement or in the Indenture; (iv) all tangible
personal property, furniture, machinery and equipment of the Company, now owned
by the Company and located on the Springdale Property, the Lowell Property, the
Junction Property or the Watts Property (the “Equipment”); and (v) inventory of
the Company located on the Springdale Property, the Lowell Property, the
Junction Property or the Watts Property, in each case subject to Permitted Liens
and subject to liens and security interests of record as of the date of
execution hereof, excluding from such

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pledge and security interest all patents, trademarks, copyrights, licenses and
similar proprietary rights of the Company now owned or hereafter acquired, to
the extent the same constitute “collateral” within the meaning of Section 3.03
hereof.
     This pledge shall be valid and binding from and after the date of the first
delivery of any of the Bonds. To the extent any assets pledged pursuant to this
Loan Agreement consist of rights of action or personal property, this Loan
Agreement constitutes a security agreement. The Company shall file financing
statements from time to time relating to this Loan Agreement in such manner and
at such places as may be required by law fully to protect the security of the
Bondholders and the right, title and interest of the Trustee in and to the Trust
Estate or any part thereof.
     Notwithstanding the foregoing, the Company shall be entitled to pledge any
accounts receivable, raw materials and inventory, on a basis senior to the
pledge herein provided, to secure the payment of Indebtedness in the form of a
revolving credit or similar agreement in a maximum principal amount up to
$25,000,000.
     In addition, the Company shall be entitled to pledge purchase order
receipts from Approved Purchasers and to pledge inventory with respect thereto
on a basis senior to the pledge herein provided, to secure the payment of
Indebtedness in a maximum principal amount equal to 95% of the principal amount
of such purchase orders. The terms of such Indebtedness shall require that the
principal balance of such indebtedness be reduced to $0 for a period of not less
than three consecutive business days annually.
     The Trustee, as assignee of the City pursuant to the Indenture, will
execute such subordination or similar agreements as reasonably requested by the
Company with respect to any such accounts receivable, purchase order receipts
and inventory pledge. In the event the Company is unable, following a reasonable
good faith effort, as certified to the Trustee, to obtain a commitment from a
lending institution to provide either such credit arrangements, the Company may
submit revised proposed lending terms to the holders of the Bonds requesting a
consent to such terms, which consent shall not be unreasonably withheld.
     Section 3.02. Term. This Loan Agreement shall remain in full force and
effect from the date of delivery hereof until such time as all of the Bonds and
Parity Indebtedness shall have been fully paid or provision is made for such
payment pursuant to the Indenture and all reasonable and necessary fees and
expenses of the Trustee accrued and to accrue through final payment of the Bonds
and Parity Indebtedness, all fees and expenses of the City accrued and to accrue
through final payment of the Bonds and Parity Indebtedness and all other
liabilities of the Company accrued and to accrue through final payment of the
Bonds and Parity Indebtedness under this Loan Agreement and the Indenture have
been paid or provision is made for such payments pursuant to the Indenture.
     Section 3.03. Patent Security. Simultaneously with the execution hereof,
the Company shall execute and deliver a Patent and Trademark Security Agreement
to the Trustee (for the benefit of the holders of the Bonds and holders of
Parity Indebtedness), the provisions of which shall control all security and
other interests of the Trustee in “collateral,” as therein defined, to

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the extent the same shall be inconsistent with the terms hereof or of the
Springdale Mortgage, Lowell Mortgage, Junction Deed of Trust or Watts Mortgage.
     Section 3.04. Deposit of Pledged Revenues: Deposit Account Control
Agreement. The Company covenants and agrees that it shall deposit or cause to be
deposited no later than the Business Day following receipt of such Pledged
Revenues all Pledged Revenues in the Deposit Account pursuant to the terms of
the Deposit Account Control Agreement. The Company covenants and agrees to
maintain or cause to be maintained the Deposit Account while the Bonds are
Outstanding. The Company covenants and agrees to execute any substitute or
replacement control agreements with respect to the Pledged Revenues. The Company
hereby consents to the filing of UCC financing statements and shall execute and
cause to be sent to the Depository Bank a notice of the security interest
granted hereunder and shall execute and deliver such other documents (including,
but not limited to, continuation statements and control agreements) as may be
necessary or reasonably requested by the Trustee or the Issuer in order to
perfect and maintain as perfected such security interest or give public notice
thereof. Amounts on deposit in the Deposit Account shall be applied pursuant to
the Deposit Account Control Agreement and when transferred to the Trustee shall
be applied by the Trustee in accordance with the Indenture. Amounts in the
Deposit Account may be used and withdrawn by the Company and the Trustee as
provided in the Deposit Account Control Agreement, the Indenture and herein;
provided, however, that in the event of a conflict among such documents, the
Indenture shall be deemed the controlling instrument. The Deposit Account
Control Agreement shall provide that immediately following receipt of a written
notice that an Event of Default under the Indenture has occurred, the Trustee
shall direct the Depository Bank to withhold disbursements of Pledged Revenues
to the Company or its designees and to transfer the Deposit Account and the
collateral held therein to the name and credit of the Trustee upon demand
thereof; provided, the Trustee shall continue to be bound by the Indenture and
the Deposit Account Control Agreement. Following an Event of Default under the
Indenture, all Pledged Revenues shall be disbursed by the Depository Bank to the
Trustee for application as may be directed by the Trustee. The Trustee also
shall be entitled to and shall take all steps, actions and proceedings following
an Event of Default under the Indenture reasonably necessary in its judgment to
enforce all of the rights of the City which have been assigned to the Trustee
and all of the obligations of the Company under this Loan Agreement. The Company
shall execute and deliver all instruments as may be required to implement this
Section. The Company further agrees that a failure to comply with the terms of
this Section shall cause irreparable harm to the Registered Owners from time to
time of the Bonds, and shall entitle the Trustee, as assignee of the City, with
or without notice to the Company, to take immediate action to compel the
specific performance of the obligations of the Company as provided in this
Section.
     Section 3.05. Assignment of Weyerhaeuser Agreement. While the Bonds are
Outstanding, the Company shall maintain the Weyerhaeuser Assignment Agreement
for the benefit of the Trustee.

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ARTICLE IV
FINANCING THE COST OF THE FACILITIES:
ISSUANCE OF THE SERIES 2008 BONDS
     Section 4.01. [Intentionally Omitted].
     Section 4.02. Agreement to Issue the Bonds; Application of Bond Proceeds.
In order to provide funds to make the Loan for payment of the Project, the City
will sell and cause to be delivered to the initial purchaser thereof the Bonds.
Proceeds of the Bonds shall be deposited in accordance with the Indenture, and
invested as provided in Section 6.01 of the Indenture.
     Section 4.03. [Intentionally Omitted].
     Section 4.04. [Intentionally Omitted].
     Section 4.05. Investment of Moneys. Any moneys held as a part of the Funds
shall be invested, reinvested and transferred to other Funds by the Trustee as
provided in Article VI of the Indenture.
     Section 4.06. Arbitrage and Tax Matters. The Company hereby covenants and
represents for the benefit of each owner of the Bonds and the City that it will
not make or permit any use of the proceeds of the Bonds or the moneys in the
Funds or take any other action which will cause the Bonds to be “arbitrage
bonds” within the meaning of Section 148 of the Code. The Company covenants that
it will comply with the applicable requirements of Section 148 of the Code so
long as any Bonds are Outstanding. The Company shall deliver to the City
certificates in such reasonable form as the City shall specify upon which the
City may rely in furnishing the certificates required by Section 6.02 of the
Indenture. The Company covenants and agrees to comply with the provisions of the
Tax Certificates.
ARTICLE V
OBLIGATIONS; PROVISIONS FOR PAYMENT
     Section 5.01. Loan Payments and Other Amounts Payable.
     (a) As repayment of the Loan, the Company shall deposit with the Trustee,
on the date of issuance of the Bonds, and thereafter not later than the
fifteenth day of each month, the Monthly Payment with respect to the following
calendar month, in accordance with the Indenture, which amounts shall be applied
to the payment of the Bonds at the times and in the manner provided in the
Indenture. The Company shall be entitled to credit with respect to such Monthly
Payments for any transfers to the Bond Principal Fund and Bond Interest Fund
pursuant to Section 3.07(b) of the Indenture.
     (b) Upon any acceleration of amounts due under the Loan Agreement, the
Company shall immediately pay as repayment of the Loan, for deposit in the Bond
Principal Fund, the Bond Interest Fund and the Reserve Fund, an amount which,
together

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with other moneys available under the Loan Agreement, is sufficient to pay the
entire principal of and interest on the Bonds.
     (c) On or before any redemption date (other than a sinking fund redemption
date) for which a notice of redemption has been given pursuant to the Indenture,
the Company shall pay as repayment of the Loan, for deposit in the Bond
Principal Fund, an amount which, together with other moneys available therefor
in the Bond Principal Fund (and, if all Bonds are called for redemption, the
Reserve Fund), is sufficient to pay the principal of and premium, if any, on the
Bonds called for optional or mandatory redemption and for deposit into the Bond
Interest Fund an amount of money which, together with other moneys available
therefor in the Bond Interest Fund, is sufficient to pay the interest accrued to
the redemption date on the Bonds called for optional or mandatory redemption. If
on any principal or interest payment date on the Bonds or the date any other
amounts are payable on the Bonds the amount held by the Trustee in the Bond
Principal Fund and the Bond Interest Fund is insufficient to make the required
payments of principal of, premium, if any, and interest on the Bonds, the
Company shall forthwith pay such deficiency as repayment of the Loan for deposit
in the Bond Principal Fund or the Bond Interest Fund, as the case may be.
     (d) At the option of the Company Representative, so long as no Event of
Default has occurred or is occurring, to be exercised by delivery of a written
certificate to the Trustee and the City not less than 45 days next preceding the
applicable sinking fund redemption date, it may (i) deliver to the Trustee for
cancellation Bonds in an aggregate principal amount desired by the Company
Representative or (ii) specify a principal amount of such Bonds which prior to
said date have been redeemed (otherwise than through the operation of the
applicable sinking fund) and canceled by the Trustee and not theretofore applied
as a credit against the respective sinking fund redemption obligation. Each such
Bond so delivered or previously redeemed shall be credited by the Trustee at
100% of the principal amount thereof against the obligation of the Company on
such respective sinking fund redemption date for Bonds and any excess over such
amounts shall be credited against future sinking fund redemption obligations for
such Bonds as directed by the Company Representative. In the event the Company
Representative shall avail itself of the provisions of clause (i) of the first
sentence of this paragraph, the certificate required by the first sentence of
this paragraph shall be accompanied by the Bonds to be canceled.
     (e) The Company shall deposit the following amounts to the Reserve Fund:
          (i) on the date of issuance of the Bonds, $1,061,000 from proceeds of
the reserve fund established with respect to the Prior Bonds;
          (ii) in the event any moneys in the Reserve Fund are transferred to
the Bond Principal Fund or the Bond Interest Fund pursuant to the Indenture, or
to the Rebate Fund pursuant to the Indenture, or in the event the valuation of
the amounts in the Reserve Fund required by the Indenture reveals there is an
amount less than the Reserve Requirement on deposit in the Reserve Fund, the
Company shall deposit, on the first day of each month following such transfer or
valuation,

