Exhibit 10.1



 





Exhibit 10.1




AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT




     GMAC Commercial Finance LLC (successor by merger to GMAC Business Credit,
LLC) (“Lender”), a Delaware limited liability company, with offices at 3000
Town Center, Suite 280, Southfield, Michigan 48075, Transcat, Inc. an Ohio
Corporation (“Parent”), and Transmation (Canada) Inc., a Canadian corporation
(“Subsidiary” or together with Parent, the “Borrowers” or a “Borrower”, as
applicable) with a principal place of business at 35 Vantage Point Drive,
Rochester, New York 14624, enter into this Amended and Restated Loan and
Security Agreement on November 1, 2004 (the “Agreement”).



BACKGROUND




     This Agreement is based on the following background facts, which are
incorporated and made a part of this Agreement:



     A.      On November 12, 2002, Borrowers and Lender entered into a Loan and
Security Agreement (as amended from time to time prior to the date of this
Agreement, the “Original Loan Agreement”) and related documents and agreements
(collectively with the Original Loan Agreement, the “Original Loan Documents”).



     B.      Borrowers are currently in default of Section 8.11 of the Original Loan
Agreement for failing to achieve EBITDA of at least $2.5 million for the four
fiscal quarters ending September 25, 2004 (the “EBITDA Default”). Borrowers
have requested that the Lender amend the Original Loan Agreement and waive the
EBITDA Default and Lender has agreed subject to amending and restating the
Original Loan Agreement as set forth in this Agreement.



     C.      In connection with amending and restating the Original Loan Agreement,
the parties desire to restate in this Agreement, and the documents and
instruments executed in connection with this Agreement, all of the terms of the
Original Loan Agreement (as previously amended and as amended hereby), but to
preserve and reaffirm the grants of security interests, liens and pledge
granted to Lender (as successor by merger to GMAC Business Credit, LLC) therein
and, further the parties hereto intend that all security agreements, and liens,
security interests, pledges and guaranties granted in accordance with the
Original Loan Documents remain in full force and effect in favor of Lender.



1A. GENERAL LENDING TERMS




     The following are the general terms of the loans to be made under this
Agreement:




     A.     A revolving line of credit (the “Revolving Loans”) up to the
lesser of the Borrowing Base (defined below) or $9,000,000.00 (the
“Revolving Advance Limit”). The “Borrowing Base” is initially (a) 85% of
the aggregate outstanding amount of Eligible Accounts plus (b) the lesser
of (i) 50% of the aggregate value of Eligible Inventory, or (ii)
$3,000,000.00; minus (c) the Reserves. The advance rate against Eligible
Accounts will reduce by one percentage point for each



 









 






percentage point (or fraction thereof) that Dilution exceeds 5% (for
so long as Dilution exceeds 5%) and the advance rate against Eligible
Inventory will change based upon the from time-to-time OLV of Borrowers’
Inventory.




     B.     A $1,498,000 term loan (“Term Loan A”) evidenced by the Term Note
in the form attached as Exhibit 3.2A (“Term Note A”) and a $502,000 term
loan (“Term Loan B” and along with Term Loan A, the “Term Loans”)
evidenced by the Term Note in the form attached as Exhibit 3.2B (“Term
Note B” and along with Term Note A, the “Term Notes”).




     C.     Provided the Cap-X Condition (defined below) has been satisfied,
up to $1,000,000 in capital expenditure loans as provided in Section 3.3
below (the “Cap-X Loans”). The Cap-X Loans will be evidenced by a Cap-X
Note in the form attached as Exhibit 3.3 (the “Cap-X Note”).




     D.     Subject to Section 3.5 below, the applicable interest rates
(prior to an Event of Default) are set forth below based on the
applicable Fixed Charge Coverage Ratio:



	 	 	 	 	 	 	 	 	 
	 	 	Fixed Charge	 	 	 	 	 	 
	Tier
	 	Coverage Ratio*
	 	Revolving Loans
	 	Cap-X Loans and Term Loan A
	 	Term Loan B

	1
	 	1.249 or less
	 	(a) Prime Rate plus

0% or (b) LIBOR

plus 2.75%***

	 	(a) Prime Rate plus .50%

or (b) LIBOR plus 3.25%***

	 	Prime Rate plus .75%
	2
	 	1.25 to 1.49**
	 	(a) Prime Rate plus

0% or (b) LIBOR

plus 2.50%***

	 	(a) Prime Rate plus .25%

or (b) LIBOR plus 3.00%***

	 	Prime Rate plus .50%
	3
	 	1.50 or greater
	 	(a) Prime Rate plus
0% or (b) LIBOR
plus 2.25%***

	 	(a) Prime Rate plus 0% or

(b) LIBOR plus 2.75%***

	 	Prime Rate plus .25%








* The Fixed Charge Coverage Ratio shall be determined as of the end
of each fiscal quarter of Borrowers for the twelve months then
ending based upon the financial statements to be delivered by the
Borrowers pursuant to this Agreement. The determination of such
ratios as of the end of each fiscal quarter shall be set forth on a
certificate prepared by Borrowers and delivered with the financial
statements to be delivered with respect to such quarter pursuant to
this Agreement. Any increase or decrease in the applicable Base
Rates (defined below) shall become effective after the fifth
Business Day following the date on which Lender receives Borrowers’
financial statements required under this Agreement together with a
certificate satisfactory to Lender in its reasonable discretion
showing that a change in the applicable Base Rates is required. If
no such financial statements or certificates are delivered and are
not delivered within 15 days after written or verbal notice from
Lender, then the applicable Base Rates will be those set forth in
Tier 1.



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** The initial pricing will be the pricing set forth in Tier 2 and
the first reset of the pricing, if any, will be based on the
financial statements delivered pursuant to this Agreement for the
fiscal year ended March 26, 2005.




*** At Borrowers’ option. These rates will be referred to as a
“Prime Base Rate” or a “LIBOR Base Rate”, as applicable, and either
may be referred to as a “Base Rate”, and both may be collectively
referred to as “Base Rates”.




     E.     This Agreement expires on October 31, 2007 (the “Term”).




     F.     Borrowers shall pay Lender a collateral servicing fee of
$3,000.00 per month in advance, beginning on the first day of the first
full month after execution of this Agreement.




     G.     Borrowers shall pay Lender a fee of $43,125 which is payable on
the execution of this Agreement, which fee is fully earned upon the
execution of this Agreement.




     H.     Borrowers shall pay Lender, on the first of each month, an unused
line fee of 0.375% per annum times the average daily unused portion of
the Revolving Advance Limit during the preceding month.




     I.     While all Revolving Loans will be made in U.S. Dollars, Revolving
Loans made against Inventory located in Ontario, Canada or Accounts
denominated in Canadian Dollars will be based upon the applicable values
of such Collateral, using the Equivalent U.S. Dollar Amount. Unless
otherwise noted, all references in this Agreement to “$” or “U.S.
Dollars” means lawful money of the United States of America.



1B. AMENDMENT AND RESTATEMENT




     1B.1 Acknowledgment of Existing Indebtedness. Borrowers acknowledge that
as of November 1, 2004, Borrowers were indebted to Lender (exclusive of accrued
but unpaid interest) in the amount of $5,955,605.95 plus fees and costs
provided for in the Loan Documents (the “Existing Indebtedness”). Borrowers
further acknowledge that the Existing Indebtedness is owing to Lender without
setoff, recoupment, defense, deduction, counterclaim, credit, allowance or
adjustment, whether in law or equity, of any nature or kind.



     1B.2 Acknowledgment and Release. Borrowers acknowledge and agree that
Lender and GMAC Business Credit, LLC fully performed all of their obligations
under the Original Loan Agreement and the Original Loan Documents. Borrowers
also acknowledge and agree that the actions taken by GMAC Business Credit, LLC
and Lender to date in furtherance of the foregoing agreements and all other
loan and security documents are reasonable and appropriate under the
circumstances and are within their rights under such agreements and applicable
law. Notwithstanding the foregoing, in consideration of the agreements and
understandings herein, Borrowers for



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themselves and on behalf of their respective employees, agents, officers,
directors, affiliates, subsidiaries, shareholders, attorneys, associates,
executors, heirs, administrators, successors and assigns (collectively,
“Associates”), hereby release, discharge, forever acquit and covenant not to
sue GMAC Business Credit, LLC and Lender and each of their Associates from all
claims based on facts in existence as of the date hereof related to the
Original Loan Agreement or the Original Loan Documents, or the business
relationship among Borrowers, GMAC Business Credit, LLC or Lender, whether or
not any such claim now exists or hereafter arises.




     1B.3 Effect of Restatement. The parties acknowledge and agree that this
Agreement amends, modifies and restates the Existing Indebtedness to Lender
under the Original Loan Agreement; provided that the execution and delivery of
this Agreement does not constitute (a) a novation or (b) a waiver or release of
any indebtedness or other monetary obligations owing to Lender under the
Original Loan Agreement. On the date of this Agreement, all Existing
Indebtedness shall constitute Obligations hereunder and all outstanding loans
advanced under the Original Loan Agreement will be deemed loans advanced under
this Agreement.



     1B.4 Effect on Original Loan Documents. Subject to the terms of this
Agreement, all Original Loan Documents (other than the Original Loan Agreement)
shall remain in full force and effect, mutatis mutandis.



     1B.5 Waiver of EBITDA Default. Pursuant to Section 12.5 of the Original
Loan Agreement, Lender hereby waives the EBITDA Default. This waiver is only
with respect to the EBITDA Default for September 25, 2004 and should not be
construed as a waiver of any other conditions, covenants, or restrictions under
the Original Loan Agreement or this Agreement including, without limitation,
further violations of Section 8.11 of the Agreement.



2. DEFINITIONS.



          In addition to the terms defined in this Agreement, the following terms
have the given definitions:



          “Account Debtor” means any obligor under, with respect to, or on account
of an Account.



          “Accounts” means all presently existing and hereafter arising accounts
receivable, contract rights, and all other forms of obligations owing to a
Borrower arising out of the sale or lease of goods or the rendition of services
by a Borrower, whether or not earned by performance, all credit insurance,
guaranties, supporting obligations, and other security therefor, as well as all
goods returned to or reclaimed by a Borrower, and a Borrower’s Business Records
relating to any of the foregoing.



          “Advance Limit” means the Revolving Advance Limit plus the from
time-to-time outstanding principal balance owing on the Notes.



          “BIA” means the Bankruptcy and Insolvency Act (Canada), as amended.



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     “Big Cat” means Borrowers’ all inclusive marketing catalogue for
distributed products for use during (and the cost of which is amortized over) a
period greater than 12 months.



     “Borrowing Base Certificate” has the meaning given in Section
8.3(a).



     “Business Day” means a day on which national banks are open for business
in Detroit, Michigan.



     “Business Records” means all of a Borrower’s books and records including
all of the following: ledgers, records indicating, summarizing or evidencing a
Borrower’s assets (including the Collateral) or liabilities; all information
relating to a Borrower’s business operations or financial condition; and all
computer programs, disk or tape files, printouts, runs or other computer
prepared information, and the equipment containing such information.



     “Canadian Dollars” means lawful money of Canada.



     “Canadian Loan Documents” means the GSA and any registration or financing
statements filed on Lender’s behalf in Ontario, Canada.



     “Capital Expenditures” means, with respect to Borrowers for any period,
the sum of the aggregate of all expenditures (whether paid in cash, capitalized
as an asset or accrued as a liability) by Borrowers during such period which,
in accordance with GAAP, are or should be included in “capital expenditures” or
similar items reflected on the statements of cash flows of the respective
Borrower. For purposes of this Agreement, Capital Expenditures shall not
include Big Cat expenditures.



     “Capital Lease” means a capital lease or a lease which should be treated
as a capital lease under GAAP.



     “Cap-X Condition” means Borrowers’ EBITDA at the end of any fiscal quarter
(for the previous four quarters then ended) must equal or exceed $2,400,000.



     “Claims” means any demand, claim, action or cause of action, damage,
liability, loss, cost, debt, expense, obligation, tax, assessment, charge,
lawsuit, contract, agreement, undertaking or deficiency, of any kind or nature,
whether known or unknown, fixed, actual, accrued or contingent, liquidated or
unliquidated (including interest, penalties, attorneys’ fees and other costs
and expenses incident to proceedings or investigations relating to any of the
foregoing or the defense of any of the foregoing), whether or not litigation
has commenced.



     “Collateral” means all of the following: the Accounts; the Equipment; the
General Intangibles; the Inventory; the Negotiable Collateral; the Real Estate;
the Business Records; Commercial Tort Claims; investment property; securities;
any money or other assets of each Borrower which hereafter come into the
possession, custody or control of Lender, including money on deposit in any
blocked accounts to the extent such funds are determined to not be Lender’s
property; and all proceeds and products,



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whether tangible or intangible, of any of the foregoing, including proceeds of
insurance covering any or all of the Collateral, and any and all Accounts,
Equipment, General Intangibles, Inventory, Negotiable Collateral, Business
Records, money, deposit accounts or other tangible or intangible property
resulting from the sale or other disposition of the Collateral or any portion
thereof or interest therein, and the proceeds thereof.




          “Commercial Tort Claims” has the meaning given in the UCC.



          “Deferred Taxes” means deferred taxes as that term is used under GAAP.



          “Depreciation Expense” means, for any period, depreciation, amortization
(including Big Cat amortization), depletion and other like reductions to income
for such period not involving any outlay of cash, determined on a consolidated
basis in accordance with GAAP.



          “Dilution” means the aggregate amount of credits, returned goods,
adjustments, deductions, setoffs and recoupments granted by either Borrower or
taken by all Account Debtors in any calendar month divided by the aggregate
amount of Borrowers’ sales during the calendar month.



          “EBITDA” means, for any stated period, Borrowers’ Net Income for such
period with the following adjustments (all determined according to GAAP):



     (a)      Plus the sum of (without duplication)




	(i)	 	Interest Expense for such period;
	 
	(ii)	 	Income Tax Expense for such period;
	 
	(iii)	 	Depreciation Expense for such period;
	 
	(iv)	 	non-recurring, extraordinary, one-time losses;
	 
	(v)	 	non-cash expenses associated with stock options
and stock grants; and
	 
	(vi)	 	loan fees.





     (b)     Minus (i) non-recurring, extraordinary, one-time gains for such
period, (ii) Big Cat advertising rebates; and (iii) income tax benefits.



          “Eligible Accounts” means for each Borrower, the Borrower’s Accounts
listed on Borrowing Base Certificates delivered to Lender which Lender, in its
discretion, determines to be an Eligible Account. Without limiting the
generality of the immediately preceding sentence, no Account will be a Eligible
Account unless it meets all of the following minimum requirements:



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	(1)	 	The Account is valued at its face amount and
represents a complete, bona fide transaction for Eligible
Inventory sold, delivered, and accepted by the Account Debtor
or for services rendered (but excluding any amounts in the
nature of a service charge added to the amount due on an
invoice because the invoice has not been paid when due) that
requires no further act under any circumstances on the part of
the Borrowers or any other person or entity to make such
Account payable by the Account Debtor, and the Account arises
from an arm’s-length transaction in the ordinary course of
Borrowers’ business between Borrowers and an Account Debtor
that is not an affiliate, partner, officer, or employee of
Borrower, or a member of the family of any partner, officer,
or employee of Borrower.
	 
	(2)	 	The Account is not unpaid more than 90 days from
the earlier of (A) the date on which the original invoice
rendered in connection with such Account was issued, and (B)
the date on which the Eligible Inventory was shipped to, or
the services were performed for, the Account Debtor.
	 
	(3)	 	The goods the sale of which gave rise to the
Account were shipped or delivered or provided to the Account
Debtor on a final sale basis and not on a bill and hold sale
basis, a consignment sale basis, a guaranteed sale basis, a
sale or return basis, a trial basis, or on the basis of any
other similar understanding, and no part of such goods have
been returned or rejected.
	 
	(4)	 	The Account is not evidenced by chattel paper or
an instrument of any kind.
	 
	(5)	 	The Account Debtor with respect to the Account
(A) is not insolvent, (B) is not the subject of any Insolvency
Proceedings of any kind or of any other proceeding or action,
threatened or pending, which might have a materially adverse
effect on its business, and (C) is not, in Lender’s reasonable
discretion deemed ineligible for credit for other reasons
(including, without limitation, unsatisfactory past experience
of Borrowers or Lender with the Account Debtor or
unsatisfactory reputation of the Account Debtor).
	 
	(6)	 	The Account Debtor is located within United
States of America or a Permitted Canadian Province.
	 
	(7)	 	If the Account Debtor is not located in the
United States of America or a Permitted Canadian Province, the
Account Debtor has provided credit insurance reasonably
acceptable to Lender or a guaranty or other assurance
reasonably acceptable to Lender from a domestic affiliate.




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	(8)	 	The Account is (A) not a Governmental Account, or
(B) if it is a Governmental Account, the Federal Assignment of
Claims Act (or applicable similar legislation in Canada) has
been fully complied with so as to validly perfect Lender’s
first-priority security interest to Lender’s satisfaction,
provided, however, that Governmental Accounts up to $118,000
in the aggregate at any one time will be deemed Eligible
Accounts even if they do not comply with provision (B) above.
	 
