Exhibit 10.1
 
CREDIT AND SECURITY AGREEMENT
BY AND BETWEEN
HEI, INC.
AND
WELLS FARGO BANK, NATIONAL ASSOCIATION
Acting through its Wells Fargo Business Credit operating division
May 15, 2007

 

 

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

 

Table of Contents

              Page  
ARTICLE I DEFINITIONS
    1  
 
       
Section 1.1 Definitions
    1  
Section 1.2 Other Definitional Terms; Rules of Interpretation
    12  
 
       
ARTICLE II AMOUNT AND TERMS OF THE CREDIT FACILITY
    13  
 
       
Section 2.1 Revolving Advances
    13  
Section 2.2 Procedures for Requesting Advances
    13  
Section 2.3 Term Advance
    13  
Section 2.4 Payment of Term Note
    14  
Section 2.5 Interest; Minimum Interest Charge; Default Interest Rate;
Application of Payments; Participations; Usury
    14  
Section 2.6 Fees
    15  
Section 2.7 Time for Interest Payments; Payment on Non-Business Days;
Computation of Interest and Fees
    17  
Section 2.8 Lockbox and Collateral Account; Sweep of Funds
    17  
Section 2.9 Voluntary Prepayment; Reduction of the Maximum Line Amount;
Termination of the Credit Facility by the Borrower
    18  
Section 2.10 Mandatory Prepayment
    18  
Section 2.11 Revolving Advances to Pay Indebtedness
    18  
Section 2.12 Use of Proceeds
    18  
Section 2.13 Liability Records
    18  
 
       
ARTICLE III SECURITY INTEREST; OCCUPANCY; SETOFF
    19  
 
       
Section 3.1 Grant of Security Interest
    19  
Section 3.2 Notification of Account Debtors and Other Obligors
    19  
Section 3.3 Assignment of Insurance
    19  
Section 3.4 Occupancy
    20  
Section 3.5 License
    20  
Section 3.6 Financing Statement
    21  
Section 3.7 Setoff
    21  
Section 3.8 Collateral
    21  
 
       
ARTICLE IV CONDITIONS OF LENDING
    22  
 
       
Section 4.1 Conditions Precedent to the Initial Advances
    22  
Section 4.2 Conditions Precedent to All Advances
    24  
 
       
ARTICLE V REPRESENTATIONS AND WARRANTIES
    24  
 
       
Section 5.1 Existence and Power; Name; Chief Executive Office; Inventory and
Equipment Locations; Federal Employer Identification Number and Organizational
Identification Number
    24  

 

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

 

              Page  
Section 5.2 Capitalization
    24  
Section 5.3 Authorization of Borrowing; No Conflict as to Law or Agreements
    25  
Section 5.4 Legal Agreements
    25  
Section 5.5 Subsidiaries and Affiliates
    25  
Section 5.6 Financial Condition; No Adverse Change
    25  
Section 5.7 Litigation
    25  
Section 5.8 Regulation U
    25  
Section 5.9 Taxes
    26  
Section 5.10 Titles and Liens
    26  
Section 5.11 Intellectual Property Rights
    26  
Section 5.12 Plans
    27  
Section 5.13 Default
    27  
Section 5.14 Environmental Matters
    27  
Section 5.15 Submissions to the Lender
    28  
Section 5.16 Financing Statements
    28  
Section 5.17 Rights to Payment
    29  
 
       
ARTICLE VI COVENANTS
    29  
 
       
Section 6.1 Reporting Requirements
    29  
Section 6.2 Financial Covenants
    32  
Section 6.3 Permitted Liens; Financing Statements
    33  
Section 6.4 Indebtedness
    33  
Section 6.5 Guaranties
    34  
Section 6.6 Investments and Subsidiaries
    34  
Section 6.7 Dividends and Distributions
    34  
Section 6.8 Salaries
    35  
Section 6.9 Books and Records; Collateral Examination, Inspection and Appraisals
    35  
Section 6.10 Account Verification
    35  
Section 6.11 Compliance with Laws
    35  
Section 6.12 Payment of Taxes and Other Claims
    36  
Section 6.13 Maintenance of Properties
    36  
Section 6.14 Insurance
    37  
Section 6.15 Preservation of Existence
    37  
Section 6.16 Delivery of Instruments, etc
    37  
Section 6.17 Sale or Transfer of Assets; Suspension of Business Operations
    37  
Section 6.18 Consolidation and Merger; Asset Acquisitions
    37  
Section 6.19 Sale and Leaseback
    38  
Section 6.20 Restrictions on Nature of Business
    38  
Section 6.21 Accounting
    38  
Section 6.22 Discounts, etc.
    38  
Section 6.23 Plans
    38  
Section 6.24 Place of Business; Name
    38  
Section 6.25 Constituent Documents; S Corporation Status
    38  
Section 6.26 Performance by the Lender
    38  
 
       
ARTICLE VII EVENTS OF DEFAULT, RIGHTS AND REMEDIES
    39  

ii 

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

 

              Page  
Section 7.1 Events of Default
    39  
Section 7.2 Rights and Remedies
    41  
Section 7.3 Certain Notices
    42  
 
       
ARTICLE VIII MISCELLANEOUS
    42  
 
       
Section 8.1 No Waiver; Cumulative Remedies; Compliance with Laws
    42  
Section 8.2 Amendments, Etc
    43  
Section 8.3 Notices; Communication of Confidential Information; Requests for
Accounting
    43  
Section 8.4 Further Documents
    43  
Section 8.5 Costs and Expenses
    44  
Section 8.6 Indemnity
    44  
Section 8.7 Participants
    45  
Section 8.8 Execution in Counterparts; Telefacsimile Execution
    45  
Section 8.9 Retention of the Borrower’s Records
    45  
Section 8.10 Binding Effect; Assignment; Complete Agreement; Sharing Information
    45  
Section 8.11 Severability of Provisions
    46  
Section 8.12 Headings
    46  
Section 8.13 Governing Law; Jurisdiction, Venue; Waiver of Jury Trial
    46  
Section 8.14 Attorneys’ Fees
    46  

iii 

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

 

CREDIT AND SECURITY AGREEMENT
Dated as of May 15, 2007
     HEI, Inc., a Minnesota corporation (the “Borrower”), and WELLS FARGO BANK,
NATIONAL ASSOCIATION (as more fully defined in Article I herein, the “Lender”)
acting through its Wells Fargo Business Credit operating division, hereby agree
as follows:
ARTICLE I
DEFINITIONS
     Section 1.1 Definitions. Except as otherwise expressly provided in this
Agreement, the following terms shall have the meanings given them in this
Section:
     “Accounts” shall have the meaning given it under the UCC.
     “Accounts Advance Rate” means up to eighty-five percent (85%), or such
lesser rate as the Lender in its sole discretion may deem appropriate from time
to time; provided that, as of the date of each quarterly audit, the Accounts
Advance Rate shall be reduced by one (1) percentage point for each percentage by
which Dilution is in excess of three percent (3.0%).
     “Advance” means a Revolving Advance.
     “Affiliate” or “Affiliates” means any other Person controlled by,
controlling or under common control with the Borrower, including any Subsidiary
of the Borrower. For purposes of this definition, “control,” when used with
respect to any specified Person, means the power to direct the management and
policies of such Person, directly or indirectly, whether through the ownership
of voting securities, by contract or otherwise.
     “Agreement” means this Credit and Security Agreement.
     “Availability” means the amount, if any, by which the Borrowing Base
exceeds the sum of the outstanding principal balance of the Revolving Note.
     “Bond Advance Rate” means up to fifty percent (50%), or such lesser rate as
the Lender in its sole discretion may deem appropriate from time to time.
     “Borrowing Base” means at any time the lesser of:
     (a) The Maximum Line Amount less the Ex-Im Amount; or
     (b) Subject to change from time to time in the Lender’s sole discretion,
the sum of:
     (i) The product of the Accounts Advance Rate times Eligible Accounts, plus
     (ii) The lesser of (A) the product of the Inventory Advance Rate times
Eligible Inventory or (B) $750,000.00, less
     (iii) The product of the Bonds Advance Rate times Eligible marketable
Bonds, less

 

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

 

     (iv) The Borrowing Base Reserve, less
     (v) The Ex-Im Reserve, less
     (vi) Indebtedness that the Borrower owes to the Lender that has not yet
been advanced on the Revolving Note and the dollar amount that the Lender in its
reasonable discretion then determines to be a reasonable determination of the
Borrower’s credit exposure with respect to any swap, derivative, foreign
exchange, hedge, deposit, treasury management or other similar transaction or
arrangement offered to the Borrower by the Lender that is not described in
Article II of this Agreement and any indebtedness owed by the Borrower to Wells
Fargo Merchant Services, L.L.C.
     “Borrowing Base Reserve” means, as of any date of determination, such
amounts (expressed as either a specified amount or as a percentage of a
specified category or item) as the Lender may from time to time establish and
adjust in reducing Availability (a) to reflect events, conditions, contingencies
or risks which, as determined by the Lender, do or may affect (i) the Collateral
or its value, (ii) the assets, business or prospects of the Borrower, or
(iii) the security interests and other rights of the Lender in the Collateral
(including the enforceability, perfection and priority thereof), or (b) to
reflect the Lender’s judgment that any collateral report or financial
information furnished by or on behalf of the Borrower to the Lender is or may
have been incomplete, inaccurate or misleading in any material respect, or
(c) in respect of any state of facts that the Lender determines constitutes a
Default or an Event of Default.
     “Business Day” means a day on which the Federal Reserve Bank of New York is
open for business.
     “Capital Expenditures” means for a period, any expenditure of money during
such period for the lease, purchase or other acquisition of any capital asset,
or for the lease of any other asset whether payable currently or in the future.
     “Collateral” means all of the Borrower’s Accounts, chattel paper and
electronic chattel paper, deposit accounts, documents, Machinery, Equipment,
General Intangibles, goods, instruments, Intellectual Property Rights,
Inventory, Investment Property, letter-of-credit rights, letters of credit, all
sums on deposit in any Collateral Account, and any items in any Lockbox;
together with (i) all substitutions and replacements for and products of any of
the foregoing; (ii) in the case of all goods, all accessions; (iii) all
accessories, attachments, parts, equipment and repairs now or hereafter attached
or affixed to or used in connection with any goods; (iv) all warehouse receipts,
bills of lading and other documents of title now or hereafter covering such
goods; (v) all collateral subject to the Lien of any Security Document; (vi) any
money, or other assets of the Borrower that now or hereafter come into the
possession, custody, or control of the Lender; (vii) proceeds of any and all of
the foregoing; (viii) books and records of the Borrower, including all mail or
electronic mail addressed to the Borrower; and (ix) all of the foregoing,
whether now owned or existing or hereafter acquired or arising or in which the
Borrower now has or hereafter acquires any rights.
     “Collateral Account” means the “Lender Account” as defined in the Wholesale
Lockbox and Collection Account Agreement.

2

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

 

     “Commitment” means the Lender’s commitment to make Advances to the
Borrower.
     “Constituent Documents” means with respect to any Person, as applicable,
such Person’s certificate of incorporation, articles of incorporation, by-laws,
certificate of formation, articles of organization, limited liability company
agreement, management agreement, operating agreement, shareholder agreement,
partnership agreement or similar document or agreement governing such Person’s
existence, organization or management or concerning disposition of ownership
interests of such Person or voting rights among such Person’s owners.
     “Control Agreement” means the Notice to Securities Intermediary and Control
Agreement executed by Thomas F. Leahy, the Lender and Wells Fargo Investments,
LLC, as securities intermediary, and dated the date hereof, in the form required
by the Lender, as the same may be amended, restated or otherwise modified from
time to time.
     “Credit Facility” means the credit facility under which Revolving Advances
may be made available to the Borrower by the Lender under Article II.
     “Cut-off Time” means 12:00 p.m. Minneapolis, Minnesota time or 11:00 a.m.
Minneapolis time on the last business day of each month.
     “Debt” means of a Person as of a given date, all items of indebtedness or
liability which in accordance with GAAP would be included in determining total
liabilities as shown on the liabilities side of a balance sheet for such Person
and shall also include the aggregate payments required to be made by such Person
at any time under any lease that is considered a capitalized lease under GAAP.
     “Debt Service Coverage Ratio” means (i) the sum of (A) Funds from
Operations and (B) Interest Expense minus (C) unfinanced Capital Expenditures
divided by (ii) the sum of (A) Current Maturities of Long Term Debt and
(B) Interest Expense.
     “Default” means an event that, with giving of notice or passage of time or
both, would constitute an Event of Default.
     “Default Period” means any period of time beginning on the day a Default or
Event of Default occurs and ending on the date identified by the Lender in
writing as the date that such Default or Event of Default has been cured or
waived.
     “Default Rate” means an annual interest rate in effect during a Default
Period or following the Termination Date, which interest rate shall be equal to
three percent (3%) over the applicable Floating Rate, as such rate may change
from time to time.
     “Dilution” means, as of any date of determination, a percentage, based upon
the experience of the trailing six (6) month period ending on the date of
determination, which is the result of dividing (a) actual bad debt write-downs,
discounts, advertising allowances, credits, or other dilutive items with respect
to the Accounts as determined by the Lender in its sole discretion during such
period, by (b) the Borrower’s net sales during such period (excluding
extraordinary items) plus the amount of subclause (a).

3

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

 

     “Director” means a director if the Borrower is a corporation, a governor or
manager if the Borrower is a limited liability company, or a general partner if
the Borrower is a partnership.
     “Earnings Before Taxes” means pretax earnings from operations, excluding
extraordinary gains, but including extraordinary losses.
     “Eligible Accounts” means all unpaid Accounts of the Borrower arising from
the sale or lease of goods or the performance of services, net of any credits,
but excluding any such Accounts having any of the following characteristics:
     (i) That portion of Accounts unpaid 60 days or more after the due date or
more than 120 days past invoice date;
     (ii) That portion of Accounts related to goods or services with respect to
which the Borrower has received notice of a claim or dispute, which are subject
to a claim of offset or a contra account, or which reflect a reasonable reserve
for warranty claims or returns;
     (iii) That portion of Accounts not yet earned by the final delivery of
goods or rendition of services, as applicable, by the Borrower to the customer,
including progress billings, and that portion of Accounts for which an invoice
has not been sent to the applicable account debtor;
     (iv) Accounts constituting (i) proceeds of copyrightable material unless
such copyrightable material shall have been registered with the United States
Copyright Office, or (ii) proceeds of patentable inventions unless such
patentable inventions have been registered with the United States Patent and
Trademark Office;
     (v) Accounts owed by any unit of government, whether foreign or domestic
(provided, however, that there shall be included in Eligible Accounts that
portion of Accounts owed by such units of government for which the Borrower has
provided evidence satisfactory to the Lender that (A) the Lender has a first
priority perfected security interest and (B) such Accounts may be enforced by
the Lender directly against such unit of government under all applicable laws);
     (vi) Accounts denominated in any currency other than United States dollars;
     (vii) Accounts owed by an account debtor located outside the United States
which are not (A) backed by a bank letter of credit naming the Lender as
beneficiary or assigned to the Lender, in the Lender’s possession or control,
and with respect to which a control agreement concerning the letter-of-credit
rights is in effect, and acceptable to the Lender in all respects, in its sole
discretion, or (B) covered by a foreign receivables insurance policy acceptable
to the Lender in its sole discretion;
     (viii) Accounts owed by an account debtor that is insolvent, the subject of
bankruptcy proceedings or has gone out of business;

4

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

 

     (ix) Accounts owed by an Owner, Subsidiary, Affiliate, Officer or employee
of the Borrower;
     (x) Accounts not subject to a duly perfected security interest in the
Lender’s favor or which are subject to any Lien in favor of any Person other
than the Lender;
     (xi) That portion of Accounts that has been restructured, extended, amended
or modified;
     (xii) That portion of Accounts that constitutes advertising, finance
charges, service charges or sales or excise taxes;
     (xiii) Accounts owed by an account debtor, regardless of whether otherwise
eligible, to the extent that the aggregate balance of such Accounts exceeds
fifteen percent (15%) (but in the case of Irvine Biomedical and Valley Lab, 20%)
of the aggregate amount of Eligible Accounts;
     (xiv) Accounts owed by an account debtor, regardless of whether otherwise
eligible, if twenty-five percent (25%) or more of the total amount of Accounts
due from such debtor is ineligible under clauses (i), (ii), or (xi) above;
     (xv) Accounts that represent milestone or progress billings;
     (xvi) Accounts, or portions thereof, otherwise deemed ineligible by the
Lender in its sole discretion; and
     (xvii) That portion of Accounts consisting of Ex-Im Accounts.
     “Eligible Equipment” means that Equipment of the Borrower designated by the
Lender as eligible from time to time in its sole discretion.
     “Eligible Finished Goods” means Finished Goods of the Borrower designated
by the Lender as eligible from time to time.
     “Eligible Inventory” means all Inventory of the Borrower, valued at the
lower of cost or market in accordance with GAAP; but excluding any Inventory
having any of the following characteristics:
     (i) Inventory that is in-transit; located at any warehouse, job site or
other premises not approved by the Lender in writing; not subject to a duly
perfected first priority security interest in the Lender’s favor; covered by any
negotiable or non-negotiable warehouse receipt, bill of lading or other document
of title; on consignment from any Person; on consignment to any Person or
subject to any bailment unless such consignee or bailee has executed an
agreement with the Lender;
     (ii) Supplies, packaging, parts or sample Inventory, or customer supplied
parts or Inventory;

5

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

 

     (iii) Work-in-process Inventory;
     (iv) Fabricated Parts Inventory;
     (v) Inventory that is damaged, defective, obsolete, slow moving or not
currently saleable in the normal course of the Borrower’s operations, or the
amount of such Inventory that has been reduced by shrinkage;
     (vi) Inventory that the Borrower has returned, has attempted to return, is
in the process of returning or intends to return to the vendor thereof;
     (vii) Inventory that is perishable or live;
     (viii) Inventory manufactured by the Borrower pursuant to a license unless
the applicable licensor has agreed in writing to permit the Lender to exercise
its rights and remedies against such Inventory;
     (ix) Inventory that is subject to a Lien in favor of any Person other than
the Lender;
     (x) Inventory stored at locations in amounts less than $100,000.00;
     (xi) Inventory otherwise deemed ineligible by the Lender in its sole
discretion; and
     (xii) Inventory consisting of routers and drill bits.
     “Eligible Marketable Bonds” means bonds (a) owned on a fully-paid basis by
Thomas F. Leahy, (b) carried in the Securities Account, (c) properly classified
as “current assets” according to GAAP and (d) of a type agreed to by the Bank in
its sole discretion.
     “Eligible Raw Materials” means Raw Materials of the Borrower designated by
the Lender as eligible from time to time.
     “Environmental Law” means any federal, state, local or other governmental
statute, regulation, law or ordinance dealing with the protection of human
health and the environment.
     “Equipment” shall have the meaning given it under the UCC.
     “ERISA” means the Employee Retirement Income Security Act of 1974, as
amended from time to time.
     “ERISA Affiliate” means any trade or business (whether or not incorporated)
that is a member of a group which includes the Borrower and which is treated as
a single employer under Section 414 of the IRC.
     “Event of Default” is defined in Section 7.1.