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substantially equal monthly payments into the Reserve Fund to cause the total
amount in the Reserve Fund to equal the Reserve Requirement not later than the
next succeeding Interest Payment Date.
     (f) The Company agrees to pay to the Trustee and the City, respectively, as
an Operating Expense, the reasonable and necessary fees and expenses of the
Trustee and the City, respectively, including the reasonable fees and other
costs incurred for the services of any paying agent or engineers, architects,
attorneys, management consultants, accountants and other consultants employed by
the Trustee or the City to make examinations and reports, provide services and
render opinions required under the Loan Agreement or the Indenture, plus the
Company agrees to pay to the appropriate party the fees and expenses of any
Rebate Analyst, as and when the same become due, upon submission of a statement
therefor.
     (g) The Company agrees to pay to the Trustee as an Operating Expense all
amounts to be deposited to the Rebate Fund, as and when the same become due as
determined pursuant to the Indenture, to the extent there are no other amounts
available to make such deposits, and to cause the Trustee to apply such funds in
compliance with the terms of the Indenture.
     (h) The Company agrees to pay as an Operating Expense all costs and
expenses which may be incurred in connection with any removal or substitution of
the Trustee and the appointment of any successor trustee.
     Section 5.02. Payees of Payments. The payments provided for in
Sections 5.01(a), (b) and (c) hereof shall be paid in funds immediately
available in the City in which the designated office of the Trustee is located
directly to the Trustee for the account of the City and shall be deposited as
therein provided. The payments provided for in Section 5.01(e) hereof shall be
paid in funds immediately available in the City in which the designated office
of the Trustee is located directly to the Trustee for the benefit of the
Bondholders and shall be deposited in the Reserve Fund. The payments to be made
under Sections 5.01(d), (g) and (h) hereof shall be paid directly to the payee
for its own use.
     Section 5.03. Obligations of Company Hereunder Unconditional. The
obligations of the Company to make the payments required in Section 5.01 hereof
and to perform and observe the other agreements on its part contained herein
shall be absolute and unconditional. The Company (a) will not suspend or
discontinue, or permit the suspension or discontinuance of, any payments
provided for in Section 5.01 hereof; (b) will perform and observe all of its
other agreements contained in this Loan Agreement; and (c) except as provided in
Article XI hereof, will not terminate this Loan Agreement for any cause
including, without limiting the generality of the foregoing, any acts or
circumstances that may constitute failure of consideration, eviction or
constructive eviction, destruction of or damage to its solid waste recovery
facilities, commercial frustration of purpose, or change in the tax or other
laws or administrative rulings of or administrative actions by the United States
of America or the State of Arkansas or any political subdivision of either, any
failure of the City to perform and observe any agreement, whether express or
implied, or any duty, liability, or obligation arising out of or connected with
this Loan Agreement, whether express or implied, or any failure of the Trustee
to perform and

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observe any agreement, whether express or implied, or any duty, liability or
obligation arising out of or connected with the Indenture, whether express or
implied. Nothing contained in this Section shall be construed to release the
City from the performance of any agreements on its part herein contained, and if
the City shall fail to perform any such agreement, the Company may institute
such action against the City as the Company may deem necessary to compel
performance, provided that no such action shall violate the agreements on the
part of the Company contained herein. The Company may, however, at its own cost
and expense and in its own name or in the name of the City, prosecute or defend
any action or proceeding or take any other action involving third persons which
the Company deems reasonably necessary in order to secure or protect its right
of possession, occupancy and use of its solid waste recovery facilities, and in
such event the City hereby agrees to cooperate fully with the Company (without
expense to the City).
ARTICLE VI
MAINTENANCE AND INSURANCE
     Section 6.01. Maintenance and Modifications . The Company agrees that
during the term of this Loan Agreement its Property, Plant and Equipment shall
be operated and maintained in substantial compliance with all laws, building
codes, ordinances and regulations and zoning laws as shall be applicable to the
Property, Plant and Equipment. The Company agrees that during the term of this
Loan Agreement it will at its own expense (a) keep the Property, Plant and
Equipment in as reasonably safe condition as its operations permit; and (b) keep
the Property, Plant and Equipment in good repair and in good operating
condition, making from time to time all necessary repairs thereto (including
external and structural repairs) and renewals and replacements thereof. The
Company may also at its own expense, make from time to time any additions,
modifications or improvements to the Property, Plant and Equipment it may deem
desirable for its purposes that do not adversely affect the structural integrity
of any building or substantially reduce its value or impair the character of its
use permitted pursuant to the Act, provided that all such additions,
modifications, renovations, repairs and improvements made by the Company shall
become a part of the Property, Plant and Equipment; provided, however, that
nothing in this subsection shall prevent the Company from ceasing to operate any
immaterial portion of the Property, Plant and Equipment. The Company hereby
covenants and agrees that it shall not construct any improvements or install any
equipment on any portion of the Springdale Property, Lowell Property, Junction
Property or Watts Property located within a federally designated flood hazard
zone unless and until such property shall be insured against loss or damage by
flood in accordance with Section 6.02(a) hereof.
     Section 6.02. Insurance.
     (a) Throughout the term of this Loan Agreement, the Company will keep the
Springdale Property, the Lowell Property, the Junction Property and the Watts
Property (or cause the Springdale Property, the Lowell Property, the Junction
Property and the Watts Property to be kept) continuously insured against such
risks as are customarily insured against with respect to property similar to the
Springdale Property, the Lowell Property, the Junction Property and the Watts
Property by businesses of like size and

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type, paying as the same becomes due all premiums in respect thereto, including
but not necessarily limited to:
          (i) insurance to the full insurable value of the Property, Plant and
Equipment of the Company as determined by the Company sufficient to prevent the
Company from being a co-issuer (and in no event less than the principal amount
of the Bonds Outstanding from time to time), against loss or damage by fire,
lightning and flood (if the Springdale Property, the Lowell Property, the
Junction Property or the Watts Property is located within a federally designated
flood hazard zone) and such other risks and matters, including without
limitation, rental loss, public liability and boiler insurance, with uniform
standard extended coverage endorsement limited only as may be provided in the
standard form of extended coverage endorsement at that time customarily used in
the state where such property is located, provided that the insurance required
by this subsection may contain a deductible provision and be in amounts which in
the opinion of an Insurance Consultant is normal and reasonable;
          (ii) general public liability insurance against claims for bodily
injury, death or property damage occurring on, in or about the Springdale
Property, the Lowell Property, the Junction Property and the Watts Property and
the adjoining streets, sidewalks and passageways, such insurance to afford
protection of the type and in an amount which in the opinion of an Insurance
Consultant is normal and reasonable with respect to bodily injury and property
damage;
          (iii) rental or business interruption insurance against abatement of
rent resulting from fire or other casualty in an amount not less than
$1,000,000, with the proceeds from such rental or business interruption
insurance being payable to the Company and the Trustee, as their respective
interest may appear;
          (iv) Worker’s Compensation Insurance as required by law; and
          (v) key-man insurance with respect to Joe Brooks, the Co-Chairman of
the Board of Directors of the Company, in the amount of $4 million and Douglas
Brooks, as the Vice President, in the amount of $2.5 million.
     (b) Anything herein to the contrary, notwithstanding, a Significant
Bondholder may, by notice thereof in writing to the Company and the Trustee,
require additional insurance to be carried by the Company with respect to the
Springdale Property, the Lowell Property, the Junction Property and the Watts
Property beyond that expressly identified herein, with respect to such risks and
in such coverage amounts and other terms as in each case are reasonable
and customary with respect to property similar to the Springdale Property, the
Lowell Property, the Junction Property or the Watts Property, and the Company
will obtain such insurance and furnish to the Trustee and Significant Bondholder
evidence thereof satisfactory to the Trustee and Significant Bondholder. All
policies of insurance shall be issued by an insurer authorized to do business in
the state where the respective property is located having a rating of at least
A:6 in Best’s Key Rating Guide. Not later than 30 days prior to the expiration
date of