	(9)	 	The Account is a valid, legally enforceable
obligation of the Account Debtor with respect thereto and is
not subject to any dispute, condition, contingency, setoff,
recoupment, reduction, claim for credit, allowance,
adjustment, counterclaim or defense on the part of such
Account Debtor (collectively, a “Setoff”), and no fact exists
that may provide a basis for any of the foregoing in the
present or future; provided that except as otherwise provided
in this Agreement, the Account will be ineligible only to the
extent of the Setoff.
	 
	(10)	 	The Account is subject to a first-priority
security interest in Lender’s favor and is not subject to any
other lien, claim, encumbrance, or security interest
whatsoever other than any Permitted Lien.
	 
	(11)	 	The Account is evidenced by an invoice or other
documentation in form acceptable to Lender and arises from a
contract, purchase order, or release that is satisfactory in
form and substance to Lender.
	 
	(12)	 	No representation or warranty contained in this
Agreement or any other agreement between Borrowers and Lender,
or in any Borrowing Base Certificate with respect to such
Account has been breached.
	 
	(13)	 	The Account is not subject to any provision
prohibiting its assignment.
	 
	(14)	 	The Account does not represent any manufacturer’s
or supplier’s credits, discounts, incentive plans, or other
similar arrangements entitling the Borrowers to discounts on
future purchases.
	 
	(15)	 	The Eligible Inventory giving rise to the Account
was not, at the time of sale thereof, subject to any lien or
encumbrance except in Lender’s favor.
	 
	(16)	 	The Account is payable in freely transferable
U.S. Dollars or Canadian Dollars.




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	(17)	 	Borrowers have observed and complied with (A) all
laws of the United States of America (including the Fair Labor
Standards Act) except for any non-compliance that would not
have a material adverse effect on Borrowers or the value of
the Accounts and (B) all laws of the state or province in
which the Account Debtor or the Account is located which, if
not observed and complied with, would deny to the Borrowers
access to the courts of such state or province.





             In addition to the foregoing requirements, Accounts of any Account Debtor
that are otherwise qualified will be reduced to the extent of (1) any accounts
payable (including, without limitation, Lender’s good faith estimate of any
contingent liabilities) by Borrowers to such Account Debtor (“Contras”) and (2)
that portion of an Account representing a retainage or holdback by the Account
Debtor; provided that Lender, in its sole discretion may determine that none of
such Accounts are Eligible Accounts if Contras and/or Setoffs represent 10% or
more of the amount owing to Borrowers from such Account Debtor. Finally, all
Accounts owing by a given Account Debtor will be ineligible if more than 50% of
the total Accounts owing by such Account Debtor are otherwise ineligible.



             Any Account that is at any time an Eligible Account and that subsequently
fails to meet any of the requirements set forth above will immediately cease to
be an Eligible Account and must be removed from the Borrowing Base immediately.



             “Eligible Inventory” means for each Borrower, that portion of Borrower’s
Inventory consisting of new, unused, finished goods Inventory in respect of
which no further manufacturing, processing, or other work has to be done (other
than packaging or crating for shipment or distribution), held for sale in the
ordinary course of Borrower’s business that is listed on a Borrowing Base
Certificate delivered to Lender in accordance with this Agreement that Lender
determines to be Eligible Inventory. Without limiting the generality of the
immediately preceding sentence, no Inventory will be Eligible Inventory unless
it meets all the following minimum requirements:




	(1)	 	The Inventory has not been shipped, delivered,
provided to, purchased or sold by Borrowers on a bill and
hold, consignment sale, guaranteed sale, trial or sale or
return basis, or any other similar basis or understanding.
	 
	(2)	 	No Account has arisen with respect to such
Inventory.
	 
	(3)	 	The Inventory has not been billed to a customer
on a “progress billing” or similar basis prior to shipment to
the customer.
	 
	(4)	 	The Inventory is valued at the lower of cost or
market, on a first-in-first-out basis.
	 
	(5)	 	The Inventory is in Borrower’s possession (or the
possession of Borrower’s salesmen to the extent that the value
of such Inventory




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	 	 	included in Borrowers’ Borrowing Base does not exceed
$200,000 in the aggregate), or if the Inventory is located on
premises not owned by the Borrower, the landlord or owner of
such premises must have waived its distraint, lien, and
similar rights with respect to such Inventory and must have
agreed in a written agreement satisfactory to Lender (A) that
Lender has a valid, perfected first priority security
interest in the Inventory, (B) to give Lender notice of any
default by Borrowers and the option to cure such default, (C)
to permit Lender to enter such premises to repossess or
remove the Inventory at any time, and (D) to grant Lender
such other rights as Lender may reasonably request.
	 
	(6)	 	The Inventory is not subject to any royalty,
copyright, trademark, trade name, or licensing arrangement, or
any law, rule, or regulation that could limit or impair
Lender’s ability to exercise its rights with respect to such
Inventory.
	 
	(7)	 	The Inventory is held for resale and is not
packaging, labels, manuals, supplies or repair parts.
	 
	(8)	 	The Inventory meets all standards imposed by any
governmental agency, department, or division having regulatory
authority over such Inventory or its use or sale including,
without limitation, standards set forth in the Fair Labor
Standards Act.
	 
	(9)	 	No representation or warranty in this Agreement,
any other agreement between Borrowers and Lender, or any
Borrowing Base Certificate has been breached with respect to
such Inventory.
	 
	(10)	 	The Inventory is not obsolete, is of good and
merchantable quality, and is readily salable.
	 
	(11)	 	The Inventory is subject to a first-priority
security interest in Lender’s favor and is not subject to any
other lien or encumbrance.
	 
	(12)	 	The Inventory is new and unused and has not been
used on a trial or demonstration basis.






	 	 	Any Inventory that is at any time Eligible Inventory and that
subsequently fails to meet any of the requirements set forth above
will cease to be Eligible Inventory immediately and must be removed
from the Borrowing Base immediately.





             “Environmental Laws” means the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended, the Resource Conservation
and Recovery Act of 1976, the Hazardous Materials Transportation Act, the Toxic
Substances Control Act, the regulations pertaining to such statutes, and any
other safety, health or environmental statutes, laws, regulations or ordinances
of the



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United States or of any state, county or municipality in which Borrowers
conduct their business or the Collateral is located.




          “Equipment” means all of Borrowers’ present and hereafter acquired
equipment, machinery, machine tools, motors, furniture, furnishings, fixtures,
motor vehicles, rolling stock, processors, tools, parts, dies, jigs, goods
(other than consumer goods, farm products or Inventory), wherever located, and
any interest of Borrowers in any of the foregoing, and all attachments,
accessories, accessions, replacements, substitutions, additions and
improvements to any of the foregoing, wherever located.



          “Equivalent U.S. Dollar Amount” means, on any Business Day with respect to
any amount of Canadian Dollars, the amount of U.S. Dollars which would be
required to buy such amount of Canadian Dollars using the rate reported in the
Wall Street Journal as the New York exchange mid-range rate to trading among
banks in amounts of U.S. $1 million or more, as quoted at 4 p.m. Eastern time
on the prior Business Day by Reuters and other sources (or another comparable
rate as announced from time-to-time by Lender).



          “ERISA” means the Employee Retirement Income Security Act of 1974, as
amended, and the regulations thereunder.



          “ERISA Affiliate” means each trade or business (whether or not
incorporated and whether or not foreign) which is or may hereafter become a
member of a group of which Borrowers are a member and which is treated as a
single employer under ERISA Section 4001(b)(1), or IRC Section 414.



          “Eurocurrency Reserve Requirement” is defined as part of the definition of
LIBOR Rate.



          “Excess Availability” means at any time, the difference between Borrowers’
Borrowing Base and the outstanding Revolving Loans.



          “Excess Cash Flow” means the following (calculated each fiscal year
according to GAAP): EBITDA less the sum of (i) principal payments on long term
debt; (ii) Interest Expense; (iii) Big Cat expenditures; (iv) taxes paid during
the fiscal year; (v) Capital Expenditures exclusive of leased or debt financed
Capital Expenditures; (vi) lease payments on all Capital Leases and (vii) loan
fees.



          “Expenses” means all reasonable fees and out-of-pocket disbursements
incurred by Lender, including fees of counsel and court costs, in any way
arising from or in connection with this Agreement, any Loan Documents, any of
the Collateral, any of the Obligations or the business relationship between
Lender and either Borrower, including, without limitation, (a) audit fees at
the per day rate provided for in Section 8.6 below; (b) all reasonable fees and
expenses (including recording fees and insurance policy fees) of Lender and
counsel for Lender for the preparation, examination, approval, negotiation,
execution and delivery of, or the closing of any of the transactions
contemplated by, this Agreement and any Loan Documents; (c) all reasonable fees
and out-of-pocket disbursements incurred by Lender, including reasonable
attorneys’ fees,



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in any way arising from or in connection with any action taken by Lender to
monitor, advise, administer, enforce or collect any of the Obligations under
this Agreement, any Loan Documents or any other obligations of either Borrower,
whether joint, joint and several, or several, under this Agreement (or any Loan
Documents), or any other existing or future document or agreement, or arising
from or relating to the business relationship between Lender and either
Borrower, or otherwise securing any of the Obligations, including any actions
to lift the automatic stay or to otherwise in any way monitor or participate in
any Insolvency Proceeding of either Borrower; (d) all reasonable expenses and
fees (including reasonable attorneys’ fees) incurred in relation to, in
connection with, in defense of and/or in prosecution of any litigation
instituted by any one or more of the Borrowers, Lender or any third party
against or involving Lender arising from, relating to, or in connection with
any of the Obligations or either Borrower’s other obligations, this Agreement
(or any Loan Documents), any of the Collateral, or the business relationship
between Lender and either Borrower, including any so-called “lender liability”
action, any claim and delivery or other action for possession of, or
foreclosure on, any of the Collateral, post-judgment enforcement of any rights
or remedies including enforcement of any judgments, and prosecution of any
appeals (whether discretionary or as of right and whether in connection with
pre-judgment or post-judgment matters); (e) all reasonable costs, expenses and
fees incurred by Lender or its agents in connection with any appraisals or
environmental assessments of all or any of the Collateral (and Borrowers shall
fully cooperate with such appraisers and make their property available for
appraisal in connection with as many appraisals or environmental assessments as
Lender may request); (f) all reasonable fees described in Section 1A above, and
(g) all reasonable costs, expenses and fees incurred by Lender and/or its
counsel in connection with consultants, expert witnesses or other professionals
retained by Lender and/or its counsel in order to assist, advise and/or give
testimony with respect to any matter relating to this Agreement or any Loan
Documents, the Collateral or the business relationship between Lender and
either Borrower (and Borrowers shall fully cooperate with such consultant,
expert witness or other professional and shall make their premises, books and
records, accounting systems, computer systems and other media for the
recordation of information available to such persons).




          “Fixed Charge Coverage Ratio” means for any applicable measurement period,
the ratio of (a) EBITDA minus Capital Expenditures that are not financed (via
loans or leases) to (b) the sum of Interest Expense, principal payments payable
on Funded Debt, lease payments due on all Capital Leases, Income Tax Expenses
(taxes attributable to the measurement period other than Deferred Taxes), loan
fees, dividends and cash expenses associated with stock options.



          “Funded Debt” means, without duplication, all indebtedness that bears
interest (whether current pay, accrued or otherwise), including without
limitation, the deferred purchase price of property or services, all
obligations to repurchase all or any portion of any property transferred or
sold and all other obligations arising under arrangements or agreements that,
in substance, provide financing.



          “GAAP” means generally accepted United States accounting principles,
consistently applied.



12









 





          “General Intangibles” means all of each Borrower’s present and future
general intangibles and other personal property (including Commercial Tort
Claims, health care receivables, contract rights, rights arising under common
law, statutes or regulations, choses or things in action, goodwill, going
concern value, “blue sky”, patents, trade names, trademarks, service marks,
copyrights, blueprints, drawings, purchase orders, customer lists, monies due
or recoverable from pension funds, monies due under any royalty or licensing
agreements, route lists, infringement claims, software, computer discs,
computer tapes, literature, reports, catalogs, deposit accounts, insurance
premium rebates, business interruption insurance claims and proceeds and
proceeds of insurance, other than casualty insurance, tax refunds and tax
refund claims) other than goods and Accounts, and each Borrower’s Business
Records relating to any of the foregoing.



          “Governmental Account” means an Account with respect to which the Account
Debtor is the government of the United States of America or Canada, or any
department, agency or instrumentality thereof (or of any State or Province
therein).



          “GSA” means the General Security Agreement dated November 12, 2002
executed by Subsidiary in favor of Lender.



          “Hazardous Material” means any substance, material, emission or waste
which is or hereafter becomes regulated or classified as a hazardous substance,
hazardous material, toxic substance or solid waste under any Environmental Law,
asbestos, petroleum products, urea formaldehyde, polychlorinated biphenyls
(PCBs), radon and any other hazardous or toxic substance, material, emission or
waste.



          “Income Tax Expense” means for any period, the aggregate of all taxes on
income for such period, whether current or deferred, determined in accordance
with GAAP.



          “Insolvency Proceeding” means any proceeding commenced by or against
Borrowers or any guarantor under any provision of the Bankruptcy Code, 11
U.S.C. §101 et. seq., the Bankruptcy and Insolvency Act (Canada), the
Companies’ Creditors Arrangement Act (Canada) or under any other bankruptcy or
insolvency law, including assignments for the benefit of creditors, formal or
informal moratoria, compositions, extensions generally with its creditors or
proceedings seeking reorganization, liquidation, arrangement or other similar
relief.



          “Interest Expense” means, for any given period, the aggregate amount of
interest paid and/or accrued on account of any debt, plus imputed interest paid
or accrued on account of any Capital Leases.



          “Inventory” means all present and future inventory in which either
Borrower has any interest, including goods held for sale or lease or to be
furnished under a contract of service, either Borrower’s present and future raw
materials, work in process, finished goods and supplies and materials used in
or consumed in either Borrower’s business, goods which have been returned to,
repossessed by or stopped in transit by either Borrower, packing and shipping
materials, wherever located, any



13









 




documents of title representing any of the above, and Borrowers’ Business
Records relating to any of the foregoing.




          “LIBOR Based Loans” means that portion of the Loans on which interest
accrues at the LIBOR Rate.



          “LIBOR Interest Period” is defined as a calendar month.



          “LIBOR Loan Tranches” means a particular portion of the LIBOR Based Loans
to which a particular LIBOR Interest Period applies.



          “LIBOR Rate” means an annual rate of interest determined by Lender as
being the rate available at approximately 11:00 a.m. London time in the London
Interbank Market, as referenced by Reuters Screen “LIBOR”, in accordance with
the usual practice in such market, for 30 day LIBOR loans in effect two
Business Days prior to the first Business day of each calendar month. LIBOR
Based Loan (including those requested in connection with the conversion of a
Prime Based Loan to a LIBOR Based Loan in accordance with Section 3.5 hereof),
or for a LIBOR Based Loan which Borrowers have elected to continue as a LIBOR
Based Loan beyond the expiration of the then current LIBOR Interest Period with
respect thereto, for deposits of dollars in amounts equal (as nearly as may be
estimated) to the amount of the LIBOR Based Loan which shall then be loaned by
the Lender to Borrowers as of the time of such determination, as such rate may
be adjusted by the reserve percentage applicable during the LIBOR Interest
Period in effect (or if more than one such percentage shall be applicable, the
daily average of such percentages for those days in such LIBOR Interest Period
during which any such percentage shall be so applicable) under regulations
issued from time to time by the Board of Governors of the Federal Reserve
System (or any successor) for determining the maximum reserve requirement
(including without limitation, any emergency, supplemental or other marginal
reserve requirement) for a national bank with respect to liabilities or assets
consisting of or including “Eurocurrency Liabilities” as such term is defined
in Regulation D of the Board of Governors of the Federal Reserve System, as in
effect from time to time, having a term equal to such LIBOR Interest Period
(“Eurocurrency Reserve Requirement”), as reasonably applied to loans of this
type. Such adjustment shall be effectuated by calculating, and the LIBOR Rate
shall be equal to, the quotient of (i) the offered rate divided by (ii) one
minus the Eurocurrency Reserve Requirement.



          “LIBOR Rate Option” is defined in Section 3.5 below.



          “Line of Credit” means the revolving line of credit provided for in this
Agreement.



          “Loan Documents” means, collectively, this Agreement, the Notes, the
Canadian Loan Documents, any security agreements, pledge agreements,
assignments, deeds of trust, mortgages or other encumbrances or agreements
which secure or relate to the Obligations or the collateral security for the
Obligations, any guaranties of the Obligations, any lock box or blocked account
agreements and any



14









 




other agreements entered into between either Borrower and Lender relating to or
in connection with this Agreement.




          “Loans” means the Revolving Loans, the Term Loans and the Cap-X Loan
together with any other loans or advances made by Lender to Borrowers.