6

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

 

     “Ex-Im Accounts” means “Eligible Export-Related Accounts Receivable” as
defined in the Ex-Im Agreement.
     “Ex-Im Agreement” means the Credit and Security Agreement for the
Export-Import Bank Guaranteed Credit Facility by and between the Borrower and
Lender dated as of May 15, 2007.
     “Ex-Im Amount” means the sum of the outstanding principal balance of the
“Notes” (as defined in the Ex-Im Agreement).
     “Ex-Im Borrowing Base” means the “Borrowing Base” as defined in the Ex-Im
Agreement.
     “Ex-Im Credit Facility” means the “Credit Facility” as defined in the Ex-Im
Agreement.
     “Ex-Im Documents” means the “Loan Documents” as defined in the Ex-Im
Agreement.
     “Ex-Im Inventory” means “Eligible Export-Related Inventory” as defined in
the Ex-Im Agreement.
     “Ex-Im Reserve” means ten percent (10%) of any amount outstanding under the
Ex-Im Credit Facility, which amount may be increased or decreased from time to
time as determined by the Lender in its sole discretion.
     “Financial Covenants” means the covenants set forth in Section 6.2.
     “Floating Rate” means, (i) with respect to Revolving Advances evidenced by
the Revolving Note, an annual interest rate equal to the sum of the Prime Rate
plus two percent (2.0%), and (ii) with respect to Term Advances evidenced by the
Term Note, an annual interest rate equal to the sum of the Prime Rate plus two
and one quarter percent (2.25%), which interest rate shall change when and as
the Prime Rate changes.
     “Floating Rate Advance” means an Advance bearing interest at the Floating
Rate.
     “Funding Date” is defined in Section 2.1.
     “Funds from Operations” means for a given period, the sum of (i) Net
Income, (ii) depreciation and amortization, (iii) any increase (or decrease) in
deferred income taxes, (iv) any increase (or decrease) in lifo reserves, and
(v) other non-cash items, each as determined for such period in accordance with
GAAP.
     “GAAP” means generally accepted accounting principles, applied on a basis
consistent with the accounting practices applied in the financial statements
described in Section 5.6.
     “General Intangibles” shall have the meaning given it under the UCC.
     “Guarantor” means Thomas F. Leahy or any other person who executes a
Guaranty in favor of the Lender.

7

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

 

     “Guaranty” means each unconditional guaranty executed by a Guarantor in
favor of the Lender.
     “Hazardous Substances” means pollutants, contaminants, hazardous
substances, hazardous wastes, petroleum and fractions thereof, and all other
chemicals, wastes, substances and materials listed in, regulated by or
identified in any Environmental Law.
     “Indebtedness” is used herein in its most comprehensive sense and means any
and all advances, debts, obligations and liabilities of the Borrower to the
Lender, heretofore, now or hereafter made, incurred or created, whether
voluntary or involuntary and however arising, whether due or not due, absolute
or contingent, liquidated or unliquidated, determined or undetermined, including
under any swap, derivative, foreign exchange, hedge, deposit, treasury
management or other similar transaction or arrangement at any time entered into
by the Borrower with the Lender or with Wells Fargo Merchant Services, L.L.C.,
and whether the Borrower may be liable individually or jointly with others, or
whether recovery upon such Indebtedness may be or hereafter becomes
unenforceable.
     “Indemnified Liabilities” is defined in Section 8.6.
     “Indemnitees” is defined in Section 8.6.
     “Infringement” or “Infringing” when used with respect to Intellectual
Property Rights means any infringement or other violation of Intellectual
Property Rights.
     “Insolvency Event” is defined in Section 7.1(e).
     “Intangible Assets” means all intangible assets as determined in accordance
with GAAP and including Intellectual Property Rights, goodwill, accounts due
from Affiliates, Directors, Officers or employees, prepaid expenses, deposits,
deferred charges or treasury stock or any securities or Debt of the Borrower or
any other securities unless the same are readily marketable in the U.S. or
entitled to be used as a credit against federal income tax liabilities,
non-compete agreements and any other assets designated from time to time by the
Lender, in its sole discretion.
     “Intellectual Property Rights” means all actual or prospective rights
arising in connection with any intellectual property or other proprietary
rights, including all rights arising in connection with copyrights, patents,
service marks, trade dress, trade secrets, trademarks, trade names or mask
works.
     “Interest Expense” means for a fiscal year-to-date period, the Borrower’s
total gross interest expense during such period (excluding interest income), and
shall in any event include (i) interest expensed (whether or not paid) on all
Debt, (ii) the amortization of debt discounts, (iii) the amortization of all
fees payable in connection with the incurrence of Debt to the extent included in
interest expense, and (iv) the portion of any capitalized lease obligation
allocable to interest expense.
     “Interest Payment Date” is defined in Section 2.7(a).

8

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

 

     “Inventory” shall have the meaning given it under the UCC but for purposes
of this Agreement shall include Raw Materials and Finished Goods.
     “Inventory Advance Rate” means fifteen percent (15%) of Eligible Raw
Materials or Eligible Finished Goods, not to exceed $750,000 (“Inventory Cap”),
or such lesser rate or amount as the Lender in its sole discretion may deem
appropriate from time to time.
     “Investment Property” shall have the meaning given it under the UCC.
     “IRC” means the Internal Revenue Code of 1986, as amended from time to
time.
     “Leahy Pledge Agreement” means the Collateral Pledge Agreement executed by
Thomas F. Leahy in favor of the Lender and dated the date hereof, as the same
may be amended, restated or otherwise modified from time to time.
     “Lender” means Wells Fargo Bank, National Association in its broadest and
most comprehensive sense as a legal entity, and is not limited in its meaning to
the Lender’s Wells Fargo Business Credit operating division, or to any other
operating division of the Lender.
     “Licensed Intellectual Property” is defined in Section 5.11(c).
     “Lien” means any security interest, mortgage, deed of trust, pledge, lien,
charge, encumbrance, title retention agreement or analogous instrument or
device, including the interest of each lessor under any capitalized lease and
the interest of any bondsman under any payment or performance bond, in, of or on
any assets or properties of a Person, whether now owned or subsequently acquired
and whether arising by agreement or operation of law.
     “Loan Documents” means this Agreement, the Revolving Note, the Term Note,
each Subordination Agreement, and the Security Documents, together with every
other agreement, note, document, contract or instrument to which the Borrower
now or in the future may be a party and which is required by the Lender.
     “Loan Year” is defined in Section 2.5(b).
     “Lockbox” means “Lockbox” as defined in the Wholesale Lockbox and
Collection Account Agreement.
     “Material Adverse Effect” means any of the following:
     (i) A material adverse effect on the business, operations, results of
operations, prospects, assets, liabilities or financial condition of the
Borrower;
     (ii) A material adverse effect on the ability of the Borrower to perform
its obligations under the Loan Documents;
     (iii) A material adverse effect on the ability of the Lender to enforce the
Indebtedness or to realize the intended benefits of the Security Documents,
including a material adverse effect on the validity or enforceability of any
Loan Document, or on the

9

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

 

status, existence, perfection, priority (subject to Permitted Liens) or
enforceability of any Lien securing payment or performance of the Indebtedness;
or
     (iv) Any claim against the Borrower or threat of litigation which if
determined adversely to the Borrower would cause the Borrower to be liable to
pay an amount exceeding $100,000 or would result in the occurrence of an event
described in clauses (i), (ii) and (iii) above.
     “Maturity Date” means, with respect to the Credit Facility, May 15, 200___.
     “Maximum Line Amount” means $8,000,000, unless this amount is reduced
pursuant to Section 2.9, in which event it means such lower amount.
     “Minimum Interest Charge” is defined in Section 2.5(b).
     “Mortgagee’s Disclaimer and Consent” means that agreement dated May 15,
2007 executed by Commerce Bank in favor of the Lender.
     “Multiemployer Plan” means a multiemployer plan (as defined in
Section 4001(a)(3) of ERISA) to which the Borrower or any ERISA Affiliate
contributes or is obligated to contribute.
     “Net Forced Liquidation Value” means a professional opinion of the
estimated most probable Net Cash Proceeds which could typically be realized at a
properly advertised and conducted public auction sale without reserve, held
under forced sale conditions and under economic trends current within 60 days of
the appraisal. The opinion may consider physical location, difficulty of
removal, adaptability, specialization, marketability, physical condition,
overall appearance and psychological appeal.
     “Note” means the Revolving Note or the Term Note, and “Notes” means the
Revolving Note and the Term Note.
     “OFAC” is defined in Section 6.11(c).
     “Officer” means with respect to the Borrower, an officer if the Borrower is
a corporation, a manager if the Borrower is a limited liability company, or a
partner if the Borrower is a partnership.
     “Overadvance” means the amount, if any, by which the outstanding principal
balance of the Revolving Note is in excess of the then-existing Borrowing Base.
     “Owned Intellectual Property” is defined in Section 5.11(a).
     “Owner” means with respect to the Borrower, each Person having legal or
beneficial title to an ownership interest in the Borrower or a right to acquire
such an interest.
     “Patent and Trademark Security Agreement” means each Patent and Trademark
Security Agreement now or hereafter executed by the Borrower in favor of the
Lender.

10

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

 

     “Pension Plan” means a pension plan (as defined in Section 3(2) of ERISA)
maintained for employees of the Borrower or any ERISA Affiliate and covered by
Title IV of ERISA.
     “Permitted Lien” and “Permitted Liens” are defined in Section 6.3(a).
     “Person” means any individual, corporation, partnership, joint venture,
limited liability company, association, joint-stock company, trust,
unincorporated organization or government or any agency or political subdivision
thereof.
     “Plan” means an employee benefit plan (as defined in Section 3(3) of ERISA)
maintained for employees of the Borrower or any ERISA Affiliate.
     “Premises” means all locations where the Borrower conducts its business or
has any rights of possession, including the locations legally described in
Exhibit D attached hereto.
     “Prime Rate” means at any time the rate of interest most recently announced
by the Lender at its principal office as its Prime Rate, with the understanding
that the Prime Rate is one of the Lender’s base rates, and serves as the basis
upon which effective rates of interest are calculated for those loans making
reference thereto, and is evidenced by the recording thereof in such internal
publication or publications as the Lender may designate. Each change in the rate
of interest shall become effective on the date each Prime Rate change is
announced by the Lender.
     “Reportable Event” means a reportable event (as defined in Section 4043 of
ERISA), other than an event for which the 30-day notice requirement under ERISA
has been waived in regulations issued by the Pension Benefit Guaranty
Corporation.
     “Revolving Advance” is defined in Section 2.1.
     “Revolving Note” means the Borrower’s revolving promissory note, payable to
the order of the Lender in substantially the form of Exhibit A hereto, as same
may be renewed and amended from time to time, and all replacements thereto.
     “Securities Account” means the securities account numbered 6436-2579
maintained by Wells Fargo Investments, LLC on behalf of Thomas F. Leahy.
     “Security Documents” means this Agreement, the Wholesale Lockbox and
Collection Account Agreement, the Patent and Trademark Security
Agreement(s),each Guaranty, the Leahy Pledge Agreement, the Control Agreement
and any other document delivered to the Lender from time to time to secure the
Indebtedness.
     “Security Interest” is defined in Section 3.1.
     “Subordinated Creditor” means each Person now or in the future who agrees
to subordinate indebtedness of the Borrower held by that Person to the payment
of the Indebtedness.
     “Subsidiary” means any Person of which more than fifty percent (50%) of the
outstanding ownership interests having general voting power under ordinary
circumstances to

11

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

 

elect a majority of the board of directors or the equivalent of such Person,
regardless of whether or not at the time ownership interests of any other class
or classes shall have or might have voting power by reason of the happening of
any contingency, is at the time directly or indirectly owned by the Borrower, by
the Borrower and one or more other Subsidiaries, or by one or more other
Subsidiaries.
     “Term Advance” is defined in Section 2.3.
     “Term Note” means the Borrower’s Equipment promissory note, payable to the
order of the Lender in substantially the form of Exhibit B hereto, in an amount
up to $340,000 but not exceeding 100% of the net forced sale liquidation value
of equipment as same may be renewed and amended from time to time, and all
replacements thereto.
     “Termination Date” means the earliest of (i) the Maturity Date, (ii) the
date the Borrower terminates the Credit Facility, or (iii) the date the Lender
demands payment of the Indebtedness, following an Event of Default, pursuant to
Section 7.2.
     “Trademark Security Agreement” means each Trademark Security Agreement now
or hereafter executed by the Borrower in favor of the Lender.
     “UCC” means the Uniform Commercial Code in effect in the state designated
in this Agreement as the state whose laws shall govern this Agreement, or in any
other state whose laws are held to govern this Agreement or any portion of this
Agreement.
     “Unused Amount” is defined in Section 2.6(b).
     “Wholesale Lockbox and Collection Account Agreement” means the Wholesale
Lockbox and Collection Account Agreement by and between the Borrower and the
Lender, dated the same date as this Agreement.
     Section 1.2 Other Definitional Terms; Rules of Interpretation. The words
“hereof”, “herein” and “hereunder” and words of similar import when used in this
Agreement shall refer to this Agreement as a whole and not to any particular
provision of this Agreement. All accounting terms not otherwise defined herein
have the meanings assigned to them in accordance with GAAP. All terms defined in
the UCC and not otherwise defined herein have the meanings assigned to them in
the UCC. References to Articles, Sections, subsections, Exhibits, Schedules and
the like, are to Articles, Sections and subsections of, or Exhibits or Schedules
attached to, this Agreement unless otherwise expressly provided. The words
“include”, “includes” and “including” shall be deemed to be followed by the
phrase “without limitation”. Unless the context in which used herein otherwise
clearly requires, “or” has the inclusive meaning represented by the phrase
“and/or”. Defined terms include in the singular number the plural and in the
plural number the singular. Reference to any agreement (including the Loan
Documents), document or instrument means such agreement, document or instrument
as amended or modified and in effect from time to time in accordance with the
terms thereof (and, if applicable, in accordance with the terms hereof and the
other Loan Documents), except where otherwise explicitly provided, and reference
to any promissory note includes any promissory note which is an extension or
renewal thereof or a substitute or replacement therefor. Reference to any law,
rule, regulation, order, decree, requirement, policy, guideline, directive or
interpretation means as

12

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

 

amended, modified, codified, replaced or reenacted, in whole or in part, and in
effect on the determination date, including rules and regulations promulgated
thereunder.
ARTICLE II
AMOUNT AND TERMS OF THE CREDIT FACILITY
     Section 2.1 Revolving Advances. The Lender agrees, subject to the terms and
conditions of this Agreement, to make advances (“Revolving Advances”) to the
Borrower from time to time from the date that all of the conditions set forth in
Section 4.1 are satisfied (the “Funding Date”) to and until (but not including)
the Termination Date in an amount not in excess of the Maximum Line Amount less
the Ex-Im Amount and as to Raw Materials and Finished Goods Inventory, not in
excess of the Inventory Cap. The Lender shall have no obligation to make a
Revolving Advance to the extent that the amount of the requested Revolving
Advance exceeds Availability. The Borrower’s obligation to pay the Revolving
Advances shall be evidenced by the Revolving Note and shall be secured by the
Collateral. Within the limits set forth in this Section 2.1, the Borrower may
borrow, prepay pursuant to Section 2.9, and reborrow.
     Section 2.2 Procedures for Requesting Advances. The Borrower shall comply
with the following procedures in requesting Revolving Advances:
          (a) Time for Requests. The Borrower shall request each Advance not
later than the Cut-off Time on the Business Day on which the Advance is to be
made. Each request that conforms to the terms of this Agreement shall be
effective upon receipt by the Lender, shall be in writing or by telephone, and
shall be confirmed in writing by the Borrower if so requested by the Lender, by
(i) an Officer of the Borrower; or (ii) a Person designated as the Borrower’s
agent by an Officer of the Borrower in a writing delivered to the Lender; or
(iii) a Person whom the Lender reasonably believes to be an Officer of the
Borrower or such a designated agent. The Borrower shall repay all Advances even
if the Lender does not receive such confirmation and even if the Person
requesting an Advance was not in fact authorized to do so. Any request for an
Advance, whether written or telephonic, shall be deemed to be a representation
by the Borrower that the conditions set forth in Section 4.2 have been satisfied
as of the time of the request.
          (b) Disbursement. Upon fulfillment of the applicable conditions set
forth in Article IV, the Lender shall disburse the proceeds of the requested
Advance by crediting the same to the Borrower’s demand deposit account
maintained with the Lender unless the Lender and the Borrower shall agree in
writing to another manner of disbursement.
     Section 2.3 Term Advance.
     (a) The Lender agrees, subject to the terms and conditions of this
Agreement, to make a single advance to the Borrower on the Funding Date (the
“Term Advance”) in an amount not exceeding the lesser of $340,000 or one hundred
percent (100%) of the Net Forced Liquidation Value of the Borrower’s Eligible
Equipment. The Borrower’s obligation to pay the Term Advance shall be evidenced
by the Term Note and shall be secured by the Collateral as provided in
Article III.