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each of the insurance policies, the Company will deliver to the Trustee
satisfactory evidence of the renewal of each of the policies. If at any time the
Trustee is not in receipt of written evidence that all insurance required
hereunder is in full force and effect, the Trustee will have the right without
notice to the Company to take such action as the Trustee deems necessary to
protect its interest in the Springdale Property, the Lowell Property, the
Junction Property and the Watts Property, including without limitation the
obtaining of such insurance coverage as the Trustee in its sole discretion deems
appropriate, and all expenses incurred by the Trustee in connection with such
action or in obtaining such insurance and keeping it in effect will be paid by
the Company to the Trustee upon demand; provided, however, that if that the
Trustee takes any such action, the Trustee shall give the Company notice of such
action within five Business Days thereof.
     (c) All of the insurance policies required pursuant to this Section 6.02
will (i) contain a standard noncontributory form of mortgage clause (in favor of
the Trustee and entitling the Trustee to collect any and all proceeds payable
under such insurance), as well as a standard waiver of subrogation endorsement,
and in the case of such liability policy, name the Trustee as an additional
insured, all to be in form and substance satisfactory to the Trustee;
(ii) provide, to the extent obtainable, that such policies may not be canceled
or amended to diminish the coverage thereunder without at least 30 days prior
written notice to the Trustee; and (iii) provide that no act, omission or
negligence of the Company, or its agents, servants or employees, or of any
tenant under any lease, which might otherwise result in a forfeiture of such
insurance or any part thereof, shall in any way affect the validity or
enforceability of such insurance insofar as the Trustee is concerned. The
Company will not carry separate insurance, concurrent in kind or form or
contributing in the event of loss, with any insurance required under this
Section 6.02.
     The Company shall retain an Insurance Consultant to review the insurance
requirements of the Company at the date of issuance of the Bonds and from time
to time thereafter (but not less frequently than every two years) and to cause a
certificate to be delivered to the Trustee and to the Bondholders as to whether
the insurance being maintained is in compliance with the requirements of this
Section. If the Insurance Consultant makes recommendations for the increase of
any coverage, the Company shall increase or cause to be increased such coverage
in accordance with such recommendations, to the extent that the Governing Body
of the Company determines in good faith that such recommendations are in the
best interests of the Company. If the Insurance Consultant makes recommendations
for the decrease or elimination of any coverage, the Company may decrease or
eliminate such coverage in accordance with such recommendations, to the extent
that the Governing Body of the Company determines in good faith that such
recommendations are in the best interest of the Company.
     Notwithstanding anything in this Section to the contrary, the Company shall
have the right, without giving rise to an Event of Default solely on such
account, (a) to maintain insurance coverage below that most recently recommended
by the Insurance Consultant, if the Company furnishes to the Trustee a report of
the Insurance Consultant to the effect that the insurance so provided affords
either the greatest amount of coverage available for the risk being insured
against at rates which in the judgment of the Insurance Consultant are
reasonable in connection with reasonable and appropriate risk management, or the
greatest amount of coverage necessary

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by reason of state or federal laws now or hereafter in existence; or (b) to
adopt alternative risk management programs which the Insurance Consultant
determines to be reasonable, including, without limitation, to self-insure in
whole or in part individually or in connection with other institutions, to
participate in programs of captive insurance companies, to participate with
other solid waste disposal and manufacturing companies in mutual or other
cooperative insurance or other risk management programs, to participate in state
or federal insurance programs, or to establish or participate in other
alternative risk management programs; all as may be approved by the Insurance
Consultant as reasonable and appropriate risk management by the Company. If the
Company shall be self-insured for any coverage, the report of the Insurance
Consultant mentioned above shall state whether the anticipated funding of any
self-insurance fund is actuarially sound, and if not, the required funding to
produce such result and such coverage shall be reviewed by the Insurance
Consultant not less frequently than annually. Notwithstanding the other
provisions of this Section, the Company shall not self-insure (other than with
respect to reasonable deductibles certified as such in an Officer’s Certificate
of the Company Representative) or otherwise participate in programs described in
clause (b) above with respect to any insurance against loss or damage to the
Property, Plant and Equipment by fire, lightning, vandalism, malicious mischief
or other casualty or with respect to boiler insurance and provided further that,
the Company shall not self-insure if such self-insurance has a material adverse
effect on reimbursement from any third party payor unless its Governing Body
shall have determined in good faith, evidenced by a resolution of the Governing
Body, that such self-insurance is in the best interests of the Company and the
Company has given prior notice of such self-insurance to the Trustee and the
Bondholders.
     The Company Representative shall deliver to the Trustee (a) upon execution
and delivery of this Loan Agreement, the originals or certified copies thereof
of all insurance policies (or certificates thereof) which the Company is
required to maintain pursuant to this Section, together with a Certificate of
the Company Representative that payment of all premiums then due thereon has
been made; (b) at least 30 days prior to the expiration of any such policies
evidence as to the renewal thereof, if then required by this Section or the
terms of such policies, and an Officer’s Certificate of the Company
Representative that payment of all premiums then due with respect thereto has
been made; and (c) promptly upon request by the Trustee, but in any case within
90 days after the end of each calendar year, a certificate of the Company
Representative setting forth the particulars as to all insurance policies
maintained by the Company pursuant to this Section and certifying that such
insurance policies are in full force and effect, that such policies comply with
the provisions of this Section and that all premiums then due thereon have been
paid.
ARTICLE VII
CASUALTY LOSS AND CONDEMNATION
     Section 7.01. Insurance and Condemnation Proceeds. In the event that damage
or destruction to the Springdale Property, the Lowell Property, the Junction
Property or the Watts Property or any portion thereof occurs such that claims
for loss do not exceed $100,000 or in the event title to or the temporary use of
the Springdale Property, the Lowell Property, the Junction Property or the Watts
Property, or any portion thereof, will be taken under the exercise of the power
of eminent domain and the Net Proceeds from any condemnation award are less than

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$100,000, the Net Proceeds of insurance resulting from such claims or from any
such condemnation award will be paid to the Company and will be used for such
purposes as the Company, in its discretion, may deem appropriate. In the event
that any damage or destruction is such that claims for loss are between $100,000
and $1,000,000, both inclusive, or the Net Proceeds from any condemnation award
are between $100,000 and $1,000,000, both inclusive, the Net Proceeds of
insurance resulting from such claims or from any such condemnation award will be
paid to the Company and used by the Company with the consent of a Significant
Bondholder either to redeem Bonds or to repair, rebuild, restore or replace the
property. In the event that any damage or destruction is such that claims for
loss exceed $1,000,000, or the Net Proceeds from any condemnation award exceed
$1,000,000, the Net Proceeds of insurance resulting from such claims or from any
such condemnation award will be held by the Trustee, and the Company will elect
to have the Net Proceeds received applied to either the redemption of the Bonds
or to repair, rebuild, restore or replace the property. If the Company elects
the latter option, then the Net Proceeds will be paid by the Trustee from a
separate account, from time to time, upon evidence of the expenditures therefor,
upon receipt of a certificate of an Independent Architect. The Company may elect
to redeem less than all of the Bonds only if (a) the property damaged, destroyed
or condemned is not essential to the Company’s use or occupancy of the
Springdale Property, the Lowell Property, the Junction Property or the Watts
Property; (b) the Springdale Property, the Lowell Property, the Junction
Property or the Watts Property has been restored to a condition substantially
equivalent to their condition prior to such damage, destruction or condemnation;
or (c) suitable replacement property has been acquired for the Company’s
operations.
ARTICLE VIII
SPECIAL COVENANTS
     Section 8.01. No Warranty of Condition or Suitability by the City. The City
makes no warranty, either express or implied, as to the condition of the
Facilities, or that they will be suitable for the purposes or needs of the
Company.
     Section 8.02. Further Assurances. The City and the Company agree that they
will, from time to time, execute, acknowledge and deliver, or cause to be
executed, acknowledge and delivered, such supplements hereto and such further
instruments as may reasonably be required for carrying out the intention of or
facilitating the performance of this Loan Agreement.
     Section 8.03. Annual Audit. The Company will have the books and records of
the Company audited annually, and shall furnish within 120 days after the end of
each Fiscal Year to the City, the Notice Beneficial Owners, the Underwriter and
the Trustee a copy of the audit report certified by independent public
accountants.
     Section 8.04. Financial Statements. The Company agrees that it will
maintain proper books of records and accounts of its Property, Plant and
Equipment with full, true and correct entries of all of its dealings in
accordance with generally accepted accounting principles, and that it will
furnish to the Trustee, the Underwriter and Notice Beneficial Owners quarterly
financial statements within 45 days after the close of each such quarter,
including a statement of income in comparative form, to the extent practicable,
with the financial figures from the corresponding

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period in the preceding Fiscal Year and a balance sheet as of the end of each
such period and of the preceding Fiscal Year.
     Section 8.05. Release and Indemnification Covenants. The Company agrees to
protect and defend the City, former, present and future council members,
officers, employees and other agents of the City and each person, if any, who
has the power, directly or indirectly, to direct or cause the direction of the
management or policies, now or hereafter, of the City and to protect and defend
the Trustee, its officers, employees and agents (collectively, the “Indemnified
Parties” and individually, the “Indemnified Party”) and further agrees to
indemnify and hold harmless the Indemnified Parties from and against any and all
liabilities, losses, damages, costs, expenses (including reasonable attorneys’
fees and court costs, including those for post-judgment and appellate
proceedings), judgments, claims, demands, suits, actions or other proceedings of
whatsoever kind or nature (including, without limitation, those in any manner
directly or indirectly arising or resulting from, out of or in connection with
any injury to, or death of any person or and damage to property but excluding
those arising or resulting from any intentional misrepresentation or any willful
and wanton misconduct of the Indemnified Party or Indemnified Parties) in any
manner directly or indirectly (in any case, whether or not by the Company, or
its successors and assigns, or directly or indirectly through the agents,
contractors, employees, licensees or otherwise of the Company, or its successors
and assigns) by any person or entity whatsoever except the City or the Trustee,
arising or purportedly arising from this Loan Agreement, the Indenture, the
Bonds, Parity Indebtedness, the initial and any subsequent offers and sales of
the Bonds, the Tax Certificate or the transactions contemplated hereby and
thereby, the Project and the ownership or the operation by the Company of the
Property, Plant and Equipment the breach or violation of its or any material
inaccuracy or material omission in any agreement, covenant, representation or
warranty of the Company set forth herein or in any document delivered pursuant
hereto, the presence of any Hazardous Material or underground storage tanks on
or under the Property, Plant and Equipment or any escape, seepage, leakage,
spillage, discharge, emission or release of any Hazardous Material from the
Property, Plant and Equipment, any Liens against the Property permitted under or
imposed by any Environmental Laws, or any violation or actual or asserted
liability or obligations of the Company under any Environmental Laws, regardless
of whether or not caused by, or within the control of, the Company, any actual
or asserted liability or obligations of the aforesaid Persons under any
Environmental Law relating to the Property, Plant and Equipment, regardless of
whether or not caused by, or within the control of, the Company or any action or
failure to act by an Indemnified Party or Indemnified Parties with respect to
any of the foregoing.
     The Company releases the City and all former, present and future council
members, servants, officers, employees and other agents of the City, and the
Trustee from, agrees that the City and the Trustee and all former, present and
future directors, members, servants, officers, employees and other agents of the
City and the Trustee shall not be liable for, and agrees to hold the City and
all former, present and future directors, members, servants, officers, employees
and other agents of the City and the Trustee harmless against, any expense or
damages incurred because of any lawsuit commenced as a result of action taken by
the City, and the Trustee or their former, present and future directors,
members, servants, officers, employees or other agents (except for any
intentional misrepresentation or willful and wanton misconduct of the aforesaid)
with respect to this Loan Agreement, the Indenture, the Bonds, Parity
Indebtedness, the Tax Certificate, the Project or the Property, Plant and
Equipment and the City and the Trustee shall