          “Material Adverse Effect” means relative to any occurrence of whatever
nature (including any determination in litigation, arbitration or governmental
proceeding or investigation) involving or affecting either Borrower that Lender
reasonably determines will or does have a materially adverse effect on:




	A.	 	The assets, business, profits, properties,
condition (financial or otherwise), operations or foreseeable
financial prospects of a Borrower as a consolidated business;
or
	 
	B.	 	The ability of a Borrower to perform any of their
payment or other material obligations under this Agreement,
any other Loan Documents or the transactions contemplated
thereby.





          “Multiemployer Plan” means a multiemployer plan as defined in ERISA
Sections 3(37) or 4001(a)(3) or IRC Section 414(f) which covers employees of
Borrowers or any ERISA Affiliate.



          “Negotiable Collateral” means all of each Borrower’s present and future
letters of credit, notes, drafts, instruments, certificated and uncertificated
securities, documents, leases and chattel paper, and each Borrower’s Business
Records relating to any of the foregoing.



          “Notes” means the Cap-X Note and the Term Notes.



          “Obligations” means all Loans, advances, debts, liabilities (including all
amounts charged to Borrowers’ loan account pursuant to any agreement
authorizing Lender to charge Borrowers’ loan account), obligations, fees, lease
payments, covenants and duties owing by either Borrower to Lender of any kind
and description for the payment of money or otherwise, (whether pursuant to or
evidenced by the Loan Documents, by the Notes or other instrument or by any
other agreement between Lender and either Borrower), whether direct or
indirect, absolute or contingent, due or to become due, now existing or
hereafter arising, including any debt, liability or obligation owing from
either Borrower to others which Lender may obtain by assignment or otherwise,
and all interest thereon, including any interest that, but for the provisions
of laws applicable to any Insolvency Proceeding, would have accrued, and all
Expenses which either Borrower is required to pay or reimburse pursuant to the
Loan Documents, by law or otherwise.



          “OLV” means the following, determined from time to time by an appraiser
acceptable to Lender in its reasonable discretion: the projected net cash
proceeds to be derived from the sale and disposition of Borrowers’ Inventory
after deduction for all



15









 




associated costs, expenses and fees as part of a professionally managed
liquidation sale taking place over a reasonable time frame not to exceed 8
weeks.




          “Overadvance” means if at any time and for any reason, the aggregate
amount of the outstanding Revolving Loans exceeds the dollar or percentage
limitations set forth in Section 1A of this Agreement.



          “Paid in Full” means fully, finally and indefeasibly paid in full and no
further obligations exist on the part of Lender to lend or extend financial
accommodations to or for the benefit of one or more Borrowers.



          “Permitted Canadian Provinces” means Canadian Provinces and territories
other than Nunavut, Yukon, and the Northwest Territories.



          “Permitted Liens” means:



          (a)      liens for taxes, assessments or governmental charges, and liens
incident to construction, which are either not delinquent or are being
contested in good faith by a Borrower by appropriate proceedings, which will
prevent foreclosure of such liens, and against which adequate reserves have
been provided, and upon demand by Lender, with adequate security being posted
with Lender;



          (b)      liens or deposits in connection with workers’ compensation or other
insurance or to secure customs’ duties, public or statutory obligations in lieu
of surety, stay or appeal bonds, or to secure performance of contracts or bids
(other than contracts for the payment of money borrowed), or deposits required
by law or governmental regulations or by any court order, decree, judgment or
rule as condition to the transaction of business or the exercise of any right,
privilege or license; or other liens or deposits of a like nature made in the
ordinary course of business; and



          (c)      security interests or mortgages granted to Lender;



          (d)      liens arising from taxes, assessments, charges or claims that are not
yet due or that remain payable without penalty;



          (e)      zoning restrictions, easements, minor restrictions on the use of real
property, minor irregularities in title thereto and other minor liens that do
not secure the payment of money or the performance of an obligation and that do
not in the aggregate materially detract from the value of a property or asset
to, or materially impair its use in the business of, the applicable Borrower;



          (f)      liens evidenced by the Loan Documents;



          (g)      liens imposed by law, such as liens of landlords, warehouses,
mechanics and materialmen arising in the ordinary course of business for sums
not yet due, or which are discharged of record (by payment or bonding, or
otherwise);



          (h)      unless as a matter of applicable law such lien could, in Lender’s
counsel’s reasonable opinion, have priority over Lender’s security interest,
any



16









 




judgment lien which does not exceed, in any single instance, $100,000 or, when
added to the amounts of any other judgment lien(s) then outstanding as to both
Borrowers, in the aggregate $250,000, unless such judgment or judgments shall
not, within thirty (30) days after the entry thereof have been discharged or
execution thereof stayed pending appeal, or shall not have been discharged
within thirty (30) days after expiration of such stay;




          (i)      lien filings for informational purposes only with respect to equipment
leases entered into in the ordinary course of business;



          (j)      ordinary deposits made to utility companies, governmental or
quasi-governmental agencies for or in connection with the provision of
services; and



          (k)      those liens listed on Schedule 6.3.


Notwithstanding anything to the contrary in the foregoing, “Permitted Liens”
shall in no event include (i) any lien imposed by, or required to be granted
pursuant to, ERISA or any Environmental Laws, (ii) any lien on any inventory of
Borrowers, or (iii) any lien on any distribution licenses or distribution
contracts issued to and held by, or entered into by, Borrowers.




          “Plan” means any plan described in ERISA Section 3(2) maintained for
employees of Borrowers or any ERISA Affiliate, other than a Multiemployer Plan.



          “PPSA” means the Personal Property Security Act (Ontario), as amended from
time to time.



          “Prime Rate” means the variable rate of interest, per annum, which is
quoted from time to time in The Wall Street Journal as the base “prime rate” on
corporate loans posted as of such time by at least 75% of the nation’s 30
largest banks, adjusted daily. The Prime Rate is nothing more nor less than an
index for determining the interest rate payable under the terms of this
Agreement. The Prime Rate is not necessarily the best rate, or any other
definition of rates, offered by Lender.



          “Real Estate” means all real estate and rights in real estate (including
leasehold interests) owned by either Borrower.



          “Reportable Event” means a “reportable event” as that term is defined and
applied in connection with ERISA.



          “Reserves” means a borrowing base reserves established by Lender in its
reasonable discretion based upon commercial lending practices.



3. LINE OF CREDIT, OTHER LOANS, INTEREST AND PAYMENTS




     3.1      Revolving Line of Credit. From time to time during the Term, so long
as an Event of Default has not occurred or if an Event of Default has occurred,
such Event of Default has been timely remedied, Lender will, in its discretion
and subject to the



17









 




terms and conditions set forth in this Agreement, make Revolving Loans to
Borrowers in such amounts as Borrowers may request, provided that the aggregate
principal amount of all Revolving Loans shall not exceed the Revolving Advance
Limit. The Revolving Loans may be borrowed, repaid and reborrowed according to
the terms of this Agreement.




          Borrowers may request from time to time Revolving Loan advances by
submitting a signed, completed Borrowing Base Certificate to Lender, in each
case given no later than 11:00 a.m. (Detroit, Michigan time) on the Business
Day of the proposed Revolving Loan advance. Subject to the terms and
conditions of this Agreement, Lender will make the proceeds of each such
requested Revolving Loan advance available to Borrowers on the day requested.



          Lender shall not be obligated to make Revolving Loans to Borrowers at any
time; each Revolving Advance which is made under this Agreement will be made at
the option of, and in the discretion of, Lender. The Revolving Loans will not
be evidenced by a promissory note and a copy of Lender’s books and records
related to the Revolving Loans shall constitute prima facie evidence of the
outstanding amount of Revolving Loans.



          Should an Overadvance exist, Borrowers shall immediately make principal
reduction payments of such excess to Lender as are required to reduce the
outstanding balance of the Revolving Loans such that no Overadvance exists.



     3.2      Term Loans. Simultaneous with the execution of this Agreement, the
Borrowers have obtained from Lender, Term Loans, which shall be evidenced by
the Term Notes. In addition to principal payments called for by the Term
Notes, Borrowers shall be obligated to make additional principal payments (the
“Excess Cash Flow Payments”) on account of the Term Loans equal (a) when there
is any principal balance owing on Term Note B, 50% of Borrowers’ Excess Cash
Flow (the “50% Payments”) and (b) after all of the obligations owing under Term
Note B have been repaid, 20% of Borrowers’ Excess Cash Flow (the “20%
Payments”). The 20% Payments will be limited to a maximum of $200,000 in any
one fiscal year and are due and payable within the sooner of (a) 120 after the
end of each of Borrower’s fiscal years, or (b) 30 days after Borrowers’ receipt
of audited annual financial statements (the “Payment Date”). The 50% Payments
are limited to the lesser of (a) 50% of Borrower’s Excess Cash flow and (b) the
outstanding principal balance of Term Note B from time to time and may be paid
in three equal monthly installments beginning with the first installment due on
the Payment Date, the second installment due 30 days after the Payment Date and
the third installment due 60 days after the Payment Date. The Excess Cash Flow
Payments will be applied first against the amounts owing under Term Note B
until Term Note B is fully and finally repaid and then against amounts owing
under Term Note A or the Cap-X Note, as determined in Lender’s sole discretion.




18









 




          3.3      Capital Expenditure Loans.



          A.      Prior to September 30, 2005, provided the Cap-X Condition has been
satisfied and no Event of Default has occurred and is continuing, Lender in its
discretion will make Cap-X Loans to Borrower on the following terms:




	(i)	 	The aggregate of the original
principal amounts of all Cap-X Loans shall not exceed
$1.0 million.
	 
	(ii)	 	Cap-X Loans will be made in
increments of no less than $100,000 and will be based on
up to 80% of the cost value of tangible capital
Equipment, excluding shipping, freight and installation
costs.
	 
	(iii)	 	The principal amount of Cap-X Loans
will be repayable based upon a 36 month amortization.
	 
	(iv)	 	Cap-X Loans shall be evidenced by the
Cap-X Note.
	 
	(v)	 	Borrower has provided documentation
reasonably acceptable to Lender demonstrating, among
other things, the cost of the Equipment and the fact
that the Equipment is owned by Borrowers free and clear
of all liens, security interests and adverse claims.






     B.     Lender shall not be obligated to make Cap-X Loans at any time;
each Cap-X Loan which is made under this Agreement will be made at the
option of, and in the discretion of, Lender.




     C.     All Cap-X Loans will be part of the Obligations for all purposes.



     3.4 Termination Premium. If this Agreement is terminated at any time
prior to the expiration of the Term, Borrowers shall be obligated to pay Lender
a termination premium equal to the following (the “Termination Premium”):




	(a)	 	2% of the Advance Limit if terminated before November 1, 2005.
	 
	(b)	 	1% of the Advance Limit if terminated after
October 31, 2005 but before November 1, 2006.
	 
	(c)	 	.5% of the Advance Limit if terminated after
October 31, 2006 but before October 31, 2007.




The Termination Premium will also be due and payable in connection with any
termination of this Agreement pursuant to Section 9.6 below and in connection
with termination of this Agreement by Lender upon an Event of Default or by or
on behalf of Borrower, whether voluntary or involuntary, including upon an
Event of Default which is not timely cured within any applicable cure period,
and including in connection with termination of this Agreement or payment of
the Obligations by any trustee or debtor-in-possession in any Insolvency
Proceeding. The Termination Premium is presumed to be a reasonable estimate of
the amount of damages sustained by Lender as a result of the




19









 







early termination of this Agreement and Borrowers agree that such amount is
reasonable under the circumstances currently existing.




     3.4 Cross-Defaults and Cross-Collateralization. A default under any Loan
or Notes is a default under any all other Notes and Loans and under all
Obligations. All Collateral secures all Obligations.



     3.5 Interest Rates; Default Interest Rates.



          (a)      Generally.



               The aggregate outstanding amount of all Obligations shall bear interest at
the rates set forth in Section 1A above, with the Borrowers having the option
(subject to the terms set forth below) to elect a LIBOR Base Rate for certain
Loans. The aggregate outstanding amounts of the Obligations shall bear
interest, from and after the occurrence of an Event of Default and without
constituting a waiver of any such Event of Default, at the rate of two percent
(2.0%) per annum above the otherwise applicable Base Rate(s). All interest
payable under the Loan Documents shall be computed on the basis of a three
hundred sixty (360) day year for the actual number of days elapsed, based on
the aggregate amount of the Obligations that are outstanding on each day.
Interest shall continue to accrue until all of the Obligations are paid in
full.



          (b)      LIBOR Rate Option.




     (1)     Provided no Event of Default has occurred and is
continuing, Borrowers shall have the option to have the unpaid
principal balance of up to 80% of the Loans bear interest at the
applicable LIBOR Base Rate (“LIBOR Rate Option”). If the LIBOR
Rate Option is elected, the portion of the Loans that bear interest
at the LIBOR Rate (and each LIBOR Loan Tranche) shall be in
$250,000 increments and not less than $500,000 in the aggregate.
Borrowers shall not have more than three (3) LIBOR Loan Tranches
outstanding at any time




     (2)     Borrowers shall elect the LIBOR Rate Option by giving
Lender written notice (in the form of Schedule 3.8) at least three
Business Days prior to but no more than five Business Days prior to
the last Business Day of each calendar month of Borrowers’
intention to have a portion of its outstanding Term Loan or
Revolving Loans treated as LIBOR Based Loans during the, succeeding
calendar month. If Borrowers fail to timely continue a LIBOR Loan
Tranche that is expiring, such LIBOR Loan Tranche shall be
converted to a Prime Based Loan and shall accrue interest at the
Prime Base Rate during the succeeding calendar month, but Borrowers
shall continue to have the right to elect the LIBOR Rate Option at
the end of such succeeding month by timely giving written notice as
provide above.




     (3)     The LIBOR Rate may be automatically adjusted by Lender on
a prospective monthly basis to take into account the additional or



20









 






increased cost of maintaining any necessary reserves for
Eurodollar deposits, or increased costs due to changes in
applicable law or regulation or the interpretation thereof,
occurring subsequent to the commencement of the then applicable
LIBOR Interest Period, including but not limited to changes in tax
laws (except changes of general applicability in corporate income
tax laws as they affect financial institutions) and changes in any
applicable law or regulation that increases the cost to Lender of
funding LIBOR Based Loans. Lender shall promptly give the
Borrowers notice of such a determination and adjustment, which
determination shall be conclusive as to the correctness of the fact
and the amount of such adjustment, absent manifest error. The
Borrowers may, by written notice to Lender, (A) request Lender to
furnish to the Borrowers a statement setting forth the basis for
adjusting such LIBOR Based Rate and the method for determining the
amount of such adjustment; and/or (B) prepay the LIBOR Based Loan
with respect to which such adjustment is made, subject to the
requirements of Section 3.5(f) and 3.4, if applicable.




     (4)     In the event that the Borrowers shall have requested the
LIBOR Rate Option in accordance with this Agreement and Lender
shall have reasonably determined that Eurodollar deposits equal to
the amount of the principal of the requested LIBOR Based Loan and
for the LIBOR Interest Period specified are unavailable,
impractical, or unlawful, or that the rate based on the LIBOR Rate
will not adequately and fairly reflect the cost of funds, of making
or maintaining the principal amount of the requested LIBOR Based
Loan specified by the Borrowers, or that by reason of circumstances
affecting Eurodollar markets, adequate and reasonable means do not
exist for ascertaining the rate based on the applicable LIBOR Rate,
Lender shall promptly give notice of such determination to the
Borrowers that the rate based on the LIBOR Rate is not available.
A determination by Lender hereunder shall be prima facie evidence
of the correctness of the fact and amount of such additional costs
or unavailability. Upon such a determination, (A) the right of
Borrowers to select, convert to, or maintain a LIBOR Based Loan at
the rate based on the LIBOR Rate shall be suspended until Lender
shall have notified the Borrowers that such conditions shall have
ceased to exist, and (B) the Loans subject to the requested LIBOR
Rate Option shall accrue interest as Prime Based Loans.




     (c)     Limitation on LIBOR Based Loans. Upon the occurrence and
continuance of an Event of Default, Lender, in its sole discretion, may
eliminate the LIBOR Rate Option and the availability of LIBOR Based
Loans.




     (d)     Conversion. Following the occurrence of an Event of Default, at
the option of Lender, all LIBOR Based Loans may be converted to Prime
Based Loans, which conversion is independent of Lender’s other rights
under this Agreement.



21









 






     (e)     Prepayment LIBOR Based Loans. In addition to Borrowers’
obligations under Section 3.4, if applicable, no portion of any LIBOR
Based Loan may be prepaid at any time unless Borrowers first satisfy in
full their obligations under Section 3.5(f) arising from such prepayment.




     (f)     Indemnity/Loss of Margin.




     (1)     Borrowers shall indemnify, defend and hold harmless Lender
against any and all loss, liability, cost or expense which Lender
may sustain or incur as a consequence of (i) any failure of
Borrowers to obtain, convert or extend any LIBOR Based Loan after
notice thereof has been given to Lender; or (ii) any payment,
prepayment, termination or conversion of a LIBOR Based Loan made
for any reason on a date other than the last day of the applicable
LIBOR Interest Period; Borrowers shall pay the full amount thereof
to Lender on demand.




