Exhibit 10.1

October 30, 2002

 

 

CREDIT AND SECURITY AGREEMENT

BY AND BETWEEN

DIGITAL ANGEL CORPORATION

AND

WELLS FARGO BUSINESS CREDIT, INC.

October 30, 2002

 

 

 

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Table of Contents

 

ARTICLE I DEFINITIONS

Section 1.1

Definitions

Section 1.2

Other Definitional Terms; Rules of Interpretation

 

 

ARTICLE II AMOUNT AND TERMS OF THE CREDIT FACILITY

Section 2.1

Revolving Advances

Section 2.2

Procedures for Requesting Advances

Section 2.3

Increased Costs; Capital Adequacy; Funding Exceptions

Section 2.4

Letters of Credit

Section 2.5

Special Account

Section 2.6

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

Section 2.7

Obligations Absolute

Section 2.8

Interest; Margin; Minimum Interest Charge; Default Interest; Participations;
Clearance Days; 360 Day Year; Usury

Section 2.9

Fees

Section 2.10

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

Section 2.11

Lockbox; Collateral Account; Application of Payments

Section 2.12

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

Section 2.13

Mandatory Prepayment

Section 2.14

Revolving Advances to Pay Obligations

Section 2.15

Use of Proceeds

Section 2.16

Liability Records

 

 

ARTICLE III SECURITY INTEREST; OCCUPANCY; SETOFF

Section 3.1

Grant of Security Interest

Section 3.2

Notification of Account Debtors and Other Obligors

Section 3.3

Assignment of Insurance

Section 3.4

Occupancy

Section 3.5

License

Section 3.6

Financing Statement

Section 3.7

Setoff

Section 3.8

Collateral

 

 

ARTICLE IV CONDITIONS OF LENDING

Section 4.1

Conditions Precedent to the Initial Revolving Advance and Letter of Credit

Section 4.2

Conditions Precedent to All Advances and Letters of Credit

 

 

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ARTICLE V REPRESENTATIONS AND WARRANTIES

Section 5.1

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

Section 5.2

Capitalization

Section 5.3

Authorization of Borrowing; No Conflict as to Law or Agreements

Section 5.4

Legal Agreements

Section 5.5

Subsidiaries

Section 5.6

Financial Condition; No Adverse Change

Section 5.7

Litigation

Section 5.8

Regulation U

Section 5.9

Taxes

Section 5.10

Titles and Liens

Section 5.11

Intellectual Property Rights

Section 5.12

Plans

Section 5.13

Default

Section 5.14

Environmental Matters

Section 5.15

Submissions to Lender

Section 5.16

Financing Statements

Section 5.17

Rights to Payment

 

 

ARTICLE VI COVENANTS

Section 6.1

Reporting Requirements

Section 6.2

Financial Covenants

Section 6.3

Permitted Liens; Financing Statements

Section 6.4

Indebtedness

Section 6.5

Guaranties

Section 6.6

Investments and Subsidiaries

Section 6.7

Dividends and Distributions

Section 6.8

Salaries

Section 6.9

Books and Records; Inspection and Examination

Section 6.10

Account Verification

Section 6.11

Compliance with Laws

Section 6.12

Payment of Taxes and Other Claims

Section 6.13

Maintenance of Properties

Section 6.14

Insurance

Section 6.15

Preservation of Existence

Section 6.16

Delivery of Instruments, etc

Section 6.17

Sale or Transfer of Assets; Suspension of Business Operations

Section 6.18

Consolidation and Merger; Asset Acquisitions

Section 6.19

Sale and Leaseback

Section 6.20

Restrictions on Nature of Business

Section 6.21

Accounting

Section 6.22

Discounts, etc

Section 6.23

Plans

Section 6.24

Place of Business; Name

Section 6.25

Constituent Documents; S Corporation Status

Section 6.26

Performance by the Lender

 

 

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ARTICLE VII EVENTS OF DEFAULT, RIGHTS AND REMEDIES

Section 7.1

Events of Default

Section 7.2

Rights and Remedies

Section 7.3

Certain Notices

 

 

ARTICLE VIII MISCELLANEOUS

Section 8.1

No Waiver; Cumulative Remedies; Compliance with Laws

Section 8.2

Amendments, Etc

Section 8.3

Addresses for Notices; Requests for Accounting

Section 8.4

Further Documents

Section 8.5

Costs and Expenses

Section 8.6

Indemnity

Section 8.7

Participants

Section 8.8

Execution in Counterparts; Telefacsimile Execution

Section 8.9

Retention of Borrower’s Records

Section 8.10

Binding Effect; Assignment; Complete Agreement; Exchanging Information

Section 8.11

Severability of Provisions

Section 8.12

Headings

Section 8.13

Governing Law; Jurisdiction, Venue; Waiver of Jury Trial

 

 

 

 

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CREDIT AND SECURITY AGREEMENT

Dated as of October 30, 2002

DIGITAL ANGEL CORPORATION, a Delaware corporation (the “Borrower”), and WELLS
FARGO BUSINESS CREDIT, INC., a Minnesota corporation (the “Lender”), hereby
agree as follows:

ARTICLE I

DEFINITIONS

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

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

“Advance” means a Revolving Advance.

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

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

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“Base Rate” means the rate of interest publicly announced from time to time by
Wells Fargo Bank National Association at its principal office in San Francisco
as its “prime rate”, with the understanding that the “prime rate” is one of
Wells Fargo’s base rates (not necessarily the lowest of such rates) and serves
as the basis upon which effective rates of interest are calculated for loans
making reference thereto.

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

“Borrowing Base” means at any time the lesser of:

(A)           THE MAXIMUM LINE; OR

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

(I)            THE LESSER OF (A) 80% OF ELIGIBLE ACCOUNTS, OR (B) $5,000,000;
PLUS

(II)           THE LESSER OF (A) 80% OF ELIGIBLE FOREIGN ACCOUNTS, OR (B)
$1,000,000.

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

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

(A)           ANY PERSON OR “GROUP” (AS SUCH TERM IS USED IN SECTIONS 13(D) AND
14(D) OF THE SECURITIES EXCHANGE ACT OF 1934) IS OR BECOMES THE “BENEFICIAL
OWNER” (AS DEFINED IN RULES 13D-3 AND 13D-5 UNDER THE SECURITIES EXCHANGE ACT OF
1934, EXCEPT THAT A PERSON WILL BE DEEMED TO HAVE “BENEFICIAL OWNERSHIP” OF ALL
SECURITIES THAT SUCH PERSON HAS THE RIGHT TO ACQUIRE, WHETHER SUCH RIGHT IS
EXERCISABLE IMMEDIATELY OR ONLY AFTER THE PASSAGE OF TIME), DIRECTLY OR
INDIRECTLY, OF MORE THAN 25% PERCENT OF THE VOTING POWER OF ALL CLASSES OF
VOTING STOCK OF THE BORROWER.

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

(c)           Randolph K. Geissler shall cease to actively manage the Borrower’s
day-to-day business activities.

 

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“Collateral” means all of the Borrower’s Accounts, chattel paper, deposit
accounts, documents, Equipment, General Intangibles, goods, instruments,
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) all sums on deposit in the
Special Account; and (viii) proceeds of any and all of the foregoing.

“Collateral Account” means the “Lender Account” as defined in the Lockbox and
Collection Account Agreement.

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

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

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

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

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

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

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

 

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

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

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

“Earnings Before Taxes” means from operations but including extraordinary
losses.