13

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

 

     (b) Upon fulfillment of the applicable conditions set forth in Article IV,
the Lender shall deposit the proceeds of the requested Term Advance by crediting
the same to the Borrower’s demand deposit account specified in Section 2.2(b)
unless the Lender and the Borrower shall agree in writing to another manner of
disbursement.
     Section 2.4 Payment of Term Note. The outstanding principal balance of the
Term Note shall be due and payable as follows:
     (a) In equal monthly installments of $5,666.67, beginning on June 1, 2007,
and on the first day of each month thereafter, in 60 equal monthly installments
sufficient to fully amortize the principal balance of the Term Note with the
balance due and payable in full on the Maturity Date.
     (b) If the Lender at any time obtains an appraisal of the Equipment as
permitted under Section 6.9(d) herein, and the appraisal shows the aggregate
outstanding principal balance of the Term Note to exceed Net Forced Liquidation
Value of Eligible Equipment, then the Borrower, upon demand by the Lender, shall
make additional monthly principal payments in an amount equal to the amount of
such excess divided by 60 months, together with any prepayment fee.
     (c) All prepayments of principal with respect to the Term Note shall be
applied to the most remote principal installment or installments then unpaid.
     (d) On the Termination Date of the Credit Facility, the entire unpaid
principal balance of the Term Note and all unpaid interest accrued thereon shall
also be fully due and payable.
     Section 2.5 Interest; Minimum Interest Charge; Default Interest Rate;
Application of Payments; Participations; Usury.
          (a) Interest. Except as provided in Section 2.5(c), the principal
amount of each Advance shall bear interest as a Floating Rate Advance.
          (b) Minimum Interest Charge. Notwithstanding any other terms of this
Agreement to the contrary, the Borrower shall pay to the Lender interest of not
less than $150,000 per “Loan Year,” paid quarterly, (the “Minimum Interest
Charge”) during the term of this Agreement, and the Borrower shall pay any
deficiency between the Minimum Interest Charge and the amount of interest
otherwise calculated under Section 2.5(a) on the first day of each quarter
following the Funding Date and each anniversary of the Funding Date and on the
Termination Date. “Loan Year” means each one year period ending on the
anniversary of the Funding Date. When calculating this deficiency, the Default
Rate, if applicable, shall be disregarded, and any interest that accrues on a
payment following its receipt on those days specified in Section 2.5(d) shall be
excluded in determining the total amount of interest otherwise calculated under
Section 2.5(a).
          (c) Default Interest Rate. At any time during any Default Period or
following the Termination Date, in the Lender’s sole discretion and without
waiving any of its other rights or remedies, the principal of the Revolving Note
and the Term Note shall bear interest at the

14

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

 

Default Rate or such lesser rate as the Lender may determine, effective as of
the date the Event of Default occurs through the last day of such Default
Period, or any shorter time period that the Lender may determine. The decision
of the Lender to impose a rate that is less than the Default Rate or to not
impose the Default Rate for the entire duration of the Default Period shall be
made by the Lender in its sole discretion and shall not be a waiver of any of
its other rights and remedies, including its right to retroactively impose the
full Default Rate for the entirety of any such Default Period or following the
Termination Date.
          (d) Application of Payments. Payments shall be applied to the
Indebtedness on the Business Day of receipt by the Lender in the Lender’s
general account, but the amount of principal paid shall continue to accrue
interest at the interest rate applicable under the terms of this Agreement from
the calendar day the Lender receives the payment, and continuing through the end
of the first Business Day following receipt of the payment.
          (e) Participations. If any Person shall acquire a participation in the
Advances or the Obligation of Reimbursement, the Borrower shall be obligated to
the Lender to pay the full amount of all interest calculated under this
Section 2.5, along with all other fees, charges and other amounts due under this
Agreement, regardless if such Person elects to accept interest with respect to
its participation at a lower rate than that calculated under this Section 2.5,
or otherwise elects to accept less than its prorata share of such fees, charges
and other amounts due under this Agreement.
          (f) Usury. In any event no rate change shall be put into effect which
would result in a rate greater than the highest rate permitted by law.
Notwithstanding anything to the contrary contained in any Loan Document, all
agreements which either now are or which shall become agreements between the
Borrower and the Lender are hereby limited so that in no contingency or event
whatsoever shall the total liability for payments in the nature of interest,
additional interest and other charges exceed the applicable limits imposed by
any applicable usury laws. If any payments in the nature of interest, additional
interest and other charges made under any Loan Document are held to be in excess
of the limits imposed by any applicable usury laws, it is agreed that any such
amount held to be in excess shall be considered payment of principal hereunder,
and the indebtedness evidenced hereby shall be reduced by such amount so that
the total liability for payments in the nature of interest, additional interest
and other charges shall not exceed the applicable limits imposed by any
applicable usury laws, in compliance with the desires of the Borrower and the
Lender. This provision shall never be superseded or waived and shall control
every other provision of the Loan Documents and all agreements between the
Borrower and the Lender, or their successors and assigns.
     Section 2.6 Fees.
          (a) Closing Fee. The Borrower shall pay the Lender a fully earned and
non-refundable origination fee of $20,000.00, due and payable upon the execution
of this Agreement.
          (b) Unused Line Fee. For the purposes of this Section 2.6(b), “Unused
Amount” means the Maximum Line Amount reduced by outstanding Revolving Advances.
The Borrower agrees to pay to the Lender an unused line fee at the rate of one
quarter of one percent (0.25%) per annum on the average daily Unused Amount from
the date of this Agreement to and

15

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

 

including the Termination Date, due and payable monthly in arrears on the first
day of the month and on the Termination Date.
          (c) Collateral Exam Fees. The Borrower shall pay the Lender fees in
connection with any collateral exams, audits or inspections conducted by or on
behalf of the Lender of any Collateral or the Borrower’s operations or business
at the rates established from time to time by the Lender as its collateral exam
fees which fees are currently $850 per eight hour day per collateral examiner
plus actual out of pocket expenses. Collateral exam fees will include a pre-loan
survey as well as Collateral exams thereafter. Collateral exams are typically
performed on a quarterly basis, but the Lender reserves the right to perform
Collateral exams at any time in its sole discretion.
          (d) Termination and Line Reduction Fees. If (i) the Lender terminates
the Credit Facility during a Default Period, or if (ii) the Borrower terminates
or reduces the Credit Facility on a date prior to the Maturity Date, then the
Borrower shall pay the Lender as liquidated damages and not as a penalty a
termination fee in an amount equal to a percentage of the Maximum Line Amount
(or the reduction of the Maximum Line Amount, as the case may be) calculated as
follows: (A) three percent (3%) if the termination or reduction occurs on or
before the first anniversary of the Funding Date; (B) two percent (2%) if the
termination or reduction occurs after the first anniversary of the Funding Date,
but on or before the second anniversary of the Funding Date; and (C) one percent
(1%) if the termination or reduction occurs after the second anniversary of the
Funding Date.
          (e) Waiver of Termination and Prepayment Fees. The Borrower will be
excused from the payment of termination and prepayment fees otherwise due under
this Agreement if such termination or prepayment is made because of refinancing
through another one of the Lender’s operating divisions more than eighteen
(18) months after the Funding Date.
          (f) Overadvance Fees. The Borrower shall pay an Overadvance fee in the
amount of $500.00 for each day or portion thereof during which an Overadvance
exists, regardless of how the Overadvance arises or whether or not the
Overadvance has been agreed to in advance by the Lender. The acceptance of
payment of an Overadvance fee by the Lender shall not be deemed to constitute
either consent to the Overadvance or a waiver of the resulting Event of Default,
unless the Lender specifically consents to the Overadvance in writing and waives
the Event of Default on whatever conditions the Lender deems appropriate.
          (g) Ex-Im Fees. The Borrower shall pay the Lender, on demand, all fees
due and payable from time to time under the Ex-Im Documents.
          (h) Other Fees and Charges. The Lender may from time to time impose
additional fees and charges as consideration for Advances made in excess of
Availability or for other events that constitute an Event of Default or a
Default hereunder, including fees and charges for the administration of
Collateral by the Lender, and fees and charges for the late delivery of reports,
which may be assessed in the Lender’s sole discretion on either an hourly,
periodic, or flat fee basis, and in lieu of or in addition to imposing interest
at the Default Rate. Borrower shall also be responsible for all out of pocket
expenses in connection with the contemplated financing including without
limitation legal fees and expenses, closing costs,

16

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

 

appraisal fees, UCC search and recording fees, costs for individual corporate
credit reports, mortgage recording fees, fees to initiate electronic reporting,
as well as collateral examination costs. Such costs are to be funded by Borrower
and shall survive.
     Section 2.7 Time for Interest Payments; Payment on Non-Business Days;
Computation of Interest and Fees.
          (a) Time For Interest Payments. Accrued and unpaid interest shall be
due and payable on the first day of each month and on the Termination Date (each
an “Interest Payment Date”), or if any such day is not a Business Day, on the
next succeeding Business Day. Interest will accrue from the most recent date to
which interest has been paid or, if no interest has been paid, from the date of
advance to the Interest Payment Date. If an Interest Payment Date is not a
Business Day, payment shall be made on the next succeeding Business Day.
          (b) Payment on Non Business Days. Whenever any payment to be made
hereunder shall be stated to be due on a day which is not a Business Day, such
payment may be made on the next succeeding Business Day, and such extension of
time shall in such case be included in the computation of interest on the
Advances or the fees hereunder, as the case may be.
          (c) Computation of Interest and Fees. Interest accruing on the
outstanding principal balance of the Advances and fees hereunder outstanding
from time to time shall be computed on the basis of actual number of days
elapsed in a year of 360 days.
     Section 2.8 Lockbox and Collateral Account; Sweep of Funds.
     (a) Lockbox and Collateral Account.
     (i) The Borrower shall instruct all account debtors to pay all Accounts
directly to the Lockbox. If, notwithstanding such instructions, the Borrower
receives any payments on Accounts, the Borrower shall deposit such payments into
the Collateral Account. The Borrower shall also deposit all other cash proceeds
of Collateral regardless of source or nature directly into the Collateral
Account. Until so deposited, the Borrower shall hold all such payments and cash
proceeds in trust for and as the property of the Lender and shall not commingle
such property with any of its other funds or property. All deposits in the
Collateral Account shall constitute proceeds of Collateral and shall not
constitute payment of the Indebtedness.
     (ii) All items deposited in the Collateral Account shall be subject to
final payment. If any such item is returned uncollected, the Borrower will
immediately pay the Lender, or, for items deposited in the Collateral Account,
the bank maintaining such account, the amount of that item, or such bank at its
discretion may charge any uncollected item to the Borrower’s commercial account
or other account. The Borrower shall be liable as an endorser on all items
deposited in the Collateral Account, whether or not in fact endorsed by the
Borrower.

17

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

 

          (b) Sweep of Funds. The Lender shall from time to time, in accordance
with the Wholesale Lockbox and Collection Account Agreement, cause funds in the
Collateral Account to be transferred to the Lender’s general account for payment
of the Indebtedness. Amounts deposited in the Collateral Account shall not be
subject to withdrawal by the Borrower, except after payment in full and
discharge of all Indebtedness.
     Section 2.9 Voluntary Prepayment; Reduction of the Maximum Line Amount;
Termination of the Credit Facility by the Borrower. Except as otherwise provided
herein, the Borrower may prepay the Advances in whole at any time or from time
to time in part. The Borrower may terminate the Credit Facility or reduce the
Maximum Line Amount at any time if it (i) gives the Lender at least 90 days
advance written notice prior to the proposed Termination Date, and (ii) pays the
Lender applicable termination and Maximum Line Amount reduction fees in
accordance with the terms of this Agreement. Any reduction in the Maximum Line
Amount shall be in multiples of $100,000, and with a minimum reduction of at
least $500,000. If the Borrower terminates the Credit Facility or reduces the
Maximum Line Amount to zero, all Indebtedness shall be immediately due and
payable, and if the Borrower gives the Lender less than the required 90 days
advance written notice, then the interest rate applicable to borrowings
evidenced by the Revolving Note shall be the Default Rate for the period of time
commencing 90 days prior to the proposed Termination Date through the date that
the Lender actually receives such written notice. If the Borrower does not wish
the Lender to consider renewal of the Credit Facility on the next Maturity Date,
then the Borrower shall give the Lender at least 90 days written notice prior to
the Maturity Date that it will not be requesting renewal. If the Borrower fails
to give the Lender such timely notice, then the interest rate applicable to
borrowings evidenced by the Revolving Note shall be the Default Rate for the
period of time commencing 90 days prior to the Maturity Date through the date
that the Lender actually receives such written notice.
     Section 2.10 Mandatory Prepayment. Without notice or demand, if the sum of
the outstanding principal balance of the Revolving Advances shall at any time
exceed the Borrowing Base, the Borrower shall immediately prepay the Revolving
Advances to the extent necessary to eliminate such excess. Any prepayment
received by the Lender under this Agreement may be applied to the Indebtedness,
in such order and in such amounts as the Lender in its sole discretion may
determine from time to time.
     Section 2.11 Revolving Advances to Pay Indebtedness. Notwithstanding the
terms of Section 2.1, the Lender may, in its discretion at any time or from time
to time, without the Borrower’s request and even if the conditions set forth in
Section 4.2 would not be satisfied, and so long as this does not create an
overadvance, make a Revolving Advance in an amount equal to the portion of the
Indebtedness from time to time due and payable, and may deliver the proceeds of
any such Revolving Advance to Wells Fargo Merchant Services, L.L.C. in
satisfaction of any unpaid obligations due to Wells Fargo Merchant Services,
L.L.C.
     Section 2.12 Use of Proceeds. The Borrower shall use the proceeds of
Advances for ordinary working capital purposes, and to repay debts to Commerce
Bank and Thomas F. Leahy.
     Section 2.13 Liability Records. The Lender may maintain from time to time,
at its discretion, records as to the Indebtedness. All entries made on any such
record shall be

18

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

 

presumed correct until the Borrower establishes the contrary. Upon the Lender’s
demand, the Borrower will admit and certify in writing the exact principal
balance of the Indebtedness that the Borrower then asserts to be outstanding.
Any billing statement or accounting rendered by the Lender shall be conclusive
and fully binding on the Borrower unless the Borrower gives the Lender specific
written notice of exception within 30 days after receipt.
ARTICLE III
SECURITY INTEREST; OCCUPANCY; SETOFF
     Section 3.1 Grant of Security Interest. The Borrower hereby pledges,
assigns and grants to the Lender, for the benefit of itself and as agent for
Wells Fargo Merchant Services, L.L.C., a lien and security interest
(collectively referred to as the “Security Interest”) in the Collateral, as
security for the payment and performance of: (a) all present and future
Indebtedness of the Borrower to the Lender; (b) all obligations of the Borrower
and rights of the Lender under this Agreement; and (c) all present and future
obligations of the Borrower to the Lender of other kinds. Upon request by the
Lender, the Borrower will grant to the Lender, for the benefit of itself and as
agent for Wells Fargo Merchant Services, L.L.C., a security interest in all
commercial tort claims that the Borrower may have against any Person. In
addition, the Borrower to further secure all such Indebtedness shall execute a
Mortgage of $1,000,000 on property in Victoria, Minnesota.
     Section 3.2 Notification of Account Debtors and Other Obligors. The Lender
may at any time after an Event of Default, notify any account debtor or other
Person obligated to pay the amount due that such right to payment has been
assigned or transferred to the Lender for security and shall be paid directly to
the Lender. The Borrower will join in giving such notice if the Lender so
requests. At any time after the Borrower or the Lender gives such notice to an
account debtor or other obligor, the Lender may, but need not, in the Lender’s
name or in the Borrower’s name, demand, sue for, collect or receive any money or
property at any time payable or receivable on account of, or securing, any such
right to payment, or grant any extension to, make any compromise or settlement
with or otherwise agree to waive, modify, amend or change the obligations
(including collateral obligations) of any such account debtor or other obligor.
The Lender may, in the Lender’s name or in the Borrower’s name, as the
Borrower’s agent and attorney-in-fact, notify the United States Postal Service
to change the address for delivery of the Borrower’s mail to any address
designated by the Lender, otherwise intercept the Borrower’s mail, and receive,
open and dispose of the Borrower’s mail, applying all Collateral as permitted
under this Agreement and holding all other mail for the Borrower’s account or
forwarding such mail to the Borrower’s last known address.
     Section 3.3 Assignment of Insurance. Except for insurance obtained or
pledged to a Landlord covering leased premises, as additional security for the
payment and performance of the Indebtedness, the Borrower hereby assigns to the
Lender any and all monies (including proceeds of insurance and refunds of
unearned premiums) due or to become due under, and all other rights of the
Borrower with respect to, any and all policies of insurance now or at any time
hereafter covering the Collateral or any evidence thereof or any business
records or valuable papers pertaining thereto, and the Borrower hereby directs
the issuer of any such policy to pay all such monies directly to the Lender. At
any time, whether or not a Default Period then exists, the Lender may (but need
not), in the Lender’s name or in the Borrower’s name, execute and deliver

19

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

 

proof of claim, receive all such monies, endorse checks and other instruments
representing payment of such monies, and adjust, litigate, compromise or release
any claim against the issuer of any such policy. Any monies received as payment
for any loss under any insurance policy mentioned above (other than liability
insurance policies) or as payment of any award or compensation for condemnation
or taking by eminent domain, shall be paid over to the Lender to be applied, at
the option of the Lender, either to the prepayment of the Indebtedness or shall
be disbursed to the Borrower under staged payment terms reasonably satisfactory
to the Lender for application to the cost of repairs, replacements, or
restorations. Any such repairs, replacements, or restorations shall be effected
with reasonable promptness and shall be of a value at least equal to the value
of the items or property destroyed prior to such damage or destruction.
     Section 3.4 Occupancy.
     (a) To the greatest extent possible under existing or future leases and
consistent with any Landlord Waivers and Mortgagee Disclaimers, but subject to
the mortgage of Commerce Bank, the Borrower hereby irrevocably grants to the
Lender the right to take exclusive possession of the Premises at any time during
a Default Period without notice or consent.
     (b) The Lender may use the Premises only to hold, process, manufacture,
sell, use, store, liquidate, realize upon or otherwise dispose of items that are
Collateral and for other purposes that the Lender may in good faith deem to be
related or incidental purposes.
     (c) The Lender’s right to hold the Premises shall cease and terminate upon
the earlier of (i) payment in full and discharge of all Indebtedness and
termination of the Credit Facility, and (ii) final sale or disposition of all
items constituting Collateral and delivery of all such items to purchasers.
     (d) The Lender shall not be obligated to pay or account for any rent or
other compensation for the possession, occupancy or use of any of the Premises;
provided, however, that if the Lender does pay or account for any rent or other
compensation for the possession, occupancy or use of any of the Premises, the
Borrower shall reimburse the Lender promptly for the full amount thereof. In
addition, the Borrower will pay, or reimburse the Lender for, all taxes, fees,
duties, imposts, charges and expenses at any time incurred by or imposed upon
the Lender by reason of the execution, delivery, existence, recordation,
performance or enforcement of this Agreement or the provisions of this Section
3.4.
     Section 3.5 License. Without limiting the generality of any other Security
Document, the Borrower hereby grants to the Lender a non-exclusive, worldwide
and royalty-free license to use or otherwise exploit all Intellectual Property
Rights of the Borrower for the purpose of: (a) completing the manufacture of any
in-process materials during any Default Period so that such materials become
saleable Inventory, all in accordance with the same quality standards previously
adopted by the Borrower for its own manufacturing and subject to the Borrower’s
reasonable exercise of quality control; and (b) selling, leasing or otherwise
disposing of any or all Collateral during any Default Period.