     (2)     In the event that any present or future law, rule,
regulation, treaty or official directive or the interpretation or
application thereof by any central bank, monetary authority or
governmental authority, or the compliance with any guideline or
request of any central bank, monetary authority or governmental
authority (whether or not having the force of law) imposes,
modifies or deems applicable any deposit insurance, reserve,
special deposit, or other similar requirement with respect to
deposits in or for the account of, or loans or advances or
commitment to make loans or advances by, or letters of credit
issued or commitment to issue letters of credit by Lender and the
result of any of the foregoing is to increase the costs of Lender,
reduce the income receivable by or return on equity of Lender or
impose any expense upon Lender with respect to any advances or
extensions of credit or commitments to make advances or extensions
of credit under this Agreement upon notice from Lender, Borrowers
agree to pay such Lender the amount of such increase in cost,
reduction in income, reduced return on equity or capital, or
additional expense after presentation by Lender of a statement
concerning such increase in cost, reduction in income, reduced
return on equity or capital, or additional expense. Such statement
shall set forth a brief explanation of the amount and Lender’s
calculation of the amount (in determining such amount Lender may
use any reasonable averaging and attribution methods), which
statement shall be conclusively deemed correct absent manifest
error.



     3.6      Payments. All payments, including any prepayments, by Borrowers on
account of principal, interest, fees, or other Obligations must be made without
setoff or counterclaim to Lender at the address specified on the first page of
this Agreement in lawful money of the United States of America and in
immediately available funds. If any payment under this Agreement or the Notes
becomes due on a day other than a day which is a Business Day, its maturity
will be extended to the next succeeding Business Day, and with respect to
payments of principal and interest thereon, will be payable at the
then-applicable rate during such extension.



22









 





     3.7      Crediting Payments. For the purpose of calculating Borrowing Base
availability for Revolving Loans, the receipt by Lender of any wire transfer or
electronic funds transfer of funds, check or other item of payment shall be
applied immediately to provisionally reduce the Obligations, but such receipt
shall not be considered a payment on account unless such wire transfer or
electronic funds transfer is of immediately available federal funds and is made
to the appropriate deposit account of Lender or unless and until such check or
other item of payment is honored when presented for payment. For the purpose
of calculating interest, the receipt by Lender of any check or other item of
payment shall be deemed to have occurred two (2) Business Days after the date
Lender actually receives such item of payment and as to any wire transfer or
electronic funds transfer, two (2) Business Days after the date Lender actually
receives such item of payment. In the event any check or other item of payment
is not honored when presented for payment, Borrowers shall be deemed not to
have made such payment. Notwithstanding anything to the contrary contained
herein, any wire transfer, electronic funds transfer, check or other item of
payment received by Lender after 1:00 p.m., Detroit, Michigan time shall be
deemed to have been received by Lender as of the opening of business on the
immediately following Business Day.



     3.8      Payment Mechanics. As an administrative convenience to Borrowers to
ensure the timely payment of amounts owing by Borrowers to Lender under this
Agreement, Borrowers hereby request Lender to advance for the account of
Borrowers an amount each month sufficient to pay interest accrued on the
principal amount of the Obligations during the immediately preceding month and
all monthly principal installments or other payments due under the Notes or
other Loan Document and amounts from time to time sufficient to pay all fees
and Expenses owing by Borrowers under this Agreement. Borrowers authorize
Lender, in Lender’s sole discretion, to make a Revolving Loan for Borrowers’
account of a sum sufficient each month to pay, on the due date thereof, all
interest accrued on the principal amount of the Obligations during the
immediately preceding month and all monthly principal installments or other
payments due under the Notes or other Loan Documents and sums from time to time
sufficient to pay, on the due date thereof, all fees and Expenses owing by
Borrowers under this Agreement, and Lender may apply the proceeds of each such
Revolving Loan to the payment of such interest, installments, fees and
Expenses. Lender will provide Borrowers with an invoice or receipt for all
items charged to the Revolving Loans pursuant to this paragraph. Each
Revolving Loan made pursuant to this Section 3.8 shall thereafter accrue
interest at the rate then applicable under this Agreement. Lender shall not be
obligated to make Revolving Loans under this Section 3.8, and such Loans shall
be made in Lender’s discretion.



     3.9      Appointment of Agent. Subsidiary hereby appoints Parent as its agent
for purposes of requesting Loans, signing Borrowing Base Certificates and
providing Lender with any information requested by Lender in connection with
this Agreement, the Loan Documents and to receive any notices from Lender
hereunder or thereunder. Subsidiary ratifies the acts of Parent pursuant to
this section and agrees that Lender shall have the right to rely on
certificates, requests, Borrowing Base Certificates and other documents and
information provided by Parent in its capacity as agent for Subsidiary with the
same legal effect as if the same were signed and/or delivered by



23









 




Subsidiary. The appointment of Parent as agent pursuant to this Section
3.9 is coupled with an interest and shall be irrevocable until all Obligations
are fully and finally paid.




     3.10      Allocation of Expenses. Because of the interrelationship of the
Borrowers and the benefits to each Borrower of being a party to a consolidated
financing arrangement with Lender, Borrowers agree that Lender may charge all
Expenses to the Revolving Loans and any reallocation between the Borrowers
shall have no effect on Lender’s rights under this Agreement.



4. CONDITIONS OF BORROWING




          Notwithstanding any other terms of this Agreement, Lender is not required
to make any Loan to Borrowers under this Agreement unless all of the following
conditions are met at or prior to the time such Loan is made:



     4.1      Representations True. Borrowers’ representations and warranties in
this Agreement (and in all agreements referred to or executed in connection
with this Agreement) are true in all material respects as of the date of each
Loan or advance under this Agreement with the same effect as though such
representations and warranties had been made by the Borrowers at such time.



     4.2      No Default. No Event of Default under this Agreement exists, nor does
any event exist which, upon the lapse of time, service of notice, or both,
would constitute an Event of Default under this Agreement, and no suit or
proceeding at law or in equity or of any governmental body has been instituted
or, to the knowledge of the Borrowers, threatened which, in either case, would
materially and adversely affect Borrowers’ financial condition or business
operations.



     4.3      Counsel Opinion. Simultaneous with the execution of this Agreement,
Lender must have received from Borrowers a reasonably satisfactory legal
opinion(s) as to: (a) the due authorization, execution and delivery by
Borrowers of this Agreement, the Notes, and all documents and agreements
referred to or executed in connection with this Agreement; (b) the due
authorization, validity and binding effect of the Loans contemplated by this
Agreement and of the Notes; (c) Borrowers’ due incorporation, existence and
qualification as a foreign corporation where the Borrowers are qualified; and
(d) such other matters as Lender may reasonably require relating to the
validity and enforceability of this Agreement. The Borrowers must also execute
and deliver to Lender or its counsel all documents Lender may request
concerning Borrowers’ status and authorization to enter into the transactions
contemplated by this Agreement.



     4.4      Adverse Developments. Since the date of the financial statements most
recently furnished to Lender, there has been no material adverse change in the
business, prospects, operations or condition, financial or otherwise, of the
Borrowers or any of the properties or assets of the Borrowers.




24









 





5. SECURITY FOR THE OBLIGATIONS






     5.1      Grant of Security. Borrowers hereby grant Lender a continuing
security interest in all presently existing and hereafter acquired or arising
Collateral to secure prompt repayment of all Obligations and to secure the
prompt performance by Borrowers of each of its covenants and duties in this
Agreement and any other agreements with Lender. Lender’s security interest in
the Collateral shall attach to all Collateral without further act on the part
of Lender or Borrowers other than execution of this Agreement and the GSA by
the applicable Borrowers. Borrowers have no authority, express or implied, to
dispose of, sell or transfer any of the Collateral other than (a) sales of
Inventory to buyers in the ordinary course of business, and (b) sales of
obsolete Equipment having a net book value of less than $50,000 per year in the
aggregate.



     5.2     Negotiable Collateral. In the event that any Collateral, including
proceeds, is evidenced by or consists of Negotiable Collateral, Borrowers
shall, upon the request of Lender, immediately endorse and assign such
Negotiable Collateral to Lender and deliver physical possession of such
Negotiable Collateral to Lender.



     5.3     Additional Documentation. At the request of Lender, Borrowers shall
execute and deliver to Lender, all financing statements, continuation financing
statements, fixture filings, security agreements, pledges, assignments,
endorsements of certificates of title, applications for title, affidavits,
reports, notices, schedules of accounts, letters of authority, and all other
documents that Lender may reasonably request, in form reasonably satisfactory
to Lender, to perfect and continue perfected Lender’s security interest in the
Collateral and in order to fully consummate all of the transactions
contemplated hereunder and under the other Loan Documents.



     5.4     Power of Attorney. Each Borrower hereby irrevocably designates,
makes, constitutes and appoints Lender (and any of Lender’s officers, employees
or agents designated by Lender) as Borrowers’ true and lawful attorney-in-fact.
Pursuant to this power of attorney, Lender, or Lender’s agent, may, without
notice to Borrowers and in either a Borrower’s or Lender’s name, but at the
reasonable cost and expense of Borrowers, at such time or times as Lender in
its reasonable discretion may determine: (a) send notifications to Account
Debtors requiring that payment of all Accounts be sent to Lender or a lockbox
designated by Lender, and upon the occurrence and continuation of an Event of
Default, enforce payment of the Accounts by legal proceedings or otherwise, and
generally exercise all of either Borrower’s rights and remedies with respect to
the collection of the Accounts; (b) take control, in any manner, of any item of
payment or proceeds relating to any Collateral; (c) upon the occurrence and
continuation of an Event of Default, prepare, file and sign either Borrower’s
name to a proof of claim in bankruptcy or similar document against any Account
Debtor or to any notice of lien, assignment or satisfaction of lien or similar
document in connection with any of the Collateral; (d) sign Borrowers’ names on
and/or file any of documents described in Section 5.3 or on any other similar
documents to be executed, recorded or filed in order to perfect or continue
perfected Lender’s security interest in the Collateral; (e) upon the occurrence
and continuation of an Event of Default, sign either Borrowers’ name on any
invoices, bills of lading, freight bills, chattel paper, documents, instruments
or similar documents or agreements relating to the Accounts, Inventory or other
Collateral, drafts against Account Debtors, schedules and assignments of
Accounts, verifications of Accounts and notices to Account Debtors; (f) send
requests for



25









 




verification of Accounts; (g) endorse either Borrower’s name on any
checks, notes, acceptances, money orders, drafts or other items of payment or
proceeds relating to any Collateral that may come into Lender’s possession and
deposit the same to the account of Lender for application to the Obligations;
(h) upon the occurrence and continuation of an Event of Default, do all other
acts and things necessary, in Lender’s determination, to fulfill either
Borrower’s obligations under this Agreement or any of the other Loan Documents;
(i) upon the occurrence and continuation of an Event of Default, notify the
post office authorities to change the address for delivery of either Borrower’s
mail to an address designated by Lender, to receive and open all mail addressed
to either Borrower, and to retain all mail relating to the Collateral and
forward all other mail to Borrowers; (j) upon the occurrence and continuation
of an Event of Default, use the information recorded on or contained in any
data processing equipment and computer hardware and software relating to the
Accounts, Inventory, Equipment and any other Collateral and to which either
Borrower has access; (k) upon the occurrence and continuation of an Event of
Default, make, settle and adjust all claims under either Borrower’s policies of
insurance relating to the Collateral, make all determinations and decisions
with respect to such policies of insurance and endorse the name of either
Borrower on any check, draft, instrument or other item of payment for the
proceeds of such policies of insurance; (l) upon the occurrence and
continuation of an Event of Default, sell or assign any of the Accounts and
other Collateral upon such terms, for such amounts and at such time or times as
Lender deems advisable; and (m) upon the occurrence and continuation of an
Event of Default, settle, adjust or compromise disputes and claims respecting
the Accounts directly with Account Debtors, for amounts and upon terms that
Lender determines to be reasonable, and, in furtherance thereof, execute and
deliver any documents and releases that Lender determines to be necessary. The
appointment of Lender as each Borrower’s attorney-in-fact and each and every
one of Lender’s rights and powers, being coupled with an interest, is
irrevocable until all of the Obligations have been fully repaid and performed
and this Agreement has been terminated.




     Notwithstanding anything contained herein to the contrary, any actions
taken by Lender to enforce or realize on its security under this Agreement
shall be subject to all applicable laws, including but not limited to the PPSA
and BIA.



     5.5      Right To Inspect. Lender, through any of its officers, employees or
agents, shall have the right at any time or times during the applicable
Borrower’s usual business hours, or during the usual business hours of any
third party having control over any of either Borrower’s Business Records, to
inspect the Business Records in order to verify the amount or condition of, or
any other matter relating to, the Collateral or either Borrower’s financial
condition. Lender also shall have the right at any time or times during the
applicable Borrower’s usual business hours to inspect and examine the Inventory
and the Equipment and to check and test the same as to quality, quantity, value
and condition. If an Event of Default has occurred or if Lender reasonably
believes that an Event of Default has occurred, Lender may conduct any of the
inspections referenced in this Section 5.5 at any time without regard to the
applicable Borrower’s or any third party’s usual business hours.



26









 





     5.6      Commercial Tort Claims. In the event that any Borrower at any time
after the date of this Agreement shall have any Commercial Tort Claim, such
Borrower shall promptly notify Lender thereof in writing, which notice shall
(a) set forth in reasonable detail the basis for and nature of the Commercial
Tort Claim, and (b) include the express grant by such Borrower to Lender of a
security interest in the Commercial Tort Claim (and the proceeds thereof). In
the event that such notice does not include such grant of a security interest,
the sending thereof by a Borrower to Lender shall be deemed to constitute such
grant to Lender. Upon the sending of such notice, any Commercial Tort Claim
described in the notice shall constitute part of the Collateral and shall be
deemed included therein. Without limiting the authorization of Lender provided
in Section 5.4 or otherwise arising by the execution by Borrowers of this
Agreement or any of the other Loan Documents, Lender is hereby irrevocably
authorized at any time to file financing statements naming Lender or its
designee as secured party and the applicable Borrower as debtor, or any
amendments to any financing statements, covering any Commercial Tort Claim as
Collateral. In addition, Borrowers shall promptly upon Lender’s request,
execute and deliver, or cause to be executed and delivered, to Lender such
other agreements, documents and instruments as Lender may reasonably require in
connection with any Commercial Tort Claim.



6. REPRESENTATIONS AND WARRANTIES




     In order to induce Lender to make Loans as provided in this Agreement and
to accept any Notes, each Borrower individually represents and warrants to
Lender as follows:



     6.1      Organization. Parent is a Corporation duly organized and existing
under the laws of the State of Ohio, and Subsidiary is a corporation duly
organized and existing under the laws of Canada and the execution, delivery and
performance of the Loan Documents, including this Agreement and the issuance of
the Notes as provided in this Agreement are within each Borrower’s corporate
powers, have been duly authorized, are not in contravention of law or the terms
of either Borrower’s articles of incorporation, bylaws, unanimous shareholder
declaration, charter or other formation and organizational documents and do not
require the consent or approval of any governmental body, agency or authority.
The Borrowers are duly licensed or qualified to do business in all
jurisdictions in which the Borrowers have substantial property or business
operations, except where any failure to be licensed or qualified would not have
a Material Adverse Effect on Borrowers’ assets or business.



     6.2      Financial Statements. Borrowers’ balance sheets and the statements of
profit and loss and surplus furnished to Lender from time to time will be in
all material respects correct and complete and will fairly present Borrowers’
financial condition as of the relevant dates and the results of its operations
for the applicable time periods in accordance with GAAP.



     6.3      Liens. Except for Permitted Liens, the Borrowers have good and
marketable title to all their assets, including all Collateral, free and clear
of all liens and encumbrances.



27









 





     6.4      Absence of Conflicting Obligations. The making and execution of the
Loan Documents and compliance with its terms and the issuance of the Notes will
not result in a breach of any of the terms and conditions of or result in the
imposition of any lien, charge, or encumbrance upon any property of the
Borrowers pursuant to, or constituting a default under, any indenture or other
agreement or instrument to which the Borrowers are a party or by which they are
bound.



     6.5      Taxes. Borrowers have no outstanding unpaid tax liabilities (except
for taxes which are currently accruing from its current operations and
ownership of property, and which are not delinquent), and no tax deficiencies
have been proposed or assessed against Borrowers. There have been no audits of
Borrowers’ federal income tax returns, which have resulted in or are likely to
result in the assessment of any material tax liability against Borrowers and
all taxes shown by any returns have been paid.



     6.6      Absence of Material Litigation. Except as set forth on Schedule 6.6,
the Borrowers are not parties to any litigation or administrative proceeding,
nor so far as is known by the Borrowers is any litigation or administrative
proceeding threatened against it, which in either case would, if adversely
determined, cause any material adverse change in its properties or the conduct
of its business.



     6.7      Absence of Environmental Problems. Except as disclosed in writing to
Lender, the Borrowers are in full and complete compliance with all
Environmental Laws involving Borrowers’ past or present operations, facilities
and property. Further, Borrowers have not been cited for violating any
applicable Environmental Laws and Borrowers have, to the best of their
knowledge, all necessary environmental permits and licenses to operate its
business, except for any non-compliance that would not have a Material Adverse
Effect on Borrowers’ assets or business.