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promptly give written notice to the Company with respect thereto. All covenants,
stipulations, promises, agreements and obligations of the City contained herein
shall be deemed to be the covenants, stipulations, promises, agreements and
obligations of the City and not of any former, present or future director,
member, servant, officer, employee or other agent of the City in his or her
individual capacity, and no recourse shall be had for the payment of the
principal of, premium, if any, or interest on the Bonds or Parity Indebtedness
or for any claim based thereon or hereunder against any former, present or
future director, member, servant, officer, employee or other agent of the City
or any natural person executing the Bonds.
     The indemnification arising under this Section shall continue in full force
and effect notwithstanding the full payment of all obligations under this Loan
Agreement or the termination of this Loan Agreement for any reason.
     Section 8.06. Company Representative. Whenever, under the provisions of
this Loan Agreement, the Tax Certificates or the Indenture, the approval or
direction of the Company is required, or the City or the Trustee is required to
take some action at the request of the Company, such approval or such request
shall be made by the Company Representative unless otherwise specified in this
Loan Agreement, the Tax Certificate or the Indenture. The City or the Trustee
shall be authorized to act on any such approval or request and the Company shall
have no complaint against the City or the Trustee as a result of any such action
taken in accordance with such approval or request. The execution of any document
or certificate required under the provisions of this Loan Agreement, the Tax
Certificates or the Indenture by the Company Representative shall be on behalf
of the Company and shall not result in any personal liability of such Company
Representative.
     Section 8.07. Leases and Operating Contracts. The Company may lease (as
lessor) any part of the Property from which it derives revenues or contract for
the performance by others of operations or services on or in connection with the
Property from which it derives revenues, or any part thereof, for any lawful
purpose, provided that (a) the Trustee shall receive written notice of such
lease or contract if such lease or contract has a value in excess of $250,000 or
a duration longer than six months; (b) each such lease or contract shall not be
inconsistent with the provisions of the Indenture or this Loan Agreement;
(c) the Company shall remain fully obligated and responsible under this Loan
Agreement to the same extent as if such lease or contract had not been executed;
and (d) no such lease or operating contract shall adversely affect the validity
of the Bonds or Parity Indebtedness or the exclusion of interest on the Bonds
from gross income for federal and state income tax purposes. The Trustee shall
request the Company to deliver an opinion of Bond Counsel addressed to the
Trustee relating to the matters set forth in (e) if the Company enters into a
lease or operating contract covered by this Section 8.07.
     Section 8.08. No Default Certificate. Within 150 days after the end of each
Fiscal Year, the Company shall furnish to the Trustee a certificate of the
Company Representative stating that no Event of Default under Section 10.01
hereof has occurred and is continuing and that he has no knowledge of an event
which, with the passage of time or the giving of notice, or both, would
constitute an Event of Default under Section 10.01 hereof, respectively, or
describing any such Event of Default or event known to the Company.
     Section 8.09. [Intentionally Omitted].

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     Section 8.10. Limitations on Creation of Liens.
     (a) The Company agrees that it will not create or suffer to be created or
permit the existence of any Lien on any tangible or intangible assets of the
Company mortgaged or pledged pursuant hereto or pursuant to the Watts Mortgage,
the Lowell Mortgage, the Junction Deed of Trust or the Springdale Mortgage,
other than Permitted Liens, as described in Section 8.10(b) hereof.
     (b) Permitted Liens shall consist of the following:
     (i) Liens arising by reason of good faith deposits with the Company in
connection with leases of real estate, bids or contracts (other than contracts
for the payment of money), deposits by the Company to secure public or statutory
obligations, or to secure or in lieu of surety, stay or appeal bonds, and
deposits as security for the payment of taxes or assessments or other similar
charges;
     (ii) any Lien arising by reason of deposits with, or the giving of any form
of security to, any governmental agency or any body created or approved by law
or governmental regulation for any purpose at any time as required by law or
governmental regulation as a condition to the transaction of any business or the
exercise of any privilege or license, or to enable the Company to maintain
self-insurance or to participate in any funds established to cover any insurance
losses or in connection with workers’ compensation, unemployment insurance,
pension or profit sharing plans or other social security, or to share in the
privileges or benefits required for companies participating in such
arrangements;
     (iii) any judgment lien against the Company so long as such judgment is
being contested in good faith and execution thereon is stayed and it will not
materially interfere with or materially impair the operations conducted on the
Property, Plant and Equipment;
     (iv) (A) rights reserved to or vested in any municipality or public
authority by the terms of any right, power, franchise, grant, license, permit or
provision of law, affecting its Property, Plant and Equipment; (B) any liens on
the Property, Plant and Equipment for taxes, assessments, levies, fees, water
and sewer rents, and other governmental and similar charges and any liens of
mechanics, materialmen, laborers, suppliers or vendors for work or services
performed or materials furnished in connection with the Property, Plant and
Equipment which are not due and payable or which are not delinquent or which, or
the amount or validity of which, are being contested and execution thereon is
stayed or, with respect to liens of mechanics, materialmen, laborers, suppliers
or vendors, have been due for less than 90 days; (C) easements, rights-of-way
servitude, restrictions, oil, gas or other mineral reservations and other minor
defects, encumbrances and irregularities in the title to the Property which in
the opinion of the Company Representative do not materially impair the use of
the Property, Plant and Equipment for its intended purpose or materially and
adversely affect the value thereof provided that the Company Representative
shall

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have given the Trustee written notice thereof at least 120 days before the
imposition of such Lien; (D) statutory landlord’s liens; and (E) all exceptions
shown on the policies of title insurance delivered pursuant to the Indenture;
     (v) any Lien securing Additional Indebtedness permitted hereby;
     (vi) any Lien permitted pursuant to Section 3.01 hereof; (vii) any Lien
created by the Indenture or this Loan Agreement; (viii) any Lien described in
Exhibit B hereto; and
     (ix) any Lien in favor of a creditor or a trustee on the proceeds of
Indebtedness and any earnings thereon prior to the application of such proceeds
and such earnings, and any Liens on trust funds established and held by a
trustee or creditor with respect to Indebtedness properly incurred.
     (c) Until such time as the lien filed by Advanced Control Solutions, Inc.
(“ACS”) on the Lowell Property, as evidenced by document number 2006-1433 of the
records of Benton County, Arkansas (the “ACS Lien”), has been released, the
Company shall maintain in favor or ACS a direct pay letter of credit issued by a
reputable bank, trust company or other financial institution in an amount of at
least $800,000 to secure its obligations with respect to the ACS Lien.
     Section 8.11. Limitations on Indebtedness. The Company may incur Additional
Indebtedness, if the Income Available for Debt Service for the two immediately
preceding Fiscal Years based on Audited Financial Statements is not less than
250% of the Long-Term Debt Service Requirements in such period, taking into
account the Loan and Indebtedness then Outstanding and the Additional
Indebtedness proposed to be incurred. Notwithstanding the foregoing, Commitment
Indebtedness and Nonrecourse Indebtedness may be incurred by the Company at any
time, without limit. In addition, the Company may incur Additional Indebtedness
secured by accounts receivable and inventory, and Additional Indebtedness with
respect to Approved Purchaser purchase orders, as provided in Section 3.01 of
this Loan Agreement.
     Section 8.12. Subordinated Debt. Subordinated Debt shall include only
Indebtedness of the Company incurred pursuant to loan agreements, credit
agreements or similar arrangements (“Subordinate Loan Documents”) which contain
provisions substantially to the following effect:
     (a) Subordinated Debt shall, to the extent and in the manner hereinafter
set forth, be fully subordinated to the Superior Indebtedness as herein defined.
For all purposes of this Section the term “Superior Indebtedness” shall mean all
obligations of the Company arising under this Loan Agreement, the Springdale
Mortgage, the Lowell Mortgage, the Junction Deed of Trust or the Watts Mortgage
(the “Loan Documents”), as each may be supplemented and modified to the date
hereof, or as the same may hereafter from time to time be further supplemented
and modified and any other obligations secured by or evidencing, directly or
indirectly, obligations evidenced by such Loan Documents, including
post-petition interest.

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     (b) No action or proceedings, judicial or otherwise (including without
limitation the commencement of or joinder in any bankruptcy or liquidation),
shall be instituted or pursued by the holder of any Subordinated Debt (together,
the “Subordinate Creditors”), nor shall such Subordinate Creditors take steps to
enforce other judgments or encumbrances on assets of the Company pledged to the
payment of the obligations of the Company arising under any Subordinate Loan
Document (an “Enforcement Action”), other than an action to compel specific
performance, and other than an action with respect to collateral pledged to the
payment of such Subordinated Debt and not pledged to the payment of the Superior
Indebtedness, unless all Bondholders shall have consented thereto, or the
Bondholders shall have been paid in full or provision therefor shall have been
made in accordance with the terms of the Indenture.
     (c) No payment on account of principal, premium, if any, sinking funds or
interest on Subordinated Debt shall be made, nor shall any property or assets
pledged to the payment of the obligations of the Company arising under any
Subordinate Loan Document, other than collateral pledged to the payment thereof
and not pledged to the payment of the Superior Indebtedness, be applied to the
payment or prepayment of Subordinated Debt, unless payment of all amounts then
due and payable for principal, premium, if any, sinking funds and interest on
Superior Indebtedness has been made or duly provided for in accordance with the
terms of the Loan Documents. No payment of principal of and interest on and
other amounts due under any Subordinate Loan Document may be made prior to full
payment of Superior Indebtedness, (other than payment derived with respect to
collateral pledged to the payment of Subordinated Debt and not pledged to the
payment of the Superior Indebtedness) if, at the time of such payment or
application or immediately after giving effect thereto, (i)  there shall exist
any default in the payment of principal, premium, if any, sinking funds or
interest with respect to the Bonds or any Superior Indebtedness; or (ii) there
shall have occurred an Event of Default (other than a default in the payment of
principal, premium, if any, sinking funds or interest) with respect to the Bonds
or any Superior Indebtedness permitting the Trustee to accelerate the maturity
thereof, and written notice of such occurrence shall have been given to the
Subordinate Creditors and such event of default shall not have been cured or
waived or shall not have ceased to exist.
     (d) Upon (i) any acceleration of maturity of the principal amount due on
any Subordinated Debt; or (ii) any payment or distribution of any kind or
character, whether in cash, property or securities, upon any dissolution or
winding-up or total or partial liquidation, reorganization or arrangement of the
Company, whether voluntary or involuntary or in bankruptcy, insolvency,
receivership or other proceedings, all principal, premium, if any, and interest
due or to become due upon the Bonds and all Superior Indebtedness shall first be
paid in full, or payment thereof provided for in accordance with the terms of
the Indenture, before any payment is made on account of the principal, premium,
if any, or interest on the Subordinated Debt (other than payment derived with
respect to collateral pledged to the payment of Subordinated Debt and not
pledged to the payment of the Superior Indebtedness), and upon any such
dissolution or winding-up or liquidation, reorganization or arrangement, any
payment or distribution of any kind or character, whether in cash, property or
securities, to which the holders of the Subordinated Debt would be entitled,
except for the provisions hereof, shall be paid by