20

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

 

     Section 3.6 Financing Statement. The Borrower authorizes the Lender to file
from time to time, such financing statements against collateral described as
“all personal property” or “all assets” or describing specific items of
collateral including commercial tort claims as the Lender deems necessary or
useful to perfect the Security Interest. All financing statements filed before
the date hereof to perfect the Security Interest were authorized by the Borrower
and are hereby re-authorized. A carbon, photographic or other reproduction of
this Agreement or of any financing statements signed by the Borrower is
sufficient as a financing statement and may be filed as a financing statement in
any state to perfect the security interests granted hereby. For this purpose,
the Borrower represents and warrants that the following information is true and
correct:
Name and address of Debtor:
HEI, Inc.
1495 Steiger Lake Lane
Victoria, Minnesota 55386
Federal Employer Identification No. 41-0944876
Organizational Identification No. MN 1P-877
Name and address of Secured Party:
Wells Fargo Bank, National Association
MAC N9312-040
Sixth and Marquette
Minneapolis, Minnesota 55479
     Section 3.7 Setoff. The Lender may at any time or from time to time, at its
sole discretion and without demand and without notice to anyone, setoff any
liability owed to the Borrower by the Lender, whether or not due, against any
Indebtedness, whether or not due. In addition, each other Person holding a
participating interest in any Indebtedness shall have the right to appropriate
or setoff any deposit or other liability then owed by such Person to the
Borrower, whether or not due, and apply the same to the payment of said
participating interest, as fully as if such Person had lent directly to the
Borrower the amount of such participating interest.
     Section 3.8 Collateral. This Agreement does not contemplate a sale of
accounts, contract rights or chattel paper, and, as provided by law, the
Borrower is entitled to any surplus and shall remain liable for any deficiency.
The Lender’s duty of care with respect to Collateral in its possession (as
imposed by law) shall be deemed fulfilled if it exercises reasonable care in
physically keeping such Collateral, or in the case of Collateral in the custody
or possession of a bailee or other third Person, exercises reasonable care in
the selection of the bailee or other third Person, and the Lender need not
otherwise preserve, protect, insure or care for any Collateral. The Lender shall
not be obligated to preserve any rights the Borrower may have against prior
parties, to realize on the Collateral at all or in any particular manner or
order or to apply any cash proceeds of the Collateral in any particular order of
application. The Lender has no obligation to clean-up or otherwise prepare the
Collateral for sale. The Borrower waives any right it may have to require the
Lender to pursue any third Person for any of the Indebtedness.

21

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

 

ARTICLE IV
CONDITIONS OF LENDING
     Section 4.1 Conditions Precedent to the Initial Advances. The Lender’s
obligation to make the initial Advances shall be subject to the condition
precedent that the Lender shall have received all of the following, each
properly executed by the appropriate party and in form and substance
satisfactory to the Lender:
     (a) This Agreement.
     (b) The Revolving Note and the Term Note.
     (c) The Ex-Im Documents.
     (d) A true and correct copy of any and all leases pursuant to which the
Borrower is leasing the Premises, together with a landlord’s disclaimer and
consent with respect to each such lease.
     (e) A true and correct copy of any and all mortgages pursuant to which the
Borrower has mortgaged the Premises, together with a mortgagee’s disclaimer and
consent with respect to each such mortgage.
     (f) A true and correct copy of any and all agreements pursuant to which the
Borrower’s property is in the possession of any Person other than the Borrower,
together with, in the case of any goods held by such Person for resale, (i) a
consignee’s acknowledgment and waiver of Liens, (ii) UCC financing statements
sufficient to protect the Borrower’s and the Lender’s interests in such goods,
and (iii) UCC searches showing that no other secured party has filed a financing
statement against such Person and covering property similar to the Borrower’s
other than the Borrower, or if there exists any such secured party, evidence
that each such secured party has received notice from the Borrower and the
Lender sufficient to protect the Borrower’s and the Lender’s interests in the
Borrower’s goods from any claim by such secured party.
     (g) An acknowledgment and waiver of Liens from each warehouse in which the
Borrower is storing Inventory.
     (h) An acknowledgment and agreement from SAP as licensor and any other
licensor in favor of the Lender, together with a true, correct and complete copy
of any such license agreements, except the expired Syteline License.
     (i) The Wholesale Lockbox and Collection Account Agreement.
     (j) Control agreements with each bank at which the Borrower maintains
deposit accounts.
     (k) The Patent and Trademark Security Agreement.
     (l) The Mortgagee’s Disclaimer and Consent.

22

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

 

     (m) Current searches of appropriate filing offices showing that (i) no
Liens have been filed and remain in effect against the Borrower except Permitted
Liens or Liens held by Persons who have agreed in writing that upon receipt of
proceeds of the initial Advances, they will satisfy, release or terminate such
Liens in a manner satisfactory to the Lender, and (ii) the Lender has duly filed
all financing statements necessary to perfect the Security Interest, to the
extent the Security Interest is capable of being perfected by filing.
     (n) A certificate of the Borrower’s Secretary or Assistant Secretary
certifying that attached to such certificate are (i) the resolutions of the
Borrower’s Directors and, if required, Owners, authorizing the execution,
delivery and performance of the Loan Documents, (ii) true, correct and complete
copies of the Borrower’s Constituent Documents, and (iii) examples of the
signatures of the Borrower’s Officers or agents authorized to execute and
deliver the Loan Documents and other instruments, agreements and certificates,
including Advance requests, on the Borrower’s behalf.
     (o) A current certificate issued by the Secretary of State of Minnesota
certifying that the Borrower is in compliance with all applicable organizational
requirements of the State of Minnesota.
     (p) Evidence that the Borrower is duly licensed or qualified to transact
business in all jurisdictions where the character of the property owned or
leased or the nature of the business transacted by it makes such licensing or
qualification necessary.
     (q) A certificate of an Officer of the Borrower confirming, in his personal
capacity, the representations and warranties set forth in Article V.
     (r) Certificates of the insurance required hereunder, with all hazard
insurance containing a lender’s loss payable endorsement in the Lender’s favor
and with all liability insurance naming the Lender as an additional insured.
     (s) Payment of all fees due under the terms of this Agreement through the
date of the initial Advance, the Term Advance, and payment of all expenses
incurred by the Lender through such date and that are required to be paid by the
Borrower under this Agreement.
     (t) Evidence that after making the initial Revolving Advance, satisfying
all obligations owed to the Borrower’s prior lender, satisfying all trade
payables older than 60 days from invoice date, book overdrafts and closing
costs, Availability shall be not less than $1,750,000.
     (u) A Customer Identification Information form and such other forms and
verification as the Lender may need to comply with the U.S.A. Patriot Act.
     (v) The Guaranty of Thomas F. Leahy.
     (w) The Leahy Pledge Agreement.

23

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

 

     (x) The Control Agreement.
     (y) With respect to the real estate that is encumbered by the mortgage of
the Lender (i) a flood hazard determination form, confirming whether or not the
parcel is in a flood hazard area and whether or not flood insurance must be
obtained, and, if the real estate is located in a flood hazard area, (ii) a
policy of flood insurance.
     (z) The Securities Account shall have been established.
     (aa) Such other documents as the Lender in its sole discretion may require.
     (bb) All conditions set forth in Section 4 of the Ex-Im Agreement shall
have been effectively completed (unless such conditions have been waived by the
Lender).
     Section 4.2 Conditions Precedent to All Advances. The Lender’s obligation
to make each Advance shall be subject to the further conditions precedent that:
     (a) the representations and warranties contained in Article V are correct
on and as of the date of such Advance as though made on and as of such date,
except to the extent that such representations and warranties relate solely to
an earlier date; and
     (b) no event has occurred and is continuing, or would result from such
Advance which constitutes a Default or an Event of Default.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants to the Lender as follows:
     Section 5.1 Existence and Power; Name; Chief Executive Office; Inventory
and Equipment Locations; Federal Employer Identification Number and
Organizational Identification Number. The Borrower is a corporation, duly
organized, validly existing and in good standing under the laws of the State of
Minnesota and is duly licensed or qualified to transact business in all
jurisdictions where the character of the property owned or leased or the nature
of the business transacted by it makes such licensing or qualification
necessary. The Borrower has all requisite power and authority to conduct its
business, to own its properties and to execute and deliver, and to perform all
of its obligations under, the Loan Documents. During its existence, the Borrower
has done business solely under the names set forth in Schedule 5.1. The
Borrower’s chief executive office and principal place of business is located at
the address set forth in Schedule 5.1, and all of the Borrower’s records
relating to its business or the Collateral are kept at that location. All
Inventory and Equipment is located at that location or at one of the other
locations listed in Schedule 5.1. The Borrower’s federal employer identification
number and organization identification number are correctly set forth in
Section 3.6.
     Section 5.2 Capitalization. Schedule 5.2 constitutes a correct and complete
list of all ownership interests of the Borrower and rights to acquire ownership
interests including the record holder, number of interests and percentage
interests on a fully diluted basis, and an organizational chart showing the
ownership structure of all Subsidiaries of the Borrower.

24

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

 

     Section 5.3 Authorization of Borrowing; No Conflict as to Law or
Agreements. The execution, delivery and performance by the Borrower of the Loan
Documents and the borrowings from time to time hereunder have been duly
authorized by all necessary corporate action and do not and will not (i) require
any consent or approval of the Borrower’s Owners; (ii) require any
authorization, consent or approval by, or registration, declaration or filing
with, or notice to, any governmental department, commission, board, bureau,
agency or instrumentality, domestic or foreign, or any third party, except such
authorization, consent, approval, registration, declaration, filing or notice as
has been obtained, accomplished or given prior to the date hereof; (iii) violate
any provision of any law, rule or regulation (including Regulation X of the
Board of Governors of the Federal Reserve System) or of any order, writ,
injunction or decree presently in effect having applicability to the Borrower or
of the Borrower’s Constituent Documents; (iv) result in a breach of or
constitute a default under any indenture or loan or credit agreement or any
other material agreement, lease or instrument to which the Borrower is a party
or by which it or its properties may be bound or affected; or (v) result in, or
require, the creation or imposition of any Lien (other than the Security
Interest) upon or with respect to any of the properties now owned or hereafter
acquired by the Borrower.
     Section 5.4 Legal Agreements. This Agreement constitutes and, upon due
execution by the Borrower, the other Loan Documents will constitute the legal,
valid and binding obligations of the Borrower, enforceable against the Borrower
in accordance with their respective terms.
     Section 5.5 Subsidiaries and Affiliates. Except as set forth in
Schedule 5.5 hereto, the Borrower has no Subsidiaries and no Affiliates.
     Section 5.6 Financial Condition; No Adverse Change. The Borrower has
furnished to the Lender its audited financial statements for its fiscal year
ended September 2, 2006 and unaudited financial statements for the
fiscal-year-to-date period ended March 31, 2007, and those statements fairly
present the Borrower’s financial condition on the dates thereof and the results
of its operations and cash flows for the periods then ended and were prepared in
accordance with GAAP. Since the date of the most recent financial statements,
there has been no material adverse change in the Borrower’s business, properties
or condition (financial or otherwise) which has had a Material Adverse Effect.
     Section 5.7 Litigation. Except as set forth in Schedule 5.7, there are no
actions, suits or proceedings pending or, to the Borrower’s knowledge,
threatened against or affecting the Borrower or any of its Affiliates or the
properties of the Borrower or any of its Affiliates before any court or
governmental department, commission, board, bureau, agency or instrumentality,
domestic or foreign, which, if determined adversely to the Borrower or any of
its Affiliates, would have a material adverse effect on the financial condition,
properties or operations of the Borrower or any of its Affiliates.
     Section 5.8 Regulation U. The Borrower is not engaged in the business of
extending credit for the purpose of purchasing or carrying margin stock (within
the meaning of Regulation U of the Board of Governors of the Federal Reserve
System), and no part of the proceeds of any Advance will be used to purchase or
carry any margin stock or to extend credit to others for the purpose of
purchasing or carrying any margin stock.

25

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

 

     Section 5.9 Taxes. The Borrower and its Affiliates have paid or caused to
be paid to the proper authorities when due all federal, state and local taxes
required to be withheld by each of them. The Borrower and its Affiliates have
filed all federal, state and local tax returns which to the knowledge of the
Officers of the Borrower or any Affiliate, as the case may be, are required to
be filed, and the Borrower and its Affiliates have paid or caused to be paid to
the respective taxing authorities all taxes as shown on said returns or on any
assessment received by any of them to the extent such taxes have become due.
     Section 5.10 Titles and Liens. The Borrower has good and absolute title to
all Collateral free and clear of all Liens other than Permitted Liens. No
financing statement naming the Borrower as debtor is on file in any office
except to perfect only Permitted Liens.
     Section 5.11 Intellectual Property Rights.
          (a) Owned Intellectual Property. Schedule 5.11 is a complete list of
all patents, applications for patents, trademarks, applications to register
trademarks, service marks, applications to register service marks, mask works,
trade dress and copyrights for which the Borrower is the owner of record (the
“Owned Intellectual Property”). Except as disclosed on Schedule 5.11, (i) the
Borrower owns the Owned Intellectual Property free and clear of all restrictions
(including covenants not to sue a third party), court orders, injunctions,
decrees, writs or Liens, whether by written agreement or otherwise, (ii) no
Person other than the Borrower owns or has been granted any right in the Owned
Intellectual Property, (iii) all Owned Intellectual Property is valid,
subsisting and enforceable and (iv) the Borrower has taken all commercially
reasonable action necessary to maintain and protect the Owned Intellectual
Property.
          (b) Agreements with Employees and Contractors. The Borrower has
entered into a legally enforceable agreement with each of its employees and
subcontractors obligating each such Person to assign to the Borrower, without
any additional compensation, any Intellectual Property Rights created,
discovered or invented by such Person in the course of such Person’s employment
or engagement with the Borrower (except to the extent prohibited by law), and
further requiring such Person to cooperate with the Borrower, without any
additional compensation, in connection with securing and enforcing any
Intellectual Property Rights therein; provided, however, that the foregoing
shall not apply with respect to employees and subcontractors whose job
descriptions are of the type such that no such assignments are reasonably
foreseeable.
          (c) Intellectual Property Rights Licensed from Others. Schedule 5.11
is a complete list of all agreements under which the Borrower has licensed
Intellectual Property Rights from another Person (“Licensed Intellectual
Property”) other than readily available, non-negotiated licenses of computer
software and other intellectual property used solely for performing accounting,
word processing and similar administrative tasks (“Off-the-shelf Software”) and
a summary of any ongoing payments the Borrower is obligated to make with respect
thereto. Except as disclosed on Schedule 5.11 and in written agreements, copies
of which have been given to the Lender, the Borrower’s licenses to use the
Licensed Intellectual Property are free and clear of all restrictions, Liens,
court orders, injunctions, decrees, or writs, whether by written agreement or
otherwise. Except as disclosed on Schedule 5.11, the Borrower

26

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

 

is not obligated or under any liability whatsoever to make any payments of a
material nature by way of royalties, fees or otherwise to any owner of, licensor
of, or other claimant to, any Intellectual Property Rights.
          (d) Other Intellectual Property Needed for Business. Except for
Off-the-shelf Software and as disclosed on Schedule 5.11, the Owned Intellectual
Property and the Licensed Intellectual Property constitute all Intellectual
Property Rights used or necessary to conduct the Borrower’s business as it is
presently conducted or as the Borrower reasonably foresees conducting it.
          (e) Infringement. Except as disclosed on Schedule 5.11, the Borrower
has no knowledge of, and has not received any written claim or notice alleging,
any Infringement of another Person’s Intellectual Property Rights (including any
written claim that the Borrower must license or refrain from using the
Intellectual Property Rights of any third party) nor, to the Borrower’s
knowledge, is there any threatened claim or any reasonable basis for any such
claim.
     Section 5.12 Plans. Except as disclosed to the Lender in writing prior to
the date hereof, neither the Borrower nor any ERISA Affiliate (a) maintains or
has maintained any Pension Plan, (b) contributes or has contributed to any
Multiemployer Plan or (c) provides or has provided post-retirement medical or
insurance benefits with respect to employees or former employees (other than
benefits required under Section 601 of ERISA, Section 4980B of the IRC or
applicable state law). Neither the Borrower nor any ERISA Affiliate has received
any notice or has any knowledge to the effect that it is not in full compliance
with any of the requirements of ERISA, the IRC or applicable state law with
respect to any Plan. No Reportable Event exists in connection with any Pension
Plan. Each Plan which is intended to qualify under the IRC is so qualified, and
no fact or circumstance exists which may have an adverse effect on the Plan’s
tax qualified status. Neither the Borrower nor any ERISA Affiliate has (i) any
accumulated funding deficiency (as defined in Section 302 of ERISA and
Section 412 of the IRC) under any Plan, whether or not waived, (ii) any
liability under Section 4201 or 4243 of ERISA for any withdrawal, partial
withdrawal, reorganization or other event under any Multiemployer Plan or
(iii) any liability or knowledge of any facts or circumstances which could
result in any liability to the Pension Benefit Guaranty Corporation, the
Internal Revenue Service, the Department of Labor or any participant in
connection with any Plan (other than routine claims for benefits under the
Plan).
     Section 5.13 Default. The Borrower is in compliance with all provisions of
all agreements, instruments, decrees and orders to which it is a party or by
which it or its property is bound or affected, the breach or default of which
could have a Material Adverse Effect on the Borrower’s financial condition,
properties or operations.
     Section 5.14 Environmental Matters.
     (a) Except as disclosed on Schedule 5.14, to the best of the Borrower’s
knowledge, there are not present in, on or under the Premises any Hazardous
Substances in such form or quantity as to create any material liability or
obligation for either the Borrower or the Lender under the common law of any
jurisdiction or under any Environmental Law, and to the best of the Borrower’s
knowledge, no Hazardous

27

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

 

Substances have ever been stored, buried, spilled, leaked, discharged, emitted
or released in, on or under the Premises in such a way as to create any such
material liability.
     (b) Except as disclosed on Schedule 5.14, the Borrower has not disposed of
Hazardous Substances in such a manner as to create any material liability under
any Environmental Law.
     (c) To the best of the Borrower’s knowledge, and except as disclosed on
Schedule 5.14, there are no, (and there have not existed in the past), nor are
there any threatened, impending requests, claims, notices, investigations,
demands, administrative proceedings, hearings or litigation relating in any way
to the Premises or the Borrower, alleging material liability under, violation
of, or noncompliance with any Environmental Law or any license, permit or other
authorization issued pursuant thereto.
     (d) To the best of the Borrower’s knowledge, and except as disclosed on
Schedule 5.14, the Borrower’s businesses are, and to the best of Borrower’s
knowledge, have in the past always been, conducted in accordance with all
Environmental Laws and all licenses, permits and other authorizations required
pursuant to any Environmental Law and necessary for the lawful and efficient
operation of such businesses are in the Borrower’s possession and are in full
force and effect, nor has the Borrower been denied insurance on grounds related
to potential environmental liability. No permit required under any Environmental
Law is scheduled to expire within 12 months and there is no threat that any such
permit will be withdrawn, terminated, limited or materially changed.
     (e) Except as disclosed on Schedule 5.14, the Premises are not, and to the
best of Borrower’s knowledge, have never been listed on the National Priorities
List, the Comprehensive Environmental Response, Compensation and Liability
Information System or any similar federal, state or local list, schedule, log,
inventory or database.
     (f) The Borrower has delivered to the Lender all environmental assessments,
audits, reports, permits, licenses and other documents describing or relating in
any way to the Premises or the Borrower’s businesses.
     Section 5.15 Submissions to the Lender. All financial and other information
provided to the Lender by or on behalf of the Borrower in connection with the
Borrower’s request for the credit facilities contemplated hereby (i) is true and
correct in all material respects, (ii) does not omit any material fact necessary
to make such information not misleading and, (iii) as to projections, valuations
or proforma financial statements, presents a good faith opinion as to such
projections, valuations and proforma condition and results.
     Section 5.16 Financing Statements. The Borrower has authorized the filing
of financing statements sufficient when filed to perfect the Security Interest
and the other security interests created by the Security Documents. When such
financing statements are filed in the offices noted therein, the Lender will
have a valid and perfected security interest in all Collateral which is capable
of being perfected by filing financing statements. None of the Collateral is or
will become a fixture on real estate, unless a sufficient fixture filing is in
effect with respect thereto.