“Eligible Accounts” means all unpaid Accounts arising from the sale or lease of
goods or the performance of services, of the Borrower’s Animal Applications
Division, net of any credits, but excluding any such Accounts having any of the
following characteristics:

(I)            THAT PORTION OF ACCOUNTS WHICH IS UNPAID MORE THAN 60 DAYS PAST
THE STATED DUE DATE OR MORE THAN 120 DAYS PAST THE INVOICE DATE;

(II)           THAT PORTION OF ACCOUNTS THAT IS DISPUTED OR SUBJECT TO A CLAIM
OF OFFSET OR A CONTRA ACCOUNT;

(III)          THAT PORTION OF ACCOUNTS NOT YET EARNED BY THE FINAL DELIVERY OF
GOODS OR RENDITION OF SERVICES, AS APPLICABLE, BY THE BORROWER TO THE CUSTOMER,
INCLUDING PROGRESS BILLINGS, AND THAT PORTION OF ACCOUNTS FOR WHICH AN INVOICE
HAS NOT BEEN SENT TO THE APPLICABLE ACCOUNT DEBTOR;

(IV)          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)           NINETY (90) DAYS AFTER THE FUNDING DATE, 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 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

 

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(B) COVERED BY A FOREIGN RECEIVABLES INSURANCE POLICY ACCEPTABLE TO THE LENDER
IN ITS SOLE DISCRETION (“FOREIGN ELIGIBLE ACCOUNTS”);

(VII)         ACCOUNTS OWED BY AN ACCOUNT DEBTOR THAT IS INSOLVENT, THE SUBJECT
OF BANKRUPTCY PROCEEDINGS OR HAS GONE OUT OF BUSINESS;

(VIII)        ACCOUNTS OWED BY AN OWNER, SUBSIDIARY, AFFILIATE, OFFICER OR
EMPLOYEE OF THE BORROWER;

(IX)           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;

(X)            THAT PORTION OF ACCOUNTS THAT HAS BEEN RESTRUCTURED, EXTENDED,
AMENDED OR MODIFIED;

(XI)           THAT PORTION OF ACCOUNTS THAT CONSTITUTES ADVERTISING, FINANCE
CHARGES, SERVICE CHARGES OR SALES OR EXCISE TAXES;

(XII)          ACCOUNTS OWED BY AN ACCOUNT DEBTOR, REGARDLESS OF WHETHER
OTHERWISE ELIGIBLE, IF 10% OR MORE OF THE TOTAL AMOUNT DUE UNDER ACCOUNTS FROM
SUCH DEBTOR IS INELIGIBLE UNDER CLAUSES (I), (II)OR (X) ABOVE;

(XIII)         ACCOUNTS CONSTITUTING CREDIT BALANCES GREATER THAN 90 DAYS; AND

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

“Eligible Foreign Accounts” means Accounts due and owing by an Account debtor
located outside the United States; but excluding any Accounts having any of the
following characteristics:

(i)            (A) That portion of Accounts (other than dated Accounts) unpaid
120 days or more after the invoice date, (B) that portion of dated Accounts
unpaid more than 60 days after the stated due date, and (C) that portion of
Accounts that do not provide for payment in full within 180 days after the
shipment date;

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

(iii)          That portion of Accounts not yet earned by the final delivery of
goods or rendition of services, as applicable, by the Borrower to the customer;

(iv)          That portion of Accounts for which an invoice has not been sent to
the applicable account debtor;

(v)           Accounts owed by any unit of government;

 

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

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

(viii)        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;

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

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

(xi)           That portion of Accounts owed by any one Account debtor that
would permit Revolving Advances supported by such Account debtor’s Accounts to
exceed $300,000 at any one time;

(xii)          Accounts denominated in any currency other than United States
dollars, Canadian dollars, Japanese yen, United Kingdom pounds sterling or
Euros;

(xiii)         Accounts with respect to which the Borrower has not instructed
the Account debtor to pay the Account to the Collateral Account;

(xiv)        Accounts owed by debtors located in countries not acceptable to the
Lender in its sole discretion;

(xv)         Accounts owed by an account debtor, regardless of whether otherwise
eligible, if 10% or more of the total amount due under Accounts from such debtor
is ineligible under clauses (i), (ii) or (ix) above; and

(xvi)        Accounts otherwise deemed unacceptable to the Lender in its sole
discretion.

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

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

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

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

 

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

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

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

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

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

“IRC” means the Internal Revenue Code of 1986.

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

“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.

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

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

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

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

 

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

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

“Licensed Intellectual Property” has the meaning given 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 hereafter acquired
and whether arising by agreement or operation of law.

“Loan Documents” means this Agreement, the Note, the Security Documents and any
L/C Application.

“Lockbox” means as defined in the Lockbox and Collection Account Agreement.

“Lockbox and Collection Account Agreement” means the Lockbox and Collection
Account Agreement by and among the Borrower, Wells Fargo Bank Minnesota, Regulus
West, LLC and the Lender, of even date herewith.

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

(IV)          ANY CLAIM AGAINST THE BORROWER OR THREAT OF LITIGATION WHICH IF
DETERMINED ADVERSELY TO THE BORROWER WOULD CAUSE THE BORROWER TO BE LIABLE TO
PAY AN AMOUNT EXCEEDING $300,000 OR WOULD BE AN EVENT DESCRIBED IN CLAUSES (I),
(II) AND (III) ABOVE.

“Maturity Date” means October 30, 2005.

“Maximum Line” means $5,000,000 unless said amount is reduced pursuant to
Section 2.13, in which event it means such lower amount.

 

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“Minimum Interest Charge” has the meaning given in Section 2.8(b).

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

“Net Income” means fiscal year-to-date after-tax net income from continuing
operations as determined in accordance with GAAP.

“Note” means the Revolving Note.

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

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

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

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

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

“Patent and Trademark Security Agreement” means the Patent and Trademark
Security Agreement by the Borrower in favor of the Lender of even date herewith.

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

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

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

 

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

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

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

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

“Revolving Note” means the Borrower’s revolving promissory note, payable to the
order of the Lender in substantially the form of Exhibit A hereto.

“Security Documents” means this Agreement, the Lockbox and Collection Account
Agreement, the Patent and Trademark Security Agreement and any other document
delivered to the Lender from time to time to secure the Obligations.

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

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

“Subsidiary” means any corporation of which more than 50% of the outstanding
shares of capital stock having general voting power under ordinary circumstances
to elect a majority of the board of Directors of such corporation, irrespective
of whether or not at the time stock of any other class or classes 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.

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

“UCC” means the Uniform Commercial Code as in effect in the state designated in
Section 8.14 as the state whose laws shall govern this Agreement, or in any
other state whose laws are held to govern this Agreement or any portion hereof.

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

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

 

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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 amended, modified, codified, replaced or reenacted, in
whole or in part, and in effect on the determination date, including rules and
regulations promulgated thereunder.

ARTICLE II

AMOUNT AND TERMS OF THE CREDIT FACILITY

Section 2.1    Revolving Advances.    The Lender agrees, on the terms and
subject to the conditions herein set forth, to make advances to the Borrower
from time to time from the date all of the conditions set forth in Section 4.1
are satisfied (the “Funding Date”) to the Termination Date (the “Revolving
Advances”).  The Lender shall have no obligation to make a Revolving Advance to
the extent the amount of the requested Revolving Advance exceeds Availability. 
The Borrower’s obligation to pay the Revolving Advances shall be evidenced by
the Revolving Note and shall be secured by the Collateral.  Within the limits
set forth in this Section 2.1, the Borrower may borrow, prepay pursuant to
Section 2.12 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 11:00 A.M., MINNEAPOLIS, MINNESOTA TIME ON THE BANKING DAY WHICH IS
THE DATE THE ADVANCE IS TO BE MADE.  EACH SUCH REQUEST SHALL BE EFFECTIVE UPON
RECEIPT BY THE LENDER, SHALL BE IN WRITING OR BY TELEPHONE OR TELECOPY
TRANSMISSION, TO BE CONFIRMED IN WRITING BY THE BORROWER IF SO REQUESTED BY THE
LENDER, SHALL BE BY (I) AN OFFICER OF THE BORROWER; OR (II) A PERSON DESIGNATED
AS THE BORROWER’S AGENT BY AN OFFICER OF THE BORROWER IN A WRITING DELIVERED TO
THE LENDER; OR (III) A PERSON WHOM THE LENDER REASONABLY BELIEVES TO BE AN
OFFICER OF THE BORROWER OR SUCH A DESIGNATED AGENT.  THE BORROWER SHALL REPAY
ALL ADVANCES EVEN IF THE LENDER DOES NOT RECEIVE SUCH CONFIRMATION AND EVEN IF
THE PERSON REQUESTING AN ADVANCE WAS NOT IN FACT AUTHORIZED TO DO SO.  ANY
REQUEST FOR AN ADVANCE, WHETHER WRITTEN OR 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.