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the Company, or by a receiver, trustee in bankruptcy, liquidating trustee, agent
or other person making such payment or distribution, to the Trustee to the
extent necessary to pay all Superior Indebtedness in full, before any payment or
distribution is made to the holders of the Subordinate Debt.
     (e) In the event that, in violation of any of the foregoing provisions, any
payment or distribution of any kind or character, whether in cash, property or
securities, shall be received by any Subordinate Creditor before all Bonds and
Superior Indebtedness is paid in full or provision for such payment in
accordance with the terms of the Indenture, such payment or distribution shall
be held in trust for the benefit of, and shall be paid over or delivered to the
Trustee for application to the payment of all Bonds remaining unpaid to the
extent necessary to pay all such Bonds in full in accordance with its terms.
     (f) Neither the Trustee nor any present or future holder of any Bonds shall
be prejudiced in any right to enforce subordination of the indebtedness
evidenced by the Subordinate Loan Documents by any act or failure to act on the
part of the Company or anyone in custody of its assets or property.
     (g) The foregoing subordination provisions shall be for the benefit of the
holders of Bonds and may be enforced by the Trustee against the holders of
Subordinate Indebtedness or any trustee therefor.
     The foregoing provisions are solely for the purpose of defining the
relative rights of the holders of Superior Indebtedness on the one hand and the
holders of the Subordinated Debt on the other hand, and nothing therein shall
impair, as between the Company and the holders of the Subordinate Indebtedness,
the obligation of the Company, which is unconditional and absolute, to pay to
the holders thereof the principal thereof, premium, if any, and interest thereon
in accordance with its terms, nor shall anything herein prevent the holders of
the Subordinated Debt or any trustee on their behalf from exercising all
remedies otherwise permitted by applicable law or thereunder upon default
thereunder, subject to the rights set forth above of the holders of Superior
Indebtedness to receive cash, property or securities otherwise payable or
deliverable to the holders of the Subordinate Indebtedness. Upon any payment or
distribution of assets of the Company of the character referred to in the fifth
paragraph of the foregoing provisions, the holders of Subordinate Indebtedness
shall be entitled to rely upon any order or decree of a court of competent
jurisdiction in which such dissolution, winding-up, liquidation, reorganization
or arrangement proceedings are pending, and upon a certificate of the receiver,
trustee in bankruptcy, liquidating trustee, agent or other person making any
such payment or distribution, delivered to the holders of Subordinate
Indebtedness for the purpose of ascertaining the Persons entitled to participate
in such distribution, the holders of Subordinate Indebtedness and other
indebtedness of Company, the amount thereof or payable thereon, the amount or
amounts paid or distributed thereon and all other facts pertinent thereto or to
the foregoing provisions. No holders of Subordinate Indebtedness shall be
charged with knowledge of the existence of any facts which would prohibit the
making of any payment of moneys to or by such holders of Subordinate
Indebtedness, unless and until the holders of Subordinate Indebtedness, as the
case may be, have actual notice or shall have received notice thereof from the
Company, the Trustee

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or one or more holders of Superior Indebtedness. The Company hereby covenants
and agrees in each case to provide such notice.
     Section 8.13. Parity Indebtedness. The Company covenants not to incur or
assume any Parity Indebtedness or Subordinated Indebtedness unless the Company
has received consent of the holders of 100% of the principal amount of the Bonds
Outstanding; provided, however, that the Indebtedness incurred by the Company in
connection with the $13,515,000 original principal amount of Adair County
Industrial Authority Solid Waste Recovery Facilities Revenue Bonds (Advanced
Environmental Recycling Technologies Project) Series 2007 shall be deemed Parity
Indebtedness approved by the holders of the Bonds. Upon issuance of Parity
Indebtedness, such debt will be entitled to share on a parity in all property
and rights securing the Bonds, except the moneys in the Funds, which shall
secure only the Bonds.
     Unless otherwise consented to by the holders of 100% of the principal
amount of the Bonds Outstanding, all instruments creating or securing Parity
Indebtedness shall (a) provide that the Trustee shall have the sole power to
select remedies to be used to enforce rights against common security for the
Bonds and Parity Indebtedness, subject to the right of the owners of a majority
in aggregate principal amount of the sum of the Bonds and Parity Indebtedness
then Outstanding to direct remedies in the manner provided in the Indenture;
(b) provide that the holders of Parity Indebtedness or the trustee therefor
shall undertake such actions as may be requested by the Trustee that are
reasonably necessary to effectuate the purposes of clause (a); and (c) contain
cross default provisions with the Loan Agreement, the Indenture and all other
instruments creating Parity Indebtedness.
     All collateral given or to be given to secure Parity Indebtedness (other
than credit enhancement devices such as letters of credit, insurance or surety
bonds and other than reserve funds) shall also secure the obligations of the
Company under the Loan Agreement on a parity basis; and the instruments under
which any Parity Indebtedness is incurred shall contain provisions that all
Parity Indebtedness and the obligations of the Company under the Loan Agreement
shall be secured equally and ratably by all such security provided for any such
Parity Indebtedness. The Property, the Pledged Revenues and any other collateral
at any time given to secure the obligations of the Company under the Loan
Agreement (other than the Funds) shall likewise secure Parity Indebtedness, and
such shall be set forth and so provided in any instrument securing Parity
Indebtedness. No release by or permission from the City and the Trustee under
the Loan Agreement shall be necessary (other than the Company’s payment of any
Trustee fees or any fees or expenses of the Trustee) to allow such collateral to
be pledged pursuant to any instrument relating to Parity Indebtedness, so long
as the conditions of the Loan Agreement are complied with.
     Section 8.14. Transfer of Assets. The Company agrees that it will not
Transfer assets without the consent of 100% of the owners of the Bonds, except
for Transfers of assets:
     (a) to any Person if prior to the sale, lease or other disposition there is
delivered to the Trustee an Officer’s Certificate of the Company Representative
stating that such assets have or will within the next 24 months become
inadequate, obsolete, worn out, unsuitable, unprofitable, undesirable or
unnecessary and the sale, lease,

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removal or other disposition thereof will not impair the structural soundness,
efficiency, or economic value of the remaining assets of the Company;
     (b) to any Person provided there shall be delivered to the Trustee prior to
such Transfer a report of a Consultant to the effect that the assets being
transferred are not an integral part of the Property, Plant and Equipment; and
either:
     (i) an Officer’s Certificate (accompanied by the Audited Financial
Statements) certifying the Long-Term Debt Service Coverage Ratio, adjusted to
exclude the revenues and expenses derived from the assets proposed to be
disposed of, for the most recent Fiscal Year for which the Audited Financial
Statements are available and such Long-Term Debt Service Coverage Ratio is not
less than 2.00 and not less than 65% of what it would have been were such
Transfer not to take place; or
     (ii) the report of a Consultant to the effect that the forecasted Long-Term
Debt Service Coverage Ratio, taking such Transfer into account, for each of the
two Fiscal Years succeeding the date on which such Transfer is expected to
occur, and the Long-Term Debt Service Coverage Ratio for each such period is not
less than 2.00 and not less than 65% of what it would have been were such
Transfer not to take place, accompanied by a statement of the relevant
assumptions upon which such forecasts are based;
     (c) with respect to any Transfer of non-inventory assets, to any Person in
the ordinary course of business and on terms not less favorable to the Company
than arm’s length, but not to exceed $1,000,000 in aggregate proceeds in any
Fiscal Year unless otherwise consented to by a majority of the Bondholders;
     (d) with respect to any Transfer of inventory, to any Person in the
ordinary course of business;
     (e) to any Person if the aggregate Net Book Value of the assets transferred
pursuant to this clause in any five consecutive Fiscal Years, does not exceed 5%
of the Net Book Value of all assets of the Company as shown in the Audited
Financial Statements for the most recent Fiscal Year; or
     (f) to any Person, if the Company shall determine to sell all or
substantially all of its assets, and (i) the Company exercises its option to
prepay the Loan; or (ii) the holders of 100% of the Bonds shall consent to such
transfer, all as provided in Section 8.15 hereof.
     Section 8.15. Consolidation, Merger, Sale or Conveyance. The Company
covenants that it will not merge or consolidate with, or sell or convey all or
substantially all of its assets to, any Person, unless (a) such merger,
consolidation or sale shall be consented to by the holders of 100% of the Bonds;
or (b) the Company shall elect to prepay the Loan and redeem the Bonds in
accordance with Section 5.01(b) of the Indenture. In case of any such
consolidation, merger, sale or conveyance and upon any such assumption by the
successor corporation, such successor