28

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

 

     Section 5.17 Rights to Payment. Each right to payment and each instrument,
document, chattel paper and other agreement constituting or evidencing
Collateral is (or, in the case of all future Collateral, will be when arising or
issued) the valid, genuine and legally enforceable obligation, subject to no
defense, setoff or counterclaim, of the account debtor or other obligor named
therein or in the Borrower’s records pertaining thereto as being obligated to
pay such obligation, except ordinary course of business returns and credit
memos.
ARTICLE VI
COVENANTS
     So long as the Indebtedness shall remain unpaid, or the Credit Facility
shall remain outstanding, the Borrower will comply with the following
requirements, unless the Lender shall otherwise consent in writing:
     Section 6.1 Reporting Requirements. The Borrower will deliver, or cause to
be delivered, to the Lender each of the following, which shall be in form and
detail acceptable to the Lender:
          (a) Annual Financial Statements. As soon as available, and in any
event within 120 days after the end of each fiscal year of the Borrower, the
Borrower’s audited financial statements with the unqualified opinion of
independent certified public accountants selected by the Borrower and acceptable
to the Lender, which annual financial statements shall include the Borrower’s
balance sheet as at the end of such fiscal year and the related statements of
the Borrower’s income, retained earnings and cash flows for the fiscal year then
ended, prepared, if the Lender so requests, on a consolidating (unaudited) and
consolidated (audited) basis to include any Affiliates, all in reasonable detail
and prepared in accordance with GAAP, together with (i) copies of all management
letters prepared by such accountants; (ii) a report signed by such accountants
stating that in making the investigations necessary for said opinion they
obtained no knowledge, except as specifically stated, of any Default or Event of
Default and all relevant facts in reasonable detail to evidence, and the
computations as to, whether or not the Borrower is in compliance with the
Financial Covenants; and (iii) a certificate of the Borrower’s chief financial
officer stating that such financial statements have been prepared in accordance
with GAAP, fairly represent the Borrower’s financial position and the results of
its operations, and whether or not such Officer has knowledge of the occurrence
of any Default or Event of Default and, if so, stating in reasonable detail the
facts with respect thereto.
          (b) Monthly Financial Statements. As soon as available and in any
event within 20 days after the end of each month, the unaudited/internal balance
sheet and statements of income and retained earnings of the Borrower as at the
end of and for such month and for the year to date period then ended, prepared,
if the Lender so requests, on a consolidating and consolidated basis to include
any Affiliates, in reasonable detail and stating in comparative form the figures
for the corresponding date and periods in the previous year, all prepared in
accordance with GAAP, subject to year-end audit adjustments and which fairly
represent the Borrower’s financial position and the results of its operations;
and accompanied by a certificate of the Borrower’s chief financial officer,
substantially in the form of Exhibit C hereto stating (i) that such financial
statements have been prepared in accordance with GAAP, subject to year-end

29

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

 

audit adjustments, and fairly represent the Borrower’s financial position and
the results of its operations, (ii) whether or not such Officer has knowledge of
the occurrence of any Default or Event of Default not theretofore reported and
remedied and, if so, stating in reasonable detail the facts with respect
thereto, and (iii) all relevant facts in reasonable detail to evidence, and the
computations as to, whether or not the Borrower is in compliance with the
Financial Covenants.
          (c) Accounts Inventory. Within 15 days after the end of each month,
the Borrower shall provide a monthly accounts receivable and accounts payable
listing and aging and an inventory report, both of which shall be submitted
electronically to the Lender via its vendor Collateral Services Inc. (CSI).
Monthly processing fees shall apply to such reporting.
          (d) Collateral Reports. Within 15 days after the end of each month or
more frequently if the Lender so requires, the Borrower’s accounts receivable
and its accounts payable, a detailed inventory report, an inventory
certification report, and a calculation of the Borrower’s Accounts, Eligible
Accounts, Inventory and Eligible Inventory as at the end of such month or
shorter time period.
          (e) Projections. No later than 30 days before the last day of each
fiscal year, the Borrower’s projected balance sheets, income statements,
statements of cash flow for each month of the succeeding fiscal year, each in
reasonable detail. Such items will be certified by the Officer who is the
Borrower’s chief financial officer as being the most accurate projections
available and identical to the projections used by the Borrower for internal
planning purposes and be delivered with a statement of underlying assumptions
and such supporting schedules and information as the Lender may in its
discretion require.
          (f) Supplemental Reports. Weekly, or more frequently if the Lender so
requires, the Borrower’s “Daily Collateral Reports”, receivables schedules, and
collection reports, as well as such additional reports as the Lender may
require.
          (g) Litigation. Immediately after the commencement thereof, notice in
writing of all litigation and of all proceedings before any governmental or
regulatory agency affecting the Borrower (i) of the type described in
Section 5.14(c) or (ii) which seek a monetary recovery against the Borrower in
excess of $50,000.
          (h) Defaults. When any Officer of the Borrower becomes aware of the
probable occurrence of any Default or Event of Default, and no later than 3 days
after such Officer becomes aware of such Default or Event of Default, notice of
such occurrence, together with a detailed statement by a responsible Officer of
the Borrower of the steps being taken by the Borrower to cure the effect
thereof.
          (i) Plans. As soon as possible, and in any event within 30 days after
the Borrower knows or has reason to know that any Reportable Event with respect
to any Pension Plan has occurred, a statement signed by the Officer who is the
Borrower’s chief financial officer setting forth details as to such Reportable
Event and the action which the Borrower proposes to take with respect thereto,
together with a copy of the notice of such Reportable Event to the Pension
Benefit Guaranty Corporation. As soon as possible, and in any event within
10 days after the Borrower fails to make any quarterly contribution required
with respect to any Pension

30

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

 

Plan under Section 412(m) of the IRC, the Borrower will deliver to the Lender a
statement signed by the Officer who is the Borrower’s chief financial officer
setting forth details as to such failure and the action which the Borrower
proposes to take with respect thereto, together with a copy of any notice of
such failure required to be provided to the Pension Benefit Guaranty
Corporation. As soon as possible, and in any event within ten days after the
Borrower knows or has reason to know that it has or is reasonably expected to
have any liability under Section 4201 or Section 4243 of ERISA for any
withdrawal, partial withdrawal, reorganization or other event under any
Multiemployer Plan, the Borrower will deliver to the Lender a statement of the
Borrower’s chief financial officer setting forth details as to such liability
and the action which the Borrower proposes to take with respect thereto.
          (j) Disputes. Promptly upon knowledge thereof, notice of (i) any
disputes or claims by the Borrower’s customers exceeding $10,000 individually or
$25,000 in the aggregate during any fiscal year; (ii) credit memos exceeding
$10,000 individually or $25,000 in the aggregate during any fiscal year;; and
(iii) any goods returned to or recovered by the Borrower exceeding $10,000
individually or $25,000 in the aggregate during any fiscal year and excluding
valid warranty work.
          (k) Officers and Directors. Promptly upon knowledge thereof, notice of
any change in the persons constituting the Borrower’s Officers and Directors.
          (l) Collateral. Promptly upon knowledge thereof, notice of any
material loss of or material damage to any Collateral or of any substantial
adverse change in any Collateral or the prospect of payment thereof.
          (m) Commercial Tort Claims. Promptly upon knowledge thereof, notice of
any commercial tort claims it may bring against any Person, including the name
and address of each defendant, a summary of the facts, an estimate of the
Borrower’s damages, copies of any complaint or demand letter submitted by the
Borrower, and such other information as the Lender may request.
          (n) Intellectual Property.
     (i) 30 days prior written notice of Borrower’s intent to acquire material
Intellectual Property Rights; except for transfers permitted under Section 6.17,
the Borrower will give the Lender 30 days prior written notice of its intent to
dispose of material Intellectual Property Rights and upon request shall provide
the Lender with copies of all proposed documents and agreements concerning such
rights.
     (ii) Promptly upon knowledge thereof, notice of (A) any Infringement of its
Intellectual Property Rights by others, (B) claims that the Borrower is
Infringing another Person’s Intellectual Property Rights and (C) any threatened
cancellation, termination or material limitation of its Intellectual Property
Rights.
     (iii) Promptly upon receipt, copies of all registrations and filings with
respect to its Intellectual Property Rights.

31

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

 

          (o) Reports to Owners. Promptly upon their distribution, copies of all
financial statements, reports and proxy statements which the Borrower shall have
sent to its Owners.
          (p) SEC Filings. Promptly after the sending or filing thereof, copies
of all regular and periodic reports which the Borrower shall file with the
Securities and Exchange Commission or any national securities exchange.
          (q) Tax Returns of the Borrower. As soon as possible, and in any event
no later than five days after they are due to be filed or after any statutory
extension, copies of the state and federal income tax returns and all schedules
thereto of the Borrower.
          (r) Violations of Law. Promptly upon knowledge thereof, notice of the
Borrower’s violation of any law, rule or regulation, the non-compliance with
which could materially and adversely affect the financial condition, properties
or operations of the Borrower.
          (s) Other Reports. From time to time, with reasonable promptness, any
and all receivables schedules, inventory reports, collection reports, deposit
records, equipment schedules, copies of invoices to account debtors, shipment
documents and delivery receipts for goods sold, and such other material,
reports, records or information as the Lender may request.
     Section 6.2 Financial Covenants.
          (a) Minimum Earnings Before Taxes. The Borrower will achieve Earnings
Before Taxes each period defined below of not less than the amount set forth for
each such period below:

          Period to Date Pretax Period   Profit
April, 2007
  $(875,000) April through May, 2007   $(1,325,000) April through June, 2007  
$(1,575,000) April through July, 2007   $(1,725,000) April through August, 2007
  $(1,775,000)       Fiscal Year 2008 through:     September, 2007   $0 October,
2007   $0 November, 2007   $300,000 December, 2007   $400,000 January, 2008  
$500,000 February, 2008   $600,000

32

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

 

          (b) Minimum Debt Service Coverage Ratio. The Borrower will maintain,
as of each year end, a Debt Service Coverage Ratio of not less than 1.1 to 1.0.,
during each fiscal year ending described below:

              Minimum Debt Service  
Period
  Coverage Ratio  
Through August, 2008
  1.1 to 1.00  
Through August, 2009
  1.1 to 1.00  
Through August, 2010
  1.1 to 1.00  

          (c) Capital Expenditures. The Borrower will not incur or contract to
incur Capital Expenditures of more than $500,000 nor more than $100,000
unfinanced Capital Expenditures, in the aggregate during any fiscal year and for
the period from April to August, 2007. The Lender and the Borrower will review
the Capital Expenditures limits after the first quarter of Fiscal Year 2008 to
determine whether an amendment is appropriate.
     Section 6.3 Permitted Liens; Financing Statements.
     (a) The Borrower will not create, incur or suffer to exist any Lien upon or
of any of its assets, now owned or hereafter acquired, to secure any
indebtedness; excluding, however, from the operation of the foregoing, the
following (each a “Permitted Lien”; collectively, “Permitted Liens”):
     (i) In the case of any of the Borrower’s property which is not Collateral,
covenants, restrictions, rights, easements and minor irregularities in title
which do not materially interfere with the Borrower’s business or operations as
presently conducted;
     (ii) Liens in existence on the date hereof and listed in Schedule 6.3
hereto, securing indebtedness for borrowed money permitted under this Agreement;
     (iii) The Security Interest and Liens created by the Security Documents;
and
     (iv) Purchase money Liens relating to the acquisition of machinery and
equipment of the Borrower not exceeding the lesser of cost or fair market value
thereof so long as no Default Period is then in existence and none would exist
immediately after such acquisition.
     (b) The Borrower will not amend any financing statements in favor of the
Lender except as permitted by law. Any authorization by the Lender to any Person
to amend financing statements in favor of the Lender shall be in writing.
     Section 6.4 Indebtedness. The Borrower will not incur, create, assume or
permit to exist any indebtedness or liability on account of deposits or advances
or any indebtedness for

33

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

 

borrowed money or letters of credit issued on the Borrower’s behalf, or any
other indebtedness or liability evidenced by notes, bonds, debentures or similar
obligations, except:
     (a) Any existing or future Indebtedness or any other obligations of the
Borrower to the Lender;
     (b) Any indebtedness of the Borrower in existence on the date hereof and
listed in Schedule 6.4 hereto; and
     (c) Any indebtedness relating to Permitted Liens.
     Section 6.5 Guaranties. The Borrower will not assume, guarantee, endorse or
otherwise become directly or contingently liable in connection with any
obligations of any other Person, except:
     (a) The endorsement of negotiable instruments by the Borrower for deposit
or collection or similar transactions in the ordinary course of business; and
     (b) Guaranties, endorsements and other direct or contingent liabilities in
connection with the obligations of other Persons, in existence on the date
hereof and listed in Schedule 6.5 hereto.
     Section 6.6 Investments and Subsidiaries.. The Borrower will not make or
permit to exist any loans or advances to, or make any investment or acquire any
interest whatsoever in, any other Person or Affiliate, including any partnership
or joint venture, nor purchase or hold beneficially any stock or other
securities or evidence of indebtedness of any other Person or Affiliate, except:
     (a) Investments in direct obligations of the United States of America or
any agency or instrumentality thereof whose obligations constitute full faith
and credit obligations of the United States of America having a maturity of one
year or less, commercial paper issued by U.S. corporations rated “A 1” or “A 2”
by Standard & Poor’s Ratings Services or “P 1” or “P 2” by Moody’s Investors
Service or certificates of deposit or bankers’ acceptances having a maturity of
one year or less issued by members of the Federal Reserve System having deposits
in excess of $100,000,000 (which certificates of deposit or bankers’ acceptances
are fully insured by the Federal Deposit Insurance Corporation);
     (b) Travel advances or loans to the Borrower’s Officers and employees not
exceeding at any one time an aggregate of $50,000;
     (c) Prepaid rent not exceeding one month or security deposits; and
     (d) Current investments in the Subsidiaries in existence on the date hereof
and listed in Schedule 5.5 hereto.
     Section 6.7 Dividends and Distributions. Borrower will not declare or pay
any dividends (other than dividends payable solely in stock of the Borrower) on
any class of its

34

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

 

stock, or make any payment on account of the purchase, redemption or other
retirement of any shares of such stock, or other securities or evidence of its
indebtedness or make any distribution in respect thereof, either directly or
indirectly.
     Section 6.8 Salaries. The Borrower will not pay excessive or unreasonable
salaries, bonuses, commissions, consultant fees or other compensation; or
increase the salary, bonus, commissions, consultant fees or other compensation
of any Director, Officer or consultant, or any member of their families, by more
than ten percent (10%) in any one year, either individually or for all such
persons in the aggregate, or pay any such increase from any source other than
profits earned in the year of payment.
     Section 6.9 Books and Records; Collateral Examination, Inspection and
Appraisals.
     (a) The Borrower will keep accurate books of record and account for itself
pertaining to the Collateral and pertaining to the Borrower’s business and
financial condition and such other matters as the Lender may from time to time
request in which true and complete entries will be made in accordance with GAAP
and, upon the Lender’s request, will permit any officer, employee, attorney,
accountant or other agent of the Lender to audit, review, make extracts from or
copy any and all company and financial books and records of the Borrower at all
times during ordinary business hours, and to discuss the Borrower’s affairs with
any of its Directors, Officers, employees or agents.
     (b) The Borrower hereby irrevocably authorizes all accountants and third
parties to disclose and deliver to the Lender or its designated agent, at the
Borrower’s expense, all financial information, books and records, work papers,
management reports and other information in their possession regarding the
Borrower.
     (c) The Borrower will permit the Lender or its employees, accountants,
attorneys or agents, to examine and inspect any Collateral or any other property
of the Borrower at any time during ordinary business hours.
     (d) The Lender may also, from time to time, obtain at the Borrower’s
expense an appraisal of Collateral by an appraiser acceptable to the Lender in
its sole discretion. The Lender agrees that it will limit the cost of such to
one appraisal per year so long as the Borrower is not in default.
     Section 6.10 Account Verification.
     (a) The Lender or its agent may at any time and from time to time send or
require the Borrower to send requests for verification of accounts or notices of
assignment to account debtors and other obligors. The Lender or its agent may
also at any time and from time to time telephone account debtors and other
obligors to verify accounts.
     (b) The Borrower shall pay when due each account payable due to a Person
holding a Permitted Lien (as a result of such payable) on any Collateral.
     Section 6.11 Compliance with Laws.