 

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(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 WELLS FARGO BANK MINNESOTA UNLESS THE LENDER AND THE BORROWER
SHALL AGREE IN WRITING TO ANOTHER MANNER OF DISBURSEMENT.

Section 2.3    Increased Costs; Capital Adequacy; Funding Exceptions.

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

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

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

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

(IV)          “RETURN”, FOR ANY PERIOD, MEANS THE PERCENTAGE DETERMINED BY
DIVIDING (I) THE SUM OF INTEREST AND ONGOING FEES EARNED BY THE LENDER UNDER
THIS AGREEMENT DURING SUCH PERIOD, BY (II) THE AVERAGE CAPITAL SUCH LENDER IS
REQUIRED TO MAINTAIN DURING SUCH PERIOD AS A RESULT OF ITS BEING A PARTY TO THIS
AGREEMENT, AS DETERMINED BY SUCH LENDER BASED UPON ITS TOTAL CAPITAL
REQUIREMENTS AND A REASONABLE ATTRIBUTION FORMULA THAT TAKES ACCOUNT OF THE
CAPITAL ADEQUACY RULES AND L/C RULES THEN IN EFFECT, COSTS OF ISSUING OR
MAINTAINING ANY ADVANCE OR LETTER OF CREDIT AND AMOUNTS RECEIVED OR RECEIVABLE
UNDER THIS AGREEMENT OR THE NOTES WITH RESPECT TO ANY ADVANCE OR LETTER OF
CREDIT.  RETURN MAY BE CALCULATED FOR EACH CALENDAR QUARTER AND FOR THE SHORTER
PERIOD BETWEEN THE END OF A CALENDAR QUARTER AND THE DATE OF TERMINATION IN
WHOLE OF THIS AGREEMENT.

 

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

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

Section 2.4    Letters of Credit.

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

(I)            $5,000,000 LESS THE L/C AMOUNT, OR

(II)           AVAILABILITY.

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

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

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

 

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

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

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

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

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

(D)           THE BORROWER’S OBLIGATION TO PAY ANY REVOLVING ADVANCE MADE UNDER
THIS SECTION 2.6, SHALL BE EVIDENCED BY THE REVOLVING NOTE AND SHALL BEAR
INTEREST AS PROVIDED IN SECTION 2.8.

 

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

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

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

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

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

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

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

Section 2.8    Interest; Margin; Minimum Interest Charge; Default Interest;
Participations; Clearance Days; 360 Day Year; Usury.

(A)           REVOLVING NOTE.  EXCEPT AS SET FORTH IN SUBSECTIONS (D) AND (G),
THE OUTSTANDING PRINCIPAL BALANCE OF THE REVOLVING NOTE SHALL BEAR INTEREST AT
THE FLOATING RATE.

(B)           MINIMUM INTEREST CHARGE.  NOTWITHSTANDING THE INTEREST PAYABLE
PURSUANT TO SUBSECTION (A), THE BORROWER SHALL PAY TO THE LENDER INTEREST OF NOT
LESS THAN $120,000 PER LOAN YEAR (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
SUBSECTION (A) ON THE FIRST DAY OF EACH MONTH FOLLOWING EACH ANNIVERSARY OF THE
FUNDING DATE AND ON THE TERMINATION DATE.  AS USED IN THIS SUBSECTION (B), “LOAN
YEAR” MEANS EACH ONE-YEAR PERIOD ENDING ON AN ANNIVERSARY OF THE FUNDING DATE.

(C)           DEFAULT INTEREST RATE.  AT ANY TIME DURING ANY DEFAULT PERIOD, IN
THE LENDER’S SOLE DISCRETION AND WITHOUT WAIVING ANY OF ITS OTHER RIGHTS AND
REMEDIES, THE

 

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PRINCIPAL OF THE ADVANCES OUTSTANDING FROM TIME TO TIME SHALL BEAR INTEREST AT
THE DEFAULT RATE, EFFECTIVE FOR ANY PERIODS DESIGNATED BY THE LENDER FROM TIME
TO TIME DURING THAT DEFAULT PERIOD.

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

Section 2.9    Fees.

(A)           ORIGINATION FEE.  THE BORROWER SHALL PAY THE LENDER A FULLY EARNED
AND NON-REFUNDABLE ORIGINATION FEE OF $50,000, DUE AND PAYABLE UPON THE
EXECUTION OF THIS AGREEMENT.

(B)           AUDIT FEES.  THE BORROWER SHALL PAY THE LENDER, ON DEMAND, AUDIT
FEES IN CONNECTION WITH ANY AUDITS OR INSPECTIONS CONDUCTED BY THE LENDER OF ANY
COLLATERAL OR THE BORROWER’S OPERATIONS OR BUSINESS AT THE RATES ESTABLISHED
FROM TIME TO TIME BY THE LENDER AS ITS AUDIT FEES (WHICH FEES ARE CURRENTLY $800
PER DAY PER AUDITOR), TOGETHER WITH ALL ACTUAL OUT-OF-POCKET COSTS AND EXPENSES
INCURRED IN CONDUCTING ANY SUCH AUDIT OR INSPECTION.

(C)           TERMINATION AND LINE REDUCTION FEES.  IF THE CREDIT FACILITY IS
TERMINATED (I) BY THE LENDER DURING A DEFAULT PERIOD THAT BEGINS BEFORE A
MATURITY DATE, (II) BY THE BORROWER AS OF A DATE OTHER THAN A MATURITY DATE, OR
IF THE BORROWER REDUCES THE MAXIMUM LINE, THE BORROWER SHALL PAY TO THE LENDER A
FEE IN AN AMOUNT EQUAL TO A PERCENTAGE OF THE MAXIMUM LINE (OR THE REDUCTION OF
THE MAXIMUM LINE, AS THE CASE MAY BE) 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, IN THE CASE
OF A REDUCTION, BY THE AMOUNT OF THE REDUCTION EXPRESSED AS A PERCENTAGE OF THE
MAXIMUM LINE IMMEDIATELY BEFORE THE REDUCTION.

 

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

(E)           UNUSED LINE FEE.  FOR THE PURPOSES OF THIS SECTION 2.9, “UNUSED
AMOUNT” MEANS THE MAXIMUM LINE REDUCED BY OUTSTANDING REVOLVING ADVANCES.  THE
BORROWER AGREES TO PAY TO THE LENDER AN UNUSED LINE FEE AT THE RATE OF ONE-HALF
OF ONE PERCENT (0.5%) PER ANNUM ON THE AVERAGE DAILY UNUSED AMOUNT FROM THE DATE
OF THIS AGREEMENT TO AND INCLUDING THE TERMINATION DATE, DUE AND PAYABLE MONTHLY
IN ARREARS ON THE FIRST DAY OF THE MONTH AND ON THE TERMINATION DATE.