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corporation shall succeed to its predecessor, with the same effect as if it had
been named herein as such predecessor.
     Section 8.16. Financial Covenants.
     (a) The Company shall calculate quarterly the Long-Term Debt Service
Coverage Ratio for the prior four fiscal quarters, and shall provide a copy of
such calculation for such period to the Trustee and Notice Beneficial Owners at
the time of delivery of the quarterly financial statements delivered in
accordance with Section 8.04 hereof. If the Debt Service Coverage Ratio
computation delivered at the time of delivery of any such statement indicates
that the Long-Term Debt Service Coverage Ratio of the Company for such previous
period shall be less than 1.50 to 1.00 (and, beginning with the report with
respect to the fiscal quarter ending March 31, 2009, shall be less than 2.00 to
1.00), the Company covenants to retain a Consultant at the expense of the
Company, within 30 days, to make recommendations to increase such Long-Term Debt
Service Coverage Ratio in the then-current Fiscal Year to such level or, if in
the opinion of the Consultant the attainment of such level is impracticable, to
the highest level attainable in such Fiscal Year. Any Consultant so retained
shall be required to submit such recommendations to the Trustee and the Notice
Beneficial Owners within 90 days after being so retained. The Company agrees
that it will, to the extent permitted by law, follow the recommendations of the
Consultant. The Company shall not be obligated to retain such a Consultant more
often than once during any 24-month period.
     (b) The Company covenants and agrees that it shall maintain a Current
Ratio, calculated as of the last day of each calendar quarter, of not less than
1.00 to 1.00. The Company shall provide a copy of such calculation to the
Trustee and Notice Beneficial Owners at the time of delivery of the quarterly
financial statements delivered in accordance with Section 8.04 hereof.
     (c) The Company covenants and agrees that it shall maintain a Debt to
Equity Ratio, calculated as of the last day of each Fiscal Year, of not more
than 3.00 to 1.00. The Company shall provide a copy of such calculation to the
Trustee and Notice Beneficial Owners at the time of delivery of the annual audit
delivered in accordance with Section 8.03 hereof.
     (d) The Company covenants and agrees that not more than 20% of its accounts
payable (for the deferred purchase price of property or services) from time to
time incurred in the ordinary course of operations and activities shall be in
excess of 75 days past the invoice or billing date, or, if greater than 75 days,
are being contested in good faith by the Company.
     (e) The Company covenants and agrees that not more than 20% of its accounts
receivable (for the deferred purchase price of property or services) from time
to time shall be in excess of 90 days past the invoice or billing date,
excluding from such calculation (i) amounts being contested in good faith by the
obligated party, and (ii) amounts which the Company has determined, in good
faith, are not likely to be

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collected and are to be treated as losses in accordance with generally accepted
accounting principles.
     Section 8.17. Reporting Extensions. Notwithstanding the foregoing, in the
event the Company receives an extension of time with respect to any annual or
quarterly reports filed with the Securities and Exchange Commission pursuant to
Section 13 and Section 15(d) of the Securities Exchange Act of 1934, as amended,
the Company shall be entitled to the same extension for annual and quarterly
reports required to be filed under this Loan Agreement.
ARTICLE IX
ASSIGNMENT AND PLEDGING OF LOAN AGREEMENT; REDEMPTION OF
BONDS
     Section 9.01. Assignment by Company. This Loan Agreement may be assigned by
the Company with the prior written consent of the Bondholders subject to each of
the following conditions:
     (a) no assignment shall relieve the Company from primary liability for any
of its obligations hereunder, and in the event of any such assignment, the
Company shall continue to remain primarily liable for payment of the Loan
Payments, payments on Parity Indebtedness and other payments required to be made
under Section 5.01 hereof and for performance and observance of the other
covenants and agreements on its part herein provided;
     (b) no assignment shall impair the exclusion of interest on the Bonds from
gross income for federal income tax purposes;
     (c) the assignee shall assume in writing the obligations of the Company
hereunder to the extent of the interest assigned; and
     (d) the Company shall, within 30 days after the delivery thereof, furnish
or cause to be furnished to the City and the Trustee a true and complete copy of
each such assumption of obligations and assignment.
     Section 9.02. Assignment and Pledge by the City. The City shall assign
certain of its interests in and pledge certain of the moneys receivable under
this Loan Agreement to the Trustee pursuant to the Indenture as security for
payment of the principal of, premium, if any, and interest on the Bonds and
Parity Indebtedness. The Company hereby consents to such assignment and pledge.
     Section 9.03. Redemption of Bonds. Upon the agreement of the Company to
deposit moneys in the Bond Principal Fund and the Bond Interest Fund in an
amount sufficient to redeem Bonds subject to redemption, the City, at the
request of the Company Representative, shall forthwith take all reasonable steps
consistent with the Indenture and this Loan Agreement necessary under the
applicable redemption provisions of the Indenture to effect redemption of all or
part of the then Outstanding Bonds on the redemption date.

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ARTICLE X
EVENTS OF DEFAULT AND REMEDIES
     Section 10.01. Events of Default Defined. The following shall be “events of
default” under this Loan Agreement and the term “event of default” shall mean
any one or more of the following events:
     (a) failure to pay the Loan Payments required to be paid under
Section 5.01(a) hereof for a period of 15 days after the time such Loan Payments
were required to be paid thereunder;
     (b) failure by the Company to observe and perform any covenant, condition
or agreement on its part to be observed or performed, other than as referred to
in Section 10.01(a) hereof, for a period of 30 days after written notice,
specifying such failure and requesting that it be remedied, shall have been
given to the Company by the City or the Trustee, provided, with respect to any
such failure covered by this clause (b) no event of default shall be deemed to
have occurred so long as a course of action adequate to remedy such failure
shall have been commenced within such 30-day period and shall thereafter be
diligently prosecuted to completion and the failure shall be remedied thereby;
provided, however, that failure to correct such default within 90 days after
receipt of such notice shall constitute an Event of Default;
     (c) any representation or warranty made by the Company hereunder or
otherwise in connection with the sale and delivery of the Bonds shall prove to
have been incorrect in any material respect on or as of the date of issuance of
the Bonds or the date of making such representation or warranty and cannot be
cured within 30 days after written notice by the City or the Trustee, specifying
such incorrect representation or warranty and requesting that it be cured,
provided no event of default shall be deemed to have occurred under this
subsection (c) so long as a course of action adequate to cure shall have been
commenced within such 30-day period and shall thereafter be diligently
prosecuted to completion and remedied thereby; provided, however, that failure
to correct such default within 90 days after receipt of such notice shall
constitute an Event of Default;
     (d) an event of default shall have occurred under the Indenture, the Tax
Certificates, the 2003 Promissory Note or with respect to any Parity
Indebtedness;
     (e) if the Company shall file a petition in bankruptcy or for
reorganization or for an arrangement pursuant to any present or future federal
bankruptcy act or under any similar federal or state law, or shall be
adjudicated a bankrupt or insolvent, or shall make an assignment for the benefit
of its creditors or shall admit in writing its inability to pay its debts
generally as they become due, or if a petition or answer proposing the
adjudication of the Company as a bankrupt or its reorganization under any
present or future federal bankruptcy act or any similar federal or state law
shall be filed in any court and such petition or answer shall not be discharged
or denied within 90 days after the filing thereof, or if a receiver, trustee or
liquidator of the Company or of all or

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substantially all of the assets of the Company, or the Property, Plant and
Equipment shall be appointed in any proceeding brought against the Company and
shall not be discharged within 90 day’s after such appointment or if the Company
shall consent to or acquiesce in such appointment if the estate or interest of
the Company in the Property, Plant and Equipment or any part thereof shall be
levied upon or attached in any proceeding and such process shall not be vacated,
discharged or released within 60 days after such levy or attachment, or if the
Property, Plant and Equipment shall have been abandoned by the Company for a
period of 30 consecutive days, or if the Company shall be dissolved or
liquidated (other than as a result of a merger or consolidation of the Company
into or with another entity under the conditions permitting such actions
contained in this Loan Agreement); and
     (f) a final judgment is entered against the Company which, together with
all unsatisfied final judgments against the Company, exceeds the sum of
$1,000,000 and which is not covered by insurance or adequate Company reserves
and such judgment shall remain unsatisfied or unstayed for a period of 90 days
after the entry thereof.
     The foregoing provisions of Section 10.01(b) hereof are subject to the
following limitations: If by reason of force majeure the Company is unable in
whole or in part to carry out its agreements herein contained, other than the
obligations on the part of the Company contained in Article V and in
Sections 4.07 and 8.05 hereof, the Company shall not be deemed in default during
the continuance of such inability so long as (a) the Company provides the
Bondholders written notice that an Event of Default has occurred by reason of
force majeure within 10 Business Days of the receipt of the notice of an Event
of Default from the Trustee, and (b) a majority of Bondholders consents to
implementation of Company’s plan to cure such Event of Default. The Company
agrees to promptly submit its plans for curing the Event of Default to the
Bondholders; provided that the settlement of strikes, lockouts and other
industrial disturbances shall be entirely within the discretion of the Company,
and the Company shall not be required to make settlement of strikes, lockouts or
other industrial disturbances by acceding to the demands of the opposing party
or parties when such course is in the reasonable judgment of the Company
unfavorable to the Company. The term “force majeure” as used herein shall mean
the following: acts of God; strikes, lockouts or other industrial disturbances;
acts of public enemies, insurrections; riots; epidemics; landslides; lightning;
earthquake; fire; hurricane; tornadoes; storms; floods; washouts; droughts;
arrests; restraint of government and people; civil disturbances; war,
explosions; or partial or entire failure of utilities.
     Section 10.02. Remedies on Default. Whenever any event of default referred
to in Section 10.01 hereof shall have occurred and is continuing, the City, or
the Trustee, where so provided herein, may take any one or more of the following
remedial steps:
     (a) the Trustee (acting as assignee of the City), as and to the extent
provided in the Indenture, or the City (in the event of a failure of the Trustee
to act under this subsection), may, and, at the direction of holders of 25% of
the aggregate principal amount of the Bonds Outstanding and Parity Indebtedness,
the Trustee shall, declare the Loan Payments payable hereunder for the remainder
of the term of this Loan Agreement to be immediately due and payable, whereupon
the same shall become due and payable;