35

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

 

     (a) The Borrower shall (i) comply with the requirements of applicable laws
and regulations, the non compliance with which would materially and adversely
affect its business or its financial condition and (ii) use and keep the
Collateral, and require that others use and keep the Collateral, only for lawful
purposes, without violation of any federal, state or local law, statute or
ordinance.
     (b) Without limiting the foregoing undertakings, the Borrower specifically
agrees that it will comply with all applicable Environmental Laws and obtain and
comply with all permits, licenses and similar approvals required by any
Environmental Laws, and will not generate, use, transport, treat, store or
dispose of any Hazardous Substances in such a manner as to create any material
liability or obligation under the common law of any jurisdiction or any
Environmental Law.
     (c) The Borrower shall (i) not use or permit the use of the proceeds of the
Credit Facility or any other financial accommodation from the Lender to violate
any of the foreign asset control regulations of the Office of Foreign Assets
Control (“OFAC”) or other applicable law, (ii) comply with all applicable Bank
Secrecy Act laws and regulations, as amended from time to time, and
(iii) otherwise comply with the USA Patriot Act as required by federal law and
the Lender’s policies and practices.
     Section 6.12 Payment of Taxes and Other Claims. The Borrower will pay or
discharge, when due, (a) all taxes, assessments and governmental charges levied
or imposed upon it or upon its income or profits, upon any properties belonging
to it (including the Collateral) or upon or against the creation, perfection or
continuance of the Security Interest, prior to the date on which penalties
attach thereto, (b) all federal, state and local taxes required to be withheld
by it, and (c) all lawful claims for labor, materials and supplies which, if
unpaid, might by law become a Lien upon any properties of the Borrower;
provided, that the Borrower shall not be required to pay any such tax,
assessment, charge or claim whose amount, applicability or validity is being
contested in good faith by appropriate proceedings and for which proper reserves
have been made.
     Section 6.13 Maintenance of Properties.
     (a) The Borrower will keep and maintain the Collateral and all of its other
properties necessary or useful in its business in good condition, repair and
working order (normal wear and tear excepted) and will from time to time replace
or repair any worn, defective or broken parts; provided, however, that nothing
in this covenant shall prevent the Borrower from discontinuing the operation and
maintenance of any of its properties if such discontinuance is, in the
Borrower’s judgment, desirable in the conduct of the Borrower’s business and not
disadvantageous in any material respect to the Lender. The Borrower will take
all commercially reasonable steps necessary to protect and maintain its
Intellectual Property Rights.
     (b) The Borrower will defend the Collateral against all Liens, claims or
demands of all Persons (other than the Lender) claiming the Collateral or any
interest therein. The Borrower will keep all Collateral free and clear of all
Liens except Permitted Liens. The Borrower will take all commercially reasonable
steps necessary to

36

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

 

prosecute any Person Infringing its Intellectual Property Rights and to defend
itself against any Person accusing it of Infringing any Person’s Intellectual
Property Rights.
     Section 6.14 Insurance. The Borrower will obtain and at all times maintain
insurance with insurers acceptable to the Lender, in such amounts, on such terms
(including any deductibles) and against such risks as may from time to time be
required by the Lender, but in all events in such amounts and against such risks
as is usually carried by companies engaged in similar business and owning
similar properties in the same general areas in which the Borrower operates.
Without limiting the generality of the foregoing, the Borrower will at all times
maintain business interruption insurance including coverage for force majeure
and keep all tangible Collateral insured against risks of fire (including
so-called extended coverage), theft, collision (for Collateral consisting of
motor vehicles) and such other risks and in such amounts as the Lender may
reasonably request, with any loss payable to the Lender to the extent of its
interest, and all policies of such insurance shall contain a lender’s loss
payable endorsement for the Lender’s benefit. All policies of liability
insurance required hereunder shall name the Lender as an additional insured.
     Section 6.15 Preservation of Existence. The Borrower will preserve and
maintain its existence and all of its rights, privileges and franchises
necessary or desirable in the normal conduct of its business and shall conduct
its business in an orderly, efficient and regular manner.
     Section 6.16 Delivery of Instruments, etc.. Upon request by the Lender, the
Borrower will promptly deliver to the Lender in pledge all instruments,
documents and chattel paper constituting Collateral, duly endorsed or assigned
by the Borrower.
     Section 6.17 Sale or Transfer of Assets; Suspension of Business Operations.
The Borrower will not without prior written consent of the Lender sell, lease,
assign, transfer or otherwise dispose of (i) the stock of any Subsidiary,
(ii) all or a substantial part of its assets, or (iii) any Collateral or any
interest therein (whether in one transaction or in a series of transactions) to
any other Person other than the sale of Inventory in the ordinary course of
business and will not liquidate, dissolve or suspend business operations. The
Borrower will not transfer any part of its ownership interest in any
Intellectual Property Rights and will not permit any agreement under which it
has licensed Licensed Intellectual Property to lapse, except that the Borrower
may transfer such rights or permit such agreements to lapse if it shall have
reasonably determined that the applicable Intellectual Property Rights are no
longer useful in its business. If the Borrower transfers any Intellectual
Property Rights for value, the Borrower will pay over the proceeds to the Lender
for application to the Indebtedness. The Borrower will not license any other
Person to use any of the Borrower’s Intellectual Property Rights, except that
the Borrower may grant licenses in the ordinary course of its business in
connection with sales of Inventory or provision of services to its customers.
     Section 6.18 Consolidation and Merger; Asset Acquisitions. The Borrower
will not consolidate with or merge into any Person, or permit any other Person
to merge into it, or acquire (in a transaction analogous in purpose or effect to
a consolidation or merger) all or substantially all the assets of any other
Person.

37

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

 

     Section 6.19 Sale and Leaseback. The Borrower will not without the prior
written consent of the Lender enter into any arrangement, directly or
indirectly, with any other Person whereby the Borrower shall sell or transfer
any real or personal property, whether now owned or hereafter acquired, and then
or thereafter rent or lease as lessee such property or any part thereof or any
other property which the Borrower intends to use for substantially the same
purpose or purposes as the property being sold or transferred.
     Section 6.20 Restrictions on Nature of Business. The Borrower will not
engage in any line of business materially different from that presently engaged
in by the Borrower and will not purchase, lease or otherwise acquire assets not
related to its business.
     Section 6.21 Accounting. The Borrower will not adopt any material change in
accounting principles other than as required by GAAP without prior written
consent of the Lender. The Borrower will not adopt, permit or consent to any
change in its fiscal year.
     Section 6.22 Discounts, etc.. After notice from the Lender, the Borrower
will not grant any discount, credit or allowance to any customer of the Borrower
or accept any return of goods sold. Except in the ordinary course of business,
and after written notice to Lender, the Borrower will not at any time modify,
amend, subordinate, cancel or terminate the obligation of any account debtor or
other obligor of the Borrower.
     Section 6.23 Plans. Except as disclosed to the Lender in writing prior to
the date hereof, neither the Borrower nor any ERISA Affiliate will (i) adopt,
create, assume or become a party to any Pension Plan, (ii) incur any obligation
to contribute to any Multiemployer Plan, (iii) incur any obligation to provide
post-retirement medical or insurance benefits with respect to employees or
former employees (other than benefits required by law) or (iv) amend any Plan in
a manner that would materially increase its funding obligations.
     Section 6.24 Place of Business; Name. The Borrower will not transfer its
chief executive office or principal place of business, or move, relocate, close
or sell any business location. The Borrower will not permit any tangible
Collateral or any records pertaining to the Collateral to be located in any
state or area in which, in the event of such location, a financing statement
covering such Collateral would be required to be, but has not in fact been,
filed in order to perfect the Security Interest. The Borrower will not change
its name or jurisdiction of organization.
     Section 6.25 Constituent Documents; S Corporation Status. The Borrower will
not amend its Constituent Documents.
     Section 6.26 Performance by the Lender. If the Borrower at any time fails
to perform or observe any of the foregoing covenants contained in this
Article VI or elsewhere herein, and if such failure shall continue for a period
of ten calendar days after the Lender gives the Borrower written notice thereof
(or in the case of the agreements contained in Section 6.12 and Section 6.14,
immediately upon the occurrence of such failure, without notice or lapse of
time), the Lender may, but need not, perform or observe such covenant on behalf
and in the name, place and stead of the Borrower (or, at the Lender’s option, in
the Lender’s name) and may, but need not, take any and all other actions which
the Lender may reasonably deem necessary to cure or

38

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

 

correct such failure (including the payment of taxes, the satisfaction of Liens,
the performance of obligations owed to account debtors or other obligors, the
procurement and maintenance of insurance, the execution of assignments, security
agreements and financing statements, and the endorsement of instruments); and
the Borrower shall thereupon pay to the Lender on demand the amount of all
monies expended and all costs and expenses (including reasonable attorneys’ fees
and legal expenses) incurred by the Lender in connection with or as a result of
the performance or observance of such agreements or the taking of such action by
the Lender, together with interest thereon from the date expended or incurred at
the Default Rate. To facilitate the Lender’s performance or observance of such
covenants of the Borrower, the Borrower hereby irrevocably appoints the Lender,
or the Lender’s delegate, acting alone, as the Borrower’s attorney in fact
(which appointment is coupled with an interest) with the right (but not the
duty) from time to time to create, prepare, complete, execute, deliver, endorse
or file in the name and on behalf of the Borrower any and all instruments,
documents, assignments, security agreements, financing statements, applications
for insurance and other agreements and writings required to be obtained,
executed, delivered or endorsed by the Borrower hereunder.
ARTICLE VII
EVENTS OF DEFAULT, RIGHTS AND REMEDIES
     Section 7.1 Events of Default. “Event of Default”, wherever used herein,
means any one of the following events:
     (a) Default in the payment of the Revolving Note, the Term Note, or any
default with respect to any other Indebtedness due from the Borrower to the
Lender as such Indebtedness becomes due and payable;
     (b) Default in the performance, or breach, of any covenant or agreement of
the Borrower contained in this Agreement;
     (c) An Overadvance arises as the result of any reduction in the Borrowing
Base, or arises in any manner on terms not otherwise approved of in advance by
the Lender in writing;
     (d) Any Financial Covenant shall become inapplicable due to the lapse of
time and the failure of the Lender and the Borrower to come to an agreement to
amend any such covenant to cover future periods that is acceptable to the Lender
in the Lender’s sole discretion;
     (e) The Borrower or any Guarantor shall be or become insolvent, or admit in
writing its or his inability to pay its or his debts as they mature, or make an
assignment for the benefit of creditors; or the Borrower or any Guarantor shall
apply for or consent to the appointment of any receiver, trustee, or similar
officer for it or him or for all or any substantial part of its or his property;
or such receiver, trustee or similar officer shall be appointed without the
application or consent of the Borrower or such Guarantor, as the case may be; or
the Borrower or any Guarantor shall institute (by petition, application, answer,
consent or otherwise) any bankruptcy, insolvency, reorganization, arrangement,
readjustment of debt, dissolution, liquidation or similar proceeding relating to
it or him

39

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

 

under the laws of any jurisdiction; or any such proceeding shall be instituted
(by petition, application or otherwise) against the Borrower or any such
Guarantor; or any judgment, writ, warrant of attachment or execution or similar
process shall be issued or levied against a substantial part of the property of
the Borrower or any Guarantor (each such occurrence constituting an “Insolvency
Event”);
     (f) A petition shall be filed by or against the Borrower or any Guarantor
under the United States Bankruptcy Code or the laws of any other jurisdiction
naming the Borrower or such Guarantor as debtor;
     (g) Any representation or warranty made by the Borrower in this Agreement,
by any Guarantor in any Guaranty delivered to the Lender, or by the Borrower (or
any of its Officers) or any Guarantor in any agreement, certificate, instrument
or financial statement or other statement contemplated by or made or delivered
pursuant to or in connection with this Agreement or any such Guaranty shall be
incorrect in any material respect;
     (h) The rendering against the Borrower of an arbitration award, a final
judgment, decree or order for the payment of money in excess of $50,000 and the
continuance of such arbitration award, judgment, decree or order unsatisfied and
in effect for any period of 30 consecutive days without a stay of execution;
     (i) A default under any bond, debenture, note or other evidence of material
indebtedness of the Borrower owed to any Person other than the Lender, or under
any indenture or other instrument under which any such evidence of indebtedness
has been issued or by which it is governed, or under any material lease or other
contract, and the expiration of the applicable period of grace, if any,
specified in such evidence of indebtedness, indenture, other instrument, lease
or contract;
     (j) Any Reportable Event, which the Lender determines in good faith might
constitute grounds for the termination of any Pension Plan or for the
appointment by the appropriate United States District Court of a trustee to
administer any Pension Plan, shall have occurred and be continuing 30 days after
written notice to such effect shall have been given to the Borrower by the
Lender; or a trustee shall have been appointed by an appropriate United States
District Court to administer any Pension Plan; or the Pension Benefit Guaranty
Corporation shall have instituted proceedings to terminate any Pension Plan or
to appoint a trustee to administer any Pension Plan; or the Borrower or any
ERISA Affiliate shall have filed for a distress termination of any Pension Plan
under Title IV of ERISA; or the Borrower or any ERISA Affiliate shall have
failed to make any quarterly contribution required with respect to any Pension
Plan under Section 412(m) of the IRC, which the Lender determines in good faith
may by itself, or in combination with any such failures that the Lender may
determine are likely to occur in the future, result in the imposition of a Lien
on the Borrower’s assets in favor of the Pension Plan; or any withdrawal,
partial withdrawal, reorganization or other event occurs with respect to a
Multiemployer Plan which results or could reasonably be expected to result in a
material liability of the Borrower to the Multiemployer Plan under Title IV of
ERISA;

40

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

 

     (k) An event of default shall occur under any Security Document;
     (l) Default in the payment of any amount owed by the Borrower to the Lender
other than any Indebtedness arising hereunder;
     (m) Any breach, default or event of default shall occur under the Borrower
Agreement or any Ex-Im Document;
     (n) The Borrower shall take or participate in any action which would be
prohibited under the provisions of any Subordination Agreement or make any
payment with respect to indebtedness that has been subordinated pursuant to any
Subordination Agreement;
     (o) The Borrower shall fail to employ both a Chief Executive Officer and a
Chief Financial Officer which is, in each case, acceptable to the Lender in its
sole discretion within 60 days of the date hereof;
     (p) The Lender believes in good faith that the prospect of payment in full
of any part of the Indebtedness or that full performance by the Borrower under
the Loan Documents, is impaired, or that there has occurred any material adverse
change in the business or financial condition of the Borrower;
     (q) There has occurred any breach, default or event of default by, or
attributable to, any Affiliate under any agreement between the Affiliate and the
Lender; or
     (r) The indictment of any Director, Officer, or any Owner of at least
twenty percent (20%) of the issued and outstanding common stock of the Borrower
for a felony offence under state or federal law.
     (s) Any Guarantor shall repudiate or purport to revoke its, his or her
Guaranty, or any Guaranty for any reason shall cease to be in full force and
effect as to the Guarantor executing and delivering the same or shall be
judicially declared null and void as to such Guarantor.
     Section 7.2 Rights and Remedies. During any Default Period, the Lender may
exercise any or all of the following rights and remedies:
     (a) The Lender may, by notice to the Borrower, declare the Commitment to be
terminated, whereupon the same shall forthwith terminate;
     (b) The Lender may, by notice to the Borrower, declare the Indebtedness to
be forthwith due and payable, whereupon all Indebtedness shall become and be
forthwith due and payable, without presentment, notice of dishonor, protest or
further notice of any kind, all of which the Borrower hereby expressly waives;

41

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

 

     (c) The Lender may, without notice to the Borrower and without further
action, apply any and all money owing by the Lender to the Borrower to the
payment of the Indebtedness;
     (d) The Lender may exercise and enforce any and all rights and remedies
available upon default to a secured party under the UCC, including the right to
take possession of Collateral, or any evidence thereof, proceeding without
judicial process or by judicial process (without a prior hearing or notice
thereof, which the Borrower hereby expressly waives) and the right to sell,
lease or otherwise dispose of any or all of the Collateral (with or without
giving any warranties as to the Collateral, title to the Collateral or similar
warranties), and, in connection therewith, the Borrower will on demand assemble
the Collateral and make it available to the Lender at a place to be designated
by the Lender which is reasonably convenient to both parties;
     (e) The Lender may exercise and enforce its rights and remedies under the
Loan Documents;
     (f) The Lender may without regard to any waste, adequacy of the security or
solvency of the Borrower, apply for the appointment of a receiver of the
Collateral, to which appointment the Borrower hereby consents, whether or not
foreclosure proceedings have been commenced under the Security Documents and
whether or not a foreclosure sale has occurred; and
     (g) The Lender may exercise any other rights and remedies available to it
by law or agreement.
     Notwithstanding the foregoing, upon the occurrence of an Event of Default
described in Section 7.1(e) or (f), the Indebtedness shall be immediately due
and payable automatically without presentment, demand, protest or notice of any
kind. If the Lender sells any of the Collateral on credit, the Indebtedness will
be reduced only to the extent of payments actually received. If the purchaser
fails to pay for the Collateral, the Lender may resell the Collateral and shall
apply any proceeds actually received to the Indebtedness.
     Section 7.3 Certain Notices. If notice to the Borrower of any intended
disposition of Collateral or any other intended action is required by law in a
particular instance, such notice shall be deemed commercially reasonable if
given (in the manner specified in Section 8.3) at least ten calendar days before
the date of intended disposition or other action.
ARTICLE VIII
MISCELLANEOUS
     Section 8.1 No Waiver; Cumulative Remedies; Compliance with Laws. No
failure or delay by the Lender in exercising any right, power or remedy under
the Loan Documents or the Ex-Im Documents shall operate as a waiver thereof; nor
shall any single or partial exercise of any such right, power or remedy preclude
any other or further exercise thereof or the exercise of any other right, power
or remedy under the Loan Documents or the Ex-Im Documents. The remedies provided
in the Loan Documents or the Ex-Im Documents are cumulative and not exclusive of
any remedies provided by law. The Lender may comply with any applicable state

42

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

 

or federal law requirements in connection with a disposition of the Collateral
and such compliance will not be considered adversely to affect the commercial
reasonableness of any sale of the Collateral.
     Section 8.2 Amendments, Etc. No amendment, modification, termination or
waiver of any provision of any Loan Document or consent to any departure by the
Borrower therefrom or any release of a Security Interest shall be effective
unless the same shall be in writing and signed by the Lender, and then such
waiver or consent shall be effective only in the specific instance and for the
specific purpose for which given. No notice to or demand on the Borrower in any
case shall entitle the Borrower to any other or further notice or demand in
similar or other circumstances.
     Section 8.3 Notices; Communication of Confidential Information; Requests
for Accounting. Except as otherwise expressly provided herein, all notices,
requests, demands and other communications provided for under the Loan Documents
shall be in writing and shall be (a) personally delivered, (b) sent by first
class United States mail, (c) sent by overnight courier of national reputation,
(d) transmitted by telecopy, or (e) sent as electronic mail, in each case
delivered or sent to the party to whom notice is being given to the business
address, telecopier number, or e mail address set forth below next to its
signature or, as to each party, at such other business address, telecopier
number, or e mail address as it may hereafter designate in writing to the other
party pursuant to the terms of this Section. All such notices, requests, demands
and other communications shall be deemed to be an authenticated record
communicated or given on (a) the date received if personally delivered, (b) when
deposited in the mail if delivered by mail, (c) the date delivered to the
courier if delivered by overnight courier, or (d) the date of transmission if
sent by telecopy or by e mail, except that notices or requests delivered to the
Lender pursuant to any of the provisions of Article II shall not be effective
until received by the Lender. All notices, financial information, or other
business records sent by either party to this Agreement may be transmitted,
sent, or otherwise communicated via such medium as the sending party may deem
appropriate and commercially reasonable; provided, however, that the risk that
the confidentiality or privacy of such notices, financial information, or other
business records sent by either party may be compromised shall be borne
exclusively by the Borrower. All requests for an accounting under Section 9-210
of the UCC (i) shall be made in a writing signed by a Person authorized under
Section 2.2(a), (ii) shall be personally delivered, sent by registered or
certified mail, return receipt requested, or by overnight courier of national
reputation, (iii) shall be deemed to be sent when received by the Lender and
(iv) shall otherwise comply with the requirements of Section 9-210 of the UCC.
The Borrower requests that the Lender respond to all such requests which on
their face appear to come from an authorized individual and releases the Lender
from any liability for so responding. The Borrower shall pay the Lender the
maximum amount allowed by law for responding to such requests.
     Section 8.4 Further Documents. The Borrower will from time to time execute,
deliver, endorse and authorize the filing of any and all instruments, documents,
conveyances, assignments, security agreements, financing statements, control
agreements and other agreements and writings that the Lender may reasonably
request in order to secure, protect, perfect or enforce the Security Interest or
the Lender’s rights under the Loan Documents (but any failure to request or
assure that the Borrower executes, delivers, endorses or authorizes the filing
of any such item shall not affect or impair the validity, sufficiency or
enforceability of the Loan

43

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

 