(F)            ELIGIBLE FOREIGN ACCOUNTS PROGRAM FEE.  THE BORROWER AGREES TO
PAY TO THE LENDER AN ELIGIBLE FOREIGN ACCOUNTS PROGRAM FEE AT THE RATE OF
$10,000 PER ANNUM WHICH IS EQUAL TO ONE PERCENT (1%) OF THE MAXIMUM AMOUNT OF
THE ELIGIBLE FOREIGN ACCOUNTS.  THE ELIGIBLE FOREIGN ACCOUNTS PROGRAM FEE SHALL
BE PAYABLE ON THE FUNDING DATE AND ON EACH ANNIVERSARY OF THE FUNDING DATE.

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

Section 2.10    Time for Interest Payments; Payment on Non-Banking Days;
Computation of Interest and Fees.

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

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

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

Section 2.11    Lockbox; Collateral Account; Application of Payments.

(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

 

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INTO THE COLLATERAL ACCOUNT.  UNTIL SO DEPOSITED, THE BORROWER SHALL HOLD ALL
SUCH PAYMENTS IN TRUST FOR AND AS THE PROPERTY OF THE LENDER AND SHALL NOT
COMMINGLE SUCH PAYMENTS 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 OBLIGATIONS.

(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.

(B)           APPLICATION OF PAYMENTS.

(I)            THE BORROWER MAY, FROM TIME TO TIME, IN ACCORDANCE WITH THE
LOCKBOX AND COLLECTION ACCOUNT AGREEMENT, CAUSE FUNDS IN THE COLLATERAL ACCOUNT
TO BE TRANSFERRED TO THE LENDER’S GENERAL ACCOUNT FOR PAYMENT OF THE
OBLIGATIONS.  EXCEPT AS PROVIDED IN THE PRECEDING SENTENCE, AMOUNTS DEPOSITED IN
THE COLLATERAL ACCOUNT SHALL NOT BE SUBJECT TO WITHDRAWAL BY THE BORROWER,
EXCEPT AFTER FULL PAYMENT AND DISCHARGE OF ALL OBLIGATIONS.

(II)           ALL PAYMENTS TO THE LENDER SHALL BE MADE IN IMMEDIATELY AVAILABLE
FUNDS AND SHALL BE APPLIED TO THE OBLIGATIONS UPON RECEIPT BY THE LENDER.  FUNDS
RECEIVED FROM THE COLLATERAL ACCOUNT SHALL BE DEEMED TO BE IMMEDIATELY
AVAILABLE.  THE LENDER MAY HOLD ALL PAYMENTS NOT CONSTITUTING IMMEDIATELY
AVAILABLE FUNDS FOR THREE (3) ADDITIONAL DAYS BEFORE APPLYING THEM TO THE
OBLIGATIONS.

Section 2.12    Voluntary Prepayment; Reduction of the Maximum Line; Termination
of the Credit Facility by the Borrower.    Except as otherwise provided herein,
the Borrower may prepay the Advances in whole at any time or from time to time
in part.  The Borrower may terminate the Credit Facility or reduce the Maximum
Line at any time if it (i) gives the Lender at least 30 days’ prior written
notice and (ii) pays the Lender termination or Maximum Line reduction fees in
accordance with Section 2.9(c).  Any reduction in the Maximum Line must be in an
amount of not less than $100,000 or an integral multiple thereof.  If the
Borrower reduces the Maximum Line to zero, all Obligations shall be immediately
due and payable.  Subject to termination of the Credit Facility and payment and
performance of all Obligations, the Lender shall, at the Borrower’s expense,
release or terminate the Security Interest and the Security Documents to which
the Borrower is entitled by law.

Section 2.13    Mandatory Prepayment.    Without notice or demand, if the sum of
the outstanding principal balance of the Revolving Advances plus the L/C Amount
shall at any time exceed the Borrowing Base, the Borrower shall (i) first,
immediately prepay the Revolving Advances to the extent necessary to eliminate
such excess; and (ii) if prepayment in full of the

 

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Revolving Advances is insufficient to eliminate such excess, pay to the Lender
in immediately available funds for deposit in the Special Account an amount
equal to the remaining excess.  Any payment received by the Lender under this
Section 2.13 or under Section 2.12 may be applied to the Obligations, in such
order and in such amounts as the Lender, in its discretion, may from time to
time determine.

Section 2.14    Revolving Advances to Pay Obligations.    Notwithstanding
anything in 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, make a Revolving Advance in an
amount equal to the portion of the Obligations from time to time due and
payable.

Section 2.15    Use of Proceeds.    The Borrower shall use the proceeds of
Advances and each Letter of Credit for ordinary working capital purposes.

Section 2.16    Liability Records.    The Lender may maintain from time to time,
at its discretion, records as to the Obligations.  All entries made on any such
record shall be presumed correct until the Borrower establishes the contrary. 
Upon the Lender’s demand, the Borrower will admit and certify in writing the
exact principal balance of the Obligations that the Borrower then 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 a lien and security interest (collectively
referred to as the “Security Interest”) in the Collateral, as security for the
payment and performance of the Obligations.  Upon request by the Lender, the
Borrower will grant the Lender a security interest in all commercial tort claims
it may have against any Person.

Section 3.2    Notification of Account Debtors and Other Obligors.  The Lender
may at any time (whether or not a Default Period then exists) notify any account
debtor or other person obligated to pay the amount due that such right to
payment has been assigned or transferred to the Lender for security and shall be
paid directly to the Lender.  The Borrower will join in giving such notice if
the Lender so requests.  At any time after the Borrower or the Lender gives such
notice to an account debtor or other obligor, the Lender may, but need not, in
the Lender’s name or in the Borrower’s name, (a) demand, sue for, collect or
receive any money or property at any time payable or receivable on account of,
or securing, any such right to payment, or grant any extension to, make any
compromise or settlement with or otherwise agree to waive, modify, amend or
change the obligations (including collateral obligations) of any such account
debtor or other obligor; and (b) as the Borrower’s agent and attorney-in-fact,
notify the United States Postal Service to change the address for delivery of
the Borrower’s mail to any address designated by the Lender, otherwise intercept
the Borrower’s mail, and receive, open and dispose of the Borrower’s mail,
applying all Collateral as permitted under this Agreement and holding all

 

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other mail for the Borrower’s account or forwarding such mail to the Borrower’s
last known address.

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

Section 3.4    Occupancy.

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

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

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

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

 

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 reasonable exercise of quality control; and (b) selling, leasing or otherwise
disposing of any or all Collateral during any Default Period.

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

Name and address of Debtor:

Digital Angel Corporation
490 Villaume Avenue
St. Paul, MN 55075-2443

Federal Employer Identification No. 52-1233960

Name and address of Secured Party:

Wells Fargo Business Credit, Inc.
MAC N9312-040
Sixth and Marquette
Minneapolis, Minnesota  55479
Federal Employer Identification No.  41-1237652

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

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

 

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ARTICLE IV

CONDITIONS OF LENDING

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

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

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

(C)           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.

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

(E)           THE LOCKBOX AND COLLECTION ACCOUNT AGREEMENT, PROPERLY EXECUTED BY
THE BORROWER AND WELLS FARGO BANK MINNESOTA.

(F)            THE PATENT AND TRADEMARK SECURITY AGREEMENT, PROPERLY EXECUTED BY
THE BORROWER.

(G)           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.

(H)           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.

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

 

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(J)            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.

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

(L)            AN OPINION OF COUNSEL TO THE BORROWER, ADDRESSED TO THE LENDER.

(M)          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.