     6.8      Legal Name. Each Borrower’s full legal name is exactly as set forth
on the signature page of this Agreement and Borrowers have not used any other
name since the date of its organization, nor has it used any assumed name,
tradename, or tradestyle; provided, however, Parent has previously used the
name “Transmation, Inc.” and Subsidiary uses the name “Transcat” as a trade
name in Canada.



     6.9      Financing Statements. Except for financing statements covering
Permitted Liens and Lender’s liens, no financing statements covering any
Collateral, proceeds of Collateral, or any other of Borrowers’ property are on
file in any public office.



     6.10      ERISA. No Reportable Event has occurred with respect to any Plan.



     6.11      Broker’s Fees. Borrowers have made no commitment, and have taken no
action, that could result in a claim for any brokers’, finders’, or similar
fees or commitments in respect to the transactions described in this Agreement.
Borrowers agree to pay all finders’ fees or similar fees payable to any
persons or entities in connection with this Agreement and to defend and hold
Lender harmless against any and all such fees.



28









 





     6.12     Principal Place of Business.




     (a)     Each Borrower’s principal place of business, records concerning
the Collateral and all other Business Records are located at or about the
address set forth at the beginning of this Agreement; and




     (b)     Borrowers will provide Lender with 30 days prior written notice
of any change with respect to any of the foregoing.



     6.13      Full Disclosure. This Agreement and all of the Exhibits, Schedules
and other written material delivered by the Borrowers to Lender in connection
with the transactions contemplated by this Agreement do not contain any
statement that is false or misleading with respect to any material fact and do
not omit to state a material fact necessary in order to make the statements
therein not false or misleading. There is no additional fact that the
Borrowers are aware of that has not been disclosed in writing to Lender that
materially affects adversely or, so far as the Borrowers can reasonably
foresee, will materially affect adversely the Borrowers’ financial condition or
business prospects.



     6.14      Non-Affiliation. Borrowers are not affiliated with an Ontario
corporation known as “Transcat Inc.,” Ontario Corporation number 1440105,
however Subsidiary is authorized to use “Transcat” as a tradename in Canada.



     6.15      Intellectual Property. The Borrowers own or possess adequate
licenses or other rights to use all patents, processes, trademarks, trade
names, and copyrights necessary to conduct their business as now conducted or
presently intended to be conducted and the Borrowers have no reason to believe
that any such rights conflict or will conflict with the rights of others. All
of Borrowers’ patents, trademarks and copyrights are described in the
Collateral Assignment of Intellectual Property and Security Agreement executed
by Borrowers in favor of Lender in connection with the Original Loan Agreement.



     6.16      Compliance With Law. Except where failure to comply would not have a
Material Adverse Effect on either Borrower’s assets or business, Borrowers are
in compliance with all laws and regulations applicable to it, its business and
properties. Borrowers have all licenses, permits, orders and approvals that
are required under any governmental law or regulation in connection with the
Borrowers’ business and properties (“Permits”). No notice of any violation has
been received with respect of any Permits and no proceeding is pending or, to
the best of the Borrowers’ knowledge, threatened to terminate, revoke or limit
any Permits.



     6.17      Accounts. All of Borrowers’ Accounts constitute bona fide existing
obligations created by the sale and delivery of Inventory or the rendition of
services to Account Debtors in the ordinary course of each Borrower’s business,
and, in the case of Accounts created by the sale and delivery of Inventory, the
Inventory giving rise to such Accounts has been delivered to the Account
Debtor. At the time of the creation of each Eligible Account or the assignment
thereof to Lender, each such Eligible Account is unconditionally owed to
Borrowers without defense, dispute, offset, counterclaim or right



29









 




of return or cancellation and Borrowers have not received notice of actual
or imminent bankruptcy, insolvency or material impairment of the financial
condition of the Account Debtor regarding such Eligible Account.




     6.18      Labor Matters. No strikes or other labor disputes against Borrowers
are pending or, to Borrowers’ knowledge, threatened. To the best of Borrowers’
knowledge, hours worked by and payment made to employees of Borrowers have not
been in violation of the Fair Labor Standards Act or any other applicable
federal, state, local or foreign law dealing with such matters. All payments
due from Borrowers on account of employee health and welfare insurance have
been paid or accrued as a liability on the books of Borrowers. Except as set
forth in Schedule 6.18, Borrowers have no obligation under any collective
bargaining agreement, management agreement, consulting agreement or any
employment agreement. There is no organizing activity involving Borrowers
pending or, to Borrowers’ knowledge, threatened by any labor union or group of
employees. Except as set forth in Schedule 6.18, there are no representation
proceedings pending or, to Borrowers’ knowledge, no group of employees of
Borrowers has made a pending demand for recognition. Except as set forth in
Schedule 6.18, there are no complaints or charges against Borrowers pending or
threatened to be filed with any federal, state, local or foreign court,
governmental agency or arbitrator based on, arising out of, in connection with,
or otherwise relating to the employment or termination of employment by
Borrowers of any individual.



     6.19      Subsidiaries. Except as set forth on Schedule 6.19, Borrowers have
no subsidiaries (other than Parent which has one subsidiary, namely the
Subsidiary) and is not engaged in any joint venture or partnership with any
other person, or is an affiliate of any other person. Except as set forth on
Schedule 6.19, there are no outstanding rights to purchase options, warrants or
similar rights or agreements pursuant to which Borrowers may be required to
issue or sell any of its stock or other equity securities.



     6.20      Deposit Accounts. Schedule 6.20 lists all banks and other financial
institutions at which Borrowers maintain deposits and/or other accounts,
including any disbursement accounts, and Schedule 6.20 correctly identifies the
name, address and telephone number of each depository, the name in which the
account is held, a description of the purpose of the account, and the complete
account number.



     6.21      Customer Relations. There exists no actual or, to Borrowers’
knowledge, threatened termination or cancellation of, or any material adverse
modification or change in: (a) the business relationship of Borrowers with any
customer or group of customers whose purchases during the preceding twelve (12)
months caused them to be ranked among the ten largest customers of Borrowers;
or (b) the business relationship of Borrowers with any supplier material to the
operations of Borrowers. The ratings (“Customer Ratings”) assigned to
Borrowers by its customers and any other applicable customer have not been
withdrawn, rescinded or downgraded in the past twelve (12) months, nor have
Borrowers received any notice of any adverse action taken or proposed to be
taken by any customer in respect of any Customer Ratings.



30









 





     6.22      Supply Programs. Borrowers do not (a) participate in any resale,
“off-load” or other programs under which any of Borrowers’ customers (or any
affiliates of any customer) sell or supply Inventory to Borrowers, including
without limitation, on a bailment, consignment or another basis, and (b)
purchase Inventory on a consignment, trial, or sale or return or similar basis.



     6.23      Special Return Programs. Other than allowing customers to return
unused Inventory purchased in the past 30 days if such Inventory remains in the
original packaging, in the ordinary course of business Borrowers do not allow
customers to return goods (including used goods) for credit against amounts
owing to Borrowers.



     6.24      Integrated Operations. The Borrowers operate as an integrated entity
and share business operations, functions and services, including sales,
marketing, finance, accounting, management, quality control and shipping.
Likewise, the Borrowers historically have managed all cash on a divisional
basis and presently handle all receipts and disbursements on a divisional basis
and it is not practicable for Borrowers to manage cash on an individual
Borrower basis. As a result of the foregoing, each Borrower will benefit in a
direct and substantial way from Loans and advances made by Lender to the
Borrowers together and, but for Lender making Loans to the other Borrower and
such other Borrower being able to provide business services to the other
Borrower, each Borrower’s business operations would be materially and
negatively impacted.



     6.25      Flood Hazard. No location at which the Borrowers do business falls
within the boundaries of a special flood hazard area so designated by the
United States Federal Emergency Management Administration, except for any
facilities therein which are covered by appropriate flood insurance.



7. NEGATIVE COVENANTS




          While any of the Obligations remain unpaid, each Borrower must not agree
to and must not (without Lender’s prior written consent):



     7.1      Restriction on Liens. Except for Permitted Liens, create or permit to
be created or allow to exist any mortgage, pledge, encumbrance, or other lien
upon or security interest in any property or assets now owned or acquired in
the future by the Borrowers.



     7.2      Restriction on Indebtedness. Create, incur, assume, or have
outstanding any indebtedness for borrowed money except:




     (a)     The Obligations;




     (b)     Indebtedness incurred in the ordinary course of each Borrower’s
business for necessary materials, supplies, etc., all of which (other
than items disputed in good faith) must be due not more than 90 days from
the date of invoice and none of which may be more than 60 days past due;



31









 






     (c)     Indebtedness for Permitted Liens.




     (d)     Indebtedness consented to by Lender, and if required by Lender,
subordinated to the Obligations pursuant to subordination agreements
acceptable to Lender;




     (e)     Subject to the Capital Expenditure limitations in this
Agreement, indebtedness incurred in connection with the purchase or lease
of Equipment.



     7.3      Mergers; Consolidations; Disposition of Assets. Merge with or into or
consolidate with or into any other corporation or entity; or sell, lease,
transfer or otherwise dispose of all or any part of its property, assets or
business (other than by sales of Inventory or Equipment permitted by this
Agreement).



     7.4      Sale and Leaseback. Enter into an agreement under which Borrowers
lease or purchase any property that Borrowers have sold or are to sell.



     7.5      Dividends, Distributions and Redemptions. Except for dividends
payable in shares of its stock, pay or declare any dividend, or make any other
distribution on account of any shares of any class of its stock, or redeem,
purchase, or otherwise acquire directly or indirectly, any shares of any class
of its capital stock.



     7.6      Investments. Make any loans or advances to, or investments in, other
persons, corporations or entities, except:




     (a)     investments in (i) bank certificates of deposit and savings
Accounts; (ii) obligations of the United States; and (iii) prime
commercial paper maturing within 90 days of the date of acquisition by
the Borrower.




     (b)     loans and advances made to employees and agents in the ordinary
course of business, such as travel and entertainment advances and similar
items, not to exceed in the aggregate $25,000 outstanding at any time.



     7.7      Contingent Liabilities. Guarantee or become a surety or otherwise
contingently liable for any obligations of others, except pursuant to the
deposit and collection of checks and similar items in the ordinary course of
business.



     7.8      Salaries and Other Compensation. Pay salaries, bonuses, profit sharing
payments, consulting or management fees, or any other compensation (other than
historical base salaries) of any kind to Borrowers’ members, shareholders,
affiliates, officers or directors which is not consistent with the compensation
plans provided to Lender prior to the date of this Agreement or increase
officers’ aggregate base salaries by more than 15% in any calendar year.



     7.9      Stock. Except as set forth on Schedule 7.9, pledge, hypothecate or
otherwise encumber or sell or otherwise transfer any shares of any class of its
capital stock or make any change in either Borrower’s capital structure.



32









 





     7.10      Nature of Business. Make any substantial change in the nature of its
business from that engaged in on the date of this Agreement or engage in any
other businesses other than those engaged in on the date of this Agreement.



     7.11     Insider Transactions. Except as set forth on Schedule 7.11, enter
into, or permit or suffer to exist, any transaction or arrangement with any
shareholder, member, employee, director, officer, affiliate, or member of
management, except on terms that are reasonably comparable to what Borrowers
could obtain in arm’s-length transactions, with persons who have no
relationship with Borrowers.



     7.12     Capital Expenditures. Make or incur liabilities for Capital
Expenditures exceeding $1,000,000 in fiscal year 2005 (ending March 26, 2005),
or $1,500,000 in subsequent fiscal years during the period from March 27, 2005
to the end of the Term.



     7.13      Catalogue Spending. Exclusive of the amortization of any prepaid
expenses related to the development, printing and mailing of Big Cat, spend in
excess of $300,000 in fiscal year ending March 26, 2005 for the development,
printing and mailing of Big Cat (net of Big Cat advertising rebates). In
subsequent years, the parties will agree in good faith on the annual cap on
such expenses to account for changes in costs to Borrowers.



8. AFFIRMATIVE COVENANTS




          While any of the Obligations remain unpaid, each Borrower must at all
times:



     8.1      Insurance. Maintain adequate fire and extended coverage and liability
insurance covering all of its present and future real and personal property,
including the Collateral, with Lender’s loss payable and noncontributory
mortgagee/secured party clauses in Lender’s favor, protecting Lender’s
interest, as such interest may appear, together with such policies of business
interruption insurance and products liability insurance as Lender may
reasonably request and insurance in accordance with all applicable workers’
compensation laws. Such insurance must be in such form, with such companies,
and in such amounts as is reasonably acceptable to Lender, insuring against
liability for damage to persons or property, and must provide for thirty (30)
days prior written notice to Lender of cancellation or material alteration.
Borrowers must provide Lender with the original policies of insurance for all
such coverages, true copies of the policies or other proof of insurance
reasonably acceptable to Lender, showing that Lender’s interest has properly
been endorsed on the applicable policy. Lender may, in its sole discretion, on
30 days written notice to the Borrowers, require the Borrowers to obtain
additional or different insurance coverages as Lender may reasonably request.



     8.2      Existence; Payment of Taxes and Other Liabilities. Maintain its
corporate existence and pay all taxes, assessments and other governmental
charges against it or its property, and all of its other liabilities, before
the same become delinquent and before penalties accrue on these debts and
obligations except to the extent and so long as the same are being contested in
good faith by appropriate proceedings in such manner as not to cause any
material adverse effect upon its



33









 




financial condition, with adequate reserves provided for such payments,
and, upon demand by Lender, posting with Lender of adequate security to protect
Lender.




     8.3     Accounting Records; Reports. Maintain a standard and modern system
for accounting in accordance with generally accepted accounting principles
consistently applied throughout all accounting periods, and furnish to Lender:




     (a)     borrowing base certificates (each, a “Borrowing Base
Certificate”) on the last Business Day of each week (unless Excess
Availability is less than $750,000, then on a daily basis).




     (b)     sales registers, which must be provided simultaneously with each
Borrowing Base Certificate.




     (c)     Within 20 calendar days after the end of each month, as of the
last day of the preceding month, aging and summary reports of Accounts
and accounts payable in such form and detail as Lender may request.




     (d)     Within 20 calendar days of each month end, a perpetual Inventory
listing in such form and detail as Lender may reasonably request.




     (e)     Within 30 calendar days after the end of each month of each
fiscal year, a consolidated balance sheet of the Borrowers as of the
close of each such month and of the comparable month in the preceding
fiscal year, and statements of income and surplus of the Borrowers for
each month and for that part of the fiscal year ending with each such
month and for the corresponding period of the preceding fiscal year, all
in reasonable detail and certified as true and correct (subject to audit
and normal year-end adjustments) by the chief financial officer of the
Borrowers.




     (f)     As soon as available and in any event within 90 calendar days
after the close of each fiscal year of Borrowers, a copy of Borrowers’
consolidated detailed long-form audit report for such year and
accompanying financial statements, as prepared by independent certified
public accountants of recognized standing selected by the Borrowers and
reasonably acceptable to Lender, together with all management letters,
which report shall be accompanied by an unqualified opinion of such
accountants, in form satisfactory to Lender, to the effect that the
financial statements fairly present the financial condition of the
Borrowers and the results of its operations as of the relevant dates.




     (g)     Within 90 calendar days after the end of each fiscal year of
Borrowers, a schedule showing all insurance policies which the Borrowers
had in force as of the end of such fiscal year, signed by an officer of
the Borrowers.




     (h)     (1) As soon as possible and in any event within 30 calendar
days after Borrowers know that any Reportable Event with respect to any
Plan has occurred, a statement of the chief financial officer of the
Borrowers setting forth details as to such Reportable Event and the
action which the Borrowers propose



34









 






to take with respect to the Reportable Event, together with a copy
of the notice of such Reportable Event given to the Pension Benefit
Guaranty Corporation, (2) promptly after the filing with the United
States Secretary of Labor or the Pension Benefit Guaranty Corporation,
copies of each annual report with respect to each Plan administered by
the Borrower, promptly after receipt, a copy of any notices the Borrowers
may receive from the Pension Benefit Guaranty Corporation or the Internal
Revenue Service with respect to any Plan administered by the Borrowers;
provided, however, this subpart shall not apply to notices of general
application promulgated by the Pension Benefit Guaranty Corporation or
the Internal Revenue Service; and (4) within five Business Days of
filing, copies of any filings made with the Securities and Exchange
Commission, NASDAQ or any other regulatory or governmental agency.




     (i)     At least 30 calendar days prior to the end of each fiscal year
end, preliminary pro forma cash flow, profit and loss and balance sheet
forecasts for the succeeding 12 month period subject to revision by
Parent’s board of directors within 30 days of the fiscal year end.




     (j)     Within each monthly financial statement delivered by Borrowers,
a letter of “covenant compliance” regarding Borrowers’ obligations under
this Agreement, delivered to Lender and prepared, in form and substance
acceptable to Lender, signed by an officer of Borrowers.




     (k)     Unless sooner requested by Lender, within 90 days of each fiscal
year end, a listing of the names and addresses of each Borrower’s
customers during the prior 12 months.




     (l)     All other reports, documents and information that Lender may
reasonably request.