Documents and the Security Interest, regardless of whether any such item was or
was not executed, delivered or endorsed in a similar context or on a prior
occasion).
     Section 8.5 Costs and Expenses. The Borrower shall pay on demand all costs
and expenses, including reasonable attorneys’ fees, incurred by the Lender in
connection with the Indebtedness, this Agreement, the Loan Documents, any Letter
of Credit and any other document or agreement related hereto or thereto, and the
transactions contemplated hereby, including all such costs, expenses and fees
incurred in connection with the negotiation, preparation, execution, amendment,
administration, performance, collection and enforcement of the Indebtedness and
all such documents and agreements and the creation, perfection, protection,
satisfaction, foreclosure or enforcement of the Security Interest.
     Section 8.6 Indemnity. In addition to the payment of expenses pursuant to
Section 8.5, the Borrower shall indemnify, defend and hold harmless the Lender,
and any of its participants, parent corporations, subsidiary corporations,
affiliated corporations, successor corporations, and all present and future
officers, directors, employees, attorneys and agents of the foregoing (the
“Indemnitees”) from and against any of the following (collectively, “Indemnified
Liabilities”):
     (i) Any and all transfer taxes, documentary taxes, assessments or charges
made by any governmental authority by reason of the execution and delivery of
the Loan Documents or the making of the Advances;
     (ii) Any claims, loss or damage to which any Indemnitee may be subjected if
any representation or warranty contained in Section 5.14 proves to be incorrect
in any respect or as a result of any violation of the covenant contained in
Section 6.11(b); and
     (iii) Any and all other liabilities, losses, damages, penalties, judgments,
suits, claims, costs and expenses of any kind or nature whatsoever (including
the reasonable fees and disbursements of counsel) in connection with the
foregoing and any other investigative, administrative or judicial proceedings,
whether or not such Indemnitee shall be designated a party thereto, which may be
imposed on, incurred by or asserted against any such Indemnitee, in any manner
related to or arising out of or in connection with the making of the Advances
and the Loan Documents or the use or intended use of the proceeds of the
Advances.
     If any investigative, judicial or administrative proceeding arising from
any of the foregoing is brought against any Indemnitee, upon such Indemnitee’s
request, the Borrower, or counsel designated by the Borrower and satisfactory to
the Indemnitee, will resist and defend such action, suit or proceeding to the
extent and in the manner directed by the Indemnitee, at the Borrower’s sole
costs and expense. Each Indemnitee will use its best efforts to cooperate in the
defense of any such action, suit or proceeding. If the foregoing undertaking to
indemnify, defend and hold harmless may be held to be unenforceable because it
violates any law or public policy, the Borrower shall nevertheless make the
maximum contribution to the payment and satisfaction of each of the Indemnified
Liabilities which is permissible under applicable law. The

44

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

 

Borrower’s obligations under this Section 8.6 shall survive the termination of
this Agreement and the discharge of the Borrower’s other obligations hereunder.
     Section 8.7 Participants. The Lender and its participants, if any, are not
partners or joint venturers, and the Lender shall not have any liability or
responsibility for any obligation, act or omission of any of its participants.
All rights and powers specifically conferred upon the Lender may be transferred
or delegated to any of the Lender’s participants, successors or assigns.
     Section 8.8 Execution in Counterparts; Telefacsimile Execution. This
Agreement and other Loan Documents may be executed in any number of
counterparts, each of which when so executed and delivered shall be deemed to be
an original and all of which counterparts, taken together, shall constitute but
one and the same instrument. Delivery of an executed counterpart of this
Agreement or any other Loan Document by telefacsimile or other electronic means
shall be equally as effective as delivery of an original executed counterpart of
this Agreement or such other Loan Document. Any party delivering an executed
counterpart of this Agreement or any other Loan Document by telefacsimile or
other electronic means also shall deliver an original executed counterpart of
this Agreement or such other Loan Document but the failure to deliver an
original executed counterpart shall not affect the validity, enforceability, and
binding effect of this Agreement or such other Loan Document.
     Section 8.9 Retention of the Borrower’s Records. The Lender shall have no
obligation to maintain any electronic records or any documents, schedules,
invoices, agings, or other papers delivered to the Lender by the Borrower or in
connection with the Loan Documents for more than 30 days after receipt by the
Lender. If there is a special need to retain specific records, the Borrower must
inform the Lender of its need to retain those records with particularity, which
must be delivered in accordance with the notice provisions of Section 8.3 within
30 days of the Lender taking control of same.
     Section 8.10 Binding Effect; Assignment; Complete Agreement; Sharing
Information. The Loan Documents shall be binding upon and inure to the benefit
of the Borrower and the Lender and their respective successors and assigns,
except that the Borrower shall not have the right to assign its rights
thereunder or any interest therein without the Lender’s prior written consent.
To the extent permitted by law, the Borrower waives and will not assert against
any assignee any claims, defenses or set-offs which the Borrower could assert
against the Lender. This Agreement shall also bind all Persons who become a
party to this Agreement as a borrower. This Agreement, together with the Loan
Documents, comprises the complete and integrated agreement of the parties on the
subject matter hereof and supersedes all prior agreements, written or oral, on
the subject matter hereof. To the extent that any provision of this Agreement
contradicts other provisions of the Loan Documents, this Agreement shall
control. Without limiting the Lender’s right to share information regarding the
Borrower and its Affiliates with the Lender’s participants, accountants, lawyers
and other advisors, the Lender may share any and all information they may have
in their possession regarding the Borrower and its Affiliates, and the Borrower
waives any right of confidentiality it may have with respect to such sharing of
information.

45

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

 

     Section 8.11 Severability of Provisions. Any provision of this Agreement
which is prohibited or unenforceable shall be ineffective to the extent of such
prohibition or unenforceability without invalidating the remaining provisions
hereof.
     Section 8.12 Headings. Article, Section and subsection headings in this
Agreement are included herein for convenience of reference only and shall not
constitute a part of this Agreement for any other purpose.
     Section 8.13 Governing Law; Jurisdiction, Venue; Waiver of Jury Trial. The
Loan Documents shall be governed by and construed in accordance with the
substantive laws (other than conflict laws) of the State of Minnesota. The
parties hereto hereby (i) consent to the personal jurisdiction of the state and
federal courts located in the State of Minnesota in connection with any
controversy related to this Agreement; (ii) waive any argument that venue in any
such forum is not convenient; (iii) agree that any litigation initiated by the
Lender or the Borrower in connection with this Agreement or the other Loan
Documents may be venued in either the state or federal courts located in
Minneapolis, Hennepin County, Minnesota; and (iv) agree that a final judgment in
any such suit, action or proceeding shall be conclusive and may be enforced in
other jurisdictions by suit on the judgment or in any other manner provided by
law.
     Section 8.14 Attorneys’ Fees. References in the Loan Documents to fees and
expenses of attorneys or counsel shall include all such fees and expenses,
whether incurred at the trial or appellate level, in an arbitration or
administrative proceeding, in bankruptcy (including, without limitation, any
adversary proceeding, contested matter or motion) or otherwise incurred.
[The remainder of this page intentionally left blank.]

46

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

 

     THE BORROWER AND THE LENDER WAIVE ANY RIGHT TO TRIAL BY JURY IN ANY ACTION
AT LAW OR IN EQUITY OR IN ANY OTHER PROCEEDING BASED ON OR PERTAINING TO THIS
AGREEMENT OR ANY OTHER LOAN DOCUMENT.
     Borrower’s Initials /s/ MT ; Lender’s Initials /s/ MG.
     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized as of the date
first above written.

HEI, INC.
1439 Steiger Lake Lane
Victoria, MN 55386
Telecopier: (952) 443-2668
Attention: Mark Thomas
e-mail: Mark.Thomas@heii.com
Wells Fargo Bank, National Association,
Wells Fargo Business Credit
MAC N9312-040
Sixth and Marquette
Minneapolis, Minnesota 55479
Telecopier: (612) 673-8589
Attention: Michael L. Guillou
e-mail: Michael.l.guillou@wellsfargo.com
GUARANTOR:
736 Widsten Circle
Wayzata, MN 55391
Telecopier:                     
e-mail:                     

          HEI, INC.    
 
       
 
       
By:
  /s/ Mark Thomas
 
    Name: Mark Thomas     Its: Chief Executive Officer    
 
        WELLS FARGO BANK, NATIONAL     ASSOCIATION    
 
       
 
       
By:
  /s/ Michael L. Guillou
 
    Name: Michael L. Guillou     Its: Relationship Manager    
 
       
 
       
 
        /s/ Thomas F. Leahy           Thomas F. Leahy    

[Signature page to Credit and Security Agreement]

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

 

Table of Exhibits and Schedules

     
Exhibit A
  Form of Revolving Note
Exhibit B
  Form of Term Note
Exhibit C
  Compliance Certificate
Exhibit D
  Premises
Schedule 5.1
  Trade Names, Chief Executive Office, Principal Place of Business, and
Locations of Collateral
Schedule 5.2
  Capitalization and Organizational Chart
Schedule 5.5
  Subsidiaries
Schedule 5.7
  Litigation Matters
Schedule 5.11
  Intellectual Property Disclosures
Schedule 5.14
  Environmental Matters
Schedule 6.3
  Permitted Liens
Schedule 6.4
  Permitted Indebtedness
Schedule 6.5
  Guaranties

 

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

 

Exhibit A to Credit and Security Agreement
REVOLVING NOTE

     
$8,000,000.00
  May                     , 2007

     For value received, the undersigned, HEI, Inc., a Minnesota corporation
(the “Borrower”), hereby promises to pay to the order of WELLS FARGO BANK,
NATIONAL ASSOCIATION (the “Lender”), acting through its Wells Fargo Business
Credit operating division, on the Termination Date referenced in the Credit and
Security Agreement dated the same date as this Revolving Note that was entered
into by the Lender and the Borrower (as amended from time to time, the “Credit
Agreement”), at the Lender’s office located at Minneapolis, Minnesota, or at any
other place designated at any time by the holder hereof, in lawful money of the
United States of America and in immediately available funds, the principal sum
of Eight Million Dollars ($8,000,000.00) or the aggregate unpaid principal
amount of all Revolving Advances made by the Lender to the Borrower under the
Credit Agreement, together with interest on the principal amount hereunder
remaining unpaid from time to time, computed on the basis of the actual number
of days elapsed and a 360-day year, from the date hereof until this Revolving
Note is fully paid at the rate from time to time in effect under the Credit
Agreement.
     This Revolving Note is the Revolving Note referenced in the Credit
Agreement and is subject to the terms of the Credit Agreement, which provides,
among other things, for acceleration hereof. Principal and interest due
hereunder shall be payable as provided in the Credit Agreement, and this
Revolving Note may be prepaid only in accordance with the terms of the Credit
Agreement. This Revolving Note is secured, among other things, pursuant to the
Credit Agreement and the Security Documents as therein defined, and may now or
hereafter be secured by one or more other security agreements, mortgages, deeds
of trust, assignments or other instruments or agreements.
     The Borrower shall pay all costs of collection, including reasonable
attorneys’ fees and legal expenses if this Revolving Note is not paid when due,
whether or not legal proceedings are commenced.
     Presentment or other demand for payment, notice of dishonor and protest are
expressly waived.

                  HEI, INC.    
 
           
 
  By:        
 
  Name:  
 
Mark Thomas    
 
  Its:   Chief Executive Officer and Chief Financial Officer    

A-1

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

 

Exhibit B to Credit and Security Agreement
TERM NOTE

     
$340,000.00
  May                     , 2007

     For value received, the undersigned, HEI, Inc., a Minnesota corporation
(the “Borrower”), hereby promises to pay to the order of WELLS FARGO BANK,
NATIONAL ASSOCIATION (the “Lender”), acting through its Wells Fargo Business
Credit operating division, on the Termination Date set forth in the Credit and
Security Agreement dated the same date as this Term Note that was entered into
by the Lender and the Borrower (as amended from time to time, the “Credit
Agreement”), at Lender’s office located at Minneapolis, Minnesota, or at any
other place designated at any time by the holder hereof, in lawful money of the
United States of America and in immediately available funds, the principal sum
of Three Hundred Forty Thousand Dollars ($340,000.00) or the aggregate unpaid
principal amount of all Term Advances made by the Lender to the Borrower under
the Credit Agreement together with interest on the principal amount hereunder
remaining unpaid from time to time, computed on the basis of the actual number
of days elapsed and a 360-day year, from the date hereof until this Term Note is
fully paid at the rate from time to time in effect under the Credit Agreement.
     This Term Note is the Term Note referred to in the Credit Agreement, and is
subject to the terms of, the Credit Agreement, which provides, among other
things, for acceleration hereof. Principal and interest due hereunder shall be
payable as provided in the Credit Agreement, and this Term Note may be prepaid
only in accordance with the terms of the Credit Agreement. This Term Note is
secured, among other things, pursuant to the Credit Agreement and the Security
Documents as therein defined, and may now or hereafter be secured by one or more
other security agreements, mortgages, deeds of trust, assignments or other
instruments or agreements.
     The Borrower hereby agrees to pay all costs of collection, including
attorneys’ fees and legal expenses in the event this Term Note is not paid when
due, whether or not legal proceedings are commenced.
     Presentment or other demand for payment, notice of dishonor and protest are
expressly waived.

             
 
  By:        
 
  Name:  
 
Mark Thomas    
 
  Its:   Chief Executive Officer and Chief Financial Officer    

B-1

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

 

Exhibit C to Credit and Security Agreement
COMPLIANCE CERTIFICATE

     
To:
  Wells Fargo Bank, National Association
Attn:
  Michael L. Guillou
Date:
  ___, 200___
Subject:
  Financial Statements

     In accordance with our Credit and Security Agreement dated as of [___] (as
amended from time to time, the “Credit Agreement”), attached are the financial
statements of ___ (the “Borrower”) as of and for ______, 200 ___ (the “Reporting
Date”) and the year-to-date period then ended (the “Current Financials”). All
terms used in this certificate have the meanings given in the Credit Agreement.
     I certify that the Current Financials have been prepared in accordance with
GAAP, subject to year-end audit adjustments, and fairly present the Borrower’s
financial condition as of the date thereof.
     I further hereby certify as follows: Events of Default. (Check one):

  o   The undersigned does not have knowledge of the occurrence of a Default or
Event of Default under the Credit Agreement except as previously reported in
writing to the Lender.     o   The undersigned has knowledge of the occurrence
of a Default or Event of Default under the Credit Agreement not previously
reported in writing to the Lender and attached hereto is a statement of the
facts with respect to thereto. The Borrower acknowledges that pursuant to
Section 2.5(c) of the Credit Agreement, the Lender may impose the Default Rate
at any time during the resulting Default Period.

     Material Adverse Change in Litigation Matters of the Borrower. I further
hereby certify as follows (check one):

  o   The undersigned has no knowledge of any material adverse change to the
litigation exposure of the Borrower or any of its Affiliates or of any
Guarantor.     o   The undersigned has knowledge of material adverse changes to
the litigation exposure of the Borrower or any of its Affiliates or of any
Guarantor not previously disclosed in Schedule 5.7. Attached to this Certificate
is a statement of the facts with respect thereto.

Financial Covenants. I further hereby certify as follows (check and complete
each of the following):
     1. Minimum Earnings Before Taxes. Pursuant to Section 6.2(a) of the Credit
Agreement, the Borrower’s Earnings Before Taxes for the [                    ]
period ending on the Reporting Date, was $___, which o satisfies o does not
satisfy the requirement that such amount be not less than ___:

C-1

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

 

            Minimum Earnings Before Period     Taxes
April, 2007
  $ (875,000)  
April through May, 2007
  $ (1,325,000)  
April through June, 2007
  $ (1,575,000)  
April through July, 2007
  $ (1,725,000)  
April through August, 2007
  $ (1,775,000)  
 
 
Fiscal Year 2008 through:
   
September, 2007
  $ 0  
October, 2007
  $ 0  
November, 2007
  $ 300,000  
December, 2007
  $ 400,000  
January, 2008
  $ 500,000  
February, 2008
  $ 600,000  

     2. Minimum Debt Service Coverage Ratio. Pursuant to Section 6.2(b) of the
Credit Agreement, as of the Reporting Date, the Borrower’s Debt Service Coverage
Ratio was [___] to 1.00, which o satisfies o does not satisfy the requirement
that such ratio be no less than the applicable ratio set forth in the table
below on the Reporting Date:

          Minimum Debt Service   Period   Coverage Ratio  
Through August, 2008
  1.1 to 1.00
Through August, 2009
  1.1 to 1.00
Through August, 2010
  1.1 to 1.00

     3. Capital Expenditures. Pursuant to Section 6.2(c) of the Credit
Agreement, for the year-to-date period ending on the Reporting Date, the
Borrower has expended or contracted to expend during the reporting period ended
___, 200___, for Capital Expenditures, $ ___ in the aggregate and at most $ ___
for any nonfinanced Capital Expenditures, which o satisfies o does not satisfy
the requirement that such expenditures not exceed $500,000 in the aggregate and
$100,000 for any nonfinanced Capital Expenditure during such year.
     4. Salaries. As of the Reporting Date, the Borrower has not paid excessive
or unreasonable salaries, bonuses, commissions, consultant fees or other
compensation, or increased the salary, bonus, commissions, consultant fees or
other compensation of any Director, Officer or consultant, or any member of
their families, by more than ten percent (10%) over the amount paid in the
Borrower’s previous fiscal year, either individually or for all such persons in
the aggregate, and has not paid any increase from any source other than profits
earned in the year of payment, and as a consequence o is o is not in compliance
with Section 6.8 of the Credit Agreement.

 

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

 

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

             
 
  By:        
 
  Name:  
 
   
 
  Its:  
 
Chief Financial Officer    

 

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

 

Exhibit D to Credit and Security Agreement
PREMISES
The Premises referred to in the Credit and Security Agreement are legally
described as follows:
Victoria Location – 1495 Steiger Lake Lane, Victoria, MN 55386, Legal
description – Lot 2, Block 1, Point Victoria, situated in Carver County,
Minnesota
Chanhassen Location – 1546 Lake Drive West, Chanhassen, MN 55317
Boulder Location – 4801 North 63rd Street, Boulder, CO 80301
Tempe Location – 610 South Rockford Drive, Tempe, AZ 85281

D-1

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

 

Schedule 5.1 to Credit and Security Agreement
TRADE NAMES, CHIEF EXECUTIVE OFFICE, PRINCIPAL PLACE OF BUSINESS,
AND LOCATIONS OF COLLATERAL
TRADE NAMES
HEI, Inc., Microelectronics Operations (Victoria), Advanced Medical Operations
(Boulder), High Density Interconnect Operations (Tempe) and RFID Operations
(Chanhassen)
CHIEF EXECUTIVE OFFICE/PRINCIPAL PLACE OF BUSINESS
1495 Steiger Lake Lane, Victoria, MN 55386
OTHER INVENTORY AND EQUIPMENT LOCATIONS
Chanhassen Location – 1546 Lake Drive West, Chanhassen, MN 55317
Boulder Location – 4801 North 63rd Street, Boulder, CO 80301
Tempe Location – 610 South Rockford Drive, Tempe, AZ 85281

D-2

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

 

Schedule 5.2 to Credit and Security Agreement
CAPITALIZATION AND ORGANIZATIONAL CHART
For Holders of more than 5% of outstanding stock on date of Closing.