(N)           PAYMENT OF THE FEES AND COMMISSIONS DUE UNDER SECTION 2.9 THROUGH
THE DATE OF THE INITIAL ADVANCE OR LETTER OF CREDIT AND EXPENSES INCURRED BY THE
LENDER THROUGH SUCH DATE AND REQUIRED TO BE PAID BY THE BORROWER UNDER
SECTION 8.6, INCLUDING ALL LEGAL EXPENSES INCURRED THROUGH THE DATE OF THIS
AGREEMENT.

(O)           EVIDENCE THAT AFTER MAKING THE INITIAL REVOLVING ADVANCE,
SATISFYING ALL TRADE PAYABLES OLDER THAN 60 DAYS FROM INVOICE DATE, BOOK
OVERDRAFTS AND CLOSING COSTS, AVAILABILITY SHALL BE NOT LESS THAN $1,000,000.

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

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

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

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

ARTICLE V

REPRESENTATIONS AND WARRANTIES

The Borrower represents and warrants to the Lender as follows:

Section 5.1    Existence and Power; Name; Chief Executive Office; Inventory and
Equipment Locations; Federal Employer Identification Number.    The Borrower is
a corporation, duly organized, validly existing and in good standing under the
laws of the State of Delaware 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

 

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qualification necessary.  The Borrower has all requisite power and authority to
conduct its business, to own its properties and to execute and deliver, and to
perform all of its obligations under, the Loan Documents.  During its existence,
the Borrower has done business solely under the names set forth in Schedule 5.1
and all of the Borrower’s records relating to its business or the Collateral are
kept at that location.  The Borrower’s chief executive office and principal
place of business is located at the address set forth in Schedule 5.1.  All
Inventory and Equipment is located at that location or at one of the other
locations listed in Schedule 5.1.  The Borrower’s federal employer
identification number is correctly set forth in Section 3.6.

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.

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

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

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

Section 5.6    Financial Condition; No Adverse Change.    The Borrower has
furnished to the Lender its audited financial statements for its fiscal year
ended December 31, 2001 and unaudited financial statements for the
fiscal-year-to-date period ended August 31, 2002, and those statements fairly
present the Borrower’s financial condition on the dates thereof and the results
of its operations and cash flows for the periods then ended and were prepared in
accordance with generally accepted accounting principles.  Since the date of the
most recent financial statements, there has been no change in the Borrower’s
business, properties or condition (financial or otherwise) which has had a
Material Adverse Effect.

 

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

Section 5.8    Regulation U.    The Borrower is not engaged in the business of
extending credit for the purpose of purchasing or carrying margin stock (within
the meaning of Regulation U of the Board of Governors of the Federal Reserve
System), and no part of the proceeds of any Advance will be used to purchase or
carry any margin stock or to extend credit to others for the purpose of
purchasing or carrying any margin stock.

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

Section 5.10    Titles and Liens.    The Borrower has good and absolute title to
all Collateral 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 FOR TRADEMARKS,
SERVICE MARKS, APPLICATIONS FOR SERVICE MARKS, MASK WORKS, TRADE DRESS AND
COPYRIGHTS FOR WHICH THE BORROWER IS THE REGISTERED OWNER (THE “OWNED
INTELLECTUAL PROPERTY”).  EXCEPT AS DISCLOSED ON SCHEDULE 5.11, (I) THE BORROWER
OWNS THE OWNED INTELLECTUAL PROPERTY FREE AND CLEAR OF ALL RESTRICTIONS
(INCLUDING COVENANTS NOT TO SUE A THIRD PARTY), COURT ORDERS, INJUNCTIONS,
DECREES, WRITS OR LIENS, WHETHER BY WRITTEN AGREEMENT OR OTHERWISE, (II) NO
PERSON OTHER THAN THE BORROWER OWNS OR HAS BEEN GRANTED ANY RIGHT IN THE OWNED
INTELLECTUAL PROPERTY, (III) ALL OWNED INTELLECTUAL PROPERTY IS VALID,
SUBSISTING AND ENFORCEABLE AND (IV) THE BORROWER HAS TAKEN ALL COMMERCIALLY
REASONABLE ACTION NECESSARY TO MAINTAIN AND PROTECT THE OWNED INTELLECTUAL
PROPERTY.

(B)           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

 

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

 

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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.

Section 5.14    Environmental Matters.

(A)           TO THE BORROWER’S BEST KNOWLEDGE, THERE ARE NOT PRESENT IN, ON OR
UNDER THE PREMISES ANY HAZARDOUS SUBSTANCES IN SUCH FORM OR QUANTITY AS TO
CREATE ANY MATERIAL LIABILITY OR OBLIGATION FOR EITHER THE BORROWER OR THE
LENDER UNDER COMMON LAW OF ANY JURISDICTION OR UNDER ANY ENVIRONMENTAL LAW, AND
NO HAZARDOUS SUBSTANCES HAVE EVER BEEN STORED, BURIED, SPILLED, LEAKED,
DISCHARGED, EMITTED OR RELEASED IN, ON OR UNDER THE PREMISES IN SUCH A WAY AS TO
CREATE ANY SUCH MATERIAL LIABILITY.

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

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

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

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

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

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

 

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projections, valuations or proforma financial statements, present a good faith
opinion as to such projections, valuations and proforma condition and results.

Section 5.16    Financing Statements.    The Borrower has provided to the Lender
signed financing statements and has authorized the filing of financing
statements sufficient when filed to perfect the Security Interest and the other
security interests created by the Security Documents.  When such financing
statements are filed in the offices noted therein, the Lender will have a valid
and perfected security interest in all Collateral which is capable of being
perfected by filing financing statements.  None of the Collateral is or will
become a fixture on real estate, unless a sufficient fixture filing is in effect
with respect thereto.

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

ARTICLE VI

COVENANTS

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

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 90 DAYS AFTER THE END OF EACH FISCAL YEAR OF THE BORROWER, THE
BORROWER WILL DELIVER, OR CAUSE TO BE DELIVERED, TO THE LENDER, THE BORROWER’S
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 AND CONSOLIDATED
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 AND WHETHER OR
NOT

 

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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 BORROWER WILL DELIVER TO
THE LENDER AN UNAUDITED/INTERNAL BALANCE SHEET AND STATEMENTS OF INCOME AND
RETAINED EARNINGS OF THE BORROWER AS AT THE END OF AND FOR SUCH MONTH AND FOR
THE YEAR TO DATE PERIOD THEN ENDED, PREPARED, IF THE LENDER SO REQUESTS, ON A
CONSOLIDATING AND CONSOLIDATED BASIS TO INCLUDE ANY AFFILIATES, IN REASONABLE
DETAIL AND STATING IN COMPARATIVE FORM THE FIGURES FOR THE CORRESPONDING DATE
AND PERIODS IN THE PREVIOUS YEAR, ALL PREPARED IN ACCORDANCE WITH GAAP, SUBJECT
TO YEAR-END AUDIT ADJUSTMENTS; AND ACCOMPANIED BY A CERTIFICATE OF THE
BORROWER’S CHIEF FINANCIAL OFFICER, SUBSTANTIALLY IN THE FORM OF EXHIBIT B
HERETO STATING (I) THAT SUCH FINANCIAL STATEMENTS HAVE BEEN PREPARED IN
ACCORDANCE WITH GAAP, SUBJECT TO YEAR-END AUDIT ADJUSTMENTS, (II) WHETHER OR NOT
SUCH OFFICER HAS KNOWLEDGE OF THE OCCURRENCE OF ANY DEFAULT OR EVENT OF DEFAULT
NOT THERETOFORE REPORTED AND REMEDIED AND, IF SO, STATING IN REASONABLE DETAIL
THE FACTS WITH RESPECT THERETO, AND (III) ALL RELEVANT FACTS IN REASONABLE
DETAIL TO EVIDENCE, AND THE COMPUTATIONS AS TO, WHETHER OR NOT THE BORROWER IS
IN COMPLIANCE WITH THE FINANCIAL COVENANTS.