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     (b) the Trustee may, subject to indemnification as provided in the
Indenture, and, at the direction of holders of 25% of the aggregate principal
amount of the Bonds Outstanding and Parity Indebtedness, shall, take any action
permitted under the Indenture with respect to an Event of Default thereunder;
     (c) the Trustee (acting as assignee of the City) may foreclose on all or
any portion of the Property or any interest of the Company therein as and to the
extent permitted of a mortgagee by applicable laws and exercise all of the
rights and remedies of a secured party under the Uniform Commercial Code of the
applicable jurisdiction with respect thereto and to the tangible personal
property, furniture, machinery and equipment of the Company described in
Section 3.01;
     (d) the Trustee may foreclose on all or any portion of the Springdale
Property, the Lowell Property, the Junction Property and the Watts Property and
any interest of the Company therein as and to the extent permitted of a
mortgagee by the laws of the State of Arkansas, the State of Texas and the State
of Oklahoma, as applicable, and exercise all of the rights and remedies of a
secured party under the Uniform Commercial Code of the State of Arkansas, the
State of Texas and the State of Oklahoma, as applicable, with respect thereto;
     (e) the Trustee may take exercise any rights permitted pursuant to the
Patent and Trademark Security Agreement and the Weyerhaeuser Assignment
Agreement;
     (f) the Trustee (acting as assignee of the City) may realize upon the
security interest in the Pledged Revenues and exercise all of the rights and
remedies of a secured party under the Uniform Commercial Code of the applicable
jurisdiction with respect thereto; or
     (g) the Trustee (acting as assignee of the City), as and to the extent
provided in the Indenture, or the City (in the event of a failure of the Trustee
to act under this subsection) may take whatever action at law or in equity as
may appear necessary or desirable to collect the amounts then due and thereafter
to become due, or to enforce performance or observance of any obligations,
agreements or covenants of the Company under this Loan Agreement.
     At any time after such a declaration of acceleration has been made, but
before the entry of a judgment or decree to enforce remedies under the Indenture
or this Loan Agreement, such declaration and its consequences shall be rescinded
and annulled (unless the Trustee is otherwise directed by the holders of a
majority of the principal amount of the Bonds Outstanding (excluding Bonds of
any series which are subordinate to any other Series of Bonds)) if:
     (i) there has been paid to or deposited with the Trustee, or provision
satisfactory to the Trustee has been made for the payment of a sum sufficient to
pay:
     (A) all sums reasonably paid or advanced by the Trustee (including
reasonable counsel fees and disbursements) under the Indenture

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or this Loan Agreement and the reasonable compensation, expenses, disbursements
and advances of the Trustee (including reasonable counsel fees and
disbursements);
     (B) all overdue installments of interest on the Bonds payable by the
Company with interest on such overdue interest at the rate of 1% per annum above
the interest borne by the Bonds during the 365 days prior to the date of such
payment;
     (C) the principal of any Bonds which have become due otherwise than by such
declaration of acceleration and accrued but unpaid interest thereon to the date
of payment of such Bonds payable by the Company at the rate or rates borne by
such Bonds;
     (D) the amounts required to be on deposit in the Reserve Fund in accordance
with the Indenture; and
     (E) all sums, including the reasonable fees and expenses of counsel,
reasonably paid or advanced by any Bondholder because of the Company’s default.
     (ii) All Events of Default of the Company, other than the nonpayment of the
principal of the Bonds, which have become due solely by such declaration of
acceleration, have been cured or waived as provided in the Indenture and this
Loan Agreement.
     In the event that the Company fails to make any payment required hereby,
the payment so in default shall continue as an obligation of the Company until
the amount in default shall have been fully paid. Any proceeds received by the
City or the Trustee from the exercise of any of the above remedies, after
reimbursement of any costs incurred by the City or the Trustee in connection
therewith, shall be applied by the Trustee in accordance with the provisions of
the Indenture.
     Section 10.03. No Remedy Exclusive. No remedy herein conferred upon or
reserved to the City or the Trustee is intended to be exclusive of any other
available remedy or remedies, but each and every such remedy shall be cumulative
and shall be in addition to every other remedy given under this Loan Agreement
or now or hereafter existing at law or in equity or by statute. No delay or
omission to exercise any right or power accruing upon any default shall impair
any such right or power or shall be construed to be a waiver thereof, but any
such right or power may be exercised from time to time and as often as may be
deemed expedient. In order to entitle the City to exercise any remedy reserved
to it in this Article, it shall not be necessary to give any notice, other than
notice required herein or by applicable law. Such rights and remedies given the
City hereunder shall also extend to the Trustee and the owners of the Bonds,
subject to the Indenture.
     Section 10.04. Agreement to Pay Attorneys’ Fees and Expenses. In the event
the Company should default under any of the provisions of this Loan Agreement,
the Indenture or the Tax Certificates, and the City, any Significant Bondholder
or the Trustee should employ

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attorneys or incur other expenses for the collection of Loan Payments or the
enforcement of performance or observance of any obligation or agreement on the
part of the Company herein or in the Tax Certificates or the Indenture, the
Company agrees that it will within 30 days of a request therefor pay to the
City, any Significant Bondholder or the Trustee, as the case may be, the
reasonable fees of such attorneys and such other reasonable expenses incurred by
the City, any Significant Bondholder or the Trustee. This Section shall continue
in full force and effect, notwithstanding the full payment of all obligations
under this Loan Agreement or the termination of this Loan Agreement for any
reason.
     Section 10.05. Waiver. In the event any agreement contained in this Loan
Agreement should be breached by any party and thereafter waived by any other
party, such waiver shall be limited to the particular breach waived and shall
not be deemed to waive any other breach hereunder. In view of the assignment of
the City’s rights in and under this Loan Agreement to the Trustee under the
Indenture, the City shall have no power to waive any Event of Default hereunder
without the written consent of the Trustee. Notwithstanding the foregoing, a
waiver of an Event of Default under the Indenture or a rescission of a
declaration of acceleration of the Bonds and a rescission and annulment of its
consequences shall constitute a waiver of the corresponding event of default
under this Loan Agreement and a rescission and annulment of its consequences;
provided that no such waiver or rescission shall extend to or affect any
subsequent or other default hereunder or impair any right consequent thereon.
     Section 10.06. Appointment of Receiver. Upon the occurrence of any Event of
Default, unless the same shall have been waived as herein provided, the Trustee,
acting as assignee of the City, shall be entitled as a matter of right if it
shall so elect, without notice or demand (such notice being expressly waived
hereby), ex parte, (a) forthwith and without declaring the Bonds or Parity
Indebtedness to be due and payable; (b) after declaring the same to be due and
payable; or (c) upon the commencement of an action to enforce the specific
performance hereof or in aid thereof or upon the commencement of any other
judicial proceeding to enforce any right of the Trustee, the Bondholders or the
holders of Parity Indebtedness, to the appointment of a receiver or receivers of
any or all of the Springdale Property, the Lowell Property, the Junction
Property and the Watts Property with such powers as the court making such
appointment shall confer. The Company hereby consents and agrees, and will if
requested by the Trustee consent and agree at the time of application by the
Trustee for appointment of a receiver of the Springdale Property, the Lowell
Property, the Junction Property and the Watts Property, to the appointment of
such receiver of the Springdale Property, the Lowell Property, the Junction
Property and the Watts Property and that such receiver may be given, the right,
power and authority, to the extent the same may lawfully be given to take
possession of and operate and deal with the Springdale Property, the Lowell
Property, the Junction Property and the Watts Property and the revenues, profits
and proceeds therefrom, with like effect as the Company could do so, and to
borrow money and issue evidences of indebtedness as such receiver.
     Section 10.07. Remedies Subject to Provisions of Law. All rights, remedies
and powers provided by this Article may be exercised only to the extent that the
exercise thereof does not violate any applicable provision of law, and all the
provisions of this Article are intended to be subject to all applicable
mandatory provisions of law which may be controlling and to be

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limited to the extent necessary so that they will not render this instrument or
the provisions hereof invalid or unenforceable under the provisions of any
applicable law.
     Section 10.08. Waiver of Appraisement, Valuation, Stay, and Execution Laws.
The Company agrees, to the extent permitted by law, that in the case of the
occurrence of an Event of Default, neither the Company nor anyone claiming
through or under it shall or will set up, claim or seek to take advantage of any
appraisement, valuation, stay or extension laws now or hereafter in force in
order to prevent or hinder the enforcement or foreclosure of the lien of this
Loan Agreement, or the absolute sale of the Springdale Property, the Lowell
Property, the Junction Property and the Watts Property, or any interest of the
Company therein, or the final and absolute putting into possession thereof,
immediately after such sale, of the purchasers thereof, and the Company for
itself and all who may at any time claim through or under it, hereby waives, to
the full extent that it may lawfully do so, the benefit of all such laws, and
any and all right to have the estates comprising the security intended to be
hereby created marshaled upon any foreclosure of the Lien hereof and agrees that
the Trustee or any court having jurisdiction to foreclose such Lien may sell the
Springdale Property, the Lowell Property, the Junction Property and the Watts
Property, or any interest of the Company therein as an entirety.
     Section 10.09. Purchase of Property by Bondholder or Holder of Parity
Indebtedness. Upon the occurrence of an Event of Default, the Lien and/or
security interest on the Springdale Property, the Lowell Property, the Junction
Property and the Watts Property created and vested by this Loan Agreement may be
foreclosed. If sold at public sale, any Bondholder, and holder of Parity
Indebtedness or the Trustee may bid for and purchase the Springdale Property,
the Lowell Property, the Junction Property or the Watts Property or any interest
of the Company therein and upon compliance with the terms of sale, may hold,
retain and possess and dispose of such Springdale Property, Lowell Property,
Junction Property or Watts Property or interest therein in his own absolute
right without further accountability; and any purchaser at any such sale may, if
permitted by law, after allowing for the proportion of the total purchase price
required to be paid in cash for the costs and expenses of the sale, compensation
and other charges, in paying purchase money, surrender Bonds or Parity
Indebtedness then Outstanding, as the case may be, in lieu of cash. Said Bonds
or Parity Indebtedness, in case the amount so payable thereon shall be less than
the amount due thereon, shall be returned to the holders thereof after being
properly stamped to show partial payment. If the Trustee shall acquire title to
the Springdale Property, the Lowell Property, the Junction Property and the
Watts Property or any interest of the Company therein as a result of any such
foreclosure sale or any proceedings or transaction in lieu of foreclosure, the
Trustee may thereafter take any lawful action with respect to the Springdale
Property, the Lowell Property, the Junction Property and the Watts Property or
interest therein which it shall deem to be in the best interest of the holders
of the Bonds or Parity Indebtedness, including but not limited to: (a) the
enforcement of all rights and remedies set forth in the Indenture and the taking
of all other courses of action permitted herein; and (b) the sale of the
Springdale Property, the Lowell Property, the Junction Property and the Watts
Property or any interest therein, or any portion thereof.