                                      No. of shares (after                
exercise of all rights   Percent interest on a Holder   Type of Rights/Stock  
to acquire shares)   fully diluted basis
Thomas F. Leahy
  Common and Preferred Stock     1,128,054       11.8 %
 
                       
Minneapolis Portfolio Management Group LLC
  Common Stock     905,246       9.5 %
 
                       
Perkins Capital Management, Inc.
  Common Stock     748,350       7.8 %

HEI, Inc. has one subsidiary, Cross Technology, Inc. that is 100% owned by HEI,
Inc.
S-5.2-1

 

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

 

Schedule 5.5 to Credit and Security Agreement
SUBSIDIARIES
HEI, Inc. has one subsidiary, Cross Technology, Inc. that is 100% owned by HEI,
Inc.
S-5.5-1

 

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

 

Schedule 5.7 to Credit and Security Agreement
LITIGATION MATTERS
HEI, Inc. is not involved in any litigation at the time of this signing and has
not received notice of any threatened litigation as of this signing
S-5.7-1

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

 

Schedule 5.11 to Credit and Security Agreement
INTELLECTUAL PROPERTY DISCLOSURES
(Patents, Trademarks, and Copyrights)
Patents

              Docket No.   Title   Serial/Patent No.   Status
14605.113
  Information Technology System for Health Care Environments (fka Information
Technology System that is Suitable for Medical Applications)   10/161, 168
(formerly
Provisions #60/295,181)   B — Pending
10139.007-CA-01
  Document Reading Apparatus    1,245,765   A — Issued
10139-0008-CA-01
  Photo-Optic Transducing Head Assembly    1,265,547   A — Issued
10139.0016-US-01
  Method of Mount DC Block Capacitor for Microwave Circuit and Packaging  
 6,646,521   A — Issued
10139.0016-TA-01
  Method of Mount DC Block Capacitor for Microwave Circuit and Packaging  
 194018   A — Issued
10139.0016-EP-WO
  Method of Mount DC Block Capacitor for Microwave Circuit and Packaging  
 1,968,674   B — Pending
10139.0016-JP-WO
  Method of Mount DC Block Capacitor for Microwave Circuit and Packaging  
 2527567   B — Pending
10139.0016-KS-WO
  Method of Mount DC Block Capacitor for Microwave Circuit and Packaging  
 37003802   B — Pending
10139.0016-MY-01
  Method of Mount DC Block Capacitor for Microwave Circuit and packaging  
 14267   B — Pending
10139.0016-TH-01
  Method of Mount DC Block Capacitor for Microwave Circuit and Packaging  
 68354   B — Pending
10139.0017-US-01
  Interconnection Device and Method    6,294,966   A — Issued
10139.0017-US-C1
  Interconnection Device and Method    6,469,592   A — Issued
10139.0017-TA-01
  Interconnection Device and Method    156859   A — Issued
10139.0017-CC-WO
  Interconnection Device and Method    8186499   B — Pending
10139.0017-EP-WO
  Interconnection Device and Method    986661.7   B — Pending
10139.0017-IN-WO
  Interconnection Device and Method    2702   B — Pending
10139.0017-JP-WO
  Interconnection Device and Method    1550811   B — Pending
10139.0017-KS-WO
  Interconnection Device and Method    27008541   B — Pending
10139.0017-MY-01
  Interconnection Device and Method    6125   B — Pending
10139.0017-PH-01
  Interconnection Device and Method    10003580   B — Pending
101039.0017-TH-01
  Interconnection Device and Method    62789   B — Pending
10139.0017-US-C2
  interconnection Device and Method    10/228,587   B — Pending
10139.0022-US-01
  Integrated Mem Switch    10/014,987   B — Pending
10139.0022-US-D1
  Low Voltage Mem Switch    10/409,742   B — Pending
10139.0027-TA-01
  Test Methods, Systems, and Probes for High-Frequency Wireless Communications
Devices    189906   A — Issued
10139.0027-CC-WO
  Test Methods, Systems, and Probes for High-Frequency Wireless Communications
Devices    18149812   A — Issued
10139.0027-EP-WO
  Test Methods, Systems, and Probes for high-Frequency Wireless Communications
Devices    1959300.3   B — Pending
10139.0027-IN-WO
  Test Methods, Systems, and Probes for High-Frequency Wireless Communications
Devices    10503   B — Pending

S-5.11-1

 

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

 

              Docket No.   Title   Serial/Patent No.   Status
10139.0027-JP-WO
  Test Methods, Systems, and Probes for High-Frequency Wireless Communications
Device    2516659   B — Pending
10139.0027-US-C1
  Test Methods, Systems, and Probes for High-Frequency Wireless Communications
Device    09/725,646   B -Pending
10139.0031-US-01
  Flexible Circuit Board having an
Integrally Formed Battery    10/789,108   B — Pending
116.002US1
  EDGE TERMINALS FOR ELECTRONIC CIRCUIT
MODULES    08/542896   A — Issued
116.002CA1
  EDGE TERMINALS FOR ELECTRONIC CIRCUIT
MODULES    2187582   B — Pending
116.006US1
  HIGH DENSITY STACKED CIRCUIT MODULE    09/050318   A — Issued
116.006CA1
  HIGH DENSITY STACKED CIRCUIT MODULE    2266980   B — Pending
116.010US1
  HEARING-AID ASSEMBLY USING FOLDED FLEX
CIRCUITS    09/792700   A — Issued
116.010US2
  HEARING-AID ASSEMBLY USING FOLDED FLEX
CIRCUITS    10/752414   B — Pending
116.012US1
  STRUCTURES AND ASSEMBLY METHODS FOR
RADIO-FREQUENCY-IDENTIFICATION MODULES    09/922245   A — Issued
116.012TH1
  STRUCTURES AND ASSEMBLY METHODS FOR
RADIO-FREQUENCY-IDENTIFICATION MODULES AND METHODS    67473   B — Pending
116.012US2
  STRUCTURES AND ASSEMBLY METHODS FOR
RADIO-FREQUENCY-IDENTIFICATION MODULES    10/785928   B — Pending
116.015CA1
  CODELOCK Design    547638   B — Pending
14605-125P
(provisions)
50611-292864
(Utility)
  Collaboration Among Health Care Instruments    60/384,902
(provisional) 10/453,442 (utility)   B — Pending
 
  Driving and Clamping Power Regulation Technique for Continuous, In-Phase,
Full-Duration, Switch-Mode Resonant Converter Power Supply    5,267,138   A —
Issued
 
  System and Method for Coupling a Plurality of Medical Devices in a Serverless
Grid       B — Pending

Trademarks

          Trademark name   Trademark Number   Reference #
Lin iT
  76/518,141   File No. 50611-292862
OneSource OutSource
  2569474   14605.096
FRESH AIR
  75/830,817   14605.09
ID-iT
  76/518,124   50611.2930219999
GridView
  78/510068   40424.4US01

S-5.11-2

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

 

Schedule 5.14 to Credit and Security Agreement
ENVIRONMENTAL MATTERS
HEI, Inc. has received a No Further Action Required letter from the State of
Colorado regarding its Boulder location and is not aware of any other
environmental issues relating to any of the other listed properties as of this
signing.
S-5.14-1

 

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

 

Schedule 6.3 to Credit and Security Agreement
PERMITTED LIENS
HEI, Inc.
Permitted Liens
As of 05-01-07
Valid UCC Filings:
     

                      File Date   File No.   Type   Description if needed  
Additional Information   Status
5/21/2003
  20037526134   UCC-1       Beacon Bank   To be released with the SBA Revolver
Payoff at Closing
10/15/2003
  2003909557   AMEND   Amendment of 20037526134   Beacon Bank   To be released
with the SBA Revolver Payoff at Closing
7/21/2003
  20038148897   UCC-1       US Bancorp   Active Operating Lease
6/8/2004
  200412104045   UCC-1       CNC Associates Inc.   Active Operating Lease
12/14/2004
  200414358590   UCC-1       Commerce Financial Group   To be released with
Tempe Equipment Lease Payoff at Closing
3/10/2005
  200515537094   UCC-1       Lease Finance Group   Active Capital Lease
9/12/2005
  20051793347   ASSIGN   Assingment of 200515537094   First Minnetonka City Bank
  Active Capital Lease
4/7/2005
  200515938368   UCC-1       Lease Finance Group   Active Capital Lease
9/12/2005
  20051793426   AMEND   Expaned Collateral Description of 200515938368   Lease
Finance Group   Active Capital Lease
9/12/2005
  20051793433   ASSIGN   Assingment of 200515938368   First Minnetonka City Bank
  Active Capital Lease
4/7/2005
  200515938673   UCC-1       Lease Finance Group   Active Capital Lease
8/16/2005
  200517630189   UCC-1       Lease Finance Group   Active Capital Lease
 
                   
9/19/2005
  20051802403   AMEND   Expaned Collateral Description of 2005176030189   Lease
Finance Group   Active Capital Lease
9/23/2005
  20051810670   AMEND   Addition of Secured Party of 2005176030189   Kevin
Roberg   Active Capital Lease
8/16/2005
  200517630468   UCC-1       Lease Finance Group   Active Capital Lease
12/21/2005
  20051922206   AMEND   Expaned Collateral Description of 200517630468   Lease
Finance Group   Active Capital Lease
12/21/2005
  20051922224   AMEND   Addition of Secured Party of 200517630468   Kevin Robert
  Active Capital Lease
12/21/2005
  20051922236   AMEND   Correction of Secured Party of 200517630468   Kevin
Roberg   Active Capital Lease
8/16/2005
  200517630711   UCC-1       Lease Finance Group   Active Capital Lease
11/29/2005
  20051892061   AMEND   Addition of Secured Party of 200517630711   Kevin Roberg
  Active Capital Lease
11/29/2005
  20051892084   AMEND   Expaned Collateral Description of 200517630711   Kevin
Roberg   Active Capital Lease
12/30/2005
  200519347755   UCC-1       Farnam Street Financial Inc   Active Operating
Lease
1/17/2006
  200610221439   UCC-1   This is now a Commerce Financial Capital Lease, but no
filing was made by Commerce   Orbotech Inc   Not filed by Commerce Financial
when they paid off Orbotech and look over the lease – Active Capital Lease
1/30/2006
  200610390897   UCC-1       Lease Finance Group   Lease taken over by Allegiant
and not refilled – Active Capital Lease
3/20/2006
  200611076803   UCC-1   Believed to be the same as filed for under 200610390897
  Lease Finance Group   Believed to be the same as filed for under 200610390897
3/28/2006
  200611204728   UCC-1       Key Equipment Finance Inc   Active Operating Lease
7/3/2006
  200612598015   UCC-1       Telogy. Inc.   Active Operating Lease
8/1/2006
  200612953559   UCC-1       Telogy. Inc.   Active Operating Lease
9/1/2006
  200613366278   UCC-1       Telogy. Inc.   Active Operating Lease
 
                    Invalid UCC Filings:          
 
                   
11/2/1998
  2080454   UCC-1       Norwest Equipment Finance Inc   No Balance Due at
05-01-07 – Needs to be released
9/8/2003
  2003866929   CONT       Norwest Equipment Finance Inc   No Balance Due at
05-01-07 – Needs to be released
12/11/1998
  2090125   UCC-1       Norwest Equipment Finance Inc   No Balance Due at
05-01-07 – Needs to be released
9/19/2003
  2003880308   CONT       Norwest Equipment Finance Inc   No Balance Due at
05-01-07 – Needs to be released
6/2/2003
  20037625319   UCC-1       Luther & Maelzer Inc   No Balance Due at 05-01-07 –
Needs to be released
12/22/2005
  200519252218   UCC-1       Orbotech Inc   Not believed to be active – no
balance is shown on our records

S-6.3-1

 

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

 

Schedule 6.4 to Credit and Security Agreement
PERMITTED INDEBTEDNESS
HEI Inc
Schedule of Permitted Indebtedness
Capital Leases and Mortgage
Balances as of March 31, 2007

                                                          Creditor   Name  
Original
Amount   Security   PMY Res   Location   Origination
Date   Last Pymt
Date   Monthly Payment   Balance 03-31-07 1  
Lease Finance Group
  LFG 5 CNC Associates     22,926.73         LFG 5   Victoria   3/15/2005  
3/15/2008     564.51       14,142.71   2  
Lease Finance Group
  MyData     212,150.00     Mydata my Hydra speedmount   LFG 5   Victoria  
3/15/2005   3/15/2008     7,910.00       105,812.64   3  
Lease Finance Group
  Ekra     183,165.68     EKRA x5 in line screen printer, Ekra x5 inline screen
printer   LFG 5   Victoria   3/15/2005   7/1/2008     6,829.32       91,358.02  
   
 
                                                4  
Lease Finance Group
  Sikama     28,154.30     Sikama Falseen S/c Solder Rodow Furance   LFG 2  
Victoria   9/5/2005   9/5/2008     1,119.04       11,843.19      
 
                                                5  
Lease Finance Group
  CyberOptics     120,600.00     CyberOptics DEMO SE 300 inspection system   LFG
4   Victoria   10/1/2005   10/1/2008     4,170.53       64,643.36   6  
Lease Finance Group
  K&S     21,990.00     Kulcke & Soffa Model 4524 Bad Bonder   LFG 1   Victoria
  12/1/2005   12/1/2008     760.45       12,968.45      
 
                                                7  
Lease Finance Group
  Nu Clean     82,400.00     Technical Devices Nu/Clean 31Bxf   LFG 3   Victoria
  2/1/2006   2/1/2009     2,849.51       52,905.40   8  
HMP Allegiant
  Allegiant Partn HMP_AL           Infinity 2-2c 2.0 megapixel CCD Camera      
Victoria   5/1/2006   2/23/2009     880.42       17,368.96   9  
OGP Allegiant
  OGP_AL           OGP Flash 300 Digital Coord measur system & HMP Infinity 2.0
Megapixesl CCD Camera       Victoria   3/1/2006   3/1/2009     1,782.83      
38,014.34   10  
Commerce Financial
  CF_01Orbotech     875,000.00     Orbotech paragon 8000 imaging system   87,500
  Tempe   2/15/2006   2/15/2009     21,272.00       689,127.97   11  
Commerce Financial
  CF_02Datacon     295,730.00     Datacon 2200 Malti-Chip Die Bonder   29,573  
Victoria   3/15/2006   3/15/2009     8,612.00       232,544.08   12  
Commerce Financial
  CF_03Hirox     52,851.00     HIROX Microscope System & TechCut 4 Prec Saw &
Polshing System   5,285   Victoria   5/15/2006   5/15/2009     1,547.00      
41,961.51   13  
Commerce Financial
  CF_04MicroCraft     257,250.00     MicroCraft EMX-6151 Moving Probe Tester  
25,725   Tempe   5/15/2006   5/15/2009     6,406.00       215,919.83      
 
                                                14  
Commerce Financial
  CF_05ESI     355,608.00     Two ESI Mdl 5200 UV YagLaser Dells   35,561  
Tempe   4/15/2006   4/15/2009     10,036.00       285,434.01   15  
Commerce Financial
  CF_06Asymtek     112,625.00     Asymtek Spectrum S-820 Batch Disperser  
11,263   Victoria   6/15/2006   6/15/2009     3,296.00       91,157.66      
 
                                                16  
Key Leasing
  Key - Cubes     62,848.00             Tempe   3/6/2006   3/6/2009     1,822.94
      43,058.19      
 
                                                17  
Pitney Bowes
  Copier Lease-Boulder     33,610.51     Toshiba Copier       Boulder          
  681.50       15,068.33      
 
                                                18  
Commerce Bank
  Building Mortgage     1,200,000.00     Corporate Office & Vic Plant Lot 2.
Block 1, Point Victoria   $100,000.00   Victoria   10/14/2003   11/1/2009    
8,318.68       1,110,686.14  

HEI Inc
Schedule of Permitted Indebtedness
Operating Leases
Balances as of March 31, 2007

                                                              Account   Start  
Ending         Name   Item   Location   Number   Date   Date   Deposit   Payment
Building Rent
Monk Properties
  1546 Lake Drive West   Chanhassen                             6,591.67      
12,971.00  
Boulder Dev. Corp.
  4801 N. 63rd Drive   Boulder                             230,000.00      
120,222.00  
Reynolds Property
  610 S Rockford Drive   Tempe                             7,260.00      
7,582.85  
Cutler Commercial
  326 South Siesta Lane   Tempe office                             3,000.00    
  2,614.34  
 
                                               
Equipment
Farnam Street Financial — CTS
  Clara view & ClearCube   Tempe   HE122205-001     8/1/2006                    
  2,184.32  
Key Leases
  Orbotech Discovery   Tempe             3/6/2006       3/6/2009              
6,906.39  
Mobile Mini
  40’ Cargo & DLX Tri Doors                       Monthly             145.94  
Pitney Bowes Global Financial
  Mailing scale A57z                               Quarterly     185.31  
Pitney Bowes Global Financial
  Mailing System                               Quarterly     1,166.18  
CNC Associates, Inc.
  HAAS Tool room mill   Chanhassen     20361001       6/4/2004       6/4/2009  
            564.51  
 
                                               
Computer Equipment
Toshiba Business Solutions
  Boulder Copier   Boulder     39120896       5/31/2002       6/4/2007          
    845.68  
Hewlett-Packard Financial Services
          50020650-01       10/11/2004                       140.22  
Hewlett-Packard Financial Services
          5002064C-001                               534.08  
US Bank
                            8/1/2007               759.64  
Pitney Bowes INC
  DLCQ Copier                                         812.35  
LFG — Marlin Leasing Corporation
  HP Compaq Notebook       001-0295999-001                               725.24
 
LFG — Marlin Leasing Corporation
  Computer System       001-0295999-002                               785.65  
DeLage Landen
  Misc Equipment   Victoria, Tempe & Boulder     24705927                      
        2,272.69  
DeLage Landen
  Boulder Copiers         534057                               737.10  
 
                                               
Miscellaneous
DeLage Laden
  Forklift   Chanhassen   270266-476532       11/4/2004       11/4/2009        
      292.27  

S-6.4-1

 

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

 

HEI Inc
Schedule of Commitments & Contingencies (Operating Leases)
Telogy

                                                      Account     Start    
Ending        
Name
  Item   Location   Number     Date     Date     Payment  
Leases
                                       
1 Telogy
  KEI 2410          501428       6/7/2006       6/7/2007       1,028.00  
2 Telogy
  KEI25 10AT          503485       11/3/2006       11/3/2007       448.00  
3 Telogy
  KEI 2001          507431       11/6/2006       11/6/2007       282.00  
 
                                        Rental — Month to Month                
                   
4 Telogy
  Various Equipment         487478       10/19/2005               476.00  
5 Telogy
  KEI (6485)          515172       2/5/2007               100.00  

S-6.4-2

 

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

 

Schedule 6.5 to Credit and Security Agreement
GUARANTIES
None
S-6.5-1