At Lender’s request, information and reports required to be submitted to Lender
by Borrowers (or Parent on behalf of Borrowers), to the extent practicable,
shall be transmitted by electronic mail and shall be in a record layout format
designated by Lender from time to time. All information sent by electronic
mail shall be deemed an authenticated record sent by the individual and entity
whose electronic mail address is provided thereon as “sender” or initiating
party.




     8.4      Inspections. Permit Lender’s representatives to visit and inspect any
of Borrowers’ properties and premises and examine, copy (by electronic or other
means) and abstract any Business Records and Collateral records at any
reasonable time, during business hours, and as often as may be reasonably
desired.



     8.5      Litigation. Promptly furnish Lender, in writing, the details of all
material litigation, legal or administrative proceedings, or other actions of
any nature adversely affecting either Borrower, including, without limitation,
any notices of violation, citation, commencement of administrative proceeding
or similar notice under any applicable Environmental Laws, commenced after the
date hereof, in which more than $50,000.00 is at issue.



35









 





     8.6     Audits and Examinations. Permit Lender’s representatives to conduct
on-site audits and examinations (an “Examination”) of Borrowers’ business
operations and Business Records as often as Lender desires. Borrowers will pay
$850 per day per auditor plus out-of-pocket expenses incurred by Lender for
each Examination performed by or on behalf of Lender. Borrowers shall not be
obligated to pay for more than two Examinations in any one fiscal year subject
to being increased in Lender’s sole discretion. After an Event of Default,
Borrowers shall be obligated to pay for all Examinations.



     8.7     Compliance With Laws. Comply in all respects with all material
applicable laws and regulations, in effect from time to time, including without
limitation all applicable environmental laws and regulations.



     8.8     Maintenance of Properties. Maintain and preserve all of its
properties that are necessary or useful in the proper conduct of its business
in good working order and condition, ordinary wear and tear excepted, and
comply at all times with the provisions of all leases to which it is a party as
lessee or under which it occupies property, so as to prevent any loss or
forfeiture thereof or thereunder.



     8.9     Further Assurances. At Lender’s request, promptly execute or cause to
be executed and delivered to Lender any and all documents, instruments and
agreements deemed necessary or appropriate to facilitate the collection of any
of the Collateral, or otherwise to give effect to or carry out the terms,
conditions or intent of this Agreement (or any agreements or documents referred
to or incorporated herein).



     8.10      Dominion of Funds. All collections of any nature and kind, including
payments and deposits received by Lender and proceeds subject to the liens and
security interests of Lender, including, without limitation, proceeds realized
from the Collateral, will be turned over to Lender in the form received or, if
applicable, deposited into a lockbox or blocked account designated by Lender.



     8.11     EBITDA Covenant. Achieve EBITDA of at least $1.9 million for the
four fiscal quarters ending December 25, 2004; $2.2 million for the four fiscal
quarters ending March 26, 2005; and $2.5 million at the end of each fiscal
quarter thereafter on a trailing 4 fiscal quarter basis.



     8.12     Fixed Charge Coverage Ratio Covenant. Maintain a Fixed Charge
Coverage Ratio of at least 1.20:1.00 at the end of each fiscal quarter on a
trailing 4 fiscal quarter basis.



9. DEFAULTS




          Without limiting the discretionary nature of Lender’s agreement to make
Revolving Loans, if any one or more of the following events (each an “Event of
Default” and collectively, “Events of Default”) occurs, then Lender’s
obligation to make or accept any Note or any Loan under this Agreement will, at
Lender’s option, immediately terminate, and the unpaid principal balance of,
and accrued interest on, all Obligations will be immediately due and payable,
without further notice of any kind, notwithstanding



36









 







anything contained to the contrary in this Agreement or in any other agreement,
Note or document:



     9.1     Default in Payment of Obligations. The Borrowers fail to make a
payment of any principal or interest when and as due on any Note or any other
Obligations, including the Expenses.



     9.2      Default Under Loan Documents. A default in the performance or
observance of any term, condition or covenant in any Loan Document required to
be observed or performed by either Borrower and which if curable (except for
the providing of timely Borrowing Base Certificates or financial reporting
called for by Section 8.3 which shall not be subject to a cure period), is not
cured within 5 days after either Borrower’s receipt of notice of such default
from Lender.



     9.3     Representations or Statements False. Any representation or warranty
made by either Borrower in this Agreement or any certificate delivered in
accordance with this Agreement, or any financial statement delivered to Lender
proves to have been false in any material respect as of the time when made or
given.



     9.4      Default on Other Debt. Either Borrower fails to pay all or any part
of the principal of or interest on any indebtedness of or assumed by such
Borrower for borrowed money as and when due and payable, whether at maturity,
by acceleration or otherwise, and such default is not cured within the period
of grace, if any, specified in the documents(s) evidencing such indebtedness.



     9.5     Judgments. A judgment is entered against either Borrower which,
together with other outstanding judgments entered against the Borrowers,
exceeds in the aggregate $100,000, and remains outstanding and unsatisfied,
unbonded or unstayed for 10 days after the date of entry of such judgment.



     9.6      Bankruptcy; Insolvency. Either Borrower: (a) becomes insolvent; or
(b) is unable, or admits in writing its or their inability to pay debts as they
generally mature; or (c) makes a general assignment for the benefit of
creditors or to an agent authorized to liquidate any substantial amount of its
or their property; or (d) files on its behalf or consents to an Insolvency
Proceeding; or (e) has an Insolvency Proceeding filed or instituted against it
that is not stayed or dismissed within 30 days after it is filed or instituted;
or (f) applies to a court for the appointment of a receiver, trustee or
custodian for any of its or their assets; or (i) has a receiver, trustee or
custodian appointed for any of its or their assets (with or without their
respective consent). Provided, however, this Agreement will be deemed
terminated immediately upon the entry of an order for relief in any proceeding
under title 11 of the United States Code without any action by Lender and in
the event of an involuntary proceeding under such statute, Lender will be under
no obligation to continue financing hereunder from and after the involuntary
proceeding.



     9.7     Reportable Event. If any Reportable Event occurs and continues for 30
days or any Plan is terminated within the meaning of Title IV of ERISA, or a
trustee is appointed by the appropriate United States District Court to
administer any Plan, or the



37









 







Pension Benefit Guaranty Corporation institutes proceedings to terminate
any Plan or to appoint a trustee to administer any Plan.



     9.8      Material Loss or Material Adverse Effect. Either Borrower suffers
(i) a casualty as to any material asset or assets used in the conduct of such
Borrower’s business which is not, except for deductibles acceptable to Lender,
fully covered by insurance conforming to the requirements of this Agreement; or
(ii) an event or occurrence that results in a Material Adverse Effect.



     9.9     Government Lien. A notice of lien, levy or assessment is filed of
record with respect to any of Borrowers’ assets by the United States’ or
Canadian government, or any department, agency or instrumentality thereof, or
by any state, province, county, municipal or other governmental agency or any
tax or debt owing at any time hereafter to anyone becomes a lien, whether
choate or otherwise, upon any of either Borrower’s assets and the same is not
paid on the payment date thereof and, unless such lien, levy or assessment
could in Lender’s counsel’s reasonable opinion, take priority over Lender’s
security interest, Borrowers do not obtain a release or discharge the same
within 30 days after notice or filing of the same.



     9.10     Material Impairment. There is a material impairment of the value or
priority of Lender’s security interests in the Collateral.



     9.11     Levy or Attachment. Any material portion of either Borrower’s assets
is attached, seized, subjected to a writ or distress warrant, or is levied
upon, or comes into the possession of any judicial officer.



     9.12      Intentionally Omitted.



     9.13      Intentionally Omitted.



     9.14      Default By Third Parties. If any guarantor, or any other party to
any agreement or instrument with or in favor of Lender entered into or
delivered in connection with the Loans or the Collateral materially defaults
under any such agreement or instrument.



     9.15     Intentionally Omitted.



     9.16     Indictment
– Forfeiture. The conviction by any governmental
authority against either Borrower or any of its officers or directors, under
any applicable criminal or civil regulatory law where the penalties levied
against either Borrower include a fine, penalty or forfeiture of more than
$100,000 of property of either Borrower and/or the imposition of any stay or
other order, the effect of which could be to restrain in any material way the
conduct by either Borrower of its business in the ordinary course.



     9.17      Challenge to Loan Documents.




     (a)     Any challenge by or on behalf of either Borrower or any
guarantor to the validity of any Loan Documents or the applicability or
enforceability of any Loan Document strictly in accordance with the
subject Loan Document’s terms or



38









 






which seeks to void, avoid, limit, or otherwise adversely affect any
security interest or lien created by or in any Loan Document or any
payment made pursuant thereto.




     (b)     Any final determination by any court or any other judicial or
government authority that any Loan Document is not enforceable in
accordance with the subject Loan Document’s terms or which voids, avoids,
limits, or otherwise adversely affects any security interest or lien
created by any Loan Document or any payment made pursuant thereto.



10. REMEDIES ON OCCURRENCE OF AN EVENT OF DEFAULT




     10.1     Right and Remedies. Upon the occurrence of an Event of Default (not
cured within the time or grace period specifically provided in Section 9) and
subject to any provisions of the PPSA or the BIA applicable to Subsidiary or
its assets, Lender has all rights and remedies provided by law, and all such
rights and remedies granted under any security agreement relating to the
Collateral, and under all other existing and future agreements between Lender
and the Borrowers. All such rights and remedies are cumulative. Upon the
occurrence of an Event of Default, Lender may, at its election, without notice
of its election and without demand, do any one or more of the following, all of
which are authorized by Borrowers:




     (a)     Declare all Obligations, whether evidenced by this Agreement,
the Notes, any of the other Loan Documents or otherwise, immediately due
and payable in full;




     (b)     Cease making Loans or advances under this Agreement, any of the
other Loan Documents or any other agreement between either Borrower and
Lender;




     (c)     Terminate this Agreement and any of the other Loan Documents as
to any future liability or obligation of Lender, but without affecting
Lender’s rights, security interests and mortgages in the Collateral and
without affecting the Obligations;




     (d)     Settle or adjust disputes and claims directly with Account
Debtors for amounts and upon terms which Lender considers advisable and,
in such cases, Lender will credit Borrowers’ loan account with only the
net amounts received by Lender in payment of such disputed Accounts,
after deducting all Expenses incurred or expended in connection
therewith;




     (e)     Cause Borrowers to hold all returned Inventory in trust for
Lender, segregate all returned Inventory from all other property of
Borrowers or in Borrowers’ possession and conspicuously label said
returned Inventory as the property of Lender;




     (f)     Without notice to or demand upon Borrowers, make such payments
and do such acts as Lender considers necessary or reasonable to protect
its



39









 






security interest in the Collateral. Borrowers agree to assemble
the Collateral if Lender so requires and to deliver or make the
Collateral available to Lender at a place designated by Lender.
Borrowers authorize Lender to enter any premises where the Collateral is
located, to take and maintain possession of the Collateral, or any part
of it, and to pay, purchase, contest or compromise any encumbrance,
charge or lien that in Lender’s determination appears to be prior or
superior to its security interest and to pay all expenses incurred in
connection therewith;




     (g)     Subject to any requirements or limitations under the PPSA or the
BIA applicable to Subsidiary or its assets, without notice to Borrowers
(such notice being expressly waived) and without constituting a retention
of any Collateral in satisfaction of an obligation (within the meaning of
the Uniform Commercial Code or the PPSA, as applicable), hold or set off
and apply to the Obligations any and all (i) balances and deposits of
Borrowers held by Lender (including any amounts received in a lockbox or
blocked account), or (ii) indebtedness at any time owing to or for the
credit or the account of Borrowers held by Lender;




     (h)     Subject to any requirements or limitations under the PPSA or the
BIA applicable to Subsidiary or its assets, hold, or set off and apply,
as cash collateral, any and all balances and deposits of either Borrower
held by Lender (including any amounts received in a lockbox or blocked
account) to secure the Obligations;




     (i)     Subject to any requirements or limitations under the PPSA or the
BIA applicable to Subsidiary or its assets, ship, reclaim, recover,
store, finish, maintain, repair, prepare for sale, advertise for sale and
sell the Collateral (in the manner provided for herein). Lender is
hereby granted a license and right to use, without charge, Borrowers’
respective labels, patents, copyrights, rights of use of any name, trade
secrets, trade names, trademarks, service marks, and advertising matter,
or any property of a similar nature, as it pertains to the Collateral, in
completing production of, advertising for sale and selling any
Collateral. Borrowers’ rights under all licenses and all franchise
agreements shall inure to Lender’s benefit;




     (j)     Subject to any requirements or limitations under the PPSA or the
BIA applicable to Subsidiary or its assets, sell the Collateral at either
a public or private sale, or both, by way of one or more contracts or
transactions, for cash or on terms, in such manner and at such places
(including Borrowers’ premises) as Lender determines is commercially
reasonable. It is not necessary that the Collateral be present at any
such sale;




     (k)     Subject to any requirements or limitations under the PPSA or the
BIA applicable to Subsidiary or its assets, Lender shall give notice of
the disposition of the Collateral as follows:




     (1)     Lender shall give the Borrowers and each holder of a
security interest in the Collateral who has filed with Lender a
written



40









 






request for notice, a notice in writing of the time and place
of public sale or, if the sale is a private sale or some other
disposition other than a public sale is to be made, then the time
on or after which the private sale or other disposition is to be
made;




     (2)     The notice will be personally delivered or mailed, postage
prepaid, to Borrowers as provided in Section 12.8, at least ten
Business Days before the date fixed for the sale, or at least ten
Business Days before the date on or after which the private sale or
other disposition is to be made, unless the Collateral is
perishable or threatens to decline speedily in value. Notice to
persons other than Borrowers claiming an interest in the Collateral
shall be sent to such addresses as they have furnished to Lender;




     (l)     Subject to any requirements or limitations under the PPSA or the
BIA applicable to Subsidiary or its assets, Lender may credit bid and
purchase at any public sale;




     (m)     Subject to any requirements or limitations under the PPSA or the
BIA applicable to Subsidiary or its assets, any deficiency that exists
after disposition of the Collateral as provided above shall be paid
immediately by Borrowers. Any excess will be remitted without interest
by Lender to the party or parties legally entitled to such excess; and




     (n)     In addition to the foregoing, Lender shall have all rights and
remedies provided by law and any rights and remedies contained in any
other Loan Documents. All such rights and remedies shall be cumulative.



     10.2      No Waiver. No delay on the part of Lender in exercising any right,
power or privilege under this Agreement or any Loan Document shall operate as a
waiver, nor shall any single or partial exercise of any right, power or
privilege under this Agreement or otherwise, preclude other or further exercise
of the right, power or privilege or the exercise of any other right, power or
privilege.



11. CROSS-GUARANTY.




     11.1     Guaranty. Each Borrower hereby acknowledges and agrees that such
Borrower is jointly and severally liable for, and hereby absolutely and
unconditionally guarantees to Lender and its successors and assigns, the full
and prompt payment (whether at stated maturity, by acceleration or otherwise)
and performance of, all Obligations owed or hereafter owing to Lender by the
other Borrowers. Each Borrower agrees that its guaranty obligation hereunder
is a guaranty of payment and performance and not of collection, and that its
obligations under Section 11 shall be absolute and unconditional, irrespective
of, and unaffected by,




     (a)     the genuineness, validity, regularity, enforceability or any
future amendment of, or change in, this Agreement, any other Loan
Document or any



41









 






other agreement, document or instrument to which any Borrower is or
may become a party;




     (b)     the absence of any action to enforce this Agreement (including
Section 11) or any other Loan Document or the waiver or consent by Lender
with respect to any of the provisions thereof; or




     (c)     the existence, value or condition of, or failure to perfect its
lien or security interest against, any security for the Obligations or
any action, or the absence of any action, by Lender in respect thereof
(including, without limitation, the release of any such security); or




     (d)     any other action or circumstances which might otherwise
constitute a legal or equitable discharge or defense of a surety or
guarantor, it being agreed by each Borrower that its obligations under
Section 11 shall not be discharged until the payment and performance, in
full, of the Obligations has occurred. Each Borrower shall be regarded,
and shall be in the same position, as principal debtor with respect to
the Obligations guaranteed hereunder. Each Borrower expressly waives all
rights it may have now or in the future under any statute, or at common
law, or at law or in equity, or otherwise, to compel Lender to proceed in
respect of the Obligations guaranteed hereunder against any other
Borrower or any other party or against any security for the payment and
performance of the Obligations before proceeding against, or as a
condition to proceeding against, such Borrower. Each Borrower agrees
that any notice or directive given at any time to Lender which is
inconsistent with the waiver in the immediately preceding sentence shall
be null and void and may be ignored by Lender, and, in addition, may not
be pleaded or introduced as evidence in any litigation relating to this
Agreement (including Section 11) for the reason that such pleading or
introduction would be at variance with the written terms of this
Agreement (including Section 11), unless Lender has specifically agreed
otherwise in writing. It is agreed among each Borrower and Lender that
the foregoing waivers are of the essence of the transaction contemplated
by this Agreement and the other Loan Documents and that, but for the
provisions of Section 11 and such waivers, Lender would decline to enter
into this Agreement.