(C)           COLLATERAL REPORTS.  WITHIN 15 DAYS AFTER THE END OF EACH MONTH OR
MORE FREQUENTLY IF THE LENDER SO REQUIRES, THE BORROWER WILL DELIVER TO THE
LENDER AGINGS OF THE BORROWER’S ACCOUNTS RECEIVABLE AND ITS ACCOUNTS PAYABLE, AN
INVENTORY CERTIFICATION REPORT, AND A CALCULATION OF THE BORROWER’S ACCOUNTS,
ELIGIBLE ACCOUNTS, INVENTORY AND ELIGIBLE INVENTORY AS AT THE END OF SUCH MONTH
OR SHORTER TIME PERIOD.

(D)           PROJECTIONS.  AT LEAST 30 DAYS BEFORE THE BEGINNING OF EACH FISCAL
YEAR OF THE BORROWER, THE BORROWER WILL DELIVER TO THE LENDER THE PROJECTED
BALANCE SHEETS AND INCOME STATEMENTS FOR EACH MONTH OF SUCH YEAR, EACH IN
REASONABLE DETAIL, REPRESENTING THE BORROWER’S GOOD FAITH PROJECTIONS AND
CERTIFIED BY 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, TOGETHER WITH A STATEMENT OF UNDERLYING ASSUMPTIONS
AND SUCH SUPPORTING SCHEDULES AND INFORMATION AS THE LENDER MAY IN ITS
DISCRETION REQUIRE.

(E)           LITIGATION.  IMMEDIATELY AFTER THE COMMENCEMENT THEREOF, THE
BORROWER WILL DELIVER TO THE LENDER NOTICE IN WRITING OF ALL LITIGATION AND OF
ALL PROCEEDINGS BEFORE ANY GOVERNMENTAL OR REGULATORY AGENCY AFFECTING THE
BORROWER (I) OF THE TYPE DESCRIBED IN SECTION 5.14(C) OR (II) WHICH SEEK A
MONETARY RECOVERY AGAINST THE BORROWER IN EXCESS OF $50,000.

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

 

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

(H)           DISPUTES.  PROMPTLY UPON KNOWLEDGE THEREOF, THE BORROWER WILL
DELIVER TO THE LENDER NOTICE OF (I) ANY DISPUTES OR CLAIMS BY THE BORROWER’S
CUSTOMERS EXCEEDING $5,000 INDIVIDUALLY OR $50,000 IN THE AGGREGATE DURING ANY
FISCAL YEAR; (II) CREDIT MEMOS; (III) ANY GOODS RETURNED TO OR RECOVERED BY THE
BORROWER.

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

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

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

(L)            INTELLECTUAL PROPERTY.

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

(II)           PROMPTLY UPON KNOWLEDGE THEREOF, THE BORROWER WILL DELIVER TO THE
LENDER NOTICE OF (A) ANY INFRINGEMENT OF ITS INTELLECTUAL PROPERTY RIGHTS BY

 

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OTHERS, (B) CLAIMS THAT THE BORROWER IS INFRINGING ANOTHER PERSON’S INTELLECTUAL
PROPERTY RIGHTS AND (C) ANY THREATENED CANCELLATION, TERMINATION OR MATERIAL
LIMITATION OF ITS INTELLECTUAL PROPERTY RIGHTS.

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

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

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

(O)           TAX RETURNS.  AS SOON AS POSSIBLE, AND IN ANY EVENT BY NOT LATER
FIVE DAYS AFTER THEY ARE DUE, COPIES OF THE STATE AND FEDERAL TAX RETURNS AND
ALL SCHEDULES THERETO AND AN UPDATED PERSONAL FINANCIAL STATEMENT OF EACH OWNER
OF THE BORROWER.

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

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

Section 6.2    Financial Covenants.

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

Period

 

Minimum Book Net Worth

October 2002

 

$120,913,000

November 2002

 

$120,476,000

December 2002

 

$121,298,000

January 2003

 

$120,681,000

February 2003

 

$120,283,000

March 2003

 

$120,082,000

April 2003

 

$120,569,000

May 2003

 

$120,524,000

June 2003

 

$120,046,000

July 2003

 

$119,911,000

August 2003

 

$120,124,000

September 2003

 

$120,954,000

October 2003

 

$121,299,000

November 2003

 

$121,441,000

December 2003

 

$123,212,000

 

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(B)           MINIMUM EARNINGS BEFORE TAXES.  THE BORROWER WILL ACHIEVE DURING
EACH PERIOD DESCRIBED BELOW, EARNINGS BEFORE TAXES, OF NOT LESS THAN THE AMOUNT
SET FORTH OPPOSITE SUCH PERIOD:

 

Period

 

Minimum Earnings Before Taxes

October 2002

 

$(25,942,000)

November 2002

 

$(26,379,000)

December 2002

 

$(26,557,000)

January 2003

 

$(617,000)

February 2003

 

$(1,014,000)

March 2003

 

$(1,215,000)

April 2003

 

$(728,000)

May 2003

 

$(773,000)

June 2003

 

$(1,251,000)

July 2003

 

$(1,387,000)

August 2003

 

$(1,172,000)

September 2003

 

$(344,000)

October 2003

 

$2,000

November 2003

 

$143,000

December 2003

 

$1,915,000

 

(C)           CAPITAL EXPENDITURES.  THE BORROWER WILL NOT INCUR OR CONTRACT TO
INCUR CAPITAL EXPENDITURES OF MORE THAN (I) $2,200,000 IN THE AGGREGATE DURING
FISCAL YEAR 2002 AND  $1,200,000 IN THE AGGREGATE DURING FISCAL YEAR 2003.

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 (COLLECTIVELY, “PERMITTED LIENS”):

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

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

 

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

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

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

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

(A)           INDEBTEDNESS ARISING HEREUNDER;

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

(C)           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 6.4 HERETO.

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

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

 

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(B)           TRAVEL ADVANCES OR LOANS TO THE BORROWER’S OFFICERS AND EMPLOYEES
NOT EXCEEDING AT ANY ONE TIME AN AGGREGATE OF $30,000;

(C)           ADVANCES IN THE FORM OF PROGRESS PAYMENTS, PREPAID RENT NOT
EXCEEDING THREE MONTHS 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.    The Borrower will not declare or
pay any dividends (other than dividends payable solely in stock of the Borrower)
on any class of its stock or make any payment on account of the purchase,
redemption or other retirement of any shares of such stock or 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 15% 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; Inspection and Examination.    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 or accountant for 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, to send and discuss with account debtors and other obligors
requests for verification of amounts owed to the Borrower, and to discuss the
Borrower’s affairs with any of its Directors, Officers, employees or agents. 
The Borrower hereby irrevocably authorizes all accountants and third parties to
disclose and deliver to Lender, at the Borrower’s expense, all financial
information, books and records, work papers, management reports and other
information in their possession regarding the Borrower.  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.

Section 6.10    Account Verification.    The Lender may at any time and from
time to time send or require the Borrower to send requests for verification of
accounts or notices of assignment to account debtors and other obligors.  The
Lender may also at any time and from time to time telephone account debtors and
other obligors to verify accounts.

Section 6.11    Compliance with Laws.

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

 

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

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

Section 6.12    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 SECTION 6.14 SHALL PREVENT THE BORROWER FROM DISCONTINUING THE
OPERATION AND MAINTENANCE OF ANY OF ITS PROPERTIES IF SUCH DISCONTINUANCE IS, IN
THE BORROWER’S JUDGMENT, DESIRABLE IN THE CONDUCT OF THE BORROWER’S BUSINESS AND
NOT DISADVANTAGEOUS IN ANY MATERIAL RESPECT TO THE LENDER.  THE BORROWER WILL
TAKE ALL COMMERCIALLY REASONABLE STEPS NECESSARY TO PROTECT AND MAINTAIN ITS
INTELLECTUAL PROPERTY RIGHTS.