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ARTICLE XI
PREPAYMENT OF THE LOAN
     Section 11.01. General Option to Prepay the Loan. Subject to Section 11.03
hereof, the Company shall have and is hereby granted the option exercisable at
any time to prepay all or any portion of the Loan by depositing with the Trustee
an amount of money or Government Obligations described in Section 1(a) of the
definition of such term as set forth in Article I of the Indenture to the extent
permitted by Section 7.01 of the Indenture, the principal and interest on which,
when due, will be equal (giving effect to the credit, if any, provided by
Section 11.02 hereof) to an amount sufficient to pay the principal of (in
integral multiples of $100,000 and in multiples of $5,000 in excess thereof),
premium, if any, and interest on any portion of the Bonds then Outstanding under
the Indenture. The exercise of the option granted by this Section shall not be
cause for redemption of Bonds unless such redemption is permitted or required at
that time under the provisions of Article V of the Indenture, and the Company
Representative specifies the date for such redemption. In the event the Company
prepays all of the Loan pursuant to this Section (and the Bonds are defeased in
accordance with the Indenture) and pays all reasonable and necessary fees and
expenses of the Trustee accrued and to accrue through final payment or
redemption of the Bonds as a result of such prepayment and all of its
liabilities accrued and to accrue hereunder to the City through final payment or
redemption of the Bonds as a result of such prepayment, this Loan Agreement
shall terminate except for Sections 5.01 (f), 4.06 and 8.05 hereof. The City and
the Trustee may certify to the Company prior to payment all expenses, fees and
liabilities due for payment hereunder. Payment of moneys or securities to the
Trustee under this Section 11.01 shall be accompanied by an Opinion of Bond
Counsel to the effect that the application of such payment will not adversely
affect the tax-exempt status of the Bonds Outstanding.
     Section 11.02. Prepayment Credits. In the event of prepayment by the
Company of the Loan in whole the amounts then contained in the Funds related to
the Bonds shall be credited first to the Rebate Fund so that it shall be fully
funded for any required payment to the federal government therefrom, and then
against the Company’s prepayment obligation.
     Section 11.03. Notice of Prepayment. In order to exercise the option
granted by this Article, the Company shall give written notice to the City and
the Trustee which shall specify therein the date of making the prepayment, which
date shall be not less than 60 days nor more than 90 days from the date the
notice is mailed. In the case of any prepayment pursuant to this Article, the
Company Representative shall make arrangements with the Trustee for giving the
required notice of redemption of any Bonds to be redeemed.
     Section 11.04. Use of Prepayment Moneys. By virtue of the assignment of the
rights of the City under this Loan Agreement to the Trustee, the Company agrees
to and shall pay any amount required to be paid by it under this
Article directly to the Trustee (other than amounts to be paid to the City for
its own account or as otherwise provided in Section 5.03 hereof). The Trustee
shall use the moneys so paid to it by the Company to pay the principal of and
interest on the Bonds on regularly scheduled payment or redemption dates.

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ARTICLE XII
MISCELLANEOUS
     Section 12.01. Notices. All notices, certificates or other communications
hereunder shall be sufficiently given and shall be deemed given when mailed by
certified mail, return-receipt requested, postage prepaid, or dispatched by
telegram or telecopy (if confirmed promptly telephonically and in writing by the
sender of such facsimile and if receipt of such facsimile is confirmed in
writing by the intended recipient), addressed as follows:

         
 
  to the City:   City of Springdale, Arkansas
 
      201 Spring Street
 
      Springdale, AR 72764
 
      Attention: Mayor
 
       
 
  to the Trustee:   Bank of Oklahoma, N.A.
 
      9520 North May Avenue, 2nd Floor
 
      Oklahoma City, OK 73120
 
      Telephone: (214) 346-3953
 
      Facsimile: (214) 987-8890
 
       
 
  to the Company:   Advanced Environmental Recycling Technologies, Inc.
 
      801 North Jefferson
 
      Springdale, AR 72764
 
      Telephone: (479) 750-1299
 
      Facsimile: (479) 750-1322

     The City, the Company, and the Trustee may, by notice hereunder, designate
any further or different addresses to which subsequent notices, certificates or
other communications shall be sent.
     Section 12.02. Binding Effect. This Loan Agreement shall inure to the
benefit of and shall be binding upon the City and the Company and their
respective successors and assigns, subject, however, to the limitations
contained in Sections 8.14, 9.01, 9.02 and 12.10 hereof.
     Section 12.03. Severability. In the event any provision of this Loan
Agreement shall be held invalid or unenforceable by any court of competent
jurisdiction, such holding shall not invalidate or render unenforceable any
other provision hereof.
     Section 12.04. Amounts Remaining in Funds. It is agreed by the parties
hereto that any amounts remaining in the Funds upon expiration of the term of
this Loan Agreement shall be paid by the Trustee as directed in writing by the
Company Representative as provided in the Indenture.
     Section 12.05. Amendments, Changes and Modifications. Except as otherwise
provided in this Loan Agreement or in the Indenture, this Loan Agreement may not
be amended, changed, modified, altered or terminated.

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     Section 12.06. Execution in Counterparts. This Loan Agreement may be
executed in several counterparts, each of which shall be an original and all of
which shall constitute but one and the same instrument.
     Section 12.07. Governing Law. This Loan Agreement shall be governed and
construed in accordance with the laws of the State of Arkansas.
     Section 12.08. Cancellation at Expiration of Term of Agreement. Upon the
expiration of the term of this Loan Agreement, the City shall deliver to the
Company any documents and take or cause the Trustee to take such actions as may
be necessary to evidence the termination of this Loan Agreement and the
discharge of the Lien hereof.
     Section 12.09. Recording. In accordance with the Indenture, the Company
shall cause the security interest in the Pledged Revenues, Funds, the Equipment
and trust accounts referred to in Section 3.01 hereof granted to the City, the
assignment of such security interest to the Trustee and the security interest in
this Loan Agreement granted to the Trustee to be perfected to the extent
permitted by law, including the filing of all financing statements. The parties
further agree that all necessary continuation statements shall be filed by the
Company within the time prescribed by applicable law and all other appropriate
actions will be taken in order to continue such security interests.
     Section 12.10. No Pecuniary Liability of the City. No provision, covenant
or agreement contained in this Loan Agreement, or any obligations herein imposed
upon the City, or the breach thereof, shall constitute an indebtedness or
liability of the City within the meaning of any Arkansas constitutional
provision or statutory limitation or shall constitute or give rise to a
pecuniary liability of the City or any member, officer or agent of the City or a
charge against the City’s general credit. In making the Loan, the City has not
obligated itself except with respect to the Trust Estate.
     Section 12.11. Partial Release. So long as no Event of Default shall have
occurred and be continuing under this Loan Agreement, whenever under the terms
of this Loan Agreement any portion of the Springdale Property, Lowell Property,
Junction Property, Watts Property or Equipment is permitted to be sold,
transferred, disposed of or released from the provisions of this Loan Agreement,
including releases in the event of condemnation of the Springdale Property,
Lowell Property, Junction Property, Watts Property or Equipment in accordance
with Article VII hereof, or Transfers permitted under Section 8.14 hereof, the
Trustee shall take all actions reasonably necessary to release that portion of
the Springdale Property, Lowell Property, Junction Property, Watts Property or
Equipment so sold, leased or disposed of from the Lien of this Loan Agreement.
Any such release shall be requested of the City in writing by the Company
Representative and shall be accompanied by a description of the Springdale
Property, Lowell Property, Junction Property, Watts Property or Equipment to be
released, an amendment or supplement to the exhibits of this Loan Agreement to
the extent necessary to provide for such release, a plat or improvement location
survey of the remaining Springdale Property, Lowell Property, Junction Property
and Watts Property after the release by a registered civil engineer or surveyor
licensed in the state in which the applicable Springdale Property, Lowell
Property, Junction Property, Watts Property or Equipment is located in
accordance with the standard detail

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requirements for land title surveys adopted by ALTA, and an Opinion of Counsel
to the effect that such release is permitted by the provisions of this Loan
Agreement.
     Section 12.12. General Release. Upon payment of all sums secured by this
Loan Agreement and upon full performance hereof by the Company, the Trustee, as
assignee of the City, shall promptly, after written notice from the Company
Representative, execute and deliver to the Company a release of the Lien of this
Loan Agreement in form reasonably acceptable to the Trustee. The Company shall,
however, pay all costs and expenses in connection with the preparation, review,
recordation and execution of said release.
     Section 12.13. Captions. The captions and headings in this Loan Agreement
are for convenience only and in no way define, limit or describe the scope or
intent of any provisions or sections of this Loan Agreement.
     Section 12.14. Payments Due on Non-Business Day. If the date for making any
payment or the last date for performance of any act or the exercise of any
right, as provided in this Loan Agreement shall not be a Business Day, such
payment may be made or act performed or right exercised on the next succeeding
business day with the same force and effect as if done on the nominal date
provided in this Loan Agreement, except as otherwise expressly provided herein.
     Section 12.15. Provision of General Application. Any consent or approval of
the City required pursuant to this Loan Agreement shall be in writing and shall
not be unreasonably withheld.
[Remainder of page intentionally left blank]

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     IN WITNESS WHEREOF, the City and the Company have caused this Loan
Agreement to be executed in their respective corporate names and attested by
their duly authorized officers, all as of the date first above written.

                          CITY OF SPRINGDALE, ARKANSAS    
 
               
 
      By        
 
         
 
Jerre M. Van Hoose, Mayor    
 
                Attest:            
 
               
By
               
 
 
 
Denise Pearce, City Clerk            
 
                        ADVANCED ENVIRONMENTAL             RECYCLING
TECHNOLOGIES, INC.    
 
               
 
      By        
 
         
 
Joe Brooks, Chief Executive Officer    

[Signature Page to Loan Agreement]

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EXHIBIT A
COSTS OF THE PROJECT

 

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EXHIBIT B
PERMITTED EXCEPTIONS

B-1