     11.2      Demand by Lender. In addition to the terms of the guaranty set forth
in Section 11.1 hereof, and in no manner imposing any limitation on such terms,
it is expressly understood and agreed that, if the then outstanding principal
amount of the Obligations under this Agreement (together with all accrued
interest thereon) is declared to be immediately due and payable, then each
Borrower shall, without demand, pay to the holders of the Obligations the
entire outstanding Obligations due and owing to such holders. Payment by any
Borrower shall be made to Lender, to be credited and applied to the
Obligations, in immediately available Federal funds to an account designated by
Lender or at the address set forth herein for the giving of notice to Lender or
at any other address that may be specified in writing from time to time by
Lender.



42









 





     11.3      Enforcement of Guaranty. Each Borrower agrees that in no event shall
Lender have any obligation (although it is entitled, at its option) to proceed
against any other Borrower or any other person or any real or personal property
pledged to secure the Obligations before seeking satisfaction from such
Borrower, and Lender may proceed, prior or subsequent to, or simultaneously
with, the enforcement of Lender’s rights under Section 11, to exercise any
right or remedy which it may have against any property, real or personal, as a
result of any lien or security interest it may have as security for all or any
portion of the Obligations.



     11.4     Waiver. In addition to the waivers contained in Section 11.1 hereof,
each Borrower waives, and agrees that it shall not at any time insist upon,
plead or in any manner whatever claim or take the benefit or advantage of, any
appraisal, valuation, stay, extension, marshaling of assets or redemption laws,
or exemption, whether now or at any time hereafter in force, which may delay,
prevent or otherwise affect the performance by such Borrower of the Obligations
guaranteed under, or the enforcement by Lender of, Section 11. Each Borrower
hereby waives diligence, presentment and demand (whether for non-payment or
protest or of acceptance, maturity, extension of time, change in nature or form
of the Obligations, acceptance of further security, release of further
security, composition or agreement arrived at as to the amount of, or the terms
of, the Obligations, notice of adverse change in the other Borrower’s financial
condition or any other fact which might materially increase the risk to such
Borrower) with respect to any of the Obligations guaranteed hereunder or all
other demands whatsoever and waives the benefit of all provisions of law which
are or might be in conflict with the terms of Section 11. Each Borrower
represents, warrants and agrees that, as of the date hereof, its obligations
under Section 11 are not subject to any offsets or defenses against Lender or
any other Borrower of any kind. Each Borrower further agrees that its
obligations under Section 11 shall not be subject to any counterclaims, offsets
or defenses against Lender or against any other Borrower of any kind which may
arise in the future.



     11.5     Benefit of Guaranty. Each Borrower agrees that the provisions of
Section 11 are for the benefit of Lender and its successors, transferees,
endorsees and assigns, and nothing herein contained shall impair, as between
any other Borrower and Lender, the obligations of any such other Borrower under
the Loan Documents. In the event all or any part of the Obligations are
transferred, endorsed or assigned by Lender to any person or persons, any
reference to “Lender” herein shall be deemed to refer equally to such person or
persons.



     11.6      Reinstatement. The provisions of Section 11 shall remain in full
force and effect and continue to be effective should any petition be filed by
or against either Borrower for liquidation or reorganization, should either
Borrower become insolvent or make an assignment for the benefit of creditors or
should a receiver or trustee be appointed for all or any significant part of
either Borrower’s assets, and shall continue to be effective or be reinstated,
as the case may be, if at any time payment and performance of the Obligations,
or any part thereof, is, pursuant to applicable law, rescinded or reduced in
amount, or must otherwise be restored or returned by Lender, whether as a
“voidable preference”, “fraudulent conveyance”, or otherwise, all as though
such payment or performance had not been made. In the event that any



43









 




payment, or any part thereof, is rescinded, reduced, restored or returned,
the Obligations shall be reinstated and deemed reduced only by such amount paid
and not so rescinded, reduced, restored or returned.




     11.7      Subordination of Subrogation, Etc. Notwithstanding anything to the
contrary in this Agreement or in any other Loan Document, and except as set
forth in Section 11.11, each Borrower hereby:




     (a)     expressly and irrevocably subordinates to Lender, to the fullest
extent possible at all times prior to the expiration or termination of
this Agreement, on behalf of itself and its successors and assigns
(including any surety) any and all rights at law or in equity to
subrogation, reimbursement, exoneration, contribution, indemnification,
set off or any other rights that could accrue to a surety against a
principal, to a guarantor against a principal, to a guarantor against a
maker or obligor, to an accommodation party against the party
accommodated, to a holder or transferee against a maker, or to the holder
of any claim against any person, and which such Borrower may have or
hereafter acquire against any other Borrower or any person in connection
with or as a result of such Borrower’s performance of Section 11, or any
other documents to which such Borrower is a party or otherwise and agrees
not to exercise any of such rights until the Obligations have been Paid
in Full;




     (b)     expressly and irrevocably subordinates to Lender any “claim” (as
such term is defined in the United States Bankruptcy Code) of any kind
against any other Borrower, and further agrees that it shall not have or
assert any such rights against any person (including any surety), either
directly or as an attempted set off to any action commenced against such
Borrower by Lender or any other person until the Obligations are fully
and finally paid.




     (c)     acknowledges and agrees (i) that this subordination is intended
to benefit Lender and shall not limit or otherwise affect such Borrower’s
liability hereunder or the enforceability of Section 11 and (ii) that
Lender and its respective successors and assigns are intended third party
beneficiaries of the waivers and agreements set forth in this Section
11.7.



     11.8      Election of Remedies. If Lender, under applicable law, proceeds to
realize its benefits under any of the Loan Documents giving Lender a lien or
security interest upon any Collateral, (whether owned by any Borrower or by any
other person), either by judicial foreclosure or by non-judicial sale or
enforcement, Lender may, at its sole option, determine which of its remedies or
rights it may pursue without affecting any of its rights and remedies under
Section 11. If, in the exercise of any of its rights and remedies, Lender
shall forfeit any of its rights or remedies, including its right to enter a
deficiency judgment against any Borrower or any other person, whether because
of any applicable laws pertaining to “election of remedies” or the like, each
Borrower hereby consents to such action by Lender and waives any claim based
upon such action, even if such action by Lender shall result in a full or
partial loss of any rights of subrogation which each Borrower might otherwise
have had but for such action by Lender. Any election of remedies which results
in the denial or impairment of the



44









 




right of Lender to seek a deficiency judgment against either Borrower
shall not impair the other Borrower’s obligation to pay the full amount of the
Obligations. In the event Lender shall bid at any foreclosure or trustee’s
sale or at any private sale permitted by law or the Loan Documents, Lender may
bid all or less than the amount of the Obligations and the amount of such bid
need not be paid by Lender but shall be credited against the Obligations. The
amount of the successful bid at any such sale, if Lender or any other party is
the successful bidder, shall be conclusively deemed to be the fair market value
of the Collateral and the difference between such bid amount and the remaining
balance of the Obligations shall be conclusively deemed to be the amount of the
Obligations guaranteed under Section 11, notwithstanding that any present or
future law or court decision or ruling may have the effect of reducing the
amount of any deficiency claim to which Lender might otherwise be entitled but
for such bidding at any such sale.




     11.9      Continuing Guaranty. Each Borrower agrees that the guaranty set
forth in Section 11 is a continuing guaranty and shall remain in full force and
effect until the payment and performance in full of the Obligations.



     11.10      Limitation. Notwithstanding any provision herein contained to the
contrary, each Borrower’s liability under Section 11 shall be limited to an
amount not to exceed as of any date of determination the lesser of:



          (i)     the net amount of all Loans advanced to the other Borrower under this
Agreement and then re-loaned or otherwise transferred to such Borrower; or



          (ii)     the amount which could be claimed by the Lender from such Borrower
under Section 11 without rendering such claim voidable or avoidable under
Section 548 of Chapter 11 of the Bankruptcy Code or under any applicable state
Uniform Fraudulent Transfer Act, Uniform Fraudulent Conveyance Act or similar
statute or common law after taking into account, among other things, such
Borrower’s right of contribution and indemnification from the other Borrower
under Section 11.11 hereof.



     11.11      Contribution with Respect to Guaranty Obligations.




     (a)     To the extent that any Borrower shall make a payment under
Section 11 of all or any of the Obligations (other than Loans made to
that Borrower for which it is primarily liable) (a “Guarantor Payment”)
which, taking into account all other Guarantor Payments then previously
or concurrently made by the other Borrowers, exceeds the amount which
such Borrower would otherwise have paid if each Borrower had paid the
aggregate Obligations satisfied by such Guarantor Payment in the same
proportion that such Borrower’s “Allocable Amount” (as defined below) (as
determined immediately prior to such Guarantor Payment) bore to the
aggregate Allocable Amounts of each of the Borrowers as determined
immediately prior to the making of such Guarantor Payment, then such
Borrower shall be entitled to receive contribution and indemnification
payments from, and be reimbursed by, the other Borrowers for



45









 






the amount of such excess, pro rata based upon their respective
Allocable Amounts in effect immediately prior to such Guarantor Payment.




     (b)     As of any date of determination, the “Allocable Amount” of any
Borrower shall be equal to the maximum amount of the claim which could
then be recovered from such Borrower under Section 11 without rendering
such claim voidable or avoidable under Section 548 of Chapter 11 of the
Bankruptcy Code or under any applicable state Uniform Fraudulent Transfer
Act, Uniform Fraudulent Conveyance Act or similar statute or common law
of the United States, Canada or any political subdivision thereof.




     (c)     This Section 11.11 is intended only to define the relative
rights of Borrowers and nothing set forth in this Section 11.11 is
intended to or shall impair the obligations of Borrowers, jointly and
severally, to pay any amounts as and when the same shall become due and
payable in accordance with the terms of this Agreement. Nothing
contained in this Section 11.11 shall limit the liability of any Borrower
to pay any Loans made to that Borrower and accrued interest, and Expenses
with respect thereto for which such Borrower shall be primarily liable.




     (d)     The parties hereto acknowledge that the rights of contribution
and indemnification hereunder shall constitute assets of the Borrower to
which such contribution and indemnification is owing.




     (e)     The rights of the parties under this Section 11.11 shall be
exercisable from and after the Obligations have been Paid in Full.



     11.12     Liability Cumulative. The liability of Borrowers under Section 11
is in addition to and shall be cumulative with all liabilities of each Borrower
to Lender under this Agreement and the other Loan Documents to which such
Borrower is a party or in respect of any Obligations or obligation of the other
Borrower, without any limitation as to amount, unless the instrument or
agreement evidencing or creating such other liability specifically provides to
the contrary.



12. GENERAL TERMS




     12.1     Expenses, Fees and Costs; Indemnification.



     (a)     The Borrowers are responsible for the payment of all Expenses. The
Borrowers also agree to indemnify Lender for any and all Claims that may be
imposed on, incurred by or asserted against Lender in connection with this
Agreement or any Loan Document or transaction contemplated hereby or thereby or
the business relationship between Lender and Borrowers.



     (b)     Borrowers’ obligation to pay the Expenses and all of the reimbursement
obligations and indemnification obligations provided for in this Section 12.1
are part of the Obligations, are secured by all of the Collateral, and survive
the repayment of the Obligations.



46









 





     12.2     Successors. The provisions of this Agreement shall inure to the
benefit of and be binding upon any successor to any of the parties to this
Agreement and shall extend and be available to any holder of the Notes;
provided, however, that persons or entities which succeed to the rights of the
Borrowers under this Agreement shall not be entitled to enforce any rights or
remedies of Borrowers under or by reason of the terms of this Agreement, or any
other agreement referred to or incorporated by reference into this Agreement,
unless they shall have obtained Lender’s prior written consent to succeed to
such rights.



     12.3      Assignments and Participations. Borrowers consent to Lender’s sale
of participations in the Loans and to Lender’s assignment of the Loan Documents
or any interest therein to any third party. Borrowers also acknowledge and
agree that any participation will give rise to a direct obligation of Borrowers
to the participant and the participant shall, for purposes of Section 12.1, be
considered to be “Lender.”



     12.4      Waivers by Borrowers. Except as otherwise provided for in this
Agreement or by applicable law, Borrowers waive: (a) presentment, demand and
protest and notice of presentment, dishonor, notice of intent to accelerate,
notice of acceleration, protest, default, nonpayment, maturity, release,
compromise, settlement, extension or renewal of any or all commercial paper,
accounts, contract rights, documents, instruments, chattel paper and guaranties
at any time held by Lender on which Borrowers may in any way be liable, and
hereby ratifies and confirms whatever Lender may do in this regard, (b) all
rights to notice and a hearing prior to Lender’s taking possession or control
of, or to Lender’s replevy, attachment or levy upon, the Collateral or any bond
or security which might be required by any court prior to allowing Lender to
exercise any of its remedies, and (c) the benefit of all valuation, appraisal
and exemption laws.



     12.5      Anti-Waiver; Amendments; and Cumulative Remedies Provisions. No
failure or delay on the part of Lender or the holder of the Notes in the
exercise of any power or right, and no course of dealing between the Borrowers
and Lender or the holder of any Note, shall operate as a waiver of such power
or right, nor shall any single or partial exercise of any power or right
preclude other or further exercise thereof or the exercise of any other power
or right. The remedies provided for herein are cumulative and not exclusive of
any remedies which may be available to Lender at law or in equity. No notice
to or demand on the Borrowers not required hereunder or under any Note or other
agreement shall in any event entitle the Borrowers to any other or further
notice or demand in similar or other circumstances or constitute a waiver of
the right of Lender or the holder of any Note to any other or further action in
any circumstances without notice or demand. Any waiver of any provision of
this Agreement, the Notes or other agreement, and any consent to any departure
by the Borrowers from the terms of any provision of this Agreement, the Notes
or other agreement, shall be effective only in the specific instance and for
the specific purpose for which given. Neither this Agreement nor the Notes or
other agreement nor any terms hereof or thereof may be changed, waived,
discharged or terminated unless such change, waiver, discharge or termination
is in writing signed by the Borrowers and Lender.



47









 





     12.6     Controlling Law. Except to the extent Ontario law governs the
creation, perfection or enforcement of Lender’s security interest in or to
Subsidiary’s Collateral, this Agreement, the Notes and any other agreements
between the parties shall be governed by and construed in accordance with the
internal laws of the State of Michigan applicable to contracts made and
performed within Michigan without regard to conflict of laws provisions.



     12.7     Counterparts. This Agreement may be signed in any number of
counterparts with the same effect as if all signatures were upon the same
instrument.



     12.8      Notices. All communications or notices that are required or may be
given under this Agreement shall be deemed effective if made in writing
(including telecommunications) and, if to Borrowers, addressed to them at the
address set forth at the beginning of this Agreement, with a copy to James
Jenkins, Harter, Secrest & Emery LLP, 1600 Bausch & Lomb Place, Rochester, New
York 14604-2711, and if to Lender, addressed to it at the address specified at
the beginning of this Agreement, and a copy to Donald F. Baty, Jr., Honigman
Miller Schwartz & Cohn LLP, 2290 First National Building, 660 Woodward Avenue,
Detroit, Michigan 48226, and delivered by any of the following means: (a)
hand delivery, (b) registered or certified mail, postage prepaid, with return
receipt requested, (c) first class or express mail, postage prepaid, (d)
Federal Express, or like overnight courier service, or (e) facsimile, telex or
other wire transmission with request for assurance of receipt in a manner
typical with respect to communications of that type. Notice made in accordance
with this section shall be deemed delivered on receipt if delivered by hand or
wire transmission, on the third Business Day after mailing if mailed by first
class, registered or certified mail, or on the next Business Day after mailing
or deposit with an overnight courier service if delivered by express mail or
overnight courier.



     12.9     Loan Agreement Controls. Excluding the Canadian Security Documents
that shall govern and control Lender’s rights and remedies against Subsidiary’s
Collateral, notwithstanding anything contained in any other agreement referred
to in this Agreement or in any other agreement now existing between Lender and
the Borrowers to the contrary, in the event of any express conflict between the
terms and provisions of such other agreement and those contained in this
Agreement, the terms of this Agreement shall govern and control.
Notwithstanding the foregoing, this Agreement and the Canadian Security
Documents are intended to be interpreted together such that Lender has a first
priority lien, security interest and charge on and against all of each
Borrower’s personal property, wherever located and whenever acquired.



     12.10     Partial Invalidity. The unenforceability for any reason of any
provision of this Agreement shall not impair or limit the operation or validity
of any other provisions of this Agreement or any other existing or future
agreements between Lender and Borrowers.



     12.11      Legal Rate Adjustment. This Agreement, the Notes and all other Loan
Documents between the Borrowers and Lender are expressly limited so that in no
event whatsoever shall the amount of interest paid or agreed to be paid to
Lender exceed the highest rate of interest permissible under applicable law.
If, from any circumstances,



48









 







fulfillment of any provision of this Agreement or the Notes at the time
performance of such provisions shall be due, shall involve exceeding the
interest limitation validly prescribed by law which a court of competent
jurisdiction may deem applicable to this Agreement and any Loans under this
Agreement, then the obligation to be fulfilled shall be reduced to an amount
computed at the highest rate of interest permissible under applicable law, and
if, for any reason whatsoever, Lender shall ever receive as interest an amount
which would be deemed unlawful under applicable law, such interest shall be
automatically applied to the payment of the principal of the Notes, as the case
may be (whether or not then due and payable), and not to the payment of
interest, or shall be refunded to the Borrowers, if such principal has been
paid in full.