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

Section 6.14    Insurance.    The Borrower will obtain and at all times maintain
insurance with insurers believed by the Borrower to be responsible and
reputable, in such amounts and against such risks as may from time to time be
required by the Lender, but in all events in such amounts and against such risks
as is usually carried by companies engaged in similar business 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

 

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

Section 6.18    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.

Section 6.19    Sale and Leaseback.    The Borrower will not 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.

 

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Section 6.21    Accounting.    The Borrower will not adopt any material change
in accounting principles other than as required by GAAP.  The Borrower will not
adopt, permit or consent to any change in its fiscal year.

Section 6.22    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.  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.    Unless disclosed to the Lender pursuant to
Section 5.12, neither the Borrower nor any ERISA Affiliate will (i) adopt,
create, assume or become a party to any Pension Plan, (ii) incur any obligation
to contribute to any Multiemployer Plan, (iii) incur any obligation to provide
post-retirement medical or insurance benefits with respect to employees or
former employees (other than benefits required by law) or (iv) amend any Plan in
a manner that would materially increase its funding obligations.

Section 6.24    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 Sections 6.12 and 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 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

 

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on behalf of the Borrower any and all instruments, documents, assignments,
security agreements, financing statements, applications for insurance and other
agreements and writings required to be obtained, executed, delivered or endorsed
by the Borrower under this Section 6.26.

ARTICLE VII

EVENTS OF DEFAULT, RIGHTS AND REMEDIES

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

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

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

(C)           A CHANGE OF CONTROL SHALL OCCUR;

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

(E)           THE BORROWER 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 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 THE BORROWER SHALL INSTITUTE (BY PETITION, APPLICATION, ANSWER,
CONSENT OR OTHERWISE) ANY BANKRUPTCY, INSOLVENCY, REORGANIZATION, ARRANGEMENT,
READJUSTMENT OF DEBT, DISSOLUTION, LIQUIDATION OR SIMILAR PROCEEDING RELATING TO
IT OR HIM UNDER THE LAWS OF ANY JURISDICTION; OR ANY SUCH PROCEEDING SHALL BE
INSTITUTED (BY PETITION, APPLICATION OR OTHERWISE) AGAINST THE BORROWER; OR ANY
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;

(F)            A PETITION SHALL BE FILED BY OR AGAINST THE BORROWER UNDER THE
UNITED STATES BANKRUPTCY CODE NAMING THE BORROWER AS DEBTOR;

(G)           ANY REPRESENTATION OR WARRANTY MADE BY THE BORROWER IN THIS
AGREEMENT, ,OR BY THE BORROWER (OR ANY OF ITS OFFICERS) 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 SHALL
PROVE TO HAVE BEEN INCORRECT IN ANY MATERIAL RESPECT WHEN DEEMED TO BE
EFFECTIVE;

(H)           THE RENDERING AGAINST THE BORROWER OF AN ARBITRATION AWARD, FINAL
JUDGMENT, DECREE OR ORDER FOR THE PAYMENT OF MONEY IN EXCESS OF $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;

 

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(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.

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

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

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

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

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

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

 

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

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

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

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

(E)           THE LENDER MAY MAKE DEMAND UPON THE BORROWER AND, FORTHWITH UPON
SUCH DEMAND, THE BORROWER WILL PAY TO THE LENDER IN IMMEDIATELY AVAILABLE FUNDS
FOR DEPOSIT IN THE SPECIAL ACCOUNT PURSUANT TO SECTION 2.13 AN AMOUNT EQUAL TO
THE AGGREGATE MAXIMUM AMOUNT AVAILABLE TO BE DRAWN UNDER ALL LETTERS OF CREDIT
THEN OUTSTANDING, ASSUMING COMPLIANCE WITH ALL CONDITIONS FOR DRAWING
THEREUNDER;

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

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

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

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

 

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ARTICLE VIII

MISCELLANEOUS

Section 8.1    No Waiver; Cumulative Remedies; Compliance with Laws.    No
failure or delay by the Lender in exercising any right, power or remedy under
the Loan Documents shall operate as a waiver thereof; nor shall any single or
partial exercise of any such right, power or remedy preclude any other or
further exercise thereof or the exercise of any other right, power or remedy
under the Loan Documents.  The remedies provided in the Loan Documents are
cumulative and not exclusive of any remedies provided by law.  The Lender may
comply with any applicable state or federal law requirements in connection with
a disposition of the Collateral and such compliance will not be considered
adversely to affect the commercial reasonableness of any sale of the Collateral.

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

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

Section 8.4    Further Documents.    The Borrower will from time to time execute
and deliver or endorse any and all instruments, documents, conveyances,
assignments, security agreements, financing statements, control agreements and
other agreements and writings that the

 

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Lender may reasonably request in order to secure, protect, perfect or enforce
the Security Interest or the Lender’s rights under the Loan Documents (but any
failure to request or assure that the Borrower executes, delivers or endorses
any such item shall not affect or impair the validity, sufficiency or
enforceability of the Loan Documents and the Security Interest, regardless of
whether any such item was or was not executed, delivered or endorsed in a
similar context or on a prior occasion).

Section 8.5    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 Obligations, this Agreement, the Loan Documents, any Letter
of Credit and any other document or agreement related hereto or thereto, and the
transactions contemplated hereby, including all such costs, expenses and fees
incurred in connection with the negotiation, preparation, execution, amendment,
administration, performance, collection and enforcement of the Obligations and
all such documents and agreements and the creation, perfection, protection,
satisfaction, foreclosure or enforcement of the Security Interest.

Section 8.6    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 6.12(B); AND

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

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

 

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Borrower shall nevertheless make the maximum contribution to the payment and
satisfaction of each of the Indemnified Liabilities which is permissible under
applicable law.  The Borrower’s obligation under this Section 8.6 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 by telefacsimile shall be equally as effective as delivery of an
original executed counterpart of this Agreement.  Any party delivering an
executed counterpart of this Agreement by telefacsimile also shall deliver an
original executed counterpart of this Agreement but the failure to deliver an
original executed counterpart shall not affect the validity, enforceability, and
binding effect of this Agreement.

Section 8.9    Retention of Borrower’s Records.    The Lender shall have no
obligation to maintain any electronic records or any documents, schedules,
invoices, agings, or other papers delivered to the Lender by the Borrower or in
connection with the Loan Documents for more than four months after receipt by
the Lender.

Section 8.10    Binding Effect; Assignment; Complete Agreement; Exchanging
Information.    The Loan Documents shall be binding upon and inure to the
benefit of the Borrower and the Lender and their respective successors and
assigns, except that the Borrower shall not have the right to assign its rights
thereunder or any interest therein without the Lender’s prior written consent. 
To the extent permitted by law, the Borrower waives and will not assert against
any assignee any claims, defenses or set-offs which the Borrower could assert
against the Lender.  This Agreement shall also bind all Persons who become a
party to this Agreement as a borrower.  This Agreement, together with the Loan
Documents, comprises the complete and integrated agreement of the parties on the
subject matter hereof and supersedes all prior agreements, written or oral, on
the subject matter hereof.  Without limiting the Lender’s right to share
information regarding the Borrower and its Affiliates with the Lender’s
participants, accountants, lawyers and other advisors, the Lender, Wells Fargo &
Company, and all direct and indirect subsidiaries of Wells Fargo & Company, may
exchange any and all information they may have in their possession regarding the
Borrower and its Affiliates, and the Borrower waives any right of
confidentiality it may have with respect to such exchange of such information.