     12.12     Setoff. In addition to any rights and remedies of Lender provided
by law, Lender has the right, without prior written notice to the Borrowers,
any such notice being expressly waived by Borrowers to the extent permitted by
applicable law, upon the occurrence of any Event of Default and so long as such
Event of Default is continuing, to set off and apply against any Obligations,
whether matured or unmatured, of the Borrowers to Lender, any amount owing by
Lender to Borrowers, at or at any time after the happening of any of the above
mentioned events, and such right of setoff may be exercised by Lender against
Borrowers or against any assignee for the benefit of creditors, receiver, or
execution, judgment or attachment creditor of Borrowers, or against anyone else
claiming through or against the Borrowers of such assignee for the benefit of
creditors, receiver, or execution, judgment or attachment creditor,
notwithstanding the fact that such right of setoff has not been exercised by
Lender prior to the making, filing or issuance or service upon Lender of, or of
notice of, assignment for the benefit of creditors, appointment or application
for the appointment of a receiver, or issuance of execution, subpoena or order
or warrant.



     12.13      No Marshalling. Borrowers, on their own behalf and on behalf of
their respective successors and assigns hereby expressly waive all rights, if
any, to require a marshalling of assets by Lender or to require that Lender
first resort to some or any portion of the Collateral before foreclosing upon,
selling or otherwise realizing on any other portion thereof.



     12.14      Judgment Currency. If, for the purposes of obtaining judgment in
any court, it is necessary to convert a sum due to a Lender in any currency
(the “Original Currency”) into another currency (the “Other Currency”), the
parties agree, to the fullest extent that they may effectively do so, that the
rate of exchange used shall be that at which, in accordance with normal banking
procedures, Lender could purchase the Original Currency with the Other Currency
on the Business Day preceding the day on which final judgment is given or, if
permitted by applicable law, on the day on which the judgment is paid or
satisfied. The obligations of the Borrowers in respect of any sum due in the
Original Currency from it to the Lender under any of the Loan Documents shall,
notwithstanding any judgment in any Other Currency, be discharged only to the
extent that on the Business Day following receipt by the Lender of any sum
adjudged to be so due in the Other Currency, the Lender may, in accordance with
normal banking procedures, purchase the Original Currency with such Other
Currency. If the amount of the Original Currency so purchased is less than the
sum originally due to the Lender in the Original Currency, the Borrowers agree,
as a separate obligation and



49









 







notwithstanding the judgment, to indemnify the Lender, against any loss,
and, if the amount of the Original Currency so purchased exceeds the sum
originally due to the Lender in the Original Currency, the Lender shall remit
such excess to the Borrowers.



     12.15      Reinstatement of Obligations and Security. To the extent that
either Borrower makes any payment to Lender or Lender receives any payment(s)
or proceeds of Accounts or other Collateral for Borrowers’ benefit, which
payment(s) or proceeds or any part thereof are subsequently invalidated,
declared to be fraudulent or preferential, set aside and/or required to be
repaid to a trustee, receiver or any other party under any bankruptcy law,
state, provincial or federal law, common law or equitable doctrine, then, to
the extent of such payment(s) or proceeds received, the Borrowers’ obligations
or part thereof intended to be satisfied thereby shall be reinstated and
continue in full force and effect, and all collateral security therefor shall
remain in full force and effect (or be reinstated), as if such payment(s) or
proceeds had not been received by Lender, and an appropriate adjustment to
Borrowers’ loan balance may be recorded, until payment shall have been made to
Lender, which payment shall be due on demand.



     12.16     Survival; Reliance. All agreements, representations and warranties
made in this Agreement (and all agreements referred to or incorporated herein)
shall survive the execution of this Agreement (and all documents and agreements
referred to or incorporated herein) and the making of the Loans and the
execution and delivery of the Notes. Notwithstanding anything in this
Agreement (or any documents or agreements referred to or incorporated herein)
to the contrary, no investigation or inquiry by any party with respect to any
matter which is the subject of any representation, warranty, covenant or other
agreement set forth herein or therein is intended, nor shall it be interpreted,
to limit, diminish or otherwise affect the full scope and effect of any such
representation, warranty, covenant or other agreement. All terms, covenants,
agreements, representations and warranties of the Borrowers made herein (or in
any documents or agreements referred to or incorporated herein), or in any
certificate or other document delivered pursuant hereto shall be deemed to be
material and to have been relied upon by Lender, notwithstanding any
investigation heretofore or hereafter made by Lender or its agents.



     12.17      Interpretation. This Agreement (and all agreements referred to or
incorporated into this Agreement) are being entered into among competent
persons, who are experienced in business and represented by counsel, and has
been reviewed by the parties and their counsel. Therefore, any ambiguous
language in this Agreement (and all agreements referred to or incorporated
herein) will not necessarily be construed against any particular party as the
drafter of such language.



     12.18      Independence of Covenants. All covenants hereunder are to be given
independent effect so that if a particular action or condition is not permitted
by any such covenant, the fact that it would be permitted by an exception to,
or would be otherwise within the limitations of, another covenant shall not
avoid the occurrence of a default or an Event of Default if such action is
taken or such condition exists.



50









 





     12.19      Communication with Accountants. Borrowers authorize Lender to
communicate directly with its independent certified public accountants
including BDO Siedman, LLP and authorizes all such accountants to make
available to Lender all financial statements and other supporting financial
documents and schedules with respect to the business, financial condition and
other affairs of Borrowers. At or before the initial Revolving Loans are made,
Borrowers shall deliver a letter addressed to and acknowledged by such
accountants instructing them to make available to Lenders such information and
records as Lender may reasonably request and to otherwise comply with the
provisions of this Section 12.19. After the closing date, if Borrowers engages
the services of accountants other than PriceWaterhouseCoopers, Borrowers shall
deliver a letter addressed to and acknowledged by such accountants containing
the same terms and provisions as the letter described above.



     12.20      Illegality and Impossibility. In the event that any applicable law,
treaty, rule or regulation (whether domestic or foreign) now or hereafter in
effect and whether or not presently applicable to Lender, or any interpretation
or administration thereof by any governmental authority charged with the
interpretation or administration thereof, or compliance by Lender with any
request or directive of such authority (whether or not having the force of
law), including, without limitation, exchange controls, shall make it unlawful
or impossible for Lender to maintain any loan or transaction under this
Agreement, the Borrowers shall, upon receipt of notice thereof from Lender,
immediately repay in full the then outstanding principal amount of all Loans so
affected, together with all accrued interest thereon to the date of payment.
This provision is for the benefit of Lender and is not intended to increase the
yield to Lender above the rates of interests provided for in this Agreement.
This Section shall apply only as long as such illegality exists. Lender shall
use reasonable, lawful efforts to avoid the impact of such law, treaty, rule or
regulation.



     12.21      Copies and Facsimiles. Each Loan Document and all documents and
paper which relate thereto which have been or may be in the future furnished to
the Lender may be reproduced by any photographic, microfilm, xerographic,
digital imaging, or other process, and Lender may destroy any document so
reproduced. Any such reproduction shall be admissible in evidence as the
original itself in any judicial or administration proceeding (whether or not
the original is in existence and whether or not such reproduction was made in
the regular course of business). Any facsimile which bears proof of
transmission shall be binding on the party which or on whose behalf such
transmission was initiated and likewise shall be so admissible in evidence as
if the original of such facsimile had been delivered to the party which or on
whose behalf such transmission was received.



     12.22      Communication with Customers. Upon the occurrence and during the
continuance of an Event of Default, Borrowers authorize Lender to communicate
directly with their customers regarding Borrowers and Borrowers’ business
relationship and authorizes Lender to obtain, and the customers to provide,
information and documentation regarding Borrowers’ performance of their
contracts, purchase orders and other obligations to such customers; provided,
however, that the foregoing shall not limit, in any way, Lender’s right to
communicate with customers for purposes of verifying Accounts.



51









 





     12.23      Certain Rules of Construction. For purposes of this Agreement:




     (a)     Certain References. The words “herein,” “hereof” and
“hereunder,” and words of similar import, refer to this Agreement as a
whole and not to any particular provision of this Agreement, and
references to Sections, Paragraphs and Exhibits, and similar references,
are to Sections or Paragraphs of, or Exhibits to, this Agreement unless
otherwise specified.




     (b)     General Rules. Unless the context otherwise requires: (i) the
singular includes the plural, and vice versa; (ii) all pronouns and any
variations thereof refer to the masculine, feminine or neuter, as the
identity of the person or persons may require; (iii) all definitions and
references to an agreement, instrument or document means such agreement,
instrument or document together with all exhibits and schedules thereto
and any and all amendments, restatements, supplements, replacements, or
modifications thereto as the same may be in effect at the time such
definition or reference is applicable for any purpose; (iv) all
references to any party shall include such party’s successors and
permitted assigns; (v) “include”, “includes”, and “including” are to be
treated as if followed by “without limitation” whether or not they are
followed by these words or words with a similar meaning; and (vi)
attorneys’ fees shall include allocated costs of in-house counsel.




     (c)     Accounting Terms and Determinations. Except as otherwise
provided in this Agreement, all accounting terms used in this Agreement
must be interpreted, all accounting determinations hereunder must be
made, and all financial statements required to be delivered hereunder
must be prepared in accordance with generally accepted accounting
principles; provided that, if Borrowers adopt a change in accounting
principles (including any changes in generally accepted accounting
principles) from those used in preparing the financial statements of
Borrowers or that affects in any material respect (as determined by
Lender) the computation of or compliance with any of the provisions of
this Agreement, then this Agreement shall be amended by the parties in
good faith to modify such provisions to take account of such change in
accounting principles for the purpose of computing any financial
covenants, restrictions or ratios in this Agreement. Unless otherwise
noted, all accounting terms shall be interpreted and applied on a
consolidated basis for both Borrowers, according to GAAP.




     (d)     Uniform Commercial Code. All other terms contained in this
Agreement shall have, when the context so indicates, the meanings
provided for by the Uniform Commercial Code as adopted in the State of
Michigan to the extent such terms are used or defined in the statute.




     (e)     Headings. The headings of the various subdivisions hereof are
for convenience of reference only and shall in no way modify or affect
the interpretation of any of the terms or provisions hereof.



52









 






     12.24     Entire Agreement of the Parties. This Agreement, including all
agreements referred to or incorporated into this Agreement and all recitals in
this Agreement (which recitals are incorporated as covenants of the parties),
constitute the entire agreement between the parties relating to the subject
matter of this Agreement. This Agreement supersedes all prior agreements,
commitments and understandings between the parties relating to the subject
matter of this Agreement and cannot be changed or terminated orally, and shall
be deemed effective as of the date noted above.



     12.25      ACKNOWLEDGMENT OF BORROWERS. THIS AGREEMENT HAS BEEN FREELY AND
VOLUNTARILY ENTERED INTO WITH THE LENDER BY THE BORROWERS, WITHOUT ANY DURESS
OR COERCION, AND AFTER THE BORROWERS HAVE EITHER CONSULTED WITH COUNSEL OR HAVE
BEEN GIVEN AN OPPORTUNITY TO DO SO, AND THE BORROWERS ACKNOWLEDGE THAT THEY
CAREFULLY AND COMPLETELY READ AND UNDERSTANDS ALL OF THE TERMS AND PROVISIONS
OF THIS AGREEMENT.



     12.26     SUBMISSION TO JURISDICTION AND VENUE. ANY JUDICIAL PROCEEDING
AGAINST THE BORROWERS BROUGHT BY LENDER WITH RESPECT TO ANY TERM OR CONDITION
OF THIS AGREEMENT, OR ANY OTHER PRESENT OR FUTURE AGREEMENT BETWEEN BORROWERS
AND LENDER MAY BE BROUGHT BY LENDER IN A COURT OF COMPETENT JURISDICTION IN THE
STATE OF MICHIGAN, AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT, BORROWERS
AND LENDER ACCEPT FOR THEMSELVES AND IN CONNECTION WITH THEIR RESPECTIVE
PROPERTIES, GENERALLY AND UNCONDITIONALLY, THE NONEXCLUSIVE JURISDICTION OF THE
AFORESAID COURTS, AND IRREVOCABLY AGREE TO BE BOUND BY ANY FINAL JUDGMENT
RENDERED THEREBY IN CONNECTION WITH THIS AGREEMENT, OR ANY OTHER PRESENT AND
FUTURE AGREEMENT BETWEEN BORROWERS AND LENDER. BORROWERS WAIVE ANY BOND OR
SURETY OR SECURITY UPON SUCH BOND OR SURETY WHICH MIGHT, BUT FOR THIS WAIVER,
BE REQUIRED OF LENDER. NOTHING CONTAINED IN THIS SECTION AFFECTS THE RIGHT OF
LENDER TO BRING ANY ACTION OR PROCEEDING AGAINST EITHER BORROWER OR ITS
PROPERTY IN THE COURTS OF ANY OTHER JURISDICTION. ANY JUDICIAL PROCEEDING BY
BORROWERS AGAINST LENDER INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER OR CLAIM
IN ANY WAY ARISING OUT OF, RELATED TO OR CONNECTED WITH THIS AGREEMENT OR ANY
PRESENT OR FUTURE AGREEMENT BETWEEN BORROWERS AND LENDER, MAY BE BROUGHT ONLY
IN A FEDERAL COURT LOCATED IN THE STATE OF MICHIGAN OR IN STATE COURTS IN
OAKLAND COUNTY, MICHIGAN. BORROWERS WAIVE ANY OBJECTION TO JURISDICTION AND
VENUE OF ANY ACTION INSTITUTED HEREUNDER OR IN CONNECTION HEREWITH AND MAY NOT
ASSERT ANY DEFENSE BASED ON LACK OF JURISDICTION OR VENUE OR BASED UPON FORUM
NON CONVENIENS. BORROWERS OR LENDER MAY FILE AN ORIGINAL COUNTERPART OR A COPY
OF THIS AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF THE WAIVERS AND
CONSENTS CONTAINED HEREIN.



53









 





     12.27     WAIVER OF JURY TRIAL. THE BORROWERS AND LENDER ACKNOWLEDGE THAT THE
RIGHT TO TRIAL BY JURY IS A CONSTITUTIONAL ONE, BUT THAT IT MAY BE WAIVED.
LENDER AND THE BORROWERS, AFTER CONSULTING COUNSEL OF THEIR CHOICE, EACH HEREBY
KNOWINGLY AND VOLUNTARILY, WITHOUT COERCION, WAIVE ALL RIGHTS TO A TRIAL BY
JURY OF ALL DISPUTES BETWEEN THEM. NEITHER THE BORROWERS NOR LENDER SHALL BE
DEEMED TO HAVE GIVEN UP THIS WAIVER OF JURY TRIAL UNLESS SUCH RELINQUISHMENT IS
IN A WRITTEN INSTRUMENT SIGNED BY THE PARTY TO BE CHARGED.



	 	 	 	 	 	 	 	 	 
	 	 	TRANSCAT, INC., an Ohio Corporation
	 
	 	 	 	 	 	 	 	 
	

	 	By:
	  /s/ Carl E. Sassano 
	

	 	 	

	

	 	 	 	Name:
	  Carl E. Sassano 
	

	 	 	 	 
	

	

	 	 	 	 	 	Title:
	  President
	

	 	 	 	 	 	 	

	 
	 	 	 	 	 	 	 	 
	 	 	TRANSMATION (CANADA) INC., a Canadian Corporation
	 
	 	 	 	 	 	 	 	 
	

	 	By:
	  /s/ Carl E. Sassano 
	

	 	 	

	

	 	 	 	Name:
	  Carl E. Sassano
	

	 	 	 	 
	

	

	 	 	 	 	 	Title:
	  President
	

	 	 	 	 	 	 	

	 
	 	 	GMAC COMMERCIAL FINANCE LLC, successor by merger to GMAC Business Credit, LLC
	 
	 	 	 	 	 	 	 	 
	

	 	By:
	  /s/ Daniel
J. Manella
	

	 	 	

	

	 	 	 	Name:
	  Daniel
J. Manella 
	

	 	 	 	 
	

	

	 	 	 	 	 	Title:
	  Senior Vice
President
	

	 	 	 	 	 	 	






     The
Exhibits and Schedules to this Amended and Restated Loan and Security
Agreement are listed below. Upon request, Transcat, Inc. will
furnish supplementally a copy of an Exhibit or Schedule to the
Securities and Exchange Commission.


	 	 	 
	Exhibits:
	 	 
	3.2A:

	 	Term Note A
	3.2B:

	 	Term Note B
	3.3:

	 	Cap-X Note







	 	 	 
	Schedules:
	 	 
	3.8:

	 	LIBOR Notice
	6.6:

	 	Litigation
	6.18:

	 	Labor Matters
	6.19:

	 	Subsidiaries
	6.20:

	 	Deposit Accounts
	7.9:

	 	Stock
	7.11:

	 	Insider Transactions








54