Section 8.11    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.

 

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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
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.

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

 

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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.

 

 

 

 

 

 

DIGITAL ANGEL CORPORATION

490 Villaume Avenue

 

 

 

St. Paul, MN 55075-2443

By

 

 

Telecopier:  (651) 455-0217

 

Randolph K. Geissler

 

Attention:  James P. Santelli

Its 

Chief Executive Officer

 

email:  jsantelli@digitalangelcorp.com

 

 

 

 

 

 

 

 

 

 

 

Wells Fargo Business Credit, Inc

WELLS FARGO BUSINESS CREDIT, INC.

 

 

 

 

MAC  N9312-040

By

 

 

Sixth and Marquette

 

Michael L. Guillou

 

Minneapolis, MN 55479

Its 

Assistant Vice President

 

Telecopier:  (612) 673-8589

 

 

 

Attention:  Michael L. Guillou

 

 

 

e-mail: michael.l.guillou@welsfargo.com

 

 

 

 

 

 

 

 

 

 

 

 

45

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Table of Exhibits and Schedules

 

 

 

Exhibit A

 

Form of Revolving Note

 

 

 

Exhibit B

 

Compliance Certificate

 

 

 

Exhibit C

 

Premises

 

 

 

Schedule 5.1

 

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

 

 

 

Schedule 5.2

 

Capitalization and Organizational Chart

 

 

 

Schedule 5.5

 

Subsidiaries

 

 

 

Schedule 5.11

 

Intellectual Property Disclosures

 

 

 

Schedule 6.3

 

Permitted Liens

 

 

 

Schedule 6.4

 

Permitted Indebtedness and Guaranties

 

 

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Exhibit A to Credit and Security Agreement

REVOLVING NOTE

 

$5,000,000

 

Minneapolis, Minnesota

 

 

October 30,2002

 

For value received, the undersigned, DIGITAL ANGEL CORPORATION a Delaware
corporation (the “Borrower”), hereby promises to pay on the Termination Date
under the Credit Agreement (defined below), to the order of WELLS FARGO BUSINESS
CREDIT, INC., a Minnesota corporation (the “Lender”), at its main office in
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 FIVE MILLION DOLLARS
($5,000,000) or, if less, the aggregate unpaid principal amount of all Revolving
Advances made by the Lender to the Borrower under the Credit Agreement (defined
below) 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 Note is fully paid at the
rate from time to time in effect under the Credit and Security Agreement of even
date herewith (the “Credit Agreement”) by and between the Lender and the
Borrower.  The principal hereof and interest accruing thereon shall be due and
payable as provided in the Credit Agreement.  This Note may be prepaid only in
accordance with the Credit Agreement.

This Note is issued pursuant, and is subject, to the Credit Agreement, which
provides, among other things, for acceleration hereof.  This Note is the
Revolving Note referred to in the Credit Agreement.  This 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 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.

 

 

DIGITAL ANGEL CORPORATION

 

 

 

 

By

 

 

 

James P. Santelli

 

Its

Vice President of Finance

 

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Exhibit B to Credit and Security Agreement

Compliance Certificate

To:

Digital Angel Corporation

 

Wells Fargo Business Credit, Inc.

 

 

 

 

Date:

 

,

200

 

 

 

 

 

Subject:

 

 

Financial Statements

 

 

 

In accordance with our Credit and Security Agreement dated as of October 30,
2002 (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.

Events of Default.  (Check one):

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

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

Financial Covenants.  I further hereby certify as follows:

1.                                      Minimum Book Net Worth.  The Borrower
will maintain, during each period described below, its Book Net Worth,
determined as at the end of each month, at an amount not less than the amount
set forth opposite such period:

Period

 

Minimum Book Net Worth

October 2002

 

$120,913,000

November 2002

 

$120,476,000

December 2002

 

$121,298,000

January 2003

 

$120,681,000

February 2003

 

$120,283,000

March 2003

 

$120,082,000

April 2003

 

$120,569,000

May 2003

 

$120,524,000

June 2003

 

$120,046,000

July 2003

 

$119,911,000

August 2003

 

$120,124,000

September 2003

 

$120,954,000

October 2003

 

$121,299,000

November 2003

 

$121,441,000

 December 2003

 

$123,212,000

 

 

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2.                                      Minimum Earnings Before Taxes.  The
Borrower will achieve during each period described below, Earnings Before Taxes,
of not less than the amount set forth opposite such period.

Period

 

Minimum Earnings Before Taxes

October 2002

 

$(25,942,000)

November 2002

 

$(26,379,000)

December 2002

 

$(26,557,000)

January 2003

 

$(617,000)

February 2003

 

$(1,014,000)

March 2003

 

$(1,215,000)

April 2003

 

$(728,000)

May 2003

 

$(773,000)

June 2003

 

$(1,251,000)

July 2003

 

$(1,387,000)

August 2003

 

$(1,172,000)

September 2003

 

$(344,000)

October 2003

 

$2,000

November 2003

 

$143,000

December 2003

 

$1,915,000

 

3.                                       Capital Expenditures.  Pursuant to
Section 6.2 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
fiscal year ended December 31, 200__, for Capital Expenditures,  which o
satisfies o does not satisfy the requirement that such expenditures not exceed
$2,200,000 in the aggregate during fiscal year 2002 and $1,200,000 during fiscal
year 2003.

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

 

2

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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.

DIGITAL ANGEL CORPORATION

 

 

By

 

 

Its Chief Financial Officer

 

3

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Exhibit C to Credit and Security Agreement

Premises

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

1.   490 Villaume Avenue, South St. Paul, MN 55075

                [Need legal description  to be completed by Borrower]

2.   1451 Research Park Drive, Riverside, CA 92507

                [Need legal description  to be completed by Borrower]

3.   8050 Southern Maryland Blvd., Owings, MD 20736

                [Need legal description  to be completed by Borrower]

 

 

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Schedule 5.1 to Credit and Security Agreement

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

Trade Names

Animal Applications Division

Digital Angel Systems Division

GPS & Communications Division

Physicians Call Center Division

Chief Executive Office/Principal Place of Business

490 Villaume Avenue

South St. Paul, MN 55075

 

Other Inventory and Equipment Locations

                                                                1451 Research
Park Drive

                                                                Riverside, CA
92507

 

                                                                8050 Southern
Maryland Blvd.

                                                                Owings, MD 20736

 

                                                                Tom Cribb Road

                                                                Thamesmead

                                                                London SE28 OBH

                                                                United Kingdom

 

 

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Schedule 5.2 to Credit and Security Agreement

Capitalization and Organizational Chart

Holder

 

Type of Rights/Stock

 

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

 

Percent interest on a
fully diluted basis

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

[_to be completed by Borrower_]

 

 

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Schedule 5.5  to Credit and Security Agreement

Subsidiaries

None

 

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Schedule 5.11 to Credit and Security Agreement

Intellectual Property Disclosures

See attached

 

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Schedule 6.3 to Credit and Security Agreement

Permitted Liens

Creditor

 

Collateral

 

Jurisdiction

 

Filing Date

 

Filing No.

 

None

 

 

 

 

 

 

 

 

 

 

 

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Schedule 6.4 to Credit and Security Agreement

Permitted Indebtedness and Guaranties

Indebtedness

Creditor

 

Principal Amount

 

Maturity Date

 

Monthly Payment

 

Collateral

 

 

 

 

 

 

 

 

 

 

 

 

Guaranties

Primary Obligor

 

Amount and Description of
Obligation Guaranteed

 

Beneficiary of Guaranty

 

 

 

 

 

Principal Capital Management

 

 

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